February 21, 2024 State and Local Tax Weekly for February 2 and February 9 Ernst & Young's State and Local Tax Weekly newsletter for February 2 and February 9 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 Total state and local business taxes: State-by-state estimates for FY22 (December 2023) The 21st annual state and local business tax report prepared by Ernst & Young LLP in conjunction with the Council On State Taxation (COST) and the State Tax Research Institute (STRI) is now available. The report presents detailed state-by-state estimates of state and local taxes paid by businesses.1 The estimates presented in this report are for fiscal year 2022 (FY22), which ran from July 2021 through June 2022 for most states. Businesses paid $1,074.5 billion in state and local taxes in FY22, which was 44.6% of all tax revenue at the state and local level. The following are key findings of the study:
A copy of the report is available here. Governors' proposals The following is a summary of recent governors' budget proposals and state-of-the state addresses. Alabama: On Feb. 6, 2024, Governor Kay Ivey delivered her 2024 State of the State Address. In it, she said "the state of our state is strong". She did not mention tax changes. Alaska: On Jan. 30, 2024, Governor Mike Dunleavy presented his annual State of the State Address. He did not mention tax changes. Hawaii: On Jan. 22, 2024, Governor Josh Green delivered his 2024 State of the State Address. In it, he said the "state of Hawaii is strong." The governor's housing plan would provide an exemption from capital gains, conveyance and general excise tax to short-term rental owners that sell to a local resident or convert a home to a long-term rental to a local resident (the governor also referred to this as a tax amnesty). The governor also is proposing child and dependent tax credits, indexing the state's tax code to provide taxpayers with relief from inflation, and imposing a $25 climate impact fee on visitors. Maine: On Jan. 30, 2024, Governor Janet Mills presented her State of the State Address. In her address, the governor said the state's economy is strong, but urged lawmakers to "practice fiscal restraint in the upcoming supplemental budget", noting that "revenues are expected to level off in the next biennium." The governor did not mention tax changes in her address. Maryland: On Feb. 7, 2024, Governor Wes Moore gave his 2024 State of the State Address. In his speech, the governor said the state can make investments in childcare and housing without raising taxes on Marylanders. The governor also said that the state "will cut red tape so Maryland is the friendliest state in the nation to start a business." Michigan: On Feb. 7, 2024, Governor Gretchen Whitmer presented her FY25 Budget. The governor's budget recommendations provide for a $100 million deposit into the Budget Stabilization Fund (i.e., the rainy-day fund). The budget recommendations also would provide: (1) $500 million in continued investment in the Strategic Outreach Attraction Reserve fund to attract new manufacturers and industries to Michigan; (2) $100 million for research and development credits; (3) $60 million to establish an innovation fund to invest in scalable startups; (4) $80 million to clean-up contaminated sites; (5) $25 million for the build ready sites program; (6) $20 million for business attraction and community revitalization; (7) $20 million to provide specialized economic assistance to businesses locating, or expanding, in Michigan; (8) $37.5 million to create the Caring for MI Family Tax Credit, which would provide $5,000 per year to families who care for aging or sick relatives; and (9) up to $2,500 in Michigan vehicle rebates. Mississippi: On Jan. 31, 2024, Governor Tate Reeve presented his Fiscal Year 2025 Executive Budget Recommendations. In his speech, the governor said one of his top priorities for FY 2025 is the elimination of the income tax and laying a foundation for "record-shattering investment". The individual income tax would immediately be reduced to 3% and then the rate would be phased out as follows: (1) 3% in 2026; (2) 2% in 2027; (3) 1% in 2028; and (4) 0% in 2029. The governor also proposed to allocate $100 million for new project-ready site development in every region of the state. Oklahoma: On Feb. 5, 2024, Governor Kevin Stitt delivered his 2024 State of the State Address. The governor said for Oklahoma "[t]o be the best state for business and attract more top[-]level CEOs, we need to keep pushing business friendly policies and reducing burdensome regulations." To do this, he wants the legislature to follow Delaware and Texas and establish "a system of courts specifically designed to address business disputes." In addition, the governor once again called