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State and local tax advisor: September 2023

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

September 26, 2023 / 24 min read

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

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

California

Corporate, personal income taxes: 2023 rate schedules, filing thresholds, other adjusted figures released

California has released 2023 indexed income tax figures, based on a 3.1% inflation rate from June 2022 through June 2023. The Franchise Tax Board (FTB) provides indexed values for the following:

Personal income tax rates

For 2023, the indexed personal income tax rates for single taxpayers and married taxpayers filing separately range from 1.0% of the first $10,412 of taxable income (formerly, $10,099 for 2022) to 12.3% of taxable income that’s $698,271 and over (formerly, $677,275 and over for 2022).

For married taxpayers filing jointly and surviving spouses with a dependent child, the rates range from 1.0% of the first $20,824 of taxable income (formerly, $20,198 for 2022) to 12.3% of taxable income that’s $1,396,542 and over (formerly, $1,354,550 and over for 2022).

For taxpayers filing as heads of households, the rates range from 1.0% of the first $20,839 of taxable income (formerly, $20,212 for 2022) to 12.3% of taxable income that’s $949,649 and over (formerly, $921,095 and over for 2022).

Return filing thresholds

For 2023, a single taxpayer or head of household taxpayer must file a return if the taxpayer’s adjusted gross income (AGI) exceeds an amount ranging from $17,249 to $44,519 (formerly, $16,730 to $43,215 for 2022) or if the taxpayer’s gross income exceeds an amount ranging from $21,561 to $48,831 (formerly, $20,913 to $47,398 for 2022).

The corresponding AGI and gross income thresholds requiring married couples to file a return range from $34,503 to $68,973 (formerly, $33,466 to $66,951 for 2022) and from $43,127 to $77,597 (formerly, $41,830 to $75,315 for 2022), respectively.

A surviving spouse taxpayer with dependents must file a return if the taxpayer’s AGI exceeds an amount ranging from $32,116 to $44,519 (formerly, $31,163 to $43,215 for 2022) or if the taxpayer’s gross income exceeds an amount ranging from $36,428 to $48,831 (formerly, $35,346 to $47,398 for 2022).

The number of dependents and the taxpayer’s age (under 65, or 65 or older) determine the filing threshold level that applies.

The tax threshold (the income level at which a person begins paying income taxes based on the tax rate schedule) has risen for 2023 to an AGI of $17,769 (formerly, $17,252 for 2022) for single or separate taxpayers and to $35,538 (formerly, $34,503 for 2022) for joint, surviving spouse, and unmarried head of household taxpayers.

Standard deduction

The standard deduction increases for 2023 to $5,363 (formerly, $5,202 for 2022) for single taxpayers and married taxpayers filing separate returns and to $10,726 (formerly, $10,404 for 2022) for married taxpayers filing jointly, surviving spouses, and heads of households.

Personal exemptions

The personal exemption credits increase for 2023 to $144 (formerly, $140 for 2022) for single taxpayers, married taxpayers filing separately, and heads of households and to $288 (formerly, $280 for 2022) for married taxpayers filing jointly and surviving spouses. The personal exemption amount for dependents increases to $446 (formerly, $433 for 2022).

Itemized deduction reduction and personal exemption phaseout thresholds

The AGI thresholds that activate the reduction of itemized deductions and the phaseout of personal exemption credits for 2023 are:

AMT exemption

The AMT exemption amounts for 2023 increase to:

Exemption phaseouts begin at the following alternative minimum taxable income levels for 2023:

The special exemption limit for certain children under 24 in the calculation of AMT for 2023 is the child’s earned income plus $8,950 (formerly, $8,300 for 2022).

Miscellaneous credits

The renter’s credit for 2023 will be available for single filers with adjusted gross incomes of $50,746 or less (formerly, $49,220 or less for 2022) and for joint filers with adjusted gross incomes of $101,492 or less (formerly, $98,440 or less for 2022).

