October 20, 2023
State and Local Tax Weekly for September 29 and October 6
Ernst & Young's State and Local Tax Weekly newsletter for September 29 and October 6 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.
Massachusetts governor signs bill that adopts single sales factor apportionment, reduces short-term capital gains tax rate, makes other tax changes
On Oct. 4, 2023, Massachusetts Governor Maura Healey signed into law H. 4104, a $951 million tax package containing various tax changes affecting businesses and individuals. Key changes include (1) adopting a single sales factor apportionment formula for all industries; (2) changing how financial institutions source receipts from investment and trading activity for sales factor purposes; and (3) reducing the short-term capital gains rate for personal income tax purposes from 12% to 8.5%.
Single sales factor apportionment: Massachusetts currently requires manufacturing companies, qualifying defense contractors and qualifying mutual fund service corporations to use a single sales factor apportionment formula for Corporate Excise Tax purposes. Beginning Jan. 1, 2025, a single sales factor apportionment formula applies to all industries, with express application to financial institutions. If both the numerator and the denominator are zero, then the corporation's net income will be fully taxable in the state.
Financial institutions' calculation of receipts from investments and trading: Starting in 2025, H. 4104 changes how financial institutions source receipts from interest, dividends, net gains, other income from investment assets and activities, and income from trading assets.1 Currently, those receipts are sourced to the taxpayer's regular place of business. H. 4104 changes this to a fraction that is based on other receipts — which generally follow the location of the property, customer or borrower. Specifically, Section 2A(d)(xii)(B) will require financial institutions to determine income from assets and activities attributable to Massachusetts and included in the numerator of the receipts factor by multiplying that income by a fraction. The numerator of this fraction equals the total receipts described in Mass. G.L. ch. 63, § 2A(d)(i) through (x), inclusive, and (xii). The denominator equals the taxpayer's total receipts excluding (1) interest, dividends, net gains (but not less than zero); (2) other income from investment assets and activities; and (3) other income from trading assets and activities.
If the statute's application does not reasonably approximate a financial institution's net income from business carried on in Massachusetts, the financial institution can apply to the commissioner to use, or the commissioner may require use of, an alternative method to determine net income.
Short-term capital gains rate: For individual income tax purposes, H. 4104 reduces the short-term capital gains tax rate, which applies to capital assets held for one year or less, to 8.5% (from 12%). This change is effective for tax years beginning on or after Jan. 1, 2023.
Other tax changes: H. 4104 enhances various tax credits as follow:
Among other changes, H. 4104:
For additional information on this development, see Tax Alert 2023-1655.
North Carolina budget bill includes various business and individual tax changes
North Carolina's budget bill, HB 259, which includes business and individual tax changes, became law without the governor's signature on Oct. 3, 2023.
HB 259 establishes a $500 cap on the franchise tax imposed on the first $1 million of a corporation's tax base. The tax rate on the tax base that exceeds $1 million is $1.50 per $1,000. This change is effective for tax years beginning on or after Jan. 1, 2025 and applies to the calculation of the franchise tax reported on the corporate income tax return for 2024 and later.
Effective for tax years beginning on or after Jan. 1, 2022, HB 259 modifies the elective pass-through entity tax (PTET) provisions to expand taxed partnership eligibility.2 In addition to publicly traded partnerships, the PTET election cannot be made by a partnership that had, at any time during the tax year, a partner who was not one of the following: (1) an individual; (2) an estate; (3) a trust described in IRC § 1361(c)(2) or a trust if such trust does not have as a beneficiary any person other than an individual, an estate, a trust or an organization described in IRC § 1361(c)(6); (4) an organization described in IRC § 1361(c)(6); (5) a partnership, including an entity that is classified as a partnership for federal income tax purposes, or an entity that is classified as a corporation for federal income tax purposes. (Italics indicate change.) This expansion allows additional trusts and any entity classified as a corporation for federal income tax purposes to qualify as eligible partners for purposes of the PTET election. For more on the changes, see N.C. Dept. of Rev., Directive TA-31-1 (Oct. 4, 2023).
