March 1, 2023
State and Local Tax Weekly for February 17
Ernst & Young's State and Local Tax Weekly newsletter for February 17 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.
IRS and Treasury outline application process and other requirements for claiming IRC § 48C credits for qualifying advanced energy projects
In Notice 2023-18, the IRS and Treasury provided initial guidance establishing the IRC § 48C(e) program, which will eventually allocate $10 billion of credits for investments in eligible qualifying advanced energy projects, of which at least $4 billion will be for projects located in certain energy communities.
The first round of allocations will be approximately $4 billion, with at least $1.6 billion going to those communities. According to the Notice, the "goal of the [IRC §] 48C(e) program is to expand U.S. manufacturing capacity and quality jobs for clean energy technologies (including production and recycling), to reduce greenhouse gas emissions in the U.S. industrial sector, and to secure domestic supply chains for critical materials (including specified critical minerals) that serve as inputs for clean energy technology production."
The IRS said more guidance would be released by May 31, 2023, which is when the first round of applications is expected to open. Taxpayers must submit a concept paper on their project to the Department of Energy by July 31, 2023, to be eligible to submit a full application.
For additional information on this development, see Tax Alert 2023-0308.
Governor Budget Proposals/State-of-State
Maine: In her State of the Budget address (Feb. 14, 2023), Governor Janet Mills "declared that Maine's fiscal health is strong". The governor's budget does not raise taxes and maintains the state's rainy-day fund. The governor also directed the state's energy office to draft legislation that would require that 100% of the state's energy come from clean energy by 2040.
Texas: In his 2023 State of the State address (Feb. 16, 2023), Governor Greg Abbot said the state has the largest budget surplus in Texas history and that money should be returned to taxpayers in the form of a property tax cut. The governor, working with the legislature, has proposed using $15 billion to cut property taxes. The governor said that reducing the property tax is an "emergency item" this legislative session.
Wisconsin: On Feb. 12, 2023, Wisconsin Governor Tony Evers announced details of his next biennial budget. With Wisconsin enjoying a budget surplus of over $7 billion, he proposed cutting taxes by more than $1.2 billion over the biennium. The governor's proposal would repeal the personal property tax on businesses and reduce taxes for the middle class. Individuals making less than $100,000 and married couples or joint filers making at or below $150,000 would receive a 10% tax cut. His budget proposal also would:
For more on this development, see Tax Alert 2023-0340.
Idaho: New law (HB 21) updates the state's date of conformity to the Internal Revenue Code (IRC) to Jan. 1, 2023 (from Jan. 1, 2022), except that IRC § 85 is applied as in effect on Jan. 1, 2020. The law deletes a provision that had applied IRC § 461(l) as in effect on Jan. 1, 2020. These changes are retroactively effective to Jan. 1, 2023. Idaho Laws 2023, ch. 1 (HB 21), signed by the governor on Feb. 15, 2023.
Kentucky: On Feb. 17, 2023, Kentucky Governor Andy Beshear signed HB 1, which amends Ky. Rev. Stat. 141.020(2)(d) to codify the reduction of Kentucky's flat individual income tax rate from 5% to 4.5% for tax years beginning on or after Jan. 1, 2023, and to 4% for tax years beginning on or after Jan. 1, 2024. The flat corporate rate of 5% imposed in Ky. Rev. Stat. 141.040(2) remains unchanged. For more on this development, see Tax Alert 2023-0341.
New Jersey: The New Jersey Division of Taxation issued updated guidance on its credit for income tax paid to other jurisdictions. Tax Topic GIT-3B focuses on business/nonwage income and Tax Topic GIT-3W focuses on wage income. Topics covered by both publications include: (1) purpose the credit; (2) components of the credit calculation; (3) claiming the credit; (4) proportional credit limitation formula; (5) completing multiple Schedule NJ-COJs; (6) part-year residents; (7) income from Pennsylvania and New York; (8) changes due to another jurisdiction's audit; (9) what to do if audited by New Jersey; and (10) estimated tax payments. Additional topics addressed in GIT-3W include estates and trusts, S corporation income, income from a partnership/sole proprietorship. Both publications include numerous examples. N.J. Div. of Taxn., Tax Topic GIT-3B (updated Jan. 2023); Tax Topic GIT-3W (updated Jan. 2023).
