February 7, 2023
State and Local Tax Weekly for January 27
Ernst & Young's State and Local Tax Weekly newsletter for January 27 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.
Texas Comptroller adopts amendments to local sales and use tax sourcing rules
The Texas Comptroller of Public Accounts (Comptroller) has adopted amendments to rule 34 TAC Section 3.334 (Section 3.334) regarding local sales and use tax. In August 2022, a Texas District Court found that the Comptroller failed to "substantially comply with" requirements of the Texas Administrative Procedure Act, specifically Tex. Gov. Code § 2001.024, in adopting amendments to 34 TAC §3.334(b)(5) [in 2020], which as amended would source online sales to the buyers location instead of the seller's business location." The court remanded the case back to the Comptroller for "revision or readoption [of the rule amendments] through established procedures within a reasonable time." In September 2022, the Comptroller issued proposed amendments to Section 3.334(b)(5) and other parts of the rule "with an explanation that augments" the those published in the proposed rulemaking (Jan. 2020) and the notice adopting the amendments (May 2020). Based on feedback, the Comptroller made changes to the proposed text published in September 2022.
Adopted amendments modify the definition of "fulfill" under Section 3.334(a)(9) to mean "[t]o complete an order by transferring possession of a taxable item to a purchaser, or to ship or deliver a taxable item to a location designated by the purchaser." (The prior rule defined "fulfill" to mean "[t]o complete an order by transferring a taxable item directly to a purchaser at a Texas location, or to ship or deliver a taxable item to a location designated by the purchaser.") The Comptroller said this change is intended to make the language more consistent with Tex. Tax Code §321.203(c-1).
The definition of "place of business of the seller" in Section 3.334(a)(16) has been amended to make clear that a place of business of the seller must be an established outlet, office or location the seller operates for purposes of receiving orders for taxable items from persons other than employees, independent contractors and affiliated natural persons. (The term does not include a computer server, internet protocol address, domain name, website or software application.) The established outlet, office or location usually requires it be staffed by at least one sales personnel. (The Comptroller noted that it added the word "usually" to clarify that the presence of sales staff is an important factor in determining whether an outlet, office or location is a place of business, but such presence is not required.) The "purpose" element can be established by showing that the sales personnel received three or more orders for taxable items at the facility during the calendar year.
Adopted amendments to Section 3.334(b)(1)(A) provide that the forwarding of previously received orders to the facility for fulfilment does not make the facility a place of business.
The Comptroller also adopted proposed amendments to Sections 3.334(b)(4) and (5), with modifications from the proposed language for Subsection (b)(5). As amended Subsection (b)(4) treats an order received by a salesperson who is not at a place of business of the seller when the salesperson receives the order as being received at the location where the salesperson operates (i.e., the fixed location where the salesperson conducts work-related activities). Subsection (b)(5) provides that "a facility without sales personnel is usually not a 'place of business of the seller'." For example, vending machines, a computer that operates an automated shopping cart software program, and a computer that operates an automated telephone ordering system are not "an established outlet, office, or location" and, therefore, they do not constitute a "place of business of the seller." A walk-in retail outlet with a stock of goods for immediate purchase through a cashier-less point-of-sale terminal, however, is "an established outlet, office, or location" and, as such, constitutes a "place of business of the seller" even though sales personnel are not required for each sale.
In Section 3.334(c)(2)(B)(ii), the term "order not fulfilled in Texas" is amended to make the language more consistent with Tex. Tax Code §321.205(c). The amended rule provides that a sale is not considered to be consummated in Texas when an order is received by a seller at a location that is not a place of business of the seller in Texas and is fulfilled from a location outside the state. A use, however, is consummated at the first point in Texas where the item is stored, used or consumed after interstate transit has ceased. There is a rebuttable presumption that a taxable item delivered to a point in Texas is for storage, use or consumption at that point. Local use tax would be collected as provided in Section 3.334(d).
The amended rule took effective Jan. 30, 2023.
