State and local tax advisor: March 2022

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

• Alabama
• Florida
• Idaho
• Illinois
• Indiana
• Iowa
• Michigan
• New Mexico
• Ohio
• Texas
• Virginia
• Washington

Alabama

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

Alabama has adopted a new rule for its elective pass-through entity (PTE) tax. The rule implements provisions enacted by Act 1 (H.B. 170), Laws 2021), and Act 423 (H.B. 588), Laws 2021. The rule provides definitions and addresses:

• Requirements for an electing entity
• Payment of tax
• Transition rules

S corporations and subchapter K entities can make the PTE tax election. Single-member limited liability companies, estates, trusts, business trusts, and disregarded entities are not eligible, except in the capacity as an owner, member, partner, or shareholder of an electing S corporations or subchapter K entity.

The taxable income used to determine the PTE tax is the sum of nonseparately stated income (loss) and deductions and separately stated income (loss) and deductions. As appropriate, the income must be apportioned.

Requirements

An entity makes the election on Form PTE-E, Pass-Through Entity Election Form. It must submit the form electronically to the Department of Revenue via My Alabama Taxes (MAT). The form is due by the 15th day of the third month after the close of the tax year for which the entity seeks to make the election. If the election is not made in this manner in a timely manner, the election will be denied. The entity will be able to request the election for the subsequent tax year. An election is binding for the year in which it’s approved and all subsequent tax years unless the entity requests to revoke the election. An entity must make the request to revoke an election in the same manner and by the same time for making an election. If an entity ceases to be a qualified, the election will be automatically revoked.

Each entity making the election must also file, by the 15th day of the third month following the close of the tax year:

• Form EPT, Electing Pass-Through Entity Payment Return
• Form 20S, S-Corporation Information/Tax Return, or Form 65, Alabama Partnership/Limited Liability Company Return of Income

An automatic six-month extension to file is available. But, this doesn’t extend the time to pay.

Owners, members, partners, or shareholders of an electing PTE may claim a refundable credit for their pro rata or distributive share of the Alabama income tax paid by the electing PTE.

When computing the amount of the elective PTE tax liability:

• The PTE must apply the maximum individual income tax rate.
• A net operating loss (carryforward) may not be used to offset income or gain.
• The entity can’t eliminate or exempt any owner, member, partner, or shareholder’s pro rata or distributive share of the Alabama taxable income.
• The 2017 historic rehabilitation tax credit and the Railroad Modernization Act of 2019 credit may only be claimed at the entity level and may not be passed through to the entity’s owners, members, partners, or shareholders.

Payments

The required annual payment is the lessor of 100% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the preceding tax year. Electing entities are subject to the same estimated tax payment requirements that apply to corporations. If an entity makes estimated tax payments but does not make the PTE tax election, or makes a timely request to revoke the election, it may request a refund by submitting Form PTE-C. Payments of $750 or more must be made through electronic funds transfer. An electing entity is exempt from Alabama composite payment requirements.

Transition rules

When an entity is transitioning to an electing PTE, the following applies:

• The required estimated quarterly payments will be 25% of the required annual payment.
• Once the election is made, the initial return’s preceding tax year’s computation is computed using the total of the Form 20S or Form 65 Schedule K (Income (Loss) and Deductions) column C (Apportioned Amount), multiplied by 5%.
• If an electing S corporation reported a loss on Schedule K for the first taxable year, the transition rules will not apply.

Rule 810-3-36-.01, Alabama Department of Revenue, effective Feb. 13, 2022.

Florida

Corporate income tax: Income from asset management services sourced to location of customer

The taxpayer should source its income from the types of asset management services it provides to the location of the customer, where the services are provided, on a market basis for Florida corporate income tax purposes. In this matter, the taxpayer’s asset management services covered four business segments: real estate, private equity, hedge fund solutions, and credit.

Based on the facts presented, the Department of Revenue determined that the taxpayer was to be treated as a financial organization and, therefore, the taxpayer’s sales factor as well as its property factor would be computed as is done for financial organizations.

Technical Assistance Advisement, No. 21C1-010, Florida Department of Revenue, March 5, 2021, released February 2022.

