Welcome to the November 2022 issue of Weaver’s State and Local Tax Digest. This month’s highlights include additional tax reductions in several states and a key ruling on digital advertising taxes.
INCOME AND FRANCHISE TAX UPDATES
Arizona to Implement Flat Tax a Year Early
Arizona Gov. Doug Duceyannouncedthat the state’s 2.5 percent flat income tax rate will be implemented on January 1, 2023. In 2021, Arizona implemented atax cutthat scheduled a 2.5 percent flat tax to be phased in over three years. The order moves the 2.5 percent rate up a year from 2024 to 2023.
California Increases Out-of-State Tax Credit for SALT Cap Workaround
California enactedS.B. 851, which makes changes to the state’s elective pass-through entity tax (PTET) for multistate firms. The bill increases the maximum credit allowed to residents for specified taxes paid to another state by the amount by which their net tax is decreased by the credit allowed to a partner, shareholder, or member of an entity that elects to pay the PTET. This is effective for tax years beginning on or after January 1, 2022, and before January 1, 2026.
California Implements Union Dues Credit and PPP Exclusions
California enacted A.B. 158, which makes several changes to state income tax. The bill allows a credit for dues paid to a labor organization during for taxable years beginning on or after January 1, 2024. It also conforms to the federal PPP Extension Act of 2021 in excluding from gross income forgiven Paycheck Protection Program (PPP) loans for taxable years beginning on or after January 1, 2019.
California Excludes Water Conservation Rebates from Taxable Income
California Gov. Gavin Newsom signed into law A.B. 2142, which excludes from taxable income any amount received as a rebate, voucher, or other financial incentive issued by a public water system, local government, or state agency for participation in a turf replacement water conservation program. The exclusion applies after January 1, 2022 and before January 1, 2027.
California Excludes Wildfire Payments from State Income Tax
California enacted A.B. 1249, which excludes payments from the Fire Victims Trust from the state income tax. This applies to settlement payments for losses from the 2015 Butte Fire, the 2017 North Bay fires, and the 2018 Camp Fire. California also enacted S.B. 1246, which excludes settlement payments for the 2017 Thomas and Woolsey fires from state income tax.
Illinois Extends 2021 Corporate Return Due Date until November 15
The Illinois Department of Revenue extended the due date for calendar-year 2021 Form IL-1120 returns to November 15, 2022. This is an additional month beyond the extended federal filing deadline.
Iowa Implements Adjustable Corporate Income Tax Rates
The Iowa Department of Revenue adopted a new rule that implements a recent law that adjusts the state’s corporate income tax rates for a given year depending on whether net corporate income tax proceeds exceed certain thresholds in the immediately prior fiscal year. The rule includes the method of determining the corporate rates.
Louisiana Proposes Rule Change on Pass-through Income Tax
The Louisiana Department of Revenue proposed a rule change on its elective pass-through entity tax. The proposed rule would implement 2021 legislation “as it concerns the repeal of the deduction for federal taxes paid and the amendment of rates for taxpayers making a pass-through entity election.”
Missouri Enacts Tax Cut Legislation
Missouri Gov. Mike Parson signed into law legislation that reduces income taxes and extends agriculture tax credits for at least six years. S.B. 3 & 5 reduces the top individual income tax rate from 5.2 percent to 4.95 percent, eliminates the bottom income tax bracket; allows an additional .15 percent top income tax rate reduction to 4.8 percent when net general revenues increase by $175 million; eliminates income taxes for individuals making less than $13,000 a year and couples making less than $26,000; and allows three additional .1 percent top income tax rate reductions in future years when net general revenue increases by $200 million, adjusted for inflation. The governor also signed into law H.B. 3, which extends and creates several agriculture tax credit programs.
New Jersey Makes Several Tax Regulatory Amendments
New Jersey adopted a proposed rule that provides new and amended rules for net operating loss deductions and combined returns. The proposed rules also make amendments to existing rules to address Federal tax reform measures applicable for tax years beginning on and after January 1, 2017, a reduced dividend exclusion, and provisions of the Internal Revenue Code from which New Jersey has decoupled.
