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State and local tax advisor: July 2023

Authors: Mike Merkel, Ron Cook, Jeanette Tolar, Stephen Palmer

July 26, 2023 / 25 min read

Have you heard about the latest changes in state and local taxes? Check out the July 2023 roundup here.

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

Alabama

Corporate income tax: Pass-through entity tax election deadline extended

The Alabama Department of Revenue has announced that it has extended the due date for certain pass-through entities to elect to be taxed at the entity level for the 2022 tax year. The deadline is extended to the due date of the electing entity’s pass-through entity tax return (with applicable extensions) so long as the entity files the election online using My Alabama Taxes and meets one of the following requirements: 

Press Release, Alabama Department of Revenue, July 10, 2023.

California

Corporate, personal income taxes: Budget trailer bill addresses tax credits, wildfire settlements, and more

A California budget trailer bill makes tax changes related to the following:

New employment tax credit

New employment tax credit provisions have been amended for taxpayers in the following industries: 

For taxpayers in the above industries:

Foster youth tax credit

For taxable years beginning on or after Jan. 1, 2024, the Controller may not offset delinquent accounts against the personal income tax refunds of an individual who received the foster youth tax credit.

Earned income tax credit

The notification requirements for the California earned income tax credit have been recast to require employers and state agencies to notify individuals of the availability of:

Incomplete gift nongrantor trusts

For taxable years beginning on or after Jan. 1, 2023, the income of an incomplete gift nongrantor trust will be included in the income of the grantor, as if the trust was a grantor trust, except when all of the following apply:

Wildfire settlements

For taxable years beginning on or after Jan. 1, 2020, and before Jan. 1, 2028, gross income doesn’t include amounts received by qualified taxpayers in settlements associated with:

Data sharing

The permissible uses of data shared by the State Department of Social Services (DSS) and the State Department of Health Care Services (DHCS) with the Franchise Tax Board (FTB) have been expanded to include informing individuals of the Volunteer Income Tax Assistance program and CalFile. Also, for taxable years beginning before Jan. 1, 2026 (previously, Jan. 1, 2022), the FTB may disclose certain individual income tax return information to the DSS and DHCS.

Middle class tax refunds

The FTB must issue payments for the Middle Class Tax Refund (Ch. 737 (A.B. 158), Laws 2022) no later than Sept. 30, 2023. It may reissue replacement payments after Sept. 30, 2023, in some instances.

Ch. 55 (S.B. 131), Laws 2023, effective July 10, 2023, and applicable as noted.

Colorado

Corporate, personal income taxes: Colorado issues updated guidance on elective pass-through entity tax

Colorado has issued updated guidance on the state’s elective pass-through entity (PTE) tax. Partnerships and S corporations may elect to pay the tax, pursuant to the SALT Parity Act, for tax years commencing on or after Jan. 1, 2018, and prior to Jan. 1, 2026. The guidance addresses:

If a partnership or S corporation makes the PTE tax election, all of its partners or shareholders must add back to federal taxable income on their Colorado returns any qualified business income deduction claimed under IRC Sec. 199A on their federal returns. The addback is required for the full amount of the qualified business income deduction claimed by the electing PTE owners on their federal returns.

Income Tax Topics: SALT Parity Act, Colorado Department of Revenue, June 2023.

Illinois

Sales and use tax: Sale of business assets through private broker qualified for occasional sale exemption

A transaction involving the sale of business assets to a construction company (taxpayer) through a private broker qualified for the occasional sale exemption from Illinois sales and use tax. In this matter, the taxpayer inquired regarding the applicability of tax to its purchase of equipment from broker auctions.

The Department of Revenue noted that the purchase opportunity wasn’t publicly known, and that the transaction was brokered by a third party (broker) and involved direct, confidential negotiations between the taxpayer and the seller. Further, the final negotiated agreement for the purchase transaction was accomplished separate and independent from the broker’s internet auction listing service. Therefore, the broker’s involvement in this matter was pursuant to its private sales services rather than as an auctioneer, and consequently, the purchase of the seller’s business assets was exempt from tax as an occasional sale.

Private Letter Ruling, ST 23-0001-PLR, Illinois Department of Revenue, Feb. 7, 2023, released May 2023.

Corporate, personal income taxes: Late payment penalty clarified

Illinois clarified the late payment penalty for corporate and personal income tax liability resulting from a change in a taxpayer’s federal income tax liability. To avoid a late payment penalty, taxpayers must report and pay Illinois income tax liability resulting from a federal change no later than the due date for their federal amended return.

P.A. 103-98 (S.B. 1641), Laws 2023, effective Jan. 1, 2024.

