State Tax News & Views: Crypto payments, Remote filer relief, and Hemingway on taxes.

Welcome to this edition of our roundup of state tax developments. Consider the Eide Bailly State & Local Tax team for your state tax planning, compliance, and incentive needs!

Crypto Tax Payments Get Few Takers as More States Eye Programs - Michael Bologna, Bloomberg ($):

In the two years since Colorado became the first state to accept cryptocurrency for payment of taxes, it hasn’t collected enough revenue to cover the cost of a single Bitcoin. Utah, the only other state to accept digital currency for taxes, hasn’t received any payments at all.

Despite taxpayers’ general lack of enthusiasm for digital currency as a payment method, policy makers in a handful of states are lining up to follow Colorado and Utah. Arizona came close this year to passing a bill, S.B. 1128, directing the state to accept cryptocurrencies for payment of taxes, fines, and fees. An Ohio lawmaker introduced similar legislation, S.B. 317, last month.

It's not a mystery. Cryptocurrency is taxed as property, rather than as currency. This means paying taxes with Bitcoin would be considered a sale, triggering gain - and tax - on any appreciation.

More cynically, paying in cryptocurrency alerts the tax authorities that you have cryptocurrency. That may be a dealbreaker for any taxpayers who haven't been bothering to report crypto income.

SSTGB Postpones Vote on Remote Seller Voluntary Disclosure Proposal - Emily Hollingsworth, Tax Notes ($):

Members of the Streamlined Sales Tax Governing Board (SSTGB) postponed a vote on the creation of a voluntary disclosure program for remote sellers with a limited lookback period, sending the proposal back to the work group.

The Supreme Court greatly expanded the ability of states to collect sales tax from out-of-state sellers with its Wayfair decision a few years ago. Differences in state laws and misunderstanding of tax rules have left many taxpayers exposed for back sales taxes and penalties, potentially for many years.

The SSTGB is a group of states that tries to harmonize sales tax rules to ease taxpayer compliance. The proposal would create a standard way for taxpayers to come into compliance through voluntary disclosure. Most states currently have such programs, but they differ in various ways, including the number of years that taxpayers have to "look back" and remit unpaid taxes.

Notably, the program would limit the lookback period to no more than 24 months. Members of the Executive Committee discussed the proposal during an August meeting, noting that a shorter lookback period (states' current lookback periods range from three to five years) would make it easier for remote sellers to voluntarily disclose their sales and tax information to states.

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The proposed amendment would require member states to participate in what would be called the Streamlined Sales Tax Voluntary Disclosure Program, unless prohibited by state law. Under the program, member states would eliminate all penalties and late filing fees during the limited lookback period. If adopted, the governing board would promulgate rules that qualified remote sellers must follow to participate in the program.

Contact an Eide Bailly tax pro to learn more about state voluntary disclosure programs.

Recreational Marijuana Taxes by State, 2024 - Adam Hoffer and Jacob Macumber-Rosin, Tax Foundation. "Approaches to tax structure vary significantly across states. Some states tax by weight, some by price, and others by THC content. Ad valorem taxes are simpler but are associated with greater revenue volatility and do not target any specific harm-causing element"

State-By-State Roundup

California

California Affirms Late SALT Cap Workaround Payment Penalties - Laura Mahoney, Bloomberg ($):

A first wave of California businesses lost appeals seeking to relieve penalties tied to an elective pass-through entity tax created in 2021 to get around the $10,000 cap on deducting state and local tax payments from federal returns.

The state’s Office of Tax Appeals upheld the Franchise Tax Board’s assessment of late payment penalties and interest in five opinions posted in September and October. Taxpayers invoked the Covid-19 pandemic, as well as confusion, complexity, and last-minute changes to the program in its first year, but the OTA ruled their claims lacked enough evidence to offer reasonable cause to overturn the board’s decisions.

Attorneys Frustrated With California's NOL Suspension - Christopher Jardine, Tax Notes ($):

California's suspension of some net operating loss deductions seems to be about raising revenues during budget gaps rather than addressing any conceptual issues with NOLs, an attorney said during a panel discussing the measure.

“I think it's a cheap shot kind of place to go to raise revenue, because it's not like there's no tax avoidance in general. I just think: Find the revenue somewhere else, leave the NOLs alone,” Leah Robinson of Mayer Brown said.

NOL deductions mitigate the inherent unfairness of annual accounting periods when income fluctuates. Consider a taxpayer with a $1 million loss in Year 1 and $1 million income in Year 2. Without a net operating loss carryforward, the taxpayer - who has net income of zero over the two years - would pay tax on $1 million of income.

