State and local tax advisor: April 2022

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

• Alabama
• California
• Colorado
• Kansas
• Kentucky
• Louisiana
• Michigan
• Mississippi
• New Jersey
• New York
• Ohio
• Oregon
• Utah
• Virginia

Alabama

Franchise tax: Minimum business privilege tax reduced, then eliminated

Alabama has enacted legislation cutting the minimum business privilege tax from $100 to $50 in tax year 2023 and exempting businesses from the tax beginning in tax year 2024. The tax reduction and elimination do not apply to businesses subject to the medical cannabis business privilege tax.

Act 2022-252 (H.B. 391), Laws 2012, applicable as noted.

California

Corporate income tax: Guidance provided on assignment of gross receipts from sales of services

What are the relevant considerations and proper analysis for determining the assignment of gross receipts from the sales of services for California corporation franchise and income tax purposes? The Franchise Tax Board (FTB) has issued a legal ruling providing some guidance for making these determinations.

Law and regulation

Under California law, sales from services are assigned to California to the extent the purchaser of the service received the benefit of the services in the state. The benefit of a service is received where the taxpayer’s customer has either directly or indirectly received value from delivery of that service. Thus, properly assigning receipts from sales of services first requires ascertaining the following:

• Who is the customer? While third parties may benefit from a taxpayer’s service, it is only the customer’s benefit that is relevant to the analysis.
• What is the service being provided? Generally, the contract evidencing the service agreement will identify the specific service that is to be performed. If there is no contract, or the contract does not describe the service performed, the taxpayer will have to identify the activities engaged in for consideration.
• What is the benefit of the service being received by the customer? Usually, the value of the service is the direct effect of the action or function being performed.
• Where is the benefit of the service being received by the customer? When the value of the service is the direct effect of the action or function being performed, the location of the benefit will be where the direct effect impacts the taxpayer’s customer. When the service provided by the taxpayer is directed at the customer’s customer(s), the benefit received by the customer is likely located at the customer’s customer(s)’ location. A regulation provides examples demonstrating application of the cascading rules for measuring where the benefit of a service is received.

Legal analysis

In the legal ruling, the FTB analyzes the application of the law to three different scenarios. The legal ruling revokes Chief Counsel Rulings 2015-03 and 2017-01. Also, to the extent the legal ruling conflicts with any other prior FTB guidance, it supersedes the prior guidance.

Legal Ruling 2022-01, California Franchise Tax Board, March 25, 2022.

Corporate income tax: Unreported installment sale gain properly accelerated

An out-of-state S corporation and its shareholders group (taxpayers) were properly subject to additional California corporate income tax assessment as the S corporation (corporation) was dissolved and the taxpayers were properly subject to accelerated reporting requirement.

In 2013, the taxpayers sold all of the corporation’s stock for a fixed price, and the third-party buyers agreed to provide deferred installment gain payments (earnout) of up to $50 million if the corporation’s earnings before interest and taxes (EBIT) would exceed certain thresholds in the three years after the sale.

According to the taxpayers, the corporation’s EBIT climbed from $1,018,000 in 2011 to $3,838,000 in 2012 and to $12,996,000 in 2013. The taxpayers and the buyers then mutually decided to consider the stock sale as an asset sale under IRC Section 338(h)(10). The corporation’s 2013 tax year ended with stock sale.

The corporation’s 2013 California tax return indicated that the return was the corporation’s final California tax return and reported its California apportionment percentage based solely on its sales factor, rather than based on its property, payroll, and double-weighted sales factors. The S corporation reported the gain in taxable income, which was calculated without factoring any contingent sums that may be received in subsequent years. The corporation reported the $101,201,823 of gross receipts attributable to the fixed portion of the deemed asset sale as other gross receipts “everywhere” resulting in the inclusion of this amount in the corporation’s sales factor denominator. Of this amount, the corporation assigned $22,395 to California for inclusion in the numerator of its sales factor; however, the corporation did not report any taxable income or gross receipts from the earnout.

Subsequently, the Franchise Tax Board (FTB) examined the corporation’s 2013 tax return and determined that:

• Since the 2013 return was the corporation’s final California tax return, it should have accelerated the reporting of earnout.
• The sale at issue was a substantial and occasional sale, and the corporation should have excluded the fixed portion of the sale amount from the sales factor.

Subsequently, the taxpayer filed an appeal against the FTB’s assessment. The Office of Tax Appeals (OTA) decided the matter on the following issues:

Accelerated reporting of unreported installment gain

Generally, under California law, a taxpayer is allowed to accelerate future installment payments when the entire income from a sale has not been reported before dissolution or cessation of a business.