on the legislature to reduce the rate of the individual income tax and "get Oklahoma back on the path to zero." The governor said that he will "sign any tax cut that comes to my desk." Pennsylvania: On Feb. 6, 2024, Governor Josh Shapiro presented his 2024-25 Budget Proposal. The governor's proposal "maintains a balanced budget and does not raise taxes"; the governor noted that the state "will still have an $11 billion surplus by the end of FY2024-25." The governor's budget calls for the legalization and taxation of sales of adult-use cannabis (a 20% tax on the wholesale price would be imposed). In addition, a 42% tax would be imposed on the daily gross revenue from electronic gaming machines that involve an element of skill and are regulated by the Pennsylvania Gaming Control Board. The budget proposal also calls for the increase in the minimum wage to $15.00 per hour (from $7.25) for non-tipped workers and to $9.00 per hour for tipped workers. Tennessee: On Feb. 6, 2024, Governor Bill Lee gave his 2024 State of the State Address. The governor wants to bolster the state's rainy-day fund with a $20 million investment. The governor also is proposing tax cuts that would simplify the state's franchise tax, which will make "Tennessee an even stronger choice for companies that choose to do business in our great state." The governor noted that the state became aware of the need to change the franchise tax and that "a solution that resolves the issue" has been crafted. (See the Income/Franchise tax section for a discussion of the proposed franchise tax legislation.) INCOME/FRANCHISE Idaho: New law (HB 385) updates the state's date of conformity to the Internal Revenue Code to Jan. 1, 2024 (from Jan. 1, 2023). This change is retroactively effective on Jan. 1, 2024. Idaho Laws 2024, ch. 1 (HB 385), signed by the governor on Feb. 1, 2024. Indiana: The Indiana Department of Revenue issued an updated bulletin on state statutory provisions related to changes made by the federal Tax Cuts and Jobs Act. The update reflects law enacted in 2023 that allows specified research and experimental expenses in their entirety in the year the expense is paid or incurred with addback for the amount deducted for federal purposes, as well as limits to the deduction for certain expenses. The updated guidance also reflects changes to the net operating loss treatment of excess business losses and nonprofit separate line losses. Ind. Dept. of Rev., Income Tax Information Bulletin #116 (Jan. 2024). Louisiana: The Louisiana Department of Revenue adopted emergency rule, LAC 61:I.1312, on the net capital gains deduction. Resident and nonresident individuals are allowed a deduction for net capital gains resulting from the sale or exchange of an equity interest in, or from the sale or exchange of substantially all of the assets of a non-publicly traded corporation, partnership, limited liability company or other business commercially domiciled in the state. The emergency rule lists the documentation taxpayers claiming the deduction must submit at the time of filing their Louisiana individual income tax return; additional documentation is required for claims greater than $250,000. The rule also sets forth eligibility restrictions. For instance, net capital gains will not qualify for the deduction when the transaction transfers ownership of the interest or assets to a related party. In addition, the rule defines the following terms: "capital gains from the sale or exchange of the assets of a business", "commercial domicile", "equity interest", "net capital gains", "related party", "sale or exchange of an equity interest", and "sale or exchange of substantially all of the assets of a business". The emergency rule took effect Jan. 1, 2024 and is effective for 180 days, unless renewed or revoked or until the adoption of the final rule. Ind. Dept. of Rev., LAC 61:I.1312, issued Jan. 1, 2024. South Dakota: New law (HB 1018) updates the South Dakota bank franchise tax date of conformity to the Internal Revenue Code to Jan. 1, 2024 (from Jan. 1, 2023). This change takes effect July 1, 2024. S.D. Laws 2024, HB 1018, signed by the governor on Feb. 5, 2024. Tennessee: The Tennessee legislature is currently considering bills, HB 1893/SB 2103, that would change how the Tennessee franchise tax is calculated by repealing the alternative minimum property measure and requiring the tax to be calculated solely using a taxpayer's apportioned net worth. The proposed bills would also authorize refunds of previously paid franchise tax calculated under the alternative minimum property measure. For additional information on this development, see Tax Alert 2024-0351. Virginia: The Virginia Department of Taxation issued guidelines on the pass-through entity tax (PTET), addressing