Idaho

Corporate, personal income taxes: IRC conformity updated

Idaho’s governor signed a bill to update Idaho’s Internal Revenue Code (IRC) conformity date to Jan. 1, 2022, with exceptions.

Exceptions

Provisions of the IRC applied as in effect on Jan. 1, 2020 are:

• IRC Sec. 85, regarding unemployment compensation
• IRC Sec. 461(l), regarding the limitation on excess business losses of noncorporate taxpayers

H.B. 472, Laws 2022, effective retroactive to Jan. 1, 2022.

Corporate income tax: Sales factor apportionment formula, market-based sourcing enacted

Idaho enacted corporate income tax legislation that:

• Replaces the three-factor apportionment formula with a single sales factor formula.
• Adopts market-based sourcing rules for sales of other than tangible property.
• Changes the definitions of “business” and “nonbusiness income” to “apportionable” and “nonapportionable income.”
• Places the burden of proof for using alternative apportionment methods on the party requesting the alternative methods.

The legislation also provides telecommunications companies, telephone corporations, and other industries with special apportionment rules the option to use either:

• The special rules
• An equally weighted apportionment formula consisting of a property factor, a payroll factor, and a sales factor

Sourcing for sales of tangible property

Idaho is retaining the current destination sourcing rule for sales of tangible property. Taxpayers must source the sales to Idaho if the taxpayer ships or delivers the property to a purchaser in the state. The destination rule applies regardless of the point of sale or other sales conditions.

A throwback rule also continues to apply if the taxpayer ships property from Idaho and:

• The U.S. government is the purchaser.
• The taxpayer is not taxable in the purchaser’s state.

Sourcing for sales of other than tangible property

Taxpayers must source sales of other than tangible property to Idaho if the taxpayer’s market for the sales is in the state. A taxpayer’s market for the sales is in Idaho if the income is from:

• The sale, rental, lease, or license of real property located in the state.
• The rental, lease, or license of personal property located in the state.
• The rental, lease, or license of intangible property used in the state or used for marketing goods and services purchased by consumers in the state.
• The sale of intangible property under a contract, government license, or similar right that authorizes the holder to conduct business in a geographic area that includes all or part of the state.
• A service delivered to a location in the state.

A special market-based sourcing rule applies to television and cable network broadcasters. A broadcaster must source advertising and licensing income from a broadcast or film programming to Idaho if a broadcast customer, like an advertiser, has its principal place of trade or business in the state.

Taxpayers that can’t determine the location of the sales using the market-based sourcing rules must reasonably approximate the source of the sales.

H.B. 563, Laws 2022, effective retroactively to Jan. 1, 2022.

Illinois

Corporate, personal income taxes: 2021 income tax returns and 2022 withholding filing changes issued

The Illinois Department of Revenue (department) has issued an informational bulletin that summarizes income tax return changes for individuals and businesses for the 2021 filing season and 2022 withholding income tax filing season.

The changes summarized in the bulletin include:

• Automatic six-month extension of the time the department has to issue an assessment of additional tax due for amended returns filed on or after June 25, 2021.
• Income tax filing and payment relief available for individuals and businesses affected by the December 2021 tornadoes.
• The 2021 personal exemption amount for individuals is $2,375.
• The due date for filing 2021 personal income returns is April 18, 2022, unless taxpayers are claiming disaster relief due to the December 2021 tornadoes.
• Quarterly 2021 estimated payments can be made in four equal installments based upon 90% of the liability for year 2021 or 100% of the liability of year 2020 or 2019.
• Individual taxpayers are allowed to take the pass-through entity tax credit using Form IL-1040, Line 28, based on the amount distributed to them by a partnership or subchapter S corporation.
• For tax years ending on or after Dec. 31, 2021, Public Act 102-0016 amended Section 203 of the Illinois Income Tax Act to decouple Illinois from federal 100% bonus depreciation.
• Ronald McDonald House Charities has been added as a donation option on Schedule G, Voluntary Charitable Donations.
• The Illinois exemption allowance, Illinois Property Tax Credit, and the K-12 Education Expense Credit are not allowed if a taxpayer’s adjusted gross income for the tax year exceeds $500,000 for returns with a federal filing status of married filing jointly or $250,000 for all other returns.
• For tax years ending on or after Dec. 31, 2021, and before Dec. 31, 2024, the Illinois net loss deduction for corporations, other than S corporations, may not exceed $100,000.
• The carryover period of any net loss that hasn’t expired as of Nov. 16, 2021, or ending on or after Dec. 31, 2021, has been extended to 20 years.
• Any person making a payment after Dec. 31, 2021, of winnings from sports wagering must withhold income tax from such payment and must complete Form IL-5754, Statement by Person Receiving Gambling Winnings.
• Form IL-990-T and Form IL-1041 can no longer be filed through MyTax Illinois for tax years beginning on or after Jan. 1, 2021.
• Public Act 102-0669 has created a new credit, REV Illinois Investment, beginning Nov. 16, 2021.
• The personal exemption allowance for individuals will increase $50 to $2,425 per person for tax years beginning on or after Jan. 1, 2022.

