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Ernst & Young's State and Local Tax Weekly newsletter for March 17 and 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.

TOP STORIES

Kentucky law updates IRC conformity, adopts an elective passthrough entity tax, and makes sales/use tax changes

On March 24, 2023, Kentucky Governor Andy Beshear signed into law HB 360, which includes a number of tax-related changes, which are discussed below. HB 360 is designated as emergency legislation and, therefore, it took effect upon the governor's signature.

Internal Revenue Code conformity: HB 360 updates Kentucky's IRC conformity date to Dec. 31, 2022, including amendments extending provisions that would otherwise terminate on Dec. 31, 2022, but excluding amendments made after that date. This change is effective for tax years beginning on or after Jan. 1, 2023.

Elective pass-through entity (PTE) tax: HB 360 allows partnerships and other PTEs to elect to pay Kentucky income tax at the entity level. The election is available for tax years beginning on or after Jan. 1, 2022. The election must be made by the 15th day of the 4th month after the close of the tax year, or the 15th day of the 10th month after the close of the tax year if filing under an extension. The election can be made only upon consent of all partners, members or shareholders (collectively, investors) holding more than 50% ownership in the PTE. If made, the election is binding on all investors. PTEs must make the election on a form to be prescribed by the Kentucky Department of Revenue (KY DOR).

Individual investors in an electing PTE will be allowed a nonrefundable PTE tax credit equal to 100% of the tax paid by the PTE "on behalf of" the investor and based on the pro rata share of the investor's income from the PTE. Conforming changes were made to Ky. Rev. Stat. 141.070(4) and 141.206(3)(c) to allow the individual credit and to specify that an electing PTE is subject to income tax at the entity level.

Sales/use tax changes: Legislation enacted in 2022 (HB 8) imposed sales and use tax on an additional 34 services. (See Tax Alert 2022-0564.) Many of these services were not defined in HB 8, requiring the KY DOR to issue guidance on many of these services through frequently updated FAQs. HB 360, applicable retroactively to Jan. 1, 2023, clarifies the definitions of the following services made taxable in HB 8:

• Cosmetic surgery services: Amends Ky. Rev. Stat. 139.010(5)(b) to provide that otherwise taxable "cosmetic surgery services" do not include services "medically necessary to reconstruct or correct dysfunctional areas of the face" due to birth disorders, trauma, burns or disease.
• Executive employee recruitment services: Adds Ky. Rev. Stat. 139.010(14)(a) and (b) to define taxable "executive employee recruitment services" to mean services provided by a person to locate potential candidates to fill open senior-level management positions, including making a detailed list of client requirements, researching and identifying potential candidates, performing pre-screening interviews, and providing contract and salary negotiations.
• Extended warranty services: Renumbers as Ky. Rev. Stat. 139.010(15)(a) (formerly (14)(a)) and expands "extended warranty services" to include contracts to repair, replace, support or maintain prewritten computer software access services.
• Lobbying services: Adds Ky. Rev. Stat. 139.010(21) to define "taxable lobbying services" as the act of promoting or securing passage of legislation or an attempt to influence or sway a public official or other public servant to a desired action, including the support of or opposition to a project or the passage, amendment, defeat, approval or veto of any legislation, regulation, rule or ordinance.
• Storage: Amends Ky. Rev. Stat. 139.010(45) (formerly (44)) to expand the definition of "storage" to include the keeping or retention in Kentucky of prewritten computer access services.
• Telemarketing services: Amends Ky. Rev. Stat. 139.010(48) (formerly (47)) to expand the definition of "telemarketing services" to include the use of text messages or social media to (1) promote products or services, take orders, or provide information or assistance regarding the products or services or (2) solicit contributions.
• Use: Renumbers as Ky. Rev. Stat. 139.010(50) (formerly (49)) and adds new subsection (b)(2) to specify that a "use" does not include the keeping, retaining or exercise of any right/power over prewritten computer services purchased for use outside of Kentucky and transferred electronically outside Kentucky for use solely outside Kentucky.

