The states covered in this issue of our monthly tax advisor include:
California
Corporate income tax: Company not entitled to additional COGS or subcontractor expense deductions
A company wasn’t entitled to additional cost of goods sold (COGS) or subcontractor expense deductions in excess of those allowed by the Franchise Tax Board (FTB) for California franchise and income tax purposes. The company helped contractors find the right clients and subcontractors, and it provided cash to them, so they had the right cash flow to complete construction projects. The company couldn’t have any COGS, because it was engaged in a service business and didn’t carry goods or inventory. Also, it failed to show that it was entitled to an increased deduction for subcontractor expenses. Additional invoices it provided weren’t reliable, as they were only created during an audit and didn’t include corroborating documents.
S & I Construction, Inc., California Office of Tax Appeals, 2024-OTA-316, Nov. 14, 2023 (released August 2024), petition for rehearing denied, 2024-OTA-317, June 7, 2024.
District of Columbia
Corporate, personal income taxes: Combined reporting, other changes enacted
The District of Columbia has passed its Budget Support Act of 2025, which includes several income tax changes. The law is similar to the recently passed Budget Support Act of 2024. The changes include:
- Changing from the “Joyce” method of corporate income apportionment to the “Finnigan” method starting in 2026.
- Narrowing the individual income tax exemption on all state and local municipal bond interest so that only interest from District bonds is exempt beginning in 2025.
- Establishing an individual income child tax credit starting in 2025.
- Amending the low-income housing credit.
- Delaying an earned income tax credit increase from after Dec. 31, 2025, until after Dec. 31, 2028.
- Permanently repealing the tax on capital gain from sale or exchange of certain qualified high technology company (QHTC) investments.
Act 25-0550 (D.C.B. 784), Laws 2024, approved July 26, 2024, effective after a 30-day congressional review period.
Illinois
Corporate income tax: Guidance issued on impact of new NOL cap
Illinois issued estimated tax guidance discussing the impact of the new cap on corporate income tax net operating loss (NOL) carryover deductions. The cap is effective for tax years ending on or after Dec. 31, 2024. The guidance advises taxpayers that calculate estimated payments without considering the NOL cap to:
- Start making payments.
- Increase the payments for the tax year to avoid a late payment penalty.
Informational Bulletin FY 2025-01, Illinois Department of Revenue, July 2024.
Corporate, personal income taxes: Angel Investment credit rules amended
Illinois amended rules to implement the new 35% corporate and personal income tax credits, effective beginning Jan. 1, 2024, for angel investments made in:
- New businesses owned 51% or more by minorities, women, or individuals with a disability.
- New businesses that have a principal place of business in a county with a population of 250,000 residents or less.
The amended rules also reflect the $15 million annual cap on total credits that’s effective beginning with the 2024 tax year.
14 Ill. Adm. Code Secs. 531.20, 531.30, and 531.55, Illinois Department of Revenue, effective July 29, 2024.
Sales and use tax: Certain retailers making sales shipped into Illinois required to collect tax using destination-based sourcing rules
Beginning Jan. 1, 2025, retailers maintaining a place of business in Illinois that make retail sales of tangible personal property to Illinois customers from a location(s) outside of Illinois are required to collect state and local sales and use tax using destination-based sourcing rules. Specifically, a retailer maintaining a place of business in Illinois that makes retail sales of tangible personal property to Illinois customers from a location(s) outside of Illinois is engaged in the occupation of selling at retail in Illinois. Those retailers are liable for all applicable state and locally imposed taxes administered by the Department of Revenue on retail sales made by those retailers to Illinois customers from locations outside of Illinois. Also, for sales that would otherwise be sourced outside of Illinois, a retailer maintaining a place of business in Illinois that makes retail sales of tangible personal property to Illinois customers from a location(s) outside of Illinois is engaged in the business of selling at the Illinois location to which the tangible personal property is shipped or delivered or at which possession is taken by the purchaser.
P.A. 103-983 (S.B. 3362), Laws 2024, effective Jan. 1, 2025.
Corporate, personal income taxes: Investment partnership regulations adopted
Illinois adopted regulations that implement:
- Changes to the definition of “investment partnership.”
- A new requirement for investment partnerships to withhold corporate, replacement, or personal income tax from each nonresident partner.
The regulations provide guidance on:
- The asset and gross income tests for determining if a partnership is an investment partnership.
- Exemptions from the withholding requirement.
- How to compute the withholding tax, including the treatment of losses, deductions, and credits.
- The due date for withholding returns and payments.
- Nonresident partners who can claim a credit for withholding tax paid by the investment partnership.
- Eligibility of partnerships for the pass-through entity tax election and its effect on the partnership’s withholding requirement.
