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August 12, 2022

State and Local Tax Weekly for July 22 and July 29

Ernst & Young's State and Local Tax Weekly newsletter for July 22 and July 29 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.


State tax authorities issue guidance on taxing digital assets

"Crypto Winter" has been the theme of 2022 as bearish market trends have brought negative volatility and a host of new issues for the digital asset industry. Meanwhile, state taxing authorities and legislatures have started to answer the call for more guidance when it comes to taxing digital assets, i.e., cryptocurrencies and non-fungible tokens (NFTs). Below is a summary of recent guidance issued in select states.

Arizona (AZ): HB 2204 (enacted July 6, 2022) creates favorable state tax rules for individual taxpayers transacting in digital assets. Effective for tax years beginning on and after Dec. 31, 2022, an individual taxpayer computing AZ adjusted gross income is required to subtract from that income: (1) virtual currency and non-fungible tokens received via "an airdrop at the time of the airdrop", or (2) gas fees paid on the purchase of the virtual currency or non-fungible token if the individual taxpayer did not (a) include such fees in the basis of such digital asset or (b) otherwise deduct such fees previously. The law defines the terms "airdrop," "gas fee," "non-fungible token" and "virtual currency."

Kansas (KS): In July 2022, the KS Legislative Division of Post Audit issued a limited-scope performance audit report (hereinafter "Report") comparing KS's cryptocurrency tax policies "to federal policies and best practices."1 The Report summarized and reviewed policy documents and publications from the IRS, the KS Department of Revenue, the Uniform Law Commission, the Treasury Department and the National Conference of State Legislatures. The Report found the following:

  • KS's cryptocurrency tax policies generally align with federal policies but there have been difficulties in enforcing some policies in recent years
  • KS's income tax code aligns with federal tax policy, which means KS should receive tax revenue from cryptocurrency transactions as reported to the federal government
  • Due to the lack of federal reporting guidelines, KS is unlikely to receive 100% of the tax revenue it should from cryptocurrency transactions
  • Interstate organizations, like the Uniform Law Commission, have issued guidance for states on the regulation of digital assets, but taxation is not specifically addressed because "a major hurdle to the creation of best practices has been the complexity and instability of the cryptocurrency industry"

The KS Legislative Division of Post Audit did not have any recommendations. Further, agency officials from the Kansas Department of Revenue "generally agreed with [the Division's] findings and conclusions."

New Jersey (NJ): On March 21, 2022, the NJ Division of Taxation (Division) released revised technical advice memorandum TAM 2015-1(R), which provides rules for taxing transactions involving convertible virtual currency for purposes of NJ's corporate business tax, sales and use tax, gross income tax and inheritance tax. In addition, the Division intends to form a working group to further review cryptocurrency transactions and release guidance on taxing fungible tokens and NFTs. In addition, the Division will evaluate exchanging information regarding such transactions with the IRS and other states.

New York State (NYS): On July 1, 2022, the NYS Department of Taxation and Finance included in its draft apportionment regulations the proposed corporate franchise tax treatment of "cryptocurrency or similar asset[s] digitally delivered." These assets would be included in the definition of "digital products." Under NYS law, corporate taxpayers are required to apportion receipts from the sale of, rental of, license to use or granting of remote access to digital products based on where the taxpayer's customer derives value from the digital product, which is determined based on a hierarchy of methods, first looking to the "customer's primary use location." Alternatively, taxpayers may be able to apportion receipts from "digital products" to its customer's customer if the transaction meets the definition of an "intermediary transaction." The intermediary transaction rule may be beneficial for people selling digital assets through cryptocurrency exchanges.

It is unclear whether the phrase "cryptocurrency or similar asset[s] digital delivered" includes more than just cryptocurrencies because such fungible assets are different from NFTs.

Pennsylvania (PA): On June 11, 2022, the PA Department of Revenue updated its list of taxable and exempt property for sales and use tax purposes (PA's Rev-717), adding NFTs as a new taxable item to the list of digital products.

