Ernst & Young's State and Local Tax Weekly newsletter for November 15 and November 29 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

Massachusetts Department of Revenue issues draft amendments to its computer software regulation

The Massachusetts Department of Revenue (MA DOR) issued a working draft of amendments to regulation 830 CMR 64H.1.3 "Computer Software and Related Transactions" (draft regulation), which would replace the current regulation "Computer Industry Services and Products." According to the draft regulation's summary, these changes "are intended to clarify the statutory rules … ."

Massachusetts sales and use tax generally applies to sales, purchases, licenses, or other right to use or consume transfers of standardized computer software, regardless of how it is delivered, accessed, used or consumed. The taxability of a transaction would depend on whether software is transferred or otherwise made available for customer use, and not on how it is characterized by the parties. The draft regulation describes indicia that a transaction is a taxable sale of standardized software. An otherwise taxable transfer, however, may qualify for a statutory exemption, such as the manufacturing exemption or sale for resale.

Software transferred as part of or in connection with a service for a single charge is taxable. An exception to this general rule would apply when the software transferred is "an inconsequential element of a professional, insurance, or personal service transaction" and the charge for the software is not separately stated. A transfer of software would not be "an inconsequential element of the transaction" if the value of the software exceeds 10% of the total transaction charge, and it would be "presumptively not an inconsequential element of a transaction" if the software is an essential component of the transaction. Circumstances under which software would be considered an inconsequential element of a transaction include when there is not a separate charge for the transfer of software to the customer and the customer uses the software to access a distinct service not performed by the software (e.g., booking a ride-share, accessing digital information, streaming digital content).

Under Massachusetts law, the taxable sales price of software sold, or purchased for use, in the state includes the value of any service provided as part of the sale,¹ including charges for services that are a required component of the software transaction such as charges for required server and desktop maintenance. Taxable sales price would not include charges for optional services that are reasonable and separately stated.

Regarding bundled transactions, charges for services generally are not taxable when they are separately billed or itemized from a charge for taxable standardized software or other taxable item, the purchase of the service is optional, and the separate charge is reasonable and stated in good faith. A separately stated service charge, nevertheless, would be included in the taxable sales price if it relates to the functionality of purchased software or the right to use the software. Mandatory charges the purchaser must pay to acquire or use the software would be included in the taxable sales price, regardless of whether the charge is separately stated.

The draft regulation includes examples of whether standardized software is an inconsequential element of a service transaction when there is a single charge for software and services, and examples that evaluate whether separately stated charges billed to a customer as part of a transaction transferring software is taxable.

Businesses may apportion tax on sales of software for use in Massachusetts and other states, if the business is registered with, and received a Software Apportionment Certificate (certificate) from, the Commissioner and meets the requirements in 830 CMR 64H.1.3(5). As set forth in 830 CMR 64H.1.3(5), a business with a certificate can either apportion the tax at the time of the transaction based on anticipated use of the software or after the transaction based on actual use of the software. The calculation of the apportionment percentage under the actual use option would include use of the software by the purchase and any agents or affiliates that use the software. In calculating the software use on an anticipated basis, the apportionment rules in 830 CMR 64H.1.3(5)(d)(2) would be applied prospectively. Specific apportionment methods would be provided for (1) software licensed for use by purchaser's employees, (2) software licensed to run the purchaser's computer hardware of other systems, and (3) software licensed for primary use by customer.

A purchaser would have to reasonably and consistently apply the apportionment percentage to the software's sales price or license fee. If the software is sold on a per-user basis and the charges are the same for all users or if it is sold for a lump sum charge, the apportionment percentage would apply to the total charge. When software is sold on a per-user basis and varying fees apply, the purchaser must apply the appropriate apportionment percentages as determined by 830 CMR 64H.1.3(5)(d). If the purchase price is not based on the actual number of users, apportionment would be based on the expected use of the license period.

