Key Takeaways
- New York's aggressive residency examiners.
- The implications of tax nexus.
- California moves SALT workaround reforms.
- Multiple Iowa tax bills head to the finish line.
- Kansas sends another tax bill to Governor, who hits at another veto.
- Maine hikes rates on high earners.
- Nebraska digital tax dies at session end.
- Virginia modifies research credits.
- Tax Policy Corner
- Tax History Corner.
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.
New York’s Rich Get Creative to Flee State Taxes. Auditors Are On to Them - Laura Hahmias and Eliyahu Kamisher, Bloomberg:
That's leading state officials to try to claw back money wherever possible through residency audits — an investigation into whether someone correctly identified themselves as a full-time, part-time, or nonresident for income-tax purposes. It’s also taking place in California, another relatively high-tax, high-departure state facing budget strains, where the number of residency audits closed in the first 11 months of 2023 more than doubled from before the pandemic.
All states are suspicious when taxpayer moves coincide with high-income years. Taxpayers need to dot their i's to make such moves successful. Chris Martin, an Eide Bailly State & Local specialist who has handled Minnesota residency audits, comments:
There are apps with geolocation tracking that people can use to show their days by state if audited. It’s never been tested and approved by MN courts.
Obviously there are many other factors and nuances to consider with regard to meeting each individual state’s factors for creating residency. And if a taxpayer is moving states, the burden is typically on the individual to prove they have changed their home state of residency.
Good records are crucial. I handled a New York residency audit for an Iowa-based taxpayer whose employer required occasional visits to New York. The employer withheld taxes for the New York days, but the auditors wanted more. Fortunately, he maintained a day calendar. Even so, we had to come up with grocery receipts, credit card slips, and other supporting evidence to convince the examiner that yes, he did live in that Iowa house.
What’s the Connection? The Far-Reaching Implications of Tax Nexus - Robert Rojas and Michael Pusey, Tax Notes ($). "In general, a taxing jurisdiction’s definition of nexus may not have different rules for different types of entities, but it can be an important factor in the analysis, particularly when there are variations in ownership. Factors that tend to trigger nexus in the case of the individual may not apply to an entity. For example, as we discuss below, General Motors walked into a big San Francisco tax bill by introducing a product there. For an individual, however, attendance at a place of worship can be a nexus factor, which obviously isn’t applicable to GM."
State-By-State Roundup
California
California Senate Taxwriters Back SALT Cap Workaround Changes - Paul Jones, Tax Notes ($):
But there are legitimate challenges that can cause taxpayers to fail to meet the requirement, including a lack of information needed to calculate the payment on time, the analysis says. And if a taxpayer’s circumstances change after the deadline has passed, it’s too late for them to make the prepayment and use the workaround.
To address that, S.B. 1501 would allow taxpayers to elect to use the workaround without making the prepayment if they pay a penalty on or before the due date of the tax return that is equal to 5 percent of the elective tax paid for the tax year.
Calif. Committee OKs Ending Local Sales Tax Agreements - Jaqueline McCool, Law360 Tax Authority ($). "S.B. 1494, which passed the local government committee 4-1 and will now go to the Senate Revenue and Taxation Committee, would bar cities from entering into tax sharing agreements with companies that designate a city as a retailer's place of sale. Any existing agreements would have to be phased out by the beginning of 2030, the bill said."
Georgia
Ga. Corp., Personal Income Tax Rates Dropping To 5.39% - Maria Koklanaris, Law360 Tax Authority ($):
In the package, Kemp signed H.B. 1023, which will bring Georgia's corporate income tax rate down to 5.39%, from 5.75%. That will match the rate in H.B. 1015, which he also signed Thursday. H.B. 1015 provides that a planned cut in the individual income tax rate, which was to be transitioned to a flat 5.49%, will be accelerated to 5.39%. The maximum was formerly 5.75%. Kemp called for the accelerated rate cut in his State of the State speech in January.
