December 19, 2022
State and Local Tax Weekly for December 9
Ernst & Young's State and Local Tax Weekly newsletter for December 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.
2022 state tax legislative round-up
The 2022 state legislative sessions have come to an end in most states that were in session this year. While no state enacted major tax reform, many states enacted a wide variety of tax law changes impacting businesses and individuals. With states reporting revenues beyond prior estimates due both to surprisingly robust tax receipts and federal funding in response to the COVID-19 pandemic, the overarching theme of the changes was to provide tax relief to both individuals and businesses and to incentivize businesses and individuals to remain in, or move into, the state. This relief includes cutting tax rates (namely income tax), as well as targeted tax credits and incentives to support business development.
States also are continuing their slow and steady move to single sales factor apportionment and market-based sourcing for corporate income tax purposes. At a faster pace, states are enacting elective pass-through entity taxes as a workaround to the federal limit on the state and local tax deduction and sales and use tax (or other transactional taxes) on peer-to-peer car sharing.
Tax Alert 2022-1822 provides a summary of select state legislative changes enacted in 2022.
California cities of Los Angeles and Santa Monica approve ballot measures to impose new real estate transfer taxes at significantly higher rates
On Nov. 8, 2022, California voters in Los Angeles and Santa Monica approved ballot measures to impose increased real estate transfer taxes on certain real property sales or transfers.
Los Angeles: The Funding Affordable Housing and Tenant Assistance Programs Through A Property Transfer Tax ballot initiative, imposes additional taxes on certain real property sales or transfers in the City of Los Angeles. Currently, the total real estate transfer tax rate for properties in Los Angeles is 0.56% (0.45% city rate + 0.11% county rate). Effective for transfers on or after April 1, 2023, the Initiative imposes an additional tax of:
Unlike the current transfer tax, the new transfer tax will be based on the fair market value of the property, without any deduction for debt on the property when transferred. See Tax Alert 2022-1833 for a grid that summarizes the rates currently and the increase with the Initiative. Additionally, the Initiative allows for certain exemptions from the tax for transfers to certain types of non-profit entities, community land trusts and cooperatives (among other similar entities).
Santa Monica: Voters in the City of Santa Monica passed Measure GS (referred to as the Funding for Homelessness Prevention, Affordable Housing, and Schools Ballot Measure) to increase the City's transfer tax revenue by adding a third tier to its transfer tax rate structure.
Effective March 1, 2023, Santa Monica's three-tier transfer tax rate structure will be as follows:
The Santa Monica tax rates are added to the 0.11% Los Angeles County transfer tax rate, for a total maximum rate of 5.77% for sales or transfers when the consideration or value of the interest or property is $8 million or more. Furthermore, Santa Monica's real estate transfer tax base continues to exclude debt secured by the property that is transferred.
For more on these developments, see Tax Alert 2022-1833.
Michigan: A recently issued Revenue Administrative Bulletin (RAB) from the Michigan Department of Treasury (MI DOT) discusses the composition of a unitary business group (UBG) and the pro-forma calculation of federal taxable income (FTI) that is the starting point for computing the base of each corporation that is a member of a UBG that files a standard combined return (i.e., persons that have elected to file as C-corporations). The MI DOT explained that since consolidated and combined filings are not the same, it requires each UBG member included in a federal consolidated return to separately compute a pro-forma federal return to determine its pro-forma FTI. Further, differences between the federal ownership test (an 80% ownership test, no relationship test) and the Michigan corporation income tax (CIT) control test (a more that 50% ownership test as well as certain relationship tests) could result in differences in the composition of the membership in a consolidated group and the UBG. The MI DOT also noted that the pro-form FTI amount is subject to adjustments in arriving at the UBG member's tax base and the UBG's combined CIT liability. The RAB includes illustrative examples. Mich. Dept. of Treas., RAB 2022-23 (Dec. 6, 2022).
