View of U.S. Capitol against the blue sky.
Article

State and local tax advisor: July 2024

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

July 26, 2024 / 27 min read

Have you heard about the latest changes in state and local taxes? Check our July 2024 roundup here.

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

California 

Corporate, personal income taxes: NOL suspension, business credits cap, and more enacted

California has enacted the following corporate tax and personal income tax changes to implement 2024–25 state budget proposals:

NOL suspension 

For taxable years beginning on or after Jan. 1, 2024, and before Jan. 1, 2027, no NOL deductions will be allowed under the corporate tax or personal income tax law, except for taxpayers with income of less than $1 million for the taxable year. The carryover period for any NOL for which the deduction is suspended will be extended by: 

Business credits cap 

For taxable years beginning on or after Jan. 1, 2024, and before Jan. 1, 2027, the total of all business credits otherwise allowable to a taxpayer under the corporate tax or personal income tax law, including the carryover of any business credits, may not exceed $5 million per taxable year. For taxpayers required or authorized to be included in a combined report, the total of all business credits must not reduce the aggregate amount of tax of all members of the combined report by more than $5 million per taxable year. The amount of any credit not allowed due to this limitation will remain available as a credit carryover. The carryover period for any credit not allowed due to the limitation will be increased by the number of taxable years the credit wasn’t allowed.

An exemption from the limitation is provided for low-income housing credits and specified nonbusiness personal income tax credits. Also, certain credit amounts that a taxpayer elects to apply against sales and use tax aren’t included in the limitation.

The legislature has stated an intent to enact other legislation in the 2023–24 legislative session to allow taxpayers subject to the temporary credit limitation to utilize their credits after the limitation period ends by electing to receive a refund of the credits they would have otherwise used to reduce their tax liability during the limitation period. 

Apportionment formula

The legislation states that when a corporation receives income or loss not included in net income subject to apportionment, that amount must be excluded from the corporation’s apportionment formula. The legislature has stated its intent that this doesn’t constitute a change in, but is declaratory of, existing law. The clarification applies to taxable years beginning before, on, or after the effective date of the legislation.

Cannabis business deductions and credits

For taxable years beginning before Jan. 1, 2030 (previously, Jan. 1, 2025), California doesn’t conform under the personal income tax law to federal law that disallows deductions or credits for businesses engaged in licensed commercial cannabis activity.

Charitable conservation easement deductions

California law allowing a deduction for charitable contribution easements will conform to certain changes in federal law made by the Consolidated Appropriations Act, 2023, for contributions made on or after Jan. 1, 2024.

Intangible drilling and development costs deduction

The deduction for intangible drilling and development costs, in the case of oil and gas wells, won’t apply to costs paid or incurred on or after Jan. 1, 2024.

Depletion deductions

For taxable years beginning on or after Jan. 1, 2024, California disallows the calculation of depletion as a percentage of gross income from property for specified natural resources, including coal, oil, oil shale, and gas. California has also repealed a provision stating that it didn’t conform to federal law preventing large crude oil producers from calculating a depletion deduction as a percentage of gross income.

Advanced strategic aircraft credit

The advanced strategic aircraft credit may be used to reduce regular tax below the tentative minimum tax for taxable years beginning before Jan. 1, 2031 (previously, Jan. 1, 2026).

Enhanced oil recovery credit

The enhanced oil recovery credit will be allowed only for taxable years beginning before Jan. 1, 2024.

Earned income, young child, and foster youth credits

For taxable years beginning on or after Jan. 1, 2024, the FTB must calculate a graduated reduction amount for the young child tax and the foster youth tax credits so that the amount of those credits is equal to zero for a qualified taxpayer with earned income in excess of the maximum earned income that results in a California earned income tax credit amount greater than $0.

Electronic notifications

California law authorizes the FTB to provide notification to a taxpayer in a preferred electronic communication method designated by the taxpayer that a specified notice, statement, bill, or other communication is available for viewing in the taxpayer’s folder on the FTB’s website. It also allows the taxpayer to file a protest, notification, and other communication to the FTB in a secure manner. The sunset date (previously, Jan. 1, 2025) for this authorization has been eliminated.

