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Ernst & Young's State and Local Tax Weekly newsletter for August 23 and August 30 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 updates guidance on property tax exclusion for new construction of active solar energy systems

Active solar energy system projects must be completed by January 1, 2027, to be excluded from property taxation, according to a recent letter sent to county assessors from the California State Board of Equalization (BOE). (Letter No. 2024/031, August 26, 2024).

Legislation enacted in 2022 (SB 1340 (Stats. 2022, ch. 425)) extended the exclusion for active solar energy systems from the 2023-24 fiscal year to the 2025-26 fiscal year and changed the repeal date to January 1, 2027 (from January 1, 2025). The BOE acknowledged Cal. Rev. & Tax. Cd. Section 73 (Section 73) contained conflicting language around the new construction exclusion and provided clarifying guidance.

The updated guidance outlines the BOE's interpretation of Section 73, confirming the exclusion remains in effect until January 1, 2027, regardless of when construction commences. Under Section 73(i), if the construction is completed by January 1, 2027, the exclusion will apply to the entire facility until its ownership changes. If the facility is not completed by January 1, 2027, construction added from January 1, 2026, will not receive the exclusion.

For a qualified project completed in phases, the phases completed before January 1, 2027 remain excluded until a subsequent change in ownership or control. Any additional phases that have not commenced construction, or that are under construction but not yet complete, as of January 1, 2027 are assessable.

For additional information on this development, see Tax Alert 2024-1667.

INCOME/FRANCHISE

Georgia: The Georgia Department of Revenue (GA DOR) proposed amendments to Rule 560-7-3-.13 "Consolidated Returns" (proposed rule) to incorporate statutory changes enacted under HB 1058 form the 2021-2022 legislative session. Starting in 2023, a group of affiliated corporations can elect to file a consolidated return; prior to 2023, a group of affiliated corporations had to petition the Commissioner for permission to do so. An affiliated group would make the consolidated return filing election on a timely filed original income tax return, including extensions. The election, once made, would be irrevocable and binding on the affiliated group and the GA DOR for five years. Affiliated groups that had permission to file a consolidated return before 2023, would be allowed to: (1) elect to file a consolidated return under this rule; (2) continue to file a consolidated return under the terms of the prior grant (affiliated groups choosing this option would be governed by Rule 560-7-3-.13 as it existed before January 1, 2023); or (3) cease filing a consolidated return and file separate returns. The proposed rule would provide guidance on terminating a prior grant of permission, making a new consolidated return election, and terminating the filing of a Georgia consolidated return during the five-year binding period when there is a change to the Georgia affiliated group. The proposed rule would require that all credits utilized against the Georgia affiliated group's tax liability be assigned to the consolidated parent, unless the parent generated the credit. Credits would only be assignable in the year generated and the assignment would have to be made by the return's due date, including extensions. Credit carryforwards would not be assignable. The proposed rule would provide a transition rule for carrying forward credits and net operating losses (NOLs). A Georgia affiliated group that had permission to file a consolidated return before 2023, and that elects to file a Georgia consolidated return for tax years beginning on or after January 1, 2023 and the four succeeding tax years, would be eligible to carry forward to the Georgia consolidated return the credits/NOLs shown on the last-filed consolidate return filed under the prior grant of permission. The proposed rule would also provide guidance on estimated tax payments and special issues. Comments on the proposed amendments are due by 10:00 a.m. on September 30, 2024; on that date and time, the GA DOR will hold a hearing on the proposed amendments. Ga. Dept. of Rev., Notice IT-2024-4 "Proposal to amend Rule 560-7-3-.13 Consolidated Returns" (Aug. 30, 2024).

