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.
IRS: Most states pandemic rebates for 2022 are non-taxable - Eide Bailly. From the IRS guidance:
During a review, the IRS determined it will not challenge the taxability of payments related to general welfare and disaster relief. This means that people in the following states do not need to report these state payments on their 2022 tax return: California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, New York, Oregon, Pennsylvania and Rhode Island. Alaska is in this group as well, but please see below for more nuanced information.
The IRS had asked taxpayers who received such payments to delay filing while the IRS decided how to tax them.
MTC Group Weighs Sourcing Partners' Guaranteed Payments - Maria Koklanaris, Law360 Tax Authority ($):
For example, the work group said, unlike distributive share, where the character of the items and the partnership activities determine sourcing, guaranteed payments for services by partners are generally sourced to the location of the partner. So if the MTC goes that route as it prepares more guidance, including a white paper, on the state taxation of partnerships, it will be generally conforming to federal principles.
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"The states that address sourcing guaranteed payments take varying approaches, including sourcing where the services are performed, sourcing the same as distributive share, or sourcing with a hybrid approach," noted Jennifer Stosberg, legal division counsel at the MTC. "However, we also found that many states do not have any specific provisions on the sourcing of guaranteed payments."
"Guaranteed payments" is the term for partnership payments to partners for services. The tax law does not allow partners to be W-2 employees of their partnership. When states treat guaranteed payments like other partnership income, the state tax result to the partners can be very different than for employees of the partnership.
New York City Tribunal Rules Payments to DISC Not Deductible - Andrea Muse, Tax Notes ($):
The New York City Tax Appeals Tribunal ruled that an architectural firm's payments to a domestic international sales corporation — whose only shareholders were the active partners of the firm — are not deductible for purposes of the city’s unincorporated business tax.
The tribunal concluded in Matter of Skidmore, Owings & Merrill LLP that commission payments made by the firm to the DISC were compensation to the partners for their services to the firm and the firm’s deduction of the payments was properly disallowed under the city’s administrative code. The decision, dated January 26, was released February 16.
The IC-DISC is a tax break in the federal law that, among other things, can convert a portion of earnings from business operations from ordinary business income to dividend income. As far as I know, the New York City treatment as computation is unique.
Related: U.S. Export Tax Incentives (IC-DISC).
State-by-state update
Colorado
Colorado DOR Adopts Rules Implementing Retail Delivery Fees - Emily Hollingsworth, Tax Notes ($).
The Colorado Department of Revenue has adopted rules on the state's retail delivery fee, though two bills under consideration by lawmakers could alter the fee by offering small businesses an exemption or by repealing it altogether.
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The 27-cent fee, which took effect July 1, 2022, applies to retailers or marketplace facilitators that collect the sales or use tax on tangible personal property that is mailed, shipped, or delivered by motor vehicle to a purchaser in Colorado.
Links: Rule 434-218 (.doc file); amended Rule Rule 39-21-116.5
Iowa
Reynolds’ goal: Abolish Iowa income tax by 2026 - Tim Barton, Omaha.com. "Iowa Republican Gov. Kim Reynolds, saying she is not done cutting taxes, announced Friday that it is her goal to abolish the state income tax by the end of her four-year term."
Iowa Pass Through Entity Tax Advances. The House Ways and Means Committee voted on Wednesday to advance HSB 69 to the House floor. The bill would allow pass-though entities to elect to pay tax at the entity level to bypass the $10,000 limit on itemized deductions for state and local taxes. The bill only allows limited credits against the entity tax. The owners of the entity (partners or S corporation shareholders) would be allowed credits on their own returns for taxes paid by the entity, but would not be entitled to refunds if the credits exceeded their tax liability.
Related: IRS Blesses Entity-level Tax Deduction used as SALT Cap Workaround
Minnesota
Minn. Panel Advances Tax Credit For Community Investment - Sanjay Talwani, Law360 Tax Authority ($). "The Senate Taxes Committee laid over S.F. 1512, sponsored by Sen. Carla Nelson, R-Rochester, and others, for possible inclusion in a tax omnibus bill this session. If enacted, the measure would establish a Minnesota new markets tax credit for investments in designated community development projects, mirroring a federal tax credit."