Disaster relief

The director of finance, rather than the FTB, must now determine whether a taxpayer is affected by a state of emergency declared by the governor for purposes of postponing certain tax-related deadlines under IRC Sec. 7508, as incorporated by California. Also, an impacted taxpayer may now request the postponement of certain tax-related deadlines under IRC Sec. 7508 during an additional relief period beginning on the date the state postponement period expires and ending on the date the federal postponement period expires. These provisions apply to any federally declared disaster or governor-proclaimed state of emergency on or after the effective date of the legislation.

Ch. 34 (S.B. 167), Laws 2024, effective June 27, 2024, and applicable as noted.

Personal income tax: FTB’s apportionment of business income to nonresident taxpayer upheld 

A nonresident taxpayer didn’t demonstrate that the Franchise Tax Board’s (FTB) apportionment of business income to him for California income tax purposes was erroneous. During the tax year at issue, the taxpayer was the sole member of a limited liability company (LLC) classified as a disregarded entity for federal and California income tax purposes. The LLC had an ownership interest in a limited partnership (LP) that generated pass-through income directly and indirectly from other partnerships. The taxpayer received a federal Schedule K-1 from the LLC, which reported a pass-through IRC Sec. 1231 net gain. The FTB used the LLC’s reported California apportionment percentage of 10.064% to determine the taxpayer’s California source income from the 1231 net gain business income.

The taxpayer proposed that the 1231 net gain business income be apportioned instead by a California apportionment percentage of 9.2511%, using the LP’s reported California apportionment percentage and adding the 1231 net gain (not gross receipts from the 1231 net gain transactions) to the LP’s reported sales factor. However, the taxpayer’s proposal to include net gains with gross receipts to compute the sales factor was inconsistent with the relevant California apportionment rules. Further, the taxpayer failed to provide credible, competent, and relevant evidence to successfully rebut the FTB’s determination to use the LLC’s reported California apportionment percentage.

Blau, California Office of Tax Appeals, No. 21088383, 2024-OTA-282, July 7, 2023, petition for rehearing denied May 9, 2024 (released July 2024).

Corporate, personal income taxes: New law provides refundable business credits, other potential tax relief

A California budget trailer bill provides corporate tax and personal income tax relief by:

Refundable business credits

In each of the 2024, 2025, and 2026 taxable years, a taxpayer may elect to receive a refundable tax credit in the amount of the business credits that would otherwise have been allowed in the taxable year but for the $5 million limitation. A taxpayer who makes the election can claim the refundable credit amount in equal installments of 20% of the qualified credits over a five-year period, beginning in the third taxable year after the election is made. The election must be made on an original timely filed return, and once made is irrevocable. Taxpayers may use the refundable credit amounts to reduce their tax below the tentative minimum tax.

For taxpayers who elect refunds under the special provisions applicable to the motion picture production credit (Program 4.0), any amount of refundable credit that exceeds the $5 million limitation will be allowed beginning in the first taxable year that the limitation is not operative. If a taxpayer makes the election under both the motion picture production credit provisions and the more general refundable credit provisions with respect to a credit amount, the total amount of credit allowed must not exceed the amount allowed under the motion picture production credit provisions.

Business credits limitation

For 2025 and 2026, the $5 million credit limitation won’t apply if the director of finance determines by May 14 of the year that there are sufficient General Fund revenues, and there is legislation in the annual budget act to not apply the limitation for the specified year.

NOL suspension

Also, for 2025 and 2026, the provision suspending NOL deductions won’t apply if the director of finance determines by May 14 of the year that there are sufficient General Fund revenues, and there is legislation in the annual budget act to not apply the provision for the specified year.

Ch. 42 (S.B. 175), Laws 2024, effective June 29, 2024.

Property tax: Change in ownership valid, tax assessment affirmed

For California property tax purposes, the Court of Appeals determined that a property purchased by a taxpayer subject to a lease to another taxpayer qualified for a change in ownership determination and resulting tax assessment. In 2015, the owner and lessor of the property sold all of its interest in the property to the taxpayer, and the taxpayer took title subject to another entity’s lease, which had a remaining term of less than 35 years. At the time of the sale, the assessor determined that the sale constituted a change in ownership because under Sec. 61(c)(1)(D), if the remaining term of the lease is less than 35 years, then for purposes of Proposition 13 there is a change in ownership. Under current law, the government can reassess the value of real property for taxation purposes after a change in ownership. Therefore, the assessor reassessed the property at its current market value. The newly reassessed value significantly increased the tax payable on the property. The taxpayers challenged the assessor’s change in ownership determination and the resulting property tax reassessment. The taxpayers asserted that only a primary owner can transfer primary ownership and because the lessee was the primary owner before the 2015 transaction between the owner and the taxpayer, and the lessee didn’t transfer any of its leasehold interest as part of that transaction, the lessee remained the primary owner after the 2015 transaction and there was no change in ownership for tax purposes.

