California proposes amendments to market-based sourcing rules with request for public comments
On Sept. 13, 2024, the California Franchise Tax Board (FTB) issued a Notice of Proposed Rulemaking, formally proposing amendments to the market-based sourcing rules for sales other than sales of tangible personally property that the FTB intends to adopt. The proposed regulations come years after several meetings were held for interested parties from 2017 through 2021. If the rules are adopted, the amendments would apply to tax periods beginning on or after Jan. 1, 2024. Written comments from the public should be submitted by Oct. 31, 2024. There currently is no public hearing scheduled as it related to the proposed amendments, however, the FTB has indicated a public hearing will be held if the FTB receives a written request to hold a public hearing from any interested party at least 15 days prior to the close of the comment period.
District of Columbia fiscal year 2025 makes corporate tax changes
Effective Sept. 18, 2024, the 30-day Congressional review period of the District of Columbia’s Fiscal Year 2025 Budget Support Act of 2024 ended, allowing the budget to become law. Mayor Muriel Bowser had returned the budget to the city council unsigned before it was transmitted to Congress. Earlier, the corresponding emergency legislation, immediately enacting the budget provisions, was returned on July 15, 2024, also unsigned. The budget makes a number of tax changes included adopting the Finnigan method of apportionment beginning in 2026 and repealing the special capital gains tax on certain qualified high technology company investments, among others. For more information, please read our article, District of Columbia budget legislation makes numerous tax changes.
Illinois provides net operating loss (NOL) deduction guidance
Recall that on June 7, 2024, Gov. J.B. Pritzker signed House Bill 4951, limiting the utilization of NOL deductions to $500,000 for tax years ending on or after Dec. 31, 2024, and prior to Dec. 31, 2027. The NOL carryforward period is extended for any tax year in which the taxpayer was limited by the $500,000 cap. In July, the Illinois Department of Revenue issued Informational Bulletin 2025-01 explaining how the change could impact estimated payments. For more information, please read our article, Illinois tax bills seek new revenue.
Kansas issues guidance on amendments to section 163(j)
On Aug. 7, 2024, the Kansas Department of Revenue issued Notice 24-16 regarding recent changes to the state’s conformity to section 163(j) for business interest expense deductions. Notice 24-16 clarifies how the addition and subtraction modifications are calculated such that: 1) the addition modification applies to the federal interest expense carryforward that was previously disallowed (but deducted for Kansas corporate income tax purposes) that is deducted federally in the current year; 2) the subtraction modification is the amount of interest expense paid or accrued in the current year that is disallowed federally under section 163(j); and 3) for the 2021 tax year only, an additional subtraction modification is allowed for any interest expense paid or accrued in 2018 through 2020 that was disallowed due to federal section 163(j) limitations. Taxpayers filing an amended return for the 2021 tax year must include a reconciliation to support the adjustment, including relevant federal Forms 8890.
Massachusetts establishes tax amnesty program, releases supplemental guidance
On July 29, 2024, Massachusetts Gov. Maura Healey signed House Bill 4800, the annual budget, enacting among other changes a tax amnesty program to run for a period of 60 days ending on or before June 30, 2025. The program applies to tax returns due on or before Dec. 31, 2024, and offers penalty waiver as well as a limited look-back period. Most tax types administered by the department are eligible, including the corporate excise tax.
On Sept. 10, 2024, the Massachusetts Department of Revenue posted additional guidance on the 2024 amnesty program. Specifically, the amnesty program will be administered from Nov. 1, 2024, through Dec. 30, 2024. The tax amnesty program will offer a limited look-back period of three years to eligible non-filers (taxpayers who have unfiled returns due) who have not been previously contacted by the department. Those taxpayers must submit an Amnesty Request and file all returns that were due from Jan. 1, 2022, through Dec. 31, 2024, with full payment of tax and interest. The limited look-back period will not be available to non-filers who have been contacted by the department about unfiled returns. Certain taxpayers may not be eligible and should review the eligibility requirements on the department’s website. Ineligible taxpayers include but are not limited to taxpayers seeking a refund of penalties that have already been paid, or a refund of tax or a credit overpayment, taxpayers that received amnesty relief in 2015 or 2016 for the same tax type and period, and taxpayers that have been or currently are involved in a criminal investigation or prosecution for tax-related crimes. Taxpayers under current payment agreements that were entered into before the amnesty period and those with pending appeals may still participate in the tax amnesty program.
For more information on the Massachusetts tax amnesty program, please read our article, Massachusetts provides tax amnesty guidance.
