State and local tax advisor: June 2022

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

• Alabama
• Arizona
• California
• Colorado
• Illinois
• Louisiana
• Massachusetts
• Michigan
• New Jersey
• New Mexico
• Ohio
• Oklahoma
• Vermont

Alabama

Corporate, personal income taxes: Due date for filing pass-through entity tax election extended

Alabama has extended the due date for certain pass-through entities to be taxed at the entity level for Alabama income tax purposes. The new due date for the 2021 tax year is Aug. 15, 2022. The Department of Revenue extended the due date because a number of taxpayers failed to file the required election by the original due date, but either made estimated tax payments or filed required returns as if the election had been made.

The entity-level tax election is available for the first time for the 2021 tax year, so the department wants to help taxpayers who showed an intention to make an election but erroneously failed to do so. Taxpayers who meet any of the following criteria may access My Alabama Taxes to make the election through Aug. 15, 2022:

• Timely filed the required entity and member tax returns, as if the election had been properly made for the year.
• Timely made an electing pass-through entity extension payment.
• Made an entity-level tax payment prior to the due date of the respective return.

Press Release, Alabama Department of Revenue, June 17, 2022.

Arizona

Corporate, personal income taxes: Corrections and clarifications enacted

The 2022 Arizona tax corrections act makes the following income tax changes:

• States that an entity-level income tax election is applicable to partners or shareholders who are individuals, estates, or trusts that waive their right to opt out of the election.
• Specifies that the taxable income for an S corporation that has elected to pay entity-level income tax comprises the total of all distributive income passed through to shareholders.
• For tax years beginning after 2021, allows a tax credit for a trust or estate that’s a partner in a partnership or shareholder of an S corporation that elects to pay the entity-level income tax.
• Establishes that a taxpayer who elects to file an Arizona small business income tax return may not make the additions or subtractions on the taxpayer’s individual income tax return for amounts that are correctly made as additions or subtractions on the taxpayer’s small business income tax return.
• Indicates that for the purposes of determining a taxpayer’s adjusted gross income for the family income tax credit, the amount subtracted from a taxpayer’s Arizona small business gross income is added back to the taxpayer’s Arizona gross income.
• Repeals the individual income tax credits for employment by a healthy forest enterprise and pollution control equipment, and the corporate income tax credit for construction costs of a qualified environmental technology facility.
• Prohibits partners in a partnership that’s not a corporation from claiming a share of the corporate income tax credit for pollution control equipment.
• Changes the date when the Department of Revenue (DOR) must adjust the dollar amounts for each rate bracket for the tax imposed on estates and trusts from Jan. 1, 2021, to Jan. 1, 2022.
• Includes a taxpayer’s Arizona small business tax return in the tax information the DOR may disclose to a designee upon the taxpayer’s written authorization.
• Allows confidential information to be shared with the Department of Agriculture for the purpose of confirming compliance with certain licensing provisions.
• Provides that prize winnings paid by a fantasy sport contest operator and an event wagering operator are subject to federal withholding and are to be treated as payments of wages from an employer to an employee for a payroll period.

Ch. 235 (S.B. 1579), Laws 2022, effective 91 days after adjournment of the 2022 legislature, and applicable as noted.

California

Personal income tax: Nonresident trust shareholders taxed on income from S corporation’s sale of subsidiary

Nonresident trusts shareholders in a unitary multistate S corporation were subject to California income tax on their pro rata share of income received from the corporation’s sale of a wholly owned subsidiary. The S corporation had characterized the income as business income and apportioned a percentage of that income to California. The trusts had to treat their respective shares of that income the same way on their tax returns.

The trusts argued that the income was from the sale of intangible goodwill, which is not taxable under the California personal income tax law applicable to trusts. But, the income was taxable even if it could be characterized as from the sale of intangible goodwill, because the goodwill had acquired a business situs in California.

The 2009 Metropoulos Family Trust et al. v. California Franchise Tax Board, Court of Appeal of California, Fourth District, No. D078790, May 27, 2022.

