The following state tax developments were enacted during the second quarter of 2022 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, Income Taxes, for the quarter ended June 30, 2022. This information summarizes the listed developments and may not provide additional nuanced considerations that may be relevant for provision purposes. For questions about these quarterly updates, or other recent legislative and regulatory developments, please reach out to your tax adviser for more information.
Arkansas administrative decision upholds sales sourcing based on customer location
In an administrative decision dated March 24, 2022, and released in May of 2022, the Arkansas Department of Finance and Administration Office of Hearings and Appeals found that a taxpayer selling digital products to customers within the state had economic nexus for corporate income tax purposes and that the taxpayer’s sales should be sourced based on customer location. Under Arkansas Code section 16-51-717, taxpayers source revenues from sales other than sales of tangible personal property based on the location of the income-producing activity. The department asserted that the location where end-customers access and purchase the items for sale is the location of the income-producing activity since, without the actual acts of purchasing and accessing the product, there would be no revenue generated. The Office of Hearings and Appeals upheld this use of a market-based sourcing approach, citing the state’s alternative apportionment statutes and the department’s authority to prescribe an apportionment method outside of the statutory method to appropriately capture activity within Arkansas.
California provides penalty relief related to updated market-sourcing guidance
As previously reported in our first quarter 2022 update article, California provided revised guidance in late March relating to the application of the state’s market-based revenue sourcing rules through the release of Legal Ruling 2022-01. This Legal Ruling also retroactively revoked two California Chief Counsel Rulings (CCRs) on the subject—CCR 2015-03 and CCR 2017-01. In a news update published on April 11, 2022, the state clarified that taxpayers who relied on the revoked CCRs in determining revenue sourcing will not be assessed either the large corporate understatement penalty or an accuracy related penalty. However, for taxpayers who relied on the CCRs to support a non-filing position, a delinquency penalty will be applied to the extent returns are required to be filed under the updated guidance.
District of Columbia ends nexus protection for remote workers
On June 6, 2022, the District of Columbia Office of Tax and Revenue (OTR) released OTR Notice 2022-06. The notice clarifies that the temporary relief from income tax nexus related to employees working from home during the COVID-19 pandemic will end on July 16, 2022.
Florida updates IRC conformity date
On May 6, 2022, Florida enacted House Bill 7071, advancing the state’s IRC conformity date from Jan. 1, 2021, to Jan. 1, 2022. The update is effective retroactive to Jan. 1, 2022.
Georgia updates IRC conformity date; amends elective consolidated filing rules
On May 2, 2022, Georgia enacted House Bill 1320, advancing the state’s IRC conformity date from March 11, 2021, to Jan. 1, 2022. The new conformity date applies to all taxable years beginning on or after Jan. 1, 2021. The bill also provides that the state will conform to changes made to section 118 by the federal Infrastructure Investment Jobs Act (P.L. 117-58) but will continue to decouple from the changes made to section 118 by the Tax Cuts and Jobs Act (P.L. 115-97). The bill preserves other existing non-conformity to specific federal provisions.
On May 5, 2022, Georgia enacted House Bill 1058, amending the state’s process around consolidated filing elections. Previously, affiliated groups of corporations with multiple Georgia nexus members could request permission from the state to file a consolidated return. Under the new rules, affiliated groups no longer require state approval to elect to file on a consolidated basis. For tax years beginning on or after Jan. 1, 2023, taxpayers may make an irrevocable election to file a consolidated return; the election is binding for five years.
Hawaii updates IRC conformity date
On April 21, 2022, Hawaii enacted Senate Bill 3143, which advances the state’s IRC conformity date from Dec. 31, 2020, to Dec. 31, 2021, for tax years beginning after 2021. The legislation preserves the state’s existing non-conformity to certain federal provisions.
