State and local tax advisor: August 2023
Sales and use tax: New tax on digital products beginning next year
Georgia will require retailers to collect sales and use tax on in-state sales of digitally downloaded products beginning Jan. 1, 2024.
Tax will apply to specified digital products, other digital goods, and digital codes, including:
- Video games or electronic entertainment
- Video or audio greeting cards
Tax won’t apply to transactions where:
- The end-user is out-of-state.
- The end-user won’t receive permanent use of the product.
- Continued payments are required by the end-user.
Act 236 (S.B. 56), Laws 2023, effective as noted above.
Corporate, personal income taxes: Pass-through treatment of credits clarified
Illinois clarified the pass-through treatment of income tax credits earned by S corporations and partnerships, including:
- The enterprise zone credit.
- The credits for enterprise zone, high-impact business, and data center construction jobs.
- The research and development credit.
- The affordable housing donation credit.
- The ex-felons jobs credit.
- The student assistance contribution credit.
- The live theater production credit.
- The Invest in Kids credit.
- The historic preservation credit.
- The apprenticeship education expense credit.
- The Reimagining Energy and Vehicles in Illinois (REV Illinois) investment credit.
A partnership or S corporation must distribute its credits to partners or shareholders based on:
- The determination of income and distributive share of income under IRC Secs. 702 and 704.
- A written distribution agreement between the partners or shareholders.
P.A. 103-396 (S.B. 2047), Laws 2023, effective Jan. 1, 2024.
Multiple taxes: Waiver of penalties and interest for taxpayers affected by recent severe weather expanded to include an additional 13 counties
Illinois Governor JB Pritzker has announced that he has expanded his original disaster proclamation for waivers of penalties and interest for income, withholding, sales, specialty, and excise taxes to include an additional 13 counties based on the severe weather, tornadoes, and derecho that affected communities across the state from June 29 through July 4. The original disaster proclamation included: Coles, Cook, Edgar, Hancock, McDonough, Morgan, Sangamon, and Washington Counties and now has been expanded to include Calhoun, Christian, Clark, Cumberland, DeWitt, Douglas, Logan, Macon, Monroe, Moultrie, Pike, Scott, and Vermillion Counties. Taxpayers in these additional counties may also request waivers of penalties and interest on state taxes if they can’t file their returns or make payments on time.
Taxpayers seeking waivers of penalties and interest for taxes should send a brief written explanation of why they can’t timely file or pay to the Illinois Department of Revenue (IDOR). Taxpayers must provide their full name, account number (if using a Social Security number, include only the last four digits), mailing address, and an estimate of when they believe they can file or pay their taxes. Requests may be sent electronically to REV.DisasterRelief@illinois.gov or via postal mail using the address on the return. Taxpayers who mail their request to IDOR must write “Severe Storms - Summer 2023” on the top of the return in red and include their explanation for penalties and interest abatement request.
Release, Illinois Department of Revenue, July 25, 2023.
Corporate, personal income taxes: Late estimated payment penalties abated for filers who elected to pay pass-through entity tax
Illinois will abate partnerships’ and S corporations’ late estimated payment penalties assessed on fourth quarter estimated payments due Dec. 15, 2022, as long as their fourth quarter estimated payments were made for the required amount and were paid on or before Jan. 17, 2023.
Penalties remain assessed on any unpaid fourth quarter estimated payment balance starting on Jan. 18, 2023.
Informational Bulletin FY 2024-03, Illinois Department of Revenue, Aug. 1, 2023.
Corporate income tax: Proportionate amount of income from sale of company attributed to Michigan
The Michigan Department of Treasury properly attributed 70% of the income from the sale of an out-of-state company to Michigan for Michigan business tax purposes. The statutory tax base apportionment formula, as applied, didn’t impermissibly tax income outside the scope of Michigan’s taxing powers and, thus, didn’t violate the Due Process or Commerce Clauses of the U.S. Constitution.
Income includable in tax base
The out-of-state company provided services in many states throughout the Midwest. While engaged in a severe oil spill cleanup project in Michigan, the company sold all of its stock to the taxpayer. Income from the sale of the company was business income and includable in the tax base.
Exclusion from sales factor
On its short-year Michigan return, the company treated the sale as a sale of assets. It also included the gain from the asset sale in the denominator of its sales factor for apportionment purposes. But, for the sales factor, “sales” means stock in trade, property that can be inventoried, and services sold, and doesn’t include the sale of a company. Thus, the income from the asset sale wasn’t includable in the sales factor denominator. This increased the taxpayer’s Michigan tax burden, as successor in interest to the company.
