Welcome to this week's state and local tax roundup. Think of Eide Bailly for your state tax needs, whether you are dealing with income taxes, sales taxes, or business incentives and credits.
States Rushing To Copy Md. On Digital Ad Tax, Panel Says - Maria Koklanaris, Law360 Tax Authority ($):
New Orleans - Even though Maryland's digital advertising tax is mired in litigation, states have seen a rash of proposals in the 2023 legislative sessions for similar taxes, tax professionals said Wednesday.
At least nine states — including Arkansas, Connecticut, Indiana, Massachusetts, Montana, New Mexico, New York, Texas and West Virginia — have proposals for a digital advertising tax, the tax professionals said. They spoke at a tax law conference in New Orleans hosted by the American Bar Association and the Institute for Professionals in Taxation.
Panelists: Post-Wayfair Nexus Thresholds, Retroactive Application Still Unresolved - Christopher Jardine, Tax Notes ($):
During a March 14 panel at the 2023 American Bar Association/Institute for Professionals in Taxation Advanced State Income Tax Seminar in New Orleans, speakers warned that state tax administrations are continuing to update guidance and regulations as courts across the country work to resolve issues brought about in the wake of the landmark case.
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Noting that states began implementing economic nexus thresholds after the Wayfair decision, Masha Yevzelman of Fredrikson & Byron PA said that as recently as February, states have been updating their nexus transaction thresholds to synchronize with Wayfair. Notably, South Dakota eliminated its 200-transactions threshold under S.B. 30, signed into law February 9.
Related: States Respond to SCOTUS Wayfair Decision.
Panelists: Nexus, Market Sourcing Important in M&A Due Diligence - Audrey Fick, Tax Notes ($). "Speaking March 13 at the American Bar Association/Institute of Professionals in Taxation Advanced State Income Tax Seminar in New Orleans, the panel warned that its focus on corporate income tax issues shouldn't be mistaken as minimizing practitioners' need to exercise comparable care with M&A-related sales and property tax ramifications."
Ninth Circuit Reverses Class Certification in LuLaRoe Sales Tax Suit - Andrea Muse, Tax Notes ($):
The Ninth Circuit vacated a class certification in a suit against multilevel marketer LuLaRoe alleging that the company improperly charged sales tax to Alaska customers by using the location of the sellers instead of the purchasers.
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Some LuLaRoe sellers charged sales tax based on the their location when using the point-of-sale system, which resulted in some online purchasers in Alaska being improperly charged sales tax when none was owed, with LuLaRoe allegedly collecting more than $255,000 in improperly assessed sales tax for more than 70,000 transactions. According to the court, LuLaRoe paid back the improper sales tax that was collected but did not pay interest on the refunded amounts.
Katie Van, an Alaska resident, filed a class action suit under state law to recover interest and statutory damages of $500 per transaction, or $36 million.
Link: No. 21-36020.
Related: Identifying Your Sales Tax Risks.
State-by-State Roundup
California
California Proposition 22 Upheld in Win for Uber, Lyft - Paul Jones, Tax Notes ($). "In its ruling in Castellanos v. California, the California First District Court of Appeal reversed a lower court ruling that Proposition 22, which treats ride-hailing companies' drivers as independent contractors instead of as employees, violated the state constitution and the state's single-subject rule for ballot measures. The appellate court's March 13 ruling means ride-hailing companies like Uber and Lyft can continue to treat their drivers as independent contractors rather than employees, exempting them from millions in payroll taxes that the companies would otherwise have had to pay."
Link: A163655
Colorado
Colo. Dept. Says Some Grass Seed, Blanket Sales Tax-Exempt - Zak Kostro, Law360 Tax Authority ($). "Such sales qualify for a tax exemption as construction and building materials if the contractor to whom a company makes a sale provides the company with a current contractor's exempt certificate, the department said in a letter ruling released Monday. However, sales of fertilizer under such circumstances aren't tax-exempt even if the contractor provides the exemption certificate because fertilizer is a part of landscape maintenance but doesn't contribute to landscape construction, the department said."
Colo. Dept. Says Biz's Property Sales Don't Need Apportioning - Jaqueline McCool, Law360 Tax Authority ($). "In a private letter ruling released Monday, the department said that the nonresident partnership that operates long-term real estate rentals in Colorado didn't have to apportion the receipts from its sales of properties. The receipts would only be attributable if they were directly tied to the company's normal business, but the sales were not within the company's normal activity and therefore were not attributable, the department said."
