November 14, 2022
State and Local Tax Weekly for October 28 and November 4
Ernst & Young's State and Local Tax Weekly newsletter for October 28 and November 4 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.
Treasury announces $5 billion award for New Markets Tax Credit program for CY 2021
On Oct. 28, 2022, the Treasury Department announced that it awarded $5 billion in New Markets Tax Credit (NMTC) allocations to successful Community Development Entities (CDEs) from the 2021 application round. The $5 billion was awarded to 107 CDEs headquartered in 35 states and the District of Columbia.
The NMTC program, administered by Treasury's Community Development Financial Institutions (CDFI) Fund, was established in December 2000 by Congress. The program was designed to encourage investment in operating businesses and real estate projects in low-income communities. It allows individual and corporate investors to receive a tax credit against their federal income tax for making qualified equity investments in investment vehicles called CDEs. An investor's credit totals 39% of the investment in a CDE and is claimed over seven years. A CDE must use substantially all of the investment to make qualified investments in low-income communities. In the previous 18 rounds, the CDFI Fund allocated 1,461 awards totaling more than $71 billion in tax credit authority.
In the latest round, CDFI received a total of 199 applications, requesting a total of $14.7 billion. Of all the applicants, 107 CDEs received the $5 billion in allocations. The average allocation award in this round ranged from $25 million to $60 million. About 78% of the amounts awarded went to loans to, or equity investments in, business; 22% went to loans to, or equity investments in, real estate.
For additional information on this development, see Tax Alert 2022-1634.
Illinois: In response to a state tax survey submitted by a publication firm, the Illinois Department of Revenue indicated "yes" that the state conforms to the federal change to IRC §174 (research and experimental expenditures (R&E)) made by the Tax Cuts and Jobs Act, which, starting in 2022, requires R&E expenditures to be amortized over five years for domestic R&E and 15 years for foreign R&E. Ill. Dept. of Rev., IT 22-0010-GIL (July 15, 2022).
Illinois: In response to a state tax survey submitted by a publication firm, the Illinois Department of Revenue (IL DOR) indicated "yes" that the state conforms to the federal tax treatment of cryptocurrency as property. For purposes of applying P.L. 86-272, the IL DOR indicated "yes" that it treats an out-of-state company's sale of cryptocurrency to customers in Illinois as a sale of intangible property. The IL DOR also indicated "yes" that it treats the sale of cryptocurrency as a sale of intangible property for apportionment purposes. In addition, the IL DOR indicated "yes" that the fair market value of cryptocurrency paid as wages is subject to Illinois's income tax withholding and payroll taxes. Ill. Dept. of Rev., IT 22-0010-GIL (July 15, 2022).
Louisiana: The Louisiana Department of Revenue (LA DOR) issued guidance on the income tax treatment of state and federal COVID-19 relief benefits. Louisiana law exempts from corporate and individual income tax state and federal COVID-19 relief benefits that were included in the corporation's federal gross income or the individual's federal adjusted gross income. COVID-19 relief benefits are defined as gratuitous grants, loans, rebates, tax credits, advance refunds, or other qualified disaster relief benefits directly or indirectly provided by the state or federal government as a COVID-19 relief benefit. Such benefits include those provided under the Coronavirus Aid, Relief, and Economic Security Act; the Taxpayer Certainty and Disaster Relief Act; the COVID-Related Tax Relief Act; the Consolidated Appropriations Act of 2021; the State Coronavirus Relief Program; the Coronavirus Local Recovery Allocation Program; the Louisiana Main Street Recovery Program; the Critical Infrastructure Worker's Hazard Pay Rebate; as well as benefits distributed through the American Rescue Plan of 2021. The guidance lists the COVID-19 relief benefits that do and do not qualify for the exemption. The LA DOR noted that for corporate income tax purposes a deduction is not allowed for expenses that were paid using qualifying COVID-19 relief benefits and that would otherwise be deductible. Lastly, the guidance explains how to claim the exemption for the 2020 or 2021 income tax year. La. Dept. of Rev., Revenue Ruling No. 22-002 (Oct. 26, 2022).
