State Tax News & Views: SALT cap dealing, Flat Kansas (Tax). KY, MS, WV SALT workarounds.

March 31, 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.


GOP Mulls Options for Deal on State and Local Tax Cap - Samantha Handler, Bloomberg ($):

Lawmakers from high-tax states like New York and California are looking at ways to raise the $10,000 cap on state and local tax deductions, enacted in the GOP-led 2017 tax overhaul, that they say may draw the bipartisan support needed for passage. While any bill would need a vehicle—a government funding bill, must-pass legislation, or even a tax package could work—some members see a chance to make some headway before they face voters again.

Republicans, as well as some Democrats, are turning to proposals that raise the limit rather than eliminate it, saying those ideas are more likely to draw a broad coalition. Though it’s unlikely the issue will be addressed before the expiration of cap and other aspects of the 2017 tax law in 2025, some say the support is there.



State-by-State Update



Ariz. Gov. Vetoes End To Local Grocery Taxes - Sanjay Talwani, Law360 Tax Authority ($). "Hobbs, a Democrat, on Tuesday vetoed S.B. 1063, which would have prohibited municipalities and other taxing authorities from enacting local taxes or fees, including transaction privilege taxes, on food and certain beverages for home consumption. If enacted, the measure would have taken effect in 2025."


Calif.'s Local Soda Tax Ban Is Unconstitutional, Court Affirms - Maria Koklanaris, Law360 Tax Authority ($). "A California law that deprives localities of their sales and use tax revenue if they impose taxes on sugar-sweetened beverages and other items is unconstitutional, a state appellate court held, affirming a trial court."



Ga. Lawmakers Approve Bill To Tax Electric Vehicle Power - Rosie Manins, Law360 Tax Authority ($).

Georgia lawmakers on Monday gave final approval to new legislation for regulating and taxing electricity as motor fuel, sending it to the governor's desk for his signature with two days left in the state's legislative session.

The Georgia Senate approved Senate Bill 146 with a 51-4 vote, shortly after an amended version was passed by the Georgia House on a 175-1 vote, as reported by the legislative bodies.



Governor appoints former state auditor to lead tax agency - O. Kay Henderson, Radio Iowa. "Governor Kim Reynolds has appointed former State Auditor Mary Mosiman to lead the Iowa Department of Revenue. Mosiman has been the Iowa Department of Revenue’s deputy director and head of its tax division since 2019."

Walmart’s ‘Dark Store’ Property Tax Argument Rejected in Iowa - Perry Cooper, Bloomberg ($):

Walmart Inc. failed to convince the Iowa Court of Appeals that its West Des Moines store was overvalued for tax purposes.

A trial court upheld the Dallas County Board of Review’s valuation of the store at $19.9 million for the 2019 tax year. Walmart sought to reduce the value to $17.9 million based on the “dark store” theory, under which big box stores should be valued as if they are vacant because they are built to suit an individual company’s specific needs and would be worth less to a different occupant.



Kansas House Approves 5.25% Flat Income Tax - Jaqueline McCool, Law360 Tax Authority ($):

Brianna Johnson, a spokesperson for Democratic Gov. Laura Kelly, told Law360 in a statement that Kelly had proposed a plan that would provide relief to Kansas families without taking money from public schools.

"The most expensive part of this bill — the flat tax — would instead provide less than $2 of savings for middle-class families and blow a hole in Kansas' budget," Johnson said. "Gov. Kelly will continue pursuing an agreement with lawmakers from both sides of the aisle about how to cut taxes responsibly."

Surely there is a flat Kansas joke in here somewhere, but I will just pass it in silence.

Lawmakers Advance Kansas Tax Relief Bill - Emily Hollingsworth, Tax Notes ($). "It would also incorporate two of the provisions included in Democratic Gov. Laura Kelly’s Axing Your Taxes plan: eliminating the state sales tax on groceries as of July 1 — Kelly proposed an April 1 start date — and allowing retirees making more than $75,000 but less than $100,000 to keep their Social Security income from being wholly subject to state income tax. Bills to enact a third provision of the Axing Your Taxes plan — the back-to-school annual sales tax holiday (H.B. 2108 and S.B. 21) — have stalled. The measure is included in Kelly’s fiscal 2024 budget plan."




Ky. Approves Sales Tax Changes, SALT Cap Workaround - Michael Nunes, Law360 Tax Authority ($). "Democratic Gov. Andy Beshear signed H.B. 360, which allows pass-through entities to elect to be taxed at the entity level for income tax purposes and gives stakeholders a tax credit for 100% of taxes paid. The law also makes changes to the state's sales tax statute, which was expanded last year to include more services."



Mississippi Enacts Changes to SALT Cap Workaround Law - Matthew Pertz, Tax Notes ($):

Mississippi Gov. Tate Reeves (R) has approved legislation aimed at correcting oversights in the state’s passthrough entity (PTE) workaround to the federal cap on the state and local tax deduction.


One concern with the original PTE election law is the order of operations for applying credits. As written, it could be interpreted that the owner-level credit for taxes paid as an entity would be calculated on the amount of taxes paid after entity-level credits, essentially nullifying tax perks earned by the business. H.B. 1668 clarifies that entity owners will receive the full benefit of electing to be taxed as a PTE.