Indiana

Corporate income and sales and use taxes: Penalties waived as taxpayer reasonably relied on professional advice

The Indiana Department of Revenue (department) waived penalties imposed on an out-of-state general contracting services provider (taxpayer) for its failure to file sales tax and corporate income tax, because the taxpayer established that the delinquency was due to its reliance on professional advice. In this matter, the department noted that the failure to file was based on the advice of a CPA employed by the taxpayer and that it had subsequently hired a new CPA firm and began correctly filing Indiana returns for both sales tax and corporate income tax. Therefore, because the taxpayer relied on professional advice and had since proactively filed timely returns and paid all base tax amounts due, the department granted its request for a waiver of the assessed penalties.

Letter of Findings Nos. 04-20221100, 04-20221101, Indiana Department of Revenue, Dec. 2, 2022, released June 14, 2023.

Note: States generally allow taxpayers to request an abatement of penalties, often when there is reasonable cause. The decision to abate penalties is at the taxing authority’s discretion, and reliance on an outside CPA firm’s guidance is not always accepted as a reason to abate penalties.

Louisiana

Corporate income tax: Repeal of throwback and throwout rules; Sourcing of rentals, leases, and licenses

Louisiana has enacted legislation repealing its apportionment “throwback” and “throwout” rules. These rules required certain sales to be excluded from the sales factor for apportionment purposes.

This rule previously excluded sales from the sales factor if a taxpayer is not taxable in the state where a sale is assigned, or if the state of assignment cannot be determined or reasonably approximated. Sales of intangible property were also excluded from the sales factor unless (1) the sales receipts derived from payments that were contingent on the productivity, use, or disposition of the property; or (2) the property sold was a contract right, government license, or similar intangible property that authorized the holder to conduct a business activity in a specific geographic area.

The legislation also removes the rental, lease, or license of immovable and tangible personal property from the sales factor for income tax apportionment purposes, instead treating these items as allocatable income.

The legislation applies to periods beginning on or after Jan. 1, 2024.

Act 430 (H.B. 631), Laws 2023, effective Jan. 1, 2024.

Corporate income tax: Pass-through entity changes

Louisiana has enacted legislation creating exclusions from taxable income for partnerships, estates, and trusts for net income or losses received from entities that the partnership, estate, or trust is a shareholder, partner, or member of if the entity properly filed a Louisiana corporation income tax return that included the net income or loss.

The legislation also creates a procedure for an S corporation or other entity taxed as a partnership for federal income tax purposes to apply for prospective termination of an election to be taxed as a corporation for Louisiana income tax purposes.

Act 450 (H.B. 428), Laws 2023, effective for taxable periods beginning on or after Jan. 1, 2023.

Maryland

Miscellaneous tax: Digital advertising tax challenge dismissed for lack of jurisdiction

The Supreme Court of Maryland dismissed a taxpayer lawsuit challenging the constitutionality of Maryland’s digital advertising tax for lack of jurisdiction. The Court held that the circuit court had lacked jurisdiction over the case because the taxpayers failed to exhaust their administrative remedies. The Court wrote that the relevant statutes required the taxpayer to first either pay the tax and seek a refund through the state’s administrative process or to wait for the state to make an assessment against the taxpayer and challenge that assessment through the state’s administrative process. Instead, the taxpayer didn’t pay the tax or wait for an assessment, but filed a suit for declaratory judgment in the circuit court without doing either.

In making its ruling, the Court expressly refused to rule on whether the tax was constitutional. Though the Court’s ruling overturns the circuit court’s ruling in this case that the tax is unconstitutional, it doesn’t prevent another taxpayer challenge to the constitutionality of the tax.

Comptroller v. Comcast of California, Maryland, Pennsylvania, Virginia, West Virginia, LLC, et al., Court of Appeals of Maryland, No. 32, July 12, 2023.

Minnesota

Corporate income tax: Company had sufficient contacts with state to be subject to tax

An out-of-state company maintained sufficient minimum contacts in Minnesota to be subject to the corporate franchise tax for the years at issue. The company was subject to tax, because its Minnesota business activities went beyond the solicitation of sales and were not de minimis, forming a nontrivial connection with the state.

The company, a business-to-business catalog and web-based distributor of industrial and packaging products, engaged in several activities in Minnesota through its employees. These included activities performed by sales representatives as well as by other personnel.

Activities not considered “doing business” in state

The occasional presence of employees in Minnesota to provide information to prospective employees at job fairs, without further interviewing or hiring activities, didn’t constitute doing business in the state.

Also, the company didn’t maintain an in-home office in Minnesota on the basis of one of its owners performing some work-related duties while at his Minnesota residence.

