State Tax News & Views: Standing at the Water's Edge.

By Joe Kristan, CPA
December 22, 2023
Bing Dall-E image of reindeer in woods

Key Takeaways

  • Minnesota nearly went beyond "water's edge" in 2023. Will states go beyond in 2024?
  • Expanding the sales tax base to services.
  • 2023's champion bad state tax decision.
  • California defeat on "underground regulations."
  • Iowa's infrared sauna sales tax.
  • New Jersey ends need for separate S corporation election.
  • New York ponders AI tax.
  • Pennsylvania fixes grantor trust taxation.
  • Virginia tax cut proposal.
  • Nebraska's EPIC - fail?

Welcome to this edition of our roundup of State and Local Tax News. We will be taking next week off. Remember Eide Bailly for your State and Local Tax and Business Incentive Needs.


States Seek to Extend Tax Codes Beyond ‘Water’s Edge’ in 2024 - Michael Bologna, Bloomberg ($):

Legislative work usually grinds to a halt during the holidays in New Hampshire, but state Rep. Thomas Schamberg has spent the last few weeks whipping votes for a bill overhauling the state’s business profits tax.

Schamberg, a Democrat, concedes his bill (H.B. 121) abandoning New Hampshire’s “water’s edge” income reporting rule and replacing it with a worldwide combined reporting requirement is a long shot. A mandatory worldwide reporting system would calculate a business’s taxes based on global income attributable to a particular jurisdiction—permitting the state to reach beyond US borders, or the “water’s edge.”

The article says that no states require worldwide combined reporting, with the partial exception of Alaska. It notes a disincentive for states that might be considering worldwide combined corporate taxation: 

Business interests such as the Council on State Taxation and conservative tax policy groups like the Tax Foundation are bracing for fights in state capitols. States adopting worldwide systems would be outliers, putting themselves at a competitive disadvantage with neighbors and making them hostile territory for business expansion, these groups argue.

On the other hand, it's a lot more fun to tax people who don't vote in your district.


Taxpayer Considerations as States Expand the Tax Base to Services - Tram Le, Tax Notes ($). "States vary widely as to whether and to what extent services are included in the tax base. Services that are commonly subject to sales tax include hotel or lodging, amusement and admissions, repair and maintenance of tangible personal property, construction and improvements to real property, professional services, and personal services."

For Your Information: That Might Be a Taxable Service - Christopher Lutz, Tax Notes ($): "Yet another wrinkle in a post-Wayfair world. Once only the concern of sellers of tangible property, service providers now must think comprehensively about the taxability of their services in states they may never enter. The answer to the question of taxability, too, will evolve in the coming years as states continue to reinterpret old rules to reach digital transactions."


Put a Bow on It: Wrapping Up 2023's Highs and Lows - Tax Notes' Audrey Pollitt collects thoughts ($) from state tax mavens, starting with Walter Hellerstein:

If it is true, as three authors concluded on these pages two and half years ago, that the Michigan Court of Appeals’ decision in Vectren is “the most cogent alternative apportionment decision in years,” then it may be fair to characterize the Michigan Supreme Court’s decision in Vectren as “the least cogent alternative apportionment decision in years,” albeit over three powerful dissents. Hence, the “worst” and the “best.”

What is "Vectren" about? From Lynn Gandhi in the same piece:

The Michigan Court of Appeals had twice found (once on remand), in published decisions, that the taxpayer had proven gross distortion that was out of all appropriate proportion to the business activity conducted in the state. Yet, in a 4-3 decision along political lines, the Michigan Supreme Court found no distortion in taxing 70 percent of the gain on the sale of an S corporation, when historically, the operations of the business in Michigan had never exceeded 15 percent in a single year, and the 10-year average had been approximately 7 percent. 

Home-court advantage is a thing for state revenue departments in litigation. Jannette Lohman piles on:

My vote for the biggest SALT “flop” for 2023 is two-pronged and goes to both the Michigan Supreme Court for its decision in Vectren and the Supreme Court of the United States for its failure to grant certiorari in Vectren.

 Others quoted in the article join in the criticism of the Michigan court, so they can expect lumps of coal in their stockings from SALTy Claus.


State-By-State Roundup


ACMA Wins P.L. 86-272 Case Against California FTB - Paul Jones, Tax Notes ($):

The P.L. 86-272 guidelines California issued in 2022 are invalid “underground regulations,” a California superior court has held.

Both Technical Advice Memorandum (TAM) 2022-01 (issued in February 2022) and Publication 1050 (issued in May 2022) constitute a regulation within the meaning of the Administrative Procedure Act, but "neither was enacted in compliance with the APA's requirements,” the San Francisco County Superior Court ruled December 13 in American Catalog Mailers Association v. Franchise Tax Board. “Accordingly, the TAM and Publication are void.”



