The states covered in this issue of our monthly tax advisor include:
California
Corporate income tax, practice and procedure: Out-of-state business owed LLC tax
A Colorado limited liability company (LLC) was liable for the annual $800 LLC tax for the privilege of doing business in California because it employed a California employee during the tax year. The LLC argued that its primary business was as a mortgage broker and that its California employee was a “limited engagement employee” who didn’t directly engage in the profit-making activity of the LLC (i.e., brokering mortgages). However, the Office of Tax Appeals (OTA) found that hiring an employee was a profit-motivated transaction as it contributed to the LLC’s business, and the LLC didn’t provide evidence to show that the employee was hired for any reason other than to further its business.
Late filing penalty
The LLC didn’t establish a basis to abate a late filing penalty imposed by the Franchise Tax Board (FTB). The LLC asserted that it was unaware of its filing requirement because it believed it didn’t conduct any business in California during the tax year. However, it didn’t demonstrate that it acted as an ordinarily intelligent and prudent business person, and ignorance of the law wasn’t an excuse for failing to file a timely return.
Demand penalty
The LLC did establish reasonable cause for abatement of a demand penalty imposed by the FTB. When the FTB issued its demand for a tax return, the LLC responded by filing a nonqualified business entity questionnaire arguing that it didn’t have a California filing requirement. The OTA found that the LLC reasonably believed it didn’t have a California filing requirement, and that an ordinarily intelligent and prudent business person would have reasonably believed that filing the questionnaire was a sufficient response to the FTB’s demand.
Filing enforcement fee
There was no authority for the abatement of a filing enforcement fee imposed by the FTB. The FTB properly imposed the fee after the LLC didn’t file a tax return. Once the fee was properly imposed, the relevant statute provided no grounds, including reasonable cause, upon which the fee could be abated.
Metro Mortgage Group, LLC, California Office of Tax Appeals, 2025-OTA-093SCP, Dec. 13, 2024.
Colorado
Corporate, personal income taxes: Business personal property tax credit guidance updated
Updated guidance issued by Colorado outlines the specifics of the business personal property tax credit as it relates to income taxes. This credit is available to qualifying taxpayers such as individuals, estates, trusts, C corporations, and tax-exempt entities, who have paid property tax on business personal property within the state. The refundable income tax credit applies to the tax levied on the first $18,000 of the total actual value of the business personal property. For partnerships and S corporations, this credit extends to partners and shareholders for qualifying business personal property taxes paid by these entities. Procedures and criteria for calculating and claiming this credit are also detailed in the guidance.
Income Tax Topics: Business Personal Property Credit, Colorado Department of Revenue, January 2025.
Connecticut
Corporate income tax: Two new returns developed for composite income tax and pass-through entity returns
Due to significant changes made to the pass-through entity tax (PET), two new returns, a composite income tax return and a pass-through entity return, were developed by the Connecticut Department of Revenue Services for corporation business tax purposes.
Changes made to pass-through entity tax
The General Assembly:
- Made the PET an elective tax starting Jan. 1, 2024.
- Reinstated the composite income tax.
Under current law, all pass-through entities are required to file a composite income tax return for the taxable years starting on and after Jan. 1, 2024. As a result, the department developed the two new returns.
New forms
The newly reenacted composite income tax will be reported using Form CT-1065/CT-1120SI, Connecticut Composite Income Tax Return. Although Form CT-1065/CT-1120SI was previously used in connection with the PET, it will no longer be used for PET purposes.
Beginning with the taxable year starting Jan. 1, 2024, any pass-through entity that elects to file and pay the PET will be required to file Form CT-PET, Connecticut Pass-Through Entity Return.
These forms are currently available and may be filed using the department’s online portal (myconneCT). Taxpayers and practitioners may also request an extension of time to file these returns through myconneCT.
Third-party software
Taxpayers or practitioners who prefer to use third-party software to file Form CT-1065/CT-1120SI and Form CT-PET may want to consider filing an extension so they can file the returns once they are available by their preferred software provider. The department will provide additional updates on the progress the software companies are making regarding incorporating Form CT-1065/CT-1120SI and/or Form CT-PET into the various tax preparation software.
Paper forms
Lastly, although electronic filing and payment is preferred, paper versions of both forms are available on myconneCT. Any taxpayer or practitioner who decides to file a paper Form CT-1065/CT-1120SI and/or Form CT-PET should download the appropriate return(s), complete it, and mail it to the department at: Department of Revenue Services, 450 Columbus Boulevard, Suite 1 Hartford, Connecticut 06103, Attention: Composite or PET Return enclosed.
