The states covered in this issue of our monthly tax advisor include:
Arkansas
Corporate income tax: Interest expenses from corporate spinoff qualified as nonbusiness income under UDITPA
A seller of retail motor fuel products domiciled in Arkansas could categorize certain interest expenses from a corporate spinoff as nonbusiness income under the Uniform Division of Income for Tax Purposes Act (UDITPA) and amend its corporate income tax returns. The amended returns resulted in allocating 100% of these interest expenses to Arkansas and a state tax refund.
The UDITPA defines “business income” as income arising from transactions in the regular course of the taxpayer’s business and includes income from the acquisition, management, and disposition of property constituting integral parts of the taxpayer’s regular business operations.
Hudson v. Murphy Oil USA, Inc., Supreme Court of Arkansas, No. 70CV-20-84, Dec. 12, 2024.
California
Corporate income tax: Former affiliate’s qualified research expenses included in credit calculation
A taxpayer had to include the qualified research expenses (QREs) of a former affiliate, which were incurred in a prior tax year, in computing the taxpayer’s fixed-base percentage for purposes of the California research credit. For the tax years at issue, because the affiliate had been merged out of existence and was no longer a member of the taxpayer’s controlled group of corporations, only the taxpayer claimed QREs for the research credit. The taxpayer contended that it disposed of a major portion of a separate unit of a business when it assigned all of the intellectual property pertaining to the affiliate’s business to another company, which entitled it to exclude the affiliate’s QREs from its fixed-base percentage computation. However, for there to be a disposition, there had to be an acquisition. Because the other company didn’t acquire all of the assets required to operate the affiliate’s business, it didn’t acquire a viable business and the transaction didn’t constitute an acquisition for purposes of the fixed-base percentage computation. Furthermore, the taxpayer’s other cited authorities, including IRC Sec. 41(b)(4), the aggregation rule, and the consistency rule, didn’t support the taxpayer’s exclusion of the affiliate’s QREs from the fixed-base percentage. Finally, the Franchise Tax Board wasn’t bound to follow the IRS determination regarding the taxpayer's research credit calculation.
Novo Nordisk Inc., California Office of Tax Appeals, 2024-OTA-679P, Sept. 16, 2024, (released December 2024).
Illinois
Sales and use tax: Guidance on destination sourcing rules issued
Illinois issued guidance on new sales tax destination sourcing rules for all retailers who make sales from locations outside the state to customers in the state. The sourcing rules are effective beginning Jan. 1, 2025 and apply to the determination of both state and local sales tax liability.
Informational Bulletin FY 2025-10, Illinois Department of Revenue, November 2024.
Sales and use tax: Tax on leases and rentals begins January 2025
Illinois issued guidance on the sales and use tax that applies to tangible personal property leased from retailers or service providers beginning Jan. 1, 2025. The guidance includes information on:
- What and who is subject to the tax on leases and rentals.
- Registration requirements for retailers and use tax filers.
- Sourcing rules.
- Reporting and payment requirements.
- The impact on items subject to the rental purchase agreement tax or local lease transaction tax.
- A credit for tax paid on tangible personal property previously purchased for leasing to customers.
- Depreciation for property acquired and used outside Illinois before being brought to the state for use under a lease or rental contract.
Informational Bulletin FY 2025-15, Illinois Department of Revenue, December 2024.
Sales and use tax: Chicago budget includes tax increases, changes
Chicago passed a 2025 budget resulting in tax rate increases, effective Jan. 1, 2025, to:
- 11% for the personal property lease transaction tax.
- 23.5% for daily weekday, daily weekend, and valet parking taxes.
- $0.10 for the checkout bag tax, with a $0.01 credit for each bag sold.
The amusement tax will apply at the rate of:
- 10.25% of charges for paid television and amusements delivered electronically, like video streaming, audio streaming, and online games.
- 9% of charges paid for the privilege to view or participate in all other taxable amusements.
There is also a 3% tax on admission fees or other charges paid in ticket resale transactions by registered resellers.
Finally, the budget changed the ground transportation tax surcharge on network providers for single passenger rides that include a pickup or drop-off in the Downtown Zone. Effective Jan. 1, 2025, the surcharge is decreasing from $1.75 to $1.50, but it applies 7 days a week between 6:00 a.m. and 10:00 p.m., instead of just weekdays during those hours.
News Release, Chicago Department of Finance, Dec. 18, 2024.
Louisiana
Multiple taxes: Governor signs tax reform bills with major income and sales tax rate changes
Louisiana Governor Jeff Landry has signed several bills included in his tax reform proposal package. Highlights of the legislative changes, including bill numbers, are found below.