how to make a PTET election for tax year 2022 and after. (See Tax Bulletin 22-6, for guidance on making the PTET election for 2021.) In addition to defining key terms, the guidelines address the following topics: (1) making the election; (2) which pass-through entities (PTEs) qualify to make the election; (3) PTE taxable income and tax, including allocation and apportionment, classifying owners, effect of classification on allocation and apportionment (general principles and the special option for certain S corporations), and computing the tax; (4) filing the annual PTET return; (5) estimated tax payments, nonresident withholding payments and composite payments, filing requirements for nonresident eligible owners of an electing PTE, penalties; (6) filing a return by an eligible owner; (7) credit for taxes paid to other states; and (8) reverse credit states (e.g., states that have reciprocity with Virginia). The guidelines include various examples. Va. Dept. of Taxn., Rulings of the Tax Comm'r P.D. 24-1 "Guidelines for the Pass-through Entity Tax" (Jan. 1, 2024). West Virginia: New law (SB 483) updates West Virginia's IRC conformity date for corporate net income tax purposes to federal changes made after Dec. 31, 2022 but prior to Jan. 1, 2024 (a change from the IRC conformity date applied to federal changes made after Dec. 31, 2021 but prior to Jan. 1, 2023). No amendment to the IRC made on or after Jan. 1, 2024, will be given any effect. This change is effective retroactive to the extent allowable under federal income tax law. W.Va. Laws 2024, SB 483, signed by the governor on Feb. 7, 2024. West Virginia: New law (SB 462) for personal income tax purposes, updates the state's IRC conformity date to federal changes made after Dec. 31, 2022 but prior to Jan. 1, 2024 (from the federal changes the IRC conformity date applied to federal changes made after Dec. 31, 2021 but prior to Jan. 1, 2023). No amendments to the IRC made on or after Jan. 1, 2024 will be given any effect. W.Va. Laws 2024, SB 462, signed by the governor on Feb. 7, 2024. SALES & USE Colorado: In response to a ruling request, the Colorado Department of Revenue (CO DOR), determined that the delivery fee (which is waivable) charged by a national online retail seller of used motor vehicles is not subject to the state's sales and use tax. The CO DOR explained that transportation of tangible personal property between the retailer and purchaser generally is not a taxable service if the service is separable from the sales transaction and the service charge is separately stated on the written invoice or contract. A service is separable from the sales transaction when the nature of the service remains the same whether contracted at the time of purchase or later, and the service can be contracted for at the initial purchase or later. The CO DOR noted that in the case of transportation services, they are separable from the sales transaction if the service is performed after the tangible personal property or service is offered for sale and the seller allows the purchaser to use either the seller's or an alternative transportation service. Colo. Dept. of Rev., PLR 23-007 (Nov. 29, 2023). Georgia: The Georgia Department of Revenue has adopted Rule 560-12-2-.117 regarding the sales and use tax exemption for certain high-technology data center equipment. The rule described the scope of the exemption, which applies to the purchase and use of high-technology data center equipment that is incorporated or used in a high-technology data center when certain conditions are met. A data center owner that holds a high-technology data center exemption can make exempt purchases from the exemption start date through Dec. 31, 2031. The exemption period may be shorter for high-technology data center customers holding an exemption certificate. The rule describes the minimum investment thresholds that must be met to qualify for the exemption, including the required number of new quality jobs and aggregate expenditure requirements. Requirements vary based on the population of the county in which the data center is located. The rule explains the application process for the exemption certificate, and it addresses certain topics related to the exemption certificate such as issuing the certificate, revoking the certificate, claiming the benefit of the exemption, filing an annual report (including the information that must be included in the report), and filing an investment report. The rule also describes the impact holding a valid sale and use tax exemption certificate has on certain income tax credits. Lastly, the rule defines various terms, including: "data center owner", "high-technology data center", "high-technology data center customer", "high-technology data center