June 14, 2024 State and Local Tax Weekly for May 24 and May 31 Ernst & Young's State and Local Tax Weekly newsletter for May 24 and May 31 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 California BOE update focuses on construction commencement date for extended solar energy exclusion Active solar energy system projects must commence construction by Jan. 1, 2025, and be completed by Jan. 1, 2027, to be excluded from taxation, according to unpublished information EY has obtained from the California State Board of Equalization (BOE). Legislation enacted in 2022 (SB 1340 (Stats. 2022, ch. 425)) extended the exclusion for the active solar energy system from the 2023-24 fiscal year to the 2025-26 fiscal year and changed the repeal date to Jan. 1, 2027 (from Jan. 1, 2025). According to Cal. Rev. & Tax. Cd. (CRTC) Section 73(g), the exclusion applies from the property tax lien dates for the 1999–2000 fiscal year to the 2025-26 fiscal year, inclusive. The BOE has specified in the updated guidance that a project must "commence construction" by Jan. 1, 2025, and complete construction by Jan. 1, 2027 for an active solar energy system to be excluded from taxation before the sunset date. Any construction in progress (CIP) as of Jan. 1, 2025 (the lien date for the 2025-26 fiscal year) will continue to be excluded from new construction until a change in ownership occurs. As the exclusion remains in effect until Jan. 1, 2027, under CRTC Section 73(i) if the construction is completed by Jan. 1, 2027, the entire facility will receive the exclusion until its ownership changes. If the facility is not complete by Jan. 1, 2027, construction added from Jan. 1, 2025, will not receive the exclusion. Additionally, the BOE described activities that would be regarded as a "triggering mechanism" to qualify as CIP. Under Rule 463.500(c)(3), the "commencement of construction" is defined as "the performance of physical activities on the property … " such as clearing land, fencing the site, and installing temporary structures. Commencement of construction does not include activities preparatory to actual construction (e.g., obtaining permits, zoning variances or architect services). Further, the BOE stated that "simply having an amount booked as CIP on a balance sheet … is not enough to be considered the commencement of construction." The BOE noted there are various examples in the rule and the Assessors' Handbook, Section 410, Assessment of Newly Constructed Property, describing the commencement of construction. For additional information on this development, see Tax Alert 2024-1099. Colorado reduces 2024 income tax rate and provides mechanism for temporary reductions for 2025-35 Colorado Governor Jared Polis on May 14, 2024 signed SB 24-228, which temporarily reduces Colorado's income tax rate for individuals, estates, trusts and corporations from 4.4% to 4.25% for tax years beginning on or after Jan. 1, 2024. SB 24-228 also allows for the annual reactivation of the temporary income tax rate reduction in years 2025-35 if certain revenue triggers are met, as well as a mechanism to temporarily reduced the state sales and use tax rate if certain revenue triggers are met. Background - Refund of excess state revenues: The existing Colorado Taxpayer Bill of Rights law requires the State to refund revenues that exceed the spending limit for the constitutional fiscal year. These refunds, known as TABOR refunds, can be returned to taxpayers via three ways, which apply in the following order:
Because the current state income tax rate is 4.4%, however, a temporary rate reduction was not an active mechanism for refunding excess state revenues. Temporary income tax rate reductions: SB 24-228 amends and reactivates the temporary income tax rate reduction as the second TABOR refund mechanism for tax years 2024 through 2034. The amount of the income tax rate reduction depends on the amount of the revenue surplus. For 2024, the income tax rate decreases from 4.40% to 4.25%. For tax years 2025-35, the reductions depend on how much of TABOR surplus funds remain after applying the first category of TABOR refunds. The rate can drop as low as 4.25% for those years but will revert to 4.4% if those triggers are not met for a tax year. Specifically, the amount of the reduction is as follows:
