March 17, 2022
State and Local Tax Weekly for March 11
Ernst & Young's State and Local Tax Weekly newsletter for March 11 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.
New Mexico governor signs various tax bills into law, reduces the state's gross receipts tax rate; establishes an elective pass-through entity tax
On March 8, 2022, New Mexico Governor Michelle Lujan Grisham signed a suite of tax bills that reduces the state's gross receipts tax rate, establishes an elective pass-through entity tax, extends selected credits and provides for certain gross receipts tax deductions and individual tax credits.
2022 NM HB 163 (N.M. Laws 2022, ch. 47) (2022 NM HB 163), effective July 1, 2022, reduces the state's gross receipts tax and compensating tax rates from 5.125% to 5.00% and further reduces the rates to 4.875% beginning July 1, 2023. If, however, for any single fiscal year occurring after FY 2025 and before FY 2030, the gross receipts tax revenue is less than 95% of the tax revenues for the prior fiscal year, the gross receipts tax rate will increase to 5.125% on the July 1st of the year following the rate determination made by the New Mexico Secretary of Finance and Administration. If the gross receipts tax rate is increased, the state's compensating tax rate will also increase to 5.125%.
Effective July 1, 2022, 2022 NM HB 163 allows receipts from selling professional services to be deducted from gross receipts or governmental gross receipts if the sale is made to a manufacturing business. For purposes of this provision, "professional services" means accounting, legal, information technology, engineering or architectural services.
2022 NM HB 163 extends for tax years before Jan. 1, 2032 (from 2028), the solar market development income tax credit, which can be claimed by an individual who purchases and installs a solar thermal system or photovoltaic system in a residence, business or agricultural enterprise in New Mexico. The credit equals 10% of the purchase and installation costs of the system but is capped at $6,000 per taxpayer per year. 2022 NM HB 163 allows the credit to be sold, exchanged or otherwise transferred to another taxpayer for the credit's full value and provides that any excess credit will be refunded. (Under prior law, any excess credit could only be carried forward for five years.)
2022 NM HB 163 reduces the period for which the 2021 sustainable building tax credit is available from tax years prior to Jan. 1, 2030 to Jan 1, 2028.
For individual income tax purposes, 2022 NM HB 163 provides (1) an income tax rebate for resident individuals (eligible taxpayers will begin receiving rebates in July 2022); (2) a one-time tax credit for nurses working full time at a New Mexico hospital (for tax year 2022); (3) a child income tax credit for tax years beginning on Jan. 1, 2023 and before Jan. 1, 2032; (4) an income tax exemption for a portion of military retirement pay; and (5) an income tax exemption for a portion of social security income.
Another act signed by the Governor (2022 NM HB 102 (N.M. Laws 2022, ch. 46)), establishes an elective entity level tax on a pass-through entity (PTE) (including partnerships, S corporation and LLCs treated as either) (PTE tax). The election to be subject to the PTE tax will be made annually and is made by filing a complete PTE tax return with the New Mexico Department of Taxation and Revenue by the original or extended due date of the PTE's federal partnership or S corporate return for the tax year. Payment of the PTE tax is due when (or before) the return is filed. The PTE tax is imposed on the distributed net income of the PTE for the tax year; the tax rate equals the higher of the maximum income tax rates imposed on individuals (NMSA §7-2-7) or corporations (NMSA §7-2A-5). A PTE's distributed net income equals the amount of net income it allocated and apportioned to New Mexico less allocations of net income from that amount to: (1) US, New Mexico or a political subdivision of either; (2) a federally recognized Indian nation, tribe or pueblo located wholly or partially in New Mexico; (3) a tax exempt organization under IRC §501(c)(3); or (4) a corporate partner that would properly include income in the partner's New Mexico unitary business return. PTEs making the election to be taxed at the entity level must make estimated tax payments. A PTE can request a refund of overpaid estimated tax. Net income subject to the PTE tax is exempt from the corporate and individual income taxes of the respective PTE owners. These provisions apply to tax years beginning on or after Jan. 1, 2022.
