Tax News Update    Email this document    Print this document  

July 21, 2022

State and Local Tax Weekly for July 1 and July 8

Ernst & Young's State and Local Tax Weekly newsletter for July 1 and July 8 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.


"Final updates" to New York's draft business corporate franchise tax regulations will affect all industries

On July 1, 2022, the New York State Department of Finance and Taxation Department posted "final updates" to its Part 4, apportionment regulations (draft apportionment regulations). This draft includes the general apportionment provisions and rules for digital products/services and services and other business receipts, which were previously posted as separate drafts. The major revisions to these parts include the following:

  1. Replacing "taxpayer" with "corporation." This change stems from the rules applying to corporations determining if the economic nexus standard is met and non-taxpayer members of combined groups.
  2. Clarifying the items included in the business apportionment factor (BAF). The Department continues to exclude rules pertaining to "unusual events."1 Therefore, receipts generated from activities outside the ordinary course of business would be apportionable unless they are not "included in the computation of entire net income for the taxable year."2
  3. Addressing the apportionment of lump-sum payments. While some of the language included in this section remains unchanged from the prior versions of the draft apportionment regulations, one particularly noteworthy, new provision for lump sum payments would prohibit "a corporation [from using] the rules for intermediary transactions unless almost all of the activities carried on under the agreement are intermediary transactions."3 The intermediary transaction rule would allow for a type of look-through sourcing approach for taxpayers to the underlying beneficiary/consumer of the product or service.
  4. Including rules for net gains from the sale of tangible personal property and real property. The new rules would, among other things, limit the amount included in New York receipts to the amount included in everywhere receipts when determining net gains from sales of tangible personal property or real property if "the total amount of net gains (not less than zero) from sales … located in New York exceed the net gains (not less than zero) from sales … located within and [outside NYS]."4
  5. Including new examples for sourcing sales of tangible personal property, royalties, advertising receipts, and receipts from digital products/services. A new example in the discretionary authority section of the draft apportionment regulations would require a corporate partner to include in apportionment the gains/losses from the sale of the underlying assets of a partnership when the corporate partner's net gain from the sale of the partnership interest was 75% of its business receipts for the tax year.5 The general statutory rule excludes gain on the sale of a partnership interest unless the Commissioner determines that the inclusion of such net gains is necessary to properly reflect the taxpayer's business income or capital.
  6. Updating the rules for federal funds and other financial instruments. The draft apportionment regulations would not consider "interest paid to [a] corporation directly by the [F]ederal [R]eserve for reserves maintained at the [F]ederal [R]eserve [B]ank [to] constitute interest income from federal funds" and would require that interest be "apportioned under the rules for other financial instruments."6 The other financial instrument section of the draft apportionment regulations require that such interest income be apportioned 1/12 to NYS because "[o]nly one of the twelve Federal Reserve Banks is located in New York."7
  7. Clarifying that cryptocurrency falls under the definition of digital product. Draft apportionment regulation section 4-3.1(c) would define "cryptocurrency or similar asset digitally delivered" as "digital products" and source them using the digital product or digital services rules, i.e., a hierarchical sourcing method first looking to the customer's primary-use location.
  8. Including a billing-address safe harbor for receipts from digital products/services and services, as well as other business receipts. In addition to the "inquiries safe harbor," the Department also would include a "billing address safe harbor" whereby the corporation may use a customer's billing address as either the primary use location (for digital products/services) or the benefits received location (for other services and other business activities) for sourcing purposes. The corporation could use the "billing address safe harbor" if it had more than 10,000 business customers purchasing substantially similar products or services and no more than 5% of receipts from those products or services come from one particular customer.8
  9. Revising the rule for provision of services to passive investment customers based on rules adopted by other states and the Multistate Tax Commission. The Department updated its sourcing rules for other services and other business activities to exclude the rule for sourcing services to passive investment customers from the "special rules" list. The benefit of the service to a passive investment customer would be "presumed to be received at the location where the contract is managed by the passive investment customer."9 "Location where a contract is managed by the customer" would be defined as "the primary location at which an employee or other representative of a customer serves as the person with responsibility for monitoring or managing the day-to-day execution of the contract or sale with the corporation."10

Comments on the draft apportionment regulations are due to the Department by Aug. 26, 2022.

With the issuance of the draft apportionment regulation, the Department has now released "final updates" to all its Article 9-A Business Corporation Franchise Tax draft regulations related to corporate tax reform that took effect in 2015, with the expectation of submitting them to the State Administrative Procedure Act process in Fall 2022 for final promulgation.