Governor Budget Proposals/State-of-State
Alabama: In her 2023 Inaugural address (Jan. 17, 2023), Governor Kay Ivey noted that the state had cut over half a billion dollars in taxes that helped middle class, farmers and small business, but she did not mention any new tax related proposals. To incentivize business and industry to grow in Alabama, the governor said the state "will build on the massive success we have experienced by renewing the Jobs Act and Growing Alabama" and that the state "will craft an economic development strategy for the 2030s today." The governor also wants to cut regulations by 25% over the next two years.
Alaska: In his 2023 State of the State address (Jan. 23, 2023), Alaska Governor Mike Dunleavy said he is proposing a carbon monetization bill (click here for more on that plan) and that he is looking to build Alaska into a "global leader in new forms of low and no carbon energy."
Delaware: In his FY2024 budget presentation (Jan. 26, 2023), Governor John Carney said he wants to provide middle class tax relief by increasing (1) the standard deduction by 75% to $5,700 (single filers) or $11,400 (joint filers) starting in 2024, and (2) the earned income tax credit to 7.5% of the federal credit effective in 2023.
Georgia: In his budget recommendations (Jan. 13, 2023), Governor Brian Kemp proposed an income tax refund that would range from $250 (single filers) to $500 (joint filers); homeowner property tax relief; and $166.7 million for the Regional Economic Business Assistance program, which provides funds to local governments to provides incentives to support business development. The governor's 2023 State of the State address (Jan. 25, 2023), did not mention taxes or credits.
Hawaii: In his 2023 State of the State address (Jan. 20, 2023), Governor Josh Green, M.D., announced the Green Affordability Plan (GAP), which would significantly increase tax credits provided to low income families. GAP would reduce individual income tax by 10%. For families making $45,000 a year: the food excise tax credit would be doubled, the credit for low-income renters would be increased, the earned income tax credit would be increased, and the individual income tax would be indexed to inflation. Tax credits and relief would be offered to households who are "Asset Limited, Income Constrained, Employed" (ALICE). For such households there would be a credit for low-income renters, a doubled personal exemption, and an increased standard deduction. The governor's plan also would expand the child and dependent care tax credit.
Maryland: In his 2024 budget plan (Jan. 20, 2023), Governor Wes Moore said he wants to permanently extend the enhanced earned income tax credit and expand the child tax credit. He also wants to provide $422 million for programs funded by the transfer tax that support land preservation and operation and capital projects in State parks.
Michigan: In her 2023 State of the State address (Jan. 25, 2023), Governor Gretchen Whitmer said she wants to repeal the retirement tax and expand the Working Families Tax Credit (formerly known as the earned income tax credit).
Minnesota: On Jan. 24, 2023, Governor Tim Walz announced his "One Minnesota Budget". As part of his budget, the governor wants to send almost $4 billion of the state's surplus back to taxpayers via checks up to $2,600. In addition, the governor is recommending a 1.5% surcharge on capital gains and dividends on individuals, trusts and estates over $500,000 up to $1 million. The rate would increase to 4% on income over $1 million. The governor is also proposing to (1) increase the School Building Bond Ag Credit, which reduces school property taxes on agricultural, rural vacant and managed forest land, to 80% (from 70%) starting in 2025; (2) reduce taxes on Social Security benefits by expanding the number of seniors eligible for lower Social Security taxes, raising the threshold at which the tax cuts start to phase-out and increasing the maximum tax subtraction; and (3) legalize and tax adult-use cannabis.
On Jan. 19, 2023, the governor announced proposals that would "invest in Minnesota's economic future." The proposal would create a paid family and medical leave program, increase access to earned sick and safe time, and expand unemployment benefits to hourly workers in K-12 schools. The governor also is proposing $20 million in funding for the Angel Tax Credit in the next biennium and $150 million to invest in the Minnesota Forward Fund, which would be used to create grants, loans or forgivable loans for infrastructure or large-scale economic development projects.
On Jan. 17, 2023, the governor announced his plan to "make Minnesota the best state in the country for kids." The plan would provide $539 million in tax credits in 2024-25 and $547 million in tax credits in 2026-27 to expand the child and dependent care credit.
