May 10, 2023
State and Local Tax Weekly for April 21 and April 28
Ernst & Young's State and Local Tax Weekly newsletter for April 21 and April 28 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.
Colorado Department of Revenue adopts and amends income tax rules
The Colorado Department of Revenue (CO DOR) has amended three administrative rules and adopted one new rule related to corporate income tax. These rules, which were adopted April 5, 2023, relate to (1) NOLs for corporations, individuals, estates and trusts, (2) Colorado's unique foreign source income exclusion and (3) IRC §78 dividends. The new, and amended, rules take effect May 30, 2023.
NOLs — corporations: Colorado Revised Stat. (CRS) §39-22-504 permits an NOL "in the same manner that it is allowed under the [IRC] except as otherwise provided … ." The former administrative rule, Colorado Code of Regulations (CCR) 39-22-504(2).1, provided that the Colorado NOL "is computed the same as a federal [NOL] except that the Colorado loss is computed using the modified federal income allocated and apportioned to Colorado." This suggested that Colorado modifications to the federal taxable income (FTI) starting point could result in a "Colorado NOL."
The CO DOR adopted amendments to CCR 39-22-504-2 for Colorado NOLs for corporate taxpayers. The amended rule allows a Colorado NOL in the same manner as the federal NOL, but considers the Colorado NOL to be only that portion of the federal NOL allocated to Colorado, subject to Colorado addition and subtraction modifications and Colorado's foreign-source income exclusion. If the Colorado NOL, as computed under the rule, exceeds the federal NOL, however, CCR 39-22-504(1)(d) limits the Colorado NOL to the federal NOL. If a group of corporations filing combined, consolidated or combined-consolidated Colorado returns do not collectively have a federal NOL, based on the group of corporations included in the Colorado return, the group does not have a Colorado NOL for that year. A similar limitation applies for separate filers.
For combined, consolidated and combined-consolidated returns, the amended rule establishes that the Colorado NOL is calculated only for the C corporations that are included in the return and based on the federal NOL that is determined only for the group included in the return. For separate return filers, the Colorado NOL is calculated only for that C corporation and based on the federal NOL that is determined only for that C corporation. Provisions of the rule on combined, consolidated, combined-consolidated, and separate filing and the modification, allocation and apportionment provisions in paragraphs of the amended rule apply in accordance with the law in effect for the tax year in which the loss was sustained.
The amended rule also addresses the following topics: (1) carryforward of Colorado NOLs; (2) limitations on the Colorado NOL deduction, including the 80% limitation that applies starting in 2018, IRC §§ 382 and 860E limitations, and SRLY limitations; and (3) Colorado taxable income before the NOL deduction for purposes of determining Colorado NOLs and limits on it.
NOLs — individuals, estates and trusts: The CO DOR adopted amended CCR 39-22-504-1 for Colorado NOLs for individuals, estates and trusts. Under the general rule, an individual, estate or trust may deduct an NOL in the same manner as allowed under the IRC; in calculating Colorado income, however, an addition to FTI is required for the portion of NOL not allocated to Colorado. The rule includes guidance for calculating the addition for full-year Colorado residents, Colorado nonresidents and part-year Colorado residents.
Foreign-source income: The CO DOR adopted amendments to CCR 39-22-303(10) on the foreign-source income exclusion. The rule defines foreign-source income and outlines how to calculate the amount of foreign-source income considered in a corporation's allocated and apportioned net income. It also describes the requirements for reporting changes to that amount.
When allocating or apportioning income, a C corporation's foreign source income generally is considered only to the extent provided in CRS § 39-22-303(10) and this rule. When a combined, consolidated or combined-consolidated return is filed, the foreign-source income exclusion is calculated only for the group of C corporations included in the return and based on the foreign tax credit or deduction determined only for the group in the return. For C corporations filing separately, the foreign-source income exclusion is calculated only for that C corporation and based on the foreign tax credit or deduction determined only for that corporation.
Foreign-source income is defined as taxable income from sources outside the United States (US), as used in IRC § 862, and includes any taxable income from sources outside the US that are considered in calculating the limit on the federal foreign tax credit under IRC § 904(a). Based on IRC § 862(b), taxpayers must deduct from "gross income from sources without the US" any expenses, losses and other deductions properly apportioned or allocated to Colorado, including any deduction allowed under IRC § 250 and a ratable part of any other expenses, losses or deductions that cannot be allocated to some item or class of gross income. "Gross income from sources without the US" includes: (1) types of income enumerated under IRC § 862(a); (2) income allocated to non-US sources under IRC § 863; (3) amounts included in the corporation's FTI under IRC §§ 951 or 951A; (4) dividends received by the corporation under IRC § 78; and (5) any item of income treated as arising from non-US sources under a treaty obligation with the US as described in IRC §§ 245(a)(10), 904(d)(6) or 904(h)(10).