2022 NM HB 67 (N.M Laws 2022, ch. 45) extends the Tech Readiness Gross Receipts Tax Credit through June 30, 2027 (from 2023). This change takes effect July 1, 2022.
SB 138 (N.M. Laws 2022, ch. 43) allows a health care practitioner or an association of health care practitioners to deduct from gross receipts the receipts from a Medicare administrative contractor for medical and other health services provided by such practitioner to Medicare beneficiaries. In addition, hospice or nursing homes are allowed to deduct from gross receipts the receipts from payments made by the US government (or agency thereof) or from a Medicare administrative contractor for medical and other health and palliative service provided by the hospice or nursing home to Medicare beneficiaries. Similar deductions for receipts from payment of a Medicare administrative contractor are deductible from gross receipts for other medical and health care services, including a clinical laboratory, a home health agency and a dialysis facility.
2022 NM HB 82 (N.M. Laws 2022, ch. 49) extends the gross receipts tax deduction for a dialysis facility through June 30, 2032 (from 2024) and amends the definition of "dialysis facility". These provisions take effect July 1, 2022.
Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) said that Pennsylvania statutory law does not contain a provision allowing a deduction for federal wage expenses disallowed as a result of claiming the federal employee retention credit (ERC). Thus, for Pennsylvania corporate net income tax purposes no adjustment is allowed when calculating Pennsylvania taxable income, which begins with federal taxable income. For Pennsylvania personal income tax (PA PIT) purposes, any reduction to the wage expense for federal income tax purposes (1) are deductible if the reduction is a result of a credit against an employee's withheld taxes (generally the "refundable portion of the credit), but (2) are not deductible if the reduction is a result of a credit against the employer's FICA liability (generally the "non-refundable" portion of the credit). The PA DOR included an illustrative example of how such expenses are treated for PA PIT purposes. Pa. Dept. of Rev., Covid-19 Information "Employee Retention Credit" (webpage last update March 8, 2022).
Utah: The Utah Supreme Court (Utah S.Ct.) reversed the Utah State Tax Commission (UT Tax Commission) and found that a couple who relocated to Florida for work but kept their home in Utah for which they claimed a residential property exemption, were able to overcome the rebuttable presumption of having a Utah domicile and presented facts demonstrating that they were actually domiciled in Florida for the tax year at issue. In so holding, the Utah S.Ct. rejected the UT Tax Commission's interpretation of the Utah Individual Income Tax Act (UT IITA), specifically the rebuttable presumption of domicile under Utah Code §59-10-136(2)(a), that taxpayers are precluded from being able to overcome a presumption of domicile when they claim a residential property exemption on their Utah residence. The Utah S.Ct. found that under the UT Tax Commission's unreasonable interpretation "only evidence relevant to rebutting … the presumption is evidence that goes to the application of the residential property tax exemption itself." Instead, the Utah S.Ct. agreed with the taxpayers' interpretation that if a presumption of domicile was triggered by claiming the residential property exemption, an individual could rebut this presumption. Turning to the facts of the case, the Utah S.Ct. determined that they "overwhelmingly support" a finding that they were domiciled in Florida in 2012. Such facts include a job based in Florida, the couple's children were enrolled in school in Florida, they belong to a Florida church and joined a local YMCA and gym, volunteered locally, obtained Florida driver's licenses and registered vehicles in the state, and received mail in the state. Buck v. Utah State Tax Commission, 2022 UT 11 (Utah S.Ct. Feb. 24, 2022).
Wisconsin: New law (Wis. Laws 2021, Act 156 (2021 WI AB 717)) creates an income tax exemption for income received in the form of a grant from the Restaurant Revitalization Fund under the federal American Rescue Plan Act of 2021. Expenses paid with grant income can be deducted to the extent they are otherwise deductible. This change applies to tax years beginning after Dec. 31, 2020. Wis. Laws 2021, Act 156 (2021 WI AB 717), signed by the governor on March 7, 2022.