Nevada: In his 2023 State of the State address (Jan. 23, 2023), Governor Joe Lombardo said he is proposing to suspend the gas tax for the next year, decrease the rate of the modified business tax to 1.17% and raise the threshold for business subject to the commerce tax to $6 million (from $4 million). In addition, the governor wants to increase the cap on the state's rainy-day fund from 20% to 30%.
New Hampshire: In his Inaugural address (Jan. 5, 2023), Governor Chris Sununu said that "[t]ogether we have crafted three balanced budgets — with no new taxes — and we are going to do it again."
South Carolina: In his 2023 State of the State address (Jan. 25, 2023), Governor Henry McMaster asked the Legislature to speed up scheduled income tax cuts if future revenues will allow it.
Texas: In his Inaugural address (Jan. 17, 2023), Governor Greg Abbot said that Texas has the largest budget surplus in the state's history, and that "[w]e will use that budget surplus to provide the largest property tax cut in the Texas history."
Utah: In his 2023 State of the State address (Jan. 19, 2023), Governor Spencer Cox said he is proposing $1 billion in tax relief for Utah families to help combat inflation and the increased cost of living. The tax relief was presented in his budget for FY 2024 (Dec. 9, 2022), and would consist of $300 million in new ongoing income tax cuts, $574 million in one-time tax relief, and maintaining the expiration of the basic levy freeze. The governor wants to reduce the income tax rate from 4.85% to 4.75%; this rate reduction would be paired with a modification to the taxpayer tax credit that would make $250 of the credit refundable. The governor is also proposing to expand the Social Security Tax Credit by increasing the income limit where the benefits phase out. One-time relief would come in the form of an income tax rebate and a one-time property tax reduction that would give the $127 million collected over the 2022 forecast back to taxpayers through a one-time basic levy rate reduction in 2023. Lastly, the governor's budget proposal would expand the circuit breaker credit, which provides relief to low-income seniors.
Vermont: In his FY2024 budget address (Jan. 20, 2023), Governor Phil Scott said he wants to take advantage of historic surpluses to make strategic investments without raising taxes. The governor is recommending the elimination of the hospital provider tax and for the full elimination of the tax on military pensions. In addition, the governor wants to expand the state's social security tax exemption for seniors and the earned income tax credit. The governor also said that Vermont "should join the 29 other states that offer their business owners a federal tax cut without reducing state revenue by a single penny."
Wisconsin: In his 2023 State of the State address (Jan. 23, 2023), Governor Tony Evers discussed providing tax relief, but rejected a flat tax noting that "[s]pending billions on a flat tax isn't a workforce plan or an economic development plan." The governor also wants to expand the child and dependent care credit.
Georgia: The Georgia Department of Revenue posted frequently asked questions (FAQs) on the state's elective pass-through entity (PTE) tax. The PTE tax election can be made for tax years beginning on or after Jan. 1, 2022. Only S corporations and partnerships that are 100% directly owned and controlled by persons eligible to be shareholders of an S corporation under IRC §1361 can make the PTE tax election. The election cannot be made by a single-member limited liability company not taxed as an S corporation or partnership. The election is made by checking a box on the applicable schedules on Form 600S (S corporation) or Form 700 (partnership); the election must be made by the due date or extended due date of the PTE's income tax return. The election is irrevocable after the due date passes. PTEs making the election are required to make estimated tax payments in the same manner as C corporations (the FAQs address making estimated payments when the entity's preceding income liability was $0.00 because the PTE tax election was not made in the prior year). Owners of an electing PTE must enter their allocable share of loss on Schedule 1, Line 5 of Form 500 and their allocable share of income on Schedule 1, Line 12 of Form 500; both entries need the description PTEDED. Entities making the PTE tax election do not have to file a composite return as the tax election is binding on all owners, including those who are a nonresident. If there is an overpayment credit from a composite return and the entity makes the PTE tax election, the electing PTE cannot claim the overpayment on its tax return. Rather, the overpayment can be refunded. The tax attributes (e.g., credits and net operating losses (NOLs)) of an electing PTE remain with the PTE when the entity does not make the PTE tax election in the following year. The electing PTE, however, can make an irrevocable election to pass through all or part of any credit generated with the applicable statute of limitations period for the entity to its owners for the tax year the credit was generated. (This election does not apply to certain credits.) NOLs of the electing PTE are treated in the same manner as for C corporations. Owners of an electing PTE are not eligible to claim a credit on their return for taxes paid to Georgia if the taxes were paid by the PTE at the entity level. Owners of an electing PTE are eligible to claim a credit on their return for taxes paid to other states in which the PTE has elected to pay tax at the entity level. They are also eligible to take an adjustment for income taxed in other states in which the PTE has elected to pay tax at the entity level. Lastly, electing PTEs cannot deduct foreign tax paid or accrued in calculating its net income subject to the PTE tax. Ga. Dept. of Rev., "HB 149 Pass-Through Entity Tax FAQ" (last accessed Jan. 27, 2023).