However, the Court of Appeal found that although the lease initially provided the lessee in December 2005 with an interest in the property deemed under the statute to be substantially equivalent to ownership of the fee, there was no support for the taxpayers’ contention that the lessee retained that interest throughout the lease despite the sale of the property’s fee title to the taxpayer. The Court of Appeal also rejected the taxpayers’ contentions that Sec. 61(c)(1)(D) was unconstitutional because it conflicted with the intent of the voters when enacting Proposition 13, and was inconsistent with Secs. 60 and 61(c)(1)(A). Therefore, under the unambiguous language of Sec. 61(c)(1)(D), the 2015 transaction was a change in ownership permitting reassessment. Accordingly, the trial court decision was affirmed.

Equinix, LLC v. County of Los Angeles, Court of Appeal of California, Second District, No. B324243, May 9, 2024.

District of Columbia

Corporate, personal income taxes: Combined reporting change, child tax credit enacted

The District of Columbia’s Budget Support Act of 2024 has become law and includes several income tax changes. The changes include:

What is the child tax credit?

After 2024, there is a refundable personal income tax credit for each qualifying child of the taxpayer.

The amount of the credit is:

The amount of the credit is reduced by $20 for each $1,000 the taxpayer’s adjusted gross income exceeds a threshold amount. The reductions can’t reduce the credit below zero.

The threshold amount is the adjusted gross income reported on the taxpayer's return in the following amounts for 2025:

After Dec. 31, 2025, the threshold amounts are increased annually pursuant to a cost-of-living adjustment.

How is the low-income housing credit changed?

The low-income housing credit is amended by:

Act 25-0506 (D.C.B. 875), Laws 2024, effective July 15, 2024, for a 90-day period that expires Oct. 13, 2024.

Illinois

Multiple taxes: Quantum computing incentives created, many other incentives changed

Illinois enacted corporate income, personal income, and utility tax incentive legislation that:

P.A. 103-595 (H.B. 5005), Laws 2024, effective June 26, 2024, and as noted.

Multiple taxes: Informal conference audit review rules amended

Illinois amended rules on Informal Conference Board (ICB) review of proposed corporate income, personal income, or sales and use tax audit adjustments that:

86 Ill. Adm. Code Secs. 215.115 and 215.120, Illinois Department of Revenue, effective June 25, 2024.

Michigan

Corporate income, insurance taxes: Unitary group of insurance companies could file combined return

A unitary business group (UBG) of insurance companies could file combined returns and calculate Michigan insurance premiums tax, retaliatory tax, and the automobile insurance placement facility credit on a groupwide basis. The Department of Treasury had rejected the group’s attempts to file combined returns and instead treated each insurance company as a separate filer. The department took the position that the Michigan law requiring UBGs to file combined returns only applied to the filing of returns for corporate income taxes, and not for insurance premiums and retaliatory taxes. However, according to the Michigan Court of Appeals, once a group meets the statutory definition of a UBG, then the entities within the UBG cease to be separate taxpayers, leaving the UBG as a single taxpayer. The court also observed that the combined return statute didn’t exclude any subcategory of tax from its provisions. Finally, the court noted that it would be illogical to include insurance companies within the definition of a UBG and then exclude UBGs from filing a unitary return under Chapter 12 of the Corporate Income Tax Act — the only chapter that imposes a tax on insurance companies.

Nationwide Agribusiness Insurance Co. v. Department of Treasury, Michigan Court of Appeals, No. 364790, June 20, 2024.

Minnesota

Corporate income tax: Alternative apportionment method allowed

The Minnesota Commissioner of Revenue’s presented sufficient evidence to support the use of an alternative apportionment method to determine a company’s net income in Minnesota for corporation franchise tax purposes. That method excluded gross receipts from foreign exchange contract (FEC) transactions from the calculation of the company’s apportionment factor and substituted net income from FEC transactions.

The company was a science and technology company with worldwide operations. It entered into FECs during the tax years at issue to address foreign currency risks and manage its foreign exchange exposure. None of those FEC activities were conducted in Minnesota. The gross receipts from the FECs were earned in the ordinary course of the company’s business, but the FEC transactions were qualitatively different from company’s other business activities. The FEC transactions played a supportive risk management function and didn’t serve an independent profit-oriented purpose.

