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.
New York and California lost over $90 billion in income to low-tax states during Covid - Robert Frank, CNBC:
New data from the Internal Revenue Service shows that New York state lost $25 billion in adjusted gross income due to outmigration in 2021, on top of $20 billion lost in 2020. California reported a net loss of $29 billion in 2021, following a loss of $18 billion in 2020. Combined, the two states lost $92 billion across the two years.
The data shows that the income flight from high-tax states to low-tax states, which has been happening for years, picked up steam during Covid. The income losses for California and New York in 2021 were more than three-times their combined losses in 2019, before the pandemic took hold in the U.S.
State-by-State Roundup
Arizona
Ariz. Lawmakers Approve Income Tax Rebate - Zak Kostro, Law360 Tax Authority ($). "S.B. 1734 passed the House of Representatives by a 46-13 vote Wednesday after clearing the Senate 24-6 the same day. The bill would require the state Department of Revenue to issue a one-time "general welfare" rebate of $250 per dependent under age 17 to any taxpayer who filed a full-year resident tax return for 2021 and claimed up to three dependents, according to a Senate fact sheet."
Colorado
Colo. Lawmakers Send Property Tax Cut To Ballot - Sanjay Talwani, Law360 Tax Authority ($). "Lawmakers in both chambers approved S.B. 303 on Monday, sending Proposition HH to the ballot in November. If approved by voters, the measure, announced by Polis on May 1, would lower residential property tax assessment rates for 10 years and provide a $50,000 valuation exemption. It would also lower commercial assessment rates over a decade, subject to revenue thresholds."
Colorado Exempts Small Businesses From Delivery Fee - Emily Hollingsworth, Tax Notes ($). "Under S.B. 23-143, signed into law by Gov. Jared Polis (D) on May 4, businesses that earned $500,000 or less in the previous year are exempt from the 27-cent fee. The bill also gives retailers the option to pay the delivery fee on behalf of their customers."
Florida
Florida Lawmakers Approve Budget Bill With Sales Tax Cuts, Holidays - Matthew Pertz, Tax Notes ($). "For consumers, H.B. 7063 would expand some sales tax holidays and create others. The annual back-to-school sales tax holiday on purchases of clothes, computers, and school supplies would be extended into two 14-day holidays, the first from July 24 through August 6 and the second from January 1 through 14, 2024. A disaster preparedness sales tax holiday would run from May 27 through June 9 and again from August 26 through September 8, and power tools would be exempt from September 2 through 8. But the marquee event is Freedom Summer, during which tickets to live events, theater performances (including movies), boating and water activity supplies, and children’s athletic equipment and toys would be exempt from sales tax from May 29 through September 4."
Georgia
Ga. Incorporates Updated Federal Tax Code Into State Law - Zak Kostro, Law360 Tax Authority ($). "H.B. 95, which Kemp signed May 2, updates references to the federal code to mean the provisions of the law as amended and enacted on or before Jan. 1, 2023, according to the bill text. However, the legislation makes certain exceptions for Internal Revenue Code Section 108(i), Section 163(e)(5)(F) and other sections, according to the text."
Indiana
Holcomb signs new two-year budget, 90 other bills into law - Casey Smith, Indiana Capital Chronicle. "Last session, lawmakers agreed to cut Indiana’s individual income tax from 3.23% to 2.9% over seven years. The new budget cuts that down to five years, or Jan. 1 of 2027. Acceleration of the rate reductions is expected to save Hoosier taxpayers over $360 million over the biennium."
Indiana Enacts Tax Code Changes, Creates SALT Review Task Force - Emily Hollingsworth, Tax Notes ($):
S.B. 419 makes various changes relating to income, property, and sales taxes. According to its fiscal note, the final version contains 20 tax provisions, nearly half of the 38 measures proposed previously.
The final bill amends net operating loss rules for state income tax calculation; updates tax code provisions based on February legislation (S.B. 2) creating an elective passthrough entity tax; creates a 30-day safe harbor from Indiana income taxes for nonresident workers; provides sales tax exemptions for wind, solar, and agricultural equipment; allows deductions from corporate income tax for some research and experimental expenditures and broadband expansion expenses; and allows an individual income tax deduction for taxpayers in healthcare cost-sharing ministries. Many of the bill’s provisions take effect retroactively, though some will become effective July 1 (such as the sales tax exemptions) or January 1, 2024 (such as the healthcare cost-sharing ministry deduction).