Starting in 2024, HB 259 accelerates the phase-down of the current 4.75% personal income tax rate to 3.99% by 2026 (changed from after 2026 under a previously enacted reduction). The revised personal income tax rate reductions are as follows: (1) 4.50% in 2024, (2) 4.25% in 2025, and (3) 3.99% after 2025. HB 259 provides for additional rate reductions that are conditioned on revenue targets being met. Starting in 2027 and through 2034, if the revenue target set forth in the law is met, the personal income tax rate will equal the greater of (1) the prior year's tax rate decreased by 0.50% or (2) 2.49%.
HB 259 establishes a new transportation commerce tax on for-hire ground transport service. The tax is imposed on gross receipts derived from each for-hire ground transport services if the person boards the vehicle in North Carolina, regardless of whether the services is completed. The rate of the tax is (1) 1.5% on exclusive-ride share services, and (2) 1.0% on shared-ride services. The tax is on the purchaser and is collected by the for-hire ground transport service provider and not by the vehicle driver. The service provide must separately state and charge the tax on any documentation provided to the purchaser at the time on the transaction. The tax is collected and administered in the same manner as the state's sales and use tax. For-hire ground transport service providers must register with the North Carolina Department of Revenue. The new tax is effective on, and applicable to such services occurring on or after, July 1, 2025.
In regard to the state's sales and use tax, HB 259 does the following:
Lastly, the law prohibits regional transportation authorities from levying a short-term car rental tax in a county that has withdrawn from the authority. N.C. Laws 2023, SL 2023-134 (HB 259), enacted Oct. 3, 2023.
California: New law (SB 264) extends the corporate and personal income tax deductions for disaster losses in any city, county or city and county that is proclaimed by the governor to be in a state of emergency to tax years beginning before Jan. 1, 2029 (from Jan. 1, 2024). The law also extends through the same period, the provision prohibiting any law that suspends, defers, reduces or otherwise diminishes the deduction of a net operating loss (NOL) from applying to NOLs attributable to these specified disaster losses. SB 264 took immediate effect. Cal. Laws 2023, ch. 285 (SB 264), signed by the governor on Sept. 30, 2023.
Colorado: In response to a ruling request, the Colorado Department of Revenue (CO DOR) said that the foreign source income exclusion under C.R.S. § 39-22-303(10) is not allowed to individuals who claimed a federal income tax credit for foreign income taxes paid or accrued. The CO DOR explained that this exclusion is only allowed for foreign income taxes paid by or on behalf of a C corporation. Colo. Dept. of Rev., GIL 23-002 (July 7, 2023).
Iowa: The Iowa Department of Revenue (IA DOR) has updated its FAQs on the state's new elective pass-through entity tax (PTET), which can be claimed starting with the 2022 tax year. The IA DOR explained how an eligible PTE can make a PTET election for tax year 2022 and for tax years 2023 and later. The election for 2022 must be made by the later of Jan. 2, 2024 or the due date for the filing the 2022 IA 1065 or 2022 IA 1120S, including extensions; the election for 2023 and after must be made by the due date for filing the PTE's IA 1065 or IA 1120S, including extensions. The IA DOR updated guidance on when penalties and interest will apply to an electing PTE, with specific guidance for tax years ending before, and tax years ending on or after, May 11, 2023. The IA DOR also updated various FAQs for owners claiming and reporting PTET credits and added FAQs for return preparers on completing the 2022 PTET form. The last update to the FAQs was on Sept. 29, 2023.