If the state revenue surplus in years 2025-35 is $2b or greater, the rate can be further reduced to the extent necessary to refund all excess revenue that would not otherwise be refunded by an alternative refund method. Temporary state sales and use tax rate reductions: For fiscal year 2024-25 through fiscal year 2034-35, SB 24-228, provides for a fourth TABOR refund mechanism via a temporary 0.13% reduction in the state's sales and use tax rate during the following fiscal year. The reduction is activated when the estimated amount of revenue surplus exceeds $1.5b and sufficient surplus exists to fund the other TABOR refund mechanisms. For more on this development, see Tax Alert 2024-1127. INCOME/FRANCHISE Alabama: New law (SB 297) excludes from individual income tax net capital gains derived from the exchange of precious metal bullion (i.e., coins, bars or rounds of refined gold, silver, platinum, palladium). This provision takes effect Jan. 1, 2025. Ala. Laws 2024, Act 447 (SB 297), signed by the governor on May 17, 2024. Georgia: New law (SB 344) for corporate income tax purposes requires any grant or subgrant under the Broadband Equity, Access, and Deployment Program established by the American Rescue Plan Act of 2021 (P.L. 117-2) received for purposes of investing in broadband infrastructure be subtracted from taxable income, to the extent that such grant/subgrant is including in the taxpayer's federal taxable income. The subtraction is effective for tax years beginning on or after Jan. 1, 2024 and before Jan. 1, 2029. Ga. Laws 2024, Act 610 (SB 344), signed by the governor on May 6, 2024. South Carolina: New law (HB 4594) updates the date of conformity of the South Carolina income tax law to the Internal Revenue Code (IRC) to Dec. 31, 2023 (from Dec. 31, 2022). If IRC sections adopted by South Carolina expired (in full or in part) on Dec. 31, 2023, are extended (but not amended) by federal enactment during 2024, they also will be extended for South Carolina income tax purposes in the same manner as extended for federal income tax purposes. HB 4594 took effect upon approval by the governor, May 20, 2023. S.C. Laws 2024, Act 175 (HB 4594), signed by the governor on May 20, 2024. Wisconsin: A Wisconsin Circuit Court recently upheld1 a Wisconsin Tax Appeals Commission's (WTAC) decision that disallowed a taxpayer's deduction for certain intercompany royalty and interest expenses paid to an affiliate. The Circuit Court focused on the "substance and reality" of the transactions in affirming the WTAC, which involved evaluating economic substance, business purpose, and whether the transaction was shaped solely by tax avoidance. The Circuit Court referenced the WTAC's findings of fact, specifically, that the taxpayer told its advisors the tax-saving measures needed to be "invisible" to its employees and customers, as well as the circular flow of funds between the affiliates. The Circuit Court dismissed the taxpayer's argument that the transactions at issue should have been respected because they were between "viable business entities," an argument based on a Massachusetts court decision containing similar facts. The District Court, however, concluded that Wisconsin courts have not adopted such a test and that the taxpayer's facts were distinguishable from those in the Massachusetts case. The District Court concluded its analysis by observing that the taxpayer's facts were a "near textbook example" of what Wis. Stat. 71.30 (2) was designed to prevent. For more on this development, see Tax Alert 2024-1094. SALES & USE Colorado: New law (SB 24-025) modifies statutory provisions governing the state-administration of local sales or use taxes, making such administration consistent with the administration of state sales and use taxes. Select changes do the following: (1) set forth procedures, and deadlines, for local jurisdictions to inform the Colorado Department of Revenue of changes to their sales and use tax; (2) align the dispute resolution process for the local sales and use tax administration with the state process; (3) permit local jurisdictions to establish vendor compensation provisions; and (4) clarify hold harmless provisions for vendors that use the state GIS database to determine the jurisdiction in which taxes are owed. These changes take effect and apply to taxable events occurring on or after July 1, 2025, provided no referendum petition is filed. Colo. Laws 2024, ch. 144 (SB 24-025), signed by the governor on May 1, 2024. Hawaii: New law (SB 2919) expands the definition of "transient accommodations" to include (1) a shelter (in addition to a room, apartment, suite, single family dwelling), and (2) letting in a vehicle equipped with or advertised as including sleeping accommodations (in addition to letting in a hotel, apartment hotel, motel, condominium, cooperative apartment, dwelling, unity, or a room in a house). This change takes effect on Jan. 1, 2025. Haw. Laws 2024, Act 17 (SB 2919), signed by the governor on May 