equipment", "high-technology data center minimum investment threshold", "investment period", "new quality job", and "real property". The rule took effect Feb. 6, 2024. Michigan: The Michigan Department of Treasury (MI DOT) issued a notice regarding changes to the sales and use tax treatment of food for human consumption. Under Michigan law, food and food ingredients are exempt from tax, while prepared food is generally subject to tax. Starting Feb. 13, 2024, the definition of "prepared food" is expanded to include food sold with eating utensils provided by the seller. The notice explains that the general standard for what constitutes a utensil "provided by the seller" — i.e., an eating utensil is 'provided by the seller' only if the seller puts the utensil in a food item's packaging, gives or hands a utensil to a purchaser, or makes available a utensil necessary for the purchaser to receive food — applies to a seller whose "prepared food sales percentage" does not exceed 75%. When the seller's "prepared food sales percentage" is over 75%, the seller is subject to the general standard and, starting Feb. 13, 2024, they are also subject to a special standard" — i.e., that a utensil is "provided by the seller" when a seller makes an eating utensil available. The notice also describes what prepared food is and is not. Under Michigan law, there are three categories of "prepared food": (1) food sold in a heated state or that is heated by the seller; (2) two or more food ingredients mixed/combined by the seller for sale as a single item; and (3) food sold with eating utensils provided by the seller (with an extended discussion on this provision). The MI DOT indicated that it will be issuing a new Revenue Administrative Bulleting on this topic to replace RAB 2022-4. Mich. Dept. of Treas., Notice Regarding Changes to the Tax Treatment of "Prepared Food" (Jan. 25, 2024). Texas: In response to a ruling request, the Texas Comptroller of Public Accounts (Comptroller) provided guidance on the tax treatment of charges for participating in a carbon offset credit program offered by the taxpayer, who sells natural gas to residential and nonresidential customers. The taxpayer purchases carbon offset credit certificates from third parties that verify and retire carbon offset credits; certificates are verifiable emission reductions from certified climate action projects to compensate for emissions made elsewhere (such as residential or commercial natural gas usage). The taxpayer's charge to its customers for the customer's natural gas usage is not impacted by a customer's participation in the program. Customers choose a percentage of carbon emissions related to their natural gas usage to offset and either pay a fixed amount (residential customers) or pay a fixed rate per natural gas mcf (commercial customers). The Comptroller determined that the taxpayer's program charge is subject to sales and use tax as part of the sales price of natural gas. The Comptroller reasoned that since the program charge is a charge to offset the carbon emissions of natural gas purchased by a customer, the charge is an expense related to the customer's purchase and consumption of gas. Thus, the charge is an expense included in the sales price of the natural gas. Program charges to residential customers, however, are exempt from state sale and use tax. Nevertheless, such charges could be subject to local sales and use taxes, depending on the taxing jurisdiction. Program charges to commercial customers are subject to state and local sales and use taxes unless a properly completed exemption certificate is provided by the customer. (Under Texas law, the sale of natural gas for residential use is exempt from state sales and use tax, while such sales for commercial use are taxable unless otherwise exempt.) The Comptroller also found that Program charges are includable in gross receipts for the miscellaneous gross receipts tax (MGRT), which is imposed on a utility company that makes a sale to an ultimate consumer. The Comptroller explained that the taxpayer's sale of credits to offset emissions are directly related to providing electricity or gas and, therefore, are in includable in gross receipts for purposes of the MGRT. Tex. Comp. of Pub. Accts., PLR No. 20230515102255 (Dec. 29, 2023). Washington: The Washington Department of Revenue adopted amendments to WAC 458-20-18801 regarding medical substances, devices and supplies for humans, adding a provision on mobility enhancing equipment under the complex needs patient exemption. As of Aug. 1, 2023, Washington sales and use tax does not apply to the sales or use of mobility enhancing equipment when it is purchased for or used by a complex needs patient. The exemption applies to mobility enhancing equipment that meets the