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February 14, 2022

State and Local Tax Weekly for February 4

Ernst & Young's State and Local Tax Weekly newsletter for February 4 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.


North Carolina violated US Constitution by basing deductibility of debt owed by affiliated corporations on whether affiliates are subject to state franchise tax

In Philip Morris USA, Inc.,1 the North Carolina Office of Administrative Hearings (NC OAH) determined that the North Carolina Department of Revenue (NC DOR) violated the US Constitution's commerce clause to the extent it denied a franchise tax deduction for debt owed to an out-of-state corporation by affiliated corporations not doing business in North Carolina but allowed the deduction for debt owed by affiliates that conducted business in the state.

The taxpayer, Philip Morris USA, Inc. (Philip Morris), is a Virginia corporation and was authorized to do business in North Carolina for the franchise tax years 2012 through 2014 (tax periods at issue). During these years, Philip Morris borrowed and lent money to related members of its affiliated group. Some of these affiliates did not conduct business in North Carolina and were therefore not subject to North Carolina's franchise tax.

For the tax years at issue, North Carolina's franchise tax was calculated as a percentage of the greater of (1) the corporation's North Carolina apportioned capital stock, surplus and undivided profits (capital stock base); (2) 55% of the appraised value of the corporation's real and tangible personal property located in North Carolina; or (3) the corporation's total investment in tangible property in North Carolina.2

Philip Morris calculated its franchise tax for each of the tax periods at issue using the capital stock base and adjusted its net worth by factoring in the debt owed to its affiliates.3 It also adjusted its capital stock base by deducting the debt owed by all its affiliates (affiliate receivables) (to the extent that the affiliate receivables were not included in the capital stock base in the first adjustment). Citing N.C. Gen. Stat. §105-122,4 the NC DOR disallowed Phillip Morris's deduction of affiliate receivables for affiliates not doing business in North Carolina because North Carolina's franchise tax does not apply to them.

The NC OAH focused on whether denying the deduction of affiliate receivables only for affiliates not doing business in North Carolina violated the US Constitution's Commerce Clause by unconstitutionally discriminating against interstate commerce. The NC OAH observed that state law permits a North Carolina Corporate Franchise taxpayer to reduce its franchise tax liability by deducting debt owed to it by affiliates doing business in North Carolina; in contrast, a North Carolina Corporate Franchise taxpayer making loans to affiliates that are not North Carolina franchise taxpayers in the state could not deduct those receivables. This limitation, the NC OAH found, violates the Commerce Clause because it discriminates against, and imposes an unconstitutional burden on, interstate commerce. Therefore, denying the deduction of affiliate receivables for affiliates not doing business in North Carolina is unconstitutional.

For more on this development, see Tax Alert 2022-0257.


Idaho: New law (2022 ID HB 436), retroactively effective to Jan. 1, 2022, reduces the state's highest income tax rate for corporations and individuals to 6% (from 6.5%). The law also reduces the number of individual income tax brackets to four (down from five) and makes adjustments to the rates and thresholds for the lower brackets. Additionally, the law provides a nontaxable rebate to any full-year resident Idaho individual taxpayer equal to the greater of 12% of the tax amount reported on the taxpayer's 2020 Idaho Form 40 or $75 per taxpayer and each dependent. The rebates will be issued during the 2022 fiscal year. Idaho Laws 2022, Sess. Law ch. 1 (HB 436), signed by the governor on Feb. 4, 2022.

Indiana: The Indiana Department of Revenue (IN DOR) updated its guidance on the application of state and county income taxes to residents with out-of-state income and nonresidents with Indiana source income to provide that certain pass-through entity (PTE) taxes are not eligible for a credit for taxes paid to another state. The IN DOR explained that at both the state and local level the credit for taxes paid to other states under Indiana's tax statutes is only available for taxes for which the individual taxpayer is personally liable. Thus, taxes paid to other taxing jurisdictions at the entity level, including PTE taxes enacted by many states as a workaround to the limitation on the federal state and local tax deduction, are not eligible for the Indiana credit for taxes paid to other states. The IN DOR said that "disallowance applies even if the taxpayer would be subject to out-of-state income taxes (including local income taxes) except for a credit against the taxpayer's tax for entity-level taxes." The IN DOR noted that the payment of a composite tax at the entity level that is an obligation of an individual taxpayer is similar to that imposed by Indiana's tax law and is eligible for the credit. Ind. Dept. of Rev., Income Tax Info. Bulletin #28 (Feb. 2022) (replaces Info. Bulletin #28 dated Nov. 2016).

