August 9, 2023
State and Local Tax Weekly for July 21 and July 28
Ernst & Young's State and Local Tax Weekly newsletter for July 21 and July 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.
Ohio budget legislation contains tax changes affecting businesses and individuals
On July 3, 2023, Governor Mike DeWine signed HB 33, Ohio's biennial budget legislation for the fiscal period July 1, 2023 through June 30, 2025. HB 33 makes several changes to Ohio's tax laws.
Commercial Activity Tax (CAT)
Computation of tax: Under current law, the first $1 million in Ohio gross receipts is excluded from the CAT base. Ohio gross receipts over $1 million are taxed at a 0.26% rate. Taxpayers that have more than $150,000 but less than $1 million in Ohio gross receipts file an annual return and are subject to a $150 minimum tax. HB 33 phases in an increase in the exclusion amount. For tax periods beginning in 2024, the exclusion amount increases to $3 million; for tax periods beginning in 2025, the exclusion amount increases to $6 million.
R&D credit: Ohio Rev. Code § 5751.51 allows a credit against the CAT for qualified research expenses incurred in Ohio. For CAT combined or elective consolidated filers, the credit is shared among the members of the combined or consolidated group. HB 33 departs from the shared credit approach and now requires the credit to be calculated on a member-by-member basis. Expenses of a member may be included in the aggregate credit only if that entity is a member of the group on December 31 of the year in which the qualified research expenses are incurred. HB 33 also requires a taxpayer claiming the credit to maintain records used in calculating the credit for four years after the later of the return due date or the actual filing date.
Exclusion for broadband funding: Effective for tax periods ending on or after HB 33's effective date, there is an exclusion for federal, state, or local funding received, or debt forgiven, to expand Internet broadband service in Ohio, which includes video service, voice-over-internet-protocol service, and internet protocol-enabled service.
Pass-through entity and individual income taxes
Pass-through entity tax (PTET) and resident credit for taxes paid to other states: Under current law, Ohio residents receive a credit for taxes paid to other states, but the credit does not apply to entity-level taxes. For purposes of the credit, HB 33 provides that a resident taxpayer's Ohio adjusted gross income (AGI) that is subject to an income tax in another state includes: (1) an entity-level tax imposed on a PTE through a composite return covering all PTE owners; or (2) a PTET designed to avoid the $10,000 federal cap on deductions of state and local tax. However, the tax liability against which the credit applies is first reduced because it is computed with an Ohio AGI that has been reduced by Ohio's business income deduction. HB 33 also requires an individual investor in a PTE to add back to federal AGI any taxes deducted on the basis of a PTET designed to comply with the requirements of IRS Notice 2020-75. In addition, any taxes added back that are business income to the individual are eligible for Ohio's business income deduction. These changes generally apply to tax years ending on or after Jan. 1, 2023, but HB 33 allows taxpayers to elect to apply the changes to tax years ending on or after Jan. 1, 2022, by filing an amended or original return for that year.
Individual income tax: HB 33 phases in, over two years, individual income tax reductions taking Ohio from four brackets to two. HB 33 also authorizes individual income tax deductions for: (1) payments from the government or any railroad company, including payments for lost business, received by the taxpayer as a result of the Feb. 3, 2023 train derailment in East Palestine, Ohio; and (2) up to $10,000 a year in contributions to a homeownership savings-linked deposit account for couples filing jointly ($5,000 for separate filers), with a lifetime maximum per account of $25,000, effective on or after Jan. 1, 2024.
Sales and use tax changes
Starting on Oct. 1, 2023, a sales tax exemption for baby products will be effective. The new exemption will include child diapers, creams and wipes, car seats, cribs, and strollers.
Ohio Rev. Code § 5739.02(B) exempts from sales and use tax sales to the State of Ohio or any of its political subdivisions. HB 33 modifies the exemption by adding a reference to construction materials and services sold or rented to government entities for the purposes of temporary traffic control or drainage.
Municipal income/net profits taxes
Net operating losses (NOLs): From 2018-22, a business could deduct NOLs subject to a limitation of the lesser of 50% of the NOL or 50% of the income needed to reduce municipal taxable income to zero. HB 33 corrects an erroneous cross-reference in municipal tax law, clarifying that the 50% limitation ceased to apply in 2023. Municipalities are required to incorporate this change into their ordinances and apply it to tax years beginning in 2023.