Maryland: The Maryland Comptroller has updated an income tax administrative release to expand the section on regulatory special apportionment formulas for banks and financial institutions. (The release also includes discussions on the regulatory special apportionment formulas for leasing companies, transportation companies, and airline industry.) COMAR 03.04.08.03 was amended to require banks use a single receipts factor apportionment formula on original returns filed after the amendment's May 2, 2022 effective date. Before this amendment and Maryland's adoption of a single sales factor apportionment formula, banks used a three factor, double weighted receipts factor formula, with special rules for calculating the receipts factor (general corporations use a sales factor). In additional to using a single receipts factor formula, banks also must continue to compute their property, payroll and receipts factors as required by COMAR 03.04.08.04.-06. According to the Comptroller, banks that filed returns using the three-factor formula that was in effect at the time of filing are not required to file an amended return. Similarly, banks that filed a return using a single receipts factor before the amended regulations effective date are not required to file an amended return. Banks that filed a return using the three factor formula before May 2, 2022, however, can file an amended return to use the single receipts factor formula if the amended return is filed within the statute of limitations. Md. Comp., Md. Income Tax Administrative Release No. 43 (Oct. 27, 2022).
Portland, OR: The governments for Metro,1 Multnomah County and the City of Portland (City) have adopted proposed changes to the business tax codes 2 for these jurisdictions (collectively, "tax codes") that conform to select state income tax provisions. Specifically, City Code §7.02.610, Apportionment of Income, has been amended to conform the local business income tax apportionment provisions with the state's allocation and apportionment provisions in Ore. Rev. Stat., chs. 314, 317 and 318, as well as related administrative rules. All business income will be apportioned to the City using a single sales factor apportionment formula. Sales of tangible personal property will be deemed to be in the City if it is delivered or shipped to a purchaser in the City. The City, however, does not adopt a throwback standard. The City also will follow Oregon's market-based sourcing statute and regulations. In addition, the changes align the City's nexus standards with the state's economic nexus standard and give "business income" and "non-business income" the same meaning as "apportionable income" and "nonapportionable income" as defined in Ore. Rev. Stat. 314.610. These changes apply to tax years beginning on or after Jan. 1, 2023. The ordinance for the City of Portland is available here (adopted Sept. 28, 2022); the ordinance for Multnomah County is available here (adopted Oct. 13, 2022) and the ordinance for Metro is available here (adopted Oct. 27, 2022).
Pennsylvania: New law (HB 324) effectuates a law change made by the City of Philadelphia to its Business and Income Receipts Tax increasing the net operating losses (NOLs) carry forward period from three years to 20 years. This change, which took immediate effect, applies to NOLs incurred in 2022 and thereafter. NOLs incurred before 2022 can only be carried forward for three years. Pa. Laws 2022, Act 103 (HB 324), signed by the governor on Nov. 3, 2022. See also, Phila. Dept. of Rev., News Release "Philly extends Net Operating Loss carryforward period to 20 years" (Nov. 1, 2022).
SALES & USE
Indiana: The Indiana Department of Revenue (IN DOR) issued guidance describing the state's various sales and use tax sourcing rules. Under Indiana law, whether a transaction is considered made in Indiana or another jurisdiction primarily depends on where the purchaser receives the goods or services. Indiana's sourcing rules differ for transactions that are sales or leases/rentals as well as for various types of tangible personal property. The guidance includes: (1) general sourcing rules, which explain the order in which retail sales of a product are sourced; (2) general sourcing rules for rentals and leases; (3) sourcing of rentals and leases of motor vehicles, trailers, semitrailers and aircraft; (4) sourcing of transportation equipment; and (5) sourcing of floral products. In regard to the sourcing rules for rentals and leases requiring recurring period payments, the first payment is sourced the same as a retail sale and subsequent payments are sourced to the primary property location for each period covered by the payment (the property location is not altered by intermittent use at different locations). For rentals and leases that do not require periodic payments, the payment is sourced the same as a retail sale. The bulletin took effect upon publication. Ind. Dept. of Rev., Sales Tax Information Bulletin #96 "Sourcing Rules" (Oct. 2022).