Massachusetts releases guidance on fiscal year 2023 supplemental budget
On July 2, 2024, the Massachusetts Department of Revenue released Technical Information Release 24-6, explaining numerous enacted provisions including clarification of the mandatory single-sales factor apportionment rules for financial institutions.
Minnesota court finds P.L. 86-272 protection exceeded by market research activities
On Aug. 7, 2024, the Minnesota Supreme Court determined that market research activities performed by a Wisconsin company’s sales team in Minnesota were not a protected activity under P.L. 86-272. The taxpayer employed various sales representatives that managed accounts and recorded ‘sales notes’ and ‘market news notes’ for customer visits. The sales notes included a summary of each customer visit including the date, time, and a summary of pertinent information about the customer’s business, its product needs and other information. Market news notes included information on special delivery needs, bulk pricing requests, complaints, and products purchased from the taxpayer’s competitors. The market news notes were also shared with taxpayer’s other departments. The court ultimately found the market news notes to be market research, and outside the federal protection, because the notes were required and shared with other departments outside of the sales department. As a result, the notes went beyond effectuating more effective sales and therefore were not entirely ancillary to the solicitation of orders.
Missouri updates administrative rules related to net operating losses
On Aug. 1, 2024, the Missouri Department of Revenue amended its administrative guidance regarding net operating losses under Missouri revenue rule section 10-2.165, effective Sept. 30, 2024. The updates initially were published on March 1, 2024, and provide some clarification as to differences between Missouri and federal net operating losses. Specifically, the updates clarify that, to the extent an NOL is carried back for more than two years or carried forward for more than 20 years for federal income tax purposes, the federal net operating loss deduction must be added back to Missouri corporate taxable income. The amounts disallowed for Missouri purposes may be carried forward for a period of 20 years. The updates also address instances where the Missouri taxpayer is a member of a federal consolidated group, but files separately for Missouri purposes, and provides some guidance in the case of corporate mergers.
Nebraska Supreme Court denies dividends-received deduction for section 965(a) income
On Aug. 30, 2024, the Nebraska Supreme Court held in favor of the Nebraska Department of Revenue as it relates to the taxability of section 965(a) income. In Precision Castparts Corp. v. Nebraska Department of Revenue, 317 Neb. 481 (Aug. 30, 2024), the taxpayer claimed that deemed repatriation income under section 965(a) qualified for Nebraska’s dividends received deduction and should be excluded from Nebraska corporate taxable income. In affirming the ruling of the lower court, the Nebraska Supreme Court held that the 965(a) income did not meet the definition of deemed dividends under Nebraska law, and as a result, does not qualify for the state’s dividends received deduction. The Nebraska Supreme Court referenced the U.S. Supreme Court’s recent decision in Moore v. United States regarding the characterization of section 965(a) income. The holding is consistent with administrative guidance previously issued by the department.
New Hampshire extends overpayment credit percentage
On July 19, 2024, New Hampshire Gov. Chris Sununu signed House Bill 1525, extending the Business Profits Tax and Business Enterprise Tax credit carryforward overpayment threshold percentage another four years. Currently, taxpayers automatically receive an overpayment refund when the overpayment is 500% or more of the total tax liability, until Dec. 31, 2025. The legislation extends that percentage threshold to Dec. 31, 2029, when for taxable periods ending on or after that date, the credit threshold is reduced to 250%. For tax periods ending on or after Dec. 31, 2031, the credit threshold is further reduced to 100%.
New Jersey issues corporate transit fee guidance
On July 3, 2024, the New Jersey Division of Taxation issued guidance on the recently enacted 2.5% corporate transit fee. For privilege periods beginning on and after Jan. 1, 2024, and through Dec. 31, 2028, the fee is imposed on businesses with corporate business tax returns with New Jersey allocated net taxable income over $10 million. The guidance explains that the fee does not apply to public utilities filing Forms CBT-100 or New Jersey S corporations filing Forms CBT-100S. For combined filers, the fee is imposed to the extent that the combined group’s New Jersey allocated net taxable income exceeds $10 million on a combined basis. Additionally, the guidance provides that the division intends to abate penalties and interest for any underpayment of tax that results from the transit fee during the first year of enactment. The 2.5% transit fee is in addition to the statutory rate of 9% on New Jersey corporate income.
Oregon ballot measure could impose a 3% minimum tax on certain corporations
The Oregon legislature has proposed a ballot measure related to the corporate income tax that will be decided by voters on election day in November. Specifically, Initiative Petition 2024-17 (IP-17), if passed, would impose a minimum tax on corporations with greater than $25 million in Oregon gross receipts that would be equal to 3% of total Oregon sourced sales. A taxpayer with a minimum tax calculation greater than the Oregon corporate income tax would be required to pay the minimum tax, and there are no deductions or credits from the proposed minimum tax. The funds generated by the new tax would be returned to residents through a rebate mechanism.
