Welcome to the November 2023 issue of Weaver’s State and Local Tax Digest. This month's digest includes new tax legislation in several states where the southern district court upheld the IRS disallowance of alcohol mixture credit and Missouri's proposed changes to manufacturing and resale exemptions.
The Indiana Department of Revenue updated Indiana Information Bulletin No. IT72, 10/1/2023, to provide updates on composite schedules for 2023, carryforward credits for 2024 and later and additional information regarding the pass-through entity tax. Beginning in 2023, all partners and shareholders must be listed on the composite schedules or risk a $500 penalty.
Massachusetts Enacts Single Sales Factor, Reduces Short-Term Capital Gains Tax Rate
On October 4, 2023, Massachusetts passed H.4104 into law. This package impacts both businesses and individuals with the significant changes being the adoption of a single sales factor apportionment formula for all industries, a change in the sourcing of receipts for financial institutions and the reduction of the short-term capital gains rate for personal income taxes. The change to the single sales factor apportionment formula and the sourcing of receipts for financial institutions will be effective starting in 2025. The change to the reduced short-term capital gains tax rate is effective for tax years beginning on or after January 1, 2023. The law also have other changes to certain credits and other changes that impact individuals and estates.
New Jersey Updates Convenience of the Employer Sourcing Rule
New Jersey enacted a “convenience of the employer test” in July 2023 whereby a nonresident employee’s compensation from a New Jersey employer would be sourced to the employer’s location if the employee works from an out-of-state location for the employee’s convenience rather than out of necessity for the employer. The state clarified that this law does not apply to employees who are residents of states that have a similar rule. In the latest update to this new law, New Jersey clarified that Connecticut’s law appears similar to New Jersey’s law, and if Connecticut’s law is applied similarly to New Jersey’s law, an employee who works in Connecticut for a New Jersey employer will not trigger New Jersey’s rule.
Ohio Board of Tax Appeals (BTA) issues decisions for sourcing sales for Commercial Activity Tax (CAT)
Ohio BTA decided two cases that provide additional guidance to taxpayers on how to source tangible personal property for CAT purposes. Under Ohio Rev. Code Ann. §5751.033(E), gross receipts from the sale of tangible personal property are situated in Ohio if the property is received in Ohio by the purchaser. The statute further explains that if the delivery is through a motor carrier or other means of transportation, the location of where the property is received is where all the transportation has been completed. Ohio also issued Tax Information Release No. CAT 2005-17 (04/01/2006) where the state indicated that the location of the purchaser must be known at the time of sale. Therefore, if a taxpayer knew that half of the product going to an Ohio customer was going to be further shipped to Pennsylvania, the taxpayer would not include the amount going to Pennsylvania in Ohio gross receipts. In VVF Intervest, LLC v. Patricia Harris, Tax Commissioner of Ohio, 2019-1233, Ohio Bd. Tax App. Sept. 13, 2023, the BTA opined that while sellers are not required to know the ultimate destination of a product sold, taxpayers can provide evidence to prove the ultimate destination was outside Ohio and source those gross receipts outside the state. In Jones Apparel Group/Nine West Holdings v. McClain, Case Nos. 2020-53, 2020-54, Ohio Bd. Tax App. Sept. 15, 2023, the BTA similarly found that the Taxpayer could provide evidence supporting that the goods were ultimately received outside of Ohio but that the Taxpayer in this case did not meet that burden of proof for the sales in question.
Utah Updates Nexus Publication
The Utah State Tax Commission updated its publication providing guidance for determining whether a business’ activities create nexus in the state. Publication 37, Business Activity and Nexus in Utah, provides a list of activities that can subject a business to the Utah corporation franchise and income tax requirements. The publication also provides guidance on the state’s Voluntary Disclosure Program.
SALES AND USE TAX UPDATES
California Clarifies Marketplace Facilitator Regulation
California Department of Tax and Fee Administration (CDTFA) approved the adoption of California Code Regulations 1684.5 to clarify Marketplace Facilitator responsibilities. The new regulation is largely the same as the emergency regulation issued in June 2020. The regulations implement the Marketplace Facilitator Act, which provides that a marketplace facilitator is generally responsible for collecting, reporting, and paying the tax on retail sales made through their marketplace for delivery to California customers. A marketplace facilitator is deemed to be “engaged in business” in California if the sales of its property and sales of items on behalf of marketplace sellers for delivery into California exceeds $500,000 annually. Both taxable and nontaxable sales should be included in this economic nexus calculation.
