May 5, 2022
State and Local Tax Weekly for April 22 and April 29
Ernst & Young's State and Local Tax Weekly newsletter for April 22 and April 29 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.
Kansas, Mississippi, Virginia and New York City enact elective pass-through entity taxes
The 2017 federal Tax Cuts and Jobs Act imposed a $10,000 annual limitation on the amount of state and local taxes (SALT) individuals can deduct in computing federal income taxes. As a workaround to this limitation, which is imposed by IRC § 164(b)(6), states have enacted new elective pass-through entity (PTE) level taxes. These PTE taxes are intended to enable taxpayers who are PTE owners to deduct, for federal income tax purposes, SALT exceeding the limitation, consistent with IRS Notice 2020-75 (see Tax Alert 2020-2690). To date, 27 states1 and New York City (NYC) have enacted PTE level taxes. Below is a summary of the most recently enacted elective PTE tax provisions in Kansas, Mississippi, Virginia and NYC as well as changes to the PTE tax previously enacted by New York State (NYS).
New PTE taxes
Kansas: HB 2239 (enacted April 14, 2022) establishes an elective PTE level tax in the state. Starting in tax years beginning on or after Jan. 1, 2022, a PTE (i.e., an S corporation or a partnership) can elect to be taxed at the entity level (electing PTE). The PTE tax election is made annually on the return filed by the electing PTE and it is binding on all electing PTE owners (i.e., shareholders of an S corporation and partners in a partnership, except that partners for purposes of the PTE tax do not include C corporations). An electing PTE is subject to tax at the rate of 5.7% on the sum of each resident electing PTE owner's distributive share of the electing PTE's income and each nonresident electing PTE owner's distributive share of the electing PTE's income attributable to Kansas. An electing PTE is treated as a corporation for purposes of estimated tax payments under K.S.A. 79-32,101, except the noncompliance penalties and interest under K.S.A. 79-32,107 does not apply during the first tax period for which the PTE tax election is made. Credits, except the credit for taxes paid to another state, attributable to the activities of an electing PTE are claimed by the PTE. Excess income tax credits, net operating losses or other modifications can be carried forward on the electing PTE's tax return but can only be used in a year in which the PTE tax election is made. For tax periods subsequent to a period in which a PTE tax election is not allowed or not made by an electing PTE, any excess income tax credits may be transferred to the electing PTE owners.
Electing PTE owners subject to Kansas individual income tax are entitled to a credit against their own Kansas personal income tax liabilities in an amount equal to their direct share of the PTE tax. Any excess credit of PTE tax is refundable to the electing PTE owner. The new law also amends the provisions relating to the credit for income tax paid to another state for Kansas resident taxpayers under K.S.A. 79-32,111 to deem the amount of income tax paid to another state by an S corporation or a partnership that is included in the Kansas adjusted gross income of a resident individual, estate or trust that is a member of such entity as income paid by the resident individual, estate or trust. Lastly, the new law authorizes the Kansas revenue secretary to adopt rules and regulations to implement these provisions.
Mississippi: Beginning in 2022 and each year thereafter, HB 1691 (enacted April 14, 2022), allows a partnership, S corporation or similar pass-through entity (each a PTE) to elect to be taxed at the entity level (PTE tax). A PTE which makes the election (an electing PTE) must submit the appropriate form to the Mississippi Department of Revenue (MS DOR) by the 15th day of the third month following the close of the tax year for which the election is being made. The election is binding for that tax year and all tax years thereafter. An electing PTE can revoke its election by timely submitting the appropriate form to the MS DOR. The election to become an electing PTE or to revoke such election must be approved by a vote or written consent of (1) the members of the PTE's governing body and (2) the owners, members, partners or shareholders holding greater than 50% of the voting control of the PTE. Owners, members, partners or shareholders of an electing PTE (collectively, electing PTE owners) must report their pro rata or distributive shares of income of the electing PTE. Such owners are not individually liable for the PTE tax on such income. Each electing PTE owner is allowed a credit against Mississippi income tax in an amount equal to their pro rata or distributive share of PTE tax paid by the electing PTE. An electing PTE owner's interest in the electing PTE is calculated without regard to the PTE tax election.
