April 22, 2022 State and Local Tax Weekly for April 8 and April 15 Ernst & Young's State and Local Tax Weekly newsletter for April 8 and April 15 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 Kentucky legislature overrides governor's veto of HB 8 to enact conditional income tax rate cuts, sales/use tax base expansion and tax amnesty program On April 13, 2022, the Kentucky General Assembly overrode Governor Andy Beshear's veto of 2022 KY HB 8, which makes several changes to Kentucky tax laws, including:
The expansion of the sales and use tax base to a wide variety of services appears similar to those enacted for a short time in Kansas and considered in other states, such as Ohio. Taxpayers will need to carefully review the list of services that will be subject to sales and use tax starting Jan. 1, 2023 to (1) understand how the commonwealth defines those services and (2) modify their own internal compliance systems and processes to make certain that the taxability determinations in their systems account for the expanded scope of services. In some cases, the legislation does not contain detailed definitions of many of these services and affected taxpayers should expect to see future interpretative guidance from the Kentucky Department of Revenue (KY DOR). Taxpayers should also monitor the developments around the amnesty program as the initiation of a program during calendar year 2022 depends upon the KY DOR successfully procuring a third-party service provider to administer the program. If the KY DOR does not procure a successful bid from an outside service provider, it would administer the amnesty program for 60 days during 2023. For more on this development, see Tax Alert 2022-0564. New York governor signs Fiscal 2022—2023 budget bill into law, includes various tax law changes On April 9, 2022, Governor Kathy Hochul signed into law 2022 NY A9009/S8009 (N.Y. Laws 2022, ch. 59), New York's Fiscal 2022—2023 budget (budget bill). Tax law changes in the budget bill include the following:
The budget bill also extends the following tax credit and incentive provisions:
The budget bill also establishes, modifies or enhances certain tax credit provisions as follows:
INCOME/FRANCHISE District of Columbia: The District of Columbia Office of Tax and Revenue (DC OTR) issued guidance on its treatment of pass-through entity (PTE) taxes paid to other jurisdictions, stating that resident individual taxpayers can claim the credit for such taxes paid by a PTE if the other state PTE tax offsets an individual net income tax similar to that imposed by the District and does not fall within the tax types listed in D.C. Code §47-1806.04 (e.g., franchise tax, license tax, excise tax, unincorporated business tax, occupation tax). To the extent allowed, the amount of credit that can be claimed equals the total share of state and local tax shown on the individual owner's tax return filed with the other state; however, the credit is limited to the DC tax calculated on the individual's distributive or pro-rata share of income subject to the entity-level tax. DC OTR, OTR Tax Notice 2022-03 (March 31, 2022). Kentucky: Amendments to 103 Ken. Admin. Reg. 16:270 (final regulation), regarding the apportionment of receipts of financial organizations that were previously subject to the Kentucky Bank Franchise Tax were finally adopted and took effect March 1, 2022. Provisions of 2019 KY Acts ch. 196 (2019 KY HB 458) caused the commonwealth's Bank Franchise Tax to sunset after 2020 but also caused its corporate income tax to be applied to the income of banks, savings and loan institutions and companies defined as financial organizations beginning in 2021. The final regulation adopts sourcing rules similar to those under the former Bank Franchise Tax by incorporating the definitions and sourcing provisions in Ken. Rev. Stat. §§ 136.500, 136.535 and 136.530 into the corporate income tax law. The definitions in Ken. Rev. Stat. § 136.500 have mostly been incorporated into Section 1 of the final regulation; however, the final regulation expands the definition of a financial organization to include any entity that is more than 50% owned, directly or indirectly, by a bank or a savings and loan holding company. The sourcing rules in Ken. Rev. Stat. § 136.530 and related definitions in Ken. Rev. Stat. §§ 136.500 and 136.535, have largely been incorporated into Section 6 of the final regulation. Ken. Admin. Reg. (Vol. 48, No. 10, April 1, 2022). Louisiana: The Louisiana Department of Revenue said that taxpayers may deduct expenses disallowed for federal income tax purposes for qualified wages or compensation paid that were utilized to claim the employee retention credit. La. Dept. of Rev., Revenue Ruling No. 22-001 "Application of 280C Deduction to Federal Employee Retention Credit" (April 4, 2022). Mississippi: New law (2022 MS HB 531) eliminates the current 4% individual income tax bracket in 2023. The law also phases-down the current 5% individual income tax rate as follows: (1) 4.7% in 2024; (2) 4.4% in 2025; and (3) 4.0% in 2026. Before 2026, the state legislature will determine if the tax rates will be further reduced or repealed for calendar years after 2026. HB 531 takes effect July 1, 2022. Miss. Laws 2022, HB 531, signed by the governor on April 5, 2022. Nebraska: On April 13, 2022, Governor Pete Ricketts signed into law 2022 NE LB 873, which gradually reduces the state's corporate and individual income tax rates. The current top Nebraska corporate income tax rate, which applies to income over $100,000, is 7.5%. 