April 12, 2022
State and Local Tax Weekly for April 1
Ernst & Young's State and Local Tax Weekly newsletter for April 1 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.
Texas Supreme Court clarifies that "origin-based" system applies to sourcing gross receipts from the sale of services for Texas apportionment purposes
In Sirius XM Radio, Inc. v. Hegar, the Supreme Court of Texas (Texas Supreme Court) ruled in favor of the taxpayer, holding that gross receipts from the sale of services should be sourced based on an "origin-based" system.1 Thus, taxpayers should look to where their employees or equipment performed services when determining whether those services are performed in Texas for apportioning receipts for Texas corporate franchise (margins) tax purposes.
The Texas Supreme Court overturned the decision by the Texas Court of Appeals, Third Circuit and remanded the case back to the appeals court to address an alternative argument by the Texas Comptroller of Public Accounts that the taxpayer may not have provided sufficient evidence to support its cost-based analysis of the fair value of services performed in the state.
The Texas Supreme Court's decision could have broad implications for taxpayers conducting business in Texas, as the Texas Comptroller of Public Accounts (Texas Comptroller) has been asserting the "receipts-producing, end-product act" approach to apportionment of services for quite some time. The decision also appears to invalidate many of the provisions contained in the Texas Comptroller's recently amended apportionment rule (34 Tex. Admin. Code § 3.591) (see Tax Alert 2021-0035). Specifically, the decision seems to invalidate the revised language in amended 34 Tex. Admin. Code § 3.591(e)(26), which applies the "receipts-producing, end-product act" test to determine the location of gross receipts from the sale of services.
Companies doing business in Texas that derive gross receipts from the sale of services should review the apportionment methodologies in light of the Texas Supreme Court's opinion. Because the decision does not address cost-based analysis, some uncertainty remains as to how both the Texas Comptroller and the Texas courts will address this aspect of the rules for sourcing gross receipts.
For additional information on this development, see Tax Alert 2022-0539.
Federal: On March 28, 2022, the Treasury Department released its FY2023 explanation of President Biden's revenue proposals (Budget proposals), which include several proposals that focus on reforming business and international taxation (see Tax Alerts 2022-9003 and 2022-0514). The federal Budget proposals, if enacted, could affect corporate and individual income taxes imposed by state and local governments. Notable provisions in the Budget proposals that could impact state income taxes for businesses include: (1) replacing the base erosion and anti-abuse tax with an "undertaxed profits rule" (UTPR) that is consistent with the UTPR described in the Pillar Two Model Rules developed by the Organisation for Economic Co-operation and Development (OECD) as part of its ongoing Base Erosion and Profits Shifting (BEPS) project; (2) providing a new general business credit equal to 10% of the eligible expenses paid or incurred in connection with onshoring a US trade or business; (3) disallowing deductions for expenses paid or incurred in connection with offshoring a US trade or business, including disallowing deductions against a US shareholder's global intangible low-taxed income or subpart F income inclusions for any expenses paid or incurred in connection with moving a US trade or business outside the US; (4) disallowing stepped-up basis of a partnership's non-distributed property to a related partner until the property is disposed; (5) conforming the definition of "control" to test the ownership of at least 80% of the total voting power and at least 80% of the total value of a corporation's stock; (6) permitting taxpayers to retroactively elect, in certain circumstances, to treat a passive foreign investment company as a qualified electing fund without IRS consent; and (7) repealing deferral of gain from like-kind exchanges. The state income tax implications of the Budget proposals generally would depend on how each state conforms to the IRC and to affected provisions. For additional information on this development, see Tax Alert 2022-0528.
Multistate: Tax Alert 2022-0544 provides a summary of the significant legislative, administrative and judicial actions that affected US state and local income/franchise and other business taxes for the period from Jan. 1, 2022 through March 31, 2022. These developments are compiled from the EY Indirect/State Tax Weekly and Indirect/State Tax Alerts issued during that period. Highlights include: (1) a summary of legislative developments in Arizona, California, Idaho, Iowa, Mississippi, New Jersey, New Mexico, North Carolina, Oregon, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wisconsin; (2) a summary of judicial developments in Texas and Virginia; (3) a summary of administrative developments in California, Colorado, Connecticut, Illinois, Massachusetts, New Jersey, Pennsylvania and Texas; and (4) a discussion of state and local tax items to watch from the US government, Florida and Virginia.
