June 29, 2023
State and Local Tax Weekly for June 16 and June 23
Ernst & Young's State and Local Tax Weekly newsletter for June 16 and June 23 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.
Texas enacts incentives program to replace expired Ch. 313 School Value Limitation Program
On June 9, 2023, Texas Governor Greg Abbott signed HB 5, the "Texas Jobs, Energy, Technology, and Innovation Act," replacing the Texas Chapter 313 School Value Limitation Program, which expired on Dec. 31, 2022. The new incentive program temporarily reduces school district maintenance and operations (M&O) property taxes for certain businesses that construct new facilities or expand existing facilities and meet job creation and investment requirements. The new law takes effect on Jan. 1, 2024, and expires on Dec. 31, 2033.
To qualify for reduced M&O property taxes, businesses in select industries must apply to the Texas Comptroller of Public Accounts to have the taxable value of eligible property they will use in an eligible economic development project reduced for M&O property tax purposes for 10 years, provided they are constructing new facilities or expanding existing facilities. Additionally, they must agree to create 10-75 new jobs and invest $20 million — $200 million (thresholds vary based on county size).1 If an eligible project is located in multiple counties, the job and investment requirements for the county with the smallest population in which part of the project is located will apply. Applicants must also demonstrate that entering into an agreement to qualify for the reduced M&O property taxes is (1) a compelling factor in a competitive site selection determination and (2) the investment would not be made in Texas without the incentive.
Eligible projects include: (1) the construction or expansion of new or existing facilities related to manufacturing, the provision of utility services (including dispatchable electric generation facilities) or the development of natural resources, or the research, development or manufacture of high-tech equipment or technology; or (2) the construction or expansion of critical infrastructure.
Eligible projects do not include projects to construct or expand new or existing nondispatchable electric generation facilities or electric energy storage facilities. Nondispatchable electric generation typically includes solar and wind power sources of electricity, among other sources.
Projects must also be located in an area designated as a reinvestment zone under Chapter 311 or 312 of the Texas Tax Code or as an enterprise zone under Chapter 2303.
Once the comptroller, governor and school district approve the application and an agreement is entered, the eligible property's taxable value, for school district M&O ad valorem tax purposes, will be limited to 50% of its market value during the incentive period outlined in the agreement. The limitation is 25% of the eligible property's market value if the property is located in a qualified Federal opportunity zone.
Jobs created at an eligible project must be new full-time jobs in Texas and meet certain wage requirements. Additionally, they must be (1) maintained in the usual course and scope of the applicant's business (this includes trainees under the Texans Work program) or (2) performed by an independent contractor and the independent contractor's employees. The new full-time jobs cannot be transferred from an applicant's existing facility or location in Texas or created to replace an existing job unless the vacancy caused by the transfer is filled. The jobs requirement does not apply to an eligible project that is a dispatchable electric generation facility.
Businesses not eligible to apply for these incentives include those listed as ineligible to receive a state contract or investment under specific provisions of Texas law (such as the prohibition on contracts with certain foreign-owned companies with critical infrastructure).
For more on this development, see Tax Alert 2023-1081.
Connecticut budget bill extends the corporate surcharge, modifies the pass-through entity tax, makes other changes
On June 12, 2023, Connecticut Governor Ned Lamont signed the budget bill, HB 6941, into law. The bill makes various tax changes, including extending the corporate surcharge, reducing certain individual income tax rates, modifying the pass-through entity tax (PTET), and amending various tax credit provisions.
The 10% corporation business tax (CBT) surcharge is extended for three years to 2023, 2024 and 2025. Interest will not be imposed on underpayments of estimated tax for 2023 resulting from the extension of the surcharge. The surcharge applies to corporations with at least $100 million of annual gross income that have a Connecticut tax liability of more than $250. (This change took effect upon passage and applies retroactively to Jan. 1, 2023).
Starting in 2024, the law reduces the bottom two individual income tax rates from 3% to 2% (applies to single/married filing separate with $10,000 or less in taxable income, $16,000 or less for head of household and $20,000 or less for married filing jointly) and from 5% to 4.50% (applies to single/married filing separate with taxable income over $10,000 but not over $50,000, over $16,000 but not over $80,000 for head of household and over $20,000 but not over $100,000 for married filing jointly).