Applicable retroactively to Jan. 1, 2023, HB 360 also amends the following taxability and exemption provisions:

• Security system monitoring services: Amends Ky. Rev. Stat. 139.200(2)(aa) (formerly (ab)) to specify that otherwise taxable residential and nonresidential security system monitoring services do not include separately stated onsite security guard services.
• Laboratory services: Amends Ky. Rev. Stat. 139.200(2)(aq) (formerly (ar)) to specify that otherwise taxable laboratory services do not include services required by (1) a federal, state, or local statute, (2) a regulation, (3) a court order, or (4) another government-related rule.
• Sewer services, water and fuel: Amends Ky. Rev. Stat. 139.470(7)(d) to specify that an exemption from otherwise taxable sewer services, water and fuel shall apply to those items billed to an owner or operator of a multi-unit residential facility or mobile home and recreational vehicle park if the owner or operator declares that the sewer services, water and fuel are purchased for residents for such residents' use.
• Building materials, fixtures, or supplies: Adds Ky. Rev. Stat. 139.480(34) to provide an exemption for building materials, fixtures or supplies purchased by a construction contractor if fulfilled by a construction contract for a sewer or water project with specified governmental agencies.
• Short-term rental space: Adds Ky. Rev. Stat. 139.480(35) to provide an exemption for the rental of space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties or other short-term social events, if the tax otherwise imposed is paid by the primary lessee to the lessor. This exemption applies to such rentals made on or after Feb. 25, 2022.
• Prewritten computer software access services: Adds Ky. Rev. Stat. 139.480(36) to provide an exemption for prewritten computer software access services sold to, or purchased by, a retailer that develops prewritten computer software for print technology and uses and sells prewritten computer software access services for print technology.
• Concessions: Adds Ky. Rev. Stat. 139.498(1)(b) to provide that Kentucky sales and use taxes do not apply to (1) concessions for leisure, recreational or athletic fundraising events or (2) the sale of leisure, recreational or athletic services made by nonprofit civic or other nonprofit organizations that operate fundraising events solely with volunteers.

Finally, HB 360 strikes former KRS 139.200(2)(r) and 139.010(22), which imposed tax on, and defined, "marketing services," making such services nontaxable.

Restaurant Revitalization Grants — individuals and corporations: Under HB 360, Restaurant Revitalization Grants, as well as related deductions and tax attributes, will receive the same treatment for state income tax purposes as they do for federal individual and corporate income tax purposes. This change applies retroactively to Jan. 1, 2020 but before March 11, 2023.

Conditions for future individual income tax rate reductions: Recently enacted HB 1 lowered the state individual income tax rate to 4.5%, retroactive to Jan. 1, 2023, and to 4.0%, effective Jan. 1, 2024. HB 360 amends Ky. Rev. Stat. 141.020 to adopt a process requiring the Office of State Budget Director to evaluate whether additional rate reductions may be adopted for tax years beginning on or after Jan. 1, 2025.

For more on this development, see Tax Alert 2023-0571.

INCOME/FRANCHISE

Federal: The Biden Administration's proposed FY2024 budget, released March 9, 2023 (Budget), includes numerous tax changes that would affect businesses and high-net-worth individuals (see Tax Alerts 2023-0532 and 2023-0509). Most of the proposals in this year's Budget appeared in prior budget proposals or proposed legislation. While the prospects for enactment are dim this year, taxpayers should familiarize themselves with these proposals as they could appear as revenue offsets in later federal legislation, which could affect corporate and individual income taxes imposed by state governments. For more on this development, see Tax Alert 2023-0587.

