Tax News Update    Email this document    Print this document  

December 15, 2023

State and Local Tax Weekly for December 1 and December 8

Ernst & Young's State and Local Tax Weekly newsletter for December 1 and December 8 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.


Minnesota Supreme Court rules gain on sale of goodwill is apportionable business income

In Cities Management, Inc.,1 the Minnesota Supreme Court affirmed the Minnesota Tax Court's ruling that income derived from the goodwill generated by the sale of company stock was apportionable business income.

Background: The taxpayer is an S corporation that did business in Minnesota and Wisconsin and was 80% owned by a nonresident taxpayer. In 2015, the nonresident and her co-owner sold their stock to a third party. The purchaser requested that the owners make an IRC 338(h)(10) election, to treat the transfer of stock as an asset sale with the purchaser obtaining a stepped-up basis in the corporation's assets. Much of the value of the deemed asset sale related to goodwill. The nonresident consulted a public accounting firm for advice about the tax treatment of the transaction. In advising the nonresident, the accounting firm relied on Nadler v. Comm'r. of Rev., a prior decision of the Minnesota Tax Court (tax court), which held the income generated from the sale of goodwill was nonbusiness income subject to allocation under Minn. Stat. 290.17, Subd. 2(c).

The Minnesota Department of Revenue (Department) did not appeal Nadler, and, internally, it took the position that it did not acquiesce to the tax court's decision in Nadler. As early as 2007, the Department circulated non-public technical advice memoranda informing its auditors that the Department would not follow Nadler, but it did not make its decision public until it issued Revenue Notice # 17-02 (July 3, 2017).

At the time the taxpayer and nonresident shareholder filed their returns for tax year 2015, they, as well as the tax advisors, were unaware of the Department's position. The taxpayer filed its nonresident withholding return, and the nonresident filed her Minnesota income tax returns, allocating the gain to her state of residence.

In 2018, the Department audited the filed returns and determined that the gain was apportionable business income and assessed the S corporation nonresident withholding tax, interest and a substantial underpayment penalty. The taxpayer appealed the assessment to the Department, which affirmed the assessment but removed the substantial underpayment penalty on the grounds that the taxpayer reasonably relied on Nadler and the Department had not issued written guidance until 2017.

The taxpayer appealed to the tax court, which affirmed the Department's decision. In so doing, the tax court rejected the taxpayer's argument that it was bound by Nadler, referencing intervening court decisions, such as YAM Special Holdings,2 which held that gain recognized by an S corporation from the sale of goodwill was apportionable business income. Following YAM Special Holdings, the tax court then held that the gain was apportionable business income. The taxpayer appealed to the Minnesota Supreme Court (Court).

Court finds goodwill is apportionable business income: The Court first addressed the taxpayer's argument that the Department was bound by Nadler based on Minn. Stat. 271.01, Subd. 5, the tax court's jurisdictional statute. This statute indicated that "the [t]ax [c]ourt shall be the sole, exclusive, and final authority … in those cases that have been appealed to the [t]ax [c]ourt … ." The taxpayer argued that this language reflected a legislative intent that the Department be bound by unappealed tax court decisions interpreting Minnesota tax law. The Court disagreed with this reasoning finding persuasive the Department's argument that the language indicated an intent that the tax court have the power "to decide each case before it completely" and concluding that the statute did not require the Department follow Nadler.3

The Court then turned to the more complicated issue of whether the tax court correctly determined that the gain was apportionable business income. The Court first reviewed Minn. Stat. 290.17, which applies to the income of nonresident individuals, including partners in partnerships and S corporation shareholders. The Court observed Minn. Stat. 290.17, Subd. 2 provides rules for allocating income "not derived from the conduct of a trade or business" and that Subdivision 2(c) provides that gain from the sale of "goodwill … is allocated to this state to the extent that the income from the business in the year preceding the year of sale was assignable to Minnesota under subdivision 3." Minn. Stat. 290.17, subd. 3 generally requires all trade or business income to be "subject to apportionment except nonbusiness income." Minn. Stat. 290.17, Subd. 6 further defines "nonbusiness income" as income that constitutionally cannot be apportioned, including income derived from a capital transaction solely serving an investment function. Finally, the Court noted that Minn. Stat. 290.17, Subd. 4 codifies the constitutional unitary business principle focusing on language stating that "the entire income of a unitary business is subject to apportionment" and that notwithstanding "subdivision 2, paragraph (c), none of the income of a unitary business is considered to be derived from any particular source and none may be allocated to a particular place except as provided by the applicable apportionment formula."

