August 3, 2022
State and Local Tax Weekly for July 15
Ernst & Young's State and Local Tax Weekly newsletter for July 15 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.
Pennsylvania enacts corporate income tax rate reduction and other tax changes
On July 8, 2022, Pennsylvania Governor Tom Wolf signed into law HB 1342 (Act 53), which includes a long-sought-after reduction to the corporate income tax rate, market-based sourcing rules for receipts from sales of intangibles, codification of the Pennsylvania Department of Revenue's economic nexus standard for corporate income taxes, imposition of sales and use tax on peer-to-peer car sharing, among other changes.
Gradual reduction of corporate income tax rate: Starting in 2023, the current 9.99% corporate income tax rate will decrease to 4.99% over nine years. The rate will be reduced to 8.99% in 2023 and reduced by 0.5% each year until it is reduced to 4.99% in 2031.
Market-based sourcing for intangibles: Prior law sourced receipts from sales of intangibles (e.g., receipts from patents, royalties, franchise agreements, securities, loan interest) based on a costs-of-performance method. Effective for tax years beginning after Dec. 31, 2022, these receipts will be sourced using the market-based sourcing method. This change aligns the sourcing method for sales of intangibles with the method already being used for sourcing sales of services, tangible personal property and real property.
Specifically, gross receipts from the following will be sourced to Pennsylvania:
Intangible property not otherwise described is excluded from the sales factor numerator and denominator. Under this provision goodwill arising from the sale of a business and gross proceeds/gains from hedging transactions will be excluded from the sales factor numerator and denominator.
Corporate income tax nexus: The law codifies the PA DOR's economic nexus standard for corporate net income taxes. In Corporation Tax Bulletin 2019-04, the PA DOR said it will deem there to be a rebuttable presumption of a filing requirement for corporations without physical presence in Pennsylvania if they have $500,000 or more of Pennsylvania-sourced gross receipts. The new law includes a rebuttable presumption that a corporation with $500,000 or more of sales sourced in the current tax year to Pennsylvania under section 401 has substantial nexus in Pennsylvania without regard to physical presence in Pennsylvania.
Under the new law, corporate net income tax applies to corporations that have "substantial nexus" with Pennsylvania. The law defines "substantial nexus" as "a direct or indirect business activity that is sufficient to grant the commonwealth authority under the [US] Constitution … to impose tax … and for which a basis exists … to apportion or allocate the corporation's income to [the] commonwealth." Business activities include (1) leasing or licensing intangible property that is used in the commonwealth, (2) regularly engaging in transactions with in-state customers involving intangible property (such as loans), or (3) selling intangible property that was used by a corporation in the commonwealth.
The newly added nexus provisions do not apply to affiliated entities domiciled in a foreign nation that has entered into a comprehensive income tax treaty with the US providing for the allocation of all categories of income subject to tax, or withholding of tax, on royalties, licenses, fees and interest in order to prevent double taxation of the foreign entity. These changes apply to tax years beginning after Dec. 31, 2022.
Other tax changes: The new law makes other tax changes, including the following:
For more on this development, see Tax Alert 2022-1085.
Arizona: New law (HB 2871) aligns the elective pass-through entity (PTE) tax rate with the income tax rate imposed on individuals. Under prior law, the PTE tax rate was 4.5% percent. Ariz. Laws 2022, ch. 321 (HB 2871), signed by the governor on June 28, 2022.