Illinois Exempts Car Sharing from the Automobile Renting Occupation and Use Tax Act
Illinois Gov. J. B. Pritzker signed into law H.B. 1497, which amends the Automobile Renting Occupation and Use Tax (rental tax) to provide the taxes imposed under the Act do not apply to any amounts paid or received for peer-to-peer car sharing, or the privilege of sharing a vehicle through a car-sharing program, as defined in the Car-Sharing Program Act if the shared vehicle owner paid applicable taxes upon the purchase of the automobile or when the automobile was brought into Illinois.
Illinois Bill Exempts Streaming Services from Local Fees
Illinois enacted H.B. 3808, which provides that effective January 1, 2024, streaming services are not included in the gross revenue subject to local fees. This bill also provides the definition of “video service” does not include direct-to-home satellite services and internet streaming content.
Louisiana Issues Draft Bulletin on Tax Collection and Remittance for Marketplace and Direct Sales
The Louisiana Sales and Use Tax Commission for Remote Sellers posted a draft bulletin to provide guidance to merchants making sales through marketplace facilitators and direct sales to consumers and the associated collection and remittance requirements. This bulletin clarifies that a Louisiana merchant who makes sales via a marketplace facilitator is making remote sales, and the marketplace facilitator is required to collect and remit sales taxes to the e Louisiana Sales and Use Tax Commission for Remote Sellers on behalf of all of their marketplace sellers.
Michigan Updates Guidance on Use Tax for Lease Transactions
The Michigan Department of Treasury issued updated guidance regarding the sales and use tax treatment of tangible personal property acquired for lease or rental. The guidance describes: what constitutes a lease of tangible personal property; the availability of the lessor election if the property is incidental to the service provided; the tax base of rental receipts; who is liable for the tax; and the applicability of exemptions on leased property.
Mississippi Issues Guidance on Remotely Accessed Software Exemption and Direct Pay
The Mississippi Department of Revenue issued a sales and use tax notice regarding the taxation of purchases of computer software and computer software services. The updates are in response to S.B. 2449, which provided an exemption for remotely accessed software hosted on servers outside Mississippi. Beginning July 1, 2023, purchasers of computer software and/or computer software service can apply for a computer software direct pay permit, which allows the customer to purchase computer software and/or computer software services exempt from Mississippi sales or use tax and then remit the correct tax directly to the Mississippi Department of Revenue.
Missouri Proposes Changes to Manufacturing and Resale Exemptions
The Missouri Department of Revenue proposed changes to rules on manufacturing machinery and equipment exemptions. The proposed updates clarify that producing, compounding, and processing are synonymous with “manufacturing;"; define a “product” as an output with market value; and remove certain provisions regarding direct use.
Missouri Requires Auto Dealers to Remit Sales Tax
Missouri Gov. Mike Parson signed into law S.B. 398, which provides that effective August 28, 2023, motor vehicle dealers are required to collect and remit sales tax to the Department of Revenue on all motor vehicles sold. This requirement applies to new and used motor vehicle dealers, power sport, wholesale motor vehicle, trailer and boat dealers on the sale or lease of motor vehicles, motorcycles, trailers, boats and outboard motors.
Missouri Issues Letter Ruling on Taxability of a Solar Energy System
The Missouri Department of Revenue issued a letter ruling regarding the sales and use tax exemptions applicable to a solar energy system. The ruling held that there are exemptions for solar panels, solar panel racking and supports, combiner boxes, inverters, solar collection transformers, project substation and interconnection transformers; tracking systems and a SCADA system control center; and electrical DC wiring, and AC electrical wiring and data cabling. The ruling found that the purchase of site fencing and gravel access and service roads are not exempt from sales and use tax because they are not a part of the energy system.
South Carolina Issues Guidance on Motor Vehicles Exemption
The South Carolina Department of Revenue issued a draft revenue ruling as updated guidance on which motor vehicles are subject to a partial state sales and use tax exemption under state law. This exemption limits the tax rate to 5% of gross sales price, not to exceed $500. The advisory opinion is in response to South Carolina Court of Appeals opinion that held that the “motor vehicle” includes motorized, self-propelled, wheeled vehicles, such as all-terrain vehicles, utility task vehicles, golf carts, and legend race cars, that the Department of Revenue previously excluded from the maximum tax provisions.
