State and local tax advisor: May 2023
Multiple taxes: MTC spring committee meetings held
The Multistate Tax Commission (MTC) held spring committee meetings last week in California. Among the topics discussed were:
- Model receipts sourcing regulations
- State taxation of partnerships
- Taxation of digital products
Model receipts sourcing regulation review
The Uniformity Committee has an ongoing project reviewing the existing model receipts sourcing regulations. The goal of the project is to identify updates, corrections, or conforming changes; to consider issues that may not be sufficiently addressed by existing model regulations; and to make recommendations to the Committee for its action.
The group began their review by considering the sourcing of receipts of trucking companies/package delivery companies in the wake of the MTC adopting market sourcing. The work group considered whether to retain the existing mileage approach or to propose a methodology based on the location of pickups and deliveries. During the review, a two-factor rule was proposed and discussed. At the most recent meeting, a poll of participants indicated that the current mileage rule should be maintained.
The work group will now review the MTC special airlines rule.
State taxation of partnerships
In April of 2021, the Uniformity Committee began a project on state taxation of partnerships. The work group provided an update on the project.
The work group has developed a comprehensive issue outline and created a draft model addressing investment partnerships. That draft has been tabled, and the group is proceeding to address other issues before finalizing. Currently, the group is drafting a white paper about guaranteed payments.
Taxation of digital products
In July 2021, the Uniformity Committee approved a project to study the application of sales tax to digital products. The resulting work group provided an update. The group is currently working on definitions of the various digital products and the expected outcome is a white paper.
Multistate Tax Commission Spring Committee Meetings, April 24 through April 27, 2023.
Corporate income tax: Rule clarifies subtraction for IRC Sec. 78 dividends
Colorado has adopted a new rule regarding the subtraction from federal taxable income for amounts treated as dividends pursuant to IRC Sec. 78. The rule:
- Advises taxpayers that the subtraction is limited to amounts treated as a dividend and included in federal taxable income.
- Clarifies that no subtraction is allowed for amounts attributable to global intangible low-taxed income and deducted pursuant to IRC Sec. 250 in the calculation of federal taxable income.
- Clarifies that the subtraction is allowed only to C corporations subject to Colorado income tax, and not to any individuals, estates, or trusts.
Rule 39-22-304(3)(j), Colorado Department of Revenue, effective May 30, 2023.
Corporate income tax: Foreign-source income rule repealed and replace
Colorado has repealed and replaced a rule on the exclusion of foreign-source income for corporate income tax purposes. The rule provides guidance regarding the definition of foreign-source income, the calculation of the amount of foreign-source income considered in the apportionment and allocation of a C corporation’s net income, and the requirement to report any changes to that amount. Specifically, the rule:
- Clarifies that the provisions in the statute and the rule regarding the exclusion of foreign-source income apply collectively to all C corporations included in the same combined, consolidated, or combined-consolidated Colorado return.
- Specifies that that foreign-source income potentially eligible for exclusion includes the types of income enumerated in IRC Sec. 862(a), income allocated to sources without the United States pursuant to IRC Sec. 863, Subpart F income, global intangible low-tax income (GILTI), dividends received pursuant to IRC Sec. 78, and any item of income treated as arising from sources outside of the United States under specified treaty provisions.
- Explains the application of the foreign-source income exclusion to C corporations that have elected to claim foreign taxes paid or accrued as a federal deduction.
- Advises that the foreign-source income exclusion for a C corporation that has elected to claim foreign taxes as a credit must be calculated separately with respect to each category for which separate calculation of the foreign tax credit is required.
- Coordinates the foreign-source income exclusion with provisions regarding C corporations that are incorporated in a foreign jurisdiction for the purpose of tax avoidance.
- Coordinates the foreign-source income exclusion with the subtraction authorized for IRC Sec. 78 dividends (see Rule Clarifies Subtraction for IRC Sec. 78 Dividends in this article).
- Specifies that foreign taxes considered in the calculation of the foreign-source income exclusion are subject to the limits imposed on the federal foreign tax credit by IRC Sec. 904 and any other section of the IRC.
- Clarifies that the effective federal corporate income tax rate, for the purpose of calculating the foreign-source income exclusion, is determined without regard to any credits allowed or claimed with respect to the taxpayer’s federal income tax.
- Clarifies that the amount of foreign-source income that may be excluded from net income and total receipts is limited to the amount of foreign-source income otherwise included in net income or total receipts, respectively.
- Provides a formula illustrating the calculation of the foreign-source income exclusion for a C corporation that has elected to claim foreign taxes as a credit.
- Advises that any taxpayer claiming a foreign-source income exclusion based on a foreign tax credit is required to file an amended Colorado return to report any change to the amount of the foreign source income exclusion, and that any additional Colorado income tax due as the result of a redetermination of federal tax pursuant to IRC Sec. 905(c) may be assessed and collected at any time.
