February 3, 2023
State and Local Tax Weekly for February 3
Ernst & Young's State and Local Tax Weekly newsletter for February 3 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.
New Jersey enacts low-carbon concrete tax incentives
On Jan. 30, 2023, New Jersey Governor Phil Murphy signed into law S.287 (P.L. 2023, c.4) to provide corporation business tax (CBT) and gross income tax (GIT) credits (1) to concrete producers that deliver low embodied carbon concrete or concrete that used carbon capture, utilization and storage technology and (2) for the costs of conducting environmental product declaration analysis of low carbon concrete.
Specifically, the credit is available to concrete producers that deliver low embodied carbon concrete or concrete that used carbon capture, utilization and storage technology under contract with a State procuring agency, or with a private contracting firm that has a contract with the State, if the concrete is used in a construction or improvement project that requires the purchase of at least 50 cubic yards of concrete. The concrete producer also must submit to the New Jersey Department of Environmental Protection (DEP) for review and approval a certified environmental product declaration that provides a global warming potential value for the delivered concrete. The amount of the tax credit is determined using a DEP developed formulae, which must provide that the amount of each credit is proportional to the reduction of the global warming potential value below the baseline. The amount of the credit is capped at 5% of the cost of concrete for low embodied carbon concrete delivered and at 3% for the cost of concrete delivered that incorporates carbon capture, utilization and storage technology. For concrete that is low embodied carbon concrete and incorporates carbon capture, utilization and storage technology, the taxpayer can qualify for both tax credits, up to 8% of its cost. The total amount of CBT and GIT credit a concrete producer can received is capped at $1 million annually, with the total amount of aggregate credit capped at $10 million a year. Credits are issued on a first-come, first-served basis. Unused credit can be carried forward seven years.
A credit is also available to taxpayers that produce concrete or a major component of concrete (e.g., cement or aggregate) for the cost of conducting an environmental product declaration analysis to determine the global warming potential of the concrete or concrete component produced at a facility the taxpayer owns or operates. The amount of credit cannot exceed the lesser of: (1) the full cost incurred for an environmental product declaration analysis of a single concrete, cement, aggregate or related production facility; or (2) $3,000. In a single privilege period, a taxpayer can claim this credit for up to eight production facilities it owns or operates. A taxpayer must submit a certificate of approval with the DEP. The total value of tax credits that can be approved by the DEP in the aggregate is capped at $10 million a year.
The law defines "low embodied carbon concrete" as "concrete that has been certified to embody lower carbon emissions, as measured by a global warming potential metric, than the baseline embodied carbon emissions of conventional concrete made with Portland cement. Low embodied carbon emissions may be achieved through any combination of: (1) higher energy efficiency at the level of the concrete or cement plant; (2) low carbon fuel substitution at the level of the concrete or cement plant; (3) local production of, and use of locally sourced material in, the concrete, resulting in reduced concrete delivery miles and reduced emissions from transportation; (4) the reduction of clinker content in the cement component of concrete, or the substitution of clinker content with lower carbon intensive alternative materials such as ground, granulated blast furnace slag, fly ash, or recycled ground-glass pozzolan; (5) the capture and storage of point source carbon dioxide emissions during the cement or concrete production process; or (6) the utilization and storage of carbon in concrete materials."
The term "carbon capture, utilization and storage technology" is defined as "technologies or methods to remove carbon dioxide generated by the concrete manufacturing process from the flue gas or the atmosphere, and to recycle the carbon dioxide either through utilization of the captured carbon dioxide in the concrete manufacturing process, or through safe and permanent storage of the captured carbon dioxide."
These credits are available for privilege periods beginning on or after Jan. 1, 2024.
Governor Budget Proposals/State-of-State
Florida: On Feb. 1, 2023, Governor Ron DeSantis announced his FY2023-24 "Framework for Freedom Budget", which includes "four permanent tax cuts and more than 10 temporary tax cuts … ." Permanent sales tax exemptions would be implemented for baby and toddler necessities, cribs and strollers, over-the-counter pet medication, and gas stoves. Temporary tax holidays would be provided for disaster preparedness items, tools and home improvement, natural gas, energy star appliances, certain household items and clothing, certain items for children (e.g., books, toys and athletic equipment), pet food, outdoor recreation items, and dental and oral hygiene products.
