17 January 2025 State and Local Tax Weekly for December 20, 2024 and January 3, 2025 Ernst & Young's State and Local Tax Weekly newsletter for December 20, 2024 and January 3, 2025 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. On December 3, 2024, the District Court of Travis County, Texas issued its final judgement in an action brought by six Texas municipalities challenging the Comptroller's attempt to adopt new rules determining how the state sources local sales tax revenue associated with online transactions shipped from locations within the State. The new rules, which were proposed and adopted by the Comptroller in 2020, would have added new provisions to 34 TAC Section 3.334 that would have required sellers to source online sales to the location of the buyer rather than to the location of the seller's business. Origin-based local sales tax sourcing, which the new rules would have eliminated, has been a long-standing Texas policy. See Tex. Tax Code Section 321.203; Texas Tax Publication 94-105 (April 1, 2022). The municipalities challenged the Comptroller, arguing that the new sourcing rules conflicted with existing state laws, were not adopted in compliance with the Texas Administrative Procedures Act (APA), and would cause them to lose significant sales tax revenue. In 2021, the District Court granted the municipalities a temporary injunction delaying implementation until it reached a final decision. In striking down the new rule, the court determined that the Comptroller had failed to comply with provisions of the APA and that the new rules "contravened specific statutory language" contained in the State's sourcing law. City of Round Rock, Texas et.al. v. Comptroller, Case No. D-1-GN-21-003198 (Tex. Dist. Ct., Travis Cnty., Dec. 3, 2024). California: The validity of a recent law change to California's corporate income tax apportionment provisions made by SB 167 (enacted June 27, 2024) are being challenged. SB 167 added new statutory provision Cal. Rev & Tax Code Section 24831.6, which provides that when a corporation receives income that is excluded from taxable business income, it must also exclude this income from its apportionment factor.1 In creating this provision, the Legislature stated that its intent is that: (1) FTB Legal Ruling 2006-1 on the treatment of apportionment factors attributable to income exempt from California's corporate income tax "apply with respect to apportionment factors attributable to the income of taxpayers subject to tax under the Corporation Tax Law," and (2) new Cal. Rev & Tax Code Section 24831.6 "apply to any apportionment formula currently and formerly allowed … " This change applies to tax years beginning before, on or after the effective date of SB 167, and took effect immediately. The plaintiff is seeking an order adjudicating that the new statutory provision "is not a clarification of, or statement of, prior law under the separation of powers doctrine … " and it "violates due process limitations on retroactive tax legislation." Cal. Taxpayers Association v. Cal. Franchise Tax Bd., Case No. 24CECG03564 (Notice of Motion and Motion for Summary Adjudication, filed Dec. 12, 2024 with the Cal. Superior Ct., Cnty. of Fresno). Hawaii: The Hawaii Department of Taxation adopted temporary administrative rules (Haw. Admin. Rule Sections 18-235-201-01 to -09) implementing the state's elective pass-through entity tax (PTET). Topics addressed by the rules include: (1) making the PTET election (the election must be made by the prescribed due date, failure to timely file constitutes a waiver of the election); (2) electronic filing of all PTET returns, schedules, statements and other documents required to be filed for the tax year in which the PTET election is made — failure to file the documents electronically may result in the PTET election being cancelled; (3) paying PTET due via electronic funds transfer and making estimated PTET payments; (4) filing a detailed schedule of each member's share of PTET paid; (5) claiming a refund of PTET paid; (6) PTET credit allowed each member of an electing PTE; and (7) credits allowed for substantially similar taxes paid to other states. The rules include examples. The temporary rules took effect on January 2, 2025 and expire on July 2, 2026. Haw. Dept. of Taxn., (Haw. Admin. Rule Section 18-235-201-01 to -09 (adopted Jan. 2, 2025). Iowa: The Iowa Department of Revenue (IA DOR) updated deadline information for making the pass-through entity tax (PTET) election. The IA DOR said that the tax year 2022 PTET election had to be made by the later of April 30, 2024 or the due date for filing the 2022 IA 1065 or 2022 IA 1120S (including extensions). For tax years 2023 and later, the PTET election must be made by the date that is six months after the original due