Business activities beyond the solicitation of sales

Instances in which sales representatives personally retrieved and transported returns from Minnesota customers to a Wisconsin facility weren’t entirely ancillary to the solicitation of orders.

Also, market research notes prepared by Minnesota sales representatives, and accessible to nonsales personnel, served a business purpose independent from the solicitation of orders.

Minimum contacts analysis

Because the sales representatives personally transported only 10 returns from Minnesota during the two years at issue, the duration and degree of contacts resulting from those returns was de minimis. But, the company instructed sales representatives to prepare market research notes twice a week, and during the years at issue, Minnesota sales representatives together produced more than 1,600 of those notes. The regular and systematic preparation of such notes wasn’t a de minimis activity.

All of the company’s nonancillary activities had to be considered together for purposes of the minimum contacts analysis. Together, those activities were sufficient for the company to be subject to Minnesota corporation franchise tax. The Commissioner’s motion for summary judgment on this issue was therefore granted. However, the Commissioner’s assessment of a substantial understatement penalty was reversed.

Uline, Inc. v. Commissioner of Revenue, Minnesota Tax Court, No. 9435-R, June 23, 2023.

New Jersey

Corporate income tax: Nexus standard, income computation amended

New Jersey has enacted a corporation business tax law to:

What is the new nexus standard?

A corporation deriving receipts from sources in New Jersey will be deemed to have substantial nexus if the corporation meets either of:

The change applies to privilege periods and taxable years ending on and after July 31, 2023.

How are GILTI and FDII treated?

For privilege periods and tax year ending on and after July 31, 2023, the deduction allowed for GILTI and FDII is repealed. GILTI will be treated as a dividend subject to the dividend exclusion rules.

How is combined group allocation amended?

The allocation factors of a combined group are amended to switch from the Joyce rule to the Finnigan rule. For privilege periods ending on and after July 31, 2022, the definition of “worldwide basis” and “worldwide group” is amended. The combined group includes all of the members of the combined group, wherever located or formed.

How are REITs, RICs, and ICs treated?

For privilege periods ending on or after July 31, 2023, REITS, RICs and ICs are included in combined groups and taxed on their net income in the same way as other firms.

How is the research and experimental expenditure deduction amended?

For privilege periods beginning on and after Jan. 1, 2022, the deduction for research and experimental expenditures is decoupled from the federal requirement.

What is the updated due date?

For privilege periods ending on and after July 31, 2023, the due date of the New Jersey return is:

What is the new installment threshold?

For fiscal or calendar accounting years ending on or after July 31, 2023, any taxpayer with a tax liability under $1,500 (previously $500) is not required to make any installment payments other than an installment payment of 50% that’s paid with the annual return.

The provision applies by taxable member in aggregate for a combined group.

How is the NOL calculation amended?

For privilege periods ending on and after July 31, 2023, when subtracting any NOLs, the limitation found under IRC Sec. 172(a)(2) applies, except that Aug. 1, 2023 is substituted for Jan. 1, 2018 and July 31, 2023, is substituted for Dec. 31, 2017.

What changes are made to deductions and carryovers?

The law also modifies the treatment of certain deductions and carryovers, including:

Ch. 96 (A.B. 5323), Laws 2023, effective July 3, 2023, and as noted.

North Carolina

Sales and use tax: U.S. Supreme Court declines to review state substantial nexus decision

The U.S. Supreme Court has denied a petition for certiorari filed by a taxpayer asking if the Supreme Court of North Carolina was correct that state courts and taxing authorities no longer must follow a 1944 U.S. Supreme Court decision that held that a state may not tax sales that occur outside its borders, even when the purchased goods are ultimately delivered into the taxing state. According to the petition, the Supreme Court of North Carolina declined to follow that 1944 case on the ground that it was “implicitly” overruled by the U.S. Supreme Court’s more recent Commerce Clause cases.

Decision of the Supreme Court of North Carolina

North Carolina’s imposition of sales tax on the transactions at issue was constitutional under the Complete Auto four-prong test. The formalism doctrine established in the U.S. Supreme Court decision in McLeod v. J.E. Dilworth, 322 U.S. 327, 64 S. Ct. 1023 (1944) hasn’t survived the subsequent decisions of the high court in Complete Auto Transit v. Brady, 430 U.S. 274 (1977) and South Dakota v. Wayfair, Inc., 585 U.S ___ , 138 S. Ct. 2080 (2018). Following the Wayfair precedent and applying the Complete Auto four-prong test to determine the constitutionality of the state’s sales tax regime, the North Carolina Supreme Court upheld North Carolina’s tax against the taxpayer’s Commerce Clause challenge. The taxpayer’s activities had a substantial nexus with North Carolina, and the imposition of sales tax on the taxpayer’s sales to North Carolina customers was fairly apportioned, nondiscriminatory, and fairly related to the services provided by the state.