Effective for tax years beginning on or after Jan. 1, 2024, the law makes the PTET elective; before 2024, the PTET is mandatory. The election to be subject to the PTET is made annually by submitting a written notice of the election to the tax commissioner by the due date or extended due date of the entity's return. The law changes the method for calculating the tax base, providing that the PTET due is equal to 6.99% multiplied by the tax base, which is equal to the resident portion of unsourced income plus modified Connecticut source income. The law also eliminates (1) the CBT tax credit for PTET paid (the individual income tax credit is retained), and (2) the option for an elective PTE to file a combined return with one or more commonly owned electing PTEs. In addition, the law eliminates the provision that waived the filing requirement for nonresident members whose only source of Connecticut income was from the PTE and the PTET credit satisfied the member's Connecticut income tax liability. Instead, the law reimposes the requirement that PTEs file a composite return for and pay the tax on behalf of nonresident members whose only Connecticut source income is from the PTE. The amount paid on behalf of the nonresident is reduced by the member's direct and indirect PTET credit that was properly reported by the PTE.
The law modifies various tax credit provisions. Enhancements to the human capital investment tax credit, which can be claimed against the CBT: (1) increase the amount of the credit to 10% (from 5%) for most eligible investments and to 25% for eligible child-care related expenditures; (2) make a credit-eligible investment donations or capital contributions to an exempt organization for establishing child-care centers in Connecticut for use by children residing in the community; and (3) allow corporations to use the 25% credit for eligible child-care related expenditures to reduce up to 70% of its CBT liability (instead of the 50.01% reduction that would otherwise apply). These changes apply to tax years beginning on or after Jan. 1, 2024.
Modifications to other tax credits do the following:
Lastly, HB 6941 expands the list of nonprescription drugs exempt from sales and use tax to include nonprescription opioid antagonists. The exemption takes effect and applies to sales occurring on or after July 1, 2023.
Illinois: New law (SB 1963) modifies investment partnership and pass-through entity tax (PTET) provisions. Under Illinois law, investment partnerships are not subject to the entity level replacement tax and their partners treat the income as nonbusiness income allocable to their state of residence or commercial domicile. For tax years ending before Dec. 31, 2023, the definition of an investment partnership requires the partnership not be a dealer in a qualifying security and that no less than 90% of a partnership's cost of its total assets2 and its gross income be from qualifying investment securities.3 Under this definition, many partnerships that are partners in lower-tier partnerships never met the test because of the flow-up of the lower-tier partnership operating activities. For tax years ending on or after Dec. 31, 2023, the definition of a qualifying investment security, for purposes of determining whether a partnership is an investment partnership, is expanded to include lower-tier partnership interests if it qualifies, in the hands of the partnership, as a security within the meaning of 15 USC § 77b(a)(1). Further the revised definition of an investment partnership does not change the 90% total asset requirement (as previously defined) but modifies the gross income provision to require that no less than 90% of the investment partnership's gross income is from qualifying investment securities (as previously defined) and the distributive share of partnership income from lower-tier partnership interests to meet the definition of qualifying investment security (gross income does not include income from a partnership operating at a federal taxable loss).4(Emphasis added to highlight new language.)
Accompanying the modification to the definition of investment partnership, new paragraph (d) is added to the nonresident withholding requirements of 35 ILCS 5/709.5. For tax years ending on or after Dec. 31, 2023, an investment partnership that now qualifies because of the modification to the investment partnership definition, must withhold tax from each nonresident partner (except for partners exempt from certain taxes) based on the amount of business income that would be apportioned to Illinois and nonbusiness income that would be allocated to Illinois, if not for the modification of the investment partnership definition. If the partner is a partnership or a subchapter S corporation, the applicable tax rate is the individual tax rate of 4.95%, rather than the entity's applicable replacement tax rate. The withholding for all other partners is based on the partner's applicable tax rate. Generally, partnerships that previously qualified as investment partnerships under the historic provisions will likely not see a change to their withholding requirements.
In regard to the PTET, SB 1963 modifies the definition of net income to allow a new deduction in computing base income (i.e., income before apportionment) for income distributions to a retired partner to the extent the partner's distribution is retirement income, which includes income that is excluded from the computation of net earnings from self-employment by IRC § 1402. This change is effective for tax years ending on or after Dec. 31, 2023. Ill. Laws 2023, Pub. Act 103-0009 (SB 1963), signed by the governor on June 7, 2023. Other tax changes in SB 1963, an omnibus tax bill, are discussed in Tax Alert 2023-1098.
