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.
California Cities, Texas Explore Switch to Destination Sourcing - Paul Jones, Tax Notes ($):
Texas lawmakers are debating legislation to end the practice of sending sales tax revenue from many online sales to localities that host retailers’ fulfillment centers.
Meanwhile, in California, an association representing city governments is reviewing a report showing that many cities would benefit substantially if the state adopted destination sourcing for the local portion of the sales tax on online sales fulfilled in-state.
What you need to know about destination and origin sourcing of sales tax - Gail Cole, Avalara:
Destination sourcing rules apply to most sales in most states. Destination sourcing is when the sale is sourced to the location where the customer takes possession of the product or service sold.
Origin sourcing is when the sale is sourced to the seller’s location — either where an order was taken or fulfilled. Pennsylvania is an origin-sourcing state: Local taxes only apply to sales originating within the boundaries of the local tax jurisdiction, so businesses with no physical presence in a local tax jurisdiction aren’t required to collect them. Businesses with a physical presence in Pennsylvania follow origin-sourcing rules.
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Mixed sourcing is when destination sourcing applies to some transactions or taxes, while origin sourcing applies to others. States with mixed sourcing rules include California, Illinois, Ohio, Tennessee, Texas, Utah, and Virginia.
State-by-state Roundup
Colorado
Colo. House OKs Exempting Small Biz From Delivery Fee - Sanjay Talwani, Law360 Tax Authority ($). "The House passed S.B. 143 by a vote of 62-3. If the bill is enacted, businesses with annual sales under $500,000 would be exempt from the state's 27-cent fee on retail deliveries, and other businesses would be allowed to pay the fees without listing them separately on customer invoices."
Indiana
Ind. House OKs Updated IRC References, Other Tax Changes - Zak Kostro, Law360 Tax Authority ($):
S.B. 419, which the House passed by a 96-2 vote Monday, would update references to the Internal Revenue Code in the state's adjusted gross income tax law from March 31, 2021, to Jan. 1, 2023, according to a fiscal impact statement.
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The bill also stipulates that compensation received by a nonresident employed in the state for 30 days or less during a calendar year is exempt from adjusted gross income tax.
The bill needs to be reconciled with a similar senate bill.
Ind. Senate Rejects Changes To Omnibus Tax Legislation - Michael Nunes, Law360 Tax Authority. "An Indiana bill that would allow broadband companies to subtract grant funding from corporate income tax, exempt nonresidents from income tax and enact a sales tax exemption for clean energy equipment will go to conference committee after the Senate rejected House amendments."
Link: S.B. 419
Iowa
Iowa Advances Pass-through entity tax retroactive to 2022. The Iowa House of representatives passed an optional pass-through entity tax (HF 352) for partnerships and S corporations on April 17. The margin of passage was 99-0, indicating likely Senate passage.
The bill would be imposed at the top individual tax rate on entity income apportioned to Iowa for electing taxpayers. Entity owners would get a refundable credit on their tax returns for their share of the entity tax.
Some key aspects of the new tax:
- The election to pay the entity tax is irrevocable and made by the entity. This means there is no opt-out for nonresident owners who might be adversely affected because of their own state's tax rules.
- The election is made annually "on a form and at a time prescribed" by the Iowa Department of Revenue. It remains to be seen whether the Department will require an advance election or whether it can be made when the tax return is due.
- Entities electing the pass-through tax will not be subject to the Iowa composite tax on pass-through income.
- Entities will be required to pay estimated tax for post-2023 tax years.
- The tax will expire when (if) the $10,000 salt cap goes away.
These taxes have become popular as a way to bypass the $10,000 cap on itemized deductions for entity income. The 2022 effective date will tempt many entities to file amended returns.
Related: Working Around the SALT Deduction Cap.
Senate confirms governor’s pick for top state tax official - O. Kay Henderson, Radio Iowa:
The Iowa Senate has confirmed former State Auditor Mary Mosiman as the state’s top tax official.
