State and local tax advisor: November 2023

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

• California
• Colorado
• Illinois
• Indiana
• Massachusetts
• Michigan
• Mississippi
• Ohio
• Pennsylvania
• Tennessee
• Texas

California

Corporate income tax: Regulation specifies procedures for alternative apportionment petitions

An amended California regulation gives taxpayers more certainty on the procedures for petitioning the Franchise Tax Board (FTB) for the use of an alternative apportionment method for corporate tax purposes. The amendments are intended to be consistent with FTB Resolution 2000-10 and FTB Resolution 2017-01, which previously provided some guidance. Prior to the amendments, there was no formal guidance, other than that in the resolutions, on the procedures for the three-member board itself, instead of FTB staff, to consider such petitions.

Petitions

In cases deemed appropriate, the board may elect to hear and decide petitions for alternative apportionment in open session, instead of having this function performed by FTB staff. Taxpayers must file these petitions with the chief counsel of the FTB explaining why their requested alternative apportionment methodology is appropriate or why FTB staff’s methodology is not. Petitions must be filed within:

• 60 calendar days from the date of a written adverse variance action determination by FTB staff.
• 120 calendar days from the date of a filed claim for refund in which the alternative apportionment methodology is relevant to the taxable years in the claim.
• 60 calendar days from the date of a filed protest in which the alternative apportionment methodology is relevant to the taxable years protested.
• Five calendar days from the date of an appeal filed with the Office of Tax Appeals (OTA) in which the alternative apportionment methodology is relevant to the taxable years on appeal.
• 60 calendar days from the date of a letter of rejection by the FTB’s Settlement Bureau in which the alternative apportionment methodology is relevant to the taxable years at issue.
• 60 calendar days from Nov. 3, 2023.

Following the filing of a petition, the following additional deadlines and conditions apply:

• Within 60 calendar days from the date of the petition, the executive officer of the FTB must notify the board of the receipt of the petition.
• Within 60 calendar days from the date of the petition, or the date of FTB staff’s determination, whichever is later, the chief counsel must notify the taxpayer in writing of the receipt of the petition and include a briefing schedule.
• If FTB staff hasn’t previously made a determination on the taxpayer’s request to use an alternative apportionment methodology, the chief counsel must ensure that FTB staff makes such a determination; if the taxpayer files an appeal with the OTA for the relevant taxable years, the taxpayer and FTB staff must file a joint request to defer proceedings with the OTA pending a decision by the board.
• If the FTB hasn’t mailed a notice of proposed deficiency assessment to the taxpayer for the relevant taxable years, the taxpayer must agree in writing to an extension of the statute of limitations for mailing such notice until 180 calendar days after the board has made its decision in open session on the taxpayer’s petition.
• The taxpayer must submit its opening brief to the chief counsel within 60 calendar days from the date of the document notifying the taxpayer of the receipt of the taxpayer’s petition.
• After the taxpayer submits its opening brief, FTB staff must submit its opening brief within 30 calendar days.
• After the FTB submits its opening brief, the taxpayer has 30 calendar days to submit a reply brief.
• The board may require further briefing.

Hearings

Upon completion of the briefing, the board may schedule a hearing to consider the taxpayer’s petition during an open session at a regularly scheduled meeting. The chief counsel must notify the taxpayer in writing of the hearing date. For these hearings:

• The parties will each have 20 minutes to present their positions and an additional 10 minutes for their reply, although the board has the discretion to allow additional time.
• Any party seeking to have a witness testify must notify the other party in writing no later than 15 calendar days after the filing of the taxpayer’s reply brief, and the executive officer must notify the board of the expected witness testimony.
• The board must render its decision on the taxpayer’s petition during the open session.

Ex parte communication rule

Generally, board members and their staff must not communicate with the taxpayer or FTB staff regarding any substantive issue in a petition without:

• Notice.
• An opportunity for all parties to participate in the communication.

The ex parte communication rule continues while the petition is pending and terminates when the board renders a decision. The rule doesn’t apply during the pending of a variance action that’s before FTB staff. Also, it doesn’t apply to certain communications that only relate to the scheduling of a future discussion of the petition and that only involve one board member at a time.

If an ex parte communication occurs, the board member must document the substance of it in writing and provide the information to the other board members and the parties to the petition during the open session at which the board considers the petition.

Reg. 25137, effective Nov. 3, 2023.

Note: Many states allow businesses to petition the state tax authority, or the state tax authority may require, to use an alternative apportionment formula rather than the standard apportionment formula. Similar to California, many states outline procedures before a business can use an alternative apportionment method. In order to use an alternative apportionment formula, a business generally has the burden to prove the existing standard apportionment formula does not fairly source its income to the state while the proposed alternative apportionment method does.

