December 3, 2021 State and Local Tax Weekly for November 24 Ernst & Young's State and Local Tax Weekly newsletter for November 24 is now available. Prepared by Ernst & Young's State and Local Taxation group, this weekly update summarizes important news, cases, and other developments in U.S. state and local taxation. TOP STORIES North Carolina enacts significant tax law changes affecting businesses and individuals On Nov. 18, 2021, Governor Roy Cooper signed into law the 2021 Appropriations Act (2021—2022 N.C. Sess. Laws, ch. SL 2021-180, 2021 NC Senate Bill 105) (the Bill), which affects various North Carolina taxes. Key provisions of the Bill:
Tax provisions in the Bill generally are effective for tax years beginning on or after Jan. 1, 2022, unless otherwise noted. For an in-depth discussion of these and other changes made by the Bill, see Tax Alert 2021-2174. Tax provisions in House-passed reconciliation bill could have state income tax implications On Nov. 19, 2021, the US House of Representatives approved the Build Back Better Act (H.R. 5376) reconciliation bill (House bill), which includes social spending measures on health, climate, low-income tax credits and many other issues, paid with tax increases on corporations and individuals (see Tax Alert 2021-9027). Certain provisions of the House bill, if enacted, could affect the computation of corporate and individual income taxes imposed by state and local (collectively, state) governments as well. The state income tax implications of the House bill generally would depend on how each state income tax law conforms to the provisions of the IRC affected by the House bill. Notable provisions in the House bill that could impact state income taxes for businesses include:
Many of the proposed changes in the House bill relate to international tax provisions, such as GILTI, FDII and subpart F income. These changes, if enacted, would amplify the complexity of state tax reporting given existing variations among the states in state income tax treatment of these items. In addition, the proposed changes impacting IRC §163 could result in additional limitations on the deductibility of interest expense. Moreover, conformity to such provisions would add increased complexity to the computation of the state income tax base, particularly if these states invoke single-entity principles of a federal consolidated return, which states often do not follow in determining state taxable income. Moreover, states have historically challenged related-party transactions like interest expense deductions, and many already limit these deductions under state specific provisions. State governments may need to enact legislation or provide specific guidance to harmonize these existing addback statutes for interest expense with these new federal limitations, similar to the way many states had to carefully analyze the intersection of the IRC §163(j) interest expense limitations under the Tax Cuts and Jobs Act of 2017 to their own laws. Businesses seeking to maintain or increase the state tax efficiency of their debt should consider the potential impact each state's conformity to these proposed federal limitations would have. Also, while most states do not follow the federal minimum tax regimes, state income tax conformity to the proposed 15% CAMT based on book income could be an issue in the handful of states that have enacted a corporate AMT that relies on IRC §55. For example, California's corporate AMT directly ties to IRC §55, where the proposed CAMT would reside. Further analysis, however, would show that California currently conforms to the IRC as of Jan. 1, 2015, meaning that state legislative action would be necessary in order for the state to conform to the CAMT. For more on this development, see Tax Alert 2021-2130. INCOME/FRANCHISE District of Columbia: New law (B24-285) increases individual income tax rates for high wage earners and expands the number of individual income tax brackets from five to seven. The current rates range from 4% (imposed on income not over $10,000) up to 8.95% imposed on income over $1 million. The tax rates remain the same for those making $250,000 or less. The increased rates apply to tax years beginning after Dec. 31, 2021 and are imposed as follows: (1) 9.25% on income over $250,000 but not over $500,000; (2) 9.75% on income over $500,000 but not over $1 million; and (3) 10.75% on income over $1 million. D.C. Laws 2021, L24-0045 (B24-285), became law Nov. 13, 2021. These provisions were previously enacted under emergency law (2021 DC emergency B24-373) that expired on Nov. 21, 2021. Illinois: On Nov. 16, 2021, Illinois Governor Pritzker signed 2021 IL House Bill 1769, the Reimagining Electric Vehicles in Illinois Act (Public Act 102-0669) (the "Act"), a provision of which changes the state's net loss deduction (NLD) carryover period. Previously, for tax years ending on or after Dec. 31, 2003, Illinois allowed an NLD carryover for 12 years following the tax year in which a loss was generated. The Act extends the carryover period from 12 years to 20 years for tax years ending on or after Dec. 31, 2021. The 20-year carryover period also applies to any net loss generated before Dec. 31, 2021, if the statutory carryover period has not expired. This includes those losses that still may be available due to the NLD limitation for tax years 2011 through 2013 imposed by Illinois statute. Modifying the carryover period from 12 to 20 years does not otherwise impact upcoming limitations on NLD carryover usage. The NLD limitation