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Ernst & Young's State and Local Tax Weekly newsletter for February 16 and 23 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

Louisiana governor sets forth criteria he will consider when approving Industrial Tax Exemption Program programs

On Feb. 21, 2024, Louisiana Governor Jeff Landry issued an Executive Order setting forth conditions for participating in the Industrial Tax Exemption Program (ITEP). The ITEP allows the Board of Commerce and Industry (Board), with the governor's approval, to enter a contract for an ad valorem tax exemption for a new manufacturing establishment or an addition to an existing manufacturing establishment. The governor, along with the Board, will consider the criteria for determining what is the best interest of the state for consideration of ITEP contracts, with the governor considering the criteria set forth in the Executive Order and the Board considering the criteria set forth in its rules and regulations. The criteria set forth in the Executive Order does not include job or payroll requirements.

Per the Executive Order, ITEP contracts (1) should demonstrate a genuine commitment to investing in the communities in which they operate and (2) must meet the constitutional definition of "manufacturing establishment" determined by the Board. To be considered for approval by the governor, ITEP applicants must file an advance notification of intent to apply for the exemption. Applications for miscellaneous capital additions or for tax exemptions for maintenance capital, required environmental capital upgrades, and replacement parts (with certain exceptions) will not be considered or approved.

Contracts for ITEP must include approval of the Local ITEP Committee. The Executive Order notes the importance of input from the Local ITEP Committee, but said it should not "unduly delay" the ITEP application process.

After reviewing an ITEP application, the Louisiana Department of Revenue (LDR) may require additional information from the applicant. A "no objection letter" from the LDR must be received by the Louisiana Department of Economic Development (LED) before the Board can act on an ITEP application. In addition, the Executive Order directs the LDR to coordinate with the LED to implement procedures to comply with existing law, this Executive Order and the ITEP contract terms.

The ad valorem exemption for an ITEP project is for a period of no more than five years and can be renewed for additional period of up to five years. Exempt property must be listed on the assessment rolls, but tax will not be collected during the exemption period. The governor said that in considering new contracts and renewals for approvals, he will only approve contracts or renewals for a period of five years or less and that provide for an 80% property tax exemption. An ITEP contract will be null and void if there are any incidents that operate to change, suspend or breach the contract's terms.

This Executive Order is effective for advance notifications filed on or after Feb. 21, 2024; it does not apply to advance notifications filed, or ITEP projects approved, before Feb. 21, 2024. La. Gov., Executive Order No. JML 24-23 (Feb. 21, 2024).

GOVERNORS' PROPOSALS

The following is a summary of recent governors' budget proposals and state-of-the state addresses.

Connecticut: On Feb. 7, 2024, Governor Ned Lamont presented his 2024 State of the State Address. In his address, the governor noted the state's growing population and the need for more housing as well as more affordable housing. The governor said that while the state recently increased and expanded the property tax credit and reduced the car tax, the state still needs to do more work on the property tax, which "hits residents on fixed incomes the hardest." The governor also is proposing paid sick days.

Illinois: On Feb. 21, 2024, Governor JB Pritzker presented his FY25 Budget, which include tax changes that would affect businesses and individuals. Most notably, the governor wants to continue limiting the corporate net loss deduction (NLD) while increasing the cap to $500,000 in allowable loss. (Under current law, the NLD limitation of $100,000 applies to corporations (excluding S corporations) for tax years ending on or after Dec. 31, 2021, and before Dec. 31, 2024. See Tax Alert 2021-1154 for more detail.) In addition, the governor is proposing to (1) permanently eliminate the grocery tax; (2) cap the sales tax retailers discount (3) increase the sports wagering tax to 35% from 15%; and (4) create a child tax credit for low and middle-income families with children under three.

