Welcome to the May 2023 issue of Weaver’s State and Local Tax Digest. This month's digest includes new tax legislation in several states including Kentucky where there are new taxpayer data privacy regulations andSouth Dakota removes its 200-transactions threshold from their economic nexus rules.
INCOME AND FRANCHISE TAX UPDATES
Illinois Extends Statute of Limitations for Local Government Tax Assessments
Illinois Gov. J.B. Pritzker signed into lawS.B. 1794,which extends the statute of limitations for local governments to issue assessments on tax returns from four years to five years.
Illinois Adopts Rule Changes for 20-Year NOL Carryback
The Illinois Department of Revenue adopted administrative rule changes to reflect 2021 legislation to extend the state’s net operating loss carryback period from 12 years to 20 years. This applies to losses incurred in tax years ending on or after December 31, 2021 and for any unexpired losses.
Indiana Implements Pass-Through Entity Tax
Indiana Gov. Eric Holcomb signed into law S.B. 2, which enacts a pass-through entity tax as a workaround to the federal $10,000 deduction limit for state and local taxes. The bill allows partnerships and S corporations to elect to pay income tax at the entity level on behalf of the individual partner or member of the pass-through entity, and the taxpayer would receive a state tax credit for the amount paid. The bill is effective for tax years after December 31, 2022.
Kentucky Enacts Pass-Through Entity Tax and IRC Conformity
Kentucky Gov. Andy Beshear signed into law H.B. 360, which enacts a pass-through entity tax as a workaround to the federal $10,000 deduction limit for state and local taxes. The bill allows partnerships and other pass-through businesses to pay income tax at the entity level on behalf of the individual partner, member or shareholder of the pass-through entity. The taxpayer would receive a state tax credit for the amount paid. The change would apply retroactively to the tax year beginning January 2022. The bill also conforms to the Internal Revenue Code as of December 31, 2022.
Kentucky Allows Counties to Reveal Taxpayer Information
Kentucky Gov. Andy Beshear signed into law S.B. 112, which allows counties to divulge tax information to taxing jurisdictions when requested for audit purposes.
Kentucky Reduces Personal Income Tax Rate
Kentucky Gov. Andy Beshear signed into law H.B. 1, which reduces the personal income tax from 5 percent to 4.5 percent for tax years beginning on or after January 1, 2023 and before January 1, 2024. The rate is further reduced to 4 percent for tax years beginning on or after January 1, 2024.
Louisiana Updates Partnership Filing Requirements
The Louisiana Department of Revenue issued aninformation bulletin that updates partnership filing requirements. Beginning with the 2021 tax year, partnerships doing business in Louisiana or deriving any income from Louisiana sources must file an informational return with all required schedules and attachments. Partnerships are exempt if gross receipts were less than $250,000 and the partnership’s total assets at the end of the tax year were less than $1 million, the partnership is not required to file IRS Form 1065, or the partnership elected to be taxed as a corporation with the Internal Revenue Service and files Form CIFT-620 with Louisiana. Regardless of the exceptions, partnerships that are required to attach Schedule 6922, Louisiana Composite Partnership to the IT-565 are required to file, and partnerships that have any partners or related parties with an approved passthrough entity election on file with the Department are required to file.
Louisiana Requires Nonresidents to File Annual Exemption
The Louisiana Department of Revenue issued a rule requiring nonresidents of Louisiana who work fewer than 25 days in the state in a calendar year to file an annual exemption form with their employer in order to refrain from income tax withholding. The rule reflects a 2021 law that exempts nonresident employees from state income tax if they work in Louisiana for no more than 25 days in a year.
Mississippi Revises Depreciation and Expensing for Certain Expenditures and Property
Mississippi Gov. Tate Reeves signed into law H.B. 1733, which revise the state’s depreciation and deduction for certain expenditures and property. This includes immediate deductions for certain research or experimental expenditures and the bonus depreciation. It also includes conformity to IRC sections 174, 168, and 179.
Montana Adopts Single-Sales Factor Apportionment Formula
Montana Gov. Greg Gianforte signed into law S.B. 124, which revises Montana’s corporate income tax by adopting a single-sales factor apportionment formula. The change takes effect for tax years beginning after December 31, 2024.
