State and local tax advisor: July 2022
Personal income tax: Sourcing of income from disposition of nonresident individual’s partnership interest
In a letter ruling, the California Franchise Tax Board discusses appropriate sourcing of gain from the disposition of a nonresident individual's partnership interest to the extent the IRC section 751 property is located in California, for personal income tax purposes.
IRC section 751 provides that the amount of any money (or the fair market value of any property) received by a selling partner in exchange for all or a part of their interest in the partnership, which is attributable to unrealized receivables or inventory items of the partnership, is considered to be realized from the sale or exchange of property other than a capital asset. The gain to the partner is considered as an ordinary gain.
In this matter, the taxpayer inquired whether a nonresident individual partner who disposes of a partnership interest has California-source income attributable to the partnership's unrealized receivables or inventory as if the partnership had sold those assets, to the extent those assets are located in California.
Upon review, the FTB stated that the operation of IRC section 751 necessitates that the sale of the partnership interest be treated as two distinct transactions: one in which the intangible partnership interest is sold by the partner, and one in which the underlying IRC 751 property is treated as sold by the partnership immediately before the partner disposes of its interest, leading to a deemed distribution to the partner.
The FTB noted that the gain or loss associated with a partnership’s IRC 751 property is sourced to California when the partnership’s business is carried on wholly within California. Additionally, the nonresident’s income is considered the sale of tangible property and sourced as per the state law. Moreover, the gain or loss associated with a partnership’s property is sourced to California based upon the partnership’s California apportionment factors when the business is carried on within and without California. Lastly, the nonresident’s income or loss would be treated as income from a trade, business, or profession and should be calculated as if the partnership had sold the property and distributed it pro rata to the individual.
Legal Ruling 2022-02, California Franchise Tax Board, July 14, 2022.
Corporate, personal income taxes: Tax credit changes, forgiven PPP loan conformity, and more enacted
California has enacted budget-implementing legislation that includes corporation franchise and income and personal income tax changes relating to:
- the Main Street Small Business Tax Credit;
- the Homelessness Hiring Tax Credit;
- the California Competes Tax Credit;
- forgiven Paycheck Protection Program (PPP) loans;
- penalty abatement; and
- offsetting delinquent accounts.
Other tax changes in the legislation will be reported separately.
Main street small business tax credit
The Main street small business tax credit changes include:
- removing the requirement that the credit be claimed on a timely filed original return; and
- extending the repeal date for the credit provisions from December 1, 2022, to December 1, 2026.
Homelessness hiring tax credit
The Homelessness hiring tax credit changes include:
- expanding the credit to include qualified taxpayers that employ a person who has recently received services from a homeless services provider; and
- allowing a continuum of care or a community-based service provider to issue recertifications to eligible individuals.
California competes tax credit
The California competes tax credit changes include:
- extending the fiscal years for which GO-Biz can allocate credits through 2027–28;
- limiting the aggregate amount of credit that may be allocated to $180 million for each fiscal year from 2023–24 to 2027–28;
- beginning with the 2023-24 fiscal year, authorizing the Governor’s Office of Business and Economic Development (GO-Biz) to consider, when determining whether to enter into a written agreement with a taxpayer, the taxpayer’s commitment to treating its workforce fairly and creating quality, full-time, wage and salary jobs in the state; and
- beginning with the 2023-24 fiscal year, authorizing GO-Biz to consider, when determining whether to enter into a written agreement with a taxpayer, the taxpayer’s willingness to relocate jobs into California from a state that, among other things, has enacted a law that discriminates against same-sex couples or their families, discriminates on the basis of sexual orientation, gender identity, or gender expression, or denies or interferes with a woman’s right to choose to bear a child or to choose and obtain an abortion.
Forgiven PPP loan amounts
California now conforms to federal law excluding from gross income any covered loan amounts forgiven pursuant to the PPP Extension Act of 2021 (P.L. 117-6).
