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State Tax News & Views: Partnership Taxes, Pilgrim Taxes.

By Joe Kristan, CPA
November 18, 2023
Pilgrim Thanksgiving as imagined by Dall-e

Key Takeaways

  • Are "guaranteed payments" like other partnership income for state taxes?
  • States look at whether to tax employees who are in the state briefly.
  • SALT workaround entity taxes remain a hot state tax topic.
  • Colorado special session on property taxes underway.
  • Citibank loses B&O tax case in Washington.
  • Milwaukee Brewers and taxes.
  • Pilgrims paid taxes too.

Welcome to this edition of our state and local tax roundup. We will take next weekend off for Thanksgiving. Remember Eide Bailly for your state and local tax planning, compliance, and incentive needs, and check back in around December 1. Happy Thanksgiving!

 

MTC Group To Pursue Framework For Sourcing Partners' Pay - Maria Koklanaris, Law360 Tax Authority ($):

In October, the group developed a draft model for sourcing guaranteed payments to partners. These are payments partners receive for services or for the use of their capital, such as a loan or equipment. If the partnership is a multistate business, these payments are to a partner what a salary is to an employee. The draft model would source the payments in the same way as distributive shares that are apportioned among the states. That model also included a draft of a model statute that would provide a credit for taxes paid to other states on guaranteed payments.

On Tuesday, McElhatton and Hecht said that unless the uniformity committee had objections, the work group would hold off on moving forward the investment partnerships and guaranteed payments models for now. They said it would be beneficial to have a general framework for sourcing partners' payments that the work group could use as a guideline before delving further into specific parts of state tax partnership law.

"Guaranteed Payments" include payments made to partners for services rendered to the partnership. The October guidance would tax these based on where the partner does business, rather than where the partner provides the services. This would tax their compensation differently from corporate employees, whose state taxes don't depend on, for example, the destination sales of their employer. 

 

COST Highlights Ongoing Tax Safe Harbor, Reporting Initiatives - Emily Hollingsworth, Tax Notes ($):

As of August, only four states have adopted a 30-day income tax safe harbor, according to COST. Of the four, Indiana and Montana adopted theirs this year.

Farooki (Azisa Farooki, Senior Director of policy at the Council On State Taxation) noted that two states — Utah and North Dakota — have adopted model legislation from the Multistate Tax Commission that sets a 20-day income tax safe harbor and allows for some exemptions, such as for key employees as defined under IRC section 416(i). She argued that the exemption provision further complicates the issue, and determining whether someone meets the wage threshold for key employees can be challenging.

The issue is how long an employee has to be in a state to be subject to income taxes there. It's a long-standing issue, but one that became more important with the rise in remote employment. Proposals in Congress to mandate a 30-day minimum threshold have not advanced because of opposition from powerful New York congressmembers.

Related: Telecommuting Workers in Refuge States Complicate State Taxes.

 

Practitioner Highlights Current and Potential Income Tax Issues for States - Emily Hollingsworth, Tax Notes ($):

Speaking November 13 at the American Institute of CPAs National Tax Conference in Washington, Jamie Yesnowitz of Grant Thornton LLP discussed the current developments in state income taxation and what could occur next year.

...

Regarding 2023's most prominent income tax developments, Yesnowitz said elective passthrough entity tax adoptions reigned supreme among states. To date, he said, 36 states and New York City have adopted workarounds to the $10,000 SALT deduction cap imposed by the federal Tax Cuts and Jobs Act. Seven states enacted the workaround this year, he said, noting that Nebraska‘s SALT cap workaround provides retroactive application to tax years beginning on or after January 1, 2018.

When asked whether the IRS would issue new guidance on passthrough entity taxes, Yesnowitz said, “I don’t know how high this issue is on the IRS’s priority list.”

Related: IRS Blesses Entity-level Tax Deduction used as SALT Cap Workaround.

 

State-by-State Roundup

 

California

California Cities Must Fix Local Sales Tax Feuds, Lawmaker Says - Laura Mahoney, Bloomberg ($). "California lawmakers are looking to city leaders to agree on an overhaul of the state’s antiquated sales tax system that pits jurisdictions against each other, with some cities reaping millions more tax dollars through revenue-sharing agreements with the likes of Apple Inc., Walmart Inc., and other major retailers."

 

Colorado

Colorado Governor Calls Special Session for Property Tax Relief - Emily Hollingsworth, Tax Notes ($). "The call to convene in a special session comes on the heels of Proposition HH, which was rejected by 60.3 percent of voters on November 7. The proposition, a contentious measure that was referred to the ballot under S.B. 23-303, would have temporarily decreased residential and commercial property assessment rates while raising the Taxpayer Bill of Rights' revenue threshold by 1 percent each year, dedicating that portion of revenue to backfill revenue for local public services."

Colo. Democrats Pitch Short-Term Property Tax Relief - Sanjay Talwani, Law360 Tax Authority ($):

Ahead of the special session, which starts Friday, legislative Democrats proposed a one-year reduction in the residential assessment rate from 6.765% to 6.7%, with the first $50,000 exempt. The plan would also commit $200 million to partially offset the reduced revenue to local governments.

