State and local tax advisor: September 2021

The states covered in this issue of our monthly tax advisor include:

• Colorado
• Florida
• Illinois
• Michigan
• Minnesota
• New York
• Pennsylvania
• Tennessee
• Texas
• Utah

Colorado

Corporate, personal income taxes: Governor discusses surplus and tax rate reduction

Colorado Governor Jared Polis has released a statement discussing the state’s budget surplus, which will result in a rebate check and an income tax rate cut. According to the governor, the economic growth will result in an income tax cut from 4.55 to 4.50% next year. Based on the state controller’s report, the Governor’s Office of State Planning and Budgeting estimates that Coloradans filing single returns on average will receive $69 in the form of a tax refund, while those filing joint returns will receive $166 on average.

Press Release, Colorado Gov. Jared Polis, Sept. 2, 2021.

Sales and use tax: Guidance on manufacturing exemption

Colorado issued a publication discussing sales and use tax exemptions allowed to manufacturers for the purchase and use of the following items:

• Ingredients and component parts
• Property brought into Colorado temporarily for testing, modification, or inspection
• Gas, electricity, and other fuels
• Machinery and machine tools

Sales & Use Tax Topics: Manufacturing, Colorado Department of Revenue, June 2021, released August 2021.

Florida

Corporate income tax information publication on IRC conformity and tax rate change issued

For corporate income tax purposes, the Florida Department of Revenue issued a tax guidance on the adoption of the 2021 Internal Revenue Code (IRC). H.B. 7059, amended the Florida Tax Code to adopt the IRC retroactively to Jan. 1, 2021, and decoupled from several federal income tax provisions. The guidance clarified the use of Florida net operating losses (NOLs) and stated that in taxable years beginning:

• Before Jan. 1, 2018, NOLs are carried forward up to 20 taxable years.
• After Dec. 31, 2017, NOLs are carried forward indefinitely until used and never expire.
• Before Jan. 1, 2021, a Florida NOL deduction may be taken against 100% of Florida tentative apportioned adjusted federal income.
• After Dec. 31, 2020, any carryover generated in a taxable year beginning before Jan. 1, 2018, may be applied against Florida tentative apportioned adjusted federal income, and then any carryover generated after Dec. 31, 2017, is applied against 80% of the remaining Florida tentative adjusted federal income.

Also, the income tax rate for tax years beginning from Jan. 1 to Dec. 31, 2021, is reduced from 4.458 to 3.535%. The rate returns to 5.5% for tax years beginning on or after Jan. 1, 2022. Thus, taxpayers are advised to recalculate the safe harbor threshold for 2022 estimated tax payments based on the 5.5% rate.

Tax Information Publication, No. 21C01-01R, Florida Department of Revenue, Aug. 13, 2021.

Illinois

Sales and use tax: Emergency marketplace facilitator rules suspended

Effective Aug. 18, 2021, Illinois suspended emergency sales and use tax rules for remote retailers and marketplace facilitators. The rules implement the “Leveling the Playing Field for Illinois Retail Act,” which established nexus thresholds for Illinois sales tax collections by remote retailers and marketplace facilitators.

Resource Page for the Leveling the Playing Field for Illinois Retail Act, Illinois Department of Revenue.

Sales and use tax: Online sellers making sales through marketplaces allowed retroactive credit and other changes enacted

Illinois makes various changes with regard to sales and use tax on sales made over online marketplaces.

Retroactive credits

Beginning Jan. 1, 2020, and through Dec. 31, 2020, sales of tangible personal property made by a marketplace seller over a marketplace for which Retailer’s Occupation Tax (ROT) is due but for which use tax has been collected and remitted to the Department of Revenue by a marketplace facilitator are exempt from the ROT tax. A marketplace seller claiming this exemption must maintain books and records demonstrating that the use tax on such sales has been collected and remitted by a marketplace facilitator. Marketplace sellers that have properly remitted ROT tax on such sales may file a claim for credit. However, no claim is allowed for such taxes for which a credit or refund has been issued to the marketplace facilitator under the Use Tax Act, or for which the marketplace facilitator has filed a claim for credit or refund under the Use Tax Act.