Idaho: New law (HB 713) modifies the state's elective pass-through entity (PTE) tax, making the election available to more PTEs, including fiscal year taxpayers and tiered PTEs. (A PTE (including a partnership, S corporation or LLC treated as either a partnership or S corporation) making the election is referred to by the law as an "affected business entity".) The new law adds definitions of "affected business entity income" (i.e., "all items of income, gain, loss, or deduction derived from or connected with Idaho sources, except for that portion of such income, gain, loss, or deduction apportioned to an exempt entity that is a member of an affected business entity") and "individual" (i.e., including an individual, a trust or an estate). In addition to making the election to be subject to the state's PTE tax on a timely filed original return for the tax year, a PTE also may make a valid election on an amended return for the tax year if the amended return is filed before the original due date or the 15th day of the fourth month following closing of the PTE's tax year. The new law amends provisions on calculating the amount of PTE tax due, the application of allowable credits earned by affected business entities and calculating the credit available to members of an affected business entity (specifically excluding the share of any member that is an exempt entity from calculating the pro rata share of the credit). The new law adds new provisions addressing the credit for tiered PTEs, trusts and estates. The changes set forth in 2022 ID HB 713 are retroactively effective to Jan. 1, 2021. Idaho Laws 2022, ch. 185 (2022 IDHB 713), signed by the governor on March 23, 2022.
Indiana: New law (SB 382) clarifies the state's consolidated return rules by providing that following the sale, merger or acquisition of a corporation, the filing status of the remaining members of an Indiana consolidated group will continue absent an election by any of those consolidated group members to file separately or on a combined basis. If a consolidated election is discontinued as a result of the sale, merger or acquisition, the new provision does not prevent the remaining members from making a new election to file an Indiana consolidated return. 2022 IN SB 382 also permits an eligible corporation that makes qualifying distribution sales to elect to determine its Indiana tax liabilities by using a specific, alternative apportionment method. These Indiana corporate income tax law changes take effect on July 1, 2022. Ind. Law 2022, P.L. 137 (2022 IN SB 382), signed by the governor on March 15, 2022.
Oregon: New law (SB 1524) modifies Oregon's elective pass-through entity (PTE) tax (known as the business alternative income tax or BAIT). The new law change requires a member of a PTE in determining the sum of distributive proceeds and computing BAIT to add back any amount of BAIT imposed and deducted by the PTE at the entity level for federal income tax purposes. Amounts added back and that meet the conditions for the use of elective tax rates under Ore. Rev. Stat. §316.043 may be treated as qualifying income under that statute. The new law also requires "taxpayers" to make estimated payments of BAIT. If the PTE or its member make sufficient estimated payments, the Oregon Department of Revenue (OR DOR) will provide penalty relief to any party that did not make estimated payments. These changes apply to tax years beginning on or after Jan. 1, 2022 and before Jan. 1, 2024, and to estimated tax payments due on and after July 1, 2022. The law also prohibits the OR DOR from imposing interest or penalty that would otherwise apply to tax due if such interest or penalty is based on an underpayment or underreporting due to the requirement to pay estimated tax. Ore. Laws 2022, ch. 82 (2022 OR SB 1524), signed by the governor on March 24, 2022.
Oregon: New law (SB 1524) provides that if all sections in 2022 OR HB 4002 become law before Jan. 1, 2023, provisions in 2022 OR SB 1524 allowing eligible taxpayers to elect to use a three-year net operating loss (NOL) carryback, will become operative. Eligible taxpayers — i.e., individual and corporate income taxpayers primarily doing business under 2017 North American Industry Classification System code 111 (crop production) or code 112 (animal production and aquaculture) — making this election would first add to taxable income the amount of NOL carryback or carryforward allowed in calculating federal taxable income (FTI), and then would subtract from FTI the deduction for NOL carryback. The NOL carryback provisions, if they become operative, would apply to tax years beginning on or after Jan. 1, 2023 and before Jan. 1, 2029, and to any tax year to which a NOL arising in those years is carried back. Ore. Laws 2022, ch. 82 (2022 OR SB 1524), signed by the governor on March 24, 2022; 2022 Ore. HB 4002 was approved by the General Assembly on March 3, 2022, and will be presented to the governor for her consideration.
West Virginia: New law (HB 4410) requires flow-through entity (FTE) income be allocated and apportioned in the same manner and to the same extent as corporate income. Income is apportioned using a single sales factor formula and market-based sourcing applies to sales of non-tangible personal property. For purposes of this new law, an FTE includes an S corporation, partnership (including those that are publicly traded), limited partnership, limited liability partnership or limited liability company. Shareholders, interest owners, partners, members or other recipients of FTE income must allocate and apportion FTE income in the same manner as corporate net income. This change applies to tax years beginning on and after Jan. 1, 2022. W.V. Laws 2022, HB 4410, signed by the governor on March 30, 2022.