Georgia: The Georgia Department of Revenue (GA DOR) proposed amendments to Rules 560-7-8-.36, 560-7-8-.42, 560-7-8-.45, 560-7-8-.51, 560-7-8-.59, 560-7- 8-.61, 560-7-8-.66 and 560-7-8-.67, to implement legislative changes enacted in 2024 (HB 1181) that shortened credit carry forward periods, among other changes. (For more on HB 1181, see Tax Alert 2024-0908.) Provisions that would be amended include those related to jobs tax credits, tax credits for qualified research expenses, film tax credits, quality jobs tax credits, postproduction film tax credits, personal protective equipment manufacturer jobs tax credits, life sciences manufacturing job tax credits, and musical tax credits. The proposed amendments also would modify the limitations on claiming the withholding tax benefit for these credits. These proposed changes, if adopted, would generally apply to tax years beginning on or after January 1, 2025, with some exceptions. Comments on the proposed amendments are due by 10:00 a.m. on September 30, 2024; on that date and time, the GA DOR will hold a hearing on the proposed amendments.

Hawaii: The Hawaii Department of Taxation (HI DOT) revised its tax information release (TIR) on the elective pass-through entity tax (PTET) to incorporate legislative changes enacted in 2024 (Act 50, SB 2725). The law amended the PTET base by imposing the tax on the sum of the distributive shares and guaranteed payments of a qualified members (i.e., a member of an elective PTE that is an individual, trust or estate) and changing the PTET rate from the highest applicable individual tax rate to 9% and allows the PTE credit to be carried forward until exhausted. The TIR addresses the following: (1) entities that may elect the PTET; (2) making the PTET election; (3) calculating the PTET; (4) deadline for the remitting the PTET; (5) estimated PTET payments; (6) filing the required schedule that details each qualified member's share of the PTET paid; (7) electronic filing and payment requirements; (8) credit for PTET paid and credit for PTET paid to another state; and (9) amendments, refunds and income tax returns. This TIR supersedes TIR 2023-02 for tax years beginning after December 31, 2023. The TIR also includes temporary PTET administrative rules. Haw. Dept. of Taxn., Tax Information Release No. 2024-01 (Aug. 15, 2024).

Kansas: The Kansas Department of Revenue (KS DOR) issued a notice describing recently enacted modifications to the state's SALT Parity Provisions (i.e., the elective pass-through entity tax (PTET)) made by SB 410. These modifications, which are generally effective for tax years beginning on or after January 1, 2022, do the following: (1) change the tax rate from 5.7% to the highest individual income tax rate; (2) provide two methods for calculating the pro rata or distributive share of a resident owner of a PTE electing to be subject to the PTET; (3) modify the manner in which credits are taken by allowing credits to be passed-through to and claimed by the owners of the electing PTE; and (4) modify the way certain modifications and deduction are treated for purposes of SALT Parity. The KS DOR noted that additional information is available on its SALT Parity Act FAQ webpage. Kan. Dept. of Rev., Notice 24-15 (Aug. 20, 2024).

Kansas: The Kansas Department of Revenue (KS DOR) issued a notice describing recently enacted retroactive changes to the subtraction modification provisions for federal jobs tax credits. (See SB 410.) For tax years beginning after December 31, 2021, taxpayers must subtract from federal taxable income (FTI) any federal credit disallowed under IRC Section 280C(a). The subtraction was previously limited to only disallowed expenses related to the federal tentative jobs tax credit. For tax years beginning after December 31, 2019 and ending before January 1, 2022, taxpayers may subtract from FTI, 50% of any disallowed federal employee retention credit. Taxpayers must prove for the applicable years that they filed a Kansas income return and paid Kansas income tax on the disallowed amount. The notice describes how to claim the retroactive subtraction modification. Refund claims and amended returns related to this change must be filed by April 15, 2025. Kan. Dept. of Rev., Notice 24-18 (Aug. 13, 2024).

Louisiana: The Louisiana Department of Revenue (LA DOR), in response to public feedback, amended proposed 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 proposed rule lists the documentation taxpayers claiming the deduction would have to submit at the time of filing their Louisiana individual income tax return; additional documentation would be required for claims greater than $250,000. The proposed rule also would set forth eligibility restrictions. For instance, net capital gains would not qualify for the deduction when the transaction transfers ownership of the interest or assets to a related party. In response to public feedback, the LA DOR reduced the percentage of real property required to be in Louisiana from 75% or more to more than 50%. In addition, the proposed rule would define 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." In response to public feedback, the LA DOR added definitions for "controlled entities," "net assets" and "gross assets" to clarify eligibility requirements for immovable or tangible movable assets. A public hearing will be held on the proposed amendments to LAC 61:I.1312 on September 24, 2024.

