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Ernst & Young's State and Local Tax Weekly newsletter for November 11 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

Various state and local tax-related ballot measures approved or rejected on November 8th

On Nov. 8, 2022, voters across the US considered various state and local tax-related ballot measures. Ballot measures to imposes additional income taxes were approved in Massachusetts but rejected in California. Voters in Colorado approved individual and corporate income tax rate cuts as well as a limit on the standard and itemized deduction for individuals with income over a certain amount. In West Virginia, voters rejected a measure that would have given the legislature the authority to exempt certain property from ad valorem property tax. Proposals to legalize and tax marijuana were approved in Maryland and Missouri, but rejected in Arkansas, North Dakota and South Dakota. At the local level, Voters in Oakland, CA approved a ballot measure to implement a modernized progressive business tax structure. Voters in Los Angeles approved a mansion tax, and in San Francisco, voters approved the empty homes tax ordinance.

Below is a list of select state and local tax-related ballot measures that were approved, followed by a list of those that were rejected.

Approved ballot measures

Arizona: Proposition 130 (approved by a vote of 63.78%) consolidates property tax exemptions within the state's constitution into a single article and allows the legislature to set certain property tax exemption amounts and qualifications, including exemptions for property used for trade, business or agriculture.

Arizona: Proposition 132 (approved by a vote of 50.72%) requires a 60% vote for tax initiative or referendum to pass; all other initiatives and referendums only need to be approved by a majority vote.

Los Angeles, CA: Measure ULA (approved by a vote of 54.79%) imposes a new "Homelessness and Housing Solutions Tax" to help fund affordable housing programs and resources for tenants at risk of homelessness. Starting April 1, 2023, the new tax will be imposed at a rate of 4% of the consideration or value of sales or transfers of real property in Los Angeles exceeding $5 million; the rate is increased to 5.5% when the real property is valued at $10 million or more. The property threshold will be adjusted annual based on the Bureau of Labor Statistics Chained Consumer Price Index. The new tax does not apply when the transferee is a qualified affordable housing organization or government entity.

Oakland, CA: Measure T (approved by a vote of 71.38%), which was put forth by the Oakland City Council (Amending Resolution No. 88227), will replace the current flat business tax structure with a modernized progressive business tax structure.¹ Effective as of Jan. 1, 2023, an annual business tax will be imposed on every person engaging in business activities within Oakland. For purposes of imposing the business tax, business activities are classified into the following 19 categories: retail sales; grocers; automobile sales; wholesale sales; business and personal services; professional and semi-professional services; recreation and entertainment; construction contractors; manufacturing; hotel and motel; administrative headquarters; media firms; public utility; residential rental and non-residential rental; cannabis business; firearms ammunition; taxi, limousine and ambulance services; transportation and trucking, and miscellaneous. Specific rate schedules and tax provisions apply to each category. Optional methods for determining tax are provided for persons engaged in two or more business activities, other than manufacturing. If the application of tax places an undue burden on interstate commerce or violates the constitution, the taxpayer can apply to the City Administrator for a tax adjustment; the application for an adjustment must be submitted within one-year after the tax payment due date. The measure also defines terms, addresses payment requirements and due dates, provides for the imposition of penalties and interest, and describes procedural options for refunds and tax appeals.

San Francisco, CA: Measure M (approved by a vote of 54.48%) will impose a tax on the owner of a building keeping residential units vacant for more than 182 days, whether consecutive or nonconsecutive, in a tax year. This new tax, which applies to buildings with at least three residential units, ranges between $2,500 up to $5,000, depending on square footage. The tax range increases to $5,000 up to $10,000 if the owner kept the residential unit vacant in the prior year, with an additional range increase to $10,000 up to $20,000 if the unit was kept vacant in the two immediately preceding tax years. The rates will be adjusted for inflation. The new tax takes effect Jan. 1, 2024 and expires on Dec. 31, 2053.

Colorado: Proposition FF (approved by a vote of 56.70%) starting in tax year 2023, limits itemized or standard state income tax deductions to $12,000 for single tax return filers and $16,000 for joint tax filers, applicable to individuals with federal adjusted gross income over $300,000. Revenue raised from this measure will help provide healthy meals to public school students. See enabling legislation HB 22-1414.