Missouri: New law (HB 2400) enacts the SALT Parity Act, which establishes an elective pass-through entity (PTE) tax intended as a workaround to the federal limit on the state and local tax deduction. The election to be taxed as a PTE is made annually, effective for tax years ending on or after Dec. 31, 2022. A partnership, an S corporation or a limited liability company taxed as either that makes the PTE tax election is an "affected business entity". The law describes how to calculate the amount of tax due (the sum of Missouri derived or connected income is multiplied by the highest rate of income tax imposed on individuals). If the amount calculated results in a net loss, the net loss can be carried forward to succeeding tax years for which the affected business entity makes the PTE tax election, until the loss is fully used. An affected business entity annually must report to each of its members, the member's direct pro rata share of PTE tax. Members of an affected business entity are entitled to a credit against Missouri income tax; the credit is equal to the member's direct and indirect pro rata share of tax paid by the affected business entity. A similar credit is available to a corporation subject to Missouri corporate income tax that is member of an affected business entity. For corporate tax purposes, the credit is applied after all other credits. Unused credit will not be refunded but it can be carried forward by the individual or the corporation until fully taken. Resident and part-year resident members also are entitled to claim a credit against Missouri income tax for the member's direct and indirect pro rate share of taxes paid to another state or the District of Columbia on the income of the partnership or S corporation for which the individual is a member, provided that the revenue director determines that the tax paid to the other state is substantially similar to Missouri's tax. The amount of credit for taxes paid to another state that exceeds the taxpayer's tax liability cannot be refunded or carried forward. Mo. Laws 2022, HB 2400, signed by the governor on June 30, 2022.
New York: In Matter of Obus,1 a New York State (NYS) appeals court held that an individual domiciled in New Jersey and working in New York City (NYC) will not be deemed a statutory resident of New York based on limited use of a vacation home located in NYS. New York law deems individuals to be a New York resident if they: (1) are domiciled in NYS (with a few narrow exceptions), or (2) meet the definition of a statutory resident, which is a taxpayer who has a permanent place of abode in New York (one held for "substantially all of the [tax] year") and is present in NYS for 184 or more days. In Matter of Gaied,2 the NYS Court of Appeals previously determined that the underlying purpose of the statutory resident statute, NYS Tax Law § 605, is to discourage tax evasion by New York residents. NYS Regulation 20 NYCRR 105.20(e) defines "permanent place of abode" as a "dwelling place of a permanent nature maintained by a taxpayer" but does not include a "mere camp or cottage." In this case, the petitioner was a New Jersey domicile resident who commuted from New Jersey to NYC for work. He was present in New York for more than 183 days, generally, due to work in NYC. The petitioner also owned a large vacation home in Northville, New York approximately four hours north of NYC. The Northville home was not used for commuting to NYC, a year-round tenant occupied an attachment apartment, and the petitioner did not keep personal effects in the Northville home and instead brought necessary items when visiting. The appeals court concluded that the petitioner's use of the Northville vacation home did not demonstrate a residential interest, even though the home is suitable for year-round living and could constitute a permanent place of abode. Because the Northville vacation home does not constitute the petitioner's permanent place of abode, the petitioner is not a statutory resident of New York. For more on this development, see Tax Alert 2022-1054.
Portland, OR: The Portland Revenue Division (Division), which administers taxes for Metro, Multnomah County and the City of Portland (City), has proposed changes (Chapter 7.02 Conformity Proposals 2022) to the business tax codes3 for these jurisdictions that would conform to select state income tax provisions. Specifically, the Division would amend City Code § 7.02.610, Apportionment of Income, to conform the local business income tax apportionment provisions with the state's allocation and apportionment provisions in Ore. Rev. Stat., chs. 314, 317 and 318, as well as related administrative rules. All business income would be apportioned to the City using a single sales factor apportionment formula. Sales of tangible personal property would be deemed to be in the City if the property is delivered or shipped to a purchaser in the City. The City, however, would not adopt a throwback standard. The proposed changes also would align Portland's nexus standards with the state's broad economic nexus standard. For more on this development, see Tax Alert 2022-1129.
