December 1, 2023 State and Local Tax Weekly for November 10 and November 17 Ernst & Young's State and Local Tax Weekly newsletter for November 10 and November 17 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. TOP STORIES Voters in various states weigh-in on various tax-related ballot measures On Nov. 7, 2023, voters in a handful of state and local jurisdictions voted to approve or to reject various tax-related ballot measures. Below is a summary of select measures. Colorado Failed: Proposition HH would have (1) reduced property tax rates for residential and nonresidential property, (2) allowed the state to retain and spend the additional revenue under the Proposition HH cap that otherwise is required to be refunded under the Colorado Taxpayer's Bill of Rights (or TABOR), and (3) required the state to use the retained funds to reimburse certain local governments for lost property tax revenue. Santa Fe, New Mexico Approved: Resolution "High-End Excise Tax for Affordable Housing" allows the City of Santa Fe to impose a 3% excise tax on the transfer of high-end residential property. Specifically, the tax is imposed on the portion of the purchase price of residential property exceeding $1 million. Starting May 1, 2026, the $1 million threshold will be increased annually by an amount corresponding with the prior calendar year's increase to the consumer price index. This resolution becomes effective six months from the date when the election results are certified. Funds from the new tax are dedicated to the city's Affordable Housing Trust Fund. Ohio Approved: Issue 2 legalizes the sale of marijuana and imposes a 10% tax on such sales. This ballot measure takes effect 30 days after the election. Salem, Oregon Failed: Referendum for the City of Salem - 24-491 — City of Salem Payroll Tax would have allowed the City of Salem's new payroll tax on wages and self-employment income earned within the city limits (Ordinance No. 12-23) to go into effect July 1, 2024. As a result of the Marion County election results on Nov. 7, 2023, the Safe Salem payroll tax is repealed. (See Tax Alert 2023-1901.) Texas Approved: Proposition 3 (HJR 132) amends the Texas Constitution to prohibit the imposition of individual wealth or net worth taxes, such as a "tax on the difference between the assets and liabilities of an individual or family." Approved: Proposition 4 (HJR 2), amends the Texas Constitution to authorize the state legislature to, among other things, establish a circuit breaker limitation on the maximum appraised value of non-homestead real property valued less than $5 million (as limited by SB 2 (2nd Special Sess.)) for ad valorem tax purposes to the lesser of the most recent market value or 120% (or a greater percentage) of the property's appraised value for the prior tax year. The circuit breaker limitation takes effect as to a parcel of real property on Jan. 1 of the tax year following the first tax year in which the owner owns the property on Jan. 1, and the limitation expires on the Jan. 1 of the tax year following the tax year in which the owner ceases to own the property. A person that acquired the real property before 2023 is deemed to have acquired the property on Jan. 1, 2023. These temporary limitation provisions expire on Dec. 31, 2026. In addition, Proposition 4 increases the residence homestead exemption from school district ad valorem taxes to $100,000 (from $40,000). The increase of the homestead exemption is effective for the tax year beginning Jan. 1, 2023. Proposition 4 also prohibits the governing body of a school district, municipality or county that adopted a local option homestead exemption for the 2022 tax year from reducing the amount of or repealing the exemption. This provision applies for a four-year period, expiring on Dec. 31, 2027. Because voters approved the property tax relief in Proposition 4, the increase of the franchise tax exemption to $2.47 million (from $1 million) will take effect, starting with reports originally due on or after Jan. 1, 2024. (See SB 3 (2nd Special Sess.)). Approved: Proposition 10 (SJR 87) provides an exemption from ad valorem tax for equipment or inventory held by a manufacturer of medical or biomedical products. The exemption is effective starting Jan. 1, 2024. INCOME/FRANCHISE Colorado: The Colorado Department of Revenue adopted new Rule 39-22-104(3)(r), which is intended to clarify the requirement to add back in the calculation of Colorado taxable income the amount an electing pass-through entity (PTE) owner is allowed to deduct under IRC §199A. The rule provides 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), does not have to make any addition under C.R.S §39-22-104(3)(r). The new rule was adopted on Nov. 8, 2023, and takes