Welcome to this edition of our state and local tax roundup. State Tax News & Views is running biweekly for awhile in honor of the wind-down of the state legislative season. Remember Eide Bailly for your state and local tax planning, compliance, and incentive needs.
State SALT Workarounds Cost Feds at Least $10 Billion Annually - Doug Sword, Tax Notes ($):
The federal government is taking in $10 billion to $15 billion less per year because of state workarounds to the $10,000 cap on the federal deduction for state and local taxes, according to the Urban-Brookings Tax Policy Center (TPC).
Losses may actually be as high as $20 billion because of the way the workarounds interact with the tax code, such as by reducing adjusted gross incomes that otherwise would have been too high to be eligible for other tax breaks, the TPC’s John Buhl said in an email August 28.
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The limitation on SALT deductibility is scheduled to expire after 2025, along with many other TCJA provisions. The Tax Foundation estimated in 2021 that by 2025 the SALT cap would be bringing in more than $100 billion annually to Treasury.
State Tax and Economic Review, 2023 Quarter 1 - Lucy Dadayan, Tax Policy Center:
Total state government tax revenue collections declined 6.8 percent in nominal terms and 11.5 percent in real terms in the first quarter of 2023 relative to a year earlier. Growth rates varied considerably among major revenue sources. Personal income tax revenues declined 22.5 percent, corporate income tax revenues declined 29.2 percent, and sales tax revenues increased 0.7 percent in real terms in the first quarter of 2023 compared with the same quarter in 2022.
Preliminary data for the second quarter of 2023 indicate double digit declines in overall state tax revenue collections, largely driven by steep declines in personal income tax revenues. The declines in personal income tax revenues were expected given a weaker stock market and state policy actions that included tax rate cuts and rebate payments. Total state tax revenues increased in 10 states in nominal terms, while 35 states reported year-over-year declines for the second quarter of 2023.
IRS Exempts Most State Tax Refunds, Some Other Payments From Tax - Robert Wood, Forbes. "In 2022, many states implemented programs to provide payments to certain individuals residing in their states. Many programs were related to the pandemic, and the programs varied in terms of the types of payments, payment amounts and eligibility criteria. IR-2023-23 addressed the federal tax treatment of these 2022 payments."
State-By-State Roundup
Alabama
Grocery sales tax cut kicks in on Friday - Mary Sell, Alabama Daily News. "The state’s sales tax on most grocery items drops from 4% to 3% on Friday."
California
Military pensions would be exempt from California state taxes under pending legislation - Leticia Jarez, ABC7.com. "California is one of three states in the nation that fully taxes veterans pensions."
Colorado
Colorado Governor Urges IRS to ‘Reverse Course’ on State Refund Guidance - Emily Hollingsworth, Tax Notes ($). "Although the latest guidance does not mention any state by name, the IRS said in a February 10 release that it wouldn’t tax special payments issued by states for the purposes of “general welfare and disaster relief.” The release included Colorado on a list of states that provided general welfare and disaster relief payments that the IRS said wouldn’t be taxed, and linked to a chart with state-specific payment programs. For Colorado, the chart lists Colorado Cash Back — a one-time TABOR refund for fiscal 2021-2022."
Florida
IRS announces tax relief for those impacted by Idalia in Florida - IRS. "Following the disaster declaration issued by the Federal Emergency Management Agency (FEMA), individuals and households affected by Idalia that reside or have a business in Alachua, Baker, Bay, Bradford, Calhoun, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Flagler, Franklin, Gadsden, Gilchrist, Gulf, Hamilton, Hardee, Hernando, Hillsborough, Jefferson, Lafayette, Lake, Lee, Leon, Levy, Liberty, Madison, Manatee, Marion, Nassau, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns, Sumter, Suwannee, Taylor, Union, Volusia and Wakulla counties in Florida qualify for tax relief. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines for taxpayers who reside or have a business in the disaster area. For instance, certain deadlines falling on or after Aug. 27, 2023, and before Feb. 15, 2024, are granted additional time to file."