Massachusetts: The Massachusetts Department of Revenue (MA DOR) issued guidance on the application of the Massachusetts Court of Appeals (Court) ruling in Bay State Gas5 that a corporation and its affiliates could deduct from their combined Massachusetts corporate excise return the utility receipts tax (URT) paid to Indiana because the URT is not a "franchise tax for the privilege of doing business" within the meaning of the commonwealth's deduction disallowance statute (Mass. G.L. c. 63, §30(4)(iii)). The MA DOR said that under this ruling, an analysis of individual tax statutes remains necessary to determine whether a tax deduction is allowed. Moreover, the criteria regarding deductibility in Directive 99-9 (describing the MA DOR's position on which types of taxes imposed by other states are and are not deductible under that statute) and Directive 08-7 (focusing on gross receipts-based taxes for purposes of the deductibility statute) continue to apply. The MA DOR concluded that "[p]ursuant to those Directives it remains the case that taxes imposed on a business as a whole, measured by gross receipts, for the privilege of doing business are not deductible under [Mass.] G.L. c. 63, § 30(4)(iii)." Mass. Dept. of Rev., TIR 22-4: Bay State Gas Company & Affiliates v. Commissioner of Revenue — Deductibility of Indiana Utilities Receipts Tax (Feb. 4, 2022).


Maine: The Maine Revenue Services (MRS) issued guidance on the obligation for out-of-state sellers and others to register with the MRS as a retailer. Mandatory registration is required for (1) sellers and lessors with a presence in Maine (e.g., having a place of business in the state, making or soliciting retail sales within Maine, leasing tangible personal property in Maine); (2) sellers and lessors and others having a substantial physical presence in Maine (e.g., seller's purposeful use in Maine of personal property to conduct business, in-state activity of a seller's employee or contractor, a seller's ownership of, or leasehold interest in, real property located in the state, those with a substantial physical presence acting in the state on behalf of an out-of-state seller); and (3) remote sellers and marketplace facilitators meeting the $100,000 gross sales threshold. In the guidance, the MRS describes limited exclusions from the obligation to register as a retailer, and voluntary registration provisions. Maine Rev. Serv., Sales, Fuel & Special Tax Division Instructional Bulletin No. 43 "Registration of Out-of-State Sellers and Other Persons" (Feb. 2, 2022).

Washington: Dollar rewards6 that a school hosting a company's book fair can earn and only use to purchase the company's merchandise represents both compensation and a bona fide discount towards the purchase of the company's products. In so holding, the Washington Board of Tax Appeals found that the dollar rewards at issue are analogous to the situation in its Determination No. 14-0159,7 in which the Appeals Division of the Washington Department of Revenue (WA DOR) "found the difference between what the customer paid for a discount voucher and the face value of the voucher was a bona fide discount." In this case, the difference between the cash value of the services and the dollar rewards value is the discount the schools receive when they make their purchase — i.e., the dollar reward represents $0.50 in consideration and a $0.50 bona fide discount. Under Washington law, bona fide discounts are not included in the sales price subject to sales tax and discounts are not included in the amount subject to business and occupation tax. Accordingly, the company is entitled to a refund, to be calculated by the WA DOR on remand. Scholastic Book Fairs, Inc. v. Washington Dept. of Rev., Dkt. No. 18-132 (Wash. Bd. Tax App. Dec. 7, 2021).