Colorado: In response to a ruling request, the Colorado Department of Revenue (CO DOR) said gross receipts from a real estate rental company's sales of Colorado real estate are not included in its receipts for purposes of apportioning income under Colo. Rev. Stat. § 39-22-303.6(4)(a), because the property sales were not from activity in the regular course of the company's real estate rental business. The CO DOR explained that rents received are transactions in the regular course of the company's trade or business and that the company received rents on a frequent, recurring basis. Sales of real property, however, were infrequent. While the sales of property were not a part of the regular course of the company's trade or business, the sold properties were related to the operation of the company's trade or business. Thus, the income arising from the sale of properties is apportionable income. Nevertheless, the amount received from the sales does not fall within the meaning of "receipts" under Colo. Rev. Stat. § 39-22-303.6(1)(d) as the sales were not from activity in the regular course of the company's business. The CO DOR noted that this ruling cannot be relied upon by any taxpayer other than the taxpayer to whom the ruling was made. Colo. Dept. of Rev., PLR 23-002 (March 13, 2023).

Montana: New law (SB 124) moves Montana from a double-weighted sales factor apportionment formula to a single sales factor apportionment formula for tax years beginning after Dec. 31, 2024. The legislature had considered immediate adoption of the single sales factor but decided to delay implementation of this change. Mont. Laws 2023, ch. 51 (SB 124), signed by the governor on March 13, 2023. (See Tax Alert 2023-0436.)

Montana: New law (SB 121) reduces the top individual income tax rate and increases the state's earned income tax credit. In 2021, the legislature enacted SB 399, which reduced the number of income tax brackets to two starting in 2024. Under SB 399, a 4.7% tax rate applies to $20,500 or less of taxable income for single filers ($41,000 for married couples filing jointly), while a 6.5% tax rate would have applied to taxable income above $20,500 for single filers ($41,000 for married couples filing jointly). SB 121, however, reduces the rate on the top bracket from 6.5% to 5.9% starting in 2024. In addition, starting in 2024, SB 121 increases Montana's earned income tax credit from 3% of the federal credit to 10% of the federal credit. Mont. Laws 2023, ch. 50 (SB 121), signed by the governor on March 13, 2023. (See Tax Alert 2023-0436.)

Montana: New law (HB 221) replaces the state's 30% net long-term capital gains deduction, which was set to take effect in 2024, with a two-tier tax rate system. Rates of 3.0% and 4.1% apply to net-long term capital gains. The 3.0% rate applies as follows: (1) single, married filing separately and estates and trust subject to tax under the IRC with net-long term capital gains of $20,500 or less; (2) head of household with net-long term capital gains of $30,750 or less; and (3) married filing jointly and surviving spouses with net-long term capital gains of $41,000 or less. The 4.1% rate applies as follows: (1) single, married filing separately and estates and trust subject to tax under the IRC with net-long term capital gains above $20,500; (2) head of household with net-long term capital gains above $30,750; and (3) married filing jointly and surviving spouses with net-long term capital gains above $41,000. This change takes effect Jan. 1, 2024. Mont. Laws 2023, ch. 46 (HB 221), signed by the governor on March 13, 2023. (See Tax Alert 2023-0436.)

Ohio: New law (SB 10) updates Ohio's Internal Revenue Code (IRC) conformity to March 15, 2023. SB 10 also updates a provision allowing a taxpayer, whose tax year ends after Feb. 17, 2022, to irrevocably elect to incorporate IRC provisions that were in effect for that tax year. The election allows taxpayers to incorporate provisions from two federal laws enacted in 2022. The first is the Inflation Reduction Act of 2022 (P.L. 117-169), which (1) extended the limitations on excess business losses and farm losses from Jan. 1, 2027 to Jan. 1, 2029, and (2) increased the maximum deduction per square foot for energy-efficient commercial buildings. The second is the Consolidated Appropriations Act, 2023 (P.L.117-328), which made the following changes to the tax treatment of certain retirement distributions and contributions: (1) authorized tax-free rollovers of up to $35,000 from 529 education savings plans to Roth IRAs, (2) authorized up to $1,000 in withdrawals from tax-preferred retirement plans for certain emergency expenses without triggering the standard 10% penalty, (3) required automatic enrollment and yearly escalation of employee contributions into retirement plans started after Dec. 29, 2022, and (4) increased the age of the required beginning date for mandatory retirement account distributions from 72 to 73 in 2023, and then to 75 in 2033. Taxpayers can make this election by filing the Ohio income tax return, which incorporates those IRC provisions. Ohio Laws 2023, SB 10, signed by the governor on March 15, 2023. For additional information on this development, see Tax Alert 2023-0435.

