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.
State Workarounds for the $10,000 SALT Cap Are Now the Norm - Michael Bologna, Bloomberg:
According to the most recent map from the American Institute of CPAs, 34 states and New York City have approved laws permitting pass-through businesses including partnerships and S corporations to pay their taxes at the entity level.
After removing the nine states with no owner-level personal income tax on pass-through entity income, the hold-outs are down to Delaware, Maine, North Dakota, Pennsylvania, Vermont and, as a jurisdiction, the District of Columbia. From that group, the legislatures in Maine, Pennsylvania, and Vermont all have bills that could circumvent the SALT cap.
Related: Working Around the SALT Deduction Cap.
Uncertainty Clouds Wayfair's Impact On Other State Tax Cases - Maria Koklanaris, Law360 Tax Authority ($). "States as well as businesses have raised Wayfair in cases following the ruling, in which a split decision by the justices upheld South Dakota's sales tax law requiring businesses to collect and remit the tax whether or not they had a physical presence in the state. In some litigation, courts have recognized the case as appropriate precedent. But in others, especially where a state or business has argued Wayfair in a non-sales and use tax matter, courts have been less accepting."
Related: A Sales Tax Reform Game Changer: How Wayfair Changed the Sales Tax Reform Landscape.
State-By-State Roundup
California
California Disaster Victim Tax Breaks Advanced by Lawmakers - Laura Mahoney, Bloomberg ($). “The disaster relief bills and other tax policy measures passed their house of origin before a June 2 deadline and now will move to the other chamber for consideration. They must win final passage by Sept. 14 to reach Gov. Gavin Newsom (D). He hasn’t taken positions on the measures.”
Calif. Tax Board Sets Process To Cut Transaction Penalties - Sanjay Talwani, Law360 Tax Authority ($):
Certain microcaptive insurance and syndicated conservation easement transactions in California may be subject to reduced understatement penalties under a process created by the state Franchise Tax Board.
In a notice Wednesday, the board said it had created a resolution process to allow eligible taxpayers to reduce their potential noneconomic substance transaction understatement penalties for certain transactions.
Colorado
Colorado: Let’s Implement a 1207800% Marginal Tax Rate! - Russ Fox, Taxable Talk. "I could have made this illustration even more ridiculous. It truly is a hard cliff: If Joe had $300,000 of wins and losses he would have refunds of $3,238 from the IRS and $490 from Colorado; if Larry had $300,001 of wins and losses he would have the same federal refund of $3,238 but would owe Colorado $11,588. That’s an insane marginal tax rate of 1,207,800% on the additional dollar of income!"
Louisiana
Louisiana Repeals Transaction Threshold for Remote Sales - Melissa Menter, Eide Bailly. "Louisiana recently repealed its 200-transaction threshold for determining whether or not a marketplace facilitator must collect and remit sales taxes on remote transactions. The bill also changed the $100,000 sales threshold, above which marketplace facilitators are required to collect sales and use taxes, such that it now applies only to retail sales, rather than to all sales."
Link: H.B. 171
Louisiana Considers Eliminating Corporate Franchise and Inventory Taxes - Manish Bhatt, Tax Policy Blog . "The term 'franchise tax' has different meanings from state to state but generally refers to a tax on the privilege of doing business in a given jurisdiction. However, Louisiana’s franchise tax is a capital stock tax and, unlike a corporate income tax, is imposed on a business’s net worth rather than net profits. Functionally, this discourages capital investment in the state and requires businesses to pay the tax regardless of profitability. The result is that Louisiana’s franchise tax is a drag on the state’s overall competitiveness, particularly since it has the second highest rate in the country."
Minnesota
Minnesota Conforms to Federal GILTI, Provides Tax Relief for Individuals - Emily Hollingsworth, Tax Notes ($):
H.F. 1938, the estimated $3 billion tax bill for the fiscal 2024–2025 biennial budget, passed the Legislature by narrow margins, with the House approving H.F. 1938 as amended by a conference committee 69 to 63 on May 20, and the Senate passing the bill 34 to 33 the next day. The bill, along with other budget legislation, was signed into law by Gov. Tim Walz (DFL) May 24.
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First, the bill amends Minn. Stat. section 290.21 to conform with IRC section 951A, which requires GILTI to be included in gross income. That approach is "designed to discourage multinational companies from shifting profits on such easily moved assets as intellectual property rights from the United States to foreign jurisdictions with tax rates below those in the U.S." and will bring in an estimated $437 million, according to a May 17 Minnesota House release outlining the conference committee's agreed-upon language.
The bill also clarifies that the state will continue to decouple from the 50 percent GILTI deduction allowed under IRC section 250.