Georgia's Film Tax Credit Is Bigger and More Costly Than Ever, Report Says - Matthew Pertz, Tax Notes ($):

Georgia’s film tax credit costs the state government far more than it generates in economic activity, according to a new report from the Georgia Department of Audits and Accounts.

Overall, Georgia is expected to forgo $1.08 billion in revenue from the credits in fiscal 2024, which in turn is expected to generate economic activity worth $224.7 million for state coffers and $65.7 million for local governments, according to the report, which was released December 15.



Illinois Dept. Floats Investment Partnership Income Tax Regs - Zak Kostro, Law360 Tax Authority ($). "The amendments would clarify the expanded definition of an investment partnership under the law, including changes to a gross income requirement and the meaning of "qualified investment security," according to the proposed text. The expanded definition would apply for tax years ending on or after Dec. 31, 2023, according to the proposed amendments."

Link: Illinois Register.

Chicago Pol Convicted In Bribery Case For Boosting Law Firm - Celeste Bott, Law360 Tax Authority ($). "An Illinois federal jury on Thursdayconvicted one of Chicago's longest serving and most powerful local politicians of using his official position to steer tax business to his personal law firm, finding ex-Alderman Ed Burke guilty of racketeering, extortion and bribery."



Iowa Use Tax Applies To Biz's Saunas, Dept. Says - Jaqueline McCool, Law360 Tax Authority ($). "The department said in the ruling that Sweat Iowa LLC was liable for remitting sales and use tax on the use of its infrared saunas because the saunas fall under the definition of taxable commercial recreation. The department said the description of the saunas on the company's website was in line with the state's definition of commercial recreation, which is all activities pursued for pleasure."



Louisiana DOR Proposes New Rules for Terminating a PTE Tax Election: Matthew Pertz, Tax Notes ($). "Under prior law, a PTE could revoke its election only by submitting a written request for termination to the DOR, with at least 50 percent of ownership in agreement. The proposed rules would establish an automatic termination process through Form R-6983, which could be filed by an individual taxpayer on the entity’s behalf."

La. Rule Outlines Tax Break For In-State Telecommuters - Jaqueline McCool, Law360 Tax Authority ($). "The Louisiana Department of Revenue explained how individuals can claim a 'digital nomad' income tax exemption offered to new residents who moved to Louisiana but telecommute for out-of-state employers in an adopted rule announced Monday." 


New Jersey

New Jersey Enacts Changes to Corporation Business Tax - Arthur Orzame and Melissa Menter, Eide Bailly:

For tax years or privilege periods beginning on or after December 22, 2022, taxpayers who have made an S election for federal tax purposes are no longer required to make a separate New Jersey S corporation election for New Jersey CBT purposes.


Under the new legislation, taxpayers can opt out and elect to be treated as a hybrid corporation, such as an S corporation for federal tax purposes but a New Jersey C corporation for CBT purposes. This election, known as the C Corporation Status Election, does not require any formal notification to be sent to the state.

New Jersey Bill Extends Remote Work Flexibility for Incentives - Danielle Muoio Dunn, Bloomberg ($):

Several tax incentive programs created before the pandemic required that full-time employees spend at least 80% of their time at their workplace. But the state reduced the requirements in 2020, when the pandemic forced many people to work from home. By a vote of 67-4 Thursday, the Assembly passed legislation, A5840, preserving those concessions through March 2024.

Workers now only have to spend 60% of their time at the office for companies to continue qualifying for programs such as the Grow NJ Assistance Program, which offers tax credits ranging from $500 to $5,000 for each job created or retained in the state on an annual basis.


New York

As amended December 18, A. 8179B, the Robot Tax Act, would impose an additional tax on some corporations that replace employees with technology such as “machinery, artificial intelligence algorithms, or computer applications.” The bill is sponsored by Assembly member Patrick Burke (D).

Corporations that would be subject to the additional tax include those with annual New York receipts of $1 million or more and those that derive less than $1 million but more than $10,000 in annual receipts and meet the ownership test as part of a unitary group under N.Y. Tax Law section 210-C, according to the bill.


North Carolina

North Carolina County to Implement Living Wage Requirement for Tax Incentives - Matthew Pertz, Tax Notes ($). "Wake County defines a living wage as one that enables an individual to afford a one-bedroom apartment with 30 percent of their monthly income, priced using the U.S. Department of Housing and Urban Development’s fair market rents. That puts the county's current living wage at $43,971 annually, or $22.14 per hour."



Portland Task Force Recommends a Pause on New Taxes - Paul Jones, Tax Notes ($). "The task force said Portland’s aggregate tax burden is now second only to New York City's, and even then, 'we trail New York City by only a fraction.' It noted that taxes approved by voters after 2019 are 'just beginning to roll out' and argued that 'given the unexpected revenue these taxes have collected, elected officials should consider a three-year pause, through 2026, on new taxes and fees to allow the new supportive housing, pre-kindergarten, and climate-related programming to fully ramp up.'"