Illinois: New law (HB 3817) increases the exemption from the annual franchise tax paid by registered corporations to the first $5,000 of liability for reports due on or after Jan. 1, 2024. The $1,000 exemption remains in place for reports due on or after Jan. 1, 2021 and before Jan. 1, 2024. Ill. Laws 2023, Pub. Act 103-0008 (HB 3817), signed by the governor June 7, 2023.
Oklahoma: New law (SB 602) provides that any depreciation calculated and claimed by a taxpayer electing immediate and full expensing of "qualified property" and "qualified improvement property" cannot be a duplication of any deprecation or bonus depreciation allowed on the taxpayer's federal income tax return. For Oklahoma income tax returns filed on or after Jan. 1, 2023, federal taxable income (FTI) is increased by the amount of depreciation received under federal law for the qualified property or qualified improvement property for which the election has been made on the Oklahoma income tax return for the year in which the property was placed in service. If the taxpayer's return filed before Oct. 1, 2023, does not include the required increase to FTI, the taxpayer will have until June 30, 2024 to file an amended return reflecting such increase. Interest and penalties will not be imposed on taxpayers that timely file a correcting amended return. SB 602 takes effect Nov. 1, 2023. Okla. Laws 2023, SB 602, signed by the governor on May 25, 2023.
Oregon: New law (SB 141) updates the date of conformity to the IRC to for purposes of Oregon's various tax laws to Dec. 31, 2022 (from Dec. 31, 2021). This change applies to transactions or activities occurring on or after Jan. 1, 2023. The effective and applicable dates and the exceptions, special rules and coordination with the IRC, relative to those dates, contained in federal law amending the IRC and enacted before Jan. 1, 2023, apply for Oregon individual income and corporate excise and income tax purposes to the extent such can be made applicable. The law takes effect on the 91st day after the legislature adjourns sine die. Ore. Laws 2023, ch. 171 (SB 141), signed by the governor on June 7, 2023.
Texas: New law (SB 1243) allows a taxable entity to (1) exclude from its total revenue qualifying broadband grant proceeds for purposes of broadband deployment in Texas, (2) include as cost of goods sold any expenses paid using qualifying broadband grant proceeds for such purpose, and (3) include as compensation any expense paid using qualifying broadband grant proceeds for such purposes if the expense is otherwise includable as compensation. The law took effect immediately and it applies only to a report originally due on or after Jan. 1, 2023. Tex. Laws 2023, SB 1243, signed by the governor on May 23, 2023.
Texas: Approved resolution (HJR 132) proposes a constitutional amendment that would prohibit the imposition of an individual net worth or wealth tax, including a tax based on the different between the assets and liabilities of an individual or family. The proposed constitutional amendment will be voted on during the general election on Nov. 7, 2023. HJR 132 was approved by the legislature on May 23, 2023 and filed with the Secretary of State on May 24, 2023.
Vermont: New law (HB 471) updates Vermont's conformity to federal law to the Internal Revenue Code as in effect on Dec. 31, 2022 (from Dec. 31, 2021). This change took retroactive effect on Jan. 1, 2023 and applies to tax years beginning on and after Jan. 1, 2022. Vt. Laws 2023, HB 471, signed by the governor on June 19, 2023.
SALES & USE
Alabama: New law (HB 479) reduces the sales and use tax rate imposed on sales of food from 4% to 3%, effective Sept. 1, 2023. The rate will be reduced to 2% on Sept. 1, 2024, if a revenue growth requirement is met for the fiscal year ending Sept. 30, 2025. If the revenue growth requirement is not met, the rate reduction will occur in a subsequent fiscal year when the growth requirement is satisfied. Food has the same meaning as it is defined under the federal Supplemental Nutrition Assistance Program. Ala. Laws 2023, Act 554 (HB 479), signed by the governor on June 15, 2023.
Alabama: New law (HB 77) increases the amount of the average monthly sales tax liability for required estimated payments from $5,000 to $20,000 during the preceding calendar year. This change takes effect Oct. 1, 2023. Ala. Laws 2023, Act 422 (HB 77), signed by the governor on June 9, 2023.