New York City: A9009/S8009 (N.Y. Laws 2022, ch. 59, Part MM, enacted April 9, 2022), establishes an elective PTE tax for NYC. Any eligible NYC partnership or eligible NYC resident S corporation (including an LLC that is treated as a partnership or S corporation) that makes an annual election to be taxed under the NYS PTE tax may make an election to be taxed under the NYC PTE tax for the same tax year for which the NYS election is made. The NYC PTE tax election must be made by the due date of the first estimated tax payment and in the same manner as the NYS PTE tax election. To be effective, the annual NYC PTE election must be made by a NYC taxpayer and (1) for S corporations, by any officer, manager or shareholder authorized to make the election; or (2) for other entities, by any member, partner, owner or other individual with authority to bind the entity or sign returns. The election takes effect for the current tax year and once the election is made it is irrevocable as of the due date. The NYC PTE tax is imposed on the NYC PTE taxable income of every electing partnership and electing resident S corporation. The NYC PTE tax is in addition to any other tax imposed on such partnerships and S corporations. The rate of the NYC PTE tax is 3.876% of NYC PTE taxable income.
A NYC taxpayer who is a direct partner, member or shareholder of an electing NYC partnership or NYC resident S corporation subject to the NYC PTE tax is allowed a credit against NYC personal income tax. Disregarded entities will be disregarded for purposes of determining whether a NYC taxpayer is a direct partner, member or shareholder of an electing partnership or NYC resident S corporation. The new law provides for certain limitations on the credit.
The new law also defines key terms; sets due dates for paying estimated tax, filing returns and paying tax; and lists information that must be included in the NYC PTE tax return. It also sets forth procedural and administrative provisions. The NYC PTE tax provisions take effect immediately and apply to tax years beginning on or after Jan. 1, 2023.
Virginia: HB 1121 (2022 Va. Acts, ch. 690) and identical bill SB 692 (2022 Va. Acts, ch. 689), both bills enacted on April 11, 2022, allow a qualifying pass through entity2 (PTE) to annually elect to be taxed at the entity level (PTE tax). The election can be made for tax years beginning on and after Jan. 1, 2021, but before Jan. 1, 2026. The Virginia Department of Taxation (VA DOT) issued guidance for making the election for the 2021 tax year (see below). For tax years 2022–2025, a qualifying PTE can make the election to pay the PTE tax on its timely field return (i.e., on or before the due date for filing the applicable return, including any granted extensions). The PTE tax is imposed at a rate of 5.75% on an electing qualifying PTE's Virginia taxable income. Electing qualifying PTE's are eligible for all credits, deductions or other adjustments to taxable income under Va. Code §58.1-391, provided that the PTE's taxable income is adjusted to eliminate any federal deduction for state and local income taxes. Any person subject to Virginia's income tax on individuals, estates and trusts and who is an owner of an electing qualifying PTE is entitled to a credit against income tax, provided that taxable income has been adjusted to add back any deduction for state and local income taxes paid by the PTE. The credit is equal to the person's pro rata share of the PTE tax paid by any qualifying PTE of which the person is an owner. If the amount of the credit exceeds the person's tax liability, the excess will be treated as an overpayment and refundable. The VA DOT will assess and collect taxes, interest and penalties on electing qualifying PTEs as if such tax is a corporation income tax.
The law also amends the credit for taxes paid to other states for Virginia personal income tax purposes under Va. Code §58.1-332, to deem the amount of any state income tax paid by a PTE under a law substantially similar to Virginia's PTE tax as having been paid by its individual owners in proportion to their ownership interests in the PTE. These changes apply to tax years beginning on and after Jan. 1, 2021, but before Jan. 1, 2026.
On April 13, 2022, the VA DOT issued preliminary instructions, "Important Information Regarding 2021 Virginia Income Tax Returns: Virginia's New Elective Pass-Through Entity Tax", for the 2021 returns. The VA DOT said that at this time it cannot accept or process the elective PTE tax. Thus, the VA DOT advised PTEs and individual owners that they should file their tax year 2021 returns by the original or extended due date but should not try and pay the elective PTE tax or claim the credit for tax paid by the PTE with their tax year 2021 returns. Individuals, however, may claim a credit on their 2021 return for a portion of taxes paid by the PTE to another state provided that the tax imposed by the other state is substantially similar to Virginia's PTE tax. The VA DOT further noted that due to the timing of enactment of the legislation, it is required to delay implementation of the elective PTE tax until at least Oct. 15, 2023. The VA DOT said that date, it will issue guidance on how to make a retroactive election for tax year 2021 as well as how the new Virginia PTE tax will be implemented for the 2022–2025 tax years.