2022 NE LB 873 reduces the top rate as follows: (1) 7.25% for tax years beginning on or after Jan. 1, 2023 and before Jan. 1, 2024; (2) 6.50% for tax years beginning on or after Jan. 1, 2024 and before Jan. 1, 2025; (3) 6.24% for tax years beginning on or after Jan. 1, 2025 and before Jan. 1, 2026; (4) 6.00% for tax years beginning on or after Jan. 1, 2026 and before Jan. 1, 2027; and (5) 5.84% for tax years beginning on or after Jan. 1, 2027. The top individual rate, which is currently 6.84% and applies to taxable income of $29,000 or more for individuals filing separately (or $58,000 or more if married filing jointly), is reduced as follows: (1) 6.64% for tax years beginning on or after Jan. 1, 2023 and before Jan. 1, 2024; (2) 6.44% for tax years beginning on or after Jan. 1, 2024 and before Jan. 1, 2025; (3) 6.24% for tax years beginning on or after Jan. 1, 2025 and before Jan. 1, 2026; (4) 6.00% for tax years beginning on or after Jan. 1, 2026 and before Jan. 1, 2027; and 5.84% for tax years beginning on or after Jan. 1, 2027. 2022 NE LB 873 also phases in, by 2025, an exemption for Social Security income from Nebraska's individual income tax, to the extent that income is included in federal adjusted gross income. For additional information on this development, see Tax Alert 2022-0614. New Jersey: The New Jersey Division of Taxation (NJ DOT) announced a significant change in its policy for members of combined groups claiming protection from New Jersey Corporation Business Tax (NJ CBT) under P.L. 86-272. The NJ DOT said it will now determine eligibility for such protections on an entity-by-entity basis. This change in policy affects 2019—2021 NJ CBT returns filed on a combined basis on the NJ Form CBT-100U and could result in significant refunds for certain taxpayers that joined in filing an elective or mandatory combined group NJ CBT return. For more on this development, see Tax Alert 2022-0625. New Jersey: The New Jersey Division of Taxation (NJ DOT) has extended several important deadlines for the New Jersey Business Alternative Income Tax (NJ BAIT). The NJ BAIT is an elective pass-through entity (PTE) tax implemented as a workaround to the $10,000 limitation on the federal deduction for state and local taxes under IRC § 164(b)(6) (e.g., the SALT Cap). The NJ DOT extended due dates for the following NJ BAIT requirements from March 15, 2022 to June 15, 2022: (1) 2021 PTE election; (2) 2021 Form PTE-100 tax return; (3) 2021 Form PTE-200-T extension of time to file; (4) 2021 revocation forms; and (5) 2022 estimated payments. The 2021 Form PTE-200-T, Extension of Time to File, grants a six-month extension to file the Form PTE-100 to Sept. 15, 2022. For more on this development, see Tax Alert 2022-0624. North Carolina: The North Carolina Department of Revenue (NC DOR) issued frequently asked questions (FAQs) on its new elective pass-through entity (PTE) tax, which is effective for tax years beginning on or after Jan. 1, 2022. The FAQs address: (1) general information (e.g., summary of the law, effective date, eligible entities, making or revoking the election, estimated taxes); (2) owners of a taxed PTE and the North Carolina tax return (e.g., owner accounting for income of the PTE on their individual income tax return, taxed PTE failed to pay the full amount of tax due on the PTE's North Carolina tax return); and (3) owner of taxed PTE and the North Carolina income tax credits (e.g., claiming a credit for income taxes paid to another state where the tax paid to the other state is paid by: the PTE electing to be taxed by NC, the owner/partner, or a PTE not making the election to be taxed by NC). The FAQs provide general answers and answers specific to S corporations and partnerships. N.C. Dept. of Rev., "Important Notice Regarding North Carolina's Recently Enacted Pass-Through Entity Tax" (April 14, 2022). Ohio: On March 29, 2022, the Ohio Supreme Court, in a 4-3 decision, declined to review the appeals court decision in Buckeye Institute v. Kilgore affirming the trial court's dismissal of a complaint claiming that 2020 Ohio HB 197 violated the Ohio and U.S. Constitutions (see Tax Alert 2021-2227). This is one of several cases that Buckeye Institute employees have filed in various counties in Ohio challenging HB 197, which deems remote work performed by an employee working from home during the COVID-19 pandemic to occur at an employee's principal place of business for purposes of determining liability for Ohio local income taxes. For additional information on this development, see Tax Alert 2022-0549. Virginia: New law (HB 453 and SB 346) provides that certain property information and analytics firms sales of