Wisconsin: The Wisconsin Department of Revenue (WI DOR) updated its fact sheet explaining the sales and use tax exemption for fuel and electricity consumed in manufacturing. The WI DOR said the following two exemptions for fuel and electricity apply specifically to manufacturing: (1) Wis. Stats. §77.54(30)(a)6 — exemption for fuel and electricity consumed in manufacturing tangible personal property; and (2) Wis. Stats. §77.54(2m) — fuel and electricity consumed, destroyed or losing its identity in the manufacture of shopper's guides, newspapers or periodicals. The fact sheet describes manufacturing and fuel and electricity consumed (or not consumed) in manufacturing; explains how to claim the exemption; lists factors to consider when determining the exemption percentages; describes recommended methods to use when determining the exemption percentages; and explains what to expect when an exemption claim is audited. Wis. Dept. of Rev., Fact Sheet 2111 "Sales and Use Tax Exemption for Fuel and Electricity Consumed in Manufacturing" (updated Jan. 31, 2022).


Wisconsin: A commercial printing company was not allowed to include income in the form of Depreciation Recapture and 4797 Gain from the sale of certain printing equipment in the calculation of its 2014 manufacturing credit because the company purchased the equipment. In so holding, the Wisconsin Tax Appeals Commission explained that to be included in "production gross receipts," the gross receipts from the lease, rental, license, sale, exchange or other disposition of "qualified production property" must be from property manufactured in whole or in part by the company.8 Because the company purchased the printing equipment and did not manufacture it, the income from the sale of the equipment was not from the disposition of "qualified production property" and, as such, it is not includable in "production gross receipts." Consequently, the income does not flow into the qualified production activities income for purposes of calculating the manufacturing credit. The Graphic Edge v. Wisconsin Dept. of Rev., Dkt. No. 19-I-220 (Wis. Tax App. Comm. Dec. 20, 2021).


Minnesota: The Minnesota Supreme Court (Minn. S.Ct.) found the tax court did not err in finding that medical clinics owned and operated by the Perham Hospital District are properly classified as exempt from property tax under Minn. Stat. §447.31, subd. 6, because the clinics were used by the Hospital District to improve and run its hospitals. In so holding, the Minn. S.Ct. found sufficient evidence in the record to support the tax court's findings and conclusions. Such evidence includes that the clinics: (1) helped attract physicians and patients, (2) improved the hospitals' overall operations and service delivery, (3) increased patient follow-up and (4) provided physical space for use by other hospital departments. Perham Hospital District v. County of Otter Tail, No. A21-0619 (Minn. S. Ct. Jan. 24, 2022).


Georgia: The Georgia Department of Labor (GA DOL) has announced that effective Jan. 2, 2022, employers with 25 or more employees are required to file their quarterly state unemployment insurance (SUI) returns and tax payments electronically. Previously, the electronic reporting requirement applied to employers with more than 100 employees. The 2022 SUI taxable wage base is $9,500, unchanged from 2021. In response to an email request, the GA DOL said that the Georgia 2022 SUI tax rates continue to range from 0.04% to 8.1%, and that new employers continue to pay at 2.64%. For more information on this development, see Tax Alert 2022-0199.

North Dakota: The North Dakota Department of Revenue announced that due to legislation enacted in 2021, the following changes apply to the electronic withholding tax payment and filing instructions for wages starting in 2022: (1) electronic filing and tax payments are required if the total amount of withholding in the previous year was $1,000 or more; (2) electronic filing of all information returns (Forms W-2, 1099, and 1042S) and annual returns (Forms 307 and Forms RWT-941) is required for forms due on after Jan. 1, 2023; and (3) the threshold for the annual filing status increases from $500 to $1,000. For more on this development, see Tax Alert 2022-0194.


