Minnesota will become the second state, joining Colorado, to impose a retail delivery fee on retail delivery transactions in Minnesota. The 50-cent fee is effective July 1, 2024 and applies to retail delivery transactions of $100 or more. The fee does not apply to products or purchasers generally exempt from sales tax with the notable exception of clothing.

The new fee is modeled after Colorado’s retail delivery fee, but Minnesota attempted to learn from the issues Colorado experienced with their fee. Some of the key points on the administration of the fee and the requirements imposed on retailers include:

Retailers are allowed to pay the fee on behalf of customers to simplify administration and reporting.

Sellers with retail sales of less than $1mm are exempt from collecting the fee.

Retailers are required to separately list the fee on their invoices or receipts.

The invoice/receipt must state that the fee is designated for road improvements.

Minnesota’s Department of Revenue has not formalized the filing process for the fee as of this writing. The emergence of retail delivery fees is troublesome for retailers as they are yet another layer of tax and fee to administer and report. Invoicing and order systems may require programming to address the retail delivery fee as well as the exemptions and exceptions.

If you have questions on Minnesota’s new retail delivery fee or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

Florida Governor Ron DeSantis signed an omnibus tax bill, on May 25, 2023, that includes several sales tax changes and exemptions. The sales tax relief for consumers is part of a broader tax relief bill touted to provide over $2 billion in tax relief during the fiscal year. We reported previously on many of the exemptions here . The legislation establishes a slew of sales tax holidays in 2023 and 2024 including:

School Supplies – July 24, 2023 through August 6, 2023 and January 1, 2024 through January 14, 2024

Disaster Preparedness – May 27, 2023 through June 9, 2023 and August 26, 2023 through September 8, 2023

Freedom Summer – May 29, 2023 through September 4, 2023

Tool Time – September 2, 2023 through September 8, 2023

Energy Star – July 1, 2023 through June 30, 2024

Gas Stoves and Cooktops – July 1, 2023 through June 30, 2024

Detailed information including lists of items that qualify for each tax holiday can be found here.

Permanent sales tax exemptions, effective July 1, 2023, are part of the tax bill and include the following:

Baby and toddler products

Diapers and incontinence products

Oral hygiene products

Machinery and equipment to produce renewable natural gas

Certain agricultural fencing

Firearm safety devices

Services provided by small investigative agencies

Lastly, the tax bill includes relief on commercial leases or rentals by reducing the applicable state tax rate to 4.5% (from 5.5%) on December 1, 2023.

If you have questions on Florida’s new tax relief or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

New North Carolina legislation, S.B. 174, which was signed into law by Governor Roy Cooper on April 3, includes extensive changes for pass-through entities (PTEs) as well as for corporate and personal income taxpayers.

IRC Conformity Update:

S.B. 174 updates North Carolina’s corporate and individual income tax conformity date from April 1, 2021, to January 1, 2023.

PTEs

The changes for PTEs are both forward-looking and retroactive for tax years beginning on or after January 1, 2022.

Retroactive changes:

S corporation and Partnership Owners:

The updated provision now allows partnerships and S corporations to become permissible owners of a PTE electing partnership. Previously, only partnerships that were fully owned by individuals, estates, trusts, and certain tax-exempt organizations were eligible to make the North Carolina PTE tax election.

Tiered partnerships are now eligible to make the election. However, for the purposes of PTE tax, the partnership’s calculation of North Carolina taxable income cannot include the distributive share of the pass-through partner. Rather, according to N.C. Gen. Stat. § 105-154(d), the partnership must transfer the distributive share to the pass-through partner. This modification takes effect for taxable years starting on or after January 1, 2022.

Credit for Taxes Paid to Another State:

The Act amends N.C. Gen. Stat. § 105-153.9 to allow North Carolina resident partners and S corporation shareholders that don’t pay the entity-level PTE tax in North Carolina a credit for PTE tax payments made in other states. This change is effective for taxable years beginning on or after January 1, 2022.