Among other topics, the bulletin also discusses:

• Changes to the 2021 Illinois business income tax schedules, various income tax credits, and 2022 withholding income tax forms
• Important information for tax preparers and software vendors
• What to watch for in 2022, updates for which will be posted on tax.illinois.gov
• Important tax due dates

Informational Bulletin FY 2022-15, Illinois Department of Revenue, January 2022.

Indiana

Corporate income, insurance taxes: Economic development bill enacted including film and media production tax credit

Amendments are made to various Indiana corporate income, personal income, and insurance premiums tax credits, including:

• The Hoosier Business Investment (HBI) corporate income, financial institutions franchise (income), or insurance premiums tax credit
• The Economic Development for a Growing Economy (EDGE) corporate income and insurance premiums tax credit
• The Headquarters Relocation corporate income tax credit
• The Redevelopment tax credit
• The Venture Capital Investment corporate income tax credit

In addition, this legislation enacts the Film and Media Production Tax Credit.

Hoosier Business Investment tax credit

The annual cap on the HBI tax credit is eliminated starting in fiscal year 2023 (current law provides an annual cap of $55 million for a state fiscal year for all taxpayers for all qualified investments).

EDGE tax credit

If the Indiana Economic Development Corporation (IEDC) enters into an agreement with a taxpayer for an EDGE tax credit, and the taxpayer elects to forgo claiming the credit against any state tax liability for that taxable year and requests that the Indiana Department of Revenue remit to the taxpayer an amount equal to the credit for the taxable year, the taxpayer must provide the following to the department:

• A copy of the taxpayer’s agreement with the IEDC
• The credit awarded to the taxpayer for that taxable year
• Any other information requested by the department

If an applicant for the EDGE tax credit proposes a project to create new jobs in Indiana but doesn’t propose a physical location in Indiana (current law requires the qualified project to have a physical location in Indiana), the IEDC may consider the following:

• The potential impact on the Indiana economy
• The incremental payroll attributable to the project
• The amount of average wage paid by the applicant that exceeds the average wage paid to all employees working in the same NAICS industry sector to which the applicant’s business belongs in Indiana
• The cost to Indiana with respect to the project
• The financial assistance and incentives that are otherwise provided by Indiana
• The extent of Indiana income tax that’s paid by eligible employees

The duration of the EDGE tax credit may not be more than 20 years (current law allows for a duration of 10 years). Moreover, recipients eligible to receive the EDGE tax credit may elect to forgo claiming the credit against any state tax liability and submit a request to receive a payment equal to the credit.

Headquarter Relocation tax credit

The criteria for receiving the Headquarter Relocation tax credit is amended by the removal of the requirement for a minimum number of employees in Indiana. Starting in fiscal year 2023, the $5 million annual limit on the credit is eliminated.

Venture capital investment corporate income tax credit

Effective Jan. 1, 2023, veteran-owned businesses are added to the list of businesses that may qualify for an enhanced Venture Capital Investment credit.

Redevelopment tax credit

A broader definition of a “qualified redevelopment site” is enacted under the credit. The IEDC must determine whether a site is a qualified redevelopment site. In addition, the definition of “rehabilitation” is expanded for purposes of the credit, and the $50 million annual limit on the credit is eliminated. The maximum applicable credit percentage is increased to up to 30%. The threshold is increased from $7 to $20 million in the amount of credit above which the taxpayer will have to repay to the IEDC with interest. Moreover, the repayment provision for projects with at least $100 million in qualified investment is eliminated. These changes are effective fiscal year 2023.

