Welcome to the October 2022 issue of Weaver’s State and Local Tax Digest. In this month’s highlights, several states clarify that forgiven student loan debt is not taxable and states continue to enact tax cut legislation.
INCOME AND FRANCHISE TAX UPDATES
States Clarify Taxation of Forgiven Student Loans
Cancellation of debt income from forgiven student loan could be subject to state income tax. While the American Rescue Plan Act of 2021 made forgiven student loan debt exempt from federal income tax, several states do not conform to the 2021 law. Taxpayers in these states would have to add the forgiven debt back to their state income tax amount. Indiana, Mississippi, and North Carolina have confirmed that forgiven student loan debt will be subject to the state income tax. Arkansas, Minnesota, and Wisconsin currently do not conform with the federal exemption for forgiven student loan debt, according to the Tax Foundation, and have not announced a decision on the issue. The legislatures in Minnesota and Wisconsin, however, are considering bills to exclude canceled student loan debt from taxable income. Hawaii, Idaho, Kentucky, Massachusetts, New York, Pennsylvania, South Carolina, Virginia, and West Virginia will exempt forgiven student loan. States not listed are in conformity with the federal law and will not tax forgiven student loan debt.
Idaho Enacts Tax Cut Legislation that Includes Flat Tax
Idaho enactedH.B. 1, which implements a 5.8 percent income tax rate for individuals, trusts, estates, and corporations. The law also exempts from tax the first $2,500 or $5,000 if filing jointly. The law also includes one-time tax rebates of 10 percent of the income tax amount paid in 2020 or $300 for individuals and $600 for joint filers, whichever is higher. The legislature passed the bill during a special session.
Indiana Enacts Additional Taxpayer Refund
Indiana Governor Eric J. Holcomb signed into law S.B. 2, which provides an additional automatic taxpayer refund of $200 for the 2021 tax year. It also provides a sales tax exemption for children’s diapers; caps the gasoline use tax rate at 29.5 cents per gallon through June 30, 2023; adds a $3,000 exemption for an adopted child.
New York Enacts $1 Million Nexus for NYC Corporation Tax and Makes NYC PTET Retroactive
New York Governor Kathy Hochul signed into law S9454, which adopts a $1 million economic nexus threshold for New York City receipts for the NYC business corporation tax. The change applies to tax years beginning on or after January 1, 2022. The act also makes the New York City elective pass-through entity tax effective to tax years beginning on or after January 1, 2021.
New York Issues Draft Regulations on Apportionment
The New York State Department of Taxation and Finance issued amended draft regulations that contain updates for all apportionment rules. This includes the rules for digital products and services as well as services and other business receipts that were previously posted separately. It also includes the rules for New York State S corporations that were previously included as Subpart 4-3, which has been moved to Subpart 10-3 in the Parts 5 through 10 draft regulation.
Texas Appeals Court Finds Non-Inventory Securities Sales Not Includible in Apportionment Factor
The Texas Court of Appeals upheld a trial court decision that found that the sale of non-inventory securities was not includable in gross receipts for calculating the franchise tax apportionment factor. The court concluded that because the non-inventory securities are not “treated as inventory of the seller” for federal tax purposes the proceeds of the sale of the securities could not be considered gross receipts for purposes of the apportionment factor.
SALES AND USE TAX UPDATES
Arizona Expands Agricultural Tax Exemption
Arizona enacted H2871, which expands the exemptions from the transaction privilege tax and use tax for the sale of agricultural machinery and equipment. The law repeals the requirement that the equipment is new and that leases are a minimum of two years long.
California Exempts Car Rental Brokers from Marketplace Facilitator Status
California enacted S.B. 1312, which creates an exception to the definition of “marketplace facilitator” for a vehicle rental broker for the facilitation of a specified vehicle rental. Under the law, a person that is a vehicle rental broker is not a marketplace facilitator with respect to the facilitation of a passenger vehicle rental on behalf of a rental company that is not a related person.
California Increases Tax Exclusion for Alternative Energy
California enacted A.B. 2887, which increases the sales and use tax exclusion for alternative energy and transportation projects by $50 million to $150 million until January 1, 2026. The exclusions go to projects that promote California-based manufacturing, jobs, advanced manufacturing, reduction of greenhouse gases, or reduction in air and water pollution or energy consumption.
North Carolina Exempts Interstate Air and Ground Couriers from Sales tax
North Carolina enacted H103, which exempts from sales tax sales of certain items to an interstate air and ground courier for use at its package sorting facility. The facility must meet certain employee investment requirements to qualify for the tax exemption. This law became effective July 1, 2022
Pennsylvania Extends Computer Data Center Exemption
Pennsylvania enacted H1342, which extends the computer data center sales tax exemption qualification period to 25 years. The bill also clarifies that peer-to-peer car-sharing is subject to sales and use tax.
