Kentucky’s legislature overrode Gov. Andy Beshear’s veto to enact several tax changes. The most significant change is the expansion of sales and use tax to many more services. The state legislature also created a tax amnesty program commencing in the Fall 2022.

The broadening of the state’s sales and use tax base to services, not previously subject to tax, is noteworthy as it will impact many taxpayers operating in Kentucky. The state has gradually increased the number of services it taxes since 2018 when only a handful of services were subject to tax. The state added several services in 2018 to its list of taxable services, but this current round of additions is the most substantial yet. A partial list of the newly taxable services in Kentucky includes photography, marketing, executive recruitment, web site hosting and design, security system monitoring, rental of space for meetings, entertainment, weddings, etc., household moving, and prewritten computer software access (SaaS). The complete listing of services subject to sales tax in Kentucky may be viewed here.

Kentucky will offer a tax amnesty program this year from October 1st through November 29th. The tax amnesty program applies to qualified tax liabilities established between October 1, 2011, and before December 1, 2021. The program applies to taxes, fees, interest, and penalties. Participating taxpayers will have penalty waived and will be responsible for one-half the interest normally due. The tax amnesty program applies to all taxes administered by the Department but does not include ad valorem taxes on real or personal property. The Kentucky Department of Revenue will be releasing more information on its tax amnesty program in the future. Please check the Department’s website or the HBK SALT page for updates.

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

The State of Iowa is making national headlines with tax reform, which includes a double flat tax: a 3.9 percent single-rate individual income tax and a 5.5 percent flat corporate income tax. But the state’s new tax code is also attracting attention for what it doesn’t include: inheritance taxes or retirement income taxes, as well as alternative minimum taxes and some farm rental income taxes. On the chopping block: several tax credits.

According to a March 14 memo from the Tax Foundation, a Washington, D.C.-based think tank that monitors governments’ tax and spending policies, Iowa is “forgoing $1.65 billion a year in revenue by FY 2027, when reforms have fully phased in.” But, based on current revenue forecasts, the memo continued, “state lawmakers believe that this can be accomplished out of future revenue growth without even dipping into a taxpayer relief fund with a balance surging toward $2 billion.”

The reform means that Iowa will leave retirement income from Roth and traditional IRAs untaxed. The new policy “does little to benefit the state’s overall economic competitiveness,” The Tax Foundation claimed. “It may induce more retirees to stay in state, potentially a welcome policy goal in its own right, but that is separate from any goal of promoting economic growth.”

Iowa Gov. Kim Reynolds (R) announced passage of the new tax bill as she addressed the nation in the Republican rebuttal to the President Biden’s first State of the Union address on March 1. “Today, I signed legislation that eliminates Iowa’s tax on retirement income and sets our tax rate at 3.9 percent,” she boasted. “That’s less than half of what it was just four years ago.”

If you have questions about the new regulation, HBK’s SALT practice can assist you. You can contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com.

The Ohio Department of Taxation (“ODT” or “Department”) issued an alert to businesses of the pending deadline to register for centralized collection of Municipal Net Profit Tax. The deadline for registration, through the Ohio Business Gateway, is April 15, 2022, for taxpayers with a taxable year beginning January 1st.

Businesses that register with ODT have the option to file a single return to cover Municipal Net Profit Tax obligations in all municipalities. The centralized collection system is also available for estimated payments. Taxpayers that utilize tax software, for example, CCH Axcess or Prosystems, have the option to file via the IRS Modernized e-File system.

The registration alert from the Ohio Department of Taxation may be viewed here. If you have questions on Ohio’s tax alert or other SALT matters, please contact HBK’s SALT Advisory group at SALT@hbkcpa.com.

Another state, Idaho, has joined the ranks of those states that have adopted single-sales factor and market-based sourcing for taxing multi-state income. Under a single sales factor formula, the share of a corporation’s total profit that a particular state tax would be based solely on the share of the corporation’s nationwide sales occurring in the state. Many states including New Jersey and Pennsylvania require the single sales factor method of apportionment. Market-based sourcing is a method of sourcing revenues from services to a state based on where the benefit of the service is received. Idaho Gov. Brad Little signed H.B. 563 into law Wednesday, March 16th, replacing the state’s cost-of-performance method for taxing multi-state income for sales other than tangible property. The market-based sourcing method assigns the sales revenue from services to the location receiving or benefiting from the services. Idaho had been using a three-factor method to apportion business income, including property, payroll, and double-weighted sales. Proponents of the new legislation contend a single-sales factor with market-based sourcing will simplify the process and create uniformity with other states. The new law applies retroactively to Jan. 1, 2022.