Kentucky updates IRC conformity, enacts legislation for tax amnesty program
On April 14, 2022, the Kentucky legislature overrode the governor’s veto to enact House Bill 8, which, among other changes, updates the state’s conformity to the IRC. For years beginning on or after Jan. 1, 2022, Kentucky will conform to the IRC in effect on Dec. 31, 2021. Kentucky’s previous IRC conformity date was Dec. 31, 2018. The state specifically decouples form the provisions of the American Rescue Plan Act (P.L. 117-2) related to restaurant revitalization grants as well as any updates to the Code enacted after Dec. 31, 2021
House Bill 8 also provides for the creation of a 60-day tax amnesty program that will run in either 2022 or 2023, depending on the state’s ability to contract with a third party or otherwise identify internal resources to administrate the program. The amnesty program will apply to multiple tax types, including corporate income tax, and will provide for waiver of penalty and 50% of applicable interest. The amnesty program will apply to tax liabilities associated with tax periods ending between Oct. 1, 2011, and Dec. 1, 2021. For more information, please read our alert, Kentucky targets personal income tax cuts; expands sales tax base.
Louisiana provides guidance on section 280C deduction and Employee Retention Tax Credit, net operating losses
On April 4, 2022, Louisiana released Rev. Rul. 22-01, clarifying that taxpayers claiming the federal Employee Retention Tax Credit are eligible for a Louisiana deduction for the amount of expenses disallowed for federal purposes under section 280C.
On May 17, 2022, Louisiana released Revenue Information Bulletin 22-011, providing guidance on the treatment of federal net operating loss (NOL) carrybacks allowed under the Coronavirus Aid, Relief and Economic Security (CARES) Act (P.L. 116-136). To the extent a federal NOL is carried back under the provisions of CARES and results in a reduction of federal income tax liability deducted on the Louisiana return in the carryback year, taxpayers must include the amount of the change in deductible federal income tax in state taxable income for the loss generation year such that the Louisiana NOL generated is adjusted for the change in deductible federal tax in the carryback year.
Maine updates IRC conformity; amends rules to reflect bright-line nexus standard
On April 14, 2022, Maine enacted Legislative Document 1763, updating the state’s IRC conformity date to Dec. 31, 2021. The change applies to tax years beginning on or after Jan. 1, 2021, and incorporates any retroactive federal changes enacted as of Dec. 31, 2021.
On April 20, 2022, Maine updated two revenue rules under chapters 801 and 810 to reflect legislation enacted in June of 2021. Among other changes, the updates reflect the state’s bright line economic nexus standard that is applicable to tax years beginning on or after Jan. 1, 2022. For tax years beginning on or after this date, taxpayers are deemed to have nexus in Maine to the extent they are organized or commercially domiciled in Maine, have over $25,000 of property or payroll within the state or have over $500,000 of sales to customers within the state.
Nebraska cuts corporate tax rates
On April 13, 2022, Nebraska enacted Legislative Bill 873; among other changes, the bill reduces the corporate tax income tax rate applicable to taxable income in excess of $100,000 as follows:
- For tax years beginning on or after Jan. 1, 2024 and before Jan. 1, 2025: 6.50%
- For tax years beginning on or after Jan. 1, 2025 and before Jan. 1, 2026: 6.24%
- For tax years beginning on or after Jan. 1, 2026 and before Jan. 1, 2027: 6.00%
- For tax years beginning on or after Jan. 1, 2027 and before Jan. 1, 2028: 5.84%
The tax rate appliable to the first $100,000 of taxable income remains at 5.58% for all years. For more information, please read our alert, Nebraska enacts corporate and personal income tax rate cuts.
New Hampshire clarifies tax treatment of COVID-19 financial relief; updates net operating loss rules; enacts rate reduction
On April 4, 2022, New Hampshire released updates to a previously published Technical Information Release (TIR), TIR 2021-001. The updates clarify that, unless specifically otherwise addressed in state guidance or legislation, New Hampshire Business Profits Tax (BPT) treatment of COVID-19 relief programs follows the federal tax treatment prescribed by the IRC in effect on Dec. 31, 2018. Additionally, the updates remind taxpayers that specific guidance on the BPT treatment of forgiven Paycheck Protection Program (PPP) loans is available in TIR 2021-003, which summarizes the impacts of state legislation exempting forgiven PPP loans from New Hampshire tax.
