Welcome to this edition of our state and local tax roundup. State Tax News & Views will take next week off and will return July 21. Remember Eide Bailly for your state and local tax planning, compliance, and incentive needs.
Multistate Tax Group Eyes Exemptions for Business Inputs - Michael Bologna, Bloomberg ($):
The Multistate Tax Commission’s ongoing examination of sales tax policies for digital goods will train its sights on the degree to which states impose levies on business-to-business transactions, officials directing the project said Thursday.
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Large businesses, particularly manufacturers, have for decades argued that state sales taxes shouldn’t be applied to business-to-business transactions as a matter of clean and efficient tax policy. Taxing business inputs, they say, leads to a range of economic distortions including “tax pyramiding,” in which the same good or service is taxed multiple times.
Top State & Local Tax Cases In 1st Half Of 2023 - Michael Nunes, Law360 Tax Authority ($). One interesting case:
Synthes USA HQ Inc. v. Commonwealth of Pennsylvania
Pennsylvania's Supreme Court held that Johnson & Johnson unit Synthes was allowed to source receipts for services based on where its customers were located and awarded the company a tax refund of $2.1 million.
In a split decision, the justices agreed with Synthes — as well as the state Department of Revenue, which had sided with the company after initially denying the refund — finding that new sourcing laws mandated the market-based sourcing approach rather than cost-of-performance.
The shift to market-based sourcing has occurred in other states recently. Taxpayers who haven't changed their systems to reflect this may be overpaying taxes by sourcing their sales in the wrong states.
Related: What is state tax apportionment and how do you calculate it?
Sales Tax Audits Are on the Rise: Are You Ready? - Michael Dillon, Tax Notes ($). "It is critically important for companies to routinely monitor sales in relation to nexus thresholds and sales tax treatment to ensure that they are properly coded as taxable. This is particularly true for sellers of digital goods and services and software as a service, such as online subscription-based gaming, information, and website platform-driven consumer tools."
State-By-State Roundup
California
Calif. Couple Can't Deduct $8M As Biz Bad Debt, OTA Says - Maria Koklanaris, Law360 Tax Authority ($):
The OTA said in an opinion published Monday that it agreed with the tax board's decision not to allow the couple, identified only as B. Patel and S. Patel, to claim the $8 million in debt as business bad debt and thus to take a deduction. It also agreed with the tax board's decision to deny net operating loss carryovers of $5 million and $1.5 million for two of the tax years in question. As such, the OTA said it would require the couple to pay additional tax of more than $1.2 million that the Franchise Tax Board assessed for 2013 through 2015.
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A business bad debt deduction is unavailable unless the taxpayer can establish that … he or she was engaged in a trade or business, and ... the acquisition or worthlessness of the debt was 'proximately related' to the conduct of such trade or business," according to the OTA opinion, authored by Administrative Law Judge Huy "Mike" Le.
California Tax Department Laps Go-Kart Company in OTA Tax Appeal - Cameron Browne, Tax Notes ($). "According to the company, the OTA's opinion didn't analyze or cite any evidence to support treating a "go-kart ride on an indoor rubber track" as a taxable lease. The company noted that its customers did not receive a possessory interest in the go-karts or equipment, and it argued that the temporary use of the go-karts was excluded under the definition of the term "lease" in Cal. Code Regs. tit. 18, section 1660(a)(1) and (e)(1). But the OTA noted that it had reviewed the evidence — including language in the company's advertisement suggesting that customers rented the go-karts — and found it sufficient to support the finding that the company leased go-karts to its customers."
How sellers of L.A. mansions are dodging a tax meant to help the homeless - Erica Werner, Washington Post. "Instead, wealthy Angelenos rebelled, putting the brakes on sales of homes priced at $5 million and above — those targeted by the initiative — with the result that the tax has raised far less money than expected since taking effect April 1."
Colorado
Colorado DOR Proposes Business Income Addback Deduction Rule - Tax Notes ($). From the rulemaking: "The purpose of this rule is to clarify the requirement to add back, in the calculation of Colorado taxable income, the amount that an electing pass-through entity owner is allowed to deduct under section 199A of the Internal Revenue Code."
Illinois
Illinois Court: Qui Tam Suit Against U.K. Tailor Properly Dismissed - Andrea Muse, Tax Notes ($). A "Qui Tam" action is when a private party, the "relator," sues another party for not having paid the proper amount of taxes. The relator claims a portion of the underpaid tax for their trouble. This has led to a little cottage legal industry in Illinois. From the story:
The relator in the case is Stephen B. Diamond. His son, Charles, met with a representative of Henry Poole & Co. at a Chicago hotel, where the representative discussed shirt options and took Charles’s measurements. The shop confirmed the order, processed the payment in its shop in the United Kingdom, and shipped the completed shirts to an address in Chicago.