The Court then acknowledged that Minn. Stat. 290.17 is not a "model of clarity" and that both parties' interpretations are supported by the statutory language, but neither parties' interpretation harmonizes all of the statute's provisions. The Court concluded that the treatment of the gain on the sale of goodwill under Minn. Stat. 290.17 is ambiguous, requiring it to resort to legislative intent as evidenced by contemporaneous legislative history and consideration of former law as authorized by Minn. Stat. 645.16(5) and (7). The Court then reviewed the legislative history of an omnibus tax bill enacted in 1999,4 which responded to two Minnesota Supreme Court cases holding that certain income was nonbusiness income under the statutes in place at that time.5 The Court noted that the conference committee's discussion of the 1999 changes reflected an intent to (1) "fix a perceived problem" in the Court's prior decisions, namely because of the Court's interpretation of business and nonbusiness income, as well as the fact out-of-state taxpayers were paying less income tax than Minnesota-domiciled taxpayers; and (2) put in place a purely constitutional distinction between business and nonbusiness income.

Based on this legislative history, the Court concluded that the taxpayer's income was derived from a unitary asset and did not constitute nonbusiness income. As a result, and contrary to the taxpayer's argument, the allocation rules did not apply. Accordingly, the Court held that the gain was apportionable business income.

For more on this development, see Tax Alert 2023-2000.


California: The California Franchise Tax Board adopted amendments to Cal. Code Regs., tit. 18, §18000-1(a), regarding the credit for taxes paid to another state. California law allows residents a credit against "net tax" for net income taxes paid to another state; nonresidents are allowed a credit against net tax for net income taxes paid to the state in which they reside. New section 18000-1(a)(2) is added to provide that for purposes of the credit, a tax is considered a net income tax "only where the tax is imposed on only net income." If the tax is imposed on items that include amounts other than net income the tax is not a net income even though in instances the taxed items include net income in whole or in part. In addition, a tax is not a tax on net income when the tax base includes items other than net income, in whole or in part, as applied to all taxpayers, regardless of whether an individual taxpayer would only be taxed on net income. The amendments were adopted on Nov. 16, 2023 and they take effect Jan. 1, 2024.

Hawaii: The Hawaii Department of Taxation (HI DOT) issued updated guidance on the state's elective pass-through entity tax (PTET) and provided notice of proposed temporary rules related to the PTET and accompanying credits. While the new PTET law takes effect Jan. 1, 2024, it applies to tax years beginning after Dec. 31, 2022. The election to be subject to the PTET is made annually, and once made it is irrevocable for that tax year and binding on all of the electing PTE's eligible members. The PTET election must be made with the HI DOT by the 20th day of the fourth month following the close of the taxable year. The election is made annually and once made is irrevocable and binding on all of the electing PTE's qualified members for that tax year. The election requires either the signatures of each member of the entity or the signature of an authorized officer, manager or member of the entity. The HI DOT's guidance explains how to calculate the PTET; due dates for remitting PTET and estimated tax payments, which must be made starting in 2024; electronic filing and tax remittance requirements; credits available to members for PTET paid and PTET paid to another state; refunds for overpayment of the PTET; and a summary of filing deadlines. The guidance also includes temporary administrative rules. Haw. Dept. of Taxn., Tax Information Release No. 2023-03 (Oct. 31, 2023) (supersedes TIR 2023-01 issued July 21, 2023).