In allocating and apportioning a corporation's Colorado income, the rule explains how to determine the amount of the foreign tax deducted for federal purposes that must be subtracted, and the amount of the federal credit for foreign tax that must be excluded. The provisions for the foreign tax credit exclusion are extensive and include discussions on, among other things, (1) separate exclusion calculations for certain categories of income, (2) the coordination with certain combined or combined-consolidated reporting provisions, (3) the effective federal corporation income tax rate, and (4) redeterminations under IRC § 905(c).
Finally, if a foreign tax credit is claimed, the foreign-source income exclusion is computed via the following formula: (Foreign source income — IRC § 78 gross up) x (Foreign taxes paid or accrued / ((federal income tax / federal taxable income) / foreign source income))). In computing the foreign-source income exclusion ratio, the amended rule includes IRC § 78 income in the denominator of the ratio even though it receives a separate exclusion under CRS § 39-22-304(j).
IRC § 78 dividends: The CO DOR adopted new CCR 39-22-304(3)(j) for corporate subtractions for IRC § 78 dividends. The rule generally limits the subtraction allowed under CRS § 39-22-304(3)(j) to the amount treated as a dividend and included in a C corporation's FTI under IRC § 78. A subtraction is not allowed for any part of an amount that is treated as a dividend under IRC § 78 and deducted in the calculation of FTI. A subtraction also is not allowed for an amount that is (1) treated as a dividend under IRC § 78, (2) attributable to global intangible low-taxed income under IRC §§ 951A and 960(d), and (3) deducted under IRC § 250(a)(1)(B)(ii) in the calculation of FTI. Only C corporations subject to Colorado corporate income tax may claim the subtraction.
For more on this development, see Tax Alert 2023-0833.
Arkansas: New law (SB 482) allows railroads to use one of provided apportionment formulas, effective for tax years beginning on or after Jan. 1, 2023. A railroad operating partly within and partly without Arkansas is required to apportion its net operating income attributable to this state by multiplying its income by: (1) the sales factor, or (2) a double weighted sales factor. The law describes how to calculate the sales factor, the property factor and the payroll factor. The Secretary of the Arkansas Department of Finance and Administration (Department) can promulgate rules to administer this provision. SB 482 also makes clear that any rules adopted by the Department that conflict with these provisions are void, including without limitation the conflicting provisions of Corp. Income Tax Rule 1.26-51-204. These provisions are retroactively effective for tax years beginning on or after Jan. 1, 2023. Ark. Laws 2023, Act 658 (SB 482), signed by the governor on April 11, 2023.
Maryland: The Comptroller of Maryland issued guidance on changes in how a pass-through entity (PTE) makes an election to (1) pay at the entity level on all members' shares of income or (2) pay the mandatory tax on behalf of nonresident members only. The election is made annually and is irrevocable for the tax year made. For tax years beginning after Dec. 31, 2022, a PTE must decide to "elect" (i.e., pay the tax with respect to the distributive or pro rata shares of all members of the PTE) or "not to elect" (i.e., pay the mandatory tax on behalf of nonresident members only) with the first filing or payment of the tax year. A PTE makes the election by checking the box on the first form of the tax year that accompanies a payment or is filed to report a loss; the box must be checked on subsequently filed returns with respect to the tax year. A PTE deciding "not to elect" must leave the checkbox blank on such forms. The Comptroller's guidance includes specific reporting and payment instructions for electing and nonelecting PTEs. Md. Comp., Tax Alert "Process Change: Instructions for Electing and Nonelecting Pass-Through Entities for Tax Years Beginning after December 31, 2022" (April 11, 2023).
New Mexico: New law (SB 147) requires, for Corporate Income Tax purposes, the add back to "base income" of the amount of credit claimed for distributed net income of an electing entity level pass-through entity. This change is effective for tax years beginning on or after Jan. 1, 2023. N.M. Laws 2023, ch. 85 (SB 147), signed by the governor on March 30, 2023.