services are in Virginia if such sales are derived from transactions with customers or clients who receive the benefit of the service in Virginia. This rule applies regardless of where the property information and analytics firm's business operations is located. For tax years beginning on or after Jan. 1, 2022 but before Jan. 1, 2029, a property information and analytics firm is subject to this rule if the Virginia Economic Development Partnership Authority (Authority) certifies that the firm has at least 1,000 full-time employees as of Jan. 1, 2022, in an eligible city (currently Richmond), subject to the terms and conditions of memorandum of understanding (i.e., a performance agreement establishing capital investment and job creation requirements). For tax years beginning on or after Jan. 1, 2029, a property information and analytics firm is subject to this rule if the Authority certifies that the firm has at least 2,785 full-time employees as of Jan. 1, 2029, in an eligible city, and from Jan. 1, 2022 through Dec. 31, 2028, it made or caused to be made a capital investment at its facilities in that city of at least $414.45 million. If this information is certified, the firm will continue to be subject to this rule and no additional certifications will be required in the future. Va. Laws 2022, ch. 256 (HB 453) and identical ch. 257 (SB 346), signed by the governor on April 8, 2022. Virginia: New law (HB 348) allows an affiliated group of corporations that have filed on the same basis for the preceding 12 years (previously, the preceding 20 years) to seek permission from the Virginia Tax Commissioner to change the basis of the type of return they file from (1) consolidated to separate or (2) separate to combined or consolidated. This change takes effect July 1, 2022. Va. Laws 2022, ch. 274 (HB 348), signed by the governor on April 8, 2022. Virginia: New law (HB 224) for tax years beginning on and after Jan. 1, 2023 but before Jan. 1, 2025, provides that a group of corporations may elect to change the basis in which they file a return from combined to consolidated if: (1) the corporations are affiliated; (2) the affiliated group has filed on the same basis for at the preceding 20 years; and (3) on or before Jan. 1, 2022, at least one member of the affiliated group is a related entity to a state or national bank that is exempt from Virginia corporate income tax. Any eligible affiliated group making this election must agree to file returns under both the new and former filing methods and must pay the greater of the two amounts for the tax year in which the new election is effective and for the immediately succeeding tax year. In addition, the group must notify the Virginia Department of Taxation that this election is being made. This change takes effect July 1, 2022. Va. Laws 2022, ch. 416 (HB 224), signed by the governor on April 11, 2022. Virginia: New law (HB 1006) increases the Virginia corporate income tax deduction for business interest to 30% (from 20%) of the business interest disallowed as a deduction under IRC § 163(j), effective for tax years beginning on and after Jan. 1, 2022. Va. Laws 2022, ch. 648 (HB 1006), signed by the governor on April 11, 2022. SALES & USE Multistate: The EY Sales and Use Tax Quarterly Update provides a summary of the major legislative, administrative and judicial sales and use tax developments. Highlights of this edition include a review of the most recent developments involving nexus, tax base and exemptions, technology, and compliance and controversy. The latest quarterly is available via Tax Alert 2022-0556. Maryland: New law (SB 488) expands the list of items that qualify for the sales and use tax exemption for medical devices and products. The expanded list includes: (1) medical or clinical thermometers; (2) pulse oximeters; (3) blood pressure monitors; (4) certain filtering facepiece respirators; and (5) diabetic care items (e.g., insulin; glucose tablets, drinks or gel; ketone meters and supplies; insulin pumps and related items; syringes; continuous glucose monitors and related supplies; lancets and lancet devices; testing strips). This change takes effect July 1, 2022. Md. Laws 2022, ch. 14 (SB 488), signed by the governor on April 1, 2022; see also, Md. Laws 2022, ch. 13 (HB 1151) (enacted April 1, 2022) (adds a similar sales and use tax exemption for diabetic care items). Maryland: New law (SB 316) expands the sales and use tax exemption to include: (1) nicotine patches or gum or any other products used to aid in the cessation of tobacco use; (2) tangible personal property manufactured to support breast-feeding; (3) baby bottles; and (4) diapers, diaper rash cream, and baby wipes. Sales and use tax also does not apply to sales of infant car seats. These changes take effect July 1, 2022. Md. Laws 2022, ch. 7 (SB 316), signed by the governor on April 1, 2022. Maryland: New law (HB 492 and SB 571) exempts from sales and use tax sales of toothbrushes, toothpaste, tooth powders, mouthwash, dental floss or other similar oral hygiene products. The exemption takes effect July 1, 2022. Md. Laws 2022, ch. 11 (HB 