State and local tax advisor: November 2022

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

• Alabama
• California
• Colorado
• Illinois
• Louisiana
• Maryland
• Massachusetts
• Michigan
• New Jersey
• New York City
• Ohio
• Texas

Alabama

Sales and use tax: Guidance on Alabama annual tax account license renewal issued 

Alabama issued a notice informing sales and use taxpayers that the applicable administrative rule requires annual renewals of the following tax account licenses:

• Sales tax
• Rental tax
• Sellers use tax 
• Lodgings tax
• Utility gross receipts tax
• Simplified sellers use tax

Taxpayers must complete the renewal process on an annual basis in order to generate a new tax license for the upcoming year. The business information must be verified and updated as necessary on an annual basis each November and December. A link to renew the tax account license is available at My Alabama Taxes (MAT) website. Taxpayers may be asked to provide the following information while renewing their licenses: 

• Current legal name, including DBAs 
• Owner/officer/member information 
• Phone numbers 
• Social Security numbers/FEINs 
• Addresses — Add/update all addresses necessary for display on the license

Also, the taxpayers must verify that the business is continuing to operate as the same business entity type for which the existing license was issued. If the entity type has changed (e.g., original entity type of sole proprietorship changes to corporation or multimember LLC), then the business must apply for a new license.

Release, Alabama Department of Revenue, Oct. 31, 2022.

California

Personal income tax: California domiciliary subject to tax on sale of company

For personal income tax purposes, the California Office of Tax Appeals (OTA) determined that a principal shareholder (taxpayer) of a Tennessee-based energy company was a California domiciliary during the tax period, when the sale of the company took place, because the taxpayer’s strongest connections were with California. In this matter, an agreement for the sale of the company and redemption of the taxpayer’s shares was entered into toward the end of 2012.

The taxpayer filed a 2012 California nonresident or part-year resident income tax return and reported being a resident of Tennessee for the entirety of 2012. The Franchise Tax Board (FTB) determined that the taxpayer was a California resident on the date of the transaction and, thus, owed tax on the proceeds of the sale. The taxpayer appealed.

Upon review, the FTB established that the taxpayer had taken up actual, physical residence in a California property and demonstrated an intent to remain in California permanently or indefinitely during the relevant period. Therefore, the taxpayer was a California domiciliary on the date of the sale of the company and was liable for the assessed tax.

Beckwith, California Office of Tax Appeals, No. 20056187, July 28, 2022, released September 2022.

Colorado

Property tax: Unusual conditions occurring after assessment date are valid considerations when valuing property

The Colorado Court of Appeals determined that unusual conditions occurring after a property tax assessment date must be considered when valuing a property. The taxpayers claimed a lower assessment on their commercial property for the 2020 tax year, asserting that the pandemic and the associated regulations issued by the state were unusual circumstances that should have been considered in the assessment. The taxpayers filed an action in district court after exhausting their administrative remedies for protesting their 2020 property valuations. The county moved to dismiss the action. The district court granted the county’s motion to dismiss and ruled that the pandemic and resulting orders occurred after the assessment date and could not be considered for the 2020 property valuations. The taxpayers appealed contending that the district court erroneously ruled that COVID-19 was not a detrimental act of nature. The Court of Appeals found that the taxpayers provided specific proof in support of their claim. The Court of Appeals noted that county assessors must consider unusual conditions that occur at any point during the even-numbered calendar year of the reassessment cycle, not just those that exist before January 1 of the even year. Further, the evidence was insufficient to conclude as a matter of law whether the pandemic or the governmental orders were unusual conditions warranting a revaluation. Accordingly, the district court’s decision was reversed and remanded.

MLS Properties, Inc. v. Weld County Board of Equalization, Colorado Court of Appeals, No. 21CA0552, Oct. 6, 2022.

Corporate, personal income taxes: Voters approve income tax rate cut

Colorado voters at the Nov. 8, 2022, general election approved a measure (Proposition 121) that cuts the statutory income tax rate from 4.55 to 4.4%, effective beginning in tax year 2022.

Proposition 121, approved by voters (unofficial results) at the Nov. 8, 2022, general election.

