Welcome to the November issue of Weaver’s State and Local Tax Digest. This newsletter provides a roundup of recent developments in state and local taxes, including sales, income, fuels, and property taxes.
SALES TAX UPDATES
Arkansas Upholds Estimated Use Tax Assessment
An Arkansas administrative hearing upheld an estimated assessment of compensating use tax based on best available evidence. The judge held that the taxpayer bears the burden of refuting the estimated assessment with actual documentation. The only documentation presented was an invoice that indicated the assessed depreciation amounts may be lower than actual purchase prices for the assessed items and that the taxpayer actually purchased the items from out of state companies.
California Requires Online Sellers to Collect Environmental Fees
The governor of California signed into law A.B. 1402, which requires marketplace facilitators to collect and remit state fees on the sale of lead-acid batteries, tires, lumber, and electronic waste. The revenues from the tax will fund the state’s Air Pollution Control Fund, the Electronic Waste and Recovery Recycling Account, Timber Regulation and Forest Restoration Fund, and the Lead-Acid Battery Cleanup Fund.
Kansas Clarifies “Remote Seller” and Eliminates “Click-Through” Nexus
Kansas clarified the nexus provisions of Senate Bill 50, which expands the definition of a “retailer doing business in this state” to include a “remote seller” and establishes a nexus threshold of $100,000 in gross sales during the current or preceding calendar year. Senate Bill 50 also eliminated the state’s click-through nexus provisions for affiliated persons related to sales and use taxes. These provisions became effective July 1, 2021.
Ohio BTA Rules that Employee is Not a Responsible Party
The Ohio Board of Tax Appeals reversed a tax commissioner's determination and ruled that an employee was not a responsible party for the bar’s unpaid sales tax. The tax commission had ruled that she was a responsible party because the owner identified her as the manager and because she was trying to buy the business. The employee presented credible evidence that she only assisted the owner with the audit, was never responsible for filing or paying sales tax, and had no access to the bar’s bills, bank accounts, checks, financial records, or tax returns.
Pennsylvania Clarifies Taxation of Equipment Rentals
Pennsylvania issued a bulletin clarifying the taxation of equipment rentals and equipment rentals with operators. According to the bulletin, when vendors furnish the equipment with the services of their operator, it is presumed that the transaction involves a transfer of the right to use or direct the use of the equipment. This is presumed to be a taxable rental of tangible personal property. The presumption may be rebutted by establishing that the work is exclusively under the control of the vendor who furnished the equipment and its operator, which makes it a nontaxable service. When vendors furnish equipment without the services of their operator, the transaction is subject to tax as a rental of tangible personal property.
Tennessee Issues Guidance for Directly Filing Sales Tax Refund Claims
Tennessee issued a notice explaining the procedure for filing a refund claim directly with the Department of Revenue in limited instances when the dealer is unresponsive or declines to credit or refund the tax collected in error. According to the requirements, (1) the claim must exceed $2,500 per dealer; (2) the dealer must have collected the tax from the customer and remitted it to the Department; and (3) the customer must have requested a refund from the dealer on at least two separate occasions and the dealer failed or declined to issue the refund.
Texas Court Finds Coal Processing Equipment Exempt from Sales Tax
The Texas Court of Appeals held that equipment used for coal processing and extraction was exempt from sales and use tax, as it qualified as tangible personal property used in manufacturing, processing, or fabrication of tangible personal property for ultimate sale. The court ruled that the original coal does not need to be tangible personal property.
Texas Certifies Sets Local Use Tax Rate for Remote Sellers
The Texas Comptroller of Public Accounts determined that the estimated average rate of local sales and use taxes imposed in Texas during the preceding state fiscal year ending August 2021 is 1.75 percent. This rate is effective January 1, 2022, through December 31, 2022.
Texas Comptroller Issues PLR on Taxation of Restaurant Mobile Platforms
The Texas Comptroller of Public Accounts issued a private letter ruling finding that service fees the restaurants pay for a mobile ordering and payment application, including all hardware, software, payment remittance fees, and other expenses incurred by the taxpayer to operate the application, are taxable charges for data processing services.
INCOME AND FRANCHISE TAX UPDATES
Alabama Issues Guidance for Electing Pass-Through Entity Tax
Alabama issued a notice reminding taxpayers that Alabama S corporations and Subchapter K entities (pass-through entities) can elect to pay Alabama income tax at the entity level. Pass-through entities (PTEs) must make this election by submitting Form PTE-E through the Department's internet portal (the Department expects Form PTE-E to be available on the portal in January of 2022). All PTEs that choose this election must submit Form PTE-E prior to the 15th day of the third month following the close of the tax year for which the election is made.
California Provides Guidance on Pass-Through Entity Tax
The California Franchise Tax Board issued FAQs as guidance for partnerships, S corporations, and limited liability companies to elect to pay income tax and get around the $10,000 federal cap on individual deductions for state and local taxes.