Net profits apportionment: Currently, municipalities may impose a net profits tax on the net profit of businesses operating within their jurisdictions. A business apportions its net profits using an evenly weighted three-factor formula based on the business' payroll, property, and sales. For tax years ending on or after Dec. 31, 2023, HB 33 allows a business with remote workers to elect to apportion payroll, property, and sales to a designated reporting location instead of the remote worker's location. This election is available to businesses that file net profits returns with municipalities or have elected to file their returns in the centralized filing system administered by the Ohio Department of Taxation (Department).
Penalties: Previously, a municipality, or the Department if a business elects in to centralized filing, could impose a penalty of $25 for each month a taxpayer failed to file a required income/net profits tax or withholding return, up to $150 for each return. HB 33 reduces the penalty to a one-time $25 penalty and permits an abatement of penalty for a taxpayer's first failure to timely file. These changes apply to tax years ending on or after Jan. 1, 2023.
Filing extensions for businesses: Under current law, the extended filing deadline for individuals and businesses is the same as the federal deadline. HB 33 provides an additional, automatic one-month filing extension for municipal net profits tax returns where a business entity has received a six-month federal extension, bringing the full duration of the extension to seven months beginning in tax years ending on or after Jan. 1, 2023.
Prohibited notices and inquiries on extended returns: HB 33 prohibits a municipal tax administrator or the Department from sending any inquiry or notice to a taxpayer with an extension in place for its municipal return until after the taxpayer either files the return or the extended due date passes.
HB 33 also modifies employer income tax withholding provisions, clarifies the application of the financial institutions tax, increases the rate and applicability of the sports gaming tax, repeals a corporation franchise tax amended filings requirement (the corporation franchise tax was repealed in 2013), and allows the Department to send the issuance of a tax notice by ordinary mail, email or text message (in addition to certified mail).
For additional information on these developments, see Tax Alert 2023-1218.
Multistate: The Multistate Tax Commission (MTC) issued a proposed draft model rule that would provide guidance on sourcing income of partnerships engaging in investment activities. MTC, "State Tax Treatment of Investment Partnerships Proposed Draft Rule — Regulation Form" (issued June 15, 2023).
Alabama: The Alabama Department of Revenue (AL DOR) announced that it was extending the due date for certain pass-through entities (PTEs) to file an election to be taxed at the entity level for the 2022 tax year. The deadline is being extended for "taxpayers who showed an intention to make an election but erroneously failed to do so by the original due date." Such taxpayers include those who made estimated payments or filed returns as if the election had been made or made an entity-level tax payment before the due date of the respective return. The AL DOR said it will recognize the entity level elections filed using My Alabama Taxes by the due date of the 2022 electing PTE return with applicable extensions. Ala. Dept. of Rev., Press Release "My Alabama Taxes Open on July 10 for Filing Extended Election for 2022 Tax Year" (posted July 10, 2023).
California: New law (SB 131), effective for tax years beginning on or after Jan. 1, 2023, requires the income of an incomplete gift nongrantor trust be included in a qualified taxpayer's gross income to the extent the trust income would be taken into account in computing the taxpayer's taxable income if the trust were treated as a grantor trust. Income of an incomplete gift nongrantor trust, however, will not be include in gross income when certain conditions are met. The law defines "incomplete gift nongrantor trust" as a trust that meets both of the following: (1) it does not qualify as a grantor trust under the IRC relating to grantors and others treated as substantial owners; and (2) the qualified taxpayer's transfer of assets to the trust is treated as an incomplete gift under IRC §2511 relating to transfers in general. Cal. Laws 2023, ch. 55 (SB 131) signed by the governor on July 10, 2023.