Minn. Creates Family Leave Plan With Payroll Tax - Sanjay Talwani, Law360 Tax Authority ($).
Democratic Gov. Tim Walz signed H.F. 2 into law Thursday. Under the bill, most employees in the state will be eligible for up to 20 weeks of annual paid family and medical leave starting Jan. 1, 2026. To pay for the program after its initial startup, most employee payrolls up to $160,200 will be taxed at 0.7%, half of it paid by the employee and half through a withholding by the employer.
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For employers with fewer than 30 employees and less than $3 million in annual revenue, the state will make available grants of up to $3,000 per employee and $6,000 per employer toward the costs of replacing workers on leave under the program. The grants will be capped at $5 million statewide each year.
Illinois, Minnesota Detach From Cannabis Industry Tax Penalty - Michael Bologna, Bloomberg ($). "Cannabis businesses operating in Minnesota and Illinois will be able to write off ordinary business expenses under legislation removing both states from federal tax rules prohibiting such tax benefits."
Nebraska
Under L.B. 754, the top individual income tax rate lowers from 6.84 percent to 5.01 percent for tax years 2024 and 2025; to 4.55 percent for tax year 2026; and to 3.99 percent for tax year 2027 and beyond. The bill also reduces the corporate income tax rate — from 7.25 percent to 5.84 percent — on all taxable income over $100,000 for tax year 2024 and lowers the rate each year to reach 3.99 percent by tax year 2027. The lowered rates for 2025 and 2026 and the final 3.99 percent rate would apply to all taxable corporate income, not just the amount exceeding $100,000.
The bill also allows qualifying taxpayers to deduct 100 percent of their Social Security income from AGI and to subtract retirement income earnings received from the Federal Employees Retirement System or the Civil Service Retirement System for income tax purposes beginning January 1, 2024.
Neb. To Cut Top Tax Rates, Increase Property Tax Credits - Zak Kostro, Law360 Tax Authority ($). "Along with the income tax cuts for people and businesses, L.B. 754 eliminates the state's tax on Social Security income starting next year, Pillen said. Additionally, the bill provides tax credits to families with children under 5 years old who are enrolled in a licensed child care or preschool program, which will make it easier for many Nebraska families that have struggled to afford increasing child care costs, the governor said."
L.B. 754 also includes a on optional pass-through entity tax, retroactive to 2018 tax years. Electing entities will have to pay estimated tax payments on their Nebraska-source income. Nonresident owners of Nebraska partnerships and S corporations with no other Nebraska-source income will not have to file Nebraska returns.
Neb. Lawmakers OK Tax Breaks For Cash To Scholarship Orgs - Zak Kostro, Law360 Tax Authority ($). "L.B. 753, which passed the state's unicameral Legislature by a 33-11 vote Wednesday, would allow individual and corporate taxpayers that make one or more cash contributions to at least one scholarship-granting organization during a tax year to claim such a credit, according to the bill text. A trust or estate that makes a qualifying contribution could claim a credit of up to $1 million, according to the bill."
This appears similar to Iowa's heavily-subscribed private school tuition organization tax credit.
Neb. Expands Eligibility For Ethanol-Blend Fuel Tax Credits - Zak Kostro, Law360 Tax Authority ($). "L.B. 562, signed by Republican Gov. Jim Pillen, modifies provisions governing tax credit amounts and certain annual limits under the state's Higher Blend Tax Credit Act. The bill expands the definition of E-15, the kind of fuel a retailer would need to sell to be eligible for a credit, to mean ethanol-blended gasoline containing between 10% and 15% ethanol by volume, according to the bill. Under previous law, E-15 was defined as ethanol-blended gasoline containing 15% ethanol by volume, the bill said."
New Jersey
New Jersey Eliminates S Election as of December 22, 2022 - Joseph Bright and Heidi Schwartz, JD Supra:
Historically, the New Jersey Division of Revenue and Enterprise Services (Division) required entities that qualified as S corporations or Qualified Subchapter S Subsidiaries (QSSS) for federal income tax purposes to make a separate election to be treated as an S corporation for New Jersey Corporation Business Tax. For periods beginning on or after December 22, 2022, a separate New Jersey S corporation election will not be required. P.L. 2022, C. 133 (Dec. 22, 2022). However, elections for hybrid entity status and C corporation status are still required.
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Entities that were granted S corporation or QSSS Federal Acceptance Letters dated before December 22, 2022, or did not elect S corporation status for New Jersey purposes for periods beginning before December 22, 2022, must make a retroactive election.
