June 17, 2022
State and Local Tax Weekly for June 3 and June 10
Ernst & Young's State and Local Tax Weekly newsletter for June 3 and June 10 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 Jersey publishes proposed combined reporting regulations for public comment
On May 16, 2022, the New Jersey Division of Taxation (NJ DOT) published proposed combined reporting regulations (the "Proposed Regulations") in the New Jersey Register.1 Interested parties may submit comments until July 15, 2022.
The Proposed Regulations would incorporate changes that the New Jersey Legislature made to the Corporation Business Tax Act (CBTA) in 2018 and 2020. Changes affecting combined reporting groups involve the following issues:
While the Proposed Regulations would likely affect certain taxpayers significantly, the following provisions could have far-reaching effects:
It is unclear whether the Proposed Regulations would apply prospectively (that is, only on and after the date when they become final) or retroactively, and if so, to what extent.
California: The Oakland City Council has approved a ballot measure, Amending Resolution No. 88227, that would implement a modernized progressive business tax structure to be submitted to voters for consideration during the Nov. 8, 2022 general election. If approved, an annual business tax would be imposed on every person engaging in business activities within Oakland. For purposes of imposing the business tax, business activities would be classified into 19 categories (e.g., business and personal services, retail sales, professional and semi-professional services, manufacturing, hotel and motel, administrative headquarters, public utility, miscellaneous), with specific rate schedules and tax provisions applying to each category. Optional methods for determining tax would be provided for persons engaged in two or more business activities, other than manufacturing. If the application of tax places an undue burden on interstate commerce or violates the constitution, the taxpayer can apply to the City Administrator for a tax adjustment; the application for an adjustment would have to be submitted within one-year after the tax payment due date. The measure also defines terms, addresses payment requirements and due dates, provides for the imposition of penalties and interest, and describes procedural options for refunds and tax appeals. If approved by the voters, these provisions of the proposed business tax would be effective starting in 2023.
New Jersey: The New Jersey Division of Taxation (NJ DOT) said that it has proposed rules that would clarify the exclusion of income exempt from federal taxation under a treaty between the US and a foreign nation. The NJ DOT explained that even though law changes enacted in 2018 through 2020 deleted the would "specific" from N.J.S.A. 54:10A-4(k)(2)(A), the change only covered treaties connected with related party addback provisions. Thus, treaty protected income is not required to be added back for New Jersey Corporation Business Tax (CBT) purposes except as otherwise may be required under the CBT statutory addback provisions. Taxpayers that addback treaty protected income for open privilege periods can file amended returns. N.J. Div. of Taxn., Notice: Income Excluded Pursuant to a Tax Treaty and CBT Returns (last updated May 20, 2022).
Oklahoma: New law (2022 OK HB 3418) allows taxpayers the option of electing immediate and full expensing/100% bonus depreciation for "qualified property" and "qualified improvement property" placed in service after Dec. 31, 2021. "Qualified property" and "qualified improvement property" have the same meaning as defined in IRC §§168(k) and (e)(6), respectively, as the IRC existed on Jan. 1, 2021. Qualified property and qualified improvement property eligible for 100% bonus depreciation can be deducted as an expense incurred during the tax year in which the property is placed in service. Such property will remain fully and immediately deductible as an expense in the year in which it was placed in service notwithstanding federal law changes related to amortization of cost recovery starting in 2023. The decision to immediately expense or amortize such property over a schedule is irrevocable unless allowed by the Oklahoma Tax Commission. The law also conforms to IRC § 179, allowing taxpayers to immediately deduct as an expense the cost of certain depreciable business assets in the tax year in which it was placed in service. The new law took effect from and after its passage and approval. 2022 Okla. Sess. Laws 2022, ch. 343 (2022 OK HB 3418), signed by the governor on May 26, 2022.
SALES & USE
Colorado: The Colorado Department of Revenue published guidance on a new $0.27 Retail Delivery Fee ("Fee") that retailers and marketplace facilitators (collectively, "Retailers") must collect on deliveries of taxable tangible personal property made by motor vehicles to a Colorado location. The Fee applies to orders placed on or after July 1, 2022. For more on this development, see Tax Alert 2022-0902.
