January 23, 2023
State and Local Tax Weekly for January 13
Ernst & Young's State and Local Tax Weekly newsletter for January 13 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.
Colorado's new carryout bag fee, effective Jan. 1, 2023, creates new compliance obligations and issues
Effective Jan. 1, 2023, Colorado imposes a 10-cent per carryout bag fee on most retail businesses.1 For the first phase of the fee, which runs Jan. 1, 2023 to Dec. 31, 2023, a store may furnish a recycled paper carryout bag or a single-use plastic carryout bag to a customer if the customer pays a fee of 10 cents per bag, or a higher fee adopted by the municipality or county in which the store is located. The fee also applies to bags used for deliveries. Beginning Jan. 1, 2024, the fee remains in place, but the store may only furnish a recycled paper carryout bag. Plastic bags used for carryout or delivered goods will not be allowed in the state after that date.
The new law lists exemptions from the fee; most notable are the following:
Although the bag fee is imposed on a state-wide basis, the bag fee is to be remitted locally to cities and counties rather than to the state. Under the new law, 60% of the carryout bag fee revenues will go to the municipality where the store is located (or the county if not located in a municipality); the remaining 40% may be retained by the retailer. This system is likely to create compliance challenges for some companies.
Due to a drafting error, retailers are not required to remit the fees until April 1, 2024, and will have to remit the fees on a quarterly basis. Some localities, however, are accepting fee remittances before April 1, 2024.
It is expected that challenges may arise due to the number of returns and different methods for remitting the fee under the new law. For instance, some home rule, self-collected municipalities are including the bag fee remittance as a part of the sales tax return, while other localities have separate forms or online filing requirements.
The fee, however, is not subject to sales tax or otherwise includable in the sales tax base. For sourcing, retailers that make deliveries using plastic or paper bags will need to remit the fee based on the address where the order is delivered, not where it originates. As such, it is crucial that retailers confirm the bag fee in municipalities where they operate, as it may be higher than 10 cents, if raised by ordinance or resolution. For additional information on this development, see Tax Alert 2023-0065.
Governor Budget Proposals/State-of-State
Arizona: In her 2023 State of the State Address (Jan 9, 2023), Arizona Governor Katie Hobbs said that her budget will set aside $50 million for a state-level child tax credit for those earning less than $40,000. Governor Hobbs also wants to exempt diapers and feminine hygiene products from Arizona sales tax (i.e., the transaction privilege tax).
Arkansas: In her Inaugural Address (Jan. 10, 2023), Governor Sarah Huckabee Sanders said that she would "work with lawmakers to pass an income tax cut this year — and we must keep cutting it, no matter how long it takes, until we eventually wipe the income tax off the books."
California: Governor Gavin Newsom's 2023-24 State Budget (Jan. 10, 2023) includes tax and incentive provisions. The governor said that budget forecasts that General Fund revenues will be $29.5 billion lower than at the 2022 Budget Act projections, leaving California with a $22.5 billion budget gap in FY2023-24. The proposed budget includes the renewal of the Managed Care Organization Tax effective 2024 through 2026. The governor explained that this tax will help maintain Medi-Cal program funding. The governor's budget plan, starting in 2023, would impose California income tax on net income derived from incomplete non-grantor trusts when the grantor of the trust is a California resident. The governor said that "[t]his proposal mitigates a tax strategy which allows California residents to transfer assets into out-of-state incomplete non-grantor trusts and potentially avoid state taxation." The budget plan also would extend the film and television tax credit for five years and make it refundable (credits that are refunded would be at a discounted value and provided over multiple years to lessen revenue loss; credits against tax liability would retain their full value); extend the California Competes grant program; and expand access to California's existing New Employment Credit by removing the geographic requirement for qualifying semiconductor manufacturing and research and development firms.