Failure-to-file or failure-to-pay penalty abatement
For tax years beginning on and after January 1, 2022, the Franchise Tax Board must, upon request by an individual taxpayer, grant a onetime abatement of a failure-to-file or failure-to-pay penalty if the taxpayer:
- was not previously required to file a California personal income tax return or has not previously been granted abatement under these provisions;
- has filed all required returns as of the date of the request for abatement; and
- has paid, or is in a current arrangement to pay, all tax currently due.
Offsetting delinquent accounts
For tax years beginning on or after January 1, 2024, the Controller may not offset delinquent accounts against personal income tax refunds of an individual who received the Earned Income Tax Credit or the Young Child Tax Credit for the tax year. This does not apply to delinquent accounts for the nonpayment of child or family support.
Ch. 55 (A.B. 194), Laws 2022, effective June 30, 2022, and applicable as noted.
Sales and use tax: Sales and use tax simplification system updates for local retailers
The Colorado Department of Revenue will collect information from relevant retailers that used the sales and use tax simplification system (SUTS) and share that information with local taxing jurisdictions.
Relevant retailers are those that:
- use SUTS;
- have a state standard retail license; and
- either do not have a physical presence, or have only an incidental physical presence, in the local taxing jurisdiction.
The Department must report required information with each municipality or county, including home rule municipalities by July 1, 2023.
General business license changes
On or after July 1, 2022, a local taxing jurisdiction may not charge a fee for a general business license to relevant retailers within the jurisdiction. On or after July 1, 2023, a local taxing jurisdiction may not require a relevant retailer to apply separately for a general business license. If the local jurisdiction requires a general business license, it must automatically issue the license at no charge using the information collected in SUTS, except that a local jurisdiction is not required to issue a license if it has previously revoked the retailers’ general business license for a violation of local code.
On and after July 1, 2022, a local taxing jurisdiction is prohibited from charging a fee for a local general business license to a retailer that:
- has a state standard retail license;
- makes retail sales within the local taxing jurisdiction; and
- either does not have physical presence within the local taxing jurisdiction or has only incidental physical presence within the local taxing jurisdiction.
On and after July 1, 2023, a local taxing jurisdiction is prohibited from requiring such a retailer to apply separately to the local taxing jurisdiction for a general business license. A local taxing jurisdiction must automatically issue a general business license to such a retailer unless the local taxing jurisdiction has previously revoked a general business license held by the retailer for a violation of its local code.
S.B. 32, Laws 2022, effective as noted above.
Sales and use tax: Information provided on grocery tax suspension
Illinois has provided information regarding the recently enacted suspension of the sales and use tax on grocery food items normally taxed at the 1% low rate. From July 1, 2022, through June 30, 2023, this 1% tax is eliminated on food for human consumption that is to be consumed off the premises where it is sold (other than alcoholic beverages, food consisting of or infused with adult use cannabis, soft drinks, candy, and food that has been prepared for immediate consumption). Note, however, there is an additional local tax on grocery food that is not suspended within the Regional Transportation Authority or Metro-East Mass Transit District.
The information is provided in charts that can be used as a guide to distinguish low-tax-rate grocery food items eligible for the tax suspension from both:
- high-tax-rate food items that are not eligible for the grocery tax suspension. Any item that is currently taxed at the high rate of tax (State tax of 6.25%, plus local taxes, if applicable) cannot qualify for the grocery tax suspension and should continue to be taxed at its current rate. This includes high-tax-rate items, such as alcoholic beverages, food consisting of or infused with adult use cannabis, soft drinks, candy, food that has been prepared for immediate consumption, tobacco, and grooming and hygiene products; and
- low-tax-rate prescription and non-prescription medicines and drugs that also are not eligible for the grocery tax suspension.
Illinois Grocery Tax Suspension Information (PIO-115), Illinois Department of Revenue, June 2022.
Corporate, personal income taxes: Partnerships required to report final federal adjustments from partnership level audits
Michigan has added a new chapter to the Income Tax Act to require partnerships and partners to report final federal adjustments arising from a partnership level audit or an administrative adjustment request and make payments.