Iowa: The Iowa Department of Revenue has extended the deadline to make the 2022 election to be subject to the pass-through entity tax (PTET) to from Jan. 2, 2024 to the later of April 30, 2024 or the due date for filing the 2022 IA 1065 or 2022 IA 1120S, including extensions. For tax years 2023 and thereafter, the PTET election must be made by the due date for filing the PTE's IA 1065 or IA 1120S, including extensions. Additional information on Iowa's PTET is available here.

Utah: The Utah State Tax Commission (UTC) updated its "Recent Info and Tax Law Changes" webpage to provide guidance on the employee retention credit (ERC). The UTC explained that for federal income tax purposes, employers claiming the ERC must reduce their income tax payroll deduction by the amount of the ERC for the tax year. Utah taxable income is calculated based on federal adjusted gross income for individuals and federal taxable income for corporations. Thus, ERC associated payroll expenses are not deductible on the Utah income tax returns to the extent they are not deductible on the federal return. Utah St. Tax Comm., "Recent Info and Tax Law Changes" (updated Nov. 2023).


Florida: New law (HB 1C ) exempts from sales and use tax certain fencing and building materials used to repair/replace farm fences on land classified as agricultural and nonresidential farm buildings damaged by Hurricane Idalia. The exemption applies to purchases made from Aug. 30, 2023 through June 30, 2024, for materials used to replace/repair fences or replace/repair nonresidential farm building located in the following counties Charlotte, Citrus, Columbia, Dixie, Gilchrist, Hamilton, Hernando, Jefferson, Lafayette, Levy, Madison, Manatee, Pasco, Pinellas, Sarasota, Suwannee and Taylor. The refund must be applied for by Dec. 31, 2024. The law describes what information must be included in the application. This provision is retroactively operative to Aug. 30, 2023. Fla. Laws 2023 (Special Session 2023C), ch 2023-349 (HB 1C), signed by the governor on Nov. 13, 2023.

Massachusetts: On Dec. 19, 2023, the Massachusetts Department of Revenue (MA DOR) will hold a hearing on proposed regulation 830 CMR 64H.1.9: Remote Retailers and Marketplace Facilitators. The proposed amendments would expand 830 CMR 64H.1.9(4), the marketplace facilitator exception provisions, to exclude a person that facilitates: (1) the sale of marijuana or marijuana products on behalf of marijuana retailers, and (2) rentals of motor vehicles. A person that facilitates rentals of motor vehicle and is subject to the marketplace facilitator rules would be required, to the extent that the person is the marketplace facilitator with respect to such sellers, to collect and remit all applicable vehicular rental transaction contract surcharge. Proposed amendments to 830 CMR 64H.1.9(7) would amend filing and payment deadlines for tax periods ending on or after April 1, 2021. As of that period, a vendor would be required to file a return and pay tax due for each calendar month on or before the 30th day of the following calendar month (from the 20th day of the following calendar month). A vendor also may be subject to the advance payment rules under 830 CMR 62C.16B.1.

Texas: In response to a ruling request, the Texas Comptroller of Public Accounts (Comptroller) determined that the operations of a foreign headquartered company providing facility management and property consulting services to commercial customers across different industries in various countries do not fall under the definition of "property management company" under Tex. Tax Code §151.354(f). For Texas sales and use tax purposes, in order be a property management company the company would have to operate and manage all the activities at a property held by the owner for purposes of rental, including securing tenants, hiring and supervising employees for property operation or upkeep, receiving and applying revenues, and incurring and paying expenses for the operation of the property. Because the foreign company does not secure tenants or receive and apply revenue for its clients, it does not operate and manage all the activities at its clients' properties. As for securing tenants, the Comptroller said that a property management company can secure tenants for landlords on their own or they can hire a third party to do so. The Comptroller also determined that the foreign company was selling various taxable items, such as real property services (e.g., landscaping, building and grounds cleaning, janitorial), real property repair and remodeling, security services, catering and food services, and printed materials and graphic art. Tex. Comp. of Pub. Accts., Star No. 202310013L (Oct. 20, 2023).