Colorado

Corporate, personal income taxes: Advanced industry investment tax credit extended and increased

Colorado has modified its advanced industry investment income tax credit as follows:

• Extended the credit to investments made through 2026 (previously, 2022).
• Increased the credit to 35% (previously, 30%) for qualified investments in rural or economically distressed areas.
• Increased the maximum amount of credit for each qualified investment to $100,000 (previously, $50,000).
• Increased the total amount of credits to $4 million (previously, $750,000) per year.
• Allows partnerships, limited liability companies, S corporations, or similar pass-through entities to allocate the credit among their partners, shareholders, members, or other constituent investors in any manner agreed to by the partners, shareholders, members, or other constituent investors (previously, only on a pro rata basis based on their ownership interests).

The modifications to the credit take effect Aug. 10, 2022, unless a referendum petition is filed. If a referendum petition is filed, then the modifications will take effect only if approved by voters at the November 2022 general election. If approved, they will take effect on the date of the official declaration of the vote thereon.

H.B. 1149, Laws 2022, effective as noted. 

Sales and use tax: Renewal of temporary sales deduction for restaurant industry

Colorado has renewed a temporary net taxable sales deduction for businesses operating in the food and drinking services industry.

Expanded deduction

Qualifying retailers can take a temporary deduction from state net taxable sales for sales made from July 1, 2022, to Sept. 1, 2022, and retain the sales tax collected. The temporary deduction from state-taxable sales for qualifying retailers is equal to the lesser of state net taxable sales or $70,000 for each month in the specified sales tax period.

Qualified retailers include those that timely file sales tax returns and who operate in the:

• Alcoholic beverages drinking places industry
• Catering industry
• Food services contractor industry
• Restaurant and other eating places industry
• Mobile food services industry

It also includes retailers that operate a hotel-operated restaurant, bar, or catering service. This same deduction was in effect from June through August 2021.

H.B. 1406, Laws 2022, effective June 3, 2022, and applicable as noted above. 

Sales and use tax: Transition to destination sourcing for all small businesses explained

Effective Oct. 1, 2022, all Colorado businesses must comply with destination sourcing rules for sales and use tax purposes. Since 2019, small businesses were given an exception to following destination sourcing rules.

Destination sourcing rules

Destination sourcing means that sales tax is calculated based on the address where the taxable product or service is delivered to the customer. It is not based on the seller’s location.

Destination sourcing uses the following rules:

1. If the purchaser takes possession of the purchased item or first uses the purchased service at the seller’s business location, the sale is sourced to that business location.
2. If the property or service is delivered to the purchaser at a location other than seller’s business location, the sale is sourced to the location the purchaser receives the purchased item or first uses the purchased service.
3. If the purchaser requests delivery of the property or service to another recipient (i.e., the purchase is a gift), the sale is sourced to the location the recipient takes possession of the item or first uses the purchased service.

Geographic information system (GIS)

Colorado provides the GIS system online that will allow sellers to determine the applicable tax rate. Additional information on destination sourcing: The publication provides additional guidance, including a frequently asked questions section.

2022 Transition to Destination Sourcing, Department of Revenue, June 2022. 

Sales and use, miscellaneous taxes: Retail delivery fee takes effect July 1, 2022

Colorado’s retail delivery fee will take effect July 1, 2022.

Retail delivery fee

Effective July 1, 2022, a retail delivery fee will apply to all deliveries:

• To a Colorado location
• By motor vehicle
• At least one item is subject to state sales or use tax

Delivery includes when any taxable item is mailed, shipped, or delivered by motor vehicle to a Colorado purchaser.

Retail delivery fee rate

From July 1, 2022, through June 30, 2023, the retail delivery fee rate is 27¢ per delivery. If every item in a sale is exempt, the retail delivery fee doesn’t apply. Each sale for delivery is considered a single retail delivery regardless of how many deliveries are needed to complete the sale.

Additional guidance

The publication addresses frequently asked questions as well as provides guidance on liability, reporting, payments, and other topics.