Idaho: In his 2023 State of the State and Budget Address (Jan. 9, 2023), Governor Brad Little said his budget plan "puts another $120 million toward property tax relief" to help Idahoans. Citing economic volatility in the near future, the governor said that this may be the last shot to make "strategic tax cuts that will sustain a balanced budget over time."
Kansas: Outlining her Fiscal Year 2024 Budget (Jan. 12, 2023), Governor Laura Kelly said her budget provides tax relief. The governor's "Axing Your Taxes" plan would provide $500 million in tax cuts over three years by completely eliminating the state sales tax on groceries, diapers and feminine hygiene products by April 1, 2023; add a four-day back to school sales tax holiday; and increase the tax exemption for Social Security income. The plan for immediately eliminating the states sales tax on groceries would supersede the gradual phaseout of the tax that was enacted in 2022 (and starts in 2023).
Maine: Governor Janet Mills' biennial budget proposal for FY 2024-25 (Jan. 11, 2023) does not raise taxes or touch the state's rainy day fund. Rather, the governor's proposals would enhance property tax relief by increasing the state reimbursement to municipalities under the Homestead exemption and providing $46 million to fund the property tax freeze law, which is available to individuals 65 years or older who owned a homestead for at least 10 years. The budget also calls for $3 million for climate-focused grants, technical assistance and incentive programs to help Maine communities plan for climate change, reduce carbon emissions, and transition to clean energy.
Montana: Governor Greg Gianforte announced his "pro-family, pro-business tax relief agenda" (Jan. 5, 2023), which would provide $1billion in property and income tax relief. Property tax relief includes a $1,000 property tax rebate for primary residence in both 2023 and 2024. Proposed tax relief also would reduce the income tax rate from 6.55 to 5.9% and substantially increase the state's earned income tax credit and provide a $1,200 child tax credit. The proposal also would expand the business equipment tax exemption from $300,000 to $1 million.
New York: In her 2023 State of the State address (Jan. 10, 2023), Governor Kathy Hochul said the state's rainy day fund, is "one of the reasons why we will not be raising income taxes this year." The governor is calling for some new credits as well as the enhancement of several already existing tax credits, including the following:
The governor also wants to tie minimum wage to inflation. The full state of the state book is available here.
North Dakota: In his 2023 State of the State address (Jan. 3, 2023), Governor Doug Burgum, noted that the state's general fund revenues are 23% (or over $700 million) ahead of forecast and oil tax revenues are running 60% (or $1.5 billion) ahead of forecast. The governor wants to adopt the lowest flat-rate income tax in the nation — the reduction would eliminate the state individual income tax for three out of five taxpayers and those still subject to tax would see their tax rate reduced. The governor noted that this change would put the state on the path to eventually zeroing out its individual income tax. The governor wants this to be one of the first bills he signs this year. In addition, the governor is proposing to refresh the state's Renaissance Zone program, which reduces overall property taxes, by allowing additional flexibility and re-entry into the program and reducing the administrative burdens to having projects approved. The governor said: "[t]his matters, because incentivizing the full utilization of existing infrastructure versus subsidizing brand new expensive and non-economic green field edge infrastructure with state dollars is a true path toward reducing property taxes and municipal water bill burdens." The governor also suggested expanding the automation tax credit, "incenting industries to adopt automation through matching grants, and investing in a workforce transition training program to retrain and upskill citizens … ". In terms of "green" the governor is proposing to invest $500 million between this biennium and the next to capitalize the Clean Sustainable Energy Loan Fund to support clean energy projects such as carbon capture.
South Dakota: In her 2023 State of the State address (Jan. 10, 2023), Governor Kristi Noem said that the state has a record surplus and she wants to use it to cut taxes and provide relief to South Dakotans. She is calling for the elimination of the state's sales tax on groceries and a reduction in the unemployment tax for businesses. The governor also called for the extension of state provided paid family leave benefits to 100% of salary for 12 weeks (from the current 60% of an employee's salary for 8 weeks).