The Commissioner would be able to require the use of an alternative apportionment method when the statutory method does not reasonable represent the use of the software in the state. Further, if the purchaser is using an alternative method that reasonably estimates its use of purchased software, they would not be allowed to subsequently use an alternative method that apportions a lower amount of use to Massachusetts.

In addition to the certificate, purchasers would also have to provide a written statement to its vendor that (1) certifies a reasonable apportionment percentage to apply to the transaction, (2) describes the anticipated in-state use of the software, and (3) other information the Commissioner deems necessary or helpful. The purchaser would have to provide both the certificate and the apportionment statement to the vendor at the time of purchase.

Vendors would be responsible for collecting and remitting sales and use tax using an apportionment percentage. If the vendor accepts a purchaser's apportionment statement and certificate, tax would be collected as provided in the statement and the vendor would be relieved of any further collection obligation and would not be held liable for any tax deficiency. If the vendor does not receive these documents at the time of sale, tax would be collected on the full sales price of the transaction. The purchaser may subsequently provide the vendor with documentation to support the apportion the tax collected and remitted.

The draft regulation includes several examples on apportioning tax.

The MA DOR's intent is that "830 CMR 64H.1.3 supersedes all prior public written statements, including letter rulings, to the extent it is inconsistent with any such prior statements or portions thereof."

INCOME/FRANCHISE

Colorado: The Colorado Department of Revenue (CO DOR) issued for public feedback proposed Rule No. 39-22-509, which would provide guidance on the requirements for claiming alternative transportation options income tax credit. Under the general rule, an employer is allowed an income tax credit equal to 50% of the amount spent on providing alternative transportation options to employees who work in Colorado and use "generally accepted transportation demand management strategies" to commute to and from work. The draft rule explains that transportation demand management strategies would be generally accepted if they are (1) expressly listed as a credit-eligible alternative transportation option or (2) listed in this rule. Such strategies would include using an intercity bus, interregional mass transit, last-mile shuttle services, parking cash out, using the employee's e-bike or scooter, and walking. "Transportation demand management strategies" would not include: (1) telework and flexible work arrangements; (2) the acquisition, use or improvement of real property; (3) electric charging stations; (4) vehicles, bicycles, scooters and other micromobility modes of transportation provided to employees to travel among work and client sites or provided to employees as a fringe benefit; (5) prearranged rides unless they are provided under a guaranteed ride home program; and (6) transportation to special events. An employer would only be allowed to claim a credit for the amount it spends for alternative transportation options it makes available for all of its Colorado based employees, with limited exception for feasibility. The draft rule provides guidance on determining the "amount spent" for various transportation options and for calculating the amount spent per employee. To claim the credit, an employer would have to file form DR 1323 "Annual Employer Plan Report" in each year it intends to claim the credit. The CO DOR will hold a rulemaking hearing on the proposed rule on January 30, 2025. Additional information on the hearing, as well as teleconference information, is available here.

Louisiana: The Louisiana Department of Revenue (LA DOR) adopted 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 rule lists the documentation taxpayers claiming the deduction must submit at the time of filing their Louisiana individual income tax return; additional documentation is required for claims greater than $250,000. The rule sets forth eligibility restrictions. For instance, net capital gains will not qualify for the deduction when the transaction transfers ownership of the interest or assets to a related party. Net capital gains from the sale or exchange of real property or other immovable assets, however, may qualify for the deduction if more than 50% of such property or assets are in the state, if other criteria is met. The rule defines the following terms: "capital gains from the sale or exchange of the assets of a business," "commercial domicile," "controlled entities," "equity interest," "gross assets," "net assets," "net capital gains," "related party," "sale or exchange of an equity interest," and "sale or exchange of substantially all of the assets of a business." The rule was adopted on November 20, 2024.