Iowa
Iowa Joins States With SALT Cap Workarounds for Businesses - Angélica Serrano-Román, Bloomberg ($):
Iowa Gov. Kim Reynolds (R) signed a measure to allow certain individuals to pay state income tax through their pass-through partnerships and S corporation businesses, her office said Thursday.
Under the bill (HF 352), the businesses could pay Iowa income tax at the entity level, instead of having their income passed through to individual owners for taxation. The individuals would get a state tax credit for the amount paid, easing the impact of the $10,000 federal limit on individual taxpayers’ deductions for state and local taxes.
Details of HF 352 are provided in our April 28 state tax roundup.
Kansas
Kansas Omnibus Taxation Bill Sent to Governor - Emily Hollingsworth, Tax Notes ($):
Kansas lawmakers have approved an omnibus tax bill that would clarify provisions in the elective passthrough entity tax, allow net operating loss deduction carryforwards, and create a property tax exemption for businesses in direct competition with government entities.
...
The bill would clarify provisions in the 2022 SALT Parity Act (H.B. 2239) on what constitutes taxable income for purposes of the passthrough entity tax election and would allow entity owners to claim an offsetting individual income tax credit. S.B. 8’s passthrough entity provisions, initially introduced as H.B. 2465, would apply retroactively to tax year 2022.
Kansas Governor Kelly vetoed an earlier tax cut bill. She will have 10 days to decide whether to sign this one.
Louisiana
Louisiana Reduces Extension from 7 to 6 Months - Melissa Menter, Eide Bailly. "Louisiana reduced the filing extension period for corporate income and franchise tax (“CIFT”) returns from seven months to six months or the extended due date of the federal return, whichever is later, effective for tax years beginning January 1, 2022. Louisiana taxpayers may only receive the six-month extension to file the return if they timely filed an extension for the federal return. For 2022 calendar year taxpayers, the original due date for the CIFT return is May 15, 2023, while the extended due date is November 15, 2023. Further, Louisiana allows an automatic six-month extension to file partnership and fiduciary income tax returns effective for tax years beginning January 1, 2022."
Maryland
Maryland Supreme Court reverses ruling on digital ad tax - Brian Witte, AP via Washington Post. "In an order, Justice Matthew Fader, the chief justice of the Supreme Court of Maryland, sent the case back to Anne Arundel County Circuit Court with directions to dismiss. He said the plaintiffs failed to exhaust administrative remedies through the state’s tax court — Reasons will be stated in a later opinion. The four-page order does not make any ruling on the constitutionality of the law."
Md. To Require Add-Backs For Pass-Through Tax Payments - Zak Kostro, La360 Tax Authority. "S.B. 240, which Democratic Gov. Wes Moore signed Monday, requires that when members of Maryland pass-through entities compute state adjusted gross income, they must add back state income tax credits the entities claimed in other states, according to a fiscal and policy note."
Massachusetts
Democratic Massachusetts Governor Wants to Cut Taxes to Stem Exodus - Maxwell Adler and Christopher Anstey, Accounting Today (free link, registration required):
The state lost almost 48,000 people by mid-2022 from two years before, according to Census Bureau estimates, spurring concern about outmigration that will curb long-term economic growth. Some $4.3 billion of income left the state in 2021, the Pioneer Institute, a pro-free-market research group, recently estimated after analyzing Internal Revenue Service data.
...
Among the reforms Healey is pushing: a reduction in the short-term capital gains tax rate to 5% from 12%, a level that is now an outlier among states, she said. Healey also wants to boost the threshold for the estate tax to $3 million from $1 million.
Minnesota
Minnesota Eyes Other Taxes After Pulling Back From Worldwide Plan - Michael Bologna, Bloomberg ($):
The Minnesota Legislature is examining alternative tax strategies sealing up revenue gaps in its 2024-25 biennial budget after the Senate appeared to suddenly abandon a plan to tax the income of foreign subsidiaries of multinational corporations.
