The states covered in this issue of our monthly tax advisor include:
California
Sales and use tax: Guidance on manufacturing and R&D exemption issued
California provides guidance on a partial sales tax exemption that allows certain manufacturers, researchers, and developers to pay a lower sales tax rate on qualifying equipment purchases and leases. The publication includes information on the reduced tax rate; eligibility; and qualified persons, property, and uses.
CDTFA Publication 541, Manufacturing and Research & Development Exemption Tax Guide, California Department of Tax and Fee Administration, March 2024.
Colorado
Corporate, personal income taxes: Workforce shortage tax credit created
Colorado has created a new income tax credit to encourage workforce development in industries that are facing worker shortages. The credit will be available for tax years 2026 through 2032.
Who is eligible for the credit?
Taxpayers in an industry with a demonstrated workforce shortage, as determined by the Office of Economic Development, are eligible for the credit if they incur costs for facility improvement or equipment acquisition associated with training programs designed to alleviate workforce shortages.
However, the credit won’t be allowed under certain circumstances where taxpayers receive other state, local, or federal appropriations.
How much is the credit?
Taxpayers may receive the credit for up to 50% of their qualified costs.
The total amount of credits reserved for all taxpayers cannot exceed $15 million per year. The credit cap will be reduced to $7.5 million per year if certain revenue targets are not met.
How do taxpayers apply for and claim the credit?
Taxpayers must apply to the Office for a tax credit reservation. The Office will accept applications only from 2025 through 2029. If the Office determines that a taxpayer is a qualified applicant and the application is complete, the Office will add the application to an evaluation pool. A selection committee will consider the merits of each application in the evaluation pool and reserve tax credits for qualified applicants. After taxpayers incur their investment costs, they must submit evidence of compliance and a certification of expenditures to receive a tax credit certificate. The Office may levy a reasonable application and issuance fee to cover administration of the credit program.
To claim the credit, taxpayers must file their tax credit certificate with their state income tax return. Persons and organizations that are exempt from tax must file an information return to claim the credit.
Is the credit refundable?
If the amount of the credit allowed exceeds a taxpayer’s income taxes for the year, or a qualified applicant is exempt from tax, the amount of the credit not used to offset income taxes will be refunded.
Is the credit subject to recapture?
The credit is subject to recapture for noncompliance with the credit requirements.
When do these provisions take effect?
These provisions take effect 90 days after final adjournment of the General Assembly, unless a referendum petition is filed. If a referendum petition is filed, then the referred provisions will not take effect unless approved by voters at the November 2024 general election. If approved, the provisions will take effect on the date of the official declaration of the vote thereon.
H.B. 1365, Laws 2024, effective as noted.
Corporate, personal income taxes: Several deductions and credits modified, others repealed
Colorado has enacted legislation modifying several income tax deductions and credits and repealing other infrequently used deductions and credits.
Modified deductions and credits
The modifications to deductions and credits include:
- Increasing the maximum amount of a rural healthcare preceptor credit from $1,000 to $2,000 and allowing taxpayers to claim the credit for up to three preceptorships per tax year (maximum credit of $6,000 per tax year), beginning in tax year 2025.
- Changing the wildfire hazard mitigation expenses credit amount from 25% of expenses up to $2,500 to 100% of expenses up to $1,000, beginning in tax year 2025.
- Extending the alternative transportation options credit for two years, through tax year 2026.
- Requiring local governments and nonprofit organizations that claim the alternative transportation options credit to file an informational return rather than a corporate tax return for tax year 2024.
- Requiring local governments and nonprofit organizations that claim the conservation easement credit or the credit for environmental remediation of contaminated land to file an informational return, beginning in tax year 2024.
- Removing certain filing requirements for enterprise zone credits.
- Adding a statement of purpose for the Colorado tuition program deduction.
- Eliminating the requirement that the Department of Revenue present the biannual tax profile and expenditure report to the finance committees of the House of Representatives and the Senate.
Repealed deductions and credits
The following deductions and credits are repealed, beginning in 2025 except as noted:
- Catastrophic health insurance deduction.
- Nonresident disaster relief worker deduction.
- Medical savings account contributions deduction.
- Childcare facility investments credit (repealed beginning in 2026).
- School-to-career expenses credit.
- Colorado works program employer credit.
- Credit for purchase of uniquely valuable motor vehicle registration numbers.
- First-time homebuyer savings account deduction.
- Wildfire mitigation costs deduction.
Effective date
These changes take effect 90 days after final adjournment of the General Assembly, unless a referendum petition is filed. If a referendum petition is filed, then the referred provisions won’t take effect unless approved by voters at the November 2024 general election. If approved, the provisions will take effect on the date of the official declaration of the vote thereon.
Ch. 373 (H.B. 1036), Laws 2024, effective as noted.