Certified service providers

On and after Jan. 1, 2021, a certified service provider timely filing a return and remitting ROT taxes on behalf of a remote retailer is entitled to claim the “retailers” discount of 1.75%. A remote retailer using a certified service provider to file a return on its behalf is not eligible for the discount.

Licensed auctioneers

The legislation specifies that a “marketplace facilitator” does not include any person licensed under the Auction License Act. However, this exemption does not apply to any person who is an internet auction listing service.

P.A. 102-0634 (S.B. 2066), Laws 2021, effective Aug. 27, 2021, except as noted.

Corporate, personal income taxes: Elective pass-through entity tax enacted

More information regarding Illinois’ pass-through entity election can be found here.

Illinois enacted legislation that allows pass-through entities to pay an elective tax on income earned or received in the state.

Eligible pass-through entities

The elective pass-through entity tax applies to S corporations and partnerships. It does not apply to publicly traded partnerships.

Election

S corporations and partnerships can make the election each tax year. The election is irrevocable once it is made.

Tax rate

The tax rate is 4.95% of the entity’s net income for the tax year. A partnership or S corporation computing net income can’t deduct:

• A standard exemption
• Net operating losses
• Distributive income subject to Illinois replacement tax
• Personal service income or compensation paid to partners

Tiered partnerships can deduct distributive income from the electing partnership.

Credits

Partners and shareholders can claim a refundable credit equal to 4.95% of the partner’s or shareholder’s distributive share of the entity’s net income. The credit can’t exceed the tax paid by the partnership or S corporation.

If the partnership or S corporation pays a pass-through entity tax to another state, resident partners or shareholders can claim a credit for the tax paid.

Nonresident partners or shareholders

Nonresident individuals do not need to file an Illinois income tax return if:

• The individual’s only source of income from Illinois is from an electing entity.
• The individual’s pass-tax entity tax credit equals or exceeds their Illinois income tax liability.

Payment of the tax also relieves the partnership or S corporation of withholding requirements for nonresident partners or shareholders.

Liability for tax

If the electing entity fails to pay the tax, the partners or shareholders must pay. They must also pay any penalties and interest on the unpaid tax.

Estimated tax

An electing entity must pay estimated tax if it reasonably expects tax liability for the year to exceed $500.

Effective dates

The elective pass-through entity tax is effective for tax years ending on or after Dec. 31, 2021. The tax applies until:

• Jan. 1, 2026.
• The federal limitation on the state and local tax deduction under IRC Sec. 164(b)(6) no longer applies.

P.A. 102-658 (S.B. 2531), Laws 2021, effective Aug. 27, 2021, and as noted.

Sales and use tax: Sales and use tax collection operation of marketplace sellers and facilitators discussed

In a general information letter, the Illinois Department of Revenue (department) clarified that beginning Jan. 1, 2021, marketplace facilitators are considered retailers engaged in the occupation of selling at retail in Illinois for purposes of the Retailers’ Occupation Tax Act if either of the thresholds are met:

• The cumulative gross receipts from sales of tangible personal property to purchasers in Illinois made through the marketplace by the marketplace facilitator and by marketplace sellers are $100,000 or more.
• The marketplace facilitator and marketplace sellers selling through the marketplace cumulatively enter into 200 or more separate transactions for the sale of tangible personal property to purchasers in Illinois.

Marketplace facilitators meeting the thresholds must register, file, and remit all applicable taxes for sales made over the marketplace to Illinois purchasers, including their own sales and sales made on behalf of marketplace sellers. Also, the department can’t collect state and local sales taxes from both the marketplace facilitators and sellers on the same transaction.

General Information Letter ST-21-0026-GIL, Illinois Department of Revenue, July 28, 2021, released September 2021.

Michigan

Sales and use tax: Assessment sustained as taxpayer wasn’t interstate fleet motor carrier

The Michigan Court of Appeals, while adopting the Department of Treasury’s guidance rolling stock exemption, affirmed a sales and use tax assessment against an excavation and transportation service corporation (taxpayer) as the taxpayer did not qualify as an interstate fleet motor carrier. In this matter, the taxpayer argued 10% of its fleet mileage was out-of-state.