Oregon: The Oregon Department of Revenue's (OR DOR) position on the treatment of the Oregon pass-through entity elective (PTE-E) tax paid and deducted on the federal pass-through entity (PTE) return, is that the amount paid or deducted is added back on the PTE member's personal income tax return, not the PTE-E return. The OR DOR explained that as originally enacted, the PTE was required to add back this amount, but a law enacted in 2022 (see Ore. Laws 2022, ch. 82 (SB 1524)), changed this provision to require the PTE member add back this amount. The OR DOR requested the Oregon Department of Justice (OR DOJ) review its position, and the OR DOJ agreed that the individual adds back the PTE-E tax on the individual's own personal income tax return. The OR DOJ also agreed with the OR DOR that filing a PTE-E tax does not alleviate the PTE from filing other tax returns that may be due. Ore. Dept. of Rev., "Revenue issues determination for the treatment of the PTE-E addition" (Feb. 15, 2023).
West Virginia: New law (HB 2777) updates West Virginia's IRC conformity date for corporate net income tax purposes to federal changes made after Dec. 31, 2021 but prior to Jan. 1, 2023 (a change from the IRC conformity date applied to federal changes made after Dec. 31, 2020 but prior to Jan. 1, 2022). No amendment to the IRC made on or after Jan. 1, 2023, will be given any effect. This change is effective retroactive to the extent allowable under federal income tax law. W.Va. Laws 2023, HB 2777, signed by the governor on Feb. 14, 2023.
West Virginia: New law (HB 2776) for personal income tax purposes, updates the state's IRC conformity date to federal changes made after Dec. 31, 2021 but prior to Jan. 1, 2023 (from the federal changes the IRC conformity date applied to federal changes made after March 12, 2021 but prior to Jan. 1, 2022). No amendments to the IRC made on or after Jan. 1, 2023 will be given any effect. W.Va. Laws 2023, HB 2776, signed by the governor on Feb. 14, 2023.
SALES & USE
District of Columbia: The District of Columbia Office of Tax and Revenue issued a notice explaining the temporary increase in the rate of the additional sales and use tax imposed on gross receipts for transient lodgings or accommodations. Effective for the period beginning April 1, 2023 to March 31, 2027 the rate of the additional tax is increased to 1.3% (from 0.3%). Thus, for this time period, the total sales and use tax rate on gross receipts for transient lodgings or accommodations is 15.95% (from 14.95%). For bookings made before April 1, 2023, but not fully paid by that date, the increased rate applies to payments received on or after April 1, 2023. The rate remains 14.95% for bookings made and fully paid before April 1, 2023, even when the transient accommodations is furnished on or after April 1, 2023. D.C. OTR, Tax Notice 2023-01 (Feb. 13, 2023).
Texas: In response to a ruling request, the Texas Comptroller of Public Accounts (Comptroller) determined that sales and use tax applies to a company's lump sum charges for remote services, on-site services, and add-on services. Charges for the company's remote services, which includes the sale and provision of audiovisual and videoconferencing equipment services such as Voice over Internet Protocol and other electronic transmission, are taxable as they meet the definition of telecommunications services. Further, equipment leased, rented or sold by the company is taxed as part of the telecommunications service if it is not separately invoiced (separately invoiced equipment, however, is taxable as the sale of tangible personal property (TPP)). Software provide as part of the telecommunication services is taxable TPP. The company's charges for on-site services that include the repair, maintenance, creation and restoration of software is taxable when performed by the person that sold or provided the software. Tax is due on all charges for labor or services to install, remodel, repair, maintain or restore computer hardware located in Texas, regardless of who sold the hardware. When a lump-sum charge includes both taxable and nontaxable services, the full amount of the charge is taxable. Regarding the charges for add-on services, the Comptroller determined that they are taxable as the repair, remodel, maintenance and restoration of TPP because the company could not confirm whether it did, or did not, provide the computer program involved in the service to implement, configure and manage a communication infrastructure. The Comptroller noted that the "[r]ecords must support any claim to an exclusion of sales tax … ." Tex. Comp. of Pub. Accts., STAR No. 202301018L (Jan. 3, 2023).