San Francisco, CA: Enacted ordinance (Ordinance No. 151-23) amends the Business and Tax Regulations Code (BTR Code) by postponing gross receipts tax rate increases and providing new tax credits to certain businesses that open a location in the city. The ordinance extends through Dec. 31, 2024, the gross receipts tax (GRT) rates in effect on Jan. 1, 2022 for the following business activities: retail trade, wholesale trade and certain services (BTR Code § 953.1); manufacturing, transportation and warehousing, information, biotechnology, clean technology and food services (BTR Code § 953.2); and accommodations, utilities and arts, entertainment and recreation (BTR Code § 953.3). The GRT rates that would have taken effect Jan. 1, 2023 for these activities now will take effect on Jan. 1, 2025. (Additional rate changes will take effect on Jan. 1, 2026.) The ordinance also provides an annual GRT credit to a person or combined group (collectively "business") that opens a physical location in designated areas1 within San Francisco on or after Jan. 1, 2023 through Dec. 31, 2027, if the business did not have a physical location in the city for at least three years before opening the physical location. For a business that is not engaged in San Francisco as an administrative office, the GRT credit equals 0.45% of the business's San Francisco taxable gross receipts from one or more of the business activities of information, administrative and support services, financial services, insurance, and professional, scientific and technical services. For businesses engaged in San Francisco as administrative office, the credit equals 0.7% of its taxable payroll expense. The credit is available for each of up to three tax years immediately following the tax year in which the physical location was opened in a designated area, provided that the business maintains the physical location in such area in the tax year the credit is taken. A business takes the credit for each tax year on an original GRT return. The amount of credit is capped at $1 million per tax year. The credit is not refundable and cannot be carried forward. Furthermore, the credit may not be claimed for tax years beginning on or after Jan. 1, 2029. The ordinance becomes effective 30 days after enactment and is retroactive to Jan. 1, 2023. San Francisco Laws 2023, Ordinance No. 151-23 (File No. 230155), signed by the mayor on July 28, 2023.
Colorado: The Colorado Department of Revenue (CO DOR) is proposing a new Rule 39-22-104(3)(r), which is intended to clarify the requirement to add back the amount an electing pass-through entity (PTE) owner is allowed to deduct under IRC §199A. The proposed rule would provide that an electing PTE owner who takes a federal qualified business income deduction under IRC §199A and adds that amount back to federal taxable income under C.R.S §39-22-104(3)(o), would not have to make any addition under C.R.S §39-22-104(3)(r). Additional information on the proposal is available here.
Maine: New law (LD 258) updates Maine's date of conformity to the Internal Revenue Code to Dec. 31, 2022 (from Dec. 31, 2021). This change applies to tax years beginning on or after Jan. 1, 2022. Maine Laws 2023, ch. 412 (LD 258), signed by the governor on July 11, 2023.
Minnesota: In Uline, Inc. v. Comm'r. of Revenue,2 the Minnesota Tax Court (tax court) evaluated the application of PL 86-272 to the taxpayer's, a Wisconsin headquartered S corporation, facts and granted both parties' motions for summary judgment on various items. The tax court first focused on activities performed by non-sales personnel — 10 visits by human resources employees to Minnesota during the two-year audit period to attend job fairs. The tax court concluded that this activity did not fall within Minnesota's minimum contacts statute and also observed that the Minnesota Department of Revenue's (Department's) own guidance,3 in the context of sales tax nexus, did not consider holding recruiting events in Minnesota when determining whether an out-of-state business has nexus. The tax court also found that the in-state activities of an individual owner, whose primary office was located outside Minnesota but who performed some of his duties (e.g., answering emails and phone calls using a company-issued electronic tablet and mobile phone) while working from his Minnesota residence, did not result in the individual maintaining an "in home office" and did not create nexus. The tax court then turned to activities conducted in Minnesota by sales personnel, evaluating PL 86-272 protection. The first activity was 10 instances during the two-year audit period of sales representatives accepting a product return from a customer. The tax court rejected the taxpayer's argument that the acceptance of product returns was ancillary to solicitation. The tax court, however, concluded that the reporting of customer complaints, including the collection of samples of purportedly defective products, was ancillary to solicitation. The third activity was the preparation, by sales representatives, of "Market News Notes," which involved obtaining information from customers about competitors' products and business practices. The tax court viewed this activity as distinct from solicitation and unprotected by PL 86-272. Finally, the tax court considered whether the two unprotected activities, the acceptance of product returns and preparation of the Market News Notes, were de minimis. Regarding the product returns, the tax court observed that the company had no written policy requiring sales representatives to perform this activity. In the absence of such a company policy, the 10 instances of product returns were found to be de minimis. There was, however, a company policy for the preparation of the Market News Notes. This policy required sales representatives to prepare two reports each week; the training manuals stressed the importance of this activity. Because this was a required activity, the tax court found that it was not de minimis. As all non-ancillary activities should be considered together for purposes of a de minimis analysis, the two activities, taken together, were not de minimis, so PL 86-272 protection did not apply. For additional information on this development see Tax Alert 2023-1267.
Oregon: New law (HB 2083) extends the sunset date of the elective pass-through entity level tax (PTET) and related personal income tax credit through tax years beginning on or before Jan. 1 2026 (from tax years beginning on or before Jan. 1, 2024). HB 2083 takes effect on Sept. 24, 2023. Ore. Laws 2023, ch. 399 (HB 2083), signed by the governor on July 27, 2023.