Final federal adjustments
Except for final federal adjustments subject to an election, final federal adjustments must be reported as follows:
- Within 90 days after the final determination date, the partnership must (i) file a completed federal adjustments report, (ii) report to each of its direct partners for the reviewed year their distributive share of the final federal adjustments, and (iii) submit a payment on behalf of any nonresident partner previously included on a composite return for the reviewed year for the additional amount that would have been due had the final federal adjustments been reported properly.
- If the partner's increase in the amount of tax due that results from the final federal adjustment is $25 or more, no later than 180 days after the final determination date, each direct partner for that reviewed year that is a corporate partner, resident partner, or nonresident partner, or nonresident partner whose payment is not included in the composite return payment, must file a federal adjustments report reporting that partner's share of the adjustments and pay any additional amount of tax due as if final federal adjustments had been properly reported.
Chapter 18 election
An audited partnership may elect to report any changes at the partnership level. A partnership that made an election must, within 90 days after the final determination date, file a completed federal adjustments report and notify the department of the election. Furthermore, within 180 days after the final determination date, the partnership must exclude from final federal adjustments the distributive share of those adjustments attributed to direct exempt partners not subject to the tax and pay a certain specified amount.
Penalties and advance payments
If a taxpayer files a federal adjustments report or an amended return within the time period specified, the department may not assess additional tax, interest, and penalties arising from final federal adjustments after the expiration of the limitations period.
A taxpayer that expects to owe additional tax as a result of a pending partnership level audit, may make payments prior to the due date of the federal adjustments report.
Act 148 (S.B. 248), Laws 2022, effective July 19, 2022.
Corporate, personal income taxes: SALT parity act enacted
For tax years ending on or after December 31, 2022, a partnership or S corporation may elect to pay Missouri income tax at the entity level. Limited liability companies treated as partnerships or S corporations for federal income tax purposes may also make the election. Owners of an electing entity may then claim an income tax credit for their share of the tax paid by the entity.
Missouri enacted legislation that included these "SALT Parity Act" provisions along with other tax changes. The other tax changes will be separately reported.
How much is the entity-level tax?
The tax is equal to:
- the sum of each member's income and loss items,
- reduced by a deduction allowed for qualified business income,
- modified by state provisions relating to pass-through entities, and
- multiplied by the highest rate of tax used to determine Missouri individual income tax liability.
How do entities make the election?
Entities may make the election on a form prescribed by the Department of Revenue. They must make a separate election for each tax year. The election must be signed by each member of the entity or by any officer, manager, or member of the entity who is authorized to make the election and who attests to having authorization under penalty of perjury.
Also, an electing entity must designate a representative for the tax year who will act on behalf of the entity on certain matters.
How much is the tax credit?
The credit is equal to a taxpayer's direct and indirect pro rata share of the Missouri tax paid by the electing entity. The credit is nonrefundable, but may be carried forward to subsequent tax years.
In some instances, a resident or part-year resident individual taxpayer may be entitled to a credit for the taxpayer's direct and indirect pro rata share of a similar tax paid by an electing entity to another state. This credit is nonrefundable and may not be carried forward to subsequent tax years.
Do nonresident owners have to file Missouri returns?
A nonresident individual owner of an electing entity does not have to file a Missouri income tax return for a tax year if, for the tax year:
- the individual's only income derived from Missouri sources is from one or more electing entities; and
- the electing entities file and pay the tax due.
H.B. 2400, Laws 2022, effective August 28, 2022, and applicable as noted.
Corporate, personal income taxes: Tax incentive provisions revised
Missouri enacted legislation revising income tax incentive provisions relating to:
- a research expenses credit;
- the business headquarters credit;
- an S corporation shareholder credit for tax paid;
- the self-employed health insurance credit;
- the Missouri Works Program incentives; and
- the Tax Credit Accountability Act.
Research expenses credit
For tax years beginning on or after January 1, 2023, the Director of the Department of Economic Development may authorize an income tax credit for a taxpayer in an amount equal to the greater of:
- 15% of the difference between the taxpayer's qualified research expenses incurred in the tax year and the average of the taxpayer's qualified research expenses incurred in the three immediately preceding tax years; or
- 20% of the difference between the taxpayer's qualified research expenses incurred in the tax year and the average of the taxpayer's qualified research expenses incurred in the three immediately preceding tax years, if the additional research expenses relate to research conducted in conjunction with a public or private college or university in Missouri.