Retail Delivery Fee, Colorado Department of Revenue, June 2022.

Illinois

Corporate income tax: Request to use alternative method of apportionment denied

For corporate income tax purposes, the Illinois Department of Revenue (department) rejected a cyber-safety solutions provider’s (taxpayer’s) request to use an alternative method of apportionment because the taxpayer failed to prove that the apportionment provisions led to a grossly distorted result with respect to its income attributed to Illinois. In this matter, gross receipts from the sale of the taxpayer’s enterprise security business were excluded from the sales factor as an incidental or occasional sale of assets used in the regular course of trade or business.

The taxpayer asserted that the failure to include the receipts from the aforesaid sale in the denominator of the sales factor resulted in an amount of income apportioned to Illinois that didn’t fairly represent the market for the taxpayer’s business income. To correct the alleged distortion of income, the taxpayer proposed an alternative method of apportionment.

Upon review, the department noted that the sale of the enterprise security business was an incidental or occasional sale of the taxpayer’s assets, and that no similar sale could be replicated by the taxpayer given the nature of the remaining business operations. Therefore, the gross receipts from such sale were properly excluded from both the numerator and denominator of the taxpayer’s sales factor.

Further, the department stated that the taxpayer failed to prove that the apportionment provisions did not fairly represent the market for the taxpayer’s goods, services, or other sources of business income warranting alternative apportionment.

General Information Letter IT 22-0002-GIL, Illinois Department of Revenue, Jan. 11, 2022, released April 2022.

Louisiana

Corporate, personal income taxes: Extension of time to file provisions amended

Louisiana has enacted changes to extension of time to file for both personal and corporate income taxpayers.

What is the personal income tax extension change?

There is now an automatic six-month extension of time to file a return for individuals, partnerships, and fiduciary income tax returns for tax periods beginning on or after Jan. 1, 2022. The return must be filed within the extension time period. If it’s not filed in the extension period, there will be no extension and any delinquent filing penalty will be computed from the original due date of the return.

Previously, Louisiana could accept a federal income tax filing extension for a tax period, but it was not required to provide for automatic filing extensions.

What are the corporate income tax extension changes?

Louisiana corporate income tax return extensions can now be granted for a period not to exceed six months from the date the Louisiana income tax return is due. Previously, the extension could be granted for up to seven months.

Further, for tax periods beginning on or after Jan. 1, 2022, Louisiana will grant an extension of time to file a Louisiana income tax return if the taxpayer timely requested an extension from the IRS to file the federal return for the same period. The extension will not exceed the later of six months or the extended due date of the federal income tax return. The return must be filed within the extension time period. If it’s not filed in the extension period, there will be no extension and any delinquent filing penalty will be computed from the original due date of the return.

Act 410 (S.B. 54), Laws 2022, effective Aug. 1, 2022.

Massachusetts

Corporate income tax: Nondomiciliary corporation’s sales gain income erroneously taxed

A nonresident S corporation (taxpayer) that sold its entire 50% interest in a Massachusetts limited liability company (LLC) and realized sales gain was erroneously subject to corporate income tax.

In this case, the Commissioner of Revenue (commissioner) relied on the taxpayer’s connection with the LLC to satisfy the constitutional requirement of a nexus between the state and the activities that produced the taxable income. The taxpayer protested against the commissioner’s assessment and the appellate tax board sustained the assessment determining that the business activities that gave rise to the sale gain at issue involved availment of the protection, opportunities, and benefits given by Massachusetts and therefore, the protection, opportunities, and benefits afforded by Massachusetts, for constitutional purposes, supplied the requisite connection between Massachusetts and business activities that resulted in the sales gain at issue. Subsequently, the taxpayer filed an appeal with the supreme judicial court (court).

Generally, Massachusetts distinguishes between income that’s subject to apportionment and income that’s subject to allocation. Apportionable income is defined by reference to the unitary business principle. As per the applicable law, a taxpayer’s income subject to apportionment is its entire income derived from its related business activities within and outside of Massachusetts not including any allocable items of income that either are or are not subject to the tax jurisdiction of Massachusetts. Additionally, an “allocable item of income” is not allocated to Massachusetts if the taxpayer’s commercial domicile is outside the state.

