State Tax News & Views: SALT Cap Boost, Cap Workaround Refunds.

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.

‘SALT’ bill on shaky ground after getting over Rules hump - Sophie Will and Caitlin Reilly, Roll Call: "The bill would double the $10,000 cap on SALT deductions for married couples for the 2023 tax year only — so in theory households could claim the extra benefit on their returns filed before this April’s deadline, though Democrats argued the IRS wouldn’t have time to get their systems ready. The extra deductions would be available only to joint filers earning up to $500,000."

When Film and TV Tax Credits Become Taxable Income - Kathleen Wright, Tax Notes ($):

In Maines the Tax Court determined that some refundable tax credits issued by New York in connection with economic development activities (EZ credits) constituted taxable income to the recipients for federal tax purposes. 

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The court considered one other refundable tax credit, the QEZE credit, a credit against income tax liability for the amount of real property taxes paid. It determined that while the refunded credit amount did not constitute a “taxable increase to wealth,” as did the EZ credits, the application of the tax benefit rule mandated that the refundable portion be subject to federal taxable income to the extent that a deduction had been claimed for the real property taxes paid.

The Tax Notes article addresses the refundable California film tax credit, but it has implecations for refundable credits from entity-level taxes passed by legislatures as SALT Cap workarounds. The details of these Pass-through Entity Taxes, or PTETs, vary by state, but all involve partnerships and S corporations paying taxes directly to states; normally the income is taxable only to the partners and shareholders. To prevent double taxation, most PTET states provide credits to entity owners for their share of the taxes paid by the entity. 

For example, an S corporation with one owner in State A, with a 5% tax rate, could elect to a the 5% tax on the entity level. If the S corporation had $100,000 of taxable income, it would pay a $5,000 PTET. The entity owner would receive a $5,000 credit against personal State A taxes, so the income would only be taxed once by the state. The S corporation would deduct the tax in computing the taxable income reported on the shareholder K-1, bypassing the cap on itemized deductions.

When the PTET credits passed to owners are "refundable," they generate cash refunds if they exceed the total state taxes otherwise imposed on the entity owner. Many states have such "refundable" PTET credits, including Colorado, Iowa, Idaho, Minnesota, Montana, and Nebraska.

As the IRS has not issued guidance, the federal tax treatment of state tax refunds generated from refundable tax credits is cloudy, but it would be unwise to assume that they can be ignored. The Maines decision implies that PTET credits generating tax refunds can cause taxable income.

Related: Working Around the SALT Deduction CAP. 

State-By-State Roundup

California

Experts Say California Tax Hikes Unlikely, Stalled Regs May Advance in 2024 Paul Jones, Tax Notes ($):

Lawmakers in California’s 2024 legislative session look like they may eschew major tax increases, according to experts with Eversheds Sutherland.

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At a January 25 webinar hosted by the firm's Sacramento office, Eric Coffill, senior counsel, and Tim Gustafson, partner in charge, discussed a range of pertinent tax issues in the Golden State. Coffill observed that so far, it looks like there won’t be a serious push for any major tax increases in 2024, particularly in light of Democratic Gov. Gavin Newsom’s opposition to new taxes.

Rocky Start for California SALT Cap Workaround Is Smoothing Out - Laura Mahoney, Bloomberg ($). "For 2022 and later, entities have two deadlines to meet to execute a valid election into the program. First, they must make a payment by June 15 of the current year of $1,000 or 50% of the amount of elective tax paid the prior year, which ever is greater. Then, on their original, timely returns they must pay the remaining amount. For many taxpayers, those returns are due by March 15 the following year."

Colorado

Colorado Governor Signs Bill Addressing EITC Expansion, Refunds -  Angélica Serrano-Román, Bloomberg ($). "The new law, signed by the Democratic governor on Wednesday, repeals and reenacts HB 23B-1002, doubling the earned income tax credit by classifying the credit expansion as a TABOR refund mechanism for fiscal 2022-2023, to be disbursed in fiscal 2023-2024. TABOR limits the revenue the state can retain and spend."

Idaho

Idaho Lawmakers OK Updated Conformity With US Tax Code - Zak Kostro, Law360 Tax Authority ($). "H.B. 385 passed the state Senate by a 34-0 vote Friday after having cleared the House of Representatives 58-8 on Jan. 17, according to a summary on the state Legislature's website. The bill would conform Idaho's income tax code to the Internal Revenue Code as amended and in effect on Jan. 1, 2024, according to the bill's text and a statement of purpose."

