October 6, 2022 State and Local Tax Weekly for September 23 and 30 Ernst & Young's State and Local Tax Weekly newsletter for September 23 and 30 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 Iowa certifies corporate income tax rate reductions starting in 2023 On Sept. 27, 2022, the Director of the Iowa Department of Revenue issued Order 2022-03, certifying that the top corporate income tax rates will decrease to 8.4% in 2023 from 9.0% and 9.8%. House File 2317, which was enacted earlier this year, amended Iowa Code § 422.33 to reduce the corporate income tax beginning in 2023 if certain revenue triggers were satisfied. (See Tax Alert 2022-0351.) New Iowa Code § 422.33(1)(b) requires both the Iowa Department of Revenue (DOR) and the Iowa Department of Management (DOM) to determine by Nov. 1, 2022 (and by November 1st of each year thereafter) whether net corporate income tax receipts in the prior fiscal year exceeded $700 million. If the revenue triggers are satisfied, then the 9% and 9.8% rate brackets will be adjusted to generate $700 million in net corporate income tax receipts. The new rates will apply to tax years beginning on or after January 1st of the year following the determination date. The rates cannot decrease below 5.5%. On Sept. 26, 2022, the DOM concluded that the net corporate income receipts exceeded $700 million for the prior fiscal year. The following day, the DOR determined that the top corporate income tax rates should be reduced and announced the following corporate income tax rate schedule for tax years beginning on or after Jan. 1, 2023:
For additional information on this development, see Tax Alert 2022-1462. Texas Comptroller proposes amendments to local sales and use tax rules The Texas Comptroller of Public Accounts (Comptroller) has proposed rule amendments to 34 TAC §3.334 (Section 3.334) regarding local sales and use tax. In August 2022, a Texas District Court found that the Comptroller 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) [in 2020], which as amended would source online sales to the buyers location instead of the seller's business location." The court remanded the case back to the Comptroller for "revision or readoption [of the rule amendments] through established procedures within a reasonable time." The Comptroller is now proposing to amend Section 3.334(b)(5) and other parts of the rule "with an explanation that augments" the those published in the proposed rulemaking (Jan. 2020) and the notice adopting the amendments (May 2020). Under the proposal, the definition of "place of business of the seller" in Section 3.334(a)(16) would be amended to make clear that a place of business of the seller would have to be an established outlet, office or location the seller operates for purposes of receiving orders for taxable items from persons other than employees, independent contractors and affiliated natural persons. (The term does not include a computer server, internet protocol address, domain name, website or software application.) The established outlet, office or location would have to be staffed by at least one sales personnel. The proposal also would provide that the "purpose" element could be established by showing that the sales personnel received three or more orders for taxable items at the facility during the calendar year. (The preamble of the proposed amendments contains a lengthy discussion of the reasons for the amendments.) Proposed amendments to Section 3.334(b)(1) would provide that the forwarding of previously received orders to the facility for fulfilment does not make the facility a place of business. According to the Comptroller, proposed amendments to Sections 3.334(b)(4) and (5) are "for stylistic reasons and to more clearly state [its] application of the definition of place of business of the seller from subsection (a)(16): … " Subsection (b)(4) would treat an order received by a salesperson who is not at a place of business of the seller when the salesperson receives the order as being received at the location where the salesperson operates (i.e., the fixed location where the salesperson conducts work-related activities). Subsection (b)(5) would provide that an order that is not received by a salesperson is received at the location that is not a place of business of the seller, such as orders received by a computer server through a shopping cart software program or by an automated telephone ordering system. In