September 16, 2022
State and Local Tax Weekly for September 2 and 9
Ernst & Young's State and Local Tax Weekly newsletter for September 2 and 9 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.
New law modifies New York City's economic nexus provisions, moves forward effective date of its elective pass-through entity tax
On Aug. 31, 2022, New York Governor Kathy Hochul signed into law A.10506 / S.9454 (the Act), which amends the New York City (NYC) administrative tax code by expanding NYC's economic nexus rules. Among other business tax changes, the Act also allows taxpayers to elect the NYC pass-through entity (PTE) tax, starting in 2022.
Nexus: Effective for tax years beginning on or after Jan. 1, 2022, the Corporate Tax of 2015 (also known as the NYC Business Corporation Tax or BCT) applies to corporations "deriving receipts from activity in the city." A corporation is "deriving receipts from activity in the city" if it has $1 million or more in receipts from NYC sources in the tax year. For purposes of this provision, "receipts" are those subject to NYC's allocation rules, while "receipts within the city" are those included in the numerator of the receipts factor. Receipts include merchant discount fees received by a corporation from processing credit card transactions. A corporation that does not meet the $1 million threshold but has at least $10,000 in receipts from NYC sources and is a member of a unitary group will be "deriving receipts from activity in the city" if it and the other unitary group members with at least $10,000 in NYC receipts meet the $1 million threshold.
A corporation is doing business in NYC if it (1) issues credits cards to 1,000 or more customers with mailing addresses in NYC; (2) has merchant customer contracts covering 1,000 or more locations in NYC to which the corporation remitted payments for credit card transactions during the tax year; or (3) the sum of both customers and merchant contracts equals 1,000 or more. A corporation that is part of a unitary group and does not meet any of these thresholds can still be considered "doing business in NYC" if (i) it has at least 10 customers, locations, or customers and locations, and (ii) the corporation and the other members of the unitary group with at least 10 customers, locations, or customers and locations meet any of the thresholds described in (1) — (3).
The provisions creating nexus for unitary groups do not apply to corporations excluded from a combined report under N.Y.C. Admin. Code § 11-654.3(2)(c).
NYC PTE tax: The Act modifies NYC's elective PTE tax, which was enacted into law earlier this year (N.Y. Laws 2022, ch. 59, Part MM). As originally enacted, the NYC PTE tax could be elected starting in 2023. The Act moves the effective date forward to tax years beginning on or after Jan. 1, 2022. The Act also changes how the annual election is made, requiring the NYC PTE tax election to be made by the person who made the New York State (NYS) PTE election.
The Act includes provisions that apply to a NYC PTE tax election made for 2022. The election must be made by March 15, 2023. (It is important to note that the NYC PTE election can only be made by city partnerships and city S corporations that timely make the NYS PTE election. Accordingly, city partnerships and city S corporations intending to make the NYC PTE tax election must have made the NYS PTE tax election by Sept. 15, 2022.) Electing city partnerships and city S corporations will not be required to make estimated tax payments for 2022. City partners, members or shareholders of an electing partnership or S corporation must calculate their required NYC personal income tax estimated tax payments as if they were not entitled to the NYC PTE tax credit.
The changes to the NYC PTE tax apply to tax years beginning on or after Jan. 1, 2022.
Additional information on the NYS and NYC PTE taxes, including a link to the portal used to opt into the PTE tax, is available on the NYS department's PTE tax webpage. The NYS department said it will let taxpayers that opted into the 2022 NYS PTE tax election know when the online application to opt into the 2022 NYC PTE tax election is available.
The Act also:
For additional information on this development, see Tax Alert 2022-1330.
Idaho: New law (HB 1) replaces Idaho's current corporate and individual income tax bracket system with a flat income tax. Currently, the highest income tax rate for corporations and individuals is 6%. Effective on and after Jan. 3, 2023, the state's corporate income tax rate is 5.8% and the tax rate on individuals, trusts and estates is 5.8% of taxable income over $2,500 ($5,000 for taxpayers filing a joint return). Idaho Laws 2022 Extraordinary Sess., ch. 1 (HB 1), signed by the governor on Sept. 1, 1022.