New Hampshire Adopts New Rule on NOL Carryovers
The New Hampshire Department of Revenue Administration adopted a rule to reflect the change in the calculation of the net operating loss carryover under the business profits tax. The new calculation permits the taxpayer to use the apportioned carryover as a deduction against a taxpayer’s apportioned taxable income. It applies to tax years ending on or after December 31, 2022.
New York Tax Court Finds Combined Group Failed to Qualify for Reduced Corporate Income Tax Rate as a Qualified Emerging Technology Company
A New York administrative law judge held that the combined group was not a qualified New York manufacturer or a qualified emerging technology company and did not qualify for a reduced corporate tax rate. For a group of corporations to be taxed as a qualified emerging technology company, all members must be a qualified emerging technology company in their separate capacities. In this case, each member of the combined group did not qualify in their separate capacity.
Ohio Conforms to Federal Tax Changes Made After February 17, 2022
Ohio Gov. Mike DeWine signed into law S.B. 10, which conforms Ohio’s income tax to changes made to the Internal Revenue Code after February 17, 2022. For changes before the effective date, which is March 15, 2023, a taxpayer may irrevocably elect to incorporate the provisions of the Internal Revenue Code or other tax laws.
Oregon Explains Addition Under Elective PTE Tax
The Oregon Department of Revenue issued an explanation of its position regarding treatment of the Oregon pass-through entity (PTE) elective tax paid and deducted on the federal PTE return. The department stated that the addition is conducted on the PTE member’s individual tax return, not the PTE-E return.
Pennsylvania Supreme Court Awards $2.1 Million Corporate Tax Refund
In Synthes USA HQ Inc. v. Commonwealth of Pennsylvania, the Pennsylvania Supreme Court awarded a company a $2.1 million corporate tax refund, ending a dispute over how to source corporate net income. In 2011, the company sourced all of its service sales to Pennsylvania. The Pennsylvania tax department, however, was basing the company’s income-producing activity on where the services were delivered to the customer, known as the “benefits-received” method. The department did not publish guidance on this method until 2014. That year, in response to the guidance, the company sought a refund for its 2011 taxes. The court agreed with the company’s position.
Tennessee Updates Tax Manual for IRC Section 174 Changes
The Tennessee Department of Revenue updated its franchise and excise tax manual to include details on the new Schedule J lines to implement Tennessee’s decoupling from IRC Section 174. The manual also reflects the Department’s revised position that, in computing net earnings or loss for Tennessee excise tax purposes, taxpayers are entitled to the full amount of the federal deduction relating to foreign-derived intangible income (FDII) under IRC Section 250(a)(1)(A).
Utah Revises Corporate Income Tax NOL Carryforward Provisions
Utah Gov. Spencer Cox signed into law S.B. 203, which allows a corporate taxpayer to carry forward a Utah net operating loss arising from a tax year beginning on or after January 1, 2008, for an unlimited number of years. The loss carryforward is subject to a cap of 80 percent of taxable income. It applies to tax years beginning on or after January 1, 2023.
Virginia Revises Pass-Through Entity Tax
Virginia Gov. Glenn Youngkin signed into law S.B. 1476, which changes the elective entity level tax on pass-through entities. It imposes the tax only on the share of income, gain, loss, or deduction attributable to eligible owners as opposed to imposing the tax on the entire entity. The law defines an "eligible owner" as an owner of a pass-through entity that is a natural person, estate or trust. The law also removes the requirement that to qualify for the tax election a pass-through entity must be 100 percent owned by natural persons or persons eligible to be shareholders in an S corporation. The law is effective beginning with the taxable year 2021.
Virginia Revises Rules for an Affiliated Group to Change Filing Status
Virginia Gov. Glenn Youngkin signed into law H.B. 1405, which removes the requirement that, in order for a group of affiliated corporations to be granted permission to change their filing status for corporate income tax purposes, for the previous tax year there would have been no decrease in tax liability computed under the proposed election as compared to the affiliated group's former filing method.
Virginia Conforms to Federal Tax Changes to December 31, 2022
Virginia Gov. Glenn Youngkin signed into law S.B. 882, which conforms the state’s tax code to changes made to the Internal Revenue Code as of December 31, 2022. The law is effective immediately.
Virginia Passes Apportionment Change for Retail
Virginia Gov. Glenn Youngkin signed into law H.B. 1978, which allows affiliated corporations filing on a consolidated basis to apportion the taxable income of all members of the affiliated group using single-sales factor apportionment even if one or more members of the affiliated group would be required to use different apportionment factors if filing separate returns. The election is valid only in taxable years for which 80 percent or more of the affiliated group's sales are derived from retail company activities.
