November 11, 2024 State and Local Tax Weekly for October 18 and October 25 Ernst & Young's State and Local Tax Weekly newsletter for October 18 and October 25 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 Pennsylvania Department of Revenue posts guidance on the related party income election In July 2024, Pennsylvania Governor Josh Shapiro signed into law SB 654, provisions of which amend the related-party interest/intangible expense and cost-addback requirements. For tax years commencing after December 31, 2022, the law amends the annual election for an affiliated entity subject to the Corporate Net Income Tax (CNIT) to exclude "intangible expense or cost" and/or related "interest expense or cost" from taxable income to the extent the taxpayer adds back those items in determining taxable income. If the taxpayer adds back intangible expense or cost and related interest expense or cost, and an affiliated entity subject to the CNIT otherwise includes those items in taxable income, the affiliated entity may make an annual election to exclude those items with the filing of its original tax return. (The affiliated entity must identify the taxpayer to which the election applies.) The exclusion may not exceed the intangible expense or cost, or the interest expense or cost, paid, accrued or incurred by the taxpayer. The Pennsylvania Department of Revenue (PA DOR) posted guidance on this election, which must be made by affected taxpayers on their originally filed Form RCT-101 Corporate Tax Report. The PA DOR explained that since the law change was enacted in July, some taxpayers may have already filed their original 2023 Form RCT-101 for 2023. Taxpayers that have already done so "cannot amend their report to make this election." In this situation, the PA DOR said that the related party should addback the intangible/interest expense/cost on its 2023 Form RCT-101 and then claim the credit under 72 P.S. Section 7401(3)1.(t)(1) for tax paid by the entity reporting the amount at issue in its taxable income. The PA DOR noted that a related entity that "believes it was not made whole" by claiming the statutory credit, may request relief by filing an appeal with the Board of Appeals. Taxpayers that have not yet filed their original 2023 Form RCT-101 can make the election by entering the amount they are electing to exclude as an Other Deduction and provide additional details on REV-860, Schedule OD — Other Deductions. Information that should be included on the Schedule OD includes each related entity's name and Federal EIN (in the Description column) and the corresponding amount of income being excluded (in the associated Amount column). (Each entity should be listed separately.) The PA DOR said the failure to include this information could result in the deduction being disallowed. Final regulations implement the advanced manufacturing investment credit established by the CHIPS Act of 2022 In final regulations (T.D. 10009), Treasury and the IRS implement the advanced manufacturing investment credit (AMIC) under IRC Section 48D, which was enacted under the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act of 2022 to incentivize semiconductor and semiconductor equipment manufacturing in the United States. The final regulations adopt, with certain taxpayer-favorable modifications, the proposed regulations (REG-120653-22) published in the Federal Register on March 23, 2023 (see Tax Alert 2023-0713). In addition, the final regulations:
The final regulations are effective as of December 23, 2024, but the regulations generally apply to property that is placed in service after December 31, 2022, and during a tax year ending on or after October 23, 2024. For taxpayers planning to make the elective payment election under IRC Section 48D(d) and Treas. Reg. Section 1.48D-6, which allows certain taxpayers to treat the AMIC as a payment of federal income tax, see T.D. 9989 and Tax Alert 2024-0624. For an in-depth discussion of the final regulations, see Tax Alert 2024-2023. INCOME/FRANCHISE Iowa: The Iowa Department of Revenue announced that the corporate income tax rate for 2025 will stay the same as the corporate income tax rate for 2024 because the net corporate income tax receipts for fiscal year 2024 did not reach the $700 million threshold required to reduce the rate. Thus, the 2025 tax rate is 5.5% on the first $100,000 and 7.1% on all income over $100,000. IA Dept. of Rev., Order 2024-01 "Certifying Iowa Corporate Income Tax Rates for 2025 under Iowa Code section 422.33(1)(b)" (Oct. 15, 2024). West Virginia: New law (SB 2033) reduces the personal income tax rate. (Before this law change, the 2025 tax year personal income tax rates were set to range from 2.27% up to 4.92%, see Admin. Notice 2024-03.) Effective for tax years beginning on and after January 1, 2025, the rate on individuals (except married individual filing separate returns), individuals filing joint returns, heads of households, and estates and trust is:
Effective for tax years beginning on and after January 1, 2025, the rate on married individual filing separate returns is:
The law also provides for future, contingent reductions in the personal income tax rates. Starting August 15, 2025, and each August 15 thereafter, the Secretary of Revenue will determine if the revenue threshold, as prescribed by the law, has been met. The amount of the reduction of the personal income tax rate is based on the excess fiscal year general revenue fund collections divided by the amount of the immediately preceding fiscal year's total personal income tax collections for all funds; the amount of the reduction may not be more than 10% of the rate. W.V. Laws 2024 (2nd Special Sess., Laws 2024), ch. 37 (HB 2033), signed by the governor on Oct. 16, 2024. SALES & USE Illinois: The Illinois Department of Revenue adopted amendments to regulations 86 Ill. Admin. Code Sections 130.120 and 130.320 (the Retailers' Occupation Tax (ROT)), 140.101 and 140.125 (the Service Occupation Tax (SOT)) and 150.105 (Use Tax) to implement statutory changes related to aircraft and fuel taxes. Starting in 2024, the ROT and SOT exemptions for materials, parts, equipment, components and furnishings incorporated into or upon an aircraft as part of the aircraft's modification, refurbishment, completion, replacement, repair or maintenance under Sections 130.120 and 140.125 is expanded to include aircraft engines and power plants. (The exclusion of aircraft engines and power plants from the exemption applied until January 1, 2024.) The amended regulations reflect the exemption's extension through December 31, 2029 (from December 31, 2024). The amended regulations also revise the list of who may qualify for the exemption, and they provide that no credit or refund is allowed for taxes paid because of the exemption being disallowed on or after January 1, 2015 and before February 5, 2020. ROT, SOT and Use Tax regulations related to gasohol, majority blended ethanol and mid-range ethanol blends (Sections 130.320, 140.101 and 150.105) have been amended to reflect statutory changes to the percentages of proceeds from sales of these fuels that are subject to tax and the dates to which these percentages apply. The amended regulations took effect on September 25, 2024. Ill. Dept. of Rev., 86 Ill. Admin. Code Sections 130.120, 130.320, 140.101, 140.125, 150.105 (Ill. Register, Vol. 48, Issue 41, Oct. 11, 2024). Missouri: In response to a ruling request by a rental car service company, the Missouri Department of Revenue (MO DOR) said that Collision Damage Waivers offered, but not required by the company, are not subject to the state's sales tax. The MO DOR reasoned that since the waiver is optional and may be declined it is not part of the underlying sale (i.e., not part of the rental transaction for the motor vehicle). Mo. Dept. of Rev., LR 8311 (July 31, 2024). Missouri: In response to a ruling request by an online food ordering company, the Missouri Department of Revenue (MO DOR) said that the company is not required to collect and remit state sales tax as a marketplace facilitator on sales to Missouri customers from Missouri restaurants, but it is required to collect and remit Missouri use tax as a marketplace facilitator for out-of-state restaurant orders that are delivered into the state. Regarding the in-state sales, the MO DOR explained that the restaurant is the seller and has the responsibility to report and remit the tax. The company may transfer tax collected on behalf of a restaurant to that restaurant. Mo. Dept. of Rev., LR 8316 (Aug. 30, 2024). New York: In response to a ruling request of an out-of-state seller of durable medical equipment, the New York Department of Taxation and Finance (NY DOTF) found the seller's sales of a portable electrotherapy device used to treat and alleviate pain as well as certain muscular injuries, are exempt from sales tax. The devices are not sold to medical practitioners, rather medical practitioner's prescribe the devices to their patients. The seller receives payment for the devices directly from the patient's insurance provider. Under New York Tax Law Section 1115(a)(3) sales of medical equipment and supplies are exempt from sales and use tax unless they are purchased at retail for use in performing medical and similar services for compensation. The NY DOTF found that the devices at issue qualify for the exemption because they are (1) used for the treatment of disease or physical incapacity, (2) are not useful in the absence of illness or injury, and (3) the equipment is not sold for use in performing medical services for compensation as the devices are sold to the patients and not the medical practitioners. N.Y. Dept. of Taxn. and Fin., TSB-A-24(18)S (Aug. 1, 2024). Tennessee: In response to a ruling request, the Tennessee Department of Revenue (TN DOR) said that a contractor's purchases of piping that will be used at a municipal freshwater treatment facility, which processes raw water into potable water for resale to customers, are exempt