State and local tax advisor: October 2023

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

• California
• Illinois
• Indiana
• Iowa
• Massachusetts
• Michigan
• North Carolina
• Ohio
• Pennsylvania
• South Dakota
• Virginia

California

Corporate, personal income taxes: Sunset date for deduction for governor-declared disasters extended

For taxable years beginning before Jan. 1, 2029 (previously, Jan. 1, 2024), federal disaster loss deduction provisions will continue to apply for California personal income and corporate tax purposes to losses sustained in governor-declared disaster areas. This allows taxpayers to claim these losses in either the year the loss occurs or the year preceding the loss, without the need for special enacting legislation for each disaster. Also, generally, any law that suspends, defers, reduces, or otherwise diminishes the deduction of a net operating loss (NOL) won’t apply to an NOL attributable to these disaster losses.

Ch. 285 (S.B. 264), Laws 2023, effective Sept. 30, 2023, and applicable as noted.

Sales and use tax: Exemption for trailers and semitrailers used in interstate commerce extended and expanded

The California sales and use tax exemption for new, used, or remanufactured trucks, and new or remanufactured trailers or semitrailers delivered to a purchaser in state for use in interstate commerce is expanded to include used trailers or semitrailers. Moreover, the sunset date of this expanded exemption is extended from Jan. 1, 2024, to Jan. 1, 2029. Applicable Jan. 1, 2029, the exemption reverts to the version that applies solely to new or remanufactured trailers or semitrailers.

Ch. 427 (A.B. 314), Laws 2023, effective Oct. 8, 2023, and applicable as noted.

Illinois

Corporate income tax: Rental real estate owner’s request for alternative apportionment denied

A corporation (taxpayer) that owned rental real estate in Illinois was not entitled to use an alternative method of apportionment for determining corporation income tax liability because the taxpayer failed to demonstrate that the sales factor didn’t fairly reflect the market for its goods or services.

Generally, if the statutory apportionment provisions don’t fairly reflect a taxpayer’s market, then an alternative apportionment method may be permitted. In this matter, there was nothing in the taxpayer’s request to show that the statutory apportionment formula failed to fairly reflect the market for the taxpayer’s business activities, or that the requested alternative method of separate accounting produced a reasonable result.

General Information Letter IT 23-0002-GIL, Illinois Department of Revenue, March 22, 2023, released August 2023.

Indiana

Corporate income tax: Taxpayer entitled to carry forward attributes and adjustments attributed to federal revenue adjustments

For Indiana corporate income tax purposes, an information technology company (taxpayer) was entitled to carry forward attributes (net operating losses, offsets) and adjustments called for in three federal revenue agent reports (RARs). In this matter, the Department of Revenue (department) assessed additional tax based on an audit review of the taxpayer’s federal and Indiana returns and business records for the period at issue. The taxpayer protested that the department erred in failing to carry forward adjustments attributable to federal revenue adjustments.

Upon review, it was noted that the Tax Court has previously determined that the department isn’t precluded from carrying net operating loss (NOL) adjustments from years otherwise outside the statute of limitations to an open year because the taxing authority isn’t attempting to assess tax against otherwise closed years. Therefore, the taxpayer was entitled to carry forward the attributes of the three RARs and, to that end, the taxpayer was required to provide the requisite amended returns as statutorily required to properly and correctly apply and claim the available Indiana NOLs carryover. Accordingly, the taxpayer’s protest was sustained.

Letter of Findings No. 02-20221113, Indiana Department of Revenue, Jan. 3, 2023, released August 2023.

Iowa

Corporate income tax: Corporate rates reduced 

Iowa has determined that corporate income tax rates for 2024 will be reduced because the lower rate will generate the required revenues.

What are the rates in 2024?

The rates for 2024 will be:

• 5.5%, $0 – $25,000
• 5.5%, $25,001 – $100,000
• 7.1%, $100,001 – $250,000
• 7.1%, over $250,000

Order 2023-02, Certifying Iowa Corporate Income Tax Rates for 2024 under Iowa Code section 422.33(1)(b), Iowa Department of Revenue, Sept. 22, 2023.

Massachusetts

Corporate, personal income taxes: Changes to apportionment formula, capital gains rate, credits enacted

Massachusetts enacted significant corporate excise and personal income tax legislation that:

• Replaces the three-factor apportionment formula for determining tax liability from business activities in and outside the state with a single-factor apportionment formula based only on sales, effective beginning with the 2025 tax year.
• Cuts the short-term capital gains rate for individuals from 12 to 8.5%.
• Increases the cap on the residential rent deduction from $3,000 to $4,000.
• Expands the commuter expense deduction to commuter transit fares, regional transit authority fares, and bike expenses.
• Codifies the deduction for student loan payment assistance received from an employer.
• Doubles the residential lead paint removal credit to $1,000 for partial abatement and $3,000 for full abatement.
• Hikes the earned income tax credit from 30 to 40% of the federal credit under IRC Sec. 32.
• Increases the residential septic credit to 60% of the actual repair or replacement costs or $30,000, the annual credit cap to $4,000, and the total credit cap to $18,000. 
• Doubles the inflation indexed limit on the circuit breaker credit for property tax or rent paid by individuals 65 or older.
• Increases the annual cap for the dairy farmer credit from $6 to $8 million.
• Raises the annual cap for the housing development incentive credit from $10 to $57 million for the 2023 tax year and caps the credit at $30 million beginning with the 2024 tax year.
• Authorizes the expansion of industries eligible to receive credits for training and hiring apprentices.
• Eliminates the multitiered child and dependent care credits and implements a single credit of $310 for each dependent child, disabled adult, or senior for the 2023 tax year and $440 beginning with the 2024 tax year.
• Increases the annual cap for the low-income housing credit from $40 to $60 million.

H.B. 4104, Laws 2023, effective Jan. 1, 2023 and as noted; Press Release, Office of Massachusetts Gov. Maura Healy, Oct. 4, 2023.

Michigan

Sales and use tax: Prepared food sales percentage calculation required annually

For purposes of sales and use taxation of prepared food, Michigan has added a definition of “food sold with eating utensils provided by the seller.” For a seller with a prepared food sales percentage of 75% or less, a seller provides utensils if its business practice is to hand utensils to purchasers. For a seller with a prepared food sales percentage greater than 75%, the seller provides utensils if the seller makes eating utensils available to purchasers or, if the food item is bottled water, candy, or soft drinks, the seller hands the utensils to purchasers or makes plates, bowls, or cups that are necessary for the purchaser to receive the food available to purchasers. If a food item has four or more servings packaged as one food item sold for a single price, the seller must hand the eating utensil to the purchaser.

Food is not sold with eating utensils provided by the seller if the utensil was placed in a package by a person other than the seller and that person’s NAIC classification code is that of a manufacturer (subsector 311).

A seller must calculate the prepared food sales percentage for each tax year or business fiscal year, based on the sales data from the prior tax year or business fiscal year, no later than 90 days after the beginning of its tax year or business fiscal year. A single prepared food sales percentage must be calculated annually for all of the seller's establishments.

Act 142 (H.B. 4378) and Act 141 (H.B. 4377), Laws 2023, effective 90 days after adjournment.

Sales and use tax: Oncology company not entitled to industrial processing exemption

An oncology company wasn’t entitled to a Michigan use tax exemption for its purchases of materials. The company argued that its purchases were eligible for the industrial processing exemption, because it used the materials in research or experimental activity for or on behalf of an industrial processor.

Research or experimental activity requirements not met

The company’s activity didn’t meet the requirements for research or experimental activity. Under the applicable statute, research or experimental activity was activity (a) related to the development, discovery, or modification of a product or (2) necessary for a product to satisfy a government standard or receive government approval. Here, the company partnered with pharmaceutical companies to identify patients as candidates for pharmaceutical drug trials. The company didn’t develop, modify, or discover any product on behalf of the pharmaceutical partners. Also, the company’s activity wasn’t necessary for its pharmaceutical partners to obtain government approval for their trial drugs. Thus, the company didn’t conduct research or experimental activity for or on behalf of an industrial processor, and failed to meet its burden of establishing that it was entitled to a use tax exemption.

Strata Oncology, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 362431, Sept. 21, 2023.

North Carolina

Corporate and personal income and franchise tax: Budget includes rate cut and cap, expanded PTE tax

The North Carolina General Assembly passed budget legislation that:

• Cuts the personal income tax rates beginning with the 2024 tax year and provides a trigger for future rate reductions.
• Caps the franchise tax rate for certain general business corporations.
• Expands eligibility for the elective pass-through entity (PTE) income tax to additional partnerships.
• Extends the deadline for making the PTE tax election.

North Carolina Governor Roy Cooper announced he will allow the budget to become law without his signature.

Personal income tax rates

The budget legislation lowers personal income tax rates to:

• 4.5% for the 2024 tax year.
• 4.25% for the 2024 tax year.
• 3.99% for tax years beginning after 2025.

The state will reduce the rates beginning with the 2027 tax year through the 2034 tax year, if total general fund revenue exceeds the trigger amount of: 

• $33,042,000,000 for fiscal year 2025–2026. 
• $34,100,000,000 for fiscal year 2026–2027. 
• $34,760,000,000 for fiscal year 2027–2028. 
• $35,750,000,000 for fiscal year 2028–2029. 
• $36,510,000,000 for fiscal year 2029–2030. 
• $38,000,000,000 for fiscal year 2030–2031. 
• $38,500,000,000 for fiscal year 2031–2032.
• $39,000,000,000 for fiscal year 2032–2033.

If the trigger amount is met, the tax rate equals the greater of:

• The tax rate for the previous tax year decreased by 0.50%.
• 2.49%.