However, the credit allowed may not exceed 200% of the taxpayer's average qualified research expenses incurred in the three immediately preceding tax years. If the amount of the credit exceeds the taxpayer's tax liability, the excess may be carried forward for 12 years.
The aggregate amount of these tax credits that can be authorized for all taxpayers is capped at $10 million per year, with no more than $300,000 issued or awarded to any single taxpayer in any year. Of the $10 million cap, $5 million is reserved for minority business enterprises, women's business enterprises, and small businesses. Any reserved amount not issued or awarded to a minority business enterprise, women's business enterprise, or small business by November 1 of the tax year may be issued to any taxpayer otherwise eligible for a tax credit. If the total eligible claims for credits received in a calendar year exceed the annual cap, each eligible claimant will be issued credits on a pro rata basis, provided all new businesses that are less than five years old are first issued full tax credits.
These credit provisions will sunset on December 31, 2028, unless reauthorized.
Business headquarters credit
The business headquarters tax credit is now available for headquarters commencing or expanding operations on or before January 1, 2031 (previously, January 1, 2025).
Also, businesses may be eligible to claim the credit for an additional six years, after expiration of the initial 10-year period and additional 10-year period, if certain conditions are met.
S corporation shareholder credit for tax paid
A resident shareholder of an S corporation will be allowed a credit for the shareholder's pro rata share of any income tax imposed by Missouri on income derived from sources in another state but not taxed in the other state.
Self-employed health insurance tax credit
The provisions allowing a tax credit for self-employed taxpayers who are ineligible for the federal health insurance deduction have been amended to:
- require a taxpayer to have a Missouri income tax liability of less than $3,000 in order to be eligible for the credit;
- make the credit nonrefundable, and not eligible to be carried forward or back to any other tax year;
- prohibit a taxpayer from claiming the credit and the state health insurance deduction for the same tax year; and
- specify that the credit will sunset on December 31, 2028, unless reauthorized by an act of the General Assembly.
Missouri works program credit
For purposes of the Missouri Works Program incentives, a qualified company or industrial development authority will be entitled to a one-time suspension of program deadlines if a statewide state of emergency existed for more than 16 months.
Tax credit accountability act
For purposes of the reporting requirements under the Tax Credit Accountability Act, the following modifications apply:
- the definition of "domestic and social tax credits" has been amended to remove the health care access fund tax credit, which has expired, and add the previously authorized Health, Hunger, and Hygiene tax credit;
- the definition of "recipient" has been amended to provide that such term does not include the transferee of a tax credit;
- every applicant for a tax credit under a program covered by the Act must, as part of the application process, sign a statement affirming that the applicant is aware of the reporting requirements and penalty provisions;
- a person or entity will not be required to begin submitting annual reports under the Act until at least one month (previously, one year) after the credit issuance date;
- the penalties for late filing of required reports have been revised, so that the penalty for failure to file the first annual report for more than three months will result in a penalty of 1% of the value of the credits for each month of delinquency, not to exceed 10% of the value of the credits issued, and the penalty for failure to file the second or third annual report for more than three months will result in a penalty of 1.5% of the value of the credits, up to a maximum of 20%, per report, of the value of the credits issued;
- the penalty equal to 100% of the value of the credits for fraud in the application process has been changed to a penalty equal to 200% of the value of the credits for fraud in the application or reporting process;
- an administering agency must send a notice of delinquency 30 days (previously, 90 days) after an annual report is past due;
- the Department of Revenue may enter into agreements to compromise or abate some or all of the penalties under the Act; and
- tax credit applicants must forfeit and repay the tax credits if they knowingly (previously, purposely and directly) employ unauthorized aliens.
H.B. 2400, Laws 2022, effective August 28, 2022.