- Overpayments and underpayments of withholding tax.
The withholding tax regulation also includes examples.
Sales and use tax: Elimination of state tax on groceries, other tax changes enacted
Enacted Illinois legislation makes various sales and use tax changes, including the following:
- Provide that, beginning Jan. 1, 2026, the state sales and use tax is eliminated for food for human consumption that’s to be consumed off the premises where it’s sold (other than alcoholic beverages, food consisting of or infused with adult use cannabis, soft drinks, candy, and food that has been prepared for immediate consumption).
- Provide authorization for any county or municipality to impose their own local 1% tax on groceries, effective on or after Jan. 1, 2026, (any local grocery taxes enacted will be administered and enforced by the Illinois Department of Revenue).
- Provide that, in Cook County, the rate of the regional transportation authority retailers’ occupation tax on sales of food for human consumption that’s to be consumed off the premises where it’s sold (other than alcoholic beverages, food consisting of or infused with adult use cannabis, soft drinks, candy, and food that has been prepared for immediate consumption) is 1.25%, and the service occupation tax for food prepared for immediate consumption and transferred incident to a sale of service by certain licensed entities is 1.25%.
- Provide that from July 1, 2024, to July 1, 2029, a home rule municipality having a population in excess of 500,000 may impose a prepaid wireless 9-1-1 surcharge not to exceed 9% per retail transaction sourced to that jurisdiction.
- Change the definition of “prepaid telephone calling arrangements” for purposes of the retailers’ occupation tax and specify that the changes apply on and after Jan. 1, 2025.
- Remove a requirement that the imposition of certain non-home rule use and occupation taxes are subject to voter referendum approval.
- Authorize Sangamon County to impose a tax upon all persons engaged in the county in the business of renting, leasing, or letting rooms in a hotel that’s subject to a specified hotel tax under the Illinois Municipal Code, at a rate not to exceed 3% of the gross rental receipts from renting, leasing, or letting, excluding, however, from gross rental receipts, the proceeds of the renting, leasing, or letting to permanent residents of that hotel.
P.A. 103-781 (H.B. 3144), Laws 2024, effective Aug. 5, 2024, except as noted.
Kansas
Corporate income tax: Addition and subtraction modifications to federal adjusted gross income explained
Pursuant to S.B. 410, Kansas enacted certain additions and subtractions to federal adjusted gross income for calculating Kansas adjusted gross income for corporate income tax purposes. For tax years 2021 and following, Kansas has decoupled from the federal code and allows a deduction for current year’s interest expense in its totality. A subtraction modification is allowed for the amount disallowed as a deduction under Section 163(j) of the federal Internal Revenue Code (IRC). An addition modification is required for any amount deducted by reason of a carry forward of disallowed business interest under Sec. 163(j) of the IRC. Furthermore, a taxpayer may also amend its 2021 return to adjust the interest deduction amount and receive the amount it would have received if the current year provisions had been operative in 2018, 2019, and 2020. A copy of the federal Form 8990 for those years should be submitted.
Notice 24-16, Kansas Department of Revenue, Aug. 7, 2024.
Corporate, personal income taxes: Modifications for federal jobs credits discussed
Kansas issued guidance on the modifications provided to corporate and personal income taxpayers for:
- Wage and salary expenses disallowed under IRC Sec. 280C because the taxpayer claimed any federal employment credit, effective for tax years beginning after 2021.
- Effective for the 2021 tax year, 50% of the amount disallowed because the taxpayer claimed a federal employee retention credit.
The guidance provides information about documentation requirements for supporting the federal employee retention credit modification. It also covers the deadline for filing a refund claim or amended return.
Notice 24-18, Kansas Department of Revenue, Aug. 13, 2024.
Minnesota
Corporate income tax: Market research activities in state created taxable nexus
Market research activities performed by a Wisconsin company’s sales team in Minnesota created a sufficient nexus with the state to subject the company to Minnesota income and franchise tax. The company argued that it was immune from Minnesota income and franchise tax because either: 1) all of the sales team’s activities in Minnesota were protected “solicitation of orders,” or 2) any unprotected activities were de minimus. However, the Minnesota sales team prepared market news notes that they shared with nonsales personnel, which went beyond the mere solicitation of orders. Further, the unprotected activities were regular and systematic, and not de minimis, as evidenced by the sales team’s preparation of over 1,600 individual market research notes in Minnesota over a two-year period.
Uline, Inc. v. Commissioner of Revenue, Supreme Court of Minnesota, No. A23-1561, Aug. 7, 2024.
New Hampshire
Corporate income tax: Overpayment credit amounts limited
New Hampshire has amended the business profits and business enterprise estimated tax overpayment provisions to decrease the amount of allowable overpayment credit before a refund.
