The California Court of Appeals ruled on June 13 that nonresident shareholders of flow-through S corporations are subject to California tax on their pro-rata share of intangible income on the sale of shares in a subsidiary. The ruling is another example of states’ initiatives to collect taxes from out-of-state businesses conducting operations in their states.

The court ruled on a particular entity, or goodwill, that had acquired a business located in California. The nonresident shareholders argued that the income from the entity should be treated as intangible income sourced to the state of their domiciles under personal income tax law. But the court ruled that even if the personal income tax law applied, the income would still be taxable by California because the goodwill had acquired a location there, that the management and disposition of the intangible property was an integral part of the goodwill’s operation, and that the intangible income of a multi-state operation must be apportioned.

For more information on how rulings and legislation related to state and local taxes might impact your business, contact us at hbksalt@hbkcpa.com or visit our website at https://hbkcpa.com/client-services/tax/state-and-local-tax-consulting/

Ohio pass-through entities, now have a way around the $10,000 limit on the deductibility of state and local taxes set by the Tax Cuts and Jobs Act of 2017. Under Ohio’s SB 246, pass-through entities can choose to be taxed at the “entity level,” at 5 percent of 2022 taxable business income, then at 3 percent, the current rate, in subsequent years.

Some of the provisions of the legislation for entities choosing the SALT cap workaround:

• Refundable tax credits will be available to the entity’s owners equal to their proportionate share of the tax.
• Entities must elect the entity level tax separately and irrevocably each tax year.
• Entities paying the entity tax are not subject to current Ohio withholding requirements.

The bill, which was passed unanimously in the Ohio Senate in March, passed by a vote of 88 to 2 in the House on June 1. With its enactment, Ohio joins more than two dozen other states that have voted in legislation to provide a workaround of the SALT deduction cap. Proponents of the legislation in Ohio had argued that the cap left Ohio businesses less competitive with companies in states where workaround legislation had been passed.

For more information on how rulings and legislation related to state and local taxes might impact your business, contact us at hbksalt@hbkcpa.com or visit our website at https://hbkcpa.com/client-services/tax/state-and-local-tax-consulting/

Retailers making sales in Colorado face a new administrative challenge (in a state well-known for its administrative challenges) beginning July 1, 2022. The state will begin imposing a $0.27 fee on every retail delivery made by motor vehicle to a destination in Colorado. The fee will apply when at least one item is subject to sales or use tax and the delivery is mailed, shipped, or delivered by motor vehicle. Wholesale sales or sales of exempt goods are not subject to the retail delivery fee.

The seller is responsible for collecting and remitting the retail delivery fee even when delivery is made by a third party. In addition, the retail delivery fee must be separately stated on the customer’s invoice. The state has created a Retail Delivery Fee Return (DR 1786) that is due on the same frequency as the retailer’s Colorado sales tax return. Retailers currently registered for sales tax will automatically be enrolled in a retailer delivery fee account.

Colorado’s retail delivery fee applies to anyone making retail sales in the state without regard to whether the seller is located in-state or out-of-state. The retail delivery fee will require retailers to modify their sales systems and/or invoicing to capture the $0.27 fee when sales are delivered to Colorado customers. The state has rarely shown concern for the burdens it imposes on retailers. The retail delivery fee will only enhance the state’s reputation as a difficult place to do business.

For more information on the retail delivery fee, visit Colorado’s website here.

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

The Florida Department of Revenue has a dedicated webpage addressing each of the nine sales tax holidays and temporary exemptions scheduled to begin in 2022. The list of tax holidays and exemptions, along with the applicable periods includes:

• Children’s Books – May 14, 2022 through August 14, 2022
• Disaster Preparedness – May 28, 2022 through June 10, 2022
• Freedom Week – July 1, 2022 through July 7, 2022
• Energy STAR Appliances – July 1, 2022 through June 30, 2023
• Children’s Diapers – July 1, 2022 through June 30, 2023
• Baby and Toddler Clothing – July 1, 2022 through June 30, 2023
• Home Hardening – July 1, 2022 through June 30, 2024
• Back to School – July 25 through August 7, 2022
• Tool Time – September 3, 2022 through September 9, 2022
• Motor Fuel – October 1, 2022 through October 31, 2022

These sales tax holidays and exemption events are a great opportunity for consumers to save money. They allow purchases of defined items exempt from tax so consumers will want to plan their purchases in conjunction with the tax holidays and temporary exemptions.

