September 8, 2023
State and Local Tax Weekly for August 18 and August 25
Ernst & Young's State and Local Tax Weekly newsletter for August 18 and August 25 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 Supreme Court takes new approach to statutory construction in applying a sales and use tax exemption statute to fracking activities
In Stingray Pressure Pumping, LLC v. Harris,1 the Supreme Court of Ohio took a new approach to construing tax statutes, particularly exemptions, and allowed most of a taxpayer's claimed Ohio sales/ use tax exemptions for oil and gas production for certain equipment it purchased for fracking activities.
Background: The taxpayer, Stingray Pressure Pumping, is engaged in the oil and gas business, including hydraulic fracturing (fracking). Fracking involves pumping a pressurized mixture of water, chemicals and sand into the earth to fracture and pop open rock formations to extract oil and gas. At issue in this case is whether certain equipment purchased by the taxpayer for use in its fracking business qualifies for the sales and use tax exemption for oil and gas production.
The Ohio Department of Taxation (Department) denied the taxpayer's claimed exemption for some of its purchases and instead assessed these purchases. During the taxpayer's appeal of the assessments, the General Assembly amended the exemption statute.
At the time the Department issued its assessments, ORC 5739.02(B) allowed an exemption for equipment "used directly" in oil and gas production. The amended statute, ORC 5739.02(B)(42)(q), still requires equipment to be "directly" used in production but also defines "production" as "operations and tangible personal property directly used to expose and evaluate an underground reservoir that may contain hydrocarbon resources, prepare the wellbore for production, and lift and control all substances yielded by the reservoir to the surface … ." The amended statute added non-exhaustive lists of items that qualify and do not qualify for exemption. The Ohio Board of Tax Appeals (BTA) applied the amended statute and, relying on older case law, denied the taxpayer's claims for exemption on the ground that the items were used "preliminary and preparatory" to production.
Court applies new method of statutory construction and allows most exemptions: On appeal to the Court, the Department argued that the amended statute did not change the substantive law that should control the application of the exemption statute. The Court rejected this argument, observing that the Department's interpretation would render the amended statute's list of items potentially qualifying for exemption as meaningless. Instead of following court precedents construing an exemption statute narrowly against the taxpayer, the Court announced that it would read tax statutes through a "clear lens, not one favoring tax collection" to "provide a fair reading of what the legislature has enacted" and that "henceforth we will apply the same rules of construction to tax statutes that we apply to all other statutes."
Applying this test to the items at issue, the Court concluded that the following items qualified for the exemption:
The Court, however, rejected the taxpayer's argument that its data van qualified for an exemption because it acted as a "command center" where computers and operators control the production process. The Court concluded that the exemption did not apply because the statute indicated that motor vehicles do not qualify for exemption.
For more on this development, see Tax Alert 2023-1400.
Louisiana: The Louisiana Department of Revenue issued a bulletin on the individual income tax credit for taxes paid to other states to provide additional guidance on eligibility and calculation of the credit following statutory changes enacted in 2023 (Act 413, La. Laws 2023). The guidance notes that no credit or deduction is allowed for resident individuals paying an entity-level tax in another state if the entity's operations result in a net loss for federal income tax purposes for the tax year. La. Dept. of Rev., RIB No. 23-024 (Aug. 17, 2023).
Massachusetts: New law (HB 4040) codifies the 4% surtax on individual income over $1 million, which had been approved by voters in November 2022. The $1 million threshold will be subject to a cost-of-living adjustment annually. The Massachusetts Department of Revenue has the authority to promulgate regulations or issue other guidance to implement this provision. Mass. Laws 2023, ch. 28 (HB 4040), signed by the governor on Aug. 9, 2023.
New Jersey: In response to recently enacted corporation business tax (CBT) reform, the New Jersey Division of Taxation (Division) has issued guidance on income excluded under a tax treaty and CBT return (Aug. 17, 2023). The Division also issued a revised bulletin to CBT filers on the IRC §163(j) limitation (TB-87(R), updated Aug. 22, 2023) and revised guidance on the combined group under the CBT Act (TB-100(R), revised Aug. 22, 2023). Additional information the CBT reform is available here.
