Welcome to the May 2022 issue of Weaver’s State and Local Tax Digest. In this month’s highlights, several states enact tax cut legislation as well as relief from fuel taxes. For information or assistance in complying with these requirements, contact us. We are here to help.
LEGISLATIVE ROUNDUP
Alabama Passes Franchise Tax Reduction for Minimum Business Privilege Tax
The Alabama house and senate passed HB 391, which reduces the minimum business privilege tax from $100 to $50 for tax years beginning after December 31, 2022. It also provides a full exemption from the business privilege tax on amounts of $100 or less for taxable years beginning after December 31, 2023. The changes do not apply to taxpayers subject to the medical cannabis privilege tax under Ala. Code §20-2A-80.
Colorado Enacts Legislation to Simplify Tax Administration
Colorado enacted S32, which simplifies the registration process under the state’s sales and use tax simplification system (SUTS) for retailers without physical presence or with only incidental physical presence in local taxing jurisdictions in which they make retail sales. On or after July 1, 2022, local jurisdictions must grant a general business license, free of charge, to retailers who have a state standard retail license, so long as the local jurisdiction has not previously revoked the retailer's general business license due to noncompliance. On and after July 1, 2023, retailers without physical presence or with only incidental physical presence in local taxing jurisdictions can make sales without applying separately to the jurisdiction for a general business license. If the local jurisdiction requires a general business license, it must automatically issue one at no charge using information provided by SUTS.
Colorado Legislature Passes Retroactive SALT Cap Workaround
The Colorado House and Senate passed SB22-124, known as the SALT Parity Act, which makes the state’s pass-through entity tax option retroactive to January 1, 2018. The original pass-through entity tax was effective for tax years beginning January 1, 2022. The changes make it the first SALT cap workaround to be retroactive. It also provides the opportunity for taxpayers to file amended returns.
Florida Enacts Sales Tax Holiday
Florida Gov. Ron DeSantis signed into law H.B. 7071, which enacts sales tax holidays on a variety of consumer products. The law conforms Florida’s tax code with the Internal Revenue Code, effective January 1, 2022, and provides several weeklong sales tax holidays for school items, disaster supplies, recreational items, skilled trade tools, and children’s books. The bill includes a 25-cent-per-gallon gasoline tax cut in October. It also includes longer tax holidays for baby clothes, diapers, and certain appliances.
Georgia Enacts Personal Income Tax Cuts
Georgia Gov. Brian Kemp signed into law HB 1437, which reduces individual income tax rates starting in 2024. The current 5.75 percent personal income tax rate will fall to 5.49 percent in 2024 with annual reductions of 0.10 percent until it reaches 4.99 percent in 2029. The exemption for married couples filing jointly will increase from $7,400 to $18,500 in 2024 with annual increases until it reaches $24,000 in 2030. The exemption for individuals will increase from $2,700 to half the deduction for married couples until it reaches $12,000 in 2030. There is a $3,000 deduction for dependents.
Georgia Enacts Consolidated Return Election
Georgia Gov. Brian Kemp signed into law HB 1058, which allows certain taxpayers to elect to file consolidated Georgia corporate income tax returns for tax years beginning on or after January 1, 2023. The bill removes the requirement that affiliated corporations file separate income tax returns unless the Department of Revenue has requested or preapproved the filing of consolidated returns. The election is irrevocable for five years.
Illinois Enacts Tax Relief Legislation
Illinois Gov. J.B. Pritzker signed into law fiscal year 2023 budget legislation H.B. 4700, which includes significant tax reductions and tax relief. The bill provides a $50 taxpayers direct payment to taxpayers with incomes of up to $200,000, or $400,000 for joint filers. There is an additional $100 direct payment for each dependent child up to three. The bill also increases the earned income tax credit from 18 percent to 20 percent of the federal credit, suspends sales taxes on groceries for one year, suspends sales taxes on fuel for six months, provides a property tax rebate of 5 percent of property taxes paid up to $300, suspends sales tax on clothing and school supplies for one week in August, and doubles the teacher’s tax credit for classroom supplies.
Kentucky Enacts Tax Reform Legislation
The Kentucky legislature overrode Gov. Andy Beshear’s veto to enact H.B. 8, which implements significant tax changes. The law reduces the individual income tax rate to 4 percent beginning in 2023 and provides further rate reduction in the future if certain tax receipt thresholds are exceeded. It also conforms the Kentucky tax code to the Internal Revenue Code, provides a tax amnesty program, and imposes sales and use tax on certain services. The bill is effective January 1, 2023.