user's specific and unique medical, physical or functional needs and capacities for basic activities when medically necessary to prevent hospitalization or institutionalization of a complex needs patient. The regulation defines a "complex needs patient" as "an individual with a diagnosis or medical condition that results in significant physical or functional needs and capacities." The exemption includes repair services and replacement parts for such equipment. To claim the exemption, the buyer must provide the seller with an exemption certificate. The seller must retain a copy of the exemption certificate for its files. The amended regulation takes effect Feb. 23, 2024. Wash. Dept. of Rev., WAC 458-20-18801 (WSR 24-03-133, adopted Jan. 23, 2024). BUSINESS INCENTIVES Mississippi: New law (HB 1) expands the Major Economic Impact Act to include certain facilities for the manufacture and assembly of battery cells for electric commercial vehicles and industrial applications. The incentives under the Act are available to qualifying enterprises engaged in the manufacture and assembly of battery cells for electric commercial vehicles and industrial applications for which construction of such plant begins after Jan. 1, 2024 and manufacturing and assembly begins on or before Dec. 31, 2029. To qualify for the incentives, the enterprise (or any combination of such enterprise and its affiliate) also must commit to an aggregate, collective capital investment of at least $1.9 billion and the creation of at least 2,000 new full-time jobs meeting certain requirements. The law authorizes counties to enter into agreements with an enterprise owning and/or operating a project comprising of the manufacture and assembly of battery cells for electric commercial vehicles and industrial applications to waive certain taxes, fees and assessments and to assist the enterprise and its affiliates that are establishing the project by defraying certain costs. Miss. Laws 2024 (First Extra. Sess.), HB 1, signed by the governor on Jan. 22, 2024. PROPERTY TAX Washington: The Washington Department of Revenue (WA DOR) issued a notice on the new personal property tax exemption, which starting Jan. 1, 2025, exempts the state portion of the property tax for qualified personal property owned by a qualifying renewable energy facility. A renewable energy facility that receives a personal property tax exemption must pay a new excise tax that is based on the facility's generation or storage capacity. An eligible taxpayer can claim the personal property tax exemption by submitting an application to the WA DOR by March 31 of the year before the personal property tax exemption takes effect. The taxpayer must include in the application whether they are requesting a 10 or 15-year exemption. If the property qualifies as operating property of a public utility, the taxpayer must file an annual report with the WA DOR. If the property does not qualify as operating property of a public utility, the taxpayer must file their annual personal property with the county assessor. Taxpayers granted the exemption must still pay personal property taxes to local taxing districts. The exemption does not apply to real property. Wash. Dept. of Rev., Special Notice "Renewable energy generation or storage facilities" (Jan. 29, 2024). COMPLIANCE & REPORTING California: Commonly overlooked California local business tax filing deadlines are quickly approaching in San Francisco, Los Angeles, and other localities throughout the state. The 2023 San Francisco Annual Business Tax (SF ABT) returns are due on or before Feb. 29, 2024. The SF ABT return includes reporting and payment of Gross Receipts or Administrative Office Taxes, Homelessness or Homelessness Administrative Office Taxes, Commercial Rents Taxes and Overpaid Executive Gross Receipts Taxes. Taxpayers can request a 60-day filing extension by submitting a written request and paying at least 90% of taxes due by the filing deadline. In addition to filing SF ABT returns, taxpayers must also file or renew their business registration and submit payment of the city's Business Registrations Tax by May 31, 2024. The deadline for filing 2024 Los Angeles Business Tax (LABT) renewals is Feb. 29, 2024. The city provides copies of forms for download and completion in writing and allows filing of renewal forms and payment of taxes through its electronic filing system. Taxpayers can apply for a maximum filing extension of 45 days by submitting a written request, accompanied by payment of at least 90% of the total tax due, by the Feb. 29, 2024 filing deadline. Companies engaged in business in San Francisco and Los Angeles should consider reviewing their SF ABT filings and LABT renewals (assuming timely filed/paid returns and renewals) before the