Film and media tax credit

The bill enacts a credit against adjusted gross income tax and financial institutions tax to taxpayers who make qualified media production expenditures. The IEDC will determine the amount of credit to award to an applicant, but the credit may not exceed 30% of the taxpayer’s qualified production expenses. The credit is nonrefundable, and unused credits may be carried forward for up to nine years.

P.L. 135, (S.B. 361), Laws 2022, effective July 1, 2022, unless otherwise provided.

Corporate, personal income taxes: Tax computation amended, filing requirements clarified

Indiana has enacted legislation making changes to the corporate and personal income taxes regarding:

• The IRC Sec. 108(f)(5) addition
• Partnership withholding and audit procedures
• Consolidated group filing
• Apportionment for certain large distributors
• An affordable and workforce housing tax credit

Also, beginning after Dec. 31, 2022, all income and financial institutions taxpayers can subtract an amount equal to the deduction disallowed under IRC Sec. 280C(h).

Personal income taxpayers

The addition for the amount of income excluded from federal income under IRC Sec. 108(f)(5), is amended to state that amounts excludable under IRC Sec. 108(f)(5) as in effect on Jan. 1, 2020 don’t need to be added back. The change is effective retroactive to Jan. 1, 2021.

Partnerships

A provision allowing shareholders, beneficiaries, and partners of a partnership to opt out of withholding tax requirements is enacted. A failure by the pass-through entity to obtain an election for a taxable year or to attach the election to the pass-through entity’s return for a taxable year will be treated as if the election wasn’t made for the taxable year. The change is effective July 1, 2022. Also, the partnership audit procedures are amended in order to clarify procedures.

Consolidated income tax filing clarified

The law clarifies that after the sale, merger, or acquisition, the filing status of the remaining members of a consolidated group doesn’t change absent an election to file separately or on a combined basis. These provisions are effective July 1, 2022.

Apportionment method

The law establishes an apportionment method to compute the Indiana taxable income for certain qualified taxpayers that elect to apply for an alternate method. The qualified taxpayers must have greater than $1 billion of tangible personal property sales that are sourced to Indiana and would have an apportionment of greater than 10%. The apportionment method is changed to exclude certain qualifying distribution sales from the numerator in the computation of Indiana apportionment.

After electing for the alternate method of apportionment, the eligible corporation is subject to the election for 10 taxable years. The taxpayer can continue to elect to use the method beyond the initial 10-year period. The change is effective July 1, 2022.

Affordable and workforce housing tax credit

An affordable and workforce housing tax credit is enacted effective July 1, 2023. The credit can be allocated for five taxable years beginning with the taxable year in which any amount of the federal low-income housing tax credit is first claimed.

The credit amount is equal to:

• The percentage of the state tax credit for the taxable year that the holder retains at the end of the last day of the taxable year, multiplied by the amount of the state tax credit for the qualified project for the taxable year.

The total amount of credit that can be awarded in a fiscal year is $30 million. The credit can be awarded in fiscal years 2024 through 2028.

The taxpayer isn’t entitled to a carryback or refund of any unused credit. However, the taxpayer can transfer, sell, or assign all or part of the credit.

S.B. 382, Laws 2022, effective as noted above.

Iowa

Corporate, personal income taxes: Rate reductions, retirement income exemption, other changes enacted

Iowa Governor Kim Reynolds signed a law enacting her proposed income tax cuts. In addition to the originally proposed personal income tax rate cuts, the law includes a process to reduce the corporate income tax rate as well.

Corporate income tax rate reduction

Iowa could first lower the corporate income tax rate in tax year 2023. The process involves comparing the amount of net corporate income tax Iowa receives in a fiscal year to a base amount of $700 million. If net corporate income tax received in a fiscal year exceeds $700 million, Iowa will calculate what top tax rate would have generated $700 million in the fiscal year that just concluded. The result of the calculation will yield a percentage by which the top tax rate for the upcoming tax year will be lowered.