Amendment to existing PTE tax
New York: A9009/S8009 (N.Y. Laws 2022, ch. 59, Part MM, enacted April 9, 2022), modifies NYS's elective PTE tax affecting resident owners of PTE's and clarifies the treatment of S corporations for purposes of the NYS PTE tax. The law modifies the definition of "electing S corporation" to provide that an electing S corporation is either an electing resident S corporation or an electing standard S corporation, defining each term; and it provides special rules for electing S corporations. These changes apply to tax years beginning on or after Jan. 1, 2022. Effective for tax years beginning on or after Jan. 1, 2021, the modified law provides that in the case of a partner, member or shareholder of an electing partnership or an electing S corporation, the term "income taxes" does not include NYS and NYC PTE taxes to the extent such taxes are added to federal adjusted gross income (AGI). Further, in the case of a partner, member or shareholder of a partnership or S corporation, the term "income taxes" does not include PTE taxes substantially similar to NYS's PTE tax imposed by other states (or any political subdivision thereof) or the District of Columbia on income derived therefrom and subject to New York individual income tax to the extent such taxes are added to federal AGI.
Federal: The Treasury Department's FY2023 explanation of President Biden's revenue proposals (Budget proposals) includes four provisions, described as "modernization rules," that would apply to digital assets. These proposals would: (1) extend the nonrecognition rules for securities loans to loans of actively traded digital assets; (2) increase information reporting by certain financial institutions and digital asset brokers for purposes of exchanging information with other jurisdictions; (3) require taxpayers to report foreign digital asset accounts under IRC § 6038D; and (4) amend the mark-to-market rules for dealers and traders to include digital assets. In addition to the federal income tax consequences described in Tax Alert 2022-0540, these proposals could affect the reporting of state and local corporate income taxes. For instance, the Budget proposals could influence the way states tax activities using virtual currency and other digital assets. IRS Notice 2014-21 treats virtual currency as property, not as currency, for federal income tax purposes. Taxing authorities in New York, New Jersey and Wisconsin have conformed to this federal guidance and treat virtual currency as property, while some other states are considering treating certain digital assets as legal tender or currency or proposing to accept virtual currency as payment for taxes. These actions suggest a potential future conflict between federal and state classification of digital assets and related transactions. For a full discussion of the state income tax implications and other considerations, see Tax Alert 2022-0623.
Georgia: New law (2022 GA HB 1437) adopts a flat Georgia personal income tax rate starting in 2024 and provides for contingent individual income tax rate reductions. Currently, Georgia's personal income tax law has six progressive individual income tax rate brackets, with rates ranging from 1% up to 5.75%. If there are no delays in the rate reductions, they will be as follows: (1) 5.49% in 2024; (2) 5.39% in 2025; (3) 5.29% in 2026; (4) 5.19% in 2027; (5) 5.09% in 2028; and (6) 4.99% in 2029 and thereafter. These reductions will be delayed by one year for each year any of the specified revenue collection, revenue estimate or revenue shortfall reserve conditions is met. The law also increases the amount allowed as a personal exemption. These changes take effect on, and apply to tax years beginning on or after, Jan. 1, 2024. Ga. Laws 2022, Act 716 (HB 1437), signed by the governor on April 26, 2022.
Hawaii: New law (2022 HI SB 3143) updates Hawaii's date of conformity to the IRC to Dec. 31, 2021 (from Dec. 31, 2020), applicable to tax years beginning after Dec. 31, 2021. SB 3143 excludes from gross income amounts received as economic injury disaster loan (EIDL) advances and restaurant revitalization grants (Sections 9672(1) and 9673(1) of the American Rescue Plan Act (P.L. 117-2), respectively). Haw. Laws 2022, Act 7 (SB 3143), signed by the governor April 21, 2022.
Maine: New law (2022 ME LD 1763) updates Maine's date of conformity to the IRC to Dec. 31, 2021 (from April 30, 2021). These changes apply to tax years beginning on or after Jan. 1, 2021 and to any prior year as specifically provided by the IRC as of Dec. 31, 2021. Maine Laws 2022, ch. 594 (LD 1763), signed by the governor on April 14, 2022.
Maine: New law (2022 ME LD 1763) directs the Maine Revenue Services (MRS) to review the impact on the state's income tax and the state's economy of adopting worldwide combined reporting, with an election to use the water's edge combined reporting method. In conducting its review, the MRS will consider: (1) the need to define a combined group's income under worldwide combined reporting; (2) the need to adjust the state's nexus and apportionment provisions; (3) implications of allowing corporations to make an election to use the water's edge combined reporting method and conditions under which a corporation would be allowed to withdraw from that election; and (4) any other statutory changes necessary to implement changes to the system to adopt worldwide combined reporting. The MRS's report to the legislative standing committee with jurisdiction over tax is due by Feb. 1, 2023. The committee may submit worldwide combined reporting legislation in 2023. Maine Laws 2022, ch. 170 (2022 ME LD 1763), became law without the governor's signature on April 26, 2022.