Illinois: New law (SB 1963) extends the sales and use tax exemption for aircraft related materials, modifies the taxation of certain fuels, and expands the farm machinery and equipment exemption. The exemption for materials, parts, equipment, components and furnishings incorporated into an aircraft for the repair, maintenance, refurbishment, modification, completion, or replacement of the aircraft is extended through Dec. 31, 2029 (from Dec. 31, 2024). (This exemption applies for purposes of the Use Tax Act (UTA), the Service Use Tax Act (SUTA), the Service Occupation Tax Act (SOTA), and the Retailers' Occupation Tax Act (ROTA).) Effective until Jan. 1, 2024, the law also limits the application of the exclusion from this exemption for any materials, parts, equipment, components and consumable supplies used in the modification, replacement, repair and maintenance of aircraft engines or power plants. Starting in 2024, the definition of what the exemption applies to is expanded to include persons that modify, replace, repair, and maintain aircraft engines or power plants.
The law modifies the taxable portion of proceeds from sales of gasohol, mid-rate ethanol blends and majority blended ethanol fuel and modifies the definitions of gasohol and majority blended ethanol and adds the definition of mid-rate ethanol blends. Before 2024 and after 2028, UTA and ROTA applies to 100% of the proceeds of gasohol sales; the amount is reduced to 90% for years 2024 through 2028. For years 2024 through 2028, UTA and ROTA applies to 80% of the proceeds from sales of mid-range ethanol blends, with the tax applying to 100% of such proceeds for sales made after 2028. UTA and ROTA, however, will apply to 100% of the proceeds if at any time during this period the tax rate is 1.25%. The law extends the UTA and ROTA exemption for majority blended ethanol fuel to sales made before Dec. 31, 2028 (from Dec. 31, 2023). Similar changes were made for SUTA and SOTA purposes; SUTA and SOTA is imposed on the selling price of property transferred as an incident to the sale of services.
Effective Jan. 1, 2024, the law expands the farm machinery and equipment exemption to include electrical power generation equipment used primarily for production agriculture. The exemption applies for UTA, SUTA, SOTA and ROTA. Ill. Laws 2023, Pub. Act 103-0009 (SB 1963), signed by the governor on June 7, 2023. Other tax changes in SB 1963, an omnibus tax bill, are discussed in Tax Alert 2023-1098.
Oklahoma: New law (SB 34) extends the sales and use tax exemption for the sale, lease, rental, storage, use or other consumption of qualifying broadband equipment by an Internet service provider or its subsidiaries if the property is directly used or consumed by the provider/subsidiary in or during the distribution of broadband Internet services. Prior law required the enactment of an incentive award formula by Jan. 1, 2023, in order for the exemption to remain effective. Failure to enact the formula would have resulted in the sunsetting of the exemption at the end of 2023. SB 34 repeals this contingency; thus, allowing for the exemption to continue. This law is operative on and after the effective date of this Act — June 2, 2023. Okla. Laws 2023 (1st Special Sess.), SB 34, became law without governor's signature on June 2, 2023.
Federal: In Notice 2023-45, the IRS updated earlier guidance on defining "energy communities" for purposes of the increased production tax credits (PTCs) under IRC §§ 45 and 45Y and investment tax credits (ITCs) under IRC §§ 48 and 48E. The earlier notice (Notice 2023-29, Tax Alert 2023-0675) described what the IRS intends to include in proposed rules on energy communities. Taxpayers with qualifying projects located in energy communities can get up to a 10% increase in either credit. Notice 2023-29 defined energy communities to include brownfields, statistical areas and coal closure census tracts. In Notice 2023-47, the IRS explained how to determine if project areas qualify as statistical areas or coal closure census tracts. For additional information on this development, see Tax Alert 2023-1083.
Federal: The IRS has issued temporary (TD 9975) and proposed (REG-105595-23) regulations on the "elective payment election" of the advanced manufacturing investment credit (AMIC), which was enacted by the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022. The proposed regulations would implement the provisions of IRC § 48D(d) and modify Prop. Reg. § 1.48D-6 of the proposed regulations issued in March 2023. For additional information on this development, see Tax Alert 2023-1080.