New Jersey: Following New Jersey's adoption of rules clarifying the exclusion of income exempt from federal taxation under a treaty with a foreign nation, the New Jersey Division of Taxation (NJ DOT) explained that for taxpayers filing on a separate company, water's-edge or affiliated group basis, treaty protected income is not required to be added back to entire net income (ENI) for New Jersey Corporation Business Tax (CBT) purposes, unless required by other related party addback statutory provisions. Taxpayers that added back this treaty exempted income can file an amended return for privilege periods that are still open. Income from foreign corporations and foreign non-corporate entities is included in the ENI of a taxpayer filing on a world-wide group basis without regard to any treaty protections. The NJ DOT noted that applying treaty protections to a world-wide group "is contrary to the legislative intent in providing a world-wide election … " The NJ DOT indicated that it would update returns for subsequent tax years. N.J. Div. of Taxn., "Income Excluded Pursuant to a Tax Treaty and CBT Returns" (last updated Dec. 1, 2022).
New York: The New York Department of Taxation and Finance (NY DoTF) announced that the rate of the N.Y. Tax Law Article 9-A Metropolitan Transportation Business Tax Surcharge (MTA surcharge) will remain at 30.0% for tax years beginning on or after Jan. 1, 2023 and before Jan. 1, 2024. The 30.0% rate will remain in effect for succeeding tax years unless the Commissioner of the NY DoTF determines a new rate. The NY DoTF also announced that the deriving receipts from activity in New York State and in the Metropolitan Commuter Transportation District (MCTD) thresholds for purposes of imposing the Article 9-A franchise tax and the MTA surcharge will remain at $1,138,000 for tax years beginning on or after Jan. 1, 2023 and before Jan. 1, 2024. Likewise, the receipts threshold for determining if members of a unitary group that meet the ownership requirements in N.Y. Tax Law §201-C are deriving receipts from activity in New York and in the MCTD will remain at $11,000 and $1,138,000. New York Dept. of Taxn. and Fin., TSB-M-22(2)C (Dec. 1, 2022).
Utah: The Utah State Tax Commission posted frequently asked questions (FAQs) on the state's new elective pass-through entity (PTE) tax. Under Utah law, a PTE can elect to pay tax on behalf of all final pass-through entity taxpayers (Final PTET) (i.e., a resident or nonresident individual who is a member of a limited liability company, partner in a partnership, shareholder of an S corporation, or beneficiary of an estate or trust). The election can be made by a PTE that distributes its Utah source income to one or more Final PTETs; the election cannot be made by an entity disregarded for federal income tax purposes. A PTE making the election must pay tax on behalf of every Final PTET that is a member, partner, shareholder or beneficiary. Final PTETs cannot opt out of having the tax paid on their behalf. A PTE makes the PTE tax election by electronically filing the TC-75 SALT Report and submitting an electronic SALT payment on or before the last day of the PTE's tax year. (The report is electronically filed through Taxpayer Access Point.) The PTE tax election, once made, is irrevocable for the tax year. Tax due is calculated by multiplying the total amount of voluntary taxable income for all Final PTETs by the applicable individual income tax rate. An electing PTE is not required to make quarterly prepayments or separate payments for each member. If the PTE underestimates the amount of tax due, the Utah resident individual is required to pay any underpayment when they file their individual Utah income tax return. If the PTE underestimates the amount due for a non-resident individual, the PTE must withhold the difference in Utah taxes when the PTE files its annual Utah partnership, s-corporation, estate or trust return. The FAQs further explain that the tax paid by the electing PTE turns into a nonrefundable tax credit which can be claimed by the Final PTET. Excess credit can be carried forward five years. Application of the credit is not limited to the income received from the PTE. Rather, it can be applied to any Utah income tax the Final PTET owes for the current year or in a carryforward year. In addition, resident individuals can claim a nonrefundable credit for income tax imposed by other states, including taxes imposed at the PTE level for the individual. The FAQs address other topics and describe how a Final PTET reports that it had Utah taxes paid under the PTE tax election. Utah State. Tax Comm., "FAQs — 2022 House Bill 444 — Federal State and Local Tax Deduction Workaround" (last accessed Dec. 9, 2022).
