March 8, 2023
State and Local Tax Weekly for February 24
Ernst & Young's State and Local Tax Weekly newsletter for February 24 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.
Indiana enacts elective passthrough entity tax
On Feb. 22, 2023, Indiana Governor Eric Holcomb signed into law SB 2 (Pub. Law 1), establishing an elective passthrough entity (PTE) tax, which allows electing entities1 to have adjusted gross income (AGI) tax imposed at the entity level. The PTE tax is intended to enable Indiana taxpayers who are PTE owners to deduct, for federal income tax purposes, state and local taxes exceeding the annual $10,000 deduction limitation imposed by IRC § 164(b)(6) (the SALT Cap), consistent with IRS Notice 2020-75 (see Tax Alert 2020-2690).
Effective for tax years beginning on or after Jan. 1, 2022, a PTE may elect to be taxed at the entity level. (See new code provision Indiana Code (IC) § 6-3-2.1.) An authorized person of the electing entity makes the election annually. Once made, the election is irrevocable. For a tax year beginning in 2022, the PTE must make the election after March 31, 2023, and before Aug. 31, 2024. For tax years beginning after Dec. 31, 2022, a PTE must make the election by the earlier of the due date of the electing entity's return for the tax year, including extensions, or the date the electing entity files its return.
The PTE tax is imposed on the electing entity's AGI under IC Ch. 6-3-1 through 6-3-7, which is the aggregate of the direct owners' share of the electing entity's AGI. Nonresident direct owners' share of AGI is determined after allocation and apportionment under IC § 6-3-2-2, while all resident direct owners' share of AGI is determined either before or after allocation and apportionment under IC § 6-3-2-2. The same method must be used for all resident direct owners.
Entity owners2 remain liable for AGI tax under IC Ch. 6-3-1 through 6-3-7 on their share of the electing entity's AGI, while receiving a refundable credit equal to such tax. The PTE tax rate is the same as the rate imposed on individuals.3
PTEs must make estimated tax payments of the PTE tax in the same manner as corporations under IC § 6-3-4-4.1(c). A PTE, however, will not be required to make estimated tax payments for tax years ending on or before June 30, 2023. For tax years ending after June 30, 2023, and before Jan. 1, 2025, PTEs must make estimated tax payments; a penalty for underpaying estimated tax will not be imposed except to the extent the underpayment is less than 50% of the PTE tax for the year. For tax years ending after Dec. 31, 2024, a penalty will not be imposed to the extent the underpayment fails to equal or exceed the lesser of 80% of the PTE tax for the tax year or 100% of the PTE tax for the preceding tax year.
SB 2 allows prior estimated tax payments and other tax payments by the electing entity to be credited to the electing entity as tax paid under the elective PTE tax or as tax withheld under IC Ch. 6-3-4 or IC § 6-5.5-2-8.
Additionally, SB 2 amends IC § 6-3-3-3 to allow PTE taxes paid to other states to be credited against the amount of Indiana tax payable by PTE owners; to qualify, the other state PTE tax must be substantially similar to Indiana's PTE tax. A credit against Indiana tax payable by PTE owners also is allowed when the PTE pays tax to another state through withholding, a composite return or otherwise. This change is retroactively effective to Jan. 1, 2019.
For additional information on this development, see Tax Alert 2023-0409.
Arkansas: New law (HB 1026) prohibits local governments from enacting a local income tax. Under prior law, a local government could enact a local income tax with voter approval. The law takes effect 90 days after the Arkansas Legislature adjourns. Ark. Laws 2023, Act 96 (HB 1026), signed by the governor on Feb. 21, 2023.
Colorado: The Colorado Department of Revenue (CO DOR) is seeking public input on draft amendments to Rule 39-22-108 regarding the credit for taxes paid to another state. The CO DOR said the amendments are intended to "improve clarity" and provide guidance on: (1) credits allowed to partners or shareholders for taxes paid to another state by the partnership or the S corporation; (2) elements in calculating credit limitations such as income sourced to another state, gross Colorado tax, modified federal adjusted gross income; and (3) redetermination to correct the credit claimed. The credit is allowed for taxes imposed on income by another state, the District of Columbia or a US territory or possession, and only for the amount of tax imposed on income derived from sources in the other state. The credit is not allowed for any franchise tax or tax not imposed on income or for taxes accrued to any city, local jurisdiction, foreign country (or subdivision thereof). The proposed rule describes (1) the credit limitation for full and part-year residents, with examples, and (2) documentation a taxpayer claiming the credit would have to submit to the CO DOR. The CO DOR will accept written comments through April 7, 2023.