of the PTE's IA 1065 or IA 1120S income tax return. For the tax year 2023 (or short tax year 2024) PTET election, the IA DOR said that for a limited period it will allow certain PTEs that missed the deadline to make the election. To qualify, (1) the PTE's PTET election deadline must have expired before January 1, 2025; (2) the PTE filed its IA 1065 or IA 1120S tax return by the PTET election deadline, but did not make a PTET election; and (3) the PTE makes the PTET election on an amended IA 1065 or IA 1120S tax return filed by April 30, 2025. The IA DOR noted that while this relief allows certain PTEs to make the PTET election after the deadline, it does not relieve the electing PTE of any penalties or interest for failure to timely file a return or to timely pay tax due. Iowa Dept. of Rev., Pass-Through Entity Tax (PTET) webpage (updated Dec. 20, 2024). Michigan: New law (SB 1050) modifies the Income Tax Act to treat a telephone corporation that converts into a limited liability company under section 7 of 1883 PA 129, MCL 484.7 as a corporation for state income tax filing purposes unless the converted entity is a disregarded entity for federal income tax filing purposes and its regarded owner was treated as a corporation for both federal and state income tax purposes. Mich. Laws 2024, Pub. Act 177 (SB 1050), signed by the governor on December 23, 2024. Michigan: The Michigan Department of Treasury (MI DOT) issued an updated revenue administrative bulletin (RAB) on the state's alternative apportionment provisions for Michigan Business Tax (MBT), Corporate Income Tax (CIT) and Income Tax to address recent judicial developments. The RAB addresses the procedures and standards governing the use of an alternative apportionment formula, including (1) when a taxpayer must submit a request to use an alternative apportionment formula and the information that must be included in the request; (2) the criteria for evaluating requests for alternative apportionment (e.g., the standard of proof that must be met in order to use an alternative apportionment formula, proving the statutory method does not fairly reflect the taxpayer's business activity in the state, showing quantitative and qualitative distortion, and proving the proposed alternative apportionment formula is reasonable); (3) when the use of an alternative apportionment formula is appropriate, with examples of gross distortion and extraterritorial taxation; (4) invalid requests for the use of an alternative apportionment; (5) the MI DOT's review and response to a taxpayer's request to use an alternative apportionment formula; and (6) when the MI DOT may impose an alternative apportionment formula. Mich. Dept. of Treas., RAB 2024-24 "Alternative Apportionment for the Michigan Business Tax, Corporate Income Tax, and Income Tax" (Dec. 17, 2024) (replaces RAB 2018-28). New York: The New York Department of Taxation and Finance (NY DOTF) extended the current deriving receipts from activity in New York State and in the Metropolitan Commuter Transportation District (MCTD) thresholds for purposes of imposing the Article 9-A franchise tax and the MTA surcharge. Accordingly, the deriving receipts threshold of $1,283,000, which first applied to tax years beginning on or after January 1, 2024, remains through tax years beginning before January 1, 2026 (from January 1, 2025). Additional rules and thresholds apply to unitary groups and corporate partners and corporate members. N.Y. Dept. of Taxn. and Fin., Webpage "Deriving receipts for Article 9-A tax and MTA Surcharge" (last updated Dec. 12, 2024). Arizona: The Arizona Department of Revenue (AZ DOR) issued a tax ruling on determining (1) "substantial nexus" for purposes of Arizona transaction privilege tax (TPT), county excise tax, use tax, and city privilege tax and (2) the appropriate tax rate for calculating TPT. An out-of-state business will establish substantial nexus with Arizona through a physical presence or economic nexus. A business with a physical presence is subject to TPT under all classifications and may rely on Arizona's sourcing rules to determine the proper tax rate for each classification.2 Out-of-state businesses that meet the economic nexus threshold, but do not have a physical presence, are subject to TPT under the retail classification. City Privilege Taxes, which are imposed on the vendor, are administered under the Model City Tax Code (MCTC). The AZ DOR said that while all Arizona cities follow the MCTC in the imposition of their privilege tax, options exist that allow each city to alter or qualify the imposition of its privilege tax. Further, the AZ DOR said that a business that has nexus with Arizona "has nexus with all municipalities to which its sales are sourced within the State and is subject to all applicable city privilege