In this matter, the taxpayers asserted that although the corporation was dissolved, the taxpayers’ continued their business in the state as C corporation therefore, the taxpayers should not be subject to the provisions related to accelerated reporting. However, it was noted that when an IRC 338(h)(10) election is made, a company is generally considered as if it had sold its assets, liquidated its assets, and ceased to exist, and therefore, the resulting C corporation was viewed as if it were a completely distinct entity from the original corporation.

Tax treatment of income from deemed asset sale relating to intangibles

The corporation’s revenue from the presumed asset sale of intangibles like goodwill and going concern value-constituted business income since these assets were important to the corporation’s ordinary trade or business activities and so met the “functional” requirement for business income.

Substantial and occasional sales

Generally, gross receipts from the deemed asset sale should be excluded from the taxpayer’s sales factor pursuant to Regulation section 25137(c)(1)(A), as receipts arising from a substantial and occasional sale. As a result, the taxpayers were required to exclude the fixed portion of the sale amount from the sales factor numerator and denominator. This increased the taxpayers’ California sales factor apportionment percentage and California taxable income, resulting in a tax liability.

Accordingly, the taxpayers’ protest was denied.

Amarr Company, California Office of Tax Appeals, No. 20046125 & 20046127, Dec. 9, 2021, released March 2022.

Colorado

Sales and use tax practice and procedure: Department will simplify the exemption application process

The Colorado Department of Revenue will review all sales and use tax exemption forms in an effort to simplify the exemption application process. Forms may be simplified, eliminated, or consolidated by the Department. The initial review of the forms will be completed by July 1, 2023.

H.B. 1039, Laws 2022, effective 90 days after adjournment of the 2022 Legislature.

Sales and use tax: Financing company not entitled to credit for tax paid on uncollectible debts

A financing company (company) was not entitled to a credit for Colorado sales tax paid on certain uncollectible debts because the company and the retailers did not act “as a unit” for any purpose other than issuing private label credit cards, and therefore, did not constitute a single “person” entitled to relief under the applicable statute. Generally, Colorado provides a credit to retailers who pay sales tax on credit sales and later write off the debt as uncollectible.

In this matter, the company had entered into contracts with numerous retailers to issue private label credit cards to customers and to finance the purchases made with those cards. Under the terms of the contracts, the company paid the retailers the purchase price plus the sales tax and bore the loss if customers failed to repay the loan, and the retailers in turn remitted the tax to the Department of Revenue (department). When some of the purchasers defaulted, the company sought a refund of the sales tax paid by the retailers. The company argued that it was a “taxpayer” entitled to a refund of the sales tax paid on behalf of the defaulting purchasers because the company and each retailer together constituted a “person,” as they were a “group or combination” of corporations “acting as a unit.”

The Court of Appeals determined that the company did not meet the statutory definition of a “taxpayer” entitled to a credit because it was not the same “person” as the retailers. They were two distinct and unrelated corporations for all purposes other than issuing private label credit cards. Further, the company was not obligated to account to the department for the taxes collected. Accordingly, the judgment was affirmed.

Capital One, N.A. v. Department of Revenue, Colorado Court of Appeals, No. 20CA0818, Feb. 10, 2022.

Kansas

Corporate, personal income taxes: SALT Parity Act creates elective pass-through entity tax

The Kansas SALT Parity Act creates an elective pass-through entity income tax for S corporations and partnerships.

Election

A partnership or S corporation can make the annual election on its Kansas return for tax years beginning on or after Jan. 1, 2022. The election is binding on all pass-through entity owners, but it does not change the owner’s basis in:

• The interest in the partnership
• The stock or indebtedness in the S corporation

Tax rate

The tax rate is 5.7% of each resident and nonresident owner’s distributive share of the pass-through entity’s income from Kansas sources.

Credits and net operating losses

An electing pass-through entity that is eligible to claim Kansas income tax credits can’t distribute those credits to its owners. Net operating losses (NOLs) and unused credits are also only available for carryforward by the electing pass-through entity. The credit and NOL limitations do not apply to tax years when a pass-through entity can’t or does not elect to pay income tax.

Pass-through entity owners can claim a credit against their Kansas income tax liability for the tax paid by the pass-through entity. The refundable credit equals the partner’s or shareholder’s direct share of the tax paid. The credit can’t exceed the tax reported by the partnership or S corporation.

Liability for tax

Partners or shareholders are not separately or individually liable for the pass-through entity tax.

Estimated tax

Kansas treats pass-through entities that elect to pay income tax like corporations for purposes of estimated tax requirements. Penalties for the underpayment of estimated tax do not apply to payments for the 2022 tax year.

Ch. 63 H.B. 2239, Laws 2022, effective July 1, 2022 and as noted.

Kentucky

Multiple taxes: Sales tax expanded on services, tax amnesty enacted, and more

After the Kentucky General Assembly voted to override Governor Andy Beshear’s veto, Kentucky has enacted multiple tax changes, including an expansion of the services subject to sales and use taxes, a new tax amnesty program, and new taxes and fees on electric vehicles.