For more on this development, including a discussion of draft regulations issued in April 2022, see Tax Alert 2022-1062.


Multistate: The recently issued state corporate income and franchise tax quarterly newsletter provides a summary of the significant legislative, administrative and judicial actions that affected US state and local income/franchise and other business taxes for the period from the second quarter of 2022.

Massachusetts: The Massachusetts Supreme Judicial Court (MA SJC) on June 30, 2022, said it would not reconsider its ruling in VAS Holdings & Investments LLC,11 in which it 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. 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. For more on this ruling, see Tax Alert 2022-0922.

North Carolina: New law (HB 83) makes various technical, administrative and clarifying changes to North Carolina's income tax laws. Effective for tax years beginning on or after Jan. 1, 2023, in determining a corporation's net worth, the net worth of a foreign entity filing a federal income tax return is based on the value of assets deemed to be in the United States. This change applies to the calculation of franchise tax on the 2022 and later North Carolina corporate income tax returns. Another change to the net worth provisions "clarify[y] that a corporation may not artificially reduce its franchise tax base by making a no-interest loan to an affiliate." As revised, the statutory provision (N.C. G.S. 105-122(b)(2)) requires a corporation add the amount of indebtedness owed to a parent, a subsidiary, an affiliate or a noncorporate entity in which it or a group of corporations owns more than 50% of the noncorporate entity's capital interest, unless the indebtedness creates qualified interest expense. The new law also modifies the definition of "qualified interest expense" (N.C. G.S. 105-130.7B(b)(4)) to make clear that the expense limitation for expenses paid or accrued to a related member does not apply to the proportionate share of such interest paid or accrued to a related member that is the ultimate payee if certain conditions are met.12 The new law defines "ultimate payee" as "[a] related member that receives or accrues interest directly from a related member or indirectly through related members." The new law also modifies net loss provisions regarding mergers and acquisitions, to provide that the revenue secretary in applying the standards in the regulations adopted under IRC §§ 381 and 382 must do so on a separate entity basis in determining the extent a loss survives a merger or acquisition. Unless otherwise noted, these changes took effect upon HB 83 becoming law. N.C. Laws 2022, ch. 13 (HB 83), signed by the governor on June 29, 2022.

Ohio: On June 24, 2022, Ohio Governor Mike DeWine signed HB 515, which clarifies the conditions under which income from the sale of an ownership interest in a business, such as an interest in a partnership or limited liability company, will qualify as business income for individual income tax purposes. Specifically, HB 515 codifies two conditions under which the sale of an ownership interest in a business will be considered business income: (1) when the transaction is treated as an asset sale for federal income tax purposes ; and (2) when the seller materially participated (as described in Treas. Reg. § 1.469-5T) in the activities of the business during the tax year in which the sale occurs or during any of the five preceding tax years. HB 515 is remedial in nature and will apply retroactively. For more information on this development, see Tax Alert 2022-0991.

Philadelphia, PA: New law (Bill No. 210284) reduces the rate of the business income and receipts taxes to 5.99% (from 6.20%). This rate change applies to tax years 2023 and thereafter, for returns due and taxes owned in 2024. Philadelphia Laws 2022, Bill No. 210284, signed by the mayor on June 27, 2022; Philadelphia Dept. of Rev., News Release "Philly announces new tax rates for Wage, Earnings, and other taxes" (June 27, 2022).

Puerto Rico: The Governor of Puerto Rico has enacted Act 52 of June 30, 2022 (Act 52-2022), which allows companies to elect a 10.5% tax on industrial development income from sales of goods and services instead of the 4% excise tax on foreign corporations, which the latest US foreign tax credit rules do not consider creditable. In addition to changing the excise tax regime, Act 52-2022 amends the incentives laws and other statutes, including the Puerto Rico Internal Revenue Code of 2011, as amended. This Alert provides a high-level overview of the Act. For more on this development, see Tax Alert 2022-9005.


Multistate: The EY Sales and Use Tax Quarterly Update provides a summary of the major legislative, administrative and judicial sales and use tax developments. Highlights of this edition, include a review of the most recent developments involving nexus, tax base and exemptions, technology, and compliance and controversy. Full text of the Quarterly is available in Tax Alert 2022-1044.