Texas: In response to a letter ruling request by a company that provides contract field operation consultants (i.e., subcontractors) on oil and gas drilling and workover rigs, the Texas Comptroller of Public Accounts (Comptroller) determined that the company may exclude from total revenue subcontracting payments made for consulting and supervision services for completions and workovers of oil and gas drilling. The Comptroller found that the company's contract with its customers established that its payments to subcontractors are mandated by contract (e.g., the company's obligation to pay the subcontractor is a contractual one). The Comptroller also found that the payments are "flow-through" as the company's customer is compensating the company for work performed by the subcontractors, and that the payments are subcontracting payments since the company makes the payments to another entity to perform the work the company provides to its customers and for which the customer compensates the company. Tex. Comp. of Pub. Accts., Letter Ruling 202407025L (July 24, 2024).

SALES & USE

Alabama: The Alabama Department of Revenue (AL DOR) issued a notice on a recent law change that requires accommodations intermediaries to collect and remit state lodging taxes as well as local levies for transactions occurring on or after January 1, 2025. Tax is imposed on the room charge. If an accommodations intermediary facilitates the lodging transaction and there is a written agreement or contract for the accommodations intermediary to remit the collected taxes to the accommodations provider, the intermediary is not liable for lodging taxes not remitted by the provider. Lodging accommodations intermediaries and providers are required to annually submit a report listing the address of each accommodation that was rented or furnished for more than 14 days during the previous year. Certain entities are exempt from filing the report, including professional property management companies, hotels and destination marketing organizations that meet certain criteria. Ala. Dept. of Rev., Notice Alabama Tourism Tax Protection (Aug. 13, 2024).

Alaska: New law (SB 179) prohibits the state and cities from levying sales or use tax on the transfer of real property. This provision applies to home rule and general law municipalities. This prohibition does not apply to a municipal sales and use tax on transfers of real property adopted before the prohibition took effect. Ak. Laws 2024, ch. 28 (SB 179), signed by the governor on Aug. 13, 2024.

Illinois: The Illinois Department of Revenue (IL DOR) adopted amendments to 86 Ill. Adm. Code Sections 195.100 through 195.150 related to booking intermediaries. The amendments explain how booking intermediaries collect and remit tax. Booking intermediaries are required to collect tax on the purchase price paid by purchasers on behalf of registered operators. Tax also is required to be collected on a booking intermediary's separate service charges included in the purchase price, even if the booking intermediary retains these service charges. Until December 31, 2023, an operator was responsible for remitting the separately stated charge to the IL DOR. Starting January 1, 2024, the booking intermediary is liable for and must remit tax to the IL DOR on any separately stated service fee that it charges to the customers. Operators are still required to remit tax on the remainder of the purchase price for the transaction. Also, effective January 1, 2024, if a booking intermediary facilitates the processing and fulfillment of a reservation for a non-registered operator, then tax must be collected on the purchase price from the purchaser by the booking intermediary on behalf of the operator and the booking intermediary must remit the tax to the IL DOR. Further, the following items added to a customer's invoice by a booking intermediary will be treated the same as a service charge: markups, services fees, convenience fees, facilitation fees, cancellations fees, overtime fees, or other such charges related or incidental to obtaining the use of a parking space. Various illustrative examples have been added to the rules. The amended rules took effect August 5, 2024. Ill. Dept. of Rev., Adopted Amendments to 86 Ill. Adm. Code Sections 195.100 through 195.150 (Ill. Register, Vol. 48, Issue 33, August 6, 2024).

