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State and local tax advisor: May 2022

Authors: Mike Merkel, Ron Cook, Jeanette Tolar

May 26, 2022 / 27 min read

Have you heard about the latest changes in state and local taxes? Check out the May 2022 roundup here.

The states covered in this issue of our monthly tax advisor include:

All states

Personal income tax: U.S. Supreme Court denies SALT cap challenge

The U.S. Supreme Court denied a petition for certiorari from several states challenging the $10,000 state and local taxes (SALT deduction) cap on the federal individual income tax deduction. The group of states questioning the constitutionality of the cap included Connecticut, Maryland, New York, and New Jersey.

The states argued that the federal government’s SALT cap:

State of New York, et al. v. Janet Yellen, U.S. Supreme Court, Dkt. 21-966, petition for certiorari denied April 18, 2022.

Arkansas

Corporate income tax: Income from sale of business assets properly characterized as business income

A taxpayer’s proceeds from the sale of intangible assets were properly characterized as business income subject to Arkansas corporate income tax because the relevant income met the functional test for apportionment purposes. Under the functional test, income from the sale of an asset is considered “business income” if the asset produced business income while it was owned by the taxpayer, despite the nature or infrequency of the transaction that gave rise to the gain. In this matter, the auditor determined that certain amounts had been omitted as business income, which should have been included in the apportionable income for tax purposes.

The taxpayer unsuccessfully argued that the sale of the business assets was a one-time transaction, not made in the normal course of business, and was not integral to the business activity because the proceeds were not reinvested in the business to fund the continuing operations.

The Office of Hearings and Appeals found that the auditor properly characterized the relevant income as business income and, accordingly, the assessment was sustained.

Docket No. 22-222, Arkansas Department of Finance and Administration, Office of Hearings and Appeals, March 2, 2022.

California

Corporate income tax: Receipts from treasury function activities not includible in sales factor

Gross receipts from a taxpayer’s treasury function activities were not includible in the sales factor of the apportionment formula used to determine the taxpayer’s California corporation franchise tax liability. The taxpayer was headquartered in New Jersey and operated a chain of home merchandise retail stores in the United States, Mexico, and Canada. It had a treasury department at its headquarters that continually invested cash generated by its retail operations to maintain adequate working capital for its daily needs.

A regulation in effect for the tax years at issue excluded gross receipts from the taxpayer’s treasury function from the numerator and denominator of the sales factor of the apportionment formula. The taxpayer argued that the regulation was not valid or applicable to the tax years at issue, and that, based on prior case law, the Franchise Tax Board (FTB) could exclude the treasury receipts only if it showed that their inclusion in the sales factor was distortive. But the Office of Tax Appeals (OTA) found that the FTB properly excluded the receipts under the regulation, which was validly adopted.

The OTA also found that the FTB reasonably determined that the inclusion of treasury receipts was distortive, and thus adopted the regulation providing that treasury receipts must be excluded. The regulation controlled, unless the taxpayer could show, by clear and convincing evidence, that its application (i.e., excluding the treasury function receipts) would not fairly represent the extent of the taxpayer’s activities in the state. The taxpayer made no such showing. The taxpayer contended that including the treasury function receipts was not distortive. However, if the taxpayer wished to deviate from the regulation, it had to prove by clear and convincing evidence that excluding the treasury function receipts would be distortive. And, if the quantitative impact of including its treasury function receipts in the sales factor arguably did not amount to distortion, then axiomatically, the exclusion of those very same treasury function receipts could not be distortive.

On the other hand, certain allowances the taxpayer received from vendors could be included in the sales factor. The OTA believed that the allowances were gross receipts from the sale of tangible personal property for sales factor purposes. But the taxpayer did not substantiate the total amount of its claimed vendor allowances or the amount attributable to each type of allowance. So, the taxpayer was not entitled to a refund based on including the vendor allowances in the sales factor.

Bed Bath & Beyond Inc., California Office of Tax Appeals, No. 18011340, 2022-OTA-134, March 17, 2022.