of $100,000 applies to corporations (excluding S corporations) for tax years ending on or after Dec. 31, 2021, and before Dec. 31, 2024 (see Tax Alert 2021-1154). For more on this development, see Tax Alert 2021-2119. Louisiana: On Nov. 13, 2021, voters approved Constitutional Amendment CA NO. 2 (2021 La. Act 134; 2021 LA SB 159) (LA SB 159), which amends Art. VII of the Louisiana Constitution, enactment of which allows Louisiana income tax rate reductions and other tax law changes to take effect. LA SB 159 provides that the maximum individual income tax rate cannot exceed 4.75% for tax years beginning after Dec. 31, 2021. Further, LA SB 159 provides that the deduction for federal income tax paid may be allowed by the legislature (under prior law, the deduction was allowed). Due to voter approval of LA SB 159, provisions of 2021 LA HB 292, 2021 LA SB 161 and 2021 LA HB 278 also take effect. Provisions of LA HB 292 eliminate the state deduction for federal income tax paid for corporations and reduce the corporate income tax rate. Applicable to tax periods beginning on or after Jan. 1, 2022, the number of corporate income tax brackets, of which there are currently four (with income tax rates ranging from 4% on the first $25,000 of net income to 8% on net income over $200,000), will be reduced to three brackets as follows:
The tax rates applicable to S corporations that elect to be taxed at the corporate level are reduced as follows:
Provisions of LA SB 161 modify Louisiana's franchise tax. Effective for tax periods beginning on or after Jan. 1, 2023, the first tier of the franchise tax will be eliminated and the rate of the franchise tax will be reduced to $2.75 for each $1,000, or major fraction thereof, in excess of $300,000 of taxable capital (from $3.00 for each $1,000, or major fraction thereof, in excess of $300,000 of taxable capital). Starting in 2024 the rate will be further reduced if certain conditions are met. Effective Jan. 1, 2022, provisions of LA HB 278 reduce individual and fiduciary income tax rates, repeal the deductibility of federal income tax paid for purposes of calculating individual and fiduciary income taxes and provide for future rate reductions if certain conditions are met, among other changes. Massachusetts: The Massachusetts Department of Revenue (MA DOR) posted answers to frequently asked questions (FAQs) about the commonwealth's newly enacted elective pass-through entity (PTE) excise. In one instance, the MA DOR stated that the election to pay the PTE excise is made annually, and once made it is irrevocable for that year. Topics addressed by the FAQs include the following: (1) entities eligible to make an election to pay the PTE excise; (2) who can be a qualified member of an eligible PTE; (3) the process for making the election to pay the PTE excise; (4) calculating taxable income and the PTE excise; (5) reporting, filing and payment requirements (including estimated payments) and due dates; (6) partners, shareholders and owners eligible to receive the PTE credit and when they can claim the credit; and (7) using capital losses to offset other items of income in calculating the PTE excise. The MA DOR noted that PTEs will be able to make estimated tax payments of the PTE excise through MassTaxConnect before the end of 2021. Mass. Dept. of Rev., Elective PTE Excise webpage (page last updated Nov. 19, 2021). SALES & USE California: In reversing a lower court's ruling in First American Title Ins. Co., a California Court of Appeal (court) found that imposing a sales tax on in-state lessors of business equipment to a title insurer does not violate Cal. Const., art. XIII, §28(f), which prohibits the imposition of certain business taxes on insurance companies that pay gross premiums tax, including sales and use tax in certain circumstances. The court reasoned that Cal. Const. art. XIII, §28(f) "does not prohibit a sales tax whose legal incidence is on a lessor, even though the economic burden of the tax is ultimately borne by the title insurer/lessee." The title insurer argued that Cal. Code Regs., tit. 18, § 1660 (Reg. 1660) imposes a de facto use tax on it in violation of the provisions of Cal. Const. art. XIII, §28(f). The court, however, rejected this argument, concluding that Reg. 1660 is not unconstitutional as it does not impose a constitutionally prohibited use tax on title insurers. Citing Occidental Life,1 the court explained that "the legal incidence of sales tax imposed under Regulation 1660(c)(1) is on the seller (or here, the lessor)." The title insurer is not the taxpayer because the lessor passed the economic burden of sales tax to it. The court also rejected the title insurer's argument that even if Reg. 1660 is constitutional, it is void because it conflicts with Cal. Rev. and Tax Code §6203, which prohibits the state from switching the tax on leases of tangible personal property from a use tax to a sales tax. First American Title Ins. Co. v. Cal. Dept. of Tax and Fee Admin., Case No. Do77970 (Cal. App. Ct., Div. One, Nov. 12, 2021). Louisiana: On Nov. 13, 2021, Louisiana voters rejected a proposed amendment to Section 3.1 of Art. VII of the Louisiana Constitution which, if approved, would have created the Louisiana State and Local Streamlined Sales and Use Tax Commission (Commission). The Commission would have had the authority to "[p]rovide for the streamlined electronic filing, electronic remittance, and the collection of sales and use taxes levied within the state ensuring prompt remittance of the respective tax returns