Upon review, it was noted that the taxpayer proffered hauling invoices showing transportation across state lines as the hiring objective only for the 2013-14 period. Additionally, it was noted that the exemption requires that the portion of the fleet used for interstate transportation-for-hire and 10% of the mileage was driven out-of-state. However, the taxpayer failed to substantiate with documents to establish itself as an interstate fleet motor carrier. Accordingly, the taxpayer’s protest was properly denied.

ML Chartier Excavation, Inc. v. Minnesota Department of Treasury, Michigan Court of Appeals, No. 353163, June 24, 2021, released July 2021.

Corporate income tax: Gain from sale of business excluded from sales factor denominator

Gain from the sale of a business was properly excluded from the denominator of the sales factor of the apportionment formula when computing a taxpayer’s Michigan business tax liability. The case involved the sale of an out-of-state business. The business provided services in many states throughout the Midwest. While engaged in a severe oil spill cleanup project in Michigan, the business sold all of its stock to the taxpayer. It treated the sale as a sale of its assets. On its short period return for the year of sale, it reported the gain on the sale as business income and included the gain in its sales factor denominator (i.e., sales everywhere).

The Department of Treasury removed the gain from the apportionment formula on the grounds that the sale of the business did not meet the definition of a “sale.” This increased the sales factor from about 15% to about 70%. The Court of Claims held that the plain language of the Michigan Business Tax Act did not support inclusion of the sale in the denominator of the sales factor. Further, the court noted that the assets sold were not inventory, and the record did not reflect that the business sold any property held primarily for sale to customers.

Vectren Infrastructure Services Corp. v. Department of Treasury, Court of Claims (Michigan), No. 17-000107-MT, May 25, 2021.

Minnesota

Corporate, personal income taxes: Pass-through entity tax questions addressed

The Minnesota Department of Revenue has addressed frequently asked questions (FAQs) regarding the state’s pass-through entity (PTE) tax.

What is the PTE tax?

The PTE tax allows an entity to pay a tax on behalf of its partners, members, or shareholders for tax years beginning after Dec. 31, 2020. Partnerships, limited liability companies (LLC) (other than single-member LLCs), and S corporations may elect to pay the PTE tax if owners who collectively control more than 50% of the entity decide to do so. The election is binding on all owners.

How is the PTE tax calculated?

The PTE tax is calculated by multiplying the entity’s Minnesota source income by the highest Minnesota individual income tax rate, which is currently 9.85%.

How is the election made?

An entity can elect to pay the PTE tax by filing Schedule PTE, Pass-Through Entity Tax, no later than the due date or extended due date of the entity’s income tax return. An entity may make the election only if no partner, member, or shareholder is a partnership, LLC, or corporation, other than a disregarded entity. The election is irrevocable. However, as long as an entity has not filed Schedule PTE, Pass-Through Entity Tax, or otherwise elected to file a return and pay the PTE tax, it is not required to make the election even if it has made estimated tax payments for the PTE tax.

Can the election satisfy a nonresident’s Minnesota filing requirement?

The PTE tax election may satisfy a nonresident’s Minnesota filing requirement if:

• The nonresident is a full-year Minnesota nonresident who is a partner, member, or shareholder in an electing entity.
• The nonresident’s only Minnesota source income is from an entity or entities that are filing and paying composite tax or PTE tax on the nonresident’s behalf.

How are estimated PTE tax payments made?

PTE estimated payments are made in e-Services using the same method as estimated tax payments for nonresident withholding, composite income tax, and other entity-level income taxes. Payments must be in four equal installments.

An entity can calculate its estimated PTE tax liability by:

• Completing the worksheet in the instructions of Form M3, Partnership Return, or Form M8, S Corporation Return, to determine the Minnesota source distributive income as if the owner was a 100% owner.
• Multiplying the result by 9.85%.