New Mexico: New law (HB 368) modifies the elective pass-through entity (PTE) tax. The law makes clear the PTE tax election is binding on all owners of the elective PTE.1 The law also provides that the distributed net income of an electing PTE equals the amount allocated and apportioned to New Mexico under the Uniform Division of Income for Tax Purposes Act from the following: (1) the total properly reported federal income of the PTE plus, for partnerships, the amount of guaranteed payments2 other than health insurance premiums paid by the partnership on behalf of a partner, less the net income or guaranteed payments properly allocated or made to the US or New Mexico (or a political subdivision of either), a federally recognized Indian nation, tribe or pueblo located in New Mexico, an exempt organization under IRC § 501(c)(3), a corporate partner that would include the income as part of its unitary business income, and (as added by the law) a PTE that is an owner of the elective PTE; and (2) less the amount of net capital gains that may be deducted and is properly allocated to owners who are subject to New Mexico income tax. Net operating losses are not included in the distributed net income calculation, but they can be carried forward until exhausted. The law allows the owner of an electing PTE a tax credit equal to the owner's share of the PTE tax, provided that the electing PTE paid the tax and provides sufficient information on its tax return to identify the owner. Excess credit will be refunded to the PTE owner. In addition, Income Tax provisions applicable to individuals, estates and trusts are amended to require the add back to "base income" of the amount of credit claimed for distributed net income of an electing entity level PTE. Lastly, the law amends the credit for taxes paid to other states by resident individuals to provide that the credit is calculated without regard to the PTE tax credit. These changes apply to tax years beginning on or after Jan. 1, 2023. N.M. Laws 2023, ch. 159 (HB 368), signed by the governor on April 5, 2023.
West Virginia: The West Virginia Tax Division (Division) issued guidance on the new pass-through entity (PTE) tax, which can be elected for tax years beginning on or after Jan. 1, 2022. For calendar year taxpayers, the 2022 tax return was due on March 15, 2023, without a filing extension. The PTE tax election, however, may not be made, and may not be filed with the Division, earlier than June 8, 2023, the effective date of SB 151, which enacted the elective PTE tax. Due to these time restraints, the Division said it will grant an extension of time to make the election until Sept. 15, 2023; this extension also applies to a taxpayer that already filed a PTE return for the tax year. Additional guidance on the method and manner of filing the return will be provided by the tax division. Electing PTEs that did not pay the PTE tax through a nonresident withholding payment by April 18, 2023, will be granted an extension until Sept. 15, 2023, to pay the PTE tax due for 2022 only if the partners, shareholders, members and any other interest holders in the PTE have paid the personal income tax liability due by April 18, 2023 without regard to the credit allowed for the tax elected to be paid by the PTE. For electing PTEs that do not meet these requirements for conditional extension, the Division will consider waiver of penalty and interest on a case-by-case basis. The Division is also granting an automatic extension until Sept. 15, 2023, for calendar year taxpayers to pay the first two quarters of estimated nonresident withholding tax payments for tax year 2023. Such payment must include the estimated liability for the first three quarters of 2023. Fiscal year taxpayers will be allowed to pay all previous estimated liability upon the first due date of the estimated tax payment following the June 8 effective date. W.V. Tax Dept., Administrative Notice 2023-01 (April 6, 2023).
SALES & USE
Arizona: The Arizona Department of Revenue (AZ DOR) issued a tax ruling on what constitutes a prosthetic appliance exempt from the retail transaction privilege tax (TPT) classification under Ariz. Rev. Stat. § 42-5061(A)(9). The AZ DOR explained that exempt prosthetic appliances are artificial devices prescribed or recommended by licensed health professionals (i.e., podiatrist, chiropractor, dentist, physician or surgeon, naturopath, optometrist, osteopathic physician or surgeon, psychologist, hearing aid dispenser, physician assistant, nurse practitioner or veterinarian) that are necessary to support or take the place of body part or to increase the acuity of a sense organ. Exempt prosthetic appliances also include devices necessary to integrated prosthetic processes (e.g., equipment, supplies and solutions necessarily used in the integrated process of kidney dialysis), or that are necessary to apply the prosthetic appliance. The ruling includes guidelines to help determine whether a device meets the definition of prosthetic appliance and describes the documentation necessary to substantiate a prosthetic appliance deduction. This ruling is effective May 1, 2023, and it also applies to the deduction from county excise and city privilege taxes for retail sales of prosthetic appliances. Ariz. Dept. of Rev., Transaction Privilege Tax Ruling TPR 23-1 (April 7, 2023).