The calculation will take place at the conclusion of each fiscal year until the Iowa corporate income tax rate is lowered to a rate of 5.50%.

Personal income tax rate reduction

The law reduces the top tax rate to:

• 6% for tax year 2023
• 5.7% for tax year 2024
• 4.82% for tax year 2025
• 3.9% for tax year 2026 and after

The number of brackets and the bracket income levels are also reduced over the years. Effective Jan. 1, 2026, there is a single income tax bracket with a flat rate of 3.9%.

Corresponding reductions are made to the alternate tax rate that may apply in situations related to a taxpayer’s qualification for Iowa’s universal and age-based low-income exemptions from the individual income tax.

Retirement income tax exemption

All income defined as retirement income is exempted from the personal income tax for disabled taxpayers and taxpayers aged 55 years or older. The exemption also applies to a deceased person’s retirement income that’s received by a surviving spouse or a person with an insurable interest in the deceased person. The changes are effective beginning in tax year 2023.

Qualified stock sale net capital gain exclusion

Capital gains earned through the sale or exchange of capital stock in a qualified corporation can be subtracted from income tax. The exemption is allowed for taxpayers who are employee-owners. The subtraction is equal to:

• For the tax years beginning in the 2023 calendar year, 33%
• For the tax years beginning in the 2024 calendar year, 66%
• For tax years beginning on or after Jan. 1, 2025, 100%

Farm lease income tax exemption

A retired farmer’s net income from a farm tenancy agreement is exempted from income. The agreement must cover real property held by the farmer for 10 years or more. The farmer must have materially participated in a farming business for 10 years or more. The retired farmer must be 55 years of age or older and must no longer materially participate in farming. The exemption is effective beginning Jan. 1, 2023.

Farm capital gains income tax exemption

The farm capital gains income exemption is amended by modifying the qualifying time frame for retired farmers to have materially participated in farm operations. The change is effective Jan. 1, 2023.

Credit amendments

The research activities tax credit is amended to:

• Require the use of the alternative simplified method of credit calculation if that method was used by the applicant for the federal tax credit.
• Disallow supplies and computer use expenses from being claimed as qualifying expenses.
• Reduce tax credit refundability each tax year beginning in 2023 and through 2027.

Other credit changes include:

• The high-quality jobs tax credit is amended to require the Economic Development Authority to prioritize the research activities tax credit.
• No geothermal heat pump tax credit awards will be issued after Dec. 31, 2022.
• The maximum amount a single taxpayer can receiver per year for the endow Iowa tax credit is limited.
• The tax credit refundability of the assistive device tax credit, historic preservation tax credit, redevelopment tax credit, research activities tax credit, and third-party developer tax credit are reduced by 5% each year for five year beginning in tax year 2023.

H.F. 2317, Laws 2022, effective as noted.

Michigan

Personal income tax: Legislature gives final ok to tax cut; governor expresses concerns

The Michigan Legislature gave final approval to a bill that would:

• Lower the individual income tax rate from 4.25 to 3.9%.
• Allow a new income tax credit for taxpayers with qualified dependents.
• Increase the amount of income certain seniors may deduct on their income tax returns.

However, in a letter to legislative leaders, Governor Gretchen Whitmer expressed concerns about the bill. She called the bill fiscally irresponsible in its current form and called on lawmakers to work with her on a compromise.

S.B. 768, as passed by the Michigan Senate on March 3, 2022; Letter, Michigan Gov. Gretchen Whitmer, March 3, 2022.

New Mexico

Corporate, personal income taxes: Pass-through entity-level tax enacted

Applicable to taxable years beginning on or after Jan. 1, 2022, New Mexico will allow pass-through entities to pay income tax at the entity level. The entity-level tax is imposed on the distributed net income of the electing pass-through entity for the taxable year at a rate equal to the higher of the maximum corporate or personal income tax rates imposed for that year. Net income subject to the entity-level tax is exempt from corporate and personal income tax.

Election

Pass-throughs that wish to pay the entity-level tax must make the election by filing a complete entity-level tax return with the department. The return must be filed no later than the original or extended due date of the entity’s federal partnership or S corporation return for the taxable year. Payment of the entity-level tax must accompany or precede the filing of the return.