492) and ch. 10 (SB 571), signed by the governor on April 1, 2022. Utah: New law (SB 106) exempts from Utah sales and use tax amounts paid or charged in connection with the construction, operation, maintenance, repair or replacement of facilities owned by or constructed for (1) a distribution electrical cooperative or (2) a wholesale electrical cooperative. This exemption takes effect July 1, 2022. Utah Laws 2022, SB 106, signed by the governor on March 23, 2022. Washington: New law (HB 1846) expands and extends the current sales and use tax exemption for data centers in rural counties, to provide an exemption for eligible equipment, services and related labor purchased by qualified business operating data centers (and qualifying tenants in such data centers) in counties with a population over 800,000. The law describes the revised eligibility requirements for data centers in rural counties as well as the new eligibility requirements for data centers in non-rural counties. New exemption certificates for data centers in rural counties may not be issued on or after July 1, 2036, with the exemption fully expiring on July 1, 2048. New exemption certificates for data centers in non-rural counties may not be issued on or after July 1, 2028, with the exemption fully expiring on July 1, 2038. In addition, newly constructed data centers — in both rural and non-rural counties — must meet specified sustainable design or green building standards within three years after being placed in service. Wash. Laws 2022, ch. 267 (HB 1846), signed in part and vetoed in part by the governor on March 31, 2022. BUSINESS INCENTIVES Federal: The IRS announced (IR-2022-79) on April 12, 2022, that it is sending letters to some qualified opportunity funds (QOFs) and their investors regarding their compliance with the certification and investing requirements applicable to such funds. The letters will be sent to taxpayers that have filed Form 8996, Qualified Opportunity Fund or Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments, with missing, invalid or incorrect information. Failure to take action may result in the IRS referring QOFs or their investors for examination and disqualifying the investments from QOF credit benefits. For more on this development, see Tax Alert 2022-0613. Maryland: New law (SB 598) creates a nonrefundable state income tax credit for up to 50% of the federal Work Opportunity Tax Credit (WOTC) claimed by an employer for wages it paid or incurred for a qualified individual employed in Maryland. (WOTC has the same meaning as defined in IRC § 51.) An employer that is a tax exempt organization under IRC §501(c), may claim the credit as a credit against wage withholding taxes it is required to pay to the Maryland Comptroller. Unused credit may not be carried over to another tax year. In addition, the law requires the Maryland Comptroller to prepare and submit a credit evaluation to the General Assembly By Dec. 31, 2028. The law takes effect July 1, 2022 and applies to tax years beginning after Dec. 31, 2021, but before Jan. 1, 2029. Md. Laws 2022, ch. 5 (SB 598), signed by the governor on April 1, 2022. Utah: New law (SB 76) provides a sunset date for the targeted business income tax credit in an enterprise zone. Qualified businesses may claim the credit for tax years beginning before Jan. 1, 2023. On Dec. 31, 2024, the law will repeal various provisions related to the targeted business income tax credit, including Utah Code tit. 63N, ch. 2, Part 3, Targeted Business Income Tax Credit in an Enterprise Zone, and various provisions related to claiming a tax credit in the same tax year as the targeted business income tax credit. Utah Laws 2022, SB 76, signed by the governor on March 23, 2022. Virginia: New law (HB 695) extends the worker training tax credit through July 1, 2025 (from July 1, 2022). The worker training tax credit also is expanded to include the training of a qualified employee or non-highly compensated worker to include training provided at any Virginia public institution of higher education. The law takes effect July 1, 2022. Va. Laws 2022, ch. 431 (HB 695), signed by the governor on April 11, 2022. PROPERTY TAX Idaho: New law (HB 565) exempts all transient personal property from taxation beginning Jan. 1, 2022. Additionally, on or after Jan. 1, 2022, any locally assessed personal property is exempt from taxation if it is: (1) self-propelled, self-powered, or pull-type equipment and machinery; (2) primarily employed for use by businesses engaged in construction, logging or mining of salable minerals (defined in Idaho Code §47-701A); and (3) designed to travel to various jobs. Idaho Laws 2022, ch. 225 (HB 565), signed by the governor on March 25, 2022. COMPLIANCE & REPORTING Puerto Rico: Following the release of Administrative Determination 22-03 by the Puerto Rico Treasury Department, the Puerto Rico Department of State in Administrative Order 2022-03 has extended the due date for filing annual reports, paying annual fees and requesting the first extension of time to file the annual reports from April 18, 2022 to April 25, 2022. Taxpayers