Hawaii: New law (HB 1971) regulates and taxes peer-to-peer (PTP) car-sharing. Specifically, PTP car-sharing is subject to the general excise tax and the rental motor vehicle surcharge tax. The PTP car-sharing program is responsible for collecting and remitting any tax and surcharges due to the Hawaii Department of Taxation. PTP car-sharing is defined as "the operation, use, or control of a motor vehicle by an individual other than the motor vehicle's owner through a [PTP] car-sharing program." PTP car-sharing program does not include a transportation network company, car-sharing organization defined in Haw. Rev. Stat. §251-1, travel agencies, or person acting as an activity desk. For purposes of the vehicle surcharge, PTP car-sharing does not mean providing a rental motor vehicle to the public (as the phrase is used in Haw. Rev. Stat.§251-3). The provisions of HB 1971 took effect July 1, 2022. Haw. Laws 2022, Act 77 (HB 1971), signed by the governor on June 17, 2022.

Louisiana: New law (SB 235) requires the Louisiana Sales and Use Tax Commission for Remote Sellers, in consultation with the Louisiana Uniform Sales Tax Board and the Louisiana Department of Revenue (LA DOR), to develop a single electronic return for all state and local sales and use taxes. The Commission has the authority to contract for the collection of state and local sales and use tax from qualifying nonremote sellers. The Commission also must provide the minimum federally required tax administration, collection and payment requirements with respect to the collection and remittance of sales and use tax on nonremote sales. Under the law, the Commission cannot begin to develop a single electronic return until it executes a contract to do so with either a local tax collector of the LA DOR. The system will be available by the first day of the second calendar quarter following execution of the contract. The new law also allows the Commission to enter into voluntary disclosure agreements with qualifying nonremote sellers. SB 235 takes effect Jan. 1, 2023. La. Laws 2022, Act 685 (SB 235), signed by the governor on June 18, 2022.

Louisiana: New law (SB 443) provides for uniform direct payment number procedures. Effective Jan. 1, 2023, the Louisiana Department of Revenue (LA DOR) is required to submit a taxpayer's application for a direct payment number to the local collector in the parish(es) in which the taxpayer has a qualified manufacturing establishment or facility. The LA DOR will issue the direct payment number within 60 days of the local collector's receipt of the application. If the taxpayer meets the qualification for the direct payment number but the local collector does not provide written approval within the 60 day period, the LA DOR will issue the number to the taxpayer. If a local collector timely denies the application of a qualified taxpayer, the taxpayer will be issued a direct payment number that only works for state sales and use tax purposes. The LA DOR will revoke the direct payment number if, after examination, it determines that the taxpayer no longer qualifies. La. Laws 2022, Act 428 (SB 443), signed by the governor on June 15, 2022.

Louisiana: New law (SB 129) expands the local sales and use tax exemption for prescription drugs for treating certain diseases and conditions to include those that are injected (prior to this change, the exemption applied to infused prescription drugs), and changes the place in which the infusion or injection must take place from a physician's office to a medical clinic. The law also expands the list of prescription drugs the exemption applies to. These provisions took effect July 1, 2022. La. Laws 2022, Act 79 (SB 129), signed by the governor on May 24, 2022.

Vermont: New law (HB 738) expands the sales and use tax exemption for manufacturing machinery and equipment to exempt manufacturing machinery and equipment that is part of an integrated production process. As revised, the exemption applies to machinery and equipment used or consumed as an integral or essential part of an integrated production operation by a manufacturing or processing plant or facility engaged in the manufacture of tangible personal property for sale, or in the manufacture of other machinery or equipment, parts or supplies for use in manufacturing process. For purposes of this provision, machinery and equipment is deemed to be used as an integral or essential part of an integrated production operation when used during the integrated production operation. The law defines what an "integrated production operation" does and does not mean. This change took effect July 1, 2022. Vt. Laws 2022, Act 179 (HB 738), signed by the governor on June 7, 2022.


South Carolina: New law (SB 901) retroactively reenacts the solar energy tax credits under S.C. Code §12-6-3775 as it existed on Dec. 31, 2021, and repeals the Dec. 31, 2021 repeal date that had been added by 2019 Act No. 77, Section 4.B. This provision applies to income tax years beginning after 2021. The maximum amount of credit for each installation of solar energy property placed in service is increased to $5 million (from $2.5 million); the credit is taken in five equal annual installments beginning within three years of the year the property was placed in service (this is a change from beginning in the year the property was placed in service). The total amount of credit that can be claimed in a year remains $2.5 million in the aggregate. Applicable to solar energy projects placed in service after 2019, the law allows a partnership or limited liability company taxed as a partnership claiming the credit to pass the credit, include unused credit carryforward, through to partners or member and to annually allocate the credit to its partners and member. This includes allocating the credit (in full or the carryforward amount) to a partner or member who was a partner or member at any time during the year in which the credit was allocated. Credit allocation is allowed without regard to any provision of the IRC or federal regulation that may be interpreted as contrary to the allocation, including the treatment of the allocation as a disguised sale. The solar energy tax credit provisions are repealed on Dec. 31, 2024; credits earned before the repeal date can be claimed until they are fully claimed. S.C. Laws 2022, Act 237 (SB 901), signed by the governor on June 28, 2022.

