August 26, 2022 State and Local Tax Weekly for August 19 Ernst & Young's State and Local Tax Weekly newsletter for August 19 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 Inflation Reduction Act has state corporate income tax implications The newly enacted Inflation Reduction Act (H.R. 5376) (the Act), which President Biden signed into law on Aug. 16, 2022, includes a 15% corporate alternative minimum tax (CAMT) based on adjusted financial statement income (AFSI) for corporations with profits over $1 billion (see Tax Alert 2022-1237), a new excise tax on corporate stock buybacks, and increased funding for IRS enforcement. See Tax Alert 2022-9006. Some of the Act's tax components could affect corporate income taxes imposed by state and local (collectively, state) governments. State conformity to federal tax changes: Generally, most state income tax systems use federal taxable income as a starting point for state corporate income tax computations, so changes to this federal income determination can have state tax implications. By contrast, states do not automatically conform to federal tax rate changes, and most do not adopt minimum tax regimes that exist outside of the general rates under IRC § 11. States also do not generally adopt the excise tax provisions under Subtitle D of the IRC; as such, the excise tax on corporate stock buybacks does not have immediate implications for state taxes. When certain tax changes under the Act will affect state income taxes generally depends on how each state conforms to the IRC. States conform to the IRC in various ways. Most either automatically incorporate the federal tax law as it changes (known as "rolling" conformity) or adopt the federal tax law as of a specific date (known as "fixed" conformity). Upon enactment of a change in the IRC, rolling-conformity states that incorporate relevant IRC sections generally would automatically adopt the changes, while such states with fixed conformity statutes generally would only incorporate changes if and when they update their conformity date to a date on or after the effective date of the corresponding federal tax changes — or otherwise adopt legislation to that effect. Potential state tax effects of the CAMT: While most states do not follow federal minimum tax regimes, as referenced previously, state income tax conformity to the 15% CAMT based on AFSI could be an issue in the few states that have enacted a corporate AMT that relies on IRC § 55. It is unclear how existing state conformity statutes intersect with the significant changes under the Act to IRC §§ 55-59.1 For example, Alaska's corporate AMT is computed as 18% of the apportioned federal AMT liability, tying directly to IRC § 55; being a rolling IRC conformity date state, that means that Alaska automatically conforms to the CAMT.2 Similarly, California's corporate AMT directly ties to IRC § 55,3 but the state conforms to the IRC as of Jan. 1, 2015,4 meaning that state legislative action would be necessary to adopt federal changes, if any, to that Code section. In Florida, on the other hand, state statute currently bases state taxable income on the federal alternative minimum taxable income under IRC § 55(b)(2) for corporations that show a federal AMT liability on their federal tax return.5 Since the Tax Cuts and Jobs Act of 2017 (P.L. 115-97) (the TCJA) repealed the corporate AMT, this Florida law has been effectively dormant.6 An update in Florida's conformity to an IRC version incorporating the CAMT could activate that dormant state AMT, with uncertain consequences, as the significant modifications to IRC §§ 55-59 do not align to Florida's current IRC references.7 A handful of other states impose corporate minimum taxes that are based on capital stock or are otherwise not based on the federal tax computed under IRC § 55, such that the CAMT would not impact those state taxes. For instance, Minnesota imposes a corporate AMT that accounts for federal AMT adjustments and preference items under IRC § 56 et seq.,8 but the state tax is not predicated on the calculation of the federal corporate AMT itself. State adoption of federal corporate AMT regimes historically has raised complexities. Before the TCJA repealed application of the federal AMT to corporations, federal-state differences arose in the timing and manner of deducting corporate AMT credits against regular corporate tax liabilities. Affected businesses could face similar challenges if states adopt the CAMT. Furthermore, the CAMT may exacerbate existing complexity from differences in federal and state filing groups. This is a particular concern for multinationals, given that a US shareholder of a controlled foreign corporation (CFC) includes in its AFSI its pro rata share of items taken into account in computing the net income or loss on the CFC's applicable financial statement, with certain adjustments. This feature of the CAMT poses risk that conforming states could tax extraterritorial values, including non-unitary income. For more on this development, including implications, see Tax Alert 2022-1246. Inflation Reduction Act of 2022 substantially changes tax code provisions related to energy transition and renewable energy On Aug. 