Colorado

Corporate, personal income taxes: Governor signs legislation to make SALT Parity Act retroactive to 2018

Colorado has enacted income tax legislation that makes the pass-through entity election (SALT Parity Act) effective retroactive to Jan. 1, 2018. The optional election was enacted in 2021 and was originally applicable beginning in tax year 2022.

Deduction converted to credit

Further, the law repeals the state income tax deduction for electing pass-through owners and replaces the deduction with a refundable tax credit equal to the electing pass-through business owner’s distributive share of the state income tax imposed on the electing pass-through entity.

Election

A pass-through entity may make the election annually on their income tax return, and such election is binding on all electing pass-through entity owners. However, for tax years beginning on or after Jan. 1, 2018, but before Jan. 1, 2022, the pass-through entity must make the election between Sept. 1, 2023, and July 1, 2024, in a composite amended tax return for all of the years for which the election is made.

S.B. 124, Laws 2022, effective May 16, 2022.

Multiple taxes: Various tax expenditures, including credits, repealed

Enacted Colorado legislation eliminates multiple infrequently used tax expenditures, including:

H.B. 1025, Laws 2022, effective on the 91st day after final adjournment of the General Assembly, and applicable as noted.

Georgia

Corporate income tax: Consolidated return filing now elective

Affiliated corporations who file consolidated federal returns will now have the option to elect to file a consolidated Georgia income tax return. Previously, affiliated corporations had to receive prior approval or have requested to file a consolidated return.

The law change will not be construed as allowing or requiring the filing of combined income tax returns under the unitary business concept.

How does an affiliated group elect?

A Georgia-affiliated group can elect to file a consolidated return on an originally filed return. Georgia can’t compel a taxpayer to file a consolidated return unless the taxpayer elects to.

How does the election impact allocation and apportionment of income?

For purposes of allocation and apportionment, each member of a Georgia-affiliated group is considered a separate taxpayer. Any taxable loss of a member is deductible against the taxable income of any other member of the affiliated group to the extent the loss is apportioned and allocated to Georgia. The separate taxable income or loss of each corporation in the Georgia-affiliated group will be included in the consolidated taxable income or loss to the extent that its taxable income or loss is separately apportioned or allocated to Georgia.

How long does the election last?

The election is irrevocable and binding on both Georgia and the affiliated group for five years. At the end of the five-year period, the taxpayer’s election is automatically terminated. The taxpayer may then reelect to file a Georgia-consolidated return.

The change is applicable to tax years beginning on or after Jan. 1, 2023.

Act 824 (H.B. 1058), Laws 2022, effective May 5, 2022.

Illinois

Corporate, personal income taxes: Changes to EDGE, REV Illinois, and other credits enacted

Illinois enacted changes to numerous corporate and personal income tax credit programs. The changes include:

EDGE credits

Eligible startup taxpayers can now apply EDGE credits against Illinois corporate and personal income tax liability. A startup taxpayer is any business:

The income tax threshold does not include the tax liability of related corporations, pass-through entities, or individuals that have a controlling interest in the startup taxpayer.

A startup taxpayer can elect to apply the credit against its Illinois income tax withholding liability. The election automatically expires when the startup taxpayer has any Illinois income tax liability at the end of the tax year during the term of the credit agreement.

Effective July 1, 2022, an “underserved area” eligible for enhanced EDGE credits is a geographic area in Illinois where:

The new definition also applies to the enhanced River Edge Redevelopment Zone construction jobs credit.

REV Illinois credits

Illinois is expanding REV Illinois credit eligibility to manufacturers of electric vehicles (EVs), EV parts, or EV power supply equipment that rely on hydrogen fuel cells or solar technology for power or refueling. Tier 1 credit eligibility also now applies to:

Finally, Illinois is modifying the minimum wage thresholds for new credit agreements to create full-time jobs. A manufacturer must pay 120% or more of the average wage paid to full-time employees in a similar position within an occupational group in the county where its facility is located.