The joint custody head of household credit and the dependent parent credit increase for 2023 to the lesser of $573 (formerly, $556 for 2022) or 30% of net tax.

The qualified senior head of household credit increases for 2023 to 2% of taxable income of up to $92,719 (formerly, $89,931 for 2022), up to a $1,748 (formerly, $1,695 for 2022) maximum credit amount.

For 2023, the California earned income tax credit will generally be available to households with AGI of less than $30,950 regardless of whether the household has a qualifying child. No credit is allowed if the aggregate amount of investment income of a qualified taxpayer for the taxable year exceeds a specific amount. For taxable year 2023, that adjusted amount is $4,525.

The maximum young child and foster youth tax credits for 2023 are $1,117 (formerly, $1,083 for 2022). The credits are reduced if the taxpayer’s earned income exceeds a threshold amount.

Doing business thresholds

The property, payroll, and sales factor thresholds for determining whether a multistate corporation is doing business in California for 2023 are:

Automobile depreciation deduction limitations 

The depreciation limitations for passenger automobiles (that aren’t trucks or vans) placed in service in 2023 for which the IRC Section 168(k) additional first year depreciation deduction doesn’t apply are:

The depreciation limitations for trucks and vans placed in service in 2023 for which the IRC Section 168(k) additional first year depreciation deduction doesn’t apply are:

The FTB also provides indexed lease inclusion amounts.

Individual shared responsibility penalty

For 2023, the applicable dollar amount on which the individual shared responsibility penalty for adults is based is $900 (formerly, $850 for 2022). The actual amount of the penalty imposed on an uninsured individual for a month could be different from the applicable dollar amount, taking into account a variety of factors.

Taxpayers’ Rights Advocate relief

For 2023, the Taxpayers’ Rights Advocate may grant a taxpayer up to $13,300 (formerly, $12,900 for 2022) in equitable relief from penalties, fees, additions to tax, or interest.

Memorandum, California Franchise Tax Board, Aug. 30, 2023.

Illinois

Corporate income tax: Elimination of intercompany transactions discussed

For corporate income tax purposes, the Illinois Department of Revenue issued a general information letter discussing the elimination of intercompany transactions involving a partnership that was more than 90% owned by members of a unitary business group (UBG). In this matter, a corporation (taxpayer) was the common parent of an affiliated group of companies that filed a federal consolidated tax return. The taxpayer inquired whether the service fee income, interest income, royalty expense, and the gain related to the sale of intellectual property (IP) to the partnership should be eliminated among the members.

Generally, the statutory apportionment method applies where more than 90% of the partnership interest is owned by other UBG members. In this case, substantially all of the interests in the partnership (90% or more) were owned or controlled by members of the same UBG as the partnership, therefore, the partnership would be treated as a member of the UBG regardless of the other unitary tests. Consequently, all members would be entitled to the intercompany eliminations of the service fee income, interest income, and royalty expense to avoid distortions in the apportionment factor.

The failure to eliminate a transfer between members of a UBG from the sales factor would alter the sales factor of the group. Additionally, if the gain in relation to the sale of IP to the partnership wasn’t recognized under the federal consolidated return regulations, then such gain wouldn’t be recognized in computing the combined base income of the UBG members.

General Information Letter IT 23-0007-GIL, Illinois Department of Revenue, June 1, 2023, released July 2023.

Sales and use tax: Out-of-state retailer’s physical presence nexus discussed

The Illinois Department of Revenue (department) issued a general information letter discussing the applicability of sales and use tax to an out-of-state retailer’s (taxpayer’s) sale of equipment and its ongoing physical presence in Illinois to qualify as a “retailer maintaining a place of business in this state.” In this matter, the taxpayer sold equipment to customers nationwide, including Illinois customers, and after delivery to the customers, the taxpayer hired a third-party company to calibrate the meters on the equipment at the customer’s location.