Income tax: FTB discusses signature alternative options for paper tax returns and other documents

Effective Nov. 1, 2023, taxpayers or their representatives may submit signed paper California corporate income and personal income tax returns and other documents, except for power of attorney (POA) declarations and tax information authorization (TIA) forms, using certain signature alternative options.

Temporary procedures

For a temporary period from April 1, 2020, through Oct. 31, 2023, the FTB didn’t require an original signature for paper tax returns and other documents that normally must be signed by original signatures, except for POA declarations and TIA forms. Although, the temporary procedures expire effective Oct. 31, 2023, and original signatures are preferred, the FTB will accept some of the signature alternative methods on a permanent basis.

Signature alternative options

Effective Nov. 1, 2023, the FTB will accept paper tax returns and other documents, except for POA declarations and TIA forms, with the following signature alternative methods.

For paper tax returns, the FTB will accept a paper tax return with a photocopied, faxed, or scanned copy of the signature page with original signatures.

For other documents filed with the FTB that require original signatures, except POA declarations and TIA forms, the FTB will accept:

• A photocopied, faxed, or scanned copy of the signature page with original signatures.
• Documents with original signatures uploaded into MyFTB (only PDF and Excel documents are currently accepted).

Taxpayers are instructed to follow the instructions on the form or notice regarding submission of the form or document to the FTB (whether by mail, fax, online, etc.).

Any photocopied, faxed, or scanned document must be legible and free of defects that impede readability, i.e., contain no speckling, folded or torn pages, poor contrast, etc.

Nonfillable or static content of tax returns, forms, and other documents must not have been modified or deleted.

When a photocopied, faxed, or scanned document has been submitted to FTB, the taxpayer is to retain the original and make it available to FTB upon request.

Public Service Bulletin: Signature Options for Paper Tax Returns and Other Documents, California Franchise Tax Board, Oct. 12, 2023.

Colorado

Sales and use tax: Sales tax guide revised

The Colorado Department of Revenue has updated a publication that provides guidance to retailers regarding the applicability of state and local sales and use tax. The updated publication provides the following additional information on retailer’s service fee:

• For sales made on or after Jan. 1, 2020, the retailer’s service fee is equal to 4% of the state sales tax due for the period, but the total service fee that a retailer may retain for any filing period may not exceed $1,000.
• Beginning Jan. 1, 2022, a retailer is not permitted to retain any money to cover the retailer’s expenses in collecting and remitting tax for any filing period in which the retailer’s total taxable sales were greater than $1,000,000.
• For sales made during the calendar year 2023 only, if the retailer’s total taxable sales for the filing period are less than or equal to $100,000, the service fee is equal to 5.3% of the state sales tax due for the period.

The publication discusses, among other topics, retail sales; taxable sales; calculation of tax; retailers who must collect tax; sales tax licensing; sales tax collection; filing and remittance; local sales taxes; record-keeping requirements; refunds and assessments; and buying or selling a retail business.

Colorado Sales Tax Guide, Colorado Department of Revenue, August 2023.

Illinois

Multiple taxes: Taxpayers affected by severe weather and flooding in Cook County may request tax relief

Individuals and businesses impacted by severe weather and flooding in Cook County on September 17 are eligible to request a waiver of penalties and interest for income taxes, withholding taxes, sales taxes, and specialty and excise taxes. Taxpayers seeking waivers of penalties and interest for taxes must send a brief written explanation of why they can’t timely file or pay to the Illinois Department of Revenue (department).

Taxpayers should provide their full name, account number (if using a Social Security number, include only the last four digits), mailing address, and an estimate of when they believe they can file or pay their taxes. Taxpayers may send in requests electronically to REV.DisasterRelief@illinois.gov or via postal mail to the department. Taxpayers who mail their request to the department must write “Severe Storm – September 17, 2023” on the top of the return in red and include their explanation for penalties and interest abatement request. Property owners who may have been impacted by severe weather must contact the Cook County Assessor’s Office if they wish to file an appeal due to any property damage.

Release, Illinois Department of Revenue, Oct. 30, 2023.

Indiana

Personal income tax: Local tax guidance updated

Indiana has updated its information bulletin regarding the application of state and county income taxes to certain residents and nonresidents. The bulletin has been updated to reflect that pass-through entity taxes similar to Indiana’s are eligible to receive the credit for out-of-state income taxes retroactive to 2019. In addition, the bulletin now reflects that the Washington D.C. unincorporated business income tax imposed directly on individuals is eligible as a credit for Indiana residents and that Washington state income taxes are treated as a credit for Indiana residents. Also, the bulletin clarifies that income from real and tangible personal property located in Indiana is considered Indiana source income for a nonresident. Finally, the bulletin provides the information required for substantiating the credit for out-of-state taxes.