and monies received electronically by the commission to the single collector for each taxing authority and to the [Louisiana] Department of Revenue for distribution." Texas: In response to a ruling request, the Texas Comptroller of Public Accounts (Comptroller) said an enrollment marketing service provider's sales of prospective student lead generating services to higher education institutions are taxable information services. The service provider uses student information it gathers to match prospective student's data with an educational program and provides that information to clients paying for these leads. The service provider cannot sell the student information to clients in a manner that makes it proprietary to the client; rather, the prospective students retain the right to control their personal information. Further, the fact that the service provider can sell the same information on a prospective student to multiple clients at the same time "does not grant a particular client an enforceable property right to a particular prospective student's information." Because the service provider is selling gathered information that is not of a proprietary nature, it is selling taxable information services. The Comptroller noted that the service provider's clients may qualify for an exemption; thus, the service provider should obtain properly completed exemption certificates from clients claiming the exemption. Tex. Comp. of Pub. Accts., Star No. 202109061L (Sept. 30, 2021). BUSINESS INCENTIVES Federal: On Nov. 16, 2021, the House Ways & Means Oversight Subcommittee conducted a hearing entitled "The Opportunity Zone Program and Who It Left Behind" that focused on potential improvements to the program, including obtaining more accurate data, adding a refundable tax credit element to the program and establishing new qualification parameters. Reforming the program could be a subject of bipartisan cooperation among the members of the Subcommittee, based on member comments. Subcommittee Chairman Bill Pascrell said several times that no one is proposing an end to the program, and some Republican members said they wanted to work with the chairman to increase its effectiveness. For more information on this development, see Tax Alert 2021-2098. Federal: On Nov. 19, 2021, the House passed the Build Back Better Act (H.R. 5376) reconciliation bill (the bill). The bill's provisions on housing and energy credits differ from those in the House Ways & Means Committee proposal (HW&M proposal) released on Sept. 10, 2021 (Tax Alert 2021-1677). The bill includes the following credits for housing and energy, which would extend and expand many current programs. Effective for tax years beginning in 2022, the bill would make the new markets tax credit (NMTC) permanent and create a new, permanent, annual $175 million NMTC allocation for low-income communities in tribal areas. The bill would increase the 9% housing credit and the small state minimum, and it would temporarily reduce the tax-exempt bond financing requirement from 50% to 25% through 2026. The bill would extend the production tax credit (PTC) for wind, landfill gas (municipal solid waste), trash (municipal solid waste), qualified hydropower, marine and hydrokinetic renewable energy facilities and geothermal facilities through the end of 2026 (the HW&M proposal would have extended the credit through 2031 and phased it down after that). For solar facilities, the PTC would be revived and extended through 2026. The base and bonus credit system from the HW&M proposal remains unchanged. The investment tax credit (ITC) for solar, geothermal energy property, fiber optic solar equipment, fuel cell property, microturbine property, small wind energy property and biogas property, would be extended through 2026. The ITC for geothermal heat pumps, combined heat and power property and waste energy recovery property would be extended through 2031. The bill also would (1) extend the credit for carbon oxide sequestration facilities that begin construction before the end of 2031; (2) extend the nonbusiness energy property credit to property placed in service before the end of 2031; (3) provide for a tax credit equal to either 6% (base) or 30% (base and bonus) of the basis of qualifying electric transmission property placed in service by the taxpayer; (4) allow taxpayers to claim a 30% credit for making qualified investments in their zero emissions facility; (5) revive the IRC § 48C qualified advanced energy property credit, allowing the US Department of Treasury to allocate an additional $25 billion in credits over the next 10 years; and (6) provide a credit for the production of electricity from a qualified nuclear power facility; among other changes. For additional information on this development, see Tax Alert 2021-2139. Illinois: On Nov. 16, 2021, Illinois Governor Pritzker signed 2021 IL House Bill 1769, the Reimagining Electric Vehicles in Illinois Act (Public Act 102-0669) (the "Act") provisions of which creates new Illinois income tax credits for electric vehicle manufacturers, electric vehicle component suppliers and electric vehicle power unit suppliers (qualifying taxpayers) that make certain investments in assets and workforce in Illinois. For more on this development, see Tax Alert 2021-2119. PAYROLL & EMPLOYMENT TAX Kansas: Effective for tax year 2022, provisions of recently enacted Kansas legislation (2021 KS HB 2196, 2021 Kan. Sess. Laws ch. 92) replaces the previous employer state unemployment insurance (SUI) tax rate schedules with 13 