Georgia
Ga. Gov. Paves Way For $1B In State Income Tax Refunds - Madeline Lyskawa, Law360 Tax Authority ($). "The Republican governor signed HB 162 into law Tuesday, under which a maximum of $250 and $500 will be doled out to 2021 and 2022 single filers and joint filers, respectively. The law comes shortly after Gov. Kemp officially signed off on the state's $32.5 billion plan Friday that covered an amended budget for the rest of the fiscal year 2023 and a new budget for the fiscal year 2024, as well as accounted for the special $1 billion refund."
Illinois
US Law Preempts Chicago's Boat Tour Tax, Ill. Court Affirms - Sanjay Talwani, Law360 Tax Authority ($). "In an opinion Tuesday, the First District Appellate Court of Illinois upheld a lower court decision that said the city taxon Wendella Sightseeing Co. was invalidated by the federal Rivers and Harbors Appropriation Act of 1884, or RHA, which gives the U.S. Secretary of the Army responsibility over the nation's navigable waterways. Amendments to that law in the Maritime Transportation Security Act of 2002 and other legislation made clear that only the federal government may charge taxes and fees on watercraft operations in navigable waters, the opinion said."
Iowa
Senate Republicans advance bill to eventually eliminate Iowa's income tax. Here's the plan - Stephen Gruber-Miller, Des Moines Register:
Senate Study Bill 1126 would lower Iowa's income tax rate to 3.55% in 2026, 2.95% in 2027 and 2.5% in 2028.
Beginning in 2030, the bill would transform Iowa's taxpayer relief fund into an "individual income tax elimination fund" and use the money in the fund to eventually lower the individual income tax rate further until it is eliminated entirely.
Bill would eliminate Iowa individual income tax - O. Kay Henderson, Radio Iowa:
A Senate committee has approved a bill that would gradually eliminate the state income tax — if state tax revenues continue to grow. Senator Dan Dawson, a Republican from Council Bluffs, is chairman of the Senate Ways and Means Committee.
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The five Democrats on the committee voted against the move. Senator Herman Quirmbach of Ames said getting rid of the state income tax will lead to cuts in state services. “The state income tax is half the state revenue,” Quirmbach said. “So how are we going to pay our bills?”
Link: SF 552 (Formerly SSB 1126)
Kansas
Analyzing the Kansas Senate’s Proposed Tax Changes - Kathrine Loughead, Tax Policy Blog. "Some of the proposed changes, such as converting to a flat individual income tax structure and inflation-indexing the standard deduction, would promote economic growth while making the tax code more structurally sound. But other proposed changes, like exempting retirement income and removing groceries from the local tax base, would narrow income and sales tax bases, making the tax code less neutral while doing little to grow the economy."
Michigan
Michigan Tax Relief Bill Signed Into Law - Emily Hollingsworth, Tax Notes ($).
A bill that modifies Michigan’s retirement deduction limit and increases the state’s earned income tax credit recently became law, but a provision that would have provided $180 tax rebates was essentially scrapped.
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Along with increasing the state’s EITC from 6 percent to 30 percent of the federal credit, the bill allows taxpayers who receive public or private pensions to choose between deducting the retirement income using the existing limits created in 2011 under then-Gov. Rick Snyder or using new limits created under H.B. 4001.
Minnesota
Minn. Film Credit Boost Advances For Omnibus Consideration - Jaqueline McCool, Law360 Tax Authority ($):
H.F. 2059, introduced by Rep. Dave Lislegard, D-Aurora, was advanced by the committee for possible inclusion in the tax omnibus bill. The bill would increase the statewide annual cap on the credit from nearly $5 million to nearly $25 million starting in tax year 2023.
If enacted, the bill would also permanently extend the availability of the credit, striking down the statute that would end the credit after 2024.
Mississippi
Miss. Lawmakers OK Tax Break On Property Sent Out Of State - Michael Nunes, Law360 Tax Authority ($). "H.B. 549 was approved unanimously by the state Senate on Tuesday by a 52-0 vote and goes next to Republican Gov. Tate Reeves. The bill would exempt the sale of property that is transported, shipped or exported from Mississippi and first used in another state from the state's 7% sales tax."