Tennessee Allows Sales Tax Deduction for Dealers
Tennessee enacted S.B. 500, which revises the dealer’s deduction for accounting for and remitting sales tax for items sold during July 1, 2022 and ending June 30, 2023. The current law provides that an out-of-state person making sales in Tennessee who, while not required, voluntarily registers to collect and remit use tax on items of tangible personal property sold to Tennessee customers is allowed a deduction against taxes due, reported, and paid to the department. The deduction is 2 percent of the first $2,500 on each report; and 1.15 percent of amounts over $2,500 on each report. The bill specifies that the deduction will apply to all dealers.
Vermont Expands Manufacturing Tax Exemption
Vermont expanded its manufacturing sales and use tax exemption to include machinery used in or consumed as part of an integrated production operation. The bill defines an “integrated production operation” as “an integrated series of operations at a manufacturing or processing plant or facility to process, transform, or convert tangible personal property by physical, chemical, or other means into a different form, composition, or character from that in which it originally existed.”
PROPERTY TAX UPDATES
New Mexico Proposes Repeal of Property Tax Regulations
The New Mexico Taxation and Revenue Department proposed to repeal and replace property tax regulations on digital advertising and business location. Additionally, the department proposed to repeal and replace property tax regulations on agricultural products and cannabis. The regulations include those on the allocation of the value of property; the valuation of residential property in counties whose ratio is 85 percent; a special method of valuation for pipelines, tanks, sales meters, and plants used in the processing, gathering, transmission, storage, or distribution of oil, natural gas, carbon dioxide, or liquid hydrocarbons; and the disabled veteran exemption.
West Virginia Approves Proposed Property Tax Valuation for Oil and Gas
The West Virginia State Tax Department published a notice of approval for the proposed amendment and adoption of regulations on the mass appraisal methodology for producing and reserve oil and natural gas properties for ad valorem tax purposes. The rule reflects recent legislation on the valuation of oil, natural gas, and natural gas liquids. The new valuation formula became effective July 1, 2022 and will terminate August 1, 2028.
FUELS AND EXCISE TAX UPDATES
Georgia Extends Gas Tax Suspension through October 12
Georgia Governor Brian Kemp issued an executive order to extend the state’s motor and locomotive fuel tax suspension through October 12. Georgia has extended the tax suspension several times since the initial suspension in March 2022. Before the extension, the suspension was scheduled to expire September 12.
New Jersey Cuts Gas Taxes
New Jersey will reduce the New Jersey Petroleum Products Gross Receipts (PPGR) tax rate on October 1, 2022 from 31.9 cents to 30.9 cents for gasoline and from 35.9 cents to 34.9 cents for diesel fuel. Combined with the Motor Fuels Tax, which is at 10.5 cents for gasoline and 13.5 cents for diesel fuel, the total tax on motorists will be 41.4 cents for gasoline and 48.4 cents for diesel fuel.
Tugboats and Towboats Exempted from New York Petroleum Business Tax
New York exempted motor fuel, diesel motor fuel, or residual petroleum products used by tugboats and towboats from the petroleum business tax as of September 1, 2022. Purchasers of motor fuel, diesel motor fuel, or residual petroleum products used by tugboats and towboats may claim a reimbursement of the full amount of tax that has been passed through to the purchaser.
UNCLAIMED PROPERTY UPDATES
California Passes Voluntary Compliance Program for Unclaimed Property
California Gov. Gavin Newsom signed into law A.B. 2280, which allows the Controller to establish the California Voluntary Compliance Program for unclaimed property holders. The bill also allows the Controller to reinstate interest that had been waived under the program if the property is not timely paid or delivered. The bill imposes the limit of $10,000 on interest payable if a holder files a report, after the initial report and before payment or delivery is made for property that may not be subject to escheat, that is not in substantial compliance with statutory requirements. The bill also authorizes the Controller to waive interest payable if the holder’s failure to report in substantial compliance with specified requirements is due to reasonable cause and would require the Controller to waive interest payable if the holder participates in and completes all of the requirements of the California Voluntary Compliance Program.
Pennsylvania Tax Cuts
Pennsylvania (PA) enacted H.B. 1342, which includes corporate and personal tax changes. The bill reduces the corporate net income tax (CNIT) rate over nine years from 9.99 percent to 4.99 percent.
Tenant Improvements: Considering the Tax Implications
Improvements to a rental property on behalf of a tenant are often key issues when negotiating a lease. Who pays for the modifications can have significant tax implications in terms of which party can take depreciation deductions or expense the costs of the improvements, can create taxable income, or an intangible asset.