Corporate income tax rate change, bonus depreciation and amortization allowed: Louisiana corporate income tax is imposed at a flat rate of 5.5% beginning in 2025 (H.B. 2). In addition, the law enacts a subtraction from federal gross income in the amount of $20,000 for corporations.
H.B. 2 also allows a bonus depreciation deduction for costs of qualified property and qualified improvement property, and a bonus amortization deduction for research and experimental expenditures. Bonus depreciation and amortization deduction provisions are effective beginning in 2025.
In addition, the deadlines for various corporate income tax credits have been accelerated.
Individual income tax rate and exemption changes: For individuals; S-corporations and other pass-through entities; and trusts and estates, the bracket system is replaced with a 3% flat tax rate on net income beginning in 2025 (H.B. 10).
The annual retirement income exemption is increased to $12,000 beginning in 2025 (from $6,000), adjusted annually.
Personal exemptions and credits are replaced with a standard deduction, adjusted annually. For tax year 2025 the amounts are:
- Single/Married filing separate, $12,500.
- Married filing joint and qualified surviving spouse/Head of household, $25,000.
H.B. 10 also includes bonus depreciation and amortization provisions for individuals; S-corporations and other pass-through entities; and trusts and estates, effective in 2025.
Corporation franchise tax repealed: Effective Jan. 1, 2026, the corporation franchise tax is repealed (H.B. 3).
Sales and use tax on digital products, rate changes, and sourcing rules: Effective Jan. 1, 2025, H.B. 8 imposes sales and use tax on “digital products,” defined as digital audiovisual and audio works; digital books, periodicals, and discussion forums; digital codes, applications and games; and any other otherwise taxable tangible personal property transferred electronically, whether digitally delivered, streamed, or accessed and whether purchased singly, by subscription, or in any other manner, including maintenance, updates, and support.
Exemptions from the tax are enacted in H.B. 8 for business and healthcare use of software and digital products.
H.B. 8 also provides that the Louisiana Department of Revenue will not consider ownership of, or rights in, digital products on servers located in the state when determining whether there is substantial nexus with Louisiana.
H.B. 10 also includes sales tax rate changes. Effective 2025 through 2029, the sales tax rate is 5% (the 0.45% temporary increase is made permanent and an additional 0.55% is imposed). In 2030, the tax decreases to 4.75%.
Sourcing rules and exceptions for sales of tangible personal property, digital products, and services are also enacted in H.B. 10.
Act 5 (H.B. 2); Act 6 (H.B. 3); Act 10 (H.B. 8); Act 11 (H.B. 10), Louisiana Legislature, effective as noted.
Michigan
Sales and use tax: Guidance on lease transactions updated
The Michigan Department of Treasury has updated guidance on the use tax obligations involving lease transactions. If a lessor elects to pay use tax on rental receipts instead of purchase costs, the lessor is required to pay tax on the total rental receipts. However, delivery and installation charges are excluded from the tax base if the charges are separately stated. In addition, the sale or lease of a school bus or transportation-related services, and adaptive equipment, are exempt when the school bus is primarily used in the performance of a contract with an authorized representative of a public school or academy. The definition of “lease” for purposes of the school bus exemption is amended such that the provision of an operator with the school bus doesn’t disqualify the transaction from being a lease.
Revenue Administrative Bulletin 2024-18, Michigan Department of Treasury, Nov. 13, 2024.
Corporate income tax: Guidance issued on treatment of federal taxable Income, net operating loss, and business loss
The Michigan Department of Treasury has issued guidance on the computation of federal taxable income (FTI) and the treatment of FTI, a net operating loss (NOL) and a business loss (BL) for purposes of calculating corporate income tax liability under Chapter 11, Part 2 of the Michigan Income Tax Act. The calculation of FTI requires taxpayers to decouple from sections 168(k) and 199 of the IRC. Therefore, taxpayers that have first year bonus depreciation under section 168(k) or a domestic production activities deduction under section 199 must make those adjustments when computing FTI.
Several adjustments must be made to the FTI to reach the corporate income tax base. One requirement is to add back any carryback or carryover of a federal NOL to the extent it was deducted in calculating the FTI. A “business loss” incurred after Dec. 31, 2011 may be deducted under the corporate income tax. Taxpayers have 10 successive years to use a BL. A taxpayer will carry the loss forward to the next succeeding year as a deduction to the apportioned corporate income tax base and then to the next nine years. A business loss is a negative business income taxable amount after allocation or apportionment.