Law Change FAQs for Tax Year 2021 - Pass-Through Entity Tax, Minnesota Department of Revenue, September 2021.

New York

Income tax: Guidance issued on pass-through entity tax

New York released a memorandum discussing the new pass-through entity tax (PTET), which is an optional tax that partnerships or New York S corporations can annually elect to pay on certain income for tax years beginning on or after Jan. 1, 2021. If a partnership or New York S corporation elects to pay the PTET, then the partners, members, or shareholders may be eligible for a PTET credit on their New York state personal income tax returns.

Among the topics addressed by the memorandum are:

• Who may make the election
• The election period
• How to calculate pass-through entity taxable income
• How to calculate the tax
• Estimated tax payments
• Filing the annual PTET return
• Calculation of the PTET credits
• Claiming the PTET credit

Detailed examples are provided to illustrate the application of the PTET provisions. TSB-M-21(1)C, (1)I, New York Department of Taxation and Finance, Aug. 25, 2021.

Note: The election for 2021 must be made by Oct. 15, 2021.

Pennsylvania

Corporate income tax: NLC deduction limitations upheld

Pennsylvania’s application of the corporate income tax percentage cap for net loss carryover (NLC) deductions was upheld. A taxpayer challenged Pennsylvania’s policy that subjected only large corporate taxpayers to the percentage cap and excluded application to small corporate taxpayers for tax years beginning prior to Jan. 1, 2017.

Taxpayer’s NLC

In 2014, the taxpayer’s taxable income apportioned to Pennsylvania before accounting for any net loss deduction was $27,332,333. At the time, the NLC deduction was the greater of 25% of income apportioned to Pennsylvania or $4,000,000. The taxpayer took a net loss deduction of $6,833,083, which was the greater amount. After accounting for the NLC deduction, the taxpayer reported taxable income apportioned to Pennsylvania of $20,499,250, which resulted in a corporate net income tax liability of $2,047,875, which the taxpayer paid in full.

The taxpayer’s issue was the application of the percentage cap for NLC deductions for 2014 following the Pennsylvania Supreme Court’s decision in Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth. In Nextel, the Pennsylvania Supreme Court severed the unconstitutional flat-dollar cap, while preserving the percentage cap. Pennsylvania implemented the Nextel decision by removing the flat-dollar deduction beginning in 2017 and after.

Uniformity provision

The taxpayer argued that Pennsylvania violated the Uniformity Clause of the Pennsylvania Constitution by applying the statutory percentage cap on net loss deductions to large corporations but refused to apply the same percentage cap to small corporations. The court determined that there was no support for a retroactive application of the Nextel case. Because the taxpayer calculated its tax liability for 2014 using the 2014 NLC deduction provision, which was not unconstitutional and was valid until 2017, the taxpayer paid the correct amount of tax and was not entitled to a refund.

Due Process, Equal Protection and Remedies Clauses

Alternatively, the taxpayer contended that the Due Process and Equal Protection Clauses of the United States Constitution and the Remedies Clause of the Pennsylvania Constitution entitled the taxpayer and other similarly situated corporations to a remedy. However, applying Nextel prospectively by subjecting all corporations to the percentage cap after 2017 did not violate due process. The Supreme Court removed the discrimination by severing the flat-dollar limitation. Prospective application of Nextel did not violate equal protection.

Lastly, the Remedies Clause did not otherwise entitle the taxpayer to the relief it sought.

Alcatel-Lucent USA Inc. v. Commonwealth of Pennsylvania, Pennsylvania Commonwealth Court, No. 803 F.R. 2017, Sept. 13, 2021.

Tennessee

Personal income tax: Effect of pushdown accounting on taxpayer’s franchise and excise tax

A single-member limited liability company (taxpayer) was issued a letter ruling by the Tennessee Department of Revenue (department) discussing the franchise and excise tax implications of election and the subsequent decision by the electing partnership to “push down” the new partners’ adjusted basis in partnership property to the indirectly owned taxpayer.

