State Tax News & Views Digital Tax Edition

February 3, 2023

Welcome to this week's state and local tax roundup. Think of Eide Bailly for your state tax needs, whether you are dealing with income taxes, sales taxes, or business incentives and credits.


States Float New Taxes on Digital Ads, Social Media, Data Mining - Michael J. Bologna and Angélica Serrano-Román, Bloomberg:

Litigation by tech giants targeting Maryland’s first-in-the-nation tax on revenue from online advertising hasn’t dampened other states’ interest in taxing the digital economy.


The legislation is legally fraught, though, as Maryland has learned in the two years since it enacted the Digital Advertising Gross Revenues Tax. The first-of-its-kind law was quickly challenged in federal court by the US Chamber of Commerce and three tech trade associations. The communications companies Verizon and Comcast followed with an action in state court.

Both lawsuits assert violations of the US Constitution and the federal Internet Tax Freedom Act, which bars states from imposing discriminatory taxes on electronic commerce. A state court judge threw out the tax in October, ruling it unconstitutional; that case is before the Maryland Supreme Court now.

Taxpayer rebates back on agenda in states awash in cash - Sophie Quinton, Pluribus News. "Supporters say one-off rebates are a prudent way to spend extra dollars, especially with a recession on the horizon, that the payments will help people cope with rising prices, and that returning money to taxpayers is the right thing to do. But some policymakers say that with so much money pouring into state coffers it is time for bigger investments."


State-by-state update


California Wealth Tax Proposal Likely to Stall in Legislature - Laura Mahoney, Bloomberg:

A California bill to impose a new tax on individuals with a global net worth above $50 million is unlikely to advance in the Legislature this year despite national fanfare about its recent introduction.

Assembly Revenue and Taxation Chair Jacqui Irwin (D) said prospects for the proposal (AB 259) from Assemblyman Alex Lee (D) are the same as last year, when a similar bill died without even an initial hearing in the committee. Although Democrats hold a two-thirds majority in both houses and the governor’s office, party members have divergent views on policy, she said in an interview this week.

Californians to Decide Vote Threshold for Local Taxes in 2024 -Laura Mahoney, Bloomberg. "The ballot measure would require two-thirds approval from voters for all local tax increases and require that the tax measures have a sunset date."

Calif. Tax Board Delays Partnership Reporting Requirement - Sanjay Talwani, Law360 Tax Authority ($). "In a notice published Monday, the FTB said for tax years 2021 and 2022, taxpayers may report their partners' or members' capital accounts using the tax basis method as determined under either federal law or California law. Starting with tax year 2023, they must use the method in state law, the notice said."



Indiana Bill Would Create Passthrough SALT Cap Workaround - Emily Hollingsworth, Tax Notes ($): "The bill, created as a workaround to the $10,000 SALT deduction cap under the federal Tax Cuts and Jobs Act, was introduced by Sen. Scott Baldwin (R) January 9. It was amended and unanimously passed by the Senate Tax and Fiscal Policy Committee January 31."

Link: Senate Bill 2.



Iowa DOR Explains Passthroughs Exempt From Filing Composite Returns - Emily Hollingsworth, Tax Notes ($):

The DOR on January 30 updated its instructions for tax year 2022 composite returns to include filing exemptions for some passthrough entities. An exemption applies to passthroughs that are financial institutions and subject to Iowa franchise tax, provided that they file the franchise tax return and pay any franchise taxes owed.

Iowa requires mandatory composite filing for partnerships, S corporations, and estates and trusts with Iowa non-resident shareholders, starting with 2022 tax years. These entities are required to pay tax to Iowa on behalf of owners or beneficiaries based on their Iowa-source income. Owners can claim the payments as withholding against their Iowa taxes; if individual owners have no other Iowa source income, they are not required to file Iowa returns.

Link: Iowa Composite Returns for Tax Year 2022 and Later.



Louisiana publishes guidance for changes to C Corporation and Individual Tax filings - Melissa Menter, Eide Bailly. "Updated guidance for changes to Louisiana C corporation income and franchise tax filings, and individual income tax filings, including automatic 6-month corporate and individual extensions."



Mo. Commission Backs Commercial Classification For Rentals - Michael Nunes, Law360 Tax Authority ($). "The Missouri tax equalization commission affirmed that three properties used as nightly vacation rentals should be classified as commercial properties instead of residential properties for tax purposes, as they generated income for the owner."

Link: Decisions 21-89530, 21-89531, 21-89533



Montana Governor Proposes Tax Breaks for Individuals, Businesses - Emily Hollingsworth, Tax Notes ($). "Gianforte’s tax items, first outlined in his proposed fiscal 2024–2025 biennium budget, would reduce the top marginal income tax rate from 6.5 percent to 5.9 percent. A bill implementing the measure (S.B. 121) was introduced by Sen. Becky Beard (R) January 4 and passed a second reading on a 34–15 vote January 25."



Nebraska Governor Proposes ‘Historic’ Income, Property Tax Cuts - Emily Hollingsworth, Tax Notes ($). "Pillen also called for an additional $1.5 billion in income tax cuts, including by expediting tax cuts approved under L.B. 873 in 2022 by lowering the top individual income and corporate tax rates to 3.99 percent by 2027 and completely exempting Social Security income from state taxes by 2024. A package of bills (L.B. 754, L.B. 806, L.B. 804, and L.B. 641) proposing the changes were introduced earlier this month at the request of the governor."