Governor Kim Reynolds appointed her to be director of the Iowa Department of Revenue on March 29. Mosiman, who is a CPA, has been the deputy director of the department for the past three years. Senator Pam Jochum (YOH-cum), a Democrat from Dubuque, says as the chief deputy, Mosiman has had oversight of the agency’s tax division.
Mosiman served as State Auditor from 2013 through 2018.
Kansas
Kansas DOR Updates Guidance on Deduction for Financial Institutions - Emily Hollingsworth, Tax Notes ($). "The guidance explains that qualified agricultural real estate loans are made on real property primarily used for producing one or more agricultural products. It clarifies that they have maturities that exceed five years but are less than 40 years; are secured by a first lien interest in real estate unless the loan is secured by a second lien interest if the institution also holds the first lien on the property; and have an outstanding loan balance of less than 85 percent of the appraised real estate value. An exception to the outstanding loan balance provision are loans with private mortgage insurance in which the insurance covers the loan amount exceeding the 85 percent threshold."
Minnesota
Minnesota House Sheds Modesty With Bold Tax Overhaul Plan - Michael Bologna, Bloomberg:
That said, the Taxes Committee of the Minnesota House abandoned modesty and rocked the state tax universe this week, approving an eye-popping tax overhaul for the upcoming 2024-25 biennium. The bill, HF 1938, cuts taxes by an estimated $3 billion over two years, but also raises nearly $1 billion in new revenue though levies on ultrawealthy taxpayers and multinational corporations.
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New revenue would arrive under a plan layering a fifth tier on the current four-bracket graduated personal income tax. Minnesota’s 9.85% bracket for joint filers earning north of $261,510 would be topped with a new 10.85% levy on those earning more than $1 million. It’s a plan worth $529 million over the two-year budget, according to a fiscal analysis.
The bill not yet been considered by the Minnesota Senate.
Minnesota Considering New Tax Bracket for the Wealthy and Worldwide Combined Reporting - Melissa Menter, Eide Bailly. "A proposed amendment to Minnesota House bill H.F. 1938 would create a new top tax bracket, imposing tax at a rate of 10.85% on single filers earning more than $600,000 and married filers earning more than $1,000,000. Currently, the highest tax rate in Minnesota is 9.85%. The proposal would also implement mandatory worldwide combined reporting, adding significant complexity to tax filing in the state."
Minn. House OKs Delivery Fee, Twin Cities Sales Tax Hike - Sanjay Talwani, Law360 Tax Authority ($):
Minnesota would place a 75-cent fee on most retail deliveries and increase sales taxes in the Twin Cities under a major transportation funding package approved by the state House of Representatives.
The House passed H.F. 2887, sponsored by Rep. Frank Hornstein, D-Minneapolis, by a 71-59 vote Wednesday. If enacted, the bill would raise about $3.6 billion in revenue from fiscal years 2024 through 2027, which would be pegged for a variety of transportation infrastructure projects, according to a legislative revenue summary. The bill would impose a local sales tax of 0.75% on the seven-county Minneapolis-St. Paul metropolitan area, on top of existing state and local taxes, as well as a 75-cent fee on most retail deliveries.
Minnesota Bill Would Tax Digital Products to Fund Local Media - Emily Hollingsworth, Tax Notes ($). "H.F. 3261, introduced April 18 by Rep. Mike Freiberg (DFL), would subject digital product providers to a tax equal to 1 percent of their gross receipts from retail sales of digital products in the state. The provider would be allowed to collect the tax from the purchaser."
The courtroom struggles of the Maryland digital tax may cause some some states to think twice before enacting their own versions, but the prospect of taxing Google and social media companies is very tempting for legislators.