Federal: In Notice 2023-17 (Notice), the IRS establishes the Low-Income Communities Bonus Credit Program (program), which increases the investment tax credits (ITCs) under IRC § 48(e) for certain solar and wind facilities placed in service in low-income communities. Taxpayers can obtain increased credits by applying and being granted a portion of the annual capacity limitation (set at 1.8 gigawatts per year for calendar years 2023 and 2024), which will be divided among four categories of facilities. The Notice gives initial information on the program, application process and criteria for receiving an allocation. Further guidance will be issued on the specific application procedures. For additional information on this development, see Tax Alert 2023-0333.
District of Columbia: The District of Columbia Office of Tax and Revenue issued guidance on the transfer requirements for the District's low-income housing tax credit,1 which is available for qualified projects located within the District. The owner of a qualified project may receive a District low-income housing tax credit in an amount equal up to 25% of the value of the federal credit received with respect to the project. The credit can be transferred, sold or assigned in full or in part. Under District law, in order for the transfer, sale, assignment or allocation to be valid, the transferee must certify to the District's Chief Financial Officer (CFO) that the qualifying owner received consideration in an amount that exceeds the lesser of $0.70 per $1.00 or 80% of the per dollar sale price for the analogous federal credit. In addition, the value received by the owner from such transfer, sale, assignment or allocation has been used to ensure financial feasibility of the qualified project. If the credit transfer is made to an unrelated party, the owner must submit to the CFO and the Commissioner a statement that the recipient of the transfer, sale, assignment or allocation is eligible. The owner also must provide the appropriate information to the CFO and the Commissioner so that they can properly allocate the credit. If the eligibility requirements are met and the transfer, sale, assignment or allocation is made for an appropriate price, the subsequent holder will be able to utilize the credit. The District's guidance includes an illustrative example. D.C. OTR, Tax Notice 2023-02 (Feb. 14, 2023).
Nevada: The Nevada Office of Economic Development (OED) has adopted amendments to regulations NAC 360.830 - 360.865 relating to transferable tax credits for film and other productions. A new section of the regulations set forth the manner for calculating the costs of tangible personal property that constitute a qualified direct production expenditure. Amendments to the regulations also (1) revise the application requirements for obtaining a certificate of eligibility; (2) modify various deadlines for providing notices related to a certificate of eligibility, submitting an audit of the qualified production, determining whether to certify the audit of the qualified production and making a final determination; (3) modify the requirements for calculating the amount of qualified expenditures and production costs that may serve as a basis for transferable credits; and (4) modify the requirements for wages and salaries that may serve as a basis for transferrable tax credits. The revised regulations took effect Feb. 13, 2023. Nev. Off. Econ. Dev., R062-22A (Dec. 2022 register).
COMPLIANCE & REPORTING
Puerto Rico: In Circular Letter (CL) 23-03, the Puerto Rico Treasury Department issued guidance on making estimated tax payments for companies that have elected, as provided under Act 52-2022, to be taxed at a 10.5% tax rate on their industrial development income from sales of goods and services instead of the 4% excise tax on foreign corporations. Under CL 23-03, companies that have elected the 10.5% tax rate are not subject to the due dates for regular estimated tax payments in Section 1061.23(d) of the Puerto Rico Internal Revenue Code of 2011, as amended. Rather, they are subject to the provisions of Section 1061.23(j)(2) for the transition period. Therefore, their first estimated tax payment is due on or before the 15th day of the month following the month in which the transition period begins, with the remaining estimated tax payments due each month thereafter until the end of the transition period. The transition period begins on the first day of the first month in which the company is subject to the new regime. The transition period ends on the last day of the 11th month after the first month. For additional information on this development, see Tax Alert 2023-0279.