Information Bulletin #28, Indiana Department of Revenue, November 2023.

Massachusetts

Corporate income tax: Manufacturing corporation treatment for developer of standardized computer software discussed

Massachusetts issued guidance discussing the manufacturing corporation treatment for a developer of standardized computer software. In Akamai Technologies, Inc. v. Commissioner of Revenue, the Appellate Tax Board (board) addressed whether a taxpayer should have been classified as a manufacturing corporation for corporate excise tax purposes. The Commissioner of Revenue had argued that the taxpayer sold a content delivery service. But the board determined that the taxpayer instead sold remote access to software that it developed; therefore, the taxpayer was engaged in substantial manufacturing activities and was to be treated as a manufacturing corporation, entitling it to use a single sales factor apportionment formula for excise tax purposes.

Technical Information Release 23-8, Massachusetts Department of Revenue, July 12, 2023, released September 2023.

Michigan

Corporate income tax: U.S. Supreme Court declines review of apportionment formula case

The U.S. Supreme Court has declined review of a decision by the Michigan Supreme Court upholding application of the standard apportionment formula to a company’s income for Michigan business tax purposes. In a case involving gain on the sale of an out-of-state business, the Michigan Supreme Court found that the state’s attribution of 70% of the company’s income to Michigan for the short tax year at issue didn’t violate the Due Process or Commerce Clauses of the U.S. Constitution.

The taxpayer had asked the U.S. Supreme Court to decide whether:

• To comply with the requirements of fair apportionment and the prohibition on extraterritorial taxation, a state had to include in its state tax apportionment formula the factors of a business giving rise to income to be taxed.
• Factor representation included a temporal element.

MMN Infrastructure Services, LLC, Successor in Interest to Vectren Infrastructure Services Corp. v. Michigan Department of Treasury, Dkt. 23-443, petition for certiorari denied, Nov. 20, 2023.

Corporate, personal income taxes: City income tax collection procedures modified

Michigan has modified its city income tax collection procedures.

Registration to withhold

An employer that doesn’t do business in or maintain an establishment in any city that has entered into an agreement with the Department of Treasury to administer, enforce, and collect the city income tax will be able to voluntarily register to withhold taxes on compensation of employees that are residents of that city. Previously, registration was limited to employers with employees who were residents of the city of Detroit.

Informal conferences

For a city that has entered into an agreement with the department to administer, enforce, and collect the city income tax, a taxpayer or employer will have 60 days after receipt of a notice of intent to assess to file a written request for an informal conference to dispute the assessment, in whole or in part. Also, for a city that has entered into an agreement with the department, a taxpayer or employer who serves a written notice upon the department within 60 days of the issuance of a credit audit or a refund denial will be entitled to an informal conference in the same manner as required for a notice of intent to assess. The taxpayer or employer may not appeal the contested portion of an assessment unless an informal conference was requested and conducted. Previously, a taxpayer or employer had 30 days after receipt of a notice of intent to assess to file a written protest with the department, whereby the taxpayer or employer or duly authorized representative was given an opportunity to be heard and present evidence and arguments on their behalf.

Penalties

If the protest to a notice of intent to assess by a city that has entered into an agreement with the department is determined to be frivolous or to delay or impede the administration of the tax, a penalty is imposed. The penalty has been expanded to also apply to a protest to a proposed assessment by a city that hasn’t entered into an agreement with the department, if it’s found to be frivolous or to delay or impede the administration of the tax.

Appeals

Further, for a city that has entered into an agreement with the department, there is a new appeals process for a final assessment, decision, or order of the department. The taxpayer or employer may appeal the contested portion of the assessment, decision, or order to the tax tribunal within 35 days of receipt of the final assessment, decision, or order of the department. As a prerequisite to appeal, the uncontested portion must be paid.

Act 195 (S.B. 507), Laws 2023, effective 90 days after adjournment of the 2023 Legislature.

Mississippi

Corporate income tax: Guidance regarding accelerated and bonus depreciation allowed for certain items

Mississippi has issued a notice providing additional guidance regarding recent legislation that allows accelerated and/or bonus depreciation to be deducted for certain items. For tax years beginning after Dec. 31, 2022, Mississippi will allow the following:

• Taxpayers may choose to immediately deduct “specified research or experimental expenditures,” as defined by Internal Revenue Code Section 174, or to depreciate them according to the federal schedule.
• Expenditures defined as “qualified property” or “qualified improvement property” under Internal Revenue Code Section 168 will be eligible for 100% bonus depreciation, and taxpayers may choose to immediately deduct these expenses or to depreciate them according to the federal schedule.
• Taxpayers may choose to immediately deduct expenses for Internal Revenue Code Section 179 property the year the property is placed into service. Mississippi’s treatment of the deduction will conform to the provisions of Internal Revenue Code Section 179 in effect for that year.