TSSB 2025-04, Connecticut Department of Revenue Services, Feb. 13, 2025.
Illinois
Corporate, personal income taxes: NOL and credit regulations amended
Illinois amended regulations to implement law changes that:
- Extended the sunset dates for the research and development credit and the student contribution assistance credit-eligible taxpayers can claim against corporate and personal income tax liability.
- Capped the corporate income tax net operating loss (NOL) carryover deduction for tax years ending on or after Dec. 31, 2024, and before Dec. 31, 2027.
86 Ill. Adm. Code Secs. 100.2160, 100.2193, and 100.2330, Illinois Department of Revenue, effective Jan. 15, 2025.
Sales and use tax: Guide on reporting sales for lease transactions updated
Illinois updated a guide on sales tax reporting requirements when:
- Retailers sell tangible personal property to purchasers who simultaneously enter a long-term lease with a lessee as part of the same transaction.
- The tangible personal property sold is subject to state title or registration requirements.
Examples of sales that retailers must report on Form ST-556-LSE, include sales for lease transactions involving:
- Cars, trucks, vans, and buses.
- Motorcycles, all-terrain vehicles (ATVs), and snowmobiles.
- Aircraft and watercraft.
- Motor homes and manufactured (mobile) homes.
- Trailers.
- The guide provides information in a Q&A format on:
- Business registration requirements.
- Reporting requirements for remote retailers and marketplace facilitators.
- Filing and payment deadlines.
- The monthly discount for filing returns and paying tax by the deadline.
- Electronic filing and payment requirements.
- How to determine the selling price on leased property, including the treatment of accessories.
- Courtesy and factory deliveries.
- Trade-in credits.
- Local use tax collection obligations.
- Tax-exempt transactions, including leases to nonresidents, farm implement and ready-mix concrete truck leases, leases to governmental bodies, leases to interstate carriers for use as rolling stock, and warranty replacements.
ST-9-LSE, Guide for Reporting Sales Using Form ST-556-LSE, Illinois Department of Revenue, January 2025.
Indiana
Corporate income tax: Corporate taxpayer required to exclude income from its finished goods sales
A corporate taxpayer, domiciled outside the United States but with manufacturing facilities in multiple states, including Indiana, was required to exclude its income from its finished goods sales for Indiana corporate income tax purposes. In addition, the taxpayer was also required to exclude any receipts from its apportionment factors other than those required to be included from the toll manufacturer. The taxpayer is a partner in a U.S. partnership (i.e., the toll manufacturer). The toll manufacturer performs the manufacturing activity but doesn’t take title to the inventory during production. The taxpayer maintains title to the raw materials and work in process inventory. Upon the completion of the toll manufacturing process, the taxpayer sells the finished goods to the toll manufacturer (i.e., a “finished goods sale”), which then sells those goods to its customers throughout the United States.
Although the taxpayer is protected from U.S. income taxation on its income pursuant to a tax treaty between the taxpayer and the taxpayer’s resident nation, the taxpayer isn’t protected from U.S. taxation on its income derived from the toll manufacturer. A corporation’s Indiana adjusted gross income starts with the corporation’s federal taxable income. In the instant case, the application of the treaty with the taxpayer’s federal taxable income resulted in the exclusion of the taxpayer’s profit/loss from its finished goods sales on its federal corporate income tax return. As a result, Indiana also excludes the profit/loss from the finished goods sales from its adjusted gross income.
However, because the taxpayer’s income from its ownership in the toll manufacturer is required to be included in the taxpayer’s federal taxable income, the taxpayer is required to include its share of income from toll manufacturer in its Indiana adjusted gross income. Because the taxpayer is permitted to exclude the federal taxable income from the finished goods transactions, but the taxpayer’s share of toll manufacturer’s income is required to be included as part of the taxpayer’s federal taxable income, the taxpayer may not include any of its own receipts in its apportionment numerator or denominator in order to prevent any unfair representation of its income. The taxpayer is required to include its share of toll manufacturer’s receipts for apportionment purposes.
Revenue Ruling No. 2024-02CCP, Indiana Department of State Revenue, Jan. 3, 2025, posted Jan. 22, 2025.