SALES & USE
Louisiana: In response to a ruling request, the Louisiana Department of Revenue (LA DOR) determined that sales of electricity at electric vehicle charging stations are subject to sales and use tax and that consumers purchasing this electricity are responsible for paying the tax on these purchases. The LA DOR noted that because the electricity sold at charging stations is not for residential use or being purchased as a business utility, neither the constitutional exclusion nor the statutory exemption for sales of electricity apply. In addition, the LA DOR found that the separately stated fee for idle time is not subject to sales and use tax as the fee has no connection to the sale of the electricity and it can be avoided if the vehicle is promptly disconnected from the charging station after the vehicle is charged. La. Dept. of Rev., Revenue Ruling No. 22-004 (Dec. 6, 2022).
Missouri: The Missouri Department of Revenue (MO DOR) posted frequently asked questions (FAQs) on the state's remote seller and marketplace facilitator provisions that take effect on Jan. 1, 2023. A remote seller must register with the MO DOR if its gross receipts from taxable sales of tangible personal property (TPP) into Missouri exceeds $100,000 in a year. A marketplace seller does not have to register with the MO DOR or collect and remit vendor's use tax if it only sells through a marketplace facilitator. A marketplace seller, however, will have to register, collect, and remit tax, if it has taxable sales in excess of $100,000 in Missouri that are not through a marketplace facilitator. The tax is remitted to the MO DOR separately from what is reported by the marketplace facilitator. Similar to remote sellers, a marketplace facilitator must register with the MO DOR and file a vendor's use tax return if its gross receipts from taxable sales of TPP into Missouri exceed $100,000 in a year. The MO DOR explained that the $100,000 threshold is based on all sales of TPP made to Missouri customers and shipped into the state, including through a marketplace facilitator. At the end of each calendar quarter, if the entity's gross receipts from taxable sales into Missouri exceed $100,000 in the preceding 12-month period, it must collect and pay Missouri vendor's use tax effective no later than three months following the close of the quarter (e.g., if on July 1, 2024, the threshold was met, the entity would collect and pay vendor's use tax by Oct. 1, 2024). The entity must continue to collect and remit vendor's use tax as long as it is engaged in business in Missouri. The FAQs explain how to register with the MO DOR and how a marketplace facilitator should report its retail sales. Lastly, the MO DOR said that marketplace facilitators are eligible for the 2% timely discount if they remit tax owed on or before the tax return's due date. Mo. Dept. of Rev., "Remote Seller and Marketplace Facilitator FAQs" (last accessed Dec. 9, 2022).
California: The California Film Commission (Commission) has announced application deadlines for the next film and TV tax credit program. For independent and non-independent feature films, the next application period runs from Jan. 30 to Feb. 1, 2023, with phase II running from Feb. 2 to 6, 2023. The approval date for these applications is March 6, 2023. For recurring and relocating television series, the application period runs from March 6 to 8, 2023, with phase II running from March 9 to 13, 2023. The approval date for these applications is April 17, 2023. The application period for new TV shows will run from March 13 to 15, 2023, with phase II running from March 16 to 20, 2023. The approval date for these applications is April 17, 2023. The Commission said that an eligible relocating TV series will qualify if it meets the following definition: "A television series without regard to episode length or initial media exhibition, with a minimum production budget of [$1 million] per episode, that filmed at least 75 percent of principal photography days in its most recent season outside of California or has filmed all seasons outside of California and for which the taxpayer certifies that the credit is the primary reason for relocating to California." Additional information on the credit program is available here.
Michigan: The Michigan State Tax Commission (Commission) issued guidance to taxpayers, assessors and boards of review on how the exemption for qualified heavy equipment rental personal property is claimed and reviewed. The guidance defines qualified heavy equipment rental personal property, which includes: (1) self-propelled vehicles that are not designed to be driven on the highway; (2) industrial electrical generation equipment; (3) industrial lift equipment; (4) industrial material handling equipment; (5) industrial portable heating, ventilation and air conditioning equipment; (6) industrial compressors, generators or pumps; (7) equipment used in shoring, shielding and group trenching; (8) equipment or vehicles not subject to titling under the Michigan Vehicle Code; (9) portable containers or office trailers; and (10) equipment used to support a construction or industrial jobsite. The exemption is claimed annually by filing Form 5819 Qualified Heavy Equipment Rental Personal Property Exemption Claim and a statement approved by the Commission of all qualified heavy equipment rental person property located at and/or rented from the qualified renter business location. Further, Form 5819 and the statement should be filed with the assessor at the location of the qualified renter business. The guidance defines "qualified renter" and "qualified renter business location", describes the process for statements filed for 2023 and 2024 if the exemption was not claimed in 2023, explains the assessor's responsibilities and the March Board of Review's responsibilities, and describes the process for appealing a denial of the exemption. Mich. State Tax Comm., Bulletin 18 of 2022 (Nov. 15, 2022).