New Mexico: New law (SB 147) exempts from compensating (use) tax the use of services by the US or New Mexico or a governmental unit or subdivision, agency, department or instrumentality thereof (hereafter "governmental entity"). This is exemption is in addition to the already existing exemption for use of property by such governmental entity. The law also provides a deduction from gross receipts or governmental gross receipts for receipts from the license to use digital goods when sold to a governmental entity for purposes of loaning such goods to the public. These changes are effective July 1, 2023. N.M. Laws 2023, ch. 85 (SB 147), signed by the governor on March 30, 2023.
Virginia: New law (HB 2479/SB 1522) extends through 2040 the sales and use tax exemption for the purchase or lease of computer equipment or enabling software on behalf of data center operators for use in a Virginia data center that is under common ownership or affiliation with the data center operator. To qualify for the extension, a data center operator must enter into a memorandum of understanding with the Virginia Economic Development Partnership on or after Jan. 1, 2023, that details the amount of capital investment, the number of jobs created, localities in which the investment will be made and the jobs created, and a timeline for doing so. If the memorandum is entered into before July 1, 2035, a data center will be eligible to use the exemption through June 30, 2040, if it (1) makes a capital investment of at least $35 billion in data centers in localities listed in the memorandum and creates at least 1,000 new full-time jobs at such locations (at least 100 of these jobs must pay at minimum one and one-half times the prevailing average wage in Virginia). If the memorandum is entered into before July 1, 2040, a data center will be eligible to use the exemption through June 30, 2050, if it (1) makes a capital investment of at least $100 billion in data centers in localities listed in the memorandum and creates at least 2,500 new full-time jobs at such locations (at least 100 of these jobs must pay at minimum one and one-half times the prevailing average wage in Virginia, and inclusive of the 1,000 new full-time jobs created). Va. Laws 2023, ch. 678 (HB 2479) and ch. 671 (SB 1522), identical bills signed by the governor on March 27, 2023 and March 26, 2023, respectively.
Federal: In proposed regulations (REG-120653-22), the IRS would clarify key terminology and the practical operation of the advanced manufacturing investment credit (AMIC) under IRC § 48D, which was enacted under the CHIPS Act of 2022, to incentivize businesses to manufacture semiconductors and semiconductor manufacturing equipment in the US. The proposed regulations define a semiconductor as "an integrated electronic device or system most commonly manufactured using materials such as silicon, silicon carbide, or III-V compounds, and processes such as lithography, deposition, and etching." The proposed regulations address, among other items: the eligibility requirements for the AMIC; an election that allows (1) taxpayers to be treated as making a tax payment or (2) a partnership or S corporation to receive an elective payment, instead of the AMIC; a special 10-year credit recapture rule for transactions involving the material expansion of semiconductor manufacturing capacity in a foreign country of concern. Taxpayers may rely on the proposed regulations for property placed in service after Dec. 31, 2022, if they consistently apply the regulations in their entirety. For additional information on this development, see Tax Alert 2023-0713.
New Mexico: New law (HB 547) amends the state's film production tax credit to provide a credit for direct production expenditures made by a New Mexico film partner for the services of nonresident performing artists, directors, producers, screenwriters and editors in an amount not to exceed $10 million for services rendered for each production. The total aggregate amount allowed for this credit is capped at $40 million for all productions in a fiscal year. The law also (1) adds a definition of "New Mexico film partner"; (2) modifies the calculation of credit amounts for expenditures made in certain areas of New Mexico related to television pilots and series; and (3) modifies the nonresident below-the-line crew credit to exclude certain payments from wage payments used to calculate the credit. These provisions apply to film production companies that commence principal photography for a film or commercial audiovisual product on or after July 1, 2023. N.M. Laws 2023, ch. 211 (HB 547), enacted in part April 7, 2023.
North Dakota: New law (HB 1266) allows a city, when a renaissance zone expires, to reapply for: (1) a subsequent renaissance zone in the same manner an original renaissance zone is formed, and (2) a renewal of the formerly expired renaissance zone in the current manner a renewal extension is granted by state law. The law also allows taxpayers eligible for property or income tax incentives for a zone project that is incomplete immediately before the expiration of the renaissance zone designation to continue to receive the incentive for the time period for which the taxpayer was original eligibility to receive the incentive. This bill takes effect Aug. 1, 2023. N.D. Laws 2023, HB 1266, signed by the governor On March 23, 2023.
