April 26, 2023
State and Local Tax Weekly for April 14
Ernst & Young's State and Local Tax Weekly newsletter for April 14 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.
Mississippi law brings clarity to the application of state sales and use tax to computer software, exempts software maintained on an out-of-state server
On March 28, 2023, Mississippi Governor Tate Reeves signed into law SB 2449, which clearly establishes the application of sales and use tax to computer software and computer software services. Computer software maintained on a server located outside Mississippi and accessible for use only via the internet, however, is exempt from sales and use tax. The changes made by SB 2449 take effect July 1, 2023.
New provisions: A newly added section1 to Miss. Code Tit. 27, Ch. 65 defines "computer software," "computer software service" and "information and data processing services," which apply for purposes of Ch 65. "Computer software" does not include charges for the use or right to use physical computer equipment, infrastructure, servers, platforms and other tangible computer devices, including "platform as a service" (PaaS) or "infrastructure as a service" (IaaS). The term "computer software services" does not include such things as the use or right to use physical computer equipment, infrastructure, servers, platforms and other tangible computer devices, including PaaS or IaaS, information and data processing services, services that use a computer, computer equipment or computer software as a tool to perform or complete that service, among other services.
The new section provides for the allocation of fees and payments for computer software or computer software services that encompass both taxable and nontaxable services or the apportionment of fees and payments that includes taxable computer software or computer software services both within and outside Mississippi.
In addition, transfers of computer software or computer software services provided by one legal entity to other commonly owned, related or affiliated entities are treated as nontaxable transfers between different segments of one entity. A credit is allowed for sales and use tax paid to Mississippi or to another state, regardless of which entity paid the tax. The law makes clear that these provisions do not exclude from taxation the purchase or payment by such organization to a third-party seller or provider for otherwise taxable computer software or computer software services.
Clarifications and changes to existing law: Most notably, provisions of SB 2449 make clear that computer software maintained on a server located outside Mississippi and accessible for use only via the internet is neither a taxable retail sale under Miss. Code § 27-65-7, nor is it a taxable use, storage or consumption under Miss. Code § 27-67-5. The definition of "tangible personal property" under Miss. Code § 27-65-3(j) is expanded to include computer software, but specifically excludes electronically stored or maintained data. Changes to the definition of "retail sales" under Miss. Code § 27-65-7 clarify that "all sales of tangible personal property" includes sales that are physically or electronically delivered or located within Mississippi.
In addition, Miss. Code § 27-65-19 is amended by deleting subsection (1)(d)(i)(5), which taxed gross income from all charges for products delivered electronically, including software, music, games, reading materials or ring tones. In its place, SB 2449 adds more specific language, taxing, as provided in other sections of this chapter, sales of computer software, computer software services, specified digital products or other products delivered electronically, including music, games, reading materials or ring tones.
The description of "digital products delivered electronically" under the list of items that are not "telecommunications services"2 has been modified to change "software" to "computer software" and expanded to include computer software services, electronically stored or maintained data, and specified digital products (this is in addition to music, video, reading materials and ring tones).
Among other changes, SB 2449 also directs the commissioner to adopt rules and regulations on issuing permits allowing purchasers and users of computer software or computer software services to report and pay sales tax directly to the commissioner instead of the vendor. This provision relieves a vendor from having to collect and remit sales and use tax, while making clear that the person holding the permit is liable for those taxes instead of the seller.
For additional information on this development, see Tax Alert 2023-0693.
Kentucky enacts technical corrections to elective pass-through entity tax
On March 31, 2023, Governor Andy Beshear signed House Bill 5 (HB 5, ch. 148) into law, supplementing the recently enacted elective pass-through entity (PTE) tax adopted in House Bill 360 (see Tax Alert 2023-0571). HB 5 makes a number of clarifying changes to the PTE tax, including:
HB 5's provisions on the elective PTE tax became effective upon the Governor's signature.
