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State and local tax advisor: May 2024

Authors: Mike Merkel, Ron Cook, Jeanette Tolar, Stephen Palmer

May 29, 2024 / 30 min read

Have you heard about the latest changes in state and local taxes? Check our May 2024 roundup here.

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

Alabama

Corporate, personal income taxes: Pass-through entity election due date extended for some taxpayers

The Alabama Department of Revenue announced an extension of the due date for a pass-through entity to elect to be taxed at the entity level for certain taxpayers for the 2023 tax year. Entities who showed intention to make the election for 2023 but erroneously failed to do so by the original due date may electronically file an election to be taxed at the entity level on or before the due date of the 2023 electing pass-through entity return with applicable extensions. Steps to show an intention to make the election are:

Taxpayers who wish to make this election must do so electronically. For tax year 2024 and beyond, recent legislation has changed the due date to make the election to the due date of the electing pass-through entity tax return, including any applicable extensions.

Press Release, Alabama Department of Revenue, May 1, 2024.

California

Corporate income tax: Receipts from sale of Alaska auto dealerships excluded from sales factor

Gross receipts from the sale of Alaska automobile dealerships were properly excluded from a taxpayer’s sales factor for California corporate tax purposes. The receipts were excludable as receipts arising from a substantial and occasional sale.

The taxpayer reported the gain on the sale as business income and used a single-sales factor formula to apportion the income. It included the gross receipts from the sale in the denominator, but not the numerator, of its sales factor. Under a California regulation, substantial amounts of gross receipts from an occasional sale of assets held for use in the regular course of a trade or business are excluded from the sales factor. The taxpayer conceded that the sale of its Alaska dealerships was a substantial and occasional sale. The taxpayer asserted, for various reasons, that the Franchise Tax Board (FTB) couldn’t apply the regulation in this appeal.

The taxpayer argued that the regulation wasn’t part of the standard apportionment formula. If that were the case, the FTB would have to establish that the standard formula was distortive. The Office of Tax Appeals (OTA) refused to overturn longstanding precedent holding that the regulation was part of the standard formula. Next, the taxpayer argued that a different subsection of the regulation applied. The OTA determined that the other subsection didn’t apply to the tax year in question. Finally, the taxpayer contended that the substantial and occasional sale rule didn’t fairly represent the extent of its business activities in California. However, the taxpayer failed to provide evidence to that effect. It also failed to show that its proposed alternative was reasonable.

Worthington Oil & Gas Corporation, California Office of Tax Appeals, No. 220410163, 2024-OTA-217, March 8, 2024 (released May 2024).

Colorado

Corporate, personal income taxes: Combined reporting, earned income credit, child care expenses credit modified

Colorado has enacted income tax legislation that:

Combined reporting

Beginning in tax year 2026, all members of an affiliated group of C corporations, wherever incorporated or domiciled, that are members of a unitary business must file a combined report as a combined group. Current law requiring three of six tests to be met for combination is being repealed. These tests have been difficult for taxpayers and the Department of Revenue to apply and are unique among states that employ unitary combined reporting. The new combined reporting standard will align with the Multistate Tax Commission standard. The way in which the income or loss of affiliates is combined in the unitary business and apportioned to Colorado is modified accordingly.

Earned income tax credit

The state EITC will increase to a larger percentage of the federal EITC in tax year 2024 and beyond. Initially, the state EITC will increase as follows:

However, after tax year 2024, the state EITC may increase further to a maximum of 50% of the federal EITC, depending on forecasted state revenue growth.

Child care expenses tax credit

Beginning in tax year 2026, Colorado’s two existing child care expenses tax credits will be merged into one credit. Currently, Colorado allows one credit equal to 50% of the federal credit allowed to taxpayers with adjusted gross income (AGI) of $60,000 or less. The second credit, commonly referred to as the low-income child care expenses tax credit, is available to taxpayers with AGI of up to $25,000 who don’t have sufficient income tax liability to qualify for the federal credit. The low-income child care expenses tax credit is equal to 25% of the expenses for care of dependent children under the age of 13, up to a maximum of $500 for a single dependent or $1,000 for two or more dependents.

The merged child and dependent care expenses tax credit will have the following features:

Effective date

These provisions take effect 90 days after final adjournment of the General Assembly, unless a referendum petition is filed. If a referendum petition is filed, then the referred provisions won’t take effect unless approved by voters at the November 2024 general election. If approved, the provisions will take effect on the date of the official declaration of the vote thereon.

H.B. 1134, Laws 2024, effective as noted.