Texas: The Texas Comptroller of Public Accounts is providing additional time for businesses that sell, rent or lease motor vehicles to deduct the fair market value (FMV) of a retired vehicle titled in Texas from the total consideration paid for a replacement vehicle. Generally, the FMV deduction must be used within 18 months of a retired vehicle's removal from service and offered for sale. The Comptroller said that because of "the current difficulty in finding replacement vehicles" it is providing such businesses with an additional 12 months to purchase a replacement vehicle for vehicles retired in 2022. The Comptroller noted that businesses need to maintain records documenting when the vehicle was retired, its FMV and when the FMV deduction was used. Tex. Comp. of Pub. Accts., Tax Policy News "Extension of the Fair Market Value Deduction (FMVD)" (Oct. 2022).
Wisconsin: The Wisconsin Department of Revenue (WI DOR) issued guidance on the application of the state's sales and use tax on non-fungible tokens (NFT), stating that taxability of the sale or purchase of an NFT depends on the taxability of the underlying product, good or service. The WI DOR provided the following examples: (1) NFTs that entitle the purchaser to download music or movies are sales of a taxable specified digital good; (2) NFTs that entitle the purchaser admission into a sporting event are sales of taxable admission; and (3) NFTs that entitle the purchaser to tangible artwork are sales of taxable tangible personal property. Wis. Dept. of Rev., Wis. Tax Bulletin 219 "Non-Fungible Tokens" (Oct. 2022).
Michigan: New law (HB 6070) starting in 2023 provides a tax credit to a qualified employer that voluntarily provides paid adoption leave to qualified employees. The qualified employer may claim the credit against taxes required to be withheld and remitted to Michigan in an amount equal to 50% of the wages paid to each qualified employee during the period in which such employee is on adoption leave. The credit is capped at $4,000 per qualified employee for a single adoption leave period; the maximum of leave for which the credit can be claimed cannot exceed 12 weeks. Amounts paid by Michigan or a political subdivision or required to be paid by law is not included in determining the amount of credit for wages paid to the employee for adoption leave. A "qualified employee" is an individual that has been employed by a qualified employer for at least a year and whose compensation for the prior year did not exceed 60% of the amount applicable for highly compensated employees under IRC §414(q)(1)(B). A "qualified employer" is an employer that has a written policy offering parental and adoption leave that: (1) provides at least two weeks of paid leave for each full-time qualified employee and a proportionate amount of leave for part-time qualified employees, and (2) the rate of paid leave is not less than 50% of wages normally paid to such employee for services performed for the employer. Mich. Laws 2022, Pub. Act 207 (HB 6070), signed by the governor Oct. 7 2022.
Maryland: The Maryland Department of Assessments and Taxation (Department) on Oct. 12, 2022, adopted amendments to Regulation .02 under COMAR 18.03.01 General regarding personal property assessments, that allow the Department "to depreciate the original cost value of personal property beyond the general 75[%] limit that [existed]." As amended, personal property may be depreciated to its salvage value (i.e., "the value of personal property after all depreciation under this regulation has been applied".) Prior to this amendment, the regulation generally prohibited personal property from being depreciated below 25% of the original cost. The amended regulation took effect Oct. 31, 2022. Md. Dept. of Assess. and Taxn., amended Regulation .02 under COMAR 18.03.01 General (Md. Reg., Vol. 49 Issue 22, Oct. 23, 2022).
COMPLIANCE & REPORTING
Illinois: The Illinois Department of Revenue announced that it will waive penalties and interest for taxpayers affected by Hurricane Ian that cannot file or pay on time. Affected taxpayers are instructed to write "Hurricane Ian — September 2022" in red at the top of their return and on the envelope containing the return or payment. Affected taxpayers also must include a written statement that includes an explanation of why they could not timely file or pay and a request for abatement of penalties and interest. Such request must be made electronically. The waiver applies to affected taxpayer for payments and returns due between Sept. 23, 2022 and Feb. 15, 2023. Ill. Dept. of Rev., News & Updates "Hurricane Ian Disaster Relief" (Oct. 31, 2022).