For more on this development, see Tax Alert 2023-0649.
Arizona: New law (SB 1473) modifies elective pass-through entity tax provisions to make clear that partners and shareholders of a partnership or an S corporation consent to be taxed at the entity level at the same rate as the highest individual income tax rate. Ariz. Laws 2023, ch. 11 (SB 1473), signed by the governor on March 28, 2023.
Arkansas: New law (SB 549) reduces corporate and individual income tax rates. Effective for tax years beginning on or after Jan. 1, 2023, the top income tax rates imposed on corporations and foreign corporations, which is impose on net income exceeding $25,000, is reduced to 5.1% (from 5.3%), and the top income tax rate imposed on individuals, estates and trust is reduced to 4.7% (from 4.9%). Ark. Laws 2023, Act 532 (SB 549), signed by the governor on April 10, 2023.
Arkansas: New law (HB 1045) phases out the throwback rule over a seven year period, starting in 2024. The phase-out is as follows: (1) for 2024 sales are sourced 85.71% within the state and 14.29% outside the state; (2) for 2025 sales are sourced 71.42% within state and 28.58% outside the state; (3) for 2026 sales are sourced 57.13% within state and 42.87% outside the state; (4) for 2027 sales are sourced 42.84% within state and 57.16% outside the state; (5) for 2028 sales are sourced 28.55% within state and 71.45% outside the state; (6) for 2029 sales are sourced 14.26% within state and 85.74% outside the state; and (7) for 2030 and after sales are sourced 100% outside the state. These provisions are effective for tax years beginning on or after Jan. 1, 2024. Ark. Laws 2023, Act 485 (HB 1045), signed by the governor on April 10, 2023.
Indiana: The Indiana Department of Revenue (IN DOR) issued guidance and FAQs on the state's new elective pass-through entity (PTE) tax, which is retroactively effective for tax years beginning on or after Jan. 1, 2022. The IN DOR said that for tax year 2022 it will not be issuing or modifying any other PTE forms or schedules other than the IN-PTET form that is currently available. The FAQs explain that the PTE election is made annually, it must be made by an authorized person from the eligible electing entity (i.e., partnerships, S corporations, limited liability companies taxed as either),5 and it is binding on the owners. (The IN DOR noted that certain PTE owners — banks and international banking facilities — are not subject to the PTE tax). The PTE tax election for 2022 can be made after March 31, 2023, and before Aug. 31, 2024; note that after April 18, 2023, the election must be made on the original return. The election for 2023 and after may be made at any time during the tax year or the entity's timely filed return (including extensions). The PTE tax rate is the same as the individual income tax rate for the tax year, which is determined on the last day of the PTE's tax year (e.g., for year end on Dec. 31, 2022, the 2022 rate applies, while the 2023 rate applies for a tax year end of Jan. 31, 2023). To qualify for the PTE tax credit, the owner must be either a direct or indirect owner of a qualifying entity, or the beneficiary of an estate or trust. Owners do not include banks and trust companies, national banking associations, savings banks, building and loan associations, savings and loan associations and international banking facilities. The IN DOR also said that nonresident partners and shareholders residing in reverse credit states should be included on the composite schedule and that their post-apportionment distributive share of the PTE's Indiana-source income included in the PTE tax calculation. If the nonresident partner is unable to claim a credit for the PTE tax in their state of residence, they can file a refund claim for the PTE tax credit. The IN DOR further explained that the PTE tax supplants composite tax requirements up to the amount of PTE tax owed; thus, composite tax requirements still apply to the portion of composite tax that exceed the PTE tax. Ind. Dept. of Rev., PTET Instructions, Form & FAQ (last update April 14, 2023).