New York: In Matter of Jefferies Group LLC & Subsidiaries, the New York Division of Tax Appeals (NY DTA) reversed determinations by the New York Division of Taxation (Division) on various broker-dealer specific issues related to the taxpayer's corporate tax filings under Article 9-A. In doing so, the NY DTA: (1) upheld the taxpayer's election under Tax Law former Section 208(7)(a) to treat cash on hand or on deposit (i.e., cash collateral used in connection with its securities lending transaction, interest rate swap transactions and its cash on deposit with a futures trading business) as investment capital and the resulting income as investment income; (2) directed the Division to exercise its discretionary authority and use US Census data to source the taxpayer's receipts from, among other receipts, its brokerage commissions, principal transactions, margin interest, management and clearing fees to prevent the distortion caused by the application of the Division's sourcing method; (3) found that application of the Division's sourcing method resulted in an unconstitutional distortion of the taxpayer's income that does not accurately reflect how the income is generated; and (4) determined that the Division improperly disallowed a substantial portion of the taxpayer's claimed investment tax credits and employment incentive credits. For more on this development, see Tax Alert 2023-1643.
Pennsylvania: On Oct. 3, 2023, the Pennsylvania House approved HB 1219, which would make a number of tax changes impacting businesses and individuals. Among the business tax changes, HB 1219 would (1) adopt mandatory combined reporting, with tax haven language, starting in 2025; (2) accelerate the corporate net income tax rate reduction so that the 4.99% rate would be phased in by 2026 (from 2031); (3) gradually increase the amount of the NOL deduction from the current 40% to 80% by 2027; (4) for purposes of the manufacturing innovation and reinvestment deduction, lower the minimum private capital investment from $60 million to $50 million; and (5) modify the film production tax credit. HB 1219 has been referred to Senate Finance Committee for consideration.
SALES & USE
Multistate: The EY Sales and Use Tax Quarterly Update provides a summary of the major legislative, administrative and judicial sales and use tax developments. Highlights of this edition include a review of the most recent developments involving nexus, tax base and exemptions, technology, and compliance and controversy. A copy of this newsletter is available via Tax Alert 2023-1664.
Georgia: In reversing an appellate court ruling, the Georgia Supreme Court held that payments made by an entertainment business to another entity for leases of coin-operated amusement machines (COAMs) are exempt from sales and use tax under the exempting statute, OCGA §48-8-3(43), because the exemption "applies to any revenues a COAM generates or brings into existence, which, in this case, are revenues generated by the lease of COAMs and revenues generated by the playing of the COAMs." In so holding, the Court determined that "by its plain terms, OCGA §48-8-3(43), [which exempts revenue generated from all bona fide commercial use COAMs that vend or dispense music or are operated for skill, amusement, entertainment or pleasure and provided to the public for play,] covers revenue generated from the lease of COAMs … " The Court further found that the statutory provision included no words of limitation restricting the manner in which COAMs generate revenue and that the phrase "which vend or dispense music or operated for skill, amusement, entertainment, or pleasure" merely describes types of machines from which revenue is generated and "does not indicate that the gross revenues can only be generated by playing the COAMs." Funvestment Group, LLC v. Crittenden, No. S22G1247 (Ga. S. Ct. Sept. 18, 2023).
Michigan: New law (HB 4377 and HB 4378) revises the state's sales and use tax provisions related to food. The law defines the following terms: "bottled water", "candy", "food sold in an unheated state by weight or volume as a single item", "food sold with eating utensils provided by the seller", "prepared food sales percentage", "soft drinks", "volume", "weight"; and modifies the definition of "prepared food". The term food sold with eating utensils provided by the seller" means food sold by a seller that meets either of the following requirements: (i) for sellers with a prepared food sales percentage of greater than 75%, the seller makes eating utensils available to purchasers or, for bottled water, candy or soft drinks, the seller gives/hands the utensils to the purchaser or makes available plates, bowls, glasses or cups that are need in order for the purchaser to receive the food (note: if a food item that has four or more servings is packaged as one food item and sold at a single price, the seller must give/hand the eating utensil to the purchaser); or (ii) for sellers with a prepared food sales percentage of 75% or less, the seller's business practice is to give/hand eating utensils to the purchaser (note: the seller need only make available to purchasers eating utensils necessary for purchasers to receive the food, e.g., cups and bowls). Food is not sold with eating utensils provided by the seller if a person other than the seller places the eating utensils in a package with the food items and that person's NAICS classification is a manufacturer. If, however, the person has any other NAICS classification, the seller is considered to have provided the eating utensil. According to legislative analysis, the statutory update was needed to maintain the state's compliance with the Streamlined Sales and Use Tax Agreement following an appellate court's decision that a rule which had defined the term "food sold with eating utensils provided by the seller" was found to conflict with statutory language. This change is effective on the 91st day after final adjournment of the 2023 regular legislative session. Mich. Laws 2023, Pub. Act 141 (HB 4377) and Pub. Act 142 (HB 4378), both bills were signed by the governor on Oct. 3, 2023.
