June 29, 2022 State and Local Tax Weekly for June 17 Ernst & Young's State and Local Tax Weekly newsletter for June 17 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 New Jersey Division of Taxation offers new transfer pricing initiative that runs through March 2, 2023 The New Jersey Division of Taxation (NJ DOT) is conducting a voluntary transfer pricing initiative that runs through March 2, 2023 (initiative). During the initiative, a business that is subject to New Jersey's corporate business tax (NJ CBT) (taxpayer) can expedite the resolution of corporate intercompany pricing issues (IPI) for all open tax years for which it has filed a NJ CBT return. The initiative is aimed at taxpayers whose intercompany transactions with affiliates may not have been made at fair market value or lack economic substance. Taxpayers with related party intercompany pricing, including those already under audit or with pending disputes in the Conference and Appeals Branch of the NJ DOT, may participate in the initiative. Taxpayers litigating cases in the courts are not eligible to not participate in the initiative. The NJ DOT will waive all penalties for any IPI issue under a Closing Agreement and waive its right to re-audit participating taxpayers, except for any future federal changes to taxable income that affect a taxpayer's NJ CBT liability. The NJ DOT stated that it will not waive any applicable penalties for non-participating taxpayers or those who fail to complete the initiative within the required time frame. For additional information on this development, including information on how to participate in the initiative and its terms, see Tax Alert 2022-0947. Vermont enacts significant corporate income tax changes Recently enacted law (2022 Vt. Laws Act No. 148 (2022 VT SB 53) (2022 VT SB 53 or new law)),1 makes a number of significant changes to the state's corporate income tax laws and updates the state's conformity to the Internal Revenue Code of 1986, as amended (IRC). Apportionment: Effective for tax years beginning on or after Jan. 1, 2023, Vermont, which currently uses a three-factor (i.e., property, payroll and sales) factor formula to apportion income to the state, will shift to a single sales factor apportionment formula and repeal its throwback rule. Even though the state is moving to a single sales factor apportionment formula, corporations subject to apportionment will be required to report in-state and out-of-state property and payroll information to the tax commissioner. Combined reporting and affiliated groups: Effective for tax years beginning on or after Jan. 1, 2023, the new law repeals Vermont's so called "80/20" provisions. Historically, an "overseas business organization" (i.e., a business organization with 80% or more of its payroll and property outside the 50 states and the District of Columbia) was excluded from a Vermont combined reporting group if certain tests were met. Under 2022 VT SB 53, the definition of "overseas business organization" is repealed and the definition of "affiliated group"2 is amended to specifically exclude "foreign corporations" instead of "overseas business organizations." Consequently, the new law will require overseas business organizations previously excluded from the Vermont combined reporting group based on foreign activity to be included in such a group going forward. As revised by the new law, "[a] taxable corporation that is part of an affiliated group engaged in a unitary business shall be treated as a single taxpayer and shall file a group return containing the combined net income of the affiliated group … " (Italics indicates text added to 32 V.S.A. § 5862(d).) The new law further requires the unitary combined return to include the income and apportionment factors of any taxable corporation that has a unitary relationship with the taxpayer and is incorporated in the US or formed under the laws of any state, the District of Columbia or any US territory or possession. The income, gain or losses of the members of the combined reporting group must be combined to the extent allowed under the IRC as if the combined group was filing a consolidated return. State tax credits, however, are limited and can only be used by the group member to which the credit is attributed. Thus, any such Vermont state tax credits cannot be combined to offset the income of other members of the group. For purposes of determining the sales factor in a combined report, Vermont will switch from the Joyce methodology to the Finnigan methodology. Thus, if one member of the unitary group has nexus with Vermont, then the Vermont sales factor numerator will include the Vermont sales of tangible personal property of all members of the unitary group. These changes are effective for tax years beginning on or after Jan. 1, 2023. Corporate minimum tax: Vermont's corporate minimum tax structure is modified by the new law by increasing the minimum tax for C corporations with Vermont gross receipts exceeding $500,000. Currently, the minimum taxes are $300 (imposed on corporations with Vermont gross receipts of $2 million or less), $500 (imposed on corporations with Vermont gross receipts exceeding $2 million but up to $5 million), and $750 (imposed on corporations with Vermont gross receipts exceeding $5 million). Starting in 2023, the new rate structure for the corporate minimum tax will be as set forth in the following table:
IRC conformity: Effective retroactively to Jan. 1, 2022, the date of conformity to the IRC for Vermont corporate income tax purposes is the IRS as in effect on Dec. 31, 2021 (previously March 31, 2021), without regard to federal income tax rates and other Vermont modifications. This change applies to tax years beginning on or after Jan. 1, 2021. (See Tax Alert 2022-1006.) INCOME/FRANCHISE California: In its June 2022 issue of Tax News, the California Franchise Tax Board (CA FTB) explained the effects of 2022 Cal. Stat. ch. 3 (2022 CA SB 113) on the elective pass-through entity (PTE) tax and the ordering of credits. Of note, 2022 CA SB 113 removed a provision that prohibited the credit for PTE tax paid from reducing tax owed below a taxpayer's tentative minimum tax (effective for tax years beginning on or after Jan. 1, 2021) and required the elective tax credit be applied against the net tax after credits for taxes paid to other states (effective for tax years beginning on or after Jan. 1, 2022). In regard to ordering of credits, before enactment of 2022 CA SB 113, the PTE credit statute contained a carryover provision but not a refundable provision. Thus, the CA FTB explained it had to be used before the other state tax credit (OSTC), which contains neither provision. Due to the change in the ordering of credits by the new law, beginning in 2022 the OSTC is taken before the PTE credit. According to the CA FTB "[t]he change in credit ordering affords taxpayers the benefit of utilizing both their OSTC and PTE Credit or carrying over the PTE Credit." The CA FTB noted that 2022 CA SB 113 did not change how the OSTC is calculated. Thus, for OSTC purposes, a taxpayer's California tax liability will be computed without a reduction of the OSTC but will be reduced by all other tax credits, including the PTE credit. Cal. FTB, Tax News "Senate Bill (SB) 113 credit ordering rules" (June 2022). District of Columbia: The District of Columbia Office of Tax and Revenue (DC OTR) announced that its temporary nexus relief provided in response to the COVID-19 pandemic, will expire on July 16, 2022. During the nexus relief period, the DC OTR said it will not assert nexus for purposes of corporation franchise tax or unincorporated business franchise tax solely because employees are working temporarily from home within the District or a business's property (e.g., computers, computer equipment or similar property) is being used by employees to work from home and which is temporarily located within the District. The presence of such employees under these conditions also will not cause a business to lose its P.L. 86-272 protection. This relief applies during the period of the declared public emergency and for 90 days after the Mayor declares the emergency over. Since the Mayor declared the emergency ended April 16, 2022, the relief period is March20, 2020 through July 16, 2022. DC OTR, OTR Tax Notice 2022-06 (June 6, 2022). Massachusetts: In VAS Holdings & Investments LLC,3 the Massachusetts Supreme Judicial Court (MA SJC) held that the commonwealth lacked statutory authority under the unitary business principle to impose corporate excise and nonresident composite taxes on gain that an out-of-state limited liability company (LLC) treated as an S corporation and its nonresident owners realized from selling its interests in an in-state LLC treated as a partnership. In so holding, the MA SJC reversed an earlier decision of the Massachusetts Appellate Tax Board (MA ATB). In another part of its unanimous opinion, the MA SJC held that it would have been constitutionally permissible for Massachusetts to tax the capital gain of nonresidents. The MA DOR filed a motion for reconsideration on June 13, 2022. For more on this ruling, see Tax Alert 2022-0922. Minnesota: The Minnesota Department of Revenue (MN DOR) announced that its temporary nexus relief provided in response to the COVID-19 pandemic will end on June 30, 2022. During the temporary relief period (from March 13, 2020 — June 30, 2022), the MN DOR will not seek to establish business income tax nexus for business income tax purposes due to the in-state presence of an employee temporarily telecommuting due to the pandemic. Minn. Dept. of Rev., "Our Response to COVID-19: COVID-19 and Telecommuters" (last updated June 6, 2022). Ohio: In its Final Determination with respect to the Ohio Commercial Activity Tax (OH CAT), the Ohio Department of Taxation (OH DOT) sitused a global investment firm's gross receipts from providing asset management services to mutual funds to the locations of the investors in those mutual funds. In so doing, the OH DOT appears to have effectively applied a "look-through sourcing" method to assign gross receipts from providing asset management services for purposes of the OH CAT. The taxpayer has appealed the Determination to the Ohio Board of Tax Appeals. For more on this development, see Tax Alert 2022-0885. South Carolina: The South Carolina Department of Revenue said a taxpayer can deduct on its South Carolina income tax return qualified wages that were disallowed as a deduction in 2020 or 2021 for federal income tax purposes due to the taxpayer claiming the federal