Colorado: New law (2022 CO SB 22-006), effective for sales made on or after Jan. 1, 2023, increases the amount a retailer with total taxable sales of $100,000 or less during a filing period to retail 5.3% of the tax reported (up from 4% for retailers with more than $100,000 in taxable sales in the filing period). In either case, a retailer cannot retain more than $1,000 in any filing period. 2022 Colo. Sess. Laws, ch. 160 (2022 CO SB 22-006), signed by the governor on May 16, 2022.
Pennsylvania: The Pennsylvania Department of Revenue has released an updated taxability matrix indicating, without comment or analysis, that non-fungible tokens (NFTs) are subject to Pennsylvania sales and use tax by simply including them in a list of computer hardware, digital products and streaming services and identifying them as taxable and newly added to that list. Several other states, the Multistate Tax Commission (MTC), and the Streamlined Sales Tax Governing Board (SST) are considering how NFTs should be subject to state sales or use taxes and whether they should be classified as "digital assets" for those purposes. See Pa. Dept. of Rev., Retailer's Information - State and Local Sales, Use and Hotel Occupancy Tax - Public Transportation Assistance Fund Taxes and Fees - Vehicle Rental Tax (REV-717) (May 2022).
Tennessee: New law (2022 TN SB 500/HB 536) allows all dealers required to register for and collect and remit sales and use tax to deduct a portion of sales and use tax collected on items sold July 1, 2022 through June 30, 2023. The deduction only applies to the state portion of sales and use tax at the following rate: (1) 2% of the first $2,500 on each report, and (2) 1.15% of the amount over $2,500 on each report. This deduction is not allowed on delinquent reports and tax remittance. The deduction is limited to $25 per report. This change takes effect July 1, 2022. Tenn. Laws 2022, Pub. Acts ch. 1082 (2022 TN SB 500/HB 536), signed by the governor on May 27, 2022. See also, Tenn. Dept. of Rev., Notice #22-09 "Vendor's Compensation" (June 2022).
Tennessee: New law (2022 TN SB 2480/HB 2608) temporarily exempts from sales and use tax purchases and leases of all equipment, machinery, software, ancillary components, appurtenances, accessories or other infrastructure that is used in whole or in part to provide broadband communications services or internet access. The exemption is in place staring July 1, 2022 through June 30, 2025. The exemption does not apply to a retail sale of personal consumer electronics (e.g., smartphones, computers and tablets, Wi-Fi routers, consumer-grade modems). Broadband communications services are defined under the new law as telecommunications services, mobile telecommunications services, video programming services and direct-to-home satellite television programming services. The Tennessee Department of Revenue (TN DOR) has said that contractors can apply for the exemption if a qualifying service provider will use the items to provide broadband communications or internet access. The TN DOR issued guidance on how to make exempt purchases and vendor's reporting responsibilities. Tenn. Laws 2022, Pub. Acts ch. 1102 (2022 TN SB 2480/HB 2608), signed by the governor on May 31, 2022. See also, Tenn. Dept. of Rev., Notice #22-07 "Tennessee Broadband Investment Maximization Act" (May 2022).
Maryland: New law (2022 MD SB 536) expands the film production activity tax credit to include certain digital animation projects. The term "digital animation project" is defined as "the creation, development, and production of computer-generated animation content for distribution or exhibition to the general public." A "film production activity" does not include a digital or animation project other than a digital animation project. The new law takes effect July 1, 2022 and applies to all tax years beginning after Dec. 31, 2021. 2022 Md. Laws ch. 323 (2022 MD SB 536), signed by the governor on May 12, 2022.
Maryland: New law (2022 MD SB 215) extends the credit for the costs of installing an energy storage system to those installed by Dec. 31, 2024. The new law also establishes a grant program that will provide grants to business entities and individuals for a portion of the costs of purchasing and installing an energy storage system. Grants awarded under the program may not exceed the lesser of: (1) $150,000 for an energy storage system installed on a commercial property, and $5,000 for such a system installed on a residential property; or (2) 30% of the total installed costs of the energy storage system. Grants are awarded on a first-come, first-served basis; grants may not be awarded for a system installed before Jan. 1, 2025. 2022 Md. Laws ch. 246 (2022 MD SB 215), signed by the governor on May 12, 2022.