Section 3.334(c)(2)(B)(ii), the term "order not fulfilled in Texas" would be amended to make the language more consistent with Tex. Tax Code §321.205(c). The amendment would provide that a sale is not considered to be consummated in Texas when an order is received by a seller at a location that is not a place of business of the seller in Texas and is fulfilled from a location outside the state. A use, however, would be considered to be consummated at the first point in Texas where the item is stored, used or consumed after interstate transit ceased. There would be a rebuttable presumption that a taxable item delivered to a point in Texas will be used for storage, use or consumption at that point. Local use tax would be collected as provided in Section 3.334(d). The Comptroller will hold a public hearing on the proposed amendments on Monday, Oct. 17, 2022. Comments on the proposed amendments are due no later than 30 days from the date the proposal was published in the Texas register, i.e., Oct. 23, 2022. Tex. Comp. of Pub. Accts., Prop. Rules 34 TAC §3.334 (47 TexReg 6158 Sept. 23, 2022). INCOME/FRANCHISE Multistate: The most recent State Income Tax quarterly summarizes the significant legislative, administrative and judicial actions that affected US state and local income/franchise and other business taxes for the third quarter of 2022. Highlights include: (1) a summary of legislative developments in Arizona, Arkansas, Idaho, Massachusetts, New York, Pennsylvania, Virginia and New York City; (2) a summary of judicial developments in Michigan and New York; (3) a summary of administrative developments in Illinois, Iowa, Minnesota, New Hampshire, New Jersey, Texas and Philadelphia, PA; and (4) a discussion of federal, state and local tax items to watch in California, Idaho, Illinois, New York and Portland, OR. See Tax Alert 2022-1479 for a copy of the newsletter. Arizona: On Sept. 29, 2022, Governor Doug Ducey announced that the state's record revenues have "unlocked the state's historic flat tax package a full year ahead of schedule." The Governor has directed the Arizona Department of Revenue Director to implement the next phase of the 2.5% flat income tax, effective for tax year 2023. As originally enacted, the flat 2.5% tax was schedule to phase in over a three year period, generally anticipated to be tax years 2022, 2023 and 2024. Ariz. Gov., Press Release "Arizona's Lowest Flat Tax in Nation to Take Effect Next Year" (Sept. 29, 2022). California: New law (SB 851) modifies the elective pass-through entity (PTE) tax provisions by providing that for each tax year the PTE tax credit is allowed, for purposes of the other state tax credit calculation, the "net tax payable" is increased by the amount of PTE tax credit reduced "net tax" in that tax year. This change applies to tax year beginning on or after Jan. 1, 2022 and before Jan. 1, 2026. Cal. Laws 2022, ch. 705 (SB 851), signed by the governor on Sept. 28, 2022. Kentucky: The Kentucky Department of Revenue announced that the new individual income tax rate for 2023 will be 4.5% (down from 5.0%). Ky. Dept. of Rev., "DOR Announces Updates to Individual Income Tax for 2023 Tax Year" (Sept. 21, 2022). New Hampshire: On Sept. 23, 2022, the New Hampshire Department of Revenue Administration (NH DRA) amended various Business Profits Tax rules2 to reflect the state's adoption of a single-sales factor apportionment formula, effective for tax periods ending on or after Dec. 31, 2022. Though the state is moving to a single-sales factor apportionment formula, new rule N.H. Admin Rules, Rev 308.04 requires business organizations and combined groups to continue to report payroll and property factors to the NH DRA for informational purposes. An amendment to N.H. Admin Rules, Rev 304.06 requires a business organization or combined group to use one of the industry-specific apportionment provisions in N.H. Admin Rules, Rev 304.07-304.11 if more than 50% of the business organization's or combined group's (1) gross receipts for the tax period are from sources related to the industry identified by the rule, and (2) total assets on the last day of the tax period are commonly related to that industry. Further, effective for tax periods ending on or after Dec. 31, 2022, business organizations and combined groups must only use the sales factor when applying one of the industry specific apportionment provisions. The net operation loss rule (N.H. Admin