State and local tax advisor: January 2024

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

• Alabama
• Illinois
• Michigan
• New York
• Ohio
• Texas
• Washington

Alabama

Franchise tax: Changes to 2024 business privilege tax filing requirements

The Alabama Department of Revenue issued a notice of changes to the state’s business privilege tax taking effect in 2024. The changes are:

• For taxable years beginning after Dec. 31, 2023, taxpayers whose business privilege tax is calculated to be $100 or less don’t have to pay any business privilege tax and don’t have to file a business privilege tax return.
• Beginning Jan. 1, 2024, the Alabama Secretary of State Corporation Annual Report will no longer be filed with the business privilege tax return. Instead, the Alabama Secretary of State’s Business Services Division will begin processing the annual reports. Only for-profit corporations and professional corporations have to file these reports. The filing fee will be $10 and the form will be available on the Alabama Secretary of State’s Business Services Division’s website.

Notice, Alabama Department of Revenue, Jan. 4, 2024.

Illinois

Corporate, personal income taxes: Investment partnership rules proposed

Illinois proposed new and amended rules implementing law changes that:

• Require withholding by investment partnerships for nonresident partners.
• Modify the definition of an investment partnership, effective for tax years ending on or after Dec. 31, 2023.

The new investment partnership withholding rule addresses:

• Exemptions from the withholding requirement.
• Computation of withholding tax liability.
• Withholding tax rates.
• Return and payment deadlines.
• Withholding tax credits.
• Tax underpayments and overpayments.
• The impact of a pass-through entity tax election by an investment partnership.

The public comment period on the rules is open until Jan. 29, 2024.

86 Ill. Adm. Code Secs. 100.7034 and 100.9730, Illinois Department of Revenue, proposed Dec. 15, 2023.

Multiple taxes: Information provided on new payment equals agreement statute

The Illinois Department of Revenue issued an informational bulletin regarding previously enacted legislation that amends the meaning of payments made for sales, use, and excise taxes and fees. Under the new law, any payment made, with the exception of quarter-monthly payments, constitutes an agreed liability by the taxpayer. The change is effective for all payments, except quarter-monthly payments, made on or after Jan. 1, 2024.

Effects of change

On and after Jan. 1, 2024, any taxpayer that doesn’t agree with a protestable assessment for a sales, use, or excise tax or fee, has two options:

• If you don’t pay the assessment, you may file a protest and request a hearing through the IDOR Administrative Hearings or the Illinois Independent Tax Tribunal, as applicable.
• If you pay the assessment, you must file a claim for credit or refund and, if the claim is denied, you will receive protest rights. You can file a protest of the claim denial and request a hearing through IDOR’s Administrative Hearings or the Illinois Independent Tax Tribunal, as applicable.

Prior to Jan. 1, 2024, making a payment didn’t necessarily mean agreement with the assessment of tax. Taxpayers under audit or examination could make a payment and retain the rights to review or protest disputed tax liabilities proposed or assessed by the IDOR.

Effective Jan. 1, 2024, making a payment for an assessed sales, use, or excise tax or fee means you are agreeing to the liability, and you waive your right to:

• Review of your proposed audit findings with IDOR’s Informal Conference Board (to the extent you make a payment of any tax shown due as a result of an auditor’s report, Notice of Proposed Tax Liability, or Notice of Proposed Tax Liability and Claim Denial).
• Protest through IDOR’s Administrative Hearings or the Illinois Independent Tax Tribunal (to the extent you make a payment of any tax shown due as a result of an auditor’s report, Notice of Deficiency, or Notice of Tax Liability). If you disagree with an assessment that you have paid, you will only receive protest rights if you file a claim for credit or refund and that claim is denied.

Unpaid (i.e., unagreed) amounts may be reviewed by the appropriate authority as long as the request is made within the review or protest timeframe allowed by Illinois law.

Tax acts and taxes affected

The informational bulletin lists all of the additional tax and fee acts that are impacted by the payment equals agreement changes made to Section 4 of the Retailers’ Occupation Tax Act.

Informational Bulletin FY 2024-15, Illinois Department of Revenue, January 2024.

Michigan

Sales and use tax: Guidance on refund procedures provided

The Michigan Department of Treasury has provided guidance on the procedures sellers and purchasers must follow when seeking a refund of sales or use tax. In order to claim a refund, a seller must show that it didn’t collect the tax from the purchaser or that it refunded the purchaser. The claim should include the following:

• Taxpayer identifying information.
• Account number.
• Tax type.
• Printed name and contact information of person filing the claim.
• The transactions for which a refund is claimed, including date and return on which the tax was reported.
• Proof that the purchaser has been refunded the tax.

