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State Tax News & Views: The Legislators Return

By Joe Kristan, CPA
January 12, 2024
Bing DALL-E 3 Image of remote worker taxation

Key Takeaways

  • The California case challenging the rule that "effectively eviscerates" protections for out-of-state sellers.
  • California Governor floats operating loss limits.
  • Problems with the LA Mansion Tax.
  • Everyone loves Shohei, except California revenue collectors.
  • Iowa Governor proposes 2024 individual rate cut to 3.65 percent.
  • First Amendment challenge to Maryland digital ad tax revived by appeals court.
  • Nebraska Governor would buy down property taxes with sales tax boost.
  • New Jersey exempts bullion from sales tax.
  • Pittsburgh "Jock Tax" loses at appeals court.
  • Which states are best for remote workers?
  • Worst auditing problem ever.

Welcome to this edition of our roundup of State and Local Tax News. Remember Eide Bailly for your State and Local Tax and Business Incentive Needs.

 

The Case Weighing on How States Tax Internet Activity, Explained - Laura Mahoney, Michael Bologna, and Perry Cooper, Bloomberg ($):

A recent California court ruling damaged the state’s efforts to extend the corporate income tax to tens of thousands of out-of-state sellers, but the state’s loss only makes the future of a novel tax initiative in other states less clear.

The Dec. 13 ruling is one chapter in a longer drama that will ultimately determine the relevance of Public Law 86-272, a 1959 federal law imposing restrictions on state taxes of out-of-state businesses, in the era of online commerce.

The ruling also has implications for the Multistate Tax Commission’s recent reinterpretation of that law broadening what out-of-state businesses may be taxed. The reinterpretation underlies new or forthcoming guidance from California, New York, New Jersey, and Minnesota. Other states may be quietly adopting the MTC’s language without official pronouncements.

PL 86-272 prevents states from taxing out-of-state sellers of tangible goods, but only if the sellers stay in a narrow lane of sales-related conduct in the state. The MTC is a group of state taxing agencies; their "reinterpretation" would allow states to tax sellers of goods who provide interactive help over the internet or similar online assistance. 

California began applying the "reinterpretation" without updating its existing formal guidance. The recent California case referred to in article blocked California's application of the guidance as illegal "underground guidance." 

John Gupta, leader of the Eide Bailly SALT team, comments: "This is a very important case to watch, since the MTC guidance adopted by California effectively eviscerates PL 86-272 protection for those who sell through internet websites.  So far, only a handful of states have officially adopted the MTC guidance, and many more likely are awaiting the results of litigation in California before taking a stance.  The San Francisco Superior Court’s recent ruling only addressed whether FTB legally followed required procedures to adopt the guidance and did not speak to the substantive validity of the guidance itself.  So, we may still have a long wait for California courts to rule on whether the MTC guidance comports with the federal statute and otherwise have clarity on the overall impact of the MTC guidance across the states."

 

State-By-State Roundup

 

California

Newsom Targets Tax Breaks, Net Operating Losses to Close Deficit - Laura Mahoney, Bloomberg ($).

Changes to the net operating loss deduction rules would account for $300 million of the total projected increase. Under the proposal, California would conform to the 2017 federal tax law, starting this year, by limiting the use of NOLs carried forward from prior years to 80% of subsequent year income.

California already conformed to the Tax Cuts and Jobs Act’s disallowance of NOL carrybacks to previous tax years. The limitation on carryforwards would make California consistent with the majority of states, according to Newsom’s administration.

Calif.'s Newsom Rules Out New Taxes Despite Budget Gap - Maria Koklanaris, Law360 Tax Authority ($). "Newsom, a Democrat, said in his budget presentation that despite the introduction of A.B. 259 by Assembly member Alex Lee, D-San Jose, there would be no new taxes in California. Lee's bill would create a 1% tax on the net worth of residents with more than $50 million in assets, with a 1.5% bracket for those with more than $1 billion."

 

LA Mansion Tax Revenue Falls Far Short of Projections - Sarah Holder, Bloomberg ($):

The tax, known as Measure ULA, was pitched in 2022 as a fix to Los Angeles’ dire housing crisis . Passed by ballot measure with 58% of voters in favor, the measure created a new land transfer fee on real estate transactions over $5 million, and directed the proceeds to affordable housing projects, tenant protections and homelessness prevention efforts.

...

But one of the biggest sticking points among LA developers is that despite the marketing, Measure ULA doesn’t only apply to mansions. Although single-family homes represent the largest share of its projected revenue at 38%, the tax also applies to most multifamily developments, office buildings and hotels.

 

Ohtani's Dodgers Contract Draws California Controller's Ire - Paul Jones, Tax Notes ($):

Japanese pitcher and freshly minted Dodgers team member Shohei Ohtani’s decade-long $700 million contract with the team — already a subject of interest in the sports and tax worlds for its structure — has now drawn the ire of California’s controller.

In a January 8 statement, State Controller Malia M. Cohen (D) argued that the contract underscores deficiencies with U.S. tax policies and urged federal lawmakers to consider reforms.