Maine: On Feb. 14, 2024, Governor Janet Mills introduced her Supplemental Budget Proposal. The governor is proposing to "streamline, simplify, and modernize certain provisions of the sales and use tax to better align it with the practice of other states across the country." Specifically, this proposal would repeal the 6% service provider tax, which generally applies to telecommunications and cable services, and instead impose the 5.5% sales and use tax on those services as well as digital streaming services. In addition, the governor's proposal would eliminate the requirement that sales tax be paid up front by a business owner when purchasing property that would be rented to consumers, such as equipment; rather, the tax would be paid over the use of the business. This change, the governor noted, would bring Maine into alignment with other states that impose a sales and use tax. The governor is also seeking to simplify and broaden the sales and use tax exemption for durable medical and mobility enhancing equipment for home use. (The governor wants to make the exemption "more consumer friendly and the equipment more affordable".) Lastly, the governor's proposal would simplify the sales tax exemption for nonprofits by making a nonprofit exempt from federal income tax under IRC §501(c)(3) automatically exempt from Maine sales tax.

Vermont: On Jan. 23, 2024, Governor Phil Scott gave his Fiscal Year 2025 Budget Address. The governor's budget proposes strategic investments but "does not impose any new taxes or fees." The governor's is calling for the elimination of the cap on the Downtown and Village Center Tax Credit program.

Wyoming: On Feb. 12, 2024, Governor Mark Gorgon gave his 2024 State of the State Address. In it, the governor noted that "the state must continue its efforts to grow its workforce and maintain its position as a leader in energy innovation." The governor also urged the Legislature to pass his budget, which keeps general fund spending flat compared to 2021. The governor's budget includes $20 million in property tax relief. (The governor asked the Legislature to be mindful of the impact property tax relief would have on county resources, roads and schools.) The governor also mentioned workforce challenges facing the state, and called for continued support for the Wyoming Innovation Partnership.

INCOME/FRANCHISE

New Hampshire: The New Hampshire Department of Revenue Administration (Department) proposed a new regulation, Rev 303.06, to related to IRC § 163(j) and proposed amendments to Rev 304.10 related to apportionment factors for financial institutions, to implement statutory changes enacted in 2023 and 2019, respectively. Proposed new regulation, Rev 303.06 would allow a business entity with a fiscal tax period beginning before, and ending on or after Jan. 1, 2024, that has a carry forward of disallowed business interest under IRC § 163(j) at the end of such fiscal tax period, to deduct the disallowed interest expense in equal parts over three consecutive years, starting with the first tax period commencing on or after the end of such fiscal period. Proposed amendments to Rev 303.06 would modify apportionment factors for financial institutes by including in the numerator the receipts from merchant discount if the transaction or the billing address of the credit card holder is in New Hampshire (a change from inclusion of the merchant discount if the commercial domicile of the merchant is in New Hampshire). The Department will hold a public hearing on the regulations on March 8, 2024.

New Jersey: The New Jersey Division of Taxation updated Corporation Business Tax (CBT) and Gross Income Tax (GIT) on S corporations and Qualified Subchapter S Subsidiaries (QSSS) to reflect legislative changes enacted in 2022, namely the elimination of the requirement for a separate New Jersey S corporation election for a federal S corporation, effective for privilege periods beginning on or after Dec. 22, 2022. Such entities will have to provide proof of their federal S corporation status and must be registered as a corporation with the New Jersey Division of Revenue and Enterprise Services. The guidance addresses the following topics: (1) three types of shareholder consent — shareholder jurisdictional consent (which is the only consent required to be submitted), C corporation tax status election consent, and revocation of C corporation tax status election consent; (2) S corporation and QSSS with federal acceptance letters dated on and after Dec. 22, 2022; (3) S corporation and QSSS with federal acceptance letters dated before Dec. 22, 2022; (4) the process for making a C corporation tax status election; (5) S corporations and QSSS that were hybrid corporations for New Jersey purposes before Dec. 22, 2022; (6) the process for revoking the C corporation tax status election; (7) New Jersey conformity to federal rules and revenue procedures regarding mergers and reorganizations — for mergers or reorganizations before Dec. 22, 2022 and those on or after Dec. 22, 2022; (8) combined groups and S corporations and QSSS; and (9) tax treatment for gross income tax purposes of S corporations and QSSS that are hybrid corporations for New Jersey purposes. Additional information on New Jersey S corporations can be found here. N.J. Div. Taxn., TB-105(R) "Corporation Business Tax and Gross Income Tax Guidance Regarding S Corporations and Qualified Subchapter S Subsidiaries" (Feb. 2, 2024).