Indiana Reduces Interest Rate on Tax Underpayments and Overpayments
The Indiana Department of Revenue reduced the interest rate on underpayments and overpayments of tax to 3 percent for 2022, down from 4 percent for 2021. The rate is effective for the calendar year beginning January 1, 2022.
Louisiana Implements Transfer Pricing Audit Program
Louisiana announced a voluntary initiative for corporations to resolve intercompany transfer pricing issues through the Louisiana Transfer Pricing Managed Audit Program. Eligible taxpayers must have a history of voluntary tax compliance with the state, a certification that it has available time and resources to participate, available and suitable records on intercompany transactions, and a reasonable expectation of the ability to pay an expected liability. Taxpayers could receive a waiver of penalties that would otherwise be due based on the results of the managed audit and abatement of interest during the course of the managed audit. The program covers the 2021 tax year for calendar and fiscal year filers, any open tax periods that have not yet prescribed, and up to four future tax periods.
Maine Expands Online Tax Filing and Payment Options
Maine implemented a single online system, known as the Maine Tax Portal, that will allow taxpayers to file and pay taxes with instant confirmation of receipt, view bills and notices, and perform account maintenance activities. The system replaces online services for corporate income and franchise taxes; insurance premiums taxes; estate taxes; the health care provider tax; blueberry, potato, mahogany quahog, and railroad excise taxes; and the marijuana excise tax.
Massachusetts Enacts SALT Cap Workaround
The Massachusetts Legislature enacted H4009, which establishes an elective pass-through entity (PTE) as a workaround to the $10,000 federal deduction limit on state and local taxes. The law allows a PTE to pay a 5 percent entity-level tax. Each partner or member would then be eligible for a credit on their individual tax return of 90 percent of the tax on their share of the entity’s income.
New Jersey Extends Combined Reporting Initiative
The New Jersey Division of Taxation extended its Combined Reporting Initiative period until January 3, 2022. The initiative, which was originally scheduled to expire on October 15, 2021, is designed to identify companies that have been included as part of a combined group filing and indicated that they have nexus with New Jersey but have not filed as a separate entity for periods prior to 2019. The Division will waive penalties for qualified companies that pay back taxes for years that they had nexus with New Jersey but failed to file as a separate entity.
Texas Amends Franchise Tax Research and Development Activities Credit
Texas finalized amendments to the research and development activities franchise tax credit under Texas Administrative Code Sec. 3.599. The finalized amendments include a definition of “business component” as “any product, process, computer software, technique, formula, or invention, which is to be held for sale, lease, or license, or used by the taxable entity in a trade or business of the taxable entity.” They also conform the definition of “qualified research expense” to IRC Section 41(b).
Texas Comptroller Finds Nexus Not Confined to Solicitation of Sales
The Texas Comptroller of Public Accounts ruled that an Illinois corporation that sells heating, air conditioning, and indoor air quality equipment through its website and had an employee in Texas had sufficient nexus for Texas franchise tax and sales and use tax purposes. The Comptroller held that an out-of-state seller can have sufficient constitutional nexus with Texas if the seller’s activities are significantly associated with the seller's ability to establish and maintain a market in Texas. The required nexus is not confined to the solicitation of sales.
Texas Court Rules that Proceeds from Commodity Sales Excluded in Franchise Tax Apportionment
A Texas Court of Appeals ruled that a company cannot include the gross proceeds from the sales of commodity futures and options contracts in determining its apportioned margin for the Texas franchise tax. In Texas, only the net proceeds from the sales of loans or securities are properly included in the apportionment calculation. The contracts and options in this case were bought and sold for the purpose of managing the price risk of its oil inventory and were not purchased or sold to its customers in the ordinary course of business.
Washington Issues Guidance on Sales Tax Exemptions for Farmworker Housing
The Washington Department of Revenue issued a special notice on the expanded sales and use tax exemptions for costs related to building or maintaining farmworker housing. The exemption now includes labor and services used to construct, repair, decorate, or improve new or existing structures, in which at least 50 percent of housing units in the development are used as farmworker housing. The expansion also includes sales of tangible personal property that become ingredients or components of the new or existing building or other structures.
Washington Supreme Court Upholds Tax on Financial Institutions
The Washington Supreme Court upheld the constitutionality of the state’s additional 1.2 percent business and occupations tax on financial institutions. The tax is applied to financial institutions with a consolidated net income of at least $1 billion, regardless of whether they are physically located in Washington, and is apportioned to income from business activity in Washington. The Court held that it does not discriminate against interstate commerce because it applies equally to in- and out-of-state institutions and is limited to Washington-related income.
EXCISE TAX UPDATES
California Issues New Renewable Fuel Registration Requirements
California issued a notice explaining the changes to the oil spill prevention and administration (OSPA) fee, which will apply to renewable fuel received at marine terminals, refineries, and at two new facility types beginning January 1, 2022. With the passage of A.B. 148, facilities that produce renewable fuel for blending or shipment and facilities that are the first point of receipt in California for renewable fuel that originated from outside California are required to register for the OSPA fee.