3, 2024. Iowa: New law (HF 664) exempts vehicles leased or rented between affiliates when the lessor or entity providing the vehicle paid the new vehicle registration fee on such vehicle before the vehicle was leased or rented to the affiliate. The law also disallows any refund of taxes, interest or penalties arising from the enactment of HF 664, for leases or rentals occurring between Jan. 1, 2015 and May 17, 2024, notwithstanding any other statutory provision to the contrary. HF 664 took immediate effect, and applies retroactively to Jan. 1, 2015 for leases or rentals occurring on or after that date. Iowa Laws 2024, HF 664, signed by the governor on May 17, 2024. Louisiana: New law (HB 403) expands the local sales and use tax exemption available to medical clinics for the procurement of certain prescription drugs to expand the list of diseases and conditions for which infused, injected or topical prescription drugs must be prescribed to include the treatment of cataracts and ocular inflammation and pain following ophthalmic surgery. This change takes effect July 1, 2024. La. Laws 2024, Act 76 (HB 403), signed by the governor on May 15, 2024. Maryland: New law (HB 557) extends the sales and use tax exemption for certain materials, parts and equipment used to repair, maintain or upgrade aircraft or aircraft systems through June 30, 2030 (from June 30, 2025). An aircraft, for purposes of this exemption, is one that (1) has a maximum gross takeoff weight of less than 12,500 pounds, or (2) has a maximum gross takeoff weight of 12,500 or more and is primarily used in interstate or foreign commerce. The law takes effect July 1, 2024. Md. Laws 2024, ch. 957 (HB 557), signed by the governor on May 16, 2024. South Dakota: The U.S. Supreme Court has been asked to review a South Dakota Supreme Court ruling upholding the imposition of use tax on an out-of-state company's movable construction equipment that the company brought into South Dakota for varying amounts of time. Specifically, the Court has been asked: "Whether South Dakota's imposition of an unapportioned use tax on the fair market value of [the taxpayer's] movable construction equipment — some of which was used in South Dakota for one day — violates the fair apportionment requirement of the Commerce Clause." Ellingson Drainage, Inc. v. South Dakota Dept. of Rev., petition for cert. filed, Dkt. No. 23-1202 (petition file May 7, 2024). Tennessee: New law (HB 2182/SB 2583) modifies the definition of a "qualified data center" to include a data center that previously made the required capital investments and previously created at least 15 new full-time jobs, and that has been transferred to an affiliate pursuant to a reorganization under IRC Section 368(a). This change took effect upon becoming law. Tenn. Laws 2024, ch. 886 (HB 2182/SB 2583), signed by the governor on May 1, 2024. Tennessee: The Tennessee Department of Revenue (TN DOR) issued guidance on changes to the state's sales and use tax sourcing rules that were enacted in 2023 and take effect July 1, 2024. According to the TN DOR, the changes to the "sourcing rules clarifies for sellers which state's tax is due on a sale into or outside the state." The guidance addresses the following topics: (1) destination sourcing for sales of services performed on tangible personal property and computer services; (2) sourcing for marketplace facilitators; (3) sourcing for leased property; (4) sourcing for sales of direct mail distributed to mail recipients outside Tennessee; and (5) sourcing sales of magazines and books by mail or common carrier. Tenn. Dept. of Rev., Notice #24-08 "Tennessee Works Tax Act Updates — Sourcing" (May 2024). BUSINESS INCENTIVES Alabama: New law (SB 336) establishes research and development (R&D) corridors and exempts them from certain tax laws. The law includes provisions addressing (1) the creation of an R&D corridor; (2) governance of an R&D corridor by a board of directors as well as the corridor's officers; (3) the powers of an R&D corridor; (4) an R&D corridor's financial obligations and the validation of such obligations; (5) authority for a public entity to support an R&D corridor by undertaking certain benefits of a corridor project (e.g., perform services for the benefit of any corridor); (6) auditing financial statements of an R&D corridor; (7) exempting the R&D corridor from certain taxes, usury and interest laws, competitive bid laws, and state oversight (but they would be subject to local codes and ordinances); (8) applicability of certain state laws to R&D corridors; (9) the dissolution of an R&D corridor; and (10) reporting requirements for an R&D