Ohtani’s contract is notable in that the player will receive just $2 million per year in actual payments from the contract through 2033, with the remaining $68 million of the annual $70 million in pay deferred. That could ultimately save Ohtani as much as $98 million in California taxes over the life of the contract, according to a December 14 report by the California Business Roundtable’s California Center for Jobs and the Economy. That’s assuming Ohtani ceases to be a resident of California on or before the end date of the contract.

 

Colorado

IRS Won’t Tax Colorado TABOR Refunds, State Revenue Agency Says - Angélica Serrano-Román, Bloomberg ($):

Colorado residents won’t pay federal income taxes on refunds issued under the state Taxpayer Bill of Rights in the 2024 filing season, Gov. Jared Polis’ administration said Wednesday.

The state Department of Revenue said refunds disbursed to residents in 2023 won’t be considered taxable income for the 2024 filing season, and thus taxpayers won’t be required to include these refunds when filing their taxes before April 15.

 

District of Columbia

DC Commission's Biz Tax Proposal Hits Opposition - Sanjay Talwani, Law360 Tax Authority ($):

The District of Columbia would eliminate a cluster of business taxes and replace them with a $275 million, broad-based business activity tax under a draft recommendation considered Monday by the district's Tax Revision Commission but opposed by some commissioners.

...

But the largest provision, the business activity tax, or BAT, was pronounced "dead on arrival" by some commissioners.

 

Georgia

Ga. Gov. Calls For Accelerated Income Tax Rate Cut - Jaqueline McCool, Law360 Tax Authority ($): "In the address, the Republican governor said he wanted to sign legislation within the year that would reduce the state's income tax rate to 5.39%. Last year, H.B. 1437 was passed, which created a flat rate of 5.49% in tax year 2024 if the state reaches certain fiscal goals. Thereafter, the rate would continue to drop by 0.1 percentage points each year until it reaches 4.99%."

 

Kansas

Kansas Governor Announces Income and Property Tax Relief Plan - Emily Hollingsworth, Tax Notes ($): "The 2024 plan, which is estimated to cost $1.4 billion over a period of five fiscal years, would increase an existing residential property tax exemption to $100,000 beginning in tax year 2024; immediately eliminate taxation of Social Security income, groceries, and diapers; and reduce the bank privilege corporate tax rate to 1.63 percent beginning in tax year 2025."

Kan. Gov Pitches Bank Tax Cut, Sales Tax Exemptions - Maria Koklanaris, Law360 Tax Authority ($). "The bank privilege tax in Kansas currently has two parts: a rate of 2.25% with a surtax of 2.125% on taxable income of more than $25,000. The surtax would stay the same, but the privilege tax rate would fall to 1.94% for the 2024 tax year and 1.63% for 2025 and beyond."

 

Iowa

Iowa Governor Proposes Expedited Flat Income Tax - Emily Hollingsworth, Tax Notes ($). "The state's income tax is scheduled to be reduced to a flat 3.9 percent rate in 2026, but in her January 9 Condition of the State address, Reynolds said she is proposing to reduce the rate to a flat 3.65 percent, retroactive to January 1. The rate would be further reduced to 3.5 percent in 2025, she said."

Iowa’s governor calls for more tax cuts, teacher pay raises in annual speech to lawmakers - O. Kay Henderson, Radio Iowa. "GOP leaders in the legislature say cutting taxes is a goal they share with Governor Reynolds, but it’s unclear if the tax plan she outlined in her annual address to lawmakers will sail through the House and Senate. House Speaker Pat Grassley said his first impression is the governor has made reasonable recommendations, but he told reporters House Republicans will examine the full impact over the next two years."

 

Maryland

Fourth Circuit Revives First Amendment Challenge to Maryland Digital Ad Tax - Andrea Muse,  Tax Notes ($):

The Tax Injunction Act bars several trade associations' challenge to Maryland’s tax on digital advertising services itself, but a First Amendment challenge to the passthrough prohibition is not moot, the Fourth Circuit has held.

In a January 10 opinion in Chamber of Commerce of the United States v. Lierman, the Fourth Circuit agreed with Judge Lydia Kay Griggsby of the U.S. District Court for the District of Maryland that the TIA prevented the claims by the trade associations that the tax violates the Internet Tax Freedom Act and the federal due process and commerce clauses, but found that the counts should have been dismissed without prejudice.

 

Nebraska

Neb. Gov. Floats Expanded Sales Tax To Fund Tax Cut - Michael Nunes, Law360 Tax Authority ($): "During a news conference Monday, Republican Gov. Jim Pillen said he wanted the state to cut property taxes from the current $5.3 billion to $3 billion. The shortfall, he proposed, should be made up with changes to the state's 5.5% sales tax."

 

New Jersey

N.J. Bill Exempting Bullion From Sales Tax Heads to Governor - Danielle Muoio Dunn, Bloomberg ($). " The legislation provides an exemption from the sales and use tax for the sale of investment metal bullion and investment coins. The bill’s fiscal statement said it could reduce state revenue between $4.8 million and $7 million annually."