Colorado: Proposition 121 (approved by a vote of 65.25%) reduces the Colorado corporate and individual income tax rate from 4.55% to 4.40% for tax year 2022 and future years.

Georgia: Referendum A (approved by a vote of 59%) provides a state-wide ad valorem tax exemption for "timber equipment" directly used by a timber producer in the production or harvest of timber. The exemption applies starting on or after Jan. 1, 2023.

Georgia: Amendment 2 (approved by a vote of 91.85%) amends the state Constitution to allow local governments and education boards of independent and county school system to grant temporary tax relief to property in their jurisdiction that was severely damaged or destroyed by a disaster, provided that the property is located in a nationally declared disaster area. (See House Resolution 594.)

Maryland: Question 1 (approved by a vote of 74.83%) changes the names of the Maryland Court of Appeals to the Supreme Court of Maryland and the Court of Special Appeals to the Appellate Court of Maryland. (See Ch. 82, Md. Laws 2021.)

Maryland: Question 4 (approved by a vote of 67.00%) legalizes the adult use of cannabis. The enabling legislation, Ch. 45 (HB 1), Md. Laws 2022, directs the Maryland Legislature to provide for the regulation and taxation of cannabis.

Massachusetts: Question 1 (approved by a vote of 52%) amends the Massachusetts Constitution to impose an additional 4% tax on individual taxable income over $1 million. (Currently, Massachusetts has a flat 5% income tax.) This additional tax will be imposed starting 2023, and the $1 million income level will be adjusted annually to reflect changes to the cost of living using the same method used to adjust federal income tax brackets. The additional tax collected will be specifically allocated to education and transportation. (See Tax Alert 2022-1750.)

Missouri: Amendment 3 (approved by a vote of 53.09%) legalizes and imposes a 6% tax on marijuana.

Nebraska: Initiative 433 (approved by a vote of 58.64%) provides for the gradual increase in the state's minimum wage from the current $9 per hour to $15 per hour by 2026. The rate will be increased to $10.50 on Jan. 1, 2023; $12.00 on Jan. 1, 2024; $13.50 on Jan. 1, 2025; and $15.00 on Jan. 1, 2026. Thereafter the rate will be adjusted annually to account for increases to the cost of living.

Rejected ballot measures

Arizona: Proposition 310 (rejected by a vote of 51.81%) would have imposed an additional 0.1% transaction privilege tax and use tax on certain business for years 2023 through 2042. The revenue from this tax would have benefited fire districts.

Arkansas: Issue 2 (rejected by a vote of 59.13%) would have required a supermajority vote for Constitutional amendments and ballot initiative measures.

Arkansas: Issue 4 (rejected by a vote of 56.27%) would have legalized and taxed marijuana.

California: Propositions 26 and 27 (rejected by a vote of 67.11% and 82.41%, respectively) would have legalized and taxed sports betting at American Indian gaming casinos and licensed racetracks in California (Prop. 26) and on online and mobile (Prop. 27).

California: Proposition 30 (rejected by a vote of 57.66%) would have imposed 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, and sunsetting on Jan. 1, 2043. Revenue generated from this additional tax would have funded investments toward California's climate change goals, namely electrification of vehicles used in California and preventing/suppressing wildfires.

Louisiana: Amendment 5 (rejected by a vote of 57%) would have allowed a taxing authority to increase ad valorem property tax millage rates without voter approval up to the maximum authorized rate in effect the prior year.

North Dakota: Measure 2 (rejected by a vote of 54.95%) would have legalized marijuana for adult use.

South Dakota: Initiated Measure 27 (rejected by a vote of 52.92%) would have legalized marijuana.

West Virginia: Amendment 2 (rejected by a vote of 64.51%) would have given the legislature the authority to exempt from ad valorem property tax (1) tangible machinery and equipment personal property directly used in business activity, (2) tangible inventory personal property directly used in business activity, and (3) personal property tax on motor vehicles.

In addition to the ballot measure discussed above, a number of local tax-related ballot measures were approved and rejected in many states, especially in California.

INCOME/FRANCHISE

Puerto Rico: In Informative Bulletin 22-11, the Puerto Rico Treasury Department has clarified that the 15% alternative minimum tax on the "adjusted financial statement income" of certain corporations enacted as part of the Inflation Reduction Act, P.L. 117-69, has not triggered the 15% income tax rate on industrial development income in Puerto Rico. For more on this development, see Tax Alert 2022-1688.