Rule 39-22-303(10), Colorado Department of Revenue, effective May 30, 2023.
Corporate income tax: Rule on net operating losses for C corporations repealed and replaced
Colorado has repealed and replaced a rule that provides guidance regarding the Colorado net operating loss (NOL) deduction allowed to C corporations. The new rule:
- Prescribes the method for determining the portion of the federal NOL that’s allocated to Colorado.
- Clarifies provisions relating to the carryforward of Colorado NOLs.
- Explains the various limitations applicable to the deduction of Colorado NOLs.
Allocation of federal NOL to Colorado
In determining the portion of the federal NOL that’s allocated to Colorado, the following requirements apply:
- For combined, consolidated, and combined-consolidated returns, the Colorado NOL is calculated only for the C corporations that are included in the return and based on the federal NOL determined only for the group included in the return.
- For a separate return filed by a single C corporation, the Colorado NOL is calculated with respect to only that C corporation and based upon the federal NOL determined with respect to only that C corporation.
- The federal NOL is subject to modification by Colorado additions or subtractions.
- The modified federal NOL is subject to allocation and apportionment.
- The Colorado NOL is limited to the amount of the federal NOL.
- For losses arising in tax years commencing prior to Jan. 1, 2019, the federal NOL is subject to modification, allocation, and apportionment in accordance with the Colorado statutes in effect and applicable for the tax year.
Carryforward of Colorado NOLs
With respect to the carryforward of Colorado NOLs, the rule clarifies that:
- A Colorado NOL arising in a tax year is carried forward to the immediately following tax year.
- In the event Colorado NOLs arising from multiple tax years are available for deduction, the C corporation must first deduct the NOL arising from the earliest tax year.
- Any Colorado NOL not deducted as the result of the applicable limitations (discussed below) may be carried forward to the next tax year.
Limitations on Colorado NOL deduction
The limitations applicable to the deduction of Colorado NOLs include:
- The Colorado NOL deduction is limited to the taxpayer’s Colorado taxable income before the NOL deduction for the tax year.
- Except as otherwise provided in Colorado law and rule, any limitation that applies to the federal NOL deduction also applies to the Colorado NOL deduction.
- Any Colorado NOL deduction for losses arising in tax years beginning after Dec. 31, 2017, is limited to 80% of the taxpayer’s Colorado taxable income before the deduction, regardless of the tax year for which the deduction is claimed.
- For its application to the Colorado NOL deduction, the NOL limitation prescribed by IRC Sec. 382 is apportioned to Colorado using the Colorado apportionment fraction for the loss corporation for the last full tax year prior to the change in ownership.
- Pursuant to IRC Sec. 860E, any excess inclusion may not be offset by a Colorado NOL and must be excluded from federal taxable income, prior to modification, allocation, and apportionment, in determining the amount of NOL deduction that may be claimed for a given tax year.
- The separate return limitation year (SRLY) limitation established in 26 CFR Sec. 1.1502-21(c) applies to Colorado NOL deductions only if it is a portion of a federal NOL to which the SRLY limitation applies.
- For its application to the Colorado NOL deduction, any limitation on the federal NOL deduction imposed in relation to federal taxable income shall be determined with respect to the Colorado net income as modified, allocated, and apportioned.
Rule 39-22-504–2, Colorado Department of Revenue, effective May 30, 2023.
Corporate, personal income taxes: CARES Act guidance updated
Colorado updated its guidance on the impact of the Coronavirus Aid, Relief and Economic Security (CARES) Act on Colorado income tax law. Prior guidance stated that, as a result of the adoption of Rule 39-22-103(5.3), certain retroactive provisions of the CARES Act and the Consolidated Appropriations Act, 2021, didn’t affect a taxpayer’s Colorado income tax liability. However, the Colorado Court of Appeals in Anschutz v. Department of Revenue, 2022 COA 132 (2022), subsequently determined that Rule 39-22-103(5.3) was invalid and that retroactive changes in federal law can affect a taxpayer’s Colorado taxable income. The Department of Revenue expects to repeal the rule, and taxpayers should disregard it in the meantime. Now, for any tax year, the federal taxable income reported on a taxpayer’s Colorado income tax return should match the federal taxable income reported on the taxpayer's federal return for that year, or as subsequently amended or adjusted by the IRS, if applicable.
Taxpayers may need to file amended Colorado income tax returns to correct their federal taxable income, additions, or subtractions previously reported on their Colorado returns. Provisions for which taxpayers may need to amend their returns include those relating to:
- Individual net operating losses
- Business interest expense limitations
- Excess loss limitations
- Depreciation for qualified improvement property
- Depreciation for certain residential rental property
- Deductions for expenses paid with forgiven Paycheck Protection Program loans and emergency Economic Injury Disaster Loan grants
CARES Act Tax Law Changes & Colorado Impact, Colorado Department of Revenue, April 2023.