Washington Supreme Court Upholds State Capital Gains Tax
The Washington State Supreme Court held that the state’s 7 percent tax on capital gains of more than $250,000 per year was constitutional under both the state and federal constitutions. In May 2022, a trial court ruled that the tax was a property tax, which, under Washington’s constitution, cannot exceed 1 percent annually. The Supreme Court held that the capital gains tax is “appropriately characterized as an excise because it is levied on the sale or exchange of capital assets, not on capital assets or gains themselves.” The Washington Department of Revenue has posted guidance on how to file and pay the tax online.
West Virginia Enacts Pass-Through Entity Tax
West Virginia Gov. Jim Justice signed into law S.B. 151, which implements an elective pass-through entity tax as a workaround to the federal $10,000 deduction limit for state and local taxes. The tax is imposed at the top marginal individual tax rate. The law would apply retroactively to the tax year beginning on or after January 2022.
Skechers was found to owe more than $1 million in taxes after losing a transfer pricing dispute that involved a royalty expense taken as a tax deduction for purposes of Wisconsin’s corporate franchise tax. The Wisconsin Tax Appeals Commission ruled in February 2023 that the company did not provide adequate evidence that its transfer of intellectual property to a holding company and the payment of royalties to the holding company was for a non-tax related business purpose and that it had economic substance.
Arizona Supreme Court Held Business Owners Can Be Held Personally Liable
The Arizona Supreme Court held that business owners can be personally liable for unremitted Transaction Privilege Tax (TPT). Transaction Privilege Tax is Arizona's name for its "Sales Tax". The DOR had sued a taxpayer as a responsible person for the unremitted TPTs, and the taxpayer argued that the DOR failed to assess the unpaid TPTs against him within the four-year limitation period. The Supreme Court stated the ADOR was not looking to collect additional taxes but collecting taxes already reported by the LLC.
Colorado Adopts Rules on Retail Delivery Fee
The Colorado Department of Revenue adopted two rules relating to the state’s retail delivery fee. Rule 43-4-218 sets forth the manner in which retail delivery fees are collected, administered, and enforced. Rule 39-21-116.5 adds the retail delivery fees to the list of fees to which the penalties apply.
Illinois Amends Regulations on General Retailers’ Occupation and Use Tax
Illinois adopted amendments to its general retailers’ occupation and use tax rules relating to the Leveling the Playing Field for Illinois Retail Act. The new rules amend sections to conform the current rules with and provide references to the Leveling the Playing Field for Illinois Retail Act to provide greater guidance and clarity. The new rules cover nexus, occasional sales, drop shipments, and marketplace transactions.
Illinois Amends Sales and Use Tax Regulations
The Illinois Department of Revenue issued a series of sales and use tax regulations. The Department of Revenue amended sales and use tax regulations related to
the Home Rule County Retailers’ Occupation Tax;
sourcing rules for the Home Rule Municipal Retailers’ Occupation Tax Act, for sales and use tax purposes;
the Regional Transportation Authority Act, for sales and use tax purposes;
the Metro East Mass Transit District Retailers’ Occupation Tax, for sales and use tax purposes;
jurisdictional questions concerning the County Water Commission Retailers’ Occupation Tax;
the Metro-East Park and Recreation District retailers’ occupation tax;
the Special County Retailers’ Occupation Tax for Public Safety Law;
the Salem Civic Center Retailers’ Occupation Tax;
the Non-Home Rule Municipal Retailers’ Occupation Tax Act;
the County Motor Fuel Tax; and
the Municipal Motor Fuel Tax Law.
Kentucky Revises Taxability of Services Including Computer Software Access Services
Kentucky Gov. Andy Beshear signed into law H.B. 360, which expands the taxability of services under Kentucky’s sales and use tax. Prewritten computer software access services purchased for use outside the state and transferred electronically outside the state for use thereafter solely outside the state are excluded. Text message telemarketing services are taxable.