Minnesota: On April 4, 2022, the Minnesota House and Senate each released omnibus tax bills outlining their respective plans for dealing with the state's projected $9.25 billion surplus. These proposals are subject to negotiation and will likely change, but the key income tax features of the two proposals are briefly discussed in Tax Alert 2022-0636.
New Hampshire: New law (2022 NH HB 102) establishes a commission to study replacing the water's edge method of combined reporting with the worldwide combined reporting method under New Hampshire's existing Business Profits Tax (BPT). The commission's preliminary findings are due by Nov. 1, 2022, with the final report and recommendations for proposed legislation due by Nov. 1, 2023. N.H. Laws 2022, ch. 12 (2022 NH HB 102), signed by the governor on April 11, 2022.
New Hampshire: The New Hampshire Department of Revenue Administration (NH DRA) issued updated guidance on the taxability of certain COVID-19 financial relief programs under the Business Profits Tax (BPT) and the Business Enterprise Tax (BET). According to the NH DRA, the guidance has been updated to clarify that taxpayers should reference the IRC in effect on Dec. 31, 2018 to determine the impact of the COVID-19 financial relief programs not specifically addressed by this guidance or subsequent legislation. The NH DRA said that because the BPT law references the IRC as of Dec. 31, 2018, New Hampshire's tax treatment of federal relief will vary from the federal treatment of those programs. N.H. Dept. of Rev. Admin., Technical Information Release: Updated TIR 2021-001 (April 4, 2022).
SALES & USE
Alabama: New law (2022 AL HB 20) extends through May 30, 2027 (from May 30, 2022) the sales and use tax exemption for gross receipts from the sale of parts, components and systems that become a part of a fixed or rotary wing military aircraft or certified transport category aircraft that undergoes conversion, reconfiguration or general maintenance, if the address of the aircraft for FAA registration is outside of Alabama. The exemption does not apply to local sales tax unless previously exempted by local law or approved by a local governing board. This exemption is not available for sales of parts, components or systems for new contracts or projects entered into after May 30, 2027, unless legislation is enacted to continue or reinstate the exemption for new contracts or projects after that date. If such legislation is not enacted, the exemption for contracts or projects entered into on or before May 30, 2027 will be available until May 30, 2030. Ala. Laws 2022, Act 293 (2022 AL HB 20), signed by the governor on April 11, 2022.
Alabama: New law (2022 AL SB 13) extends the sales and use tax exemption for gross proceeds of sales of bullion or money through June 1, 2028 (from June 1, 2023). A person or company receiving a sales and use tax exemption for the gross proceeds of the sales of gold, silver, platinum and palladium bullion and money is not required to file a report on the exemption with the Alabama Department of Revenue. Ala. Laws 2022, Act 373 (2022 AL SB 13), signed by the governor on April 14, 2022.
Kansas: New law (2022 KS HB 2239) excludes from "sales or selling price" delivery charges that are not separately stated on the invoice, bill of sale or similar document given to the purchaser. The law also removes the sunset date for the exemption from "sales or selling price" for cash rebates granted by a manufacturer to a purchaser or lessee of a new motor vehicle. The rebate was previously set to expire on June 30, 2024. Kan. Laws 2022, 2022 KS HB 2239, signed by the governor on April 14, 2022.
New Jersey: The New Jersey Division of Taxation (NJ DOT) said that retail sales of COIVD-19 test kits are subject to the state's sales tax. Sales and use tax applies to purchases of such kits that are reimbursed by the federal or New Jersey state government; the NJ DOT said kits are presumed taxable because they contain an exempt reagent and other taxable components. COVID-19 test kits purchased directly by the federal or state government are exempt from sales and use tax. N.J. Dept. of Taxn., COVID-19 Related Tax Information: Sales Tax (last updated March 4, 2022).
New Jersey: The New Jersey Division of Taxation issued a notice regarding the $2 per day casino room surcharge imposed on each occupied casino hotel room in Atlantic City starting March 1, 2022. The surcharge is imposed on the hotel which may pass the cost onto occupants by including it in the taxable sales price of the room. The surcharge is in addition to other taxes imposed on casinos, such as the 9% Atlantic City Luxury Tax, the 3.625% Sales Tax, the 1% State Occupancy Fee, the $2 per day Tourism Promotion Fee, and the $3 per day Casino Room Fee. N.J. Dept. of Taxn., "Notice to Atlantic City Casino Hotels Imposition of $2 per day Surcharge on Casino Room Rentals (P.L. 2021, c.497)" (last updated April 6, 2022).