Connecticut
Multiple taxes: NOL carryforward period extended, other changes enacted
Connecticut enacted legislation that:
- Extends the net operating loss (NOL) carryforward period for corporation business taxpayers from 20 to 30 years, effective for NOLs from tax years beginning on or after Jan. 1, 2025.
- Allows, rather than requires, personal income tax withholding from certain retirement distributions, effective beginning Jan. 1, 2025, except lump sum distributions of more than $5,000 or 50% of the individual’s entire account balance.
- Reduces the number of full-time jobs that corporations, pass-through entities, and insurance companies must create to qualify for JobsCT rebate program tax credits or offsets, if three or more new employees live in an area of the state with concentrated poverty.
- Creates an additional JobsCT credit or offset, effective beginning with the 2025 tax year, for 50% of the income tax withholding from 1 or more new employees who live in an area of the state with concentrated poverty.
- Extends the due date from 45 days to 90 days for newly licensed nonresident or foreign insurance companies to report and pay tax on net direct premiums received during the five previous calendar years.
- Authorizes the reexamination and reassessment of insurance gross premiums tax liability.
The legislation also provides an optional valuation allowance deduction to corporation business taxpayers subject to combined reporting requirements if:
- Members of the group are publicly traded companies, including affiliated corporations participating in a publicly traded company’s financial statements prepared according to GAAP rules.
- The shift to combined reporting beginning with the 2016 tax year resulted in an aggregate decrease in the amount of NOLs or tax credits the combined group can realize in Connecticut as reported according to GAAP rules.
- The group didn’t include in the computation of the deduction the impact of any valuation allowance from enactment of combined reporting.
- The group files a statement of intent to claim the deduction with the Department of Revenue Services by July 1, 2025.
Combined reporting groups that meet the criteria can claim the deduction against their net income over a 30-year period beginning with the 2026 tax year. The deduction is equal to one-thirtieth of the amount necessary to offset the increase in the valuation allowance against NOLs and tax credits in the state. A combined group can carry forward any unused deduction to succeeding tax years until it can use the entire deduction.
Act 151 (H.B. 5524), Laws 2024, effective June 6, 2024 and as noted.
Illinois
Multiple taxes: NOL cap, many other tax changes enacted
Illinois Gov. J.B. Pritzker signed a budget-related tax package that:
- Caps corporate income tax net operating loss (NOL) carryover deductions at $500,000, effective for tax years ending on or after Dec. 31, 2024, and before December 31, 2027.
- Requires banks and financial organizations to source receipts from investment assets and activities based on the location of the assets and activities, rather than based on a fixed place of business in or outside the state, effective for tax years ending on or after Dec. 31, 2024.
- Increases the franchise tax exemption from the first $5,000 of liability to the first $10,000 of liability, effective on or after Jan. 1, 2025.
- Allows a personal income tax deduction for student loan repayments received from a qualified community foundation under the state’s Workforce Development through Charitable Loan Repayment Act, effective beginning with the 2026 tax year.
- Offers local news organizations an income tax withholding credit of $15,000 for each full-time journalist, and $10,000 for each new full-time journalist, employed for a 12-month period before applying for the credit, effective beginning with the 2025 year.
- Expands corporate and personal income tax credits for live theater productions to eligible nonprofit productions, effective July 1, 2024, and allows an employer income tax withholding credit for those productions beginning with the 2025 tax year.
- Creates income tax credits for up to 15% of the labor expenditures and 10% of certain investments by qualified music production, distribution, and promotion companies doing business in the state, effective beginning with the 2025 tax year.
- Renames the corporate and personal income tax credits for “wages paid to ex-felons” to “wages paid to returning citizens” and, effective beginning with the 2025, increases the credit from 5% to 15% of the wages paid.
- Expands the volunteer emergency worker income tax credit to individuals who volunteer for 100 or more hours during the tax year for a county or municipal emergency services and disaster agency, effective beginning with the 2024 tax year.
- Extends the sunset dates on income tax credits for student assistance contributions and adoption expenses to Dec. 31, 2029.
- Adds a refundable child tax credit for personal income taxpayers, effective beginning with the 2024 tax year.
- Grants income tax credits to businesses, trusts, and individuals for 25% of a gift to a permanent endowment fund held by a qualified community foundation, effective for tax years ending on or after Dec. 31, 2025.
- Imposes the hotel operator’s occupation tax on any business or individual who is a re-renter of hotel rooms in the state and who is not employed by the hotel operator, effective July 1, 2024.
- Effective beginning with the 2025 tax year, expands the sales and use tax to tangible personal property leased from retailers or service providers, except for motor vehicles, watercraft, aircraft, semitrailers, licensed software meeting certain requirements, and personal property subject to any local home rule government lease tax adopted by ordinance before Jan. 1, 2023.