Oregon: Adopted amendments to Or. Admin. R. §150-317-0060 clarify that a federal capital loss deduction used to determine a taxpayer's federal taxable income must be added back to the taxpayer's taxable income or loss determined under ORS 317.010(10) before calculating the Oregon capital loss deduction using the provisions of this rule. Illustrative examples of this provision have been added to the amended rule. The amended rule took effect Jan. 1, 2023. Ore. Dept. of Rev., Or. Admin. R. §150-317-0060 (Ore. Bulletin, REV 29-2022, Jan. 2023).
Texas: In response to a question, the Texas Comptroller of Public Accounts (Comptroller) said that a taxpayer cannot amend a report for a year outside the statute of limitations to create a research and development (R&D) credit and the associated credit carryforward. Thus, if the tax year in which the taxpayer made eligible R&D expenditures is closed by the statute of limitations, the taxpayer is barred from creating a credit in that year. The Comptroller, however, is allowed to verify Qualified Research Expenses of a closed year in order to verify the credit available for carryforward in open periods. Tex. Comp. of Pub. Accts., STAR No. 202301007L (Jan 19, 2023).
Wisconsin: The Wisconsin Department of Revenue (WI DOR) explained that the state has not adopted the Tax Cuts and Jobs Act's changes to definition and deductibility of research and experimental (R&E) expenses that took effect for tax years beginning on or after Jan. 1, 2022. The WI DOR said the following options are available to taxpayers with R&E expenses: they can elect to (1) deduct the expenses in the year paid or incurred, (2) defer the expenses and deduct ratably over at least 60 months, or (3) treat the expenses as capital expenditures amortizable over a useful life, if determinable. Wis. Dept. of Rev., Wis. Tax Bulletin No. 220 (Jan. 2023).
SALES & USE
Alabama: In response to a ruling request, the Alabama Department of Revenue (AL DOR) said royalties a company paid to the copyright owner of medical billings codes the company licensed for use and incorporation into its software is not subject to the state's sales and use tax. The AL DOR reasoned that the licensed codes are not themselves classified as computer software, but rather it is copyrighted content in computer software that is tangible personal property. Ala. Dept. of Rev., Revenue Ruling 22-003 (June 27, 2022).
Colorado: The Colorado Department of Revenue (CO DOR) announced that it is convening a workgroup meeting to discuss the adoption of a new rule to implement HB 22-1118 regarding a buyer's claim for a refund of sales tax paid. HB 22-1118 imposes significant new penalties on refund claims for sales and use taxes paid by a purchaser to a vendor (Buyer's Claims). The penalties apply to Buyer's Claims filed with the CO DOR on or after July 1, 2022, and before July 1, 2026. (For more on HB 22-1118 see Tax Alert 2022-0746). The CO DOR said that the meeting will be held on Feb. 28, 2023, and it will focus on the data, information and documentation a purchaser must provide with a refund claim. Click here for information on how to participate in the meeting.