The relator then filed a complaint against the shop under the state's False Claims Act, arguing that the retailer sells special order clothing in Illinois, the sales are completed in the state, and the retailer failed to collect and remit taxes.
Why the dismissal?
The court ruled that there are two theories of liability under the plain language of the act: that a person knowingly made or used a false record or statement that is material to an obligation to pay the state, or that a person knowingly conceals or avoids an obligation to pay the state.
The court opinion concludes:
Here, the record fails to show that Poole knowingly concealed, avoided, or decreased an overpayment it received from the State of Illinois. The record also fails to show that Poole made or used a false record or statement material to an obligation to pay or transmit money or property to the State. As such, we find the circuit court's grant of summary judgment in favor of Poole was proper, where, as a matter of law, Relator failed to show Poole was liable under section 3 of the False Claims Act (740 ILCS 175/3 (West 2018)).
The taxpayer wins here. Still, the presence of parties actively seeking to file Qui Tam actions is a good reason to make sure you cover your state tax obligations.
Louisiana
La. Gov. Rejects Cut To Biz Tax - Jaqueline McCool, Law360 Tax Authority ($). "S.B. 6, which Democratic Gov. John Bel Edwards vetoed June 28, would have reduced the tax rebate available to businesses under Louisiana's Quality Jobs Program. The bill was the companion to a bill Edwards vetoed June 27, S.B. 1, which would have reduced the state's corporate franchise tax if certain revenue targets were met."
Louisiana Governor Vetoes Franchise Tax Reduction Bills - Matthew Pertz, Tax Notes ($):
In June 27 veto letters for S.B. 1 and companion bill S.B. 6, Edwards said it would be "unwise to create a second franchise tax reduction trigger" before the fiscal impact of corporate, individual, and franchise income tax cuts enacted in the state over the last two years is known.
“There is little doubt among tax experts that this tax is antiquated and should be structurally reformed or repealed,” Edwards wrote, adding that "the phaseout and ultimate elimination of the franchise tax will require future policymakers to reconcile the inherent reduction to the corporate income tax due to the portability of these hundreds of millions of available tax credits.”
Minnesota
Minnesota DOR Amends Rule on Factors for Domicile Determinations - Emily Hollingsworth, Tax Notes ($):
The amended rule was published July 3 in the Minnesota State Register. It lists more than 20 considerations used by the DOR in determining whether a person is domiciled in Minnesota, including the person’s place of employment, homestead status, and income tax returns filed as a resident or nonresident.
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The DOR notice announcing the changes explained that Minn. Stat. section 290.01 was amended in 2017 to bar the state tax commissioner and courts from considering the “place of business of a financial institution at which the individual applies for any new type of credit or at which the individual opens or maintains any type of account” to determine taxpayer residency. Since a taxpayer’s bank account location is explicitly barred from consideration of domicile, “this part of the rule is now inconsistent with statute and should be removed,” the DOR said.
New Jersey
New Jersey Governor Signs GILTI Decoupling Package - Amy Hamilton, Tax Notes ($):
New Jersey Gov. Phil Murphy (D) has signed into law a package under which global intangible low-taxed income will now be treated as a dividend subject to the state’s 95 percent exclusion rule.
New Jersey effectively has been taxing 50 percent of GILTI by conforming to the IRC section 951A GILTI inclusion and the section 250 deduction. A. 5323, signed July 3, repeals the section 250 deduction for both GILTI and foreign-derived intangible income purposes. The bill was approved 77–0 by the General Assembly and 36–0 by the Senate in June 30 votes.
New York
New York City Cannabis Firms Poised to Get Full Tax Deductions - Rachel Wright, Adam Finberg, and Siman Menkes, Bloomberg. "New York City currently follows Section 280E of the tax code, which disallows all business deductions for cannabis companies other than cost of goods sold. Senate Bill 7508 would mean that for local New York City tax return preparation for years 2023 and after, cannabis businesses would be able to take all ordinary and necessary business expenses that are allowed for any other businesses and wouldn’t be subject to 280E."
But only in computing New York taxes, of course. 280E remains effective for federal taxes.