SALES & USE
North Carolina: In response to a ruling request, the North Carolina Department of Revenue (NC DOR) determined that a taxpayer operating an online platform that (1) is not open to the general public, (2) enables participating entities to list their inventory of parts on the platform, and (3) allows qualified customers with log-on credentials to order parts through the platform, is a marketplace facilitator making marketplace facilitated sales in the state. The NC DOR explained that the taxpayer falls within the definition of marketplace facilitator because it "lists or otherwise makes available for sale a marketplace seller's items through a marketplace [it] owned or operated" and it makes payment processing available via a third-party credit card processor and pre-existing credit lines that have been established with certain customers. N.C. Dept. of Rev., Private Letter Ruling No. SUPLR 2022–0001 (Feb. 28, 2022).
Florida: The Florida Department of Revenue has announced the application period for the state's research and development (R&D) tax credit for expenses incurred during 2021. Qualified businesses can apply for an allocation of the credit starting at midnight on March 20, 2022 through March 26, 2022. Before submitting this application, a business must obtain a letter from the Florida Department of Economic Opportunity that it is a qualified target industry business. Additional information on the Florida R&D credit, including the online application, is available here.
California: In Letters to Assessors, the California State Board of Equalization (CA SBE) provided advice on implementing certain changes to California's property tax law stemming from voters' approval of Proposition 19 (Prop 19) in November 2020. Letter to Assessors No. 2022/012 (Feb. 24, 2022) provides guidance on implementing changes to the exclusion for property transfers between parents and their children and grandparents and their grandchildren. Letter to Assessors No. 2022/009 (Feb. 17, 2022) addresses the impact of Prop 19 on transfers of base-year value. For additional information on this development, see Tax Alert 2022-0389.
South Dakota: New law (S.D. Laws 2022, HB 1120) expands pipeline companies subject to tax to include every person, co-partnership, association, limited liability company, corporation, or syndicate engaged in the business of transporting or transmitting carbon dioxide. The South Dakota Department of Revenue will determine and fix the tax value of any private pipeline owned and operated by a carbon dioxide capture company that extends through more than two South Dakota counties. All other property of a carbon dioxide capture company (not including a pipeline up to the line of any terminal or pumping station), including real estate and all buildings, facilities or equipment on the real estate is assessed by the director of equalization for the taxing district where the real estate is located. These changes take effect July 1, 2022. S.D. Laws 2022, HB 1120, signed by the governor on March 9, 2022.
COMPLIANCE & REPORTING
Arizona: The Arizona Department of Revenue (AZ DOR) announced that Arizona estimated tax payments for the first and second quarter of 2022 are not required for partnerships and S corporations making the new pass-through entity tax (PTE tax) election. Although partnerships and S corporations making this election are generally required to make estimated payments, the AZ DOR explained that it "is currently unable to process electronic estimated tax payments for the [PTE tax] … ." The 2022 quarterly estimated payments due by April 15 and June 15 will be waived and affected taxpayers will not incur a penalty. (The AZ DOR said it will notify affected taxpayers, if any action is needed to request abatement.) The AZ DOR anticipates that it will be able to accept electronic estimated payments from PTE taxpayers for the third quarter estimated tax payments due September 15 for which a minimum payment of 25% of the estimated tax for 2022 will be due. Ariz. Dept. of Rev., "Corporations Making the Pass-Through Entity Tax Election" (March 2, 2022).
