May 25, 2022
State and Local Tax Weekly for May 13
Ernst & Young's State and Local Tax Weekly newsletter for May 13 is now available. Prepared by Ernst & Young's State and Local Taxation group, this weekly update summarizes important news, cases, and other developments in U.S. state and local taxation.
New Colorado law penalizes unreasonable or incomplete sales-and-use-tax refund claims
On April 21, 2022, Colorado Governor Jared Polis signed legislation (HB 22-1118) that imposes significant new penalties on refund claims for sales and use taxes paid by a purchaser to a vendor (Buyer's Claims). The penalties apply to Buyer's Claims filed with the Colorado Department of Revenue (CO DOR) on or after July 1, 2022, and before July 1, 2026. In addition, interest will not be paid on any Buyer's Claims unless the CO DOR takes more than 180 days to review the claim. Interest will only be paid back to the claim date.
If a Buyer's Claim totals $5,000 or more, the new law requires the Director of the CO DOR (Director) to assess and collect, in addition to other penalties provided by law, a civil penalty equal to: (1) 10% of any part of a refund claim that is duplicative or lacking a reasonable basis in law or fact and (2) 5% of the entire refund claim if it is found to be incomplete. If a third party prepared the penalized refund claim, in whole or in part, the Director will impose the penalty on the preparer instead of the purchaser. Recipients of a penalty assessment can appeal the determination within 30 days of receiving the assessment notice.
A claim is considered "incomplete" under the new law if it does not include the correct form and lacks substantially all the pertinent data, information and documentation required by law and related regulations. The Director is authorized to issue regulations prescribing the additional data, information and documentation that must be submitted with a sales-and-use-tax refund claim.
The Director must notify purchasers or preparers of an "incomplete" claim before assessing a penalty, including specific items that appear to be missing. The recipient of the notice will then have at least 60 days to perfect or withdraw the claim before penalties are imposed.
The Director may waive these penalties if the purchaser or preparer can establish a duplicate claim was unintentional and was either minimal or immaterial, or if they can demonstrate "other good cause for waiver of the civil penalty."
As noted above, the new provisions are effective beginning July 1, 2022. The new law also repeals these provisions effective on July 1, 2030.
For more on this development, see Tax Alert 2022-0746.
Maine: The Maine Revenue Services (ME RS) has updated the following rules: Rule 808 "Corporate Income Tax Nexus", Rule 801 "Apportionment" and Rule 810 "Maine Unitary Business Taxable Income, Combined Reports and Tax Return." According to ME RS, these rule amendments are intended to reflect the state's adoption of a factor presence nexus standard starting in 2022. Under the new Maine factor presence nexus standard, a corporation will have income tax nexus with Maine if its Maine property, payroll or sales exceed any of the following thresholds for the tax year: (1) property of $250,000; (2) payroll of $250,000; (3) sales of $500,000; or (4) 25% of its total property, payroll or sales. Property, payroll and sales are calculated in the same manner as calculated for Maine corporate income tax apportionment purposes. Amended Rule 808 was finalized on May 10, 2022 and amended Rules 801 and 810 were finalized April 20, 2022.
New York: New law (2022 NY SB 8948) extends the deadline for taxpayers to make the pass-through entity (PTE) tax election for tax year 2022 to Sept. 15, 2022 (from March 15, 2022). The law also provides that for tax year 2022, in order for a PTE tax election made after March 15, 2022 and before June 15, 2022 to be valid, the electing partnership or electing S corporation must make estimated tax payments with the permissibly late PTE tax election that represents 25% of the required annual payment. The amount of the estimated payment is increased to 50%, if such election is made after June 15, 2022 and before Sept. 15, 2022. N.Y. Laws 2022, ch. 188 (SB 8948), signed by the governor on May 6, 2022.
Texas: The Texas Comptroller of Public Accounts (TX CPA) issued additional guidance on how printers should treat ancillary services for purposes of the Texas corporate franchise (margins) tax deduction for costs of goods sold (COGS) and apportionment purposes. Under the TX CPA's 2014 revised policy, a printer owns and produces goods when it custom manufactures and sells tangible personal property to its customers. COGS includes handling costs, which includes assembling products for sale. Examples of these costs are kitting, folding, inserting, addressing, affixing postage, and sorting and delivering printed materials to third-party carriers. The TX CPA's revised policy also allows a COGS deduction for the storage of raw materials, work-in-process inventory and goods awaiting shipment. The following handling costs may be included in COGS: those for delivery of printed material to customers or third parties without delay and those before delivery of printed material to the printer's storage facility. The following costs are excluded from COGS: storage costs for more than a necessary delay in transit and handling costs after this storage and handling costs for printed materials not produced and sold to the customer. The TX CPA's revised guidance also describes changes to the apportionment calculation for printers and provides illustrative examples. The revised policy applies to all open and future periods. Tex. Comp. of Pub. Acct., STAR Doc. No. 202204004L Changes in franchise tax policy for printers (April 21, 2022) (supersedes STAR Doc. Nos. 200304862L, 9706859L and 201406921L).