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the IRA). Embedded in the IRA is $369 billion in climate and energy-related provisions, which are designed to (1) incentivize and accelerate the buildout of renewable energy, (2) advance the adoption of EV technologies and (3) improve the energy efficiency of buildings and communities. The IRA's energy- and climate-related provisions are a monumental and unprecedented investment in the adoption and expansion of renewable and alternative energy sources. Specifically related to energy transition and renewable energy, the IRA:
For an in-depth discussion of these changes, see Tax Alert 2022-1236. INCOME/FRANCHISE California: Proposition 30, "the Clean Cars and Clean Air Act" (Prop. 30), has qualified for inclusion on the Nov. 8, 2022 ballot. If approved by voters, Prop. 30 would impose an additional 1.75% income tax on the portion of an individual's taxable income exceeding $2 million, effective for tax years beginning on or after Jan. 1, 2023. This additional tax would sunset on Jan. 1, 2043. Revenue generated from this additional tax would go to fund investments toward California's climate change goals, namely electrification of vehicles used in California and preventing/suppressing wildfires. Connecticut: The Connecticut appellate court upheld the commissioner's assessment against an individual income taxpayer with respect to compensation from his exercise of stock options and vesting of restricted stock previously given to him by his employer for services he performed in Connecticut and New York (collectively, "stock"). In so holding, the court rejected the taxpayer's argument that the commissioner miscalculated the amount of credit for tax paid to another state available to him (and his spouse). Under Connecticut law, the taxpayer was required to allocate income from such stock between Connecticut and New York under, and apportion the credit for tax paid to another state using the methodology set forth in, Conn. Regs. §§12-711(b)-17(c) and 12-711(b)-18(c). The parties agreed that the credit is apportioned based on the ratio between total compensation received during the grant-to-exercise period or grant-to-vest period (collectively, "period") for services performed in New York and total compensation received during these periods for services performed everywhere. At issue is whether the commissioner properly included in the computation of the credit deferred compensation earned earlier but not received during the period or, as the taxpayer argue, it is calculated based on compensation that was received during the period for services performed during that period. Agreeing with the commissioner, the appeals court concluded that "deferred compensation falls squarely within the straightforward regulatory language directing that the computation of credit shall include all of the compensation received during the relevant periods … ." The appeals court also rejected the taxpayer's argument that the commissioner abused his discretion by not using the alternative apportionment method to determine the amount of such credit they were entitled to use, finding that since the commissioner correctly construed and applied Conn. Regs. §§12-711(b)-17(c) and 12-711(b)-18(c), "the resulting apportionment … is presumptively fair and equitable." Costas et al. v. Connecticut Comm'r of Rev. Serv., AC 44075 (Ct. App. Ct. July 19, 2022). Ohio: Following Ohio's enactment of an elective pass-through entity (PTE) tax as a workaround to the federal cap on the state and local tax deduction, the Ohio Department of Taxation (OH DOT) announced that it is developing new PTE tax form IT 4738 for tax year 2022, along with instructions, FAQs and other related information. Highlights of the new PTE tax include the following: (1) an entity makes the PTE tax election by filing form IT 4738; (2) the PTE election is binding on all the entity owners and is irrevocable for the tax year; (3) disregarded entities cannot make the PTE tax election; (4) an entity cannot claim refundable or nonrefundable credits on form IT 4738; (5) the due date for the 2022 form is April 18, 2023; (6) estimated payments are due on the same day as IT 1140 estimated payments; (7) owners that file an Ohio individual income tax return must add back amounts paid on IT 4738 to the extent not included in computing federal or Ohio adjusted gross income; and (8) owners filing form IT 1040 can claim a refundable credit (UPC) for the proportionate share of tax paid by the PTE on IT 4738. The OH DOT noted that the estimated payment coupon is not currently available for form IT 4738. Taxpayers that need to make estimated payments can use IT 1140 UPC. IT 4738 will include a line in Schedule 1 so that taxpayers can notify the OH DOT that payments need to be transferred from