Expanded list of taxable services

Kentucky has expanded its list of services subject to sales and use tax to include:

• Photography and photo finishing services
• Marketing services
• Telemarketing services
• Public opinion and research polling services
• Lobbying services
• Executive employee recruitment services
• Website design and development services
• Website hosting services
• Facsimile transmission services
• Private mailroom services, including:
  • Presorting mail and packages by postal code
  • Address barcoding
  • Tracking
  • Delivery to postal service
  • Private mailbox rentals
• Bodyguard services
• Residential and nonresidential security system monitoring services
• Private investigation services
• Process server services
• Repossession of tangible personal property services
• Personal background check services
• Parking services:
  • Including valet services and the use of parking lots and parking structures; but
  • excluding any parking services at an educational institution
• Road and travel services provided by automobile clubs
• Condominium time-share exchange services
• Rental of space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties, and other short-term social events
• Social event planning and coordination services
• Leisure, recreational, and athletic instructional services
• Recreational camp tuition and fees
• Personal fitness training services
• Massage services, except when medically necessary
• Cosmetic surgery services
• Body modification services, including tattooing, piercings, scarification, branding, tongue splitting, transdermal and subdermal implants, ear pointing, teeth pointing, and any other modifications that are not necessary for medical or dental health
• Testing services, except testing for medical, educational, or veterinary reasons
• Interior decorating and design services
• Household moving services
• Specialized design services, including the design of clothing, costumes, fashion furs, jewelry, shoes, textiles, and lighting
• Lapidary services, including cutting, polishing, and engraving precious stones
• Labor and services to repair or maintain commercial refrigeration equipment and systems when no tangible personal property is sold in that transaction, including service calls and trip changes
• Labor to repair or alter apparel, footwear, watches, or jewelry when no tangible personal property is sold in that transaction
• Prewritten computer software access services

Additional amendments to service provisions include:

• The definition of admission is expanded to include a fee paid for the use of a boat ramp
• The definition of extended warranty services is expanded to include real property
• The current exemption for admission to historical sites is removed
• The current exemption for residential utilities will only apply to the residential utilities will only apply to the resident’s place of domicile and not to additional residential properties owned
• The threshold for exempting sales of services is reduced to $3,000 during a calendar year

Exclusions from the expanded services taxes are provided for:

• Sales of the services in fulfillment of a lump-sum, fixed-fee contract, or a fixed-price sales contract executed on or before Feb. 25, 2022.
• A lease or rental agreement entered into on or before Feb. 25, 2022.

Definitions are provided for many, but not all, of the new taxable services.

Nexus may be created for retailers selling services

The new list of taxable services has nexus provisions attached to them. Under specific situations, retailers soliciting orders or having a representative solicit orders may create nexus.

Temporary exemptions provided

Temporary exemptions apply for the newly taxed services. For gross receipts from the sale of newly taxed services prior to Jan. 1, 2023, if the gross receipts were less than $6,000 during calendar year 2021, the services are exempt. When gross receipts from these new services exceeds $6,000 in a calendar year:

• All gross receipts over $6,000 are taxable in that calendar year.
• All gross receipts are subject to tax in subsequent calendar years.

Excise tax on vehicle rental services

An excise tax of 6% is imposed on every person for the privilege of providing a motor vehicle for sharing or for rent within Kentucky. The tax applies if the transaction includes a driver or not. The 6% tax is on the gross receipts from the:

• Rental of a shared vehicle by a peer-to-peer car-sharing company
• Rental of a vehicle by a motor vehicle renting company
• Sales of TNC services
• Sales of taxicab services
• Sales of limousine services (no longer subject to the sales and use tax)

The tax is the obligation of the company or provider, but it may be charged to and collected from the user of the service. The tax must be remitted to the Department of Revenue monthly. The Department will issue regulations providing additional guidance.

State and local transient room taxes

State and local governing bodies must currently impose a transient room tax on the rent for every occupation of a suite, room, or rooms. Effective Jan. 1, 2023, the tax will be expanded to also include:

• Cabins
• Lodgings
• Campsites
• Other accommodations charged by any place in which accommodations are regularly furnished to transients for consideration

The expanded tax also applies to any person that facilitates the rental of the accommodations. The local and state transient room tax does not apply to rooms, lodgings, campsites, or accommodations supplied for a continuous period of 30 days or more to a person.

Consumer debts for healthcare

The Department of Revenue can’t collect on any consumer debts owed for healthcare goods and services.

Excise tax on electric vehicle power

Effective Jan. 1, 2023, an excise tax with an initial base rate of 3 cents per kilowatt hour is imposed on electric vehicle power distributed in Kentucky by an electric vehicle power dealer for charging electric vehicles. Additionally, a surtax with an initial base rate of 3 cents per kilowatt hour is imposed if the charting station is located on state property.