SALES & USE

Delaware: The Delaware Division of Revenue (DE DOR) issued guidance on the state's short-term rental lodging tax, which was enacted earlier in the year.² Starting January 1, 2025, the short-term rental lodging tax is imposed at a rate of 4.5% on every occupancy of a short-term rental in the state. A "short-term rental" is defined as "a house, duplex, multi-plex, apartment, condominium, houseboat, trailer, or other residential dwelling unit where a tourist or transient guest rents sleeping or living accommodations for no more than 31 consecutive nights but excludes certain excepted rentals." The guidance list accommodations that do not fall within the definition of a "short-term rental" including hotels, motels, cabins, among other accommodations. The guidance explains the requirements, obligations and responsibilities of accommodations intermediaries. They are required to obtain an annual Delaware accommodations intermediary business license before providing accommodations intermediary services, and they are responsible for collecting and remitting the short-term rental lodging tax unless they have a contractual agreement with a hotel, motel, or other accommodations intermediary to collect and remit tax. The guidance explains when the short-term rental lodging tax must be collected, the way the tax must be reported and remitted, and when penalties and interest will be imposed for failure to file a return or pay tax due. The DE DOR also issued short term rental FAQs. Del. Div. of Rev., Technical Information Memorandum 2024-01 "Short-Term Rental Lodging Tax" (Nov. 15, 2024).

Illinois: The Illinois Department of Revenue (IL DOR) issued an informational bulletin, explaining that the amount of the retailers' discount for certain returns is limited to $1,000 per month. Retailers and servicepersons may claim the discount on returns filed by the due and only for a percentage of taxes paid by the due date. The maximum discount of $1,000 per month may be claimed for each of the following returns: (1) Form ST-1 "Sales and Use Tax and E911 Surcharge Return" (2) Form ST-70 "Aviation Fuel Sales and Use Tax Return" (3) Form CD-1, "Cannabis Dispensary Tax return" (the sales and use tax portion); (4) Form LSE-1 "Tax Return for Vehicle Leasing Companies" (5) Form ST-201 "Rental Purchase Agreement Occupation Tax Return" (6) Form ART-1 "Automobile Renting Occupation and Use Tax return" (7) Form CMFT-1 "County Motor Fuel Tax Return" and (8) Form MMFT-1, "Municipal Motor Fuel Tax Return." The IL DOR said that retailers should continue to calculate the discount using the appropriate discount rate for the tax as provided in the return instructions. Ill. Dept. of Rev., Informational Bulletin FY 2025-04, "Retailers' Discount for Certain Tax Returns Capped at $1,000 Per Month" (Oct. 2024).

Illinois: The Illinois Department of Revenue (IL DOR) issued an informational bulletin, explaining that for certain transaction returns due on or after January 1, 2025 — i.e., for vehicles with a delivery date on or after December 12, 2024, which corresponds with returns due in January 2025 — the amount of the retailers' allowance is limited to $1,000 per month. Retailers may claim the allowance on returns filed by the due and only for a percentage of taxes paid by the due date. Returns impacted by the discount cap include Form ST-556 "Sales Tax Transaction Return" and Form ST-556-LSE "Transaction Return for Leases." If both forms are filed in a single month, the returns are subject to a combined $1,000 discount for the month. The bulletin includes an example of the amount of discount allowed per return when multiple returns are filed in the same month. The IL DOR explained that for returns filed on or after January 1, 2025 retailers will no longer be able to use the allowance to reduce their tax remittance when filing Forms ST-556 and ST-556-LSE. Instead, the IL DOR will calculate the discount on the returns through a monthly reconciliation process. This process generally will occur 60 days after the end of the monthly liability period. After the process is completed, the IL DOR will issue a check for the discount amount. Ill. Dept. of Rev., Informational Bulletin FY 2025-11, "Retailers' Allowance for Certain Transaction Returns Capped at $1,000 Per Month" (Nov. 2024).