one PTE form type (IT 1140 or IT 4708) to IT 4738 for previously made payments. Oho Dept. of Taxn., "Ohio's PTE SALT Cap Workaround for 'Electing Pass-Through Entities' beginning in Tax Year 2022" (Aug. 5, 2022). Virginia: On Sept. 7, 2022, the Virginia Department of Taxation will hold a meeting to solicit feedback from interested parties before promulgating guidelines (preliminary or final) on the use of market-based sourcing by certain property information and analytics firms. Click here for more information on the meeting. SALES & USE Indiana: New law (SB 2) exempts sales of children's diapers (disposable or reusable) from the state's gross retail tax, effective for retail transactions occurring on or after Sept. 1, 2022. A transaction is considered to have occurred before Sept. 1, 2022 if an agreement to the transaction is entered into and payment for the property is made before that date. The law also provides that from Sept. 1, 2022 through June 30, 2023, the gasoline use tax rate is the lesser of (1) the monthly gasoline use tax rate per gallon of gasoline as determined by the revenue department or (2) $0.295 per gallon of gasoline. The gasoline use tax cap provision expires July 1, 2023. Ind. Laws 2022 (Special Session), P.L. 180(ss) (SB 2), signed by the governor on Aug. 5, 2022. Minnesota: The Minnesota Department of Revenue (MN DOR) update its digital products sales tax fact sheet to explain that non-fungible tokens (NFTs) are subject to tax when the underlying product (i.e., goods or services) is taxable. The MN DOR said that NFTs may entitle purchasers to receive products or services such as digital products (e.g., music, video games, audio visual works), admission to sporting events or concerts, prepared food and beverages, and tangible personal property (e.g., collectibles or memorabilia). Minn. Dept. of Rev., Sales Tax Fact Sheet 177 "Digital Products" (updated Aug. 2022). Texas: A District Court Judge for Travis County found that the Texas Comptroller of Public Accounts failed to "substantially comply with" requirements of the Texas Administrative Procedure Act, specifically Tex. Gov. Code § 2001.024, in adopting amendments to 34 TAC §3.334(b)(5), which as amended would source online sales to the buyers location instead of the seller's business location. In July 2021, the City of Round Rock filed a lawsuit, seeking to overturn this provision, arguing that the rule is contrary to the Tax Code. (Other cities challenging the rule include Coppell, Humble, DeSoto, Carrollton and Farmers Branch.) Following an Aug. 30, 2021 hearing, the Comptroller and the city reached an agreement, enjoining the Comptroller from implementing or enforcing Rule 3.334(b)(5) until a final hearing on the merits or further order from The Travis County District Court. In an Aug. 10, 2022 letter ruling, the court remanded the case back to the Comptroller for "revision or readoption through established procedures within a reasonable time." The court also directed the parties to submit an order consistent with the court's findings and ruling. City of Coppell, Tex. v. Hegar, Cause No. D-1-GN-21-003198 (Tex. Dist. Ct., Travis Cnty., Aug. 10, 2022); City of Round Rock, Tex. V. Hegar, Cause No. D-1-GN-21-003203 (Tex. Dist. Ct., Travis Cnty., Aug. 10, 2022). Virginia: New law (HB 90/SB 451) beginning on and after Jan. 1, 2023, exempts from state retail sales and use tax (1) food purchased of food for human consumption and (2) essential personal hygiene products. These items, however, are still subject to the 1% local option sales tax. The law includes definitions of "food purchased for human consumption" and "essential personal hygiene products". Va. Laws 2022 Spec. Sess.1, ch. 5 (HB 90) and ch. 4 (SB 451), both signed by the governor on Aug. 4, 2022. BUSINESS INCENTIVES Massachusetts: New law (HB 5060) establishes the Massachusetts offshore wind industry investment program, which consists of the Massachusetts offshore wind tax incentives program and provides access to expenditures under the Massachusetts offshore wind industry investment trust fund. Tax incentives available to certified offshore wind companies include a refundable jobs credit that can be claimed against income or corporate excise tax. To be eligible to claim this credit, a taxpayer must commit to create a minimum of 50 net new permanent full-time employees in Massachusetts. If the amount of credit exceeds the taxpayer's tax liability, 90% of the excess credit is refundable. Excess credit cannot be carried forward. Owners or tenants of an offshore wind facility may take a refundable credit against income or corporate excise tax of up to 50% of its total capital investment in an offshore wind facility. The total amount of credit will be awarded in equal parts over the five taxable years that correspond to the period in which the owner or tenant is certified. To be eligible for this investment credit, the owner must demonstrate that: (1) it is a certified offshore wind company, (2) its total capital