The states covered in this issue of our monthly tax advisor include:
California
Personal income tax: Loss couldn’t be carried back or forward to other tax years
A loss taken on a taxpayer’s 2017 California income tax return wasn’t connected to a trade or business and, therefore, couldn’t be carried back or forward and be deducted as a net operating loss (NOL) in other tax years. The loss arose from a payment the taxpayer, a CPA, made to settle a claim related to embezzlement of client funds, self-dealing, and breach of fiduciary duty. According to the Office of Tax Appeals, the alleged tortious actions weren’t connected with the taxpayer’s trade or business as a CPA. Thus, the loss was a nonbusiness loss and didn’t give rise to an NOL deductible in other tax years.
Sadatnejad and Marconet, California Office of Tax Appeals, 2024-OTA-625P, Aug. 21, 2024, (released November 2024), 407-970.
Personal income tax: Taxpayer couldn’t retroactively report sale of property on installment basis
A taxpayer couldn’t retroactively elect to report her sale of property on an installment basis for California income tax purposes. On her original return, she elected out of reporting the gain from the sale on the installment method. That election was binding and couldn’t be changed after the expiration of the time allowed for filing her original return for the year of sale. To allow otherwise would impose administrative burdens on the Franchise Tax Board (FTB). Further, the taxpayer didn’t provide any evidence that she requested or the FTB granted any revocation of the election. Thus, she wasn’t permitted to change the election made on her original return.
Ro, California Office of Tax Appeals, 2024-OTA-603P, Sept. 6, 2024, 407-971.
Florida
Property tax: Proposed Amendment 5 to require annual inflation adjustment to homestead exemption approved by voters
Florida Amendment 5, the Annual Inflation Adjustment for Homestead Property Tax Exemption Value Amendment, which was on the ballot as a legislatively referred constitutional amendment, was approved by voters in the general election held on Nov. 5, 2024. Amendments require 60% to pass. Amendment 5 received 66.02% of the vote.
House Joint Resolution 7017 proposed the amendment to the Florida Constitution that requires that the $25,000 of assessed value amount between $50,000 and $75,000, which is exempt from all ad valorem property taxes other than school district taxes, be adjusted annually for positive inflation growth. The adjustment is set to be made every year on January 1 based on the percent change in the consumer price index reported by the U.S. Department of Labor if the change is positive. The amendment also applies to any future homestead exemption applying only to ad valorem taxes, other than school district taxes, and is effective Jan. 1, 2025.
In addition, H.B. 7019, which has already been enacted, implements Amendment 5 to Article VII, Section 6 of the Florida Constitution by making conforming statutory changes. Since Amendment 5 was approved by voters, this legislation amends current law to add an annual positive inflation adjustment to the current exemption on the assessed value for all levies, other than school district levies, of $50,000 up to $75,000. The inflation adjustment begins on Jan. 1, 2025.
Constitutional Amendments, Florida Division of Elections, Nov. 6, 2024; H.J.R. 7017, filed with the Secretary of State, March 21, 2024; Ch. 2024-261 (H.B. 7019), Laws 2024, approved by Gov. Ron DeSantis June 21, 2024, chaptered June 25, 2024, effective on the effective date of the amendment to the State Constitution proposed by H.J.R. 7017.
Corporate income tax: Guidance on adoption of 2024 Internal Revenue Code provided
Florida has issued corporate income tax guidance on the adoption of the 2024 Internal Revenue Code (IRC).
The Florida corporate income tax “piggybacks” federal income tax determinations and uses adjusted federal income as the starting point for computing Florida net income. Legislation enacted this year amended the Florida Income Tax Code to adopt the IRC retroactively to Jan. 1, 2024. This means Florida follows the computation of federal taxable income. However, several modifications to federal taxable income are required, including:
- Bonus depreciation — an addition is required equal to the amount deducted as bonus depreciation under IRC Sec. 168(k), (the addback) for assets placed in service before Jan. 1, 2027.
- Qualified improvement property placed in service on or after Jan. 1, 2018 — an addition is required equal to the amount of federally deducted depreciation of qualified improvement property, as defined in IRC Sec. 168(e)(6), whether depreciated under IRC Sec. 167(a), or bonus depreciated under IRC Secs. 167 or 168(k).
- Business meal expenses — an addition is required equal to the amount federally deducted in excess of the amount allowed prior to changes made to the IRC by Public Law 116-260, Division EE, Title II, s. 210, making business meals provided by a restaurant 100% deductible.