The rate will be adjusted annually on January 1. However, it can’t be less than the initial base rate.

The tax must be added to the selling price charged at the charging station. If there is no selling price at the charging station, the electric power dealer is responsible for paying the tax on the power distributed by the charging station, except if the charging station is installed prior to July 1, 2022.

Remittance and filing will be due on the 25th of each month. The Department will issue regulations that will provide additional guidance.

A study has been ordered by the Legislative Research Commission related to electric vehicles and transportation funding. The study will include other states’ tax treatment and federal regulations and guidance.

Electric vehicles and electric motorcycle registration

Effective Jan. 1, 2023, the following annual vehicle registration fees apply:

• $120 for electric vehicles
• $60 for electric motorcycles or hybrid vehicles

The registration fees will be adjusted annually but will not drop lower than the initial base fees.

Tax amnesty program

Kentucky will conduct a tax amnesty program beginning Oct. 1, 2022, and ending on Nov. 29, 2022. The program will apply to qualified tax liabilities for taxable periods ending or transactions occurring on or after Oct. 1, 2011, and before Dec. 1, 2021.

The amnesty program is available to taxpayers owing taxes, penalties, fees, or interest. Exclusions apply to:

• ad valorem taxes on real property.
• ad valorem taxes on motor vehicles and motorboats collected by county clerks.
• ad valorem taxes on personal property payable to local officials.
• any penalties imposed under the Tobacco Master Settlement Agreement Complementary Act or penalties for prohibited acts by cigarette licensees or manufacturers.

Every amnesty-eligible taxpayer will be contacted and notified about the tax amnesty program.

The Department will impose cost-of-collection fees for any unpaid taxes that were eligible for the amnesty program, but remain unpaid, and for any taxpayer failing to file for a period that amnesty was available. The fees range from 25 to 50%. Additionally, any unpaid amnesty-eligible tax liability will accrue interest at a rate 2% higher than the set interest rate.

Amnesty granted by the Department will be invalidated if the taxpayer fails to timely file any tax return or timely pay any tax and interest due for any period ending on or after Oct. 1, 2011, and ending three years from the date amnesty was granted to the taxpayer.

Local license fee on certain vehicle rentals

Provisions regarding local license fees for retailers that rent motor vehicles have been updated.

Coal severance tax refund on exported coal

The tax refund for tax paid on coal directly transported to a market outside of North America has been extended. The refund was set to expire July 1, 2022, and now expires July 1, 2024.

Exemption for drugs for farm animals

Drugs that are purchased by a farmer and used to treat specified farm animals are exempt, effective Jan. 1, 2023.

Festival reporting requirements

Festival event coordinators must provide the Department with a list of vendors selling any tangible or digital products or taxable services at the event.

Taxation of prefabricated homes

Prefabricated homes held for sale in inventory are only subject to state tax. They are exempt from county, city, school, and other taxing district taxes. The exemption applies to property assessed on or after Jan. 1, 2023. Prefabricated homes include manufactured homes, mobile homes, and modular homes. New and/or amended definitions are provided for all three.

Property tax disputes by public service corporations

If the Department does not respond within one year from the date of a property tax dispute filed by a public service corporation, the taxpayer’s proposed true value is automatically accepted.

Delinquency notices

Various amendments have been made to delinquency notice requirements.

H.B. 8, Laws 2022, effective 90 days after the General Assembly adjourns and as noted above.

Louisiana

Corporate, personal income taxes: Applicability of IRC Section 280C deduction to federal employee retention credit discussed

For corporate and personal income tax purposes, the Louisiana Department of Revenue has issued a revenue ruling providing guidance to employers regarding the applicability of deduction to federal employee retention credit (ERC), under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The revenue ruling discusses the applicability of the provisions, which allow taxpayers a deduction for any amounts disallowed pursuant to Internal Revenue Code (IRC) Section 280C.

Generally, Section 280C(a) requires an employer to reduce a deduction for the portion of wages or salary equal to the sum of certain credits determined under the IRC. Further, the CARES Act requires employers to reduce any amount of deduction claimed for the payment of wages or compensation, which are also utilized for purposes of claiming the ERC by the amount of the credit. The employers claiming the ERC for the payment of wages pursuant to the CARES Act and subject to the wage deduction disallowance for amounts utilized to claim the credit may recover such offset amounts by claiming the applicable IRC 280C expense deduction provided for in LA R.S. 47:293(9)(a)(ix) or 287.73(C)(4).

Revenue Ruling No. 22-001, Louisiana Department of Revenue, April 4, 2022.

Michigan

Personal income tax: Tax cut bill vetoed

Michigan Governor Gretchen Whitmer has vetoed a bill that would have:

• Lowered the individual income tax rate to 3.9%.
• Created a new tax credit for taxpayers with qualified dependents.
• Increased tax deductions for certain seniors.