Franchise tax rate

Effective for tax years beginning on or after Jan. 1, 2025, the franchise tax rate for general business corporations is $500 for the first $1 million of a corporation’s net worth. The tax rate applies to the calculation of franchise tax liability reported on 2024 and future corporate income tax returns.

Elective PTE tax 

The legislation expands eligibility for the elective PTE tax to partnerships with partners that include:

• A trust that doesn’t have as a beneficiary any person other than an individual, an estate, a trust, or an exempt organization described in IRC Sec. 1361(c)(6).
• An entity classified as a corporation for federal income tax purposes.

A partnership that can’t make the election on its 2022 tax return can make the election by filing an amended return by Oct. 15, 2023. H.B. 259, Laws 2023, effective 60 days after adjournment of the North Carolina General Assembly and as noted; Press Release, Office of North Carolina Gov. Roy Cooper, Sept. 22, 2023. 

Ohio

Corporate, personal income taxes: Corporation’s president properly responsible for unpaid withholding taxes

The president of a corporation was properly held liable for the corporation’s unpaid Ohio personal withholding taxes because he failed to prove that the Tax Commissioner’s final determination was made in error. In this matter, the individual acknowledged that he was the corporation’s sole shareholder and was ultimately responsible for the business operations, but that he wasn’t liable for the tax delinquency because he was duped by an employee who handled the corporation’s finances. The Board of Tax Appeals noted that Ohio law prevents responsible corporate officers from escaping personal liability by merely delegating the responsibility to file an organization’s tax returns to another. Accordingly, the final determination holding the individual responsible for the unpaid taxes was affirmed.

Chapman Enterprises, Inc. v. Tax Commissioner of Ohio, Ohio Board of Tax Appeals, Nos. 2020-1161, 2020-1162, June 16, 2023, released August 2023.

Note: Many states have similar provisions for personal withholding taxes, as well as other types of state/local taxes, including sales/use tax. Thus, holding employees, especially officers, responsible for underpaid taxes can be an important consideration in deciding where to file state and local tax returns.

Pennsylvania

Corporate income tax: Net loss deduction limitations guidance updated

Pennsylvania has updated its corporation tax bulletin discussing net loss deduction limitations under IRC Sec. 381 and IRC Sec. 382. The bulletin has been expanded to include a discussion of the IRC Sec. 382 limitation, IRC Sec. 163(j) interest expense limitation carryforward, capital loss carryforward, and application of Pennsylvania net losses.

Corporation Tax Bulletin 2008-03, Pennsylvania Department of Revenue, Oct. 11, 2023.

South Dakota

Sales and use tax: Guidance for remote sellers updated 

The South Dakota Department of Revenue has updated a tax facts sheet on the applicability of sales and use tax to the sale of products and services by remote sellers. A remote seller is an out-of-state business that lacks a physical presence in South Dakota but makes sales to consumers within the state. If the business doesn’t have a physical presence but has more than $100,000 in gross sales in South Dakota in the previous or current calendar year, the business is required to license its business and remit applicable sales tax. Topics covered in the tax facts sheet include licensing requirements for South Dakota businesses that are also remote sellers and answers relevant frequently asked questions.

Tax Facts - Remote Seller Bulletin, South Dakota Department of Revenue, July 2023.

Virginia

Sales and use tax: Protest of assessment that included exempt repair labor charges partly sustained

A tractor-trailer repair shop operator’s (taxpayer’s) protest against a Virginia sales and use tax assessment that included exempt labor charges was partly sustained. In this matter, the auditor found that the taxpayer had failed to collect sales tax on the sale of repair parts and that it invoiced its customers on a lump-sum basis for both sales of tangible personal property (repair parts) and charges for labor. The taxpayer argued that it didn’t collect tax on the sales of repair parts because tax was paid at the time of purchase from vendors, and that repair-labor charges should be exempt.

Generally, replacement parts, materials, and supplies meant for transfer to a customer may be purchased tax-exempt from vendors upon submission of a sale-for-resale exemption certificate. Here, it was noted that the taxpayer was responsible for collecting tax from customers on the sales of repair parts and that, to avoid double taxation, it should have provided an exemption certificate to vendors at the time of purchase. Therefore, the auditor properly included the untaxed repair part sales in the audit.

Further, Virginia law allows an exemption for separately stated charges for labor or services rendered in installing, applying, remodeling, or repairing property sold or rented. When a seller doesn’t segregate a nontaxable installation charge from a taxable charge but instead charges on a lump-sum basis, the entire charge is taxable. In this case, the invoices failed to separately itemize charges for repair parts and labor, but the taxpayer had recorded the labor charges in its internal records. Since this was a first audit, the assessment was returned to the audit staff to remove the charges for labor shown on the internal records.

Ruling of Commissioner, P.D. 23-76, Virginia Department of Taxation, July 6, 2023, released September 2023.