- Film, television, and live theatrical production expenses — an addition is required equal to the amount of the deduction taken on the federal return under IRC Sec. 181.
Moreover, Florida doesn’t allow any adjustment to federal taxable income for federal credits unless specifically stated in the Florida Statutes. Florida allows a deduction for wages and salaries paid in Florida when a federal deduction is not allowed pursuant to IRC Sec. 280C(a). However, for other federal credits, a Florida deduction isn’t included in the Florida Statutes and is, as a result, not allowed.
Tax Information Publication, No. 24C01-02, Florida Department of Revenue, Nov. 6, 2024, 206-718.
Illinois
Sales and use tax: Aircraft leases and use of state infrastructure created nexus
Illinois use tax imposed on the purchase price of a Delaware limited liability company’s aircraft wasn’t unconstitutional because the taxpayer had substantial nexus with the state. The taxpayer listed an Illinois address both for the aircraft’s bill of sale and federal registration. It retained an Illinois company to manage the operation of its aircraft. It entered lease agreements with another Illinois company to control, repair, and maintain the aircraft. It had a separate lease agreement with a third company to use the aircraft for charter business and generate lease income for the taxpayer. The lease agreements listed a Chicago airport as the home location for the aircraft. The aircraft flew in and out of Illinois 44 times and was on the ground in the state for 71 days over a 9-month period after entering the state. The use tax was also fairly related to services provided to the taxpayer by Illinois. The aircraft made extensive use of Illinois airports regulated and funded by the state. The taxpayer gained economic benefits through its use of the roadways for deliveries. Its lease arrangements benefited from the state’s entire physical and social infrastructure. The services provided by Illinois enhanced the taxpayer-s economic activity. These services aided the operation of the aircraft that generated the taxpayer’s lease income.
TCRG, LLC v. Illinois Department of Revenue, Appellate Court of Illinois, First District, No. 1-23-1389, Oct. 30, 2024, 404-089.
Sales and use tax: Fee for cloud-based software application not taxable
Illinois issued information on the application of sales tax to a subscription membership fee for a cloud-based fitness software application. Sales tax doesn’t apply to computer software applications accessed remotely through a cloud-based delivery system if customers can never download the software to their computer. If a service provider offers an API, applet, desktop agent, or a remote access agent to enable subscribers to access its network and services, the subscriber is receiving computer software. If the service provider charges a subscription for the software in a single transaction, it’s subject to tax, unless the transfer qualifies as a nontaxable license of computer software. Illinois customers who download computer software for free from an out-of-state retailer’s or service provider’s website or server located outside Illinois aren’t subject to use tax liability.
General Information Letter ST 24-0032-GIL, Illinois Department of Revenue, Oct. 9, 2024, 404-094.
Louisiana
Multiple taxes: Details of proposed tax reform package released
The Louisiana Department of Revenue has released information on Governor Jeff Landry’s comprehensive tax reform proposals to be addressed in the upcoming special session of the legislature.
The special session is scheduled to begin on November 6 and end no later than November 25.
Highlights of the proposal are summarized below.
Corporate income tax: The corporate income tax rate would be set at 3.5% on income subject to tax under the proposal. Bonus depreciation would be allowed retroactively for certain capital investments. Certain credits would be repealed immediately, and others would be repealed if not earned prior to a specified date.
Individual income tax: Under the proposal, individual income would be taxed at a 3% rate. Certain personal exemptions and net capital gains deductions would be repealed. Bonus depreciation would be allowed retroactively for certain capital investments.
Standard deductions would be increased from $4,500 to $12,000 and $9,000 to $24,000. The exemption on pension and annuity income for seniors would be increased from $6,000 to $12,000.
Corporate franchise tax: The corporate franchise tax and related tax incentives would be repealed entirely.
Sales and use tax rate changes: The proposal makes permanent the 0.45% levy that’s set to expire June 30, 2025. Additionally, nonresidential utilities would be subject to a 2% sales and use tax. Certain exemptions would also be repealed.
Sales and use tax on digital products: The proposal adds a list of digital transactions to be included in the sales and use tax base, including items such as digital books, games, applications, periodicals, other information services, and access to certain software services.
Sales and use tax on services: Under the proposal, about 40 services would be explicitly included in the sales and use tax base, including personal services (spas, tanning, piercing, personal shopping, fitness training, and dating services), auto/boat services (storage, auto club fees, car washes, marina services, and wrecking/towing services), property services (property repair, interior decorating/painting, lawn care, and alarm systems), and pet grooming/boarding.
