State Tax News & Views: Massachusetts tax cuts, EV taxes, more.

Welcome to this edition of our state and local tax roundup. Remember Eide Bailly for your state and local tax planning, compliance, and incentive needs. Due to mysterious software problems, last week's post is combined with this week's. Regular posting will resume (we hope) next week.

MTC Hears First Reaction to Proposed Digital Tax Base Principles - Amy Hamilton, Tax Notes ($):

In the first public reaction to the draft, Karl Frieden of the Council On State Taxation complimented Langenberg’s “comprehensive and thought-provoking” draft principles. But Frieden took issue with the section on business inputs, arguing that Langenberg places too much emphasis on the “fairly novel and controversial opinions” of David Agrawal of the University of Kentucky and William Fox of the University of Tennessee.

Frieden took issue with Langenberg citing a 2020 article by Agrawal and Fox for the premise that states should impose tax on digital advertising and data mining, as has been proposed in New York. As he has argued in his writing, Frieden told the work group that digital advertising and data mining are business inputs, not consumer products, and thus are supposed to be untaxed.

States Likely to Change Laws to Conform to Tyler, Legal Foundation Says - Paul Jones, Tax Notes ($): 

Such statutory changes are necessary for the states to be in compliance with the decision, in which the Court ruled that a Minnesota county unlawfully confiscated the equity in Geraldine Tyler’s home by keeping the entire proceeds of the tax sale of the property.

...

“We are aware of jurisdictions in Massachusetts and Illinois that are . . . ignoring Tyler and conducting business as usual,” Manley said, predicting that those actions would ultimately be overturned by taxpayers in courts.

Seems bold.

States Weigh IRS Call for Free Direct File Feedback, Integration - Erin Slowey, Bloomberg:

California and Washington—which doesn’t have a state income tax—confirmed they will be participating in the pilot program, though officials from those states declined to comment further on the tool’s rollout ahead of an IRS announcement. Nebraska and Massachusetts officials told Bloomberg Tax they expressed interest in the pilot but are waiting for the IRS’s selection of states.

...

Of the 44 states that responded to Bloomberg Tax, 38 said they didn’t express interest or won’t be participating in the pilot program. Officials in some states like Oregon, Illinois, and Vermont said they will sit on the sidelines this year, but will be watching as the program develops. Others pointed to the lack of income tax in their states as a reason why they aren’t participating.

State-By-State Roundup

California

Calif. Extends Income Tax Deductions For Disaster Losses - Zak Kostro, Law360 Tax Authority ($). "S.B. 264, which Newsom signed Saturday, extends to taxable years starting before Jan. 1, 2029, a personal and corporate income tax deduction for disaster losses, according to a bill digest. The bill also extends for those taxable years a provision prohibiting any law that suspends, defers, reduces 'or otherwise diminishes' a net operating loss deduction from applying to disaster losses as specified by the legislation, according to the digest."

California grants tax relief for hurricane, fire, and seawater intrusion victims - California Franchise Tax Board:

The California Franchise Tax Board (FTB) today announced special state tax relief for taxpayers and businesses affected by Hurricanes Idalia and Lee, wildfires in Maui and Hawaii, and seawater intrusion in Louisiana.

Taxpayers and businesses in presidentially declared disaster areas are granted an extension to February 15, 2024, to file the 2022 income tax returns for California and make any income tax related payments that would have been due between September 15, 2023, and January 16, 2024.

Newsom Approves Use Tax Reporting Reform, Other Tax Bills - Paul Jones, Tax Notes ($). "Under prior law, a business was required to register as a qualified purchaser if it had more than $100,000 in annual gross receipts. But under A.B. 1097, a qualified purchaser is a person that makes more than $10,000 in purchases per year that are subject to use tax that hasn't been collected and remitted to the state by the remote seller. The change is scheduled to sunset on January 1, 2029."

Link: A.B. 1097

Colorado

Denver Asks Court If Colo. Tax Deed Sales Are Constitutional - Paul Williams, Law360 Tax Authority ($). "In a complaint filed Thursday in the Denver District Court, Denver asked for a declaratory judgment explaining whether the tax lien deed system set out in Colorado law violates the Fifth Amendment due to the U.S. Supreme Court's May decision in Tyler v. Hennepin County. That ruling held that the county violated the takings clause when it sold a condominium for a price that exceeded the tax debt incurred by the owner and kept the surplus."