taxes." The tax ruling includes several examples. Ariz. Dept. of Rev., Transaction Privilege Tax Ruling TPR 24-1 (Dec. 6, 2024). District of Columbia: New law (B25-0277) clarifies that the District of Columbia's sales tax exemption applies to landscape architecture services performed by a District of Columbia-licensed landscape architect or provided by a professional design firm that employs such architect. This law change applies upon the date of inclusion of its fiscal effect in an approved budget and financial plan. D.C. Laws 2024, L25-0237 (B25-0277), became law on Dec. 17, 2024. Georgia: In response to a ruling request, the Georgia Department of Revenue (GA DOR) found a company's sales of design software that it loads onto USB keys (a tangible medium) and ships to its Georgia location for pick-up by customers are subject to the state's sales and use tax, including sales of USB keys that a customer picks-up at the Georgia location and subsequently distributes to its employees outside the state. The GA DOR said that these sales are sourced to Georgia because the software is shipped to the state by the seller and picked up in the state by the customer. The GA DOR noted that Georgia, unlike some other states, does not have a multiple point of use tax exemption that would apply to sales of software ultimately used outside the state. Ga. Dept. of Rev., LR SUT-2024-02 (Nov. 25, 2024). Illinois: New law (HB 4636) modifies the definition of "prepaid telephone calling arrangements" under the Retailers' Occupation Tax to remove a provision that starting on and after January 1, 2025, would have required the telephone or telecommunications services included in a prepaid telephone calling arrangement be obtained through the purchase of a preloaded phone, calling card or other item of tangible personal property. HB 4636 took effect December 20, 2024. Ill. Laws 2024, Pub. Act 103-1055 (HB 4636), signed by the governor on December 20, 2024. Illinois: The Illinois Department of Revenue issued a bulletin summarizing local sales tax rate changes that took effect on January 1, 2025, for purposes of business district sales taxes, home rule municipal sales taxes and non-home rule municipal sales taxes. Ill. Dept. of Rev., Informational Bulletin: "FY 2025-12, Sales Tax Rate Change Summary, Effective January 1, 2025" (Nov. 2024). Louisiana: Following the enactment of various tax law changes in December 2024, the Louisiana Department of Revenue (LA DOR) has issued bulletins to address certain changes.3 Revenue Information Bulletin (RIB) No. 25-007 (Dec. 23, 2024) provides notice on changes to the state's sales and use tax rate. As of January 1, 2025, the aggregate state sales and use tax rate is 5% and it applies to sales and use of tangible personal property, certain services and digital products. The new 0.55% rate does not apply to certain sales of materials and services for construction contracts that meet all the requirements set forth in La. R.S. 47:305.11. In RIB No. 25-006 (Jan. 1, 2025), the LA DOR discusses changes to the state's sales tax deduction for vendor's compensation, which effective January 1, 2025 is reduced from $1,500 to $750 per month. Texas: The Texas Comptroller of Public Accounts determined that for purposes of the optional single local use tax rate for remote sellers, the estimated average rate of local sales and use taxes imposed in Texas during the preceding state fiscal year ending August 2024 is 1.75%. This rate will be in effect for the period from January 1, 2025 to December 31, 2025. Tex. Comp. of Pub. Accts., Texas Register "In Addition" (49 TexReg 10411 Dec. 20, 2024). Illinois: New law (HB 4636) modifies the tax credit for hiring returning citizens, by providing that for tax years ending before December 31, 2025 (from tax years ending before December 31, 2024) the amount of credit allowed for each qualified returning citizen hired is limited to $1,500. A previously enacted law change increases the amount of the credit that can be claimed to $7,500 effective for tax years ending on or after December 31, 2025. HB 4636 took effect December 20, 2024. Ill. Laws 2024, Pub. Act 103-1055 (HB 4636), signed by the governor on December 20, 2024. Illinois: New law (SB 3410) extends the apprenticeship education expense credit, which can be claimed against the state's income tax, through tax years beginning on or before January 1, 2026 (from January 1, 2025). SB 3410 took effect upon becoming law. Ill. Laws 2024, Pub. Act 103-1059 (SB 3410), signed by the governor on December 20, 2024. Iowa: The Iowa Department of Revenue recently issued tax credit evaluation study reports for several tax credits, including the retailers' biofuel tax credits (which covers the E15 plus gasoline promotion tax credit, E85 gasoline promotion tax