P.A. 101-700 (S.B. 157), Laws 2022, effective April 19, 2022 and as noted.

Multiple taxes: Enacted budget includes tax suspension on groceries, motor fuel tax increase, and other tax provisions

Illinois Governor J.B. Pritzker signed budget legislation that contains a variety of sales and use, motor fuel, property, and other tax changes, including those detailed below.

Suspension of tax on groceries

Beginning on July 1, 2022, and until July 1, 2023, the 1% sales and use tax on certain food products is suspended. Specifically, sales and use tax will not be imposed on food for human consumption that’s to be consumed off the premises where it’s sold (other than alcoholic beverages, food consisting of or infused with adult-use cannabis, soft drinks, and food that has been prepared for immediate consumption). During this same time period, the service use tax and the service occupation tax are also not imposed on food prepared for immediate consumption and transferred incident to a sale of service by an entity licensed under the following: the Hospital Licensing Act, the Nursing Home Care Act, the Assisted Living and Shared Housing Act, the ID/DD Community Care Act, the MC/DD Act, the specialized Mental Health Rehabilitation Act of 2013, the Child Care Act of 1969, or an entity that holds a permit issued pursuant to the Life Care Facilities Act. Until July 1, 2022, and beginning again on July 1, 2023, the tax rate on such items is 1%.

In addition, retailers who sell items that would have been taxed at the 1% rate but for this tax suspension must, to the extent feasible, include the following statement on any cash register tape, receipt, invoice, or sales ticket issued to customers: “From July 1, 2022 through July 1, 2023, the State of Illinois sales tax on groceries is 0%.” If it’s not feasible for the retailer to include such statement, then the retailer must post the statement on a sign that is clearly visible to customers. The sign must be no smaller than 4 inches by 8 inches.

Suspension of motor fuel tax rate increase

For the period July 1 through Dec. 31, 2022, the scheduled inflation adjustment rate increase for the motor fuel tax is suspended (previously, the adjustment increase was scheduled to occur on July 1, 2022). As a result, the motor fuel tax rate remains at 39.2 cents per gallon through Dec. 31, 2022. Beginning Jan. 1, 2023, the rate of tax imposed will be increased by an amount equal to the percentage increase, if any, in the consumer price index for the months ending in September 2022. On July 1, 2023, and on July 1 of each subsequent year, the rate of tax imposed will be increased by an amount equal to the percentage increase, if any, in the consumer price index for the 12 months ending in March of the year in which the increase takes place.

During the period that the tax increase is suspended, each retailer of motor fuel must post the following notice in a prominently visible place on each retail dispensing device that’s used to dispense motor fuel in Illinois: “As of July 1, 2022, the State of Illinois has suspended the inflation adjustment to the motor fuel tax through December 31, 2022. The price on this pump should reflect the suspension of the tax increase.” The notice must be printed in bold print on a sign that’s no smaller than 4 inches by 8 inches. The sign must be clearly visible to customers. Any retailer who fails to post or maintain a required sign through Dec. 31, 2022, is guilty of a petty offense for which the fine is $500 per day per each retail premises where a violation occurs.

Back-to-school tax holiday

From Aug. 5 through Aug. 14, 2022, a sales and use tax holiday applies to the following qualifying items (tax applies at a reduced rate):

Items that qualify for the tax holiday are subject to tax at a reduced rate of 1.25%.

Detailed definitions are provided for qualifying items, as well as items that do not qualify for the holiday. Special rules are also provided for bundled sales, coupons and discounts, splitting of items normally sold together, rain checks, exchanges, order date and back orders, and returns.

Breast pumps

Beginning July 1, 2022, breast pumps, breast pump collection and storage supplies, and breast pump kits are exempt from sales and use tax.