Iowa

Iowa Tax Ruled To Apply To Nonresident Gambling Winnings - Jaqueline McCool, Law360 Tax Authority ($). "A business that had an agreement with an Iowa gambling boat to serve as the host and manager for online sports betting conducted on the boat is responsible for withholding state income tax on winnings received by nonresidents, the state Department of Revenue ruled."

Massachusetts

Massachusetts Governor Signs Tax Relief Package - Emily Hollingsworth, Tax Notes ($):

House Ways and Means Committee Chair Aaron Michlewitz (D) said switching Massachusetts from a three-factor apportionment formula to single-sales-factor apportionment based on a corporation’s sales tax receipts will “create a more competitive working environment for all.” The provision takes effect on January 1, 2025.

H. 4104 also reduces the short-term capital gains tax rate from 12 percent to 8.5 percent; eliminates the tax on estates valued below $2 million by creating a uniform tax credit of $99,600; and establishes a child and dependent tax credit that is equal to $310 per child for tax year 2023 and will increase to $440 for tax year 2024 and thereafter. A family with three children could see a child and dependent tax credit of more than $1,000, Healey said.

Governor Healey Signs First Tax Cuts in More Than 20 Years - Masschussetts.gov:

Provisions of the tax cuts package include:

• Child and Family Tax Credit – Eliminates two-dependent cap and increases credit from $180 per dependent child, disabled adult, or senior to $310 for 2023 and to $440 on a permanent basis, starting in 2024. An estimated 565,000 families will benefit, and this will be the most generous universal child and dependent tax credit in the county.
• Earned Income Tax Credit (EITC) – increases credit from 30% to 40% of the federal credit
• Estate Tax – increases threshold from $1 million to $2 million with a credit that mitigates cliff effect
• Short-Term Capital Gains – reduces rate from 12% to 8.5%
• Rental Deduction – increases cap from $3,000 to $4,000
• Senior Circuit Breaker Tax Credit – doubles credit, indexed to inflation, which equates to an increase from $1,200 to $2,400
• Single Sales Factor – shifts from three-factor apportionment system based on business’s share of sales, payroll, and property to apportionment based solely on sales

Kentucky

Supreme Court Passes on Kentucky Coal Tax Commerce Clause Case - Perry Cooper, Bloomberg. "The US Supreme Court said Monday that it won’t consider Kentucky’s request to revive the state’s regulatory scheme to make state coal more competitive by providing utility providers with a discount on taxes for coal extraction."

Michigan

Mich. Aligns Prepared Food Tax Rules With Multistate Pact - Paul Williams, Law360 Tax Authority ($). "The bills, H.B. 4377 and H.B. 4378, provide that sales of food for immediate consumption will be generally taxable if more than 75% of a business' food sales are sales of prepared food and utensils are made available to customers. But if that threshold is crossed, sales of candy, soft drinks and bottled water will be taxable only if utensils are handed directly to the customer during the purchase."

Nebraska

Measure to Repeal Nebraska School Choice Tax Credit Qualifies for Ballot - Emily Hollingsworth, Tax Notes ($). "A referendum petition targeting a recent Nebraska law creating income tax credits for contributions to private school scholarships has received enough signatures to appeal on the November 2024 ballot."

Neb. Referendum May End Tax Break For Scholarship Gifts - Zak Kostro, Law360 Tax Authority ($). "If retained, the legislation, which Republican Gov. Jim Pillen signed May 30, would allow individuals and companies to claim a nonrefundable tax credit for up to half of their income or $100,000, whichever is less, for cash contributions to certain scholarship-granting organizations." 

New York

New York Bill Targets Film Companies Using Artificial Intelligence - Emily Hollingsworth, Tax Notes ($). "S. 7422-A would expand the list of film productions that are ineligible for the tax credit to include 'a production which uses artificial intelligence in a manner which results in the displacement of employees whose salaries are qualified expenses, unless such replacement is permitted by a current collective bargaining agreement in force covering such employees.'"

Oregon

Ore. Taxpayers Will Get Credit, Triggered By $5.6B Surplus - Jaqueline McCool, Law360 Tax Authority ($). "In a news release issued Monday, the department announced that taxpayers would be entitled to a "kicker" credit that would be applied to 2023 returns. To calculate their credit amount, taxpayers will multiply their 2022 liability by 44.28%, the release said. Taxpayers can choose to donate their credit as well, the release said."