Iowa Implements Changes for Motor Fuel Tax Filing and Payment
Iowa announced that beginning November 2, 2021, eFile & Pay will no longer be available for motor fuel filing and payments, and Telefile and secure file exchange options for submitting refund claims will no longer be available. Several other changes become effective on November 15, 2021: all returns, reports, and payments must be completed using GovConnectIowa; fuel tax filers can use the quick-file or quick-pay options available on the home screen; companies reporting more than 5,000 gallons of product on their return or report must submit the schedule supporting information using the Excel upload filing method; excel uploads must use the template in GovConnectIowa exactly as formatted; returns should be filed using exact cents instead of rounding to the nearest dollar, and CNG filers will file online. Additionally, all refund claims must be completed using GovConnectIowa. Fuel tax license and refund claim permit holders will soon receive a letter containing instructions and an access code to create your account in GovConnectIowa.
PROPERTY TAX UPDATES
California Implements Changes to Inherited Property Tax Law
The governor of California signed into law S.B. 539, which implements changes to the state’s taxation of inherited real property from Proposition 19. In November 2020, voters approved Proposition 19, which narrowed property tax breaks for people who inherit homes from their parents or grandparents and expanded property tax breaks for people over 55 years old, severely disabled, or who are a victim of a wildfire or natural disaster.
California Expands Solar Property Tax Exclusion to Certain Changes in Ownership
The governor of California signed into law S.B. 267, which provides that the exclusion from property taxes for solar properties applies after a partnership flip transactions. Solar energy systems are real property under California property taxes, but are excluded from the definition of “new construction” under the state’s Proposition 13 property tax system. This bill retains the exclusion for changes in ownership.
Illinois Announces Tentative Property Tax Assessment Multiplier for Peoria County
The Illinois Department of Revenue announceda tentative 2021 property tax assessment equalization factor, or “multiplier,” of 1.00 for Peoria County. Assessments in Peoria County are at 33.36 percent of market value, based on sales of properties in 2018, 2019, and 2020. The equalization factor currently being assigned is for 2021 taxes, which are payable in 2022. The factor is subject to change if the County Board of Review takes actions that significantly affect the county assessments or if local officials or others can present data showing that the Department’s estimates of the average level of assessments in the county should be adjusted.
Rhode Island Proposes Extension of Property Tax Regulations on Renewable Energy
The Rhode Island Office of Energy Resources proposed to extend through January 1, 2026 property tax regulations on the tangible tax value of commercial renewable energy systems. The proposal would also exempt from local taxation renewable energy systems installed on residential and manufacturing properties and require the Office of Energy Resources to determine whether to update the regulations by July 1, 2025. Comments on the proposed rule are due by November 12, 2021.
Texas Passes Homestead Exemption for New Residence
Texas passed S.B. 8, a new homestead exemption law that authorizes a person who acquires a residence homestead to receive an ad valorem tax exemption for the homestead in the year in which the property is acquired. A person who acquires the property after January 1 of a tax year may receive the exemption for the applicable portion of that tax year if the preceding owner did not receive the same exemption for that tax year.
Texas Comptroller Publishes Updated Property Tax Law Changes
The Texas Comptroller of Public Accounts published an update on property tax law changes as of September 2021. The publication includes recent property tax legislation, general property tax code provisions; state and local property tax administration; taxable property and applicable exemptions and credits; property redevelopment and tax abatement; and the appeal process.
HURRICANE TAX UPDATES
New York Extends Filing and Payment Deadlines
New York extended certain tax filing and payment deadlines for individual income, corporate income, trust income, sales and use, excise, property, and estate taxes for taxpayers in specified counties impacted by Post-Tropical Depression Ida. The October 15 deadline is postponed to January 3, 2022, for filing tax returns, making tax payments, requesting extensions, and filing for credits or refunds; interest at the underpayment rate applies to payments received after January 3, 2022; and penalties and interest will be abated for taxpayers who file returns and pay taxes by January 3, 2022.
Podcast: Property Taxes, an Appeal to the Appeals Process
The tax assessor’s notice isn’t always the final say on what taxpayers must remit. Companies can easily appeal these decisions with a proactive appeal strategy for their real and personal property taxes.
Texas Flowback Services are Taxed as Equipment Rentals, Not Services
“Flowback services” used to transition an oil and gas well to production after hydraulic fracturing are taxable as equipment rentals under the Texas Administrative Code. In Private Letter Ruling 202009002L, issued on September 21, 2020, the Texas Comptroller clarified the tax treatment of flowback services in a policy statement that applies to all periods open within the statute of limitations and supersedes four STAR documents (Accession Nos. 200208347L, 200811221L, 9705464H, 200804075H).