Corporate income tax: Elective pass-through entity tax changes
Georgia has enacted legislation making changes to its elective pass-through entity tax. The legislation provides that an entity’s election to pay income tax at the entity level will have no impact on the tax or accounting treatment of the entity’s distributions. The legislation also removes a limitation on which partnerships may elect to pay income tax at the entity level.
Act 238 (H.B. 412), Laws 2023, effective for tax years beginning on or after Jan. 1, 2023.
Sales and use tax: Private civil action to enforce tax ordinance properly dismissed
An Illinois circuit court properly dismissed an individual’s qui tam complaint, on behalf of the City of Chicago (city), against lease-to-own purchase agreement businesses (businesses) for alleged fraudulent failure to collect and remit lease taxes, because her claim was barred by the tax exclusion. Generally, the city bars private actions that “concerns the application, interpretation or enforcement of any tax ordinance,” which includes any chapter of the city’s Municipal Code (code), or other ordinance passed by the city council, that imposes a tax. In this matter, the individual sought penalties and interest for the businesses’ alleged violation of the city’s false claims ordinance due to their failure to collect and remit lease taxes. The city argued that the individual could not state a claim because the city’s false claims ordinance precludes private civil actions to enforce tax ordinances and, additionally, private civil actions are only authorized against city contractors. The circuit court dismissed the individual’s complaint.
Upon appeal, the individual asserted that she was attempting to collect from the businesses only penalties and interest — not the tax itself — that were fraudulently withheld from the city. The Illinois Appellate Court (court) noted that the individual’s claim for penalties and interest resulting from the businesses’ failure to collect and remit lease taxes wholly depends on proof that a lease tax applied to the businesses’ transactions and that they failed to comply with tax collection obligations under the code. Therefore, the individual couldn’t have any false claim separate and apart from the businesses’ alleged failure to collect and remit the lease tax, which required an application and interpretation of a tax chapter. As a result, the court determined that the individual’s claim against the businesses concerned the application, interpretation, or enforcement of a chapter of the code that imposes a tax on personal property lease transactions and, therefore, her claim was barred. Finally, the city correctly asserted that the individual’s complaint also failed because the businesses were not “city contractors” against whom a false claim action could be brought. Accordingly, the judgment of the circuit court was affirmed.
City of Chicago v. Prog Leasing, LLC, Appellate Court of Illinois, First District, No. 1-22-0714, March 17, 2023.
Multiple taxes: Regulations adopted on automatic assessment limitations period extensions
Illinois adopted regulations implementing law changes that extend the assessment limitations period by six months if a taxpayer files a claim less than six months before the period ends for a refund of:
- Corporate or personal income tax
- Partnership replacement tax
- Sales and use tax
- Public utility or gas revenue tax
- Motor fuel tax
- Cigarettes/tobacco tax
- Telecommunications excise tax
The regulations also address agreements to waive the assessment limitations period for:
- Public utility and gas revenue tax
- Telecommunications excise tax
86 Ill. Adm. Code Secs. 100.9320, 130.1501, 140.1401, 150.1401, 440.230, 450.120, 470.140, 495.130, and 510.140, Illinois Department of Revenue, effective April 4, 2023.
Corporate, personal income taxes: IRC conformity, income computation updates enacted
Indiana has enacted a law making personal and corporate income tax changes, including:
- Updating the IRC conformity date.
- Making changes to calculation of net operating losses (NOL).
- Creating an exemption for broadband expansion grants.
- Clarifying the acquisition date for purposes of adding back interest from tax-exempt bonds.
- Amending provisions regarding the exemption for certain income from patents.
- Changing the treatment of specified research or experimental expenditures.
- Creating a deduction for healthcare sharing.
- Clarifying taxation of organizations providing nonprofit agricultural organization insurance coverage.
- Clarifying the income tax exemption for nonresidents.
What is the updated IRC conformity date?
Indiana is updating its income tax IRC conformity date to Jan. 1, 2023 (previously March 31, 2021), retroactive to that date. The new conformity date includes the changes made by the Inflation Reduction Act of 2022 and Consolidated Appropriations Act of 2022.
What changes are made to the NOL calculation?
Indiana clarifies that for tax years ending after June 30, 2021, and before Jan. 1, 2023, to determine an NOL deduction, federal taxable income means:
- For an individual, or a corporation, federal taxable income as defined in IRC Sec. 63.
- For an estate or trust, federal taxable income as defined in IRC Sec. 641(b).
- For an insurance company subject to IRC Sec. 831, federal taxable income as defined in IRC Sec. 832(b).
- For a life insurance company subject to IRC Sec. 801(a), federal life insurance company taxable income as defined in IRC Sec. 801(b).