SALES & USE
Colorado: New law (2022 CO HB 22-1025), effective Jan. 1, 2023, repeals the sales and use tax exemption for storage, use or consumption of tangible personal property that is transferred to out-of-state vendees without consideration. Colo. Laws 2022, HB 22-1025, signed by the governor on May 2, 2022.
Colorado: New law (2022 CO SB 22-023) modifies provisions regarding local sales and use tax compliance and administration for retailers making sales in any local jurisdiction where they have no or limited physical presence by requiring the Colorado Department of Revenue (CO DOR) to collect sufficient information from relevant retailers that use the CO DOR's sales and use tax simplification (SUTS) system and make that information available to the local taxing jurisdiction. The CO DOR, after consulting with retailers and local taxing jurisdictions (including home rule jurisdictions) to address any reasonable concerns they may have, has until July 1, 2023 to make necessary changes to the SUTS system. Further, on or after July 1, 2022, a local taxing jurisdiction is prohibited from charging a fee for a general business license to retailers with no or incidental physical presence in the local jurisdiction. Starting July 1, 2023, local jurisdictions in Colorado cannot require a retailer that has a Colorado state standard retail license, makes retail sales within the local jurisdiction and either has no or limited physical presence in the jurisdiction, to apply separately to the local jurisdiction for a general business license. Colo. Laws 2022, SB 22-023, signed by the governor on April 21, 2022.
Colorado: The Colorado Department of Revenue (CO DOR), in response to a ruling request, said that for Colorado sales tax purposes, the taxable purchase price does not include a surcharge imposed by a seller or lessor on a buyer or lessee who uses a credit or charge card to make a payment if the surcharge complies with certain requirements. Starting July 1, 2022, under Colo. Rev. Stat. § 5-2-212 (added by Colo. Laws SB 21-091), a seller or lessor can impose a surcharge on a buyer or lessee who uses a credit or charge card in lieu of payment by cash, check, debit payment, gift card or similar means. The CO DOR said to impose the surcharge, in addition to meeting the statutory requirements, the surcharge must be listed as a separate line item on the customer's receipt and it cannot be used to shift part of the actual sales price to the surcharge. Colo. Dept. of Rev., GIL 22-004 Surcharges on Credit Transactions (May 5, 2022).
Illinois: New law (2022 IL SB 157) suspends for one year the sales and use tax imposed on food for human consumption off the premises where it is sold (other than alcoholic beverages, food consisting of or infused with adult use cannabis, soft drinks, candy and food prepared for immediate consumption). For the period beginning July 1, 2022 and until July 1, 2023, the tax rate is 0%; before and after this period, a 1% tax rate is imposed on these food items.1 The law also provides for a school sales tax holiday on qualifying items that will run from Aug. 5, 2022 through Aug. 14, 2022.2 During this period, the state portion of the Illinois sales tax will be reduced from 6.25% to 1.25%, and the applicable rate will apply to sales of qualifying clothing and footwear with a retail selling price of less than $125 per item and certain school supplies. In addition, starting in 2024 through 2030, taxes under the Use Tax Act (UTA), the Service Use Tax Act (SUTA), the Service Occupation Tax Act (SOTA), or the Retailers' Occupation Tax Act (ROTA) do not apply to proceeds from sales of any diesel fuel containing more than a set amount of biodiesel or renewable diesel.3 The amount of biodiesel or renewable diesel range from more than 10%, more than 13%, more than 16% and more than 19%, with different amounts applying to various periods during each year, as set forth in the law. From Jan. 1, 2024 through Dec. 31, 2030, these taxes apply to 100% of the proceeds of sales of (1) biodiesel blends with no less than 1% and no more than 10% of biodiesel and (2) any diesel fuel containing no less than 1% and no more than 10% of renewable diesel. Other changes made by the law including: (1) suspending the inflation adjustment to the motor fuel tax from July 1, 2022 through Dec. 31, 2022;4 (2) removing the sunset date for the tax exemption under the UTA, the SUTA, the SOTA, or the ROTA for tangible personal property sold to or used by a hospital owner that owns hospitals licensed under the Hospital Licensing Act or operated under the University of Illinois Hospital Act (the Illinois General Assembly in the enacted law stated that it is its intention that the exemption apply on a continuous basis); and (3) starting July 1, 2022, exempting breast pumps, breast pump collection and storage supplies and breast pump kits from the UTA, the SUTA, the SOTA, or the ROTA. Ill. Laws 2022, P.L. 102-0700 (2022 IL SB 157), signed by the governor on April 19, 2022.