Biodiesel, renewable diesel, and biodiesel blends

From Jan. 1, 2024, through Dec. 31, 2030, sales and use taxes apply to 100% of the proceeds of sales of the following:

However, sales and use taxes do not apply to the proceeds of sales of any diesel fuel containing more than 10% biodiesel or renewable diesel according to the following schedule (percentages vary by time period as indicated):

In addition, the definition of “biodiesel” is amended to mean diesel fuel that’s not a hydrocarbon fuel and that’s derived from biomass, which is intended for use in diesel engines. Further, a definition is added for “renewable diesel.” Specifically, “renewable diesel” means a diesel fuel that’s a hydrocarbon fuel derived from biomass meeting the requirements of the latest version of ASTM standards D975 or D396. Fuels that have been co-processed are not considered renewable diesel.

Right to blend

A distributor who is properly licensed and permitted as a blender may blend petroleum-based diesel fuel with biodiesel and sell the blended or unblended product on any premises owned and operated by the distributor for the purpose of supporting or facilitating the retail sale of motor fuel. A refiner or supplier of petroleum-based diesel fuel or biodiesel can’t refuse to sell or transport to a distributor who is properly licensed and permitted as a blender any petroleum-based diesel fuel or biodiesel based on the distributor’s or dealer’s intent to use that product for blending.

Hospital exemption

The sales and use tax exemption for tangible personal property sold to or used by a hospital owner that owns one or more hospitals licensed under the Hospital Licensing Act or operated under the University of Illinois Hospital Act, or a hospital affiliate that is not already exempt and meets the criteria for an exemption, is made permanent. Previously, the exemption was scheduled to expire on July 1, 2022.

Coal and aggregate exploration, mining, hauling, processing, maintenance, and reclamation equipment

The sales and use tax exemption for coal and aggregate exploration, mining, off-highway hauling, processing, maintenance, and reclamation equipment is extended until July 1, 2028. Previously, the exemption was scheduled to expire July 1, 2023.

Parking excise tax

The parking excise tax is amended to make changes concerning booking intermediaries, effective July 1, 2023.

MICRO Act tax incentives

The Manufacturing Illinois Chips for Real Opportunity (MICRO) Act is created to provide various types of tax incentives for manufacturers of semiconductors, microchips, or semiconductor or microchip component parts, subject to an agreement with the Department of Commerce and Economic Opportunity, including those detailed below.

Building materials exemption for microchip and semiconductor manufacturing. Each retailer who makes a sale of building materials that will be incorporated into real estate in a qualified facility for which a certificate of exemption has been issued by the Department of Commerce and Economic Opportunity under Section 110-105 of the MICRO Act, may deduct receipts from such sales when calculating any state or local use and occupation taxes. No retailer who is eligible for the deduction or credit under the Act related to enterprise zones or related to high-impact businesses for a given sale are eligible for the deduction or credit authorized under this section for that same sale.

In addition to any other requirements to document the exemption, the retailer must obtain the purchaser’s exemption certificate number issued by the department. A construction contractor or other entity must not make tax-free purchases unless it has an active exemption certificate issued by the department at the time of purchase.

MICRO Illinois project facilities. Any taxing district, upon a majority vote of its governing body, may, after determination of the assessed value, order the clerk of the appropriate municipality or county to abate any portion of real property taxes otherwise levied or extended by the taxing district on a MICRO Illinois Project facility owned by a semiconductor manufacturer, microchip manufacturer, or a semiconductor or microchip component parts manufacturer that’s subject to an agreement with the Department of Commerce and Economic Opportunity under the MICRO Act, during the period of time such agreement is in effect.

Telecommunications excise tax. For purposes of the telecommunications excise tax, “gross charges” does not include charges to business enterprises certified under the MICRO Act.

Electricity excise tax. The electricity excise tax is not imposed with respect to any use of electricity at a project site that has received a certification for tax exemption from the Department of Commerce and Economic Opportunity pursuant to the MICRO Act, to the extent of such exemption, which shall be no more than 10 years.

P.A. 102-0700 (S.B. 157), Laws 2022, effective April 19, 2022, except as noted.