SALES & USE
Indiana: New law (SB 382) modifies Indiana's marketplace facilitator provisions to provide that a marketplace facilitator is considered the retail merchant of each retail transaction that is facilitated on its marketplace, regardless of whether the marketplace facilitator has a contractual relationship with the seller. A provision of the new law also provides that the acquisition of an aircraft for rental or lease in the ordinary course of the person's business is not exempt from state gross retail tax unless the person establishes that the annual amount of gross lease revenue from the lease or rental of the aircraft is at least 7.5% of the book value of the aircraft or net acquisition price for the aircraft. The transaction is exempt from tax if the aircraft is acquired by a person to rent or lease to another person for predominant use in public transportation by the other person or by an affiliate. The exemption applies regardless of the relationship between the person or the lessor and the lessee or renter of the aircraft. These changes are effective July 1, 2022. Ind. Law 2022, P.L. 137 (2022 IN SB 382), signed by the governor on March 15, 2022.
Mississippi: New law (SB 2831) establishes the "Taxation of Remote and internet-based Computer Software Products and Services Study Committee" to examine and develop recommendations for which remote and internet-based computer software products and services should be subject to Mississippi sales and use tax. The committee's recommendations and report is due to the legislature by Oct. 1, 2022. Miss. Laws 2022, SB 2831, signed by the governor on March 28, 2022.
Utah: New law (SB 93) exempts from sales and use tax amounts paid by a service provider for tangible personal property, other than machinery, equipment, parts, office supplies, electricity, gas, heat, steam or other fuels, that: (1) is consumed in the performance of a taxable service under Utah Code §59-12-103(1)(b), (f), (g), (h), (i) or (j); (2) has been consumed in the performance of the service described in (1); and (3) will be consumed in the performance of service described in (1), to one or more customers, to the point the tangible personal property disappears or cannot be used for any other purpose. This exemption takes effect on July 1, 2022. Utah Laws 2022, SB 93, signed by the governor on March 23, 2022.
Indiana: New law (SB 382) creates an affordable and workforce housing tax credit, which applies to tax years beginning on or after Jan. 1, 2024. Taxpayers eligible to apply for the credit include an owner of a qualified project or a shareholder, member or partner of an owner of a qualified project. A qualified project is a low income building (as defined in IRC §42(c)) that is located in Indiana, for which the federal affordable housing credit was awarded using a 30% present value of the qualified basis of the building and is financed by tax exempt bonds subject to the private activity bond volume cap. The new law explains how to calculate the amount of state tax credit the taxpayer is allowed to claim against its state tax liability for the tax year. Unused credit can be carried forward for up to nine consecutive tax years; carryback of unused credit is not allowed. The law also addresses the process for claiming the credit when a PTE is entitled to the credit. Although the credit is not available until 2024, starting July 1, 2023 and before Jan. 1, 2028, eligible applicants may submit applications for qualified projects to the Indiana housing and community development authority; the authority will review such applications and issue eligibility statements. The aggregate amount of state tax credit available is capped at $30 million per fiscal year. These provisions expire July 1, 2028. Ind. Law 2022, P.L. 137 (2022 IN SB 382), signed by the governor on March 15, 2022.
Mississippi: New law (SB 2773) extends to July 1, 2025 (from July 1, 2022), the repeal date of the law authorizing the income tax credit for a company that transfers or relocates its national or regional headquarters to Mississippi from outside the state. This provision takes effect July 1, 2022. Miss. Laws 2022, SB 2773, signed by the governor on March 26, 2022.
Mississippi: New law (SB 2846) extends to Oct. 1, 2025 (from Oct. 1, 2022), the repeal date of the law providing an income tax credit for certain companies for debt service paid by such companies under financing agreements entered into with the Mississippi Business Finance Corporation. This law takes effect July 1, 2022. Miss. Laws 2022, SB 2846, signed by the governor on March 26, 2022.
Oregon: New law (SB 1524) modifies the Oregon Production Investment Fund by increasing the maximum reimbursement for a single film or a single local media production project to (1) 20% of payments made for employee salaries, wages and benefits for work done in Oregon (from 10%); and (2) 25% of all other actual Oregon expenses (from 20%). This change applies to fiscal years beginning on or after July 1, 2022. Ore. Laws 2022, ch. 82 (SB 1524), signed by the governor on March 24, 2022.