effect on Dec. 30, 2023. Colorado: The Colorado Department of Revenue, in response to recent litigation, repealed Colo. Regs. 39-22-103(5.3), which had clarified that Colorado's definition of "IRC" incorporates federal changes on a prospective basis only. Specifically, the rule had provided that "[the IRC for Colorado tax law purposes] does not, for any taxable year, incorporate federal statutory changes that are enacted after the last day of that taxable year." In 2022, a Colorado appeals court determined that the rule was contrary to the statutory language. Amendments repealing the rule were adopted on Nov. 8, 2023, and take effect on Dec. 30, 2023. Colorado: The Colorado Department of Revenue (CO DOR) adopted amendments to Rule 39-22-108 regarding the credit for taxes paid to another state. The amendments are intended to "improve clarity" and provide guidance on: (1) credits allowed to partners or shareholders for taxes paid to another state by the partnership or the S corporation; (2) elements in calculating credit limitations such as income sourced to another state, gross Colorado tax, modified federal adjusted gross income; and (3) redetermination to correct the credit claimed. The credit is allowed for taxes imposed on income by another state, the District of Columbia or a US territory or possession, and only for the amount of tax imposed on income derived from sources in the other state. The credit is not allowed for any franchise tax or tax not imposed on income or for taxes accrued to any city, local jurisdiction, foreign country (or subdivision thereof). The rule describes (1) the credit limitation for full and part-year residents, with examples, and (2) documentation a taxpayer claiming the credit must submit to the CO DOR. The new rule was adopted on Nov. 8, 2023, and takes effect on Dec. 30, 2023. New Jersey: The New Jersey Division of Taxation (NJ DOT) updated its FAQs on its elective pass-through entity tax (PTET), the Business Alternative Income Tax (BAIT). Specifically, the list of states with a PTET that is substantially similar to the BAIT for purposes of the resident tax credit that can be claimed against their New Jersey Gross Income Tax for PTET imposed by another state or the District of Columbia that is substantially similar to the BAIT. The list, which includes 33 states and New York City, is current as of Oct. 2, 2023. New Jersey: In response to recently enacted corporation business tax (CBT) reform, the New Jersey Division of Taxation (Division) has issued updated guidance on the following: (1) included and excluded business entities in the combined group and the minimum tax of a taxpayer that is a member of a combined group (TB-86(R) — revised Nov. 1, 2023); (2) banking corporations and combined returns (TB-91(R) — revised Nov. 1, 2023); and (3) income reporting and returns for banking corporations for privilege periods ending on and after July 31, 2020 (TB-99(R) — revised Nov. 1, 2023). The Division also issued new guidance on captive investment companies, real estate investment trusts and regulated investment companies and combined groups (TB-113 — issued Nov. 1, 2023). Additional information the CBT reform is available here. Texas: The Texas Comptroller of Public Accounts (Comptroller) issued guidance on cost that may be included as benefits for the compensation subtraction under the franchise "margin" tax. The Comptroller explained that in order for the cost of an item to be included in "benefits" for purposes of the compensation subtraction, the item must meet the following: (1) be similar to items listed in Texas Tax Code §171.1013(b)(2) in that it provides value to the employee in a personal capacity (e.g., workers' compensation, health care, contributions to employees' health savings accounts, retirement); (2) be deductible for federal income tax purposes; (3) not already be included in wages and cash compensation; and (4) meet all the requirements in Tex. Admin. Code, tit. 34 §3.589(e). The Comptroller determined that the following items, provided they are deductible for federal income tax purposes and not already included in wages or cash compensation, may be included as benefits in the compensation subtraction: immigration expense, meals, relocation-travel expenses, personal use of a company-provided vehicle, health checkups, sports club, cell phones, entertainment (i.e., tickets to events or other similar items), book and journal subscriptions, dues, and studies/tuition reimbursement. The Comptroller determined that the following items may not be included as a "benefit": business use of a company-provided vehicle, recruiting referral fees, travel per diems, other entertainment (i.e., expenses for internal taxpayer celebrations for employees), and