State and local tax advisor: February 2024

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

• Arkansas
• California
• Illinois
• Indiana
• Massachusetts
• Michigan
• Minnesota
• New Mexico
• New Jersey
• Ohio
• Oregon
• South Carolina
• Washington
• Wisconsin

Arkansas

Sales and use tax: Petition challenging business closure order denied

For sales and use tax purposes, a taxpayer’s petition challenging a business closure order issued by the Arkansas Department of Finance and Administration (Department) was denied. In this matter, the taxpayer failed to pay the amount of tax due for three or more months during a consecutive period of 24 months. The Department established that the taxpayer wasn’t compliant and also met the notice requirement for business closure.

Once the Department establishes noncompliance, the only statutory defenses available to a taxpayer in business closure proceedings are: (1) to present written proof that the taxpayer has filed all delinquent returns and paid all delinquent tax, penalties, and interest; or (2) to show that the taxpayer is currently in a written payment plan approved by the department to satisfy the tax delinquencies. Upon review, it was noted that neither defense applied because the taxpayer had unpaid tax, penalty, and interest balances and hadn’t entered into an active payment plan approved by the department. Accordingly, the business closure order was affirmed.

Docket No. 23-TAC-02657, Arkansas Tax Appeals Commission, Oct. 26, 2023, released December 2023.

Plante Moran note: This case illustrates the importance of timely filing returns, regardless of amount of tax, and/or responding to state tax notices and correspondence. State tax authorities often have the power to significantly impact businesses and their employees, such as closing a business, holding individuals responsible for taxes to pay outstanding liabilities, and/or taking cash from a business’ bank.

California

Corporate income tax: Superior court refuses to vacate order holding FTB’s P.L. 86-272 guidance invalid

A California superior court has denied a motion by the Franchise Tax Board (FTB) to vacate and modify the court’s Dec. 13, 2023, order, in which the court held that the FTB’s Technical Advice Memorandum (TAM) 2022-01 and Publication 1050, addressing the application of P.L. 86-272, were invalid. The court previously concluded that TAM 2022-01 and Publication 1050 were void, because they were regulations that weren’t adopted in compliance with the requirements of the Administrative Procedure Act.

American Catalog Mailers Association v. Franchise Tax Board, Superior Court, San Francisco County (California), No. CGC-22-601363, Feb. 13, 2024.

Illinois

Corporate, personal income taxes: EDGE credit rules amended

Illinois amended rules that apply to corporation and personal income tax credits provided under the Economic Development for a Growing Economy (EDGE) Program. The amended rules:

• Clarify the treatment of credits that a partnership or S corporation distributes to its partners or shareholders and how to claim those credits.
• Provide guidance on the election that startup taxpayers can make to claim the credits against Illinois income tax withholding liability.

86 Ill. Adm. Code Secs. 100.2198 and 100.7380, Illinois Department of Revenue, effective Jan. 29, 2024.

Indiana

Corporate, personal income taxes: TCJA guidance updated

The Indiana income tax bulletin discussing the state’s conformity to the Tax Cuts and Jobs Act (TCJA) has been updated. The bulletin was updated to reflect that Indiana has continued expensing for specified research and experimental expenses, as well as changes related to the net operating loss treatment of excess business losses and nonprofit separate line losses. In addition, the bulletin was updated to remove obsolete provisions related to the definition of Internal Revenue Code and interest waiver provisions applicable to 2018.

Information Bulletin #116, Indiana Department of Revenue, January 2024.

Massachusetts

Corporate, personal income taxes: Millionaire’s surtax and extension of brownfields tax credit discussed

Massachusetts issued guidance discussing the provisions of the fiscal year 2024 budget (FY24 budget) that pertain to the recently enacted millionaire’s surtax and the extension of the brownfields tax credit for an additional five years.

Massachusetts will impose an additional 4% tax on the taxable income of resident and nonresident individuals exceeding $1 million. The FY24 budget codified the 4% surtax and clarified the computation of taxable income subject to the surtax.

The FY24 budget also extended the sunset date for the brownfields tax credit from Jan. 1, 2024, to Jan. 1, 2029. Applicants for the credit must commence and diligently pursue an environmental response action before Aug. 5, 2028.

Technical Information Release 23-12, Massachusetts Department of Revenue, Nov. 15, 2023, released December 2023.

Michigan

Property tax: Tax tribunal correctly denied taxpayer’s petition for lack of jurisdiction

The Michigan Tax Tribunal properly dismissed the taxpayer’s eligible manufacturing personal property (EMPP) tax exemption appeal for lack of jurisdiction because the taxpayer didn’t timely file its petition. The taxpayer completed Form 5278 and sent it in the mail via the U.S. Postal Service on Feb. 19, 2022. The township didn’t receive the form and assessed the property’s taxable value without any EMPP tax exemption. The taxpayer contended that timely filed form because the form was postmarked before the deadline. The taxpayer filed its petition for the EMPP tax exemption with the tax tribunal, and it argued that the tax tribunal must order the township to accept the form as timely delivered because the form was timely mailed. The taxpayer replied that the tax tribunal didn’t have jurisdiction to hear the matter because the application for the EMPP tax exemption was never delivered and, thus, never denied.