Minn. House Panel OKs Restoring Historic Rehab Tax Credit - Sanjay Talwani, Law360 Tax Authority ($). "If the bill is enacted, the revived credit would be worth 20% of qualified rehabilitation expenditures for historic structures." Link: HF 1488
Mississippi
Miss. House Bill Seeks To Exempt Bullion From Sales Tax - Michael Nunes, Law360 Tax Authority ($). "H.B. 1661, introduced Wednesday by Rep. Jody Steverson, R-Ripley, would exempt the sale of coins, currency and bullion from sales and use taxes. Bullion includes bars, ingots and coins made at least in part of gold, silver, platinum or palladium that are sold based on their intrinsic value as precious metals or collectibles and not as a medium of exchange."
Montana
Montana Governor's Tax Relief Proposals Make Headway in Legislature - Emily Hollingsworth, Tax Notes ($):
S.B. 121, introduced by Senate Taxation Committee member Becky Beard (R), would lower the top marginal income tax rate while raising its EITC; the Senate passed it 34 to 16 on February 14. The bill was transmitted to the House the next day.
The legislation would reduce the top income tax rate to 5.7 percent from 6.5 percent starting January 1, 2024. It would also increase the state EITC from 3 percent to 10 percent of the federal credit.
New Hampshire
NH Gov. Proposes Ending Telecommunications Tax - Michael Nunes, Law360 Tax Authority ($). "The (7%) tax, according to the Department of Revenue Administration, was enacted in 1990 and requires communication service providers and retailers to collect and remit the tax from consumers."
Oregon
Oregon Updates PTET FAQ - Melissa Menter, Eide Bailly. "The Oregon DOR recently updated its PTET information page to include answers to additional FAQs." Link: Pass-Through Entity Elective (PTE-E) Tax
Related: Working Around the SALT Deduction Cap
COST Urges Ore. House Panel To End Biz Tax Throwback Rule - Sanjay Talwani, Law360 Tax Authority ($):
The Council on State Taxation and other business interests urged an Oregon House panel to advance legislation that would eliminate the state's "throwback" rule for apportionment of corporate income for state tax purposes.
COST and others told the House Revenue Committee on Tuesday to advance H.B. 2546, sponsored by Rep. Werner Reschke, R-Klamath Falls, a panel vice chair. If enacted, the measure would repeal Oregon's throwback rule, which includes sales made into states where that income is not taxed in calculating Oregon's apportionment of taxable income.
The Tax Foundation explains throwback rules:
When companies sell into a state where they do not have nexus, that destination state lacks jurisdiction to tax the company’s income. This results in what is known as “nowhere income”—income that cannot legally be taxed by the state where the income-producing sale occurs.
Under throwback rules, sales of tangible property which are not taxable in the destination state are “thrown back” into the state where the sale originated, even though that’s not where the income was earned.
The Tax Foundation post argues that "Over the long run, these rules reduce competitiveness while yielding very little—or no—increase in state collections."
South Dakota
SD Ends Remote Transaction Threshold To Remit Sales Tax - Zak Kostro, Law360 Tax Authority ($). "A remote seller was defined as a business without a physical presence in South Dakota that in the previous or current calendar year achieved gross sales exceeding $100,000 or completed 200 or more separate transactions into the state, according to an earlier version of the bill. The change means that remote sellers that exceed the $100,000 gross sales threshold must remit sales tax regardless of the number of transactions." Link: SB 30.
Tennessee
Tennessee Lawmakers Preparing Single-Sales-Factor Bill - Matthew Pertz, Tax Notes ($).