If a purchaser pays tax directly to Treasury or another state department, it may seek a refund directly from Treasury. A purchaser may use form 5633 (Purchaser Refund Request for Sales or Use Tax Exemption) in cases where the purchaser didn’t present an exemption claim at the time of the purchase. For those products that are exempt by their very nature (e.g., food), no claim of exemption is required; therefore, when tax is collected in such instances, only the seller may seek a refund. If the purchaser believes the seller improperly charged tax, the purchaser may directly request a refund from the seller.

Revenue Administrative Bulletin 2023-24, Michigan Department of Treasury, Dec. 19, 2023.

Corporate income tax: Audit of member didn’t extend limitations period for unitary group returns

An audit of an individual business included in a unitary business group (UBG) didn’t extend the statute of limitations for filing the UBG’s returns to claim Michigan business tax refunds. The UBG was a separate and distinct taxpayer. If a UBG return was required, then separate returns for individual members shouldn’t even have been filed. There was no legal support to transfer the tolling of the statute of limitations from the audit of returns that should never have been filed to returns that should have been filed but weren’t timely filed. Also, the statute of limitations could be extended only as to items that were the subject of the audit. Here, the UBG returns didn’t even exist when the audit began and weren’t the subject of the individual business audit.

The UBG also argued that some of the entities that made up the UBG requested federal income tax extensions for the years at issue, thereby extending the statute of limitations for the UBG’s state tax returns. However, the UBG didn’t provide evidence that any of the entities submitted the necessary documentation to receive a federal extension. Moreover, it failed to demonstrate how an extension of the due date for some individual entities’ federal returns would operate to extend the deadline for the UBG’s state return.

Soave and Unitary Affiliates v. Department of Treasury, Michigan Court of Appeals, No. 364415, Jan. 4, 2024.

Corporate income tax: Tribunal erred ruling company didn’t have taxable nexus with Detroit

The Michigan Tax Tribunal erred when it ruled that an out-of-state holding company didn’t have sufficient nexus with Detroit to be subject to the city’s income tax. The Tax Tribunal had granted summary disposition in favor of the company. The Michigan Court of Appeals reversed and remanded the case for further proceedings.

The company was a Delaware corporation, but it listed in its Delaware filings that Detroit was its principal place of business. It had no employees and no property in Detroit. But, its officers and agents in Detroit took many actions on behalf of the company in conjunction with the sale of an asset that the company owned. According to the court, these actions were sufficient to show a taxable nexus between the company and Detroit, and the Tax Tribunal erred when it ruled otherwise. Further, the company’s presence and activities in Detroit couldn’t be deemed minimal.

On remand, the Tax Tribunal must determine what alternate method of accounting should be used to determine the net profits of the taxpayer allocable to Detroit.

Apex Laboratories International, Inc. v. City of Detroit, Michigan Court of Appeals, No. 363984, Jan. 4, 2024.

Sales and use tax: Sourcing rules explained

The Michigan Department of Treasury has issued guidance on the sourcing of sales of tangible personal property and rentals/leases, for purposes of sales and use tax. The following sourcing rules apply to tangible personal property hierarchically:

• If products are received at the business location of the seller, the sale is sourced to the state in which the product was received.
• If the prior condition doesn’t apply, the sale is sourced to the location where the product was received by the purchaser or purchaser’s designee.
• If the prior conditions don’t apply, the sale is sourced to the address for the purchaser available from the seller’s business records.
• If the prior conditions don’t apply, the sale is sourced to the location indicated by an address for the purchaser obtained at the sale’s completion, including the address of the purchaser’s payment instrument.
• If none of the conditions apply, the sale is sourced to the location from which the tangible personal property was shipped.

For rentals or leases, if the agreement doesn’t require periodic recurring payments, the general sourcing rules apply. If periodic recurring payments are required, the first payment is sourced the same way as a retail sale. Subsequent payments are sourced to the primary property location for each period covered by the payment.

For a lease or rental of motor vehicles, trailers, semitrailers, and aircraft, if the agreement doesn’t require periodic recurring payments, it’s sourced the same way as a retail sale. If periodic recurring payments are required, each payment is sourced to the location of the leased property as indicated by the address of the property provided by the lessee and available from the lessor’s records.