Wisconsin: New law (SB 70) increases the amount of the research credit not used to offset the tax due that can be refunded to 25% (from 15%) of the allowable amount of the credit claimed. This increase applies to tax years beginning after Dec. 31, 2023. Wis. Laws 2023, Act 19 (SB 70), approved by the governor with partial veto on July 5, 2023. See also, Wis. Dept. of Rev., Wis. Tax Bulletin 222 (July 2023).
SALES & USE
Colorado: On Aug. 15, 2023, the Colorado Department of Revenue (CO DOR) will host a workgroup meeting to solicit input for sales tax rules to implement law enacted in 2022 (HB 22-1118), that impose significant new penalties on refund claims for sales and use taxes paid by a purchaser to a vendor (Buyer's Claims). (See Tax Alert 2022-0746.) Draft Rule 39-26-703-1 "Protective Claims for Sales or Use Tax Refunds" would provide guidance on protective claims for sales and use tax refunds. Under the general rule, the CO DOR would have the discretion to decide how to process protective refund claims, noting that it would be in the CO DOR and taxpayers "interest … to delay action on protective claims until the pending litigation or other contingency is resolved." The draft rule would define a "protective claim" and would require a protective claim satisfy all of the following: (1) be in writing and signed by the claimant; (2) include the claimant's name, address, social security number (for individuals) or federal employer identification number or Colorado account number (for corporations, partnerships and other entities); (3) identify and describe the contingencies upon which it depends; (4) clearly alert the CO DOR to the nature of the claim; and (5) identify the specific months for which the refund is sought. The draft rule would make clear that "[a] refund claim is not a protective claim merely because the claimant labels it as such." A claimant that timely submits a valid protective refund claim would be able to supplement their claim with additional data, information and documentation upon resolution of the contingency the claim is based on. Draft Rule 39-26-703-2 "Buyer's Claims for Refund of Sales Tax Paid" would prescribe the form for making a refund application for sales or use taxes and the data, information and documentation an applicant must provide, and it would provide guidance on the penalty imposed for incomplete refund claims. An "applicant" filing the protective refund claim would include both the purchaser who paid the sales tax and any person who prepares the refund claim, in whole or in part, on behalf of the purchaser. The draft rule lists the information an applicant would have to include with their refund claim including a complete itemization of all purchases included in the claim, proof of purchase and proof of payment. Certain claims may require the provision of additional data, information and documentation, such as refund claims for machinery used in an enterprise zone or for computer software that is excluded from the definition of tangible personal property. Additional information on the workgroup meeting as well as links to the latest version of the draft rules are available here.
Mississippi: The Mississippi Department of Revenue issued a sales and use tax notice regarding the taxation of purchases of computer software and computer software services following a 2023 law change (SB 2449) that took effect July 1, 2023. (See Tax Alert 2023-0693.) As of that date, Mississippi exempts from sales and use tax remotely accessed software hosted on servers located outside the state, and it allows reasonable allocation of fees/payments for computer software and computer software services that include taxable and nontaxable items. In addition, purchasers of computer software and computer software services can apply for a computer software direct pay permit, which can only be accepted by vendors that sell, rent or lease computer software and computer software services. The notice includes definitions of "computer software" and "computer software services" and explains how to apply for the computer software direct pay permit. Miss. Dept. of Rev., Sales and Use Tax Bureau, Notice 72-23-12 (July 6, 2023).
Missouri: New law (SB 398) will require licensed motor vehicle dealers to collect and remit to the Missouri Department of Revenue (MO DOR) sales tax due on all motor vehicles it sells. This requirement will apply following the development and maintenance of a modernized, integrated system for the titling of vehicles, issuance and renewal of vehicle registrations, among other things. The MO DOR has the authority to promulgate rules to administer this provision. Mo. Laws 2023, SB 398, signed by the governor on July 6, 2023.
Texas: New law (SB 1122) provides a sales and use tax exclusion for medical services, examinations or tests required or authorized for purposes of determining an appropriate level of workers' compensation benefits. SB 1122 took effect immediately. Tex. Laws 2023, SB 1122, signed by the governor on June 18, 2023.
Texas: New law (SB 379) expands the sales and use tax exemption for certain family care items to include wound care dressing, diapers (children or adult), and baby wipes. Items that qualify as "wound care dressing" include individual sterile adhesive bandages, sterile rolls or pads of gauze and surgical and medical tape used to secure wound care dressing; it does not include general purpose absorption items such as cotton balls or swabs, tissues, or appliances/devices used to drain bodily fluids or irrigate body cavities (e.g., drains, suction catheters or irrigation systems.) SB 379 takes effect on Sept. 1, 2023. Tex. Laws 2023, SB 379, signed by the governor on June 18, 2023.