Ohio: New law (SB 225) updates Ohio's Internal Revenue Code (IRC) conformity date for the second time this year. Ohio's IRC conformity provision under Ohio Rev. Code 5701.11 is typically updated annually. Legislation, HB 51, enacted earlier this year, moved Ohio's IRC conformity date from March 31, 2021, to Feb. 17, 2022. SB 225 returns Ohio's IRC conformity date to March 31, 2021. It appears that Ohio changed its IRC conformity date to address a potential revenue loss from federal changes enacted late in 2021, namely the Infrastructure Investment and Jobs Act's (IIJA) change to IRC §118, which modified the federal tax treatment of a corporation's capital contributions. The modification allows certain regulated water and sewer utilities to exclude amounts that qualify as contributions of capital from their gross income. Returning Ohio's conformity to March 31, 2021, decouples from the federal changes made by the IIJA. For more on this development, see Tax Alert 2022-1051.
Ohio: On June 7, 2022, the Supreme Court of Ohio accepted an appeal of a decision by the Court of Appeals for Hamilton County to uphold Cincinnati's imposition of income tax on a nonresident working remotely during the COVID-19 pandemic. The case, Schaad v. Adler, Appeal No. C-210349; 2022-Ohio-340, involves the dismissal of a complaint claiming that 2020 Ohio House Bill 197 (HB 197) violated the Ohio and U.S. Constitutions. This is one of several cases that Buckeye Institute employees had filed in various counties in Ohio challenging HB 197, which deems remote work performed by an employee working from home during the COVID-19 pandemic to occur at an employee's principal place of business. Buckeye Institute employees have had similar appeals dismissed in other Ohio counties, but this is the first case where the Supreme Court of Ohio has accepted the appeal. For more on this development, see Tax Alert 2022-1044.
Washington: The Washington Supreme Court will review the Douglas County Superior Court's decision finding Washington's 7% excise tax on sales of certain long-term capital assets where the profit is in excess of $250,000 annually,4 violates the uniformity and limitation requirements of Art. VII, §§ 1 and 2 of the Washington State Constitution. Quinn, et. al. v. State of Washington, et. al., Cons. Cause Nos. 21-2-00075-09 & 21-2-00087-09 (Wash. Super. Ct., Douglas Cnty., March 1, 2022); Wash. S.Ct. Order No. 100769-8, order retaining the case for hearing and decision, (filed July 13, 2022).
SALES & USE
Kansas: The Kansas Department of Revenue issued guidance on the repeal of the accelerated sales and use tax monthly filing frequency by 2022 KS Laws HB 2136. Starting July 1, 2022, the filing frequency was changed to monthly. The monthly filing requirement applies when a retailer's total tax liability exceeds $4,000 in any calendar year; the return is due each month on or before the 25th day of the following month. In addition, businesses that report the vehicle rental excise on an accelerated monthly basis will now file the vehicle rental excise tax on a monthly basis. Kan. Dept. of Rev., Notice 22-02 "Accelerated Monthly Filing Frequency for Sales Tax Filers" (July 1, 2022).
Missouri: New law (HB 2400) provides that "retail sale" or "sale at retail" does not include the purchase of electricity, electrical current, water and gas by a person operating a hotel, motel or other transient accommodation establishment if such purchase (1) is used to heat, cool or provide water or power to the guests' accommodations, and (2) are included in the charge made for the accommodations. Persons required to remit sales tax on such purchases before Aug. 28, 2022 will be entitled to a refund of such taxes remitted. Mo. Laws 2022, HB 2400, signed by the governor on June 30, 2022. (A similar provision is in Mo. Laws 2022, SB 745, signed by the governor on June 29, 2022.)
Missouri: New law (SB 745) exempts from sales and use tax all purchases by a company of solar photovoltaic energy systems, components used to construct a solar photovoltaic energy system and all purchases of materials and supplies used directly to construct or improve such systems, if the systems: (1) are sold or leased to an end user or (2) are used to produce, collect and transmit electricity for resale or retail. The law also establishes the "Task Force on Fair, Nondiscriminatory Local Taxation Concerning Solar Energy Systems," that studies (1) the economic benefits and drawbacks of solar energy systems to local communities and the state; (2) the fair, uniform and standardized assessment and taxation of solar energy systems and their connected equipment owned by a retail or wholesale provider of electricity at the county level; (3) compliance with existing state and federal programs and regulations; and (4) potential legislation that would provide a uniform assessment and taxing method for solar energy systems. The report is due to the general assembly by Dec. 31, 2022. Mo. Laws 2022, SB 745, signed by the governor on June 29, 2022.