Estimated taxes

Pass-throughs electing to pay the entity-level tax are required make estimated payments of the tax at the same time and in the same amounts as the required pass-through entity withholding. Amounts remitted will be deemed payments of estimated entity-level tax.

Ch. 46 (H.B. 102), Laws 2022, effective May 18, 2022, and applicable as noted.

Ohio

Corporate, personal income taxes: IRC conformity updated

Ohio has updated its income tax Internal Revenue Code (IRC) conformity to incorporate changes to the IRC taking effect after March 31, 2021, the previous conformity date.

Incorporated changes

The updated conformity date is Feb. 17, 2022. Among the changes to federal law incorporated by the update are changes made by the Infrastructure Investment and Jobs Act.

Further, taxpayers with tax years ending after March 27, 2021, and before Feb. 17, 2022, can irrevocably elect to apply the IRC in effect to their taxable year.

H.B. 51, Laws 2022, effective Feb. 17, 2022.

Texas

Sales and use tax: Taxpayer properly subject to successor liability

A taxpayer who acquired a business (predecessor) was properly liable for the unpaid Texas mixed beverage sales and use tax liabilities of the predecessor company because the Tax Division (division) established a prima facie case showing that imposition of successor liability was appropriate.

Under the applicable law, if a person who is liable for a tax sells the business or the stock of goods of the business, then the purchaser shall withhold an amount from the purchase price sufficient to pay the tax, unless the seller first obtains a receipt from the Comptroller showing that the amount has been paid or a certificate stating that no tax is due. If the purchaser of the business fails to withhold the tax due, the purchaser is liable for the delinquent taxes to the extent of the value of the purchase price.

In this matter, the division claimed that the taxpayer was subject to successor liability with respect to the business and that the acquisition process itself was fraudulent. The division established that the imposition of successor liability was appropriate because the taxpayer acquired the assets of the business from the predecessor for a consideration totaling $45,000 and was aware of the outstanding tax liabilities.

However, the division failed to substantiate its contention that the taxpayer acquired the business through a fraudulent transfer or sham transaction because there was no intent to evade, hinder, delay, or prevent collection of tax. Accordingly, the assessment was upheld in part holding the taxpayer liable for the unpaid mixed beverage gross receipts and mixed beverage sales and use tax liabilities to the extent of the purchase price paid.

Decision, Hearing No. 202112017H, Texas Comptroller of Public Accounts, Dec. 1, 2021, released January 2022.

Corporate income tax: Satellite radio company’s subscription receipts improperly apportioned

A satellite radio company's receipts from Texas subscribers were improperly apportioned to Texas for franchise tax purposes. The tax code requires apportionment based on whether receipts are from a service performed in the state. The company argued that the service it performed for its Texas subscribers was the production of radio shows and the transmission of a radio signal, nearly all of which took place outside Texas. The comptroller argued that the service the company performed for its Texas subscribers was the provision of access to its encrypted radio signal, which took place on each subscriber’s radio in Texas. The Court of Appeals agreed with the comptroller's position, but the Texas Supreme Court reversed and remanded the case for further proceedings.

Focusing on the words used in the applicable statute, the Supreme Court noted that the legislature chose the word “performed,” not “received.” And, the most natural reading of “service performed in this state” supported locating the performance of the service at the place where the company’s personnel or equipment was physically doing work for the subscribers. Case law applying an origin-based approach to the taxation of services also supported this reading of the tax code. Further, the economic reality here was that the company was operating dozens of satellite radio channels from locations outside Texas. Characterizing the service the company performed as “decryption” elevated the technicalities of the transaction over the economic reality of the service performed. It was true, in a narrow technical sense, that a subscriber paid for the decryption of a signal. But, the economic reality was that the encryption-decryption model was for the company’s benefit and not the subscriber’s. And, even if decryption was the relevant service, the company did not perform it in Texas. The record did not reflect any evidence that the company sent its activation signals to initiate decryption in the chip set from personnel or equipment in Texas. Also, even if the car radios that received the signals were in Texas, the company did not own the equipment in each subscriber’s car. In sum, the company had little personnel or equipment in Texas that performed the radio production and transmission services for which its subscribers paid monthly subscription fees. Thus, the Court of Appeals’ decision apportioning to Texas all of the company’s receipts from Texas subscribers had to be reversed.