Rules, Rev 303.03) has been amended to change the reference to IRC § 172 by removing "in effect December 31, 1996." New Jersey: The New Jersey Division of Taxation has adopted new rules, and adopted various amendments to existing rules, related to net operating loss deductions, filing combined returns, federal tax reform under the Tax Cuts and Jobs Act, reduction to the dividend exclusion, and decoupling from certain Internal Revenue Code provisions. The amendments and new rules were adopted Aug. 18, 2022 and took effect Sept. 19, 2022. (N.J. Register, Vol. 54, Issue 18, Sept. 19, 2022).2 Oregon: During a Sept. 20, 2022 Rules Advisory Committee (RAC) meeting, the Oregon Department of Revenue (DOR) said it was no longer pursuing the adoption of the Multistate Tax Commission revised Statement of Information concerning practices of the MTC and supporting states under P.L. 86-272, which lists activities conducted over the internet that would and would not be protected by P.L. 86-272. The DOR indicated that it would continue to discuss the issue internally, noting that the Oregon legislature could consider this issue during the 2023 legislative session. SALES & USE California: New law (SB 1382) exempts from sales and use tax the sale, storage, use or other consumption in California of a qualified motor vehicle (e.g., plug-in hybrid vehicles, zero-emission vehicles) sold to a qualified buyer. The exemption applies to sales made on or after Jan. 1, 2023 until Jan. 1, 2028. The exemption does not apply to local sales and use tax or to specified state sales and use taxes from which the proceeds are deposited into the Local Revenue Fund, the Local Revenue Fund 2011, or the Local Public Safety Fund. Cal. Laws 2022, ch. 375 (SB 1382), signed by the governor on Sept. 16, 2022. California: New law (AB 2622) extends until Jan. 1, 2026 (from Jan. 1, 2024) the partial sales and use tax exemption for specified zero-emission technology transit buses until Jan. 1, 2026 (from Jan. 1, 2024). This exemption applies to the sale, storage, use or other consumption in California of specified zero-emission technology transit buses sold to a city, county, city and county, transportation or transit district, or other public agency that provides transit service to the public that is eligible for the California Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project. Cal. Laws 2022, ch. 353 (AB 2622), signed by the governor on Sept. 16, 2022. Kentucky: The Kentucky Department of Revenue (KY DOR) recently issued guidance on several services that become taxable on Jan. 1, 2023 as a result of the enactment of HB 8 earlier this year. The guidance covers the following services: (1) photography and photo finishing; (2) rental of space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties and other short-term social events; (3) certain instructional, camp and training; (4) interior decorating and design; (5) labor to repair or alter apparel, footwear, watches or jewelry when no tangible personal property is sold in the transaction; (6) labor and services to repair or maintain commercial refrigeration equipment and systems when no tangible personal property is sold in that transaction including service calls and trip charges; and (7) extended warranty. The KY DOR noted that taxation of these services "creates significant changes to guidance previously given to businesses on how to handle both the sales and purchases of these services." Ky. Dept. of Rev., Kentucky Sales Tax Facts (Sept. 2022). Puerto Rico: In Administrative Determination 22-07, the Puerto Rico Treasury Department has announced prepared food is temporarily exempt from sales tax from Sept. 22, 2022 to Oct. 6, 2022, as a result of the state of emergency declared by the Governor of Puerto Rico due to Hurricane Fiona. This temporary exemption does not apply to alcoholic beverages. For more on this development, see Tax Alert 2022-1438. This exemption has been further extended through Oct. 13, 2022. See Tax Alert 2022-1511. South Carolina: A retail book store's club membership fees, which entitled members to receive retail discounts, are included in its gross proceeds of sales and, therefore, are subject to South Carolina's sales tax. In affirming the lower court's ruling, the South Carolina Supreme Court (court) explained that "gross proceeds of sales" is defined as "the value proceeding or accruing from the sale, lease, or rental of tangible personal