South Carolina: In response to a ruling request, the South Carolina Department of Revenue (SC DOR) said that a resident individual taxpayer should report 2.4% of any portion of gain from his sale of his interest in a multistate tiered partnership that does business in the state that is not directly allocated to the state under S.C. §§ 12-6-2220 or 2230. The SC DOR noted that the proportion of the partnership's business carried on within South Carolina was 2.4% in the year of the sale, and said that it was not able to determine whether any part of the gain is otherwise allocable to South Carolina because information about the nature of the assets owned by the partnership was not available. SC Dept. of Rev., SC Private Letter Ruling #24-1 (Feb. 21, 2024).

SALES & USE

Colorado: In response to a ruling request, the Colorado Department of Revenue (CO DOR) determined that an online marketplace's charges for a subscription-based membership the primary benefit of which provides the purchaser with unlimited free delivery on certain orders is not subject to the state's sales and use tax. The CO DOR explained that Colorado only taxes specifically enumerated services and that transportation services, including delivery servicers, are not listed as a taxable service. The charge for transportation/delivery services are not subject to tax if they are separable from the sales transaction and separately stated on the 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. In this instance, the online marketplace's charge is separately invoiced and the charge for the membership is separable because the nature of the delivery and other services provided in exchange for the membership remains the same whether contracted for and the time of purchase or later. Colo. Dept. of Rev., PLR 23-006 (Dec. 1, 2023).

Illinois: The Illinois Department of Revenue (IL DOR) adopted amendments to Retailers' Occupation Tax rolling stock regulation, 86 Ill. Adm. Code 130.340, to restructure the rule and implement law changes that established a new rolling stock test for motor vehicles and trailers, among other modifications. The rolling stock exemption is available to (1) purchasers that are interstate carriers for hire and otherwise meet the requirements of the exemption and (2) lessors that lease to interstate carriers who use the property as rolling stock moving in interstate commerce and to shippers. In determining eligibility for the rolling stock exemption, the item must meet the following conditions in each instance: (1) it must transport persons or property for hire, and (2) it must transport persons or property in interstate commerce. Items that do not meet both criteria are not eligible for the exemption. The amended regulation modifies the definition of "rolling stock" to expand the list of examples of "interstate transportation company for hire" to include barge and limousine companies (in addition to railroads, bus lines, airlines and trucking companies) and the list of examples of exempt equipment to include shipping containers transferred at intermodal terminal facilities or commercial service or cargo service airports. The adopted amendments define additional terms, including "motor vehicle", "aircraft", "limousine", "trailer", and "watercraft". Generally, the rolling stock exemption cannot be claimed by a purely intrastate carrier for hire, but can be claimed by an interstate carrier for hire, even just between points in Illinois, if the rolling stock transports for hire persons or property whose journey/shipment originate or terminate outside Illinois. The amended regulation sets forth the specific requirements motor vehicles (other than limousines) and trailers, as well as repair and replacement parts for such, must meet to qualify for the rolling stock exemption, with separate rules for motor vehicles, trailers and repair/replacement parts for such purchased (1) on or after Aug. 14, 2017, and (2) before Aug. 14, 2017. The amended regulation also sets forth the requirements limousines, aircraft, watercraft, and repair and replacement parts for such, must meet to qualify for the rolling stock exemption. The amended regulation includes numerous examples. The IL DOR also adopted amendments to rolling stock language, as well as other provisions, in regulations 86 Ill. Adm. Code 140.201 and 150.701. The amended regulations took effect Jan. 18, 2024. Ill. Dept. of Rev., 86 Ill. Adm. Code 140.201 and 150.701 (Ill. Register, Vol. 48, Issue 5, Feb. 2, 2024).

