State Tax News & Views: IRS tax prep, Minnesota's Big Tax Deal, California's budget woes highlight big week.

May 19, 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.


State Returns Pose Challenge for IRS Direct File - Lauren Loricchio, TaxNotes ($):

Taxpayers may be more apt to use an IRS-run free direct-filing tool if they can also easily file their state tax returns, but the agency acknowledges that setting that up will be a challenge.

The IRS will hold a direct-file pilot in the 2024 tax filing season that will allow a group of taxpayers to file their income tax returns electronically with the agency. Officials have yet to work out the details of exactly how an IRS-run direct-file program will fuse with state tax systems.

This is probably the biggest obstacle to a successful program to file 1040s on the IRS website. Taxpayers will be happy to use free software, even if it's clunky, but nobody wants to prepare their returns twice.

It could still be accomplished if states would greatly simplify their tax systems so they more closely mimic the federal system. The states' track record doesn't make that seem likely. 


3 Takeaways For State Tax Pros From Justices' Pork Ruling - Maria Koklanaris, Law360 Tax Autiority ($). "John Fletcher, a tax partner at Jones Walker LLP, said he thought state tax lawyersshould begin to take that idea a bit more seriously. After attending the Pork Producers oral argument and reading the opinion, Fletcher said his hopes have dimmed for successful arguments under the dormant commerce clause or Pike, unless a tax is not constitutional under the 1977 decision in Complete Auto Transit Inc. v. Brady ."

In other words, it may be harder for taxpayers to claim that they cannot be taxed in a state.


States Eye Excise Taxes, Transaction Fees as Revenue Raising Tactic - Szymon Maziakowski, Bloomberg ($). "As states find ways to generate revenue from transaction fees and taxes that sidestep legal and constitutional barriers, the alternative of a hike in direct tax on income may look less transformative."


State-By-State Roundup



Ariz. To Issue One-Time Income Tax Rebates - Sanjay Talwani, Law360 Tax Authority ($). "Under S.B. 1734, signed Thursday by Democratic Gov. Katie Hobbs, the state Department of Revenue will issue one-time "general welfare" rebates. The rebates will be worth $100 for each dependent age 17 or older at the end of 2021, and $250 per dependent who was under 17 as of the end of 2021, up to a total of three dependents."



Newsom Says California Tax Hikes Unneeded Despite Bigger Deficit - Laura Mahoney, Bloomberg ($):

California Gov. Gavin Newsom (D) is holding the line against tax increases, despite a projected budget deficit that has grown to $31.5 billion and pressure from legislative leaders in his own party.

The Democrat is instead proposing to use more delayed or reduced spending, internal funding shifts, and reserve funds to close the deficit, which is $9.3 billion more than he projected in January.

Newsom Approves Tax Exemption for Forgiven Student Loans - Paul Jones, Tax Notes. "A.B. 111, which Gov. Gavin Newsom (D) signed May 15, will conform to federal law to 'exclude from an individual’s gross income the amount of certain student loans discharged, in whole or in part, after December 31, 2020, and before January 1, 2026.' The legislation provides similar relief for forgiven community college fees and federal grants provided to support students pursuing post-secondary education."

California Office of Tax Appeals Postpones Controversial Rule Change - Paul Jones, Tax Notes:

California’s Office of Tax Appeals (OTA) is postponing a rule amendment that would require taxpayers challenging tax regulations to do so in court rather than as part of an appeal before the office.

The proposed amendment would declare that the OTA, which is the state’s forum for appeals against the Franchise Tax Board and the California Department of Tax and Fee Administration, doesn’t have the authority to invalidate tax regulations. The OTA says the amendment would conform its rules to a correct reading of existing law, but opponents argue that the change would unlawfully limit the office's authority to deem faulty regulations invalid in appeals.

Link: Notice of Proposed Regulatory Action.



Colo. Boosts Anti-Carbon Tax Breaks, Cuts Oil And Gas Credit – Sanjay Talwani, Law360 Tax Authority ($). “Colorado is reducing a tax credit for oil and gas producers and enhancing credits for electric vehicle purchases and other clean energy efforts under legislation signed into law by Democratic Gov. Jared Polis.”



Ind. Income Tax Owed By Overseas Couple, Tax Dept. Finds - Michael Nunes, Law360 Tax Authority ($):

An Indiana couple who moved out of the country still owe income tax because they claimed a homestead tax deduction for property they continue to own in the state, the state Department of Revenue said.

The Indiana Department of Revenue, in a letter of finding published Wednesday, said the couple owe state income tax for 2020 despite having lived in the U.K. for most of that year.

Related: Eide Bailly Global Mobility Services



Kansas Governor Vetoes Omnibus Tax Bill - Emily Hollingsworth, Tax Notes ($):

Kansas Gov. Laura Kelly (D) has rejected an omnibus tax bill that would have allowed net operating loss deduction carryforwards, amended the homestead property tax refund program, and created sales tax exemptions for some businesses.