Tennessee: New law (2022 TN SB 2325/HB 2267) removes auctioneers licensed in Tennessee from the definition of "marketplace facilitator" for purposes of the state's sales and use tax law. This change took immediate effect. Tenn. Laws 2022, ch. 783 (2022 TN SB 2325/HB 2267), signed by the governor on April 8, 2022.
Virginia: New law (2022 VA SB 101) extends through 2025 (from 2022) the expiration date of the retail sales and use tax exemption for an advertising business's purchases of printing materials from a Virginia printer for distribution outside the commonwealth. SB 101 takes effect July 1, 2022. Va. Acts 2022, ch. 481 (2022 VA SB 101), signed by the governor on April 11, 2022.
Virginia: New law (2022 VA SB 683) expands the sales and use tax exemption for amplification, transmission and distribution equipment used to provide Internet service to include network equipment. The term "'network' includes modems, fiber optic cables, coaxial cables, radio equipment, routing equipment, switching equipment, a cable modem termination system, associated software, transmitters, power equipment, storage devices, servers, multiplexers and antennas … used to provide Internet services." The exemption applies regardless of whether the service provider is also a telephone common carrier or provides services other than Internet services. This change is effective July 1, 2022. Va. Acts 2022, ch. 435 (2022 VA SB 683), signed by the governor on April 11, 2022. Identical bill, Va. Acts 2022, ch. 434 (2022 VA HB 1155), signed by the governor on April 11, 2022.
Kansas: New law (2022 KS HB 2239), effective for tax years beginning after Dec. 31, 2022, increases the amount of the state's research and development (R&D) activities credit to 10% (from 6.5%) of the amount by which the amount expended for such activities in the tax year exceeds the taxpayer's average of the actual expenditures for such purposes made in such tax year and the next preceding two tax years. Starting in 2023, a Kansas taxpayer without a current liability can transfer the R&D credit. The credit can be transferred once to any person. The transferee can claim the credit against its Kansas income tax in the year of transfer. Unused credit cannot be refunded but can be carried forward. HB 2239 also extends the Rural Opportunity Zone program through July 1, 2026 (from July 1, 2023).
In addition, HB 2239 provides a new credit allowing a qualified employer subject to Kansas income tax a credit against the tax for tuition reimbursed to a qualified employee (i.e., a person newly employed on a full-time basis by or first contracting with a qualified employer on a full-time basis on or after Jan. 1, 2022, who has been awarded a degree or certificate from a qualified program by an institution). The credit can be claimed for up to four years so long as the employee remains employed. The credit equals 50% of the tuition reimbursed during the tax year for which the credit is claimed to a qualified employee. The credit cannot exceed 50% of the average annual amount paid by a qualified employee for enrollment and instruction in a qualified program (i.e., a program accredited by the engineering accreditation commission, the federal aviation administration or a regional accrediting body; or a program within the meaning of an associate of applied science degree or a technical education program). A qualified employer subject to Kansas income tax also is allowed a credit against tax for compensation paid during the tax year to a qualified employee in the first through fifth consecutive years of employment. The credit equals 10% of the compensation paid and the credit is capped at $15,000 annually for each qualified employee. These credits are: (1) applied to the taxpayer's income tax liability after all other credits allowed under the income tax, (2) nonrefundable, and (3) cannot be carried forward. These provisions take effect for tax years beginning after Dec. 31, 2021. The law also provides a $5,000 credit to taxpayers who become a qualified employee; the credit is deducted from the taxpayer's income tax liability for the tax year in which the taxpayer is or has been a qualified employee and may be claimed for up to four years succeeding the tax year in which the credit was first allowed. New credits will not be issued or earned after Dec. 31, 2026.
HB 2239 also provides a credit to taxpayers that contribute to a community college or technical college located in Kanas for capital improvements, deferred maintenance or the purchase of technology or equipment. The credit can be claimed against income tax, premium tax or privilege fees, or the privilege tax on financial institutions. The credit is allowed for contributions made on and after July 1, 2022 and for tax years 2023–2026. The amount of the credit equals 60% of the total amount contributed during the tax year to such colleges located in Kansas. The credit is capped at $250,000 for each taxpayer per tax year and the amount of contributions to any one community or technical college eligible for the credit cannot exceed $500,000 per tax year.
Lastly, the new law provides a credit against Kansas income tax equal to 50% of an eligible taxpayer's qualified railroad track maintenance expenditures paid or incurred during the tax year. The amount of the credit allowed in each tax year cannot exceed the product of $5,000 and the number of miles of railroad track owned or leased within Kansas by the eligible taxpayer as of the close of the tax year. A similar credit is allowed for a rail siding located within the state. Unused credits can be transferred and carried forward for up to five years. The credit is available for tax years 2022 through 2031. Kan. Laws 2022, HB 2239, signed by the governor on April 14, 2022.