Virginia: In his 2023 State of the Commonwealth address (Jan. 11, 2023), Governor Glenn Youngkin said that the commonwealth is "going to have to systematically move to lower taxes to make Virginia more attractive to young people, families, veterans, and retirees, and more competitive for business." The governor is calling for "immediate tax cuts for businesses and individuals", the elimination of tax on military retirement income for veterans, and an increase in the standard deduction by 20%.
West Virginia: In his 2023 State of the State Address (Jan. 11, 2023), Governor Jim Justice called for a 50% reduction in the individual income tax, to be accomplished over a three year period. The cut in the first year would be 30%, followed by 10% cuts in each of the following two years. The governor also said that he sent a bill that would eliminate the car tax.
New Hampshire: Proposed bill (HB 121) would replace the state's water's edge combined reporting provisions with worldwide combined reporting provisions for purposes of the state's business profits tax. If enacted, this change would apply to taxable periods beginning after Dec. 31, 2023. HB 121 was proposed on Jan. 17, 2023.
New Jersey: New law (A. 4295) eliminates the requirement that taxpayers qualifying as a S corporation for federal tax purposes affirmatively elect New Jersey S corporation status. The law does so by modifying the definition of "New Jersey S corporation" to mean a taxpayer that has made a valid S corporation election for federal tax purposes and has not made a valid election to opt out of being taxed as a New Jersey S corporation. An election to opt out of being a New Jersey S corporation can be made for any tax year at any time during the preceding tax year or at any time on or before the due date (including the extended due date) of the S corporation's tax return; 100% of the shareholders must consent to opt out. The election to opt out is effective for the tax year for which the election is made and for each succeeding tax year until revoked. Revocation of the election can be made by the shareholders holding more than 50% of the share of the S corporation's stock. These changes took effect immediately but apply to tax years and privilege periods beginning after the date of enactment. N.J. Laws 2022, ch. 133 (A. 4295), signed by the governor on Dec. 22, 2022.
Virginia: The Virginia Department of Taxation (VA DOT) issued FAQs on the pass-through entity (PTE) tax. The VA DOT said that estimated payments made by PTE owners before the PTE tax election is made can, upon request, be reallocated from their accounts to that of the PTE, so that the payments count as estimated payments of the Virginia PTE Tax for tax year 2022. The VA DOT further said that to be eligible for the PTE tax, a PTE only needs to meet the qualifying PTE test at any time during the tax year. Refundable PTE tax credits only flow through to direct natural person owners in proportion to each owner's distributive share of income. A valid PTE tax election cannot be made by submitting a paper Form 502V and a check. Making a PTE tax payment using online Form PTET-PMT (the VA DOT's preferred method) or ACH credit using code 00032, however, will count as a valid election. PTEs filing a short-year return for tax year 2022 can make the PTE tax election. The VA DOT also said that PTE tax guidelines, including draft guidelines, can be relied on by taxpayers until it issues final guidance. Lastly, the VA DOT said that it will permit non-Virginia PTEs with no Virginia source income to make the PTE tax election. Va. Dept. of Taxn., "Virginia Pass-Through Entity Tax Frequently Asked Questions for Taxable Year 2022 and After" (Jan. 3, 2023).
SALES & USE
New Jersey: The New Jersey Division of Taxation (NJ DOT) updated its guidance on the application of sales and use tax on the sales of prepared food and beverages (e.g., sold by restaurants, caterers, taverns, snack bars, food trucks) to add information on the taxability of credit/debit card service charges. The NJ DOT said that a credit card surcharge added to the check when the customer pays by credit or debit card are part of the sales price subject to New Jersey sales tax. N.J. Div. of Taxn., Tax Topic Bulletin S&U-1 "Restaurants and New Jersey Taxes" (updated Jan. 2023).