Updates for Tax Year 2023 and Beyond:

Resident Partners and Shareholders: Starting from January 1, 2023, the Act will exclude the resident partner or shareholder’s portion of the PTE’s income or loss that is not related to North Carolina from the calculation of North Carolina taxable income for the PTE. The resident partners and shareholders can deduct their portion of the PTE’s income, which is subject to PTE tax in another state and included in their adjusted gross income. However, they won’t receive a tax credit for taxes paid to other states, and the credit that was previously available to resident shareholders of taxed S corporations for taxes paid to other states is now abolished.

Multistate Sole Proprietorships: The North Carolina Department of Revenue’s current treatment of multistate sole proprietorship is confirmed by the Act, which requires these businesses to allocate and apportion in the same way as partnerships and S corporations

Binding Election: Beginning on or after January 1, 2023, the PTE tax election is an annual election for the tax year covered by the return and may not be revoked after the return is filed.

Administrative and Miscellaneous Provisions

Under S.B. 174, a presidentially declared disaster can result in the waiver of penalties for failure to timely file an informational return.

Bad Check/EFT Penalty: The new law clarifies that bad check or electronic funds transfer penalties apply to garnishees who issue such payments and allows taxpayers to request review of proposed assessments or denials of refunds using forms other than Form NC-242, provided they include a written statement clearly indicating their request for review.

Statute of Limitation on Collections: North Carolina now has a 10-year limitations period for collecting delinquent taxes, starting from the date the respective taxes become collectible by the DOR.”

If you have questions on State and Local Tax matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

In the era of remote work, New York State has held to its long-standing controversial position that for an employee whose assigned or primary office is in New York, any normal workday spent working at a home office will be treated as a day worked in New York—and income earned for that day subject to New York State income taxes. The rule applies unless the home office meets requirements for a “bona fide employer home office,” a threshold considered extremely difficult to meet.

That so-called “convenience of the employer” rule is being challenged for a second time by Edward Zelinsky, a tax law professor and nonresident of New York State who teaches at Yeshiva University’s Cardozo School of Law, a New York-based institution. He has filed petitions with the New York Division of Tax Appeals contending that the days spent working outside the State should not be taxable to New York. Zelinsky previously challenged the rule unsuccessfully in 2003.

While the challenge is to New York’s rule, the impact could be broader, as other states, including Arkansas, Delaware, Nebraska, Pennsylvania, and to a limited extent, Connecticut, have similar laws. As well, hybrid working arrangements, including working remotely from home, have become more popular and prevalent since the height of the COVID-19 pandemic, and many employees and their companies have implemented technology to make working remotely more efficient and convenient. As such, tax and legal professionals are warning employers, particularly in states with a convenience of the employer rule, to keep an eye on the litigation as it progresses.

If you have questions on State and Local Tax matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

Quad Graphics Inc. has filed a petition for review with the U.S. Supreme Court (SCOTUS) relative to a recent decision in a sales tax case by the North Carolina Supreme Court. The North Carolina Supreme Court upheld a sales tax assessment of $3.24 million, by a 6-1 vote, issued against Quad Graphics by the North Carolina Department of Revenue (“NC DOR”) on sales that took place outside North Carolina.

Quad Graphics is a seller of printed materials based in Wisconsin. The NC DOR issued a sales tax assessment on sales made by Quad Graphics between 2009 and 2011 to customers located in North Carolina. Quad Graphics did sell the printed materials to North Carolina customers, but the sales occurred entirely outside the state of North Carolina. Quad Graphics received the orders in Wisconsin, delivered the goods to common carriers at their shipping dock (outside North Carolina), and title and risk of loss passed to the customer at this point (also outside of North Carolina).