 

New Mexico

New Mexico Governor, Lawmakers Set to Consider Tax Cuts - Paul Jones, Tax Notes ($):

Gov. Michelle Lujan Grisham (D) included an allocation of roughly $500 million that could go to tax breaks in her January 4 budget plan. Meanwhile, lawmakers on the state’s Legislative Finance Committee (LFC) — an independent agency headed by a bipartisan mix of state legislators — said January 5 that they included up to $200 million to pay for possible tax cuts in the committee’s budget recommendation.

Both proposals are less ambitious than the tax omnibus bill (H.B. 547) approved by lawmakers last year, which included roughly $1 billion in recurring tax cuts and was largely vetoed by Lujan Grisham over concerns about the provisions' long-term cost to the state. Lawmakers' smaller appetite for tax cuts this year reflects concerns that the state’s multiyear revenue boom is slowing.

 

New York

Hochul Rejects New York Tax Hikes, Touts NYC Housing Breaks - Zach Williams and Laura Nahmias, Bloomberg ($):

Hochul said she will push for a new tax abatement to encourage the construction of new rental and affordable housing in New York City. A similar proposal stalled in the legislature last year amid progressive demands for expanded tenant protections.

...

She pledged to lift a floor-area ratio cap that would allow developers to build more densely and will pursue legislation legalizing basement apartments.

Hochul also offered to provide tax credits to commercial property owners willing to convert their unused spaces into housing.

 

Pennsylvania

Pittsburgh 'Jock Tax' Is Unconstitutional, Pa. Court Affirms - Jaqueline McCool, Law360 Tax Authority. "The Commonwealth Court upheld a state trial court judge's ruling that Pittsburgh's fee on nonresident athletes using publicly funded facilities, known as the "jock tax," is unconstitutional because it violates the state's uniformity clause. In its opinion, the court also found that the trial court judge had correctly entered an injunction blocking the city from assessing, imposing or collecting the tax." 

Pennsylvania Appeals Court Says Pittsburgh 'Jock Tax' Is Unconstitutional - Christopher Jardine, Tax Notes ($): 

Pittsburgh’s nonresident sports facility usage fee, also known as the jock tax, is imposed on nonresident athletes who compete in athletic events or other performances at a publicly funded sports stadium or arena in Pittsburgh under Pittsburgh Ordinance section 271.03.

In November 2019 former Philadelphia Phillies baseball player Jeff Francoeur, former Pittsburgh Penguins hockey player Scott Wilson, New York Islanders hockey player Kyle Palmieri, and the players associations for the National Hockey League, Major League Baseball, and National Football League filed suit challenging the constitutionality of the fee.

 

West Virginia

West Virginia’s Justice Would Kill Tax on Social Security Income - Angélica Serrano-Román, Bloomberg:

West Virginia Gov. Jim Justice is proposing full elimination of the tax on Social Security income and creation of a state-level child and dependent care tax credit.

...

West Virginia enacted HB 2001 in 2019, instituting progressively larger Social Security income exemptions for single filers with incomes under $50,000 and married joint filers with incomes under $100,000. The exemptions reached 100% in tax year 2022. Justice’s proposal would remove the income restrictions entirely.

 

Tax Policy Corner

Louisiana and New Mexico Offer Contrasting Digital Tax Models - Michael Bologna, Bloomberg ($):

Louisiana narrowly taxes digital products, but aspires to collect tax on a much broader group of goods and services in the future, said Mia Strong, confidential assistant to the secretary of the Louisiana Department of Revenue.

...

In contrast, New Mexico arguably levies the most expansive tax on digital products in the country. The state’s decades-old posture is rooted in its extremely broad gross receipts tax. That tax, which operates like a sales tax in other states, applies to most tangible and intangible property and most services, said Mark Chaiken, New Mexico’s director of tax policy.

...

The department recently went through a rulemaking process that clarified most digital advertising accessed from a computer, phone, or other internet-connected device is subject to the gross receipts tax.

 

New Report: Which States Are Best for Remote Workers? - Kevin Glass, National Taxpayers Union Foundation. "In a landscape reshaped by the rise of remote work, the Remote Obligations and Mobility (ROAM) Index has unveiled the best states for remote workers in terms of tax treatment. This comprehensive index, designed to assess the tax-friendly environments for remote workers, has unveiled this year’s rankings:"

Link: Full report

Related: Telecommuting Workers in Refuge States Complicate State Taxes.

Tax History Corner

Worst auditing assignment ever. "The emperor Vespasian (69-79) imposed a tax on urine, using it to teach his son the lesson that pecunia non olet: money has no smell."

Source: Rebellion, Rascals, and Revenue: Tax Follies and Wisdom through the AgesMichael keen and Joel Slemrod. 

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About the Author(s)

Joe Kristan

Joe B. Kristan, CPA

Partner
After 38 years centered on tax consulting for closely held businesses and their owners, Joe is joining Eide Bailly's National Tax Office. Joe's responsibilities include communication, process improvement and training. He is a principal contributor to the Eide Bailly Tax News and Views blog, providing daily updates on tax reform and other tax news. Joe is a Certified Public Accountant and a member of the AICPA Tax Section and Iowa Society of Public Accountants.