Illinois

Corporate income tax: Extra one-month extension restored

Illinois restored the one extra month beyond the automatic federal filing extension to file corporate income tax returns with the state.

What is the new automatic extension period?

The amended rule changes the Illinois automatic extension period for corporate income taxpayers from six to seven months. The deadline for filing both federal and Illinois corporate income tax returns is normally April 15 for calendar year taxpayers. So, the new deadline for extended Illinois returns is November 15 instead of October 15 for the corresponding extended federal return.

When does the new automatic extension period take effect?

The new seven-month automatic extension period is effective for tax years ending on or after Dec. 31, 2021.

86 Ill. Adm. Code Sec. 100.5020, Illinois Department of Revenue, effective Oct. 26, 2022, and as noted.

Sales and use tax: Lease tax neither ad valorem tax nor local sales tax

The appellate court of Illinois (court) determined that Chicago Personal Property Lease Transaction Tax (lease tax) is neither an ad valorem tax nor a local sales tax.

In this matter, the taxpayer was a business of leasing specialty vehicles and equipment. In 2008, the taxpayer entered into a lease agreement with corporation A for the lease of certain vehicles, trailers, and related equipment. In 2013, corporation B, a beer distributor in the Chicagoland area, purchased corporation A’s assets and assumed the lease agreement.

The lease agreement mentioned that the taxpayer will pay for the state motor vehicle license and inspection fees for each vehicle for the licensed weight for the state in which it’s domiciled and pay the ad valorem tax and federal heavy vehicle use tax for each vehicle, exclusive of any for hire taxes, tags, or permit. However, a dispute between the taxpayer and corporation B arose on the matter if the lease tax falls within the category of ad valorem tax or local sales tax. Lease tax is generally levied on the lease or rental of personal property in Chicago, or on the privilege of using in Chicago personal property that was leased or rented outside Chicago Municipal (City). The amount of the tax is determined by applying the rate of 9% to each lease or rental payment.

Generally, if a lessor fails to collect or remit the tax, the lessee is liable to the city, for the amount of such tax. In such a case, the lessee is required to file a return and pay the tax directly to the city. In 2019, the city determined that the corporation B was liable for nonpayment of the lease tax from the period of July 2011 through June 2017. Corporation B paid the lease taxes accrued from July 2017 through June 2019. Later, the corporation B sent the taxpayer a letter demanding compensation for the amounts it had paid. However, the taxpayer refused, maintaining that it had no responsibility for the taxes identified in the corporation B’s letter.

Upon appeal, corporation B argued that the lease agreement required the taxpayer to pay the lease tax because it’s an ad valorem tax, which is determined “according to the value.” However, the court noted that the lease tax is proportional to the contract price, not value. Lease tax, the court noted, is not dependent on any assessment or appraisal to determine the lease’s value. Instead, the tax is calculated merely by applying the rate to the price of each lease payment. Therefore, the lease tax is generally not assessed “according to the value.”

Accordingly, the tax at issue was not an ad valorem tax. Further, it was noted that the lease tax was not sales tax as a sales tax is a tax on the sale of tangible personal property. Thus, the lease tax at issue was neither ad valorem tax nor local sales tax, and the taxpayer was not liable to pay the tax.

RN Acquisition, LLC V. Paccar Leasing Company, Appellate Court of Illinois, First District, No. 19 L 12510, Nov. 9, 2022.

Louisiana

Corporate, personal income taxes: COVID-19 assistance and benefit subtraction guidance issued

Louisiana has issued guidance regarding the individual and corporate income tax exemption for all state and federal COVID-19 relief benefit. The purpose of the ruling is to determine which relief benefits may or may not qualify for the exemption.

What benefits are exempt?