Sales and use tax: State sales tax rates temporarily lowered for large revenue surpluses

Colorado has enacted a Taxpayer Bill of Rights (TABOR) refund obligation for the refund of excess state revenues through a temporary reduction in state sales and use tax. Beginning with the 2024–25 TABOR surplus, if the surplus is at least $1.5 billion, Colorado will reduce the sales tax the following fiscal year if there is sufficient surplus to fully fund the first two TABOR refund mechanisms. If activated, the state sales tax rate would be temporarily reduced by 0.13% for the following fiscal year. This act is effective until July 1, 2035.

S.B. 228, Laws 2024, effective May 10, 2024.

Multiple taxes: New act limits property tax revenue and establishes temporary property tax credit

Colorado has enacted legislation establishing limits on property tax increases for some types of property and has enacted tax rate reductions on other types of property. Local governmental entities will have a 5.5% cap on annual property tax revenue growth. Exceptions are provided for school districts and other specific entities.

Additionally, the 27.9% assessment rate on nonresidential properties will be gradually reduced to 25% by 2027. Residential properties will have a set tax rate of 6.95% in 2026, but that will be calculated after subtracting 10% of the value of the home, up to $70,000.

The effective date of the legislation is May 14, 2024; however, that’s subject to change if either ballot initiative to further reduce property taxes passes at the general election held on Nov. 5, 2024, and/or with the passage or failure of S.B. 111 and H.B. 1448.

S.B. 233, Laws 2024, effective as noted above.

Corporate, personal income taxes: Temporary income tax rate cut reactivated

Colorado has reactivated a temporary income tax rate reduction mechanism for refunding state revenues that exceed constitutional limits on spending under the TABOR. To refund a portion of the FY 2023–24 surplus, the income tax rate for tax year 2024 is temporarily reduced from 4.40 to 4.25%. In tax years 2025 through 2034, the amount of the income tax rate reduction will depend on the amount of the TABOR surplus remaining for FY 2024–25 through FY 2033–34 after reimbursements to local governments for homestead property tax exemptions. The range of income tax rates based on remaining TABOR surplus is:

Sales tax refund mechanism modified

In addition, Colorado has modified the sales tax refund mechanism for TABOR refunds by increasing the amount of the identical refund threshold. Under the existing mechanism, qualified individuals would receive identical TABOR refund amounts if the calculated identical refund amount was $15 or less. Otherwise, refunds were distributed to taxpayers based on six AGI tiers. Under the modified sales tax refund mechanism, the identical refund amount above which the six-tier mechanism is triggered is increased and tied to Internal Revenue Service (IRS) calculations of sales tax paid in the state. However, if, by September 1 of any year, the executive director of the Department of Revenue hasn’t received advice from the IRS indicating that the identical refund is regarded as a refund of sales tax rather than an accession to wealth, then the identical refund threshold will remain at $15. An individual may claim the sales tax refund by filing an income tax return or a specified assistance grant application by October 15 of the calendar year following the taxable year for which the refund is being claimed.

S.B. 228, Laws 2024, effective May 14, 2024.

Georgia

Corporate, personal income taxes: Carryforward periods and repeal dates changed

Georgia has enacted legislation changing the repeal dates and carryforward periods for various tax credits and tax exemptions. The legislation makes the following changes, all of which become effective on Jan. 1, 2025:

Act 598 (H.B. 1181), Laws 2024, effective Jan. 1, 2025.

Kansas

Corporate, personal income taxes: Interest expense adjustments clarified, NOL deduction added, other changes made

Kansas enacted legislation with corporate and personal income tax changes that:

Business interest expense adjustments

The legislation specifies that the corporate and personal income tax addition adjustment for the business expense deduction under IRC Sec. 163(j) applies to:

The subtraction adjustment for corporate and personal income taxpayers applies to interest expenses paid or accrued in the current tax year. An interest expense is paid or accrued only in the first tax year the federal deduction would have been allowable if IRC Sec. 163(j) didn’t exist.

The legislation also adds a subtraction adjustment for the 2021 tax year equal to:

IRC Sec. 280C and employee retention credit adjustment

The legislation allows a subtraction adjustment by corporate and personal income taxpayers for:

Kansas previously tied the IRC Sec. 280C adjustment to the “federal tentative jobs credit.”

To claim the employee retention credit adjustment, taxpayers must prove that:

A taxpayer can file a refund claim or amended return based on the employee retention credit until April 15, 2025.

Net operating loss adjustment

The legislation creates a subtraction from federal adjusted gross income for the amount of a taxpayer's federal carryback of net operating losses from tax years 2018, 2019, and 2020. A taxpayer can carryforward and subtract the amount of any unused NOL carryback for up to 20 tax years following the loss year.