Quad Graphics, Inc. v. North Carolina Department of Revenue, U.S. Supreme Court, Docket No. 22-890, petition for certiorari denied June 20, 2023.

Ohio

Corporate, personal income taxes: CAT exemption increased, rate reductions enacted

The Ohio budget signed this month includes changes to the commercial activity tax (CAT), financial institutions tax (FIT), personal income tax, and municipal income tax.

What changes are made to the commercial activity tax?

The existing CAT exemption is increased from $150,000 in total taxable gross receipts to:

As part of the change, calendar year CAT filing is eliminated. Further, the CAT minimum tax is eliminated.

Also, any federal, state, or local grants received or debt forgiven to provide or expand broadband service in Ohio are excluded from taxable gross receipts. Further, compensation for business losses resulting from the East Palestine train derailment are excluded. Amounts collected by the taxpayer and remitted to the fire marshal provided the fee is separately stated on the invoice, bill of sale, or similar document given to fireworks purchasers are also excluded.

Finally, heating companies are exempted from the state’s public utilities excise tax, and instead those companies will be subject to the CAT, beginning on or after July 1, 2023.

What changes are made to the financial institutions tax?

The entities included in a taxpayer group subject to the FIT is clarified.

What changes are made to the personal income tax?

The personal income tax rate is amended, for 2023 the rate on income:

For 2024 and after the rate on income:

The tax on estates is similarly amended, the first $26,050 (previously $25,050) will be taxed at a rate of 1.38462%.

After 2023, there are now home ownership savings accounts and an income tax deduction for individuals who contribute to those accounts. The deduction is equal to the amount of contributions made by the taxpayer and, if filing a joint return, the taxpayer’s spouse. However, the deduction can’t exceed $10,000 for any tax year for joint filers or $5,000 for all other taxpayers. There is a lifetime maximum of $25,000. Also, there is an income tax deduction for interest earned on savings in, and employer contributions to, an account.

The law allows donations to scholarship-granting organizations made before the federal income tax return filing deadline to be the basis of an income tax credit claim for the preceding taxable year. Also, taxpayers with income of $100,000 or more to qualify for the nonrefundable income tax credit for tuition paid to a nonchartered, nonpublic school. Further, the annual maximum credit is increased from $500 to $1,000 for taxpayers with a total income below $50,000 and from $1,000 to $1,500 for taxpayers with a total income at or above $50,000.

There is now a personal income tax deduction for government or railroad company payments received by a taxpayer as the result of the Feb. 3, 2023, train derailment in East Palestine.

What updates are made regarding the elective pass-through entity (PTE) tax?

Updates are made regarding how Ohio’s PTE tax and similar taxes in other states interact. There is now an addition of any income taxes deducted from federal income on the basis of a PTE entity tax designed to reduce federal income levied by another state or the District of Columbia. The addition, to the extent it is business income, will be treated as business income. Also, the income tax credit for taxes due to other states and the District is amended to account for PTE taxes. The changes apply to tax years ending on or after Jan. 1, 2023, but taxpayers can choose to apply the provisions to taxable years ending on or after Jan. 1, 2022, with an amended or original return.

What change is made regarding withholding?

The requirement for employers who withhold and remit employee income taxes on a partial weekly basis to file quarterly reconciliation returns is removed. Instead, those employers will file an annual return, starting in 2024.

What changes are made to the municipal income tax?

Stock options and nonqualified deferred compensation is exempted from a municipal income tax levied by any municipality, applicable to tax years beginning on or after Jan. 1, 2024.

Further, businesses with employees who work remotely can use a modified version of the apportionment formula. Instead of apportioning the payroll earned, sales made, or property used by a remote employee to that employee’s remote work location, the employer may instead apportion those amounts to a designated “reporting location.” The business must assign a remote employee to a designated reporting location, which is any location owned or controlled by the employer or, in some circumstances, by a customer of the employer. A business that wishes to use the modified apportionment formula must make an election with each municipality in which it’s required to file a net profits tax return or, if the business has elected to file a single return, with Ohio. The change applies to tax years ending on or after Dec. 31, 2023.

Further, the penalty that may be imposed on a taxpayer for failing to timely file municipal income tax returns is limited to a one-time $25 penalty. The change applies to tax years ending on or after Jan. 1, 2023. Also, there is an automatic one-month filing extension for municipal income tax returns where a business entity has received a six-month federal extension.