Utah: New law (HB 54) reduces the corporate and individual income tax rates to 4.65% (from 4.85%), effective retroactively for tax years beginning on or after Jan. 1, 2023. Utah laws 2023, HB 54, signed by the governor on March 22, 2023.

Virginia: New law (SB 1346 and HB 1978) allows a retail group of affiliated corporations filing on a consolidated basis to elect to apportion taxable income of all members of such group using a single sales factor apportionment formula. The election is only valid for tax years in which 80% or more of the sales of such affiliated group after consolidation and eliminations is derived from activities of a retail company. Once the election is made, it cannot be changed without the permission of the Virginia Department of Taxation. The election can be made in tax years beginning on or after Jan. 1, 2023. Va. Laws 2023, ch. 39 (SB 1346) and ch. 38 (HB 1978), signed by the governor on March 17, 2023.

SALES & USE

North Dakota: New law (SB 2141) modifies the definition of purchase price for motor vehicle excise tax purposes to provide that the purchase price excludes any charges or fees for auction services (this is in addition to the already existing exclusion for the amount of a manufacturers incentive or discount that reduces the amount paid by the purchasers to the seller at the time of purchase). This change is effective for taxable events occurring after June 30, 2023. N.D. Laws 2023, SB 2141, signed by the governor on March 13, 2023.

South Dakota: New law (HB 1137) temporarily reduces the State's sales and use tax rate from 4.5% to 4.2%, effective July 1, 2023. The reduced rate applies to: (1) sales of tangible personal property of goods, wares or merchandise; (2) gross receipts from engaging or continuing in various businesses and services; (3) gross receipts of any person engaging in oil and gas field services; (4) gross receipts from sales, furnishing or services of gas, electricity and water; (5) sales and uses of intrastate, interstate or international telecommunications services that originate or terminate in the state and billed or charged to a service address in this state; (6) sales and use of mobile telecommunications services; (7) tickets or admission to places of amusement and athletic contests or events; (8) transportation of passengers; (9) services used in the State; (10) use of rented tangible personal property and products transferred electronically; (11) use of any transportation of passengers; (12) use of ancillary services; (13) sale, resale or lease of farm machinery, attachment units and irrigation equipment used exclusively for agricultural purposes; (14) operation of any mechanical or electronic amusement device; and (15) renting rental vehicles. The rate reduction provisions are repealed on June 30, 2027; after the repeal, the sales and use tax rate will revert back to 4.5%. S.D. Laws 2023, HB 1137, signed by the governor on March 21, 2023.

Utah: New law (HB 54) will eliminate the State sales and use tax on amounts paid or charged for food and food ingredients if a proposal to amend the Utah Constitution — Income in S.J.R. 10 passes the Legislature and is approved by a majority of voters in the next regular general election. If S.J.R. 10 is approved, the elimination of sales and use tax on food and food ingredients will take effect on Jan. 1, 2025. Utah laws 2023, HB 54, signed by the governor on March 22, 2023.

Utah: New law (SB 14) imposes sales and use tax on sales of leased tangible personal property from the lessor to the lessee made in Utah. The law also modifies the sales and use tax exemption for vehicles to add that the exemption applies if the sale is not from the vehicle's lessor to the vehicle's lessee. These changes take effect July 1, 2023. Utah Laws 2023, SB 14, signed by the governor on March 14, 2023.