Mississippi
Miss. Tax Dept. Updates Guidance On Pass-Through Entities - Michael Nunes, Law360 Tax Authority ($). "The notice, published Thursday, said income tax credits can be passed through to stakeholders on a pro rata basis and any excess credit may be carried forward as an overpayment or refunded. Tax credit limitations will apply to owners, members, partners or shareholders of pass-through entities. The updated guidance took effect Jan. 1."
New Mexico
New Mexico Changes its PTET from an Exemption to a Credit - Melissa Menter, Eide Bailly. "Under HB 0368, beginning with the 2023 tax year, owners of pass-through entities that have elected to pay tax at the entity level in New Mexico will take a credit for their share of the tax, rather than exempting the income from tax. This credit is refundable."
Ohio
Ohio Senate Confirms New Tax Commissioner - Michal Nunes, Law360 Tax Authority ($). "The Ohio Senate confirmed Republican Gov. Mike DeWine's pick to lead the state Department of Taxation following the retirement of the state's previous tax commissioner at the end of last year."
South Dakota
South Dakota Lowers Sales Tax Rates and Changes Rules for Remote Sellers - Melissa Menter, Eide Bailly. "During the most recent legislative session, South Dakota passed HB 1137 and SB 30. HB 1137 reduces the sales tax rate from 4.5 to 4.2% effective July 1, 2023. This rate change also applies to use, excise on farm machinery and farm attachment units, amusement device, and motor vehicle gross receipts taxes. SB 30 eliminates the 200 or more transaction threshold that required remote sellers to be licensed and remit sales tax in South Dakota. Now, only sellers with $100,000 or more of gross sales in South Dakota must be licensed and remit sales tax."
Va. To Conform To Federal Tax Code On Rolling Basis - Zak Kostro, Law360 Tax Authority ($):
Virginia will conform to the Internal Revenue Code on a rolling basis under identical bills that were enacted after both chambers of the state's General Assembly unanimously approved amendments to the legislation recommended by Republican Gov. Glenn Youngkin.
H.B. 2193 and S.B. 1405 were enacted April 12 after lawmakers adopted clarifying amendments to the legislation Youngkin had recommended, according to the General Assembly's website and a representative of the governor. The legislation conforms Virginia to the federal code on a rolling basis, thereby allowing the state to conform to federal tax changes "as soon as they are enacted by Congress," according to the bills' fiscal impact statements. This allows Virginia to conform to the Inflation Reduction Act and the Consolidated Appropriations Act of 2023 , the statements said.
Washington
Inslee Names New Washington State Revenue Department Chief - Laura Mahoney, Bloomberg ($). "Washington state’s new Department of Revenue director is Drew Shirk, who has been Gov. Jay Inslee’s (D) legislative affairs director since 2017."
West Virginia
Analysis of the Historic Tax Cuts in West Virginia - Thomas Norton, Tax Notes ($). "Before this new change, West Virginia had a personal income tax with a graduated rate starting at 3 percent and peaking at 6.5 percent. With the next tax regime, the beginning rate will be 2.36 percent and will only rise to 5.12 percent. The tax cuts are also being applied retroactively. So West Virginians should see their paychecks increase in the coming weeks when the state Department of Taxation distributes the new withholding rate tables."
In Other News
Pre-Stuffed, Unsliced Bagels Are Here to Upend NYC’s Bagel Tax - Jason Wilson, Taste of Home:
Of all the things in the world that you would have expected to be taxed, we bet bagels aren’t one of them. But, did you know that New York City imposes a “bagel tax,” an eight-cent tax if you order a bagel that’s sliced and schmeared with cream cheese? Meanwhile, you won’t be charged this tax for an unsliced bagel. Crazy, right?
But, if this “bagel tax” has NYC residents properly flustered, they’re in for a break. Philadelphia Cream Cheese and H&H Bagels are releasing limited-edition “Tax-Free” bagels this month: Full-sized, unsliced bagels filled with cream cheese. It’s just in time for Tax Day on April 18.
But of course a bagel would have a loophole.
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