Under the draft bill, a copy of which was provided to Tax Notes, starting in 2024 Tennessee would phase in single-sales-factor apportionment over three years, with sales being weighted five times over property and payroll in the first year, 11 times in the second, and totally adopted by 2026. Since 2017 qualifying manufacturers have been able to elect to calculate their business tax (also called the business license tax, separate from the corporate income tax) using the single-sales-factor method as opposed to the traditional three-factor formula. The bill would make single-sales-factor apportionment mandatory after the three-year phase-in period, with an exception for businesses that elect to pay a higher apportionment factor under the current calculation method.
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Gov. Bill Lee (R) during his February 6 State of the State address listed transitioning the state to single-sales-factor apportionment as one of his priorities. Once the draft bill language is finalized, it will be filed as H.B. 323.
Texas Comptroller Amends Sourcing Rule in Response to Sirius XM Decision - Paul Jones, Tax Notes ($). " The amendments most notably would eliminate a provision adopted by the comptroller in January 2021 that established that services are performed at the location where the "receipts-producing, end-product act or acts” occur, if such acts exist."
Link: Texas Register edition that includes proposed rule.
West Virginia
W.Va. Conforms Personal, Corp. Income Tax Laws To IRC - Jared Serre, Law360 Tax Authority ($). "H.B. 2776 and H.B. 2777 were signed into law by the Republican governor Tuesday, aligning the state's personal and corporate income tax laws with the 2023 IRC."
West Virginia Senate Passes Income Tax Cut, Property Tax Rebate Bill - Benjamin Valdez, Tax Notes ($):
S.B. 424 was approved 32 to 0 by the Senate February 9 after lawmakers voted the previous day to suspend rules that require a bill to be read over three consecutive days. It would institute an overall income tax cut of 15 percent and allow taxpayers to claim annual rebates for the property tax levied on various categories of business equipment and personal vehicles. The bill would take effect for tax years beginning on or after January 1, 2024.
Current personal income tax rates range from 3 percent to 6.5 percent; S.B. 424 would trim these to range from 2.78 percent to 6.02 percent. The rebates would equal 50 percent of the personal property taxes paid on business machinery, equipment, and inventory; leasehold investments; computer equipment; furniture and fixtures; and retail inventory. Rebates for personal vehicles would equal 100 percent of the taxes paid.
Wisconsin
Wis. Gov. Unveils Tax Plan, Opposing GOP's Flat-Tax Pitch - Michael Nunes, Law360 Tax Authority ($). "Democratic Gov. Tony Evers' office said in a statement Sunday that his 2023-2025 budget proposes repealing the personal property tax, capping the manufacturing tax credit and limiting a capital gains tax exclusion to those making less than $400,000. The plan also provides additional credits to working families. Evers also criticized a proposal backed by Republican legislators that would cut the state's individual income tax rate over the next three years and impose a 3.25% flat tax in 2026."
Deferral and Exclusion of Long-Term Capital Gains for Investments in Qualified Wisconsin Businesses - Wisconsin Department of Revenue:
For taxable years that begin on or after January 1, 2016, Wisconsin law (sec. 71.05(25), Wis. Stats.) provides for a capital gain exclusion when an investment is held for at least five years in a "qualified Wisconsin business."
The exclusion is only available to individuals, including individual partners or members of a partnership, limited liability company, or limited liability partnership, and individual shareholders of a tax-option corporation.
In other news
Maine lawmakers aim to strip Whole Foods of state tax breaks over lobster ban - Breck Dumas, Fox Business:
Whole Foods' decision to pull Maine lobster from its stores has lawmakers in the state looking to pull tax incentives from the grocery chain.
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Now, Maine legislators from both sides of the aisle are looking to hit Whole Foods back, along with any other retailers that blacklist Maine products due to outside pressure.
Maine Senate Republican Leader Trey Stewart is sponsoring a bill aimed at punishing any business that boycotts Maine products due to the influence of a third party, by prohibiting the companies from participating in the state's Business Equipment Tax Reimbursement program.
Aside from constitutional concerns, it seems like it would be pretty easy to say that you just don't want to sell Lobster any more. Less importantly, there are sadly missed headline opportunities here. "Mainers boiling over lobster ban." "Mainers look to claw back tax breaks."
I'll show myself out.
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