Tennessee: In response to a ruling request, the Tennessee Department of Revenue (TN DOR) said that an entity whose revenue is primarily derived from the sale of industrial gas and the renewable information numbers and low carbon fuel standard credits that were generated when the industrial gas was produced is eligible to claim the Tennessee franchise and excise tax industrial machinery credit on equipment used primarily for the production of industrial gas. The TN DOR determined that during the tax periods at issue, the entity's principal business was manufacturing since more that 50% of the entity's revenue at the location is derived from fabricating or processing tangible personal property for resale, in this case the production of industrial gas. Tenn. Dept. of Rev., Letter Ruling #22-01 (Feb. 2, 2022).
Indiana: New law (SB 382) provides that beginning after Dec. 31, 2022, a taxpayer who claims the business personal property tax exemption will not be required to file a personal property tax return for its business personal property for an assessment date occurring after the assessment date for which the taxpayer provided the required information on its personal property tax return when it first claimed the exemption. This change takes effect Jan. 1, 2023. Ind. Law 2022, P.L. 137 (2022 IN SB 382), signed by the governor on March 15, 2022.
Utah: New law (SB 93) exempts supplies, including the cost of freight-in, used in the course of business from the personal property tax. For purposes of this exemption, "supply" means "taxable tangible personal property that is (A) not held for sale in the ordinary course of business; (B) either carried on hand and for which no record of consumption is taken in the ordinary course of business or typically used up within the calendar year; and (C) used in the provision of the taxpayer's business activity." Such items include office supplies, shipping supplies, maintenance supplies, replacement parts, lubricating oils, fuels or items consumed in the course of operating the business. The term "supply" does not include furniture, fixtures, machinery, equipment, computers, cell phones or vehicles. This change takes effect Jan. 1, 2023. Utah Laws 2022, SB 93, signed by the governor on March 23, 2022.
Indiana: New law (SB 382) prescribes procedures and guidelines by which a nonresident partner, shareholder or beneficiary (collectively, partner) of a pass-through entity (PTE) may elect not to be subject to withholding. The election must: (1) include the conditions of the election; (2) be signed under penalty of perjury before the due date for the PTE to remit tax for the tax year; (3) state that the partner has adequate funds to remit tax due; (4) provide any periods for which withholding is not required or is reduced; (5) provide that the partner agrees to Indiana tax jurisdiction and is liable to file any required returns and submit tax due, including any interest and penalties; (6) provide that the election is subject to Indiana Department of Revenue (IN DOR) approval and that an approved election may be revoked by the IN DOR at any time, for any reason; and (7) be attached to the returns of each of the PTE and the partner. Failure to obtain the election or to attach it to the PTE's return will result in the election being treated as if it were not made for the tax year. These changes take effect July 1, 2022. The new law also makes various modifications to the state's partnership audit provisions, with various effective dates. Ind. Law 2022, P.L. 137 (2022 IN SB 382), signed by the governor on March 15, 2022.
COMPLIANCE & REPORTING
Indiana: New law (SB 382) modifies the due dates for returns under Indiana's corporate income tax and financial institution tax. Effective Jan. 1, 2023, the due date for the annual financial institution tax return is changed to the 15th day of the fifth month (from the fourth month) following the close of the taxpayer's tax year. For corporations whose federal tax return is due on or after the 15th day of the fourth month following the close of the tax year, the return is due the 15th day of the fifth month following the close of the tax year (changed from the 15th day of the month following the due date of the federal tax return). The new law also allows the Indiana Department of Revenue to extend the due date of these returns to reflect the due date of a federal income tax return that has been extended by the IRS. Ind. Law 2022, P.L. 137 (2022 IN SB 382), signed by the governor on March 15, 2022.
Puerto Rico: In Administrative Determination (AD) 22-03, the Puerto Rico Treasury Department (PRTD) has extended the due date from April 18, 2022 to April 25, 2022 for certain tax payments and certain income tax returns, forms and statements. Specifically, AD 22-03 extends the due date to April 25, 2022 for individual (Form 482) and corporate (Form 480.2) income tax returns and the corresponding tax payments. The extended due date also applies to requests for an extension of time to file the tax returns and the first quarterly estimated tax payment originally due April 18, 2022. As long as the taxpayer pays the tax due or makes the first quarterly payment by April 25, 2022, the PRTD will not impose penalties for missing or insufficient payments. Taxpayers that submit an extension request by April 25, 2022, will have until Oct. 18, 2022, to file their tax returns. For more on this development, see Tax Alert 2022-0591.