New York Tax Court Rules that Email Tracking Service was Nontaxable Service
A New York Division of Taxation judge held that a company providing email tracking was performing a bundled non-taxable information service. The judge ruled that the company was not selling prewritten computer software but is instead selling an information service.
North Carolina Provides Hurricane Ian Tax Relief
The North Carolina Department of Revenue (NCDOR) announced that state tax relief is available to victims of Hurricane Ian in North Carolina. NCDOR will not assess certain late filing and late payment penalties for licenses, returns, or payments due from September 28, 2022 through Feb. 15, 2023 if the license is obtained, the return is filed, or the tax is paid by February 15, 2023.
In Online Merchants Guild v. Secretary of Revenue, the Pennsylvania Commonwealth Court held that out-of-state businesses selling merchandise through an online marketplace and with storage of merchandise in a third-party warehouse in Pennsylvania warehouses lacked sufficient contacts with the state for sales tax or personal income tax purposes.
South Dakota Supreme Court Rejects Deduction Calculation
The South Dakota Supreme Court affirmed a state Department of Revenue ruling that rejected a bank’s method of calculating its federal income tax deduction from net income subject to South Dakota’s bank franchise tax. The court rejected a deduction over the years at issue that was higher than the entire consolidated group’s federal tax payments.
Texas Comptroller States that Credit Ratings of Legal Entities are Taxable Service
The Texas Comptroller of Public Accounts stated that credit ratings of legal entities are taxable as a credit reporting service. The credit ratings of debt obligations are not taxable, however. The Comptroller reasoned that while the credit rating of a debt obligation may be based in part on the financial situation of the entity that issued the obligation, the rating of the obligation is separate from the rating of the issuing entity.
SALES AND USE TAX UPDATES
California to Require Additional Information from Online Marketplace Sellers
California Gov. Gavin Newsom signed into law S.B. 301, which requires an online marketplace to require a high-volume third-party seller on the online marketplace’s platform to provide to the online marketplace specified information. This includes certain contact information and a bank account number or, if the seller does not have a bank account, the name of the payee for payments issued by the online marketplace to the seller. The requirements take effect July 1, 2023.
California to Require Release of Winegrower Tax Data
California Gov. Gavin Newsom signed into law S.B. 518, which requires taxpayers to file a tax return using electronic media for excise tax returns on beer and wine sold in the state. For winegrower returns filed on or after January 1, 2023, the bill requires the board, upon request, to make public the names and addresses of taxpayers filing a winegrower return, as well as any information in a winegrower return and schedules. A taxpayer, however, can elect to prohibit the disclosure of any information contained in that taxpayer’s winegrower return and schedules.
California Retailer Must Remit Tax Collected from Out-of-State Customers
The California Office of Tax Appeals held that a California retailer must either remit to California or refund its customers the tax amount that it collected from out-of-state customers on California exempt or nontaxable transactions in jurisdictions in which the retailer was not authorized to collect sales or use tax. The Office of Tax Appeals found that the excess collections cannot constitute reimbursement for those states’ sales or use tax because there is no evidence that appellant was registered or authorized to collect those states’ sales or use tax during the liability period.
Iowa Proposes Rule on Taxation of Digital-Based Services
The Iowa Department of Revenue proposed a rule to formally adopt its informal guidance on the taxability of digital services. The proposed rule would include as subject to sales and use tax information services, software as a service, services related to specified digital products, storage, and webinars.
Maryland Judge Finds Digital Advertising Tax Unconstitutional
A Maryland circuit court judge ruled in Comcast of California/ Maryland/ Pennsylvania/ Virginia/ West Virginia LLC et al. v. Comptroller of the Treasury of Maryland, No. C-02-CV-21-000509 that the state’s digital advertising tax was unconstitutional. The judge ruled that the tax violates the Commerce Clause of the U.S. Constitution, the federal Internet Tax Freedom Act, and the First Amendment. The Maryland state comptroller is expected to appeal the decision.
