State Tax News & Views: Transaction Counts Fade, Minnesota Gotcha

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.

More States Eliminating Transaction Counts for Remote Sales Taxes - Angélica Serrano-Román, Bloomberg ($):

More states are modifying their economic nexus thresholds—the criteria used to determine whether a remote seller has established an economic connection with the state—by moving away from the requirement for remote sellers to begin collecting and remitting sales tax after reaching a set number of transactions.

...

While most states use only a dollar amount to establish sellers’ economic nexus, nearly half of the states still incorporate transaction or sales counts in their calculations, despite concerns from some practitioners and business groups that this mandate disproportionately impacts retailers with low-dollar transactions, forcing them into tax compliance with a state even when revenue there is minimal. The transaction count is typically set at 200 transactions—following South Dakota’s model upheld in Wayfair—except for New York, where it stands at 100 sales.

Related: A Sales Tax Reform Game Changer: How Wayfair Changed the Sales Tax Reform Landscape.

More States Considering Public Databases of LLC Beneficial Owners - Amy Hamilton, Tax Notes ($). "New York is primed to create the first public registry of beneficial ownership in the United States, pending the fate of the LLC Transparency Act, which is currently awaiting action by Gov. Kathy Hochul (D), but lawmakers in California and Massachusetts this session also held hearings on similar transparency measures."

The federal government is imposing a registry of beneficial ownership of entities beginning in 2024, but it will not be public. 

Related: Updates to the Corporate Transparency Act for 2024 and Beyond.

NCSL Report Floats State Tax Credits for Disaster Resistance - Benjamin Valdez, Tax Notes ($). "The report, issued November 29, offered several policies that states should consider adopting to improve resilience to natural disasters, including tax credits, rebates, or other incentives that encourage homeowners and building owners to retrofit properties to meet current building code standards."

Tax credits - is there anything they can't do?

State-By-State Roundup

Colorado

Colorado Governor Approves Handful of Tax Relief Measures - Michael Bologna, Bloomberg ($):

Polis also signed HB23B-1002, which expands the Colorado earned income tax credit to 50% from 25% of the federal EITC for the 2023 tax year. The bill categorizes the expansion as a feature of the state’s unique Taxpayer’s Bill of Rights, known as TABOR, which limits the revenue the state can retain and spend. A fiscal note by the legislature indicated the bill would provide $182.5 million to taxpayers.

The governor also signed SB23B-003, which adjusts the refund mechanism under TABOR for the 2023 tax year to provide an equal refund of $800 for all taxpayers, and $1,600 for joint filers. The change boosts the annual TABOR refund for most filers.

Minnesota

Minnesota Supreme Court Upholds Tax on Sale of Goodwill - Andrea Muse, Tax Notes ($):

The gain on the sale of goodwill as part of the sale of an S corporation is apportionable business income and subject to Minnesota tax, the state supreme court has held.

The court said November 22 in Cities Management Inc. v. Commissioner of Revenue that the gain from the sale, including the sale of goodwill, is income from a unitary business and may be constitutionally apportioned to Minnesota as business income.

The decision includes a blistering dissent that says Minnesota changed the rules without telling anyone:

But what is perhaps most troubling about this conduct is the Commissioner's lack of transparency. For more than 10 years after the Nadler opinion was issued, the Commissioner did not make public the Department of Revenue's position on the interpretation of section 290.17. Public notice of the Commissioner's disagreement was not provided until July 2017 when the Department issued Revenue Notice 17-02. In this revenue notice, the Commissioner publicly advised taxpayers for the first time that "the department does not administer the income allocation provisions in [section 290.17] using the Minnesota Tax Court's reasoning in Nadler v. Commissioner." Minn. Dep't of Revenue Notice No. 17-02 (July 3, 2017).

This revenue notice was, of course, no use to CMI; the business was sold and the 2015 tax return was filed relying on Nadler before the Commissioner issued the revenue notice...

Given the outrageous conduct of the Commissioner, I would instead announce an equitable rule that the Commissioner is bound by tax court decisions that are not appealed unless the Department of Revenue provides public notice of its disagreement with the tax court opinion.

Mississippi

Mississippi Governor Rejects Revenue Estimates to Maintain Tax-Cut Momentum - Matthew Pertz, Tax Notes ($): "Mississippi Gov. Tate Reeves (R) has refused to authorize the state budget committee's lower revenue projections for 2024, fearing the lower estimates could weaken his chances of eliminating the income tax."

Montana

Montana Conservatives Call on Legislature to Ease Tax Impacts - Michael Bologna, Bloomberg ($):

Conservative Montana lawmakers are seeking a special legislative session in January to address tax issues including a revenue surplus and rising property taxes, filing a request Monday with the Secretary of State.

The secretary plans to circulate ballots to lawmakers by the end of the week asking whether a special session should be convened Jan. 15, said Richie Melby, a spokesperson for the secretary. A majority of the state legislature must approve the proposal before a special session can be held. The legislature has been adjourned since May 2.

Nebraska

‘EPIC’ Question for Nebraska: Choose a Consumption Tax System? - Michael Bologna, Bloomberg ($). "Nebraska state Sen. Steve Erdman (R) and several other lawmakers this week unveiled an epic proposal, which also goes by the name “EPIC,” for Eliminate All Property Income Inheritance and Corporate Taxes. As the name suggests, the plan would rescind the state’s primary tax structures and replace them with a simple 7.5% consumption tax on all services and new goods, with the exception of groceries. Erdman insists the tax trade would be revenue neutral."