Hawaii
Hawaii wildfire victims qualify for tax relief; Oct. 16 deadline, other dates postponed to Feb. 15 - IRS. "The Internal Revenue Service today announced expansive tax relief for Hawaii wildfire victims in Maui and Hawaii counties. These taxpayers now have until Feb. 15, 2024, to file various federal individual and business tax returns and make tax payments."
lllinois
Illinois Extends Business Tax Incentives to Grocery Stores - Benjamin Valdez, Tax Notes ($). "S.B. 850, signed August 18, directs the Department of Commerce and Economic Opportunity to develop a grant program for grocery stores located in food deserts and allows businesses that receive relief to qualify for tax benefits under the High Impact Business program, which provides investment tax credits and several sales tax exemptions."
Iowa
Iowa Dept. Floats Regs To Explain Tax Dispute Settlements - Zak Kostro, Law360 Tax Authority ($). "The regulations proposed Wednesday would define key terms of the law and describe required procedures and limitations for different types of settlements the department may enter to resolve disputes over taxes, penalties or interest, according to a notice and the proposed regulation text published in the state administrative bulletin. The notice said the proposed regulations would implement provisions of S.F. 565, which Republican Gov. Kim Reynolds signed June 1."
Kentucky
Kentucky fails to meet criteria to cut income tax again, budget director says - Tessa Duvall, Lexington Herald Leader. "Kentucky has failed to meet the required fiscal triggers to further lower the state income tax, the Office of the State Budget Director said in a recent letter to lawmakers."
Louisiana
Hunters Get a State Tax Break During the 2nd Amendment Sales Tax Holiday - Associated Press via U.S. News. "The exemption, which runs through Sunday, applies to all consumer purchases of firearms, ammunition and specified hunting supplies, including archery items, hunting apparel and certain types of knives, the state Department of Revenue said in a news release Tuesday."
Montana
Montana Proposes Rules on Tax Treatment of EV Charging Stations - Emily Hollingsworth, Tax Notes ($). "H.B. 55 defines an EV charging station as 'equipment with a rated capacity greater than 25 kilowatts . . . that transfers electric current to the power system of an electric vehicle and the real property in which the equipment is affixed, and includes public charging stations and public legacy charging stations.' The definition does not include charging stations installed at a residence or owned by a homeowners association."
Missouri
Missouri House Forms Special Committee to Analyze Earnings Tax - Matthew Pertz, Tax Notes ($). "The earnings tax is a 1 percent tax on residents and workers in St. Louis and Kansas City. In St. Louis, the tax is collected from employees who work in the city, regardless of where they live, and from residents, regardless of whether they work within city limits."
Nebraska
Gov. Pillen Appoints Jim Kamm as State Tax Commissioner - Nebraska Office of Governor Press Release. "Today, Governor Jim Pillen announced his appointment of Jim Kamm as the new Tax Commissioner. Kamm, who currently serves as the assistant vice chancellor for the Business and Finance Division at the University of Nebraska at Omaha (UNO), will begin leading the Department of Revenue on Sept. 5."
New Jersey
New Jersey Guidance Clarifies Changes to Corporation Business Tax - Matthew Pertz, Tax Notes ($):
A. 5323, signed in July, repealed the IRC section 250 deduction for GILTI and foreign-derived intangible income. It also made technical changes and corrections to the state's Corporation Business Tax Act, which are explained in the Division of Taxation's August 22 revised technical bulletins.
TB-100(R) clarifies that, for periods ending on or after July 31, 2023, combined groups will be taxed as one taxpayer, regardless of the filing method. It also states that New Jersey will follow the Finnigan method for sourcing receipts, which includes in the numerator all New Jersey allocation factors from all members, regardless of whether each member has nexus. The state used to follow the Joyce method, which only included allocation factors from members with nexus in New Jersey.
New Mexico
Santa Fe Council Sends Mansion Tax Proposal to Voters - Paul Jones, Tax Notes ($). "The city's council on August 22 voted 8 to 1 to put a measure on the November ballot asking residents to approve a 3 percent excise tax on the portion of a property’s purchase price in excess of $1 million. That threshold amount would be raised with inflation over time. The tax is projected to generate as much as $5 million annually and is intended to fund the Affordable Housing Trust Fund."
Ohio
Ohio Tax Dept. Explains Rising Gross Receipts Exclusion - Paul Williams, Law360 Tax Authority ($). "The department's bulletin explained how taxpayers who file quarterly and annually should determine whether they fall under the higher exclusion amounts for the commercial activity tax when the threshold is raised in tax years 2024 and 2025. The bulletin also said that the exclusion amount for combined groups is calculated based on the qualifying receipts from all members of a group."