Indiana

Corporate income tax: Taxpayer excluded from affiliate groups’ combined returns due to lack of Indiana nexus

For corporate income tax purposes, the Indiana Department of Revenue (department) properly excluded a financial service provider (taxpayer) from its affiliate groups’ combined financial institution tax (FIT) returns because the affiliate did not conduct business in Indiana during the tax years at issue and, as a result, taxpayer lacked Indiana nexus.

In this matter, the taxpayer (as the holding company) along with a number of its affiliates filed combined 2014, 2015, and 2016 Indiana FIT returns. One of those affiliates was an Indiana single-member limited liability company treated as a disregarded entity for income tax purposes. The taxpayer argued that it had Indiana “nexus” by virtue of the disregarded entity’s Indiana activities.

The department found that the disregarded entity’s activities were de minimus as it did not maintain an office in Indiana or generate income from Indiana during the tax years at issue. Further, the department noted that the taxpayer’s losses incurred during the audit period would not fairly represent the combined group’s income attributable to Indiana for FIT purposes. Therefore, the taxpayer failed to establish that the assessment was incorrect.

Additionally, the taxpayer argued that the department made an error by “adding back” income a subsidiary bank received from the sale of stock originally purchased from a credit card company, based on a business or nonbusiness income distinction. The department stated that the applicable statutes do not allow a business or nonbusiness distinction in the realm of the FIT calculation. Accordingly, the taxpayer’s protest was denied.

Letter of Findings No. 18-20210085, Indiana Department of Revenue, March 2, 2022.

Louisiana

Corporate income tax: Net operating loss guidance issued

Louisiana has issued guidance to address recent federal and state legislative changes that modified the utilization of net operating losses (NOLs) by corporate and individual income taxpayers.

What is the guidance for corporate taxpayers?

Louisiana treatment of NOLs does not conform to federal treatment, so the CARES Act federal NOL changes do not apply. When a taxpayer carries back an NOL on a federal return, and it results in a reduction of federal income tax deducted on a Louisiana return for a prior period, the taxpayer must make adjustments. The taxpayer must include in its state taxable income, in the tax year in which the taxpayer incurred the carried back NOL, the amount of the reduction in its federal income tax liability in the year to which the federal NOL was carried back.

The Louisiana NOL, in the year any carried back federal NOL originated, must be reduced by the amount of the reduction in federal tax liability that was previously deducted on a Louisiana return for the tax year to which the NOL loss was carried back.

What is the guidance for individual taxpayers?

The CARES Act provisions related to NOLs are applicable to a business whose loss is reported on individual income tax returns of its owners. Louisiana piggybacks federal treatment of NOLs for individual income tax purposes and business losses are included in an individual’s federal adjusted gross income.

If a taxpayer carries back an NOL to an open taxable period on a federal return, the taxpayer must amend their state income tax return to correct the federal adjusted gross income and the federal income tax deduction. Nonresident individuals must carryback and carryforward NOLs in accordance with Louisiana regulations.

The passage of the CARES Act does not suspend or interrupt prescription to claim a credit or refund under Louisiana law. However, Louisiana law provides that when a claim for a refund of individual income taxes is attributable to an election to carryback an NOL, the refund claim prescribes three years from December 31 of the year in which tax for the loss year would become due instead of the general three-year prescriptive period for a tax year.

If the CARES Act allows a taxpayer to carry back an NOL on a federal return to an otherwise prescribed period for Louisiana income tax purposes, the taxpayer may amend the state income tax return and claim the refund no later than three years from December 31 of the year in which the tax for the loss year became due.

Revenue Information Bulletin No. 22-011, Louisiana Department of Revenue, May 17, 2022.

New York

Corporate, personal income taxes: Pass-through entity tax election deadline for 2022 extended

For New York’s optional pass-through entity tax, a new law requires the election for taxable year 2022 to be made by Sept. 15, 2022. Previously, the election for 2022 had to be made by March 15, 2022.

The new law also makes related changes to estimated payment requirements.

Ch. 188 (S.B. 8948), Laws 2022, effective May 6, 2022.

