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State and local tax advisor: July 2022

July 27, 2022 / 28 min read

Have you heard about the latest changes in state and local taxes? Check out the July 2022 roundup here.

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

California

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:

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:

Homelessness hiring tax credit

The Homelessness hiring tax credit changes include:

California competes tax credit

The California competes tax credit changes include:

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 oneĀ­time abatement of a failure-to-file or failure-to-pay penalty if the taxpayer:

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.

Colorado

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

Relevant retailers are those that:

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:

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.

Illinois

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:

Illinois Grocery Tax Suspension Information (PIO-115), Illinois Department of Revenue, June 2022.

Michigan

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:

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.

Missouri

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:

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:

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:

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:

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:

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:

H.B. 2400, Laws 2022, effective August 28, 2022.

New Jersey

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.

New York

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.

Ohio

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 amendment is considered a remedial measure to clarify existing law. The change applies to:

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:

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:

What are the changes to the historic building rehabilitation tax credit?

Changes to the historic building rehabilitation tax credit include:

What are the changes to the opportunity zone investment credit?

Changes to the opportunity zone investment credit include:

S.B. 225. Laws 2020, effective 91st day after filed with Secretary of State.

Pennsylvania

Corporate income tax: Rate reduction, market-based sourcing for intangibles enacted

Pennsylvania has enacted legislation:

What are the reduced corporate income tax rates?

The corporate income tax rate will be reduced as follows:

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:

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.

Washington

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.

West Virginia

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:

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:

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:

In-person services

Taxpayers must assign a sale of in-person services to West Virginia if a customer received services in the state that involve:

Professional services

A taxpayer that delivers a professional service to an individual customer must assign the receipts to West Virginia if:

A taxpayer that delivers a professional service to a business customer must assign the receipts to West Virginia if:

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:

Intangible property

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:

Throwout rule

A taxpayer must exclude or throwout certain receipts from its West Virginia sales factor, like income from the sale of:

Reg. Secs. 110-24-1 to 110-24-27, West Virginia State Tax Department, effective July 1, 2022.

The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC, is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use. 

©2022 CCH Incorporated and its affiliates. All rights reserved.

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