training. Tex. Comp. of Pub. Accts., STAR No. 202310005L (Oct. 13, 2023). Wisconsin: New law (Act 36) updates Wisconsin's conformity to the IRC. For tax years beginning after Dec. 31, 2022, Wisconsin conforms to the IRC as amended to Dec. 31, 2022, with exceptions.1 Amendments to the IRC enacted after Dec. 31, 2022, do not apply for Wisconsin purposes. Wisconsin's IRC conformity references underlying federal statutes, which can make understanding what provisions the state couples and decouples from somewhat challenging. Act 36 updates certain references for 2023 and clarifies what IRC updates enacted in 2020 and 2021 do or do not apply for Wisconsin purposes. These provisions are discussed in Tax Alert 2023-1926. Wis. Laws 2023, Act 36 (AB 406), signed by the governor on Oct. 25, 2023. SALES & USE Louisiana: In response to a ruling request, the Louisiana Department of Revenue (LA DOR) issued guidance on the tax collection and remittance requirements for peer-to-peer vehicle sharing platforms. Peer-to-peer (P2P) vehicle sharing platforms do not own or rent vehicles; instead, they facilitate the lease or rental of vehicles between vehicle owners and drivers. Under Louisiana law, the term "dealer" includes anyone that operates, maintains or facilitates a P2P vehicle sharing program and collects a portion of the amount paid under the vehicle sharing agreement. Regarding the platform company's collection and remittance obligations for vehicles leased or rented through its platform, the LA DOR determined that the company, through its operation, maintenance and facilitation of a P2P vehicle sharing program, is a "dealer". As a "dealer", the company must collect and remit sales tax on transactions facilitated on its vehicle sharing platform and it also must collect and remit automobile rental taxes that are due on taxable rentals (i.e., rentals for 29 days or less) made through its P2P vehicle sharing program. Both the sales tax and the automobile rental tax must be electronically remitted and paid. The LA DOR noted that local sales tax collected on these transactions must be remitted to the appropriate local sales tax collector. P2P vehicle sharing platforms are specifically excluded from the definition of marketplace facilitator and, therefore, are not eligible to file or remit tax to the Louisiana Sales and Use Tax Commission for Remote Sellers. La. Dept. of Rev., Revenue Ruling 23-001 "Peer-to-Peer Vehicle Sharing Platforms: Tax Collection and Remittance Requirements" (Nov. 14, 2023). Rhode Island: The Rhode Island Division of Taxation (RI DOT) issued a notice to Sales Tax permit holders, informing them that starting with Tax Year 2023 and thereafter the Rhode Island Annual Sales and Use Tax Reconciliation Return — Form T-204R — Annual (for general retailers) will no longer be required. The RI DOT noted, however, that annual reconciliation returns covering the 2023 calendar year will still need to be filed by filers of T-204A (liquor stores) and T-204W (writers, composers, and artists). Delinquent prior-year annual reconciliation returns also are still required to be filed. R.I. Div. of Taxn., ADV 2023-17 "Discontinuation of Annual Sales Tax T-204R Reconciliations Forms" (Nov. 10, 2023). Texas: The Texas Comptroller of Public Accounts (Comptroller) issued additional guidance on the taxability of electronic games and associated content, which includes downloadable content, virtual goods and currencies for use within the electronic game, additional game content, game-play enhancements and aesthetic enhancements. Purchasers of electronic games also may purchase subscriptions or membership fees for access to games or game communities (e.g., chat rooms, discussion boards). Purchases of electronic games and associated content can be made directly through the game's website or from third-party retailers. Electronic games do not include games received on physical media, stand-alone free-to-play video games or Internet access services. The Comptroller explained that under existing statutes, rules and policy decisions, electronic games and associated content, including virtual currencies, are subject to Texas sales and use tax as an amusement service, regardless of whether access is purchased directly through a game's website or a redeemable card. In addition, membership and subscription fees for access to an electronic game or associated content are charges for membership or access to special privileges and, as such, are subject to tax as amusement services. Tex. Comp. of Pub. Accts., STAR No. 202309029L (Sept. 25, 2023) (replaces STAR No. 201405957L (May 28, 2014)). Texas: In response to a ruling request, the Texas Comptroller of Public Accounts (Comptroller) determined that a company's biometric