Utah: New law (SB 121) establishes provisions relating to the administration and taxation of car-sharing business platforms. Sales and use tax is imposed on car sharing; however, when the shared vehicle owner certifies to the commission that the shared vehicle is an individual-owned shared vehicle, sales and use tax does not apply to car sharing, a car-sharing program, a shared vehicle driver or a shared vehicle owner. This exception also applies to certified individual-owned shared vehicles that are shared through a car-sharing program that also shares non-certified vehicles. If a car-sharing program relies in good faith on a shared vehicle owner's representation that the shared vehicle is an individual-owned shared vehicle certified with the commission, the car-sharing program is not liable for any tax, penalty, fee or other sanction imposed on the shared vehicle owner. Provisions of SB 121 also prohibit counties, municipalities and other political subdivisions from imposing a tax, fee or charge on the gross proceeds or gross income of a car sharing transaction that the jurisdiction does not impose on other transactions involving the rental or a motor vehicle without a driver. These changes take effect July 1, 2023. The following changes have retrospective operation to Jan. 1, 2019 for a transaction that is the subject of an appeal pending on or filed after Jan. 1, 2023: (1) the definition of "short-term rental" is amended to exclude car sharing; and (2) beginning on July 1, 2023, if (i) a county legislative body or any county imposes a tax on short-term motor vehicle rentals or (ii) the motor vehicle rental tax is imposed, a tax at the same rate applies to car sharing, except for (a) car sharing for the purpose of temporarily replacing a person's vehicle while it is being repaired under a repair or insurance agreement, and (b) car sharing for more than 30 days. Utah Laws 2023, SB 121, signed by the governor on March 17, 2023.

Utah: New law (SB 82) directs the State Tax Commission to require a seller to renew an exemption certificate if more than 12 months have passed between transactions between a seller or certified service provider and purchaser. This change is retroactively operational to Jan. 1, 2023. Utah Laws 2023, SB 82, signed by the governor on March 17, 2023.

BUSINESS INCENTIVES

New York: The New York Department of Taxation and Finance (NY DOTF) issued guidance on recent amendments to the state's brownfield redevelopment tax credit. The credit is available for sites accepted into Brownfield Cleanup Program before Jan. 1, 2033; a certificate of completion must be received before Jan. 1, 2037. The NY DOTF explained that the period to claim the site preparation credit component was extended to seven taxable years after the certificate of completion was issued for qualified sites issued a certificate of completion on or after July 1, 2015, but on or before June 24, 2021 (the exception period). Site preparation costs for a site issued a notice of acceptance during the exception period can include all costs paid or incurred within 84 months after the last day of the tax year in which the certificate of completion is issued. Thus, only sites that are both accepted into the Brownfield Cleanup Program and that receive a certificate of completion within the exception period can include such costs within the 84-month period and claim the credit for seven years after the issuance of a certificate of completion. The on-site groundwater remediation credit component also has been extended to seven tax years after the certificate of completion was issued for qualified sites issued a certificate of completion during the exception period. The tangible property credit component was extended to 180 months after the certificate of completion was issued for qualified sites issued a certificate of completion on or after March 20, 2010, but before Dec. 31, 20215. Further, beginning in 2022, for sites complying with track one remediation standards, athletic facilities and their components are considered buildings and structural components under the IRC for purposes of this credit. For sites accepted into the Brownfield Cleanup Programs on or after Jan. 1, 2023, new enhanced credit project categories — disadvantaged community and renewable energy facility — have been added. The law also amended two existing project categories for sites located in a city having a population of 1 million or more. N.Y. Dept. of Taxn. and Fin., TSB-M-23(1)C, (1)I (March 17, 2023).

Utah: New law (HB 144) modifies the high cost infrastructure development tax credit by expanding the "high cost infrastructure project" to include the storage or production of all fuels. The law also defines "underground mine infrastructure project" and adds the term to the definition of "infrastructure" for purposes of being eligible for a high cost infrastructure development income tax credit. In addition, for purposes of determining whether a project meets the definition of high cost infrastructure project, a project will be considered a new project if it began no earlier than the tax year before the year in which the applicant applies for the tax credit. Lastly, the law prohibits the tax commission from removing the corporate high cost infrastructure development tax credit from the tax return for a tax year beginning before Jan. 1, 2027. HB 144 takes effect Jan. 1, 2024. Utah Laws 2023, HB 144, signed by the governor on March 23, 2023.