New Jersey: New law (A. 4208) provides a sales and use tax exemption to supermarkets and grocery stores located in a food desert community or located in an enterprise zone and received an annual certification of eligibility from the Department of Community Affairs (DCA). The certification is effective for the 12-month period immediately following the date of approval by the DCA. To qualify for the certification, the supermarket and grocery store must demonstrate to the DCA that during the 12-month period immediately preceding the date of application that: (1) not less than 30% of the hired employees were comprised of any combination of persons who were unemployed for not less than three consecutive months immediately preceding the date of employment or person with a disability; or (2) not less than 35% of the hired employees are residents of a municipality in which the enterprise zone has been established and the store actively participated with the One Stop Career Centers in the recruitment of such individuals. These provisions took immediate effect. N.J. Laws 2022, ch. 42 (A. 4208), signed by the governor on June 30, 2022.
Missouri: New law (HB 2400) extends the business headquarter tax credit through 2030, with no incentives for facilities commencing or expanding operations on or after Jan. 1, 2031 (from Jan. 1, 2025). The business headquarter tax credit initially may be claimed for a 10-year period, with the possibility of an additional 10-year period if certain conditions are met. If these conditions continue to be met, the new law provides for an additional six-year period that is in addition to the additional 10-year period. Starting in 2023, the Department of Economic Development can approve and award tax credits for qualified research. The credit is the greater of 15% of a taxpayer's additional qualified research expenses or 20% if the additional research expenses relate to research conducted in conjunction with an in-state college or university. A credit will not be allowed for any portion of qualified research expenses that exceed 200% of the taxpayer's average qualified research expense incurred during the three immediately preceding tax years. Unused credit can be carried forward for the 12 succeeding tax years or until fully used. The credit may be transferred, sold or assigned. Purchases of Missouri qualified research and development equipment are exempt from all state and local sales and use tax. The aggregate amount of credit available is $10 million, with no single taxpayer receiving more than $300,000 in a year. The credit provisions sunset Dec. 31, 2028. The law also makes various modifications to the "Tax Credit Accountability Act of 2004", the Missouri One Start program, and the Missouri works program. These provisions have various effective dates. Mo. Laws 2022, HB 2400, signed by the governor on June 30, 2022.
Missouri: New law (SB 672) establishes the "Targeted Industrial Manufacturing Enhancement Zones Act" (TIME zone), which allows the governing bodies of at least two contiguous or overlapping Missouri political subdivisions to form one or more TIME zones. The purpose of TIME zone is for "completing infrastructure projects to promote the economic development of the region." A TIME zone board will be allowed to retain 25% of withholding tax on new jobs within the zone; the revenue will be deposited in the TIME zone fund for purpose of the continued expansion, development and redevelopment of Time zones. New TIME zones may not be established after Aug. 28, 2025. The law takes effect Aug. 28, 2022. Mo. Laws 2022, SB 672, signed by the governor on June 30, 2022.
New Jersey: New law (S.2917) allows a recipient of tax credits under New Jersey's Aspire Program to carry forward unused credits for the seven privilege periods following the period for which the credit was awarded. Under prior law unused credit generally could not be carried forward unless the developer could not use the credit due to the direct impact of a natural disaster, a state or national emergency, or other situation out of the developer's control. S. 2917 took immediate effect. N.J. Laws 2022, ch. 46 (S. 2917), signed by the governor on June 30, 2022.