Colorado: New law (2022 CO HB 22-1301) values a "controlled environment agricultural facility" (CEA facility)2 for property tax assessment purposes as all other agricultural property using the cost, market and income approaches. A CEA facility will be classified and valued for assessment purposes based on actual use if its sole use is not the growing of crops for human or livestock consumption. On or after Jan. 1, 2023 but before Jan. 2, 2028, agricultural equipment used in any CEA facility is exempt from property tax. The law takes effect 90 days following the adjournment of the Colorado legislature (Aug. 10, 2022). 2022 Colo. Sess. Laws ch. 198 (2022 CO HB 22-1301), signed by the governor on May 20, 2022.
Georgia: New law (2022 GA HB 997), if approved by voters at the November 2022 general election, would provide a state-wide ad valorem tax exemption for "timber equipment" directly used by a timber producer in the production or harvest of timber. If approved by voters the exemption would apply starting on or after Jan. 1, 2023. 2022 Ga. Laws ch. 859 (2022 GA HB 997), signed by the governor May 10, 2022.
Virginia: New law (2022 VA HB 791) provides that fixtures installed at a data center and taxed as real property are assessed using the cost approach (i.e., assessing the value by determining the cost to construct a reproduction or suitable replacement of fixtures, with a deduction for the fixture's physical, function and economic depreciation). For purposes of this provision, "fixture" is defined as "fixtures and equipment used in a data center except computer equipment and peripherals, equipment used for external surveillance and security, and fire and burglar alarm systems." Fixtures include items such as generators, power equipment, chillers, heating, ventilation, air conditioning, water storage, monitoring systems, and distribution equipment. The law takes effect July 1, 2022. 2022 Va. Acts ch. 671 (2022 VA HB 791), signed by the governor on April 11, 2022. An identical bill, (2022 VA SB 513), was also signed by the governor on April 11, 2022 and enacted as 2022 Va. Acts ch. 672.
Connecticut: New law (2022 CT HB 5473) modifies various tax administrative procedures, including the requirement that an individual income taxpayer who has claimed a credit for tax paid to another state file an amended income tax return for any tax year in which the taxpayer paid an assessment to the other state where the taxpayer had not filed an income tax return in that state. An amended return must be filed if the amount finally paid to the other state is different from the amount used to calculate the credit for Connecticut tax purposes. The amended return must be filed within 90 days of the final determination. A refund based on such a change will not be allowed if it is filed more than five years after the original due date of the taxpayer's Connecticut return. This change applies to tax years beginning on or after Jan. 1, 2022. Effective May 27, 2022, the new law does the following: (1) imposes a $5 million cap on the amount of interest added to a refund issued by the Connecticut Department of Revenue Services (CT DRS) or as part of a refund awarded by a court; (2) limits the period in which a taxpayer may file a refund claim for a closed audit period to within six months after the date the results become final by operation of law or exhaustion of administrative and judicial remedies (this provision does not affect certain refund claims); (3) allows the CT DRS to reassess a sales and use tax deficiency assessment for a tax period (i.e., allows for more than one sales and use tax deficiency assessment for a tax period); (4) limits the time in which the CT DRS can collect tax to 10 years from: (a) the date the tax was reported on a filed return or (b) if a timely assessment has been filed, the date the assessment became final — tax remaining after the 10-year period will be abated (this provision does not apply to taxes for which the CT DRS has entered into a compromise or closing agreement or that are secured by a line on the taxpayer's real or personal property); (5) requires the CT DRS to study the feasibility of selling outstanding tax liabilities owed to the state, with the report due by Jan. 1, 2023; and (6) requires the CT DRS to study alternative approaches for the imposition of individual income tax with respect to the residency of individuals subject to the tax. 2022 Conn. Pub. Acts 22-117 (2022 CT HB 5473), signed by the governor on May 27, 2022.
Connecticut: New law (2022 CT HB 5473) codifies the Connecticut Department of Revenue Services policy of allowing an affected business entity (i.e., pass-through entity) to annually elect to file composite returns on behalf of nonresident members. The election must be made by the due date or extended due date of the affected business entity's return. The new law describes how to compute the amount of composite income tax due. These provisions took effect May 27, 2022. 2022 Conn. Pub. Acts 22-117 (2022 CT HB 5473), signed by the governor on May 27, 2022.