PAYROLL & EMPLOYMENT TAX
Iowa: Governor Reynolds and Iowa Workforce Development (IWD) announced that the state unemployment insurance (SUI) tax rate schedule dropped to Tax Rate Table 8, the lowest rate level in 24 years and the lowest SUI rates currently allowed under Iowa law. For 2023, the SUI tax rates range from 0% to 7.0%, a decrease from the 2022 rates of 0% to 7.5% from Tax Rate Table 7. For 2023, new employers are subject to a rate of not less than 1.00%. New construction employers are subject to the highest rate of 7.0% for 2022. For additional information on this development, see Tax Alert 2023-0285.
Oregon: The Oregon Department of Consumer and Business Services announced that the Workers' Benefit Fund (WBF) assessment is 2.2 cents per hour worked in 2023, unchanged from 2022. The 2.2 cents-per-hour rate is the employer and worker rate combined. Employers contribute not less than half of the hourly assessment (1.1 cents per hour) and deduct not more than half from worker's wages. In no case may an employer deduct more than half of the assessment from workers' wages, and, in all cases, the employer is responsible for payment of the full 2.2 cents-per-hour assessment. For additional information on this development, see Tax Alert 2023-0272.
VALUE ADDED TAX
International — Kenya: The Value Added Tax (VAT) treatment on exported services from Kenya has been a contentious topic that has been the subject of numerous disputes between the Kenya Revenue Authority (KRA) and taxpayers engaged in cross-border business. In a recent ruling delivered on Jan. 31, 2023, the High Court of Kenya dismissed consolidated petitions challenging the imposition of VAT on exported services under the Finance Act 2022. For more on this development, see Tax Alert 2023-0271.
Friday, March 10, 2023. State & local tax developments in the real estate industry: Updates on state pass-through entity taxes and budget legislation (1:00-2:00 p.m. ET). Three months into 2023, the US economy continues to take center stage, with questions about how sectors such as real estate, hospitality, and construction may be affected. Meanwhile, in their ongoing budget sessions, some states are proposing state and local tax (SALT) revenue raisers while others are proposing tax cuts, depending on the jurisdiction. At the federal level, policymakers continue to debate the SALT deduction cap for US federal income tax purposes. At the same time, states continue to rapidly enact new pass-through entity (PTE) taxes to address the SALT cap. State tax measures targeting high-net-worth individuals and corporate profits are also gaining steam with coordinated efforts by some state lawmakers. Join our panel of experienced SALT professionals for a discussion of these topics, including: (1) major state budget legislative tax proposals, (2) elective state PTE tax updates, (3) 2022 ballot initiatives - what passed and what did not, and (4) other recent SALT legislative activity affecting the real estate sector. Register.
Tuesday, March 14, 2023. Latest clean-energy and manufacturing incentives and grants from the US and Europe: IRA (including Section 48C), IIJA and EU (1 pm ET). Now that companies have begun claiming tax credits and grants under the Inflation Reduction Act of 2022 (IRA) and the Investment, Infrastructure and Jobs Act (IIJA), many have questions about the incentives' requirements, as well as their applicability, timing and disbursement process (which may be time-sensitive). The European Union's (EU's) recent release of its Green Deal Industrial Plan, which includes initial details to better match US green subsidies for manufacturing, raises similar questions. Join our panelists for an in-depth discussion of these incentives. Topics to be discussed include: (1) Notice 2023-18, which provides updated guidance and timing on the Section 48C Advanced Manufacturing Tax Credit; (2) how taxpayers claiming IRA tax credits can use technology to secure a 30% bonus credit (instead of the 6% base credit) by paying laborers prevailing wages and utilizing apprentices; (3) additional discussion of the benefits of Energy communities and other designations; (4) updated guidance and timing for IIJA incentives; (5) updated guidance under Section 45X and lessons learned; (6) guidance on Section 48 and Section 45 clean energy credits and lessons learned; and (7) potential benefits of the Green Deal Industrial Plan for European manufacturers. Register.
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 D.C. Code §47-4801 et seq.