property," and that the term "proceeding" is critical, noting that "[f]or a monetary value to proceed from something, the value must come from it." In this case the value of the club membership originates from the sales of taxable goods since "the only benefit to buying the … membership is discounts on taxable transactions." The book store does not require membership to enter the store and the membership does not give proprietary rights such as advance purchasing. The only benefit the membership gives to members over the general public is that members pay less to buys books and merchandise. The court also made clear that it reached this conclusion based on statutory interpretation and "not based on any deference to the [South Carolina Department of Revenue]." Books-A-Million, Inc. v. S.C. Dept. of Rev., Op. No. 28110 (S.C. S. Ct. Sept. 14, 2022). PROPERTY TAX California: New law (SB 1340) extends the exclusion from the classification as "newly constructed" the construction or addition of any active solar energy systems through the 2025-26 fiscal year (from 2023-24 fiscal years), with a sunset date of Jan. 1, 2027 (from Jan. 1, 2025). An "active solar energy system" is defined as "a system that, upon completion of the construction of a system as part of a new property or the addition of a system to an existing property, uses solar devices, which are thermally isolated from living space or any other area where the energy is used, to provide for the collection, storage, or distribution of solar energy." An active solar energy system can be used for: (1) domestic, recreational, therapeutic or service water heater; (2) space conditioning; (3) production of electricity; (4) process heat; and (5) solar mechanical energy. Such system does not include heaters used in swimming pools or hot tubs. An active solar energy system that qualifies for this exclusion before Jan. 1, 2027 will continue to receive the tax appraisal exclusion until there is a subsequent change in ownership. Cal. Laws 2022, ch. 425 (SB 1340), signed by the governor on Sept. 18, 2022. COMPLIANCE & REPORTING Federal: The IRS has extended the due dates for filing individual and business tax returns and making tax payments to Feb. 15, 2023, for victims of Hurricane Fiona. The extension applies to taxpayers who reside or have a business in the federally declared disaster area, which includes all 78 municipalities of Puerto Rico. Taxpayers that are not located in the disaster area but have records in the disaster area also qualify for the extension. For more on this development, see Tax Alert 2022-1424. Puerto Rico: In Administrative Determination 22-08 (AD 22-08), the Puerto Rico Treasury Department (PRTD) has issued guidance on the tax measures put in place as a result of the state of emergency declared by the Governor of Puerto Rico because of Hurricane Fiona. The PRTD extended the due date to Dec. 15, 2022, for the following returns and payments: (1) income tax returns or extension requests that are for individuals, corporations, pass-through entities and other legal entities and have an original due date on or after Sept. 30, 2022 and before Dec. 15, 2022; (2) income tax payments due on or after Sept. 30, 2022 and before Dec. 15, 2022; (3) Form 481.1, Credit Return for Persons 65 or older and Compensatory Credit for Low-Income Pensions, for tax year 2021 with an original due date of Oct. 14, 2022; and (4) the second installment of the balance due with the 2021 individual income tax return with an original due date of Oct. 18, 2022. If an extension is requested for the filing of income tax returns on or before Dec. 15, 2022, the extended due date will be June 15, 2023. For additional information on this development, and other extensions, see Tax Alert 2022-1476. Rhode Island: Provisions of HB 7123, Sub. A as amended (enacted June 27, 2022) require larger business registrants to use electronic means to file returns and remit taxes to the Rhode Island Divisions of Taxation (RI DOT) starting Jan. 1, 2023. A "larger business registrant" is a taxpayer that: (1) operates as a business whose combined annual liability for all taxes administered to the RI DOT for the entity is $5,000 or more; or (2) operated as a business whose annual gross income is over $100,000 for the entity. R.I. Dept. of Rev., ADV 2022-23 "Larger business registrants must file and pay electronically" (Sept. 14, 2022). PAYROLL & EMPLOYMENT TAX Michigan: On July 