Iowa: The Iowa Department of Revenue (IA DOR) issued guidance on the state's new composite return requirements that took effect starting in tax year 2022. Law enacted in 2021 (2021 Iowa Acts, SF 608) modified the state's composite return rules. Starting in 2022, a pass-through entity (PTE) with nonresident members is required to file an Iowa composite return and pay Iowa income or franchise tax on behalf of nonresident members on their Iowa-source income from the PTE. The composite return tax is computed by multiplying each nonresident member's Iowa-source income from the PTE by the applicable top Iowa tax rate. The composite return is due by the due date of the PTE's Iowa income return, not including extensions. A PTE can, but is not required to, make quarterly estimated composite tax payments. Further, starting in 2022, PTEs are no longer required to additionally withhold and remit Iowa income tax on a nonresident member's Iowa-source income from the PTE because such income is subject to the composite return requirement. A PTE, however, may still be required to withhold and remit income tax on income paid to a nonresident who is not a member of the PTE. In the guidance, the IA DOR describes PTEs and nonresident members for purposes of the composite return requirement, explains who is exempt from the composite return requirement and how a nonresident member may elect out of the composite return requirement. The IA DOR further explained that a nonresident member will receive a refundable credit for tax paid on its behalf by a PTE on the composite return; and that a nonresident member included in a composite return is not required to file an Iowa income tax return if the member's only Iowa-source income is derived from the PTE. Iowa Dept. of Rev., "Iowa Composite Returns for Tax Year 2022 and Later" (Feb. 4, 2022).


Wednesday, Feb. 23, 2022. Domestic tax quarterly webcast series: a focus on state tax matters. (1:00-2:30 p.m. EST; 10:00-11:30 a.m. PST). For our first quarterly webcast in 2022, we welcome Joe Crosby, CEO of MultiState, a full-service state and local government relations company, who will join us to discuss important state and local tax policy considerations that are emerging in 2022. Topics will include: state and local tax legislative proposals and trends, the upcoming federal midterm and state elections, the continuing impact of the COVID-19 pandemic on state and local tax revenues, and the effects of current economic trends and federal tax developments on state and local taxes and policy developments. EY state and local tax professionals from around the country will join in these discussions, bringing unique insights from each region. They'll also highlight key state and local judicial, legislative and administrative developments from the past quarter and hot audit issues taxpayers and their advisors should consider as they prepare for a busy tax season. To register for this event, go to State tax matters.

Wednesday, March 2, 2022. The indirect tax technology journey. (1:00-2:00 p.m. EST; 10:00-11:00 a.m. PST). Join our EY team of tax technology professionals for the fourth in a series of webcasts focused on the evolving technology landscape. During these 60-minute webcasts, we share insights into how market-leading organizations are using technology to adapt to new legislation and market trends, and to effectively transform tax operations. Because technology is a vital component for every business looking to build a resilient, future-ready tax function, these webcasts will be relevant across all sectors and to businesses of every size. This fourth webcast in the series will focus on: leading practices for developing and implementing a tax technology road map, the role of Tax in large global transformations, leading practices for selecting the right technology, and successful implementation and maintenance of indirect tax technology. To register for this event, go to Indirect tax technology.

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 Philip Morris USA, Inc. v. NC Dept. of Rev., No. 20 REV 04215 (N.C. Off. Admin. Hearings Dec. 30, 2021).

2 N.C. Gen. Stat. § 105-120(b). The 2021 Appropriations Act (2021—2022 N.C. Sess. Laws, ch. SL 2021-180, SB 105) simplifies the franchise tax calculation. Effective for a corporation's franchise tax calculated on its 2022 income tax returns filed in 2023, the franchise tax is calculated using only a corporation's North Carolina apportioned net worth.

3 See N.C. Gen. Stat. § 105-122 for capital stock adjustments.

4 Id.

5 Bay State Gas Co. & Affiliates v. Mass. Comr. of Rev., No. 19-P-114 (Mass. App. Ct. Oct. 7, 2020).

6 Schools hosting the book fair for the company can either retain 25% of the book fair sales in cash or it can select dollar rewards, which equal 50% of the total book fair sales but can only be used to purchase the company's merchandise.

7 I/M/O Pet. for Correction of Assessment of [ ], Det. No. 14-0159, 34 WTD 257 (Wash. Dept. of Rev., Tax App. Div. May 29, 2015) (available on the internet at

8 See, Wis. Stat. §§71.28(5n)(a)6 and (5n)(a)9.a.