California: The California Franchise Tax Board (CA FTB) issued guidance clarifying the reporting requirements for the analysis of a partner's capital account tax basis for Schedule K-1 (CA FTB Form 565) and Schedule K-1 (CA FTB Form 568) for tax year 2021 and thereafter. For tax year 2021 only, the CA FTB will allow taxpayers filing CA FTB Form 565 or Form 568 to report its partners' or members' capital accounts on the Schedules K-1 (either CA FTB Forms 565 or 568) using the tax basis method (1) as determined under federal law (reported on Schedule K-1 (IRS Form 1065)) or (2) as determined under California law. This option only applies to the capital account analysis on Schedules K-1 (CA FTB Forms 565 or 568) for tax year 2021. The CA FTB reiterated that taxpayers cannot use their federal tax basis in lieu of their California tax bases for any other purposes. Starting in 2022 and thereafter, taxpayers filing CA FTB Form 565 or Form 568 to report its partners' or members' capital accounts on the Schedules K-1 (CA FTB Form 565 or 568) must use the tax basis method as determined under California law. Cal. FTB, Notice 2022-01 Capital Account Analysis Tax Basis Methodology for Schedule K-1 (565) and Schedule K-1 (568) for Taxable Year 2021 and Subsequent Tax Years (March 8, 2022).
PAYROLL & EMPLOYMENT TAX
Multistate: EY's annual publication of key federal and state income tax withholding and payroll and unemployment tax rates and limits for 2022 has been released. The updated guide reflects changes in the 2022 state income tax withholding rates/tables and state unemployment insurance wage bases and tax rates. For additional information on this development, see Tax Alert 2022-0402.
Idaho: On Feb. 18, 2022, Idaho Governor Brad Little signed into law 2022 ID HB 450, which gives employers stability and consistency in their state unemployment insurance (SUI) costs by extending the 2021 SUI rates in Idaho for two years through 2023. It is estimated the enactment of this new law will result in tax savings of $64 million for Idaho businesses over the next two years. For additional information on this development, see Tax Alert 2022-0381.
South Dakota: New law (S.D. Laws 2022, HB 1130) requires an insurer to pay premium tax on travel insurance premiums paid by (1) a South Dakota resident individual who is the primary policyholder; (2) a South Dakota resident individual who is a primary certificate holder and elects coverage under a group travel insurance policy; or (3) a South Dakota resident blanket travel insurance policyholder that is a resident of the state or has its principal place of business in the state (or that of an affiliate or subsidiary of such policy certificate holder) that has purchased blanket travel insurance in South Dakota for eligible blanket group members. Blanket travel insurance policyholders are subject to apportionment rules that apply to insurers across multiple taxing jurisdictions or that allow the insurer to allocate premium on an apportioned basis. Lastly, the premiums reported by the insurer for these purposes includes the amount allocable to travel insurance and not any amounts received for travel assistance services or cancellation fee waivers. These provisions take effect July 1, 2022. S.D. Laws 2022, HB 1130, signed by the governor on March 8, 2022.
VALUE ADDED TAX
International — Mexico: The Mexican tax reform, which came into force on Jan. 1, 2022, includes a broad definition about "non-VATable activities," requiring taxpayers to consider these activities when determining whether input VAT should be creditable. This definition/provision is significant and will affect businesses that are VAT registered in Mexico and incur VAT on costs in Mexico, but perform activities (e.g., sell goods or provide services) outside of Mexico. The new law is likely to affect some supply chains, including manufacturing, mining and aviation to name a few. For more on this development, see Tax Alert 2022-0370.
Wednesday, April 6, 2022: US corporate income tax compliance: Tax year 2021 readiness and preparing your tax function for what's next (3:30-4:45 p.m. EDT New York; 12:30-1:45 p.m. PDT Los Angeles). The corporate tax landscape is more dynamic than ever as we prepare for the 2021 tax filing season. Join our Ernst & Young LLP professionals for insights on preparing for 2021 US federal and state tax filings as well as key considerations for international filers. Topics will include: (1) key federal and state tax compliance updates and developments, including interdependencies among federal, state and international compliance and filings; (2) an IRS update and discussion of current activities, including notifications and plans for compliance enforcement; and (3) trends and insights from the recent EY Tax and Finance Operate and Chief Executive Officer surveys, including preparing your tax function for tax year 2022 and beyond. 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.