S.B. 8 would have clarified provisions in the state’s passthrough entity tax election enacted in 2022 (H.B. 2239); provided a property tax exemption for child care centers, health clubs, and restaurants located within 5 miles of state government entities that provide the same services; raised the homestead exemption income threshold to $80,000 and excluded Social Security from the income threshold calculation; exempted from sales tax machinery and equipment used for telecommunications, video, and internet services until July 1, 2028; and created a tax credit for contributions made to nonprofit pregnancy centers.



La. Senate OKs Phasing Out Corp. Franchise Tax - Michael Nunes, Law360 Tax Authoirty ($):

The amended version of S.B. 1, which the Senate passed by a 37-1 vote, would reduce the state's corporate franchise tax rate starting in 2025, with a 25% reduction every year until eliminating the tax in 2028. The bill, which still requires a vote for final adoption, was amended to include revenue triggers before a rate decrease could take effect.


Louisiana taxes capital assets at a rate of $2.75 for every $1,000 in excess of $300,000. The state also has a separate corporate income tax rate of 3.5% to 7.5%.

Related: Tax Foundation, Does Your State Levy a Capital Stock Tax?



Digital Ad Tax Status No Clearer After Maryland High Court Ruling - Michael Bologna, Bloomberg ($):

Worldwide Reporting: Minnesota was poised to become the first state in decades to tax the income of foreign subsidiaries of multinational corporations last week, but a key Senate lawmaker torpedoed the idea early in the week. Lawmakers then started scrambling to make up the lost revenue, examining options that could include a new tax on business profits from intangible assets held by offshore subsidiaries, and a phase-out of itemized deductions available to high-income taxpayers.



 Minnesota Lawmakers Advance Strategy to Tax Global Companies - Michael Bologna, Bloomberg ($):

The compromise plan raises significant new revenue by treating GILTI as taxable income for state purposes, beginning with the 2024 tax year. Corporations, however, could claim a 50% deduction for dividends received. The provision is expected to generate $437 million over the biennium and another $379 million during the next biennium.


High-income taxpayers would pay more in taxes under a less generous scheme for claiming standardized and itemized deductions. Deductions would be cut by 10% for joint filers with adjusted gross income over $304,970, and 20% for those earning more than $1 million. The change is expected to generate $354 million over the biennium, and $385 million over the next biennium.

Additional revenue would be created through a new tax on the net investment income of individuals, estates, and trusts over $1 million at a rate of 1%.

5 things to know about the tax deal, rebate checks from the MN Capitol - Dana Ferguson and Brian Bakst, MPR News:

Families with children or dependents could also see tax relief through child tax credits, as well as child care tax credits in the bill that would start at $1,750 but phase out for those with higher incomes.

Under the proposal, joint filers who make up to $35,000 would get the full $1,750 credit per dependent. The amount of the credit would gradually decrease for earners making up to about $90,000.


While lawmakers initially considered a total exemption of Social Security income from taxes, they settled on exempting 100 percent for those who make $100,000 a year or less with a phased out exemption for joint filers who make up to $140,000.

Link: Minnesota House of Represenatives Wiebsite article "House, Senate cut $3 billion tax deal that includes money back to taxpayers"

Minnesota Looks to Raise Taxes despite Projected $17.6 Billion Budgetary Surplus - Timothy Vermeer, Tax Policy Blog. "The Senate no longer seems willing to support mandatory worldwide combined reporting, a welcome development. However, several other uncompetitive proposals remain under consideration: the addition of Global Low-Taxed Intangible Income (GILTI) to the corporate tax base, a fifth marginal tax bracket that would add a full percentage point to the individual income tax rate, and a surtax on capital gains income. Each would have a significant negative impact on the state’s economy if enacted individually, but, when implemented together, the negative effects would be compounded."

Minn. To Initiate 0.25% Metro Region Sales, Use Tax - Zak Kostro, Law360 Tax Authority ($):

A Minnesota metropolitan council will impose a 0.25% regional sales and use tax in certain metropolitan counties under a bill signed by the governor.

H.F. 2335, which Democratic Gov. Tim Walz signed Monday, stipulates that a statutorily defined metropolitan council must impose the tax on retail sales made in certain designated counties or to a destination in those counties, according to the text. The tax will apply to Anoka, Carver, Dakota, Hennepin, Ramsey, Scott and Washington counties, according to the bill text and applicable statute.



Montana Governor Signs Temporary Adoption Tax Credit Bill - Emily Hollingsworth, Tax Notes ($):

H.B. 225, signed May 16, provides a $5,000 credit for the legal adoption of a child. The credit would increase to $7,500 for a child adopted from the state foster care system. The bill was sponsored by Rep. Courtenay Sprunger (R).