Michigan: In response to a letter ruling request, the Michigan Department of Treasury (MI DOT) issued a Technical Advice Letter on the sales tax treatment of certain transactions involving software. The taxpayer requesting the ruling is a foreign-based company whose software is hosted on servers located outside the state. The taxpayer sells subscriptions to access its services, which are fundamentally Software as a Service (SaaS), through a web portal or an app to customers in the US. The MI DOT said determination of taxability of computer software "is a fact-intensive inquiry", requiring each product be analyzed based on the type of software and what is delivered to the customer. The MI DOR explained that if the product is sold without software being downloaded, it does not constitute the sale of prewritten computer software and, thus, is not taxable. When the product is sold as part of a mixed transaction, e.g., there is a sale of prewritten computer software (in this case a downloaded application) along with a sale of nontaxable services, the incidental to the service test will be applied to determine taxability. Based on the facts presented, the MI DOT determined that the taxpayer is charging for services and the downloaded application, which is free of charge, is not useful without also paying for the services. Thus, the transactions at issued are nontaxable services. Mich. Dept. of Treas., Published Tech. Advice Letters "Sales Tax Treatment of Certain Transaction Involving Software" (Jan. 31, 2024).

Minnesota: The Minnesota Department of Revenue (MN DOR) issued guidance on the new retail delivery fee. Starting July 1, 2024, the 50-cent fee applies to each transaction where charges for taxable tangible personal property and clothing equal or exceed $100. In calculating whether a transaction meets the threshold, the transaction includes all charges that are part of the sale, excluding the retail delivery fee. The retail delivery fee: (1) is not subject to sales tax if it is stated separately on the receipt or invoice, (2) applies once per transaction regardless of the number of shipments made, (3) is shone as a separate line item on the receipt, and (4) follows Minnesota sourcing rules. Retailers not liable for the Retail Delivery Fee including retailers whose prior calendar year Minnesota retail sales were less than $1 million, and marketplaces that facilitate sales for a retailer whose prior calendar year Minnesota retail sales were less than $100,000. Both taxable and nontaxable retail sales are included in the calculation of the retail sales threshold for the retailer exclusion. Charges for certain items, including drugs, medical devices, food and select baby products, are not included in calculating whether the threshold has been met. The retail deliver fee does not apply to: (1) deliveries to a purchaser that is exempt from sales tax, (2) deliveries by motor vehicles with permits issued under Minn. Stat. Ch. 169 or 221, (3) deliveries by a food and beverage service establishment (regardless of who delivers), (4) purchases picked up at the retailer's business location (e.g., curbside delivery); (5) deliveries to locations outside Minnesota. Also not included in determining whether the threshold was met are sales made to retailers for resale purposes, utilities (e.g., natural gas, electricity), and items delivered electronically (e.g., software). The retail delivery fee is not refundable if items are returned. Retailers will need to register for the fee, and they will need to report the fee on the "Retail Delivery Fee" tax line on the Sales and Use tax return. The guidance includes examples of transactions and how the fee is calculated. The MN DOR also said that the retail delivery fee applies even when there is free shipping, and that taxpayers should follow the sales price definition in determining how to handle discounts and coupons when calculating the $100 threshold. Minn. Dept. of Rev., Retail Delivery Fee (last update Feb. 21, 2024).

Washington: The Washington Department of Revenue updated regulation WAC 458-20-15503 "Digital Products" to modify the exemption provision for purchases of standard financial information by qualifying international investment management companies (QIIMC). The amendments (1) expand the exemption to include purchases by persons affiliated with the QIIMC, (2) clarify that the exemption is from sale and use tax (new material italicized), and (3) update the exemption sunset date to July 1, 2031 (from July 1, 2021). The amendment revises the definition of a QIIMC to mean a person engaging within Washington in the business of providing qualifying international investment management services as defined in RCW 82.04.293(1). The amended regulation was adopted on Jan. 23, 2024, and become effective Feb. 23, 2024.

BUSINESS INCENTIVES

Kansas: New law (SB 15) modifies and extends the tax credit available for certain purchases from qualifying vendors employing individuals with disabilities. The law removes the sunset date, allowing credits to continue after 2023, and increases the cap on the total amount of credits annually available to $8 million (from $5 million) for tax years 2024 through 2028, and starting in 2029, $8 million for each consecutive five tax years thereafter. The law also amends the definition of "qualified vendor" and "individuals with disabilities". SB 15 takes effect and is in force from and after its publication in the Kansas register. KS Laws 2024, SB 15, signed by the governor on Feb. 8, 2024.