North Carolina: The North Carolina Department of Revenue (NC DOR) issued its 2022 Personal Taxes Bulletin, which provides "the administrative interpretation and application of North Carolina income tax laws relating to individuals, partnerships, S corporations, estates, trusts, and income tax withholding in effect at the time of publication." Topics covered in the bulletin include: (1) requirements for filing individual returns; (2) computation of North Carolina taxable income; (3) taxable income of nonresident and part-year residents; (4) tax considerations of partnerships, S corporations, estates and trusts; (5) tax credits; (6) withholding of income tax and paying the tax withheld; (7) reporting changes resulting from a federal determination; (8) appeals process and collection of tax; (9) penalties and interest; (10) estimated income tax and interest on underpayments of estimated income tax; (11) various adjustments such as net operating losses; (12) the elective pass-through entity tax; among other topics. The N.C. DOR noted that information in the bulletin supplements information in Administrative Rules but does not supersede those rules, and the "bulletin does not cover all provisions of the law." NC Dept. of Rev., 2022 Personal Taxes Bulletin (Feb. 2023).
SALES & USE
Colorado: The Colorado Department of Revenue adopted new Rule 43-4-218 "Retail Delivery Fees" and amendments to Rule 39-21-116.5 "Penalties for Officers or Members". New Rule 43-4-218 sets forth how the retail delivery fee is collected, administered and enforced. As of July 1, 2022, retailers doing business in the state that make retail deliveries have been required to add the retail delivery fee to the price of a retail delivery. The rule provides guidance on the following: (1) imposition and sourcing of the fee; (2) deliveries of tangible personal property not subject to or exempt from the retail delivery fee; (3) contractors and repair services, including time and materials contractor, lump-sum contractors, suppliers to contractors; (4) deliveries of marijuana; (5) registration; (6) collection and remittance of the retail delivery fee; (7) refunds and credits of the retail delivery fee; and (8) calculation and publication of the retail delivery fee. Rule 39-21-116.5 is amended to add the retail delivery fee and the daily vehicle rental fee to the list of fees the penalty for officers or members applies. Colo. Dept. of Rev., Rules 43-4-218 and 39-21-116.5 (adopted Feb. 14, 2023).
In addition, the Colorado Legislature is considering bills that would: (1) repeal the retail delivery fee (HB23-1166) or (2) modify the retail delivery fee by creating an exemption from the retail delivery fee by a business that has $500,000 or less or retail sales in the prior year or is new and it would allow a retailer to pay the fee on behalf of the purchaser, among other proposed changes (SB23-143).
North Carolina: In response to a private letter ruling request, the North Carolina Department of Revenue (NC DOR) determined that a company operating a non-public online platform that (1) enables participating entities to list their inventory of parts on the platform, and allows qualified customers with log-on credentials to view and order inventory, but (2) does not process payments for such items or make a payment processing service available, is not a marketplace facilitator because it does not meet both parts of the definition of a marketplace facilitator. The NC DOR explained that while the company lists or otherwise makes available for sale a marketplace seller's items through a marketplace it owned or operated, neither the company nor its affiliates process payments for such items. Rather an independent party processes qualified customers' payments and makes payment processing services available. N.C. Dept. of Rev., SUPLR 2022—0008 (Dec. 9, 2022).