Louisiana exempts benefits from the following sources from income tax:

• Coronavirus Relief Grant Funds
• Provider Relief Fund Payments
• Granting Unserved Municipalities Broadband Opportunities Funds
• Louisiana Rescue Plans Fund
• Louisiana Loggers Relief Program
• Louisiana Save Our Screens Program
• Louisiana Small Business and Nonprofit Assistance Program
• Louisiana Tourism Revival Fund
• The Water Sector Program
• Gulf States Marine Fisheries Commission Payments
• Coronavirus Relief Loans subsequently forgiven
• HHS Provider Relief Fund Payments Payroll Support to passenger air carriers, cargo air carriers, and certain contractors
• Coronavirus Food Assistance Program
• Emergency Rental Assistance (in the hands of the lessor)
• Coronavirus Economic Relief for Transportation Services (CERTS) Act
• Medicaid per diem increase of $12 per day for privately-owned or -operated nursing facilities and hospital leave rates
• CFAP and CFAP2 payments received by farmers from the USDA
• Coronavirus-related distributions from a retirement plan to the extent included in federal AGI
• COVID-19-related tax credits for paid leave provided by small and midsize businesses
• American Rescue Plan (ARP) Act Child Care Stabilization Grants
• Louisiana Child Care Assistance Provider (LaCAP) Relief Grant for Child Care Assistance Program (CCAP) childcare providers

No deduction is allowed for expenses that were paid using qualifying COVID-19 relief benefits and that would otherwise be deductible. There is no deduction because Louisiana disallows any deduction that’s attributable to income that doesn’t bear Louisiana income tax.

The guidance includes information on claiming the exemption for the 2020 or 2021 tax years.

Revenue Ruling No. 22-002, Louisiana Department of Revenue, Oct. 26, 2022.

Maryland

Miscellaneous tax: Digital ad tax found unconstitutional, comptroller urges legislature to revisit

Maryland Comptroller Peter Franchot has urged the incoming governor and legislation to revisit the digital advertisement gross revenue tax following the ruling by a circuit court holding the law unconstitutional. Franchot noted that the unconstitutionality, combined with the impact on small businesses, continues to “give (him) pause.”

The judge in Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC, et al. v. Comptroller of the Treasury of Maryland, Case No. C-02-CV-21-000509 (Md. Cir. Ct. Anne Arundel Cnty.) issued a bench opinion on Oct. 21, 2022, finding the law unconstitutional and in violation of the Internet Tax Freedom Act.

The digital advertising gross revenue tax was enacted in 2021 after the Maryland Senate overrode Gov. Hogan’s 2020 veto of the bill. The first of its kind law imposes a tax of between 2.5 and 10% of gross revenues derived from digital advertising.

News Release, Comptroller of Maryland, Oct. 20, 2022.

Massachusetts

Personal income tax: Voters approve millionaire tax

Massachusetts voters approved a state constitutional amendment to establish an additional 4% tax on taxable personal income over $1 million.

Constitutional Amendment, as approved by the voters (unofficial results) on Nov. 9, 2022.

Michigan

Property tax: Qualified heavy equipment rental personal property exemption explained

The Michigan State Tax Commission has provided guidance on the qualified heavy equipment rental personal property (QHERPP) tax exemption beginning Dec. 31, 2022.

The exemption is claimed annually by filing Form 5819 and a statement approved by the Commission of all QHERPP located at and/or rented from the qualified renter business location. The form and statement are filed with the assessor of the local unit where the renter business is located by February 20. QHERPP is only exempt if it is located in Michigan on Tax Day (December 31) and satisfies one of the following conditions:

• It is permanently labeled with the name and rental business location of the qualified renter.
• It is permanently labeled with the name and phone number of the qualified renter, and the qualified renter's annual exemption claim identifies the physical location of the QHERPP on Tax Day.

Statements filed in 2023 or 2024 must include the amount of ad valorem taxes levied in 2020, 2021, and 2022 on QHERPP owned by the qualified renter. Furthermore, the statement must include the qualified renter’s liability under the QHERPP specific tax for 2020, 2021, and 2022 if the specific tax had been in effect for those years under certain specified situations.

Bulletin No. 2022-18, Michigan State Tax Commission, Nov. 15, 2022.

New Jersey

Income tax: Tax treatment of cancellation of debt income discussed

New Jersey clarified that for general income tax purposes, cancellation of debt (COD), or forgiveness of debt income is not subject to tax. For example, student loan debt forgiveness. Taxpayers should not include COD or forgiven loan amounts on an individual income tax return.