Virginia: New law (HB 2479/SB 1522) establishes the cloud computing cluster infrastructure grant fund. A qualified company is eligible to receive grant payments for each fiscal year beginning on July 1, 2025 and ending no later than July 1, 2044. A qualified company is a company (and its affiliates) that enters into a memorandum of understanding into or after Jan. 1, 2023, with the Commonwealth and the Virginia Economic Development Partnership Authority (VEDP) and is expected by the performance date to (1) make or cause to be made a capital investment at facilities in locations identified in the memorandum of understanding of at least $50 billion and (2) creates at least 1,500 new full-time jobs that pay an average annual wage of at least one and one-half times the prevailing wage of the locality where the job is located. The amount of the grant is based on the qualified company's actual investments — each $1 million of capital investment in construction costs by the qualified company in the prior calendar year — and the number of each new full-time job created by the qualified company in the prior calendar year. The total aggregate amount of all grants paid to a qualified company is capped at the amount approved by the General Assembly and included in the memorandum of understanding. Capital investment made by a qualified company in, and new full-time jobs created in, a locality that was not identified in the memorandum of understanding will not qualify for grant payments. The MEI Commission must endorse the company to receive the grants from the fund. Va. Laws 2023, ch. 678 (HB 2479) and ch. 671 (SB 1522), identical bills signed by the governor on March 27, 2023 and March 26, 2023, respectively.
Idaho: New law (HB 59) modifies the property factor method used for calculating the Investment Tax Credit for property used both inside and outside Idaho. Under Idaho law, a taxpayer elects to do a pro-rated calculation of the credit using the percentage-of-use method or the property factor method. Prior to changes made by this bill, only the percentage-of-use method included a provision requiring the pro-rated calculation occur if the property is placed in service in the last 90 days before year-end. Retroactively effective to Jan. 1, 2023, HB 59 adds this provision to the property factor method. For assets acquired, constructed, reconstructed, erected, or placed into service within 90 days before the end of the tax year in which the investment first qualifies, the investment in such qualified property must be multiplied by the percent of the investment that would be included in the numerator of the Idaho property factor determined under Id. Code §63-3027 during the first 90 days of use of the asset. Id. Laws 2023, ch. 33 (HB 59), signed by the governor on March 16, 2023.
Utah: New law (HB 56) establishes requirements for a pass-through entity (PTE) to file a Utah amended return to report changes to the PTE's net income or loss. If the federal government makes a change to a PTE's net income or loss on the PTE's federal income tax return, the PTE has 90 days after a final determination to report the change to the Utah tax commission. The PTE must submit (1) a copy of its amended federal income tax return or federal adjustment, and (2) an amended Utah income tax return that conforms with the federal changes. A similar 90-day requirement applies when the PTE changes its net income on a filed amended federal income tax return. This change has retrospective operation for tax years beginning on or after Jan. 1, 2022. Utah Laws 2023, ch. 470 (HB 56), signed by the governor on March 23, 2023.
New Mexico: New law (SB 147) makes clear that the insurance premium tax applies to insurers that procure or renew insurance with a non-admitted insurer. This change takes effect July 1, 2023. N.M. Laws 2023, ch. 85 (SB 147), signed by the governor on March 30, 2023.
West Virginia: New law (HB 3012) starting July 1, 2023, provides a nine-year exemption from the severance tax for the "severing, extracting, reducing to possession and producing for sale, profit or commercial use rare earth elements and critical minerals." For purposes of this exemption, "rare earth elements" are defined as "yttrium, lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium, and scandium." The law defines "critical minerals" as "aluminum, antimony, arsenic, barite, beryllium, bismuth, cesium, chromium, cobalt, fluorspar, gallium, germanium, graphite, hafnium, indium, iridium, lithium, magnesium, manganese, nickel, niobium, palladium, platinum, rhodium, rubidium, ruthenium, tantalum, tellurium, tin, titanium, tungsten, vanadium, zinc, zirconium, uranium, osmium, strontium, rhenium, potash, and bauxite." W.V. Laws 2023, ch. 318 (HB 3012), became law without the governor's signature on March 29, 2023.
VALUE ADDED TAX
International — Argentina: The Argentine tax authorities published General Resolution 5339, suspending until Dec. 31, 2023, the validity of exemption certificates for income tax and value added tax withholdings on imported goods. Potentially affected taxpayers should assess the impact of the Resolution, as the changes could have a significant financial impact. For additional information on this development, see Tax Alert 2023-0690.
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 The definition of PTE is modified to mean a partnership or corporation that elects to pass income, losses, deductions and credits through to its owners (changed from shareholders) for federal tax purposes.
2 As defined in IRC §707(c).