Vermont: The Vermont Department of Taxes (VT DOT) issued individual income tax net operating loss (NOLs) guidance. The guidance discusses common errors in calculating and reporting NOLs, limitations on Vermont's conformity to federal provisions, retroactive changes of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES), the availability of NOL carrybacks and an NOL guidance chart. Among the common errors noted by the VT DOT is the inclusion of capital losses that are unrelated to business assets in operational losses and failure to adjust NOL carryforwards after using some or all of an NOL. Vermont does not conform to retroactive changes made by the CARES Act for NOL years 2018 and 2019, but does conform to the changes for NOL year 2020. Thus, a taxpayer who carries back a federal NOL from 2018 or 2019, cannot carry back that NOL on the Vermont return. The guidance includes illustrative examples and a chart listing the federal and Vermont carryback and carryforward periods that apply to each year, 2009 through 2021. Vt. Dept. of Taxes, GB-1315 "Personal Income Tax: Net Operating Losses" (Oct. 26, 2022).

SALES & USE

Arizona: The Arizona Department of Revenue (AZ DOR) said that it is sending 2023 Transaction Privilege Tax (TPT) renewal letters to businesses. Taxpayers selling products or engaging in taxable business activity must renew their Arizona TPT license by Jan. 1, 2023. The renewal is good from Jan. 1 to Dec. 31, 2023; the renewal must be made annually. Renewals received by the AZ DOR after Jan. 1 are subject to penalties and/or late fees. Taxpayers with multiple business locations must renew their license electronically. Ariz. Dept. of Rev., 2023 Transaction Privilege Tax License Renewals Notice (Nov. 8, 2022).

California: The Ninth Circuit Court of Appeals affirmed a district court's dismissal of a federal lawsuit brought by a trade association for e-commerce merchants seeking to enjoin California from requiring its members to obtain a seller's permit from California to facilitate sales tax collection. In so holding, the Ninth Circuit agreed with the district court that the Tax Injunction Act bars federal jurisdiction in this matter because the injunction sought by the association would stop, to some degree, the assessment or collection of state sales tax in California and an adequate state remedy — California's tax refund procedures — exists. Online Merchants Guild v. Maduros, No. 21-16911 (US Ct. App., 9th Cir. Dist. Ct., Nov. 9, 2022).

New York: A company's subscription fees for tracking emails its customers send to prospective clients and analyzing that information and providing customers with reports on what activity occurred when the email was sent — such as whether the email was read, whether links were clicked, whether attachments were downloaded or emailed replied to — are nontaxable information services. In so holding, the New York Division of Tax Appeals (NY DTA) found that the reports are nontaxable because they consists solely of the customer's own data, are personal/individual in nature and are not furnished to other customers. The NY DTA also determined that the customer's use of software provided through a browser extension in email platforms to share templates and the download of a plugin to sync with an email platform and Salesforce was incidental to the primary purpose of proving reports and, as such, the company was not selling prewritten software. Matter of Yesware, Inc., Matter of Bellows, and Matter of Andrus, DTA Nos. 829638, 829639 and 829640 (N.Y. Div. of Tax App. Sept. 29, 2022).

Texas: The Texas Comptroller of Public Accounts (Comptroller) in STAR Accession No. 202210014L (Oct. 20, 2022) determined that charges for designated doctor exams ordered by the Texas Department of Insurance, Division of Workers' Compensation (TDI-DWC) are "insurance services" subject to Texas sales and use tax. The Comptroller acknowledged that STAR Accession No. 202210014L addressed policy issues related to workers' compensation insurance that it had not previously addressed. Given this, the Comptroller said it would delay implementation of that policy until after the 2023 legislative session concludes; this delay provides the TDI-DWC and participants in the workers' compensation system to seek legislative change. Given the delayed implementation, the Comptroller said doctors are not required to collect sales or use tax on designated doctor exams performed before Oct. 1, 2023. Tex. Comp. of Pub. Acct., STAR Accession No. 202211002L (Nov. 10, 2022).

Texas: The Texas Comptroller of Public Accounts determined that for purposes of the optional single local use tax rate for remote sellers, the estimated average rate of local sales and use taxes imposed in Texas during the preceding state fiscal year ending Aug. 2022 is 1.75%. This rate will be in effect for the period from Jan. 1, 2023 to Dec. 31, 2023. Tex. Comp. of Pub. Accts., Texas Register "In Addition" (47 TexReg 7443 Nov. 4, 2022).