Tennessee: The Tennessee Department of Revenue in partnership with the Tennessee Entertainment Commission and the Tennessee Department of Economic Community Development, announced a new franchise and excise tax credit program to bolster job creation and economic development in the state's entertainment industry. Companies approved as a qualified production (e.g., scripted and unscripted television, feature films, video game development, animation, commercials and audio/visual postproduction) can apply for a tax credit generated through resident and nonresident payroll expenses and apply for a point of purchase (POP) sale tax exemption certificate on nonpayroll expenses. Applicants can receive 40% of their qualified payroll expense (QPE) in tax credits (increased to 50% if the expenses were paid to individuals living in a tier 2-4 enhancement county). The credit can be claimed against the applicant's combined franchise and excise tax liability for QPE paid in Tennessee during the applicable tax period. The credit can be extended for up to 15 years. Applicants also can apply for the POP sales tax exemption for all taxable goods and services involved in the production. An exemption can separately be applied for by third party individuals that bought or used goods or services from the production. Click here for more on these credits and exemptions. Tenn. Dept. of Rev., Press Release "Tennessee Entertainment Commission Launches New Incentive Program" (April 12, 2022).
Wisconsin: New law (2022 WI AB 759) modifies the state's angel investment tax credit program to provide that if a business's failure to meet the eligibility requirement that at least 51% of employees employed by the business are employed in Wisconsin is due to a business merger or acquisition, the business may be granted a waiver allowing it to remain eligible for certification or recertification of the credit if certain conditions are met. These conditions are: (1) the business maintains its headquarters in Wisconsin; (2) after the merger or acquisition the business increases the number of employees in the state; (3) the Wisconsin Economic Development Corporation determines that the merger or acquisition was not for the purpose of relocating the business's operation or employees from Wisconsin to another state or for the purposes of ceasing its efforts to further grow and expand in Wisconsin; and (4) no later than the first day of the 13th month beginning after the date of the merger or acquisition, at least 51% of the employees employed by the business are employed in Wisconsin. These provisions took effect April 10, 2022. Wis. Laws 2022, Act 224 (2022 WI AB 759), signed by the governor on April 8, 2022.
Alabama: New law (2022 AL HB 400) exempts grain bins used exclusively for the purpose of storing, holding, drying, preserving or otherwise preparing a grain for market from ad valorem property taxation. The new law took immediate effect. Ala. Laws 2022, Act 2022-295 (2022 AL HB 400), signed by the governor on April 11, 2022.
Kansas: New law (2022 KS HB 2239) modifies the telecommunications machinery and equipment property tax exemption by amending the definition of "telecommunications machinery and equipment" to include machinery and equipment placed in inventory or work-in-progress. This change takes effect July 1, 2022. Among other property tax law changes made by HB 2239, the law expands the authority of county commissions to abate property taxes for property that has been destroyed during a gubernatorial-declared disaster and has a restoration costs that equal or exceed 50% of the pre-damage market value. This provision is retroactive to tax year 2019 and applies to disasters occurring in 2019 and 2020; applications must be submitted by Dec. 20, 2022. Kan. Laws 2022, HB 2239, signed by the governor on April 14, 2022.
Michigan: Under new law (2022 MI HB 4833) starting Jan. 1, 2023, qualified heavy equipment rental personal property (QHERPP) for which an exemption was properly claimed under the Qualified Heavy Equipment Rental Personal Property Specific Tax Act (QHERPP Specific Tax Act) will be exempt from the collection of tax under the General Property Tax Act (see 2022 MI HB 4834). The rate imposed under the QHERPP Specific Tax Act is equal to 2% of the rental price of eligible personal property net any customer credits provided at the end of the rental. The tax imposed under the QHERPP Specific Tax Act does not apply to the eligible property rented to the US or any agency, department, administration or political subdivision thereof, to Indian tribes, to Michigan or any Michigan local governmental entity or public body corporate. Beginning Dec. 31, 2022 and each year thereafter, 2022 MI HB 4834 exempts from the general property tax QHERPP for which an exemption has been granted under the QHERPP Specific Tax Act. Qualified renters claiming the exemption must annually file a statement with the local assessing unit in which the qualified renter business is located. 2022 MI HB 4834 describes the information that must be included in the statement. Mich. Laws 2022, PA 46'22 (2022 MI HB 4834), signed by the governor on March 23, 2022, and Mich. Laws 2022, PA 35'22 (2022 MI HB 4833), signed by the governor on March 17, 2022.