19, 2022, Michigan Court of Claims Judge Douglas B. Shapiro found that changes made in December 2018 (under an "adopt and amend" strategy) to state legislation enacted in September 2018 to remove voter initiatives for enhanced paid leave benefits and an increase in the minimum wage from the 2018 ballot were unconstitutional. Note, however, that Judge Shapiro agreed to stay the ruling until Feb. 19, 2023, allowing employers time to institute the changes provided for under the ruling. It is also expected that the ruling and subsequent stay will be appealed. These actions mean that employers can continue as-is for now and do not have to make any significant changes until further guidance is received from the courts. For more on this development, see Tax Alert 2022-1450. Rhode Island: On July 6, 2022, Rhode Island Governor Daniel J. McKee signed into law S0270A, which effective Jan. 1 2023, seeks to expand employee protections from wage discrimination by requiring employers to provide wage information to certain job applicants and employees seeking a job transfer and prohibiting employers from asking applicants about their salary history and/or relying on that wage history in the hiring decision. Employers will also be required to post a notice (once available) in the workplace about the additional rights established under S0270A. For more on this development, see Tax Alert 2022-1412. Tennessee: According to the Tennessee Department of Labor and Workforce Development website, the employer state unemployment insurance (SUI) tax-rate schedule continues to be the lowest possible for fiscal year 2023 (July 1, 2022, to June 30, 2023). Because the SUI trust fund balance exceeded $1 billion as of June 30, 2022, SUI tax rates for experience-rated employers will continue to range from 0.01% to 10.0% on Premium Rate Table 6 (though individual SUI tax rates increased or decreased as of July 1, 2021, because tax rate factors affect tax rates on a fiscal-year basis). Most new employers continue to pay at 2.7% for fiscal year 2022. The new-employer rate for construction employers may be found on Form LB-0441, Report to determine status. For more on this development, see Tax Alert 2022-1422. MISCELLANEOUS TAX Federal: In Notice 2022-42, the IRS and Department of Treasury announced that they plan to issue proposed regulations amending the IRC § 901 regulations on the application of the noncompulsory payment regulations to certain amended Puerto Rico tax decrees. Taxpayers can rely on the notice pending the issuance of the regulations. For more on this development, see Tax Alert 2022-1435. California: New law (AB 2836) extends the $1.75 per tire fee through Jan. 1, 2034. The tire fee will be reduced to $0.75 per tire on Jan. 1, 2034 (from Jan. 1, 2024). Cal. Laws 2022, ch. 355 (AB 2836), signed by the governor on Sept. 16, 2022. Tennessee: The Tennessee Department of Revenue issued guidance on changes to the list of professions subject to the Professional Privilege Tax. As of Jan. 1, 2023, only the following professions will be subject to the tax: (1) lobbyists; (2) agents, broker-dealers and investment advisors registered under Tenn. Code tit. 48; and (3) attorneys. Law (Pub. ch. 1083) enacted in 2022 removed physicians and osteopathic physicians licensed or registered under tit. 63 from the list of taxable professions. Tenn. Dept. of Rev., Notice #22-13 "Professions Subject to Professional Privilege Tax" (Sept. 2022). VALUE ADDED TAX International — France: The new e-invoicing system that is being introduced in France will apply from July 1, 2024. It covers invoices for all transactions between entities subject to VAT issued in electronic form and provides that the data they contain should be transmitted to the tax authority in real-time. For more on this development, see Tax Alert 2022-1401. 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 Amended rules are: N.H. Admin Rules, Rev 301.06, 302.07, 303.03, 304.06, 304.10, 305.03, 306.06, 307.04, 308.04 and 240.03. 2 The adopted amended rules are: N.J.A.C. 18:7-1.3, 1.14, 1.16, 1.17, 2.1, 3.4, 3.6, 3.10, 3.13, 3.15, 3.16, 3.23, 5.2, 5.11, 5.12, 5.13, 5.14, 5.15, 7.6, 8.3, 8.7, 8.8, 8.10A, 8.12, 10.1, 11.6, 11.7, 11.8, 11.12, 11.15, 11.17, 11.18, 12.1, 12.2, 12.3, and 13.8. Adopted new rules are: N.J.A.C. 18:7-1.24, 1.25, 3.23A, 3.26, 3.27, 3.28, 3.29, 5.21, 5.22, 5.23, 11.17A, and 21. | ||||||||||
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