New York
New York Legislature OKs Bill to Extend NYC Condo Tax Break - Emily Hollinsworth, Tax Notes ($). "A. 4972A, introduced by Assembly Committee on Cities Chair Edward C. Braunstein (D), would amend section 467-a of the state statutes to extend for four years — through 2026 — the partial property tax abatement for co-op or condo unit owners in cities with populations of 1 million or more. State law lists 2022 as the most current year that qualified owners could be eligible for the partial abatement."
NY Senate OKs Ending Opportunity Zone Tax Breaks - Jaqueline McCool, Law360 Tax Authority ($). "S.B. 543 passed the state Senate 41-20 on Tuesday and is now in the Assembly. The bill, which was introduced by Senate Deputy Majority Leader Michael Gianaris, D-Queens, would fully decouple the state from the federal credit by removing the gain exclusion benefit."
Related: End of the Year Opportunity Zone Considerations.
Oklahoma
Oklahoma Legislation Would Repeal Corporate Franchise Tax - Emily Hollingsworth, Tax Notes ($):
H.B. 1039, which would take effect July 1, would eliminate the annual corporate franchise tax that applies to corporations, associations, joint-stock companies, and business trusts that do business in the state. According to the Oklahoma Tax Commission, the franchise tax equals $1.25 of each $1,000 of capital that’s invested or used in the state, and “foreign corporations are additionally assessed at $100 per year.”
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Meanwhile, H.B. 1040 would — for tax years beginning on or after January 1, 2024 — increase the income amount for the second-highest tax bracket for joint filers, heads of household, and surviving spouses. Under the bill, the 3.75 percent income tax rate would apply to a $4,600 slice of income, rather than $2,400. The top income tax rate of 4.75 percent would apply to income exceeding $4,600.
Texas
Texas Lawmakers Pass Property Tax Incentive Program for Developers - Paul Jones, Tax Notes.
A Texas property tax incentive program designed to encourage construction of factories and other large commercial projects would be resurrected under a bill passed by lawmakers at the end of the regular session.
The House and Senate passed the conference committee report for H.B. 5 on May 28. The bill, which is expected to be signed by Gov. Greg Abbott (R), would once again allow school districts to approve property tax breaks for projects such as semiconductor plants and energy production facilities if they meet statutory hiring and dollar investment requirements.
Vermont
Vermont Governor Cites Payroll Tax as Reason for Budget Veto - Benjamin Valdez, Tax Notes ($). "Scott vetoed H. 494 May 27, citing concerns over the $8.5 billion spending plan's 0.44 percent payroll tax, which would boost funding for the state’s child care and early education program. “We cannot and should not ask Vermonters to shoulder the burden of new and higher taxes, fees and penalties,” the governor said in his veto letter."
Tax Policy Corner
Digital Ads And Electric Vehicles: SALT In Review - David Brunori, Law360 Tax Authority ($):
A bill in New York would impose a tax on digital advertising. There must be a bill-cloning machine somewhere, because similar bills are popping up all over. At least seven similar bills are being introduced around the country, and they all mirror Maryland's law, which is considered the granddaddy of them all.
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I find it funny that states are pushing this idea when the Maryland law is likely to be shut down for good by the courts. And if this bill becomes law, I suspect the folks at McDermott Will & Emery and Eversheds Sutherland will batter it into submission. There are all kinds of legal issues, including those involving the foreign commerce clause, the due process clause and that pesky Internet Tax Freedom Act.
But just as important, these taxes are horrible tax policy.
Sadly, whether a tax law is horrible policy is well down the list of considerations in modern statehouses.
Tax History Corner
Grumpy about taxes? It's a great American tradition. During the administration of President Washington, the federal government enacted a distilled spirits tax that gave rise to the "Whiskey Rebellion." From Wikipedia:
Resistance came to a climax in July 1794, when a US marshal arrived in western Pennsylvania to serve writs to distillers who had not paid the excise. The alarm was raised, and more than 500 armed men attacked the fortified home of tax inspector John Neville. Washington responded by sending peace commissioners to western Pennsylvania to negotiate with the rebels, while at the same time calling on governors to send a militia force to enforce the tax. Washington himself rode at the head of an army to suppress the insurgency, with 13,000 militiamen provided by the governors of Virginia, Maryland, New Jersey, and Pennsylvania. The rebels all went home before the arrival of the army, and there was no confrontation. About 20 men were arrested, but all were later acquitted or pardoned. Most distillers in nearby Kentucky were found to be all but impossible to tax—in the next six years, over 175 distillers from Kentucky were convicted of violating the tax law.
Nowadays, people still are convicted of tax crimes, but they aren't likely to get the President to saddle up after them.
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