PAYROLL & EMPLOYMENT TAX
Alabama: New law (2022 AL SB 224) modifies the rules governing the eligibility for unemployment insurance (UI) benefits by requiring that claimants contact prospective employers at least three times per week for each week of unemployment claimed to be eligible to receive unemployment compensation benefits. This modification takes effect Jan. 1, 2023. For more on this development, see Tax Alert 2022-0818.
Minnesota: Recently enacted legislation (2022 MN SF 2677) reduces the 2022 Minnesota state unemployment insurance (SUI) tax rates for experience-rated employers and allows for the deposit of $2.7 billion in American Rescue Plan Act (ARPA) funds and general state funds to the state's SUI trust fund to repay the outstanding federal unemployment insurance loan balance, pay the federal interest due for fiscal year 2022, and replenish the state's SUI trust fund to prevent future borrowing. For additional information on this development, see Tax Alert 2022-0831.
Mississippi: New law (2022 MS SB 2723) holds the general experience rate portion of the 2022 state unemployment insurance (SUI) tax rates at 0%. As a result, the 2022 Mississippi SUI tax rates range from 0.0% to 5.4%, unchanged from 2020 and 2021. For more on this development, see Tax Alert 2022-0823.
Puerto Rico: The Puerto Rico Department of Labor and Human Resources announced on May 31, 2022 that because numerous employers continue to have difficulty accessing the its electronic reporting portal, the deadline for filing the first-quarter 2022 state unemployment insurance (SUI) tax return is extended from May 2, 2022 to June 30, 2022. The due date for future 2022 SUI returns is unchanged. For more information on this development, see Tax Alert 2022-0924.
Federal: A panel of judges of the U.S. Court of Appeals for the Fifth Circuit ("Fifth Circuit") recently held that the federal oil spill liability tax imposed by IRC § 4611(b) on crude oil that is exported outside of the US violated the Export Clause of the U.S. Constitution (Export Clause).3 On May 23, 2022, the Fifth Circuit denied the government's request to rehear the case with a full panel. The government still has the option of appealing the appellate panel's decision to the US Supreme Court. For more on this development, see Tax Alert 2022-0869.
Kentucky: Governor Beshear filed an emergency regulation to freeze an automatic two cent gas tax increase set to take effect July 1, 2022. In the emergency regulation, the Kentucky Department of Revenue indicated that the freeze would be necessary until mid-January 2023 when the Kentucky General Assembly convenes. The governor has proposed using funds from the budget surplus to replace the lost road fund revenues. Ky. Gov. Beshear, Press Release "Gov. Beshear Stops State Gas Tax Hike, Providing Relief to Kentuckians at the Pump" (July 2, 2022).
Oregon: The U.S. Supreme Court has been asked to review a ruling of the Oregon Supreme Court (Ore. S.Ct.) that neither the Due Process nor the Commerce Clauses of the U.S. Constitution prohibit Oregon from requiring an out-of-state company whose only connection to the state was the provision of Voice over Internet Protocol (VoIP) services from collecting Oregon's emergency communications tax (9-1-1 tax) from its subscribers. Ooma, Inc. v. Ore. Dept. of Rev., SC S067581 (Ore. S.Ct. Dec. 23, 2021), pet. for cert. filed, Dkt. No. 21-1488 (U.S. S.Ct. filed May 23, 2022).
VALUE ADDED TAX
International — Uruguay: In Decree No. 140/022, Uruguay's Executive Power extended the reduced 9% VAT rate (normally 22%) for certain tourism activities from April 30, 2022 to Sept. 30, 2022. For more on this development, see Tax Alert 2022-0840
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 The New Jersey Register (N.J.R.) is the official journal of New Jersey state agency rulemaking. LexisNexis provides free public access to the N.J.R. at http://www.lexisnexis.com/hottopics/njoal/. The Regulations are published in the May 16, 2022 edition under “Rule Proposals” at 54 N.J.R. 865(a).
2 Under the new Colorado law, a “CEA facility” is defined as “a nonresidential structure and related equipment and appurtenances that combines engineering, horticultural science, and computerized management techniques to optimize hydroponics, plant quality, and food production efficiency from the land’s water for human or livestock consumption.”
3 Trafigura Trading, LLC v. United States, 29 F.4th 286 (5th Cir. 2022).