Including FEC gross receipts in the Minnesota apportionment factor substantially distorted the company’s income arising from taxable business activities in Minnesota. Thus, the Tax Court agreed with the Commissioner that the general apportionment method didn’t fairly reflect the company’s net income in Minnesota for the tax years at issue. The Commissioner contended that the proposed alternative, excluding FEC gross receipts from the calculation of the apportionment factor but including net income from FEC transactions, maintained a relationship between the FEC transactions and the sales apportionment factor without overwhelming the factor with the FEC activity. The Tax Court determined that this method fairly reflected the company's net income in Minnesota.

E.I. duPont de Nemours and Co. & Subsidiaries v. Commissioner of Revenue, Minnesota Tax Court, No. 9485-R, June 24, 2024.

Missouri

Corporate, personal income taxes: Taxation of pass-through entities modified

Missouri has enacted legislation modifying the taxation of pass-through entities. The modifications relate to:

Credits for income tax paid to another state

Current law authorizes a taxpayer to claim a credit for income tax paid to another state on income that is also taxable in Missouri. The new law allows resident S corporation shareholders to take a similar credit for the amount of individual income tax imposed by Missouri on their share of the S corporation’s income derived from sources in another state but not subject to income tax in the other state.

Business income deductions

Currently, when calculating tax under the SALT Parity Act, a taxpayer’s tax burden may be reduced through use of the federal business income deduction. The new law alters this calculation by allowing use instead of the Missouri business income deduction.

Opt-outs from the SALT Parity Act taxation methods

The SALT Parity Act allows an alternative method for the taxation of income of pass-through entities, as well as a tax credit against those sources of income tax. The new law allows a member of an affected business entity to opt out of the SALT Parity Act’s taxation methods. If one or more members opt out, the affected business must subtract those members’ allocable income and deduction items. If a member doesn’t file a timely opt-out election for a tax year, that member will not be precluded from timely filing an opt-out election for subsequent tax years.

If a nonresident member chooses to opt out, that member must agree to:

SALT Parity tax credits

The new law also makes the SALT Parity tax credit available to a fiduciary of an estate or trust that’s a member of an affected business entity.

H.B. 1912, Laws 2024, effective Aug. 28, 2024.

New Jersey

Corporate income tax: Corporate transit fee surtax enacted

New Jersey has enacted a new “Corporate Transit Fee’ on certain corporation business tax taxpayers. The surtax is in effect for privilege periods beginning on and after Jan. 1, 2024, through Dec. 31, 2028.

What is the rate of the “Corporate Transit Fee?”

The surtax is 2.5%.

No credits are allowed against the surtax, except for credits for installment payments, estimated payments made with request for an extension of time for filing a return, or overpayments from prior privilege periods.

Which corporations must pay the surtax?

The surtax is on taxpayers that have New Jersey allocated taxable net income over $10 million. The surtax will not be imposed on any S corporation or public utility.

Ch. 2024-20 (A.B. 4704), Laws 2024, effective June 28, 2024; Press Release, New Jersey Department of Treasury, June 29, 2024.

North Carolina

Sales and use tax: Guidance provided on repeal of economic nexus transaction threshold

Guidance is provided on the repeal of the economic nexus transaction threshold for North Carolina sales and use tax purposes.

Repeal of transaction-based threshold

Effective July 1, 2024, the transaction-based prong of the economic nexus threshold is repealed. Formerly, remote sellers were required to collect and remit tax if they met the economic nexus threshold, which was either: (1) gross sales in excess of $100,000 from remote sales sourced to North Carolina for the previous or calendar year; or (2) 200 or more separate transactions. As a result of legislation enacted on July 1, 2024, the 200 transactions threshold is eliminated and only the gross sales threshold applies.

Consequently, and effective July 1, 2024, the remote seller threshold is:

Remote sellers exceeding the transaction threshold

Prior to July 1, 2024, remote sellers may have registered with the North Carolina Department of Revenue and obtained a certificate of registration solely because they exceeded the transaction threshold. A remote seller may cancel its registration if it:

The term “gross sales” includes all sales as a marketplace seller. If the retailer is a marketplace facilitator, this includes marketplace-facilitated sales for all marketplace sellers. If a remote seller meets all the above criteria, it may elect to cancel its registration or remain registered with the department. However, the remote seller must continue to collect sales and use tax, file returns, and remit sales and use tax until it cancels its registration.