Taxpayers can file a refund claim or amended return based on the NOL carrybacks until April 15, 2025.

Elective pass-through entity tax

The legislation amended the elective pass-through entity tax provisions (otherwise known as the SALT Parity Act) to:

Withholding tax penalty

The legislation replaces the 15% penalty for the late payment of withholding tax with a graduated schedule equal to:

The penalty increases to 15% of the underpayment, if:

Ch. 81 (S.B. 410), Laws 2024, effective after its publication in the statute book and as noted.

Michigan

Sales and use tax: Industrial processing guidance updated

The Michigan Department of Treasury has updated its guidance on the industrial processing sales tax exemption. The activity in which the tangible personal property is used is determinative of whether the exemption applies (not the character of the property owner’s business). The temporal limitation in the definition of industrial processing, which states that industrial processing begins “when tangible personal property begins movement from raw materials storage to begin industrial processing” and ends “when finished goods first come to rest in finished goods inventory storage” doesn’t apply to enumerated activities in MCL 205.54t93) or MCL 205.94o(3). Furthermore, the exemption doesn’t apply to auto body repair or to the use of tangible personal property to produce some other product that is not tangible personal property.

Revenue Administrative Bulletin 2024-7, Michigan Department of Treasury, May 14, 2024.

Montana

Corporate, personal income taxes: Reminder issued on PTET overpayments

Montana issued a reminder concerning pass-through entity tax (PTET) returns that push PTET overpayments to affected owners. Overpayments of the PTET can’t be allocated to affected owners. When a pass-through entity elects to pay PTET and records payments in excess of the tax legally owed, the overpayment must be refunded to the entity. The law provides that the amount of tax allocated to affected owners is the amount of PTET assessed, or legally owed by the entity, not the amount that the entity paid. The Department of Revenue is adjusting all returns that allocate more PTET than the amount resulting from the calculation method specified in the law. The department will notify pass-through entities if their return is adjusted for this reason.

Tax News You Can Use, Montana Department of Revenue, May 1, 2024.

Nebraska

Corporate, personal income taxes: Expensing deduction added

Effective beginning with the 2025 tax, Nebraska corporate and personal income taxpayers can expense and deduct:

The state limits the deductions to 60% of the full cost of the expenditures during:

The deductions apply even if there are changes to federal law related to:

Taxpayers can’t claim the Nebraska deduction if they already claimed a federal deduction for the expenditures. If the taxpayer can’t claim the entire Nebraska deduction, the taxpayer can elect to depreciate the property or amortize the R&D expenditures over five years.

A partnership, limited liability company, S corporation, cooperative, estate, or trust can distribute the deduction to its:

L.B. 1023, Laws 2024, effective July 15, 2024 and as noted.

New York

Corporate income tax: Corporations couldn’t deduct royalties from foreign affiliates

The New York Court of Appeals affirmed two lower court decisions holding that corporations couldn’t deduct royalties they received from certain foreign affiliates. Under New York’s taxation scheme in effect at the time, corporations could deduct income received as royalty payments from members of the same corporate group; however, the deduction was allowed only if the royalty payment came from a related entity that had already paid a New York tax on the same income because of a provision requiring companies to add back royalty payments made to related entities.

In these cases, the royalty payments were received from foreign affiliates that weren’t subject to New York franchise taxes and, therefore, weren’t required to add those payments back on a New York tax return. Accordingly, the deduction didn’t apply. The lower decisions were supported by both the plain language of the law and the explicit legislative purpose behind the statute (i.e., closing a loophole by which international corporate groups avoided paying state taxes on royalty payments between related members).

The corporations asserted that the denial of the deduction violated the dormant Commerce Clause, but that argument was rejected. With respect to the discrimination prong, the corporations failed to show that the tax scheme was facially discriminatory against out-of-state commerce. Further, the corporations failed to show that, under the internal consistency test, the scheme necessarily discriminated against interstate commerce in its ordinary application.

Walt Disney Co. v. Tax Appeals Tribunal and International Business Machines Corp. v. Tax Appeals Tribunal, New York Court of Appeals, Nos. 34 and 35, April 23, 2024.

North Carolina

Multiple taxes: PTE tax election extended, franchise tax rate clarified

North Carolina enacted legislation that:

Ch. 2024-1 (S.B. 508), Laws 2024, effective July 1, 2023, and as noted.

Ohio

Personal income tax: City tax collection against nonresident allowed

The Ohio Board of Tax Appeals has held that a city can assess income tax liability to a nonresident employee for work performed outside of a city under H.B. 197. The temporary state law allowed municipalities to continue to collect income tax from an employee working outside the municipality, during the COVID-19 pandemic.