Due process and commerce clauses
The taxpayer didn’t dispute that 70% of the company’s business in the relevant tax year was in Michigan. The Department of Treasury taxed a proportionate amount of the company’s income, based on this business activity. The taxpayer failed to prove that this was a grossly disproportionate reflection of the business done by the company during the tax year in the state. Thus, the tax assessment didn’t violate the Due Process Clause. Also, given the substantial nexus between the company and Michigan and the fact that Michigan didn’t wholly tax out-of-state values, the tax formula didn’t violate the Commerce Clause.
Vectren Infrastructure Services Corp. v. Department of Treasury, Supreme Court of Michigan, No. 163742, July 31, 2023.
Sales and use tax: Guidance on taxation of computer software and digital goods updated
The Michigan Department of Treasury has updated guidance on the sales and use taxation of computer software and digital goods. In accordance with Auto-Owners Ins. v. Dept. of Treasury, the department uses the following analysis to determine whether software is considered "prewritten computer software:"
- If software will not be accessed through a download or application stored locally on the consumer’s hardware, there is no delivery, and no taxable retail sale.
- If a portion of the software is accessible through a download or locally stored code, such as a desktop agent, there is delivery in Michigan and the software is considered prewritten computer software.
- If the software is downloaded in its entirety and locally stored on the consumer’s hardware, the software is taxable as prewritten computer software.
If the transaction includes both prewritten software and services, the department applies the Catalina incidental to services test.
In addition, the bulletin reflects that the multiple points of use (MPU) exemption form is no longer in use. Therefore, a sale of prewritten computer software that’s sourced to Michigan is taxable based on the full sales price even if it might also be used outside Michigan.
Revenue Administrative Bulletin 2023-10, Michigan Department of Treasury, July 31, 2023.
Corporate income tax: Effective date for 70% corporate NOL limit may change
Legislation enacted this year (H.F. 1938, Laws 2023) reduced the Minnesota corporate net operating loss deduction limit from 80 to 70%, effective for tax years beginning after Dec. 31, 2022. But, the effective date for the 70% limit might change. The legislature has provided the Commissioner of Revenue with a letter of intent to change the effective date to tax years beginning after Dec. 31, 2023. The Department of Revenue will continue to monitor the legislative process and provide updates as information becomes available.
Release, Minnesota Department of Revenue, July 2023.
Corporate income tax: Deduction for disallowed business interest enacted
New Hampshire has enacted a business profits tax deduction equal to the amount disallowed as a deduction under IRC Sec. 163(j) regarding business interest. The deduction will be available for tax years commencing on or after Jan. 1, 2024. Further, for tax years beginning on or after Jan. 1, 2024, there will be an addition equal to the amount deducted as a carryforward of disallowed business interest under IRC Sec. 163(j) generated in tax years beginning after Jan. 1, 2024. The amount of the carryforward of disallowed business interest under IRC Sec. 163(j) as of tax year ending before Jan. 1, 2024 is allowed as a deduction in three equal parts over three consecutive years, in tax years beginning on or after Jan. 1, 2024.
Ch. 169 (S.B. 189), Laws 2023, effective Jan. 1, 2024.
Corporate income tax: Taxpayer not required to include subsidiary in combined return
A corporation wasn’t required to file its New York return on a combined basis with one of its subsidiaries, despite the Division of Taxation’s claim that excluding the subsidiary would result in distortion. The corporation and the subsidiary weren’t engaged in a unitary business, and there were no substantial intercorporate transactions between them. There was no flow of value between the subsidiary and any other members of the group because the subsidiary’s minimal transactions with other members were limited to oversight of a valuable investment, and they were all conducted at arm’s length. Further, the subsidiary engaged in a completely different line of business than the business conducted by other group members during the audit years. The subsidiary owned a valuable asset (a partnership interest in a mall located in Pennsylvania) that the group actively sought to dispose of because it was nonintegral and didn’t align with the group’s other business strategies.
The record didn’t support various arguments made by the division, e.g., that centralized management existed between the subsidiary and the other group members; that the subsidiary was part of a common decision-making and management system; that there were economies of scale between the subsidiary and the other group members; and that there was functional integration between the subsidiary and the other group members. Instead, the corporation established that the inclusion of the subsidiary in its combined reports for the tax years at issue would distort the corporation’s true income and tax liability.
Lendlease Americas Holdings, Inc., New York Division of Tax Appeals, Administrative Law Judge Unit, DTA No. 829540, July 27, 2023.