Rhode Island: New law (HB 8220 Sub. A) provides that cities and towns may only assess tax on real property upon which a renewable energy resource is located as provided by R.I. Gen. Laws §§ 44-5-12(a)(5) and 44-27-10.1(b), which govern the assessment of tangible property. Per R.I. Gen. Law § 44-5-12(a)(5), renewable energy resources can only be taxed as tangible property and the real property located upon which cannot be reclassified, revalued or reassessed due to the presence of renewable energy resources, except farmland can be reclassified under by R.I. Gen. Law § 44-12-10.1. All assessments of real property (except farmland) with renewable energy resources will revert to the last assessed value immediately before the renewable developer's purchasing, leasing, securing an option to purchase or lease, or otherwise acquiring any interest in the real property. The law specifically provides that municipalities will not be liable or otherwise responsible for any rebates, refunds or other reimbursements for previously collected tax on real property upon which a renewable energy resource is located. These provisions take effect and apply to property assessed on and after Dec. 31, 2022. RI Laws 2022, ch. 268 (HB 8220 Sub. A), became law without the governor's signature on July 2, 2022.
PAYROLL & EMPLOYMENT TAX
Multi-jurisdiction: EY's annual publication of key federal and state rates and limits has been updated for 2022. The updated guide reflects changes in the 2022 state income tax withholding rates/tables and state unemployment insurance wage bases and tax rates. The guide is available through Tax Alert 2022-1039.
Pennsylvania: Effective Jan. 1, 2022, the City of Scranton replaced its business privilege and mercantile tax with a new payroll preparation tax of .2787% of payroll expenses. The due date for the first return was June 30, 2022 (an extension from May 31) and the return for second quarter is due Aug. 31, 2022. Businesses with employees in the City of Scranton will need to be certain to register and file/pay the taxes due. For additional information on this development, see Tax Alert 2022-1059.
Hawaii: New law (SB 2570) establishes a zero-emission vehicle fueling system rebate program, which provides incentives for the installation or upgrade of such system. Rebates for each eligible installation of a system are $200,000 for the installation of a hydrogen fueling system or upgrade of a fuel capacity for a hydrogen fueling system, provided that these systems store or dispense only renewable hydrogen. Applicants will be required to furnish reasonable information to ascertain the validity of the claim. This provision applies to hydrogen fueling systems that are installed or upgraded after Dec. 31, 2022. Applicants must submit an application for the rebate to the Hawaii Public Utilities Commission within 12 months of the date the newly installed or upgraded system is placed into service; failure to timely file the application for the rebate will constitute a waiver of the right to claim the rebate. A rebate received under this program is not considered income for state or county taxes. SB 2570 took effect July 1, 2022. Haw. Laws 2022, Act 241 (SB 2570), signed by the governor on July 5, 2022.
International — China: The Shenzhen Customs Authority and Municipal Tax Bureau issued Shenguanshui  No. 62 (Circular 62) on May 18, 2022 to formally launch a new approach to collaboratively manage transfer pricing matters related to goods imported from overseas related parties. This new collaborative management provides institutional standards of transfer pricing to the Customs Authority and is also the first-ever formal cooperation between the customs and the tax authorities in relation to transfer pricing. For more information on this development, see Tax Alert 2022-1001.
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 Matter of Obus v. NYS Tax Appeals Trib., 2022 NY Slip Op. 04206 (N.Y. Sup. Ct., App. Div., 3d Dept., June 30, 2022).
2 Matter of Gaied v. NYS Tax Appeals Trib., 22 N.Y.3d 592 (2014).
3 The changes would specifically affect the Portland Business License Tax (a net income tax on business activity conducted within the City of Portland); the Multnomah County Business Income Tax (an income tax on net business income); and the Metro Supportive Housing Services Business Income Tax (which was approved by voters in 2020 and, starting in 2021, imposes a 1% business profits tax imposed on businesses with gross receipts over $5 million per year).
4 Imposed by Wash. Laws 2021, ch. 196 (SB 5096).