Retroactive to Jan. 1, 2023, the term “separately stated net operating loss” means a federal net operating loss, or a portion of a federal net operating loss, determined according to the IRC that’s:
- Computed as an allowable federal NOL with regard to a taxable year.
- Required to be carried forward or carried back under the IRC, regardless of whether the taxpayer had federal taxable income for the year of the loss.
The changes then provide for certain adjustments to the separately stated NOL that must be made to determine the Indiana NOL.
What is the broadband expansion grant subtraction?
Corporate income taxpayers can subtract amounts used to provide or expand access to broadband in Indiana of any:
- Federal, state, or local grant received by the taxpayer.
- Discharged federal, state, or local indebtedness incurred by the taxpayer.
The change applies to tax years beginning after Dec. 31, 2021.
How is ownership determined when adding back interest from tax-exempt bonds?
Indiana clarifies when ownership occurs for purposes of the existing addback for interest received on an obligation of a state other than Indiana or political subdivision other than Indiana. If a taxpayer receives interest from a pass-through entity, a regulated investment company, a hedge fund, or similar arrangement, they are considered to have acquired the obligation on the date the entity did.
If the ownership occurs by means other than purchase, the date of obligation is the date ownership was transferred. If a portion of the obligation is acquired on multiple dates, the date of acquisition is considered separately for each portion of the obligation.
If ownership occurs because of refinancing of an obligation, the acquisition date is the date of refinancing.
The change is retroactive to Jan. 1, 2023.
How is the patent income exemption clarified?
The law clarifies the definition of a qualified taxpayer. A corporation is a qualified taxpayer if the number of employees in the corporation, including affiliates, doesn’t exceed 500 persons.
- The taxpayer doesn’t have to claim the exemption in the first year after the patent was issued.
- The years in which the exemption is claimed aren’t required to be consecutive taxable years.
- If a qualified taxpayer claims an exemption for a taxable year, the taxpayer may not file an amended return to reverse the claimed exemption unless the correct amount of the claimed exemption would have been zero.
- If a qualified taxpayer doesn’t claim an exemption on the taxpayer's return for a taxable year, the taxpayer may not file an amended return to claim an exemption.
- If a qualified taxpayer files returns claiming an exemption with regard to a particular qualified patent for more than 10 years, the statute of limitations for assessment of the qualified taxpayer and any entities claiming an exemption through a qualified taxpayer for taxable years after the 10th taxable year for which the exemption is claimed for the qualified patent shall not expire with regard to any claimed exemption.
Certain S corporations may pass through the exemption to its shareholders in proportion with their ownership of the corporation.
The changes are retroactive to Jan. 1, 2023.
How are research or experimental expenditures treated?
For tax years beginning after Dec. 31, 2021, taxpayers must add or subtract amounts related to specified research or experimental procedures. Specified research or experimental expenditures have the meaning defined in IRC Sec. 174(b). The term doesn’t include expenditures for which a deduction is disallowed under IRC Sec. 280C(c). Taxpayers can:
- Deduct amounts equal to the specified research or experimental expenditures charged to capital account under IRC Sec. 174(a)(2)(A).
- Add to the taxpayer's adjusted gross income the amount deducted under IRC Sec. 174(a)(2)(B).
For owners of partnerships or S corporations, the amount that must be deducted may not exceed the sum of:
- The taxpayer’s adjusted basis in the partnership or corporation for federal tax purposes, as determined at the end of the taxpayer’s taxable year and after application of any expenses, deductions, or losses.
- The amount of any specified research or experimental expenditures claimed as a deduction under IRC Sec. 174 in determining the taxpayer's federal adjusted gross income for the taxable year.
A deduction or part of a deduction that is disallowed must be:
- Carried forward to the subsequent taxable year.
- Treated as a specified research or experimental expenditure that’s paid or incurred in the subsequent taxable year.
- Applied against the adjusted basis of the partnership or corporation for the subsequent taxable year.
What is the deduction for healthcare sharing ministry?
An individual is entitled to a deduction for the tax year equal to the amount of qualified healthcare sharing expenses paid by the individual. The deduction is effective Jan. 1, 2024.
What tax do organizations offering nonprofit agricultural insurance pay?
Clarifies that organizations offering nonprofit agricultural organization insurance coverage pay the nonprofit agricultural organization health coverage tax unless they file a notice with Indiana. In the notice, the organization must state that it elects to be subject to the tax gross income tax. The change is retroactive to Jan. 1, 2023.
How is the income tax exemption for nonresidents changed?
The law provides that compensation is exempt from income tax if received by an individual who:
- Is not a resident of Indiana.
- Receives compensation for employment duties performed in Indiana for 30 days or less during the calendar year.
Reporting, withholding and recordkeeping requirements are also provided for. The change is effective Jan. 1, 2024.
