State Tax News & Views: Market Sourcing, EV Taxes, Nebraska, Swimming Pools.

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

Rocky Transition to Market-Based Sourcing Evident at MTC Forum - Amy Hamilton, Tax Notes ($):

Disruption caused by states transitioning to market-based sourcing emerged as an unplanned theme at the Multistate Tax Commission’s annual conference during sessions on litigation and audits, and a vote to shelve work on a draft model.

“Market-based sourcing is huge in the litigation realm across the country,” said Leah Robinson, leader of Mayer Brown’s state and local tax group, during the panel that kicked off the meeting. “This is the biggest issue on my firm’s state tax litigation slate right now on the income tax side.”

DraftKings Announces Surcharge Plan on States With High Betting Taxes - Emily Hollingsworth, Tax Notes ($):

DraftKings Inc. is looking at a surcharge on winning bets in four states whose sports wagering tax rates exceed 20 percent.

The online sports betting giant announced the gaming tax surcharge plan in its August 2 letter to shareholders. It said that the goal of the surcharge is “to ensure an operational effective tax rate of approximately 20 percent.”

States scramble to replace gas tax cash - Adam Aton, Politico:

Now, the rise of electric vehicles threatens to make the gas tax obsolete everywhere. Even in states where revenues have continued to grow, lawmakers see a need to design alternative funding models. Some of the ideas are relatively new, such as fees on retail deliveries. Some, like expanding tolls, are almost as old as roads themselves.

States’ most common approach, though, has been to levy more costs on EV owners. Thirty-nine states now charge some kind of annual fee for hybrid or electric vehicles. That includes states that plan to require all new car sales to be zero-emission vehicles by 2035, such as California and Washington, as well as the states with the fewest EVs, like West Virginia and Mississippi.

Gas Tax Rates by State, 2024 - Adam Hoffer and Jacob Macumber-Rosin, Tax Foundation. "California pumps up its gas tax the most at 68.1 cents per gallon (cpg), followed by Illinois (66.5 cpg) and Pennsylvania (58.7 cpg). The lowest gas tax rates are levied in Alaska at 8.95 cpg, followed by Mississippi (18.4 cpg) and Hawaii (18.5 cpg). These rates don’t include the effects of cap-and-trade carbon policies or low carbon fuel standards, which drive prices even higher in California, Washington, and select northeastern states."

Tax Foundation map of state gas taxes in 2024

State-By-State Roundup

California

Group Challenges Calif. Law Targeting Microsoft's Tax Win - Maria Koklanaris, Law360 Tax Authority ($):

A portion of California's new tax law written to prevent more wins such as Microsoft secured when the state's Office of Tax Appeals ruled it could include 100% of the dividends from foreign affiliates in its California sales factor denominator is unconstitutional, a national taxpayers group said.

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In addition, the group said, the section of the law, which deals with apportionment, also violates the due process clause by having an unlimited period of retroactivity. The complaint was filed Wednesday in the Superior Court of California, County of Sacramento.

California Measure to Block New Vote Thresholds Delayed to 2026 - Paul Jones, Tax Notes ($). "California voters will have to wait until 2026 to weigh in on a ballot measure designed to make it harder for antitax groups to establish supermajority voter approval thresholds for taxes."

California OTA: Investor Owes Additional Tax for Ed McMahon's House - Christopher Jardine, Tax Notes ($). "In Matter of Schryer, the California OTA determined that Daniel Schryer wasn't eligible to claim rental losses from the period he owned the home because he did not attempt to make a profit and that the Franchise Tax Board was not barred from challenging his claimed net operating losses carryover."

Colorado

Colo. Gov. Calls Special Session On Property Tax Relief - Michael Nunes, Law360 Tax Authority ($). "Polis said in a statement that the special session will start Aug. 26 and focus on legislation meant to provide property tax relief next year. The call was made after two ballot questions were submitted to the secretary of state that proposed capping property tax growth and reducing assessing rates.