Iowa
Iowa Republican lawmakers reach deal to speed up flat tax, lower rate to 3.8% - Stephen Gruber-Miller, Des Moines Register:
The bill, unveiled by the top Republicans on the House and Senate Ways and Means Committees. would take Iowa to a 3.8% flat income tax rate by next year.
Iowa Republicans advance plan to cut income tax to 3.8% flat rate in 2025 - Katarina Sostaric, Iowa Public Radio:
...
The bill that advanced Thursday would also make changes to a property tax relief law passed last year by adjusting when and how much a city or county may have to reduce their revenue by lowering their general levy.
Link: HF 2705. The bill also has a provision reforming the rules for bank investment subsidiaries.
Other Iowa tax bills likely to pass this session include HF 2649, restoring the capital gain exemption for farmers on sales of breeding livestock; HF 2666, which would extend the lease income exclusion for retired farmers to include income from pass-through entity leases; and HF 264, providing an exemption from tax for up to $10,000 in wages for caretakers of disabled individuals.
Indiana
Indiana Amends Sales Tax Guidance for Facilitators, Remote Sellers - Emily Hollingsworth, Tax Notes ($). "According to a correction to Information Bulletin No. 89, merchants that are registered in Indiana can close their sales tax accounts in 2024 if their sales into the state don’t exceed $100,000 in 2024, but they will still need to file all required sales tax returns for that year. This guidance applies to merchants with 200 or more transactions into the state in 2023."
Kansas
Kansas Tax Omnibus, Income Rate Changes Head To Gov. - Jaqueline McCool, Law360 Tax Authority ($):
The bill is a compromise from Kelly's original tax relief plan, introduced in January. Kelly has previously indicated she would not approve a bill that altered the state's income tax rates.
Kansas Gov. Kelly’s ‘gut sense’ says recent tax proposal too expensive, unsustainable - Jenna Barackman, Kansas City Star. "Kelly told reporters on Tuesday the proposal had not yet reached her desk, but suggested the tax plan would prove too expensive and therefore unsustainable."
Kentucky
Kentucky Governor Again Vetoes Tax Amnesty - Matthew Pertz, Tax Notes ($). "Gov. Andy Beshear (D) vetoed a tax amnesty provision that was included in the state's annual revenue bill (H.B. 8), and he also vetoed a provision that would have exempted gold and bullion from sales tax."
Massachusetts
Millionaire’s Tax Seen Exceeding Expectations in Massachusetts - Angélica Serrano-Román, Bloomberg ($). "The 4% surtax on incomes over $1 million, also known as the Fair Share Amendment, was projected to generate just over $1 billion a year for education and transportation spending, though the Massachusetts Department of Revenue said inflation and greater income concentration could raise that figure."
Maine
Maine Lawmakers Approve Tax Increase on Higher Earners - Matthew Pertz, Tax Notes ($):
Beginning January 1, 2025, L.D. 1231 would create three additional tax brackets on top of the current structure and amend the income thresholds for the existing brackets. The new rates for single filers would be:
5.8 percent on income less than $41,600;
6.75 percent on income of $41,600 but less than $85,000;
7.15 percent on income of $85,000 but less than $144,500;
7.55 percent on income of $144,500 but less than $205,000;
7.15 percent on income of $205,000 but less than $500,000; and
8.45 percent on income of $500,000 and up.
Nebraska
Nebraska Tax Cut Bill With Advertising Tax Dies in Legislature - Angélica Serrano-Román, Bloomberg ($). "In its final form, LB388, originated by Pillen and amended significantly, would have instituted property tax cuts partially funded by a 7.5% levy on revenue from ads. The tax would apply to Nebraska-related advertising revenue of companies earning over $1 billion from advertising, except for television and radio broadcasters. The measure defined the 'assessable base' as 'the portion of gross advertising revenue that is derived from sales to customers where services are delivered within Nebraska.'"
Stunning last-minute defeat for Pillen tax shift bill likely ensures special session - Paul Hammel, Nebraska Examiner:
...
Only one other state, Maryland, has attempted to tax advertising placed on social media giants like Facebook and Google, and that state is fighting multiple lawsuits and being forced to pay back what it’s collected in taxes plus interest.