Mississippi and Nebraska Enact Tax Cut Legislation
On April 5, 2022, Mississippi Gov. Tate Reeves signed into law the Mississippi Tax Freedom Act of 2022, which reduces the state income tax on individual taxable income. The Act eliminates the state’s 4 percent tax bracket, which applies to the first $5,000 in taxable income. The 5 percent rate that applies to income of more than $10,000 is reduced to 4.7 percent for calendar year 2023 and after, 4.4 percent for 2025, and 4 percent for 2026 and after. The Mississippi Legislature is also required before calendar year 2026 to consider tax further reductions and possibly repeal the individual income tax. The act is effective July 1, 2022.
Nebraska Gov. Pete Ricketts signed into law L.B. 873, which reduces individual income tax rates from 6.84 percent to 5.84 percent over five years and reduces corporate income tax rates from 7.5 percent to 5.84 percent over five years. It also accelerates Social Security income tax phase out to 2025 and makes property tax changes.
New York Expands SALT Cap Workaround and Provides Tax Reductions
New York’s recently passed $221 billion Fiscal Year 2023 budget expands the benefits of the state’s workaround of the $10,000 federal cap on state and local tax (SALT) deductions and provides a number of tax breaks for both individuals and businesses. The business tax provisions in the legislation include a new small business COVID capital costs tax credit, reduced taxable income for small businesses, cannabis business tax deductions, expanded tax credits for farmers. The individual tax provisions include accelerated personal income tax reduction, a homeowner tax rebate, suspension of state fuel excise and sales taxes, a geothermal tax credit, and student loan forgiveness deduction.
New York Passes Six-Month Entity-Level Tax Election Deadline
New York Gov. Kathy Hochul signed into law S8948, which extends the pass-through entity tax election deadline to September 15, 2022. The six-month extension allows taxpayers that missed the March 15, 2022 deadline to elect S corporation status for the pass-through entity tax as a workaround to the SALT cap. The law also provides for the necessary estimated payments for electing resident S corporations based on the date a pass-through entity tax election was made.
Oklahoma Requires Withholding for Royalty Interest Remitters and Pass-Through Entities
Oklahoma passed H3905, which requires a 5 percent withholding by remitters of certain royalty interest payments and pass-through entities making certain distributions. Remitters of payments to royalty interest owners for the production of oil and gas must deduct and withhold 5 percent of the gross amount that would have otherwise been payable to the person entitled to the payment. Pass-through entities must withhold the income tax from a nonresident member’s share of the Oklahoma share of income of the entity that was distributed to each nonresident member and pay the withheld amount on or before the due date of the pass-through entity's tax return, including extensions.
INCOME AND FRANCHISE TAX UPDATES
California FTB Announces Proposed Settlement in Tax Refund Class Action
The Franchise Tax Board informedlimited liability companies (LLCs) and the public that the San Francisco County Superior Court granted preliminary approval of a proposed class action settlement for the Franchise Tax Board Limited Liability Corporation Tax Refund Cases. The court appointed a settlement administrator and the administrator has begun accepting claims from affected LLCs. The court will consider issuing an order granting final approval of the proposed settlement on August 2, 2022. If final approval is granted, funds will be provided to the settlement administrator to provide payments to LLCs with valid claims for refund.
Illinois Investment Partnership Can Elect to Pay PTE Tax
The Illinois Department of Revenue updated its pass-through entity publication to provide that an investment partnership may elect to pay the state’s pass-through entity (PTE) tax. The publication states that an investment partnership making the election must file Form IL-1065 and check the box indicating it is making the election to pay PTE tax. The investment partnership will complete the PTE Income Worksheet in the Form IL-1065 Instructions as if it did not qualify as an investment partnership.
New Jersey Revises Bulletin on Combined Group Filing
The New Jersey Division of Taxation revised its bulletin on combined reporting. In New Jersey, the water’s-edge group filing method is the default filing method for combined groups, but the managerial member of the combined group may elect to make a world-wide election. There is an alternative option to file the New Jersey combined return as an “affiliated group.” The bulletin also provides information on allocation methods for combined returns; the water's-edge group; elective combined returns on a world-wide group basis or affiliated-group basis; and elections made on the 2019 CBT-100U and elections made on the 2020 CBT-100U.
New York to Adopt MTC’s Expansion of Taxation of Internet Activities
New York issued a draft rule to conform New York law with the Multistate Tax Commission’s (MTC) updated P.L. 86-272 guidance on internet activities. P.L. 86-272 limits the ability of states and local governments to tax the net income of out-of-state businesses, and the MTC updated its interpretation of the law in response to advances in technology and commerce, particularly online commerce. California was the first state to adopt the MTC’s interpretation when the state’s Franchise Tax Board issued a technical memorandum in February.