Texas Exempts Certain Medical Services from Sales and Use Tax
Texas Gov. Greg Abbott signed into law S.B. 1122, which excludes certain medical services from sales and use taxes in determining workers' compensation benefits. Previously, in 2022, the Texas Comptroller issued a private ruling that required doctors to collect Texas sales tax when performing exams ordered by the Division of Workers’ Compensation (DWC) regarding work-related injuries or occupation illnesses. Therefore, all medical services, examinations, or tests required for the purpose of determining the appropriate level of workers’ compensation benefits are now exempt from Texas sales and use tax.
Wisconsin Creates Exemption for Data Center Construction
Wisconsin Gov. Tony Evers signed into law S.B. 70, which creates a sales and use tax exemption for property affixed, incorporated, or used exclusively for the development, construction, renovation, expansion, replacement, repair, or operation of a qualified data center and any related water cooling or conservation systems for the qualified data center.
PROPERTY TAX UPDATES
Alabama Supreme Court Voids Tax Sale over Notice Issue
The Alabama Supreme Court affirmed a lower court decision that voided a tax sale because the true owner would receive no notice of the proceedings against their property. The county assessed the property taxes in the name of the prior owner and sold the property at a tax sale. (Espinosa v. Chamblin, Ala. S. Ct., Dkt. No. SC-2022-1034, 08/25/2023.)
California Updates Urban Agriculture Incentive Zone Valuations
The California State Board of Equalization (SBOE) has advised county assessors that the average per-acre value for irrigated cropland in California will be updated for the 2024 lien date to $18,600. The letter refers to Cal. Gov't. Cd. § 51042, which allows cities and counties to provide preferential property tax assessments under the Urban Agriculture Incentive Zones Act. The letter also refers to Cal. Rev. & Tax. Cd. § 422.7, which requires a county assessor to value land that is restricted by a contract based on the average per-acre value of irrigated cropland.
Illinois Court Finds Partial Property Tax Exemption for Revoked Parcels
An Illinois tax-exempt hospital complex that had its property tax exemption revoked for four parcels is entitled to a partial property tax exemption and refund for each of those parcels in each year they were revoked. An Illinois appellate court, in Carle Foundation v. Department of Revenue, held that the hospital met the requirements to qualify for partial exemption.
Michigan Appeals Court Rules that Taxpayer Did not Receive Required Notice on Appeals
The Michigan Court of Appeals ruled that a taxpayer did not receive the required notice on their ability to appeal property reassessments. The court concluded that there was no indication that the township provided the taxpayer notice that was reasonably calculated to alert the taxpayer to the avenues available for challenging the increase in the taxable value of the taxpayer's property. This violated the taxpayer's right to due process, and the case was remanded to accept the taxpayer's appeal as timely. (Winkler v. Township of Markey, Mich. Ct. App., Dkt. No. 362568, 08/24/2023 (unpublished).)
Michigan Implements Solar Energy Districts
Michigan Governor Gretchen Whitmer signed into law two property tax changes, H.B. 4317 and H.B. 4318. H.B. 4317 provides for the establishment of solar energy districts in qualified local governmental units and the issuance of solar energy exemption certificates to qualified solar energy facilities not yet placed in service in these districts. Facilities with approved certificates, but not the land they are on, would be exempt from ad valorem property taxes and would instead be subject to the solar energy facilities tax. H.B. 4318 would amend the General Property Tax Act to make complementary changes implementing that exemption.
Oregon Increases Limits on “Minor Construction” for Tax Purposes
Oregon Gov. Tina Kotek signed into law H.B. 3194, which increases the maximum dollar amounts used to determine whether addition of real property improvements constitutes “minor construction” for purposes of property tax law. The new law increases the current threshold of $10,000 per assessment year or $25,000 cumulatively over five assessments to $18,200 and $45,000, respectively and were increased to account for inflation.
Pennsylvania Increases Property Tax Rebates
Pennsylvania Gov. Josh Shapiro signed into law H.B.1100, which expands the Property Tax/Rent Rebate (PTRR) program by raising the maximum rebate for seniors from $650 to $1,000, increasing the income cap for renters and homeowners to $45,000 a year, and tying that cap to the cost of living.