Michigan: The Michigan Department of Treasury issued updated guidance on the sales and use tax treatment of food and prepared food to incorporate law changes enacted under Acts 141 and 142, Laws 2023. Generally, the Michigan Constitution prohibits tax on the sale or use of food for human consumption. This prohibition does not, "by its own terms … reach 'prepared food intended for immediate consumption'"; thus, such food may be subject to tax. Acts 141 and 142 modify the tax treatment of prepared food via changes to definitions. The guidance: (1) defines "foods" and "prepared food"; (2) describes when "food sold in a heated state or that is heated by the seller" and when "two or more food ingredients mixed or combined by the seller for sale as a single item" are prepared food; and (3) describes for periods after February 13, 2024, the controlling standard for determining whether food is "sold with eating utensils provided by the seller." Relevant to "food sold with eating utensils provided by the seller" are focused discussions on (a) the "prepared food sales percentage," which is used to determine what constitutes an eating utensil provided by the seller, (b) the definition of "eating utensils," (c) the three ways in which a seller may provide a utensil, (d) when a seller provides a utensil by packaging it with a food item, and (e) when a seller's prepared food sales percentage is "greater than 75%" or "75% or less." The guidance also describes categories of food items that are excluded from "prepared food" (e.g., food that is only cut, repackage or pasteurized by the seller, certain items that are raw or sold in an unheated state, bakery items), the tax treatment of items sold through a vending machine, and other exemptions. The guidance includes numerous examples. Mich. Dept. of Treas., RAB 2024-13 (Aug. 20, 2024)(replaces RAB 2022-4).

New Jersey: The New Jersey Division of Taxation (NJ DOT) posted guidance on the phase-out of the sales and use tax exemption for sales of zero emission vehicles (e.g., vehicles certified under the California Air Resources Board zero emission standards for the model year). Under legislation enacted in 2024 (P.L. 2024, ch. 19), the exemption will be phased-out over nine months, with a 3.3125% sales tax rate applying to zero emission vehicles sold on or after October 1, 2024 through June 30, 2025; and a 6.625% sales tax rate applying to such sales made on or after July 1, 2025. The exemption does not apply to partial zero emission vehicles such as hybrids, or to labor or parts for qualified vehicles. Additional information is available on the NJ DOT's Zero Emission Vehicles FAQs webpage. N.J. Div. of Taxn., "Zero Emission Vehicles Exemptions" webpage (last updated July 12, 2024).

South Carolina: In response to a ruling request, the South Carolina Department of Revenue (SC DOR) determined that sales of prepared meals and other food items to students using flex dollars are not retail sales subject to state or local sales tax. ("Flex dollars" are meal/food plan options offered by an educational institution for board plans that may be purchased by students at the beginning of a semester or year.) The SC DOR reasoned that flex dollars are used in the same manner as meal plans but with more "flexible options" for students to purchase meals and other food items. While sales and use tax does not apply to a student's purchase of meals and other food items using meal plan flex dollars, a student's purchase of items other than meals and other food items using flex dollars will be subject to state and local sales tax. S.C. Dept. of Rev., SC Private Letter Ruling #24-3 (Aug. 5, 2024).

Texas: The Texas Comptroller of Public Accounts issued guidance on the sales and use taxability of separately stated credit card processing fees billed by a retailer to customers for the purchase of taxable items. The Comptroller said that such fees "are taxable as part of the total sales price of a taxable item." The retailer, the Comptroller explained, is not extending credit to the customer for the purchase of an item, but rather is accepting the credit card as a means of payment. As such, the processing fee "is not a finance, carrying and service, or interest charge from extending credit." The Comptroller also found that separately stated credit card processing fees "do not qualify for exclusion from taxable data processing services." The Comptroller noted that legislation enacted in 2021 clarified that "data processing" does not include the processing of electronic payment transactions. The Comptroller further explained that the retailer, in passing along the cost of the credit card processing fee to its customers is passing along the cost of an expense incurred in connection with the sales of a taxable item. Tex. Comp. of Pub. Accts., Memorandum # 202406004M (June 27, 2024).

BUSINESS INCENTIVES

Massachusetts: New law (HB 4977) establishes tax credits that can be claimed against the corporate excise tax or the personal income tax for qualified conversion projects — i.e., the rehabilitation of commercial property located in designated areas that is primarily for multi-unit residential or mixed-use and that meet certain requirements. These requirements include that the rehabilitation contains at least two residential units and it is at least 80% market rate residential units upon completion of the rehabilitation, and that before the rehabilitation the building was nonresidential property. Credits available include up to 10% of the qualified conversion project development costs. Taxpayers eligible for the credit, with prior notice to the tax commissioner, may transfer the credit in whole or in part. Excess credit may be carried forward for up to 10 years. The tax commissioner has the authority to adopt regulations necessary to implement the credit, including recapture provisions. Before construction of a project, the executive office will certify that the proposed project meets the definition of qualified conversion project and it also will certify that all or a portion of the project's cost are for construction or substantial rehabilitation and identify the development costs. Projects will be reviewed and re-certified upon completion; certification may be revoked for various reasons.