P.L. 194, (S.B. 419), Laws 2023, effective as noted above.
Unclaimed property: Unclaimed property provisions amended
Indiana unclaimed property provisions are amended.
A “gift card” is defined as stored care value:
- The value of which does not expire.
- That may be decreased in value only by redemption for merchandise, goods, or services, or due to any fees deducted by the card issuer.
- That, unless required by law, may not be redeemed for or converted into money or otherwise monetized by the issuer.
The term includes a prepaid commercial mobile radio service.
The time frame of property being presumed abandoned is extended from one year to three years for property held by a court, including property received as proceeds from a class action.
A holder of property presumed abandoned and subject to the custody of the attorney general must report in an electronic record to the attorney general concerning the property.
Any reported abandoned property in the form of virtual currency must be liquidated by the holder at any time within 30 days before filing the report. In addition, the owner of the virtual currency will have no recourse against either the holder or the Attorney General for any change in value after the liquidation of the currency.
P.L. 101, (S.B. 183), Laws 2023, effective July 1, 2023.
Corporate income tax: Taxpayer’s affiliate properly excluded from consolidated tax returns
A communication services provider (taxpayer) was not entitled to a refund of Indiana corporate income tax because the Department of Revenue (department) properly determined that one of the taxpayer’s affiliates should not have been included in its amended consolidated tax returns. Generally, to be included in a consolidated return, the law requires that the entity must have adjusted gross income (AGI) derived from activities within the state. In order for an affiliate to have AGI from “sources within Indiana,” it must have taxable income that includes either Indiana apportionment factors resulting in deemed Indiana business income (or losses) or nonbusiness income (or losses) that’s allocated to Indiana and which is attributable to doing business within the state. Here, the department was unable to discern the activities undertaken by the affiliate that would substantiate a taxable nexus with the state. Accordingly, the taxpayer’s protest was denied.
Final Order Denying Refund No. 02-20221088, Indiana Department of Revenue, Feb. 7, 2023, released April 19, 2023.
Corporate, personal income taxes: Elective PTE tax enacted
Iowa has enacted an elective pass-through entity (PTE) income tax that can be paid by partnerships and S corporations. However, publicly traded partnerships are not eligible.
When is the PTE tax election available?
The PTE tax applies retroactively to Jan. 1, 2022, for tax years beginning on or after that date. The election is only available in tax years when the limitation on individual deductions under IRC Sec. 164(b)(6) is applicable.
How does the PTE elect?
A taxpayer will need to make an election each tax year. The election is irrevocable once made and is binding on the taxpayer and all partners or shareholders. Electing taxpayers don’t have to file a composite return in the same tax year.
What is the PTE tax rate?
The PTE tax rate is paid at the maximum personal income tax rate.
Can partners or shareholders claim a credit?
The partners or shareholders of the PTE can claim a credit in the tax year when the election is made. The credit is equal to the product of:
- The ratio of the partner’s or shareholder’s share of the taxpayer’s taxable income over the taxpayer’s total taxable income multiplied by the state tax liability actually paid by the taxpayer.
- The difference between 100% and the highest individual income tax rate in effect for the tax year.
If the taxpayer is a partner or shareholder of another taxpayer making an election, the credit is allowed. Any credit in excess of the tax liability is refundable. The partner or shareholder can elect to have the overpayment shown on the partner’s or shareholder’s final completed return credited to the tax liability for the following tax year.
If the electing taxpayer is also a financial institution that pays the franchise tax, that tax will be reduced by a franchise tax credit equal to the amount of the franchise tax paid by the taxpayer for the same year.
How are nonresident partners treated?
A nonresident individual who is a partner or shareholder of an electing PTE is not required to file an individual income tax return for the tax year if:
- The only Iowa source income of the individual is from a taxpayer making the election.
- The credit allowed to the partner or shareholder equals or exceeds the tax liability of the partner or shareholder for the tax imposed in the tax year the election is made.
- If the taxpayer files and pays the tax due.
Are estimated payments required?
An electing taxpayer must make estimated payments of tax if the amount of tax, less credits, can reasonably be expected to be more than $1,000. An electing PTE is not required to make estimated tax payments for a tax year beginning prior to May 11, 2023.
H.F. 352, Laws 2023, effective May 11, 2023.
Sales and use tax: Industrial processing exemption expanded to include property used to manufacture or recycle certain aggregate materials
Michigan has expanded its industrial processing sales and use tax exemption to include property that performs an industrial processing activity on an aggregate product that will be used as an ingredient or component for the construction, repair, or maintenance of real property in Michigan, as long as the aggregate product is subject to the use tax. “Industrial processing” includes the production, manufacturing, or recycling of aggregate to be used in the construction, repair, or maintenance of real property in Michigan, as long as the aggregate is subject to the use tax. “Aggregate” means common variety building materials such as sand, gravel, crushed stone, slag, recycled asphalt, recycled concrete, and geosynthetic aggregate.