South Carolina: New law (SB 901) establishes a tax credit for taxpayers that hire veterans of the US Armed Forces or formerly incarcerated individuals, after 2021 but before 2027, as a new employee in a registered apprenticeship program that has been approved by the US Department of Labor. For the first year of employment, the amount of the credit equals $3,000 for each eligible employee. The credit is reduced to $2,500 for the second year of employment and to $1,000 in the third year of employment. The credit is not available after the third year of employment. These credits can be claimed against income tax, bank tax, savings and loans association tax, corporate license tax, and insurance premium taxes. Unused credit cannot be carried forward. The credit can be claimed for an eligible individual only once, regardless of the employer. S.C. Laws 2022, Act 237 (SB 901), signed by the governor on June 28, 2022.

South Carolina: New law (SB 901) modifies Enterprise Zone Act (EZ Act)provisions to add a definition of related persons under S.C. Code §12-10-30. A "related persons" is a person or entity that bears a relationship with a business (per IRC §§ 267 or 707(b)) and it must be a "qualifying business". The law also modifies the EZ Act's job development credit provisions under S.C. Code §12-10-80 to allow a qualifying business to designated up to two related persons whose jobs and investments located at the project may be included in determining whether the qualifying business has met and maintained the job requirements and minimum capital investment requirements. Further, "qualified expenditures" incurred by a related person may be treated as if they were incurred by the qualifying business for purposes of claiming the job development credit. Each related person may claim the credit for jobs created by the related person and include any qualifying expenditures of the qualifying business or related person as if created and made by the related person. The changes took effect upon the governor's approval. S.C. Laws 2022, Act 237 (SB 901), signed by the governor on June 28, 2022.


Louisiana: New law (SB 95) for local sales and use tax purposes, creates a multi-parish audit program. A multi-parish audit can be requested by a taxpayer that: (1) has a location in the state and registered to file and remit local sales and use taxes in at least three parishes; (2) has not been issued a jeopardy assessment by any collector; (3) is not currently engaged in an audit by a collector for which a notice of intent to assess was issued before July 1, 2022; (4) agrees to promptly suspend prescription; and (5) is not involved in litigation with a collector. A qualifying taxpayer may request a multi-parish audit from the Uniform Local Sales Tax Board within 30 days from issuance of a notice of examination from all of the parishes in which it engaged in transactions during the audit period. Parishes have 30 days from when they receive a notice of the multi-parish audit from the Board to opt in or out; a parish that does not respond within the time period will be deemed to have opted out of the multi-parish audit. Parishes that opt in will review completed audits and make a determination regarding the issuance of a notice of intent to assess tax within 45 days of the receipt of a completed audit. Parishes that opt out will not be able to audit the taxpayer until after the multi-parish audit is complete. This change took effect July 1, 2022. La. Laws 2022, Act 596 (SB 95), signed by the governor on June 18, 2022.

North Carolina: New law (HB 83) reduces the amount of the penalty imposed for failure to pay tax when due under N.C. G.S. 105-236(a)(4). Effective to tax assessed on or after Jan. 1, 2023, the penalty is reduced to 5% (from 10%) of the tax. Effective for tax assessed on or after July 1, 2024, the penalty is reduced to 2% (from 5%) when the failure to pay tax due is without an intent to evade the tax. An addition 2% penalty will be imposed for each month, or fraction thereof, the failure to pay tax due continues, not to exceed 10% in the aggregate. N.C. Laws 2022, ch. 13 (HB 83), signed by the governor on June 29, 2022.