The law also establishes tax credits for a "qualified homeownership development project," which is a project that focuses on the development of new, single-family dwellings (i.e., a project that consist of at least 10 new dwellings, be in an eligible location, and result in not less than 20% of the dwellings being sold to qualified buyers, subject to an affordability restriction). The amount of credit available will be listed on the eligibility certificate. A taxpayer can carry forward excess credit, but cannot apply the credit to tax due for any tax year beginning after the affordability period (i.e., "the 10-year period that commences on the date of the initial sale of a single-family dwelling constructed as part of a qualified homeownership development project"). Taxpayers may transfer, sell or assign the credit to any individual or entity. The credit may be recaptured for various reasons, including eligibility issues.

Lastly, the law extends the Massachusetts historic rehabilitation tax credit through December 31, 2030 (from December 31, 2027) and increases the aggregate amount of credit available annually to $110 million (from $55 million). These provisions are effective for tax years beginning on or after January 1, 2025. Mass. Laws 2024, ch. 150 (HB 4977), signed by the governor on August 6, 2024.

Massachusetts: New law (HB 4976) increases the amount of the credit available for hiring qualified veteran to $2,500 (from $2,000) for each qualified veteran hired; this credit may be claimed against the corporate excise tax and the personal income tax. This change is effective for tax years beginning on January 1, 2024. Mass. Laws 2024, ch. 178 (HB 4976), signed by the governor on August 8, 2024.

PROPERTY TAX

District of Columbia: The District of Columbia Office of Tax Revenue (OTR) issued guidance on the application of the purchase money exemption to purchase money mortgage or purchase money deed of trust (collectively "instrument"). Under the District's law, an exemption from the recordation tax is provided for such instrument that is recorded at the same time as the deed conveying the real property for which the instrument was obtained — a purchase money exemption.¹ An instrument must be: (1) recorded with the deed conveying title to the real property to the purchaser and (2) executed by the purchaser of such property. An instrument may qualify for the purchase money exemption to the extent the amount of the instrument does not exceed the property's purchase price. The OTR said that because a lease is not a "deed conveying title," a mortgage or deed of trust granted to secure indebtedness incurred to acquire a leasehold is not an instrument entitled to the exemption. The OTR further explained that the purchase money exemption "pertains to the deed of title conveying the property encumbered by the instrument and the purchaser to whom the property is conveyed." The purchase money exemption, the OTR noted, does not contemplate other transactions, properties or property owners; nor does the statute contemplate a combination of an instrument with a refinance or modification of other deeds of trust or mortgages for other real properties or other owners. The OTR's Recorder of Deeds said that for an instrument to qualify for the purchase money exemption "the instrument must encumber only the real property purchased by the purchaser … and be executed only by the purchaser of such real property." Lastly, the OTR said that if separate deeds of title convey the lots or parcels of real property acquired by the purchaser, then "an allocation of the principal amount of the mortgage or deed of trust must be made among the deeds." D.C. OTR, Tax Notice 2024-03 (August 5, 2024) (Replaces and Supersedes OTR Tax Notice 2022-09).