Mississippi: New law (2022 MS SB 2769) exempts from ad valorem property tax all property, real or personal, belonging to any foundation organized as a nonprofit corporation exempt from federal income tax under IRC § 501(c)(3) and that provides support for state-supported institutions of higher learning, in-state public community/junior colleges or in-state nonprofit private universities or colleges. For purposes of this exemption, such property belonging to an entity wholly owned, and controlled by such a foundation is treated as belonging to the foundation. The law also exempts from tax all property, real or personal, belonging to a federally qualified health center where all the center's income is used entirely for purposes of the health center and not for profit. These provisions take effect July 1, 2022. Miss. Laws 2022, SB 2769, signed by the governor on March 22, 2022.
California: The California Franchise Tax Board (Cal. FTB), following the issuance of its Legal Ruling 2022-01 regarding the assignment of gross receipts from sales of services to business entities and in which it revoked two prior Chief Counsel Rulings,3 said it will not assess the Large Corporate Understatement Penalty or apply the Accuracy Related Penalty if the taxpayer relied on either of the revoked rulings in determining its tax filing position. (This assumes that the taxpayer filed a California tax return.) The delinquent penalty, however, will apply if the taxpayer filed a late return because it relied on the analyses in the revoked rulings to determine it did not have a filing requirement. Interest also will be assessed on underpayments resulting from the taxpayer's reliance on the revoked rulings. Cal. FTB, News Release "FTB issues Legal Ruling on California's Market-Based Rules" (April 11, 2022). (For more on Cal. FTB Legal Ruling 2022-01, see Tax Alert 2022-0531.)
Wisconsin: On April 15, 2022, Governor Tommy Evers signed Senate Bill 794 (2022 WI SB 794), changing the rules governing audits of pass-through entities (PTEs) by the Wisconsin Department of Revenue (WI DOR).4 For purposes of 2022 WI 794, PTEs include partnerships, limited liability companies and tax-option (S) corporations. 2022 WI SB 794 allows the WI DOR to do the following: (1) assess and collect additional tax from a PTE on income otherwise reportable by the PTE's members; (2) direct the Secretary of the Wisconsin Department of Administration to refund to a PTE its portion of the overpayment; (3) assess an adjustment to reduce a PTE's tax credit if it previously computed the credit and reported it to its members; (4) assess an adjustment to increase a tax credit to offset additional tax assessed to a PTE; (5) assess any pass-through member of a PTE for its allocated portion of additional collective tax owed by one or more of the PTE's members; (6) disclose to a member that the PTE has been audited when necessary to explain amounts assessed to a member; and (7) disclose to a PTE that one or more members have not reported the Wisconsin income from the PTE when necessary to explain amounts assessed to the PTE based on nonfiling or unreported income of members. 2022 WI SB 794 requires a PTE and/or its members to take several actions. A PTE must designate a tax matters member similar to that required by the federal PTE audit rules set forth in IRC § 6223(a). If the PTE receives a federal audit determination assessed at the entity level, the PTE must report the federal adjustments to the WI DOR within 180 days of the date the PTE received the determination from the IRS. In addition, the PTE may submit, within 60 days of receiving the determination, a request to the WI DOR to amend the partnership returns and pay the tax on behalf of its members. For more information on this development, see Tax Alert 2022-0630.
PAYROLL & EMPLOYMENT TAX
Illinois: After a delay of several years, Illinois employers can now take advantage of a state workshare (also known as short-time compensation) program. A state workshare program provides an alternative to layoff for employers faced with a reduction in force by allowing employees to receive a portion of their unemployment insurance benefits while working reduced hours. For more information on this development, see Tax Alert 2022-0651.
West Virginia: New law (2022 WV SB 245), effective June 9, 2022, eases the restrictions governing the use of payroll cards for the payment of wages. Specifically, the requirement that employees provide their written consent for the payment of wages through a payroll card is removed. Instead, employers compensating employees through a payroll card account are required to provide to those employees a full written disclosure of any applicable fees associated with the payroll card. W.Va. Laws 2022, SB 245, signed by the governor on March 23, 2022. For more information on this development, see Tax Alert 2022-0638.