The proper interpretation and application of a state’s apportionment methods can often be complex with substantial financial consequences. In today’s complex multi-state landscape, it’s important to surround yourself with trusted State and Local Tax advisors. If your business has questions about the new regulation, HBK’s SALT practice can assist you. You can contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com.

Effective April 1, 2022, the following jurisdictions in Ohio will increase their sales and use tax rates:

• Coshocton County 7.75% from 7.25%
• Mahoning County 7.50% from 7.25%
• Lucas County and City of Rossford are part of The Toledo Area Regional Transit Authority (TARTA) which enacted 0.50% sales and use tax. The rate in Rossford, Wood County will be 7.25% an increase from 6.75%. The rate in Lucas County increases to 7.75% from 7.25%.

Taxpayers should ensure that the rate changes are accurately reflected in their systems so that customers are charged the appropriate sales tax rate. This may include retailers updating cash registers and point-of-sale software and systems. It is a good practice to review sales on the effective date of the rate change to confirm systems are properly calculating the tax. In addition, businesses need to update their use tax rates in order to capture the rate increases when self-assessing use tax in these jurisdictions. Use tax rates are typically updated in a firm’s accounting software or ERP system.

Additional Ohio sales and use tax rate information can be found here.

I am happy to answer further questions regarding how this increase may affect you or your business. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com.

In the final moments before the March 15 deadline, the New Jersey Division of Taxation announced that it is granting an extension to the original due dates of the Business Alternative Income Tax (“BAIT”). The Division of Taxation is extending the original due date of March 15, 2022, to June 15, 2022. Taxpayers will have until June 15, 2022, to file their 2021 PTE Election, 2021 PTE-100 Tax Return, 2021 PTE-200-T Extension of Time to File, and 2021 revocation forms. In addition, the 2022 estimated payments for the first quarter will be extended from April 15, 2022, to June 15, 2022. Please make sure to consult with your HBK SALT team should you still wish to take advantages of the tax savings available by participating in the NJ BAIT program.

On February 17, 2022, The Pennsylvania Department of Revenue issued Corporate Tax Bulletin 2022-01 providing guidance on the apportionment of income by a taxpayer involved in activities subject to one or more special apportionment formulas.

All states require the apportionment of income for multi-state businesses. Apportionment is the determination of the percentage of a business’s profits that are subject to a given jurisdiction’s corporate income tax or other business taxes. Pennsylvania currently requires businesses to apportion income based on a single sales factor methodology, where only a company’s sales are considered. A specialized apportionment formula is required in Pennsylvania for companies within certain industries. Airlines, pipeline companies, publishing companies, railroads, and trucking companies are a few examples of industries that require a special apportionment formula.

In certain instances, a taxpayer could be positioned in a business that requires special apportionment as well as the regular method of apportionment required by the state. The matter of Buckeye Pipeline Co v Commonwealth presented such a case. Buckeye was a Delaware Corporation that was doing business in Pennsylvania. The company owned a one-percent interest, as the general partner in four limited partnerships. The sole business of these limited partnerships involved the transportation of petroleum products through 3,500 miles of pipeline situated in ten states, which included Pennsylvania. Buckeye provided complete operational management. In Buckeye Pipeline Co v. Commonwealth, the taxpayer requested the use of pipeline apportionment to apportion all its income. The pipeline apportionment method requested by Buckeye resulted in a tax liability that was more than fifty percent less than the method prescribed by the Commonwealth. Pennsylvania countered that 98.6% of the company’s gross receipts were derived from management activities and 1.4% of its gross receipts were derived from pipeline activities. The Commonwealth ultimately adopted a split method of apportionment for similarly situated taxpayers who engage in activities subject to both the standard apportionment formulas as well as one or more of the special apportionment formulas.

The proper interpretation and application of a state’s apportionment methods can often be complex with substantial financial consequences. In today’s complex multi-state landscape, it’s important to surround yourself with trusted State and Local Tax advisors. If your business has questions about the new regulation, HBK’s SALT practice can assist you. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.

Ohio residents that worked from home in 2021 because of the pandemic may be entitled to a refund of municipal income tax. When COVID-19 struck, employees were often forced to work from home instead of their employer’s office (or principal place of work). In 2020, Ohio passed a temporary provision requiring employers to continue withholding municipal income tax from employees based on their office location even though employees were no longer working at the office.