Lawmakers are working with the Department of Revenue to quickly identify options for replacing revenue that would have resulted under mandatory worldwide combined reporting for the calculation of corporate income taxes, according to Sen. Ann Rest (D), chair of the Senate Taxes Committee. The worldwide reporting plan had seemed on track to becoming law, as it was featured in omnibus tax bills passed in both the House and Senate.
Background: What the heck is ‘worldwide combined reporting’ and why do DFLers think it can raise hundreds of millions? - Peter Callaghan, Minnpost.
Missouri
Missouri Legislature Passes Property, Income Tax Relief for Seniors - Matthew Pertz, Tax Notes ($):
The House approved S.B. 190 on a 154–2 vote May 8, while the Senate passed it 33 to 1 on April 17. The bill would authorize counties to issue property tax credits to homeowners and homesteaders who are eligible for Social Security retirement benefits.
...
S.B. 190 would also expand the deductibility of retirement benefits to allow all taxpayers to claim a maximum deduction, regardless of filing status or income. Under current law, only joint filers with an adjusted gross income of less than $100,000 can deduct 100 percent of Social Security income and retirement income.
Missouri House, Senate Will Meet to Finalize $1.6 Billion in Tax Cuts - Matthew Pertz, Tax Notes ($). "Likely the most contentious point is S.B. 247's plan to speed up an individual income tax cut by reducing the rate to 4.5 percent as of January 1, 2024. Under current law, approved barely seven months ago, the rate was reduced to 4.9 percent for 2023 and would be further reduced to 4.8 percent as of 2024. If the state meets revenue triggers, the rate would be further reduced each year to 4.5 percent as of January 1, 2027."
Nebraska
Proposed tax cut bills trimmed, then advanced to final round debate - Paul Hammel, Nebraska Examiner:
State lawmakers adjusted, then advanced to final-round debate, two tax relief measures pushed by Gov. Jim Pillen that have been described as “transformative” and “historic.”
...
The rest of the tax relief, about $3.2 billion over six years, would come via LB 754. It would gradually reduce the state’s top corporate and personal income tax rates to 3.99% by the 2027 tax year, as well as phase out state taxes on Social Security and, under an amendment from Bellevue Sen. Carol Blood, on federal pension payments.
New Hampshire
New Hampshire Taxwriters OK Bill to Decouple From Interest Deduction Limit - Benjamin Valdez, Tax Notes ($). "The House Ways and Means Committee during a May 9 executive session voted to approve S.B. 189 on a vote of 19 to 0. The bill would decouple the state from the limit on the IRC section 163(j) business interest expense deduction, allowing companies to deduct the full amount of interest expenses in the year they are incurred. The change would take effect for tax year 2024."
New Jersey
NJ To Allow Biz Expense Deductions For Pot Cos. - Michael Nunes, Law360 Tax Authority ($). "Murphy, a Democrat, signed A.B. 3946 on Monday, which decouples the state from a federal statute prohibiting businesses that traffic in Schedule I and II controlled substances from claiming deductions and tax credits."
Oklahoma
Oklahoma Governor Signs Two Senate Tax Bills Despite Veto Threat - Emily Hollingsworth, Tax Notes ($). "Despite threatening to veto Senate bills because of an impasse over his education and tax credit plan, Oklahoma Gov. Kevin Stitt (R) approved Senate legislation extending a tax exemption for rolling stock and changing the calculation of a revenue transfer."
Oregon
Oregon cuts Amazon $1B in tax breaks for 5 new data centers - Mike Rogoway, Seattle Times. "Wednesday’s unanimous votes by the five-member port commission were the final step in securing the enterprise zone incentives, which local officials hope will secure $12 billion in new Amazon spending in their remote county, about 160 miles up the Columbia River from Portland."
Tennessee
Gov. Lee signs ‘single largest tax cut’ in Tennessee history into law – Caleb Wethington, WSMV4:
Governor Bill Lee has announced the signing of the Tennessee Works Tax Act, which is the “single largest tax cut in state history.”