Texas: The application process for the new Texas Jobs, Energy, Technology, and Innovation (JETI) program, a competitive economic incentive tool, is now open. The JETI program replaced the Texas Chapter 313 School Value Limitation Program, which expired on Dec. 31, 2022. The JETI program temporarily reduces school district maintenance and operations property taxes for certain businesses that construct new facilities or expand existing facilities and meet job creation and investment requirements. The new law is effective Jan. 1, 2024 through Dec. 31, 2033. (See Tax Alert 2023-1081.) Projects eligible for the JETI program include manufacturing projects, dispatchable electric generation facilities, and some water-related projects and research and development facilities. The application and other information (e.g., FAQs, resources, forms) on the JETI program is available here. Tex. Gov., Press Release "Governor Abbott Announces Launch of Texas Jobs, Energy, Technology, And Innovation Program" (Feb. 22, 2024); Tex. Comp. of Pub. Accts., "Jobs, Energy, Technology and Innovation Act (JETI)" webpage.

CONTROVERSY

Illinois: The Illinois Department of Revenue adopted amendments to 86 Ill. Adm. Code 700.305, which implements the state's Uniform Penalty and Interest Act. The amended regulation modifies late payment penalty provisions for returns due on or after Jan. 1, 2024. Penalties that may be imposed include penalties for failure to make accelerated tax payments and failure to pay tax, as well as special provisions for overpayments reported on an original return that was allowed as a refund or credit, federal change returns filed under IITA §506(b), and Protest Act payments. The amended regulation includes provisions describing the initiation of an audit or investigation, provisions for waiving restrictions on assessments or amended returns after an audit or investigation is completed, and illustrative examples. The amended regulation took effect Jan. 31, 2024. Ill. Dept. of Rev., 86 Ill. Adm. Code 700.305 (Ill. Register, Vol. 48, Issue 7, Feb. 16, 2024).

PAYROLL & EMPLOYMENT TAX

Hawaii: SB 1057 (HI Laws 2023, Act 203) requires that, effective Jan. 1, 2024, Hawaii employers with 50 or more employees include in job advertisements the hourly rate and salary range that reasonably reflects the applicable compensation. The law does not indicate if the 50-employee threshold includes all employees of the employer or only those employed within Hawaii. For more on this development, see Tax Alert 2024-0395.

Ohio: In its long-awaited decision in Schaad v. Alder, the Supreme Court of Ohio (Court) upheld a temporary state law allowing cities to collect income tax from non-resident individuals working remotely during the COVID-19 pandemic. In a 5-2 ruling, the majority opinion rejected the taxpayer's primary argument that Section 29 of HB 197, which treated income earned by an employee required to work remotely due to the emergency as earned at the employee's principal place of work for the duration of the declared emergency, violated the Due Process Clause of the US Constitution, finding the Federal constitutional provisions govern interstate taxation and not intrastate taxation. The majority also noted that the U.S. Supreme Court has never applied Federal constitutional limitations to purely intrastate taxation. The majority also concluded that Section 29 of HB 197 did not violate the Home Rule provision of the Ohio Constitution; while temporarily expanding the power of primary workplace cities to tax employees working remotely, the provision also limited the employees' cities of residence from taxing that same income. For more on this decisions, see Tax Alert 2024-0435.