Illinois: The Illinois Department of Revenue (IL DOR) issued guidance to certain in-state and out-of-state retailers that before 2025 were obligated to collect and remit Illinois use tax on retail sales sourced outside the state and made to Illinois customers. Effective January 1, 2025, such sales will be subject to destination-based retailers' occupation tax (ROT)³ — i.e., the total state and local ROT rate calculated using the local rate in effect in the Illinois location to which the items are shipped or delivered or the purchaser takes possession. The IL DOR said that "[f]or destination-based sales, retailers must register a tax site for each jurisdiction (i.e., city or county) where it has made a sale or plans to make sales." The IL DOR will change out-of-state retailers registration status from use tax to ROT; after December 23, 2024 out-of-state retailers will be responsible for registering new sites to their accounts. The IL DOR noted that in-state retailers are responsible for registering new tax sites to their account for any sales sourced outside the state. The guidance list steps that affected retailers should take for sales made on or after January 1, 2025, including registering any changing location before filing the return for the period in which the sale took place, and reporting the destination-based sales on the proper lines of the tax form. The IL DOR noted that retailers may close their sales tax account if all their sales are made through a marketplace facilitator that has met the Illinois' tax remittance threshold. Ill. Dept. of Rev., Informational Bulletin FY 2025-10, "Retailers' Occupation Tax Guidance for Out-of-State Retailers and Certain Illinois Retailers, Effective January 1, 2025" (Nov. 2024).

Michigan: The Michigan Department of Treasury issued a revenue administrative bulletin (RAB) to update guidance describing on when lessees and lessors are liable for use tax on lease transactions and explains the application of sales and use tax to tangible personal property acquired for lease or rental. The RAB describes: (1) what constitutes a lease of tangible personal property; (2) the availability of the lessor election for a single mixed transaction if the property is incidental to the service provided; (3) the tax base of rental receipts; (4) how leases are sourced; (5) who the "lessor" is under the Use Tax Act; (6) the consequences of making a lessor election to pay use tax and using the property for non-leasing purposes; (7) when a lessee is liable for use tax; (8) when use tax is owed on a sublease; and (9) when a lessor owes use tax on property that is exempt from use tax or that is leased to a lessee is exempt from use tax. The RAB includes examples. Mich. Dept. of Treas., Revenue Administrative Bulletin 2024-18 (Nov. 13, 2024) (replaces RAB 2023-13).

Utah: The Utah State Tax Commission announced that effective January 1, 2025, Salt Lake City will impose a 0.5% capital city revitalization tax on all sales except motor vehicles, aircrafts, watercrafts, modular homes, manufactured home and mobile homes. Consequently, the City's combined state and City sales and use tax rate will increase from 7.75% to 8.25%. Utah State Tax Comm., Tax Bulletin 23-24 (Nov. 2024).

BUSINESS INCENTIVES

California: Governor Gavin Newsom is proposing to increase the annual cap on the state's Film and Television Tax Credit program from $330 million to $750 million. The governor said that this increase "would position California as the top state for capped film incentive programs … ." Cal. Gov., Press Release "Governor Newsome proposes historic expansion of film & TV tax credit program" (Oct. 27, 2024).

Massachusetts: The Massachusetts Department of Revenue issued a technical information release (TIR) on tax credits established and modified by the Affordable Homes Act. The TIR describes the new Massachusetts homeownership credit, the new qualified conversion project credit, and changes to the historic rehabilitation credit and to the community investment credit. The new Massachusetts homeownership credit is available starting in 2025 for qualified homeownership development projects authorized by the Massachusetts Housing Finance Agency (MHFA). The credit, while nonrefundable, can be transferred in whole or in part to any individual or entity. It is also subject to recapture if the MHFA determines that the project does not qualify for, ceases to qualify for or did not qualify for the credit. The new qualified conversion project credit is available 2025 through 2029 for conversion projects certified by the Executive Office of Housing and Livable Communities (EOHLC). The EOHLC will determine the amount of credit awarded to the project sponsor; the amount of the credit cannot exceed 10% of the qualified project's development costs. Excess credit is not refundable but it may be carried forward for 10 years. Like the new Massachusetts homeownership credit, the new qualified conversion project credit is transferrable and it is subject to recapture. The historic rehabilitation credit has been extended through 2030 (from 2027). Starting in 2024, the aggregate amount of credit available is increased to $110 million from $55 million. The community investment credit, which was set to expire in 2025, has been made permanent. In 2025 the annual credit limit is increased to $15 million from $12 million. Mass. Dept. of Rev., "TIR 24-16: Tax Credit Provisions in the Affordable Homes Act" (Nov. 26, 2024).