Texas: The Texas Comptroller of Public Accounts determined that for purposes of the optional single local use tax rate for remote sellers, the estimated average rate of local sales and use taxes imposed in Texas during the preceding state fiscal year ending Aug. 2023 is 1.75%. This rate will be in effect for the period from Jan. 1, 2024 to Dec. 31, 2024. Tex. Comp. of Pub. Accts., Texas Register "In Addition" (48 TexReg 6927 Nov. 24, 2023).

Texas: In response to a ruling request regarding qualifying jobs for a certified large data center project, the Texas Comptroller of Public Accounts said that jobs assigned to the new data center but physically located at the existing data center while the new data center was under development and construction will be qualifying jobs if they are hired on or after the date the new data center is certified. Tex. Comp. of Pub. Accts., Star No. 202310014L (Oct. 27, 2023).


Federal: In PLR 202347009, the IRS ruled that a proposed transaction in which a consolidated group is restructured will not result in any credit recapture under IRC § 50. For additional information on this development, see Tax Alert 2023-1998.

New York City: New law (Int 1070) renews the biotechnology tax credit, which lapsed at the end of 2018. The credit, which can be claimed against the General Corporation Tax, the Unincorporated Business Tax, and the Corporate Tax of 2015, is available for tax years beginning on or after Jan. 1, 2023 and before Jan. 1, 2026. A taxpayer that is a qualified emerging technology company located in New York City, engages in biotechnologies and meets eligibility requirement will be allowed to claim the credit. The law took effect immediately and applies to tax years beginning on or after Jan. 1, 2023. N.Y.C. Laws 2023, Int 1208, signed by the mayor on Dec. 4, 2023.


Colorado: New law (HB23B-1003) establishes the commission on property tax, which will study and make recommendations for a property tax structure that protects property owners and tenants from increasing property taxes while meeting the needs of governments that use the property taxes to pay for local services. The commission will meet at least twice a month, or more, beginning the week of Dec. 18, 2023 through the week of March 15, 2024. A majority of the commission can vote to extend the commission's work beyond March 15, 2024 or to terminate the commission's work at any time. The commission has the discretion to identify, consider and evaluate proposed property tax initiatives for the 2024 general election. The commission's report to the legislature is due by March 15, 2024; however, if a majority of Commission members vote to extend their work past March 15, 2024, then the report is due by Dec. 31, 2024. The report can only include recommendations supported by at least 10 commission members, and it should include recommendations for both short-term and long-term legislative changes that will further the purpose of the commission. Colo. Laws 2023 (1st Extra. Sess.), HB23B-1003, signed by the governor on Nov. 28, 2023.

Florida: New law (HB 1C) requires certain tangible personal property owned and operated by a farm, farm operation or agricultural processing facility in certain counties6 to be assessed at no greater than the property's salvage value if the property was not usable for at least 60 days because of Hurricane Idalia. This valuation is only effective for the 2024 tax year. The deadline to file an application with the property tax appraiser for such assessment is March 1, 2024. If the application is denied, taxpayers can file an appeal with the Valuation Adjustment Board. Fla. Laws 2023 (Special Session 2023C), ch 2023-349 (HB 1C), signed by the governor on Nov. 13, 2023.

Michigan: New law (HB 4926) requires that personal property (including exempt personal property) that on the tax-day has been moved to an alternative location be assessed in its ordinary location rather than the alternative location. Under prior law, this requirement was only applied to tax years 2021, 2022 and 2023 and only if the property was in an alternative location due to the COVID-19 pandemic. The law took immediate effect. Mich. Laws 2023, PA 218 (HB 4926), signed by the governor on Nov. 22, 2023.