credit, biodiesel fuel tax credit and ethanol promotion tax credit), wind energy production and renewable energy tax credit, angle investor tax credit and historic preservation tax credit. The IA DOR is required to evaluate each state tax credit at least once every five years. The evaluations review a tax credit's equity, simplicity, competitiveness, public purpose, adequacy and the extent the credit meets its legislated purpose. The reports were issued on December 3, 2024, except the biofuel tax credits report which was issued on November 19, 2024. District of Columbia: On December 20, 2024, the Deputy Chief Financial Officer of the District of Columbia Office and Tax Revenue (OTR) gave public notice of its second proposed amendment to rules (Prop. D.C. Mun. Regs. tit. 9, Section 105.14) that would require taxpayers filing returns with the District of Columbia to submit a copy of their federal income tax return (including any schedules or other information provided to the Internal Revenue Services), subject to certain income thresholds (e.g., corporations, unincorporated businesses and partnerships with gross income for the tax year exceeding $2.5 million worldwide and $50,000 apportioned to the District). This change was first proposed in October 2024. The December notice indicates that the regulations are being re-proposed to specify that the copy of the federal income tax return must be in electronic form. The OTR intends to adopt the second proposed amendment no less than 30 days from the publication of its notice. Prop. D.C. Mun. Regs. tit. 9, Section 105.14 (D.C. Register, Dec. 20, 2024). Louisiana: The Louisiana Department of Revenue adopted amendments to rule LAC 61:I.1001 and 1302 to set forth information and documentation that must be provided by taxpayers claiming the pass-through entity (PTE) exclusion and nonresident individuals reporting a net operating loss (NOL). As amended, LAC 61:I.1001 requires individual and fiduciary income taxpayers that have an ownership interest in a PTE that makes an election to be subject to the PTE tax and is claiming the PTE exclusion to submit a copy of Form R-6981 "Louisiana Statement of Owner's Share of Entity Level Tax Items." Nonresidents are required to submit a pro forma NPR Worksheet of the Louisiana Form IT-540B that excludes any income, deductions or other tax items that were included in the calculation of the PTE's Louisiana net income on its Louisiana Form CIFT-620 (instead of a pro forma Federal Form 1040.) Amendments to LAC 61:I.1302 lists the documentation a nonresident claiming the NOL deduction must provide, with specific requirements for: (1) when a year produces a Louisiana NOL; (2) when an NOL carryback or carryover is used; and (3) when federal law provides for the carryback of an NOL. Amendments to both provisions suspend the accrual of interest for the period of time that the issuance of a refund is delayed due to the taxpayer's failure to provide the required information or documentation. The amended rules were adopted on December 20, 2024. New Hampshire: The New Hampshire Department of Revenue Administration revised the filing thresholds for the business enterprise tax (BET) and the business profits tax (BPT). For tax periods beginning on January 1, 2025 the BET (gross business receipts or enterprise value tax base) filing threshold is $298,000, while the filing threshold for the BPT is $109,000. N.H. Dept. of Rev. Admin., TIR 2024-004 (Dec. 17, 2024). Multistate: Six jurisdictions (California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island) operate state disability insurance (SDI) programs. Another 16 jurisdictions (California, Connecticut, Colorado, Delaware, District of Columbia, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Oregon, Rhode Island, Vermont and Washington) now have, or soon will have, paid family and medical leave (PFML) insurance programs. Washington is currently the only jurisdiction with a long-term care (LTC) insurance program. Depending on the jurisdiction, the employee may pay all contributions to the SDI, PFML or LTC program through wage withholding, or the employer and the employee may share the cost of the insurance coverage. Most states allow employers to use a private insurance company or self-insured plan in lieu of paying into the state insurance fund(s). The chart in Tax Alert 2024-2362 shows the state SDI, PFML and LTC rates and taxable wage limits for 2025 based on information currently available. Multistate: During our December 10, 2024, webcast, 2024 Employment tax year in review, panelists discussed numerous federal state and local topics to consider for year-end 2024 and 2025. The replay of the webcast is available here. For links to various year-end special reports, see Tax Alert 2024-2307. Hawaii: Governor Josh