from sales and use tax because the piping qualifies as industrial machinery. The TN DOR found the piping met the four part test to qualify as exempt industrial machinery because: (1) the piping is used by a manufacturer, in this case the freshwater treatment facility which processes raw water into potable water for resale to customers for consumption off the premises; (2) the purchased piping constitutes "machinery, apparatus and equipment" as it conveys preliminarily treated water from one part of the manufacturing process to another part of the process; (3) the piping is necessary for the processing of raw water into potable water and it also aids in temperature stabilization during the preliminary treatment process; and (4) the piping is primarily for the processing of raw water into potable water as it is used exclusively to move raw water through the treatment system and to the facility where it is processed into potable water. Tenn. Dept. of Rev., Letter Ruling #24-07 (Aug. 21, 2024). Texas: In response to a ruling request by a multinational company that provides industrial automation products and services, the Texas Comptroller of Public Accounts (Comptroller) addressed various sales and use tax questions regarding a series of sales transactions occurring while imported tangible personal property was stored within a bonded warehouse. The Comptroller said that sales and use tax is not due on transactions that occur within the bonded area before it is imported into Texas because "[i]mported property retains its character as an import while in the bonded area." Use tax applies to the imported property after it is removed from the bonded area by the importer of record — i.e., the U.S. customer. The importer of record, not the company, is liable for use tax due after the items are removed from the bonded area. The Comptroller also said that entities that take ownership of goods within the bonded warehouse in Texas have physical presence in the state, reasoning that such entities are making use of the warehouse in Texas and deriving receipts from the sale of tangible personal property in the state. Further, even though the entities make sales of goods in the state, the Imports and Exports Clause and Tex. Code Section 151.307 exempts these sales from the imposition of tax. Lastly, the Comptroller noted that these entities are engaged in business in Texas and, as such, are required to obtain a Texas sales and use tax permit. Tex. Comp. of Pub. Accts., STAR No. 202408014L (Aug. 29, 2024). Texas: In response to a ruling request, the Texas Comptroller of Public Accounts (Comptroller) said that a company's provision of health insurance pre-authorization approval or denial services to hospitals, clinics and doctors whose patients have healthcare plans administered by the insurer, are not taxable insurance services. The Comptroller explained that even though the company performs activities that may meet the definition of data processing services, these activities are performed to facilitate the non-taxable pre-authorization services. Tex. Comp. of Pub. Accts., STAR No. 202408013L (Aug. 30, 2024). BUSINESS INCENTIVES Arizona: The Arizona Commerce Authority (Authority) adopted Rule 24-05 to provide guidance on the International Operations Center (IOC) Program, which provides certain utility tax relief to a business that operates an IOC. The rule sets forth the required investments and the time frame in which they must be made to qualify as an IOC. Applicates that were initially certified as an IOC before January 1, 2019 also may qualify for income tax credits for investment in new renewable energy facilities that produce energy for self-consumption using renewable energy resources, if the energy will be used primarily for an IOC. The Authority may certify IOCs through 2030. The rule, which provides an overview the program, also: (1) describes eligibility requirements; (2) explains the process for submitting applications as well as annual reporting requirements; (3) describes when an IOC certification may be revoked; and (4) defines key terms for purposes of the program. Rule 24-05 was adopted, and took effect, on October 17, 2024. Hawaii: The Hawaii Department of Taxation (HI DOT) issued a tax information release (TIR) to provide guidance on the imposition and calculation of Hawaii general excise tax (GET) on payments made by a film production company to payroll services providers and the application of the GET exemption for professional employer organizations (PEOs). The HI DOT explained that under Hawaii law, all gross receipts of a business are considered taxable gross income unless specifically exempted. Hawaii provides an exemption to PEOs that are registered with the Department of Labor and Industrial Relations (DLIR) for amounts received from a client company. A PEO is defined as "any person that is a party to a professional employer agreement with a client company and whose covered employees perform services on a long-term, rather than