Washington: The Washington Department of Revenue (WA DOR) said that it will not appeal the Washington Board of Tax Appeals (BTA) decision in Terrapower LLC,² in which the BTA held that a manufacturer is not required to manufacture items for sale in order for the manufacturer's purchases of qualifying machinery and equipment used in its research and development operation to qualify for the retail sales tax exemption, provided that all other requirements are met. The WA DOR said that it is developing further clarification or guidance, which will be issued at a later date. Wash. Dept. of Rev., Special Notice: "Notice regarding manufacturers' retail sales and use tax exemption for purchases of machinery and equipment used in a research and development operation" (Nov. 9, 2022).

BUSINESS INCENTIVES

Pennsylvania: New law (HB 1059) establishes Pennsylvania Economic Development for a Growing Economy (PA EDGE) tax credits, which provide tax incentives to certain industries to locate new facilities within Pennsylvania. Such industries include clean hydrogen, semiconductor, biomedical and milk processing. For clean hydrogen there must be at least $500 million in capital investment to construct the project facility and place it in service and a minimum aggregate total of 1,200 new jobs and permanent jobs must be created. The credit equals any one or more of the following: (1) $0.81 per kilogram of clean hydrogen purchased from a regional clean hydrogen hub within Pennsylvania and used in manufacturing at the project facility; (2) $0.47 per unit of natural gas purchased and used in manufacturing at the project facility by a qualified taxpayer. The total aggregate amount of tax credit awarded to a qualified taxpayer under this program may not exceed 50% of the capital investment made to construct the project facility and place it into service.

For semiconductor manufacturing, biomedical manufacturing and biomedical research there must be at least $200 million in capital investment to construct the project facility and place it in service and a minimum aggregate total of 800 permanent jobs must be created. The credit is determined based upon any one or more of the following: (1) no more than 2.5% of the capital investment; (2) no more than 100% of tax withheld from employees and paid under Art. III or $20,000, whichever is less, for each permanent job at the project facility. The total aggregate amount of tax credit awarded to a qualified taxpayer under this program may not exceed 25% of the capital investment made to construct the project facility.

For milk processing there must be at least $500 million in capital investment to construct the project facility and place it in service and a minimum aggregate total of 1,200 new jobs and permanent jobs must be created. The credit equals to $0.05 per gallon of milk purchased and produced from sources exclusively within Pennsylvania and processed at the project facility. The total aggregate amount of tax credit awarded to a qualified taxpayer under this program may not exceed 25% of the capital investment made to construct the project facility and place it into service.

Credits under these programs cannot be carried back or carried forward and they are not refundable. The new law defines key terms and includes provisions regarding the purchase and assignment of credits and credits claimed by pass-through entities, among other provisions. Pa. Laws 2022, Act 108 (HB 1059), signed by the governor Nov. 3, 2022.

PROPERTY TAX

Oklahoma: In a matter of first impression, the Oklahoma Supreme Court (Court) held that production tax credits (PTCs) a company used to fiancé the building of a wind farm are intangible personal property and, therefore, are not subject to ad valorem taxation under Oklahoma Constitution Art. 10, §6A. In so holding, the Court determined that given the Constitutional change to exclude all intangible property from taxation, it must treat PTCs as intangible property even if they have qualities of both tangible and intangible property. The Court noted that "[t]he Legislature has not chosen to define PTCs so as to allow them to be taxable as part of a real property tax assessment. Until it does so, they are not subject to taxation." Kingfisher Wind v. Wehmuller, 2022 Ok 83 (Okla. S.Ct. Oct. 18, 2022).