Wisconsin: New law (SB 70) creates a sales and use tax exemption for tangible personal property or property (as defined in Wis. Stat. §77.52(1)(c)) used exclusively for the development, construction, renovation, expansion, replacement, repair or operation of a qualified data center (as defined in Wis. Stat. §238.40(1)(b)) and used solely at the qualified data center. Such property includes computer server equipment, networking equipment, various cabling, substations, fuel piping and storage, among other property. The law also creates a sales and use tax exemption for tangible personal property or property used in the development, construction, renovation, expansion, replacement, or repair of a water cooling or conservation system used exclusively to cool or conserve water for one or more qualified data centers. Such property includes chillers, mechanical equipment, refrigerant piping, cooling towers, water softeners, fans. Lastly, a sales and use tax exemption is created for tangible personal property or property sold to a construction contractor that, in fulfillment of a real property construction activity, transfers such property to a qualified data center, if that property becomes a component of the qualified data center. The Wisconsin Economic Development Corporation must certify a qualified data center for purposes of the exemption. The exemption takes effect Oct. 1, 2023. Wis. Laws 2023, Act 19 (SB 70), approved by the governor with partial veto on July 5, 2023. See also, Wis. Dept. of Rev., Wis. Tax Bulletin 222 (July 2023).
Wisconsin: New law (SB 70) increases the retailers discount for sales tax reported on a sales and use tax return. Effective Oct. 1, 2023, the discount on the total sales tax is increased to 0.75% (from 0.5%), with the maximum that can be deducted on the sales tax return per reporting period increased to $8,000 from $1,000. Wis. Laws 2023, Act 19 (SB 70), approved by the governor with partial veto on July 5, 2023. See also, Wis. Dept. of Rev., Wis. Tax Bulletin 222 (July 2023).
California: New law (SB 131) expands the credit for qualified taxpayers that hire a qualified full-time employee so that it is available to taxpayers engaged in semiconductor manufacturing, semiconductor research and development (R&D), electric airplane manufacturing, lithium production, or manufacturing of lithium batteries. Specifically, for each tax year beginning on or after Jan. 1, 2023 and before Jan. 1, 2026, the requirement that qualified taxpayers who hire qualified full-time employees pay or incur qualified wages attributable to work performed by such employees in a designated census tract or economic development area will not apply to taxpayers engaged in semiconductor manufacturing, semiconductor R&D, electric airplane manufacturing, lithium production, or manufacturing of lithium batteries. For purposes of the credit, persons/entities engaged in semiconductor manufacturing or semiconductor R&D, upon requesting a tentative credit reservation, must self-certify and provide verification, that they intend to apply or have applied for federal funding pursuant to Sections 101 to 106 of, or intend to claim or have claimed the credit under Section 107 of, Division A of the federal CHIPS Act (PL 117-167). Electric airplane manufacturers must certify and verify that they have received a sales and use tax exclusion under CR&TC §6010.8 for an electric vertical takeoff and landing (eVTOL) manufacturer. Persons/entities engaged in lithium production must certify and verify that they are a producer who pays tax on lithium extraction, while lithium battery manufacturers must certify and verify that their primary business (i.e., 50% or more) is lithium battery manufacturing. In addition, these taxpayers also must pay or incur qualified wages during the tax year. Generally, upon hiring a qualified full-time employee, a qualified taxpayers must request a tentative credit reservation from the California Franchise Tax Board within 30 days of complying with the new hire reporting requirement. However, for tax years beginning on or after Jan. 1, 2023 and before Jan. 1, 2024, qualified taxpayers engaged in semiconductor manufacturing, semiconductor R&D, electric airplane manufacturing, lithium production, or manufacturing of lithium batteries will need to request the tentative credit reservation on or before the last day of the month following the close of the tax year for which the credit is claimed. These provisions apply to tax years beginning on or after Jan. 1, 2023. Cal. Laws 2023, ch. 55 (SB 131) signed by the governor on July 10, 2023.