have until June 27, 2022 to file a request for a second extension of time to file the annual reports. If requested, the due date to file the report under the second extension period is Aug. 29, 2022. For more on this development, see Tax Alert 2022-0601. CONTROVERSY Idaho: New law (HB 677), with the stated Legislative intent "to protect the citizens of Idaho from the overreach of out-of-state taxing entities" (with a specific mention of the Oregon Corporate Activity Tax), provides that "[n]o out-of-state taxing entity may tax an Idaho business for conducting sales or other business taking place within the state of Idaho between Idaho businesses and a nonresident who is physically present within the state of Idaho while engaging in the business transaction." The law states that "any attempt to tax an Idaho business contravention to this section violates the United States constitution, is null and void, and shall not be enforced in the state of Idaho." For purposes of these provisions, an out-of-state taxing entity means another state or territory of the United States, or any governmental subdivision thereof, or any foreign nation or government; it does not include the federal government. This provision took immediate effect. Idaho Laws 2022, ch. 312 (HB 677), signed by the governor on March 29, 2022. Idaho: New law (HB 715) extends the statute of limitations for individuals to claim a credit of overpaid income taxes, penalties or interest paid to the later of 10 years (from three years) of the due date of the return (without regard to extensions) or 10 years from the date the return was filed. The statute of limitations for filing a refund of overpaid income taxes, penalties or interest is unchanged and remains three years. This change is retroactively effective to Jan. 1, 2022. Idaho Laws 2022, ch. 311 (HB 715), signed by the governor on March 29, 2022. PAYROLL & EMPLOYMENT TAX Iowa: The Iowa Department of Revenue announced that various changes to the state's personal income tax laws under recently enacted 2022 IA HF 2317 will apply to tax years beginning on and after Jan. 1, 2023 and will have no impact on tax returns due on May 2, 2022 or May 1, 2023. For additional information on this development, see Tax Alert 2022-0545. Kentucky: Recently enacted legislation (2022 KY HB 144) lowers the previously assigned 2022 state unemployment insurance (SUI) tax rates by reducing the rate schedule in effect from Rate Schedule C to the lowest allowed by law, Rate Schedule A. Rate Schedule A was in effect for 2021 following the enactment of legislation during that year. The legislation also reduces the 2022 SUI taxable wage base to $10,800, down from the original $11,100 scheduled to be in effect for 2022. For additional information on this development, see Tax Alert 2022-0595. Minnesota: The 2022 SUI taxable wage base has been increased to $38,000, up from $35,000 for 2021. The Minnesota 2022 state unemployment insurance (SUI) tax rates have increased substantially to range from 0.67% to 10.816%, up from a range of 0.208% to 9.36% for 2021. The 2022 new employer SUI rates are based on the average industry rate, and range from 1.0% to 8.9%. New employers also pay the 0.1% Workforce Development Assessment surcharge. A federal interest assessment is added to employers' SUI tax rates for 2021 — 2022, used to pay the federal interest due as of Sept. 30, 2021 and Sept. 30, 2022 on the state's federal UI loan. The federal interest assessment rate is 1.8% for 2022, down from 4% for 2021. For additional information on this development, see Tax Alert 2022-0563. MISCELLANEOUS TAX Alabama: New law (HB 391) reduces the minimum business privilege tax from $100 to $50, effective for tax years beginning after Dec. 31, 2022. For tax years beginning after Dec. 31, 2023, taxpayers who would otherwise be subject to the minimum tax due are exempt from the tax and associated filing requirements. Ala. Laws 2022, Act 252 (HB 391), signed by the governor on April 6, 2022. West Virginia: New law (HB 4567) phases-out the municipal business and occupation or privilege tax on the business of selling automobiles. The tax imposed on the sale of new automobiles that have never been registered in the name of an individual is phased-out as following: (1) effective July 1, 2023 - reduced by 50% of the total amount of tax; (2) effective July 1, 2024 — the remaining tax is reduced by an additional 50% of the total amount of tax; and (3) effective July 1, 2025 — the tax is completely eliminated. Automobiles include light-duty trucks with an enclosed cabin and an open loading area at the rear and sport utility vehicles; it does not include motorcycles. The bill takes effect June 9, 2022. W.Va. Laws 2022, ch. 279 (HB 4567), signed by the governor on March 30, 2022. West Virginia: New law (SB 533) repeals the soft drink tax effective July 1, 2024. The tax will no longer be imposed or collected after that date. W.Va. Laws 2022, ch. 270 (SB 533), signed by the governor on March 30, 2022. 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. | ||||
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