An entity that joins a unitary business group (UBG) may bring its BL carryforward to the UBG. If it was part of a prior UBG, it will bring its share of the prior UBG’s total BL carryforward.
Revenue Administrative Bulletin 2024-23, Michigan Department of Treasury, Dec. 4, 2024.
Corporate income tax: Guidance on alternative apportionment updated
The Michigan Department of Treasury has updated guidance on the procedures and standards relating to the alternative apportionment provisions in the Michigan Income Tax Act and the Michigan Business Tax Act in response to the supreme court’s opinion in Vectren Infrastructure Servs Corp v. Dep’t of Treasury, 512 Mich 594 (2023). In Vectren, a taxpayer made a belated request for alternative apportionment to either exclude a gain from the sale of assets from its business income tax base or to include it in the sales factor denominator. The Court concluded that the gain was properly included in the tax base as the asset sale constituted business activity and business income. Furthermore, the sale could not be included in either the sales factor numerator or denominator because it was not “stock in trade” or other property that could be inventoried or sold as a service pursuant to statutory requirements.
The department has concluded that a gain realized from an isolated sale or sale of a business doesn’t entitle taxpayers to utilize an alternate method of apportionment. Furthermore, fair apportionment of a business’s income is based on activity in the taxing state in the current tax year period and not on its historical business activity. Lastly, a taxpayer must petition the department for permission to use an alternate method.
Revenue Administrative Bulletin 2024-24, Michigan Department of Treasury, Dec. 17, 2024.
Corporate income tax: Taxpayer was required to seek approval for alternative apportionment
The Michigan Department of Treasury has reported on the resolution of MGM Grand Detroit, Inc. v. Dept. of Treasury, MI Ct of Claims, No. 24-000009-MT. One of the unitary business group’s (UBG) members sold its interest in a non-unitary partnership. The gain was included in its unitary corporate income tax filing and in the denominator of its apportionment factor. The department later removed the gain from the sales factor denominator. The taxpayer claimed that since the partnership was not unitary with its member, the gain arising from the sale could not be included in apportionable income. The Court held that the Corporate Income Tax Act required the taxpayer to petition the department for approval before using an alternative apportionment method.
Treasury Update, Michigan Department of Treasury, Dec. 17, 2024.
Sales and use tax: Reminder issued for data center annual report
The Michigan Department of Treasury reminds data center operators that if they claimed a sales or use tax exemption for the sale or purchase of data center equipment, they are required to submit form 5726 by January 31. The filing of this form is not a means of claiming the exemption but is required by the Acts. If no equipment was sold or purchased or an exemption was not claimed in a specific calendar year, the form is not required.
Treasury Update, Michigan Department of Treasury, December 2024.
Minnesota
Corporate income tax: Income from pharmacy benefits management services was attributable to state
Income from pharmacy benefits management services provided to an affiliated insurance company were attributable to Minnesota based on the location of the affiliate’s plan members in Minnesota. The taxpayer contended that the income should have been excluded from the Minnesota sales factor for apportionment purposes because the affiliate, its direct customer, received the services in Wisconsin and not in Minnesota. However, nothing in the relevant statute limited the receipt of services to a direct customer of the taxpayer or prohibited the receipt of services by a customer of a customer. Rather, the determination of who received the services was fact specific, and the taxpayer failed to show that the services it provided were received only by the affiliate at locations outside of Minnesota. There were no facts in the record giving rise to a genuine issue for trial as to any one of the essential elements of the taxpayer’s case. Thus, the Commissioner of Revenue’s motion for summary judgment was granted.
Humana MarketPoint, Inc. v. Commissioner of Revenue, Minnesota Tax Court, No. 9570-R, Nov. 21, 2024.
North Carolina
Corporate income tax: Taxpayer denied use of an alternative method of apportionment
The taxpayer’s request to use an alternative method of apportionment for North Carolina corporate income tax purposes was denied. The taxpayer failed to meet its burden to show that the statutory method of apportionment subjects the taxpayer to tax on a greater portion of its income than is reasonably attributable to its business in North Carolina.
Administrative Decision Number 2024-01, North Carolina Department of Revenue, Sept. 17, 2024, released Dec. 2024.
Pennsylvania
Corporate income tax: NLC deduction decision applies prospectively
The Pennsylvania Supreme Court has found that its General Motors Corp. v. Commonwealth decision holding that its Nextel Communications of Mid-Atlantic, Inc. v. Commonwealth decision applied retroactively to corporate income taxes collected before that decision was erroneously decided. Instead, the Nextel decision regarding the net-loss carryover (NLC) deduction applies prospectively and due process doesn’t require Pennsylvania to refund the corporate net income taxes that the taxpayer paid in 2014.