S.B. 768, as vetoed by Michigan Gov. Gretchen Whitmer on March 18, 2022.

Mississippi

Corporate, personal income taxes: Pass-through entity-level tax enacted

Mississippi has enacted legislation that allows pass-through entities to pay income tax at the entity level, applicable to taxable years beginning on or after Jan. 1, 2022.

Election

A pass-through entity may make the election to pay income tax at the entity level by submitting the appropriate form to the Department of Revenue at any time during the tax year, or on or before the 15th day of the third month following the close of that taxable year for which the entity elects to be taxed as an electing pass-through entity. This election is binding for that taxable year and all taxable years thereafter.

The election may not be revoked unless the electing entity submits the appropriate form to the department at any time during a subsequent taxable year, or on or before the 15th day of the third month following the close of that taxable year for which the entity elects to no longer be taxed as an electing pass-through entity.

Both the election to become an electing pass-through entity and the revocation of that election must be made by a vote by or written consent of the governing body members, as well as a vote by or written consent of the owners, members, partners, or shareholders holding greater than 50% of the voting control of the entity.

Reporting

Each owner, member, partner, or shareholder of an electing entity is required report their pro rata or distributive share of the income of the electing entity but is not liable for the tax imposed on such pro rata or distributive share of the electing entity’s income.

Credit

Each owner, member, partner, or shareholder of an electing entity is allowed a tax credit in an amount equal to their pro rata or distributive share of tax paid by the electing pass-through entity with respect to the corresponding taxable year.

H.B. 1691, Laws 2022, effective Jan. 1, 2022, and applicable as noted.

New Jersey

Corporate income tax: P.L. 86-272 policy for combined groups revised

New Jersey is revising its corporation business tax policy on the treatment of members of a combined group claiming P.L. 86-272.

What was the previous policy?

Previously, New Jersey determined that if one member of a combined group had nexus and sufficient activities in New Jersey to be taxed, no member that had nexus with New Jersey could claim P.L. 86-272 protection. This policy was articulated in form instructions for 2019, 2020, and 2021 and in multiple technical bulletins.

What is the new policy?

New Jersey has decided to change this policy. Although a combined group is a taxpayer and taxed as one taxpayer, P.L. 86-272 protection for a member will be determined on an entity-by-entity basis.

What should impacted taxpayers do?

If a combined group filed their 2019, 2020, or 2021 CBT-100U following the previous guidance, the managerial member may amend the group’s 2019, 2020, and 2021 CBT-100U returns to reflect the change in policy.

Revision to Division Policy on Combined Groups and P.L. 86-272, New Jersey Division of Taxation, April 12, 2022.

New York

Multiple taxes: Enacted budget accelerates middle-class tax cut, adds and revises credits, suspends taxes on motor fuel

Enacted as part of New York’s 2022–23 budget package, S.B. 8009 contains a variety of personal income, corporate franchise, sales and use, motor fuel, property, and other tax changes, including those detailed below.

Gas tax holiday. The following state taxes on motor fuel and highway diesel motor fuel are suspended from June 1 to Dec. 31, 2022:

• State fuel excise taxes (Article 12-A)
• State sales and use taxes (including the Metropolitan Commuter Transportation District sales and use tax)
• Prepaid sales taxes

Every retailer is directed to pass the entirety of this tax savings on to consumers. Also, any retailer that purchases motor fuel or diesel motor fuel during this period upon which such taxes were previously paid and included in the price paid by such retailer are entitled to a refund or credit of such taxes. Further, localities would have the option to cap the price their applicable local sales and use tax rate is imposed on at $4 per gallon.

Middle-class tax cut. The budget accelerates the existing middle-class tax cut. Specifically, for taxpayers in the affected income brackets, lower rates previously scheduled to apply beginning in tax year 2025 have been moved forward to tax year 2023. Alternative tax table benefit recapture provisions are also included for certain taxpayers.

Tax credits for farmers. For eligible farmers, the budget increases the investment tax credit to 20% of the investment credit base for property principally used in the production of goods by farming, agriculture, horticulture, floriculture, or viticulture. This applies to property placed in service on or after April 1, 2022. The budget also increases the farm workforce retention credit from $600 to $1,200 per eligible employee and extends the credit for an additional year through tax year 2025. Further, the budget creates a farm employer overtime credit, applicable to taxable years beginning on or after Jan. 1, 2022.

Small business relief. The budget expands the small business tax relief subtraction modification under the personal income tax for taxable years beginning on or after Jan. 1, 2022. Specifically, the subtraction is increased from 5 to 15% of the net business or net farm income included in the taxpayer’s federal adjusted gross income from the small business. In addition, the definition of a “small business” is expanded to include certain pass-through entities.