Lee said this act will provide more than $400 million in savings for Tennessee families and businesses while supporting future economic growth. This legislation also includes a three-month grocery tax holiday which is slated to begin on Aug. 1.
Tenn. Shifts To Single-Sales-Factor Apportionment For Taxes - Zak Kostro, Law360 Tax Authority ($). "The Tennessee Works Tax Act, S.B. 275/H.B. 323, will transition the state to a mandatory single-sales-factor apportionment formula for determining state franchise and excise taxes by the 2025 tax year, with some exceptions, according to a fiscal memorandum. Under preexisting state excise tax law, a person or company doing business in and outside Tennessee could apportion net earnings or losses to the state using a three-factor formula based on property, payroll and sales, according to a summary of the legislation."
Vermont
Vermont Lawmakers OK Bill to Legalize and Tax Sports Betting - Benjamin Valdez, Tax Notes ($). "The House concurred with Senate amendments to H. 127 on May 9. Under the bill, sportsbook operators would be subject to a revenue-share rate of no less than 20 percent that acts as a tax on gross revenue from sports wagering."
Moving to save taxes: a cautionary tale
New Jersey Couple Owes $1.14 Million on Capital Gain in New York - Christopher Jardine, Tax Notes ($): (taxpayer names omitted):
[The Division of Tax Appeals] determined that Taxpayers had not abandoned their New York domicile at the time of the sale of the interest in the LLC, despite their lease in New Jersey starting a week prior, and the couple therefore owe New York taxes on the capital gain from the sale.
From the DTA opinion:
All conditions for finalization of the transaction were completed on or before May 12, 2016...
The sale of shares from Epic was finalized on May 23, 2016. Petitioners submitted a bank statement reflecting that they received a wire transfer from that sale in the amount of $8,280,921.08 on May 24, 2016. The Division found that petitioners reported capital gain from the sale of their shares in Epic was not properly allocated to their period of New York State and City residency.
The opinion presents this timeline for their move to New Jersey (my emphasis):
The Questionnaire also asked whether, for 2016, he maintained living quarters in New York and if so, for the address and the dates such living quarters were maintained. Petitioner responded that he did live in New York, provided the address in New York, New York, and wrote that he lived there from January 1, 2016 through May 12, 2016. When asked how many days he was present in New York for work, he stated that he was employed in New York “all year,” and wrote that he was a resident from January 1, 2016 through May 12, 2016, and a non-resident from May 13, 2016 through December 31, 2016. Petitioner also wrote that he resided in the apartment in New York, New York until May 12, 2016, and that he lived in Jersey City, New Jersey, beginning on May 12, 2016, and remained there through the end of the year.
The New York revenue examiners questioned that timeline:
The Division subpoenaed... cell phone records from Verizon for May 2016. These records reflected phone calls and text messages originating in New Jersey on May 14, 2016. The next time a call or message originated or was received in New Jersey was on May 21, 2016. Calls and texts originated from Jersey City, New Jersey, from 12:42 p.m. until 1:30 p.m. that day. Each night in May, other than the night of May 26, 2016, when petitioners were in Newark, New Jersey, for their trip to Sweden, the last call or text message of the night was made in New York City, and the first message or call the following morning was made from New York City. This remained true until the morning of June 8, 2016, where the first call or message that the day originated in New Jersey.
That meant a lot to the administrative law judge:
Upon a review of the entire record and pursuant to the foregoing standards, it is concluded that petitioners have not proven, by clear and convincing evidence, that they abandoned their New York domicile and became domiciliaries of New Jersey on May 15, 2016, instead of June 13, 2016. cell phone records suggests (sic) that petitioners did not change their lifestyle of going from their New York City apartment to work, and back to their New York City apartment at night, until mid-June 2016. Additionally, petitioners' credit card statements indicated minimal activity in New Jersey, with most charges for the period at issue occurring in New York City.
The Moral? It appears the taxpayers tried to make a last-minute move to a lower-tax state to reduce their capital gain tax. State revenue examiners will review such moves carefully. If you want to move for tax reasons, make sure you really move in time, and that your paperwork - and your cell phone records - are consistent with your moving date.
We're Here to Help