Minnesota

Minnesota High Court: Company’s Reports Constitute Taxable Market Research - Cameron Browne, Tax Notes ($):

An out-of-state catalog and internet-based distributor's activities in Minnesota exceeded P.L. 86-272's protections and therefore it is subject to the state's corporate franchise tax, the Minnesota Supreme Court held.

In an August 7 decision in Uline Inc. v. Commissioner of Revenue, the state supreme court affirmed that the company’s practice of having its sales representatives obtain information about its competitors’ products and business practices constitutes market research and is not protected under P.L. 86-272 as mere solicitation of orders.

Nebraska

Nebraska Lawmakers Advance Stripped-Down Property Tax Reform - Michael Bologna, Bloomberg ($):

The latest version requires income tax credits against property taxes to be added to annual property tax statements to prevent credits from going unclaimed. A second feature expands educational tax credits next year and ramps up credits in future years. A third feature limits annual increases by municipal and local governments to the rate of inflation, but creates a carveout for public safety and county attorneys.

The bill now excludes various revenue raisers Pillen previously sought. For weeks, the Republican governor worked with lawmakers on a plan to expand the sales tax base through the repeal of exemptions on about 70 products and services. The bill also sought to raise funds for property tax cuts through higher excise tax increases on cigarettes, vaping, consumable hemp products, and liquor, as well as a new 50-cent fee on all retail deliveries.

You can follow the Nebraska special session action on LB34 here. You can watch the action on the legislature livestream here.

Property tax debate to pick up Friday as Nebraska lawmakers continue to seek broader relief - Zach Wendling, Nebraska Examiner:

The final hours of debate on Legislative Bill 34, the latest tax package originally introduced by State Sen. Tom Brewer of north-central Nebraska, could represent a last-chance push for 13 term-limited lawmakers to help offer more significant tax relief before leaving office.

“If we’re going to get one shot to move this in the right way, let’s take one shot, the right way,” State Sen. Justin Wayne of Omaha said during debate.

State Sen. Danielle Conrad of Lincoln saw it differently. She led opposition to LB 34 and its 122-page committee amendment Tuesday, one of various plans backed by Gov. Jim Pillen that she panned as a “reverse Robin Hood scheme” to raise taxes on low-income Nebraskans while cutting taxes for large landowners, including the governor.

Education Government & Politics Labor & Growth Nebraska lawmakers advance ‘absolute minimum’ property tax package after months of buildup - Zach Wendling, Nebraska Examiner. "That was a striking contrast from plans Gov. Jim Pillen, the Revenue Committee and others championed this summer. That included the results of a statewide tour that Pillen led to 26 communities, along with organizing a “task force” of select lawmakers."

North Dakota

North Dakota Ballot Initiative Seeks To End Property Tax - Jaqueline McCool, Law360 Tax Authority ($). "Initiative measure four, which qualified Friday for the ballot in North Dakota, would ban the imposition of property tax if passed. Only political subdivisions that have a bonded indebtedness that was incurred before or within 30 days of the measure's approval by voters would be able to levy property tax to pay off the debt, the ballot measure text said."

Utah

Utah Justices Refuse Tax Break For Sports Lab - Sanjay Talwani, Law360 Tax Authority ($). "The justices said they were not persuaded by Sports Medicine's argument that it needed to perform tests for performance-enhancing drugs for professional sports organizations at the market rate in order to sustain its philanthropic mission of testing for government agencies and charitable organizations for free or at significant discounts.

Washington

Washington High Court Rules Against Backers, Opponents of Ballot Measures - Paul Jones, Tax Notes ($):

The Washington State Supreme Court won't order the removal of allegedly biased descriptions of three ballot measures, including one that would repeal the state's capital gains tax.

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In Walsh v. Hobbs, backers of the measures — led by Rep. Jim Walsh (R), chair of the state’s Republican Party — argued that public investment impact disclosures should be removed from the ballot materials for I-2109, a measure to repeal the state’s 7 percent capital gains tax on long-term gains over $250,000; for I-2117, which would repeal the state’s cap-and-trade law; and for I-2124, which would let workers opt out of the state’s employment-tax-funded long-term care program.