Federal: In its Notice 2022-15 (issued on April 15, 2022), the IRS stated that it will not impose penalties on taxpayers that fail to deposit superfund chemical taxes required under IRC § 6656 for the third and fourth calendar quarters of 2022 and the first calendar quarter of 2023. Superfund chemical taxes, with modifications, were reinstated by Section 80201 of the Infrastructure Investment and Jobs Act (IIJA), effective July 1, 2022. In addition, the IRS updated Form 637, Application for Registration (For Certain Excise Tax Activities), to add Activity Letter G, which must be used by taxpayers claiming exemptions from the tax because they are (1) making inventory exchanges of certain taxable chemicals or (2) selling or buying intermediate hydrocarbon streams. For more on this development, see Tax Alert 2022-0688.
Tennessee: New law (2022 TN HB 1937/SB1847) requires the Tennessee Department of Revenue to make available to every person filing a business tax return a certificate indicating whether the person (i.e., customer) reported tax due for a location at the wholesaler rate or the retailer rate. The customer can use the certificate as proof to the vendor of which rate it paid. The certificate is valid from the original due date of the underlying tax return until the due date of the customer's next return (the "covered period"). During the covered period, a vendor can rely on the certificate in determining its tax liability; however, a vendor will not owe additional tax or be entitled to a refund due to a retroactive change in the customer's status as a wholesaler or retailer during the covered period. This provision takes effect Jan. 1, 2023. Tenn. Laws 2022, Pub. ch. 683 (2022 TN HB 1937/SB1847), signed by the governor on March 30, 2022.
Washington: New law (2022 WA SB 5849) extends through July 1, 2032 (from July 1, 2027), the 0.275% preferential business and occupation tax rate for manufacturers of certain solar energy systems or entities in the business of making wholesale sales of such solar energy systems. Specifically, the preferential rate applies to the manufacture (or wholesale sales) of (1) solar energy systems using photovoltaic modules or stirling converters; or (2) solar grade silicon, silicon solar wafers, silicon solar cells, thin film solar devices or compound semiconductor solar wafers for exclusive use in components of such systems. The bill takes effect July 1, 2022. Wash. Laws 2022, ch. 172 (SB 5849), signed by the governor March 24, 2022.
Washington: New law (2022 WA SB 5799) provides that the workforce education investment surcharge does not apply to a provider clinic offering primary care, multispecialty and surgical services, including behavioral health services. In addition, the surcharge does not apply to an affiliate of such clinic if it is an organization that offers health care services or provides administrative support for a provider clinic, or is an independent practice association or accountable care organization. For purposes of this exemption, "health care services" is defined as "services offered by health care providers relating to the prevention, cure, or treatment of illness, injury, or disease." The term "primary care" is defined as "wellness and prevention services and the diagnosis and treatment of health conditions." The new law takes effect on July 1, 2022. Wash. Laws 2022, ch. 170 (SB 5799), signed by the governor March 24, 2022.
UNCLAIMED PROPERTY West Virginia: New law (2022 WV HB 4511) makes various modifications to West Virginia's unclaimed property law. Among the changes, any virtual currency held or owing by any banking organization, corporation, custodian, exchange or other entity engaged in the business of virtual currency is presumed to be abandoned three years after the owner's last indication of interest in the property. For purposes of this provision, "virtual currency" does not include software or protocols governing the transfer of the digital representation of value, game-related digital content or a loyalty card or gift card. The abandonment presumption period is changed for the following: (1) three years (from five) for debt of a business association or financial organization, other than bearer bonds or original issue discount bonds; (2) one year (from two) for any deposit or refund owed to a subscriber by a utility; (3) three years (from five) for all funds held by a fiduciary for the payment of a note, bond, debenture or evidence of indebtedness; and (4) three years (from five) for all other property not specifically enumerated. 2022 WV HB 4511 takes effect on June 10, 2022. W.Va. Laws 2022, ch. 282 (2022 WV HB 4511) signed by the governor on March 28, 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.
1 States that have enacted a similar PTE tax for these purposes are: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Louisiana, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Oregon, Rhode Island, South Carolina, Utah, Virginia and Wisconsin.
2 For purposes of the Virginia PTE tax, a qualifying PTE is a PTE 100% owned by natural persons or, in the case of an S corporation, 100% owned by natural persons or other persons eligible to be shareholders in an S corporation.
3 Specifically, the Cal. FTB revoked (1) Cal. FTB Chief Counsel Ruling 2015-03, which addresses applying market-based sourcing rules for non-marketing services under Cal. Code Regs. tit. 18, § 25136-2 and (2) Cal. FTB Chief Counsel Ruling 2017-01, which addresses whether a taxpayer's service is marketing or non-marketing and how to determine where the benefit of a service is received when a taxpayer's service relieves its customer's obligations to another party.
4 These rules do not apply to PTEs that have elected to be taxed in Wisconsin at the entity level under legislation enacted in 2018 (see Tax Alert 2018-2521).