The Department of Treasury must cancel outstanding balances on notices of intent to assess or final assessments related to these industrial processing activities that were issued prior to the amendment’s effective date. The department is further prohibited from issuing new assessments related to these industrial processing activities for any tax period prior to the effective date.
Act 27 (S.B. 97), Act 30 (H.B. 4054) Laws 2023, effective May 9, 2023.
Personal income tax: Flow-through entity tax rate reduced
For tax years beginning in 2023, the Michigan flow-through entity (FTE) tax rate is reduced to 4.05% for all flow-through entities. The notice can be viewed on the department’s website.
Notice, Michigan Department of Treasury, May 3, 2023.
Sales and use tax: Separately stated delivery and installation charges excluded from tax
Delivery and installation charges are excluded from the definition of sales price for purposes of Michigan’s sales and use tax if they are separately stated on an invoice or bill of sale. The exclusion also requires that the seller maintain its books and records to show separately the transactions used to determine the tax. The exclusion doesn’t apply to delivery or installation charges relating to the sale of electricity, natural gas, or artificial gas by a utility.
The department is required to take the following actions in regards to delivery and installation charges (except for those relating to the sale of electricity, natural gas, or artificial gas by a utility):
- Within 90 days of the legislation’s effective date, cancel outstanding balances related to delivery and installation charges on notices of intent to assess that were issued before the effective date.
- Within 90 days of the legislation’s effective date, cancel outstanding balances related to delivery and installation charges on final assessments issued before the effective date.
- After the legislation’s effective date, the department is prohibited from issuing new assessments on delivery and installation charges for any tax period before the legislation’s effective date that is open under the applicable statute of limitations.
Act 20 (H.B. 4039), Laws 2023, Act 21 (H.B. 4253) effective April 26, 2023.
Multiple taxes: Enacted budget extends corporate rates; adds and revises credits; increases cigarette tax
Enacted as part of New York's 2023-24 budget package, S.B. 4009 contains a variety of personal income, corporate franchise, sales and use, motor fuel, property, cigarette, tobacco, and other tax changes, including those detailed below.
- Corporate franchise tax rates. The budget extends the current 7.25% business income tax rate for three years, through tax year 2026, for taxpayers with a business income base over $5 million. In addition, the current 0.1875% capital base tax rate is also extended for three years, through tax year 2026.
- Metropolitan transportation business tax surcharge. A permanent rate of 30% is set for the Article 9-A metropolitan transportation business tax surcharge, for taxable years beginning after 2023.
- Treatment of limited partners under MCTMT. The budget amends a Metropolitan Commuter Transportation Mobility Tax (MCTMT) provision to clarify that only true limited partners are not subject to the tax. Partners who take part in the management or operations of the partnership remain subject to the provisions of the MCTMT.
- ITC for farmers. The investment tax credit (ITC) is made fully refundable for eligible farmers for taxable years beginning before 2028. The provision applies to property placed in service on or after Jan. 1, 2023.
- Film credits. The budget extends and enhances the empire state film production and post-production credits, generally applicable to initial applications received on or after April 1, 2023. Among other changes, the yearly funding cap is increased from $420 to $700 million, beginning in 2024, and the credits are extended through 2034.
- Underpayment of corporate estimated tax. The Department of Taxation and Finance is granted the authority to waive the penalty for underpayment of estimated tax by a corporation in the case of taxpayers affected by casualty, disaster, or other unusual circumstances.
- COVID-19 capital costs tax credit. The budget extends the application deadline for the COVID-19 capital costs tax credit program from March 31, 2023, to Sept. 30, 2023.
- Childcare creation and expansion credit. A childcare creation and expansion tax credit program is established to provide a credit to businesses that create new childcare seats, or expand existing childcare to add new seats, for the children of their employees. The credit amount is based on the type of childcare seat created or expanded and a specified rate. The aggregate amount of credits allowed is capped at $25 million each year during 2023 and 2024.
- Other extended and revised credits. A number of existing credits are extended, expanded, and/or revised, including: the New York City biotechnology credit; the historic properties rehabilitation credit; the empire state commercial production tax credit; the grade no. 6 heating oil conversion tax credit; the New York City musical and theatrical production credit; the credit for companies providing transportation to individuals with disabilities; the brownfield redevelopment tax credit; and the alcoholic beverage production credit.
- Pass-through entity taxes. The budget makes certain technical corrections to the state and New York City pass-through entity tax provisions, for example requiring entities to include any pass-through entity taxes, which were deducted in the taxable year for federal income tax purposes, in the computation of their pass-through entity taxable income and city pass-through entity taxable income.