COMPLIANCE & REPORTING

North Carolina: The North Carolina Rules Review Commission approved amendments to 17 NCAC 05C .2004 "Extension of Filing Date," to extend the length of the corporate income tax filing extension to one month later than the federal extended due date. For tax years beginning on or after January 1, 2025, the filing extension for corporate taxpayers is seven-months from the original due date of the return. Before 2025, taxpayers granted an extension have six-months from the original due date of the return to file the return. The amended rule includes a list of elements that must be included with the form CD-419 "Application for Extension for Corporate Franchise and Income Tax," including total corporate income tax due, estimated income tax payments, total franchise and corporate income tax due with the application, and franchise tax paid. The amended rule, which was approved by the Rules Review Commission on October 30, 2024, takes effect January 1, 2025.

CONTROVERSY

Massachusetts: Reminder - The Massachusetts 60-day tax amnesty program authorized by the FY 2025 budget bill (HB 4800) will run 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.

Mississippi: The Mississippi Department of Revenue (MS DOR) expanded the way taxpayers may submit a voluntary disclosure agreement (VDA) application to include via email. The MS DOR's VDA program offers a limited lookback period, with prior year returns filed for the last three years or 36 months. The MS DOR will waive late file and late payment penalties. Taxpayers are responsible for computing and remitting taxes; the MS DOR will calculate interest due. VDA is generally available for income, corporate franchise, sales and use, and withholding taxes. Taxpayers are not eligible to participate in the VDA program if they have been contacted by the MS DOR for audit for any tax the MS DOR administers or if they have filed returns or have qualified to do business in the state and are not in compliance with their filing responsibilities. Taxpayers seeking to participate in the VDA may come forward anonymously. Once accepted into the VDA, taxpayers will have 60 days to provide the required information, file the appropriate forms and pay the amount due. Miss. Dept. of Rev., "Update on Voluntary Disclosure Agreement Program" (Nov. 8, 2024).

Pennsylvania: New law (SB 1051) makes various procedural and administrative changes. Namely, SB 1051 creates a voluntary settlement conference process available to both parties once an appeal is filed with the Pennsylvania Board of Finance and Revenue (BF&R). Under SB 1051 either party may request, or the BF&R may refer a case to a settlement conference before an impartial and unconflicted settlement officer.⁴ SB 1051 establishes a timeframe for requesting a settlement conference, objecting to participate in a settlement conference, referring a case to a settlement conference, scheduling and having a confidential settlement conference and either reaching a settlement and reporting the settlement to the BF&R or scheduling a hearing if a settlement is not reached. Settlement agreements are not precedential and may not be appealed. SB 1051 also increases the period in which a taxpayer may appeal a Personal Income Tax (PIT) assessment to the Board of Appeals (BOA) and to the BF&R to 90 days (from 60 days). Taxpayers may be granted an additional 30 days to file an appeal upon showing cause. The law applies the standard for determining whether a petition for reassessment was timely filed with the BOA — i.e., either actual receipt or a USPS postmark — to a petition for refund. Lastly, SB 1051 authorizes the Pennsylvania Department of Revenue (DOR) to enter into a written closing agreements with "any person relating to the liability of the person, or of the person or estate for whom the person acts, in respect of any tax administered by the [DOR] for any taxable period." These changes generally take effect January 27, 2025. Pa. Laws 2024, Act 123 (SB 1051), signed by the governor on October 29, 2024.