Alabama: New law (HB 439) modifies the Growing Alabama Credit to provide that the credit from a parent or holding company may be claimed by the subsidiary if both parent or holding company and subsidiary are filing as part of an Alabama consolidated return. This change applies to tax years beginning on or after Jan. 1, 2021. Ala. Laws 2023, Act 313 (HB 439), signed by the governor on May 30, 2023.
Colorado: New law (HB 23-1272) extends and enacts new tax credits intended to reduce greenhouse gas emissions. The law extends through 2028 (from 2025) income tax credits for the purchase or lease of electric and plug-in hybrid electric passenger vehicles. The law, starting July 1, 2023, increases the amount of credit available to $5,000 for a purchase or lease (from $2,000 for a purchase or $1,500 for a lease) of such vehicle, but annually reduces the amount of the credit ($3,500 in 2025, $1,500 in 2026, $1,000 in 2027, and $500 in 2028). An additional $2,500 credit is available for electric passenger vehicles under $35,000. The amount of credit is reduced by half if the revenue forecast projects that state revenues will not increase by at least 4% in the next fiscal year. The law extends the innovative motor vehicle credit for electric and plug-in hybrid electric trucks through 2032 (from 2025). Credits are also available for the lease or purchase of medium-duty electric trucks and heavy-duty trucks. The amount of the credit varies, depending on the weight of the truck. The law modifies provisions for assigning these credits to a financing entity or a motor vehicle dealer, effective for purchases or leases completed on or after Jan. 1, 2024.
The law creates the following refundable income tax credits that are available for tax years 2024 through 2032:
In addition, the law creates a heat pump technology and thermal energy network income tax credit and sales and use tax exemption, a tax credit for retailers that sell electric bicycles, a sustainable aviation fuel production facility income tax credit, and it allows for advance payment of certain income tax credit. Lastly, the law modifies the severance tax ad valorem credit by reducing the credit amount from 87.5% to 75% of the ad valorem taxes assessed or paid to a local government on oil and gas production in 2024 and 2025, among other changes to this credit. Colo. Laws 2023, HB 23-1272, signed by the governor May 11, 2023.
Colorado: New law (HB 23-1260) provides incentives to encourage investments in semiconductor and advanced manufacturing in Colorado. The law permits taxpayers eligible to claim the enterprise zone investment tax credit (ITC), the enterprise zone new employee tax credit (NETC) and the enterprise zone research and development tax credit (R&D) to apply to the Colorado Economic Development Commission for a refundability certificate, which allows the taxpayer to claim a refund for the portion of these credits that exceed their tax liability. The refund is 80% of the credits listed on the refund certificate that are earned by the taxpayer during the 12 years following the commission's approval and are not used to offset the taxpayer's state income tax due. The amount of credit certificates that can be approved is capped at $15 million during any fiscal year, with a $75 million cap for all approved refunds for all fiscal years from July 1, 2023 through June 30, 2028. For tax years beginning on or after Jan. 1, 2023 but before Jan. 1, 2036, municipalities and counties may create incentive zones related to semiconductor manufacturing, designated as CHIPS Zone. In designated CHIPS Zone, taxpayers are eligible for the ITC, NETC and R&D credit and are eligible to apply for approval to make these credit refundable. All CHIPS Zones will terminate automatically on Dec. 31, 2040. Lastly, for tax years beginning on or after Jan. 1, 2024 but before Jan. 1, 2029, an advanced manufacturing or semiconductor manufacturing businesses that create at least 20 jobs in Colorado with an average yearly wage of at least 75% of the average wage of the county in which the taxpayer is located can apply to make the Colorado jobs growth incentive tax credit refundable. Colo. Laws 2023, HB 23-1260, signed by the governor May 11, 2023.
Colorado: New law (HB 23-1281) creates a refundable income tax credit for qualified uses of clean hydrogen. The credit is available for tax years 2024 through 2032, and the amount of credit varies based on whether the use of the clean hydrogen results in a tier one or tier two greenhouse gas emissions rate in the income tax year. The tax credit is capped at $1 million for tax years 2024-2025; capped at $500,000 for tax years 2026-2028; and capped at $250,000 for tax years 2029-2032. Colo. Laws 2023, HB 23-1281, signed by the governor May 22, 2023.