Student loan forgiveness. A subtraction modification is created for the amount of any student loan forgiveness award made by New York, to the extent included in federal adjusted gross income. The subtraction applies to tax years beginning on or after Jan. 1, 2022.

COVID-19 capital costs tax credit program. The budget creates a refundable tax relief program targeting COVID-19-related expenses for small businesses, thereby providing up to $250 million in additional relief. Eligible COVID-19-related capital investments include but are not limited to: costs associated with expanding space to accommodate social distancing; HVAC equipment; expenses related to outdoor space expansions; and machinery and equipment to facilitate contactless sales. The credit amount is 50% of the applicant’s qualifying costs, up to $25,000. The credit is available for qualifying capital costs incurred from Jan. 1, 2021, through Dec. 31, 2022.

Homeowner tax rebate credit. The budget includes a homeowner tax rebate credit for eligible low- and middle-income households, as well as eligible senior households. Under the program, basic School Tax Relief (STAR) exemption and credit beneficiaries with incomes below $250,000 and Enhanced STAR recipients are eligible for the rebate, with the benefit equal to a percentage of the homeowners’ existing STAR benefit.

Extended and revised credits. A number of existing credits are extended, expanded, and/or revised, including: the New York City musical and theatrical production credit; the hire-a-vet credit; the low-income housing credit; the clean heating fuel credit; the credit for companies providing transportation to individuals with disabilities; the empire state film production credit; the New York youth jobs program credit; the empire state apprenticeship tax credit; the alternative fuels and electric vehicle recharging property credit; the workers with disabilities tax credit; the earned income tax credit; and the restaurant return-to-work credit.

Heating oil conversion credit. The budget provides a refundable tax credit for the costs incurred by taxpayers to convert from grade No. 6 heating oil usage to biodiesel fuel or a geothermal system. The credit, which is allowed for 50% of the conversion costs, applies to costs paid on or after Jan. 1, 2022, and before July 1, 2023. The credit can’t exceed $500,000 per facility.

Geothermal energy systems credit. A new credit is created for the purchase and installation of geothermal energy systems, applicable to taxable years commencing on and after Jan. 1, 2022.

New York City child care credit. The budget establishes a child care credit against certain New York City business income taxes for taxpayers that create or expand child care. The credit is available to be applied for the tax year beginning between Jan. 1, 2023, and Dec. 31, 2023, and to the two tax years immediately following the initial tax year.

Supplemental child credit and EITC. The budget provides for a supplemental empire state child credit, a supplemental earned income tax credit, and a supplemental enhanced earned income tax credit.

Digital gaming media production credit. An empire state digital gaming media production credit is created, applicable to taxable years beginning on and after Jan. 1, 2023, and before Jan. 1, 2028. The credit is generally 25% of qualified digital gaming media production costs.

Cannabis deduction. Subtraction modifications are allowed for the amount of any federal deduction disallowed under IRC Sec. 280E related to the production and distribution of adult-use cannabis products, applicable to taxable years beginning on and after Jan. 1, 2022.

Remote work during pandemic. The budget clarifies that certain work performed remotely due to COVID-19 qualifies for certain tax credit programs.

Pass-through entity tax. The budget includes provisions regarding the pass-through entity tax for electing resident S corporations and electing standard S corporations. In addition, applicable to taxable years beginning on or after Jan. 1, 2023, a city pass-through entity tax is established for electing city partnerships and electing city resident S corporations.

Financial institution data match. Under the financial institution data match program, the definition of “financial institution” is expanded to include virtual currency businesses.

Creation or expansion of child care centers. Applicable to tax years beginning on and after July 1, 2023, an abatement of real property taxes is provided for the creation or expansion of child care centers in certain eligible buildings in New York City. Specifically, the property tax abatement is provided to an eligible building in which construction, conversion, alteration, or improvement that is completed on or after April 1, 2022, has resulted in the creation of a premises of a child care center or in an increase in the maximum number of children allowed on the premises of an existing child care center when such center is in operation, as such number is specified in the permit issued by the Department of Health and Mental Hygiene to operate such center. Only one such abatement may be granted to any eligible building. “Eligible building” means a class one, class two, or class four property, located within a city having a population of 1 million or more. However, for any such property held in the condominium form of ownership, “eligible building” means a tax lot in such property. “Child care center” means a child care program for which a permit to operate such program has been issued by the Department of Health and Mental Hygiene pursuant to the health code of the city.

In addition, an enhanced tax abatement is provided to an eligible building that is located within a childcare desert. “Child care desert” means a census tract in a city having a population of 1 million or more where, at the time of an application for tax abatement, there are three or more children under five years of age for each available child care slot, or where there are no available child care slots, as of the most recently published determinations by the Office of Children and Family services.

Food and drinks sold through vending machines. The sales and use tax exemption for certain food and drinks sold through vending machines is extended from May 31, 2022, to May 31, 2023.