Mississippi: In his 2023 State of the State Address (Jan. 30, 2023), Governor Tax Reeves said Mississippi has a competitive advantage with its people and that the state "need[s] to add another competitive advantage with our tax code." The governor once again called for the elimination of Mississippi's income tax, noting that doing so would help the state compete with Florida, Tennessee and Texas. The governor is also calling for the establishment of a childcare tax credit. As described in the governor's FY 2024 Executive Budget (Nov. 15, 2022), the income tax rate immediately would be reduced to 4% on all taxable earned income, followed by an 1% reduction in each of the following four years.
New York: In her FY 2024 New York State Executive Budget (Feb. 1, 2023), the governor did not raise personal income taxes, but is calling for a three year extension of the temporary Art. 9-A franchise tax rates on business corporations through Tax Year 2026. The budget includes a provisions that would (1) allow the New York Department of Taxation and Finance the right to appeal New York Tax Appeals Tribunal decisions, (2) authorize the abatement of interest for taxpayers impacted by declared disasters, (3) allow for the abatement of penalties for underpayment of estimated tax by a corporation, (4) clarify the treatment of limited partners for the metropolitan commuter transportation mobility tax, (5) require a federal S corporation be treated as such for state tax purposes unless it is a qualified New York manufacturer and choose to be a New York corporation, and (6) extend for three years the reduced real estate transfer tax rates for qualifying REITs. Other tax changes would extend for one year the vending machine sales tax exemption and limit it to business enterprise program vendors. In regard to tax credit, the budget proposal would: (1) modify the investment tax credit for farmers by making it a refundable credit for five years; (2) extend the production and post-production film tax credit for five years and enhance the credit by increasing the funding cap and the credit base rate from 25% to 30%, provide an addition five percentage points credit for eligible relocating television series, among other proposed changes; (3) extend the New York City musical and theatrical production tax credit; (4) establish a New York City biotech credit; (5) create a two-year statewide business income tax credit for business that create or expand child care access for employees; and (6) extend for six months the 50% tax credit for the phase out of a certain grade of fuel. Lastly the governor's proposed budget would increase the cigarette tax by $1, to $5.35 per pack.
Ohio: In his 2023 State of the State address (Jan. 31, 2023), Governor Mike DeWine said that he wants to provide relief to new parents by repealing the state's sales tax on critical infant supplies (e.g., diapers, wipes, cribs, car seats, strollers, safety equipment) and by providing a $2,500 per child state tax deduction. The governor is also proposing the creation of a state low-income housing tax credit and a single-family housing tax credit.
Oregon: On Jan. 31, 2023, Governor Tina Kotek released her "Mission Focused" budget recommendations. In the full budget book, the governor said that general fund revenues for 2023-25 are expected to be $3 billion lower than the current biennium, with revenues falling by 11%. Tax and incentive related proposals include: the implementation of an Agricultural Worker Overtime Tax Credit program and modernization of the property tax valuation system.