- Limits the 9-1-1 surcharge deduction and vendor’s sales and use tax discount, including any local tax or surcharge administered by the Department of Revenue, to a total of $1,000 each month, effective for returns due on or after Jan. 1, 2025.
- Replaces the flat 15% tax on sports wagering revenues with graduated rates ranging from 20% on annual adjusted gross receipts up to $30 million to 40% on annual adjusted gross receipts of more than $200 million, effective beginning July 1, 2024.
- Imposes an additional 1% tax on net terminal income from video gaming, beginning July 1, 2024.
- Extends the motor fuel receiver’s tax and environmental impact fee to Jan. 1, 2030.
- Extends the housing opportunity area property tax abatement program through the 2034 tax year.
- Modifies the county property tax redemption penalty for foreclosure sales based on the number of residents in the county, effective beginning with the 2024 tax year.
- Requires county property tax bills to include a list of exemptions and contact information for the chief county assessment officer, effective beginning with the 2026 tax year.
- Eliminates a requirement that senior citizens reapply for the property tax homestead exemption each year.
P.A. 103-592 (H.B. H4951), Laws 2024, effective June 7, 2024 and as noted.
Michigan
Personal income tax: Taxpayer was personally liable for company’s unpaid withholding taxes
A taxpayer was personally liable as a corporate officer for a company’s unpaid Michigan withholding taxes. Although the taxpayer didn’t sign any of the company’s withholding returns during the period of default, he did sign returns before the period of default using the title of “controller” or “officer.” And while he downplayed his role as merely one of data entry, his testimony indicated that he was almost exclusively responsible for providing financial information to support both tax payments and business decisions. Moreover, the position of “controller” is generally one with significant control over accounting and financial operations, and thus an officer position.
The taxpayer also argued that there was no evidence he willfully failed to pay the taxes. But undermining that premise was his testimony admitting that he knew taxes were in arrears and his duties included trying to resolve the arrearage.
Finally, the taxpayer argued that the Department of Treasury should have been required to first assess the company’s successor purchaser, before assessing the taxpayer. However, the department couldn’t be required to do so where it didn’t have information clearly identifying the purchaser.
Mertz v. Department of Treasury, Michigan Court of Appeals, No. 365480, June 13, 2024.
Corporate income, sales and use taxes: Tax relief available for taxpayers in Cass, St. Joseph, and Kalamazoo counties
The Michigan Department of Treasury has announced that due to the severe storms affecting Kalamazoo, St. Joseph, Branch, and Cass counties, taxpayers residing in those counties may request additional time to file state tax returns. A penalty and interest waiver is also available. Taxpayers must contact the Department by telephone or mail to request relief. The request must include (i) name and taxpayer’s account number, (ii) a description of how the taxpayer was impacted by storm damage and (iii) taxpayer address within the emergency area or the address of the tax preparer located within the emergency area.
News Release, Michigan Department of Treasury, May 28, 2024.
Missouri
Corporate, personal income taxes: Rules amended, rescinded
Missouri has amended various income tax rules relating to:
- Changes of accounting periods.
- Determinations of timeliness.
- Net operating losses (NOLs) on individual income tax returns.
Missouri has also rescinded a bank franchise tax rule relating to the deduction for federal income tax paid.
Changes of accounting periods
The rule on changes of accounting periods has been amended to expand the scope of the rule to address changes of tax periods for additional income tax types, personal and dependency exemption deductions, and the handling of 52-53 week tax periods.
Determinations of timeliness
The rule on determinations of timeliness has been amended to address determinations of timeliness where a return is electronically filed or emailed and make other minor changes.
NOLs for individuals
The rule on NOLs for individuals has been amended to make changes to the description of the proper treatment of NOLs for purposes of Missouri individual income tax and address the handling of negative federal adjusted gross income by individuals.
Federal income tax deduction
The bank franchise tax rule for computing the federal income tax deduction has been rescinded because the information in it will be updated and published annually in the bank franchise tax return instructions.
Reg. Secs. 12 CSR 10-2.030, 12 CSR 0-2.240, 12 CSR 10-2.710, and 12 CSR 10-10.135, Missouri Department of Revenue, effective July 30, 2024.
Oregon
Corporate income tax: Affiliates could use different apportionment
An Oregon corporation excise (income) taxpayer, that filed a consolidated return, was correct that each affiliate was required to determine its own apportioned percentage of the group’s overall income. Oregon argued that a single percentage must be determined for the group as a whole.
The taxpayer contended that some affiliates in its group were interstate broadcasters, while others were not. A taxpayer that is an “interstate broadcaster” must use a special apportionment formula relying on an “audience ratio” to attribute gross receipts. However, the taxpayer contended that other affiliates that do no broadcasting must use the standard, uniform attribution statutes, which generally look to the “destination” of sales of tangible personal property to apportion income.