COMPLIANCE & REPORTING

Federal/State: The IRS has extended (IR 2024-205, IR-2024-209) the due dates for filing individual and business tax returns and making tax payments to February 3, 2025, for taxpayers in five states affected by Hurricane Debby. The extension applies to taxpayers, including tax-exempt organizations, that reside or have a business in the federally declared disaster areas in Georgia, Florida, North Carolina, South Carolina and Vermont. Taxpayers that are not located in the disaster area but have records there may also qualify for the extension. Taxpayers without a recorded address in the disaster area may still qualify for penalty abatement resulting from a late filing or payment notice. Affected taxpayers should contact the IRS to determine if their circumstances and situation warrant penalty abatement. The postponement until February 3, 2025, applies to various individual and business filings and payments, including: (1) individuals, businesses and tax-exempt organizations with an extension to file their 2023 federal tax return (payments are not eligible for the February 3, 2025 extended time as they were due on the original due date); (2) quarterly estimated tax payments normally due on September 16, 2024, and January 15, 2025; (3) quarterly payroll and excise tax returns normally due on July 31, 2024, October 31, 2024, and January 31, 2025. For more on this development, see Tax Alert 2024-1580.

Several states are also providing tax-related relief to taxpayers impacted by Hurricane Debby, including Florida, Georgia, North Carolina, South Carolina and Vermont. Relief varies by state.

CONTROVERSY

Rhode Island: New law (SB 2639) allows municipal tax collectors to establish a program to provide notice of tax owed through digital or electronic means. This law took effect upon passage. R.I. Laws 2024, ch. 222 (SB 2639), signed by the governor on June 24, 2024.

PAYROLL & EMPLOYMENT TAX

Federal: The 2024 edition of our US employment tax rates and limits report is now updated through August 25, 2024, to reflect changes in state paid family and medical leave insurance, state unemployment insurance and state income tax rates. For more on this development, see Tax Alert 2024-1608.

Kansas: Governor Laura Kelly signed into law HB 2570, which makes numerous changes to the state unemployment insurance (SUI) law that directly impacts employers. Starting in 2026, the current set SUI wage base of $14,000 will be adjusted annually as a percentage of the statewide average annual wage. The percentage will increase progressively through 2030 as follows: (1) 25% beginning in calendar year 2026; (2) 30% beginning in calendar year 2028; (3) 35% beginning in calendar year 2029; and (4) 40% beginning in calendar year 2030. Starting in 2025, the current SUI rate schedules will be revised to include a 0% rate group for employers with the highest positive rating and SUI tax rates will be lowered for all positive-rated employers. Starting in 2026, changes will also be made to solvency and credit rate adjustments in conformity with the adjustments to the SUI wage base. Also starting in 2025, the SUI rate for new employers will decrease from 6% to 5.55% for construction industry employers, and from 2.7% to 1.75% for all other employers. Effective with the 2025 rating year, the deadline for employers to make voluntary contributions for the purpose of potentially reducing their SUI tax rate is extended from 30 to 90 days following the date the SUI rate notice for the upcoming year is mailed. For additional information on this development, see Tax Alert 2024-1587.

Vermont: Governor Phil Scott signed into law HB 704, which effective July 1, 2025, requires that most written job advertisements include information concerning the type and range of monetary compensation the employer expects to offer the job applicant. The requirement applies to both internal and external job applicants and to positions into which employees can be promoted or transferred. The law applies to Vermont employers with five or more employees and to jobs that will be physically performed within Vermont or that are remote if the employee will predominantly perform work for an office or work location that is physically located in Vermont. For additional information on this development, see Tax Alert 2024-1579.

MISCELLANEOUS TAX

Washington: The Washington Department of Revenue adopted new rule WAC 458-20-301 "Capital Gains Excise Tax." The rule "provides interpretive guidance related to the tax, including definitions of terms and explanations regarding the treatment of specific transactions." Defined terms include: "adjusted capital gain," "another taxing jurisdiction," "grantor trust," "federal net long-term capital gain," "internal revenue code," "resident," "Washington capital gains," "principally directed or managed within the state of Washington" and "qualifying interest," among several other terms. The rule also explains how the tax is imposed and how it is calculated, with various examples covering such topics as maturity of bonds, excess partnership distribution, expatriation, capital gain invested in qualified opportunity funds, sales of qualified opportunity funds, stock loss, partnership interest, out-of-state losses, short-term capital losses, sale of real estate, tiered partnerships, mutual funds, sales of private entities owning real estate, nondepreciable intangible property, allocation of gain from tangible personal property or intangible property, among other topics. The amended rule took effect July 29, 2024. Wash. Dept. of Rev., WAC 458-20-301 (adopted June 28, 2024).