Kansas: New law (2022 KS HB 2106) phases-out the state's sales and compensating use tax rate on food and food ingredients. Starting Jan. 1, 2023, the 6.5% rate is reduced to 4.0%, and then to 2.0% on Jan. 1, 2024. The rate is reduced to 0.0% on Jan. 1, 2025. Under the new law, the term "food and food ingredients" is defined to include bottled water, candy, dietary supplements, soft drinks and food sold through vending machines, but does not include alcoholic beverages, tobacco and most prepared foods. Food and food ingredients are subject to local taxes. Kan. Laws 2022, HB 2106, signed by the governor on May 11, 2022.
Massachusetts: In response to a ruling request, the Massachusetts Department of Revenue (MA DOR) advised a durable medical equipment sales company that its retail sales of continuous glucose monitors are not exempt from the commonwealth's sales tax. The MA DOR reasoned that the monitors are not exempt because they do not treat or cure an illness and do not constitute medicine on prescription of a registered physician. Further, because the monitors do not supply insulin they do not qualify as equipment worn as a correction or substitution for any functioning portion of the body. The MA DOR also advised that continuous glucose monitors paid in full or in part with MassHealth benefits remain taxable and do not become exempt sales to Massachusetts. Mass. Dept. of Rev., Letter Ruling 22-1: Taxability of Continuous Glucose Monitors (March 30, 2022).
Puerto Rico: On May 6, 2022, Puerto Rico enacted Act 20-2022, establishing a sales and use tax (SUT) holiday for hurricane season purchases. Under Act 20-2022, the SUT holiday will take place annually during the last weekend in May. The law states that Puerto Rico's Treasury Secretary should issue a circular letter indicating the dates for the SUT holiday. For hurricane season 2022, the law provides that the Secretary will establish what will be the weekend for this first year of the law's effectiveness. For additional information on this development, see Tax Alert 2022-0761.
Federal: The IRS has released (FR Doc. 2022—079675) the 2022 inflation adjustment factor and reference prices for calculating the IRC § 45 production tax credit (PTC) for qualified energy resources. The PTC originally allowed taxpayers to claim a credit equal to 1.5 cents (adjusted annually for inflation) per kilowatt hour of renewable electricity produced at a qualified facility. The PTC applies if the qualified facility began construction before Jan. 1, 2017, under one of the methods conveyed in IRS Notice 2013-29. The PTC rate available for wind facilities is phasing down and the rate applied depends on the year in which a project begins construction. For additional information on this development, see Tax Alert 2022-0699.
Illinois: New law (2022 IL SB 157) expands the Reimagining Electric Vehicles in Illinois (REV Illinois) program to provide financial incentives to battery recycling and reuse manufacturers and battery raw materials refining service providers. This is in addition to eligible manufacturers of electric vehicles, electric vehicle component parts and electric vehicle power supply equipment. The provisions under REV Illinois for full-time employee jobs creation are modified for incentive agreements entered into after April 19, 2022. The new law the Manufacturing Illinois Chips for Real Opportunity (MICRO) Act, which provides financial incentives to eligible semiconductor and microchip manufacturers that meet certain job creation and investment requirements. The Illinois Department of Commerce (IL DOC) cannot enter into new agreement with taxpayers after Dec. 31, 2028. The law also provides utility tax exemptions for MICRO projects and building materials exemptions for project sites. The law amends the Economic Development for a Growing Economy (EDGE) Tax Credit Act by providing that the IL DOC cannot enter into a new agreement with a taxpayer for EDGE credits after June 30, 2027 (from June 30, 2022) and, in regard to making an application for a project to create and retain new jobs, providing that if the applicant is a startup taxpayer, employees employed by related members are not attributed to the applicant for purposes of determining the capital investment or job creation. Both the EDGE and the River Edge Redevelopment Zone Act are amended to redefine "underserved area" as of July 1, 2022. The film production services credit is modified by requiring a taxpayer who transfers a credit to pay the IL DOC a fee equal to 2.5% of the transferred credit amount eligible for nonresident wages and an additional fee of 0.25% of the total amount of the transferred credit not calculated on nonresident wages. The fee applies beginning on July 1, 2023. Other changes to the film production services credit under the new law modify the "labor expenditure" and "Illinois production spending" requirements and define the term "loan out company". The law establishes the Illinois Production Workforce Development Fund, which will be used exclusively to provide grants to community based organizations, labor organizations, private and public universities, community colleges and other organizations and institutions approved by the IL DOC to administer workforce training programs that support efforts for a diverse and inclusive workforce in the film industry. Lastly, the law extends the hospital credit through Dec. 31, 2027 (from 2022). Ill. Laws 2022, P.L. 102-0700 (2022 IL SB 157), signed by the governor on April 19, 2022.