Texas: The Texas Comptroller of Public Accounts (Comptroller) has updated the date on which taxpayers should begin collecting and remitting sales and use tax on their taxable credit rating services to July 1, 2023 (from April 1, 2023). Comptroller memo, STAR No. 202302004L (Feb. 17, 2023), provides guidance on the taxability of credit rating services for legal entities and debt obligations. The Comptroller determined that credit ratings of legal entities are subject to sales/use tax as a credit reporting service, while credit ratings of debt obligations are not taxable. Under Texas law, credit reporting services means the assembly or furnishing of credit history or information relating to any person. A person includes corporations, organizations, governments or governmental subdivisions or agencies, business trusts, estates, trusts, partnerships, associations and any other legal entities. The Comptroller found that credit ratings of legal entities relate to a person but those of a debt obligation do not. The Comptroller said that taxpayers should begin collecting and remitting sales and use tax on their taxable credit rating services starting July 1, 2023. Tex. Comp. of Pub. Accts., STAR No. 202302004L (Feb. 17, 2023) (supersedes STAR No. 202301006L (Jan. 17, 2023)).
Nebraska: The Nebraska Department of Revenue (NE DOR) issued an updated directive setting forth guidance for county assessors using comparable sales, including a list of the types of sales that should be analyzed in determining whether a "sale truly is a comparable sale." County assessors should look at recent sales of properties with similar value contributions for physical, functional and locational characteristics; sales with special conditions should be reviewed to determine their validity as a comparable sale. Sales with special conditions include: (1) those with special financing, adjoining property owners, tax considerations (e.g., IRC §1031), nonagricultural influences, recreational uses; (2) agricultural land parcels less than 40 acres; (3) sales between family members; and (4) those facing foreclosure, bankruptcy, condemnation or other legal actions. The guidance notes that all sales are considered arm's length unless sufficient information proves otherwise; the purchase price should be thoroughly evaluated to ensure the purchase price reflected market value; and sales with special conditions that have a substantial effect on the sales price are either excluded or adjusted to reflect market value. Neb. Dept. of Rev., Directive 23-1 "Comparable Sales" (Feb. 21, 2023) (supersedes Directive 16-3).
Wyoming: New law (SF 0063) allows the Wyoming Department of Revenue (WY DOR) to credit or waive any interest on severance tax as part of a settlement or for any other good cause. Further, the new law gives the WY DOR one year following the completion of a final audit findings or department review to issue any assessment or levy of sales and use tax, including penalties and interest, resulting from such audit or review. These provisions take effect July 1, 2023. Wyo. Laws 2023, ch. 33 (SF 0063), signed by the governor on Feb. 15, 2023.
PAYROLL & EMPLOYMENT TAX
Missouri: A Missouri Circuit Court recently held that employees who lived and worked outside of St. Louis are entitled to a refund of the St. Louis payroll earnings taxes withheld from their pay because the tax applies only to days of work physically performed within the city. The decision applies to earnings taxes withheld in 2020 and beyond. Boles v City of St. Louis, No. 2122-CC00713 (Mo Cir. Ct., 22nd Cir., Jan. 19, 2023). For more on this development, see Tax Alert 2023-0351.
South Dakota: New law (SB 71) expands fuels included in the State's International Fuel Tax Agreement collection to include motor fuel, ethyl alcohol, methyl alcohol, biodiesel, liquid natural gas, biodiesel blend, liquid petroleum gas, compressed natural gas, special fuel (which was already listed), or any combination of these fuels. This change takes effect July 1, 2023. S.D. Laws 2023, SB 71, signed by the governor on Feb. 22, 2023.
South Dakota: New law (SB 73), effective July 1, 2023, extends the fuel excise tax exclusion to self-propelled machinery, equipment and vehicles owned by a township. The exclusion from the fuel excise tax already applies to such items owned by the state and counties and municipalities in this state. S.D. Laws 2023, SB 73, signed by the governor on Feb. 22, 2023.
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 An "electing entity" is defined as "a [PTE] described in [IC §] 6-3-1-35 that is subject to Subchapter K or Subchapter S of the Internal Revenue Code" and makes the PTE tax election under IC Ch. 6-3-2.1.
2 An "entity owner" is defined as "the direct or indirect owners of an electing entity that are ultimately taxable on the entity's income under Subchapter K or Subchapter S of the Internal Revenue Code, except an owner described" in IC §§ 6-3-2.1-(4)(A) — (C).
3 Indiana's individual income tax rate is being phased down through 2029; see IC § 6-3-2-1(b) for the applicable tax rate.