temporary or project-specific basis." The HI DOT said that a film production payroll service provider may qualify for the PEO exemption if it: (1) meets the statutory definition of a PEO, (2) is registered with the DLIR as a PEO, and (3) has a written contract with the client company (i.e., the production company) that provides for covered employees, describes the duties and responsibilities of the production company and the PEO in regard to covered employees, and includes a declaration of the PEO's responsibilities. The exemption allows a PEO to exempt receipts disbursed to covered employees of a client company; receipts from a client company not so disbursed remain subject to tax. The HI DOT further explained that Hawaii law does not require GET be "passed on" in a transaction between a payroll service provider and a production company; rather, it is a contractual matter. Payroll service providers that do not qualify for the PEO exemption may "pass on GET up to the amount assessed on all receipts from a production company," while a PEO claiming the exemption may only "pass on GET assessed on taxable income." Lastly, the HI DOT said payments made by a production company to a payroll service provider or PEO may be claimed as qualified production costs for the motion picture, digital media, and film production income tax credit, if such payments are either subject to GET at the highest tax rate or, if the costs are not subject to the GET, they are subject to Hawaii income tax. Haw. Dept. of Taxn., Tax Information Release No. 2024-04 (Oct. 10, 2024). PROPERTY TAX Kansas: The Kansas Department of Revenue (KS DOR) issued a memorandum regarding renewable energy resources and battery energy storage systems to clarify prior communications and provide additional guidance to taxpayers and counties. The memorandum provides an overview of the renewable energy exemption, which must be applied for and granted by the Kansas Board of Tax Appeals, and it outlines the application process and includes links to the forms that must be used. (There are different forms for wholesale customers and retail customers.) An exemption granted to a renewable energy project will last for 10-years; an annual renewal application must be submitted to the county. The KS DOR explained that when a renewable energy project comes on the tax roll after the expiration of the exemption, it "would not typically qualify for the … . [personal property commercial and industrial machinery and equipment (CIME) exemption … " The memorandum also discusses the battery energy storage system (BESS), which are "designed to capture, store, and release electrical energy when needed." The KS DOR said that such systems (1) may not be included in the renewable exemption if they are "not actually and regularly used predominantly to produce and generate electricity utilizing renewable energy resources or technologies," and (2) may not be eligible for a CIME exemption when the BESS and other items are considered a component or addition to electric generation facility that is used predominately to produce and generate electricity utilizing renewable energy resources or technologies. The BESS and other items, however, may qualify for the CIME exemption when they are found to be personal property distinct and separate from, and not an addition to or component of, an electric generation facility using renewable energy resource. Other topics covered by the memorandum include lease agreements, valuation and assessment of renewable energy property when it comes on the tax roll after the expiration of the exemption, data tracking, buildings with renewable energy equipment integration applying for the renewable energy exemption, and when a renewable energy system requires maintenance or repower. Kan. Dept. of Rev., Memorandum "Renewable Energy Resources & Battery Energy Storage Systems (BESS)" (Sept. 17, 2024). Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) issued a bulletin to provide guidance on the application of the state's Realty Transfer Tax (RTT) to transfers from a decedent's estate where consideration is exchange. Under Pennsylvania law, the RTT is imposed on the value of real estate transferred by deed, instrument, long-term lease or other writing. RTT is due on every document unless an exemption applies. For RTT purposes, the estate exemption is provided for transfers for "no or nominal actual consideration" of property passing from the personal representative of the decedent's estate to a decedent's devisee or heir. The PA DOR makes clear that "no or nominal actual consideration" means a donative transfer; nothing of value can be given in exchange for the transfer of real estate. Consideration "is not limited to cash consideration," it "can be anything of value," including liens or encumbrances on the real estate. The PA DOR further explained that a payment to the estate can include paying off the estate's debts or satisfying/assuming a mortgage on the real estate. An exception to this rule applies