The North Carolina Supreme Court overturned the decision of a lower Court decision that the sales tax assessment was unconstitutional under the Commerce Clause. Both Courts cited McLeod v. J. E. Dilworth Co., 322 U.S. 327 (1944) in their reasoning. The Dilworth case determined that “a state may not tax sales that occur beyond its borders, even when the goods are purchased for delivery into the taxing state.” There is a notable distinction between sales tax and use tax. A sales tax applies to the sale of goods while the use tax applies to the use of goods (potentially purchased out-of-state). Therefore, a state may tax the in-state use of goods but is not entitled to tax the out-of-state sale of goods. The North Carolina Supreme Court concluded that the state could subject goods purchased for delivery into North Carolina to its sales tax, effectively overruling Dilworth.

The question before the SCOTUS is whether Dilworth remains good law. Quad Graphics argued in its petition that allowing Courts to disregard precedent “would invite anarchy”. They also pointed to potential uncertainty for taxpayers and the risk of significant tax assessments all for (a taxpayer) following precedents established by SCOTUS. The decision by the North Carolina Supreme Court is troublesome for taxpayers as it opens the door for other states to tax transactions occurring outside their borders. Please check our website for updates on this case and whether it is accepted for review by SCOTUS.

If you have questions on sales tax, use tax or other SALT matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

The state of Indiana recently joined 29 other states and New York City in offering an optional pass-through entity tax (PTET) election. The tax is retroactive to January 1, 2022.

In essence, the bill authorizes a partnership or S corporation to make an election to pay tax at the entity level based on each owner’s aggregate share of adjusted gross income. The tax rate is the same as the individual’s income tax rate for that tax year.

The law’s provisions include a refundable tax credit for the amount of tax paid with regard to the owner’s share, which, according to the legislation, “would effectively offset any impact of payment of tax at the entity level on the entity owners.” It also provides for a credit for pass-through entity taxes imposed by and paid to other states.

A few additional notes about the law:

Indiana resident pass-through entity owners can elect that ALL of their income from the entity will be subjected to Indiana tax at the entity level.

Owners who elect the entity-level tax can claim the credit for the PTET paid on their behalf on their individual Indiana returns.

The definition of credit for taxes paid is expanded beyond other states’ withholding tax or composite tax to include PTET paid to other states. The provision opens the door for Indiana resident pass-through entity owners to make PTET elections in other states.

Entities can make the election for the 2022 tax year after March 21, 2023, but before August 31, 2024.

The $10,000 state tax expense limitation for federal tax purposes does not apply to state taxes expensed by the pass-through entity.

The election option is not available to C corporations, trusts, sole proprietorships, or limited liability companies taxed as C corporations for federal income tax purposes.

The Indiana Department of Revenue is developing details on how to make the election. It may be necessary to file an Indiana state extension if you intend to take advantage of the legislation.

Here are other related articles for Ohio and New York for Pass-Through Entities.

If you have questions on State and Local Tax matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

The Pennsylvania Supreme Court recently issued its greatly anticipated decision in Synthes v. Commonwealth of Pennsylvania which addressed different interpretations of Pennsylvania’s cost of performance (“COP”) statute for sourcing revenue. Understanding how taxes will be sourced for apportionment purposes for companies doing business in multiple states can be confusing. Prior to 2014, Pennsylvania required the sale of services to be sourced to the location of the income producing activity. Whenever the income producing activity occurred within and without the state, receipts were required to be sourced to where the greater of the income producing activity occurred. In 2014, Pennsylvania transitioned to market-based sourcing rules for services- but retained COP sourcing for the sale of intangibles.

In Pennsylvania, the interpretation of COP for revenue sourcing purposes was an ongoing debate. The argument was the substance of differing stances by Pennsylvania’s Department of Revenue and the Office of the Attorney General and reached the state’s Supreme Court via Synthes v. Commonwealth of Pennsylvania.

Synthes is a Pennsylvania-based company that had filed for its 2011 tax year based on a standard understanding of Cost of Performance (COP) for the sale of its services, thereby sourcing its sales to Pennsylvania. But it sought a refund based on its intent to have the DOR’s market-based sourcing interpretation of COP applied, meaning that it would be taxed based on where it provided its services, that is, the states where its services were being bought and used. The Court sided with the DOR, and therefore with Synthes, citing in part “the sourcing of sales of services to the point of delivery to the customer.”