Texas: The Texas Comptroller of Public Accounts (Comptroller) posted frequently asked questions regarding the sales and use tax collection, reporting and remitting obligations for remote sellers, marketplace sellers and marketplace providers. The Comptroller said that a seller, depending on its activities, could be a remote seller, a marketplace seller, a marketplace provider, or a combination of the three. The FAQs describe remote sellers, marketplace sellers, and marketplace providers and the safe harbor provisions that apply to remote sellers and marketplace providers. Regarding remote sellers, the FAQs describe their state and local sales and use tax collection obligations, including when the remote seller sells its products through a marketplace; when a remote seller can terminate its Texas use tax collection responsibilities; and how a remote seller can elect to use the single local use tax rate. For Texas sellers, the FAQs explain reporting requirements if the seller makes sales through a marketplace. As for marketplace providers, the FAQs make clear that they cannot use the single local use tax rate, and that marketplace providers, along with marketplace sellers, are subject to audit. Tex. Comp. of Pub. Acct., STAR System No. 202301002L (Jan. 5, 2023).
Virginia: In response to a ruling request, the Virginia Department of Taxation said that the sales and use tax exemption under Va. Code § 58.1.609.10 applies to prescription pet food sold on a veterinarian's prescription or dispensed to patients within a veterinarian-client-patient relationship. The exemption also applies to a veterinarian's purchase of prescription pet food. Va. Dept. of Taxn., Rul. of the Tax Comm. No. 22-159 (Dec. 20, 2022).
Federal: The IRS ended 2022 by releasing several pieces of guidance on the new clean vehicle credits enacted or revised under the Inflation Reduction Act. The guidance addresses credits under IRC § 30D (clean vehicles), IRC § 45W (commercial clean vehicles) and IRC § 25E (previously owned clean vehicles). For the most part, this guidance applies to vehicles sold and purchased beginning in 2023. For additional information on this development, see Tax Alert 2023-0076.
COMPLIANCE & REPORTING
California: The California Franchise Tax Board (FTB) announced tax relief for those affected by the recent winter storms. The FTB is extending filing and payment deadlines for businesses and individuals to May 15, 2023. The relief applies to deadlines falling on or after Jan. 8, 2023 and before May 15, 2023, including individual income tax returns and quarterly estimated tax payments. The FTB's release lists the disaster areas eligible for the tax relief and explains how to claim a deduction for disaster losses. Cal. FTB, Release "California grants tax relief for those affected by the recent winter storms" (last updated Jan. 13, 2023).
New Jersey: New law (A. 4295) establishes provisions for reporting federal partnership audit and adjustments. Generally, a taxpayer has 180 days to file an amended return and pay any New Jersey gross income tax or corporate business tax due with respect to a final federal adjustment, except for final federal adjustments arising from a partnership level audit or administrative adjustment request. The new rules for reporting federal partnership audits and adjustments require that within 90 days after the final determination date of a final federal adjustment, a partnership must file a completed federal adjustments report with the New Jersey Division of Taxation (NJ DOT), notify each of its direct partners of their distributive share of the final federal adjustment, file an amended return and pay the amount required, and submit a payment on behalf of any nonresident partner previously included on a composite return. Within 180 days after the final determination date, each direct partner must file a federal adjustment report reporting the adjustment to their distributive share and pay additional state tax, penalty and interest due. Alternatively, an audited partnership can make an irrevocable election to file a federal adjustments report and pay tax, penalty and interest due. An electing partnership will have 90 days to file a completed federal adjustment report and notify the NJ DOT that it is making the election. The electing partnership will have 180 days after the final determination date to pay a determined amount for its direct and indirect partners. These reporting and payment provisions apply to direct and indirect partners of an audited partnership that are tiered partners. An audited partnership or tiered partner may enter into an agreement with the NJ DOT to use an alternative reporting and payment method, if it demonstrates that the requested alternative method will reasonably provide for the reporting and payment of tax, penalty and interest due. The law also (1) sets forth the period in which the NJ DOT can assess additional tax, interest and penalties arising from a federal adjustment; (2) allows taxpayers to make estimated New Jersey tax payments during the course of a federal audit; (3) describes the process for claiming refunds or credits of tax arising from final federal adjustments; and (4) provides for the scope of adjustments and extension of time to make an adjustment. The NJ DOT is authorized to promulgate rules to implement these requirements. These provisions took effect immediately and apply to adjustments to taxpayer's federal taxable income on or after Jan. 1, 2020. N.J. Laws 2022, ch. 133 (A. 4295), signed by the governor on Dec. 22, 2022.