California: New law (SB 132) extends the California Motion Picture and Television Production Credit, which can be claimed against the corporate and individual income taxes, for an additional five years, through 2030. The law also provides a qualified taxpayer with a one-time election to make the credit refundable at a discounted amount over a five-year period. The annual refundable amount is 20% of the total refundable amount (the total refundable amount is defined as 90% of the credit amount that exceeds the "net tax" in the first tax year of the refundable period). A taxpayer also can carryforward excess credit for up to eight years. SB 132 makes other changes to the credit, and it requires a motion picture production that receives a motion picture tax credit hire or assign a safety advisor for California filming activities. Cal. Laws 2023, ch. 56 (SB 132) signed by the governor on July 10, 2023.
Maine: New law (LD 258) establishes the Dirigo business incentives program. For tax years beginning on or after Jan. 1, 2025, a qualified business is allowed a credit equal to 10% of the eligible capital investment placed in service outside Cumberland, Sagadahoc and York counties (the credit amount is reduced to 5% when the investment is placed in service inside such counties) and $2,000 for each qualified employee engaged in a qualified employee training program provided by the business completed in the tax year. The credit is refundable up to $500,000 per tax year. Unused credit can be carried forward for up to four years; carry over amounts may be applied to tax years after the expiration of the certification letter (discussed below). The credit, including carry over amounts, may not exceed $2 million for any one tax year. For purposes of the $500,000 and $2 million caps, specific provisions apply to taxpayers that are partners, shareholders or beneficiaries in a partnership, S corporation, estate or trust and corporations that are members of an affiliated group engaged in a unitary business. For purposes of the credit program, a business must apply to the Commissioner of Economic and Community Development (commissioner) for certification as a qualified business. A certification letter (1) is valid for five years, (2) will describe the qualified business activity for which it is being issued, and (3) may describe qualified business activities in multiple locations and multiple eligible business sectors. A qualified business may be issued more than one certification letter. The following may not be a qualified business: a public utility; a certified Pine Tree Development Zone business; a business with a certificate of approval for the Maine Employment Tax Increment Financing Program; business with a certificate of approval for tax credits allowed under 36 MRSA §§5219-RR (Maine shipbuilding facility investment) or -YY (paper manufacturing facility investment); or a business that has undergone a layoff within the past two tax years. The credit must be recaptured and unused credit carryover will be disallowed if the eligible business property forming the basis of the credit is not used in Maine for the entire five-year period following the date it is placed in services. Unused credit carryover also will be disallowed if the business undergoes a layoff. The law defines terms such as "eligible capital investment" and "eligible business property". The commissioner may not issue certifications for the Pine Tree Development Zone tax credit and the employment tax increment financing benefits after Dec. 31, 2024 (formerly Dec. 31, 2023). Benefits under these programs terminate on Dec. 31, 2034 (from Dec. 31, 2033). Maine Laws 2023, ch. 412 (LD 258), signed by the governor on July 11, 2023.
Oregon: New law (HB 2009) creates a research and development (R&D) tax credit for the semiconductor industry, extends the Enterprise Zone and Long-term Rural Enterprise Zone program and increases the eligibility threshold for the Strategic Investment Program. Oregon's new R&D credit, which is effective for tax years beginning on or after Jan. 1, 2024 and before Jan. 1, 2030, is allowed to eligible taxpayers for increases in qualified research expenses and basic research payments. The credit is determined based on the federal R&D credit, and it is equal to 15% of the "excess amount" of qualified research activity that is performed in Oregon by a qualified semiconductor company in support of a trade or business directly related to semiconductors. The maximum credit allowed under this provision may not exceed $4 million for any taxpayer. Unused credit can be carried for up to five years. For taxpayers with fewer than 3,000 employees employed in Oregon at the close of the tax year, a portion of the unused allowable credit may be refunded. Before claiming a credit, a taxpayer must file for each tax year a written application for certification with, and obtain certification from, the Oregon Business Development District (OBDD). The law describes the information that must be included in the application. In order for a taxpayer be allowed a credit in a tax year beginning in 2024, a taxpayer intending to claim the credit for the 2024 year must register with the OBDD by Dec. 1, 2023. The registration must include documentation of the taxpayer's qualified research expenses and basic research expenses averaged over the three preceding calendar years and a projection for such expenses in 2024. The total amount of tax credits for all qualified semiconductor companies is capped at $35 million for the biennium beginning July 1, 2023; $80 million for the biennium beginning July 1, 2025; $90 million for the biennium beginning July 1, 2027 and $50 million for the fiscal year beginning July 1, 2029.
