January 3, 2023
State and Local Tax Weekly for December 16 and 23
Ernst & Young's State and Local Tax Weekly newsletter for December 16 and 23 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.
EY-COST study: state and local government tax revenue surge
Businesses paid more than $951 billion in state and local taxes in fiscal year 2021, an increase of 13.6% from fiscal year 2020, according to a study prepared by Ernst & Young LLP (EY US) for the Council On State Taxation (COST) and its affiliate, the State Tax Research Institute (STRI). The report, titled "Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2021," shows that in 2021, business tax revenue accounted for 43.6% of all state and local tax revenue. In all, state business taxes increased by 17%, and local business taxes grew by 10.2%.
The study provides estimates of state and local business taxes that reflect tax collections from July 2020 through June 2021. The strong growth in corporate income taxes and individual income taxes on business income is in part due to the extension of the April 15 filing deadline to July, which shifted revenues from FY20 to FY21. The data presented in this study is for each state's fiscal year, which differs by state.
Other key findings of the study include the following:
Visit here for the full study.
Illinois: Proposed amendments to Rule 100.3380 would provide guidance for when receipts from certain sales-inducing payments from vendors to retailers, such as buying allowances and merchandising allowances, should be included or excluded from the sales factor. As currently proposed, the Illinois Department of Revenue (IL DOR) would exclude rebates and other buying allowances, which generally are considered reductions to cost of goods sold, from the sales factor. Merchandising allowances, which are part of the product's selling price, would be included in the sales factor to the extent they promote sales. Types of merchandising allowances described by the IL DOR include cooperative advertising, salary or payroll allowances and up-front cash payments and long-term agreements that compensate the retailer for a commitment to purchase a targeted volume of goods over a period-of-time. The proposed amendments also address payments received under a cost sharing agreement and include illustrative examples. Comments must be submitted by no later than 45 days after publication of this notice — i.e., by Jan. 23, 2023. Ill. Dept. of Rev., Proposed Rule 100.3380 (Ill. Reg., Vol. 46, Issue 50, Dec. 9, 2022).
Kansas: The Kansas Department of Revenue issued guidance on the state's SALT Parity Act, which allows certain pass-through entities (PTE) to elect to pay Kansas income tax at the entity level. In order for a PTE to file at the entity level, it must be an electing PTE. The election is made annually on the return the electing entity files for the tax year (Form K-120S), and the election is binding on all electing PTE owners (i.e., shareholder of an S corporation or a partner in a partnership, except partner does not include a C corporation). While elective PTEs do not have to make estimated tax payments in 2022, they will have to do so in subsequent years. Kansas's elective PTE tax law also provides that any credit attributable to the entity's activities, other than credits for tax paid to other states, must be claimed by the electing PTE; credits do not pass through to the PTE owners in years in which the election is made. Kansas law also provides that any excess income tax credit, net operating loss (NOL) or other modification may be carried forward on the electing PTE's return and any limitation on the tax credit, NOL or modification applies to the PTE. Further, the credit, NOL or modification can only be utilized in subsequent years when the PTE tax election is made. If, in a year after an electing year, the election is not allowed or is not made, any excess income tax credits that already exist may be transferred to the electing PTE owners. Lastly, income tax paid to another state by the electing PTE on the income of a resident individual taxpayer is deemed to be tax paid to the other state by the resident individual taxpayer for purposes of the credit for taxes paid to other states. Kan. Dept. of Rev., Notice 22-16 "SALT Parity Act" (Dec. 13, 2022).
Michigan: On Dec. 22, 2022, Governor Gretchen Whitmer vetoed SB 195, which would have modified the application of the federal business interest limitation under IRC § 163(j) to persons that are included in a unitary business group. In her veto message, the governor said SB 195, among other vetoed bills, was "rushed through a lame duck session and need[s] closer examination."
Rhode Island: The Rhode Island Division of Taxation (RI DOT) issued guidance on the use of passive losses at the state level, finding no statutory support for the application of passive losses as a reduction of the addback of bonus depreciation under R.I. Gen. Laws § 44-61-1. The RI DOT cautioned against reducing bonus depreciation addback for passive losses not available on the federal return due to federal loss limitations, noting that "to remain in compliance with tax obligations and [Rhode Island] law, … the federal treatment for passive losses" must be followed. R.I. Div. of Taxn., Advisory 2022-39 "Guidance for Tax Pros regarding passive losses and bonus depreciation" (Dec. 13, 2022).
SALES & USE
Minnesota: Recently issued Rev. Notice #22-04, states the Minnesota Department of Revenue's (MN DOR) position on when the charge for a service must be included in the price of a taxable good or service when the service is necessary to complete the sale. This notice provides a broad clarification of the MN DOR's position, and it revokes and replaces the industry specific Rev. Notice #06-06, which only pertained to interior design services. (Revocation of Notice #06-06 also removes the one-year lookback period for interior design services.) The MN DOR's position on "services necessary to complete the sale" is that services not otherwise subject to sales tax are included in the sales price of a taxable good or service if they are necessary to complete the sale of the taxable good or service. The MN DOR explained that "[a] service is necessary to complete the sale of a taxable good or service if it is an essential part of the transaction such that purchase of the service results in [such sale] from the same retailer." The MN DOR said that a service is necessary to complete the sale if it meets any of the following conditions: (1) the retailer, in conjunction with the sale of taxable goods or services, requires or otherwise does not permit the purchaser to opt out of the service; or (2) the purchaser receives a credit for the purchase of the service against the purchase of the goods or services from the same retailer. The MN DOR further stated that contracting for or stating a service separately from the taxable goods or services does not control whether the service is necessary for the completion of the sale. Notice #22-04 includes illustrative examples. Revocation of Notice #06-06 is effective for sales and purchases made after Dec. 19, 2022, except revocation of the lookback period is effective for purchases of interior design services made after March 31, 2023. Minn. Dept. of Rev., Notice #22-04 (Dec. 19, 2022) (revokes and replaces Rev. Notice #06-06).