- State excise tax on cigarettes. Effective Sept. 1, 2023, the state excise tax and use tax rates on cigarettes increase from $4.35 to $5.35 per pack of 20 cigarettes. For packs containing more than 20 cigarettes, the tax rates on the excess cigarettes increase from $1.0875 to $1.3375 for each five cigarettes. In addition, any tax due on account of the increased rate on any cigarettes possessed for sale in New York, as of the close of business on Aug. 31, 2023, must be paid by Nov. 20, 2023.
- Authority to abate interest for declared disasters. The Department of Taxation and Finance is authorized to abate interest charges on the underpayment of tax for taxpayers who are affected by a presidentially or gubernatorially declared disaster, regardless of a tax deadline extension.
- Congestion surcharge registration requirements. The congestion surcharge registration requirements are eliminated. Also, any congestion surcharge registration fees paid prior to the enactment of this bill are not refundable.
- Motor fuel and diesel motor fuel reporting designation. Effective Sept. 1, 2023, distributors of motor fuel and diesel motor fuel are required to collect, report, and remit the following taxes on every gallon of fuel sold, including the additional gallons realized due to temperature fluctuations:
- Excise tax (Article 12-A)
- Petroleum business tax (Article 13-A)
- Prepaid sales and use tax (Article 28)
- Vending machine sales tax exemption. The existing sales tax exemption for certain food and drink purchased from vending machines is extended until May 31, 2024. Previously, the exemption was scheduled to expire May 31, 2023.
- Cigarette and tobacco taxes certificate of registration. If a retail dealer of cigarettes and tobacco products refuses to comply with the requirements of Tax Law Sec. 474(4), its certificate of registration to sell cigarettes and tobacco products may be revoked:
- For a period of one year.
- For a period of up to three years for a second such violation within a five-year period.
- For a period of up to 10 years for a third or subsequent violation within a seven-year period.
- In addition, penalties are established for any inspection refusal by a retail dealer who does not possess a valid registration because it never obtained one or because its registration was suspended or revoked at the time of refusal. In such circumstances, the penalty is up to $4,000 for the first refusal and up to $8,000 for a second or subsequent refusal within three years of a prior refusal.
- Reduced transfer tax rates for qualifying REITs. The tax rate reductions for qualifying real estate investment trusts (REITs) under the New York state real estate transfer tax and the New York City real property transfer tax for conveyances are extended until Sept. 1, 2026. Previously, such rates were set to expire on Sept. 1, 2023.
- Oil and gas fee. The existing property tax schedule of fees to cover the cost of setting unit of production values for the oil and gas industry is extended to March 31, 2027. Previously, the oil and gas fees authorization was set to expire on March 31, 2024.
- Wind and solar valuation model. The bill clarifies the real property tax law to state that, although the Department of Taxation and Finance is required to comply with the notice and public comment requirements contained in Sec. 575-b of the Real Property Tax Law, the adoption of the solar and wind energy system appraisal model is not subject to the State Administrative Procedure Act (SAPA). Also, the use of the 2022 appraisal model is allowed in 2023 without the need to once again engage in a notice and public comment period. This change is deemed to have been in full force and effect as of April 19, 2021.
- Appeal of Tax Appeals Tribunal decisions. The Department of Taxation and Finance is authorized to seek judicial review of decisions of the Tax Appeals Tribunal.
- Senior citizen exemptions. The real property tax law is amended to simplify and modernize certain senior citizens real property tax exemptions, including income eligibility and the definition of “income.” The changes are effective May 3, 2023, and apply to all applications for exemptions on assessment rolls that are based on taxable status dates occurring on and after Oct. 1, 2023.
Ch. 59; (S.B. 4009), Laws 2023, effective May 3, 2023, or as noted.
Corporate income, franchise taxes: Tax cut legislation enacted
Tennessee has enacted H.B. 323, known as the Tennessee Works Tax Act, which contains a number of franchise and excise tax changes, as noted below.
In addition, the Tennessee Department of Revenue has posted a summary of the legislation.
- Single sales factor. The law generally adopts single sales factor apportionment, with a three-year transition period. The single factor will be fully phased in for tax years ending on or after Dec. 31, 2025.
- Paid family leave credit. A credit is provided for the next two years to companies offering paid family leave. The credit is equal to the federal employer tax credit under IRC Sec. 45S resulting from compensation paid in Tennessee, but the credit can’t exceed 50% of the combined franchise and excise tax liability shown on the return.
- Excise tax deduction. The law includes an excise tax deduction for the first $50,000 in net earnings.
- Franchise tax exemption. A franchise tax exemption is provided for up to $500,000 of business property.
- Bonus depreciation. The law conforms to the federal bonus depreciation provisions of the 2017 Tax Cuts and Jobs Act, applicable to assets purchased on or after Jan. 1, 2023.
- Credit carryforwards. The carryforward period for credits earned in tax years ending on or after Dec. 31, 2008, is increased from 15 to 25 years.