expiration of each city's one-year statute of limitation for filing refund claims on Feb. 28, 2024 for tax year 2022 (for Los Angeles this is the 2023 tax year, based on 2022 activity). Nearly every California municipality imposes some form of local business license tax or fees, but the types of levies, tax bases, and filing requirements and deadlines vary widely by locality. For example, the City of Santa Monica, like its neighbor Los Angeles, imposes a gross receipts tax on businesses operating within the city, but returns and payments aren't due until August 31 of each year. For additional information on this development, see Tax Alert 2024-0287. CONTROVERSY Louisiana: The Louisiana Department of Revenue adopted amendments to its rule on corporation income and franchise tax filing extensions — LAC 61:III.2503. New provisions provide that for tax periods beginning on or after Jan. 1, 2022, the revenue secretary will grant an extension to file the state corporation income and franchise tax returns for the later of six-months or the same extended period as the taxpayer's federal return. A state extension request is not required. Further, taxpayers (1) described under IRC §§ 6072(b) and (d) (i.e., partnerships, S corporations and cooperative associations) with a federal due date after the Louisiana due date, and (2) in a federally declared disaster area that receive a federal extension under IRC §7508A, will be considered to have requested a federal extension and will be granted a six-month extension. Taxpayers will need to mark the box on form CIFT-620 "Louisiana Corporation Income and Franchise Tax Return", noting that they have applied for a federal extension for the same tax period. La. Dept. of Rev., LAC 61:III.2503 (La. Register, Vol. 50, No. 1, Jan. 20, 2024). MISCELLANEOUS TAX Washington: The Washington Department of Revenue (WA DOR) updated its frequently asked questions (FAQs) on the state's capital gains tax, which applies to individuals. (The tax does not apply to a business entity, however, an individual owner of a pass-through or disregarded entity may owe capital gains tax on sales or exchanges made by such entity.) The WA DOR said the state's capital gains tax does not apply to sales or exchanges of real estate or to transactions through a retirement savings account. The WA DOR also said that a taxpayer generally will owe capital gains tax on sales of cryptocurrency if it was held for more than one year and the taxpayer was domiciled in the state at the time the sale or exchange occurred. (For purposes of the capital gains tax, cryptocurrency is deemed to be intangible property.) As for mutual fund distributions, capital gains tax does not apply to distributions of interest and dividends, but tax may be owed on a distribution from the fund manager's sale of intangible assets that were held for more than one year. Tax also may be owed on capital gain that is retained in the fund and not distributed to the taxpayer. In addition, the WA DOR also: (1) explained how capital gains are allocated to Washington, how exemptions are applied to the capital gains tax, and how to report long-term capital gain from installment sales; (2) discussed the use of short term losses against long term losses and use of loss carryforwards from before 2022; and (3) addressed various questions regarding the filing of the capital gains tax return and paying tax due. (The FAQs were last accessed on Feb. 9, 2024.) UPCOMING WEBCASTS Wednesday, February 28. Domestic tax quarterly webcast series: a focus on state tax matters (1:00-2:30 pm ET). For our first quarterly webcast in 2024, we welcome Amanda Hiller, the Acting Tax Commissioner and General Counsel of the New York State Department of Taxation and Finance, and Preston Niblack, Commissioner of the New York City Department of Finance, who will join us to discuss the recently adopted New York corporate franchise tax regulations and their departments' priorities for the new year. In this webcast, we also will hold the first discussion in a four-part series on the use of artificial intelligence (AI) in the world of state and local tax. In this series we will discuss how businesses and governmental agencies, including tax departments and economic development agencies, may use AI and related considerations regarding the use of AI. We will round out the webcast with a state and local tax policy discussion. Topics to be discussed include an update on the current state of the states; governors' budget initiatives; state tax legislative proposals and trends; and the effects of current economic trends on state and local tax policy developments around the country. Register here. 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.
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