New York City: New law (S.7386) extends New York City's current income tax rates on resident individuals and the general corporation tax through 2026, with the implementation of lower individual income tax rates and lower corporation tax rates postponed until 2027. The 14% additional tax on city taxable income of resident individuals, estates and trust has also been extended through 2026. N.Y. Laws 2023, ch. 345 (S.7386), signed by the governor on Aug. 23, 2023.
SALES & USE
Michigan: The Michigan Department of Treasury issued updated guidance on when lessees and lessors are liable for use tax on lease transactions and explains the application of sales and use tax to tangible personal property acquired for lease or rental. The guidance describes: (1) what constitutes a lease of tangible personal property; (2) the availability of the lessor election for a single mixed transaction if the property is incidental to the service provided; (3) the tax base of rental receipts; (4) how leases are sourced; (5) who the "lessor" is under the Use Tax Act; (6) the consequences of making a lessor election to pay use tax and using the property for non-leasing purposes; (7) when a lessee is liable for use tax and when use tax is owed on a sublease; and (8) when a lessor owes use tax on property that is exempt from use tax or that is leased to a lessee is exempt from use tax. The guidance includes examples. Mich. Dept. of Treas., RAB 2023-13 (Aug. 15, 2023) (replaces RAB 2020-16).
Missouri: In response to a ruling request, the Missouri Department of Revenue (MO DOR) said that sales an out-of-state IRC §501(c)(3) nonprofit organization facilitated on its marketplace platform on behalf of nonprofit organizations as part of their charitable activities are exempt from Missouri use tax. Further, because the sales are exempt and the out-of-state nonprofit will not be remitting tax due, it is not required to register with the MO DOR as a marketplace facilitator. Mo. Dept. of Rev., LR 8263 (July 31, 2023).
Missouri: In response to a ruling request, the Missouri Department of Revenue (MO DOR) said that an out-of-state company that does not have physical locations in Missouri is liable for collecting state use tax as a vendor on leases of ground support equipment to an air cargo company with offices at an in-state airport. Under regulation 12 CSR 10-114.100(1), an out-of-state vendor must register with the MO DOR and collect and remit use tax when the vendor has sufficient nexus with the state. Sufficient nexus is established by having a physical presence in the state, and 12 CR 10-114.100(2) defines a physical presence as "owning or leasing real or tangible personal property within this state; or having … independent contractors … in … this state on behalf of the vendor." Because the company meets the definition of vendor and maintains a physical presence in the state through its leases of tangible personal property and its use of independent contractors for future maintenance and parts for such property, it is liable for use tax as a vendor. Mo. Dept. of Rev., LR 8264 (July 31, 2023).
Washington: In a recently issued notice, the Washington Department of Revenue explained that the sales and use tax exemption for the construction of new airplane repair stations has been extended to Jan. 1, 2031. In addition, effective July 23, 2023 the definition of eligible maintenance repair operator (eligible operator) means an operator "classified by the Federal Aviation Administration … as a federal aviation regulation part 145 certificated repair station and … located in a commercial services airport that is either of the following: (1) [o]wned by a county with a population less than [1 million, or] (2) [j]ointly owned by a county and city." The exemption can be claimed by (1) an eligible operator engaged in the maintenance of airplanes and (2) a port district, political subdivision or municipal corporation that entered into an agreement with an eligible operator to build the facility for lease to the operator. The exemption applies to items such as labor and services used to construct new buildings, materials used as ingredient or part during construction, and labor and services to install certain fixtures that do not qualify for the manufacturing machinery and equipment sales and use tax exemption. The notice also provides guidance on when and how to claim the exemption, including information that must be included in the refund request. Wash. Dept. of Rev., Special Notice "Sales and use tax exemption for construction of new airplane repair stations modified" (July 26, 2023).
Washington: The Washington Department of Revenue issued guidance on when an item qualifies as an exempt export sale when a customs broker is involved. Among other responsibilities, a customs broker calculates and pays taxes, duties and excises. To qualify for an exempt export sale when a customs broker is involved, the seller must meet one of the following requirements it must deliver the goods: (1) to the buyer, to a place in another country, (2) to a for-hire carrier who transports the goods to a place in another country, or (3) to the buyer at shipside or aboard the buyer's vessel or other transportation vehicle for export (the export process should obviously be started). The guidance includes examples. Wash. Dept. of Rev., Tax Topic "Customs brokers" (Aug. 21, 2023).