Neb. Gov. Plans To Call For Session To Revive Digital Tax - Michael Nunes, Law360 Tax Authority ($):
...
The proposal would also have changed the state's 5.5% sales tax regime by eliminating exemptions for candy, soft drinks, storage and moving services, dry cleaning and veterinary services, except for specialty services for livestock. Taxes on cigarettes would have been increased by 64 cents per pack, to $1, and the sales tax exemption for lottery sales and games of skill would have been nixed and, instead, subject to a 20% sales tax for lottery sales and 5% tax for games of skill. CBD and consumable hemp products would have been subject to a 25% sales tax, according to an amendment.
Virginia
Virginia Modifies R&D Credits, Extends Sales Tax Holiday - Matthew Pertz, Tax Notes ($). "H.B. 1518, which the governor signed April 8, makes changes to two R&D tax credits. It lowers the cap of the major research and development expenses tax credit — which is available for annual R&D expenses above $5 million — from $24 million to $16 million; and it increases the cap of the research and development expenses tax credit by the same $8 million amount, from $7.77 million to $15.77 million, to better match demand. H.B. 1518, which takes effect July 1, is retroactive to January 1, 2023."
Tax Policy Corner
Long-Term Trends in State Personal Income Tax - Craig Johnson, Luis Navarro, Rahawal Shahryar, and Andreay Yushkov, Tax Notes ($). "Every year from 2002-2024, at least one state decreased its PIT. In contrast, there were four years when no state made a tax rate increase. There were record rate increases in 2009, which is indicative of the state sector’s response to the fiscal challenges of the Great Recession. In contrast, there were record tax rate decreases from 2020-2024 — 44 in total, by far the largest number of decreases and overall number of changes during any five-year period. Rates in the state sector reached their lowest level in 2024 at 6.11 percent, 58 bps lower than the high of 2009. This is another indication that state government tax policy during the COVID-19 pandemic was the reverse of tax policy during the Great Recession."
The Digital Ad Tax Invasion - Joe Crosby, Stephen Kranz, Diann Smith, and Doug Sheppard, Tax Notes ($). The article is an interview with state tax law observers. Mr. Crosby, CEO of government relations firm Multistate, is quoted on digital taxes, such as the one in play in Nebraska (my emphasis):
But this is not a criticism of legislators: Most of them don’t come in as tax experts, and so they hear things from partisans who assert counterfactuals as unassailably true — that these companies are not paying taxes, they’re escaping tax, they’re not paying their fair share, etc. We all know that last phrase is loaded and means nothing except whatever somebody thinks “fair” is. The Council On State Taxation study comes out every year to show that businesses are paying — as they have every year — about 43 percent of all state and local taxes; it’s been the same since we were all in COST a couple of decades or so ago. But still, every time something new happens in the world, it’s like this is somehow escaping taxation and we need to do something about it. As if someone has figured out how to structure a real, large, profitable business that pays no state or local property, sales, income, excise, insurance premium, social insurance, etc., taxes.
Unorthodox Tax Tactics
Todd Chrisley ordered to pay $755K for defamatory statements while serving prison sentence - KiMi Robinson, USA Today:
A Georgia jury last week found Chrisley, who is currently serving a 10-year prison sentence for bank fraud and tax evasion, liable for defamatory statements against Amy Doherty-Heinze that he shared on his podcast and social media accounts, according to court documents obtained by USA TODAY Wednesday.
Perhaps it is best to not get into too much detail about your state revenue examiners on your podcast.
Tax History Corner
Taxing businesses operating in different jurisdictions has vexed revenue collectors for centuries. An entry in History Stack Exchange provides this insight:
My question is not what taxes were used, but how they were collected. As I understand, tax collection was generally outsourced and done in a haphazard way. Was there always a tax collector at city gates and bridges to collect tolls? Was there a tax collector at the townsquare every morning to collect stallage fees? Were merchants often able to avoid taxes while traveling through a country if they didn't stay long?
As you can see from the items above, the tax collectors are still working on it.
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