identification service, which verifies a person's identity based on biometric information such as fingerprints and iris scans, is not subject to Texas sales and use tax because it is not an enumerated taxable service. The Comptroller found that the business is not performing a taxable security service, nor is it performing taxable data processing services even though some of its activities (e.g., gathering and storing customers' electronic information) meets the definition of data processing services. These activities, the Comptroller found, are performed to facilitate the company's service to verify a person's identity using biometric information. Tex. Comp. of Pub. Accts., STAR No. 202309040L (Sept. 19, 2023). BUSINESS INCENTIVES Mississippi: The Mississippi Department of Revenue (MS DOR) announced that it is implementing a new online system for businesses and individuals to submit charitable contribution credits (there are six available for business taxpayers and four available for individual taxpayers). Starting in 2024, the MS DOR only will accept applications made through its new online system. Paper application will not be accepted after calendar year 2023. The MS DOR noted that it will add an "Apply for a Charitable Contribution Credit" link to its website. Miss. Dept. of Rev., Charitable Contribution Credits Notice (Oct. 31, 2023). PROPERTY TAX Chicago, Illinois: On Nov. 7, 2023, the Chicago City Council voted 32 to 17 to approve a referendum question to put before Chicago voters regarding the real estate transfer tax. Currently, Chicago imposes a real estate transfer tax at the rate of $3.75 for every $500 of the transfer price (paid by the buyer) and a supplemental tax at the rate of $1.50 per $500 of the transfer price (revenue from this supplemental tax provides funding for the Chicago Transit Authority). Voters are being asked to approve a measure that would reduce the real estate transfer tax to $3.00 for every $500 of the transfer price under $1 million, $10 for every $500 of the transfer price between $1 million and $1.5 million, and $15 for every $500 of the transfer price exceeding $1.5 million. The rate of the supplemental tax for the Chicago Transit Authority would not be changed. Funds generated by the increased rates would be used to address homelessness. The referendum will be voted on in 2024. CONTROVERSY California: The California Franchise Tax Board (FTB) adopted amendments to Cal. Code Reg., tit. 18, §25137(d), on the process for petitioning to use an alternative apportionment method. The amendments:
The amendments also create a rule on "ex-parte communications" (i.e., "any communication concerning a petition to or from the [FTB], itself, or [FTB] member staff, outside the presence of either [FTB] staff or the taxpayer without notice to all parties"). Under the rule no ex-parte communication is allowed for any substantive issue in the petition without notice and opportunity for all the parties to participate in the communication, except as provided by this regulation. This rule applies beginning with notification and ends when the FTB renders a decision. The ex-parte communication rule does not apply to certain communications between the FTB/FTB staff and the taxpayer or the taxpayer's representative. The amended regulation took effect on Nov. 3, 2023. South Carolina: The South Carolina Department of Revenue (SC DOR) provided procedural guidance for when due dates fall on a Saturday, Sunday, or legal holiday. The SC DOR explained that when the statutory due date for filing a tax return, refund claim or other document with the SC DOR falls on a Saturday, Sunday, or legal holiday the filing will not be considered late if it is postmarked, hand-delivered or received by the SC DOR by the next business day. (If the return, claim, or document is electronically filed, it will not be considered late if filed by 11:59 p.m. EST the next business day). Legal holidays that fall on Saturday are observed on the preceding Friday, and those falling on Sunday are observed on the following Monday. The observance day is considered the legal holiday for purposes of determining timely filing. Thus, if the legal holiday falls on a Saturday and is observed the preceding Friday, then the deadline for filing or payment is extended until the following business day, which would be the following Monday. The guidance lists legal holidays in South Carolina. S.C. Dept. of Rev., SC Revenue Procedure #23-1 (Oct. 30, 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. The October 2023 issue is available via Tax Alert 2023-1855. Multistate: From tax filing to taxability, there is so much to consider when closing the year and starting anew, and, with federal, state and local rules constantly