California Enacts Additional Tax Relief for Pot Businesses - Paul Jones, Tax Notes ($). "S.B. 1059 was signed by Gov. Gavin Newsom (D) on September 28. It will bar cities and counties, for purposes of any local cannabis business tax or fee, from including in their definition of taxable gross receipts the amount of state cannabis excise tax and sales tax the retailers pay. The bill takes effect January 1, 2025."

Newsom Vetoes Bills Excluding Fire Settlement Payments From Tax - Laura Mahoney, Bloomberg ($). "California Gov. Gavin Newsom signed a bill on Sunday excluding from state income tax grants that property owners receive to make their homes more resistant to wildfires, but vetoed two others meant to help wildfire victims."

Colorado

Colorado Tax Policy Oversight Panel Issues Draft Tax Credit Bills - Emily Hollingsworth, Tax Notes ($). "Draft Bill 2 would extend a refundable income tax credit to help seniors with housing costs. The credit is for taxpayers 65 years or older who have not claimed a homestead property tax exemption. Under the bill, the credit would be extended to tax years 2025 and 2026 and would be available to single filers with federal adjusted gross income of up to $75,000 or joint filers with AGI of up to $125,000. The maximum credit amount would be $800, for seniors with AGI of up to $25,000."

Colo. Panel Advances Small Biz Property Tax Break - Sanjay Talwani, Law360 Tax Authority ($):

The legislation aims to expand a personal property tax break intended for small businesses. Currently, businesses with less than $52,000 in personal property, adjusted each assessment cycle for inflation, are not required to pay tax on the property. Those meeting that threshold must pay the tax on the entire amount, without any exemption or subtraction.

The legislation would fix most of that gap with a $50,000 state income tax credit for businesses with personal property worth up to $150,000, adjusted in future cycles for inflation. The credit would replace a current credit of up to $18,000, established in 2019, which lawmakers said is not widely used and not as simple to calculate as the proposed exemption.

District of Columbia

DC Tax Commission Punts on Latest Overhaul Proposal - Michael Bologna, Bloomberg ($). "The DC Tax Revision Commission met briefly Wednesday and declined to adopt the 'chairman’s mark,' a set of 40 draft recommendations designed to improve tax competitiveness and fairness. The latest proposal, issued in July and revised from a draft shared in January, would rebalance the city’s tax code through a series of revenue-neutral policy proposals. If and when a plan is approved, it would be forwarded to the DC Council for final consideration."

Georgia

Georgia Amendment 1 Threatens the State’s Housing Market - Andrey Yushkov and Joseph Johns, Tax Policy Blog. "Amendment 1 reaches far beyond the mere ballot question. By triggering the implementation of HB 581, it would change Georgia’s property tax system dramatically, modeling it after harmful assessment limit policies that began in California. To the extent that localities were unable—or chose not—to opt out, they would be required to adopt a harmful property tax structure that disincentivizes new entrants into the housing market and keeps the real estate market more stagnant than it would be otherwise."

Iowa

Iowa declares infrared sauna a taxable Turkish bath - Iowa Department of Revenue declaratory order.

While it is true that the Iowa legislature likely did not have infrared sauna, specifically, in mind when it decided to include Turkish baths as a taxable service, the provisions of the Code are not to be viewed as prehistoric insects trapped forever in amber. Instead, the Iowa Supreme Court has long held that “legislative enactments in general and comprehensive terms, prospective in operation, apply alike to all persons, subjects and business within their general purview and scope coming into existence subsequent to their passage.”

I just want to know where I can go in Iowa for a good taxable Turkish bath.

Kansas

Kansas Realty Assessors to Ignore Like-Kind Replacement Price - Alan Lederman, Bloomberg ($):

The 2023 KSA 79-503a provides that in assessing non-agricultural realty, “sales in and of themselves shall not be the sole criteria of fair market value but shall be used in connection with cost, income and other factors….” In 2024, the statute was changed to add this language: “The sale price or value at which a property sells or transfers ownership in a federal internal revenue code §1031 exchange shall not be considered an indicator of fair market value nor as a factor in arriving at fair market value. Federal internal revenue code §1031 exchange transactions shall not be used as comparable sales for valuation purposes nor as valid sales for purposes of sales ratio studies….”

Louisiana

Louisiana Governor to Call Special Session on Income and Sales Taxes - Matthew Pertz, Tax Notes ($):

Landry is proposing to cut the income tax to a flat rate of 3 percent for all income over $12,500; anyone making under that amount would pay zero income tax. He also pledged to eliminate the corporate franchise tax and reduce the top corporate income tax rate from 7.5 percent to 3.5 percent.

The task of reducing tax burdens becomes more difficult with the state facing a fiscal cliff, which is partly because a temporary 0.45 percent sales tax expires in 2025. Landry said he expects the revenue shortfall for the coming year to top $700 million. But the constitutionally protected corporate and sales tax exemptions leave the state with few options.