Oregon
Oregon Set for Largest-Ever ‘Kicker’ Refunds of Over $5 Billion - Angélica Serrano-Román, Bloomberg ($). "The Oregon surplus credit, known as a “kicker,” is a refundable tax credit that the government returns when state revenues are higher than anticipated. If there’s a surplus, taxpayers can claim the credit on their returns or contribute it to the State School Fund."
Puerto Rico
Puerto Rico's Governor Proposes $472M In Tax Breaks - Sanjay Talwani, Law360 Tax Authority ($). "Under the proposal, the income tax rate on net incomes between $41,501 and $61,500 would drop from 25% to 22%. For income from $61,501 to $81,500, the rate would drop from 33% to 22%, and for income from $81,501 to $300,000, the rate would drop from 33% to 30%. Those reductions would benefit about 100,000 taxpayers, the department said."
Tennessee
Tenn. Legislature OKs Tax Exemption For Gun Safety Devices - Jaqueline McCool, Law360 Tax Authority ($). "S.B. 7085, which was unanimously concurred in the state Senate on Tuesday after passing the state House of Representatives by a vote of 77-9 on Monday, would exempt gun safes and safety devices from sales and use tax beginning Nov. 1."
Virginia
Va. Gov. Calls For Special Session To Provide Tax Relief - Zak Kostro, Law360 Tax Authority ($). "In December, Youngkin proposed an additional $1 billion in state tax cuts and rate reductions to be enacted as amendments to the commonwealth's two-year budget. The additional $1 billion would be on top of about $4 billion in cuts the legislature passed in 2022, in which the state nearly doubled the standard deduction, sent a check for $250 to single filers and $500 for joint filers and cut taxes on groceries, among other provisions."
Virginia Lawmakers Seal Tax Deal After Months of Negotiations - Angélica Serrano-Román, Bloomberg. "The amended budget announced Friday would include one-time tax rebates of $200 for individuals and $400 for joint filers, as well as an increase in the standard deduction to $8,500 for single filers and $17,000 for joint filers. Additionally, the deal would remove the age requirement for military retirees to exempt up to $40,000 of their retirement income, and reinstate the commonwealth’s sales tax holiday."
Tax Policy Corner
State Sales Tax Holidays Are a Massive Burden for Retailers - Scott Peterson, Bloomberg. "For retailers that sell in multiple states, sales tax holidays are an increasingly common pain point, because the particulars of each tax-free period vary. A tax-free weekend in Arkansas exempts cosmetics, handbags, jewelry, wigs, and athletic uniforms, but these items remain subject to tax during a sales tax holiday in Connecticut and Iowa."
Digital Services And Asphalt Production: SALT In Review - David Brunori, Law360 Tax Authority ($):
A bill in Massachusetts, H. 74, seeks to impose a 5% gross receipts tax on revenue that digital streaming service providers collect from Massachusetts customers. I hate gross receipts taxes, and you should, too. Taxing revenue without regard to profits is unsound. And as everyone who has ever studied the issue knows, gross receipts taxes are ultimately paid by customers. This is particularly true with streaming services, which as I understand are inelastic.
So while Hulu will nominally pay the tax, it will pass the burden on to its customers as higher prices. Many politicians, and even some tax scholars, think saliency, transparency and open government are overrated. You should not be one of those people. Gross receipts taxes are a hidden, cowardly, dastardly way to collect revenue. They are money grabs by people who do not want you to know they are grabbing your money.
Ultimately, the taxes are paid by consumers. That's true of sales taxes imposed on business inputs as well.
Tax History Corner
So what keeps Denmark from invading nowadays? From Wikipedia:
Danegeld (/ˈdeɪnɡɛld/;[1] "Danish tax", literally "Dane yield" or tribute) was a tax raised to pay tribute or protection money to the Viking raiders to save a land from being ravaged. It was called the geld or gafol in eleventh-century sources. It was characteristic of royal policy in both England and Francia during the ninth through eleventh centuries, collected both as tributary, to buy off the attackers, and as stipendiary, to pay the defensive forces. The term Danegeld did not appear until the late eleventh century. In Anglo-Saxon England tribute payments to the Danes was known as gafol and the levy raised to support the standing army, for the defence of the realm, was known as heregeld (army-tax).
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