changing, preparing a year-end payroll checklist is no simple task. To get you started, we have compiled a sample checklist of items to consider for 2023 and 2024, and state charts to guide you through the federal and state Form W-2 and electronic filing requirements that apply. For additional information on this development, see Tax Alert 2023-1847. Multistate: California, New York, and the Virgin Islands are subject to a federal unemployment insurance (FUTA) credit reduction in 2023 because they did not repay their FUTA loan balance by Nov. 10, 2023. Connecticut and Illinois repaid their loan balances just prior to the Nov. 10 cutoff. Except for the Virgin Islands, states subject to the FUTA credit reduction (0.6% for 2023) will pay a net FUTA rate of 1.2%, rather than a net FUTA rate of 0.6%. The additional FUTA tax owed due to the FUTA credit reduction will be shown on the 2023 Form 940, and the increase in FUTA tax is due on Jan. 31, 2024. New York employers will pay to the state a FUTA loan interest surcharge of 0.18% (down from 0.22%), or approximately $22.14 per employee. Virgin Islands employers continue to pay the territory a FUTA loan interest assessment of $25 per employee. For additional information on this development, see Tax Alert 2023-1919. MISCELLANEOUS TAX New York: Vetoed bill (A.954) would have established the New York cryptocurrency and blockchain study task force to study the effects of the widespread use of cryptocurrencies and other forms of digital currencies and ancillary systems such as blockchain technology in New York. A. 954 was vetoed on Nov. 17, 2023. VALUE ADDED TAX International — Kenya: The Kenya Revenue Authority (KRA) has issued a public notice (Nov. 2023) requiring all taxpayers carrying on business, including those not registered for value added tax (VAT), to onboard on the electronic Tax Invoice Management System (e-TIMS). The electronic Tax Invoicing Management system was introduced in Kenya following the gazettement of the VAT (Electronic Tax Invoice) Regulations, 2020, which replaced the electronic tax register in force since 2005. Pursuant to the regulations, only VAT-registered taxpayers were required to maintain an electronic tax invoicing system. The regulations also prescribed the details that an electronic tax invoice should have, including buyer pin (optional), unique register identifier (control unit serial number), unique invoice identifier (control unit invoice number) and a quick response (QR) code. For additional information on this development, see Tax Alert 2023-1897. UPCOMING WEBCASTS Wednesday, December 6. Domestic tax quarterly webcast series: A focus on state tax matters (1 pm ET). For our fourth quarterly webcast in 2023, please join our panel in discussing: (1) state and local revenue and fiscal conditions; (2) 2023 state tax policy trends and state tax policy considerations for 2024; (3) potential state income tax implications of the U.S. Supreme Court's forthcoming ruling in Moore v. United States; (4) recent and pending state tax cases; and (5) recent regulatory activity. Register. Thursday, December 7. 2023 employment tax year in review (2 pm ET). In this webcast, our employment tax professionals will discuss the following common areas of year-end payroll and employment tax concern: (1) 2023 and 2024 federal and state tax rates and limits; (2) Forms W-2/1099-NEC reporting changes; (3) payroll and employment tax insights for 2023; (4) state unemployment insurance and the federal unemployment insurance credit reduction; (5) state payroll and employment tax developments; (6) hybrid employees and multistate income tax considerations; (7) highlights from our 2023 payroll year-end checklist. Register. Wednesday, December 13. Spotlight on BEPS 2.0: Developments and practical implications for US MNEs (12 pm ET). Jurisdictions are enacting and proposing legislation implementing the Pillar Two rules developed under the Organisation for Economic Co-operation and Development/G20's project on addressing the tax challenges of the digitization of the economy (BEPS 2.0). Global minimum tax rules are set to take effect as soon as 2024, and many multinational entities (MNEs) still have a lot to do to prepare. Join Pillar Two subject-matter professionals for an action-oriented panel discussion. Topics to be covered include: (1) recent BEPS 2.0 activity around the globe; (2) US Congressional response to BEPS 2.0; (3) practical considerations with the Transitional Country-by-Country Report Safe Harbor. 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. ——————————————— 1 For tax years beginning after Dec. 31, 2020 and before Jan. 1, 2023, the conformity date is generally Dec. 31, 2020. | ||||
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