Illinois: Adopted amendments to 86 Ill. Admin. Code Rule 100.3200 "Taxability in Other State", for allocation and apportionment purposes, "remove[s] the stipulation regarding treaties with foreign countries in determining whether a taxpayer is subject to tax." In determining whether a taxpayer is considered taxable in another country, such that the throw-back or throw-out rules under IITA Section 304 would apply, the prior rule, which applies to tax years ending before Dec. 31, 2022, provides that a taxpayer will not be considered subject to tax if the taxpayer's activities are exempt from tax as a result of a treaty. Effective for tax years ending on or after Dec. 31, 2022, the amendment provides that "if jurisdiction is otherwise present, due to income-producing activities conducted by the taxpayer, that foreign country or political subdivision is not considered as being without jurisdiction by reason of the provisions of a treaty between that foreign country or political subdivision and the United States." The amended rule adds an example. In the rulemaking notice, the Illinois Department of Revenue said the state's current provision "is unique" and "contrary to the Multistate Tax Commission model rule provision." The amended rule is effective Aug. 24, 2022. Ill. Dept. of Rev., Amended Rule 100.3200 (Ill. Reg., Vol. 46, Issue 37, Sept. 9, 2022).
Illinois: The Illinois Department of Revenue proposed amendments to 86 Ill. Adm. Code 100.2330 that would implement Pub. Act 102-0669's changes to the Illinois net loss deduction that extended the carry forward period to 20 years for losses incurred in tax years ending on or after Dec. 31, 2021. Net losses incurred before Dec. 31, 2021 can be carried forward for 12 years; however, such losses that had not expired as of Nov. 16, 2021 (the effective date of Pub. Act 102-0669) could be carried forward 20 years following the taxable year of loss. Comments on the proposed amendments to the rule are due no later than 45 days after publication of the Notice of Proposed Amendment. Ill. Dept. of Rev., 86 Ill. Adm. Code 100.2330 (Ill. Register Vol. 46, Issue 35, Aug. 26, 2022).
Michigan: The Michigan Department of Treasury (MI DOT) issued basic guidance on how digital currencies are treated for individual income tax purposes, stating that the federal income tax treatment of digital currencies and cryptocurrencies dictates their state tax treatment. The MI DOT noted that the state currently "does not have any rules or policies with respect to digital currency transactions that differ from the federal policies regarding such transactions." The MI DOT said that digital assets a taxpayer buys, sells, mines or uses to pay for things are subject to income tax and that digital assets used to pay an employee represents taxable income. Further, the difference between a taxpayer's acquisition cost of a digital asset and its value at the time of sale is treated as a gain or loss and taxed as such. The MI DOT also said that "[h]ow digital currency is received or used may have an impact on an individual's tax liability," noting that successfully mining digital currency creates an immediate taxable event. (Fair market value of such currency is calculated on the day it was mined.) Purchases made by a taxpayer using digital currency also may result in a federal tax liability. Mich. Dept. of Treas., Update (Aug. 2022).
Minnesota: The Minnesota Department of Revenue on its "Tax Law Changes: 2022 Legislative Session" webpage explained that since the state has not conformed to the federal tax changes in the American Rescue Plan Act, which excluded funds from COVID-19 business relief from federal income tax, such funds are income for Minnesota income tax purposes. Accordingly, taxpayers that excluded on their federal tax return grants or forgivable loan income from Targeted Economic Injury Disaster Loan Advances, Restaurant Revitalization Grants, Small Business Administration forgivable loan assistance, Shuttered Venue Operators Grant, must add such amounts back on their Minnesota income tax returns. Minn. Dept. of Rev., "Tax Law Changes: 2022 Legislative Session" (Aug. 8, 2022).
SALES & USE
California: New law (SB 1312) modifies the definition of marketplace facilitator to create an exception for vehicle rental broker for the facilitation, for a commission, fee or other consideration, of a passenger vehicle rental on behalf of a non-related rental company. This provision takes effect Jan. 1, 2023. Cal. Laws 2022, ch. 228 (SB 1312), signed by the governor on Aug. 29, 2022.
California: New law (AB 2887) increases to $150 million per year (from $100 million) the amount of sales and use tax exclusions the California Alternative Energy and Advanced Transportation Financing Authority can authorize for projects that promote California-based manufacturing, California-based jobs, advance manufacturing, greenhouse gas reduction and the reduction in air and water pollution or energy consumption. The increased exclusion amount is authorized through Jan. 1, 2026. These changes took immediate effect. Cal. Laws 2022, ch. 248 (AB 2887), signed by the governor on Sept. 6, 2022.
Illinois: The Illinois Department of Revenue (IL DOR) issued a compliance alert on the improper reporting of receipts that qualify for the suspension of low rate of state sales and use tax on retail sales of groceries. The IL DOR said the following common errors should be corrected immediately: (1) retailers excluding sales of groceries from gross receipts reported on Form ST-1, Line 1 (rather, these receipts should be include and then the retailer can claim a credit for the retails sales of groceries on Schedule GT); (2) retailers including sales of groceries in their taxable receipts on Form ST-1 and then deducting the entirety of those receipts on Line 16 of Schedule A on Form ST-1 (rather, the credit for such sales should be claimed on Schedule GT); and (3) retailers selling both groceries and other low-rate items (e.g., medicine, medical supplies) claiming credit on Schedule GT for retail sales of all low-rate items and, thus, claiming a credit for low-rate items that do not qualify for the suspension. The IL DOR also noted that consumers are reporting that some retailers are collecting tax on retail sales of groceries that qualify for the suspension. The IL DOR's compliance alert describes how to properly report these receipts as well as calculating and claiming the credit, including illustrative examples. Ill. Dept. of Rev., Compliance Alert: Improper Reporting of Grocery Tax Suspension Sales on Form ST-1 (Sept. 2022).