Generally, an out-of-state retailer making sales to Illinois purchasers incurs use tax collection obligation on those sales if it falls within the definition of a “retailer maintaining a place of business in this state.” Further, the physical presence required to establish a taxable nexus isn’t limited to an office or other physical building in Illinois, and the Illinois Supreme Court has previously ruled that a vendor’s delivery and installation of its product on a repetitive basis triggered use tax collection responsibilities. Moreover, a determination regarding physical nexus is very fact-specific and can’t be addressed in the context of a general information letter.

General Information Letter ST 23-0014-GIL, Illinois Department of Revenue, May 23, 2023, released August 2023.

Corporate income tax: Out-of-state insurance agency’s nexus in insuring in-state risks discussed 

The Illinois Department of Revenue (department) issued a general information letter discussing whether insuring risk in Illinois by an out-of-state insurance agency (taxpayer) triggered taxable nexus for corporate income tax purposes. The department stated that nexus determinations are inherently fact-specific; however, merely receiving payments from an in-state customer with no other contacts in the taxing jurisdiction is insufficient to constitute nexus under the due process clause. Moreover, merely insuring risk on property located in the state with most of the insurance transactions, such as negotiations and payments, taking place entirely outside the state isn’t a valid basis to assert nexus.

General Information Letter IT 23-0004-GIL, Illinois Department of Revenue, May 31, 2023, released July 2023.

Michigan

Sales and use tax: Guidance provided on registering to file and pay sales and use taxes

The Michigan Department of Treasury has issued guidance on the requirements and thresholds for registering to file and pay Michigan sales and use taxes.

Retailers

Any business that has nexus with Michigan and is engaged in retail sales in Michigan must register with the Department of Treasury. The registration process is simple and involves submitting the business’s pertinent information (name, address, FEIN, shareholders, etc.) to ensure that all tax returns, payments, and correspondence are applied to the proper account. This process can be completed manually, using Form 518, or electronically, by visiting Michigan Treasury Online.

In-state sellers making retail sales of tangible personal property will generally be liable for sales tax on those transactions and should obtain a sales tax license. Sellers located out-of-state that have nexus with Michigan and make a taxable retail sale to a Michigan purchaser where the transfer of ownership of the property occurs outside of Michigan should register for and report use tax; if transfer of ownership occurs in Michigan the seller should obtain a sales tax license and report sales tax.

Wholesalers

Sellers that only engage in wholesale activity and make no retail sales aren’t required to be registered. Wholesalers claiming an exemption should provide Form 3372 or a written statement that they are purchasing for “resale at wholesale” to their seller. Sellers that only engage in wholesale activity aren’t required to obtain a sales tax license or provide a sales tax license number when claiming an exemption for purposes of resale.

Marketplace sellers

Also, marketplace sellers that make no direct sales (i.e., only engage in sales facilitated by a marketplace facilitator) aren’t required to obtain a sales tax license.

Additional information

Businesses can find additional information or begin the registration process on the Department of Treasury’s website.

Treasury Update, Michigan Department of Treasury, September 2023.

Sales and use tax: Taxability of delivery and installation charges explained

As of April 26, 2023, delivery and installation charges are excluded from Michigan’s sales and use tax base when they are separately stated in the seller’s records and on the customer invoice. However, utilities supplying gas or electricity must continue to include delivery charges in the tax base, regardless of how the charges are stated in customer documents or in their books and records.

Revenue Administrative Bulletin 2023-16, Michigan Department of Treasury, Sept. 11, 2023.

New Jersey

Corporate income tax: Prior add-back regulation violated dormant commerce clause

The New Jersey tax court has found that the pre-2020 version of a corporation business tax regulation wasn’t discriminatory but did violate the dormant Commerce Clause. The fair apportionment prong was violated due to the geographic limitation when proving taxation of the same income elsewhere.