Pennsylvania: The U.S. Supreme Court (Court) has been asked to review the Pennsylvania Supreme Court (PA S.Ct.) decision in Zilka. In that case, the PA S.Ct. held an individual resident of Philadelphia, who worked in Wilmington, Delaware, was not allowed a credit against the Philadelphia Wage Tax (PWT) for the portion of withheld Delaware Income Tax not credited against her Pennsylvania Personal Income Tax (PIT). Pennsylvania allowed the individual a full credit for the Delaware Tax to offset her PIT. The Philadelphia Department of Revenue (DOR), however, only allowed a full credit for the Wilmington Earned Income Tax to offset the PWT. The individual argued that the DOR's refusal to apply the remainder of the Delaware Tax as a credit against the PWT resulted in double taxation in violation of the Commerce Clause. In ruling the PWT does not violate the Commerce Clause, the PA S.Ct. found that the PWT was enacted and operates as a purely local tax as it was enacted by the City and is collected by the City's revenue department for the benefit of the City and its residents. Thus, the Court treated the PWT and PIT as discrete taxes in considering whether the Philadelphia's tax scheme — the tax and corresponding credit system — discriminates against interstate commerce. Ultimately, the Court found that the PWT and the City's corresponding credit systems satisfy the Complete Auto¹ test, namely that it is fairly apportioned and it does not discriminate against interstate commerce. The question presented to the Court is "[w]hether the Commerce Clause requires states to consider a taxpayer's burden in light of the state tax scheme as a whole when crediting a taxpayer's out-of-state tax liability as the West Virginia and Colorado Supreme Courts have held and this Court has suggested, or permits states to credit out-of-state state and local tax liabilities as discrete tax burdens, as the Pennsylvania Supreme Court held below." Zilka v. Tax Review Bd. City of Philadelphia , No. 20 EAP 2022 and 21 EAP 2022 (Pa. S.Ct. Nov. 22, 2023), petition for cert. filed, Dkt. No. 23-914 (U.S. S.Ct. filed Feb. 23, 2024).

MISCELLANEOUS TAX

South Dakota: New law (SB 78) allows a licensed marketer that has demonstrated compliance with alternative fuel compatibility requirements with the Department of Agriculture and Natural Resources to claim an E15 fuel tax refund for calendar years 2025 through 2029. The refund is an amount equal to five cents multiplied by the total number of gallons of ethanol blended E15 classified gasoline sold and dispensed by the licensed marketer during the prior calendar year through motor fuel pumps located on its in-state retail premises. The licensed marketer must apply for the refund using the form provided by the Office of Economic Development (the form will be posted on its website). The application must be filed within 30 days after the end of the calendar year for which the refund is claimed. Applications will be approved or denied within 90 days after being filed. If there is insufficient money in the ethanol infrastructure fund to pay the full amount of refunds for the year, refund payments will be prorated among the applicants. SB 78 takes effect July 1, 2024. SD Laws 2024, SB 78, signed by the governor on Feb. 15, 2024.

South Dakota: New law (HB 1095) prohibits a state agency or political subdivision from enacting or keeping in force rules or ordinances that would impose taxes, fees or other requirements specific to the operation of fully autonomous vehicles, automated driving systems or on-demand autonomous vehicle networks. HB 1095 takes effect on July 1, 2024. SD Laws 2024, HB 1095, signed by the governor on Feb. 12, 2024.

VALUE ADDED TAX

International — Macedonia: The Ministry of Finance of North Macedonia recently adopted two new rulebooks of interest to taxpayers affected by the value added tax (VAT). Following the adoption of the amendments of the VAT (Law on VAT) in September 2023, the Ministry of Finance on Dec. 29, 2023 adopted a rulebook for appointment of a fiscal representative (Rulebook). In addition, on Jan. 25, 2024 the Ministry adopted a rulebook for implementation of the Law on VAT (new Rulebook). For additional information on this development, see Tax Alert 2024-0384.

UPCOMING WEBCASTS

Tuesday, March 12. The Inflation Reduction Act: Monetization benefits for companies across all sectors (1 pm ET). When the Inflation Reduction Act of 2022 (IRA) was passed, some companies took a wait-and-see approach to the law's $369 billion in climate and energy-related provisions designed to (1) incentivize and accelerate the buildout of renewable energy, (2) accelerate the adoption of electric vehicle (EV) technologies and (3) improve the energy efficiency of buildings and communities. Now that Treasury and the IRS have issued guidance on almost all of the IRA's provisions, companies across all sectors will want to take another look at the law's provisions to enhance investment with credit transferability and monetization. Join EY's tax professionals to gain perspective on the key tax considerations and forecasting required to determine how to capture credit value and monitor compliance. Topics to be covered include: (1) current state of the IRA eighteen months in, (2) update on guidance and policy outlook, (3) tax capacity considerations — approaches for developer/seller and investor/buyer, and (4) key developer/seller concepts and investor/buyer and financial partner discussion. 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.

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ENDNOTE

¹ Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).