What did the court determine?
The court found that Oregon law requires the separate computation of apportionment factors for each affiliate joining in a consolidated Oregon return. Oregon’s statutory exception requires each affiliate’s status as an “interstate broadcaster,” or not, to be determined separately. Nothing in the 1989 law adopting the interstate broadcaster apportionment provisions changed that fact.
ABC Inc. and Combined Affiliates v. Department of Revenue, Oregon Tax Court, No. TC 5431, May 14, 2024.
South Carolina
Corporate, personal income taxes: IRC conformity updated
South Carolina has updated its Internal Revenue Code conformity date from Dec. 31, 2022, to Dec. 31, 2023.
If there are IRC sections adopted by South Carolina that expired on Dec. 31, 2023, and are extended, but not amended, by congressional enactment during 2024, then those sections are also extended for South Carolina income tax purposes.
H.B. 4594, Laws 2024, effective May 20, 2024.
Texas
Sales and use tax: Taxability of website design, development, and marketing consulting services discussed
The Texas Comptroller of Public Accounts issued a publication discussing the applicability of sales and use tax to an advertising agency’s (taxpayer’s) sales of website design, website development, marketing consulting, advertising, and retainer services. The comptroller determined that the services to design and plan, but not create, a website didn’t fall under the list of services subject to tax. Therefore, the taxpayer’s website blueprinting service, when provided on a stand-alone basis, wasn’t taxable.
However, the taxpayer’s website creation, design and development, and website support services were taxable data processing services as it involved the compilation, storage, and manipulation of data. Additionally, it was noted that the marketing consulting and advertising services generally don’t fall under the list of taxable services. But the creation of graphic or finished art is a taxable sale of tangible personal property.
Finally, although the taxpayer’s lump sum charges for retainer services included both taxable and nontaxable items, as an advertising agency, it wasn’t required to separately list these items or list tax on its charges for retainer services. The comptroller stated that the taxpayer’s invoices must indicate tax was collected on any taxable items provided and that the taxpayer’s books and records must document the taxable items provided and the tax collected on those items.
Letter No. 202404008L, Texas Comptroller of Public Accounts, April 25, 2024.
Washington
Sales and use tax: Assessment partly sustained due to sufficient nexus
The Washington Department of Revenue’s (department’s) assessment of business and occupation (B&O) tax and retail sales tax issued against a limited liability company (taxpayer) was partly sustained because the taxpayer’s activities created sufficient nexus with Washington. In this matter, the taxpayer challenged the assessments covering a period when it was a subsidiary of a national retailer and a subsequent period after it merged into its parent entity. The taxpayer disputed the sufficiency of taxing nexus for pre-merger periods and disputed the taxation of internal transfers for post-merger periods. Additionally, the taxpayer asserted that a number of wholesale sales were improperly classified as retail sales.
Upon review, the Administrative Review and Hearings Division determined that the taxpayer had substantial nexus for pre-merger periods based on its relationship with and use of its parent company’s Washington retail locations. Further, it was noted that the taxpayer did not provide sufficient records to characterize disputed transactions as wholesale sales, and thus these portions of the assessments were sustained.
Finally, for post-merger periods, it was noted that the taxpayer ceased to exist as a separate legal entity and became part of the parent entity and, therefore, there was no longer a basis to tax accounting entries as if they were still taxable intercompany transfers. Accordingly, the taxpayer’s petition was granted in part and denied in part.
Determination No. 21-0083, Washington Department of Revenue, 42 WTD 066, Dec. 22, 2023, released April 2024.
Sales and use tax: Rule on single factor apportionment revised
The Washington Department of Revenue has amended its excise tax rule on single factor receipts apportionment for purposes of the business and occupation (B&O) tax. Neither the taxpayer nor the department may use an attribution method that unfairly attributes or distorts the apportionment of the taxpayer’s receipts. A taxpayer with Washington apportionable receipts is required to keep all books and records to show that the attribution method used fairly apportions and doesn’t distort the taxpayer’s apportionable receipts. Such records must also support the attribution method. The taxpayer must use the same attribution method for all apportionable receipts in a tax year from the same service.
Regarding where the taxpayer’s customer receives the benefit of the service, if the taxpayer’s service is provided to a customer engaged in business and the service relates to the customer’s business activities, the customer receives the benefit of the service where the customer’s related business activities occur. Related business activities occur either in the customer’s market or at the customer’s business location. The customer’s related business activities occur in the customer’s market if the taxpayer's service is:
- Promoting the customer’s products.
- Engaging in or completing sales of the customer’s products.
- Obtaining payment of amounts owed to the customer.
- Establishing or maintaining the customer’s market.
WAC 458-20-19402, Washington Department of Revenue, effective June 15, 2024.
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