Illinois: New law (SB 1963) expands the Reimagining Energy and Vehicles in Illinois Act (REV) credits to address agreements entered into after the enactment of SB1963 (June 7, 2023) and before June 1, 2024, for applicants that (1) are electric vehicle manufacturers, electric vehicle component manufacturers or renewable energy manufactures, or (2) convert or expand existing facilities in Illinois to these capabilities. To be eligible, the applicant must make an investment of at least $500 million in capital improvements within a 60-month period and retain at least 800 full-time jobs at the project. SB 1963 also modifies various credit and incentive provisions as follows: (1) extends the historic preservation credit through Dec. 31, 2028 (from Dec. 31, 2023); (2) allows the Illinois Department of Revenue to certify two additional pilot River Edge Redevelopment Zones, including one in Joliet and one in Kankakee; (3) expands designation as a "high impact business" to include a business that intends to establish a new cultured cell material food production facility in Illinois; (4) modifies the definition of "startup taxpayer" for purposes of the Economic Development for a Growing Economy (EDGE) Tax Credit Act; (5) modifies the Angel Investment Credit by increasing the amount of the credit to 35% for an investment made in a new business venture that is (a) a minority-owned business, a woman-owned business or a business owned by a person with a disability, or (b) located in a county with a population of 250,000 or less; (6) modifies the New Markets Development Program's definition of "qualified equity investments," increases the credit's annual cap and extends the credit's sunset date to fiscal years following fiscal year 2031 (from fiscal year 2024); and adds guidance and structure to the aviation fuel purchase credit. Ill. Laws 2023, Pub. Act 103-0009 (SB 1963), signed by the governor on June 7, 2023. Other tax changes in SB 1963, an omnibus tax bill, are discussed in Tax Alert 2023-1098.
Indiana: New law (HB 1454) establishes tax credits for employing individuals with disabilities and historic rehabilitation. Effective Jan. 1, 2024, a tax credit is available to an eligible taxpayer that employs an individual whose employment is referred to the taxpayer through a vocational rehabilitation service program for individuals with disabilities and who was initially hired by the employer after Dec. 31, 2023. To qualify for the credit, the individual must work on average at least 20 hours per week for the taxpayer at a rate comparable to other employees who perform similar tasks. The amount of the credit depends on the requirements the taxpayer satisfies. Excess credit can carryforward for up to five years; carry back is not allowed. The credit expires on Dec. 31, 2028. Also starting in 2024, the Indiana Economic Development Corporation may award a tax credit to a qualified taxpayer who completes restoration and preservation of a qualified historic structured if the total amount of qualified rehabilitation expenditures is at least $5,000. The amount of credit is 25% of qualified rehabilitation expenditures made by a taxpayer for restoration and preservation of a qualified historic structure. The credit is increased to 30% of such expenditures if the historic structure is owned by an exempt organization under IRC §501(c)(3) or it is not income producing. Excess credit can be carried forward for up to 10 years; carryback is not allowed. The historic rehabilitation credit provision expires on Jan. 1, 2030. Ind. Laws 2023, Pub. Law 236 (HB 1454), signed by the governor on May 4, 2023.
Louisiana: New law (SB 69) extends the sunset date of the research and development tax credit through Dec. 31, 2029 (from Dec. 31, 2025). La. Laws 2023, Act 251 (SB 69), signed by the governor on June 12, 2023.
Colorado: New law (HB 23-1233) effective for property tax years beginning before Jan. 1, 2023 but before Jan. 1, 2030, exempts electric vehicle charging stations from the levy and collection of property tax. Colo. Laws 2023, HB 23-1233, signed by the governor on May 23, 2023.
Iowa: New law (HF 111) provides an exception to the real estate transfer tax for deeds that transfer distributions of assets to the beneficiaries of a trust when conveyed without consideration. This change takes effect July 1, 2023. Iowa Laws 2023, HF 111, signed by the governor on June 1, 2023.