Nebraska: The Nebraska Department of Revenue (NE DOR) issued guidance on the analysis that an assessor should use in determining whether an item of property is a fixture (real property) or a trade fixture (personal property). The NE DOR, citing Vandenberg v. Butler County, 281 Neb, 437 (2011), explained that there are three considerations in determining whether an item of property is a trade fixture, whether the item: (1) is "machinery or equipment"; (2) is used in commercial, manufacturing or processing activities; and (3) is being used directly in the commercial, manufacturing or processing activities. If the item of property is neither a fixture nor a trade fixture, the analysis reverts to whether the property fits within the definition of "real property" or "personal property". Neb. Dept. of Rev., Directive 22-2 "Fixtures And Trade Fixtures Classification As Real Or Personal Property" (Dec. 2, 2022) (supersedes Directive 11-5).
California: The California Franchise Tax Board extended through June 30, 2023, its temporary e-Signature options for taxpayers or their representatives to submit signed paper returns and other documents, except for Power of Attorneys (POAs). Two acceptable alternative signature measures for paper returns are: (1) an attached document that must be included with the filed return that provides a copy of the original signature — the attached document should identify what the document signature is for (e.g., Corp XX, 2021 Form 100) and state "Refer to the attachment for a copy of the original signature" on the signature line; or (2) a paper return with a faxed signature on the signature page. For all other documents, except POAs, that normally require an original signature, documents with photographed or digital copies of required signatures will be accepted. Cal. FTB, "COVID-19 frequently asked questions for tax relief and assistance" (last updated Nov. 16, 2022).
PAYROLL & EMPLOYMENT TAX
Washington: The Washington Department of Labor & Industries (L&I) announced a 4.8% increase in the average price employers and employees will pay in 2023 for workers' compensation insurance next year. L&I will use contingency reserves to cover any gap between premiums and costs to keep rates steady and avoid a larger increase. For more on this development, see Tax Alert 2022-1817.
MISCELLANEOUS TAX Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) issued guidance on how to obtain a refund of state and local Realty Transfer Tax (RTT). Generally, the RTT is remitted to the Recorder of Deeds (ROD) in the county where the taxable document is recorded at the time of recording. The ROD collects the state and local RTT and disburses the state RTT to the PA DOR and the local RTT to the appropriate municipality and school district. The PA DOR does not administer local RTT paid to the ROD. If RTT is not paid when a document is filed with the ROD, the PA DOR can issue an assessment for both state and local RTT; the PA DOR will disburse the local RTT paid to the appropriate ROD, which will distribute the RTT to the local municipality. The RTT still must be paid to the PA DOR when a taxable document is not recorded. The PA DOR explained that the manner in which a refund of RTT is obtained depends on how the RTT was paid. If the RTT was paid to the ROD, the taxpayer must seek a refund of local RTT from the municipality and school district. Refunds of state RTT are filed with the PA DOR. For RTT paid as a result of a PA DOR assessment, the taxpayer must seek a refund of state and local RTT from the PA DOR. If the refund is granted, the PA DOR will refund the state RTT and the taxpayer will have to notify the municipality and school district and obtain a refund of local RTT from them. The guidance describes the methods for seeking a refund from the PA DOR — i.e., the informal method (i.e., the "application for refund") and formal method (i.e., the "petition for refund"). Lastly, the PA DOR noted that in general refund petitions must be filed with the PA DOR Board of Appeals within three years of the payment of tax, or in case of an assessment, with six months of the actual payment of tax. Pa. Dept. of Rev., Realty Transfer Tax Bulletin 2022-01 "Realty Transfer Tax Payments and Refund Procedures" (Dec. 5, 2022).
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.