investment in the offshore wind facility equals not less than $35 million, and (3) the facility will employ not less than 200 new full-time employees by the fifth year of its certification period. A tenant, on the other hand, must demonstrate that: (1) it is a certified offshore wind company; (2) the owner's total capital investment in the facility equals not less than $35 million; (3) the tenant occupies a leased area of the facility that represents not less than 25% of the owner's capital investment in the facility; and (4) the tenant will employ, in the aggregate with other tenants of the facility, not less than 200 new full-time employees by the fifth year of the tenant's certification period. The amount of credit available to the tenant cannot exceed its total lease payments for occupancy of the facility for the tax year. The credits must be expressly granted by the Secretary of Administration and Finance in writing. The total amount of available credit is $35 million annually. Certification as an offshore wind company is valid for five years starting with the year certification is granted; if certification is revoked for material noncompliance with the company's certification proposal, any credits, exemptions or other tax benefits allowed by such certification will be disallowed as of the date of revocation. The law also includes an electric vehicle adoption incentive trust fund, which allows for the creation of a program of rebates and other financial incentives to parties that purchase or lease new or used qualifying zero-emission vehicles in Massachusetts. The program applies to individual and corporate fleet purchases and leases of passenger cars and light/medium/heavy duty trucks, buses and vans; however, rebates and incentives are not allowed for a used zero-emission vehicle that (1) was bought new or used within the prior 24 months; (2) such passenger cars or light duty trucks with a sales price exceeding $55,000; or (3) such vehicle that is leased for less than 36 months. The rebate for passenger cars and light duty trucks ranges between $3,500 and $5,000. For medium/heavy duty trucks, buses and vans, the rebate cannot be less than $4,500. Mass. Laws 2022, ch. 179 (HB 5060), signed by the governor on Aug. 11, 2022. Massachusetts: New law (SB 3075) allows a business (pass-through entity, corporation) that employs not more than 100 employees a credit equal to $2,000 for each member of the Massachusetts national guard it hires. An additional $2,000 will be allowed in the second year of continued employment. To be eligible for the credit, the primary place of employment and the primary residence of the Massachusetts national guard member must be Massachusetts. In addition, not later than the day the individual begins work, the business must obtain certification from the Office of the Adjutant General that the individual is a member of the Massachusetts national guard. This credit is not transferable or refundable. Excess credit can be carried forward for up to three years. The total amount of credit available under this program is capped at $1 million annually. Mass. Laws 2022, ch. 154 (SB 3075), signed by the governor on Aug. 5, 2022. Texas: As required by law, the Texas Comptroller of Public Accounts has created an online database containing information regarding all local development agreements in the state. Local governments are required to provide the Comptroller with certain information and the agreements they have entered into, amended or renewed. The database is available on the Comptroller's website. PROPERTY TAX Missouri: The Missouri Supreme Court ruled that a statutory provision, RSMo §137.100(10), providing a property tax exemption for "solar energy systems not held for resale" is unconstitutional because the Missouri Constitution did not grant the legislature the authority to exempt such property from taxation. In so holding, the Court explained that the Missouri constitution sets out property exempt from tax — Article X, sec. 6 expressly exempts certain categories of property from tax, allows the legislature to establish tax exemptions for specific categories of property, and voids any law exempting property from tax other than the property enumerated in this article. The Court found that the taxpayer's "solar energy system not held for resale" does not fall within any category described in sec. 6. The Court also rejected the taxpayer's argument that Article X, sections 4(a) and 4(b) grant the legislature an implied authority to create tax exemptions for any type of real or personal property, such as it solar energy system. The Court reasoned that such interpretation would require it "to ignore the explicit language in article X, section 6 indicating all property tax exemptions not enumerated in article X shall be void." Accordingly, the solar energy system owned by a company is not exempt from property tax. Johnson v. Springfield Solar 1, LLC, No. SC99441 (Mo. S.Ct. Aug. 9, 2022). CONTROVERSY Michigan: New law (SB 248) establishes provisions for reporting federal partnership audit and adjustments. Generally, a taxpayer has 180 days to file an amended return and pay any Michigan tax due with respect to a final federal adjustment, except for final federal adjustments arising from a partnership level audit or administrative adjustment request. 