corridor. Eligible taxes include any tax, fee or charge levied or imposed by an authorizing subdivision within a geographical boundary; they do not include taxes levied for public schools or incremental ad valorem taxes levied within a tax increment district. SB 336 took effect immediately. Ala. Laws 2024, Act 308 (SB 336), signed by the governor on May 9, 2024. Colorado: New law (HB 24-1439) creates an apprenticeship tax credit that can be claimed against the state's income tax. The credit, which is available for tax years beginning on or after Jan. 1, 2025 but before Jan. 1, 2035, can be claimed by a qualified taxpayer in a new and emerging industry for each apprentice employed by the taxpayer in Colorado for at least six months during the taxpayer's tax year. The credit is up to $6,300 for six months of employment plus $1,050 for each addition month of employment, with the credit capped at $12,600 per apprentice per year. The qualified taxpayer cannot claim a credit (1) for more than 10 apprentices per tax year, (2) for the same apprentice for more than two consecutive tax-years, and (3) for months in which the apprentice did not receive wages from the taxpayer. To qualify, a taxpayer must either have established a registered apprenticeship program in good standing with the State Apprenticeship Agency (SAA) and received a registration certificate from them or be an employer-partner of a registered apprenticeship program in good standing with the SAA. To claim the credit, taxpayers must reserve the credit as set forth in the law, annually apply for it and receive an income tax credit certificate from the SAA. Excess credit will be refunded to the taxpayer; it cannot be carried forward. If this credit is claimed for an apprentice, the taxpayer cannot claim the Colorado job growth incentive tax credit, the Colorado credit for new enterprise zone business employees, or the rural jump-start zone program benefits for the same apprentice. The law also provides for the establishment of (1) a scale-up grant program to establish new, or expand existing, registered apprenticeship programs in Colorado; and (2) a qualified apprenticeship intermediary grant program to support entities that demonstrate expertise in connecting employers or apprenticeship program participants to registered apprenticeship programs. HB 24-1439 took effect upon becoming law. Colo. Laws 2024, ch. 163 (HB 24-1439), signed by the governor on May 10, 2024. PROPERTY TAX Alabama: New law (HB 73) limits the increase in the assessed value of Class Ill and Class II real property for ad valorem tax purposes to not more than a 7% increase in assessed value of the property from the prior year's assessed value. This limit does not apply to the following: (1) real property that has never been assessed; (2) additions or improvements to the real property, including new construction but not repairs to or ordinary maintenance of an existing structure or the property's grounds; (3) a change to the property's classification or ownership (with certain exceptions); and (4) property in certain tax increment districts. The limitation is effective starting Oct. 1, 2024 through the fiscal year beginning Oct. 1, 2027. Ala. Laws 2024, Act 344 (HB 73), signed by the governor on May 15, 2024. Mississippi: New law (HB 1984) provides a tax credit to a person, firm or corporation (collectively, "entity") operating a refinery for the refining of oil, gas or petroleum products and owning oil, gas or petroleum products that are (1) located at such a refinery before being refined, (2) are in the process of being refined at such refinery, or (3) have been refined at such refinery and are stored there. The credit is equal to the amount of all ad valorem taxes payable to the entity that are attributable to the oil, gas or petroleum products. The credit can be applied against other ad valorem taxes payable on the entity's other taxable refinery property by the same jurisdiction or other taxing authority of the state or political subdivision. The amount of credit that can be used cannot exceed the entity's ad valorem tax liability on such other property for the tax year. HB 1984 takes effect and is in force from and after Jan. 1, 2024. Miss. Laws 2024, HB 1984, signed by the governor on April 29, 2024. COMPLIANCE & REPORTING Louisiana: The Louisiana Department of Revenue adopted new rule La. Admin. Code §61:I.1402 to provide guidance on a partnership's filing requirements. Generally, all partnerships doing business or deriving Louisiana sourced income are required to file an informational partnership return, unless otherwise provided. Partnership's subject to