The law extends the Enterprise Zone and Long-term Rural Enterprise Zone program through June 30, 2032 (from June 30, 2025), except for fulfilment centers; the law also modifies termination provisions related to these zones. In addition, the law increases the eligibility threshold for the Strategic Investment Program to $150 million (from $100 million) or $40 million (from $25 million) for projects located in a rural areas (the thresholds will be adjusted annually for inflation) and increases the amount of the real market value for rural projects that is taxable, which depending on the size of the project, ranges from $40 million, $75 million and $150 million (from $25 million, $50 million and $100 million, respectively). Lastly the law creates a school support fee that ranges between 15% and 30% of the property taxes that otherwise would be due but for the enterprise zone property tax exemption. These provisions have various effective and applicability dates. Ore. Laws 2023, ch. 298 (HB 2009), signed by the governor on July 18, 2023.
PAYROLL & EMPLOYMENT TAX
Alabama: Govern Kay Ivey approved HB 217, which, effective Jan. 1, 2024 and through June 30, 2025, exempts from wages subject to state income tax and withholding the compensation required to be paid to employees for hours worked over 40 per week under the federal Fair Labor Standards Act (FLSA). The Alabama Department of Revenue is directed to issue regulations administering the law. For additional information on this development, see Tax Alert 2023-1282.
Arkansas: Governor Sarah Huckabee Sanders signed into law HB 1026, which prohibits counties, municipalities and other local governments from levying a tax on income. Under prior law, an Arkansas locality could impose an income tax if approved by a majority of its voters. There are currently no local income taxes in Arkansas. For additional information on this development, see Tax Alert 2023-1208.
Colorado: On May 1, 2023, Colorado Governor Jared Polis signed into law SB 232, making numerous changes to the state's unemployment insurance (SUI) law. Effective with SUI tax rates issued for 2024, 10% of the employer's assigned SUI experience rate will be diverted to a new Support Surcharge. The Support Surcharge, which will be deposited to the Employment Support Fund, the Benefit Recovery Fund and the Employment and Training Technology Fund, is not a certified SUI contribution and is not reported on the federal Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return. For additional information on this development, see Tax Alert 2023-1153.
Georgia: Governor Brian Kemp approved legislation (SB 160) that temporarily lowers the state unemployment insurance (SUI) tax rate for new employers from 2.7% to 2.64% and reinstates the 0.6% administrative assessment. For additional information on this development, see Tax Alert 2023-1258.
Maine: On July 11, 2023, Maine Governor Janet Mills signed into law LD 1964, which establishes a state paid family and Medical leave (PFML) program. Employers will begin collecting the premium effective Jan. 1, 2025, and PFML benefits will begin May 1, 2026. The program will be administered by the Maine Department of Labor. For additional information on this development, see Tax Alert 2023-1317.
Missouri: On July 20, 2023, the Supreme Court of Missouri (Supreme Court) declined to hear a request for class action certification in Boles v. City of St. Louis before the Missouri Court of Appeals had a chance to do so. The case was brought by employees seeking refunds of the 1% St. Louis earnings tax that was withheld from their wages during the COVID-19 emergency when they were working remotely outside of the city. (Boles v City of St. Louis: Cause No. 2122-CC00713.) For more on this development, see Tax Alert 2023-1314.
New Jersey: On July 21, 2023, New Jersey Governor Phil Murphy signed into law A.4694, which, retroactive to Jan. 1, 2023, establishes a "convenience of the employer rule," subjecting New Jersey nonresidents assigned to work primarily for a New Jersey employer to New Jersey state income tax and withholding. The law applies only to New Jersey nonresidents who are residents of states that also have a convenience of the employer rule. The law creates a refundable gross income tax credit for New Jersey residents who receive a refund of taxes paid to another state on the grounds that the income was derived from services performed by the resident taxpayer while within New Jersey. In addition, a pilot program administered by the Economic Development Authority will provide grants to businesses located outside the state that assign New Jersey resident employees to New Jersey locations. A business is eligible to apply if it has 25 or more full-time employees and is principally located outside of New Jersey. Lastly, the law amends N.J.S.A. 54A:4-1(e) to create an explicit one-year limitation period for reporting "readjustments" by other states. For more on this development, see Tax Alert 2023-1291.
Vermont: Employees who have recently moved, or plan to move to Vermont, may still be eligible for a relocation expense reimbursement grant of up to $7,500 through the state's "ThinkVermont" Worker Relocation Incentive program. The program was funded by a one-time allocation of $3.09 million from the state's legislature and is available to two types of workers — new relocating workers and new remote workers. For additional information on this development, see Tax Alert 2023-1271.