The refundable tax credit applies to adopted children under the age of 18 and to adopted people who are “physically or mentally incapable of providing self-care,” the bill says. It applies retroactively to adoptions occurring on or after July 1, 2022, and can be claimed on returns for tax years beginning after December 31, 2022. The credit will expire December 31, 2031.


New Jersey

New Jersey Heading Toward Decoupling From GILTI - Amy Hamilton, Tax Notes ($):

New Jersey would go from taxing 50 percent to 5 percent of global intangible low-taxed income and would repeal the related-party royalty and interest expense disallowance provisions under a package negotiated by government and corporations.

S. 3737 and companion A. 5323 would also move the state from a Joyce to a Finnigan apportionment method for combined reporting and would revise the treatment of net operating losses by changing their deduction ordering and by allowing the sharing of NOLs within a combined group.

A fuller explanation of what they mean by "Joyce" and "Finnigan" can be found here. Key part: "...under Joyce, a corporation is determined to be taxable in a state only if the corporation itself possesses taxable nexus, whereas under Finnigan, a corporation is taxable if any member of its unitary group is taxable."


New York

New York Enacts Budget With Expanded Credits, Payroll Mobility Tax Increase - Emily Hollingsworth, Tax Notes ($):

The enacted fiscal 2024 budget increases from 0.34 percent to 0.6 percent the top rate of the metropolitan commuter transportation mobility tax (MCTMT), applying to employers with payroll expenses above $437,500 in any calendar quarter.

The budget also hikes the MCTMT rate for individuals who are self-employed and with earnings attributable to specific counties in the metropolitan commuter transportation district of at least $50,000 per year, increasing the tax from 0.34 percent to 0.47 percent for tax year 2023, and raising it to 0.6 percent for tax years beginning on or after January 1, 2024.



Ore. County Voters Appear To Sink Gains Tax For Eviction Aid - Sanjay Talwani, Law360 Tax Authority ($). "The county just before midnight Tuesday said Ballot Measure 26-238, which would have imposed a local 0.75% tax on capital gains to fund a program to provide free legal and financial assistance to tenants facing eviction, had only received about 18% of the vote, with more than 125,000 ballots cast."

Ore. Gov. Looks To Rein In Cannabis Retailers' Tax Avoidance - Jonathan Capriel, Law360 Tax Authority ($). "Oregon Gov. Tina Kotek is looking to crack down on the 9% of cannabis retailers not paying their taxes by requiring those seeking to update or renew their permit to show proof they paid their taxes, according to an announcement made Tuesday."



Vermont Lawmakers OK Bill to Create Payroll Tax to Fund Child Care - Benjamin Valdez, Tax Notes ($):

House lawmakers concurred with Senate amendments to H. 217 on a vote of 118 to 27 on May 12, a day after the Senate approved the bill on a 24-6 vote. The bill would greatly increase funding for an existing child care program and establish a 0.44 percent tax on wage income and a 0.11 percent tax on self-employed net income beginning July 1, 2024.

The bill now heads to Gov. Phil Scott (R), who has been vocal in his opposition to new taxes and is expected to veto it.

Vermont ranks 44th, or 7th worst, in the Tax Foundation 2023 Business Tax Climate Index.


Tax Policy Corner

Taxing The Internet And Remote Workers: SALT In Review - David Brunori, Law360 Tax Authority ($):

If you must tax corporate income, let's try to do it in a way that causes the least pain. I think the folks in Louisiana are trying to do that. A measure in the Legislature would adopt a factor-presence nexus standard. The bill, H.B. 518, follows the Multistate Tax Commission's model statute.

If the bill passes, nonresident individuals and business entities will have nexus if they have more than $50,000 of property, $50,000 of payroll or $500,000 in sales into Louisiana for a given tax. Businesses would also have nexus when 25% of any one of the entity's total property, total payroll or total sales is in Louisiana...

Is this a good idea? Yes. 

Unfortunately, the states are all over the place in determining nexus, which is the amount of activity in a state that triggers income tax filing for a taxpayer. The 1959 law was designed to require some amount of physical presence in a state before a taxpayer became subject to tax. Revenue-hungry states have eroded these protections. The move to a service and digital economy means more taxpayers are outside the traditional manufacturing and distribution world that existed in 1959. 

This is the sort of issue a non-dysfunctional Congress would address. In real life, it will be dealt with state-by-state.

Meanwhile, taxpayers are often tempted to ignore states, or to be aggressive in evaluating where to file state returns. This is becoming less viable as states become better at mining their own data to identify non-filing businesses. Being "aggressive" can also come back to bite taxpayers when it comes time to sell, as business buyers typically inquire about state tax filing practices. Be careful out there. And maybe consider whether it's time for your business to have a nexus study done. 


Did you know? Salt Taxes - not to be confused with SALT - played a key part in the finance of the Ming Dynasty

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