The “addback statute” required a taxpayer to add back to its earned net income the royalties that it paid to a related entity. However, the royalty income received by the related entity payee was also taxed. The statute permitted a taxpayer to reduce the addback by amounts, which were “unreasonable.” New Jersey promulgated regulations to implement the addback statute’s exception.

The court found that domestic entities weren’t treated more favorably than foreign entities in the application of the unreasonableness exception of the addback statute. Further, the pre-2020 version of the regulation and the computational methodology didn’t cause a disparate impact under the dormant Commerce Clause.

However, the taxpayer’s argument that limiting proof of double taxation by only accounting for the corporation business tax paid by the related entity to New Jersey was problematic. The pre-2020 regulation didn’t permit a payor the option to show that there was out-of-state(s) multiple taxation of the royalties. Denying the taxpayer a deduction of the amount of royalties paid to its related entity, without consideration of whether those same amounts were reported/taxed elsewhere, violated the external consistency part of the fair apportionment prong of the dormant Commerce Clause.

The court held the constitutional concern was resolved with the passage of amendments in 2020. The amendments eliminated the geographic limitation and included instances of an unconstitutional result as an exception to the royalty addback. Thus, the court ordered the application of the 2020 amendments to the tax years at issue.

Lorillard Tobacco Co. v. Director, Division of Taxation, Tax Court of New Jersey, No. 008305-2007; 014043-2012, Sept. 13, 2023.

Corporate income tax: GILTI treatment guidance issued

New Jersey has issued a new technical bulletin discussing changes to the treatment of:

Effective for privilege periods ending on and after July 31, 2023, GILTI income is treated as a dividend. GILTI may be excluded (dividend exclusion) or may be eliminated (intercompany eliminations). The IRC Sec. 250 deductions for GILTI and FDII are no longer allowed. The gross amount of FDII is included in entire net income.

Technical Bulletin TB-110, New Jersey Division of Taxation, Sept. 12, 2023.

Corporate income tax: Business interest limitation guidance updated

New Jersey has revised its corporation business tax bulletin discussing the IRC Sec. 163(j) limitation. A recent law change repealed the related party addbacks but otherwise is in-line with how New Jersey had been treating IRC Section 163(j). The law doesn’t change the way it is reported on New Jersey returns.

Technical Bulletin TB-87(R), New Jersey Division of Taxation, Aug. 22, 2023.

New York City

Multiple taxes: Various tax rates extended

The New York City general corporation tax rates currently imposed under Administrative Code Section 11-604(1)(E) are extended for three years, through 2026.

Personal income tax. The transition to New York City personal income tax rates imposed under Tax Law Section 1304(b) is delayed until tax years beginning after 2026.

The additional personal income tax surcharge, imposed at the rate of 14%, is also extended through taxable years beginning before 2027. Previously, the additional tax surcharge was authorized only for taxable years beginning before 2024.

Sales tax on certain services. The expiration date of the New York City 4.5% sales and use tax imposed on credit rating and credit reporting services and certain personal services, such as beauty, barbering, hair restoring, manicuring, pedicuring, electrolysis, massage, and health salon services, is extended through Nov. 30, 2026. Previously, the tax could only be imposed through Nov. 30, 2023.

Cigarette tax. The existing New York City cigarette tax rate is extended for an additional three years, until Dec. 31, 2026.

Ch. 345 (S.B. 7386), Laws 2023, effective Aug. 23, 2023.

North Carolina

Corporate income tax: Methodology for calculating franchise tax for taxpayer’s CFC discussed 

The North Carolina Department of Revenue issued a private letter ruling as to the proper methodology for calculating franchise tax for a company’s (taxpayer’s) wholly owned controlled foreign corporation (CFC). In this matter, one of the taxpayer’s CFCs started to do business in North Carolina through a disregarded single-member limited liability company (SMLLC). Inventory of medical devices was sold from the CFC to the SMLLC. But since the imported inventory needed to be physically present in the hospital and surgical centers when the surgeries took place, the SMLLC owned such inventory in hospitals across the United States, and when a surgeon selected the medical device size for a patient, a sale took place between the SMLLC and the U.S. affiliate, and then a second sale took place between the affiliate and the third-party hospital.