Vermont: New law (HB 738) establishes provisions for reporting federal partnership audit and adjustments. Generally, a taxpayer has 180 days to report and pay any Vermont tax due with respect to a final federal adjustment, except final adjustments that must be reported by a partnership and its partners. The new rules for reporting federal partnership audits and adjustments require that within 90 days after the final determination date of a final federal adjustment, a partnership must file a federal adjustments report with the Vermont tax commissioner, notify each of its direct partners of their distributive share of the final federal adjustment, and file amended composite and amended withholding returns for direct partners. Within 180 days after the final determination date, each direct partner must file a federal adjustment report reporting the adjustment to their distributive share and pay additional state tax, penalty and interest due. Alternatively, an audited partnership can make an irrevocable election to file a federal adjustments report and pay tax, penalty and interest due. An electing partnership will have 90 days to file a completed federal adjustment report and notify the tax commissioner that it has made the election. The electing partnership will have 180 days after the final determination date to pay a determined amount for its direct and indirect partners. These reporting and payment provisions apply to direct and indirect partners of an audited partnership that are tiered partners. An audited partnership or tiered partner may enter into an agreement with the tax commissioner to use an alternative reporting and payment method, if it demonstrates that the requested alternative method will reasonably provide for the reporting and payment of tax, penalty and interest due. The tax commissioner may adopt rules establishing a de minimis amount under which a partnership/partner would not be required to comply with these provisions. The law sets forth the period in which the tax commissioner can assess additional tax, interest and penalties arising from a federal adjustment. These provisions apply retroactively to Jan. 1, 2022 and apply to adjustment to a taxpayer's federal taxable income with a final determination date occurring on or after July 1, 2022. Vt. Laws 2022, Act 179 (HB 738), signed by the governor on June 7, 2022.


Pennsylvania: On Dec. 16, 2021, the City of Hazelton enacted Ordinance 2020-33, which effective Jan. 1, 2022, replaces the city's business privilege and mercantile tax with a new Payroll Preparation Tax of 0.26% of payroll expense or profits generated as a result of the employer's conducting business within the city. The tax is paid by employers and cannot be deducted from employees' wages. For more on this development, see Tax Alert 2022-0998.

Philadelphia, PA: The Philadelphia Department of Revenue announced changes to the net profits tax, the wage tax, the earnings tax and the school income tax. The rates of net profits tax, wage tax, and earnings tax on residents is 3.79% and for nonresidents the rate is 3.44%. The rate change for wage and earnings tax applies starting July 1, 2022, while the change to the net profits tax applies to net profits earned in 2022. The school income tax rate also was reduced to 3.79%, effective July 1, 2022. Philadelphia Dept. of Rev., News Release "Philly announces new tax rates for Wage, Earnings, and other taxes" (June 27, 2022).

Washington: The Washington State Department of Labor & Industries has announced that the state's Equal Pay and Opportunities Act was amended in 2022 by SB 5761. Specifically, effective Jan. 1, 2023, employers with 15 or more employees must provide job applicants, on request, the minimum wage or salary of the position for which they applied. Wage and salary information includes a wage/salary range and a general description of all benefits and other compensation. The Department will be developing guidance to assist employers in complying with this new requirement. Once available, it will be posted here.


Federal: In Revenue Procedure 2022-26 (released June 28, 2022), the IRS provided detailed procedures for requesting a determination to add or remove a substance from the list of taxable substances under IRC § 4672(a) (List). In Notice 2021-66, the IRS had suspended the former determination procedures in Notice 89-61, as modified by Notice 95-39 (prior guidance) and added new substances to the List. For more on this development, see Tax Alert 2022-1015.

Puerto Rico: As of July 1, 2022, Superfund excise taxes under IRC §§ 4661 and 4671 will be reinstated and apply to all US-based operations, including those in Puerto Rico. These excise taxes were reinstated under the Infrastructure Investment and Jobs Act. For more on this development, see Tax Alert 2022-1013.

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 Prior versions of the draft regulation, specifically old section 4-1.1(b), contained rules excluding "unusual events" from business receipts.

2 See, draft regulation 4-1.2(a).

3 Draft regulation 4-1.3(b).

4 See, draft regulation 4-2.1(b)(2) and 4-2.2(c).

5 See, generally, draft regulation 4-1.6(e)(3). In this example, the corporate partner used the aggregate method of partnership taxation.

6 Draft regulation 4-2.9(c).

7 Draft regulation 4-2.12(f), Example 3.

8 See, draft regulation 4-3.2(d)(1)(iii) and 4-4.2(d)(1)(iii). The "billing address safe harbor" rule in the digital products and digital services section is not identical to the comparable rule in the other services and other business activities rule, as their language around the 5% standard differs.

9 Draft regulation, 4-4.4(c)(1) and (2).

10 Id. at 4-4.1(e).

11 VAS Holdings & Investments LLC v. Commissioner of Rev., 489 Mass. 669 (Mass. Sup. Jud. Ct. May 16, 2022).

12 Per the bill analysis, this changes "clarifies that a corporation cannot claim a qualified interest expense by creating multiple layers of affiliated debt that meets one of the exceptions from the limitation when … the ultimate payee is a related member that would not have met the exception."