North Carolina: New law (SB 174) updates the states date of conformity to the Internal Revenue Code (IRC), amends elective pass-through entity (PTE) tax provisions, and modifies other income tax provisions. The state's date of conformity to federal law is moved to the IRC as enacted as of Jan. 1, 2023 (from April 1, 2021). New subsection (d1) to N.C. G.S. §105-153.4 "North Carolina taxable income defined", is added to clarify that the statutory rules for allocating and apportioning income for multistate partnerships and S corporations, which is the method that applies to multistate corporations, also applies to multistate sole proprietorships. The tax credit for income taxes paid to another state by individuals is modified to provide that the credit cannot exceed the amount of income tax imposed for the tax year reduced by the sum of all credits allowed, except payments of tax made by on or behalf of the taxpayer. These changes took immediate effect.
Changes to the elective PTE tax that are retroactively effective for tax years beginning on or after Jan. 1, 2022: (1) require tiered partnerships that are taxed at the entity level to pay tax on behalf of nonresident partners; (2) expand the list of permissible owners of an electing PTE to include partnerships and S corporations; and (3) allow a partner/shareholder to deduct taxes paid by a partnership/ S corporation to another state in which it elected to pay the PTE tax but did not elect to pay PTE tax in North Carolina.
In addition, the law modifies the calculation of an electing PTE's North Carolina taxable income, effective for tax years beginning on or after Jan. 1, 2023. As amended:
Additional changes to the PTE tax that are effective for tax years beginning on or after Jan. 1, 2023: (1) do not allow a credit for income tax paid to another state by individuals on income eligible for the above described deduction; (2) provide that an S corporation or partnership cannot make or revoke the PTE tax election after the return is filed, thus making the election irrevocable; and (3) repeal certain PTE provisions which are no longer needed due to the changes to the elective PTE tax. N.C. Laws 2023, ch. SL 2023-12 (SB 174), signed by the governor on April 3, 2023. See also, N.C. Dept. of Rev., Important Notice: Session Law 2023-12 Includes Retroactive Benefits that May Help Taxpayers Preparing 2022 Tax Returns (April 4, 2023), which discusses the PTE tax changes effective in 2022.
Virginia: New law (HB 2193/SB 1405) changes the manner in which Virginia conforms to the IRC from a fixed date conformity (i.e., ties to the federal law as a specific date) to a rolling conformity (i.e., automatically tie to the federal tax law as it changes), except when the projected impact of the federal amendment will increase or decrease general fund revenues by a specific amount. The exception applies when: (1) any amendment enacted on or after Jan. 1, 2023 has a projected impact that increases or decreases general fund revenues by more than $15 million in the fiscal year in which the amendment was enacted or any succeeding four fiscal years; or (2) all amendments enacted on or after Jan. 1, 2023 and occurring between the adjournment of the Virginia General Assembly and the first day of the following legislative session, if the cumulative projected impact of the amendments increase or decrease general fund revenue by more than $75 million in the fiscal year in which the amendments were enacted or any of the succeeding four fiscal years. These exceptions do not apply to an amendment that is subsequently adopted by the Virginia General Assembly, is a federal tax extender or is enacted before the date on which the cumulative projected impact is met (this last provision only applies to the "all amendments" exception). The law also provides that the IRC conformity bill enacted this past February (Va. Laws 2023, ch. 1), applies only to tax years beginning on or after Jan. 1, 2022, but before Jan. 1, 2023, and the move to rolling conformity applies to tax years beginning on and after Jan. 1, 2023. Va. Laws 2023, ch. 791 (HB 2193) and ch. 763 (SB 1405), identical bills signed by the governor on April 12, 2023.
SALES & USE
Illinois: The Illinois Department of Revenue adopted amendments to various Retailers' Occupation Tax regulations that will significantly affect sourcing, remote retailing and marketplace facilitator operations in the state. Most notably, the amendments revise, effective Feb. 7, 2023, 86 Ill. Adm. Code 270.115 (the "Home Rule Municipal Retailers' Occupation Tax") to "provide uniformity among the various sourcing rules." The requirements in Section 270.115 apply to other Retailers' Occupation taxes. Entities making sales in Illinois as either remote retailers or marketplace facilitators need to pay close attention to the sourcing rules, given the potential impact on rate determination. Depending on the transaction, either origin sourcing or destination sourcing applies. The changes also may impact leasing, installment and sourcing of conditional sales in the state. For more on this development, see Tax Alert 2023-0605.