if the consideration is less than the value of the real estate. The guidance describes when the family exemption applies to the transfer of real estate to an heir, and it include various examples. Pa. Dept. of Rev., Realty Transfer Tax Bulletin 2024-01 (Oct. 18, 2024). COMPLIANCE & REPORTING Indiana: The Indiana Department of Revenue issued updated tax information bulletins on the pass-through entity tax (PTET) and composite return filing requirements for partnerships, S corporations and trusts (hereafter, pass-through entity (PTE)). Under Indiana law, a PTE is required to file a composite return on behalf of its nonresident partners and shareholders. Updates to the PTET bulletin reflect that: (1) the revised computation of income subject to withholding and PTET will be used starting in 2025 and later instead of 2024 (a similar update was made to the composite return bulletin); (2) PTET flows through to the grantor and should be treated as such by the grantor trust; (3) estimated tax penalties will not be imposed in 2023 and 2024; and (4) the determination of the safe harbor for payments will be based on combined PTET and composite withholding. Updates to the composite return bulletin clarify that the 90% safe harbor for tax reasonably expected to be due provision only applies if the PTE makes the PTET election, among other clarifications. Ind. Dept. of Rev., Income Tax Information Bulletin #72 and Income Tax Information Bulletin #72B (Oct. 2024). CONTROVERSY Massachusetts: Reminder - The Massachusetts 60-day tax amnesty program authorized by the FY 2025 budget bill (HB 4800) will run from November 1, 2024 through December 30, 2024. Amnesty applies to tax returns due on or before December 31, 2024. The commissioner will waive most penalties for taxpayers that participate in the amnesty program and come into tax compliance by filing outstanding returns and paying tax and interest owed for the periods covered by the returns. (The commissioner is not authorized to waive interest charges.) Penalties will not be waived, however, for any period for which taxpayers do not properly file a return by December 30, 2024. Taxes eligible for penalty waiver under the amnesty program include, but are not limited to, the corporate combined excise tax, corporate excise tax, entity level (63D) tax, financial institution excise tax, sales and use tax, fiduciary income tax, life insurance excise tax, partnership income tax, personal income tax, estate tax, inheritance tax, withholding, withholding-pension, room occupancy tax, satellite service tax, special fuel tax, gasoline fuel tax, aviation gasoline tax, alcoholic beverages excise tax, urban redevelopment excise tax, cigarette tax, cigar tax, marijuana excise tax, motor vehicle excise tax, motor vehicle sales-use tax, meals tax (before July 1, 2024) and meals, food and beverage tax. Amnesty does not apply to penalties the commissioner does not have the sole authority to waive, such as penalties associated with the fuel taxes administered under the International Fuel Tax Agreement and the local portion of taxes or excise taxes collected for cities, towns or state government authorities. In addition, the MA DOR indicated that eligible non-filers who have not previously been contacted by the DOR may be subject to a three-year limited look-back period. Non-filers will not qualify for limited look-back if (1) they have been contacted by the MA DOR about unfiled returns, (2) they are reporting trustee taxes (e.g., sales, use, meals, withholding) that were collected but not paid, or (3) they are filing an estate tax return. The MA DOR has posted Tax Amnesty 2024 FAQs, which describe how to request amnesty as well as the terms and conditions of the amnesty program, among other topics. For more on the amnesty program, see Tax Alert 2024-1819. PAYROLL & EMPLOYMENT TAX Federal: Proposed legislation entitled the Multi-State Worker Tax Fairness Act of 2024 (H.R. 10026) would limit the ability of a state to impose tax on the income of a nonresident individual telecommuter and other multi-State workers to the period of time when such individual is present in or physically working in the state for "any period of time." A state could not impose income tax on the compensation of a nonresident for "any period of time" when the nonresident is physically present in another state. A State could not deem a nonresident individual present in or working in the State when: (1) the nonresident individual is present at or working at home for convenience, or (2) their work at home or home office fails any convenience of the employer test. In determining the "period of time" with respect to compensation paid, a State could not deem a period of time when the nonresident individual is physical present in another State and performing certain tasks in the other State to be: (1) time that is not normal work time (unless deemed as such by the employer), (2) nonworking time (unless deemed as such by the employer), or (3) time with respect to