Puerto Rico (PR): On June 30, 2022, Governor Pedro Pierluisi signed PR Act 52-2022 (HB 1367) into law, which, among other things, specifies PR's treatment of digital products for sales and use tax purposes. The new law includes within the definition of taxable digital products, "digital products in the format or medium of a … NFTs"; thereby subjecting them to sales and use tax in the jurisdiction.

Washington (WA): On July 1, 2022, the WA Department of Revenue (WA DOR) issued interim guidance on the taxability of certain transactions involving NFTs for purposes of its sales and use tax and business and occupation (B&O) tax.2 The guidance:

  • Defines key terms, such as "token," "non-fungible," "NFT," "digital automated services" and "digital code"
  • Makes clear that for purposes of determining the taxability of an NFT, it is important to consider "(a) whether the transaction is comprised of multiple components or merely a digital code which grants the owner access to a digital good, (b) the taxability of each underlying component, and (c) the identity of the parties to the transaction"
  • Requires a seller that receives cryptocurrency when selling an NFT to convert the value of the cryptocurrency tendered into US dollars as of the time of the sale
  • Describes the tax treatment under four basic types of arrangements involving NFTs
    • when the object of the purchase is a standalone digital product
    • when the object of the purchase is a standalone good or service classified as a retail sale
    • when the object of the purchase is a standalone good or service not classified as a retail sale
    • when the sale of an NFT includes a royalty payment to the NFT minter
  • Provides rules for mixed transactions and marketplace facilitators
  • Provides sourcing or apportionment rules for both sales tax and B&O tax
  • Includes examples

The WA DOR indicated that this guidance is not meant to be all encompassing and acknowledged that "[t]here are many types of NFTs available today." The WA DOR instructs taxpayers who purchase NFTs different from those discussed in the guidance to seek from it a "binding letter ruling." More permanent, comprehensive guidance is expected as the WA DOR works with stakeholders.

For more on these developments, see Tax Alert 2022-1158.


California: The California Franchise Tax Board (FTB) issued a legal ruling on how to source IRC §751(a) gain from a nonresident individual partner's disposition of a partnership interest to the extent the partnership owns IRC §751 property (i.e., unrealized receivables or appreciated inventory which are sometimes referred to as "hot assets") located in California. Prior to this ruling, a nonresident partner would have sourced the entire gain to its state of residence under R&TC §17952. Therefore, none of the gain from the sale of its partnership interest would have been sourced to California. However, as a result of this ruling, the portion of the gain attributable to the IRC §751 assets, could now be sourced to California.

The FTB explained that the operation of IRC §751 treats the sale of a partnership interest as two separate transactions: (1) the intangible partnership interest is sold by the partner, and (2) the underlying IRC §751 property is treated as sold by the partnership immediately before the partner disposes its interest, resulting in a deemed distribution to the partner. Due to this characterization of the transaction, the FTB said that the sourcing rules for the sale of an intangible asset will not apply to the portion of the gain attributable to sale of the underlying IRC §751 property. Rather, the proceeds attributable to a deemed sale of IRC §751 property is treated as a pro rata distribution to the partner of gain or loss items of the partnership; this distribution is income from a trade, business or profession that is sourced under Cal. Code of Regs., (CCR) tit. 18, §17951-4. When the sold partnership interest is from a partnership that operates wholly within California and holds IRC §751 property, income attributable to the sale of such property is sourced to California.3 Income attributable to the deemed sale of IRC §751 property of a partnership operating within and without California is business income; the gain on such sale is sourced according to the Uniform Division of Income for Tax Purposes Act under CCR §17951-4(d)(1) (therefore, R&TC §25135 and §25136 would apply to source the gains). Further, because the proceeds are treated as if the IRC §751 property is sold by the partnership, gain is sourced as if the IRC §751 property itself was sold and not the partnership interest. The FTB applied this guidance to two different fact patterns. In one example the partnership was operating solely in California (income attributed to the IRC §751 gain is sourced to California), and in the second example the partnership was operating within and without California (each item of IRC §751 property is sourced under the applicable sourcing rule ). Cal. FTB, Legal Ruling 2022-02 (July 14, 2022).4

Idaho: The Idaho State Tax Commission is considering various amendments to Income Tax Rules §§ 001-299 and 700-999 and 300-699, that, among other changes, would implement the state's adoption of single sales factor apportionment and market-based sourcing as of Jan. 1, 2022. The Commission will hold a hearing on the proposed amendments on Sept. 1, 2022. Additional information on the proposal, including the latest draft of the rules, is available on the Income Tax Rules Committee webpage.