Pa. Aligns With Federal Law For Taxation Of Grantor Trusts - Zak Kostro, Law360 Tax Authority ($):

Pennsylvania will align with federal tax law by allowing income received by a resident or nonresident trust from in-state sources to be taxable to the grantor of the trust under a bill signed by Gov. Josh Shapiro.

S.B. 815, which Shapiro, a Democrat, signed Thursday, will allow the grantor of a resident or nonresident trust to be taxable on the trust's income, to the extent the grantor is treated as the trust's owner under sections 671 through 679 of the Internal Revenue Code, according to a fiscal note. The bill stipulates that such income may be taxable to the grantor regardless of whether the income is distributed or distributable to the beneficiaries of the trust or accumulated.


Texas Appeals Court Upholds Comptroller’s Apportionment Rules - Cameron Browne, Tax Notes ($). "The comptroller 'has adopted rules governing the computation and sourcing of a business's gross receipts in a variety of commercial contexts' under 34 Tex. Admin. Code section 3.591, the court said. Subsection (29) apportions to the state receipts from the sales of tangible personal property that is delivered in Texas directly by the taxpayer, through methods that the taxpayer leases and controls, owns, or through drop-shipping. Subsection (32), which was labeled subsection (31) in the court's decision, also apportions revenue from transactions that occur in Texas waters."

Link: No. 03-21-00669-CV

Texas Franchise and Property Tax Relief- Melissa Menter, Eide Bailly:

Businesses with Texas activity under the gross receipts or tax liability thresholds (commonly known as the “no tax due threshold”) no longer need to file a no tax due report.

The bill also increases the gross receipts threshold from $1 million to $2.47 million. These changes are effective for franchise tax reports originally due on or after January 1, 2024.

Note that taxable entities with annualized total revenues less than or equal to the no tax due threshold must still file a Public Information Report or Ownership Information Report.



Youngkin proposes Virginia budget that cuts income tax, raises sales tax - Gregory Schneider, Washington Post:

On the signature issue of tax cuts, Youngkin is proposing a 12 percent reduction in all income tax rates. The top bracket would drop to 5.1 percent from 5.75 percent — a decrease he tried but failed to get through a politically divided General Assemblythis year.

This time, though, Youngkin is also proposing to increase the earned-income tax credit to 25 percent of the federal allowance from 20 percent, a change that would benefit low-income working families. Democrats have long sought to raise that credit.

Governor Youngkin Unveils a New Tax Plan for Virginia - Jared Walczak and Andrey Yushkov, Tax Policy Blog. "The plan includes three major structural elements: a reduction in the individual income tax rate, a 0.9 percentage point increase in the sales tax rate, and the broadening of the sales tax base to include some 'new economy' digital services."


Tax Policy Corner

A Bold Idea And A Striking Disregard: SALT In Review - David Brunori, Law360 Tax Authority ($):

... the boldest tax reform proposal I have ever seen is percolating in Nebraska. The measure, first proposed as L.B. 79, may go to the voters next November in the form of a constitutional amendment. Oh, how I want to champion this cause. The Eliminate All Property, Income and Corporate Tax option, or EPIC, would repeal most state and local taxes except for a broad state sales tax. It would get rid of the personal income tax.


If proponents stopped there, this just might work, and the state and people of Nebraska would be better off. But the proposal eliminates all property taxes. I still believe the property tax is, so to speak, a good tax. Yes, people hate it. But there is no better way to fund local government. Indeed, there is no viable alternative to funding local government. Without the property tax, you centralize local funding. That is inefficient. History shows that central funding results in less local government than citizens want and are willing to pay for.


Tax History Corner

Luke, Taxes, and the Birth of Jesus - Online Library of Liberty:

In the Gospel of Luke (2: 1-7) it is stated that the reason Jesus was born in Bethlehem was because his parents were ordered by Emperor Augustus to return to their ancestral village at a time when Mary was pregnant, thus linking the founding story of the Christian religion with Roman imperial economic policy:

1 And it came to pass in those days, that there went out a decree from Cæsar Augustus, that all the world should be taxed.

2 (And this taxing was first made when Cyrenius was governor of Syria.)

3 And all went to be taxed, every one into his own city.

May you have a non-taxing holiday season, wherever you may be spending it.

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About the Author(s)

Joe Kristan

Joe B. Kristan, CPA

After 38 years centered on tax consulting for closely held businesses and their owners, Joe is joining Eide Bailly's National Tax Office. Joe's responsibilities include communication, process improvement and training. He is a principal contributor to the Eide Bailly Tax News and Views blog, providing daily updates on tax reform and other tax news. Joe is a Certified Public Accountant and a member of the AICPA Tax Section and Iowa Society of Public Accountants.