For corporation business tax (CBT) purposes, COD income is taxable when it’s subject to tax for federal purposes.

Loan and Grant Information, New Jersey Division of Taxation, Oct. 10, 2022.

New York City

Corporate, personal income taxes: Taxpayers can now opt-in to city pass-through entity tax

The New York Department of Taxation and Finance announced that New York City partnerships and city resident New York S corporations that opted-in to the state pass-through entity tax for 2022 can now opt-in to the New York City pass-through entity tax (NYC PTET) for 2022 using the online application.

According to the announcement, eligible entities may make the election for the 2022 NYC PTET online now through March 15, 2023. Estimated tax payments for the 2022 NYC PTET are optional. The announcement noted that the ability to make NYC PTET estimated payments will be available soon.

Notice, New York State Department of Taxation and Finance, Nov. 2, 2022.

Ohio

Sales and use tax: Construction company’s purchase of truck did not qualify for transportation for hire exemption

The Ohio Board of Tax Appeals (board) determined that a construction company’s (taxpayer’s) purchase of a truck didn’t qualify for the transportation for hire exemption because the taxpayer did not satisfy the mandatory elements necessitating entitlement to the exemption. In this matter, the taxpayer claimed that the truck was used for hauling tangible personal property (TPP) such as products sold by its business to its customers, construction or demolition debris, and trash or garbage.

The department denied the exemption and assessed tax, and the Tax Commissioner affirmed the assessment because the taxpayer failed to submit evidence that established entitlement to the exemption. Generally, in order to qualify for the exemption, a taxpayer must satisfy four elements: (1) the taxpayer must transport TPP; (2) such TPP must belong to others; (3) the taxpayer must transport TPP for consideration; and (4) the taxpayer must be certified by Ohio or the United States to engage in the transportation of TPP.

Upon review, the board noted that the taxpayer failed to meet the first and second elements because the waste did not belong to the generator of the waste and, therefore, it was not TPP belonging to another. Further, the truck was used to haul construction debris (also considered waste under the statute), which doesn’t qualify under the exemption. Accordingly, the assessment was affirmed.

Battle Axe Construction v. Mcclain, Ohio Board of Tax Appeals, No. 2022-559, Oct. 11, 2022.

Texas

Sales and use tax: Single use tax rate for remote sellers unchanged

The Texas single local use tax rate for remote sellers is set at 1.75% for 2023. The rate is unchanged from 2022.

Single local use tax rate for remote sellers

The single local use tax rate provides an optional way of computing the amount of local use tax that remote sellers would be required to collect on taxable items. A remote seller can collect the local use taxes using either:

• The combined rate of all applicable local use taxes.
• If the remote seller chooses, the single local use tax rate.

The single use tax rate is the estimated average of local sales and use taxes imposed in Texas during the preceding state fiscal year. The rate remains unchanged from the initial rate put into effect Oct. 1, 2019.

Certification of the Single Local Use Tax Rate for Remote Sellers - 2023, Texas Comptroller of Public Accounts, November 2022.

Corporate income tax: Texas Court of Appeals allows apportionment by cost of performance

A Texas Court of Appeals allowed a satellite radio provider to apportion receipts from services provided both inside and outside Texas by a cost of performance methodology, though the Court made clear that this was not the only apportionment method available for these types of services. The Court of Appeals heard this case on remand from the Texas Supreme Court, which as previously reported found that the satellite radio provider’s receipts from its satellite radio services should be apportioned to the location where they were performed, but sent the case back to the Court of Appeals to decide the method for determining where the services were performed.

The Court of Appeals held that cost of performance was an appropriate apportionment method in this circumstance. It noted that the relevant statutes and rules did not prohibit the use of this method. The Court of Appeals also rejected the Texas Comptroller’s arguments challenging the validity of the method due to calculation flaws, as the Texas Comptroller didn’t properly object to the satellite radio provider’s expert witness report describing the method.

Glenn Hegar, Comptroller of Public Accounts of the State of Texas; and Ken Paxton, Attorney General of the State of Texas v. Sirius XM Radio, Inc., Court of Appeals of Texas, Third District, Austin, No. 03-18-00573-CV, Nov. 10, 2022.