The proposal also repeals certain sales and use tax exemptions, such as the exemption for radio and television audio and video programming services and makes clarifications like providing that tax is due on total charges, including any service, facility, processing, delivery, or other similar fees or charges.
Louisiana Forward Special Session Fiscal Memo Drafts, Louisiana Department of Revenue, October 2024.
Massachusetts
Multiple taxes: Tax amnesty guidance issued
Massachusetts has issued guidance on the state’s tax amnesty program for the two-month period beginning on Nov. 1, 2024, and ending on Dec. 30 2024. During the tax amnesty period, Massachusetts will waive most penalties for eligible taxpayers who file outstanding returns and pay tax and interest due by Dec. 30, 2024.
The guidance provides information on topics including:
- Eligibility.
- Filing periods.
- The amnesty request process.
- Existing liabilities.
- Amended returns.
- Nonfilers and first-time filers.
- Taxpayers under audit.
- Amnesty determination notices.
The state also provides answers to frequently asked questions and multiple video tutorials on how to request amnesty.
Massachusetts Tax Amnesty 2024, Massachusetts Department of Revenue, Nov. 1, 2024, 401-950.
Maryland
Corporate, personal income taxes: Taxation of pass-through entities
Maryland revised and reissued the document previously known as Administrative Release No. 6, Taxation of Pass-Through Entities, as Technical Bulletin No. 6. The document was revised to reflect that for tax years beginning after Dec. 31, 2022, a partnership must indicate whether or not they elect to pay the entity level tax on their first filing or payment of the year. Therefore, taxpayers who make estimated payments must indicate whether they have made the election on the Form 510/511D accompanying their first payment. Otherwise, taxpayers must indicate whether they have made the election on their pass-through entity tax return or extension form. The election must be made separately each year and is irrevocable for the tax year once made.
Another revision addresses the Supreme Court of Maryland’s opinion in Comptroller of Maryland v. FC-GEN Operations Investments LLC. There, the Court held that a pass-through entity that made estimated tax payments on behalf of its members and then determined it had a taxable loss for the year and, therefore, no tax liability, was entitled to a refund of the estimated tax payments. If a nonelecting pass-through entity’s estimated payments exceed the tax owed on nonresident members’ distributive or pro rata shares of income, the entity must either claim a refund or request that the overpayment be applied to estimated tax for the following tax year. The overpayment may not be distributed to members as a credit.
Technical and organizational changes were also made to the document.
Technical Bulletin No. 6, Maryland Comptroller of the Treasury, Dec. 27, 2024, 202-147.
New York
Personal income tax: Severance payment received by nonresident individual was taxable as state source income
A severance payment paid to a nonresident individual (taxpayer) employed by a New York corporation, in connection with the termination of her employment was New York source income subject to personal income tax. The taxpayer worked for her employer for 11 years and during that time, she and her husband lived in New York. The taxpayer then took a sabbatical leave from her employer for personal reasons, and she and her husband left New York and moved to Hawaii at the end of June 2018. The taxpayer’s employment was terminated by her employer via an email sent at the end of May 2019. In 2020, while still living in Hawaii, the taxpayer received the severance payment that was to remedy the fact that she lost her entire calendar school year of potential employment elsewhere. New York imposes personal income tax on the income of nonresident individuals to the extent that their income is derived from or connected to New York sources. The administrative law judge determined that the severance payment was New York source income under Tax Law Section 631 (b) (1) (F) as income received by a nonresident related to a business, trade, profession, or occupation previously carried in this state including termination agreements. Additionally, as there was no indication in the record that the taxpayer’s employment wasn’t entirely carried on in New York State, the severance payment was properly allocated to New York State. Accordingly, the taxpayer was properly assessed personal income tax on the severance payment.
Vora, New York Division of Tax Appeals, Administrative Law Judge Unit, DTA No. 830987, Oct. 31, 2024, 410-391.
Pennsylvania
Corporate income tax: Guidance regarding related party income election issued
Pennsylvania has issued guidance regarding a law enacted this year allowing corporate income taxpayers to make an election excluding specific types of income added back to a related entity’s base for the same tax year.
What do taxpayers who have already filed do?
The statutory language is clear that the election must be made by the taxpayer on an originally filed return. Taxpayers impacted by the law that have already filed their 2023 Form RCT-101’s can’t amend their reports to make the election. Rather, the related entity should addback the intangible expense or cost and/or the interest expense or cost on its 2023 Form RCT-101 and then claim the existing statutory credit.
How do taxpayers who haven’t filed elect?