West Virginia

State officials certify 4% income tax reduction in West Virginia - Matthew Schaffer, WCHSTV.com. "State Revenue Secretary Larry Pack and State Auditor JB McCuskey signed off on the reduction before filing it with the State Tax Division, according to an announcement from West Virginia Gov. Jim Justice's office."

Wisconsin

Catholic Charities Seeks SCOTUS Review of Wisconsin Exemption Case - Christopher Jardine, Tax Notes ($). "The Catholic Charities Bureau (CCB) is urging the U.S. Supreme Court to review a Wisconsin high court's decision that the charity is not operated primarily for religious purposes and is therefore subject to unemployment insurance taxes."

State Taxes on the Campaign Trail

The Tax Policy Record of Minnesota Gov. Tim Walz - Richard Auxier, TaxVox:

When governors across the country signed tax cuts from 2021 to 2023, most simply used surplus revenue to fund the tax cuts. Minnesota was an exception.

While the legislation Walz signed in 2023 was a net tax cut, it included some offsetting tax increases. Specifically, the bill limited the amount of standard or itemized deductions that filers earning more than $220,000 could claim (with tighter restrictions on those earning more than $1 million), reduced a deduction for dividend income, and created a surtax on capital gain income. The law also conformed state tax law with federal rules on the global intangible low-taxed income tax (GILTI)—a minimum tax intended to prevent multinational corporations from shifting profits overseas—that amounted to a tax hike on corporations operating in Minnesota.

Gov. Tim Walz Raised Taxes as Most Governors Cut Them - Jared Walczak, Tax Policy Blog:

This makes Walz an outlier among contemporary governors, though perhaps not an outlier in his own state, which has a tradition of progressive fiscal policy that runs from the early 20^th-century Progressive era through such progressive stalwarts as Eugene McCarthy, Walter Mondale, and Paul Wellstone.

Under Walz, Minnesota became the only state to impose a surtax on the long-term capital gain income and other net investment income of high earners (all other states tax long-term capital gains at ordinary income tax rates or even preferential rates). Walz also signed legislation partially phasing out the benefit of standard and itemized deductions for high earners, and later had to sign legislation fixing a drafting error that accidentally reduced the standard deduction for all taxpayers in what would have been an unintended $350 million tax increase.

Walz also signed legislation expanding the scope of the corporate income tax to capture more international business income through global intangible low-taxed income (GILTI) taxation, something most states have eschewed, and which New Jersey largely eliminated from its tax base recently. New Jersey, which raised its corporate tax rate, is one of only three other states besides Minnesota (with California and New York) to raise the rate of a major tax since 2021. A further effort to tax international income, which would have seen Minnesota become the only state with worldwide combined reporting, failed in the legislature by a single vote.

Tax Policy Corner

A Good Outcome in South Carolina - David Brunori, Law360 Tax Authority ($):

South Carolina law provided a sales tax exemption for durable medical equipment paid directly by Medicaid or Medicare if the seller's principal place of business was in South Carolina. But out-of-state sellers of the equipment into South Carolina, like the taxpayers in these cases, were not entitled to the exemption.

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Here is what you should know. The South Carolina Legislature passed this law because it wanted to benefit in-state sellers of these products ― and not help their out-of-state competitors. Decades of court decisions explain why such discrimination is unconstitutional. Yet state legislatures still pass discriminatory laws.

Summer Tax History

It's about the hottest time of the year, and it's natural to think of refreshing swimming pools. Tax administrators in Europe are way ahead of you. Tax returns in Greece require you to disclose whether you have a swimming pool - a potential indicator of unreported high income. Compliance was not good:

ATHENS — In the wealthy, northern suburbs of this city, where summer temperatures often hit the high 90s, just 324 residents checked the box on their tax returns admitting that they owned pools.

So tax investigators studied satellite photos of the area — a sprawling collection of expensive villas tucked behind tall gates — and came back with a decidedly different number: 16,974 pools.

Stay cool, dear readers.

State Tax News & Views: Market Sourcing, EV Taxes, Nebraska, Swimming Pools.

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Joe B. Kristan, CPA