New York: In Matter of Nordstrom, Inc. and Combined Affiliates,5 the New York State Division of Tax Appeals (NY DTA) held that Nordstrom, Inc. (Nordstrom) and its affiliates (collectively, taxpayer) could not subtract from entire net income (ENI) a related intangible holding company's income from deferring intercorporate profits reported on the taxpayer's combined returns for the tax years at issue. The taxpayer, however, met its burden of proof in demonstrating that it could deduct bad debt claimed on its federal income tax return for these tax years. It is not yet known if the taxpayer will appeal the determination regarding intercompany deferral of income or if the Division will appeal the NY DTA's determination regarding the deduction for bad debt expenses. Nevertheless, the determination is instructive in considering statutory and regulatory construction when computing ENI, since for example New York State (NYS) and New York City (NYC) may assert its discretionary authority. The determination also makes clear that NYS and NYC tax authorities will generally respect IRS audits, closing agreements and stipulated facts. For a discussion of the NY DTA's ruling, see Tax Alert 2022-1154.


Arizona: Resolution (SCR 1049), if approved by voters during the Nov. 8, 2022 general election, would impose an additional 0.1% transaction privilege tax and use tax on certain business, effective from and after Dec. 31, 2022 through Dec. 31, 2042. The additional tax would be imposed on persons engaging in a business with a classification listed in Ariz. Stat. §42-5010(A)(1), which currently includes: transportation, utilities, telecommunications, pipeline, private car line, publication, job printing, prime contracting, amusement, restaurant, personal property rental, and retail. Revenues collected from this additional tax would be deposited into the newly established Fire District Safety Fund. The resolution was approved by the General Assembly and transmitted to the Secretary of State on June 23, 2022.

Georgia: Payments made by an entertainment business to another entity for leases of coin-operated amusement machines (COAMS) are not exempt from sales and use tax because the exempting statute, OCGA §48-8-3(43), contains no language that the legislature intended to exempt amounts paid to lease COAMS from tax. In so holding, a Georgia appeals court explained that OCGA §48-8-3(43) exempts revenue generated from all bona fide COAMS that vend or dispense music or are operated for skill, amusement, entertainment or pleasure which are in commercial use and provided to the public for play. The court said it "discern[s] that the absence of such language was a matter of considered choice" and that it "cannot add a line to the law" when the statutory provision does not provide an exemption for lease payments. Funvestment Group, LLC v. Crittenden, No. A22A0193 (Ga. Ct. App., 1st Div., June 23, 2022).

Missouri: A political action committee's purchases of branded, promotional gift items it gives to supporters in exchange for their donations are subject to Missouri's sales and use tax. The promotional items are not sold at retail, but rather the items are used or consumed by the committee as a gift to supporters and the committee gains the benefit of advertising their branded products. Mo. Dept. of Rev., Letter Ruling 8192 (June 1, 2022).

Missouri: An out-of-state ticket broker is not required to collect and remit Missouri sales tax on its sales of event tickets. Under Missouri law, the place of amusement and entertainment is required to collect and remit sales tax on their sales for admissions or seating accommodations, and any subsequent sales of such admissions or seating accommodations will not be subject to tax if the initial sale was an arms' length transaction for fair market value with an unaffiliated entity. Accordingly, the broker should pay sales tax on its purchases of the tickets. Mo. Dept. of Rev., Letter Ruling 8196 (June 2, 2022).