The tax holidays and exemptions should drive additional sales for retailers, but retailers need to ensure that their point-of-sale systems are properly setup to administer the exemptions. Many of the exemptions are limited by the cost of the item, for example, during Freedom Week there is an exemption on the first $5 of bait or fishing tackle. The exemptions apply to in-store and online sales so it is imperative that even remote sellers apply the exemptions properly to avoid customer service issues.

The Department’s website contains details on each of the tax holidays and temporary exemptions, including lists of qualifying items and information specific to consumers and retailers. The Department’s webpage can be accessed here.

If you have questions any of Florida’s sales tax holidays or temporary exemptions, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

The Interstate Income Act of 1959 (P.L. 86-272) protects an out-of-state business or representative from a state’s net income tax if the only activity in the state is soliciting orders for sales of tangible personal property and if the orders are reviewed and approved out of state and the property is delivered from outside the state.

On February 14, 2022, California became the first state to update its interpretation of P.L. 86-272, adopting the view of the Multistate Tax Commission (MTC) that an out-of-state person or business could lose protection under PL 86-272 due to internet-based activities with in-state customers. The MTC’s guidance contends that a customer using a business’s website in the customer’s home state is an activity of the business in the customer’s state.

On Friday, April 29, the New York Department of Taxation and Finance proposed guidance on P.L. 86-272 that would make it the second state to conform to the MTC interpretation. Like the MTC and California, New York proposes that any activities, including those conducted over the internet, would not be shielded by P.L. 86-272 unless they consist only of solicitation of orders for tangible personal property, or are insignificant. However, also like the MTC and California, posting text or images on a website alone would not trigger taxation.

Opponents of the New York proposal contend that it is inconsistent with the intent of P.L. 86-272. They suggest it incorrect to interpret P.L. 86-272 as supporting taxation of a corporation merely due to residents of a state engaging with a company’s website.

If you have questions on the New York’s legislation or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

On May 9, Philadelphia Mayor Jim Kenney said the city will ask state lawmakers to pass legislation that would allow the city to adopt market-based sourcing for its business income and receipts tax (BIRT). The market-based approach would source receipts to where a customer is located.

Kenney’s statement read, “This change in policy is meant to promote fairness by leveling the playing field for Philadelphia-based service providers with companies based outside of Philadelphia,” noting that it would match the state’s corporate income tax sourcing rules.

According to a city spokesperson, Philadelphia doesn’t currently have a projection for how shifting to market-based sourcing would affect its business income tax collections, but the plan is consistent with city officials’ goals, which include shifting its BIRT tax liabilities and the related tax burden to out-of-city businesses.

The proposal was part of a broader announcement in response to an increase in the aggregate value of property assessments of 21 percent since the previous assessments of 2020 that would hike property tax collections by a projected $460 million over the next five years. The mayor proposed $200 million in property tax relief through a higher homestead exemption and boosting funds for other programs. As well, he suggested a cut in the residential wage tax rate to 3.7% from 3.8398% and the nonresident wage tax rate to 3.44% from its current 3.4481% over the next two years as a means of providing $260 million in tax relief.

If you have questions on the Philadelphia legislation or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

The Ohio Department of Taxation recently issued an alert for its upcoming back-to-school Sales Tax Holiday. This year’s sales tax holiday runs from Friday, August 4th through Sunday, August 6th. Purchases of the following items are exempt during the holiday period:

The Sales Tax Holiday does not apply to items purchased for use in a trade or business.

The Department also maintains a FAQ page related to the sales tax holiday. The FAQs include definitions of clothing, school supplies, and instructional materials as well as answers to other common questions. The Sales Tax Holiday webpage can be viewed here.

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

Legislators in New York have responded to the requests of taxpayers and tax practitioners for an extension to utilize the SALT cap workaround for the tax year 2022. The legislation NY State Senate Bill S8948 (nysenate.gov) extends the election date deadline for the tax year 2022 until September 15, 2022. The extension will provide taxpayers that missed the March 15, 2022 deadline an opportunity to elect S Corporation status for the pass-through entity tax (“PTET”).