What did the Court hold in Nextel?
In Nextel, the Court held that the 2007 NLC deduction to Pennsylvania’s corporate net income tax violated the Uniformity Clause of the Pennsylvania Constitution because it favored one group of corporate taxpayers and disadvantaged another. Subsequently, in General Motors, the Court concluded that Nextel applied retroactively.
How was General Motors incorrect?
The Court agreed with the lower court that General Motors was incorrectly decided. Although the majority in General Motors stated it was applying the three-factor Chevron test, it failed to analyze all three Chevron factors. Courts applying Chevron must consider:
- Whether the decision in question established a new principle of law.
- Whether retroactive application of the decision would forward the operation of the decision.
- Whether the relevant equities favor prospective application.
The General Motors majority only addressed the first factor, concluded that Nextel didn’t announce a new principle of law, and then declined to address the second and third factors. However, Pennsylvania case law makes clear that all three factor were relevant, and the Court has stressed that the third factor is often the most important.
How do the Chevron factors apply?
First, the Court held that the General Motors majority erred in concluding that Nextel didn’t announce a new principle of law. Second, regarding the next Chevron factor, the Court didn’t believe that retroactively applying the holding in Nextel to taxes levied prior to the decision was necessary to further the operation of the rule announced in Nextel. Third, the final factor requires that the Court balance the equities, which clearly weighed in favor of the prospective-only application of Nextel. Thus, the Nextel decision only applies prospectively, and the lower court decision holding the taxpayer was entitled to a refund of corporate net income taxes paid for 2014, was reversed.
Alcatel-Lucent USA, Inc. v. Commonwealth of Pennsylvania, Supreme Court of Pennsylvania, Middle District, No. 8 MAP 2023, Nov. 20, 2024.
Texas
Multiple taxes: Buying an existing business
The Texas Comptroller of Public Accounts has revised its publication that provides guidance to taxpayers buying existing businesses. The revisions are to make largely technical changes. The publication advises taxpayers planning to buy an existing business to inquire if the business owes any state taxes. Failing to do so would make the purchaser liable for any past-due taxes or fees, plus any interest and penalties owed by the business. Taxpayers should request a Certificate of No Tax Due (certificate) from the Comptroller’s office in case they plan to buy an existing business, the inventory of an existing business or the name and goodwill of an existing business. The certificate is tax-specific and free of charge. Further, the publication discusses successor liability, seller liability, procedure for requesting a certificate, the turnaround time and also provides helpful hints.
Letter No. 202411001P, Texas Comptroller of Public Accounts, Nov. 18, 2024.
Plante Moran comment: It’s important to understand where a buyer may succeed to a seller’s tax exposure that exists prior to acquisition. Obtaining a no tax due certificate, often referred to as a tax clearance certificate, is a step that may protect a buyer from inheriting pre-acquisition exposure from the seller. There are other steps that a buyer also can take to protect themselves, such as conducting due diligence and filing bulk sale notifications.
Virginia
Sales and use tax: Applicability of interstate commerce exemption discussed
The Virginia Tax Commissioner has issued a ruling discussing the applicability of the interstate commerce exemption for sales and use tax purposes. The dealer, a privately-owned manufacturer had a Virginia-based facility and warehouses, made sales of tangible personal property from these facilities to customers around the United States. The Tax Commissioner noted that the dealer’s sales of products whereby the customer pays a third-party common carrier to pick up tangible personal property at the dealer’s Virginia warehouse given that the dealer hadn’t completed its contractual obligation in Virginia, the title to the property wasn’t transferred until the property was delivered to the customers’ location in another state, and no use of the property was made in the state would not be subject to Virginia sales and use tax because the delivery was through a common carrier and the property wasn’t used within Virginia. However, the dealer’s sales of products whereby the customers pay a third-party common carrier to pick up tangible personal property at the dealer’s Virginia warehouse given the title to the property was transferred in Virginia would be subject to Virginia sales and use tax because the common carrier had taken possession of goods pursuant to a contract between the carrier and the purchaser, and the title to the property was transferred to the purchaser at the Virginia location.
Ruling of Commissioner, P.D. 24-100, Virginia Department of Taxation, Oct. 3, 2024.
Plante Moran comment: The interstate commerce exemption is a common exemption when goods are sold outside of state. As illustrated in this decision, there are nuances whereby not all goods shipped to another state qualify for the interstate commerce exemption.
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.
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