The tax tribunal held that it didn’t have jurisdiction to hear the taxpayer’s claim because there was no final decision on the taxpayer’s application for the EMPP tax exemption. The Court of Appeals found that the U.S. Postal Service didn’t deliver the form to the township’s assessor and, thus, the taxpayer’s application for the EMPP tax exemption was not timely submitted. Further, the taxpayer also failed to file a late application directly with the March Board of Review before its final adjournment. Therefore, the township wasn’t presented with the opportunity to make a final decision on the taxpayer’s application for the EMPP tax exemption. Accordingly, the tax tribunal didn’t have jurisdiction to hear the taxpayer’s claim.

Proquest, LLC v. Township of Ypsilanti, Michigan Court of Appeals, No. 362977, Nov. 30, 2023.

Minnesota

Sales and use tax: Information provided on retail delivery fee

Minnesota provides additional information regarding previously enacted legislation that imposed a 50 cent retail delivery fee on certain transactions involving retail delivery in Minnesota. Starting July 1, 2024, the fee applies to each transaction where charges for these items equal or exceed $100:

• Tangible personal property subject to sales tax.
• Clothing.

When calculating whether a transaction meets or exceeds the $100 threshold, a transaction includes all charges that are part of the sale, not including the retail delivery fee.

The retail delivery fee:

• Is not subject to sales tax if separately stated on the receipt or invoice.
• Applies once per transaction, regardless of the number of shipments made.
• Is shown as a separate line item on the receipt as “Road Improvement and Food Delivery Fee.”
• Follows Minnesota sourcing rules for application.

Retailer exclusions

Retailers aren’t liable for the retail delivery fee if you are one of the following:

• A retailer, who for the previous calendar year, had Minnesota retail sales that totaled less than $1 million.
• A marketplace provider facilitating a sale for a retailer, who during the previous calendar year, made Minnesota retail sales through the marketplace that totaled less than $100,000.

When calculating the retail sale threshold for the retailer exclusion, include all taxable and nontaxable retail sales. Don’t include sales where the purchaser is buying for resale. The purchaser must give you an exemption certificate.

Exemptions

Charges for the following items aren’t included when determining if the transaction meets or exceeds the $100 threshold:

• Drugs
• Medical devices, accessories, and supplies
• Food, food ingredients, or prepared food

Certain baby products are exempt from the fee, but some of those products are still subject to sales tax.

Retail Delivery Fee, Minnesota Department of Revenue, Feb. 21, 2024.

New Mexico

Sales and use tax: NTTC not accepted in good faith

The Supreme Court of New Mexico held that a taxpayer didn’t accept a nontaxable transaction certificate (NTTC) in good faith, and wasn’t entitled to safe harbor protection from the payment of gross receipts tax. The taxpayer, a private prison corporation, accepted an NTTC executed by the County for the taxpayer’s housing of federal prisoners at the County Detention Center. The taxpayer agreed to fulfill a previous obligation of the County to the Marshals Service to house and supervise federal prisoners at the Detention Center. The taxpayer directly invoiced, and directly received payments from, the Marshals Service for housing federal prisoners.

The administrative hearing officer for the New Mexico Taxation and Revenue Department (the Department) concluded that the taxpayer, as the seller, did not in good faith accept the NTTC, executed by the County as buyer, and therefore wasn’t entitled to the deduction from gross receipts it received for housing federal prisoners. The taxpayer conceded that its tax advisor made a misstatement of fact to the Department because the Marshals Service was sending payments directly to the taxpayer. These facts were known to the taxpayer when it accepted the NTTC and preclude any honest belief by the taxpayer that its services were being resold.

The Court of Appeals disagreed with the administrative hearing officer, and the state Supreme Court reversed the Court of Appeals. In applying the ordinary meaning of the term, the Supreme Court of New Mexico determined that in this case “good faith” is most simply expressed as honesty in belief or purpose. The taxpayer knew that there was no resale of services or a license because it was directly billing the Marshals Service, that the Marshals Service was paying the taxpayer directly. The Department relied on the taxpayer’s misstatement in issuing the NTTC. Therefore, the taxpayer did not, on the facts and circumstances known to it, accept the NTTC in good faith.

CCA of Tennessee, LLC v. New Mexico Taxation and Revenue Department, Supreme Court of New Mexico, No. S-1-SC-38681, Jan. 16, 2024.