Texas: A company's sales of various subscriptions for online learning products generally are not subject to Texas sales and use tax. These nontaxable products include access to digital courses, assessments, homework, online tutors, online advisors, assigned live "success coaches" as well as proctored exams and the ability to download pdf copies of assessments and transcripts. The Texas Comptroller determined that these services do not resemble the types of services described in Rule 3.342(a)(6) and are not taxable information services. Sales of its product that help teachers manage their classroom and curriculum, however, are subject to tax as a data processing service. The functions of this product, which involve the storage, retrieval and compilation of data and information related to lessons and students, are all elements of data processing. In addition, the company's charges for completing insertion orders, which involve the gathering of information and forwarding of prospective student information to universities that pay for marketing leads on such students, are subject to sales tax as an information services. Note, that 20% of the taxable data processing services and taxable information services are exempt from tax. Tex. Comp. of Pub. Accts., Star No. 202206014L (June 10, 2022).

Texas: The Texas Comptroller of Public Accounts recently updated a publication listing types of services that are taxable, including examples and references to additional information. The following are 17 broad categories of taxable services: amusement; cable television and bundled cable; credit reporting; data processing; debt collection; information; insurance; motor vehicle parking and storage; nonresidential real property repair, restoration or remodeling; personal property maintenance, remodeling or repair; real property; security; telecommunications; telephone answering; utility transmission and distribution; and taxable labor such as photographers, draftsmen, artists, and tailors. Tex. Comp. of Pub. Accts., Publication 96-259 "Taxable Services" (July 2022).

Washington: The Washington Department of Revenue issued guidance on the (1) application of the state's sales and use tax exemption for machinery and equipment when petroleum products are manufactured at fuel storage terminals, and (2) imposition of the state's hazardous substance tax and petroleum products tax to fuel blending manufacturing activity. The guidance includes illustrative examples. Wash. Dept. of Rev., ETA 3234.2022 "Blending of Petroleum Products at Storage Terminals" (June 27, 2022).


Arizona: New law (HB 2156) creates a corporate and individual income tax credit for motion picture production costs. For tax years beginning from and after Dec. 31, 2022, a tax credit is allowed against production costs paid by a motion picture production company (hereafter, "company") that are directly attributed to a motion picture production. The amount of the credit is equal to a percentage of the total amount of qualified production costs, as follows: (1) 15% for a company that spends up to $10 million; (2) 17.5% for a company that spends more than $10 million but less than $35 million; and (3) 20% for a company that spends more than $35 million. Additional credits equal to 2.5% are available for (1) the company's production labor costs related to jobs held by Arizona resident, (2) for the total amount of qualified production cost if an Arizona qualified production facility is used or its primarily film location is in Arizona, or (3) qualified production costs if the production is produced and filmed in association with a long-term tenant of a qualified production facility. The amount of credit that exceeds the company's income tax (or if no income tax is due), will be refunded.

To qualify for the credit, a company must do: (1) either of the following: (a) use an Arizona qualified production facility to produce the motion picture production, or (b) if the picture is filmed at a practical location,6 the production of the film is primarily in Arizona and all preproduction, postproduction and editing is performed at an industry standard facility in Arizona, if such facility is available; (2) maintain the company's production labor positions in Arizona; (3) include in the motion picture credits a statement that production was filmed in Arizona; (4) submit a completed application, including all requested information; and (5) provide supporting information and records that demonstrate that the company satisfies the above criteria. The Arizona Commerce Authority (ACA) will approve or deny a company's application that it qualifies for the credit; the ACA will issue preapproval letters to approved companies and provide a copy of such letter to the Arizona Department of Revenue. Once production of the motion picture is complete, a preapproved company can apply to the ACA for approval of the tax credits (the company must include a statement by a CPA that certifies the total amount of eligible productions costs). The credits expire on Dec. 31, 2043. Ariz. Laws 2022, ch. 387 (HB 2156), became law without the governor's signature on July 6, 2022.