Louisiana: The Louisiana Department of Revenue (LA DOR) issued guidance to clarify the effects of disaster extensions on automatic filing extensions granted for state corporate, individual, fiduciary and partnership income taxes. Starting in 2022, taxpayers are granted an automatic extension of time to file their Louisiana corporate income tax return if they timely filed an extension to file their federal income tax return. Generally, the extension is the later of six months or the extended due date of the federal return. If the qualified taxpayer has an original due date within a disaster extension period, the disaster extended due date is the later of the original due date or the final date of the disaster extension period. If a federal extension was timely filed, the extended due date is the later of six months from the original due date, the final date of the disaster extension period or the federal extended due date. If the extended due date is within the disaster extension period, the extended due date is the later of the final date of the disaster extension period or the federal extended due date. These extension provisions also apply to corporation franchise tax returns filed in conjunction with the corporate income tax return. If the taxpayer only files a corporation franchise tax return with an original due date in the disaster extension period, the due date is the later of the original due date or the final date of the disaster extension period. Starting in 2022, taxpayers are granted an automatic six-month extension to file their individual, fiduciary and partnership income tax returns. If said taxpayer's extended due date falls within a disaster extension period, the automatic extended due date to file the return is the later of the final date of the disaster extension period or the automatic due date. The LA DOR's guidance includes examples. La. Dept. of Rev., Revenue Information Bulletin No. 23-029 (Dec. 1, 2023).


Indiana: The Indiana Department of Revenue (IN DOR) updated its guidance on revised procedures for partnership audits, amended returns and adjustments for other entities arising from partnership adjustments. The bulletin has been revised to add a discussion on the state's new elective pass-through entity tax (PTET), which can be made starting in 2022. In addition, updates to the bulletin: (1) reflect the disallowance of new elections for partnerships to be subject to tax and the revised procedures for issuing proposed adjustments; (2) provide that partnership audits, protests, assessments and other rules apply to S corporation that elect to be subject to the PTET; and (3) add clarifying examples. Ind. Dept. of Rev., Income Tax Information Bulletin #72A (Dec. 2023).


Colorado: The Colorado Department of Labor and Employment (Department) announced that, effective Jan. 1, 2024, a new definition of taxable wages will apply for paid family and medical leave insurance (PFML) purposes. CRS § 8-13.3-501 et seq., implementing the Nov. 3, 2020 ballot initiative 283, states that from Jan. 1, 2023 through Dec. 31, 2024, the premium amount is 0.9% of "wages" per employee. The term "wages" is not defined. For PFML purposes, beginning in 2024, the Department is replacing the term "wages" with "gross wages." For more on this development, see Tax Alert 2023-2005.

Philadelphia, PA: In response to the rise in hybrid work policies brought about by the COVID-19 pandemic, the Philadelphia Department of Revenue (Department) published enhanced guidelines concerning the application of its wage tax when employees of Philadelphia employers work from their homes outside of the City. The latest guidance includes examples that provide important insights into how the Department has long implemented its convenience of the employer rule. For more on this development, see Tax Alert 2023-1959.


Florida: New law (HB 1C) creates a refund for state and county fuel taxes paid for agricultural shipment and debris removal from agricultural properties in counties affected by Hurricane Idalia. The refund applies to fuel purchased and used in Florida during the period from Aug. 30, 2023 through June 30, 2024. The fuel must be used in a motor vehicle driven or operated on public highways for agricultural shipment or hurricane debris removal. Fla. Laws 2023 (Special Session 2023C), ch 2023-349 (HB 1C), signed by the governor on Nov. 13, 2023.

New York City: New law (Int 1208) extends the 5.875% tax rate imposed on the occupancy of hotel rooms in New York City through Nov. 30, 2027 (from Nov. 30, 2023). The rate will be reduced to 5% on Dec. 1, 2027. The law took effect immediately. N.Y.C. Laws 2023, Int 1208, signed by the mayor on Nov. 17, 2023.

