State Tax News & Views: Guaranteed Payments, Voluntary Disclosures.

By Joe Kristan, CPA
September 22, 2023

Welcome to this edition of our state and local tax roundup. Remember Eide Bailly for your state and local tax planning, compliance, and incentive needs.


MTC Partnerships Project to Draft Guaranteed Payments Model - Amy Hamilton, Tax Notes ($):

The Multistate Tax Commission’s partnerships work group has agreed to begin drafting model state regulatory language for sourcing an individual partner’s guaranteed payments for services as distributive share rather than as compensation.

During the work group’s September 20 call, participants also asked MTC staff to begin drafting language for provisions granting credits for taxes paid to other states when another state’s rules for sourcing guaranteed payments differ. Among the group’s draft proposed recommendations is that a state of residence adopt a credit mechanism for residents who can show that they paid tax on more than 100 percent of their guaranteed payments.

This is a questionable call at best because guaranteed payments for services are, by definition, compensation, rather than a share of the residual income of the entity. If the IRS didn't insist that partners cannot be treated as W-2 employees, the issue wouldn't exist. Employees are taxed in the states where they work, not where their employee does business.

There are ways to structure businesses to enable many partners to get W-2s, but they by definition come with complications and compliance costs. 


SALT Republicans Search for Unity While Blocking GOP Tax Bill - Samantha Handler, Bloomberg:

GOP members of the bipartisan SALT Caucus—dedicated to reinstating the full state-and-local tax deduction that the 2017 tax law capped at $10,000—are blocking their party’s tax bills from full House passage because it does not address the issue.

While that legislation has no chance of passing the Democratic-controlled Senate, the impasse threatens to hold up movement on any bipartisan tax pact that could revive business tax breaks like that both parties support. 


Charting the Course for Multistate Voluntary Disclosures - Timothy Noonan, K. Craig Reilly, and Brandon Bourg, Tax Notes ($):

Often in the state and local tax world, some cleanup duty is required. As states get more and more aggressive, and cases like Wayfair expand taxpayers’ multistate compliance obligations, more businesses are forced to confront the skeletons in their SALT closets. And because of a growing awareness of these concerns, we’ve also seen an increased focus on SALT issues in the mergers and acquisitions area, as due diligence efforts key into targets’ potential past noncompliance regarding multistate sales tax or corporate income tax.

So what tools are there to help with this cleanup duty? Perhaps the best one, and the one we’ll focus on in this month’s column, is the voluntary disclosure process. Voluntary disclosure programs provide an opportunity for businesses and individuals with unresolved state tax obligations to voluntarily submit past-due information and clear overdue tax debts. 

Eide Bailly's State & Local Tax team regularly assists taxpayers using voluntary disclosures.


State-By-State Roundup


Arkansas Lawmakers Approve Income Tax Cuts, Tax Credit in Special Session - Matthew Pertz, Tax Notes ($). "Following a drop in 2023's topmost rate for individuals that was enacted in April, S.B. 8 would further reduce the top marginal rate for individuals from 4.7 percent to 4.4 percent and the top corporate rate from 5.1 percent to 4.8 percent, starting in tax year 2024. The top rate for individuals applies to those with annual income over $24,300, while the top corporate rate applies to annual income over $11,000."

Link: S.B. 8



Calif. Ballot Measures Seek To Make It Easier To Raise Taxes - Maria Koklanaris, Law360 Tax Authority ($):

One of the measures, ACA 1, would amend the California Constitution to bring the vote threshold for passing local taxes for housing or infrastructure on par with the threshold for passing local taxes for schools. Currently, it takes a two-thirds majority of voters to pass a tax increase intended to raise revenue for housing or infrastructure, but it takes only a 55% majority to raise revenue for schools. If voters approve ACA 1 next year, the threshold for passing a tax increase for housing or infrastructure will decrease to 55%.


The Legislature, which has a supermajority of Democrats in each chamber, also passed ACA 13 on Thursday with a 28-9 vote in the Senate and a 55-19 vote in the Assembly. ACA 13 would make it more difficult to require higher thresholds for other tax measures in some California localities. The constitutional amendment would apply to votes on subjects other than taxes as well.

Additional coverage: California voters will decide in 2024 whether to lower bar for new taxes and housing bonds (Los Angeles Times)

California Lawmakers Approve Extended Tax Break for Space IndustryPaul Jones, Tax Notes ($):

According to a September 12 legislative staff analysis for the bill, the program provides “a personal property tax exemption for tangible personal property that has space flight capacity.” The tax break, created in 2014, applies variously to raw materials and “work in progress” or finished products that can be used for space flights, including launch and space vehicles, satellites, space stations, and fuel. According to the analysis, the exemption “provides that the property need not be returned to Earth to qualify for the exemption” and applies even if a launch is canceled or fails, or the property is destroyed.

Link: S.B. 419



Trillion-Dollar Industry Powering Chicago at Risk of Leaving - Isis Almeida, Bloomberg ($).

These are some of the derivatives firms that collectively handle trillions of dollars a year in trades, greasing the wheels of global markets with everything from stock options to corn futures. Most of them have called Chicago home for decades — providing thousands of jobs within the city’s $75 billion finance industry.

Now, the firms’ commitment to the Windy City is being tested by some $800 million in taxes proposed by a new mayor staring down a budget gap that’s swelled to half a billion dollars. One idea is a levy on financial transactions, which has alarmed companies already worried about a jump in crime that shows few signs of abating.