Arizona: The Arizona Department of Revenue (AZ DOR) issued guidance on the state's elective pass-through entity (PTE) tax, which is available for tax years beginning from and after Dec. 31, 2021. The PTE income tax is assessed at a rate of 2.98% of income attributable to the partnership or S corporation's resident partners or shareholders and income derived from Arizona sources that are attributable to nonresident partners or shareholders. (For tax year 2023 the PTE tax rate will be reduced to 2.5%.) The PTE tax election must be made by the partnership or S corporation by the due date or extended due date for filing its Arizona return (Form 165 for partnerships and Form 120S for S corporations). Before making the election, the PTE must notify individual, estate and trust partners and shareholders, of its intent to make the election so that the partners and shareholders have at least 60 days after receiving the notice to opt out of the election. Partners and shareholders that opt out and those that are not individuals, estates or trusts cannot participate in the election. If an electing PTE's taxable income for the prior tax year exceeds $150,000, it must make four estimated tax payments. The guidance also includes responses to FAQs and illustrative examples. The FAQs address the following topics: (1) PTE election; (2) eligibility to make the PTE election; (3) partners and shareholders claiming the PTE credit; (4) PTE tax rates; (5) income subject to the PTE payment calculation; (6) estimated tax payments and electronic funds transfer; (7) carryforward of the PTE tax credit; (8) PTE tax credits and other tax credits; (9) PTE tax forms; and (10) penalties. Ariz. Dept. of Rev., Publication 713 "The Arizona Pass-Through Entity Election" (Feb. 3, 2023).
Maine: The Maine Revenue Services (MRS) issued updated individual income tax guidance on the credit for income tax paid to other taxing jurisdictions. For purposes of this credit, "other taxing jurisdiction" must be another state, a political subdivision of any state, the District of Columbia, or a political subdivision of a foreign country that is analogous to a state. The credit is limited to the portion of the individual's Maine income tax that relates to the income that is derived from sources in the other jurisdiction and taxed by that jurisdiction. Business tax paid to another jurisdiction will only be eligible for the credit if the business tax was imposed on the individual. Hence, if the other jurisdiction imposes tax on the business entity (e.g., partnership, S corporation, C corporation), the tax will not qualify for the credit for tax paid to other jurisdictions. When an individual is seeking the credit for tax paid to multiple other jurisdictions, the individual must complete a separate "Worksheet for Credit for Income Tax Paid to Other Jurisdictions" for each jurisdiction. Further, resident individuals claiming the credit must determine the income sourced to another state using the method a Maine nonresident calculates Maine-source income for purposes of Schedule NR or Schedule NRH. The guidance also explains when a part-year resident is eligible to claim both the credit for tax paid to other jurisdictions and the nonresident credit. Me. Rev. Serv., "Credit for Income Tax Paid to Other Taxing Jurisdictions" (updated Jan. 2023).
New Mexico: The New Mexico Taxation and Revenue Department (NM TRD) has posted to its website frequently asked questions (FAQs) on the state's elective pass-through entity (PTE) tax. To make the election to be taxed at the entity level, a PTE must file RPD-41367, PTW-D Pass-Through Entity Withholding Detail Report, and select the "Entity Level Tax" under Section D. The election to be taxed at the entity level must be made annually, and once it is made for the tax year, it cannot be revoked. Each partner in a tiered partnership makes its own, separate election. The election to be taxed at the entity level is binding on partners or members, with the electing PTE directly paying tax on all distributed net income (the FAQs lists four categories of income that are excluded from the PTE's taxable net income). The NM TRD further said that it "believes that deductions that are available to a partner or member should also be available to the PTE when it elects to pay tax directly, to the extent that the deduction relates to income earned by the PTE." The NM TRD "noted that while it believes this is the intent of the legislation, the statutory language is unclear as to the treatment of deductions with respect to direct tax paid by PTEs … ." Credits that are specific to a corporate or individual partner cannot be claimed by an electing PTE. Rather, the partner will have to claim the credit on either the personal income tax return or corporate return. The NM TRD indicated that it is currently developing rules to govern the use of net operating losses by PTEs and the carry-forward effects making the PTE tax election has on NOLs. The NM TRD also said that a PTE cannot directly pay income tax on income allocable to a corporate partner that would be included in the corporation's New Mexico corporate income tax return as part of its unitary business income. PTEs have a duty to make estimated tax payments. Tax payments made by a PTE for the benefit of a partner or member can be a payment for the PTE if the PTE makes the election when filing its return. N.M. Taxn. And Rev. Dept., FAQs About Direct Taxation of Pass-Through Entities (Jan. 27, 2023).