Franchise tax: Reminder issued on end of franchise tax
The Oklahoma Tax Commission reminds taxpayers that tax year 2023 is the last year that franchise tax returns are required. Taxpayers that remit the maximum amount must do so annually by May 1, with the final return due by June 1, 2024. Other taxpayers must remit by July 1, with the final return due by Sept. 15, 2024. If a taxpayer has chosen to file as part of their corporate income tax return, franchise tax must be remitted with the tax year 2023 corporate tax return. The notice can be viewed on the commission’s website.
News Release, Oklahoma Tax Commission, July 27, 2023.
Corporate, personal income taxes: Elective PTE-E tax extended
Oregon has extended the applicability of the pass-through business elective income tax (PTE-E) and the corresponding personal income tax credit to tax years beginning on or before Jan. 1, 2026. The tax and credit originally applied to tax years beginning on or before Jan. 1, 2024.
Ch. 399 (H.B. 2083), Laws 2023, effective 91 days after adjournment.
Income, miscellaneous taxes: Philadelphia discussed IRC Sec. 174
Philadelphia has released business income and receipts and net profits tax guidance stating that it will conform to the federal income tax treatment of research and experimental (R&E) expenses paid/incurred in tax years beginning after Dec. 31, 2021.
The federal Tax Cuts and Jobs Act (TCJA) amended IRC Sec. 174 to require that certain R&E expenses paid/incurred in tax years beginning after Dec. 31, 2021, be capitalized and amortized over a period of five years (domestic research), or 15 years (foreign research) for federal income tax purposes.
Philadelphia guidance on business tax treatment of amendments to IRC Section 174, City of Philadelphia Department of Revenue, June 26, 2023.
Corporate income tax: No tax due threshold and reporting requirements changed
Texas has enacted legislation changing its franchise tax no tax due threshold and reporting requirements for reports originally due on or after Jan. 1, 2024. Taxpayers now owe no franchise tax if the taxpayer’s total revenue from its entire business is less than or equal to $2.47 million. The prior threshold was $1 million, adjusted annually for inflation. Additionally, the Texas Comptroller may no longer require taxpayers who owe no tax because their total revenue is less than the no tax due threshold to file an information report with the Texas Comptroller. Previously, these taxpayers were required to file a no tax due information report with the Texas Comptroller stating the amount of the taxpayer’s total revenue from its entire business.
S.B. 3, Laws 2023, effective Jan. 1, 2024.
Property tax: Cleaning equipment not used directly in manufacturing not entitled to exemption
For Wisconsin property tax purposes, the Court of Appeals found that the taxpayers, clean-in-place equipment (cleaning equipment) used in its cheese plants didn’t qualify for exemption because the equipment wasn’t directly used in the production process. The taxpayers manufactured and distributed cheese as a United States subsidiary of a Canadian dairy company. The taxpayers manufactured cheese in batches, and after each batch was completed, the cleaning equipment was used to run a cleaning cycle to clean the production equipment. The taxpayers contested the Department of Revenue’s property assessments between 2014 and 2018 regarding the cleaning equipment arguing that the Department had incorrectly concluded that it didn’t qualify for a tax exemption. The Tax Appeals Commission ruled in favor of the Department. The circuit court also affirmed the Commission’s decision and agreed with the Department that the cleaning equipment didn’t qualify for exemption because it wasn’t used directly in the production process. The taxpayers then appealed to the Court of Appeals, arguing that the clean-in-place process undisputedly involved raw materials because the equipment caused a physical or chemical change to the leftover raw material. The taxpayers also asserted that the milk that was leftover in the cheese production vats was a raw material, which the cleaning equipment then chemically changed and moved. The appellate court noted that the statute’s plain language makes it clear that the milk residue left in a cheese production vat isn’t a raw material, according to the common, ordinary, and accepted meaning of that term. The cleaning equipment chemically cleanses the cheese vats after the production process has been completed, removing the milk residue and pumping it into a waste tank for disposal. Thus, the leftover milk residue wasn’t a raw material to be converted into a useful product; it was, by the taxpayers’ own admission, waste. Additionally, the taxpayers’ arguments that the Commission’s ruling violated the contrary-to-guidance statute and that the Department was estopped from assessing the equipment as nonexempt failed because they weren’t preserved for appeal. Accordingly, the taxpayers’ cleaning equipment didn’t satisfy the statutory requirements in order to qualify for the exemption.
Saputo Cheese USA, Inc. v. Wisconsin Department of Revenue, Court of Appeals of Wisconsin, District II, No. 2022AP195, May 24, 2023.
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