Tugboats and towboats. Effective Sept. 1, 2022, motor fuel, diesel motor fuel, or residual petroleum products used by tugboats and towboats are exempt from the petroleum business tax. In addition, tugboats and towboats are allowed to apply for reimbursement where the tax has already been paid. This reimbursement may be claimed only where:

• Any petroleum business tax has been paid with respect to such gallonage and the entire amount of such tax has been absorbed by such purchaser.
• Such tugboat or towboat possesses satisfactory documentary proof evidencing the absorption by it of the entire amount of such tax.

STAR exemption refunds. The STAR property tax exemption program is amended by allowing the Department of Taxation and Finance to send good cause refund checks directly to the homeowner. Specifically, if the assessment roll can’t be corrected in time for the STAR exemption to appear on the applicant’s school tax bill, the department is authorized to remit directly to the applicant the tax savings that the STAR exemption would have yielded if it had appeared on the applicant’s tax bill. The amounts so payable must be paid from the account established for the payment of STAR benefits to late registrants.

Telecommunications assessment ceiling program. The property tax assessment ceilings for local public utility mass real property is extended for four years, to Jan. 1, 2027. In addition, a local assessing unit can choose to have the challenge against its value consolidated with the challenge to the state’s ceiling value for the same property. If the local assessing unit preferred to keep the proceedings separate, it would be permitted to introduce the state’s ceiling value and would be entitled to request and make use of the company’s inventory data as well.

Solar and wind energy systems valuations. The bill clarifies how to challenge property tax assessments based on the Department of Taxation and Finance’s solar and wind valuation model. Specifically, complaints with respect to assessments for solar and wind energy systems are governed by the following provisions:

• Upon request, the assessor must give the property owner a copy of the inputs that the assessor entered into the appraisal model when valuing the property.
• The property owner may advise the assessor of any alleged errors to the appraisal model inputs believed to have been made by the assessor and may provide information to the assessor showing why a change should be made.
• If the property owner provides such information to the assessor prior to the filing of the tentative assessment roll, the assessor may make such adjustments to the appraisal model inputs as they deem warranted based upon the information provided by the property owner and may recalculate the property value by entering the adjusted inputs into the appraisal model.
• If dissatisfied with the assessed value appearing on the tentative assessment roll, the property owner may file a complaint with the board of assessment review. However, the grounds for review of an assessment determined under this section are limited to the accuracy of the appraisal model inputs made by the assessor.
• Actions or proceedings that challenge the validity and accuracy of the appraisal model or discount rates may not be commenced against assessing units. Such challenges may only be brought by commencing an action against the commissioner in the Third Department of the Appellate Division of the Supreme Court.

Ch. 59 (S.B. 8009), Laws 2022, effective April 9, 2022, or as noted; Press Releases, New York Governor’s Office, April 9, 2022.

Ohio

Sales and use tax: Exemption denied as equipment not used directly in production process

A taxpayer’s purchase of equipment used in hydraulic fracturing was not exempt from Ohio sales and use tax as the equipment was not used directly in the production of crude oil and natural gas and instead were adjuncts to the drilling process. Generally, the purchase of equipment used directly in the production of crude oil and natural gas is exempt from sales tax.

In this matter, subsequent to a retroactive amendment to the applicable statute, the District Court of Appeals determined that the amended statute applied to the present appeal and remanded the matter to the Board of Tax Appeals (board) to reassess the equipment at issue. The taxpayer argued that all the equipment at issue was used in and during the production of crude oil and natural gas through the process of hydraulic fracturing. However, the Tax Commissioner (commissioner) maintained that the equipment was not exempt and that the modified language of the statute did not remove the requirement that the equipment must be used “directly” in the production of crude oil and natural gas. The commissioner further asserted that much of the equipment was expressly excluded by the statute.

Upon review, the board noted that to qualify for the exemption each item must be used directly for providing reservoir stimulation, hydraulic fracturing, or acidizing services, and not be included in the exclusions listed in the statue. That was not the case in the instant matter. Accordingly, the final determination was affirmed.

Stingray Pressure Pumping, LLC v. Jeffrey A. McClain, Tax Commissioner of Ohio, Ohio Board of Tax Appeals, No. 2015-1465 and 2015-1823, Feb. 25, 2022.

Sales and use tax: Bank’s purchase of computerized services qualified as automatic data processing

The Ohio Tax Commissioner’s denial of the taxpayer’s sales tax refund relating to its purchase of computerized services was upheld in part and remanded for further proceedings, as the court failed to apply the true object test. The taxpayer, a bank, purchased computerized services that maintained the accounting system and services on a real-time basis. It claimed that these services were exempt as accounting services and as customization of software.