New Mexico: The New Mexico Taxation and Revenue Department (NM TRD) is proposing to amend NMAC § 126.96.36.199 "General Rules for Determining Reporting Location" and NMAC § 188.8.131.52 "Engaging in Business" and to adopt new rule, NMAC § 184.108.40.206, "Receipts of a Digital Platform that Displays Digital Advertising". The proposed rule changes would clarify the taxation of digital advertising services under the Gross Receipts and Compensating Tax Act, detail which receipts from such services are taxable and which are deductible, clarify the sourcing rules for receipts from digital advertising services, and clarify engaging in business for taxpayers that only have an economic nexus with the state. New rule, NMAC § 220.127.116.11, would make clear that receipts from sales of digital advertising services are subject to the gross receipts tax.3 The term "digital advertising services" would be defined as "advertisement services on digital platforms, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services." The term "digital platform" would include websites and applications. Amendments to NMAC § 18.104.22.168(C) would add an example for determining the proper reporting location for gross receipts and related deduction from digital advertising services. Proposed amendments to NMAC § 22.214.171.124 would clarify "engaging in business" for taxpayers that only have an economic nexus with the state. Under the proposal, a taxpayer that only had an economic nexus with the state would be able to close its gross receipts tax account following any calendar year in which it no longer meets the economic nexus threshold. A public hearing on the proposal will be held on, and written comments on the proposal are due by, Nov. 9, 2023. N.M. Dept. of Taxn. and Rev., Notice of Hearing(Oct. 5, 2023).
South Carolina: The South Carolina Department of Revenue issued a reminder that additional items are now subject to the state's maximum sales and use tax (Max Tax). The Max Tax applies to cars, aircrafts, and boats, along with newly added items including all-terrain vehicles (ATVs), utility task vehicles (UTVs), golf carts, dirt bikes and legend race cars. The rate of the Max Tax is 5% and capped at a maximum of $500; retailers of items subject to the Max Tax must collect and pay the tax and file the Max Tax returns. Further, starting Dec. 1, 2023, the Max Tax return must be filing online using MyDORWAY. Also starting on that date, Max Tax sales items must be reported item-by-item, instead of one total amount. S.C. Dept. of Rev., News Release "More Items Subject to Max Tax; Electronic Filing Requirement Starts December 1" (Sept. 27, 2023); see also S.C. Dept. of Rev., SC Revenue Ruling #23-3 (Sept. 26, 2023) (updates guidance on which vehicles are motor vehicles subject to the partial tax exemption under S.C. Code Ann. §12-36-2110).
Federal: On Sept. 27, 2023, the IRS, Treasury Department and Department of Energy announced that taxpayers can begin applying for allocations of the annual capacity limitation under the Low-Income Communities Bonus Credit Program (program) beginning on Oct. 19, 2023, at 9 a.m. EST. The program increases the investment tax credits under IRC § 48(e) for certain solar and wind facilities placed in service in low-income communities. For additional information on this development, see Tax Alert 2023-1647.