Ohio
Ohio Governor Signs Budget, Vetoes CAT Exclusion Increase - Emily Hollingsworth, Tax Notes ($):
H.B. 33 lowers the number of individual income tax brackets from four to three for tax year 2023. For tax years 2024 and beyond, the number of brackets drops to two: 2.75 percent for income above $26,050 but below $100,000, and 3.5 percent for income above $100,000. Taxpayers with income no higher than $26,050 will be exempt from the tax.
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The governor also vetoed a provision that would have increased the commercial activity tax exemption threshold from $150,000 in annual business gross receipts to $3 million in fiscal 2024 and to $6 million in fiscal 2025, and would have allowed the tax commissioner to adjust the exclusion amount in future years.
Ohio BTA Denies Refund for Taxpayer Who 'Indefinitely' Moved to Florida - Christopher Jardine, Tax Notes ($). "A taxpayer who moved to Florida to care for her parents did not abandon her Ohio domicile and is not entitled to a refund of Ohio income tax, according to the Ohio Board of Tax Appeals (BTA)."
Wisconsin
Democratic Wisconsin governor guts Republican tax cut before signing state budget - Joe Jacquez, The Hill. "Evers used his constitutional veto power to reduce the income tax cut included in the budget passed by the state’s Republican-controlled legislature from $3.5 billion to $175 million, and did away with tax cuts for the highest two income brackets entirely."
Related: State Individual Income Tax Rates and Brackets for 2023
Wisconsin Governor Vetoes Most of GOP Income Tax Cuts - Paul Jones, Tax Notes ($):
In his February budget plan, Evers proposed a 10 percent tax credit that would begin to phase out as taxpayers’ income exceeded $100,000 for single filers and $150,000 for joint filers. The main tax cut included in the bill passed by GOP lawmakers, however, was a broad income tax rate cut. That included reducing the rate for the lowest income tax bracket (applying to income up to $13,810 for single filers, as adjusted for inflation for 2023) from 3.54 percent to 3.5 percent; changing the rates for the next two brackets from 4.65 percent (applying to single filers’ income between $13,810 and $27,630) and 5.3 percent (for single filers' income between $27,630 and $304,170) to 4.4 percent, collapsing those two brackets into one; and dropping the top rate (applying to income above $304,170 for single filers and $405,550 for joint filers) from 7.65 percent to 6.5 percent.
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But Evers nixed the rate cuts for the two highest brackets and approved reductions only for the two lower ones. His office argued that the GOP cuts would have disproportionately benefited higher earners.
Wisconsin Personal Property Tax Repeal to Streamline Compliance - Luke Lucas, Bloomberg:
On June 20, Wisconsin Gov. Tony Evers (D) signed AB 245 into law, which carries significant implications for the state’s tax landscape. Notably, the bill repealed the business personal property tax statewide.
The personal property tax typically applies to tangible assets, such as furniture, machinery, and equipment held by businesses, and reporting requirements can vary across states. Prior to the law’s enactment, Wisconsin businesses were required to file annual reports and pay taxes based on the assessed value of their tangible personal property to local assessors. This created a financial burden and complicated tax compliance, hindering innovative business growth.
Tax Policy Corner
Stop Location Subsidies - Calvin Johnson, Tax Notes ($). "Viewed from above, the tax abatements are pure waste. The subsidies may look good on the local level, giving up future tax to get more local jobs. Overall, however, location subsidies add not a single job, or a dollar to any wage, or any productivity on net; rather, the same jobs just move around. For every job the winning subsidizer gets, the other bidders lose. Essentially, the subsidies are just a transfer to the rich corporation and the richest shareholders with no net overall benefit."
Tax History Corner
How Failed Tax Policy Led to the Constitutional Convention - Jared Walczak, Tax Foundation.
Although prohibited from levying taxes that fell exclusively on residents of other states, and required to extend the privileges and immunities of citizens to them, the several states were not prevented from imposing imposts and duties that fell on shipping from other states so long as they were imposed equally on all vessels in port. This provided ample room for the development of protectionist trade barriers, and increasingly, feuds over taxation boiled over into state retaliatory actions and even tax rebellions, Shays’ Rebellion most prominent among them.
The Annapolis Convention, orchestrated by James Madison, was convened in 1786 in response, but only five states sent delegates. Unable to “remedy defects of the federal government,” as was their charge, within the system established by the Articles of Confederation, the convention issued a report to Congress calling for a constitutional convention, with a recommendation that it convene in Philadelphia the following May.
So when you order from Amazon, you may have to pay sales tax, but you don't have to pay a tariff as well to protect sellers in your state from those mean other states who want to sell you stuff at low prices.
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