Petition drive pushing to repeal, replace Nebraska taxes takes key step - Martha Stoddard, Omaha World-Herald:

The amended version of LB 79 would set the tax rate at 7.5%, based on a study by the Beacon Hill Institute, a Massachusetts-based think tank.

That study looked at what rate would be needed to equal the $11.7 billion needed to replace the eliminated taxes in 2026. The study assumed that some of the revenue would come from projected increases in economic activity and calculated the tax base that year would be more than twice as large as the current sales tax base.

But a study released in March by the OpenSky Policy Institute, a Lincoln-based think tank, concluded that it would take a 22.1% rate to bring in $11.5 billion in revenue. The OpenSky study did not assume economic growth and calculated a much smaller increase in the tax base.

New Hampshire

New Hampshire Reconsiders Phasing Out Investment Income Tax - Michael Bologna, Bloomberg ($). "Lawmakers are taking a closer look at a plan to phase out the 100-year-old tax on interest and dividend income, the so-called I&D tax, after a judge ruled the state’s current per pupil allocation for education is 'too low' and 'unconstitutional.' If the ruling continues to stand after an expected appeal by the state, the New Hampshire Legislature may have to find an additional $537 million to fund public education."

New Jersey

Top New Jersey Democrats Support Expiration of Corporate Surtax - Danielle Muoio Dunn, Bloomberg. "The surtax was added in 2018 to increase state revenue, boosting the tax rate on the state’s largest businesses from 9% to 11.5%—making it the highest in the country."

New York

NY Will Allow NYC Pot Cos. To Deduct Business Expenses - Jaqueline McCool, Law360 Tax Authority ($). "S.B. 7508, which was signed by Democratic Gov. Kathy Hochul on Friday, will decouple the city from Internal Revenue Code Section 280E, which limits tax deductions for companies engaged in the production, distribution or sale of cannabis. Adult-use and medical cannabis businesses will be able to claim business expense deductions in New York City under the new law, which took effect immediately." 

Pennsylvania

Pennsylvania Supreme Court Upholds Philadelphia Wage Tax Scheme - Christopher Jardine, Tax Notes ($):

Philadelphia’s denial of a city wage tax credit for income taxes paid to another state by a city resident was constitutional, according to the state supreme court.

In a November 22 decision in Zilka v. Tax Review Board of Philadelphia, the Pennsylvania Supreme Court found that Philadelphia did not unconstitutionally discriminate against interstate commerce when it allowed Diane Zilka a credit against the city’s wage tax for local income tax paid to Wilmington, Delaware, but denied additional credits for out-of-state income tax Zilka paid to Delaware. The decision affirms the finding of the Pennsylvania Commonwealth Court.

This is a surprising result in light of the U.S. Supreme Court Wynne decision, which struck down a Maryland tax that failed to credit taxes paid in other states. The article closes:

Joseph Bishop-Henchman, executive vice president of the National Taxpayers Union Foundation, told Tax Notes: “I would be astonished if the taxpayer doesn't appeal. Wynne says states must give full credits to avoid violating the commerce clause, and cities get their taxing power from the state.”

Wisconsin

Wis. Gov. Vetoes 'Unserious' GOP Income Tax Cut Plan - Michael Nunes, Law360 Tax Authority ($). "Wisconsin's governor vetoed an omnibus bill Monday that included a Republican-backed plan to slash the tax rate for the state's third-highest income bracket from 5.3% to 4.4%, days after the Legislature concluded its special session."

Wisconsin Governor Vetoes GOP-Backed Tax Cut Bill - Paul Jones, Tax Notes ($). "Evers’s veto is no surprise. The governor promised to reject the bill's main tax cut back in September and had previously vetoed a similar tax cut that Republicans inserted in the biennial state budget approved in July. The GOP majority doesn’t have the numbers to override a veto by Evers."

Tax Policy Corner

Massachusetts, New York Bills Would Require High Schools to Teach Financial Literacy - Emily Hollingsworth, Tax Notes ($):

New York’s bill, A. 8306, was introduced November 27 by Assembly member Matthew Simpson (R). It would require a half-credit or half-unit course in financial literacy for public high school students; students would need to pass the course to graduate.

According to the bill, the financial literacy curriculum must include instruction on computing state and federal income taxes, understanding net versus gross income, analyzing state and federal laws concerning finance, and recognizing the importance of planning for retirement as well as analyzing retirement planning options. The curriculum would also be required to teach students how to develop a personal budget, calculate interest rates, and manage debt.

If legislators have to pass the course final exam before each legislative session, I vote yes.

Did you know?

From the IRS History Timeline:

In 1948, the Bureau introduced punch-card equipment to process notices. They also introduced photocopying to reduce the typing workload and relieve a typist and stenographer shortage.

In 1949, the IRS introduced electric typewriters, continuous forms, dual-roller platens and posting machines to more efficiently process income tax returns. By 1950, the Bureau introduced computers for tabulation.

This may surprise some readers, but the IRS no longer uses punch cards.