The legislation also addresses estimated payments related to PTET for the tax year 2022. Depending on the date of the election, New York will require estimated tax payments to validate the election. Elections made before June 15, 2022, require an estimated payment of 25% of the annual payment. Elections made after June 15, 2022, and before September 15, 2022, require an estimated payment of 50% of the annual payment.

New York’s Governor, Kathy Hochul, is expected to sign the legislation. Please check our website for additional details on the PTET extension update as they become available.

If you have questions on the New York’s legislation or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

The Pennsylvania State House approved three Tax Reform Code bills on Tuesday, April 26: House Bills 1960, 385, and 2277. House Bills 1960 and 385 were amended in the House Appropriations Committee earlier in the day to incorporate additional reform measures. All three bills will have to clear the Senate, which will likely have a say in the final versions.

House Bill 1960 is designed to “lower the Corporate Net Income Tax (CNIT) and provide additional tax relief to job creators,” according to a House release. The legislation would reduce the CNIT tax rate from 9.99 percent to 8.99 percent for tax years 2023 and thereafter and provides a trigger mechanism to further reduce the tax rate to 7.99 percent by tax year 2025 based on the General Fund budget surplus for the fiscal years 2022-23 and 2023-24. The amount of the budget surplus will be as certified by the budget secretary and confirmed by the Independent Fiscal Office (IFO). The bill also includes specific target thresholds allowing for greater CNIT rate reductions and provides a trigger mechanism to increase the current net operating loss (NOL) deduction cap of 40 percent of taxable income based on the General Fund budget surplus for the fiscal years 2022-23 and 2023-24. The bill passed the House by a vote of 195-8 and now goes to the Senate for consideration.

House Bill 385 applies to Pennsylvania’s personal income tax. It would allow for the tax deferral of like-kind exchanges as currently permitted under Section 1031 of the Internal Revenue Code. Under federal rules, the recognition of a gain or loss on the disposition of property can be deferred when the property was used for productive use in a trade or business or for investment and the property is exchanged for another property of a like-kind to be held for productive use in a trade or business or for investment. Previously, Act 1 of 2021 amended the Fiscal Code to allow forgiveness of Paycheck Protection Program Loans and Economic Impact Payments (stimulus checks) received by individuals to be excluded from personal income tax. House Bill 385 repeals these provisions in the Fiscal Code under Section 104-A and re-codifies them in the Tax Reform Code. The bill passed the House unanimously by a vote of 203-0 and now goes to the Senate for consideration.

House Bill 2277 eliminates the requirement for licensees with tax liability for the third quarter of the preceding year equal to or exceeding $25,000 to file a return and remit accelerated sales tax prepayments. The bill also passed the House unanimously and is headed to the Senate.

The tax breaks follow a pattern emerging across America, apparently connected to the recovery from the pandemic, which has left many states “flush with cash,” noted a CBS report. “Across the country, state and local government tax revenue jumped 42% in the second quarter of 2021 compared with the same period a year earlier, according to a December analysis from the Urban Institute. Taxes have been bolstered by the economic recovery from the pandemic, with corporate taxes rebounding. Workers have regained jobs, helping to boost income taxes. And consumers are spending more, helping to bolster sales tax revenue.”

On Monday, April 18, 2022, the U.S. Supreme Court decided against hearing a case brought by New York, Connecticut, Maryland, and New Jersey that challenged the state and local tax (SALT) cap on federal deductions. The SALT cap was a major component of the Tax Cuts and Jobs Act of 2017. The SALT cap limited the state and local tax deduction on federal taxes to $10,000. The impact has been substantial in many high tax states that impose state and local taxes on income and real property (e.g. California, New York, etc.). The court ultimately refused to reconsider the state’s argument on the constitutionality of the SALT cap limit. A lower court ruled in October that the SALT cap limit was within Congress’s authority and that it is not uncommon for the impact of federal laws to vary from state to state and location to location.

The court’s decision is certainly a setback for Democratic states with high state and local taxes. Gov. Kathy Hochul of New York called on Democrats to address the SALT cap, but the issue is highly politicized with many legislators arguing the cap is largely beneficial to wealthy taxpayers. The SALT cap issue has led many states to create workarounds allowing pass-through entities to take an unlimited SALT deduction at the entity level. This workaround is expected to continue given the court’s decision on Monday.

If you have questions on the court’s decision or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.