Louisiana Issues Notices of Intent for Proposed Rules on Remote Sellers
The Louisiana Sales and Use Tax Commission for Remote Sellers released a notice of intent to adopt new rules for remote sellers. These include rules to provide requirements for companies without a physical presence in Louisiana who do not meet the sales thresholds; clarify the definition of sales; provide prospective liability for rules and requirements for remote sellers to charge, collect and remit sales and use tax; and to provide a publicly available tool for remote sellers to look up applicable state and local rates and exemptions.
Maryland Publishes Digital Ad Gross Receipts Tax Return
The Comptroller of Maryland’s Legal Division announced that it published the Maryland Form 600, Digital Advertising Gross Revenues Tax Return. The form is part of the implementation of the state’s tax on annual gross revenues derived from digital advertising services in the state. The return is due on April 15. Because April 15, 2023 fell on Sunday, it was due on April 17, 2023.
Mississippi Exempts Certain Property from Sales Tax
Mississippi Gov. Tate Reeves signed into law H.B. 549, which exempts from sales tax the sale of property that is shipped, transported, or exported from Mississippi and first used in another state. The law takes effect July 1, 2023.
Mississippi Enacts Law on Taxability of Computer Software Services and Electronic Products
Mississippi Gov. Tate Reeves signed into law S.B. 2449, which addresses computer software services and products delivered electronically in Mississippi. The law states that tangible personal property includes computer software but does not include electronically stored or maintained data. Under the law, computer software maintained on a server outside the state and accessible through the internet only is not taxable use. Sales of computer software, computer software services, specified digital products, or other products delivered electronically, including, but not limited to, music, games, reading materials or ring tones, are taxable.
Mississippi Issues Notice to Farmers and Farm Dealers
The Mississippi Department of Revenue issued a notice to commercial farmers and farm dealers on single-transaction commercial farmer affidavits and multiple-transaction commercial farmer permits. Beginning January 23, 2023, commercial farmers will be able to complete a single transaction Commercial Farmer Affidavit with their vendors to be eligible for the reduced one and one-half percent sales tax rate on purchases of farm tractors, farm implements and parts and labor for the repair or maintenance of farm tractors and farm implements used for agricultural purposes. Retail sales of farm tractors and farm implements sold to farmers and used directly in the production of poultry, ratite, domesticated fish, livestock, livestock products, agricultural crops or ornamental plant crops or used for other agricultural purposes, and parts and labor used to maintain and/or repair such tractors and implements, shall be taxed at the rate of one and one-half percent when used on the farm.
Missouri Proposes Rules on Marketplace Facilitators and Third-Party Shipments
The Missouri Department of Revenue proposed amendments to rules affecting out-of-state sellers. The department proposed an amendment that provides guidance for Marketplace Facilitators and an amendment for determining whether a transaction that uses third-party shipments is subject to sales or use tax.
New York Division of Tax Appeals Rules that Vendor Management Fees are Taxable
The New York Division of Tax Appeals ruled that vendor management fees were a taxable sale of pre-written software. The company argued that its web-based application that helps to manage and procure staffing services had a primary purpose to act as a “matching” agent for suppliers of temporary labor and customers needing such labor and not the license of software. The Division of Tax argued that it is licensing pre-written software, which is a taxable service.
South Dakota Removes 200-Transactions Threshold from Economic Nexus Law
South Dakota Gov. Kristi Noem signed into law S.B. 30, which removes the 200-transactions threshold for the state’s economic nexus provisions for out-of-state remote sellers. Sales tax remittance is required only if a seller’s gross revenue from the sale of tangible personal property, electronically transferred products, or services delivered into South Dakota is more than $100,000.
South Dakota Temporarily Lowers Sales Tax Rate
South Dakota Gov. Kristi Noem signed into law H.B. 1137, which temporarily lowers the overall sales tax rate from 4.5 percent to 4.2 percent through 2026. The bill also repeals the Partridge Amendment, which required the state to reduce the overall sales tax rate by 0.1 percent for every $20 million raised in online sales tax collections.
Texas Comptroller Rules that Taxpayer Cannot Use Parent Company’s Sales Tax Exemption for R&D Purchases
The Texas Comptroller of Public Accounts issued a letter ruling on whether a taxpayer may use a parent company’s qualified Texas qualified research registration number or research activities to qualify for the research and development (R&D) sales tax exemption on the taxpayer’s purchases. The comptroller found that the taxpayer cannot use the parent’s research registration number or its research activities to qualify for the R&D sales tax exemption to make its purchases tax-free. Only an entity engaging in qualified research is eligible for the sales tax R&D exemption.