Michigan: The Michigan Department of Treasury (MI DOT) explained that generally sales of gift cards and gift certificates (collectively, gift cards) are not subject to sales and use tax even when sold as tangible personal property (e.g., plastic card, paper certificate). Rather, gift cards are intangible property, representing the monetary value for which the card can be redeemed. When a gift card is redeemed for taxable property, the seller must remit tax on the transaction. If the gift card does not have a specified monetary value, such as a gift card that can be redeemed for something specific (e.g., a three night stay at a hotel), tax is based on the purchase price. For example, when a gift card issued by a hotel for a three-night stay is redeemed, the amount of tax due is based on the value of the of the accommodation at the time of rental. Mich. Dept. of Treas., Update (Aug. 2022).
New York: The New York State Department of Taxation and Finance issued guidance on new taxes imposed on peer-to-peer (P2P) car sharing beginning Sept. 1, 2022. The new 3% statewide P2P car sharing tax is due on the gross receipts paid by the shared vehicle driver for use of a shared vehicle when the shared vehicle driver takes possession of the shared vehicle in New York. In addition, either a 3% regional transportation tax or a 3% Metropolitan Commuter Transportation District tax is imposed, depending on where the driver takes possession of the shared vehicle in New York. There is a rebuttable presumption that every transfer of possession of a shared vehicle in New York is subject to these taxes. These new taxes are in addition to state and local sales and use taxes imposed. The guidance also describes the procedures for collecting the tax and filing returns, and it includes definitions of key terms. N.Y. State Dept. of Taxn. and Fin., TSB-M-22(1)S (Aug. 30, 2022).
Pennsylvania: An out-of-state business that sells merchandise through an online marketplace's fulfillment program, and whose only connection to Pennsylvania is the storage of its inventory at the online marketplace's in-state warehouse, is not required to collect and remit Pennsylvania sale tax on such sales because it does not have sufficient contacts with Pennsylvania. Merchants participating in the fulfillment program submit a list of inventory to the online marketplace who then designates the location to which it is shipped, unless the merchant pays a fee enabling it to direct the initial shipment of inventory to certain locations. The merchant has no control over inventory once it is received by the online marketplace. The online marketplace facilitates and fulfills sales of the merchant's inventory, collects payment from the customer and ships the merchandise from its warehouses. The identity and location of the purchaser is not disclosed to the merchant. Given these facts, the Pennsylvania Commonwealth Court said "[w]e are hard pressed to envision how, in this circumstances, a [merchant] has placed its merchandise in the stream of commerce with the expectation that it would be purchased by a customer located in the Commonwealth, or has availed itself of the Commonwealth's protections, opportunities, and services." The court also held that the Pennsylvania Department of Revenue's authority to examine a taxpayer's records under Pa. Tax Code §272 cannot be used to demand business information against out-of-state merchants participating in the fulfillment program. Online Merchants Guild v. Hassell, No. 179 M.D. 2021 (Pa. Commw. Ct. Sept. 9, 2022).
California: New law (AB 209) directs the California Energy Commission to establish and administer the Climate Innovation Program to provide financial incentives (e.g., contract, grant, or other appropriate funding measure) to California-headquartered companies for developing and commercializing technology advancements that help California either (1) meet its greenhouse gas reduction targets and achieve its climate goals on an accelerated timeline and at a lower cost or (2) be more resilient to the impacts of climate change. A company or business may be eligible for the "financial incentives" if it agrees to relocate its headquarters to California, complies with the requirement of the program, and it relocates from a state that has enacted one of the specifically enumerated laws. The financial incentives will be awarded using a competitive award process. The law also establishes clean energy programs (which include the Industrial Grid Support and Decarbonization Program, the Food Production Investment Program, the Hydrogen Program, and the Equitable Building Decarbonization Program) and the Carbon Removal Innovation Program, which provide financial incentives (e.g., contract, grant, loan, rebate, block grant, or other appropriate funding measure) for eligible projects. Eligible projects under the Carbon Removal Innovation Program include technology, research, development and demonstrations, and prototypes and pilot research test centers to remove atmospheric carbon. Eligible projects do not include those that benefit petroleum or gas production, or refining facilities, through enhanced oil or gas recovery. The law also provides that for calendar years 2022, 2023 and 2024 the California Alternative Energy and Advanced Transportation Financing Authority (CAETFA) shall make at least $15 million in sales and use tax exclusions under Cal. Rev. and Tax Code §6010.8 available to projects that manufacture, refine, extract, process or recover lithium. Cal. Laws 2022, ch. 251 (AB 209), signed by the governor on Sept. 6, 2022.