Illinois: New law (SB 3617), effective for tax years beginning on or after Jan. 1, 2023, provides a qualified employer a tax credit for hiring individuals in recovery from substance use disorders or mental illness in part- or full-time positions within Illinois. An eligible individual must be employed by the qualified employer for a minimum of 500 hours in Illinois during the calendar year. The tax credit begins on the date the eligible individual is hired by the qualified employer and ends on December 31 of that calendar year or when the individual's employment ends, whichever occurs first. The amount of the credit is $1 and the number of hours worked by each eligible individual during the individual's period of employment with the qualified employer; the credit may not exceed $2,000 per eligible individual employed. The total amount of credits that can be awarded during the year is $2 million. The credit must be claimed in the tax year in which the tax credit certificate is issued. Unused credit cannot be carried forward. Ill. Laws 2022, Pub. Act. 102-1053 (SB 3617), signed by the governor on June 10, 2022.

Iowa: New law (HF 2564) establishes an employer childcare tax credit equal to the amount of the federal employer-provided childcare credit in IRC §45F that the taxpayer was eligible for in the same year. The credit can be claimed against individual and corporate income, franchise and gross premium taxes. Unused credit is not refundable but can be carried forward for up to five years. The aggregate amount of credits available in the year is $2 million. To receive the credit, a taxpayer must submit an application to the Iowa Economic Development Authority, which will issue credit certificates on a "first-come, first-served basis". Taxpayers can then redeem the certificate for a tax credit. These provisions apply to tax years beginning on or after Jan. 1, 2023. Iowa Laws 2022, HF 2564, signed by the governor on June 17, 2022.


Louisiana: New law (SB 54) provides an automatic six-month extension of time to file individual, partnership and fiduciary income tax returns, applicable to tax periods beginning on or after Jan. 1, 2022. The law also reduces the amount of time the revenue secretary may grant as an extension of time to file corporate income and franchise tax returns from seven months to six months. Also applicable to tax periods beginning on or after Jan. 1, 2022, the secretary must grant a corporate taxpayer an extension to file its Louisiana income tax return if the taxpayer timely requested a federal extension from the IRS for the same period. The extension cannot exceed six months or the extended due date of the federal return, whichever is later. These extensions are conditioned upon the filing of the required returns within the extended period; failure to file the return will result in no extension and any delinquent filing penalty being computed from the original due date of the return. These changes take effect Aug. 1, 2022. La. Laws 2022, Act 410 (SB 54), signed by the governor on June 15, 2022.


Louisiana: New law (SB 364) requires the tax commission to post current drafts of proposed emergency rules on its website at least 60 days before the final version of the emergency rule is published in the Louisiana Register. The tax commission must allow for the submission of comments, and it is required to review and consider all comments received within 30 days of the emergency rule being posted. The tax commission can revise the draft emergency rule before publication. These requirements do not apply to statewide advisories issued by the commission. This change takes effect Aug. 1, 2022. La. Laws 2022, Act 287 (SB 364), signed by the governor on June 6, 2022.


Idaho: On June 15, 2022, the Idaho State Tax Commission issued revised income tax withholding tables reflecting the changes under HB 436, which, retroactive to Jan. 1, 2022, lowers the state's top personal income tax rate from 6.5% to 6.0% and from 3.1% to 3.0% for taxpayers earning $1,000 but less than $3,000, and eliminates the tax rate of 5.5% that applies to income of $4,000 but less than $5,000. Employers should begin using the revised tables as soon as possible; however, no retroactive withholding adjustments are required. Idaho regulations do not allow for a flat rate of income tax withholding on supplemental wages. Employers using the highest tax rate for bonuses and similar compensation will need to lower the rate for 2022 from 6.5% to 6.0% going forward. For more on this development, see Tax Alert 2022-1096.

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 "Reviewing Issues Related to State Cryptocurrency Tax Policies," Kansas Legislative Div. of Post Audit, Report Number: L-22-013, p. 1 (July 2022).

2 Wash. Dept. of Rev., Interim statement regarding the taxability of NFTs (July 1, 2022).

3 The income from the business is treated as California source income under Cal. Code of Regs., tit. 18, §17951-4(a).

4 The ruling did not address the applicability to corporate partners.

5 DTA No. 828931 (N.Y. Div. Tax App. July 7, 2022).

6 The term "practical location" is defined as "a location at which a motion picture production is filmed that is not and that does not use an industry standard sound stage or production facility to produce and film the motion picture production."