Effective January 1, 2022, Ohio passed a new law allowing employees to obtain refunds for 2021 based on where they worked during the calendar year. However, the law does not address the withholding issue for 2020 due to pending litigation. Read more here.

For 2021, the difference in municipal income tax rates between an employee’s home and office (principal place of work) may result in a refund opportunity for employees that had local tax withheld at a higher rate – which is often the case for employees that work in Columbus or Cleveland or other high-rate cities but live in a lower rate municipality.

The Regional Income Tax Agency (RITA) which administers the local income tax for hundreds of Ohio municipalities has issued guidance on their website for employees seeking refunds – https://ritaohio.com/Individuals/Home/Refunds. The RITA website has an FAQ on refunds that addresses questions of timing and how to handle refunds from a municipality of employment when additional tax is owed to a municipality of residence.

Individual taxpayers should evaluate their work situations and tax withholding in 2020 and 2021 to determine if a refund is warranted. Those with the greatest opportunity for refund will be employees that worked from home in a low or no tax municipality. Refunds for 2020 will not be processed while litigation is pending, but taxpayers need to file refund claims before the statute of limitations expires (three years from the date tax was due/paid). Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.

California will require taxpayers filing a corporation franchise/income tax return, partnership return, or LLC return to disclose whether they have historically filed unclaimed property reports with the State Controller’s Office (SCO). The law passed last summer and is effective January 1, 2022 for 2021 tax returns. The unclaimed property reporting is significant as it will allow the Franchise Tax Board (FTB) to share information with the SCO that will likely lead to unclaimed property audits of taxpayers that have not filed unclaimed property returns.

California’s unclaimed property system is one of the most unforgiving in the United States with no current voluntary compliance program, a 10-year lookback, and an annual interest rate of 12% on unreported property. There is speculation around the new reporting law that California may consider offering a voluntary compliance program to incentivize property holders into reporting unclaimed property. Reports suggest a mere 2% of businesses comply with the state’s reporting laws.

If your business has California unclaimed property or you are unsure, now is the time to review your records. Assessing the potential liability for the unclaimed property will allow you to evaluate risk and prepare for the reputed voluntary compliance program if it comes. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.

On January 18, 2022, New Jersey Governor, Phil Murphy, signed into law the NJ BAIT Clean Up Bill bringing several favorable changes to the optional NJ PTE election. The bill became effective as of January 1, 2022. The New Jersey BAIT was originally crafted by legislators in response to the limits imposed by the Federal State and Local Tax (“SALT”) deduction of $10,000 in the 2017 Tax Cuts and Jobs Act. The workaround had several unintended pitfalls which have been fine tuned in the NJ Bait Clean-up bill to provide additional tax savings to New Jersey shareholders and members of pass-through entities.

The legislation improves upon several areas of the BAIT that were in need of clarification:

• The legislation clarifies that NJ source income will be the basis for calculating the BAIT rather than federal taxable income. Provision is also made for a three-factor apportionment formula. Partnerships (including LLCs treated as partnerships) and S corps generally apply a single sales factor or a three-factor formula respectively. Under the previous law, it was not clear if the apportionment formula would mirror the standard apportionment formula applicable to each entity type. The legislation confirmed that S corporations will now have the option to use a three-factor apportionment rather than a single sales factor normally used on S corporation returns.
• The legislation also eliminates the need for non-resident withholding on partner income, where the taxpayer has reasonable basis that the BAIT would substantially cover the withholding amount required under separate provisions of New Jersey tax law.
• An additional clarification is that payments made in a tiered partnership can be applied to upper-tier non-individual entities. Overpayment of BAIT taxes by a PTE may also be applied to future estimated taxes or, if preferred, they may be refunded.
• Finally, the bill expands the highest tax bracket to include distributable income in excess of $1 million, replacing the former $5 million top tax bracket. The updated threshold may not seem like a benefit; however, the updated provision more closely aligns with the current individual income tax benefits in New Jersey.

In the first fiscal year of adoption, business owners were projected to have saved an estimated $500 million. With a more taxpayer friendly revision to the bill and several other states following the PTE credit model, it’s important to consult with the HBK state and local tax team to determine if one may qualify and how HBK can bring clients additional value.

If your business has questions about the new regulation, HBK’s SALT practice can assist you. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.