In its February 22 ruling, the court found that, “To determine the Pennsylvania income tax for a corporation doing business in multiple states, the Tax Reform Code for the 2011 tax year employed an ‘apportionment factor,’ which in turn derives from three other factors: sales, property, and payroll. 72 P.S. § 7401(3)2.(a)(9)(A). As is relevant to the case at bar, the ‘sales factor’ is the ratio of ‘total sales of the taxpayer in this State’ compared to the ‘total sales of the taxpayer everywhere.’ 72 P.S. § 7401(3)2.(a)(15). Accordingly, the Tax Reform Code necessitates categorization of which sales are ‘in this State,’ or in the parlance of the parties, which sales should be ‘sourced’ to Pennsylvania.”

In many states, market-based has replaced COP sourcing in determining tax liability. States often cite efficiency as a rationale. While COP receipts source the income from the location of performed services, such as the home base of the seller, the market-based method can source receipts based on the location of the customers receiving the services. It is important to note that the COP language remains applicable as it relates to the sourcing of intangibles prior to 01/01/2023. Despite the legislative change for 2014, there may be refund and tax savings opportunities for corporate taxpayers with intangible income in addition to pass-through entity nonresident owners living in no tax states.

If you have questions, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

As we previously reported here and here, Ohio passed legislation allowing refund claims for 2021 to employees that worked from home but paid municipal income tax to a jurisdiction associated with their employer’s office (often at a higher rate). However, refunds for 2020 have been on hold due to pending litigation before the Ohio Supreme Court.

The Court will now hear arguments on March 1, 2023 in Schaad v. City of Cincinnati. The issue in the case is whether the taxpayer is entitled to a refund of municipal income taxes paid to Cincinnati while working outside the city. The Supreme Court of Ohio accepted the case last summer. As background, in the beginning of the pandemic in 2020, Ohio passed a rule that work done from home by an employee was deemed work performed at the employer’s location for municipal income tax purposes. The Supreme Court’s decision in this case is expected to resolve the issues surrounding tax year 2020 and clarify whether refunds will be permitted. The Court’s decision will likely not be issued until spring or summer of this year.

If you have questions on Ohio municipal income taxes or other SALT matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

South Dakota, the state that ushered in the economic nexus era for sales tax with the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., has enacted legislation to drop the transaction count from its remote seller collection threshold. The new law goes into effect on July 1, 2023 and remote sellers will no longer be required to collect and remit the state’s sales tax if they only exceed “200 or more separate transactions” in South Dakota. Remote sellers with $100,000 in gross revenue from sales into South Dakota remain liable for collection of the state’s sales tax.

South Dakota joins a handful of other states in dropping the transaction count threshold which tends to disproportionately impact high-volume, low dollar sellers. For example, a clothing company can easily sell 200 shirts at $20 each into a state thereby triggering economic nexus and its corresponding sales tax obligations. The sales tax obligations create a significant burden on a small business as the $4,000 in receipts (200 shirts x $20) results in a requirement to register for sales tax and file returns in the subject state. Achieving sales tax compliance is rarely as simple as flipping a switch. In the preceding example, the clothing retailer may need to add sales tax software to properly calculate the state and local sales tax based effective rates at the shipping destination. If the state is one of the several that exempt clothing, additional problems arise. Suppose that, in addition to clothing, the company also sells accessories. The retailer may now also need software to properly tax its products in the target state based on category (clothing = exempt, accessories = taxable).

South Dakota’s law change will not likely impact many of our clients, but it does illustrate the sales tax compliance considerations and complexities associated with economic nexus. State tax law changes, such as South Dakota’s, offer a minor respite to smaller business from the onslaught of economic nexus issues facing remote sellers. If your company has questions on economic nexus or other SALT matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.