Sirius XM Radio, Inc. v. Hegar, Supreme Court of Texas, No. 20-0462, March 25, 2022.

Virginia

Corporate, personal income taxes: IRC conformity updated

Virginia enacted legislation advancing the IRC conformity date under the corporate and personal income taxes from Dec. 31, 2020, to Dec. 31, 2021. Accordingly, Virginia generally conforms to the federal American Rescue Plan Act (ARPA). However, under the legislation, Virginia continues to decouple from various federal tax law provisions, including the CARES Act provisions temporarily changing the limitations applicable to excess business losses, the net operating loss deduction, and the business interest deduction.

In addition, for taxable years 2021 and after, the legislation allows full deductibility of expenses paid or incurred with forgiven Paycheck Protection Program (PPP) loan proceeds, Economic Injury Disaster Loan (EIDL) program funding, and funding from certain other COVID-19 business assistance programs.

The legislation also retroactively allows the $100,000 deduction for PPP loan forgiveness recipients to certain fiscal year filers who were previously ineligible. Similarly, the $100,000 subtraction for Rebuild Virginia grant recipients is retroactively allowed to certain fiscal year filers who were previously ineligible.

The Virginia Department of Taxation issued Tax Bulletin 22-1 explaining the conformity adjustments that may be required because of the legislation.

Ch. 3 (H.B. 971), Laws 2022, effective Feb. 23, 2022.

Washington

Miscellaneous tax: Capital gains tax invalidated

A Washington superior court held that the capital gains tax enacted in 2021 was unconstitutional because it violated the uniformity and limitation requirements. The court found that the tax should be characterized as an income tax, rather than an excise tax. The Washington Attorney General announced that the decision will be appealed.

Quinn/Clayton v. State of Washington, Superior Court, Douglas County (Washington), Nos. 21-2-0075-09 and 21-2-00087-09, March 1, 2022.

Sales and use tax: Taxpayer subject to B&O tax due to sufficient economic nexus

An out-of-state wholesaler (taxpayer) was properly subject to Washington business and occupation (B&O) tax as it had sufficient economic nexus with the state. In this matter, the Department of Revenue (department) determined that the taxpayer had met the economic nexus thresholds for wholesaling B&O tax because (1) the taxpayer made sales and delivered goods via common carrier to retailers in Washington for resale; and (2) the taxpayer exceeded the gross receipts threshold for wholesaling. Under the applicable statute, a wholesale seller of goods is liable for B&O tax provided the seller has nexus in Washington and the sale occurs in or is “sourced” to Washington. Washington provides two general rules for sourcing sales: (1) when tangible personal property (TPP) is received by the purchaser at a seller’s business location, the sale is sourced to that business location; and (2) when TPP is not received by the purchaser at a seller’s business location, the sale is sourced to the location where receipt by the purchaser occurs.

The taxpayer argued that its sales and delivery arrangements with Washington customers excluded the majority of sales from being sourced to Washington, and that the remaining sales that were properly sourced to Washington were insufficient to trigger substantial economic nexus. Specifically, the taxpayer identifies three sales arrangements under which the ownership of the sold goods would be deemed transferred to the customer at the time the “third-party common carrier” picked up the goods from the taxpayer’s out-of-state warehouse and thus not be considered a Washington sale. The department stated that the fact that the goods were shipped outside of Washington did not mean the goods were not received in Washington. The taxpayer’s customers took actual physical possession of the goods in Washington, regardless of whether the goods were delivered to them via a third-party common carrier. Therefore, the sales were properly sourced to Washington.

Additionally, the taxpayer was not entitled to a waiver of penalties because the lack of knowledge of a tax liability isn’t considered a circumstance beyond a taxpayer’s control and the taxpayer didn’t have a 24-month record of timely filing and payment to qualify for a waiver. Finally, there was no basis to waive the assessed interest and, accordingly, the taxpayer’s petition was denied.

Determination No. 20-0128, Washington Department of Revenue, 41 WTD 100, March 8, 2022.