Chicago Mayor Proposes Tiered Rates for Real Estate Transfer Tax - Benjamin Valdez, Tax Notes ($). "Johnson on September 14 submitted a resolution that would ask voters to consider increasing the real estate transfer tax for properties valued at or above $1 million and decreasing it for properties valued under $1 million to create a new stream of dedicated funding for combating homelessness."



Iowa Top Corporate Tax Rate Dropping to 7.1% as Target Is Met - Angélica Serrano-Román, Bloomberg ($).

Iowa’s top corporate tax rate is set to decrease to 7.1% for the tax year 2024, as the state met the criteria outlined in a law enacted last year, enabling tax cuts.

Gov. Kim Reynolds (R) on Friday announced that the rate will drop from 8.4% under a law (HF 2317) signed in March 2022. The law creates a process to reduce corporate income taxes over time, incorporating a formula for reduction when net corporate income tax receipts surpass $700 million.

Link: Iowa Department of Revenue Order 2023-02.

Iowa Issues Updated Guidance On Pass-Through Entity Tax - Zak Kostro, Law360 Tax Authority ($). "The updated guidance explains how the tax is calculated, whether an electing entity may be subject to penalties and interest related to election and payment of the tax and how pass-through entity tax credits are calculated for and claimed by such entities' owners, according to the notice."

Link:Iowa Department of Revenue PTET guidance.



Fight Brewing in Kansas Over Local Property Tax Reduction Fund - Emily Hollingsworth, Tax Notes ($). "Aimed at reducing local property taxes, the fund is statutorily required to receive two transfers of sales and use tax revenue each year, totaling 3.63 percent of sales and use tax collections credited to the general fund. The funds are to be apportioned to county treasurers to be used to reduce local property taxes. But the fund has not received revenue transfers since 2003."


North Carolina

North Carolina Adopts Overdue Budget Package With Tax Changes - Angélica Serrano-Román, Bloomberg ($):

Lawmakers voted to adopt a state budget, more than two months into the current fiscal year, moving up scheduled personal income tax reductions by one year. The state’s income tax will drop to 4.5% in 2024, from 4.6%, then to 4.25% in 2025 and 3.99% in 2026. The state Senate passed the bill 26-17 Friday morning, hours after the House’s 70-40 vote shortly after midnight.

Gov. Roy Cooper (D) said in a statement that he will allow the budget to become law without his signature.



Soap Manufacturer Entitled to Partial CAT Refund, Ohio BTA Says - Cameron Browne, Tax Notes ($). "In the September 13 decision in VVF Intervest LLC v. Harris, the BTA partially reversed the tax commissioner's final determination, finding that the company was not subject to the CAT on most of its transactions with High Ridge Brands (HRB) because it was able to prove that the products were transported out of state. However, the BTA rejected the taxpayer's claims regarding its transactions with Dollar General, finding the evidence to be speculative."



Portland Approves Tax Credit to Bolster Downtown Economy - Paul Jones, Tax Notes ($). "The new, one-time downtown business incentive credit will be provided to qualifying businesses that move to, or continue to operate in, select areas of the city center that have experienced business flight in recent years. The credit, which is against the city’s business license tax (BLT), is cumulatively capped at $25 million. The maximum credit amount a business would be eligible to receive is $250,000."



Pa. Senate OKs Conforming To Fed Taxation Of Grantor Trusts - Zak Kostro, Law360 Tax Authority ($):

S.B. 815, which passed the Senate by a 46-0 vote Tuesday, would provide that income received by a trust is taxable to the grantor of the trust to the extent the grantor is treated as the trust's owner under the Internal Revenue Code, according to a fiscal note. The bill would provide that the income is taxable to the grantor regardless of whether the income is distributable to the beneficiaries or accumulated, the fiscal note said.

Under the current state law, a trust's beneficiaries are taxed on income required to be distributed or credited to them and the grantor trust is taxable on the remainder, according to the fiscal note.


Tax Policy Corner

Leave Worldwide Combined Reporting in the ‘80s, Where It Belongs - Jared Walczak, Tax Policy Blog:

Given enough time, everything old is new again—including tax ideas best consigned to history. But worldwide combined reporting, which a few states flirted with in the 1980s, is rearing its head again. It was nearly enacted in Minnesota this past session, and now lawmakers in New Hampshire are awaiting the analysis of a study commission formed to review the proposal.


When states force companies to apportion some of the profits of their foreign subsidiaries, they also massively increase compliance costs for many businesses, since those subsidiaries’ books must be converted from local rules to align with U.S. and state accounting rules, and transactions recorded in different currencies must be standardized. Factors that do not matter for taxation elsewhere—like the payroll of all affiliates in all countries, even for subsidiaries that do no business in the United States—must be tracked to comply with a single state’s apportionment regime.


Tax History Corner

Still thinking of Rome, guys? The TaxEDU page of the Tax Foundation reports

Sales Tax

Ancient Rome administered a sales tax. Julius Caesar was the first to implement a sales tax: a 1 percent flat rate that was applied across the entire Empire. Under Caesar Augustus, the sales tax was 4 percent, closer to a rate we see today in many U.S. state sales taxes.

Income Tax

Ancient Roman Emperor Augustus changed the tax system in the late 1st century BCE. The collection had originally been done through “tax farmers” who collected taxes from their respective regions based on the assessment of the region as a whole and turned them over to the government. This system was tough to continue, and Augustus switched to a direct taxation system that resembled an income tax. This began as a direct tax on an individual’s wealth, but when it was clear this too was difficult to execute, the income tax replaced that collection.

Until next time, valete.

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