COMPLIANCE & REPORTING
Puerto Rico: In Administrative Order 2022-005, the Puerto Rico Department of State extended the due date for filing annual reports from Aug. 29, 2022 to Oct. 18, 2022. The extension applies to corporations that requested a second or additional extension of time for filing. For more on this development, see Tax Alert 2022-1304.
Florida: The Florida Department of Revenue (FL DOR) said that it "accepts electronic digital signatures, as they have the same force and effect as a written signature under Florida law." Taxpayers and taxpayer representative can use "established, secured messaging systems" for submitting documents with an electronic digital signature. The FL DOR noted that it must be able to validate the electronic digital signature or any other electronic signature used by the signer. The FL DOR listed the types of image file types it will accept (e.g., JPG, TIFF, PDF, JPEG, Microsoft Office suite, ZIP). Similarly, FL DOR employees may use electronic digital signatures on documents sent to taxpayers, authorized representative or other authorized entity for tax administration purposes. Fla. Dept. of Rev., Tax Information Publication No: 22ADM-07 (Aug. 24, 2022).
Michigan: The Michigan Department of Treasury (MI DOT) issued a notice discussing the implementation of Pub. Act 148 of 2022, which establishes rules for reporting and paying Michigan income tax resulting from a federal partnership level audit or administrative adjustment. Michigan law provides two methods for reporting adjustments and paying tax due: (1) the push out method — partnership reports adjustments to members who then separately report and pay their share of Michigan income tax due; or (2) the pay up method — the partnership elects to report and pay any applicable Michigan income tax due on behalf of its members. There are 90 day deadlines for: (1) all partnerships to notify the MI DOT that it will be making the pay up election and to report preliminary information about the adjustments to the MI DOT; and (2) partnerships using the push out method to report adjustments to each direct partner and, if applicable, pay any Michigan income tax due on behalf of direct partners that were previously included on a composite return. There are 180 day deadlines for: (1) direct members of a partnership using the push out method to report their share of adjustments to the MI DOT and pay tax on those adjustments; and (2) partnerships that made the pay up election to pay the collective Michigan income tax due on the adjustments. The MI DOT noted that the "deadlines are established by reference to the 'final determination date' of the federal adjustment." These provisions are generally applicable to federal adjustment made for tax years beginning on or after Jan. 1, 2018. The MI DOT said it anticipates that procedures for reporting these adjustments will be available by Jan. 1, ,2023. If the final determination date is before Jan. 1, 2023, the MI DOT said it will regard as timely any reports, elections and payments made as if Jan. 1, 2023 was the applicable final determination date. Penalty and interest on the adjustments will be automatically waived if timely reported. Mich. Dept. of Treas., "Notice Regarding the Implementation of 2022 Public Act 148" (Aug. 26, 2022).
Georgia: Governor Brian Kemp extended the suspension of fuel taxes through Oct. 12, 2022 (from the extended date of Sept. 12, 2022). The suspension applies to motor fuel and diesel fuel taxes under Ga. Code §48-9-3 and to sales taxes on locomotive fuel required by Ga. Code § 48-8-30. Ga. Gov., Executive Order 09.01.22.02 (Sept. 1, 2022).
VALUE ADDED TAX
International — Peru: On Aug. 12, 2022, Peru's President enacted Law 31556, establishing a temporary VAT rate reduction for activities conducted by restaurants and hotels. According to the law, the purpose of the temporary VAT rate reduction is to promote the economic reactivation of the hospitality sector. For additional information on this development, see Tax Alert 2022-1321.
Thursday, September 22. Domestic tax quarterly webcast series: A focus on state tax matters (1:00-2:30 pm ET). For our third quarterly webcast of 2022, please join our panel to discuss state and local tax disruptions in an ever-changing world. The discussion will focus on top-of-mind issues impacting state and local taxes, including: (1) the US economy and key economic indicators, including inflation, GDP and labor; (2) state and local revenue and fiscal conditions; (3) the impact of workforce issues, such as the hybrid workplace and worker shortages at the state administrative level, on taxpayers; (4) recent state income and sales/use tax guidance on digital assets, which may clarify state tax positions but may also pose new questions as the technology evolves; and (5) select federal and recent state and local tax developments on other topics. Register for the webcast here.
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 Under Section 16-ff of the New York State Urban Development Corporation Act.