employee retention credit (ERC). The ruling applies with respect to wages paid or accrued after March 12, 2020, but before Jan. 1, 2022. S.C. Dept. of Rev., SC Revenue Ruling #22-4, "Federal Employee Retention Credit — Modification for Qualified Wages for Tax Years 2020 and 2021 (Income Tax)" (June 10, 2022). Virginia: The Virginia Department of Taxation (VA DOT) is seeking public comments on the development of guidelines on Virginia's new elective pass-through entity (PTE) tax. The guidelines to be developed by the VA DOT will provide general guidance on the elective PTE tax, the corresponding income tax credit for PTE owners, and the credit for taxes paid to other states. The pre-drafting guideline comment period is open through July 11, 2022. The VA DOT will post the guidelines, and other information, on its elective PTE tax webpage. Va. Dept. of Taxn., "Elective Pass-Through Entity Guidance Document Interested Parties Notice" (June 2022). SALES & USE Maryland: New law (2022 MD HB 791 and SB 723, respectively) amends the definition of "digital products" to exclude certain products. Specifically, "digital products" do not include: (1) a product having electrical, digital, magnetic, wireless, optical, electromagnetic or similar capabilities where the purchaser holds a copyright or other intellectual property interest in the product, and the purchaser only uses the product for commercial purposes (including advertising or other marketing activities); or (2) computer software or software as a service purchased or licensed solely for commercial purposes in an enterprise computer system (including operating programs and application software used exclusively by such system) that is housed or maintained by the purchaser or on a cloud server. This change takes effect July 1, 2022. Md. Laws 2022, chs. 534 and 535 (2022 MD HB 791 and SB 723, respectively), enacted without the governor's signature on May 29, 2022. Minnesota: The Minnesota Department of Revenue (MN DOR) announced that the temporary nexus relief provided in response to the COVID-19 pandemic will end on June 30, 2022. During the temporary relief period (March 13, 2020 — June 30, 2022), the MN DOR will not seek to establish sales and use tax nexus due to the in-state presence of an employee temporarily telecommuting due to the pandemic. Minn. Dept. of Rev., "Our Response to COVID-19: COVID-19 and Telecommuters" (last updated June 6, 2022). Oklahoma: New law (2022 OK SB 1339) amends the definitions of "marketplace facilitator" and "remote seller" and changes the term for items subject to sales from "tangible personal property" to "product." (Throughout the marketplace facilitator and remote seller provisions the term "tangible personal property" is replaced with the new term "product(s)".) The term "product" is defined as tangible personal property, services or other transactions subject to Oklahoma's sales and use tax. The new law also provides that the collection obligation of a marketplace facilitator or a referrer that elects to collect and remit sales and use tax also applies to local taxes administered by the Oklahoma Tax Commission. These changes take effect Jan. 1, 2023. 2022 Okla. Sess. Laws, ch. 396 (2022 OK SB 1339), signed by the governor on May 26, 2022. Tennessee: A provision of new law (2022 TN SB 2898/HB 2883) exempts from sales tax retail sales of food and food ingredients sold on Aug. 1, 2022 through Aug. 31, 2022. This exemption does not apply to sales from micro markets or vending machines or devices. The Tennessee Department of Revenue has issued guidance on the food/food ingredients sales tax holiday, including a definition of "food and food ingredients" and guidance on reporting exempt sales. "Food and food ingredients" are defined as "liquid, concentrated, solid, frozen, dried, or dehydrated substances that are sold to be ingested or chewed by humans and are consumed for their taste or nutritional value." It does not include alcoholic beverages, tobacco, candy, dietary supplements and prepared food. 2022 Tenn. Pub. Acts, ch. 1131 (2022 TN SB 2898/ HB 2883), signed by the governor on June 1, 2022; Tenn. Dept. of Rev., Notice #22-10 "2022 Sales Tax Holiday for Food and Food Ingredients" (June 2022). Tennessee: New law (2022 TN SB 1857/HB 1874) exempts from sales and use tax the sale of all coins, currency and bullion that are: (1) manufactured in whole or in part from gold, silver, platinum, palladium or other materials; (2) used solely as legal tender, security or commodity; and (3) sold based primarily on their intrinsic value as precious material or collectible items rather than their representative value as a medium or exchange. This exemption took immediate effect. 2022 Tenn. Pub. Acts, ch. 1092 (2022 TN SB 1857/HB 1874), signed by the governor on May 27, 2022; Tenn. Dept. of Rev., Notice #22-08 "Coins, Currency, and Bullion" (June 2022). BUSINESS INCENTIVES Colorado: New law (2022 CO HB 22-1051) extends the sunset date of Colorado's affordable housing tax credit through Dec. 31, 2031 (from Dec. 31, 2024). The annual aggregate $10 million credit limit is removed for credits allocated to qualified development in an area located in a county that has been designated as having been impacted by a federally declared disaster; the removal of the limit is for purposes of leveraging state and federal funds appropriated for recovery efforts. 