PAYROLL & EMPLOYMENT TAX
Multistate and Federal: During our Dec. 8, 2022, webcast, 2022 Employment tax year in review, panelists discussed numerous federal and state employment tax topics to consider for year-end 2022 and 2023. For your reference, the December 8th webcast slide deck is included in Tax Alert 2022- 1862. You can easily navigate the content by clicking on the topics on slide 6. You can also find links to our year-end special reports on slides 65 and 66. The replay of the webcast, once available, will be posted here.
Multistate: State unemployment insurance (SUI) trust funds are largely financed by employer contributions (in Alaska, New Jersey and Pennsylvania employees also make contributions). States are required to maintain a SUI taxable wage base of no less than the limit set under the Federal Unemployment Tax Act (FUTA). The 2023 FUTA wage limit of $7,000 has remained unchanged since 1983, despite increases in the federal minimum wage and annual cost-of-living adjustments over the last 40 years. Some states are conservative in their approach to maintaining adequate SUI trust fund reserves. Consequently, the SUI wage base is flexible in those states, meaning, it is indexed to the average wage or varies based on the trust fund balance. According to the U.S. Department of Labor (US DOL), 25 jurisdictions had a flexible wage base in 2021 (the US DOL expects the 2022 information will be available by the end of December 2022). For more on this development, see Tax Alert 2022-1913.
Multistate: Six jurisdictions (California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island) operate state disability insurance (SDI) programs. Another 13 jurisdictions (California, Connecticut, Colorado, Delaware, District of Columbia, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Oregon, Rhode Island and Washington) are now operating, or will soon be operating, paid family and medical leave (PFML) insurance programs. Washington is currently the only jurisdiction with a long-term care (LTC) insurance program. Depending on the jurisdiction, the employee may pay all contributions to the SDI, PFML or LTC program through wage withholding, or the employer and the employee may share the cost of the insurance coverage. Most states allow employers to use a private insurance company or self-insured plan in lieu of paying into the state insurance fund(s). For more on this development, see Tax Alert 2022-1920.
Multistate: Though the federal minimum wage remains at $7.25 per hour, state (and local) minimum wage rates will increase in numerous jurisdictions on Jan. 1, 2023. Increases in the minimum wage can be the result of voter approval, law changes or because of annual inflation adjustments. Employers should be aware of differences in localities that independently set a minimum wage for employees working within their city or county limits (for example, several cities in California). The chart in Tax Alert 2022-1930 shows the minimum wage rates that apply in 2023 as reported by the respective agencies as of Dec. 20, 2022.
Pennsylvania: The Pennsylvania Department of Labor & Industry announced that effective Jan. 1, 2023, the employee state unemployment insurance withholding rate is increased from 0.6% to 0.7%. The employee contribution applies to total covered wages. (Pennsylvania Department of Labor & Industry, Yearly Tax Highlights for 2023.) For more on this development, see Tax Alert 2022-1883.
Pennsylvania: On Nov. 3, 2022, Pennsylvania Governor Tom Wolf signed into law SB 1083, which effective immediately provides retroactive state unemployment insurance (SUI) tax relief to businesses temporarily shut down due to COVID-19 and lessens the wait time for employers to implement an approved state Shared Work plan. For more on this development, see Tax Alert 2022-1874.
Georgia: Governor Brian Kemp extended the suspension of fuel taxes through Jan. 10, 2023 (from the extended date of Dec. 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 12.08.22.02 (Dec. 8, 2022).
Washington: On Dec. 13, 2022, the Washington Tax Structure Work Group (Workgroup) recommended introducing legislation during the 2023 session to repeal the state's business and occupation (B&O) gross receipts-based tax and replacing it with a margins tax modeled after the Texas franchise tax. Under the recommendation, the B&O tax could be eliminated on Jan. 1, 2027, with the margins tax in effect for gross income earned in 2027 and thereafter. While legislative language has not been proposed and most of the details of implementing a margins tax replacement are still being developed, the Workgroup's proposal includes the general principles for the new tax regime. The recommended margins tax regime would: (1) apply a single default 2.95% rate based on Washington Department of Revenue calculations to maintain revenue neutrality; (2) apply on a combined-group basis with the inclusion of all entity types in a single group, applying the Finnigan method of apportionment; (3) apply the same nexus standards imposed under the current B&O tax; (4) be calculated using worldwide gross income under Washington's existing definition, but with all deductions, exclusions and exemptions eliminated other than those deemed necessary for legal compliance or administration; (5) determine the pre-apportioned margin by deducting the greatest of the cost of goods sold, total compensation paid, 30% of taxable income or $1 million; (6) apportion the resulting taxable margin to Washington using a single sales factor formula; (7) repeal most currently available B&O credits; and (8) allow limited carryforward of existing B&O credits. Once the measure is formally introduced, the legislature will have to address significant transition, administration and policy issues. For additional information on this development, see Tax Alert 2022-1931.
Federal — International: Issue 3, 2022 of TradeWatch, the global EY organization's global trade magazine is now available. The final edition of the year reflects on trade developments from 2022 (including trade disruption, legislative change, customs valuation, and sustainability), examines select current trade trends and looks forward to the trade outlook for 2023. The full issue is available 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.