The states covered in this issue of our monthly tax advisor include:
California
Sales and use tax: Changes to bad debt deductions for lenders and affiliated entities discussed
Recently enacted legislation made the following changes regarding bad debt deductions for lenders and affiliated entities for California sales and use tax purposes:
- Lenders may no longer take a bad debt deduction or file a claim for refund for accounts found worthless on and after Jan. 1, 2025.
- Affiliated entities (as defined under Section 1504 of Title 26 of the United States Code) of a retailer may no longer take a bad debt deduction or file a claim for refund for accounts found worthless on and after Jan. 1, 2025.
A lender is any person who holds a retail account purchased directly from a retailer who reported the tax or any person who holds a retail account according to a contract they hold directly with the retailer who had previously reported the tax. Any person who is an affiliated entity or assignee of these persons is also a lender.
Lenders and affiliated entities may continue to take a bad debt deduction or file a claim for refund for accounts found worthless and written off prior to Jan. 1, 2025. Claims for refund may be filed for up to three years from the date the account was found worthless and written off for income tax purposes. Lenders and affiliated entities that subsequently collect previously claimed bad debts, in whole or in part, must report to the California Department of Tax and Fee Administration the taxable percentage of the amount collected.
Retailers who have incurred bad debts may continue to take bad debt deductions for sales or use tax paid to the state that’s later found worthless and written off for income tax purposes. The recently enacted legislation (Ch. 34 (S.B. 167), Laws 2024) doesn’t impact a retailer’s ability to take a bad debt deduction on and after Jan. 1, 2025.
Special Notice L-951, California Department of Tax and Fee Administration, September 2024.
Illinois
Sales and use tax: Appliance installations not qualified for contractor exemption
A national home improvement store violated the Illinois False Claims Act when it failed to collect and remit sales tax on dishwashers and microwaves purchased with installation services. The violation occurred during the tax period after the Illinois Department of Revenue issued a tax alert stating that most retailers don’t act as a construction contractor when an appliance is sold, the purchaser requires installation of the appliance, and the invoice lists the charge for installation separately. There was sufficient evidence that the store consciously disregarded this alert to suit its longstanding tax practice that it was not required to collect and remit sales tax on the purchases and installations. The store was liable for damages based on the unpaid state sales tax, but it wasn’t liable for prejudgment interest or unpaid local sales tax. It was also entitled to a setoff against the damages for use tax it paid during the tax period.
Illinois v. Lowe's Home Centers, LLC, Appellate Court of Illinois, First District, 1-23-1163 and 1-23-1177, Sept. 30, 2024, 404-085.
Michigan
Personal income tax: Reduction to tax rate in 2023 was temporary
The Michigan Supreme Court has allowed a court of appeals decision to stand that concluded that the 2023 reduction to the income tax rate was temporary. The attorney general had previously held that the 4.05% tax rate only applied to the 2023 tax year. Therefore, the 4.25% tax rate applies to tax years that begin in 2024 for individuals, fiduciaries, and flow-through entities paying Michigan’s flow-through entity tax.
Notice, Michigan Department of Treasury, Sept. 23, 2024.