Plante Moran note: This case illustrates the importance of accepting an exemption certificate in good faith, which may include evaluating the facts of the sale or reviewing a state tax authority’s website to ensure the buyer has the proper sales tax permit. We have seen state tax authorities perform more detailed reviews of exemption certificates upon audit, including checking whether the buyers that issued resale exemption certificates are registered as resellers in the state.

New Jersey

Personal income tax: S corporation guidance updated

The New Jersey Division of Taxation has updated its gross (personal) income tax bulletin explaining the reporting procedures for reporting S corporation income. The bulletin was updated to include information on changes that went into effect for privilege periods beginning on or after Dec. 22, 2022. The changes include:

• The elimination of the requirement for a separate New Jersey S corporation election for a federal S corporation.
• A federal S corporation that doesn’t wish to be treated as a New Jersey S corporation for New Jersey purposes can opt out by making a C corporation tax status election.
• Shareholders must consent to the New Jersey tax treatment of the entity.

GIT-9S, Income From S Corporations, New Jersey Division of Taxation, January 2024.

Ohio

Personal income tax: Temporary COVID-19 era tax collection law upheld

The Ohio Supreme Court ruled that a temporary state law allowing municipalities to continue to collect income tax from an employee working outside the municipality, during the COVID-19 pandemic, didn’t violate the state or federal constitutions. During the pandemic, Ohio passed a temporary law, allowing Ohio workers to be taxed by the municipality that was their “principal place of work” rather than by the municipality where they actually performed their work.

What was the taxpayer's argument?

The taxpayer challenged the law after his employer withheld Cincinnati taxes, the location of his employer’s business, while he was working from home outside the city. The taxpayer argued that the due process clause of the 14th Amendment to the U.S. Constitution forbid an Ohio municipality from taxing a nonresident for work performed outside of that municipality. 

What did the court hold?

The Court held that Ohio didn’t violate the due process clause by directing the taxpayer to pay taxes to the municipality where the employee’s principal place of work was located rather than to the taxpayer’s home location. The taxpayer failed establish that there was no “reasonably conceivable state of facts that could provide a rational basis” for the enactment of the law. Ohio had a legitimate interest in ensuring that municipal revenues remained stable amidst the rapid switch to remote work that occurred during the pandemic.

Further, the federal authority on due process limits on interstate taxation, that the taxpayer relied upon to argue the law violated the due process clause, didn’t apply because this was an intrastate tax issue. Last, the Ohio General Assembly did possess authority to enact the law.

Schaad v. Adler, Supreme Court of Ohio, No. C-210349, 2022-Ohio-340, Feb. 14, 2024.

Oregon

Corporate income tax: Affiliate’s sales excluded from apportionment factor

An Oregon corporation excise (income) taxpayer didn’t have to include certain sales of an affiliate in its apportionment factor because the affiliate lacked the necessary contacts with Oregon. The taxpayer included the income of two affiliates on its consolidated return but excluded 95% of Oregon gross receipts paid by retail customers to one of the affiliates for certain care plans.

What was the taxpayer’s business?

The taxpayer is a technology company that, among other things, sells cell phones. The taxpayer filed a consolidated return with two affiliates. One of the affiliated corporations (care plan affiliate) issued care plans to retail customers. The care plan affiliate then reinsured 95% of the risk with another affiliate (insurance affiliate) and forwarded 95% of the premium to the insurance affiliate. Under federal law, the taxpayers treated the care plan affiliate and insurance affiliate as insurance companies and defined the care plan affiliate’s income as excluding 95% of premiums ceded to the insurance affiliate. The taxpayer reasoned the amount of the care plan affiliate’s gross receipts under Oregon law covering apportionment excluded 95% of the premiums because gross receipts for Oregon apportionment purposes corresponded to federal gross income. Further, the 95% of premiums ceded to the insurance affiliate could not be counted in the numerator on the consolidated Oregon return because the insurance affiliate did business only in Arizona.

The court first concluded that the amounts paid by retail customers for care plans were gross receipts of each affiliate to the extent they were required to include the amounts paid in gross income under federal law. The technology company argued that it was an agent of the care plan affiliate, which meant the amounts paid by customers weren’t income to the taxpayer. The court agreed and found that the care plan affiliate, not the taxpayer, had gross receipts from sales of plans. Further, the court concluded that the care plan affiliate’s gross receipts, for apportionment purposes, didn’t include the amount of premiums ceded to the insurance affiliate.

What was the taxpayer’s argument?

The taxpayer argued that Oregon law allowed the gross receipts of the insurance affiliate to be excluded from the numerator of the consolidated Oregon return because Oregon lacked jurisdiction to tax the insurance affiliate. The taxpayer argued that applying Oregon’s Joyce provision, the insurance affiliate wasn’t doing business in Oregon, and thus, the affiliate’s sales could not be included in the numerator of the apportionment percentage. The court concluded that the taxpayer’s primary position was correct on the law. Meaning, if Oregon lacked jurisdiction to tax the insurance affiliate, the 95% of premiums ceded by the care affiliate to the insurance affiliate could not be counted in the numerator on the consolidated Oregon return.