Texas Comptroller Issues Sales Tax Guidance on Credit Rating Services
The Texas Comptroller of Public Accounts issued a memo on the taxability of credit rating services. The Comptroller said credit ratings of legal entities are taxable as a credit reporting service. The credit ratings of debt obligations, however, are not taxable.
Texas Comptroller Issues PLR on Oil Well Servicing Company’s Local Tax Sourcing
The Texas Comptroller of Public Accounts issued a private letter ruling on the local and sales and use tax sourcing for an oil well servicing company. The company provided rentals of tangible personal property and repairs to tangible personal property and non-residential property. The Comptroller ruled that the taxpayer must charge its customers the local sales and use tax rate at the equipment yard on its charges for rentals and repairs/restoration of tangible personal property. On charges to repair/remodel nonresidential real property, Taxpayer should charge local tax at the job location. On Taxpayer’s purchases, taxpayers’ vendors should collect local tax based on the consummation of sale rules. Still, the taxpayer is responsible for any local tax that the vendor does not collect. The Comptroller noted that the changes to Rule 3.334 of the Texas Administrative Code, effective October 1, 2023, did not affect the ruling.
Utah Taxes Sales of Leased Tangible Personal Property
Utah Gov. Spencer Cox signed into lawS.B. 14, which imposes the state’s 4.7 percent sales and use tax on the sale of leased tangible personal property from the lessor to the lessee. The bill takes effect July 1, 2023.
Virginia Extends Sales Tax Exemption for Oil and Gas Drilling Equipment
Virginia Gov. Glenn Youngkin signed into law H.B. 2334, which extends the sunset date of a sales and use tax exemption for oil and gas drilling equipment from July 1, 2022 to July 1, 2024. The drilling equipment includes machinery or tools, fuel, power, energy, supplies and parts.
Washington Appellate Court Holds that Digital Service Qualified for Data Processing Exemption
A Washington Court of Appeals held that the primary purpose of a taxpayer’s service was extracting data from service meters and converting that data into a usable format. This was a digital automated service subject to retail sales tax, but it also met the requirements of the data processing exception under Washington’s retail sales tax.
Wyoming Allows Electronic Tax Filings and Payments
Wyoming Gov. Mark Gordon signed into lawH.B. 229, which clarifies that the state Department of Revenue and county treasurers may collect monthly gross sales returns and sales and use tax payments electronically. County treasurers may also impose a 3 percent process fee.
PROPERTY TAX UPDATES
Georgia Enacts Tax Relief for Properties in Federal Disaster Areas
Georgia enacted H311, which allows local authorities to provide temporary tax relief to certain properties located in nationally declared federal disaster areas.
Minnesota Supreme Court Holds that Concession Fee is Not Rental Income
The Minnesota Supreme heldthat a concession fee of 10 percent of the revenue earned at the property should not be included as rental income attributable to the property when assessing its value. The Minnesota Supreme Court agreed with the tax court’s reduction of the estimated market value of the properties.
Texas Property Tax Appraisal Review Board Protest Deadlines, May 15th or 30 days from notice date
Property owners and lessees who are dissatisfied with your appraised value or if you believe errors exist in the appraisal records regarding your property should file a Form 50-132, Notice of Protest with the applicable Appraisal District Review Board. In most cases, the deadline to file your protests is May 15th or 30 days from the date the appraisal district notice is delivered to the taxpayer, whichever date is later. Weaver’s property tax consultants can help you navigate the protest process or represent your interests on your behalf. Reach out to us to find out more.
FUELS AND EXCISE TAX UPDATES
Georgia Enacts Electric Vehicle Charging Excise Tax
Georgia Gov. Brian Kemp signed into law S.B. 146, which imposes a per-kilowatt-hour excise tax for electric vehicle charging. The law takes effect July 1, 2023.
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California Extends Tax Filing Deadlines in Response to Winter Storms
The California Franchise Tax Board (FTB) extended the tax filing deadline to October 16, 2023 for individuals and businesses in response to winter storms in the state from December 2022 through February 2023.
The allowances for two significant business deductions have changed for 2023. The deduction for business meals provided by a restaurant decreased from 100 percent to 50 percent of the cost, as scheduled, and the optional standard mileage rates used to calculate the deductible costs of operating a vehicle increased. Both changes are effective January 1, 2023.