Revenue Administrative Bulletin 2023-26, Michigan Department of Treasury, Dec. 26, 2023.

New York

Corporate, personal income taxes: PTET guidance on states with similar taxes updated

New York has updated its list of other states imposing a substantially similar pass-through entity tax (PTET). The information relates to the New York credit allowed to resident partners, members, or shareholders for any substantially similar PTET imposed by another state, local government, or the District of Columbia that is paid by a partnership or New York S corporation to another jurisdiction on income derived from that jurisdiction and subject to New York personal income tax under Article 22. The list also indicates the first tax year that each state qualifies as having a tax substantially similar to the New York state PTET.

Notice, New York Department of Taxation and Finance, Jan. 3, 2024.

Corporate income tax: Receipts nexus thresholds increased for 2024

New York announced an increase in the thresholds at which a corporation is deemed to be deriving receipts from activity in the state and in the Metropolitan Commuter Transportation District (MCTD) for purposes of imposing the corporate franchise tax and MTA surcharge. Specifically, the thresholds have increased to $1,283,000 for tax years beginning on or after Jan. 1, 2024, and before Jan. 1, 2025. 

Also, when determining whether the thresholds are met for a unitary group, only receipts from qualifying corporations with at least $12,000 in New York receipts, for the franchise tax, and at least $12,000 in MCTD receipts, for the MTA surcharge, are aggregated.

The thresholds will remain the same until the Commissioner of Taxation and Finance next reviews the cumulative percentage change in the consumer price index and is required to adjust the receipts thresholds.

Notice, New York Department of Taxation and Finance, Dec. 29, 2023.

Ohio

Corporate income tax: Guidance on separate filing of combined taxpayer group member amended 

The Ohio Department of Taxation updated its release on separate filing of a member of a combined taxpayer group, discussing a revised rule, effective Dec. 21, 2023. For the member to file separately, the member and the reporting person of the group must agree that the member will not claim any of the group’s annual exclusion amount. Furthermore, the member isn’t entitled to claim its own annual exclusion amount. For calendar year 2024, the exclusion amount is $3 million and for calendar year 2025 and after, the amount is $6 million.

Commercial Activity Tax Information Release CAT 2005-12, Ohio Department of Taxation, Dec. 21, 2023.

Texas

Sales and use tax: Local tax sourcing rule amended

The Texas Comptroller has amended rule Section 3.334, regarding local sales and use taxes. The amendment adds the following as subsection (c)(7), regarding the location where an order is received:

The location where the order is received by or on behalf of the seller means the physical location of a seller or third party such as an established outlet, office location, or automated order receipt system operated by or on behalf of the seller where an order is initially received by or on behalf of the seller and not where the order may be subsequently accepted, completed, or fulfilled. An order is received when all of the information from the purchaser necessary to the determination whether the order can be accepted has been received by or on behalf of the seller. The location from which a product is shipped shall not be used in determining the location where the order is received by the seller.

The Texas Comptroller’s rules didn’t previously define the word “receive” in the local tax sourcing context. The Texas Comptroller is currently in litigation with several Texas cities, including Coppell, Humble, DeSoto, Carrollton, Farmers Branch, and Round Rock in which these cities argue that the underlying statute treats the location where the vendor forwards the order for fulfillment as the location where the order is received, not the location where the order is received from the customer.

34 TAC 3.334, Texas Comptroller of Public Accounts, Jan. 9, 2024.

Corporate income tax: Apportionment rule upheld

A Texas court of appeals upheld the validity of a Texas Comptroller rule that apportions a business’s receipts from sales of tangible personal property to the location to which that property is delivered. The taxpayer, a business that sold fuel that was delivered to certain oceangoing foreign vessels in Texas but transported outside Texas waters before it was used, argued that the rule is invalid as it contradicts the underlying statute. The relevant statutory language states that sales are apportioned to Texas “if the property is delivered or shipped to a buyer in this state.” The challenged rule provided more specific factual situations, such as when property is delivered in Texas to a means of conveyance the purchaser controls or in Texas waters, the sale is apportioned to Texas. The court of appeals upheld the trial court’s decision that the rule didn’t contact the statutory language.

NuStar Energy, L.P. v. Hegar, Court of Appeals of Texas, Third District, Austin, No. 03-21-00669-CV, Dec. 21, 2023.

Washington

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

The U.S. Supreme Court has denied a request from taxpayers 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 had 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 denied Jan. 16, 2024.