In this matter, the taxpayer was a subsidiary of a multimember limited liability company (partnership), classified as a partnership for federal tax purposes, and this partnership was acquired by unrelated limited liability companies (purchasers). Accordingly, pushdown accounting allows for the purchasers’ basis to be used in preparation of the taxpayer’s separate financial statements. The partnership made an election, such that the purchasers’ adjusted basis in the partnership’s property was stepped up to fair market value.

The department advised the following:

• If pushdown accounting is elected, the taxpayer would be required to calculate its net worth for franchise tax purposes by including the step-up in basis of its assets.
• For federal income tax purposes, the step-up in basis is attributable to the purchasers rather than the partnership property. Thus, for Tennessee excise tax purposes, the taxpayer’s net earnings or net loss will be determined without making any addition or subtraction relating to the basis adjustment pursuant to the election.

Letter Ruling No. 21-06, Tennessee Department of Revenue, June 10, 2021, released August 2021.

Texas

Corporate income tax: Corporation qualified for reduced tax rate and properly included costs in COGS deduction

A corporation qualified for the lower 0.5% Texas franchise tax rate applicable to entities primarily engaged in retail or wholesale trade for report years 2008 and 2009. Also, the corporation properly included costs related to sales-type leases in its costs of goods sold (COGS) deduction.

Reduced tax rate

The corporation contended that it was primarily engaged in wholesale trade. To be primarily engaged in wholesale trade, among other things, the total revenue from the corporation’s activities in wholesale trade had to be greater than the total revenue from its activities in trades other than wholesale trade. The Comptroller asserted that the corporation’s sales-type leases should not be treated as sales. Under the sales-type leases, unless the lessee exercised its option to “purchase” the leased equipment, title to the leased equipment remained with the corporation, and the lessee had to return the equipment at the end of the term. However, most equipment was returned at or near the end of the contract term and typically scrapped as it had no value. Although the sales-type leases stated that they were leases, courts will give effect to the substance of transactions, not the form. Thus, the Court of Appeal held that the district court did not err in effectively concluding that the substance of the sales-type leases constituted wholesale trade. Further, upon including revenue from the sales-type leases in the corporation’s revenues from whole trade activities, the corporation met the threshold for the reduced franchise tax rate.

COGS deduction

The Comptroller asserted that the corporation’s costs related to sales-type leases were not deductible because the transactions did not involve the sale of goods. The Comptroller argued that a sale takes place only when there is a transfer of title to property for a price. The issue of whether a “sale” required the transfer or passage of title appeared to be an issue of first impression in Texas.

The Legislature did not provide a statutory definition. The Court of Appeals concluded that the ordinary meaning of “sale” did not require the transfer or passage of title, although it did require the transfer of the item being sold. After examining the evidence, the court concluded that the Comptroller failed to show that the corporation improperly included any costs in its COGS deduction.

Hegar v. Xerox Corp., Court of Appeals of Texas, Fourteenth District, Houston, No. 14-19-00358-CV, Aug. 31, 2021.

Utah

Corporate income tax: Gain from sale of subsidiary was business income, sales factor adjusted

A taxpayer and its subsidiary were part of a unitary business. Gain from the sale of the subsidiary was apportionable business income. Also, an audit adjustment removing the gain attributable to intangibles from the denominator of the taxpayer’s sales factor was appropriate.

Unitary business

The taxpayer and the subsidiary were related by common ownership. Further, the evidence showed that they were unitary based on centralized management, functional integration, and economies of scale.

Business income

Because the subsidiary was used in the taxpayer’s trade or business while it was held, its sale generated business income under the functional test. Also, because it was customary for the taxpayer to buy and sell business units, the selling of the subsidiary also appeared to generate business income under the transactional test.

Sales factor

When business income from intangible property can’t readily be attributed to any particular income-producing activity of the taxpayer, the income can’t be assigned to the numerator of the sales factor for any state and must be excluded from the denominator. The taxpayer was not able to identify the percentage of proceeds from goodwill and intangibles that could be attributed to Utah. Thus, the proceeds could be excluded from the sales factor denominator.

Commission Decision, Appeal No. 16-278, Utah State Tax Commission, March 31, 2021, released August 2021.