the filing requirement are required to file Form IT-565, Partnership Return of Income, including all required schedules and attachments. An exception to this filing requirement applies when the partnership's gross receipts were less than $250,000 and the partnership's total assets at the end of the tax year were less than $1 million. A partnership that qualifies for this exception still must file complete Form IT-565, Partnership Return of Income, to provide partners with information necessary to file income tax returns. The rule was adopted and took effect May 20, 2024. CONTROVERSY Georgia: New law (HB 1267) repeals the Georgia Tax Tribunal (Ga. Code Ann. Tit. 50, Ch. 13A) and creates the Georgia Tax Court. HB 1267 provides for the make-up, role and jurisdiction of the tax court; the requirement of the tax court to issue orders and opinions; the process for filing a petition with the tax court; matters pending before the Georgia Tax Tribunal that will and will not be transferred to the tax court. Persons would be able to petition the tax court for relief starting Aug. 1, 2026. Provisions of HB 1267 take effect on various dates; however, in order to take effect, the Constitutional amendment in HR 598 — which would vest judicial power of the state in, and provide for venue and jurisdiction of, the Georgia Tax Court — must be approved by voters at the November 2024 state-wide general election. If the measure is not approved, then HB 1267 will not take effect and will be repealed on Jan. 1, 2025. Ga. Laws 2024, Act 601 (HB 1267), signed by the governor on May 6, 2024; HR 598 was approved by the General Assembly on March 20, 2024. Maryland: New law (HB 454) modifies the definition of "tax information" subject to disclosure and expands the list of entities to whom tax information may be disclosed to include a tax compliance organization for purposes of assisting the Comptroller in tax compliance activity (this is in addition to the allowed disclosure to persons and governmental entities). Before tax information can be disclosed to a person, governmental entity or tax compliance organization, the party to whom the information is being disclosed must enter into a binding, written agreement regarding the use and security of the tax information. The Comptroller must "adequately supervise" the recipient of this tax information "at all times." In addition, the law expands the definition of "tax information" to include any tax return, information return, estimated tax declaration, filing extension or refund claim that is filed with a tax collector by, on behalf of, or with respect to any person, including any amendments or supplements filed (e.g., supporting schedules, attachment, lists). A "tax compliance organization" means an organization that (1) "assist state tax officials in ensuring compliance with and enforcing state and federal tax law;" (2) has a membership consisting solely of states or state tax collectors, comptrollers or revenue directors (including their employees); and (3) the state is a member or participate. HB 454 takes effect July 1, 2024. Md. Laws 2024, ch. 728 (HB 454), signed by the governor on May 16, 2024. PAYROLL & EMPLOYMENT TAX Arizona: On March 29, 2024, Arizona Governor Katie Hobbs signed into law SB 1358, which allows participants of most qualified pension and annuity plans to request voluntary state income tax withholding from nonperiodic and lump-sum distributions provided the payments are included in Arizona gross income. Prior law allowed voluntary income tax withholding only from regularly scheduled payments from qualified pension and annuity plans. The law also clarifies the types of qualified pension and annuity plans for which the voluntary income tax withholding option applies. For additional information on this development, see Tax Alert 2024-1089. MISCELLANEOUS TAX Washington: The Washington Department of Revenue has adopted amendments to Wash. Admin. Code Section 458-20-19402, to provide additional guidance on sourcing sales from services for business and occupation tax purposes. Amendments revise definitions of "apportionable receipts," "business activities tax," "customer," "reasonable method of proportionally attributing" and "taxable in another state." The definition of "customer," has been expanded to provide that in determining whether a "third-party beneficiary" relationship exists, the WA DOR will consider the terms of the contract and all other books and records as a whole. Such relationship exists if the contracting parties intend that the taxpayer will assume a direct obligation to the intended beneficiary at the time they enter into a contract. When