Links:  L.B. 754, L.B. 806, L.B. 804, L.B. 641, L.B. 873.


New Jersey. 

Low-Carbon Concrete Tax Incentives Signed into Law in New Jersey - Stephen Lee, Bloomberg ($). “New Jersey Gov. Phil Murphy (D) on Monday signed a bill that gives businesses tax credits for using concrete made with lower carbon emissions.”4

Link: NJ S287


New York

Chip Maker Entitled to $152 Million Refund for NY Tax Credits – Perry Cooper, Bloomberg ($). “Semiconductor manufacturing company GlobalFoundries U.S. Inc. will get a $152 million refund on its corporate income taxes for carryover Empire Zone investment tax credits, resulting in a 100% refund for 2014, a New York tribunal ruled.”

Link: DTA NO. 829184

Hochul Floats NY Biz Tax Hike Extension, Appeal Rule Change - Paul Williams, Law360 Tax Authority ($). "Hochul's fiscal year 2024 spending plan would keep the state's corporate franchise tax rate at 7.25% through 2026 for businesses with more than $5 million in base income, after which the rate would drop to 6.5%. The temporary rate increase, which was enacted in 2021 and is set to expire this year, is projected to raise close to $3 billion over the next three years if extended, according to officials in the governor's administration."



Ohio Pass-through Entity Tax FAQ and Information - Melissa Menter, Eide Bailly. Ohio recently release an FAQ and guidance for its PTET election. Lots of good information in here.  Links:

Ohio Gov. Seeks Housing Tax Credits, Diaper Tax Exemption - Paul Williams, Law360 Tax Authority ($). "Ohio Gov. Mike DeWine proposed tax credits for building housing and a sales tax exemption for infant supplies such as diapers and cribs in his executive budget proposal for the upcoming biennium."



Choctaw Citizens Can't Escape Okla. Income Tax, Judge Says - Caleb Symons, Law360 Tax Authority ($). "A federal judge said two Choctaw Nation citizens cannot recover thousands of dollars in state income tax simply because they live in Indian Country, slamming the door on a lawsuit that threatened to upend an entire system of civil regulation in Oklahoma."

Link: Meashintubby v. Paulk (PDF).


South Dakota 

South Dakota Bill Would Remove Sales Threshold for Remote Sellers - Emily Hollingsworth, Tax Notes ($). "Under current law, remote sellers are required to collect and remit sales tax if their gross revenue from sales in South Dakota exceeds $100,000 or if they have 200 or more separate transactions into the state. S.B. 30, which passed the Senate on a 30–3 vote January 20 and was sent to the House for consideration, would eliminate the latter requirement."

SD Trims Employer Unemployment Tax Rate In Flush Years - Jared Serre, Law360 Tax Authority ($). "South Dakota will cut employer contribution rates for unemployment insurance by 0.5 percentage points in periods of financial success under legislation signed into law Wednesday."

Link: H.B. 1011.



Texas - proposed change to sourcing rule - Melissa Menter, Eide Bailly. "The Texas Comptroller's office has proposed amendments to Rule 3.591, which would bring the rules in line with the Texas Supreme Court decision in Sirius XM Radio, Inc. v. Hegar. That case affirmed the cost of performance approach to apportionment." explaining the decision and its significance."
Texas High Court Urged to Reverse 'Tax Ferret' Holding - Christopher Jardine, Tax Notes ($). "The Texas Supreme Court should reverse an appellate court ruling that the state tax code authorizes taxing units to enter into contingent fee agreements to pursue ad valorem tax payments from Kinder Morgan Production Co., an attorney for the company argued."



Va. House OKs Pass-Through Entity Tax Changes - Jaqueline McCool, Law360 Tax Authority ($). "The requirement that a pass-through entity owner be entirely owned by a person or person eligible to be the shareholder of an S corporation would be removed, according to the bill's fiscal note."

Link: H.B. 1456


What about California "Middle Class Tax Relief Payments?

Are special state tax refunds taxable? Maybe; it depends! - Annette Nellen, 21st Century Taxation. "How can funds given to about 97% of Californians be a needs-based program? How can payment given to people well above the federal poverty line be based on need? How can $200 given to a married couple with $499,000 of income or single with $249,000 of income be based on need? Well, it would appear that the general welfare exception doesn't apply - the refunds/grants are taxable for federal purposes."


An Open Letter to the Last IRS Commissioner - Bob Kamman, Procedurally Taxing.

More than 30 million beneficiaries know about Middle Class Tax Relief, but the rest of the country might want some details. It provided payments ranging from $200 to $1,050 for residents who filed a 2020 state income tax return with AGI less than $250,000 (single) or $500,000 (joint). Yes, in California that’s middle class.


The state law made it clear that these payments were not subject to state income tax. But apparently no one was sure how IRS would view them. So with an abundance of caution, envelopes and postage, the Franchise Tax Board (that’s what California calls its Department of Revenue) decided to send 1099-MISC forms to anyone who received $600 or more. The FTB explained it was doing this because “The MCTR payments may be considered federal income.”

It would be useful to know, what with it being tax season and all.


Did you know? When the first Federal income tax was enacted for 2013, the first 1040s were due on March 1, 1914. The April 15 deadline was first effective in 1955. Good thing the tax law hasn't gotten any more complicated since then.





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