Alabama: New law (SB 299) extends a number of tax credits for five years and modifies the coal production tax credit. The law extends the sunset date of following credits to Dec. 31, 2028: the Brownfield Development Tax Abatement Act, the Coal Production Tax Credit, the Reemployment Act of 2010, the Full Employment Act of 2011, the Veterans Employment Act, the Irrigation Equipment Tax Credit, the Entertainment Industry Incentive Act of 2009, the Alabama Enterprise Zone Act, and the Rural Physician Tax Credit. The law also modifies the coal production tax credit to allow: (1) the credit be claimed against both income and utility services taxes, provided the same credit is used only once, (2) a flow-through entity to allocate the credit among some or all of its owners, and (3) unused credit to be carried forward for up to five years. The law also requires that, before claiming the credit, the person producing the Alabama coal must submit to the Alabama Department of Revenue a certification regarding the amount of increased coal production from the prior year's production. Lastly, starting in 2024 Regular Legislative Session, the law requires every bill enacting a new tax credit include a credit performance statement, a credit expiration statement, a statement establishing the limit on the amount of credit available during any applicable period, a statement that unused credit can be carried forward for no more than five years, and a statement limiting the transfer or sale of tax credits. The changes to the coal production tax credit are retroactively effective to Jan. 1, 2023, while the other changes in the law take effect Sept. 1, 2023. Ala. Laws 2023, Act 546 (SB 299), signed by the governor on June 14, 2023.
Alabama: New law (SB 175) repeals the Apprenticeship Tax Credit effective Dec. 31, 2024, unless extended by the Legislature before the sunset date. The law takes effect Sept. 1, 2023. Ala. Laws 2023, Act 539 (SB 175), signed by the governor on June 14, 2023.
Delaware: New law (HB 219) expands the eligibility for the investment and employment credit to include the year-round operation of a climate-controlled building or other permanent structure (hereafter "facility"), of no less than 400,000 enclosed square feet, for growing fruits or vegetables. Further, the qualified investment made during any consecutive 12-month period the new or expanded fruit/vegetable growing facility was placed in service must be at least $40 million. This law took effect upon approval by the governor. Del. Laws 2023, ch. 134 (HB 219), signed by the governor on Aug. 3, 2023.
Illinois: New law (SB 850) expands the definition of "high impact business" eligible for certain tax incentives to include a grocery store, as defined in the Grocery Initiative Act (Act), and receives financial support under the Act within 10 years before submitting its application under the Act. The law takes effect Jan. 1, 2024. Ill. Laws 2023, P.L. 103-0561 (SB 850), signed by the governor on Aug. 18, 2023.
Wisconsin: The Wisconsin Department of Revenue issued updated guidance on the state's research expense credit and the sales and use tax exemption for property used in qualified research. Specifically, the guidance has been updated to reflect that the state has not adopted changes made by the federal Tax Cuts and Jobs Act (P.L. 115-97) to IRC §§ 41, 174 and 280C that took effect in 2022. Wis. Dept. of Rev., Publication 131 "Tax Incentives for Conducting Qualified Research in Wisconsin" (Aug. 2023).
Michigan: New laws (HB 4317 and HB 4318) allow qualified local governmental units to establish one or more solar energy districts and exempt qualified solar facilities from ad valorem taxes collected under the General Property Tax Act. Instead, the owner or lessee of a qualified facility will pay an annual solar energy facilities tax that is equal to $7,000 per megawatt of nameplate capacity, alternating current as reported on the annual form. The tax will be reduced to $2,000 per megawatt of nameplate capacity for a qualified facility meeting certain criteria such as property being owned by the state or located in an opportunity zone. HB 4317 lays out the process for establishing a solar energy district and the process (and timing) for the owner or lessee of a qualified facility not yet placed in service to apply for a solar energy exemption certificate. A new property tax exemption cannot be granted under HB 4317 after Dec. 31, 2031. HB 4318 exempts from property tax a facility for which a solar energy facility exemption certificate has been issued; the exemption applies to the period for which the exemption certificate is in force, beginning on the effective date of the certificate. The property tax exemption does not apply to the land on which the facility is or will be located. Mich. Laws 2023, Pub. Act 108 (HB 4317) and Pub. Act 109 (HB 4318), both signed by the governor on July 26, 2023.