Miss. To Tax Software, Services And Digital Products - Michael Nunes, Law360 Tax Authority ($). "Republican Gov. Tate Reeves signed S.B. 2449 on Tuesday. The law will impose the state's 7% sales and use tax on computer software, services and digital products, including music, games and reading materials. It also specifies that software that is maintained on a server located out of state and accessible online is not subject to sales and use tax."

Miss. Approves Expedited Depreciation For Biz Expenses - Michael Nunes, Law360 Tax Authority ($). "Republican Gov. Tate Reeves signed H.B. 1733 into law on Monday. The law allows businesses to elect to fully deduct research or experimental expenditures in the year they are incurred. Businesses may also elect to deduct expenditures of qualified property or qualified improvement property for a 100% bonus depreciation in the tax year the property is placed into service."



Tax relief in Mass: Gov. Healey deflects criticism over estate tax, short-term capital gains plan - Alison Kuznitz, Masslive. "But her push to overhaul the commonwealth’s estate and short-term capital gain taxes — and in effect, removes Massachusetts’ outlier tax code status — drew skepticism at the Joint Revenue Committee hearing Tuesday at the State House."



Missouri House Passes Billion-Dollar Income Tax Cut Bill - Matthew Pertz, Tax Notes ($):

The Missouri House has advanced a billion-dollar income tax cut bill along party lines, priming the state to further drop rates only six months after its last massive tax cut.

H.B. 816, which was combined with H.B. 660, would cut the top individual tax rate, which applies to Missouri income over $9,000, from 4.95 percent to 4.5 percent, beginning January 1, 2024. It would also halve the corporate income tax rate from 4 percent to 2 percent. The legislation was passed by the House March 23 on a 111–48 vote.

Missouri has a Republican governor, and the GOP controls both chambers of the missouri legislature.



Virginia Governor Approves Changes to Elective PTE Tax Law - Matthew Pertz, Tax Notes ($). "The original law required all owners of an electing PTE to be natural persons. H.B. 1456 eliminates that prerequisite so that entities owned in part by trusts or estates could still reap the benefits of passthrough ownership. While owners that are not individuals will not qualify for a PTE credit, this election allows individuals to claim the credit without modifying the ownership structure of their company."

Virginia PTET Election Amended - Melissa Menter, Eide Bailly.

Virginia Governor signed an amendment to Virginia's PTET rules including measures that:
  1. Define "eligible owner" as a direct owner of a pass-through entity who is a natural person . . . or an estate or trust subject to the tax imposed by Article 6,
  2. Remove the requirement that a pass-through entity must be 100% owned by natural persons or persons eligible to be shareholders in an S corporation,
  3. Impose tax only on the pro rata or distributive share of income, gain, loss, or deduction attributable to eligible owners,
  4. Limit the share the pro rata or distributive share of taxable income to income that is attributable to Virginia sources, subject to modifications; and
  5. Limiting these changes to taxable years beginning on or after Jan. 1, 2021



Washington Supreme Court Affirms Capital Gains Tax and Invites Challenge to Broader Income Tax Restrictions - Jared Walczak, Tax Policy Blog. "For now, the new tax on aggregate net capital gains income rests uneasily in a framework where the state supreme court still acknowledges that income is property, and that the tax would fail under that definition if it were, in fact, an income tax. Hence the ingenious (or perhaps disingenuous) solution: this tax, imposed on a class of net income, is actually an excise tax on the privilege of earning capital gains income, measured in income."

Washington State Supreme Court Upholds Capital Gains Tax as an “Excise Tax” – Adam Sweet, Eide Bailly. "This new tax on capital gains is effective as of January 1, 2022, with 100% of any payments due on or before April 18, 2023 (even if a filing extension is requested). Many affected taxpayers may be surprised that they now have a Washington State tax liability on account of capital gains recognized in 2022."


West Virginia

West Virginia Governor Signs SALT Cap Workaround Bill - Benjamin Valdez, Tax Notes ($) (my emphasis) "Gov. Jim Justice (R) signed S.B. 151 March 28, which allows passthrough entities to elect to pay income tax at the entity level and owners to claim a tax credit for their distributive share of the tax paid, effectively avoiding the $10,000 SALT deduction cap created by the Tax Cuts and Jobs Act in 2017. The bill is effective for tax years beginning on and after January 1, 2022."

West Virginia Enacts SALT Deduction Cap Workaround Effective for Tax Years Beginning January 1, 2022 - Becca Stadtner, Eide Bailly. "West Virginia Senate Bill 151, signed by Governor Jim Justice, allows pass-through entities that are not disregarded entities for federal income tax purposes to irrevocably elect to pay an entity level income tax."


Other State Tax News

Metaverse Economy Poses Daunting Challenges to State Tax Agencies - Michael Bolgna and Donna Borak, Bloomberg ($).

State tax administrators have plenty of experience taxing automobiles, boats, and clothing sold from both brick-and-mortar stores and online retail platforms. But what about virtual versions of those same items?

It’s an important question, because there are growing numbers of virtual sports cars, yachts, luxury handbags, and even concert tickets sold in the metaverse, the universe of immersive virtual worlds where people can socialize, work, and shop. Millions, for instance, have attended virtual concerts by avatars of Ariana Grande, Travis Scott, and Marshmello in the video game Fortnite Battle Royale, but it isn’t clear if any taxes were imposed or collected.

Just hire some virtual revenue examiners, right?

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