Property tax: Circuit court’s decisions’ affirmed as county treasurers’ complied with statutory scheme
For Michigan property tax purposes, the Court of Appeals affirmed the circuit court’s decisions’ because the legislature provided a duly enacted, constitutionally valid statutory means of recovering proceeds remaining from a tax-foreclosure sale in excess of the tax debt. In the two consolidated cases before the Court of Appeals, the trial court determined that the former owners’ notices of intentions (Form 5743) weren’t timely and denied their motions to compel the county treasurers, to disburse the proceeds from the tax-foreclosure sales. The former owners challenged the constitutionality of Section 78t of the Michigan General Property Tax Act (MCL 211.78t) and asserted that MCL 211.78t wasn’t the exclusive means of recovering surplus proceeds and that if it was, then the statute resulted in a taking without just compensation and violated due-process protections, and the July 1 deadline in MCL 211.78t(2) shouldn’t be enforced as it resulted in harsh and unreasonable consequences. The former owners also argued that the imposition of a constructive trust to prevent the county treasurers’ unjust enrichment was warranted. Additionally, one of the former owners separately argued that MCL 600.5852 applied to toll the July 1 deadline for filing the notice of intent required by MCL 211.78t. The Court of Appeals noted that the county treasurers’ followed the statutory scheme, but the former owners failed to enforce their constitutional rights by not availing themselves of the provided means of recovery. The former owner cited no authority for applying the substantial-compliance exception to a plain and unambiguous deadline such as the one in MCL 211.78t. Therefore, the trial court didn’t err by finding that the former owner’s Form 5743 was untimely or by declining to apply the substantial-compliance exception to excuse the untimeliness of her notice. Further, the former owners didn’t cite any authority contrary to the Court of Appeals’ conclusion regarding the exclusivity of MCL 211.78t(2). One of the former owners urged the Court of Appeal to construe “action” in MCL 600.5852(1) as meaning that the decedent’s right to recover proceeds at a future date survived the decedent’s death. However, to the extent that the right to recover surplus proceeds follows the title to the property, the legal interest in surplus proceeds passed with the property to the decedent’s heir(s) after the decedent’s death. Therefore, the Court of Appeals concluded that the circuit court didn’t err by concluding that MCL 600.5852 didn’t apply to toll the filing deadline in MCL 211.78t(2). The Court of Appeals also rejected the argument that the operation of MCL 211.78t was resulting in the county treasurers’ unjust enrichment because the legislature provided an exclusive, validly enacted, constitutional scheme by which former property owners can recover remaining proceeds, and the county treasurers’ complied with the scheme.
Alger County Treasurer v. McGee, Michigan Court of Appeals, Nos. 363803 and 363804, Sept. 12, 2024, 402-698.
Missouri
Sales and use tax: Taxability of marketplace facilitator’s sales of food and beverage to Missouri customers discussed
An online ordering company that allows customers to order meals and beverages from restaurants through it’s website or mobile application is not required to collect and remit Missouri sales tax as a marketplace facilitator for a Missouri restaurant with sales to Missouri diners. The company may transfer sales taxes collected on behalf of Missouri restaurants to those restaurants, but those Missouri restaurants are the sellers with primary reporting and remittance obligations. The online ordering company is not responsible as a marketplace facilitator under Section 144.752, RSMo, because that is specific to the collection of use tax for goods delivered into this state. An order from a Missouri restaurant to a Missouri customer does not involve the delivery of goods "into this state," and is subject to sales tax.
However, the online ordering company is required to collect and remit Missouri use tax as a marketplace facilitator for out-of-state restaurant orders that are being delivered into Missouri. According to the company, it is a marketplace facilitator. As a marketplace facilitator for orders from out-of-state being delivered into the state, they would be responsible for collecting and remitting use tax. If the customer picks up the food from the out of state restaurant, no Missouri tax would be due.
Letter Ruling No. LR 8316, Missouri Department of Revenue, Aug. 30, 2024, 204-635.
Sales and use tax: Tax treatment of construction material discussed
In a letter ruling, Missouri clarified that purchases and rentals of machinery and equipment such as lifts, construction fencing, and motorized machinery made by a contractor working on a tax-exempt project for a medical-based university weren’t exempt from sales tax. However, purchases and rentals of consumables such as plywood put on the ground to walk on, bits for drills, and small miscellaneous tools were exempt from tax.
Letter Ruling No. LR 8313, Missouri Department of Revenue, Aug. 30, 2024, 204-632.
New York
Sales and use tax: Tax applies to jurisdiction where delivery of taxable service takes place
If a foreign company has nexus with New York and delivers a taxable service in New York, it must collect sales tax at the combined state and local rate in effect in the jurisdiction where delivery of this service takes place, even if the address on the invoice for that service is outside of New York.
TSB-A-24(33)S, New York Commissioner of Taxation and Finance, Aug. 16, 2024, 410-355.
