State Tax News & Views: Election Week and Voting with your Feet.

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.

Jeff Bezos’s Move Undercuts Proposed Washington State Wealth Tax - Jared Walczak, Tax Policy Blog.:

Bezos sold about $15.7 billion worth of Amazon stock between 2020 and 2021, according to news reports. If we assume that Bezos—who, other than the symbolic purchase of one share last year, has not purchased any shares of Amazon in decades—had held onto these shares since the IPO, he saved nearly $1.1 billion in taxes by selling those shares before the new state capital gains tax went into effect. Whether or not it was a motivating factor, relocating to Florida ensures that future sales won’t be subject to Washington’s new capital gains tax, either.

Meanwhile, Washington officials have spent recent years bandying about wealth tax proposals...

The state’s economists projected that the wealth tax would raise about $3.2 billion a year once implemented. This estimate included assumptions that some share of high-net-worth households would move to avoid the tax, but a Bezos move is going to be particularly hard for the state to stomach. Based on his current net worth, which is mostly in publicly reported ownership of Amazon shares, Bezos would have been on the hook for about $1.44 billion a year under the proposed wealth tax—a full 45 percent of the projected total.

Other states are a built-in limit on the ability of states to tax high incomes and wealth. 

Remote Seller Tax Proposal Falls Short at Sales Tax Group Meeting - Angélica Serrano-Román, Bloomberg ($):

The proposed guideline suggested states give businesses room to complete the process no later than the first day of the first calendar month that begins at least 60 days after a state’s threshold for collecting sales tax is met.

The governing board, responsible for overseeing a 24-state agreement, rejected the measure by one vote when Washington state opposed it on the grounds that it already follows a 30-day time frame for completing the process, rather than 60 days...

Fred Nicely, a member of Streamlined’s Business Advisory Council and senior adviser at the Council on State Taxation, a business group, said the proposed best practice was designed to help small businesses that go over a state’s threshold for tax collection.

The Streamlined Sales Tax Governing Board is an organization of 24 states to implement the "Streamlined Sales and Use Tax Agreement." Their goal is "to simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance."

Since the Wayfair decision allowing states to tax remote sellers with no physical presence, simplifying sales taxes among states becomes more important, even though it has a long way to go.

Related: How Wayfair Changed the Sales Tax Reform Landscape.

SSTGB Votes on Digital Sourcing Guidance, Issue Resolution Plan - Emily Hollingsworth, Tax Notes ($). "The first guidance will direct the work group to limit its scope to digital goods transactions that don’t require physical delivery. The second will request — not require — that states collect full addresses or nine-digit ZIP codes for digital transactions. However, states will be required to record five-digit ZIP codes. The last point will allow states to assign tax rates for digital transactions and record the five-digit ZIP code into a database."

State-by-State Roundup

Colorado

Colo. Gov. Calls Special Session After Voters Nix Tax Plan - Maria Koklanaris, Law360 Tax Authority ($):

After Colorado voters overwhelmingly rejected a measure that would have more broadly restructured the property tax regime, Gov. Jared Polis said Thursday that he would call the Legislature into a special session to quickly find a way to cut property taxes.

...

The measure would have used some of the state's revenue surplus to backfill local governments to replace the local revenue reduced by the plan and for other programs. Because Proposition HH would have withheld a portion of the state's revenue surplus instead of refunding it to taxpayers, voter approval would have been required under the Colorado Taxpayer's Bill of Rights, or TABOR.

Colorado Lawmakers to Reconvene After Tax Ballot Issue Fails - Angélica Serrano-Román, Bloomberg ($). "The ballot question (Proposition HH)—intended to reduce property tax rates across the state while also implementing a cap on local government property tax revenue—was rejected this week."

Florida

Florida DOR: Charitable Trust Must File Returns, Pay Tax on UBTI - Matthew Pertz, Tax Notes ($). "A national charitable trust is not a private trust and therefore is required to file a Florida corporate income tax return and pay tax on its unrelated business taxable income, the state Department of Revenue determined."

Hawaii

Hawaii Issues SALT Cap Workaround Guidance - Benjamin Valdez, Tax Notes ($). "Passthroughs seeking to elect to pay tax at the entity level under the SALT cap workaround need to do so by April 20 following the close of the tax year and will need to make a separate election each tax year, according to the department's amended tax information release issued October 31. An automatic six-month extension is granted for entities that pay the correct amount of tax, the department noted."

Illinois

Chicago Council Approves Putting Mansion Tax Measure on Ballot - Shruti Date Singh, Bloomberg ($). "Chicago’s City Council on Tuesday voted to put a proposal on the March 2024 ballot that would raise taxes on property sales over $1 million, making the third-largest US city the latest to turn to higher-end real estate deals to reduce homelessness."

Iowa

Iowa DOR Proposes Rule on Retirement Income Exclusion - Emily Hollingsworth, Tax Notes ($):

Qualifying taxpayers under the proposed rule include disabled individuals, individuals who are at least 55 years old, surviving spouses, or “a survivor with an insurable interest in an individual who would have qualified for the exclusion.”

According to the rule, qualifying retirement income includes IRAs and Roth IRAs; simplified employee pension IRAs (SEP-IRAs); savings incentive match plans for employees (SIMPLE IRAs); qualified deferred compensation plans under IRC sections 401(k) and 457(b); and other benefit plans, pension plans, profit-sharing plans, or stock bonus plans under IRC section 401.