South Dakota: New law (SB 29) updates the South Dakota bank franchise tax date of conformity to the Internal Revenue Code to Jan. 1, 2023 (from Jan. 1, 2022). This change takes effect July 1, 2023. S.D. Laws 2023, SB 29, signed by the governor on Feb. 2, 2023.
SALES & USE
Texas: In response to a ruling request regarding the taxability of the retrieval of medical records, the Texas Comptroller of Public Accounts (Comptroller) determined that fees (1) covering charges the taxpayer incurs when requesting records from medical providers and (2) those for reviewing records for accuracy and completeness and to ensure they are provided in accordance with all applicable laws and regulations, are not subject to sales and use tax. The Comptroller explained that providing patient records and reviewing the records are not the provision of a taxable service. The third fee imposed for additional tasks requested by customers, such as optical character recognition, electronic bookmarking records and making additional copies, are taxable as data processing services and taxable sales of tangible personal property. Tex. Compt. of Pub Accts., STAR No. 202212003L (Jan. 30, 2023).
Illinois: The Illinois Department of Revenue adopted amendments to rule 86 Ill. Adm. Code 100.2135 to implement the Reimagining Electric Vehicles (REV) in Illinois Act. The REV Act creates new Illinois income tax credits for electric vehicle manufacturers, electric vehicle component suppliers and electric vehicle power unit suppliers for investment in qualified property that is placed in service at a REV Illinois project subject to an agreement between the taxpayer and Illinois Department of Commerce and Economic Opportunity. The credit, which is available for tax years beginning on or after Nov. 16, 2021, equals 0.5% of the basis of the qualified property (i.e., the basis used to compute the deprecation deduction for federal income tax purposes) and is allowed for the year in which the property was placed in service. The credit cannot reduce the taxpayer's liability below zero; excess credit can be carried forward for five years. The amended rule describes "qualified property", "used at the site of the REV Illinois project by the taxpayer", "placed in service" and when used property will qualify for the credit when it was previously used in Illinois. The amended rule provides guidance on how to claim the credit, and it include illustrative examples. The amended rule took effect Jan. 10, 2023. Ill. Dept. of Rev., Amended 86 Ill. Adm. Code 100.2135 (Ill. Reg. 2023, Vol. 47, Issue 4, Jan. 27, 2023).
Maine: The Maine Revenue Service's (MRS) updated its guidance on the business equipment tax exemption, which exempts eligible business equipment from property tax. Eligible business equipment is tangible personal property first placed in service in Maine after April 1, 2007, and first subject to assessment on or after April 1, 2008. Examples of eligible business equipment include repair or replacement parts, replacement equipment, accessions and accessories to other eligible business equipment, and inventory parts. To qualify for the exemption, eligible business equipment must be: (1) used exclusively for a business purpose by the business, for construction-in-progress or as inventory parts intended to be used exclusively for a business purpose by the business; and (2) subject to a depreciation allowance under the IRC or would be subject to such allowance for the appropriate property tax year if not already fully depreciated. Eligible business equipment also includes property attached to real estate if it is attached to further a specific business activity taking place in or on that estate (e.g., a specialized refrigeration unity); it does not include such equipment if it is used primarily to serve that building as a building or serve the land as land (e.g., an air conditioning system). The MRS guidance lists of persons excluded from the exemption and excluded property. In addition, the following do not qualify/are not eligible for the exemption: (1) property located at a retail sales facility and used primarily is a retail sales activity, and (2) property exempted from property tax under another area of law. The guidance also addresses the application process, assessor requirements, reimbursement, and audit and appeals. Me. Rev. Servs., Property Tax Div., Bulletin No. 28 "Business Equipment Tax Exemption" (Jan. 31, 2023) (replaced July 3, 2019 revision).