Sales and use tax: Taxability of vehicle purchased in Maine discussed
A taxpayer’s purchase of a vehicle in Maine was properly subject to New York use tax when the vehicle was registered in New York. The taxpayer temporarily lived and worked in Maine from September 2016 through December 2016. She purchased, registered, and insured a vehicle in Maine on Sept. 28, 2016, and also paid sales tax to Maine. The taxpayer returned to New York for vacation in December 2016 and brought the vehicle with her. In December 2017, the taxpayer’s mother registered the vehicle for her in New York and paid use tax to New York. The taxpayer was a New York resident at the time she purchased and registered her vehicle. The vehicle was brought to New York in December 2016 and garaged in New York until June 2018. The taxpayer’s storage of the vehicle in New York constituted use under Tax Law Section 1101(b)(7). Therefore, the taxpayer’s purchase of the vehicle was subject to New York use tax, and the tax was properly collected when the vehicle was registered in New York. New York may provide a credit on a rate-to-rate basis for sales or use taxes paid to another state only where, and to the extent that, the other state provides a reciprocal credit for sales or use taxes paid to New York State and/or its localities. However, Maine doesn’t allow a credit for either New York state or local sales taxes. Consequently, the taxpayer wasn’t entitled to a credit against the New York use tax due for taxes paid to Maine.
TSB-A-24(17)S, New York Commissioner of Taxation and Finance, Aug. 1, 2024, 410-345.
Sales and use tax: Taxpayer’s moving service not taxable
The New York Department of Taxation and Finance has issued an advisory opinion discussing the applicability of sales and use tax to a taxpayer’s business of helping its customers prepare for on-premises corporate events and conferences. The taxpayer was only moving customer-owned furniture (e.g., tables and chairs) from one location on its customer’s premises — typically a storage area — to another location also on its customer’s premises to assist the customer in preparing for a corporate event or conference. The taxpayer doesn’t design the layout of, arrange, or otherwise install the customer-owned furniture. The service of moving tangible personal property isn’t among the services subject to tax. Therefore, the taxpayer’s moving service was not subject to sales tax.
TSB-A-24(20)S, New York Commissioner of Taxation and Finance, Aug. 2, 2024, 410-346.
Corporate income, sales and use taxes: Taxability of commercial lighting fixtures discussed
In an advisory opinion, New York State Department of Taxation and Finance (department) discusses whether sales tax is imposed on its receipts for the sales and installations of commercial lighting fixtures. Also, the department discusses how these sales should be sourced for corporation tax apportionment purposes.
The department clarified that a taxpayer selling commercial lighting fixtures must pay sales or use tax on fixtures sold on an installed basis where installation occurs in New York. The taxpayer must collect sales tax on fixtures sold without installation where it delivers the fixture to the customer or its designee in New York. Also, where the taxpayer transfers possession of the fixtures to the purchaser within New York State or the final destination of the property is a point in New York state, the receipts for the sale of those fixtures must be apportioned to New York for corporation tax purposes.
TSB-A-24(1)C, 11(S), New York Department of Taxation and Finance, July 30, 2024, 410-369.
Corporate income tax: U.S. Supreme Court asked to review decision on deduction of royalties from foreign affiliates
Corporate taxpayers have asked the U.S. Supreme Court to review a New York Court of Appeals opinion upholding lower court decisions that found corporations couldn’t deduct royalties they received from certain foreign affiliates. The New York Court of Appeals rejected the taxpayers’ constitutional arguments and concluded that the lower decisions were supported by both the plain language of the law and the explicit legislative purpose behind the statute, i.e., closing a loophole by which international corporate groups avoided paying state taxes on royalty payments between related members (TAXDAY, 2024/04/24, S.12).
One of the taxpayers has specifically asked the U.S. Supreme Court to decide whether a state may impose a “heads I win, tails you lose” regime that taxes either side of an interstate or foreign transaction, depending on which side has a nexus to the state, even though such a regime would inherently disadvantage interstate and foreign commerce if it were replicated by every jurisdiction.