In this matter, as the court noted, since there was no unitary business between the taxpayer, and the LLC and because the taxpayer’s commercial domicile was Florida, the taxable income at issue was not authorized by the applicable law either as apportionable or allocable income.

Also, since the taxpayer did not actively participate in the in-state LLC’s activities, its sales gain was not subject to the nonresident composite tax. Accordingly, the commissioner lacked statutory authority to tax the capital gain of the taxpayer.

Vas Holding and Investment LLC v. Massachusetts Commissioner of Revenue, Supreme Judicial Court of Massachusetts, No. SJC-13139, May 16, 2022.

Michigan

Property tax: Taxpayer’s motion for summary disposition granted as property qualified for exemption

For Michigan property tax purposes, the taxpayer’s property was entitled to eligible manufacturing personal property (EMPP) exemption because the legislature did not intend to make the definition of EMPP dependent on the assessor’s classification. The taxpayer appealed the Department of Treasury’s rescission of the EMPP exemption for tax years 2020 and 2021. The Department of Treasury filed a partial summary disposition motion, contending that the taxpayer’s property was not property tax exempt for the 2020 tax year because it was not classified as industrial personal property. The taxpayer argued the exemption was not limited to properties classified as industrial personal property.

The tax tribunal found that the definition of EMPP requires a property to be used predominantly in industrial processing or direct integrated support. Further, the Department of Treasury did not dispute that the property was predominantly used in industrial processing or direct integrated support. Additionally, the State Tax Commission’s Assessor Guide to EMPP Exemption states that a property’s classification is not a determining factor in establishing eligibility for the exemption. Accordingly, the tax tribunal granted summary disposition in the taxpayer’s favor and vacated the rescission of the EMPP exemption for tax years 2020 and 2021.

Marathon Petroleum Company v. Michigan Department of Treasury, Michigan Tax Tribunal, No. 21-002548, April 15, 2022.

New Jersey

Corporate income tax: Treatment of treaty protected income discussed

New Jersey has explained that for corporation business tax (CBT) purposes, income that was protected by a treaty is generally not required to be added back. The income is added back if pursuant to other related party addback statutory provisions.

Why is the guidance being issued?

The guidance is being issued because among recently proposed rules are clarifications on the exclusion of income that was exempt from federal taxation pursuant to a treaty with a foreign nation. The clarifications are in line with Infosys Limited of India Inc. v. Director, Div. of Taxation, New Jersey Tax Court, No. 012060-2016 (2018).

What action can a taxpayer take?

For the CBT returns filed for privilege periods still in the statute of limitations, if a taxpayer added back this treaty exempted income, it may file an amended return. New Jersey will update the return instructions for the subsequent tax years as the 2018 through 2021 returns have already been filed.

Notice Income Excluded Pursuant to a Tax Treaty and CBT Returns, New Jersey Division of Taxation, May 20, 2022.

New Mexico

Corporate income tax practice and procedure: Guidance issued on estimated payments for pass-throughs electing to pay at the entity level

The New Mexico Taxation and Revenue Department has issued income tax guidance on estimated payment requirements for pass-through entities that elect to file and pay taxes at the entity level. H.B. 102, passed by the Legislature and signed into the law during the 2022 regular session, provides that a pass-through entity may elect on annual basis to pay tax at the entity level for the taxable year. This option is beginning for tax year 2022.

Estimated payment requirement for electing entities

The new law provides a requirement for those entities electing to file entity level tax to make estimated payments. Under the law, withholding payments made by a pass-through entity are also considered estimated payments for entity-level tax. Both the amount and due date for making estimated payments for entity-level tax are the same as for pass-through entity withholding payments. Since the current requirement for making withholding payments is only that payments are made annually, an entity is not required to make a separate estimated payment for entity level tax quarterly and the Department will only require these entities to submit the annual pass-through entity withholding payment.