Michigan
Corporate income tax: Guidance provided on changes to flow-through entity tax
The Michigan Department of Treasury has provided guidance on the amendment to the flow-through entity (FTE) tax by PA 216. For tax years beginning Jan. 1, 2024, the Act moved the deadline for electing the tax to the ninth month after the end of the tax year (September 30 for calendar year filers). As the new election period becomes available on the effective date of PA 216, taxpayers should wait until April 2, 2025, to submit a new election payment. FTEs that have yet to make a timely election should wait until April 2, 2025, to file the 2024 FTE return.
The Act also revised the penalties for estimated payments. Penalties and interest will not be assessed for any quarterly estimated payment due before the taxpayer makes a valid election. In regards to the credit funding deadline, the timing of credits is now based on the tax levied and paid on or before the date for the filing of the FTE return, including any extension. Members of an FTE taxpayer will claim 100% of their credits on their annual return for the same tax year for which the FTE paid the tax, if the entity pays its liability by its return due date.
Notice, Michigan Department of Treasury, Feb. 3, 2025.
Sales and use tax: New data center incentive enacted
Michigan has amended its sales and use tax exemption for qualified data centers and created a new exemption for enterprise data centers. The sunset date for the exemption for the sale and use of data center equipment sold to the owner or operator of a qualified data center or a co-located business has been extended to Dec. 31, 2050.
Enterprise data center incentives
A sales and use tax exemption is created for the purchase of equipment for an “enterprise data center” through Dec. 31, 2050. The exemptions extend to Dec. 31, 2065, for an enterprise data center located on a brownfield redevelopment or former electric power plant. An enterprise data center is a facility that:
- Is located in Michigan.
- Is composed of one or more buildings.
- Houses data center equipment to centralize the storage of data.
- Has an aggregate capital investment of $250 million.
- Creates and maintains at least 30 qualified new jobs with an annual wage of 150% or more of the prosperity region median wage through Dec. 31, 2050 (or Dec. 31, 2065, for a facility located on a brownfield redevelopment or a former electric power plant).
In order to claim the exemption, a taxpayer must obtain a certificate from the Michigan strategic fund. The application must include an affirmation that the facility will meet the specified criteria for an enterprise data center within a time frame not exceeding six years. The qualified entity in receipt of a certificate must report purchases for which an exemption is claimed, employment, tax withholding, capital investment and other information required by the Michigan strategic fund.
No later than three years after a facility has been placed in service, the qualified entity must certify that the facility has attained certification under at least one of the green building standards specified in the Act. Furthermore, at the time an exemption is claimed, a qualified entity or affiliate must certify that: (i) the facility uses municipal water sourced from a municipal water system and (ii) has procured clean energy equivalent to 90% of the facility’s forecasted electricity usage on an annual basis.
The Michigan strategic fund may not issue any new certificates after Dec. 31, 2029.
Act 181 (S.B. 237), Laws 2024, effective Mar. 31, 2025 and Act 207 (H.B. 4906), Laws 2024, effective Apr. 17, 2025.
New York
Corporate income tax: U.S. Supreme Court declines to review decisions on deduction of royalties from foreign affiliates
The U.S. Supreme Court has declined a request by taxpayers to review New York court decisions that found corporations couldn’t deduct royalties they received from certain foreign affiliates. The New York Court of Appeals had rejected the taxpayers’ constitutional arguments and concluded that the lower court 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.
One of the taxpayers had 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 had asked whether a state tax law that on its face treats royalty income derived from corporate affiliates less favorably if the affiliates don’t 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, and The Walt Disney Co. v. The Tax Appeals Tribunal of the State of New York, U.S. Supreme Court, Dkt. 24-333, petitions for certiorari denied Jan. 21, 2025.
Corporate income tax: Taxpayer not required to include subsidiary in combined return
The New York Tax Appeals Tribunal found that a corporation was not required to file its return on a combined basis with one of its subsidiaries, despite the Division of Taxation’s claim that excluding the subsidiary would result in distortion. The division asserted that because the subsidiary had no salary, officer, rent, or advertising expenses, it was relying on the employees and officers of other members of the group to perform its functions, thus demonstrating a centralized management system and a flow of value between the subsidiary and the corporation. However, that assertion was rejected. The tribunal agreed with the administrative law judge (ALJ) that the subsidiary was merely a holding company for a single investment asset in a Pennsylvania shopping mall and that the asset itself was operated and managed by an entity that wasn’t an affiliate or member of the corporation's group. The ALJ properly determined that the corporation and the subsidiary weren’t engaged in a unitary business. In addition, the ALJ’s conclusion that excluding the subsidiary didn’t result in distortion was supported by the payment and receipt of arm’s length interest on loans and bank deposits and by the nature and purpose of the loans. Further, the oversight exercised by members of the corporation’s group over the subsidiary was minimal, and the management authority that was exercised was done so under the terms of a management agreement that mirrored a previous agreement with an unrelated party.