Indiana

Ind. Senate Tax Committee OKs Easing Sales Tax Nexus - Michael Nunes, Law360 Tax Authority ($):

The Senate Tax and Fiscal Policy Committee advanced S.B. 228 by a 14-0 vote. If enacted, the bill would eliminate a part of the state's sales tax nexus laws that require retailers that make 200 or more transactions in Indiana to collect and remit the state's 7% sales tax.

If enacted, only retailers with more than $100,000 in gross revenue from sales in Indiana would have to collect and remit sales tax.

Iowa

Kim Reynolds wants to cut Iowa taxes — again. Here's how it would work and who gets a break. - Stephen Gruber-Miller, Des Moines Register:

Iowa’s top tax rate is 5.7% as the state phases in a 2022 law that is already scheduled to bring down the individual income tax rate to a 3.9% flat tax by 2026.

Reynolds’ bill would speed up that process and make further cuts by dropping Iowa’s income tax rate to a flat tax of 3.65% for 2024 and make the change retroactive to the beginning of the year.

Iowans would see their income tax rate further drop to 3.5% in 2025.

The bill also includes a provision imposing a $100 per paycheck, per employee penalty for employers who fail to incorporate a tax cut in the bill in employee withholding with 60 days of enactment.

Link: HSB 543

Kansas

Kansas Governor Vetoes Flat Income Tax Bill - Emily Hollingsworth, Tax Notes ($). " The bill's conference committee report was quickly approved by the Senate on January 17 and by the House on January 18. H.B. 2284 proposed to shift the state to a flat income tax rate of 5.25 percent beginning in tax year 2025. The first $12,300 in income for joint filers and the first $6,150 for single and all other filers would have been exempt from the tax. Under current law, the state's income tax rates range from 3.1 percent to 5.7 percent."

Louisiana

Louisiana Governor’s Council Wants Massive Tax Cuts Despite Looming Deficit - Matthew Pertz, Tax Notes ($). "Landry’s Economic Development and Fiscal Policy Council issued a news release January 26 in which it recommended a total phaseout of the franchise, corporate, and personal income taxes, as well as a gradual reduction — but not a total elimination — of the severance tax. Taken together, these taxes amounted to $6.33 billion of Louisiana’s $12.08 billion in tax collections in fiscal 2022, according to the Department of Revenue’s latest annual report."

Minnesota

IRS’s Final Word on Minnesota Rebates: Definitely Taxable - Michael Bologna, Bloomberg ($). "Despite pleas for reconsideration by Gov. Tim Walz (D) and members of Minnesota’s congressional delegation, IRS Commissioner Daniel Werfel said there is no basis for a federal tax waiver on special payments rebating a portion of the state’s surplus to residents. Werfel relayed the agency’s position in letters to Minnesota Rep. Pete Stauber (R) and Rep. Angie Craig (D), made public this week."

Mississippi

Mississippi Governor Calls for End to State Income Tax by 2029 - Laura Mahoney, Bloomberg ($). "The Republican governor offered the proposal as part of his budget plan for the next fiscal year, which starts July 1. It would go further than legislation enacted in 2022 that cuts the tax from 5% to 4% by 2026."

Nebraska

COST Warns Neb.'s Proposed Ad Tax May Be Unconstitutional - Michael Nunes, Law360 Tax Authority ($):

Nebraska's proposal to levy a 7.5% tax on advertising services, including digital advertising services, exposes businesses to double taxation and may run afoul of some constitutional provisions, the Council on State Taxation said in public comments Thursday.

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In written comments, COST said any tax on digital advertisements would be "immediately embroiled in protracted litigation," as the bill leaves the state open to challenges under the First Amendment and commerce clause of the U.S. Constitution.

Oklahoma

Okla. House OKs Personal Income Tax Cuts For All Brackets - Zak Kostro, Law360 Tax Authority ($):

H.B. 1002, which passed the House by a 71-20 vote, would lower each of the state's personal income tax brackets by a quarter of a percentage point for tax years 2024 and 2025, according to a bill summary. The bill was introduced Monday by House Speaker Charles McCall, R-Atoka.