Kentucky: New law (HB 5) modifies changes to the definition of taxable "telemarking services" made by HB 360, by deleting the reference to social media that had been added by HB 360 (see Tax Alert 2023-0571). Ky. Laws 2023, ch. 148 (HB 5), signed by the governor on March 31, 2023.
Mississippi: New law (HB 549) exempts from sales tax the gross proceeds from sales of tangible personal property by the manufacturer or custom processor thereof if such property is shipped, transported or exported from Mississippi and first used in another state, whether such shipment, transportation or exportation is made by the seller, purchaser or any third party acting on behalf of such party. For purposes of this provision, instruction to, training of or inspection by the purchaser of the property before it is shipped, transported or exported does not constitute a first use of the property within Mississippi. The exemption takes effect and is in force from and after July 1, 2023. Miss. Laws 2023, HB 549, signed by the governor on March 22, 2023.
North Carolina: New law (SB 174) codifies the North Carolina Department of Revenue's administrative provision for determining when utensils are provided by the retailer in order to meet the definition of prepared food. Under North Carolina law, food is taxed as "prepared food" when it is sold with eating utensils (e.g., plates, knives, forks, spoons, glasses, cups, napkins and straws). If a retailer has a prepared food sales percentage of greater than 75%, "provided by the retailer" means the retailer makes eating utensils available to purchasers (with a certain exception). If the percentage is 75% or less, "provided by the retailer" means the retailer's business practice is to physically give or hand eating utensils to purchasers. A retailer must calculate the prepared food sales percentage for each business fiscal year based on its data from the prior year. New retailers must make a good faith estimate of its prepared food sales percentage for its first year in business, with a prospective adjustment to the estimate after the first three months of its business operations. The law also allows the revenue secretary to treat sales representatives, solicitors, representatives, consignees, peddlers or truckers and the dealers, distributors, consignors, supervisors, employers or persons for whom they operate or obtain the items they sell, as a marketplace facilitator when such treatment is necessary for the efficient administration of the sales tax. In addition, the law allows a marketplace facilitator to recover sales or use tax originally paid to a marketplace seller when the marketplace facilitator pays tax to a marketplace seller on facilitated sales for which the marketplace facilitator is considered the retailer and the tax is separately stated on an invoice given to the marketplace facilitator at the time of sale. Any amount recovered in excess of tax due for the reporting period is not refundable, but the excess may be carried forward and taken as an adjustment to taxable receipts. Lastly, the law updates North Carolina's reference to the Streamlined Sales Tax Agreement to Dec. 22, 2022 (from Dec. 21, 2021). These changes took immediate effect. N.C. Laws 2023, ch. SL 2023-12 (SB 174), signed by the governor on April 3, 2023.
Tennessee: New law (HB 320/SB 272) expands the definition of "industrial machinery" under the industrial machinery sales and use tax exemption to include machinery, apparatus and equipment with all associated parts, appurtenances and accessories, repair parts and any necessary repair or taxable installation labor used by the Tennessee Department of General Services for the Megasite Authority of West Tennessee. This expansion takes effect July 1, 2023. Tenn. Laws 2023, ch. 53 (HB 320/SB 272), signed by the governor on March 21, 2023.
Utah: New law (SB 235) exempts from sales and use tax: (1) sales of rolling stock manufactured in Utah, and (2) purchases of sand, gravel, rock aggregate, cement products or construction materials between certain establishments that are related through 100% common ownership or control and each establishment is described in one of the following subsections the 2022 North American Industry Classification System (NAICS): (a) Heavy and Civil Engineering Construction (NAICS Subsector 237), or (b) Nonmetallic Mineral Product Manufacturing (NAICS Subsector 327). These changes take effect on July 1, 2023. Utah Laws 2023, SB 235, signed by the governor on March 23, 2023.