2022 Colo. Sess. Laws, ch. 231 (2022 CO HB 22-1051), signed by the governor on May 26, 2022. West Virginia: New law (2022 WV HB 2096) reinstates, with modifications, the West Virginia Film Industry Investment Act, which expired in 2018. The reinstated film credit applies to tax years beginning on or after July 1, 2022 and terminates on Dec. 31, 2027. Of note, the definition of "qualified project" is modified to require that a motion picture, music video, commercial still photography, or television pilot program, series or mini-series incurs a cumulative amount of $50,000 in a calendar year (previously a minimum of $25,000) in direct production expenditures and post-production expenditures. A combination of projects not previously claimed that would qualify but for the cost will qualify if the combination of projects meet or exceed the $50,000 threshold in a calendar year. A commercial may be a qualified project if it incurs a minimum of $50,000 in a calendar year in direct production expenditures and post-production expenditures in West Virginia on its own and not in combination with other projects. Under prior law, the annual amount of available credit was limited to $5 million per year. The new law removes this limit. 2022 W.Va. Acts , ch. 273 (2022 WV HB 2096), signed by the governor on April 19, 2022. PROPERTY TAX Oklahoma: New law (2022 OK SB 1079) waives the payroll requirement for tax year 2022, which is based in part on the 2021 calendar year payroll reported to the Oklahoma Employment Security Commission, for manufacturing facilities qualifying for the ad valorem tax exemption. Such manufacturing facilities may continue to receive the exemption for a five-year period if all other requirements for the exemption are met. The bill took effect upon approval by the governor. 2022 Okla. Sess. Laws, ch. 390 (2022 OK SB 1079), signed by the governor on May 26, 2022. COMPLIANCE & REPORTING Alabama: The Alabama Department of Revenue (AL DOR) extended the deadline for a pass-through entity (PTE) to make an election to be taxed at the entity level for the 2021 tax year from July 1, 2022 to Aug. 15, 2022. The AL DOR said that it will recognize such elections that are filed using My Alabama Taxes by Aug. 15, 2022, as validly made for PTEs that: (1) timely filed the required entity and member tax returns, as if the election had been properly made for the year; (2) timely made an electing PTE extension payment; or (3) made an entity-level tax payment before the due date of the respective return. Ala. Dept. of Rev., Press Release: ALDOR Announces Extension of Time for Filing the Election to be Taxed at the Entity Level for Certain Pass-Through Entities (June 17, 2022). CONTROVERSY Oklahoma: New law (2022 OK HB 3901) vests the Oklahoma Court of Tax Review with jurisdiction to hear complaints challenging an order of a county board of equalization sustaining the value of real or personal property with a fair cash value in excess of $3 million. A decision of the Oklahoma Court of Tax Review must be made within 12 months of the case being assigned to a three-judge panel of the court. This change takes effect Jan. 1, 2023. 2022 Okla. Sess. Laws, ch. 349 (2022 OK HB 3901), signed by the governor on May 26, 2022. MISCELLANEOUS TAX Virginia: The Virginia Department of Taxation (VA DOT) announced that the Virginia Disposable Plastic Bag Tax has been adopted by Loudoun County effective July 1, 2022. The cities of Alexandria, Fredericksburg and Roanoke and the counties of Arlington and Fairfax began collecting the bag tax on Jan. 1, 2022, while the City of Falls Church began collecting the tax on April 1, 2022. The tax applies to disposable plastic bags provided to customers in grocery stores, convenience stores and drugstores within the locality. The VA DOT administers the bag tax. Additional information on Virginia's bag tax is available here. Va. Dept. of Taxn., Tax Bulletin 22-9 "Virginia Disposable Plastic Bag Tax Enacted in Loudon County" (June 1, 2022). Washington: The U.S. Supreme Court will not review the Washington Supreme Court ruling upholding the constitutionality of the additional 1.2% Washington business and occupation (B&O) tax rate imposed on specified financial institutions under 2019 Wash. Laws, ch. 420. Specifically, the additional tax is imposed on a financial institution that is a member of a consolidated financial institution group that reported on its consolidated financial statement for the prior calendar year annual net income of at least $1 billion, not including net income attributable to noncontrolling interests. Petitioners had argued that effectively, the additional tax only applied to out-of-state based financial services institutions and thus, discriminated against interstate commerce. Washington Bankers Association et al. v. Washington, No. 98760-2 (Wash. S.Ct. Sept. 30, 2021), pet. for cert. denied, Dkt. No. 21-1066 (U.S. S.Ct. June 13, 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 Enacted May 31, 2022. 2 Vt. Stat. Ann. tit. 32, § 5811. 3 VAS Holdings & Investments LLC v. Commissioner of Rev., 489 Mass. 669 (Mass. Sup. Jud. Ct. May 16, 2022). | ||||||||||||
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