new rate schedules geared toward restoring and maintaining unemployment insurance (UI) trust fund solvency. The law also requires the state to deposit $250 million in federal COVID-19 relief funds into the UI trust fund by July 15, 2021 and June 15, 2022 to lessen the impact of COVID-19 UI benefits on future SUI tax rates. The law stipulates that failure to make these required federal transfers will result in a SUI tax rate schedule of new Standard Rate Schedule 7, with SUI tax rates ranging from 0.2% to 7.6% with no applicable solvency credit or adjustment. For more on this development, see Tax Alert 2021-2133. MISCELLANEOUS TAX Pennsylvania: Concert tickets a casino distributed to patrons for playing table games and slot machines at its facility constitute personal property and are not services under Section 1103 of the Gaming Act. Thus, the casino is entitled to exclude the value of the concert tickets distributed to the players of those games in calculating its taxable revenue attributable to its table game and slot machines. In so holding, the Pennsylvania Supreme Court (Court) concluded that the concert tickets at issue fit within the definition of personal property, noting that they can be moved freely or transferred by their owner and after the concert the tickets have value as memorabilia. The Court further found that the concert tickets "do not, in and of themselves, constitute service, as they do not perform any duties or work for their holder." The Court reasoned that the entertainer does not work for the ticket holder, but rather, the "ticket confers on the holder merely the right of admittance to view [the entertainer's] artistic performance, and nothing more." Greenwood Gaming & Entertainment, Inc. & Pennsylvania, No. 19 MAP 2020 (Pa. S.Ct. Nov. 17, 2021). GLOBAL TRADE International — Costa Rica: Costa Rica's General Customs Directorate issued "Guidelines for the Procedures Carried out by Free Zone Companies for the Category of Logistics Services" for public comment. The guidelines establish adjustments that may be made to processes and operations of companies in free trade zones offering logistics services for the transit, temporary storage, mobilization and exit of goods. For additional information on this development, see Tax Alert 2021-2062. VALUE ADDED TAX International — Tanzania: Tanzania's Minister for Finance and Planning issued Regulations on the Value Added Tax (VAT) (Exemption Management Procedures) by Government Notice No. 715 which was published on Oct. 8, 2021. The stated procedures under the Regulations apply to VAT exemptions granted under Section 6(2) of the VAT Act, 2014. That section of the law provides the Commissioner General (CG) of the Tanzania Revenue Authority (TRA) the power to grant VAT exemptions on importation by or a supply of goods or services to various taxable persons including a Non-Governmental Organization (NGO) or to an entity executing a strategic project under an agreement with the Government which provides for VAT exemption on goods and services. The stated regulations have revoked the Value Added Tax (Exemption Monitoring Procedures) Regulations, 2018. For more on this development, see Tax Alert 2021-2099. UPCOMING WEBCASTS Tuesday, Dec. 7, 2021. Webcast: 2021 employment tax year in review (3:30 pm EST). In meeting their 2021 year-end employment reporting requirements, employers will need to address the unique challenges created by temporary federal and state COVID-19 provisions while also following other necessary procedures for closing the tax year. In this information-packed webcast, EY's employment tax and benefits professionals will discuss the following common areas of year-end employment tax concern: (1) 2022 federal and state rates and limits; (2) temporary COVID-19 federal employment tax provisions, including the scope and limitations of the federal employee retention tax credit; (3) taxation of domestic partner and paid family and medical leave insurance benefits; (4) IRS Forms W-2/1099-NEC reporting changes; (5) state developments including teleworker income tax relief; (6) state unemployment insurance and the federal unemployment insurance credit reduction; (7) year-end reconciliation and required employee notices; and (8) preparing the year-end payroll checklist. Register. Monday, Dec. 13, 2021. Implications of the Superfund chemicals excise tax (2:00 pm EST). Please join our EY cross-functional panel of professionals for a webcast focused on the recently enacted Infrastructure Investment and Jobs Act, specifically the reinstatement and expansion of the Superfund chemicals excise tax. During the webcast, the panel will discuss the impact of the reinstatement and expansion of this excise tax to sectors that import or manufacture chemicals or chemical compounds subject to the tax and some of the nuances of the new law as enacted that will prove challenging in identifying them. The panelists will also share insights into what businesses will need to consider as they evaluate the readiness of their existing systems and processes to comply with the reinstated tax requirements. Topics will include affected chemicals, sector implications, tracking and compliance requirements and leading practices to evaluate the adequacy of existing systems and processes to the reinstated tax laws. Register. Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor. ——————————————— 1 Occidental Life Ins. Co. v. State Bd. of Equalization (1982) 135 Cal.App.3d 845, 847. | ||||
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