What change is made regarding overpayments?
Currently, a credit for overpayment is allowed in an amount up to 500% of the total tax liability for the tax period, and the remainder is refunded. The law is amended to decrease the credit amount to:
- For tax periods ending on or after Dec. 31, 2029, a credit will be allowed up to 250% of the total tax liability for the taxable period, and the remainder of the overpayment will be refunded.
- For tax periods ending on or after Dec. 31, 2031, a credit will be allowed up to 100% of the total tax liability for the taxable period, and the remainder of the overpayment will be refunded.
Ch. 245 (H.B. 1525), Laws 2024, effective July 1, 2024.
Tennessee
Sales and use tax: Repair services performed in-state on traffic management equipment then shipped out-of-state were subject to tax
Repair services performed on traffic management equipment by a taxpayer at its Tennessee facility were subject to sales and use tax on transactions that occurred before July 1, 2024.
Repair services exemption inapplicable
An exemption is provided for repair services, including parts and labor, with respect to qualified tangible personal property, where such services are initiated, completed, or both, by a repair person within Tennessee, and where that property, after having been repaired, is delivered or shipped outside Tennessee. “Qualified tangible personal property” is defined, in part, to include machinery, apparatus, and equipment, with all associated parts, appurtenances, and accessories, that’s necessary for building or improving roads or highways.
The exemption was inapplicable, however, to the services at issue because the equipment wasn’t necessary for building or improving roads and highways. The equipment wasn’t used to build roads, and it didn’t improve the physical structure of the road itself. Instead, the equipment increased efficiencies for vehicles traveling on the roads. The shipping method isn’t relevant to the taxability of the taxpayer’s repair services.
Law amended effective July 1, 2024
The law was amended, effective July 1, 2024, to provide that if the service is performed in Tennessee and the serviced property is then shipped or delivered by the seller to a purchaser outside Tennessee, the sale is no longer sourced to Tennessee and is reported as an exempt interstate sale.
Letter Ruling No. #24-05, Tennessee Department of Revenue, June 4, 2024.
Sales and use tax: Updated guidance issued for marketplace facilitators
Updated guidance is issued for marketplace facilitators for Tennessee sales and use tax purposes.
Marketplace facilitators
A marketplace facilitator is responsible for collecting and remitting Tennessee sales tax on sales made through its marketplace. A marketplace facilitator must register in Tennessee to collect and remit sales tax if it made or facilitated total sales to consumers in Tennessee of $100,000 or more during the previous 12-month period. Marketplace facilitators must register and begin collecting sales tax on the first day of the third month following the month it meets the threshold.
Marketplace sellers
An out-of-state marketplace seller isn’t required to register in Tennessee if all of its taxable sales are facilitated by a marketplace facilitator. However, if the marketplace seller makes any sales other than those through a marketplace facilitator, it may be required to register if it has physical presence in the state or has made $100,000 or more in sales in the state during the previous 12-month period.
Important Notice No. 20-15, Tennessee Department of Revenue, July 2024.
Texas
Corporate income tax: Limitations period when extension filed
The Texas Comptroller has issued updated guidance as to the limitations period for assessments and refunds of franchise tax when a taxpayer requests an extension of the deadline to file and pay any tax due on a Texas franchise tax report. This guidance is the same as Letter No. 202404005M, issued on April 24, 2024, except the updated guidance clarifies that the stated policy applies only to reports originally due on or after Jan. 1, 2021.
In general, the limitations period is four years from the date a tax becomes due and payable. The Comptroller’s guidance explains that Texas franchise tax becomes due and payable on the due date for the Texas franchise tax report for that report year, which is typically May 15.
However, if a taxpayer properly requests an extension on or before May 15 and makes the required extension payment with its request (either 100% of tax due in the prior report year or 90% of the tax that ends up being due in the current year), the date that the tax becomes due and payable becomes the extended deadline. As a result, the beginning of the limitations period is the extended deadline, not the original deadline of May 15. But, if the taxpayer doesn’t make the required extension payment or otherwise doesn’t meet the legal requirements for an extension, the limitations period will begin on the original deadline of May 15.
Letter No. 202408001M, Texas Comptroller of Public Accounts, Aug. 2, 2024.
Virginia
Corporate, personal income taxes: Entities given until mid-September to file PTET
Pass-through entities (PTEs) are given until Sept. 16, 2024, to make a retroactive pass-through entity tax (PTET) election for tax year 2021. The communication issued by Virginia tax suggests that PTEs file the tax year 2021 PTET electronically using a business account (iFile) and insists on full payment of the Tax year 2021 PTET. There are no extensions or late filing options available for this.
Email, Virginia Department of Taxation, Aug. 15, 2024.
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