H.B. 323, Laws 2023, applicable as noted; Press Release, Tennessee Governor’s Office, May 11, 2023.
Sales and use, miscellaneous taxes: Tennessee Works Tax Act enacted
The Tennessee Works Tax Act, which makes changes to sales and use tax and business tax provisions, is enacted.
Sales and use tax provisions
A sales tax holiday is enacted for the retail sale of food and food ingredients sold between 12:01 a.m. on Aug. 1, 2023, and 11:59 p.m. on Oct. 31, 2023. The holiday provision doesn’t exempt sales from a micro market or a vending machine or device.
Effective July 1, 2024, sales tax is imposed on the following, when such repair, cleaning, or installation occurs at a place of business outside Tennessee and the serviced tangible personal property or computer software is delivered by the seller to the purchaser or the purchaser’s designee within the physical limits of Tennessee, or to a carrier for delivery to a place inside the physical limits of Tennessee, for use or consumption in Tennessee:
- The repair of tangible personal property
- The repair of computer software
- The laundering or dry cleaning of tangible personal property
- The installation of tangible personal property that remains tangible personal property after installation
- The installation of computer software
Effective July 1, 2024, the existing sales and use tax exemption for magazines and books that are sold to consumers by U.S. mail or a common carrier for certain sellers and cooperative direct mail advertising is repealed.
Also, effective July 1, 2024, the following transactions are sourced to the seller’s place of business:
- The sale of advertising and direct mail that’s made from a place of business within Tennessee and delivered to a recipient within Tennessee.
- The lease or rental of a product that’s made from a place of business within Tennessee and delivered to a recipient within Tennessee.
Effective July 1, 2024, multiple terms regarding telecommunications services are defined, including:
- “Ancillary services” are defined as services that are associated with, or incidental to, the provision of telecommunications services, including but not limited to, detailed telecommunications billing service, directory assistance service, vertical service, and voicemail service.
- “Prepaid calling service” means the right to access exclusively telecommunications services, which must be paid for in advance, and which enables the origination of calls using an access number or authorization code, whether manually or electronically dialed, and that is sold in predetermined units or dollars of which the number declines with use in a known amount.
- “Prepaid wireless calling service” means a telecommunications service that provides the right to utilize mobile wireless service, as well as other nontelecommunications services, including the download of digital products delivered electronically, content and ancillary services, which must be paid for in advance, that’s sold in predetermined units or dollars, of which the number declines with use in a known amount.
- “Vertical service” means an ancillary service that is offered in connection with one or more telecommunications services, and that offers advanced calling features that allow customers to identify callers and to manage multiple calls and call connections, including conference bridging services.
Business tax provisions
Effective May 11, 2023, and applicable to tax years ending on or after Dec. 31, 2023, the minimum threshold of compensation earned from contracts for various types of work in a county or incorporated municipality that requires a business to file a business tax return in that location, is increased from $50,000 to $100,000.
The business tax rate for industrial loan and thrift companies is decreased from three-tenths of 1% to one-tenth of 1%. In addition, the business tax exemption for goods sold from a manufacturing location to any goods sold from a facility within 10 miles of the manufacturing location is extended to manufacturing locations outside Tennessee. Moreover, the filing threshold for state and local business tax is increased from $10,000 to $100,000 in gross receipts.
H.B. 323, Laws 2023, effective May 11, 2023, unless otherwise indicated.
Corporate income tax: Adoption of bonus depreciation explained
Tennessee issued a notice discussing recent legislation that aligned the state with the federal bonus depreciation provisions contained in the Tax Cuts and Jobs Act of 2017 (TCJA). Taxpayers can take bonus depreciation deductions for assets purchased on or after Jan. 1, 2023, for excise tax purposes, in the year of the purchase if the taxpayer takes bonus depreciation on the asset for federal tax purposes. The TCJA phases out bonus depreciation over a five-year period. Accordingly, the notice includes a table that sets forth the applicable bonus depreciation percentage, depending on the year when the asset is acquired.
Notice 23-07, Tennessee Department of Revenue, May 2023.
Sales and use tax: Sourcing of local taxes discussed
The Texas Comptroller of Public Accounts issued guidance regarding the sourcing of local sales and use tax collected on sales of goods and services. Previously, an oil well servicing company (taxpayer) had requested a ruling regarding the correct location to source the local tax it would collect on the rental and repair of oil field equipment. The Comptroller determined that the taxpayer’s equipment yard was a place of business because the taxpayer received all of its orders through its salespersons over their cellphones, either at the equipment yard or out in the field. Therefore, the taxpayer would be required to collect and remit local taxes on its nonresidential real property repair and remodeling services based on the location of the job site.
Letter No. 202304006L, Texas Comptroller of Public Accounts, April 17, 2023.
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