H.B. 33, Laws 2023, effective July 4, 2023, and as noted.

Corporate, personal income taxes: New credits enacted, existing credits amended

Ohio has created new tax credits against the insurance premiums, financial institutions (FIT), commercial activity (CAT), or income tax and amended existing tax credits as part of its budget legislation. The new credits enacted include the:

The amended credits include the:

What is the low-income housing tax credit?

A new nonrefundable tax credit is available against the insurance premiums, FIT, and income tax for the development of low-income rental housing that’s awarded in conjunction with an existing federal low-income housing tax credit (LIHTC) authorized under IRC Sec. 42. Any project that’s allocated a federal LIHTC may also qualify for the bill’s Ohio LIHTC, as long as the project is located in Ohio and placed into service at any time on or after July 1, 2023.

The annual credit amount equals the lesser of:

The Governor’s Office of Housing Transformation (GOHT) reserves credit amounts for federal LIHTC projects up to the amount necessary to ensure the project’s financial feasibility. The total amount of state credits reserved by GOHT is limited to $100 million per fiscal year. Eligibility begins for projects placed in service on or after July 1, 2023, and GOHT is prohibited from reserving credits after June 30, 2027.

What is the single-family housing development credit?

A new nonrefundable tax credit is available against the insurance premiums, FIT, and income tax for investment in the development and construction of affordable single-family homes. The credit equals the amount by which the fair market value of the project’s completed homes exceed the project’s development costs. The applicant may allocate credits to taxpayers who invest capital in the project. The total credit amount is claimed in equal increments over the 10 years after the project’s completion, and each project home is subject to an affordability requirement.

A local government or quasi-public development entity, in partnership with a private “development team,” must submit an application to the GOHT. Each application must identify a project’s development team, a person that will make annual credit allocation reports on behalf of the applicant, and an estimate of the project’s total development costs. The amount of total credits that may be reserved in a fiscal year is $50 million. The GOHT is prohibited from reserving any credits after June 30, 2027.

What is the film and theater capital improvement tax credit?

There is a new tax credit for a motion picture or Broadway theatrical production company that completes a capital improvement project in Ohio. The credit is refundable and may be claimed against the CAT, FIT, and income tax. Eligible projects include the construction, acquisition, repair, or expansion of facilities or equipment used in a motion picture or Broadway production or for postproduction. The expenditures must occur after June 30, 2023.

The credit equals 25% of either the company’s actual qualified expenditures, the amount of such expenditures estimated on the company’s application, or $5 million, whichever is less. The credit is capped at $5 million per county.

What changes are made to the other credits?

The total amount of film and theater tax credits that can be awarded each year is increased from $40 to $50 million. Also, $5 million of the $50 million must be reserved for Broadway theatrical productions each year. The job creation and retention credit recapture provision is amended to allow the tax credit authority to adjust the repayment amount under certain circumstances.

Finally, the research and development tax credit is modified to change how a taxpayer made up of more than one person may calculate and claim the credits. A taxpayer group must compute the credit on a member-by-member basis, rather than across the entire taxpayer group. Also, members whose expenses may be included in a group’s aggregate credit amount must be members of the group on the last day of the taxable year during which the R&D expenses are incurred. Taxpayers claiming the credit must also retain records substantiating the claim for four years after the due date on which the credit is claimed.

H.B. 33, Laws 2023, effective July 4, 2023.

Texas

Sales and use tax: Assessment sustained as taxpayer had sufficient nexus with state

A Delaware corporation (taxpayer) was properly subject to Texas sales and use tax on its sales of licensed software applications in Texas because these sales transactions triggered taxable nexus with Texas. In this matter, the taxpayer didn’t collect or remit Texas sales or use tax on its Texas sales for the period beginning Aug. 1, 2015, to Aug. 31, 2019, and the Business Activity Research Team (BART) of the Texas Comptroller of Public Accounts assessed tax for the tax period. The taxpayer argued that it was not required to remit tax prior to Oct. 1, 2018, because it lacked the requisite nexus with Texas as it didn’t have a physical presence in the state.

The Administrative Law Judge (ALJ) noted that the evidence demonstrated that, during the entire tax period, the taxpayer derived receipts from the sale, lease, or rental of tangible personal property in Texas (the software licenses), had substantial nexus with Texas, and was engaged in business in Texas. Therefore, the business activities established sales and use tax nexus in Texas, and the taxpayer failed to demonstrate error in the assessment. The Comptroller concurred with the ALJ’s findings, and accordingly, the assessment was upheld.

Decision, Hearing No. 118,524, Texas Comptroller of Public Accounts, May 4, 2023, released June 2023.

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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