Ohio: In Aramark Corp.,7 the Ohio Board of Tax Appeals (BTA) ruled that a managed services company could not claim an "agency exclusion" from the Commercial Activity Tax (CAT) on reimbursements it received under a management fee contract because the contract did not expressly authorize the taxpayer to enter contracts on its client's behalf. The taxpayer, a food, hospitality, facility and uniform services company, provides managed services to business, educational, healthcare, and government institutions on two types of contracts: (1) profit and loss, and (2) management fee. Under a profit-and-loss contract, the taxpayer operates independently of the client, retaining all receipts, and making a profit to the extent receipts exceed expenses. Under the management fee arrangement, the taxpayer's clients bear the risk of profitability, with the taxpayer purchasing food, supplies and other items for the client. The client retains the receipts and reimburses the taxpayer for its expenses, plus a management fee for its services. The taxpayer had sought a refund for a portion of the receipts received under a management fee contract — specifically reimbursements for purchases of food, labor, and other direct expenses — arguing that they were received as an agent of its client under ORC 5751.01(F)(2). The Ohio Department of Taxation (OH DOT) denied the taxpayer's refund request, relying on OAC 5703-29-13(C)(2)(c), which requires a general contractor engaged in a cost-plus contract to have a written agreement with its subcontractors that it is acting as the property owner's agent. As no written agency agreement existed, the OH DOT denied the refund and the taxpayer appealed. On appeal, the BTA was not persuaded that incurring expenses on the client's behalf or acting for the client's benefit, per the contract's terms, satisfied the contractual agency requirement. Similarly, the client's continued control over day-to-day operations was unpersuasive. The BTA noted that Ohio Supreme Court decisions, such as Willoughby Hills Dev. & Distrib., Inc. and Cincinnati Golf Mgt., Inc., 8 require the purported agent to have actual authority to bind the principal to its contracts. Those cases also rejected applicability of the "control test," which considers how much control a principal retains over a purported agent. Given the absence of express contractual language authorizing the taxpayer to bind its clients, the BTA concluded that the agency exclusion did not apply. The BTA also rejected the taxpayer's secondary argument that the expense reimbursements received from management fee contracts are not gross receipts. The BTA found that ORC 5751.01(F) includes all gross receipts without deductions for cost of goods sold or other expenses incurred. For more on this development, see Tax Alert 2023-2020.


International — Denmark: Effective Jan. 1, 2024, Denmark will begin applying new rules on local reverse charge for wholesale supplies of telecommunications services. The rules state that local reverse charge applies when the primary purpose of the telecommunications services purchase is resale, and the purchaser's own consumption of the services is negligible. This means that it is the purchaser who will be required to settle the VAT with the Danish tax authorities. The rules will only apply to trade between locally established Danish entities and only for trade between VAT-registered businesses. For additional information on this development, see Tax Alert 2023-1935.

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 Cities Management, Inc. v. Comm'r. of Rev., Case No. A23-0222 (Nov. 22, 2023).

2 YAM Special Holdings, Inc. v. Comm'r. of Rev, 947 N.W.2ed 438 (Minn. 2020). See Tax Alert 2020-2118.

3 The Court noted that it was "troubled by the Commissioner's conduct that this case brought to light" and that deciding internally, without notice to the public, that it would not follow Nadler would "do little to inspire the trust and confidence of taxpayers in Minnesota's tax system." The Court, however, concluded that it could not invalidate the assessment based on the Department being bound to Nadler.

4 Act of May 25, 1999, ch. 243, art. 2, Sec. 21, 1999 Minn. Laws 2054, 2076.

5 See Firstar Corp. v. Comm'r. of Rev., 575 N.W.2d 835 (Minn. 1998) and Hercules, Inc. v. Comm'r. of Rev., 575 N.W.2ed 111 (Minn. 1998).

6 The counties are Charlotte, Citrus, Columbia, Dixie, Gilchrist, Hamilton, Hernando, Jefferson, Lafayette, Levy, Madison, Manatee, Pasco, Pinellas, Sarasota, Suwannee and Taylor.

7 Aramark Corp. v. Harris, Case No. 2019—2975 (Ohio Bd. of Tax App. Nov. 6, 2023).

8 Such as Willoughby Hills Dev. & Distrib., Inc. v. Testa, 155 Ohio St.3d 276, 2018-Ohio-4488 and Cincinnati Golf Mgt., Inc. v. Testa, 132 Ohio St.3d 299, 2012-Ohio-2846.