The service provider did not provide nontaxable personal or professional services, as they did not involve accounting-related services performed by individuals. Furthermore, the services did not qualify as professional accounting services, as the service provider lacked the necessary legal authority. Therefore, the automatic data processing (ADP) and electronic information services (EIS) provided by the service provider were taxable sales.

However, the court erred in treating the customization of software claim as a claim for exemption. The taxpayer obtained modifications to its software as well as ADP and EIS. As such, this was a mixed transaction that required the application of the true object test. On remand, the court must determine whether the true object of the transaction was the ADP and EIS, or the customization of the taxpayer’s software.

Cincinnati Federal Savings & Loan Co. v. McClain, Supreme Court of Ohio, No. 2022-Ohio-725, March 15, 2022.

Oregon

Corporate income tax: Information on pass-through entity elective tax discussed

For tax years beginning on or after Jan. 1, 2022, entities taxed as S corporations and partnerships may elect annually to be subject to the pass-through entity - elective tax (PTE-E) tax at a rate of 9% on the first $250,000 of distributive proceeds and 9.9% on any amount exceeding $250,000.

In response to the $10,000 cap on the federal individual state and local tax (SALT) deduction in the 2017 Tax Cuts and Jobs Act, Oregon established PTE-E, a business alternative income tax.

The PTE-E tax is effective for tax years beginning on or before Jan. 1, 2022, and before Jan. 1, 2024. Qualifying members of an electing PTE are eligible for a refundable credit equal to 100% of the member’s distributive share of the PTE-E tax paid.

ReveNews, Oregon Department of Revenue, March 15, 2022.

Utah

Corporate, personal income taxes: Elective pass-through entity tax enacted

Utah has enacted legislation authorizing pass-through entities (other than disregarded entities) to pay a tax on behalf of their individual owners for tax years beginning on or after Jan. 1, 2022, but on or before Dec. 31, 2025. Payment of the tax on or before the last day of the tax year will constitute an irrevocable election to be subject to the tax for the tax year.

What is the amount of tax payable?

Electing entities must pay tax at the individual income tax rate on the sum of:

• Income attributed to resident individual owners.
• Business income and nonbusiness income derived from or connected with Utah sources and attributed to nonresident individual owners.

How do individual owners treat the tax paid?

Individuals must add to their adjusted gross income the amount of the tax paid (and any substantially similar tax paid to another state) on income attributed to them. They may then claim a nonrefundable income tax credit equal to the amount of the tax paid by the pass-through entity. They may carry forward any amount of tax credit that exceeds the taxed pass-through entity’s tax liability for the tax year to the next five tax years. They may not carry back any excess tax credit.

What are the reporting and payment requirements?

Electing entities must notify their owners of the election and provide statements to the owners indicating the amount of tax paid on income attributable to the owners. They must also electronically file a Utah Schedule K-1 (or substantially similar form) with the State Tax Commission for each owner and include that form with their tax returns.

They must remit the tax on or before the last day of their tax year. They will be subject to a penalty if they report the tax paid on a Utah Schedule K-1 but fail to pay the tax.

H.B. 444, Laws 2022, effective March 23, 2022, and operative as noted.

Virginia

Corporate, personal income taxes: Preliminary guidance issued on elective pass-through entity tax

Virginia issued a tax bulletin discussing the recently enacted elective pass-through entity (PTE) tax, including the impact on 2021 income tax returns. Qualifying PTEs will not be able to make an election or pay the new entity-level tax on taxable year 2021 returns by the original or extended due date. Similarly, owners of a qualifying PTE will not initially be able to claim the refundable income tax credit allowed by this legislation on their taxable year 2021 return by the original or extended due date. Instead, qualifying PTEs and their owners should file their taxable year 2021 returns and make any required tax payments as they normally would by the applicable due dates under existing law in order to avoid penalties and interest.

Before Oct. 15, 2023, the Department of Taxation will publish guidelines on how to make the election retroactively for taxable year 2021. A qualifying PTE will then be permitted to make an election and pay the entity-level tax for taxable year 2021 according to the published guidelines. In addition, owners of a qualifying PTE will be allowed to claim the refundable income tax credit for taxable year 2021 under the guidelines. The guidelines will also address the implementation of the legislation for taxable years 2022 through 2025.

Credit for taxes paid to other states. The legislation also allows taxpayers to claim a credit on their individual income tax return for certain taxes paid by a PTE under another state’s substantially similar PTE tax structure for taxable years 2021 through 2025. Unlike the new elective PTE tax, implementation of this provision is not delayed. Therefore, taxpayers can claim a credit on their taxable year 2021 individual income tax returns for taxes paid by the PTE under another state’s substantially similar PTE tax structure, in proportion to their ownership in the PTE. Taxpayers who have already filed a taxable year 2021 Virginia income tax return but need to make an adjustment can file an amended return.

Tax Bulletin 22-6, Virginia Department of Taxation, April 15, 2022.