Income tax: Guidance on transfer pricing initiative issued
Beginning June 15, 2022 and continuing through March 2, 2023, New Jersey Division of Taxation (division) is implementing voluntary transfer pricing resolution initiative to work with corporate taxpayers (taxpayer) to expedite the resolution of corporate intercompany pricing issues (IPI).
Certain New Jersey corporate taxpayers may engage in transactions between members of an affiliated group (intercompany transactions). Intercompany transactions that lack economic substance or are not at fair market value can cause a taxpayer to inaccurately report net income attributable to New Jersey. If division determines a taxpayer has an IPI, it may re-determine the New Jersey net income of the corporation properly attributable to its business carried on in New Jersey.
The initiative applies to all filed corporate income tax returns within the statute of limitations that have intercompany transactions subject to adjustment. Taxpayers may access the division's guidance that provides information on the taxpayers’ responsibilities, the division’s responsibilities, taxpayers’ participation rights and benefits, and consequences of not participating. Notice, New Jersey Division of Taxation, June 16, 2022.
Sales and use tax: Sales tax liability of bulk sale purchaser sustained
A corporation (taxpayer) that acquired business assets from a seller but did not file a notification of bulk sale was properly subject to New York State sales and use tax assessment. In this matter, the taxpayer acquired business assets from an auto repair shop but did not file a notification of bulk sale with the Division of Taxation (division). The division made field visits to investigate potential bulk sale and noticed that there was only a name-change for the business and it still had the same management team. Subsequently, the division determined a bulk sale had occurred. The seller had outstanding tax liabilities and the division determined the taxpayer was liable for them. Subsequently the taxpayer protested.
Generally, the term bulk sale means any sale, transfer, or assignment in bulk of any part or the whole of business assets, other than in the ordinary course of business, by a person required to collect tax and pay the same over to the Department of Taxation and Finance.
Upon review, the Division of Tax Appeals (DTA) noted that the noncompliance of the bulk sale notification requirements resulted in the taxpayer becoming personally liable for the payment of any taxes determined to be due from the seller. Moreover the taxpayer did not establish that the liability asserted exceeded any maximum amount of liability that could transfer with the assets because it did not provide any evidence. Accordingly, the taxpayer's protest was denied.
Relax Auto Services, Inc., New York Division of Tax Appeals, Administrative Law Judge Unit, DTA No. 829708, June 16, 2022.
Corporate, personal income taxes: Sale of ownership interest treatment amended
Ohio has amended the income tax definition of "business income" to include the sale of an ownership interest in two situations.
In what two situations will a sale be taxable business income?
The two situations in which the sale of an ownership interest will be considered business income are when:
- the sale is treated as a sale of assets for federal income tax purposes; and
- the seller materially participates in the activities of the business during the taxable year in which the interest was sold or during any of the five preceding taxable years.
The amendment is considered a remedial measure to clarify existing law. The change applies to:
- any petition for reassessment or any appeal and to any application for refund or any appeal pending on or after the effective date; and
- to any transaction that is subject to an audit by Ohio on or after the effective date.
H.B. 515, Laws 2022, effective on the 91st day after filed with Secretary of State.
Corporate income tax: New regulation on commercial activity tax credit adopted
For corporate income tax purposes, the Ohio Department of Taxation adopted new regulation on commercial activity tax credits.
The regulation includes several new measures, such as:
- taxpayers may now claim six different credits against their commercial activity tax liability;
- taxpayers are prohibited from claiming amounts they previously or simultaneously claimed and received against any other tax;
- pass-through entities may elect to pass through the credit to its owners; and
- taxpayers may carry forward nonrefundable credits not used in the year generated.
Regulation Section 5703-29-22, Ohio Department of Revenue, May 2022.
Corporate, personal income taxes: Historic rehabilitation, opportunity zone investment credits amended
Ohio has amended the:
- historic rehabilitation credit; and
- the opportunity zone investment credit.
What are the changes to the historic building rehabilitation tax credit?