Nebraska: New law (2022 NE LB 917) creates a nonrefundable credit that can be claimed against income tax to employers that employ an eligible employee — an individual convicted of a felony — during the tax year. The credit equals 10% of wages paid by the employer to the eligible employee during the tax year. The credit is only allowed with respect to wages paid during the first 12 months of the eligible employee's employment with the employer. The credit is capped at $20,000 per employee. The Nebraska Department of Revenue will consider credit applications in the order in which they are received. The total amount of credits that can be approved during the year is limited to $5 million. The credit is available for tax years beginning on or after Jan. 1, 2023. Neb. Laws 2022, LB 917, signed by the governor on April 18, 2022.
PAYROLL & EMPLOYMENT TAX
Alabama: In late April, 2022, the Alabama Department of Revenue issued revised Withholding Tax Tables and Instructions for Employers and Withholding Agents to reflect changes to the standard deduction and dependent exemption amounts under legislation enacted in 2022. The personal income tax rates are unchanged. The revised income tax withholding tables are effective immediately. For additional information on this development, see Tax Alert 2022-0716.
Minnesota: A bill pending in the state legislature (2022 MN HF 1200/SF 1205) if enacted, would create a state family and medical leave (PFML) insurance program funded 50% by employers and 50% by employees. Employers would have the option of providing PFML insurance through a private plan. The program would be administered by the Minnesota Department of Employment and Economic Development. For more on this development, see Tax Alert 2022-0772.
Thursday, June 2, 2022. Domestic tax quarterly webcast series: A focus on state tax matters (1 pm - 2.30 pm EDT). For our second quarterly webcast of 2022, our panel will discuss important state tax policy developments, as well as international tax policy developments that could affect state and local taxes. Topics to be addressed include: (1) the potential US state and local tax implications of the OECD Model Rules for new global minimum taxes under Pillar Two of the BEPS 2.0 project; (2) an update on new and recently amended state pass-through-entity-level tax laws which were enacted as a workaround to the federal income tax law's limitation on the deduction for state and local taxes, and related administrative guidance; (3) the latest administrative and judicial developments on Maryland's novel digital advertising tax and key sales and use tax updates; (4) an update on state fiscal conditions and their potential impact on state tax policy; and (5) other highlights of recent state and local tax legislative and administrative developments from the past quarter. Register.
Tuesday, June 7, 2022. Are you ready for July 1? — Top five questions companies ask about Superfund tax implementation and selected issues (1 pm - 2 pm EDT). Please join EY's cross-functional panel of professionals for a webcast in which they address the questions most commonly asked by companies preparing for the July 1st implementation date for federal Superfund chemicals excise taxes which were reinstated by the Infrastructure Investment and Jobs Act (P.L. 117-58) (IIJA). During the webcast, our panel will focus on some of the key considerations that companies may want to analyze to determine the potential impact of Superfund excise taxes on their business. The panel will also share insights into what businesses may need to consider as they evaluate the readiness of their existing systems and processes to comply with the re-enacted and expanded Superfund tax requirements. Register.
Thursday, June 9, 2022. The indirect tax technology journey: Now. Next. Beyond. (1 pm - 2 pm EDT). Join our EY team of tax technology professionals for the fifth in a series of webcasts focused on the evolving technology landscape. During this 60-minute webcast, the final one in this series, our EY panel will share insights into how market-leading organizations are using technology to adapt to new legislation and market trends and to effectively transform tax operations. This webcast will focus on leading practices for global indirect tax technology selection and implementation. Because technology is a vital component for every business looking to build a resilient, future-ready tax function, these webcasts are relevant across all sectors and to businesses of every size. 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 See Ill. Dept. of Rev., Informational Bulletin: FY 2022-23 "Grocery Tax Suspension from July 1, 2022, through June 30, 2023" (May 2022).
2 See Ill. Dept. of Rev., Informational Bulletin: FY 2022-24 "State Sales Tax Holiday August 5, 2022, through August 14, 2022" (May 2022).
3 "Renewable diesel" is defined as a diesel fuel that is a hydrocarbon fuel derived from biomass meeting the requirements of the latest version of ASTM standards D975 or D396. Co-processed fuels are not considered renewable diesel.
4 See Ill. Dept. of Rev., Informational Bulletin FY 2022-25, Notice to Retailers: Illinois Suspends the Inflation Adjustment to the Motor Fuel Tax Rate for Six Months from July 1, 2022, through December 31, 2022 (May 2022); Informational Bulletin FY 2022-22, Illinois Suspends the Inflation Adjustment to the Motor Fuel Tax Rate for Six Months from July 1, 2022, through December 31, 2022 (May 2022); Informational Bulletin FY 2022-21, Illinois Suspends the Inflation Adjustment to the Motor Fuel Use Tax Rate for Six Months from July 1, 2022, through December 31, 2022 (May 2022).
5 87 Fed. Reg. 22286 (Apr. 15, 2022).