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 completed federal adjustments report with the Michigan Department of Treasury (department), notify each of its direct partners of their distributive share of the final federal adjustment, and submit a payment on behalf of any nonresident partner previously included on a composite return. If tax due resulting from a final federal adjustment is $25 or more, 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, if the partner was not included in the payment made on behalf of nonresident partners. 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 department that it is making 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 department 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 law sets forth the period in which the department can assess additional tax, interest and penalties arising from a federal adjustment. The department is authorized to promulgate rules to implement these requirements. These provisions are effective and apply retroactively to Jan. 1, 2018. Mich. Laws 2022, Pub. Act 148 (SB 248), signed by the governor on July 19, 2022. PAYROLL & EMPLOYMENT TAX Connecticut: The Connecticut Department of Labor announced that the deadline for filing the second-quarter 2022 state unemployment insurance return and paying the associated taxes is extended by one month, from July 31 to Aug. 31, 2022. The extension allows employers extra time to sign up for the new ReEmployCT online reporting system, which came online July 5, 2022. The extension applies to late fees and interest, which will not be assessed until Sept. 1, 2022, and penalties, which will not be assessed until Oct. 1, 2022. For additional information on this development, see Tax Alert 2022-1231. New Jersey: The US Department of Treasury showed that New Jersey repaid its federal unemployment insurance (UI) loan in full as of May 2022, but has since borrowed again. According to the New Jersey Office of Legislative Services fiscal year (FY) 2023 budget analysis for the New Jersey Department of Labor & Workforce Development, the federal UI loan balance was $834.6 million as of April 22, 2022, before the full loan balance was repaid. For additional information on this development, see Tax Alert 2022-1244. New York: The New York Department of Labor announced that employers will soon receive a bill from the Department, known as the Interest Assessment Surcharge, the proceeds of which will be used to pay federal interest charges of approximately $162 million owed by the state on its federal UI loans. For additional information on this development, see Tax Alert 2022-1204. UPCOMING WEBCASTS Wednesday, August 31, 2022. Breakdown of CHIPS and Science Act of 2022: what companies can do now (1:00 pm ET).The recently signed CHIPS and Science Act of 2022 aims to build a domestic US supply chain for semiconductor chips in the face of foreign competition. The law includes $52.7 billion in funding for semiconductor manufacturing subsidies, grants and loans. It also provides a 25% investment tax credit (Advanced Manufacturing Investment Credit) for investments in semiconductor manufacturing that includes incentives for the manufacturing of semiconductors, as well as for manufacturing of specialized tooling equipment required in the semiconductor manufacturing process. Please join us for a discussion and overview of the new law and its potential implications for businesses. A robust panel of subject matter professionals from across EY will share the issues and opportunities related to both the incentives and loans and the Advanced Manufacturing Investment Credit provisions included in the Act. The following topics will be discussed: (1) analysis of the CHIPS and Science Act of 2022; (2) framework of the Act; and (3) who qualifies for the Act's incentives and credits? Click here to register for this webcast. 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 This includes newly-added IRC § 56A, which defines AFSI of a corporation. 2 Alaska Stat. §§ 43.20.021(a) and (f), 43.20.300(a) and 43.20.340(5); Alaska Admin. Code tit. 15, § 20.135. 3 Cal. Rev. & Tax. Code §§ 23400 and 23455. 4 Cal. Rev. & Tax. Code § 23051.5(a), which cross-references Cal. Rev. & Tax. Code § 17024.5(a)(1) (a provision in California's personal income tax law), wherein the current conformity date is codified. 5 Fla. Stat. Ann. § 220.13(2)(k). See also Fla. Stat. Ann. § 220.11(4). 6 See Fla. Admin. Code Ann. r. 12C-1.013(19). 7 Florida tax law currently conforms to the IRC as amended and in effect on Jan. 1, 2022. Fla. Stat. Ann. §220.03(1)(n). 8 Minn. Stat. § 290.0921(subd. 3). | ||||
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