Changes to the historic building rehabilitation tax credit include:
- increasing, from $60 million to $120 million, the amount of historic building rehabilitation tax credits in 2023 and 2024;
- allowing several credit enhancements for rehabilitation projects approved by the director on or after the bill’s 90-day effective date and before July 1, 2024;
- permitting owners of projects approved after June 30, 2020, and before the effective date to reapply for an enhanced credit so long as construction on the project has not begun;
- making a tax credit certificate “effective” on the date that all historic buildings rehabilitated by the project are "placed in service" according to the meaning in federal income tax law; and
- allowing the consideration of potential increased attendance and gross revenue in determining whether to approve a project rehabilitating a historic theater.
What are the changes to the opportunity zone investment credit?
Changes to the opportunity zone investment credit include:
- expanding eligibility to receive an Ohio opportunity zone investment tax credit allocation to investors in Ohio opportunity zones that are not subject to the personal income tax;
- increases the cap for the 2022-2023 biennium from $50 million to $75 million, and sets caps of $50 million for 2024, and $25 million for FY 2025 and after; and
- implements two annual application periods, each covering qualifying investments made during the preceding six months.
S.B. 225. Laws 2020, effective 91st day after filed with Secretary of State.
Corporate income tax: Rate reduction, market-based sourcing for intangibles enacted
Pennsylvania has enacted legislation:
- to reduce the corporate income tax over a series of years;
- to require market-based sourcing for the sales of intangibles; and
- codify the existing economic nexus rules currently in place as tax policy issued in Corporation Tax Bulletin 2019-04.
What are the reduced corporate income tax rates?
The corporate income tax rate will be reduced as follows:
- 9.99% through December 31, 2022;
- 8.99%, January 1, 2023 through December 31, 2023;
- 8.49%, January 1, 2024 through December 31, 2024;
- 7.99%, January 1, 2025 through December 31, 2025;
- 7.49%, January 1, 2026 through December 31, 2026;
- 6.99%, January 1, 2027 through December 31, 2027;
- 6.49%, January 1, 2028 through December 31, 2028;
- 5.99%, January 1, 2029 through December 31, 2029;
- 5.49%, January 1, 2030 through December 31, 2030; and
- 4.99%, January 1, 2031 and each taxable year after.
What will market-based sourcing of intangibles mean?
The sales factor used for apportioning the income of multi-state corporations will be determined using market-based sourcing rules for intangible related receipts. Currently, corporations source those receipts using costs of performance. The change will apply to tax years beginning after December 31, 2022.
Sales of intangibles will be sourced to Pennsylvania if the gross receipt are:
- from the lease or license of intangible property, including a sale or exchange of property where the receipts from the sale or exchange derive from payments that are contingent on the productivity, use or disposition of the property, if and to the extent the property is used in Pennsylvania;
- from when the property sold is a contract right, government license or similar property that authorizes the holder to conduct a business activity in a specific geographical area, if and to the extent the property is use in or associated with Pennsylvania;
- from the sale, redemption, maturity or exchange of securities, held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business, if the customers are in Pennsylvania;
- received by a corporation that regularly lends funds to unaffiliated entities or to individuals from interest, fees and penalties imposed in connection with loans secured by real property;
- received by a corporation that regularly lends funds to unaffiliated entities or to individuals from interest, fees, and penalties imposed in connection with loans related to the sale of tangible personal property;
- received by a corporation that regularly lends funds to unaffiliated entities or to individuals from interest, fees, and penalties imposed in connection with loans not described above, if the borrower is in Pennsylvania;
- received from interest, fees, and penalties in the nature of interest from credit card receivables and gross receipts from fees charged to cardholders, such as annual fees, if the billing address of the cardholder is in Pennsylvania;
- received from interest, not described above, is included in the numerator of the sales factor if the lender's commercial domicile is in Pennsylvania; and
- received from intangible property, not described above, will be excluded from the numerator and the denominator of the sales factor.
What are the nexus rules being codified?
Corporations with no physical presence and sales of $500,000 or more per year sourced to Pennsylvania are deemed to have nexus in Pennsylvania. The change applies to tax years beginning after December 31, 2022.