the taxpayer does not provide services under a contract (or does not provide the WA DOR with the contract), the WA DOR will identify the customer based on facts and information it obtains. A new provision describes the application of the cascading steps used to determine the attribution of apportionable receipts. The WA DOR said it expects that most taxpayer will be able to attribute specific apportionable receipts to the state in which the benefit is received or they will be able to use a "reasonable method of proportionally attributing receipts" that fairly apportions where the customer received the benefit of the taxpayer's services. When a taxpayer is affiliated with another entity that has information indicating where the customer received the benefit of the taxpayer's services, the WA DOR said it will presume that the taxpayer has access to the affiliate's information, unless otherwise indicated. The rule makes clear that neither the taxpayer nor the WA DOR may use an attribution method that unfairly attributes or distorts the apportionment of the taxpayer's apportionable receipts. Taxpayers should keep books and records necessary to demonstrate that the apportionment method used fairly apportioned, and did not distort, their apportionable receipts. Further, the rule requires the taxpayer to use the same attribution method for all apportionable receipts in a tax year from the same services. The rule explaining the "benefit of the service" is amended to provide guidance on where the customer receives the benefit, noting that a customer's related business activity will generally occur either at the customer's market or at the customer's business location. The rule provides guidance on determining whether a customer's related business activities occur at its market or its business location. The amendments delete and revise various existing, and add new, examples. In terms of the examples, the WA DOR noted that examples using a particular reasonable method to proportionally attribute the benefit of a service "does not preclude the existence of other reasonable methods" to so attribute the benefit, depending on the taxpayer's facts and circumstances. The rule was filed on May 15, 2024 and it takes effect 31 days after filing - i.e., June 15, 2024. Wash. Dept. of Rev., WSR 24-11-073 (May 15, 2024). GLOBAL TRADE Federal — International: The United States Trade Representative (USTR) announced in a May 27, 2024 Federal Register Notice (FRN) that it will extend through June 14, 2024 exclusions of 429 products (352 previously reinstated exclusions and 77 COVID-19-related exclusions), set to expire on May 31, 2024, with a 14-day transition period. Instructions to this effect were missing from a previous FRN announcing the continuation of duties under Section 301 of the Trade Act of 1974 (Section 301) and the further increase of such duties between 2024 and 2026 for certain Chinese products in the strategic sectors worth a total of US $18 billion. For additional information on this development, see Tax Alert 2024-1096. Federal — International: On May 22, 2024, the United States Trade Representative (USTR) issued a formal statement concerning recent updates to the Section 301 tariff actions and published a Federal Register Notice (FRN) detailing the conclusion of the statutory four-year review. The statement and FRN provide additional information for companies in consideration of the May 14, 2024 announcement from the White House and the USTR that formalized continued Section 301 of Trade Act of 1974 (Section 301) duties and intention to increase such duties between 2024 and 2026 on certain Chinese products in strategic sectors totaling US $18 billion. For more on this development, see Tax Alert 2024-1064. VALUE ADDED TAX International — Ghana: The Commissioner-General (CG) of Ghana Revenue Authority (GRA), the officer responsible for the administration of the tax laws, has issued new administrative guidelines on: (1) the requirement to show CG's invoice as proof of expenses incurred for income tax purposes (Guideline on the Requirement to Show CG's Tax Invoice as Proof of Expenses Incurred); and (2) Value-added tax (VAT) on the supply by estate developers and supplier of an immovable property for rental purposes (VAT Administrative Guideline on the Supply by an Estate Developer and Supplier of an Immovable Property for Rental Purposes). This Global Tax Alert highlights the key matters set forth in the administrative guidelines. For additional information on this development, Tax Alert 2024-1068. 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.
| ||||||||||||||||||||||||||||||
|