Where did the income-producing activity occur?

In order for the sales to be in Oregon, and added to the numerator of the apportionment percentage, it was necessary that a greater portion of income-producing activity be performed in Oregon over any other state based on costs of performance. The court rejected Oregon’s theory that the insurance affiliate became subject to Oregon’s taxing jurisdiction because its contract to reinsure the care plan affiliate’s plans amounted to hiring the care plan affiliate as an in-state agent. Oregon failed to put forward any evidence of any other agency relationship between the insurance affiliate and the care plan affiliate. Further, Oregon failed to provide any facts, or theory, to support a conclusion that any income-producing activities associated with reinsurance occurred in Oregon. Therefore, the court couldn’t find that the numerator of taxpayer’s sale factor must include all gross receipts from Oregon purchasers of extended warranty service contracts.

Apple Inc. v. Department of Revenue, Oregon Tax Court, No. TC 5416, Jan. 24, 2024.

South Carolina

Sales and use tax: Marketplace facilitator liable for third-party sales

A marketplace facilitator was liable for South Carolina sales taxes on sales of products by third-party sellers because it qualifies as a “seller” pursuant to statute. The marketplace facilitator processes the transaction, holds the funds, and remits them to the seller. Furthermore, the facilitator is the only party the buyer encounters during the transaction. South Carolina law doesn’t require a seller to own the goods sold. Though the marketplace facilitator contended that the tax statutes are ambiguous and should be interpreted in their favor, the terms “seller,” “sale,” and “business” are clearly defined.

Amazon Services LLC v. Department of Revenue, Court of Appeals of South Carolina, No. 6047, Jan. 24, 2024.

Washington

Sales and use tax: Online merchants selling via Amazon were liable for tax remittance

Two merchants, which sold tangible personal property via Amazon’s website and shipped goods to Amazon for storage and delivery to Washington customers, owed retail sales tax and retailing business and occupation (B&O) tax because as sellers, they remained responsible for the collection and remittance of tax. The sellers’ agreements with Amazon explicitly stated that the sellers retained liability for state taxes due to Amazon’s fulfillment and storage services. Though the merchants claimed that they had a consignment relationship with Amazon, the contracts show an intent to facilitate the merchants’ ability to sell their own goods through Amazon’s website. Furthermore, the merchants’ names were listed on Amazon’s sale pages.

Even if the arrangement was viewed as a consignment relationship, Washington statutory and administrative guidance states that where the consignee is selling items in the name of the seller, the seller may report and remit tax. Though the merchants further claimed they were unaware they could incur tax liability in states where they had no physical presence, ignorance of the law isn’t a valid excuse.

Orthotic Shop Inc. v. Department of Revenue, The Court of Appeals of Washington, Division Three, No. 39321-6-III, Jan. 23, 2024.

Plante Moran note: It’s important to determine which party, the seller or the marketplace facilitator, is required to collect sales tax when selling through a marketplace platform. While states generally require marketplace facilitators to collect and remit tax on sales made through their platform, there may be situations where the seller is required to file and remit sales tax to the state.

Sales and use tax: Guidance on drop shipments provided

The Washington Department of Revenue has updated guidance on the application of excise taxes to drop shipment transactions. When a wholesale vendor is asked to drop-ship an item directly to the retailer’s customer, the vendor is not required to collect retail sales tax. It must document the wholesale nature of the sale by obtaining from the retailer, an SST exemption certificate, a reseller permit, or a multistate tax exemption certificate. If the retailer doesn’t have a valid reseller permit or exemption certificate, the wholesale vendor must collect and submit sales tax.

Drop Shipments, Washington Department of Revenue, Feb. 1, 2024.

Plante Moran note: It’s recommended that businesses confirm the sales tax treatment of drop shipments as it can differ among the states.  For example, some states require the retailer to be registered as a reseller for sales tax in the ship-to state, and, if not, the wholesaler must charge sales tax on the sales price or the sales price plus an enumerated mark-up.

Wisconsin

Corporate income tax: Pre-2009 net business losses couldn’t be shared with new combined group

In a Wisconsin income tax case, the Tax Appeals Commission found that a corporation wasn’t entitled to use pre-2009 carried forward net business losses incurred by members of its group that incurred the losses prior to joining the group and previously belonged to a different combined reporting group. The corporation didn’t meet its burden of proving that the Department of Revenue’s tax assessment was incorrect.

Lincare Holdings, Inc. v. Wisconsin Department of Revenue, Wisconsin Tax Appeals Commission, No. 23-I-018, Dec. 15, 2023.