Texas Exempts Certain Charities from Real Estate Ad Valorem Tax
Texas Gov. Gregg Abbot signed into law H.B. 456, which exempts from ad valorem taxation certain interests in a mineral in place owned by certain charitable organizations. The exemption applies to ad valorem taxes imposed for tax years beginning on or after January 1, 2024.
Vermont Changes Property Reappraisals Periods
Vermont Gov. Phil Scott signed into law H.480, which removes the common level of appraisal as a trigger for the Vermont Division of Property Valuation and Review (PVR) to order reappraisals. The law requires municipalities to reappraise property every six years unless another period of time is approved by PVR. The law is retroactive to April 1, 2022.
Washington State Issued Interim Guidance on property tax on Tribal Gaming
The Washington Department of Revenue (WA DOR) issued interim guidance on whether state and local governments may impose personal property tax on leases of Class II and III gaming equipment to an Indian tribe for use in a tribal casino located in a tribe’s Indian Country in Washington. The WA DOR determined that federal law preempts state and local personal property taxation of both Class II and Class III gaming equipment located in Indian Country.
FUELS AND EXCISE TAX UPDATES
Alabama Increases Fuel Tax Rates
Alabama is increasing its fuel tax rates effective October 1. Gasoline will increase to $0.29 per gallon (from $0.28 per gallon); diesel will increase to $0.30 per gallon (from 0.29 per gallon); CNG will increase to $0.13 per GGE (from $0.08 per GGE); and LNG will increase to $0.13 per GGE (from $0.08 per DGE).
District Court Upholds IRS Disallowance of Alcohol Mixture Credit
In Chemoil Corp. v. U.S., the U.S. District Court for the Southern District of New York upheld the IRS’s disallowance of the ethanol mixture tax credit because the taxpayer had no legitimate basis for engaging in the transactions in question and did so only to claim the tax credit. The Court upheld the IRS’s decision under the economic substance doctrine, which disallows the tax benefits of a transaction if the transaction lacks a business purpose. The court reasoned that Chemoil sold ethanol at a pre-tax loss in each of the transactions in question and had no reasonable expectation of profit from the sale, and there was no evidence that Chemoil had any motivation to enter into the transactions other than potential tax benefits that could be reaped from obtaining the alcohol mixture excise tax credit.
California Increases Sales Tax on Diesel Fuel
California has posted a change to its prepaid sales tax on diesel fuel. Effective October 1, 2023, the rate will change from $0.345 per gallon to $0.50 per gallon. Additionally, the state retail sales tax rate will increase from 9.0625% to 13%.
New Jersey Increases Petroleum Products Gross Receipts Tax
New Jersey has announced an increase in its Petroleum Products Gross Receipts Tax, effective October 1, 2023. The rate for gasoline will increase to $0.318 per gallon and the rate for diesel will increase to $0.358 per gallon. The rates for all other fuels will remain unchanged. This is the first-rate increase since October 2020.
U.S. Customs User Fees Increase
Effective October 1, 2023, it will become a little more expensive to import goods into the United States. Several Customs user fees, including the Merchandise Processing Fee, will increase. The Merchandise Processing Fee will remain at 0.3464% ad valorem but the minimum increases to $31.67 and the maximum increases to $614.35. Note that this fee may be exempted when importing from countries with a free trade agreement.
Vermont Posts Fuel Tax Rates for Q4, 2023
Vermont posted its motor fuel tax rates for Q4 2023. The Motor Fuel Transportation Infrastructure Assessment (MFTIA) rate is $0.0644. The Motor Fuel Tax Assessment (MFTA) rate is $0.1340.
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Alcohol Mixture Credit Case Delivers Blow to Taxpayers Based on Economics of Transactions and the Tax Credits
The biofuels industry suffered a blow in the U.S. District Court for the Southern District of New York in a case that pitted the alcohol fuel mixture credit against the economic substance doctrine. The case is Chemoil Corp. v. U.S., No. 19-CV-6314-LTS-JW.
Transfer Pricing in Unexpected Places – State and Local Income Tax
Transfer pricing is commonly viewed as an international issue, but certain state tax authorities are beginning to scrutinize domestic related-party transactions. These transactions include supply chains for materials or finished goods, services, equipment leasing, licensing software and intellectual property (royalties) or loans among domestic related parties.