Green signed into law HB 2404, which increases the standard deduction every two years through 2031 and raises the income tax limits that apply to the income tax brackets in tax years 2025, 2027 and 2029. The income tax withholding formula and withholding tables will first be adjusted to reflect the law change for tax year 2025 (no withholding changes apply to tax year 2024). Haw. Dept. of Taxn. Announcement 2024-03 (June 3, 2024). For more on this development, see Tax Alert 2024-2325. Louisiana: On December 4, 2024, Louisiana Governor Jeff Landry signed into law HB 10, which, effective January 1, 2025, significantly changes the personal income tax system by replacing the existing three income tax brackets, with tax rates ranging from 1.85% to 4.25%, to a flat tax rate of 3% for all filers. HB 10 also raises the standard deduction from $4,500 to $12,500 for taxpayers who are single or married filing separately and from $9,000 to $25,000 for taxpayers who are married filing jointly, heads of household or surviving spouse. Beginning January 1, 2026, and thereafter, the amount of the standard deduction will be adjusted annually by the percentage increase in the Consumer Price Index. Also, effective January 1, 2025, the retirement income exemption doubles from $6,000 to $12,000 and beginning in 2026 will be adjusted annually by the percentage increase in the Consumer Price Index. For more on this development, see Tax Alert 2024-2322. Maryland: Governor Wes Moore signed into law SB 38, which effective October 1, 2024, expands information that employers are required to include in employee pay stubs/statements and related employee notices. The new law applies to all private-sector employers with at least one employee. The law does not apply to state, county or local governments. An individual considered an employee for Maryland tax law purposes is also considered an employee for purposes of these new requirements. The Maryland Department of Labor states that employers should comply with the requirements as soon as they can do so but interprets the law to apply to pay periods that begin on or after October 1, 2024. For more on this development, see Tax Alert 2024-2348. Washington: The Washington Department of Revenue issued a special notice on the state's new business and occupation (B&O) tax classification for real estate commissions, reminding taxpayers that a new real estate commissions B&O tax classification is included on the excise tax returns for 2025. Before 2025, real estate commissions were reported under the service and other activities B&O tax classification. Only commissions earned from sales of real estate taxable under RCW 82.04.255 are included in the real estate commission classification; non-commission income (such as income from property management services or shared expenses) is still included under the service and other activities B&O tax classification. Wash. Dept. of Rev., Special Notice "New B&O tax classification for real estate commissions" (Dec. 12, 2024). Federal — International: The December 2024 edition of Trade Talking Points provides updates on the following: (1) the new European Union (EU) Commission; (2) EU-MERCOSUR partnership agreement; (3) application of the EU's General Product Safety Regulation; (4) the US-Taiwan Initiative on 21st Century Trade; (5) US export controls; (6) Chinese export restrictions; and (7) US and UK trade remedies. For more on this development, see Tax Alert 2024-2297. January 22, 2025. Preparing your operating model for 2025's expected trade shifts (2:00-1:00 pm ET / 9:00-10:00 am PT). Substantial tax and trade policy changes are likely under the new administration. Companies need to closely examine their operating models and supply chains to identify risks and explore ways to manage increased tariff and non-tariff barriers. The issues are complex, and changes could happen quickly. Those with global supply chains need to know what to expect, when to expect it and how to prepare now. Join EY tax, trade and supply-chain strategy professionals for the second in a four-part series of webcasts on the ins and outs of trade policy and its impact on companies' supply-chain and operating model effectiveness. The following topics will be discussed: (1) the expected 2025 trade and tax legislative landscape; (2) trade items to watch; and (3) steps to take now. 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. 1 For purposes of this provision, "not included in 'net income'" is defined as "income from transaction and activities that is not included in net income subject to apportionment for any reason, including … exclusion, deduction, exemption, elimination, or nonrecognition." 3 For more on the Louisiana law changes enacted in December 2024, see Tax Alert 2024-2266. Document ID: 2025-0275 |