PAYROLL & EMPLOYMENT TAX
Indiana: New law (Ind. Law 2022, P.L. 138 (2022 IN HB 1002)) lowers the personal income tax rate from the current 3.23% to 3.15% in 2023 and 2024. For taxable years beginning after Dec. 31, 2024, additional reductions in the tax rate gradually apply if budget conditions are met until the rate potentially reaches 2.9% by 2029. Governor Holcomb also signed into law Ind. Law 2022, P.L. 95 (2022 IN HB 1246)) that, effective July 1, 2022, authorizes Indiana counties to impose a local income tax of not more than 0.2% for emergency medical services provided within the county. For more on this development, see Tax Alert 2022-0497.
Utah: On March 23, 2022, Utah Governor Spencer J. Cox signed into law Utah Laws 2022, SB 39, which, effective Jan. 1, 2023, incorporates a nonresident income tax exemption for short-term business travel by adopting the Multistate Tax Commission's 20-day threshold model legislation. Specifically, an employer is not required to withhold Utah state income tax from the wages earned within the state by a nonresident employee if the nonresident employee provides services within Utah for 20 days or less during a calendar year. If the nonresident employee provides services within Utah for more than 20 days during a calendar year, the employer is required to withhold nonresident income tax on all wages paid for services provided within the state during the year. Employers may be exempt from Utah's income tax withholding requirements if they do business in Utah for 60 days or less in a calendar year and the employer secured approval from the Utah State Tax Commission. Employers doing business for more than 60 days within the state are required to withhold taxes for the entire period unless they can show good cause. For additional information on this development, see Tax Alert 2022-0501.
Oregon: New law (SB 1524) modifies Oregon's Corporate Activity Tax (OR CAT) law by amending the exclusion for any person with commercial activity not exceeding $750,000 for the calendar year (other than a person that is part of a unitary group with commercial activity exceeding $750,000) to change "calendar year" to "tax year." According to the explanation to the law, this change was made to accommodate fiscal year filers. The new law also clarifies that the OR CAT is due and estimated OR CAT payments for the previous quarter are payable on or before the last day of the 4th, 7th and 10th months of the tax year and of the first month immediately following the end of the tax year (new text in bold). These changes take effect June 3, 2022. The provisions of the OR CAT law are also amended to exclude from the definition of "commercial activity" and to exempt from the OR CAT, amounts received by an eligible pharmacy from the sale of prescription drugs. An "eligible pharmacy" is defined as "a pharmacy that has nine or fewer locations under common ownership in this state"; the term does not include pharmacies that primarily cater to veterinary customers. This exemption applies to tax years beginning on or after Jan. 1, 2022 and before Jan. 1, 2026. Ore. Laws 2022, ch. 82 (2022 OR SB 1524), signed by the governor on March 24, 2022.
Utah: New law (HB 125) eliminates the scheduled repeal of the State Transient Room Tax Act. That act was scheduled to be repealed on Jan. 1, 2023. Utah Laws 2022, HB 125, signed by the governor on March 23, 2022.
Federal: On March 22, 2022, the United States (US) and the United Kingdom (UK) issued a joint statement announcing the US will replace existing punitive tariffs under Section 232 of the Trade Expansion Act of 1962 (Section 232) on UK origin steel and aluminum products with a tariff-rate quota (TRQ) effective June 1, 2022. The agreement also includes a special requirement for any UK steel producer owned by a Chinese entity to prove that it does not receive any subsidy provided by any government-controlled or directed entity in China by Dec. 1, 2022. Additionally, the US Trade Representative (USTR) announced on March 23, 2022 the retroactive reinstatement of 352 eligible exclusions for products of Chinese origin that were subject to punitive tariffs under Section 301 of the Trade Act of 1974 (Section 301). For additional information on this development, see Tax Alert 2022-0488.
Wednesday, April 13, 2022. Indirect tax considerations of digital assets, Web3 and the metaverse (1:00-2:15 p.m. EDT New York; 10:00-11:15 a.m. PDT Los Angeles). Join our EY team of tax professionals for the first in a series of discussions focused on the evolving digital landscape of blockchain technology, digital assets, Web 3.0 applications and how those items may converge in a metaverse ecosystem. During this 75 minute webcast, we will discuss this evolving landscape through a state and local and indirect tax lens. The agenda will include a discussion defining the "what" and the "why" — what the digital revolution is and why it is important to understand how it could change the way your company engages with other businesses and consumers. Specifically, we will provide an overview of the new digital landscape to identify and analyze some of the pertinent considerations from the perspective of state sales tax, state income tax and value-added tax, as well as certain potential information reporting requirements. 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 Sirius XM Radio, Inc. v. Hegar, No. 20-0462 (Tex. March 25, 2022).