On June 17, 2022, New Hampshire enacted Senate Bill 435, which ends the state’s historical approach of double apportioning BPT net operating loss (NOL) carryforwards, and House Bill 1221, which lowers the BPT rate from 7.6% to 7.5% for tax years ending on or after Dec. 31, 2023. Previously, New Hampshire law provided that BPT NOLs should be apportioned in the year of generation and again in the year of utilization. The provisions of Senate Bill 435 update the BPT statutes to indicate that NOLs should be apportioned only in the year of generation. Note that these updated NOL provisions are effective July 1, 2022, and apply to taxable years beginning on or after Dec. 31, 2022.
New Jersey revises P.L. 86-272 guidance for combined group taxpayers; clarifies treatment of treaty-protected income; creates new voluntary transfer pricing resolution program
In April 2022, New Jersey released a news update indicating a revision to its policy on the application of P.L. 86-272 to taxpayers filing as part of a unitary combined group. Previously, the form instructions for the CBT-110U for tax years 2019-2021 indicated that “if one member in the combined group has nexus and sufficient activities in New Jersey to be taxed based on income, no member that has nexus with New Jersey may claim P.L. 86-272 protection.” The updated guidance indicates that the state will determine P.L. 86-272 protection on an entity-by-entity basis, retroactive to all applicable years. Impacted taxpayers may amend previously filed returns to reflect the change in policy.
On May 20, 2022, New Jersey posted a notice on the state’s website clarifying that income exempt from federal taxation pursuant to a treaty with a foreign country is not required to be added back for New Jersey purposes, unless the state’s related party addback statutes would otherwise require a modification. This update is related to proposed rule changes published in the New Jersey Register for comment and also reflects the holdings in Infosys Limited of India Inc. v. Director, Div. of Taxation from March of 2018.
On June 16, 2022, New Jersey announced a new voluntary transfer pricing resolution program. The program will allow taxpayers and the division to agree on a settlement amount and transfer pricing methodology for tax years open under New Jersey’s four-year statute of limitations. All businesses that have filed returns in open years, including those under audit or in appeals, are eligible to participate. The program is not available to taxpayers currently in litigation. For more information, please read our alert, New Jersey announces voluntary transfer pricing resolution program.
Oklahoma lowers corporate income tax rate
On May 5, 2022, Oklahoma enacted Senate Bill 1802, lowering the corporate income tax rate from 6% to 4% for tax years beginning after Dec. 31, 2021.
Oregon allows net operating loss carryback for certain taxpayers
On April 1, 2022, Oregon enacted Senate Bill 1524; among other changes, the legislation provides for a three-year carryback of Oregon NOLs for taxpayers operating under North American Industry Classification System (NAICS) codes 111 (crop production) or 112 (animal production and aquaculture). Losses generated in tax years beginning on or after Jan. 1, 2023, and before Jan. 1, 2029, are eligible for the carryback.
South Carolina updates IRC conformity; adopts federal treatment of certain pandemic relief programs; provides guidance on Employee Retention Tax Credit; extends COVID-19 nexus protection
On April 21, 2022, South Carolina issued Rev. Rul. 22-3, extending its COVID-19 related nexus protections through June 30, 2022. The guidance indicates that employees working remotely as a result of the pandemic will not be deemed to trigger nexus for income tax purposes and provides guidance to taxpayers on employer withholding requirements. The state’s nexus protections were previously scheduled to expire on March 31, 2022.
On May 16, 2022, South Carolina enacted House Bill 5057, advancing the state’s IRC conformity date from Dec. 31, 2020, to Dec. 31, 2021. The bill also provides that the state will conformany federal legislative activity during 2022 which extends provisions already in effect as of the updated conformity date. Additionally, the bill provides that South Carolina will conform to federal tax treatment of Economic Injury Disaster Loan and restaurant revitalization grant proceeds.
On June 10, 2022, South Carolina issued Revenue Ruling 22-4, providing that taxpayers claiming the federal Employee Retention Tax Credit are allowed a subtraction modification for wage expenses disallowed for federal purposes under section 280C. The subtraction modification only applies to wages paid or accrued after March 12, 2020, and before Jan. 1, 2022.