Virginia: New law (HB 1563/SB 1240) expands the retail sales and use tax agricultural exemption to include certain property used directly in producing agricultural products (i.e., horticultural, floricultural, viticulture or other farm crops) for market in an indoor, closed, controlled-environment commercial agricultural facility. Exempt items include internal components, external components and structural components. The exemption applies to internal components or materials, regardless if they are affixed to real property, required: (a) to create, support and maintain the necessary growing environment for plants (including towers to grow the plants), conveyances for moving such towers, and insulation, partitions and cladding; (b) for lighting systems; (c) for heating, cooling, humidification, dehumidification and air circulation systems; and (d) for watering and water treatment systems. The exemption applies to external components, machinery and equipment required: (a) for heating, cooling, humidification, dehumidification, and air circulation systems; (b) for utility upgrades and related distribution infrastructure; and (c) for creating, supporting and maintaining the necessary growing environment for plants. The exemption applies to structural components of: (a) insulation, partitions, or cladding used in indoor vertical farming to create and maintain the necessary growing environment for plants; or (b) translucent or transparent elements such as windows, walls and roofs, allowing sunlight in greenhouses to create the necessary environment to grow plants. This provision takes effect July 1, 2023. Va. Laws 2023, ch. 516 (HB 1563) and ch. 517 (SB 1240), identical bills signed by the governor on March 26, 2023.
Federal: In Notice 2023-29 (Notice), the IRS described what it intends to include in proposed rules on "energy communities" for purposes of the production tax credit under IRC §§ 45 and 45Y and the investment tax credit under IRC §§ 48 and 48E for certain clean electricity facilities. Taxpayers with qualifying projects located in energy communities can get up to a 10% increase in either credit. According to the Notice, the rules will apply to tax years ending after April 4, 2023. Taxpayers can rely on the Notice until the proposed regulations are issued. For more on this development, see Tax Alert 2023-0675.
Federal: In proposed rules (REG-120080-22), the IRS offers much-anticipated guidance on critical minerals, battery components and other requirements for clean vehicles to qualify for the federal income tax credit under IRC § 30D. The new requirements apply to vehicles placed in service (defined as the day the taxpayer takes delivery of the vehicle) on or after April 18, 2023, even if the vehicle was ordered or purchased before that date. The IRS invites comments and requests for a public hearing to be submitted by June 16, 2023. For more information on this development, see Tax Alert 2023-0660.
Arkansas: New law (HB 1592) amends the production tax incentives program by increasing the amount of tax incentive that may be offered to an eligible production company to 25% (from 20%) of all qualified production costs in connection with the production of a state-certified film project. The law also increases the amount of tax credit or rebate for postproduction costs to 25% (from 20%) of all qualified production costs in connection with the postproduction of an approved state-certified film project. Both the production tax incentive and postproduction tax incentive provisions are expanded to grant a state-certified production an additional 5% tax incentive for either of the following: (1) hiring below-the-line employees whose full-time permanent address is in a Tier 3 or Tier 4 county, or (2) expenditures paid to a person or business for qualified production costs with a state-certified production located in a Tier 3 or Tier 4 county. An additional 5% credit will also be granted for producing a multi-project production, including a television series and a multi-film project. The changes are effective for financial incentive agreements signed on or after the effective date of this Act, which takes effect 90 days after the General Assembly adjourns sine die. Ark. Laws 2023, Act 517 (HB 1592), signed by the governor on April 10, 2023.