What was the taxpayer’s situation?

The taxpayer worked in an office located in Cincinnati but began working from home, outside of the city, during the pandemic. The taxpayer changed employers and continued working remotely from home. The taxpayer filed a request for refund for days worked outside of Cincinnati. The Board of Review determined that the taxpayer’s wages from his first employer were properly taxed for the period of time he worked from home because those duties were deemed to have been performed at his first employer’s office in Cincinnati.

What did the city and taxpayer argue?

The city argued that it was entitled to collect income taxes because the taxpayer only worked outside the city due to the COVID-19 pandemic. Further, his employer had an office in the city, and that office should be considered his principal place of work. The taxpayer argued that H.B. 197 didn’t apply to him because he wasn’t explicitly required to work from home. Also, he claimed that H.B. 197 directed only the withholding requirements applicable to the employer and didn’t extend tax liability to work physically performed outside of the city.

What was the decision?

The Ohio Supreme Court’s recent decision in Schaad v. Adler was dispositive in this case. In Schaad, the court relied on the conclusion that the “principal place of work” language referred to not only the employer’s withholding requirements but also to the taxability of the employees’ wages. Thus, the board found that H.B. 197 applied to the taxpayer’s income at issue. The days on which the taxpayer worked from his home took place after the employer’s office closed because of the COVID-19 declaration. So, on those days the taxpayer was performing personal services at his principal place of work, which was his employer’s office in the city. Furthermore, those wages were properly considered “income” for purposes of his municipal income tax liability to the city. Therefore, the city properly found that the taxpayer’s wages earned for those days he worked from home due to the COVID-19 declaration were taxable.

Price v. City of Cincinnati, Ohio Board of Tax Appeals, No. 2021-2679, April 22, 2024.

Oklahoma

Corporate, personal income taxes: Pass-through entity election method amended

Oklahoma has modified the pass-through entity tax election method to add an additional way to make the election. Entities will be able to make the election by filing an income tax return before but not later than the due date of the income tax return, including any extensions.

H.B. 3559, Laws 2024, effective 90 days after adjournment.

Tennessee

Franchise tax: Repeal of property measure discussed

Tennessee issued a notice discussing S.B. 2103, which eliminates the franchise tax property measure (also referred to as the “minimum measure”) for tax years ending on or after Jan.1, 2024.

2023 calendar year returns and 2024 fiscal year returns

On returns filed for tax years ending on or before Dec. 31, 2023, taxpayers are required to complete Schedule G and calculate franchise tax based on the greater of Schedule F net worth or Schedule G property. Taxpayers that pay franchise tax based on Schedule G property can then request a refund.

On returns filed for tax years ending in 2024, taxpayers should omit Schedule G from the return and calculate franchise tax based on Schedule F net worth.

Refunds for certain prior tax years

Taxpayers that paid franchise tax based on the Schedule G property measure can request a refund for tax years ending on or after March 31, 2020, for which a return was filed with the Department of Revenue on or after Jan. 1, 2021.

The tax amount that can be refunded is the difference between the amount of franchise tax paid based on the Schedule G property measure and the amount that would have been owed based on the Schedule F net worth measure for the applicable tax years.

Refund claims filed according to the procedure set forth in the notice must be filed between May 15, 2024, and Nov. 30, 2024.

Refund procedure

The notice details the refund procedure for eligible taxpayers, including requirements for amended returns and the filing of refund claim forms.

Additional considerations

The notice also addresses a number of other refund considerations. For example, the department may audit the refund claim; adjust or deny the claim; or audit the amount of tax otherwise due, within the applicable statute of limitations. In addition, upon acceptance of a refund claim, the taxpayer is required to knowingly waive any claim in any court on any theory that the franchise tax is unconstitutional by failing the internal consistency test. More information is provided in the notice.

S.B. 2103, Laws 2024, applicable as noted; Important Notice 24-05, Tennessee Department of Revenue, May 2024.

Please see more details on the Tennessee franchise tax change in our Plante Moran article here.

Texas

Corporate income tax: Inflation-adjusted wage and cash compensation deduction

The Texas Comptroller has revised its list of frequently asked questions regarding the Texas franchise tax compensation deduction to include the inflation-adjusted amount for the maximum wage and cash compensation deduction for each 12-month period. For reports originally due in 2024 and 2025, the amount is $450,000.

Letter No. 202405005W, Texas Comptroller of Public Accounts, May 13, 2024.