Texas updates rules on computation of margin and compensation deduction
On April 19, 2022, the Texas Comptroller of Public Accounts updated rules related to the computation of margin and the compensation deduction for the state’s franchise tax. The full text of the rule changes were previously published in the Feb. 18, 2022 issue of the Texas Register for comment, and the final rules changes remain unchanged from the previously published version.
Among other changes, the finalized rules contain amendments which allow taxpayers to include in the computation of the compensation deduction for franchise tax purposes wages and cash compensation paid to employees in a foreign country; note that this compensation is only eligible for deduction to the extent that it is reported to the employee as income on a form substantially equivalent to a federal Form W-2. Additionally, the amended rules specify the maximum per-employee compensation expense amounts for report years through 2024. Finally, the rules reflect changes enacted in House Bill 1195 (2021), which allow a taxpayer to deduct compensation expenses paid for with COVID-19 relief grant or loan proceeds, even when the grant or loan proceeds are excluded from total revenue.
In addition to making changes to the compensation deduction rules, the amendments also provide that taxpayers may amend a franchise tax report to change the method used to compute total margin. This rule change is retroactively effective and reflects a policy change from the comptroller’s previous approach on the issue.
Vermont updates IRC conformity; makes apportionment changes
On May 31, 2022, Vermont enacted Senate Bill 53, making various changes to the state’s corporate income tax regime. First, the bill advances the states IRC conformity date from March 31, 2021, to Dec. 31, 2021; this conformity update is applicable to tax years beginning on or after Jan. 1, 2021. Additionally, the bill moves the state’s apportionment factor computation to single-sales factor and eliminates the state’s throwback rule for sales of tangible personal property. The bill also provides that the state will move from using the Joyce method to the Finnigan method for computing the sales factor numerator for a unitary group filing a combined return. Finally, the bill removes the language related to the state’s historical ‘80/20 rule,’ which provided an exclusion from a unitary filing group for any entity with more than 80% of its property or payroll located in a foreign jurisdiction.
Virginia updates deduction for disallowed business interest
Virginia has historically decoupled from the provisions of section 163(j) but allowed corporate taxpayers a deduction for 20% of the amount of interest disallowed for federal purposes in the computation of Virginia taxable income. Enacted on April 11, 2022, House Bill 1006 updates the allowable deduction to 30% of limited interest for tax years beginning on or after Jan. 1, 2022.
State pass-through entity tax workarounds
The TCJA limited the individual taxpayer deduction for state and local tax (SALT) payments to $10,000 a year ($5,000 for a married person filing a separate return). SALT payments (including income and real property taxes) that exceed these amounts are no longer deductible by individual taxpayers unless the payments are in pursuit of a trade or business.
As a response to the TCJA's limitation, several states began to adopt a pass-through entity-level tax intended as a workaround. In 2022, at least 29 jurisdictions will allow a workaround. In the second quarter of 2022, and as of the date of this article, the following states have adopted a new workaround (with the first effective year in parentheses): Mississippi (2022), New York City (2023), Ohio (2022) and Virginia (2021). Note that Colorado previously enacted a pass-through entity-level tax regime but passed legislation during the second quarter of 2022 to make the election retroactively available to 2018—for more information, see our article: Colorado allows retroactive PTE tax election beginning in 2018.
The complete list of jurisdictions that have adopted a pass-through entity-level tax as of the date of this article include the following: Alabama (2021), Arizona (2022), Arkansas (2022), California (2021), Colorado (2022), Connecticut (2018 and mandatory), Georgia (2022), Idaho (2021), Illinois (2021), Kansas (2022), Louisiana (2019), Maryland (2020), Massachusetts (2021), Michigan (2021), Minnesota (2021), Mississippi (2022), Missouri (2022) New Jersey (2020), New Mexico (2022), New York (2021), New York City (2023), North Carolina (2022), Ohio (2022), Oklahoma (2019), Oregon (2022), Rhode Island (2019), South Carolina (2021), Utah (2022), Virginia (2021) and Wisconsin (2018).
These pass-through entity tax workarounds have complex accounting implications. Depending on the characteristic of a particular PTE, the accounting treatment may be that the tax is treated as a payment on behalf of the partner (an equity transaction), or as an entity level expense. Please consult with your tax advisor to understand any ASC 740 or other accounting implications associated with these tax regimes.