...

The plan also includes distributing the state's upcoming refunds under the Taxpayer's Bill of Rights, or TABOR, in identical amounts, instead of in staggered amounts according to income.

 

Indiana

Indiana Effort to Eliminate Income Tax Creates New Tax Puzzles - Mark Richards, Bloomberg. "The individual income tax accounts for roughly $8 billion of annual revenue. Finding government cost savings of that magnitude seems to be an insurmountable hill to climb. That leaves either considering alternative revenue sources or merely reducing as opposed to eliminating the tax, or both."

Ind. Readopts Rule Determining Domicile For Tax Purposes - Michael Nunes, Law360 Tax Authority ($). "The department will continue to determine if a person is domiciled in the state depending on how many days in a year they stay in Indiana and if they have a permanent residence in the state. Where a person votes, where they claim a homestead tax credit and where they are employed are among criteria the department will continue to use to determine whether a person is domiciled in the state."

 

Kansas

Kansas House GOP Calls For Tax Cuts Amid Revenue Surplus - Jaqueline McCool, Law360 Tax Authority ($). "Kansas should enact long-term tax cuts amid the state's revenue surplus as opposed to one-time rebates, state House Republican leadership said in a news release."

 

Massachusetts

Mass. Dept. Limits Loss Application For High-Earner Surtax - Sanjay Talwani, Law360 Tax Authority ($). "In a technical information release Wednesday, the Massachusetts Department of Revenue said that when determining taxable income under the state's new surtax on income above $1 million, taxpayers may not apply losses in one of the state's three income parts to income in another part to reduce their total."

 

New York

Pot Business Deductions, Crypto Study Among Bills Sent to New York Governor - Emily Hollingsworth Tax Notes ($). "The task force would study the use of digital currencies and their effects on state and local tax receipts; digital currencies that are being traded and their approximate percentage of market share; the number of exchanges operating in New York and their average monthly trade volume; the transparency of the digital currency marketplace; the laws and regulations on cryptocurrencies used in other states; and potential regulatory and legislative recommendations for the state."

 

Washington

Washington Appellate Court Rules Against Citibank in B&O Tax Case - Christopher Jardine, Tax Notes ($). "In a November 14 decision in Citibank (South Dakota) National Association v. Department of Revenue, the Washington Court of Appeals, Division II, ruled that despite having no branches in the state during the at-issue period, Citibank's in-state activities satisfied the physical presence requirement for B&O tax purposes. The court affirmed a decision by the Washington Board of Tax Appeals (BTA) granting summary judgment in favor of the DOR, which had assessed the company more than $6 million in tax, plus interest and penalties."

 

Wisconsin

Wis. Lawmakers OK Tax Breaks To Keep Brewers In Milwaukee - Michael Nunes, Law360 Tax Authority ($):

Under the legislation, the state would expand a sales tax exemption for building materials to include purchases to improve, repair and maintain the stadium, which is operated by the Southeast Wisconsin Professional Baseball Park District.

The bill would also exempt sales of tangible personal property and services to the stadium, according to a report by the Joint Survey Committee on Tax Exemptions.

Is it certain that Craig Counsell will pay more in income taxes because he works in Illinois and not Wisconsin? - Tom Kertscher, Wisconsin Watch. "Illinois and Wisconsin have tax reciprocity. If Counsell keeps Wisconsin as his primary residence, he would pay Wisconsin taxes — roughly $200,000 more."

 

Tax History Corner, Pilgrim Department

When the pilgrims gave thanks for surviving the early challenges of Plymouth Colony, they might have also been thankful for low taxes. Alvin Rabushka writes of The Colonial Roots of American Taxation (my emphasis):

Although the modern income tax dates from the adoption of the Sixteenth Amendment in 1913, an income-like tax, known as a “faculty” tax, appeared very early in the New England colonies. A Massachusetts Bay law of 1634 provided for the assessment of every man’s assets and the product of his abilities. In 1643, assessors were appointed to rate inhabitants on their estates and their faculties, which included personal abilities. Further definition three years later specified the taxation of “laborers, artificers, and handicraftsmen” on their “returns and gains.”

It is possible to estimate roughly the effective rates of the poll and faculty taxes. The text of the Massachusetts law stipulates that artificers who were paid 18d. per day in the summer should pay 3s. 4d. a year in faculty tax in addition to their poll tax (day laborers, engaged in sporadic work, were exempt). Assuming 78 days of work (13 six-day weeks during the summer season), an artificer would earn £5 17s. during the summer. If he earned at least that much in other work during the rest of the year, which was not subject to additional income tax, his annual income would be in the neighborhood of £12. A tax of 4s. 4d. (poll tax plus faculty tax) on an annual income of £12 amounts to an effective total tax rate of 1.8 percent on labor income.

Our rates tend to be higher, but at least we don't have to kill and clean our own turkey or cook it in a wood oven.

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