Portland, OR: On Sept. 14, 2023, the Portland City Council approved emergency Ordinance 191451 to establish the downtown business incentive credit to encourage new and extended leases in core business districts. The credit is available to certain businesses located within the eligible sub-district boundaries — i.e., the sub-districts of Lower Albina, Lloyd, Downtown and Old Town/China Town — as they existed on Jan. 1, 2023. The credit can be claimed against the Business License Tax, and it is only available in either calendar year 2023 or 2024. If the year of origination is 2023, the credit will be calculated on the tax year 2023 business license tax return. And it will be calculated on the 2024 return if the year of origination is 2024. The credit is taken equally over four years beginning with the tax year of origination. The credit allowed in each year cannot exceed the amount of tax owned for that year; excess credit does not carryover and it is not refundable. A business must apply for preapproval of the credit amount it may claim. A total of $25 million is available for the two-years of the program; the maximum amount of credit allowed to an eligible business is $250,000 in the year of origination. A business may be eligible for the new credit if it meets certain criteria and either (1) enters into a new, or extends a current, lease, during 2023 or 2024 for building space within sub-district boundaries for four years or more; or (2) owns and occupies that business space within the sub-district boundaries. The ordinance includes guidance on how to calculate and claim the credit. If the business does not meet the requirements of the credit, breaks the lease/extension or sells the building before the end of the four-year period, the business will have to repay the entire credit previously claimed. Penalties will not be imposed on tax due resulting from the lost credit.
COMPLIANCE & REPORTING
California: The California Franchise Tax Board (FTB) is providing tax filing relief for taxpayers and businesses affected by Hurricanes Idalia and Lee (i.e., certain taxpayers in Florida, Georgia, Maine, Massachusetts and South Carolina), the wildfires in Maui, HI and the seawater intrusion in Louisiana. Taxpayers and businesses located in these presidentially declared disaster areas will have until Feb. 15, 2024 to file their 2022 California income tax returns and make related tax payments that would have been due between Sept. 15, 2023 and Jan. 16, 2024. For example, this relief applies to (1) quarterly estimated tax payments due Sept. 15, 2023 and Jan. 16, 2024; (2) calendar-year partnership and S corporations whose 2022 extensions ran out on Sept 15, 2023; (3) calendar-year corporations whose 2022 extensions ran out on Oct. 16, 2023; and (4) calendar-year tax-exempt organizations whose extensions run out on Nov. 15, 2023. This extension relief, however, does not apply to tax year 2022 return payments originally due on April 18, 2023. The FTB noted that taxpayers who are affected by a presidentially declared disaster may be eligible to claim a deduction for a disaster loss, and provided guidance on how to do so. Cal. FTB, "California grants tax relief for hurricane, fire, and seawater intrusion victims" (Oct. 6, 2023).
Maine: The Maine Revenue Services (MRS) announced that it is providing filing relief to taxpayers that reside, or have a business located, in various federally declared disaster areas. Such areas include flooding in Alaska, Illinois and Vermont, Hawaii wildfires and Hurricanes Idalia and Lee. Additional information on the extended deadlines is available here. Maine Rev. Servs., Maine Tax Alert (Vol. 33, Issue 11, Oct. 2023).
PAYROLL & EMPLOYMENT TAX
Illinois: New law (HB 3129), effective Jan. 1, 2025, expands the Illinois Equal Pay Act (IEPA) to require that employers with 15 or more employees provide pay transparency in job postings. The law applies to Illinois employers, including individuals, partnerships, businesses, trusts, the State of Illinois (as well as state offices, departments or agencies), units of local government and any school district, with 15 or more "gainfully employed" employees. Ill. Laws 2023, Pub. Act 103-0539 (HB 3129), signed by the governor Aug. 11, 2023. For more on this development, see Tax Alert 2023-1608.
Missouri: The Missouri Department of Revenue (DOR) has rescinded the rule (12 CSR 10-2.019) governing income tax withholding on wages earned at temporary work locations from March 13, 2020 through Nov. 1, 2020 (the COVID-19 relief period) because the rule is no longer applicable. For additional information on this development, see Tax Alert 2023-1602.