Washington: The Washington Department of Revenue (WA DOR) issued interim guidance on whether state and local governments can impose personal property tax on a nonmember's lease of Class II and Class III gaming equipment to an Indian tribe for use at a tribal casino. The WA DOR determined that federal law preempts state and local personal property taxation of both Class II and Class III gaming equipment located in Indian Country because, under the Bracker2 analysis, the state and local interest involved do not outweigh the tribal and federal interest. The WA DOR noted that this guidance is limited to personal property taxation of certain personal property and does not apply to other types of taxes or the property taxation of real or other personal property. Wash. Dept. of Rev., "Interim guidance statement on the taxation of Class II and Class III gaming equipment leased by a non-tribal lessor to a tribal casino" (Aug. 3, 2023).
Michigan: The Michigan Department of Treasury (MI DOT) issued an administrative bulletin on the impact of COVID-19 extensions and penalties and interest waivers on the statute of limitations for individual income tax, corporate income tax, and sales, use and withholding taxes. The MI DOT said that it had issued multiple notices in response to the COVID-19 pandemic for individuals and businesses that extended deadlines and waived penalties and interest for late filing and late payment of tax. These notices varied depending on the tax and type of return being filed. For the modified income tax return filing deadlines for individuals (2019 and 2020) and corporations (2019), the MI DOT said the four-year statute of limitations period applies to the modified 2019 and 2020 due dates for purposes of determining the deadlines for requesting refunds and issuing assessments. For sales, use and withholding tax purposes, because the MI DOT only waived penalties and interest, the filing due dates were not changed and, as such, the statutory deadlines for requesting refunds or issuing assessments was not changed. The bulletin includes examples. Mich. Dept. of Treas., RAB 2023-14 "Impact of COVID-19 Extensions and Penalty and Interest Waivers on the Statute of Limitations"(Aug. 23, 2023).
Washington: The Washington Department of Revenue (WA DOR) announced a pilot program to allow stakeholders to comment on proposed Washington Tax Decisions (WTDs) before they are published. After receiving feedback, the WA DOR will decide whether to publish the proposed WTD or make edits before publishing. Stakeholders can sign up to receive email or text notification of comment activity regarding proposed WTD. Types of edits and comments the WA DOR are looking for would clarify a point that could be confusing to taxpayers who would rely on the WTD, further sanitization of information that could identify the taxpayer, removing discussions that are irrelevant or distracting from the analysis, or an explanation with legal authority for a recommendation that the proposed WTD reaches the incorrect result. The WA DOR said it is not looking for edits that would effectively change the outcome of the proposed WTD, alter key holdings of the proposed WTD or make substantial edits to the proposed WTD. Once a proposed WTD is posted, stakeholders will have a limited amount of time to provide comments. Wash. Dept. of Rev., "Washington Tax Decision (WTD) Publication Comment Pilot Program" (Aug. 2023).
PAYROLL & EMPLOYMENT TAX
Multistate: EY's Employment Tax Advisory Services group has developed a publication summarizing the latest employment tax and other payroll developments in an easy-to-read format. Developments in US federal, state and local payroll and human resources matters are highlighted, as are our insights to improve US employment tax and payroll compliance. A copy of the publication is available via Tax alert 2023-1380.
Multistate: The 2023 edition of our US employment tax rates and limits report is now updated through July 25, 2023, to reflect changes in state paid family and medical leave insurance and state income tax rates. For more on this development, see Tax Alert 2023-1394.
Connecticut: The Connecticut state budget (HB 6941) approved by Governor Ned Lamont on June 12, 2023, includes reductions to the state's personal income rates for middle-class income taxpayers. Effective Jan. 1, 2024, the first $10,000 ($20,000 for married filing joint) will be taxed at 2%, down from 3%. The next $40,000 ($80,000 for married filing joint) will be taxed at 4.5%, down from 5%. This tax relief is capped for individual taxpayers who earn $150,000 or more and married couples filing joint who earn $300,000 or more. The remaining tax rates are unchanged, with the highest marginal tax rate remaining at 6.99%. Connecticut does not allow for a supplemental rate of withholding for bonuses and irregular wage payments. For additional information on this development, see Tax Alert 2023-1429.