New Jersey: New law (A.4929) provides additional waivers regarding certain requirements for businesses participating in the Business Employment Incentives Program (BEIP), the Business Retention and Relocation Assistance Grant (BRAG) Program, the Grow New Jersey Assistance (GROW) Program and the Urban Transit Hub (HUB) Program. During the COVID-19 pandemic, the New Jersey Economic Development Authority (EDA) provided accommodations to businesses that had previously been approved for BEIP, BRAG, GROW and HUB programs. One accommodation waived the requirement that to be eligible for an award under one of these incentive programs full-time employees of such businesses had to spend at least 80% of their time at the qualified business facility. Law enacted in 2020 lowered this full-time employee work location requirement to 60%. A.4929 provides an additional temporary waiver. Before Dec. 31, 2023, a business that has entered into incentive agreement for one of these programs can elect to waive, for the period beginning July 1, 2022 through Dec. 31, 2023, the 60% full-time employee work location requirement, if such business satisfies the following criteria: (1) any full time employee employed by the business must spend at least 10% of the employee's time at the qualified business facility through the 2023 tax period, and (2) the business must pay 5% of the amount of tax credit it received for 2022 to the EDA.
The EDA also allowed business participating in the GROW program to terminate the program before Dec. 31, 2022, without the EDA recapturing previously distributed tax credits. A.4929 extends the recapture waiver, allowing business participating the GROW program to terminate its program agreement before Dec. 31, 2023, starting with the 2020 tax period for any subsequent tax period ending before Dec. 31, 2023. An executed termination agreement cannot be amended. A.4929 extends this waiver to businesses participating in the HUB program.
Lastly, A.4929 extends the period in which a business can suspend its obligation under a GROW tax credit to include the 2022 and 2023 tax periods (in addition to the 2020 and 2021 tax periods), and it extends this accommodation to businesses participating in the HUB program. The election to suspend obligations must be made in writing and it must be made before the tax credit is issued for the corresponding tax year. The suspension also extends the term of eligibility period by the same amount of time as the suspension. N.J. Laws 2022, ch. 134 (A.4929), signed by the governor on Dec. 22, 2022.
California: The California Franchise Tax Board (FTB) is proposing to amend Cal. Code of Reg., tit. 18, §25137(d) on the process for petitioning to use an alternative apportionment method. The proposed amendments would: (1) define key terms, such as "variance action", "ex-parte communication", and "petition"; (2) provide that records submitted to the FTB by the taxpayer or the FTB staff, and the FTB's decision would be open to public inspection, however, records of the FTB staff not submitted to the FTB would remain confidential; (3) set forth the deadlines for filing a petition to use an alternative apportionment method and for various notifications between the taxpayer and the FTB; (4) set forth deadlines related to the briefing process, as well as the brief requirements; and (5) set forth the procedures related to the hearing. The proposed amendments also would provide a rule on "ex-parte communications" (i.e., "any communication concerning a petition to or from the [FTB], itself, or [FTB] member staff, outside the presence of either FTB staff or the taxpayer without notice to all parties"). Under the proposed rule no ex-parte communication would be allowed for any substantive issue in the petition without notice and opportunity for all the parties to participate in the communication, except as provided by this regulation. This rule would apply beginning with notification and end when the FTB renders a decision. The ex-parte communication rule would not apply to certain communications between the FTB/FTB staff and the taxpayer or the taxpayer's representative. These changes, if adopted, would apply only as of the effective date of the amendments to Section 25137(d). Comments on the proposed amendments are due by March 7, 2023. Click here for information on how to submit comments.
PAYROLL & EMPLOYMENT TAX
Arizona: The Arizona Department of Revenue has announced that a revised Form A-4 applies effective Jan. 31, 2023, to take into account the new flat tax of 2.5%. Prior versions of the Form A-4 on file with the employer are not valid for withholding purposes after Jan. 31, 2023. If employees do not submit the 2023 Form A-4, employers are instructed to use the default withholding rate of 2.0%. For additional information on this development, see Tax Alert 2023-0154.
Oregon: Adopted amendments to Or. Admin. R. §150-317-1200 for Corporate Activity Tax (CAT) purposes modifies the commercial activity ratio to exclude prescription drug sales realized by eligible pharmacies. This modification implements a law change enacted in 2022. The amendments to the rule take effect Feb. 1, 2023. Or. Admin. R. §150-317-1200 (Ore. Bulletin, REV 1-2023, Feb. 2023).
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.