COMPLIANCE & REPORTING
Colorado: New law (HB 23-1277) changes the deadline for filing Colorado's corporate income tax return from April 15 to May 15 (for non-calendar year filers, by the 15th day of the fifth month following the close of the tax year). Further, the law provides that the Executive Director may grant a reasonable extension of time to file a return and for paying tax. This change is effective for tax years beginning on and after Jan. 1, 2024. The law also consolidates two of three options available to partnerships and S corporations for ensuring that income taxes of nonresident owners are paid — merging the options to file a composite return and the option to withhold an estimated payment. Starting in 2024, S corporations and partnerships required to file a return also must file a composite return and make composite tax payments on behalf of all its nonresident shareholders and partners. The composite filing can exclude nonresident shareholders and nonresident partners who agree to file a return and pay tax due. (Such agreement must be filed with the return.) The composite payment is the aggregate income from Colorado sources multiplied by the highest marginal individual income tax rate. Colo. Laws 2023, HB 23-1277, signed by the governor on June 1, 2023.
Colorado: New law (HB 23-1277) replaces current provisions for reporting federal adjustments to income with the Multistate Tax Commission's model statute for reporting federal adjustments to taxable income and reporting federal partnership audit and adjustments. Generally, taxpayers have 180 days to file an amended return and pay any Colorado tax due with respect to a final federal adjustment, except for final federal adjustments arising from a partnership level audit or administrative adjustment request. The new rules for reporting federal partnership audits and adjustments require that within 90 days after the final determination date of a final federal adjustment, a partnership must file a completed federal adjustments report with Executive Director, notify each of its direct partners of their distributive share of the final federal adjustment, file an amended composite return for direct partners or an amended return and pay the addition amount due had the final federal adjustment been reported properly, and for direct partners pay the additional amount that would have been due had the final federal adjustment been reported properly. Within 180 days after the final determination date, each direct partner not included in an amended composite return and that is subject to tax must file a federal adjustment report reporting the adjustment to their distributive share and pay additional state tax, penalty and interest due, less any amounts paid on behalf of such partner. Alternatively, an audited partnership can make an irrevocable election to file a federal adjustments report and pay tax, penalty and interest due. An electing partnership will have 90 days to file a completed federal adjustment report and notify the Executive Director that it is making the election. The electing partnership will have 180 days after the final determination date to pay a determined amount for its direct and indirect partners. These reporting and payment provisions apply to direct and indirect partners of an audited partnership that are tiered partners. An audited partnership or tiered partner may enter into an agreement with the Executive Director to use an alternative reporting and payment method, if it demonstrates that the requested alternative method will reasonably provide for the reporting and payment of tax, penalty and interest due. The law sets forth the period in which the Executive Director can assess additional tax, interest and penalties arising from a federal adjustment. These provisions apply to any adjustments to a taxpayer's federal taxable income with a final determination date occurring on and after Jan. 1, 2024. Colo. Laws 2023, HB 23-1277, signed by the governor on June 1, 2023.
PAYROLL & EMPLOYMENT TAX
Minnesota: Bloomington, Minnesota has published initial rules implementing its Earned Sick and Safe Leave (ESSL) ordinance, which takes effect July 1, 2023. All employers are required to provide ESSL to all employees, with certain exceptions, who have physically worked more than 80 hours in the calendar year within the city boundaries of Bloomington. Hours worked outside of Bloomington do not count toward ESSL coverage. Employees accrue one hour of ESSL for every 30 hours worked up to 48 hours per year and may carry over up to 80 hours of unused ESSL from year to year. Accrual of ESSL begins July 1, 2023, or the first day of employment, whichever is later. For more on this development, see Tax Alert 2023-0968.
Minnesota: On May 25, 2023, Governor Tim Waltz signed into law HF 2, which establishes a state aid family and medical leave (PFML) insurance program to be administered by a new division of the Minnesota Department of Economic Development (DEED). The program will initially be funded with state revenue so that PFML contributions and benefits both start on Jan. 1, 2026. However, for the state to determine initial funding for the start of the program, employers will be required to file quarterly reports with the DEED effective July 1, 2025. The program provides up to 20 weeks of PFML benefits for an employee's own serious health condition and for other reasons including the care of an employee's family member, bonding, safety or a qualifying exigency. For more on this development, see Tax Alert 2023-1111.
North Dakota: The North Dakota State Tax Commission issued 2023 revised income tax withholding rates and instructions in late May reflecting personal income tax cuts, which under HB 1158, are retroactive to Jan. 1, 2023. Employers should begin using the revised withholding rates as soon as possible. The supplemental withholding rate of 1.84% remains unchanged. For more on this development, see Tax Alert 2023-1011.