The other taxpayer has asked whether a state tax law that on its face treats royalty income derived from corporate affiliates less favorably if the affiliates do not subject themselves to the state’s jurisdiction facially discriminates against interstate and foreign commerce.
International Business Machines Corp. v. New York State Tax Appeals Tribunal, U.S. Supreme Court, Dkt. 24-332, petition for certiorari filed Sept. 19, 2024; The Walt Disney Co. v. The Tax Appeals Tribunal of the State of New York, U.S. Supreme Court, Dkt. 24-333, petition for certiorari filed Sept. 20, 2024.
Oregon
Corporate income tax: Repatriation amount included in sales factor
The Oregon tax court has concluded that deemed dividends arising under Subpart F of IRC Sec. 951 through IRC Sec. 965 must be reincluded in the sales factor for a corporation excise (corporate) taxpayer’s water’s edge group.
What was the law regarding dividends?
Subpart F generally deems earnings and profits of “controlled foreign corporations” (CFCs) to have been distributed annually to their significant domestic shareholders as an addition to the shareholders’ federal gross income if those earnings and profits haven’t been subject to federal income tax in the hands of the CFCs. There was a one-time requirement, enacted in 2017, to apply the same deemed dividend treatment to up to 31 years’ worth of CFC earnings and profits. Oregon incorporated the federal requirement to add the repatriation amount to income but didn’t set a lower tax rate for that amount. However, Oregon determined that an existing 80% “subtraction” available to certain corporate taxpayers applied. The question in this case involves how to determine Oregon’s apportioned share of the remaining 20%.
The taxpayer included the 20% amount in its income but didn’t include any portion of the full repatriation amount in either the numerator or the denominator of the apportionment fraction. The taxpayer paid the tax but immediately applied for a partial refund, claiming a right to increase the denominator by the amount of the repatriation amount, which would reduce Oregon’s fractional share of the taxpayer’s overall taxable income. Oregon denied the refund, adhering to its published position that no amount could be included in either the numerator or the denominator.
What was the taxpayer’s argument?
The taxpayer relied on the court’s analysis in Oracle II for the definition of “sales.” That definition initially excludes deemed dividends under Subpart F, however, an exception treats those amounts as sales if they are “derived from the taxpayer’s primary business activity.” Oracle II determined that Subpart F amounts are sales under the exception if the CFC and the taxpayer were engaged together in a single unitary business and the CFC’s earnings and profits constituting the subpart F amounts are from a single “primary business activity” shared by the CFC and the taxpayer. This statutory interpretation was referred to as “reinclusion” of the 20% repatriation amount in the sales factor.
The court agreed with the taxpayer, regarding the application of Oracle II. Reinclusion didn’t fully resolve the parties’ cross-motions because the refund amount was somewhat less than one-half the amount the taxpayer requested. The taxpayer’s other theory was that it was entitled to factor relief. However, the taxpayer failed to make any specific argument about the inaccuracy or unfairness of that reduced amount at issue. The taxpayer failed to carry its burden of proof that it was entitled to factor relief beyond what reinclusion already provides. The taxpayer was awarded a refund computed under reinclusion but denied any further relief under a factor representation theory.
Microsoft Corp. v. Department of Revenue, Oregon Tax Court, No. TC 5413, Aug. 29, 2024, 401-612.
Texas
Corporate income, sales and use taxes: Guidance for remote sellers updated
For Texas corporate income tax and sales and use tax purposes, the Comptroller of Public Accounts updated its guidance discussing tax collection and reporting obligations of remote sellers. Remote sellers are out-of-state sellers whose only activity in Texas is the remote solicitation of sales. The guidance clarifies that remote sellers with total revenue of less than $500,000 in the preceding 12 calendar months aren’t required to obtain a tax permit or collect, report, and remit state and local use tax; local use tax is due at the location where the order is shipped or delivered when the order is not received or fulfilled from a Texas place of business; the current single local use tax rate is 1.75%; and each taxable entity with nexus must file a franchise tax report and an information report, and pay any franchise tax due.