PROPERTY TAX

Montana: New law (HB 212) increase the business equipment property tax exemption from $300,000 to $1 million. Effective for tax years beginning after Dec. 31, 2022, the first $1 million of market value of class eight property of a person or business entity is exempt from taxation. Mont. Laws 2023, ch. 45 (HB 212), signed by the governor on March 13, 2023. (See Tax Alert 2023-0436.)

COMPLIANCE & REPORTING

Indiana: The Indiana Department of Revenue announced that specific counties in Alabama, California and Georgia are eligible for filing extensions for individual and corporate income tax purposes. Specifically, the filing deadline for eligible taxpayers is extended from April 18, 2023 to Oct. 16, 2023. The deadline for making estimated payments due April 18, June 15 and Sept. 15 also is extended to Oct. 16, 2023. Click here for a list of counties. Ind. Dept. of Rev., "Designated Disaster Counties Granted Tax Filing Extensions" (March 10, 2023).

Kansas: The Kansas Department of Revenue (KS DOR) issued guidance to pass-through entities (PTEs) that (1) made the election to be taxed at the entity level for the 2022 tax year, (2) have source income from Kansas and other states, and (3) have owners who are residents of Kansas. The KS DOR said that filing questions have arisen regarding the calculation of PTE tax for PTEs with Kansas and non-Kansas source income, noting that the "income attributable to Kansas" provisions in K.S.A. §79-32,287(a) are unclear and can be interpreted in more than one way. In light of this, the KS DOR said that for the current filing year it will accept returns computing Kansas taxable income for electing resident individual partners, resident individual shareholders, or resident trusts by adding back in the partners/shareholders/trusts PTE income from non-Kansas sources. The KS DOR is in process of creating a worksheet for this calculation. In the meantime, the KS DOR "suggests Kansas filings of the K-120S be delayed until the worksheet is available," but noted that K-120S is still due by April 18, 2023. Kan. Dept. of Rev., "SALT Parity Act — 2022 Tax Year Filing Notification" (March 14, 2023).

PAYROLL & EMPLOYMENT TAX

Federal: President Biden's FY2024 budget and its accompanying "Green Book" propose changes of interest to employers and employees. For example, the proposals would make permanent some employer and employee credits while reducing others, such as the work opportunity tax credit (WOTC). In addition, the budget reproposes, from prior budgets, specific tax rules for on-demand pay arrangements and other tax changes that may be of interest to employers. For more on this development, see Tax Alert 2023-0514.

Philadelphia, PA: Effective Dec. 31, 2022, a Philadelphia ordinance (Bill No. 22033701) requires employers with 50 or more covered employees to provide mass transit or bicycle commuter benefits to covered employees under its new Employee Commuter Transit Benefit Program. Employers are required to make available at least one of the following benefit programs in amounts at least equal to the federal limits: (1) election of pre-tax payroll deduction for mass transit expenses or qualified bicycle expenses; (2) employer-provided fare instrument; or (3) any combination of (1) or (2). For additional information on this development, see Tax Alert 2023-0471.

West Virginia: On March 16, 2023, West Virginia Governor Jim Justice announced that the West Virginia State Tax Department has released a revised Form IT-104, Employee's Withholding/Exemption Certificate and income tax withholding tables/formula for 2023, which employers should begin using immediately. The revised withholding tables/formula reflect the personal income tax cut that applies retroactive to Jan. 1, 2023, under HB 2526. For additional information on this development, see Tax Alert 2023-0527.

MISCELLANEOUS TAX

Mississippi: New law (HB 838) extends through July 1, 2028 (from July 1, 2023) the sunset date of the temporarily reduced 1.3% rate for the levy and assessment of oil and gas severance taxes on the initial oil and natural gas produced from certain horizontally drilled wells and horizontally drilled recompletion wells. HB 838 takes effect July 1, 2023. Miss. Laws 2023, HB 838, signed by the governor on March 13, 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.