Pass-through withholding submissions

Pass-through withholding is required to be submitted annually and is reported on the RPD-41367, Pass-Through Entity Withholding Detail Report PTW-D. This return and withholding payment may be submitted electronically after creating an account by using the Department’s online filing system Taxpayer Access Point (TAP).

Bulletin B-300.23, New Mexico Taxation and Revenue Department, May 2022.

Ohio

Corporate, personal income taxes: Elective PTE tax enacted

Ohio has enacted an elective pass-through entity (PTE) income tax.

What is the benefit of electing?

A PTE may elect to be subject to the tax to reduce the federal income tax liability of its owners. The state and local tax (SALT) deduction is capped at $10,000. Taxes paid by a PTE can be deducted by owners and do not count toward a PTE owner’s $10,000 SALT limitation.

What is the rate of tax for electing PTEs?

An electing PTE’s income apportioned to Ohio will be taxed at a rate of 5% for tax years beginning in 2022 and 3% for tax years after.

How does a PTE elect?

A PTE can elect to be taxed by filing a form with the tax commissioner on or before the deadline to file a return. The election applies only to the tax year for which the election is made and is irrevocable for that year.

Are PTE owners allowed to claim a credit?

PTE owners are allowed a refundable credit against their personal income tax liability. The credit is equal to the owner’s proportionate share of tax and remitted by the owner’s electing PTE.

S.B. 246, Laws 2022, effective on the 91st day after filed with Secretary of State; News Release, Governor of Ohio, June 14, 2022.

Oklahoma

Corporate, personal income taxes: Bonus depreciation deduction enacted

Oklahoma income taxpayers will have the option for immediate and full expensing, 100% bonus depreciation, for qualified property and qualified improvement property under IRC Sec. 168.

When does the bonus depreciation deduction begin?

For tax years beginning after Dec. 31, 2021, the cost of expenditures for business assets that are qualified property or qualified improvement property under IRC Sec. 168 is eligible for 100% bonus depreciation and may be deducted as an expense incurred by the taxpayer during the tax year the property is placed in service.

What is the impact on asset expensing?

Further, to conform to IRC Sec. 179, taxpayers are allowed to immediately deduct as an expense the cost of certain depreciable business assets in the tax year in which the property is placed in service. For tax years beginning after Dec. 31, 2021, taxpayers may elect to treat the cost of any IRC Sec. 179 property as an expense, which is not chargeable to the capital account. Any cost treated in this manner will be allowed as a deduction for the taxable year in which the property is placed in service.

H.B. 3418, Laws 2022, effective May 26, 2022.

Vermont

Corporate, personal income taxes: IRC conformity updated, single sales factor, and other changes enacted

Vermont has updated its IRC conformity date from March 31, 2021, to Dec. 31, 2021. In addition, significant corporate income tax changes have been enacted, including the following.

Minimum tax

The law revises the corporate minimum tax, which previously ranged from $300 to $750, depending on the amount of Vermont gross receipts. As amended, the minimum tax ranges from $100 (Vermont gross receipts not exceeding $500,000) to $100,000 (Vermont gross receipts over $300 million).

Apportionment

Vermont’s apportionment formula is changed from three factors to a single sales factor. In addition, the throwback rule is eliminated. Further, for purposes of determining whether sales are in Vermont and included in the numerator of the sales factor, the state is transitioning from the Joyce method to the Finnigan method.

80/20 exclusion

In the definition of “affiliated group,” the law removes the exclusion for overseas business organizations and replaces it with an exclusion for foreign corporations. “Overseas business organization” had been defined to mean a business organization ordinarily having 80% or more of its payroll and property outside the United States.

The IRC conformity update is effective retroactively to Jan. 1, 2022, and applies to taxable years beginning on and after Jan. 1, 2021. The other amendments take effect on Jan. 1, 2023, and apply to taxable years beginning on and after that date.

S.B. 53, Laws 2022, applicable as noted.