North Carolina

Corporate, personal income taxes: Guidance on new income tax deductions

The North Carolina Department of Revenue (department) issued a notice providing guidance on how specific provisions of the Session Law 2022-06 affect the 2020 and 2021 North Carolina personal and corporate income tax returns. North Carolina amended the applicable law to allow a new deduction for proceeds received from specific grant programs and also allows an employer to deduct the amount of qualified wages disallowed for federal income tax purposes because the employer availed the Employee Retention Credit (ERC). Both these deductions are effective retroactively.

Taxpayers who have already filed their 2020 or 2021 North Carolina tax returns, and had included grant payments in their federal income or reduced qualified wages based on the claimed ERC, can file an amended return with the department. The department will not automatically recalculate a taxpayer’s North Carolina taxable income. The notice also provides a table indicating the form and specific line on which an affected taxpayer should report the change.

Important Notice: Impact of Session Law 2022-06 on North Carolina Individual and Corporate Income Tax Returns, North Carolina Department of Revenue, March 18, 2022.

Ohio

Sales and use tax: Rule on construction contracts amended

The Ohio Department of Taxation has revised its sales and use tax rule on construction contracts to add certain exempt construction contractor purchases. A construction contractor may purchase exempt those materials and services incorporated into:

OAC 5703-9-14, Ohio Department of Taxation, effective May 5, 2022.

Texas

Income tax: Rule on computation of margin and compensation amended

Texas amended a rule on the computation of margin and compensation for franchise tax purposes. The amendments implement statutory changes, incorporate policy decisions, and improve readability. The amendments include:

34 TAC 3.589, Texas Comptroller of Public Accounts, effective April 21, 2022.

Sales and use tax: Taxability of data processing services discussed

The Texas Comptroller of Public Accounts has issued a publication discussing the applicability of sales tax to data processing services. The entering, storing, manipulating, or retrieving of a customer’s data using a computer is considered taxable data processing services. However, the charges for professional services, such as engineering, bookkeeping, or other services that use a computer as a tool to complete such service, are not taxable.

The publication provides a list of taxable data processing services, as well as examples of nontaxable services. If a business includes both taxable and nontaxable services, the taxpayer is required to collect tax only on the taxable services, provided the nontaxable service is distinct and identifiable and is a type of service that is commonly provided by itself without another accompanying service. Further, tax need not be collected from clients if the taxable service represents 5% or less of the overall contract price and the charge for the taxable service is not separately identified.

The publication also discusses allocation of the services to in-state or out-of-state locations for tax purposes, usage of resale certificates, and services provided to tax-exempt organizations.

Letter No. 202203001L (Publication No. 94-127), Texas Comptroller of Public Accounts, March 2022.

Utah

Income tax: Gain from sale was business income but not taxable

An out-of-state corporate taxpayer’s gain on the sale of its interest in a corporation that operated in Utah was business income for Utah corporate franchise tax purposes. But Utah could not constitutionally tax the gain because there was no unitary relationship between the corporations.

The taxpayer argued that the gain on the sale was not business income because the sale was part of an extraordinary event and did not benefit its regular trade or business in any way. However, the gain was business income under the functional test, as the taxpayer’s trade or business consisted of purchasing an interest in a company, through various partnerships, and holding that interest in anticipation of selling it for profit.

The U.S. Supreme Court has held that states are prohibited from apportioning similar gains from the sale of a business where the taxpayer and the sold business were not unitary. Here, there was no unitary relationship, because the taxpayer did not share centralized management or economies of scale with the other corporation, nor was there functional integration between the two.

Commission Decision, Appeal No. 16-1358, Utah State Tax Commission, Jan. 27, 2022, released April 2022.

Wisconsin

Multiple taxes: Pass-through entities audit changes enacted

Wisconsin has made a number of changes related to Department of Revenue (DOR) tax audits of pass-through entities. Pass-through entities affected include partnerships, limited liability companies, and tax-option corporations. Specifically, these changes permit DOR to do the following:

Act 262 (S.B. 794), Laws 2021, effective April 17, 2022.

The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC, is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use. 

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