202409004W and 202409005W, Texas Comptroller of Public Accounts, Sept. 6, 2024, 405-054.
Sales and use tax: Taxability of and nexus creation by imports stored in bonded warehouse discussed
The Texas Comptroller issued a private letter ruling regarding the taxability of and possible nexus creation by imported goods stored by a taxpayer in a bonded warehouse in Texas to be sold to a customer in the European Union by the taxpayer’s subsidiary in the European Union. The private letter ruling states that while the imported goods wouldn’t be subject to Texas sales and use tax so long as the goods remain in the bonded area, the goods would create a physical presence in Texas and therefore establish nexus for entities that take title to the goods while they are stored in the bonded warehouse.
The taxpayer requesting the private letter ruling has subsidiaries in the United States, Europe, and Mexico. The taxpayer requested advice on a transaction in which a customer in the European Union places an order with the taxpayer's subsidiary in the European Union. The customer in the European Union will sell the item to a customer in the United States. The customer in the European Union requests that the taxpayer drop-ship the items ordered directly to its customer. The taxpayer’s subsidiary in the European Union places and intercompany purchase order with the taxpayer, who then places an order with its Mexican subsidiary. The Mexican subsidiary builds the goods, invoices the taxpayer, and arranges transportation of the goods to the bonded warehouse in Texas. The taxpayer receives title to the goods when they are provided to the carrier for export.
While the goods are stored in the bonded warehouse, the taxpayer invoices and transfers title to the goods to its European subsidiary. The European subsidiary then invoices its European Union customer and transfers title to it. Then, the European Union customer invoices and transfers title to its U.S. customer, who has title to the goods when the goods are removed from the bonded warehouse.
The Comptroller concluded that in this situation, the taxpayer wouldn’t be subject to Texas sales or use tax on the goods, as the goods retain their character as an import during the time the taxpayer holds title to them. The transactions that occur while the goods are stored are exempt from Texas sales and use tax because the Imports and Exports clause of the United States Constitution prohibits Texas from taxing an import.
However, the Comptroller wrote that all of the entities that take title to the goods while in the bonded area would have a physical presence in Texas, and therefore nexus with Texas. This is because the entities own goods that are in Texas, use a warehouse in Texas, and make sales of goods in Texas. The Comptroller states that while the Imports and Exports Clause prohibits Texas from taxing imports, it doesn’t prevent those imports from creating nexus for the taxpayer in Texas.
Letter No. 202408014L, Texas Comptroller of Public Accounts, Aug. 29, 2024, released Oct. 2, 2024, 405-060.
Virginia
Sales and use tax: Audit staff directed to review taxpayer’s exemption certificate documentation
For Virginia sales and use tax purposes, the Tax Commissioner returned the refund request to the audit staff to perform greater scrutiny procedures. The taxpayer, a manufacturer of medical devices and equipment, submitted a refund claim for the period January 2018 through July 2020, contending that it had erroneously remitted tax on exempt sales. To support its claim, it submitted exemption certificates from several customers involved in transactions on which sales tax was remitted but not collected. The refund claim was reviewed and denied in full because the exemption certificates provided by customers were not valid. The taxpayer filed an application for correction asserting that the certificates support the allowance of the exemption. The Tax Commissioner found that the exemption certificate issued to the taxpayer by Customer 1 didn’t fulfill the certificate requirements because the name on the certificate didn’t match the name of the purchaser. Thus, the refund request for Customer 1 was properly denied. The sales to Customer 2 occurred before either of the exemption certificates were issued, and it cannot be confirmed whether the medical equipment it purchased was used directly in the manufacturing process. However, the audit staff did not review Customer 2’s registration status and filing and payment history of sales tax and use tax returns. Therefore, the exemption claim wasn’t strictly scrutinized. Accordingly, the Commissioner returned the refund request to the audit staff to review the taxpayer’s documents, make adjustments as appropriate, and issue an updated audit report.
Ruling of Commissioner, P.D. 24-77, Virginia Department of Taxation, Aug. 21, 2024, 207-208.
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