Montana: Governor Greg Gianforte signed into law HB 652, which lowers the maximum number of unemployment insurance (UI) benefit weeks from 28 to 24. The law is effective for UI benefit claims filed on or after July 1, 2023. This legislation has the indirect effect of lowering employers' state unemployment insurance (SUI) costs while also reducing cash outflows from the state's UI trust fund. The 2023 Montana SUI wage base is $40,500, up from $38,100 in 2022. Montana SUI tax rates for 2023 continue at Rate Schedule 1 with rates ranging from 0% to 6.12% and the average SUI rate at 1.12%. The rate for new employers ranges from 1% to 2.20%. For 2023, all employers pay the Administrative Fund Tax of 0.18%, except for employers assigned a 0% rate and employers assigned a 0.13% rate in Eligible Rate Classes 1 and 2. For additional information on this development, see Tax Alert 2023-1621.
New Jersey: In additional guidance on the state's new convenience of the employer rule, the New Jersey Division of Taxation (Division) has confirmed that wages earned by Connecticut residents while performing services from their Connecticut home offices for a New Jersey employer are exempt from New Jersey nonresident income tax. The Division further explains that, while it expects that Connecticut will follow New Jersey's guidance, it recommends that employers and individual taxpayers look for formal guidance from Connecticut concerning an exemption from Connecticut nonresident income tax for New Jersey residents working from home for a Connecticut employer. For more on this development, see Tax Alert 2023-1637.
Georgia: Governor Brian Kemp temporarily suspended fuel taxes through Nov. 11, 2023. The suspension applies to motor fuel and diesel fuel taxes under Ga. Code §48-9-3 and to sales taxes on locomotive fuel required by Ga. Code §48-8-30. Initially the governor suspended these taxes on Sept. 12, 2023 (Executive Order 09.12.23.01), with that order expiring on Oct. 12, 2023. This new order renews the suspension for an additional 30 days, and is effective Oct. 12, 2023 through Nov. 11, 2023. Ga. Gov., Executive Order 10.06.23.01 (Oct. 6, 2023).
VALUE ADDED TAX
International — Kenya: The Commissioner for Domestic Taxes, Kenya Revenue Authority issued a public notice reminding nonresident suppliers of digital services who have not yet complied with Digital Services Tax and value-added tax regulations to register within 30 days of Sept. 22, 2023. Failure to register will cause enforcement measures to be initiated. For more on this development, see Tax Alert 2023-1633.
Wednesday, October 25. US corporate income tax compliance (1 pm ET). As we wrap up the 2022 business tax compliance season, how did you fare? Join Ernst & Young LLP professionals for the latest insights on this dynamic compliance environment and how your company can continue navigating its complexity and challenges. We will also focus on preparing for tax year 2023 (TY23) and beyond. Topics to be discussed include: (1) insights from Tax Year 2022 around the federal, international and state compliance process, including what went well, the challenges and the leading practices; (2) tax considerations and actions to take before year-end to address and prepare for TY23 and beyond; (3) a BEPS 2.0 Pillar Two update, including potential implications for tax reporting and planning; (4) an IRS update on current activities, including the latest news, insights and plans for compliance enforcement; (5) a tax policy update from Ernst & Young LLP's Washington Council Ernst & Young, including how new and pending legislation could affect current compliance and reporting requirements. Register.
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.
1Current Section 2A(d)(xii)(A) was not changed, but Section 2A(d)(xii)(C) through (E) will be eliminated.
2 The law also provided an extension to make the PTET election for 2022. A partnership that could not make the 2022 election on its timely filed return could make the election by filing an amended return by Oct. 15, 2023.
3 Specifically, the new rule would provide: "Receipts of a provider of a digital platform that displays digital adverting services, whose digital platform may be accessed or viewed within New Mexico, from the sale of advertising services to advertisers within and without New Mexico are subject to the gross receipts tax.