Nonqualified deferred compensation plans under IRC section 409A and nonqualified annuities wouldn’t qualify for the retirement income exclusion, according to the rule.

Link: ARC 7109C

Iowa Explains Exclusion For Employee-Owned Stock Sales - Zak Kostro, Law360 Tax Authority ($):

Employee-owners of a qualified corporation may make a single, irrevocable lifetime election to exclude from net income the net capital gains earned from the sale or exchange of capital stock in the corporation, the regulations said. Such gains may be excluded at a rate of 33% for tax years starting in the 2023 calendar year, 66% for tax years starting in calendar year 2024 and 100% for tax years starting on or after Jan. 1, 2025, according to the regulations.

For the sale or exchange to qualify for exclusion, the stock must be acquired by the employee-owner while employed and due to employment with the qualified company, the regulations said, meaning the employee-owner must have acquired the stock in a manner only available to the company's employees. In addition, an employee-owner must have owned the stock for at least 10 years for it to qualify for exclusion, the regulations said.

There are a lot of hurdles that have to be cleared for this exclusion to work, besides the ownership restrictions and the 10-year holding period. These include:

- Only stock qualifies. Gains on options and warrants themselves do not.

- The employee has to have a 10-year employment history in with the employer.

- The employer has to have employed people in Iowa for at least 10 years.

- There have to be at least five shareholders in the employer for the ten years before the sale or exchange, with at least two of them unrelated.

- If holding company stock is used to compensate a subsidiary employee, the holding company has to qualify to file a consolidated return with the subsidiary. This can be tricky.

Link: ARC 7103C

Indiana

Indiana DOR Finds Partnership Liable for Composite Tax but Abates Penalties - Emily Hollingsworth, Tax Notes ($). "In Letter of Findings 02-20231624.LOF, the DOR denied a resident partnership's protest of additional composite tax assessments relating to guaranteed payments it made to nonresident partners. However, the department abated the penalty assessment. The ruling was issued on August 17 but was published in the Indiana Register on November 1.."

New Hampshire

New Hampshire Taxwriters Sink Worldwide Combined Reporting Bill - Benjamin Valdez, Tax Notes ($). "The bill would have adopted worldwide combined reporting under the business profits tax, allowing New Hampshire to tax the income apportioned by all members of a unitary business, domestic or foreign, to the state. The water’s-edge method excludes foreign entities."

New Mexico

Santa Fe Voters Approve 3% Tax on High-End Residential Sales - Danielle Muoio Dunn, Bloomberg ($). "The 3% excise tax would apply to the portion of home sale prices exceeding $1 million, with revenue to be dedicated to an affordable housing trust fund. The measure passed with 73% of the vote, according to unofficial county results."

Ohio

Voters Reject Wealth Taxes in Texas, Approve Pot Tax in Ohio - Benjamin Valdez, Tax Notes ($). "Ohio is set to join the 20 states that have legalized and taxed recreational cannabis after 56.97 percent of voters approved Issue 2, according to the state's election results website. The measure will legalize adult-use marijuana and impose a 10 percent tax on sales in dispensaries, in addition to the 5.75 percent sales tax rate."

Texas

Texas Votes to Outlaw Additional Taxes on Wealthy Residents - Benjamin Freed, Bloomberg ($). "Texas voters made clear Tuesday the state won’t levy a tax on high-net-worth residents, approving a ballot measure denying the state Legislature the option of imposing a wealth tax."

Tax Policy Corner

A Ministry Of Silly Ideas: SALT In Review - David Brunori, Law360 Tax Authority ($).

The Tax Foundation recently released its 2024 State Business Tax Climate Index. Since its first release in 2003, the index has been widely read by policymakers across the country, for good reason. The index ranks the states on their tax structures, focusing on how those structures affect businesses. Many of my liberal friends criticize the index. They don't like the idea that a state with a relatively low tax burden or one that does not tax income can be ranked high in the index.

...

This year's top 10 are 1, Wyoming; 2, South Dakota; 3, Alaska; 4, Florida; 5, Montana; 6, New Hampshire; 7, Nevada; 8, Utah; 9, North Carolina; and 10, Indiana. The top 10 do not surprise me. The top 10 also illustrate that while taxes matter, they are not the only thing that drives development. Wyoming is not exactly a hotbed of economic activity.

Link: 2024 State Business Tax Climate Index.

Department of Unintended Consequences, Tax Section

There are many proposals to impose taxes to improve our behavior, health, and so on. Sometimes they even get enacted. Then the regrets begin. Take, for example, the 2011 Danish tax on saturated fat:

The economic effects of the fat tax were almost invariably negative. It was blamed for helping inflation rise to 4.7 per cent in a year in which real wages fell by 0.8 per cent. Many Danes switched to cheaper brands or went over the border to Sweden and Germany to do their shopping. At least ten per cent of fat tax revenues were swallowed up in administrative costs and it was estimated to have cost 1,300 Danish jobs.

The fat tax had a very limited impact on the consumption of ‘unhealthy’ foods. One survey found that only seven per cent of the population reduced the amount of butter, cream and cheese they bought and another survey found that 80 per cent of Danes did not change their shopping habits at all.

The tax was repealed 15 months later. And yet how often do you run into a chubby Dane?