Hawaii: New law (SB 1534) replaces the annual $50 registration surcharge on electric vehicles with a mileage-based road usage charge for electric vehicles. Starting July 1, 2025, electric vehicles will be subject to a state mileage-based road usage charge, which will be calculated at the rate of 0.8 cents per mile traveled multiplied by the number of miles traveled, less the estimated amount of paid state fuel taxes that correspond with the number of miles traveled. The mileage-based road usage charge may not be less than $0 or more than $50 per year. Until June 30, 2028, owners of electric vehicles have the option to pay a $50 registration surcharge in lieu of the state mileage-based road usage charge. The Legislature noted that this "is a first step in the eventual statewide transition to a per-mile road usage charge for all vehicles, which will serve as a replacement of the state motor fuel tax with all vehicles paying the per-mile road usage charge." Haw. Laws 2023, Act 222 (SB 1534), signed by the governor on July 5, 2023.
Oregon: New law (HB 2073) modifies the Corporate Activity Tax (CAT). The law excludes from commercial activity subject to the CAT, cost paid by a dealer for items of precious metal. The law also creates an exclusion from the CAT for agricultural commodities sold to a processor for out-of-state sales. These changes apply to tax years beginning on or after Jan. 1, 2024. In addition, the law clarifies CAT filing requirements, providing that if the 15th day of the fourth month (of the end of the tax year) falls on a Saturday, Sunday or legal holiday, including any legal holiday in the District of Columbia, the return is due on the next business day following the weekend or holiday. The law takes effect Sept. 24, 2023. Ore. Laws 2023, ch. 397 (HB 2073), signed by the governor on July 27, 2023.
VALUE ADDED TAX
International - Costa Rica: The Costa Rica Tax Authority has published a notice on the Ministry of Finance website reminding taxpayers who provide tourism services and are duly registered with the Costa Rican Tourism Institute (known by its Spanish acronym as ICT) that, as of July 1, 2023, they must charge the 13% Value Added Tax (VAT). This new VAT charge follows the June 30, 2023 termination of differentiated tax treatment (reduced rates) for tourism services provided by taxpayers duly registered with the ICT. For more on this development, see Tax Alert 2023-1199.
International — Cyprus: On July 13, 2023, the Cyprus Parliament enacted a super-reduced 3% value added tax (VAT) rate and extended the application of 0% VAT for goods used by people with disabilities. For additional information on this development, see Tax Alert 2023-1270.
International — Italy: On June 1, 2023, the Italian Revenue Agency published a tax ruling addressing the value added tax (VAT) fixed establishment (FE) intervention. According to the Italian Revenue Agency, the promotional activities carried out in respect of Italian clients to facilitate the closing of the agreements and manage client relationships indicate that an Italian FE has intervened in a transaction. The ruling is binding for the Italian Revenue Agency exclusively with respect to the applicant but it also is very interesting for non-Italian resident persons with a VAT FE in Italy. For more on this development, see Tax Alert 2023-1120.
International — Switzerland: A new law passed in Switzerland on June 16, 2023 will revise the value added tax (VAT) Act. It is currently assumed that the amendments will enter into force on Jan. 1, 2025. An optional referendum opposing the amendment to the VAT Act (with temporal effects on its entry into force) is generally possible, but unlikely. For additional information on this development, see Tax Alert 2023-1124.
International — Turkiye: Presidential Decree No. 7346, which was published in the Official Gazette on July 7, 2023, makes the following changes in value added tax (VAT) rates: (1) VAT rate increased from 8% to 10% for deliveries and services included in "list II," which includes toothbrushes, toothpaste, dental floss; (2) VAT rate increased from 8% to 20% for soap, shampoo, detergent, disinfectants, wet wipes (whether soap, detergent or solution impregnated), toilet paper, paper towels, tissue and napkins; (3) general rate of 18% increased to 20% for transactions subject to taxation, except those included in "lists I and II". These changes are effective as of July 10, 2023. For additional information on this development, see Tax Alert 2023-1194.
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 term "designated areas" means areas in San Francisco in the following zip codes: 94102, 94103, 94104, 94105, 94107, 94108, 94109, 94111, 94133 and 94158 as these zip codes exist on the effective date of this ordinance.
2 Uline, Inc. v. Comm'r. of Revenue, File No. 9435-R (Minn. Tax Ct. June 23, 2023).
3 Minn. Dept. of Rev. Notice 02-20 (Dec. 2, 2002).