Arkansas: New law (HB 1475) amends the property tax exemption for intangible personal property by adding a list identifying exempt intangible personal property of self-service storage facilities. Such exempt property includes goodwill, rental agreements, customer lists, security systems, future development opportunities and management software. The law also requires a county assessor to provide to a taxpayer, upon the taxpayer's request, a written explanation of the value of the taxpayer's intangible personal property and how the value of such property was excluded from ad valorem tax. These changes are effective for assessment years beginning on or after Jan. 1, 2023. Ark. Laws 2023, Act 332 (HB 1475), signed by the governor on March 21, 2023.
Mississippi: New law (SB 2698) extends the period in which certain renewable energy projects may begin construction in order to be eligible for a partial ad valorem tax exemption to Dec. 31, 2027 (from Dec. 31, 2024). Such ad valorem exemptions must be authorized by a county board of supervisors or municipal governing authorities before July 1, 2026 (from July 1, 2023). The law also extends through July 1, 2026 (from July 1, 2023) the period in which county boards of supervisors and municipal governing authorities can enter into an agreement with certain renewable energy projects, granting a fee-in-lieu of ad valorem taxes. These provisions take effect July 1, 2023. Miss. Laws 2023, SB 2698, signed by the governor on March 16, 2023.
North Carolina: New law (SB 174) adds a new section establishing a statute of limitation on collections. Under the new provisions, the North Carolina Department of Revenue may collect a tax for a period of 10-years from the date the tax becomes collectible under N.C. G.S. §105-241.22. The 10-year period may be tolled for the same reasons the enforcement period for a certificate of tax liability may be tolled N.C. G.S. §105-242(c). A tax liability not collected within this period will be abated. This provision took effect when it became law. N.C. Laws 2023, ch. SL 2023-12 (SB 174), signed by the governor on April 3, 2023.
PAYROLL & EMPLOYMENT TAX
Michigan: On March 29, 2023, the Michigan Department of Treasury (MI DOT) announced that retroactive to Jan. 1, 2023, the personal income tax rate will be reduced from 4.25% to 4.05%. This temporary tax cut is the result of legislation enacted in 2015 that requires, starting in 2023, a rate cut for any tax year that the general fund grows faster than the rate of inflation. The MI DOT also announced that the reduced rate of 4.05% will not be reflected in its 2023 withholding tables and that individuals with questions about their 2023 Michigan income tax withholding should contact their employers or the MI DOT directly. Updated forms, instructions and guidance necessary about the 2023 income tax rate will be posted here once available. For additional information on this development, see Tax Alert 2023-0670.
Kentucky: New law (HB 551) establishes provisions providing for the administration and taxation of sports betting. An excise tax is imposed on persons licensed to conduct sports betting at a rate of: (1) 9.75% on the adjusted gross revenue on wagers placed at a licensed track, and (2) 14.25% on the adjusted gross revenue placed online via websites or mobile applications or other off-site technology approved by the Kentucky Horse Racing Commission. Ky. Laws 2023. Act 147 (HB 551), signed by the governor on March 31, 2023.
North Carolina: New law (SB 174) exempts from motor fuel excise tax the transfer of fuel grade ethanol or biodiesel between terminals within North Carolina if the fuel grade ethanol or biodiesel is owned by the same licensed supplier. This exemption applies to transfers occurring on or after April 3, 2023. The law also imposes the motor fuel excise tax on fuel grade ethanol or biodiesel fuel if it is removed from the terminal transfer system before being blended and is not subject to federal excise tax imposed by IRC § 4081. N.C. Laws 2023, ch. SL 2023-12 (SB 174), signed by the governor on April 3, 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.
1 See Section 6 of SB 2449.
2See Miss. Code § 27-65-19(1)(d)(iv) for a list of items that are not "telecommunications services".
3 Defined as any individual with the authority from the electing entity to bind the electing entity or to sign returns on its behalf.
4 Ky. Rev. Stat. 141.206.
5 The PTE election is not available to C corporations, trusts, sole proprietorships, or limited liability companies taxed as a C corporation.