Cancellation of registration

To cancel a registration, the remote seller must:

The date must be on or after the date the form is filed.

However, if a remote seller registered via the Streamlined Sales Tax Registration System, any updates must be made at: sstregister.org.

Directive No. SD-24-1, North Carolina Department of Revenue, July 1, 2024.

Oregon

Corporate income tax: Nexus safe harbor exceeded by manufacturer

The Oregon Supreme Court affirmed a tax court decision holding a cigarette manufacturer’s activities, including return of goods and “prebook orders,” created nexus for purposes of Oregon’s corporation excise tax.

What activities did the manufacturer engage in?

The taxpayer was a New Mexico corporation operating out of state. The taxpayer had no offices or inventory of its own located in Oregon. The taxpayer sold tobacco products only to wholesalers. The taxpayer sent its employees into Oregon to persuade Oregon retailers to order its products from wholesalers. Many of the wholesalers were located in Oregon. When a representative visited an Oregon retailer in person and convinced the retailer to agree to order products from a wholesaler, the representative could take one of two actions.

One option was for the representative to leave the retailer a “sell sheet order.” A sell sheet order was a “suggestion” to buy. Oregon did not argue that the taxpayer’s actions regarding sell sheet order took it outside the safe harbor of P.L. 86-272. The second option, was a “prebook order.” The prebook order contained additional information over a sell sheet order, and the taxpayer representative would personally send the order to the wholesaler by hard copy. When a wholesaler received a prebook order, that triggered a provision of an incentive agreement with the taxpayer. The incentive agreements required every wholesaler to “accept and process” prebook orders.

Did the taxpayer exceed the safe harbor?

The taxpayer’s representatives went beyond soliciting orders on behalf of wholesalers. Because the wholesalers had already been committed by the terms of their incentive agreements to accept any prebook order, the taxpayer’s representatives were doing more than “enabling” wholesalers to sell products to retailers. Instead, they were “requiring” wholesalers to sell those products and facilitating those sales. That exceeded the scope of the permitted “solicitation of orders.” The taxpayer, by having its representatives take “prebook orders” from Oregon retailers, took itself outside the safe harbor of P.L. 86-272. Thus, the manufacturer was subject to tax by Oregon.

Santa Fe Natural Tobacco Co. v. Department of Revenue, Supreme Court of Oregon, No. SC S069820, June 20, 2024.

Pennsylvania

Corporate, personal income taxes: NOL deduction increased, other changes enacted

Pennsylvania has made changes to the corporate and personal income tax computation and enacted and amended tax credits.

What are the corporate income tax changes?

The corporate income tax changes include:

The net loss deduction is calculated as follows:

What are the personal income tax changes?

The personal income tax changes include:

What are the tax credit changes?

Tax credit changes include:

S.B. 654, Laws 2024, effective immediately and as noted above.

South Carolina

Corporate income tax: Combined reporting was reasonable alternative to correct distortion

A business group engaged in retail sales of automobiles was using intercompany transfer pricing and a partnership with an east-west structure to significantly distort the taxpayer’s business activity in South Carolina and artificially lower its South Carolina tax burden, without a reasonable justification.

Separate reporting, together with standard apportionment, didn’t correct the distortion. Accordingly, combined unitary reporting was a reasonable and equitable alternative method that could correct the distortion and result in a fair representation of the taxpayer’s South Carolina business activity. However, because the Department of Revenue didn’t complete the application of combined unitary reporting by applying the Finnigan method, the case had to be remanded.

CarMax Auto Superstores, Inc. v. South Carolina Department of Revenue, South Carolina Administrative Law Court, No. 21-ALJ-17-0182-CC, July 12, 2024.

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.

©2024 CCH Incorporated and its affiliates. All rights reserved. 

Related Services:

State & Local Tax Tax

Related Thinking

View of Washington Monument at sunrise.
June 27, 2024

State and local tax advisor: June 2024

Article 18 min read
Birds flying above water in front of a U.S. government building.
May 29, 2024

State and local tax advisor: May 2024

Article 30 min read
Tree in bloom in front of a U.S. Congress building.
April 25, 2024

State and local tax advisor: April 2024

Article 15 min read