Pennsylvania

Pennsylvania House Democrats Approve Combined Reporting, Tax Cuts - Benjamin Valdez, Tax Notes ($):

The bill would require members of a unitary business, which includes members doing business in designated tax havens such as the Bahamas and the British Virgin Islands, to combine their apportionment factors to determine corporate net income tax liability.

It would also decrease the corporate net income tax to 7.99 percent in tax year 2023 and further reduce the rate by 1 percentage point each year until it reaches 4.99 percent by 2026. Under current law, the rate is set to decrease at a slower pace, to 8.99 percent for tax year 2023 and again by half a percentage point each year until it reaches 4.99 percent by 2031.

Pennsylvania Work Group Concludes Study on Cap-and-Trade Initiative - Benjamin Valdez, Tax Notes ($). "A Pennsylvania work group created to examine a regional cap-and-trade program stopped short of recommending the controversial initiative and left unaddressed concerns that it acts as a carbon tax."

Virginia

Virginia Waives Late Penalty for Some PTEs While Finishing Filing Software - Matthew Pertz, Tax Notes ($). "In an October 3 bulletin, the Department of Taxation announced that because some software vendors don't support the filing of PTE tax returns, the department is offering a free online filing option. But that software won't be available until December. The guidance clarified that the waiver only applies to electing PTEs filing extended 2022 returns with due dates on or before February 1, 2024. To qualify, an entity must have paid its entire tax liability before its original deadline, which was April 17 for calendar-year filers."

Washington

Wash. Dept. Floats Expedited Regs To Implement Bank Tax - Zak Kostro, Law360 Tax Authority ($). "The proposed updates would amend existing regulations to implement legislation Democratic Gov. Jay Inslee signed in 2019, known as H.B. 2167, according to the proposal filed Monday. The legislation imposed an additional 1.2% tax, effective Jan. 1, 2020, on the taxable gross income of members of any consolidated financial institution group that reported net income of at least $1 billion in the previous year, excluding net income from noncontrolling interests."

Tax Policy Corner

Should We Tax or Subsidize Your EV? - Martin Sullivan, Tax Notes ($):

 Road wear and tear is generally estimated by engineers to be an exponential function of vehicle weight. One common way of measuring the relationship uses the equivalent single-axle load formula, which basically states that road wear is proportional to vehicle weight raised to the fourth power. Using this rule of thumb, a gas tax designed to pay for road upkeep should be 27 times larger for the Cherokee than it is for the Honda.

There are other formulas to use and other factors to take into account in determining the correct user charge for a vehicle. But it is hard to deny that heavier passenger vehicles should be taxed much, much more than lighter ones. If this logic ever made it to the policymaking process, it could be bad news for EVs. Batteries are extremely heavy, and consumers are demanding larger and larger batteries to increase the distance needed between recharges.

Maybe taxpayers could apply their Uncle Sam Instant Rebates to their heavy vehicle levies.

Potential Calamities, Greatly Exaggerated: SALT In Review - David Brunori, Law360 Tax Authority ($):

Next year, Iowa's top corporate income tax rate will drop from 8.4% to 7.1%. It is dropping because the state met a revenue goal established in 2022 in H.F. 2317. I am more convinced than ever that revenue triggers are the best way to get rid of or at least reduce bad taxes. Triggers shield proponents from the charge that they are trying to reduce the state to a governmentless wasteland.

In this case, the revenue triggers were met three years ahead of schedule. Under the law, the corporate rate would be reduced when corporate income tax receipts exceeded $700 million. For fiscal year 2023, net corporate income tax receipts exceeded $838 million.

The 2022 law will keep lowering the rate until it reaches 5.5%. Now, it would be better if Iowa had a path for repealing the corporate income tax. That, too, can be done with triggers.

Tax History Corner

Broke: obsessing over ancient Rome. Bespoke: obsessing over ancient Greece. Modern attention spans don't allow us to obsess over one thing very long, so we turn to another classical ancient civilization, and its taxes.

Greece was never an empire, but a collection of independent city-states. An article on LinkedIn dives into city-state finances. For example, Athens:

In Athens, there was a specific tax practice that allowed preserving social equality and unity among citizens—the liturgy. Essentially, citizens had to perform public duties at their own expense from time to time.

Liturgies were one of the main sources of income for the city treasury and a kind of indirect taxation. Wealthy citizens were proud of their liturgical performance. In return for the services provided to the city, they received honor and respect from citizens and, as an additional reward, were allowed to erect monuments.

When we pay taxes nowadays, we don't even get a T-shirt. Still, I would hate to be pressed into service as a tax examiner from time to time, so no complaints.