which no compensation is paid (unless deemed as such by the employer). If approved as currently proposed, these provisions would take effect upon enactment. H.R. 10026 was introduced on October 22, 2024. MISCELLANEOUS TAX Washington: The Washington Department of Revenue (WA DOR) issued for public comment a draft Excise Tax Advisory (ETA) on non-fungible tokens (NFTs). The draft ETA defines key terms, includes various examples, and provides general guidance regarding the imposition of business and occupation (B&O), retail sales tax and use tax on transactions involving NFTs. The WA DOR explained that in determining the proper tax treatment of an NFT, taxpayers should consider the following: (1) the underlying product (e.g., a good or a service or other item of value) that represents the NFT; (2) the number of products the transaction represents; (3) the B&O, sales and use tax treatment of the underlying product; and (4) the parties to the transaction (e.g., a purchaser, consumer or reseller). The WA DOR said if there is only one product representing the NFT, then the B&O, sales and use tax treatment is determined by the nature of the underlying product. Thus, if the underlying product is taxable tangible personal property, the sale of the NFT is taxed as the sale of tangible personal property. And if the purchaser is a consumer and the sale is in Washington, the sale would generally be subject to the B&O tax under the retailing classification. In this situation, the seller would collect retail sales tax. If the NFT represents two or more distinct and identifiable products at a single price, the sale or exchange of the NFT would be treated as a bundled transaction and the purchaser of the NFT is the consumer of the products. In addition, the draft ETA addresses the following topics: (1) selling price; (2) sourcing; (3) bundled transactions; (4) marketplace facilitators and marketplace sellers; (5) apportionment of non-retail activities; (6) royalties, burning and minting; (7) use tax; and (8) reselling activities. The draft ETA does not address topics on advanced computing surcharge, exemptions, exclusions, deductions, credits or other incentives that may apply. This ETA replaces the WA DOR's July 1, 2022 interim statement on the taxability of NFT (and any prior conflicting rulings or written reporting instructions provided to taxpayers). Comments on the draft ETA are due by November 18, 2024. Wash. Dept. of Rev., Draft ETA 3XXX.20XX (released Oct. 2024). VALUE ADDED TAX International — Slovakia: An amendment to the Slovakian VAT Act, which the President signed on October 18 after the amendment had passed Parliament, increases the general VAT rate from 20% to 23% from January 1, 2025. At the same time, the reduced VAT rate of 10% will cease to exist. Instead, a new reduced 19% rate is being introduced. The second reduced VAT rate of 5% remains in place. For more on this development, see Tax Alert 2024-1947. UPCOMING WEBCASTS November 19, 2024. State Tax Navigator quarterly series: A focus on state tax matters for banking, capital markets & insurance industry members (1 pm ET). Please join us for this installment of our quarterly webcast, which will focus on navigating complexities in state tax, with a specific focus on issues that are top of mind for tax professionals in the banking, capital markets & insurance (BCMI) sectors. In this webcast, panelists will: (1) provide an update on state fiscal conditions, pending legislation of interest and policy watchlists; (2) highlight hot topics in state tax of relevance to BCMI sector participants; (3) explore particular state-specific issues for the BCMI sector: hear from our state tax desks, this quarter featuring Illinois and Massachusetts; and (4) share an artificial intelligence/technology tidbit featuring a use case for BCMI sector members. Register. December 4, 2024. Domestic tax quarterly webcast series: A focus on state tax matters (1 pm ET). With the current fiscal environment, states are looking to increase tax revenue without creating new taxes. This leaves those tasked with managing their business' sales-and-use-tax function with a critical endeavor — properly characterizing what is being sold. For our final quarterly webcast in 2024, members of EY's Sales and Use Tax Practice will discuss how changing state policies can shift this characterization. They will also cover sales-and-use-tax audit trends and leading practices around this critical determination. In this webcast, we will also complete our four-part series on the use of artificial intelligence (AI) in state and local taxation. Part IV will focus on potential applications of generative AI in the tax profession, particularly leveraging agents and digital teams. 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, trends from 2024 state legislative sessions and the policy considerations going into the 2025 legislative sessions. 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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