COMPLIANCE & REPORTING
Louisiana: The Louisiana Department of Revenue (LA DOR) has provided administrative filing relief for eligible partnerships. Starting with the 2021 tax year, partnerships are required to file an informational return, along with all required schedules and attachments, with the LA DOR using Form IT-565 Partnership Return of income. This filing requirement applies to partnership doing business in Louisiana or deriving any income from Louisiana sources. An exemption applies if one or more of the following applies: (1) the partnership's gross receipts were less than $250,000 and its total assets at the tax year end were less than $1 million; (2) the partnership is not required to file Form 1065 with the IRS; and (3) the partnership elected to be taxed as a corporation with the IRS and files Form CIFT-620 with the LA DOR. These exemptions, however, do not apply to a partnership required to attach Schedule 6922 Louisiana Composite Partnership to IT-565 and partnerships that have partners or related parties with an approved pass-through entity election on file with the LA DOR. La. Dept. of Rev., Revenue Information Bulletin No. 23-009 "Partnership Filing Requirements 2022 Tax Year" (Feb. 8, 2023).
California: The California Franchise Tax Board (CA FTB) issued guidance clarifying the reporting requirements for the analysis of a partner's capital account tax basis for Schedule K-1 (CA FTB Form 565) and Schedule K-1 (CA FTB Form 568) for tax years 2021, 2022 and thereafter. For tax years 2021 and 2022, the CA FTB will allow taxpayers filing Form 565 or Form 568 to report its partners' or members' capital accounts on the Schedules K-1 (either Form 565 or Form 568) using the tax basis method (1) as determined under federal law (reported on Schedule K-1 (IRS Form 1065)) or (2) as determined under California law. This option only applies to the capital account analysis on Schedules K-1 (Forms 565 or 568) for tax years 2021 and 2022. The CA FTB reiterated that taxpayers cannot use their federal tax basis in lieu of their California tax basis for any other purposes. Starting in 2023 and thereafter, the FTB will require taxpayers filing Form 565 or Form 568 to report its partners' or members' capital accounts on the Schedule K-1 (Form 565 or 568) to use the tax basis method as determined under California law. Cal. FTB, Notice 2023-01 Capital Account Analysis Tax Basis Methodology for Schedule K-1 (565) and Schedule K-1 (568) for Taxable Years 2021, 2022, and Subsequent Tax Years (Jan. 30, 2023).
PAYROLL & EMPLOYMENT TAX
Idaho: The Idaho State Tax Commission stated that the new flat tax of 5.8% on income over $2,500 ($5,000 for married filing joint) that took effect Jan. 1, 2023 under HB 1 will be reflected in its annual withholding formula revisions that are published before July 1 each year, delaying issuance of the updated withholding formula by six months. The Commission's Table for Percentage Computation Method of Withholding and the Table for Wage Bracket of Withholding, last updated June 15, 2022, reflect changes under HB 436, that, effective Jan. 1, 2022, lowered the state's top personal income tax rate from 6.5% to 6.0% and reduced the number of brackets from five to four. (See Tax Alert 2022-1096.) Accordingly, until the withholding formula is updated (by July 2023), the withholding rates that apply for January through June 2023 range from 1.0% to 6.0% (1%, 3%, 4.5% and 6%), rather than the flat 5.8% under HB 1 that applies effective Jan. 1, 2023. For additional information on this development, see Tax Alert 2023-0182.
Arkansas: New law (HB 1040) repeals the Arkansas Legal Insurance Act, which had imposed a tax on legal insurance premiums at a rate of 2.5% of direct written premium income in Arkansas. The law takes effect 90 days after the legislature adjourns sine die. Ark. Laws 2023, Act 32 (HB 1040), signed by the governor on Feb. 3, 2023.
Wednesday, March 1, 2023. Domestic tax quarterly webcast series: a focus on state tax matters (1:00-2:30 p.m. EST). For our first quarterly webcast in 2023, we welcome Douglas L. Lindholm, President and Executive Director of the Council On State Taxation, who will join us to discuss important state and local tax policy considerations that are emerging in 2023. Topics to be discussed include an update on the current state of the states, governors' budget initiatives, state and local tax legislative proposals, and the effects of current economic trends on state and local tax policy developments around the country. EY state and local tax professionals from California, Georgia, Illinois, New York, Texas and Washington will join in these discussions and highlight key state and local issues in their states. Register 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.