Illinois: New law (SB 1963) effective Jan. 1, 2024, requires a booking intermediary5 that facilitates the processing and fulfillment of a reservation for a parking space for an operation not registered under 35 ILCS 525/10-30, to collect the parking excise tax on the purchase price from the purchaser and remit it to the Illinois Department of Revenue (Department). The booking intermediary and unregistered operator are jointly and severally liable for the payment of tax. Booking intermediaries are also required to collect the tax on (1) the purchase price paid by the purchaser on behalf of registered operators and (2) separate service charges that are included in the purchase price (even separate charges the booking intermediaries retain). Beginning Jan. 1, 2024, booking intermediaries are liable for and must remit tax to the Department on any separately stated fees that it charges to the customer. Booking intermediaries that collected the tax on behalf of registered operators, however, must remit the tax to the operator who then remits the tax to the State. Operators remain liable for remitting tax on the remainder of the purchase price. Penalty and interest provisions apply to booking intermediaries required to register for the parking excise tax. Ill. Laws 2023, Pub. Act 103-0009 (SB 1963), signed by the governor on June 7, 2023. Other tax changes in SB 1963, an omnibus tax bill, are discussed in Tax Alert 2023-1098.
Montana: New law (HB 55) establishes a tax on electric vehicle charging stations. The tax is imposed at a rate of 3 cents a kilowatt hour (or its equivalent) in addition to the public utility's approved rate on the electric current used to charge or recharge an electric vehicle's battery at public charging stations installed after July 1, 2023. Starting July 1, 2025, the tax also will apply to public legacy charging stations (i.e., charging stations operating before July 1, 2023 that did not have a metering system in place capable of measuring electricity transferred from charging station to the vehicle). Effective July 1, 2028, the additional electric vehicle registration fee is reduced by 30%. Mont. Laws 2023, ch. 619 (HB 55), signed by the governor on May 19, 2023.
VALUE ADDED TAX
International — Costa Rica: On June 1, 2023, the Tax Authority updated the list of digital services that will incur the 13% value added tax (VAT). According to the article 30 of the VAT Law, entities that issue credit or debit cards, must collect a 13% VAT when their cardholders purchase certain services through internet or any other digital platform. For more on this development, see Tax Alert 2023-1007.
International — China: The Ministry of Finance (MOF) and State Taxation Administration (STA) for The People's Republic of China recently introduced the "super-input VAT credit" policy for integrated circuit (IC) enterprises through Caishui  No. 17 (Circular 17). The policy aims to support the development of the IC industry. From Jan. 1, 2023 to Dec. 31, 2027, general value-added tax (VAT) taxpayers engaging in IC design, manufacturing, equipment, materials, packaging and testing would be eligible for an extra 15% "super-input VAT credit." This allows qualified IC enterprises to credit their eligible input VAT at a rate of 115%. For additional information on this development, see Tax Alert 2023-1008.
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 If the project is in a county with a population of at least 750,000, the business must create at least 75 required jobs and invest at least $200 million by the end of the first tax year of the incentive period prescribed by the agreement. The number of required jobs and the amount of investment is reduced to 50 and at least $100 million, respectively, if the project is in a county with a population of at least 250,000 but less than 750,000. The number of required jobs and the amount of investment is reduced to 35 and at least $50 million, respectively, if the project is in a county with a population of at least 100,000 but less than 250,000. The number of required jobs and the amount of investment is reduced to 10 and at least $20 million, respectively, if the project is in a county with a population of less than 100,000.
2 Specifically, "(i) no less than 90% of the partnership's cost of its total assets consists of qualifying investment securities, deposits at banks and other financial institutions, and office space and equipment reasonably necessary to carry on its activities as an investment partnership; … "
3 Specifically, "(ii) no less than 90% of its gross income consists of interest, dividends, and gains from the sale or exchange of qualifying investment securities; … "
4 The law also removes the requirement that the partnership is not a dealer in qualifying investment securities.
5 Definition section is expanded to include "booking intermediary" and modifies the definition of "operator" to specifically exclude a booking intermediary (except if the booking intermediary is required to be registered under 35 ILCS 525/10-30).