Texas Comptroller Rules that Wireless Service Company Not Engaged in Retail Business
The Texas Comptroller of Public Accounts ruled that a seller of wireless airtime, cellular telephones, and accessories was not engaged in a retail trade or business and cannot use the 0.5 percent wholesale/retail rate for the Texas franchise tax. The seller must use the 1 percent standard tax rate. Under the 1987 Standard Industrial Code (SIC) manual, “retail trade” is defined as activities described in Division G of the 1987 SIC Manual and “wholesale trade” is defined in Division F.
Texas Comptroller Rules Gross Proceeds from Hedging Excluded from Apportionment Factor
The Texas Comptroller of Public Accounts ruled that an electricity producer cannot include the gross proceeds from commodities hedging transactions in its apportionment factor in calculating Texas franchise tax. The producer reported the gains from the hedging transactions as capital gain net income and losses as cost of goods sold on its federal income tax return. Taxable entities must exclude from total revenue the tax basis of securities and loans sold as determined under the Internal Revenue Code. The tax basis of securities sold cannot be included in the gross receipts calculation of either the numerator or denominator of the apportionment factor. Securities treated as inventory of the seller for federal income tax purposes are allowed an exception. The electricity producer made a mark-to-market election for traders in commodities on its IRS Form 1120 and is therefore treated as a trader, which do not maintain an inventory of securities.
SALES AND USE TAX UPDATES
Texas Court Finds Store Manager Personally Liable for Sales Tax
The Texas Court of Appeals ruled that a convenience store manager who helped a convenience store evade the payment of sales and use taxes was personally liable for the store’s delinquent taxes. In Texas, an individual who controls or supervises the collection of tax holds the amount collected in trust for the state as a responsible person. Texas law holds the individual liable for the taxes if they willfully fail to pay or cause to be paid the tax. In Elesawi v. The State of Texas et al., Tex. Ct. App. (7th Dist.), the manager willfully failed to pay the store’s sales and use taxes and knowingly underreported taxes by 25 percent. The individuals also prevented the taxing authorities from properly calculating the taxes during the audits and delayed collection proceedings by terminating the company and selling the store during the audit. The dissolution of the business entity did not affect the responsible individual's liability.
FUELS AND EXCISE TAX UPDATES
IRS Issues Interim Guidance on 637 “G” Registration for Taxable Chemicals
The IRS recently issued guidance on Form 637, Application for Registration (For Certain Excise Tax Activities), which impacts taxpayers who are required to obtain a “G” registration under the reinstated Superfund Tax (effective July 1, 2022). The guidance provides that all applications for “G” designation are to be treated as new registrations, irrespective of whether a taxpayer may have had this designation prior to the expiration of the Superfund Tax in 1995. Additionally, the G letter designation will only be issued to taxpayers who either make inventory exchanges of taxable chemicals or buy/sell intermediate hydrocarbon streams. The Memorandum also states that applicants for a letter G designation need to show a satisfactory tax history.
IRS Provides Penalty Relief for Failure to Deposit Superfund Excise Taxes
The IRS has provided relief for failure to deposit Superfund chemical taxes for the third and fourth calendar quarters of 2022 and the first calendar quarter of 2023. Notice 2022-15 provides relief from IRC Section 6656 penalties for failure to deposit IRC Section 4661 excise taxes on certain chemicals and IRC Section 4671 excise taxes on certain imported chemicals. During the first, second, and third calendar quarters of 2023, the IRS will not withdraw a taxpayer’s right to use the deposit safe harbor rules of § 40.6302(c)-1(b)(2) of the Excise Tax Procedural Regulations for failure to make required deposits of Superfund chemical taxes if certain requirements are met.
The governor of New Mexico signed into law HB2, which includes a gas tax rebate of $500 or $1,000 for joint filers. Taxpayers will receive the money across two payments, the first by June 30 and the second by August 30. A resident who files an individual New Mexico income tax return for taxable year 2021 by May 31, 2023 is eligible or the payment.
New York’s recently passed budget suspends the state’s 8 cents-a-gallon fuel excise tax and 8 cents-a-gallon fuel sales tax from June 1 through December 2022.
LPs, LLPs, and LLCs Now Exempt from California’s Minimum Franchise Tax for First Filing Year
Certain pass-through entities filing first-year California tax returns are exempt from the state’s $800 minimum franchise tax beginning in 2021. The exemption applies to limited partnerships (LPs), limited liability partnerships (LLPs), and limited liability companies (LLCs) filing first-year returns in 2021, 2022, and 2023.
Podcast: Oil Spill Liability Tax on Exports Could be Unconstitutional
Is the oil spill tax under IRC Section 4611(b) unconstitutional when imposed on exports of crude oil? Listen in to explore the dynamics of motor fuel taxation and get insights on a constitutional challenge to the federal oil spill liability tax.