PAYROLL & EMPLOYMENT TAX
Arizona: The Arizona Department of Revenue (AZ DOR) announced that SB 1828, enacted in 2021, substantially lowers individual income tax rates effective for tax year 2022 and 2023, and the current Form A-4, Arizona Withholding Percentage Election (rev. 1-1-2022), does not reflect these rate cuts. Accordingly, the AZ DOR has published a revised Form A-4 (10-28-2022), which employees may begin using immediately. For more on this development, see Tax Alert 2022-1645.
Indiana: Effective Oct. 1, 2022, the Indiana Department of Revenue announced that the following five counties have increased their income tax rates: Boone County: 0.017 (increased from 0.015); Johnson County: 0.014 (increased from 0.012); Knox County: 0.017 (increased from 0.012); LaPorte County: 0.0145 (increased from 0.0095); Monroe County: 0.02035 (increased from 0.01345). All Indiana county income tax rates are available in Departmental Notice #1 (revised Oct. 1, 2022). Note that the October 1 update includes withholding instructions for the new adopted-child exemption. For more information on this development, see Tax Alert 2022-1623.
VALUE ADDED TAX
International — Bulgaria: The proposed introduction of bad debt relief in the Bulgarian legislation is a natural continuation of the administrative and court practice evolving on the topic over the past two years. It started with the case UniCredit Leasing, which requested clarity on the possibility to enforce rights conferred to taxpayers by European Union (EU) law in the absence of local rules to recover VAT on bad debts. As anticipated, the CJEU confirmed the possibility for an adjustment of output VAT in the case of non-payment of receivables even where the local legislation did not provide specific rules to allow such adjustment. The CJEU was clear that the EU Member States could not revoke the right to recover VAT on bad debts, they are allowed only to provide the requirements and conditions for such recovery. Once the CJEU's decision on the UniCredit Leasing's case was issued, requests for VAT refunds related to unpaid receivables began to be filed with the Bulgarian tax authorities; in many cases such requests were denied. The introduction of the bad debt relief in the local Bulgarian legislation is a positive development. Adoption of the proposed amendments is expected to limit the refusal of the tax authorities to grant refunds. For more on this development, see Tax Alert 2022-1621.
International — Peru: On Oct. 13, 2022, Peru's President enacted Regulations of Law 31556 for the temporary VAT reduction for specific hotels and restaurants, through Supreme Decree 237-2022. For more information on this development, see Tax Alert 2022-1628.
International — UAE: On Oct. 28, 2022, the UAE MOF announced the issuance of Federal Decree Law No. 18 of 2022 (Amended Decree Law) amending Federal Decree Law No. 8 of 2017 (Decree Law). The amendments will be effective from Jan. 1, 2023. Key changes include an extension to the general statute of limitations, inclusion of time limits for the issuance of tax invoices and tax credit notes, changes to the applicability of domestic reverse charge provisions, amendment of existing terminology, as well as the introduction of new terminology. For more information on this development, see Tax Alert 2022-1650.
Tuesday, Nov. 15, 2022. An essential unclaimed property update: The impact of continued change and enforcement in the unclaimed property landscape (2 pm ET). Please join members of Ernst & Young LLP's Unclaimed Property and Escheat Services practice as they provide an update on legislation, real-time controversy issues, industry responses and overall trends. The panelists will also discuss the impact of recent developments on current and future compliance issues, in addition to identifying leading practices that are vital to an effective unclaimed property compliance program. As states are continuously looking for new ways to increase unclaimed property compliance, this discussion will be focused on the recent trends observed within the regulatory and audit landscapes. More specifically, this webcast will dive into the recent shift from traditional audits to "mini-audits" or compliance reviews. We will also discuss recent, significant updates related to California and changes in Delaware that could impact ongoing exams or reviews. Register.
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 Metro is a regional government that serves those in Clackamas, Multnomah and Washington counties. It encompasses Portland and 23 other cities.
2 The changes specifically affect the Portland Business License Tax (a net income tax on business activity conducted within the City of Portland); the Multnomah County Business Income Tax (an income tax on net business income); and the Metro Supportive Housing Services Business Income Tax (which was approved by voters in 2020 and, starting in 2021, imposes a 1% business profits tax imposed on businesses with gross receipts over $5 million per year).