Lendlease Americas Holdings, Inc., New York Tax Appeals Tribunal, DTA NO. 829540, Jan. 23, 2025.
North Carolina
Multiple taxes: Guidance provided on how to obtain a seven-month filing extension
As a result of a recent amendment to a regulation, taxpayers that receive an extension to file their franchise and corporate income tax returns with the North Carolina Department of Revenue are granted an additional month to file. Consequently, taxpayers that receive an extension have seven months from the original due date to file franchise and corporate income tax returns.
Extension of filing date regulation
The rule change is effective for tax years beginning on or after Jan. 1, 2025. A corporate taxpayer that can’t file its corporate return by the original due date may be granted a seven-month extension of time to file the return with the department. Generally, the original due date to file a corporate return is the 15th day of the fourth month following the close of the income year.
How to obtain a seven-month extension
Moreover, a corporate taxpayer that’s granted an automatic extension to file its federal income tax return will be automatically granted seven months to file its corresponding corporate return provided the taxpayer certifies that the corporation was granted the automatic federal extension.
A taxpayer who’s not granted an automatic extension to file its federal income tax return may submit Form CD-419, Application for Extension Franchise and Corporate Income Tax, by the original due date of the corporate return.
Important notice: Extension of Time to File Franchise and Corporate Income Tax Return, North Carolina Department of Revenue, Jan. 29, 2025.
Ohio
Sales and use tax: Delivery of network services addressed, sport facility exemption enacted
Ohio recently made changes to the sales and use tax law to:
- Alter the taxation of delivery network services.
- Enact a sales tax exemption for sport facilities.
How are delivery network service taxed?
The collection of sales and use tax on goods sold by a “local merchant” are separated from “delivery network services” sold by “delivery network companies” acting as marketplace facilitators. The terms are defined as:
- A “local merchant” is a person engaged in selling local products from a temporary or fixed place of business, including a kitchen, restaurant, grocery store, retail store, or convenience store.
- “Delivery network services” means pickup of a local product by a delivery network courier from a local merchant not under common ownership or control of the delivery network company through which the transaction was initiated, and which may include selection, collection, and purchase of the local product and delivery by the that courier of the local product to a location designated by the consumer that is not more than 75 miles from the local merchant’s place of business where the pickup occurs.
- “Delivery network company” means a person that operates a business platform, including a web site or mobile application, to facilitate delivery network services.
Following receipt of a waiver by a delivery network company, local merchants transacting with that network company will be required to collect and remit sales and use tax on all taxable goods sold by the local merchant and delivered by the network company. This shifts the collection of sales and use tax from the network company, the marketplace facilitator, to the local merchant, the marketplace seller. Further, some delivery charges previously exempt from taxation, such as those imposed on the conveyance of food, will become taxable for network companies obtaining a waiver.
What is the sales tax exemption for sports facilities?
The sales of tangible personal property sold for incorporation into the construction of a sports facility housing a major league professional athletic teams are exempt from tax. The change is effective on the first day of the first month after the general effective date of the law.
H.B. 315, Laws 2025, effective 91 days after filing with the Secretary of State.
Corporate income tax: Situsing of motor vehicle sale or lease clarified
Ohio has amended the commercial activity tax law to clarify that gross receipts from the sale or lease of a motor vehicle are only sitused to Ohio if a certificate of title with an Ohio address is issued for the vehicle.
The change applies retrospectively and prospectively to all tax periods.
H.B. 315, Laws 2025, effective 91 days after filing with the Secretary of State.
Virginia
Corporate income tax: Research and development credit application properly denied as untimely
The Virginia Department of Taxation upheld the denial of an application for a corporate income tax credit for research and development expenses because the application was filed beyond the statutory deadline. Under the applicable statute, applications for the credit must be received by the department no later than September 1 of the calendar year following the close of the taxable year in which the expenses were paid or incurred. Here, the taxpayer requested an exception to the deadline because the individual responsible for preparing the application died. However, the taxpayer’s request was denied. The department’s policy of establishing a hard deadline for capped tax credits has been applied to all capped tax credits that are administered by the department. Accordingly, the department couldn’t accept an application for the credit after the deadline, regardless of the circumstances.
Ruling of Commissioner, P.D. 24-137, Virginia Department of Taxation, Dec. 13, 2024.
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