The Department of Revenue noted that the starting point for computation of the North Carolina corporate income tax is a taxpayer’s federal taxable income, and for the CFC it was its Effectively Connected Income (ECI) as calculated and reported on Form 1120-F, U.S. Income Tax Return of a Foreign Corporation. Further, the receipts derived from the CFC’s sales of inventory should be excluded from the calculation of the CFC’s sales factor for computing its income tax apportionment percentage. Moreover, a multistate corporation that’s subject to franchise tax must apportion its franchise net worth base utilizing the same apportionment percentage that it computed for corporate income tax purposes. Finally, the department stated that since the CFC was a foreign entity that was filing a federal income tax return, it should only use the value of assets that were deemed to be based in the United States to compute its net worth base for North Carolina franchise tax purposes.

CPLR 2023-01, North Carolina Department of Revenue, March 8, 2023, released July 2023. 

Ohio

Corporate income tax: Changes to CAT exclusion and minimum tax discussed

Ohio has released guidance discussing recent commercial activity tax (CAT) changes. The major changes discussed include:

Commercial Activity Tax Information Release CAT 2023-01, Ohio Department of Taxation, Aug. 21, 2023. 

Virginia

Multiple taxes: Enacted budget increases standard deduction, provides rebates, makes other changes

Virginia enacted a budget bill containing various corporate and personal income tax provisions.

Standard deduction. For tax years beginning after 2023 and before 2026, the standard deduction is increased to $8,500 for individuals and $17,000 for joint filers.

Individual income tax rebate. For taxable years beginning after 2021 and before 2023, taxpayers filing a return by Nov. 1, 2023, will be issued a refund of up to $200 for individuals and $400 for joint filers. The refund will only be allowed up to the amount of the taxpayer’s liability after applicable deductions, subtractions, and credits.

Deduction for disallowed business interest. The bill increases from 30 to 50% the individual and corporate income tax deduction for business interest disallowed as a deduction under IRC Section 163(j), applicable to taxable years beginning on and after Jan. 1, 2024.

Military retirement. The budget amends a previously enacted subtraction modification for military benefits (starting at $10,000 in 2022 and increasing to $40,000 when fully phased-in beginning in 2025). Specifically, the provision limiting the subtraction to benefits received by an individual age 55 or older no longer applies after 2023. Instead, after 2023, the subtraction is allowed for military benefits received by an individual of any age.

Earned income tax credit. For taxable years beginning after 2021 and before 2026, eligible taxpayers have the option of claiming a refundable credit equal to 15% of the federal earned income tax credit claimed for the taxable year.

Food crop donation tax credit. The credit for food crop donations remained in effect through the tax year beginning on Jan. 1, 2022.

Housing opportunity tax credit. For calendar years 2022 through 2025, the total amount of housing opportunity tax credits authorized for qualified projects, may not exceed $60 million per calendar year. Various other modifications are made to the credit provisions.

Intangible holding company addback exceptions. Uncodified limitations on the state’s “subject to tax” and “unrelated party” addback exceptions to the addition required for intangible expenses and costs associated with a transaction with a related member are included in the legislation. Similar uncodified provisions have been included in state budget legislation since 2014.

Retroactive to tax years after 2003, the “subject to tax” exception is limited to the portion of income received by the related member that owns the intangible property, which portion is attributed to a state or foreign government in which the related member has sufficient nexus to be subject to such taxes. The exception applies to income that’s subject to a tax based on or measured by net income or capital imposed by: Virginia; another state; or a foreign government.

The exception for a related member deriving at least 1/3 of its gross revenues from licensing to unrelated parties is limited to the portion of income received by the related member that owns the intangible property and derived from licensing agreements for which the rates and terms are comparable to agreements the related member has entered into with unrelated entities.