PAYROLL & EMPLOYMENT TAX

Multistate: The Social Security Act requires a reduction in the federal unemployment insurance (FUTA) tax credit when a jurisdiction has an outstanding federal unemployment insurance (UI) loan balance on January 1 of the second consecutive year and if the loan balance is not repaid in full by November 10 of that year. The reduction in the FUTA tax credit is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid. California, New York and the Virgin Islands are subject to a FUTA credit reduction in 2024 because they did not repay their FUTA loan balance by November 10, 2024. Except for the Virgin Islands, states subject to the FUTA credit reduction (0.9% for 2024) will pay a net FUTA rate of 1.5%, rather than a net FUTA rate of 0.6%. The additional FUTA tax owed due to the FUTA credit reduction will be shown on the 2024 Form 940, and the increase in FUTA tax is due on January 31, 2025. New York employers pay to the state a FUTA loan interest surcharge of 0.12%, or approximately $15 per employee. Virgin Islands employers continue to pay the territory a FUTA loan interest assessment of $25 per employee. For additional information on this development, see Tax Alert 2024-2121.

MISCELLANEOUS TAX

Delaware: The Delaware Division of Revenue announced that on January 1, 2025 the rate of the tax imposed by the Hazardous Substance Cleanup Act will increase to 1.120% (from 0.675%). The tax applies to taxable gross receipts from the sale of petroleum or petroleum products. Del. Div. of Rev., News Release "Revenue Announces New HSCA Rate Effective January 2025" (Oct. 28, 2024).

Pennsylvania: New law (HB 2177) delays the applicable date of the electric vehicle (EV) and plug-in hybrid electric vehicle (PHEV) fee, established by Act 85 (Laws 2024) to April 1, 2025 (from January 1, 2025). Pa. Laws 2024, Act 149 (HB 2177), signed by the governor on November 18, 2024.

GLOBAL TRADE

International — European Council: On November 19, 2024, the European Council adopted a proposed regulation (Regulation) on prohibiting, on the European Union (EU) market, products made with forced labor (EU Forced Labor Regulation or EUFLR). As this is the last step in the legislative process, the Regulation has been adopted. It will enter into force on the day following its publication in the Official Journal of the European Union and will apply three years after the date of entry into force. This means that these rules will impact imports and sales taking place as of late 2027 or early 2028. For more on this development, see Tax Alert 2024-2130.

VALUE ADDED TAX

International — Philippines: Republic Act no. 12023 (RA no. 120230), which imposes 12% VAT on digital transactions and services performed or rendered in the Philippines by residents or nonresidents, came into effect on October 18, 2024. Digital transactions/services are considered performed or rendered in the Philippines if the services are consumed in the Philippines. Under the new law, a digital service is defined as a service supplied over the internet or other electronic network with the use of information technology and where the supply is essentially automated. This includes online search engines, online marketplaces or e-marketplaces, cloud services, online media and advertising, online platforms and digital goods. For additional information on this development, see Tax Alert 2024-2058.

UPCOMING WEBCASTS

January 16, 2025. Observations and trends in unclaimed property: What your organization needs to know in today's environment (1:00-2:00 pm ET). Please join members of Ernst & Young LLP's Unclaimed Property and Escheat Services practice as they discuss recent trends and legislation in unclaimed property that could have an impact on your organization, including: (1) recent trends in enforcement from Delaware, such as verified report requests and compliance reviews; (2) observations related to organizations selected by states for examinations, self-reviews and self-audits and steps to take if your organization receives a notice; (3) challenges to accepted norms in the healthcare, transportation and financial services industries; (4) California's recently operational Voluntary Compliance Program; (5) proactive unclaimed property considerations during transactions, such as initial public offerings (IPOs) or mergers and acquisitions; and (6) opportunities to help prepare your organization for an audit-ready and efficient annual compliance program. 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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Endnotes

¹ M.G.L. c. 64H, Section 1.

² See Del. Laws 2024, ch. 474 (House Substitute 2 for HB 168 as amended by House Amendment No. 1).

³ See Pub. Act 103-983.

⁴ The settlement officer must be an attorney or certified public accountant with substantial knowledge of Pennsylvania tax law and may not be an employee of the DOR, BF&R or the Treasurer, other than in the capacity as a settlement officer.