Oregon

Oregon Measure 118 Is an $8 Billion Tax Increase That Raids $2 Billion from the State Budget - Jared Walczak, Tax Policy Blog:

Oregon Measure 118 would raise $8 billion a year in its first full year, and nearly $10 billion a year within five years of implementation—yet it would shrink the state’s general fund by as much as $2 billion a year within five years ($1.2 to $1.5 billion immediately), with an additional $1.3 billion hit at the start. That seems impossible, but due to the peculiar design of the proposed tax increase, it’s true: the largest tax increase Oregon has ever seen would create a substantial budget shortfall.

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Under Measure 118, the existing minimum tax regime would be replaced with a 3 percent gross receipts tax for large businesses, imposed on all Oregon revenue, regardless of level of profitability (or lack thereof). A business with $100 million in gross sales into Oregon would pay $2.75 million in taxes (3 percent on the amount above $25 million)—even if it suffered losses. Businesses with low profit margins, like the grocery industry, would face taxes that far outstrip their net income.

Pennsylvania

Pennsylvania High Court Upholds Tax on Gains From Like-Kind Exchanges - Cameron Browne, Tax Notes ($). "In a September 26 consolidated opinion in Pearlstein v. Pennsylvania, the state supreme court upheld an income tax assessment against members of several real estate purchasing and development partnerships after determining that the net gains from like-kind exchanges were taxable at the time of the exchange. Justice Kevin M. Dougherty wrote a concurring opinion and Justice Daniel D. McCaffery wrote a dissenting opinion."

South Dakota

South Dakota Use Tax Ruling Stands After US Justices Deny Review - Perry Cooper, Bloomberg ($):

The US Supreme Court declined Monday to consider whether states should apportion use taxes based on how long a piece of property is within their borders.

Minnesota-based Ellingson Drainage Inc. asked the high court to overturn a South Dakota Supreme Court decision upholding a $75,000 use tax bill on equipment it brought into the state for 30 drainage projects. The state court found the bill was reasonable because a use tax is a substituted sales tax designed to preclude the loss of revenue by the state or a local business.

South Dakota’s Initiated Measure 28 Undermines Sales Tax Rate Reductions - Jared Walczak and Abir Mandal, Tax Foundation. "South Dakota’s Initiated Measure 28 proposes something popular, common, and, particularly in South Dakota’s context, misguided. The measure, which attempts to exempt groceries from the sales tax, is ambiguously drafted, with the potential to exempt not only groceries but also cigarettes and other non-grocery products from sales and excise taxes. And in a state that forgoes income taxes and instead relies on an unusually broad-based sales tax, carving up that base is no small thing, especially when (despite the popularity of grocery exemptions), the evidence suggests that grocery exemptions are an unusually poor way of providing tax relief to low-income households."

West Virginia

West Virginia Legislature Passes Income Tax Reduction Bill - Tyrah Burris, Tax Notes ($). "S.B. 2033, which would lower the state's income tax by 2 percent, came to the Senate after Gov. Jim Justice (R) changed his previous request to reduce personal income tax rates by up to 5 percent. On October 7 Justice amended his first special session proclamation to request the new amount."

Tax Policy Corner

Taxpayers Shoulder a Heavy Burden for Sports Stadium Subsidies - Adam Hoffer, Joseph Johns, and Craig Depken, Tax Foundation. "Given that stadium subsidies fail cost-benefit analyses, why do state and local policymakers persist in offering substantial tax-financed subsidies to professional sports teams? The answer lies in the basic political motivation to prioritize re-election above other interests, even when those interests are aligned with good governance and sound tax policy."

Tax History Corner

For Whom the Tax Tolls: Ernest Hemingway’s Personal Taxes - Joseph Thorndike, Tax Notes History Project:

Ernest Hemingway had a lot to say about taxes, little of it good. Some of his thoughts found their way into his novels, including To Have and Have Not, a 1937 story about a Key West fishing captain. The book features a rather extended meditation on audits, evasion, and enforced sobriety.

“On one of the largest yachts, a handsome, black, barquentine rigged three-master, a sixty-year-old grain broker lay awake worrying about the report he had received from his office of the activities of the investigators from the Internal Revenue Bureau,” Hemingway wrote.

“Ordinarily, at this time of night, he would have quieted his worry with Scotch highballs,” Hemingway continued. But the broker’s doctor had forced him to quit drinking, which left him to ponder his fate “with no kindly blurring, denied all that chemical courage that had soothed his mind and warmed his heart for so many years.”

The whole article is worth reading, and it is available without a Tax Notes subscription. It covers timeless tax themes like the difficulty of documenting deductions, the moral issues of tax avoidance, and the tyranny of annual tax periods. Enjoy it with whatever soothes your own mind.

State Tax News & Views: Crypto payments, Remote filer relief, and Hemingway on taxes.

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Joe B. Kristan, CPA