Taxpayers impacted by the law that haven’t already filed their 2023 Form RCT-101’s can make the election on their originally filed return. To make the election, the taxpayer should enter the amount they are electing to exclude as an Other Deduction on page 2, Section C Line 2D of the PA Corporate Net Income Tax calculation and provide additional details on REV-860, Schedule OD – Other Deductions.
Guidance for Related Party Income Election, Pennsylvania Department of Revenue, October 2024, 205-007.
Sales and use tax: Taxability of canned computer software, digital goods, and related services explained
Pennsylvania has released detailed sales and use tax guidance regarding computer software, digital goods, and related services. The guidance provides:
- An overview of existing law.
- Conclusions based on the law.
- Examples applying the principles and concepts.
What are the conclusion based on the law?
Canned computer software, by definition and long-standing case law, is tangible personal property. The taxable portion of purchase price includes the total paid in complete performance of the sale at retail. A vendor isn’t allowed to exclude the cost of labor or service from the purchase price of a sale at retail of tangible personal property. Any charges for modifying or configuring canned computer software is taxable as the alteration of tangible personal property regardless of whether such modification or configuration is performed in conjunction with the sale of canned computer software or not.
The sale of custom software and any related services to custom software is not subject to sales tax. Custom software is designed, created, and developed for and to the specifications of an original purchaser. The original purchaser is the first person for whom the custom software was designed, created, and developed, and to whom it was transferred in a sale at retail.
Taxability of Canned Computer Software, Digital Goods, and Related Services, Pennsylvania Department of Revenue, October 2024, 205-008.
Texas
Sales and use tax: Private letter ruling treats dealers selling extended warranties as marketplace providers
The Texas Comptroller issued a private letter ruling in which it held that dealers who sold certain extended warranties/service polices on behalf of a particular equipment manufacturer were “marketplace providers” and therefore obligated to collect and remit sales tax on the taxable extended warranties/service policies. This is true even though the extended warranties/service policies were contractual agreements between the manufacturer and the customer, not the dealers, since the dealers invoice and collect payment for the extended warranties/service policies.
Letter No. 202410006L, Texas Comptroller of Public Accounts, Oct. 7, 2024, 405-066.
Washington
Sales and use tax: LLCs didn’t qualify for investment deduction
Limited liability companies that generated all of their income from investments were unable to claim Washington’s business and occupation (B&O) deduction for amounts derived from investments because the income didn’t originate from “incidental investments of surplus funds.” Though the legislature amended the relevant statute after the court’s interpretation of the term “investments” in O’Leary v. Department of Revenue, it didn’t express a clear intent to abrogate the definition. Instead, the legislature addressed ambiguity in the statutory phrase, “other financial businesses.” The fact that the legislature has failed to amend the court’s definition of investments in the 38 years since O’Leary suggests acquiescence.
Antio v. Department of Revenue, Supreme Court of Washington, No. 102223-9, Oct. 24, 2024, 204-943.
Wisconsin
Personal income tax: No full credit for taxes paid to another state
Wisconsin resident taxpayers realized capital gains on the sale of their real estate in Colorado and Arizona. The taxpayers paid nonresident income tax to Colorado and Arizona. On their Wisconsin income tax return, they claimed a full credit for taxes paid to another state. The Wisconsin Department of Revenue informed the taxpayers of taxes still due. Taxpayers argued that when a Wisconsin resident reports the same income on two income tax returns for the same year, and pays income tax to the other state, the resident is entitled to a credit on their Wisconsin income tax return for the tax paid to the other state. While the state DOR agreed with this, the real issue was whether a taxpayer may claim a credit for all income tax paid to another state regardless of whether both states levy tax on the same income, or whether the taxpayer must first determine a proportion of the income tax paid to the other state when Wisconsin only levies income tax on a portion of the income reported on the other state’s income tax return.
TAC review
In reviewing the case, the Wisconsin Tax Appeals Commission looked to what “considered income for Wisconsin tax purposes” means. The taxpayers claimed the full amount of the capital gains realized on the sale of their properties. However, in Wisconsin, income tax is assessed on 70% of capital gains realized from the sale of an appreciated asset. Therefore 30% of capital gains income isn’t considered income for Wisconsin tax purposes. There is a limit placed on the other state tax credit when Wisconsin considers a smaller portion of the income as income for tax purposes than the other state does.
Wolfgang and Terry Hemschik v. Wisconsin Department of Revenue, Wisconsin Tax Appeals Commission, No. 23-I-028, Oct. 14, 2024, 402-579.
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