Virginia

Corporate, personal income taxes: Enacted budget revises credit provisions, makes other changes

Virginia enacted biennial budget legislation containing various corporate and personal income tax provisions.

Intangible holding company addback exceptions

Uncodified limitations on the state’s “subject to tax” and “unrelated party” addback exceptions to the addition required for intangible expenses and costs associated with a transaction with a related member are included in the legislation. Similar uncodified provisions have been included in state budget legislation since 2014.

Retroactive to tax years after 2003, the “subject to tax” exception is limited to the portion of income received by the related member that owns the intangible property, which portion is attributed to a state or foreign government in which the related member has sufficient nexus to be subject to such taxes. The exception applies to income that’s subject to a tax based on or measured by net income or capital imposed by: Virginia; another state; or a foreign government.

The exception for a related member deriving at least one-third of its gross revenues from licensing to unrelated parties is limited to the portion of income received by the related member that owns the intangible property and derived from licensing agreements for which the rates and terms are comparable to agreements the related member has entered into with unrelated entities.

Historic preservation tax credit

For tax years after 2016 and before 2025, the historic rehabilitation tax credit amount that may be claimed by each taxpayer, including amounts carried over from prior taxable years, can’t exceed $5 million for any tax year. For taxable years beginning on and after Jan. 1, 2025, the annual cap is increased to $7.5 million.

Land preservation tax credit

For tax years after 2016 and before 2023, as well as taxable years beginning on and after Jan. 1, 2024, the land preservation tax credit amount that may be claimed by each taxpayer, including amounts carried over from prior tax years, can’t exceed $20,000.

Neighborhood assistance act tax credit

In order to be eligible to receive an allocation of Neighborhood Assistance Act credits, a neighborhood organization must meet the following requirements: (1) at least 50% of individuals served by the neighborhood organization must be low-income individuals or eligible students with disabilities; and (2) at least 50% of the organization’s revenues must be used to provide services to low-income individuals or eligible students with disabilities.

For fiscal years 2025 and 2026, the amount of the credit available is limited to $20 million, with allocations specified in the law.

Deduction for ABLE Act contributions

For tax years after 2015, taxpayers are allowed a deduction from Virginia AGI for the amount contributed during the taxable year to an ABLE savings trust account entered into with the Virginia College Savings Plan. The amount deducted on any personal income tax return in any taxable year is limited to $2,000 per ABLE savings trust account. No deduction will be permitted if the contributions are also deducted on the contributor’s federal income tax return. If the contribution to an ABLE savings trust account exceeds $2,000, the remainder may be carried forward and subtracted in future taxable years until the ABLE savings trust contribution has been fully deducted. However, if contributors are age 70 years or older, they may deduct the entire amount contributed to an ABLE account.

Sunset dates for credits

The sunset date on any existing tax credit may not be extended beyond June 30, 2030. Any new credit enacted after the 2019 regular legislative session but prior to the 2029 regular legislative session must have a sunset date not later than June 30, 2030. This requirement doesn’t apply to credits with sunset dates after June 30, 2022, enacted or advanced during the 2016 session of the General Assembly, to the housing opportunity tax credit, or to the motion picture production tax credit.

Retaliatory costs to other states credit

The amount deposited to the Priority Transportation Trust Fund must not be reduced by more than $266,667 by any refund of the tax credit for retaliatory costs to other states.

Tax collection efforts

In any pending or future administrative or judicial proceeding in which the validity of a tax assessment is an issue, the participation of the Department of Taxation in any capacity will be considered a collection effort.

Ch. 1 (H.B. 6002), Laws 2024, Special Session I, effective May 13, 2024, and Ch. 2 (H.B. 6001), Laws 2024, Special Session I, effective July 1, 2024, applicable as noted.

Wisconsin

Corporate income tax: Royalty deductions disallowed due to lack of economic substance and valid business purpose

In a Wisconsin corporate franchise tax case involving a corporation that claimed deductions for royalties paid to an affiliate for the use of certain intellectual property, it was proper for the deductions to be disallowed because the underlying transactions lacked economic substance and a valid business purpose. The corporation essentially argued that such sham transactions could be transformed into lawful ones if the organization with which the transactions were occurring was a viable business entity, but the Circuit Court rejected that position. The court noted that the corporation’s conduct in this case was a near textbook example of what the sham transaction doctrine aims to prevent, and the Tax Appeals Commission correctly applied the law in determining that the corporation was not entitled to the claimed deductions.

Skechers USA, Inc. v. Wisconsin Department of Revenue, Circuit Court (Wisconsin), No. 23 CV-000730, April 1, 2024. 

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.

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