Under current law, Oklahoma's personal income tax rates range from 0.25% to 4.75%, according to the bill. 

Oklahoma Senate Delays Moving Tax Legislation Until Regular Session - Emily Hollingsworth, Tax Notes ($). "The special session began on January 29. Stitt issued an executive order January 16 instructing lawmakers to vote on legislation to reduce individual income taxes by 0.25 percent. But although the House remains in special session and is in the process of considering three bills that would do so, the Senate adjourned January 29 without scheduling any bills for consideration."

Oregon

Oregon Tax Court: Apple Can Exclude Insurance Subsidiary's Receipts - Cameron Browne, Tax Notes ($). "Apple Inc. can exclude from its Oregon consolidated corporate excise tax return 95 percent of insurance plan gross receipts ceded to an insurance company subsidiary because the state did not have taxing jurisdiction over the subsidiary, the Oregon Tax Court has held." 

Link: TC 5416

South Dakota 

SD Expands Meaning Of 'Seller' In Sales, Use Tax Statutes - Zak Kostro, Law360 Tax Authority ($). "H.B. 1019, which Republican Gov. Kristi Noem signed Wednesday, expands the definition of "seller" in statutes governing sales and use tax to include any person making sales, leases or rentals of any product transferred electronically, according to the text of the enrolled bill. The legislation also specifies that personal property sold, leased or rented by a seller means tangible personal property, according to the bill."

Texas

Texas Court Gives Streaming Platforms a Win in Franchise Fee Suit - Andrea Muse, Tax Notes ($):

A lawsuit by 31 municipalities seeking franchise fees from Disney+, Hulu, and Netflix should have been dismissed, a Texas appellate court has held.

The Texas Court of Appeals, Fifth District, held in In re Disney DTC LLC that the Texas Public Utility Regulatory Act (PURA) does not provide the municipalities with a cause of action against non-franchise holders like the streaming providers, and found that a trial court abused its discretion in denying the companies’ motion to dismiss.

Washington

Voters Likely to Decide Whether to Overturn Washington Capital Gains Tax - Paul Jones, Tax Notes ($). "The capital gains tax is a 7 percent tax on annual long-term capital gains that exceed $250,000. Enacted in 2021, the tax funds child care and early education spending and, according to the state’s Department of Revenue, generated $896 million in 2023, its first year. The tax has been controversial, with business owners and conservative groups litigating to overturn it, arguing that it violates the state’s ban on progressive income taxation and that it's a prelude to the creation of a broader statewide income tax."

Tax Policy Corner

Envy, Regressivity And Other Sins: SALT In Review - David Brunori, Law360 Tax Authority:

In any event, the Council on State Taxation again counterpunched with its annual study of state and local business tax burdens. The report covers 2022 and shows all state and local taxes paid by businesses. Next time you are tempted to don a Che Guevara T-shirt and demand more business taxes, read the report, available on the COST website.

In 2022, according to the report, businesses paid about $1,074.5 billion in state and local taxes, up 13.7% from the previous year. Over a trillion dollars. That accounts for about 44.6% of all state and local tax revenue. Businesses pay property taxes; sales and excise taxes, which they shouldn't; gross receipts taxes; corporate income and franchise taxes; business and corporate license taxes; unemployment insurance taxes; and individual income taxes, paid by owners of noncorporate, or pass-through, businesses. 

Tax History Corner

A man who worked as a contractor for the IRS was sentenced to five years in federal prison last month for leaking federal tax return data on Donald Trump and a number of high-income individuals. The statute pleaded guilty to violating, Sec. 6103, begins with the statement "Returns and return information shall be confidential..."

It hasn't always been that way. The version of Sec. 6103 in place before 1976, started (my emphasis): 

 Returns made with respect to taxes imposed by chapters 1, 2, 3, and 6 upon which the tax has been determined by the Secretary or his delegate shall constitute public records; but, except as hereinafter provided in this section, they shall be open to inspection only upon order of the President and under rules and regulations prescribed by the Secretary or his delegate and approved by the President.

The current confidentiality rules were a response to reported abuses of the IRS for political purposes during the Nixon years. 

Not every country believes in taxpayer confidentiality. For example, Finland allows taxpayers to access income tax data by phone or at tax offices. The day that the tax information goes public has been dubbed "National Jealousy Day."