Act 53 (H.B. 1342), Laws 2022, effective July 8, 2022 and as noted above.
Corporate income, miscellaneous taxes: Seattle payroll expense tax upheld
The Washington Court of Appeals rejected a challenge to the Seattle payroll expense tax, finding that the tax is an excise tax on businesses imposed under powers vested in the City by the state constitution and legislature. The court noted that engaging in business is a substantial privilege upon which the City can properly impose taxes, and the use of a business’s payroll expense is an appropriate measure of that taxable incident. Further, the City’s payroll expense tax is not a tax on employee income or the right to work for wages.
Greater Seattle Chamber of Commerce v. City of Seattle, The Court of Appeals of Washington, Division One, No. 82830-4-I, June 21, 2022.
Corporate income tax: Final apportionment and market-based sourcing regulations adopted
Effective for tax years beginning on or after January 1, 2022, West Virginia corporate income taxpayers must:
- use a single sales factor apportionment formula instead of a three-factor formula; and
- apply market-based sourcing rules for income from sales of services and intangible property.
The state also eliminated the sales factor throwout rule for income from sales of tangible personal property. West Virginia adopted final regulations that implement the law changes.
Market-based sourcing rules in general
Receipts from sales other than sales of tangible personal property are in West Virginia, if the taxpayer’s market for the sales is in the state. The regulations establish uniform rules for:
- determining whether the market for a sale is in West Virginia; and
- reasonably approximating the state or states of assignment if the location of the taxpayer’s market cannot be determined.
Several of the sourcing rules apply in sequential order. Taxpayers must also determine the method of assignment in good faith and with reasonable effort.
Services in general
In general, taxpayers must assign receipts to West Virginia from the sales of services delivered to a location in the state. The term "delivered to a location" refers to the location of the taxpayer’s market for the service and not the location of its employees or property.
The specific rules for determining the location of the delivery of a service depend on the type of service provided by the taxpayer, like in-person or professional services. There are also special sourcing rules for:
- taxpayers that receive more than 5% of all service receipts from a customer;
- services delivered physically or electronically for or through a customer;
- architectural, engineering, and advertising services; and
- services sold to related members that own or control the taxpayer.
Taxpayers must assign a sale of in-person services to West Virginia if a customer received services in the state that involve:
- the customer’s body or the physical presence of the customer;
- the customer’s real estate;
- tangible personal property at the customer’s residence or in the customer’s possession; or
- tangible personal property shipped or delivered to the customer, whether the service is performed in or outside the state.
A taxpayer that delivers a professional service to an individual customer must assign the receipts to West Virginia if:
- the customer's primary residence is in the state; or
- the customer's billing address is in the state.
A taxpayer that delivers a professional service to a business customer must assign the receipts to West Virginia if:
- the customer principally managed the contract of sale in the state;
- the customer placed the order for the service in the state; or
- the customer's billing address is in the state.
West Virginia provides a safe harbor rule for sourcing professional services to a customer’s billing address. A taxpayer can assign its receipts from professional services to a particular customer based on the customer’s billing address if the taxpayer:
- engages in substantially similar service transactions with more than 250 individual or business customers; and
- does not receive more than 5% of its sales of services from that customer.
Taxpayers must assign receipts to West Virginia from the license or sale of intangible property used in the state. The term "use" refers to the location of the taxpayer’s market for the use of the intangible property and not to the location of the taxpayer’s property or payroll.
The sourcing rules depend on the type of license or nature of the property sold. This includes distinct rules for:
- marketing intangibles;
- production intangibles;
- mixed intangibles;
- broadcasting intangibles;
- contract rights or government licenses that authorize use in a specific geographic area;
- software transactions;
- digital goods or services; and
- transactions that resemble the sale of goods or services.
A taxpayer must exclude or throwout certain receipts from its West Virginia sales factor, like income from the sale of:
- going concern value;
- workforce in place; and
- other similar intangible property.
Reg. Secs. 110-24-1 to 110-24-27, West Virginia State Tax Department, effective July 1, 2022.
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