Historic preservation tax credit. For tax years after 2016, the historic rehabilitation tax credit amount that may be claimed by each taxpayer, including amounts carried over from prior taxable years, can’t exceed $5 million for any tax year.

Land preservation tax credit. For tax years after 2016 and before 2023, the land preservation tax credit amount that may be claimed by each taxpayer, including amounts carried over from prior tax years, can’t exceed $20,000.

Neighborhood assistance Act Tax Credit. In order to be eligible to receive an allocation of Neighborhood Assistance Act credits, a neighborhood organization must meet the following requirements: (1) at least 50% of individuals served by the neighborhood organization must be low-income individuals or eligible students with disabilities; and (2) at least 50% of the organization's revenues must be used to provide services to low-income individuals or eligible students with disabilities.

For fiscal years 2023 and 2024, the amount of the credit available is limited to $20 million, with allocations specified in the law.

Deduction for ABLE Act Contributions. For tax years after 2015, taxpayers are allowed a deduction from Virginia adjusted gross income for the amount contributed during the taxable year to an ABLE savings trust account entered into with the Virginia College Savings Plan. The amount deducted on any personal income tax return in any taxable year is limited to $2,000 per ABLE savings trust account. No deduction will be permitted if the contributions are also deducted on the contributor's federal income tax return. If the contribution to an ABLE savings trust account exceeds $2,000, the remainder may be carried forward and subtracted in future taxable years until the ABLE savings trust contribution has been fully deducted. However, if contributors are age 70 years or older, they may deduct the entire amount contributed to an ABLE account.

Sunset Dates for Credits. The sunset date on any existing tax credit may not be extended beyond June 30, 2025. Any new credit enacted after the 2019 regular legislative session but prior to the 2024 regular legislative session must have a sunset date not later than June 30, 2025. This requirement does not apply to credits with sunset dates after June 30, 2022, enacted or advanced during the 2016 session of the General Assembly, or to the motion picture production tax credit.

Retaliatory Costs to Other States Credit. The amount deposited to the Priority Transportation Trust Fund must not be reduced by more than $266,667 by any refund of the tax credit for retaliatory costs to other states.

Ch. 1 (H.B. 6001), Laws 2023, Special Session I, effective September 14, 2023, applicable as noted.

Washington

Miscellaneous tax: U.S. Supreme Court asked to review validity of capital gains tax

Taxpayers have asked the U.S. Supreme Court to review a decision by the Washington Supreme Court upholding the state’s new capital gains tax. The Washington Supreme Court found that (1) because the tax is an excise tax, it’s not subject to the uniformity and levy requirements of article VII of the state constitution, and (2) the tax is consistent with the state constitution’s privileges and immunities clause and the federal dormant commerce clause.

The taxpayers have specifically asked the U.S. Supreme Court to decide whether the Constitution permits a state to tax out-of-state transactions involving only out-of-state property.

Quinn v. Washington, U.S. Supreme Court, Dkt. 23-171, petition for certiorari filed Aug. 21, 2023.

Sales and use tax: Taxability of business assets explained

The Washington Department of Revenue has provided guidance on the applicability of sales tax and business and occupation tax (B&O) tax to the sale of a business. The sale of capital assets and consumable supplies are not subject to B&O tax if the business doesn’t regularly sell this type of property. Such sales qualify for the casual sales B&O tax deduction. A casual sale is still subject to sales tax. Capital assets include office furniture, vehicles, and machinery and equipment.

If a business sells inventory without obtaining a reseller permit, the transaction is subject to retailing B&O tax. If a reseller permit is obtained, the sale is subject to wholesaling B&O tax.

The sale of intangible assets, such as the sale of goodwill, is not subject to B&O tax or retail sales tax.

Tax Topics: Selling Your Business, Washington Department of Revenue, Aug. 22, 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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