Ohio: New law (HB 45) provides for a two-month tax and fee amnesty program that would run in 2023 if the Ohio Director of Budget and Management before Nov. 1, 2023, determines that the state will need the program's revenue in order to meet General Revenue Fund obligations. In exchange for paying the full amount of delinquent taxes and fees due, and meeting the amnesty program's requirements, the state will waive otherwise applicable penalties and accrued interest. Taxes covered by the amnesty program include income tax, state and county sales and use tax, commercial activity tax, financial institutions tax, public utility excise taxes, natural gas excise tax, fuel use tax, motor fuel excise tax, alcoholic beverage taxes, severance taxes, tire fees, wireless 9-1-1 charges, among others. School district income taxes would not be covered by the amnesty program. Ohio Laws 2022, HB 45, signed by the governor on Jan. 6, 2023.
PAYROLL & EMPLOYMENT TAX
Massachusetts: At the Massachusetts Society of CPAs Annual State Tax Seminar on Jan. 10, 2023, high-level representatives from the Massachusetts Department of Revenue (MA DOR) announced that the state does not plan on updating its current withholding instructions as contained in Massachusetts Circular M, effective Jan. 1, 2020 to reflect the new 4% surtax on taxable income over $1 million that is effective Jan. 1, 2023. The MA DOR suggested that businesses attempt to estimate the appropriate withholding. However, given the computational complexities, the MA DOR confirmed that for tax year 2023, it will not impose penalties associated with underpayments of withholding or estimated tax in connection with the added 4% surtax. For additional information on this development, see Tax Alert 2023-0086.
Washington: The Washington Department of Revenue (WA DOR) issued interim guidance explaining when the preferential printing and publishing business and occupation (B&O) tax rate under RCW 82.04.280(1) applies to gross income from publishing digital versions of the magazines and periodicals. The preferential printing and publishing B&O classification applies to the digital version of the magazine or periodical only when there is a substantially equivalent paper/printed version. To be "substantially equivalent" neither the digital or paper version should have significantly different content or functionality (e.g., a digital version that offers daily updates would not be "substantially equivalent"). The WA DOR further noted that if the digital version of the magazine or periodical allows the user to access additional or different content, it could be considered a digital automated service (DAS). Income from the sales of DASs are subject to the retail or wholesale taxes on digital products and services; advertising income from such would no longer be subject to the printing and publishing classification and likely would be taxed under the service and other activities classification. The WA DOR said that this guidance will be in effect until it issues final guidance. Wash. Dept. of Rev., "Interim guidance statement regarding the application of the printing and publishing B&O tax classification to digital subscriptions of magazines and periodicals" (Dec. 14, 2022).
International — Dubai: On Jan. 1, 2023, Dubai Customs started implementing Customs Notice 05/2022 issued on June 22, 2022. This Customs Notice lowers the threshold of consignment value of shipped goods to AED300 for the customs duty exemption when importing consignments to Dubai. For additional information on this development, see Tax Alert 2023-0077.
VALUE ADDED TAX
International — Peru: Peru recently enacted two VAT measures for extending the VAT exemption for specific goods and services (Law 31651) until Dec. 31, 2025; and introducing a temporary and exceptional early VAT recovery regime (Law 31661) applicable until Dec. 31, 2024. For additional information on this development, see Tax Alert 2023-0072.
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 Colo. Laws 2021, ch. 440 (HB 21-1162), enacted July 6, 2021.