Montana
Montana Governor Signs Tax Relief Package - Emily Hollingsworth, Tax Notes ($):
Montana Gov. Greg Gianforte (R) has signed a package of bills implementing some of his promised tax relief proposals, including an increase in the state earned income tax credit, an increase in the business equipment tax exemption threshold, and individual income and property tax rebates.
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S.B. 121, sponsored by Sen. Becky Beard (R), reduces the top marginal income tax rate from 6.5 percent to 5.9 percent and increases the state EITC from 3 percent to 10 percent of the federal credit. The tax rate change takes effect January 1, 2024, and the EITC increase is applicable to tax years beginning after December 31, 2023, according to the bill.
Mont. Taxpayers To Get Income, Property Tax Rebates - Sanjay Talwani, Law360 Tax Authority ($):
Gov. Greg Gianforte, a Republican, signed H.B. 192 and H.B. 222 into law Monday. H.B. 192 will provide taxpayers with income tax rebates equal to their 2021 liability, up to $2,500 for joint returns and $1,250 for single filers. H.B. 222 will provide a property tax rebate of $500 or the amount of taxes paid for a taxpayer's principal residence, whichever is lower.
With the signing of the bills and three others, H.B. 212, which Gianforte also signed Monday, will increase the current $300,000 business property tax exemption to $1 million. Without the passage of the other five measures, the exemption would have increased to only $500,000.
Montana Moving to Single Sales Factor Apportionment - Melissa Menter, Eide Bailly. "Effective in tax year 2025, Montana will begin using a single sales factor for apportionment instead of the current 3-factor apportionment with double-weighted sales."
Oklahoma
Oklahoma Lawmakers’ Tax Reform Plan Would Put State in Top 10 - Janelle Fritts, Tax Policy Blog. "House Bill 2695 would repeal the state’s franchise tax; House Bill 2285 would create a flat income tax of 4.5 percent, with revenue triggers for additional rate reductions in the future; and House Bill 1375 would repeal the state’s throwback rule and shift the state’s apportionment formula from three-factor to single sales factor."
Pennsylvania
Pennsylvania Mask Sales Tax Cases Against Mall Stores Tossed - Perry Cooper, Bloomberg ($). "Foot Locker Inc., American Eagle Outfitters Inc., The Gap Inc., and other retailers convinced a Pennsylvania appeals court to toss a class action alleging they improperly charged sales tax on cloth face mask purchases."
Link: J-A18006-22
West Virginia
West Virginia to Join States With SALT Cap Workarounds - Angélica Serrano-Román, Bloomberg ($):
West Virginia would soon enact a pass-through entity tax workaround to the federal state and local tax deduction cap, under a bill heading to the desk of Gov. Jim Justice (R).
The measure, SB 151, would allow partnerships and other pass-through businesses to pay West Virginia income tax at the entity level, instead of having their income passed through to individual owners for taxation. The individuals would get a state tax credit for the amount paid, thus easing the impact of the $10,000 federal limit on deductions for state and local taxes.
Other Items
State Revenue Forecasts Look Bleak as Revenue Boom Subsides - Lucy Dadayan, TaxVox. "There is also significant variation across the states. California and New York are reporting large declines in overall revenues, whereas many states are still reporting growth in nominal terms – albeit much weaker compared to the prior two years."
Drinking And Driving: SALT In Review - David Brunori, Law360 Tax Authority ($):
In any event, a bill in Kentucky, H.B. 5, would phase out state and local property taxes on barrels used in the distilling of bourbon. While many states produce alcohol products, few if any impose such a tax. Indeed, state and local governments have been reducing their reliance on such taxes.
Why? Because business personal property taxes are terrible. Everyone knows it, and everyone admits it, except those who value the raising of revenue over sound tax policy. Personal property taxes discourage firms and people from buying personal property. Buy more and more valuable property and pay more tax ― why would anyone think that is a good idea?
Did you know? Alabama still collects a tax enacted "For the relief of needy Confederate soldiers and sailors, resident citizens of Alabama and their widows." The tax now funds, among other things, "capital improvements and maintenance at the Confederate Memorial Park at Mountain Creek, Chilton county, Alabama."
The last Alabama civil war veteran - and the last confirmed surviving Confederate veteran - died in 1951.
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