CONTROVERSY

Louisiana: The Louisiana Sales and Use Tax Commission for Remote Sellers has adopted amendments to rule LAC 61:III.2905, which provides guidance on voluntary disclosure agreements (VDA), including defining key terms and explaining the program requirements. Undisclosed liabilities will qualify for the VDA if it results from the underpayment or non-payment of sales: (1) due to an error in the computation of tax due on the return, the interpretation of law, or the process of reporting tax due on the return; or (2) if it results from the merger or acquisition of a company that previously failed to properly report sales and use tax. An applicant will not qualify for a VDA if: (1) the applicant is a registered dealer required to report retails sales or sales at retail to the commission and the undisclosed amount is from the applicant's failure to report remote sales; (2) the undisclosed liability is from the filing of false, fraudulent or "grossly incorrect" returns and the applicant had the intent to defraud the commission; (3) the applicant is affiliated with an entity that has been contacted by the commission for purposes of performing an audit; or (4) the applicant has been contacted by the commission to inquire about a tax matter such as nexus, potential tax liabilities or audit. These conditions do not apply to VDAs that applicants applied for before the effective date of this rule but were entered into after the effective date; such VDAs will be deemed to have met the program requirements. The rule also provides guidance on: (1) the application, evaluation and acceptance of an offer to enter into a VDA; (2) determining the look-back period and treatment of periods before the look-back period; (3) payment of tax, interest and penalty due; (4) waiver or remittance of payment of penalty; (5) disclosure of information to the Multistate Tax Commission or any political subdivision of Louisiana; and (6) auditing of the look-back period. La. Dept. of Rev. and Taxn., LAC 61:III.2905 (La. Reg., Vol. 48, No. 9, Sept. 20, 2022).

MISCELLANEOUS TAX

Georgia: Governor Brian Kemp extended the suspension of fuel taxes through Dec. 11, 2022 (from the extended date of Nov. 11, 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 11.04.22.02 (Nov. 4, 2022).

Kentucky: The Kentucky Department of Revenue posted frequently asked questions on the motor vehicle rental/ride share excise tax, which will be imposed starting Jan. 1, 2023. The tax is imposed on peer-to-peer car sharing companies, motor vehicle rental companies, transportation network companies, taxicab service providers and limousine service providers. The following separately stated charges passed on to customers are included in the gross receipts subject to the tax: (1) vehicle license cost recovery fees, (2) airport concession recovery fees, (3) airport consolidated facility charges, (4) tolls and parking fees, and (5) mandatory gratuities. Such charges not included in taxable gross receipts include local, municipal license fee imposed under KRS 68.200, U-Drive-It tax imposed under KRS 138.463, and voluntary gratuities. Types of transactions that are considered to be providing a motor vehicle for sharing or rent within Kentucky include those that originate in Kentucky and terminate outside or inside Kentucky, but does not include transactions that originate outside Kentucky and terminate in Kentucky. This tax does not apply to motor vehicle dealers in the loaner/rental program. The FAQs also address when the tax is due and how to file and pay the tax due, among other topics. Ky. Dept. of Rev., FAQs: Motor Vehicle Rental Ride Share Excise Tax (Oct. 2022).

UPCOMING WEBCASTS

Wednesday, Dec. 7, 2022. Domestic tax quarterly webcast series: a focus on state tax matters (1:00 p.m. ET). For our fourth quarterly webcast of 2022, please join our panel discussion on the top-of-mind issues impacting state and local taxes, including: (1) federal and state election outcomes — what they may mean for state tax policy; (2) update on state and local revenue and fiscal conditions; (3) overview of 2022 state tax legislative activities; (4) 2023 state tax policy considerations; (5) state tax audit trends and issues related to the Tax Cuts and Jobs Act; (6) discussion of Multistate Tax Commission audits; and (7) update on transactions, with a discussion of market trends and leading practices. Register.

Thursday, Dec. 8, 2022. 2022 employment tax year in review (2:00 p.m. ET). In this webcast, our employment tax professionals will discuss the following common areas of year-end payroll and employment tax concern: (1) 2022 and 2023 federal and state tax rates and limits; (2) considerations for claiming retroactive credit for temporary COVID-19 federal employment tax provisions such as employee retention tax credit, paid sick and family leave tax credit, COBRA premium assistance tax credit, employer Social Security tax deferral; (3) remote worker considerations, including proper sourcing and Form W-4 compliance; (4) forms W-2/1099-NEC reporting changes; (5) noteworthy state developments; (6) state unemployment insurance and the federal unemployment insurance credit reduction; (7) year-end reconciliation and required employee notices; and (8) preparation of the year-end payroll checklist. 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.

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ENDNOTES

¹ Section six of the resolution makes clear that the tax is not a sales or use tax or other excise tax.

² Terrapower LLC v. Wash. Dept. of Rev., BTA Dkt. No. 19-065 (WA BTA July 25, 2022).