New Jersey: In the latest guidance, the New Jersey Division of Taxation (Division) outlines how the new "convenience of the employer rule" will work for those who must comply with it. Although the rule, enacted July 21, 2023, is retroactively effective to Jan. 1, 2023, the Division said it will not impose penalties and interest on employers and individual taxpayers that begin complying by Sept. 15, 2023. (For discussion of the rule's enactment, see Tax Alert 2023-1291.) For more on this development, see Tax Alert 2023-1401.
New Jersey: The New Jersey Department of Labor has launched a new public website, the Workplace Accountability in Labor List (WALL), that displays the names of businesses barred from contracting with New Jersey state agencies, counties, local government bodies or other subdivisions because they have outstanding state wage, benefit or unemployment insurance/gross income tax liabilities. The WALL is a new tool to encourage compliance authorized by legislation enacted in 2019 (S.4226). For additional information on this development, see Tax Alert 2023-1433.
New York: Under legislation enacted in 2022 (S. 9427A) and amended in 2023 (A. 999), New York employers with four or more employees are subject to a state-wide wage transparency law effective Sept. 17, 2023. A covered employer includes any person, corporation, limited liability company, association, labor organization or entity employing four or more employees in any occupation, industry, trade, business or service. The requirements also extend to employment agencies, recruiters, employees and agents advertising jobs on behalf of the employer. Temporary help agencies are not subject to the law. For additional information on this development, see Tax Alert 2023-1406.
Washington: The U.S. Supreme Court (Court) has been asked to review the Washington State Supreme Court's (WSC) ruling in Quinn,3 which held that the legislatively imposed capital gains tax (CGT or tax) is a valid excise tax, not an unconstitutional income tax. The WSC held that the CGT was an excise tax because it taxes transactions involving capital assets but "not the assets themselves or the income they generate." Accordingly, the CGT is not an income tax, and is not subject to the restrictions imposed by the Washington State Constitution. The question present to the Court is: "Whether the Constitution permits a state to tax out-of-state transactions involving only out-of-state property." Quinn, et al v. Washington, et al, No. 100796-8 (Wash. S.Ct. March 24, 2023), petition of cert. filed, Dkt. No. 23-171 (U.S. S.Ct. Aug. 21, 2023).
VALUE ADDED TAX
International — Brazil: The Brazil Senate is currently analyzing a tax reform proposal for indirect taxes that, after many years of discussion, passed the Chamber of Deputies on July 7, 2023. The proposal provides for a major simplification of the Brazilian tax system, streamlining the five existing indirect taxes into just two main taxes (IBS, state and municipal, and CBS, federal) plus an excise tax and a possible state contribution applied upon primary and semi-finished products (still under discussion in the Senate). In addition to significantly simplifying the current tax system, the proposal would generate a wide range of changes in markets and relative prices of products, and might also reduce the "weight" of tax factors in allocation decisions for productive and commercial investments. For more on this development, see Tax Alert 2023-1386.
International — Costa Rica: On Aug. 4, 2023, the Tax Authority published in the Official Gazette resolution No. MH-DGT-RES-0017 — 2023 (Resolution), which aims to clarify and include, under a single resolution, the services associated with operations related to exports that, in accordance with the Value Added Tax (VAT) Law and its Regulations, are VAT exempt. For more on this development, see Tax Alert 2023-1373.
International — Luxembourg: On Aug. 2, 2023, the Law of July 26, 2023, transposing Council Directive (EU) 2020/284 of Feb. 18, 2020, amending Directive 2006/112/EC as regards introducing certain requirements for PSPs (CESOP Law), was published in the Official Journal of the Grand-Duchy of Luxembourg. These new rules are set to combat VAT fraud by enabling national tax authorities to carry out controls. This means that with the CESOP Law, all PSPs providing payment services in the EU will be required, starting on Jan. 1, 2024, to record and disclose transactional data on cross-border payments that fall within the scope of the obligations defined in the CESOP Law. For more on this development, see Tax Alert 2023-1423.
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 Stingray Pressure Pumping, LLC v. Harris, Slip Opinion No. 2023-Ohio-2598 (Ohio S.Ct. Aug. 2, 2023).
2 White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980).
3 Quinn et al v. Washington State, No. 100796-8 (Wash. S.Ct. March 24, 2023). For additional information on this decision, see Tax Alert 2023-0608.