Mississippi Supreme Court Rules Digital Photograph Not a Taxable Service
The Mississippi Supreme Court affirmed an order vacating the sales tax assessment against a company providing photography services and selling copyrights to the digital images. The court affirmed that these transactions are not subject to Mississippi sales tax because neither activity is subject to tax under state law. The court reasoned that photography is not a taxable business services and still digital images are not taxable digital products.
Portland, Oregon Adopts Market-Based Sourcing
Portland, Oregon adopted an ordinance that implements a market-based sourcing methodology for sourcing the sale of items other than tangible personal property. The ordinance conforms the City of Portland with the State of Oregon in a method of apportionment for the sales of services called cost of performance. The state changed to a method of apportionment for the sales of services called market-based sourcing beginning in 2018.
PROPERTY TAX UPDATES
California Expands Property Tax Welfare Exemption
California Gov. Gavin Newsom signed into law A.B. 1206, which requires that a unit continue to be treated as occupied by a lower-income household if the owner is a community land trust whose land is leased to low-income households. The bill requires a claim for a welfare exemption pursuant to this requirement to be accompanied by an affidavit containing specified information regarding the units for which the exemption is claimed.
California Extends Property Tax Appraisal Exclusion for Solar
California Gov. Gavin Newsom signed into law S.B. 1340, which extends the property tax appraisal exclusion for an active solar energy system to January 1, 2027. The California Constitution limits the maximum rate of ad valorem tax on real property to 1% of the full cash value of the property and defines “full cash value” for these purposes as the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment. The exclusion prevents the construction or addition of any “active solar energy system” from triggering a property value reassessment under Proposition 13. An active solar system will continue to receive the exclusion until there is a subsequent change in ownership.
Kansas Provides Guidance for COVID-19 Retail Property Tax Relief Program
Kansas Gov. Laura Kelly announced the application process for the COVID-19 Retail Storefront Property Tax Relief program. The application process opens in October and claimants have until April 15, 2023 to file for assistance. H.B. 2136, passed during the 2022 legislative session, created the COVID-19 Retail Storefront Property Tax Relief Act to provide assistance to certain claimants impacted by COVID-19 related shutdowns and restrictions during tax years 2020 and 2021, based on a portion of property taxes accrued on retail storefront property. The governor’s memo includes generally eligible, assistance amounts, the process or claiming assistance, and the appeals process.
Oklahoma Amends Ad Valorem Tax Regulations on Homestead Exemption Qualification
The Oklahoma Tax Commission amended regulations on ad valorem property tax to implement the changes made through recent legislation. The legislation increases the income ceiling to qualify for an additional homestead exemption from $20,000 to $25,000; excludes federal stimulus or relief payments related to COVID-19 from gross household income for purposes of the exemption; changes payroll and investment cost requirements; allows custom manufacturers to qualify for the five-year ad valorem manufacturing exemption; and provides that a 100 percent disabled veteran and an unremarried spouse of a veteran killed in action, owning a residence on leased land owned by a municipality, town, or city, qualify for the statutory homestead exemption.
Utah Proposes to Amend Personal Property Valuation Regulations
The Utah State Tax Commission proposed amended regulations to the valuation of personal property. The proposal includes rules defining classes of property considered to be personal property; exempt personal property; updated valuation schedules for locally assessed personal property; the calculation of the taxable value of noncapitalized personal property; and the rule as binding on taxpayers beginning January 1, 2023.
FUELS AND EXCISE TAX UPDATES
Georgia Extends Gas Tax Suspension after Hurricane Ian
Georgia Gov. Brian P. Kemp signed two executive orders extending the temporary suspension of state taxes on motor and locomotive fuel as well as the supply chain state of emergency. Both orders are effective through November 11, 2022.
IRS Issues Proposed Amendments to the Required Minimum Distribution Rules
On February 24, 2022, the Internal Revenue Service (IRS) issued proposed amendments to rules for required minimum distributions from a defined contribution plan after the participant’s death.
Why is Now the Perfect Time to Act? The current environment for estate planning and gifting is about as favorable as it has ever been in U.S. history. But this “golden age” is not likely to last. In the near future, estate tax laws are almost certain to become less favorable.