The first two elections listed above must be made by checking the appropriate boxes on the taxpayer’s Mississippi income tax return. The elections must be made by the due date or the extended due date of the return and are irrevocable unless a change in method is allowed by the Commissioner.

Notice 80-23-003, Mississippi Department of Revenue, Oct. 20, 2023.

Ohio

Corporate, personal income taxes: Claiming credit for pass-through entity taxes imposed by other states

Effective for tax year 2023, an individual investor’s proportionate share of taxes paid by a pass-through entity (PTE) that are related to IRS notice 2020-75 (i.e., SALT cap taxes) must be added to federal adjusted gross income (AGI) as part of the calculation of Ohio AGI, for corporate and personal income tax purposes.

Additionally, if the income on which the tax is based qualifies as business income under Ohio law, the add-back also qualifies as business income. Any portion of the tax remaining in Ohio AGI, after accounting for the business income deduction, is then eligible for the Ohio resident credit.

Press Release, Ohio Department of Taxation, September 2023.

Pennsylvania

Personal income, miscellaneous taxes: Philadelphia issues remote work guidance

Philadelphia has issued wage tax guidance regarding nonresident employees in the era of remote work. The guidance is intended to assist employers and employees in understanding the application of Philadelphia’s “Requirement of Employment” policy to hybrid work arrangements.

Under the “requirement of employment” policy, the compensation of nonresident employees who perform work for Philadelphia-based employers is not subject to Philadelphia Wage Tax during the time they are required to work remotely from a location outside Philadelphia, including working from home. If an employer allows an employee to work from home, at the convenience and discretion of the employee, the employee’s compensation will be subject to wage tax.

Additionally, the guidance provides remote work examples and information on applying for wage tax refunds.

Philadelphia Wage Tax policy guidance for nonresident employees in the era of remote work, City of Philadelphia Department of Revenue, Oct. 12, 2023.

Tennessee

Sales and use tax: Taxpayer qualified for industrial machinery exemption

A wholly owned single-member limited liability company (taxpayer) qualified for the Tennessee sales and use tax exemption for industrial machinery and the business tax exemption for manufacturers because it elected to be treated as a corporation for federal income tax purposes. In this matter, the parent company operated a fabrication plant and formed the taxpayer for purposes of only fabricating goods for resale and use off the premises. Generally, the industrial machinery exemption is granted to entities whose principal business is the fabrication or processing of tangible personal property (TPP) for resale and consumption off the premises. Moreover, an activity is a taxpayer’s principal business if more than 50% of its revenues at a given location are derived from fabricating or processing TPP for resale (the “51% test”).

In this case, it was noted that because the taxpayer elected to be treated as a corporation for federal income tax purposes, it would be treated as a separate entity from the parent for Tennessee sales and use tax purposes. This separation would satisfy the 51% test because more than 50% of its revenue would be from sales of fabricated goods for resale and consumption off the premises, while its parent’s sales of contracting services would be excluded. Accordingly, the taxpayer would qualify as a manufacturer at the new business location and would be eligible for the industrial machinery exemption from sales and use tax and reduced rates for water and energy fuel. The taxpayer also qualified as a manufacturer for business tax purposes because it was primarily engaged in the fabrication of goods for resale and consumption off the premises.

Letter Ruling No. 23-08, Tennessee Department of Revenue, Aug. 24, 2023.

Texas

Corporate income tax: No tax due reporting guidance

The Texas Comptroller issued guidance regarding recent legislation that prohibited the Texas Comptroller from requiring certain entities to file No Tax Due Reports when the entities have no Texas franchise tax liability. The guidance states the Texas Comptroller has eliminated the No Tax Due Report and states what, if anything, these entities should file beginning with the 2024 Texas franchise tax report year.

Based on this new guidance, entities with annualized total revenue at or below the “No Tax Due” threshold and new veteran-owned businesses do not have to file a Texas franchise tax report. Entities with annualized total revenue below the “No Tax Due” threshold still must file a Public Information Report or Ownership Information Report, but new veteran-owned businesses do not have to file this. Passive entities, REITs, and entities with zero Texas gross receipts must file either a Texas franchise tax long form or EZ computation form, but they will not need to provide any information other than darkening the appropriate circle on the form and signing the form. These entities must also file a Public Information Report or Ownership Information Report.

Letter No. 202311002L, Texas Comptroller of Public Accounts, Nov. 6, 2023.