Oregon court rules in favor of Microsoft for sales factor inclusion of section 965 income
On Aug. 29, 2024, the Oregon Tax Court ruled in favor of Microsoft Corp., concluding that 20% of deemed dividends repatriated under section 965 is includable in the sales factor for the water’s edge group, resulting in a partial refund of Oregon income taxes paid on these repatriated earnings. While the entire amount of section 965 income is included in federal taxable income, Oregon provides dividends received deduction for 80% of the repatriated income from the Oregon corporate income tax base. For the period at issue, Microsoft did not include any section 965 income in the sales factor denominator, but subsequently filed amended returns including 100% of the section 965 income in the sales factor denominator. Microsoft proposed several arguments for the sales factor inclusion, and ultimately the court, relying on Oracle Corp. V. Dept. of Rev., found that Microsoft was permitted to include 20% of the section 965 income in the denominator. Similar to the subpart F income in the Oracle decision, the court found that the section 965 income was “derived from the taxpayer's primary business activity", and the taxpayer was in a water's edge group that is engaged in a single unitary business with its controlled foreign corporations generating the section 965 income. As a result, 20% of the section 965 income qualified as income included in the Oregon sales factor denominator. The ruling contrasts prior administrative guidance from the Oregon Department of Revenue as to how to treat such income for sales factor purposes.
Pennsylvania increases allowable net operating loss deduction and makes other corporate income tax changes
NOL deductions
On July 11, 2024, Pennsylvania Gov. Josh Shapiro signed Senate Bill 654, providing for several tax changes including the phased-in increase of the allowable NOL. Currently, Pennsylvania limits net operating loss deductions to 40% of Pennsylvania corporate taxable net income. Under the bill, the allowable NOL deduction remains 40% for a loss incurred prior to tax years beginning on or before Jan. 1, 2025. For taxable years beginning after Dec. 31, 2025 (and for losses incurred after Dec. 31, 2024), the allowable NOL deduction increases by 10% each year until reaching 80% for tax years beginning after Dec. 31, 2028. In calculating the allowable NOL deduction for losses on or after 2025, the taxpayer must first make an adjustment for the percentage of taxable income deducted under the pre-2025 losses that were limited at 40% of taxable net income.
Intercompany intangible expense addback
For tax years beginning on or after Dec. 31, 2022, the bill makes changes to the treatment of certain interest and intangible expenses between related members filing Pennsylvania corporate income tax returns. A taxpayer filing the Pennsylvania corporate income tax return may elect to exclude from taxable income any amounts of interest or intangible expense received from a related party to the extent that the affiliate paying the interest or intangible expense added such expenses back to Pennsylvania taxable income on its own return. The election to exclude such interest and intangible income from the calculation of Pennsylvania corporate taxable income is in lieu of the credit for taxes paid. The election is made on an annual basis, so taxpayers should consider which option is most beneficial in each tax period before making the election.
Medical cannabis businesses
The bill also permits the deduction of ordinary and necessary expenses incurred by medical cannabis businesses if such a deduction was not taken for federal income tax purposes for tax years beginning after Dec. 31, 2023.
On Aug. 1, 2024, the Pennsylvania Department of Revenue published a summary of the tax law changes enacted through the legislation.
Tennessee issues ruling addressing ultimate destination sourcing
On July 31, 2024, the Tennessee Department of Revenue published Revenue Ruling No. 24-06, finding against the taxpayer’s request to apply an ultimate destination sourcing approach for sales factor apportionment purposes for the corporate income and excise tax. The taxpayer, headquartered outside of Tennessee, manufactured product outside of Tennessee, and sold finished product to a third-party wholesale distributor located in Tennessee. The wholesale distributor did not provide any further finishing and packaging services, and held the finished product for a period of 14 to 25 days, until the product was sold to end customers. The wholesale distributor provided the taxpayer with routine reports on the location of the ultimate customers, who are located within and without Tennessee. The taxpayer requested a ruling from the department that sales to the wholesale distributor could be sourced to the location of the ultimate customer. The department rejected the taxpayer’s argument, finding that the sales to the distributor and the subsequent sales to the end customer were separate transactions, in part because the taxpayer did not control the subsequent sales, and that sourcing of sales to the wholesaler location fairly reflected the taxpayer’s business activities in Tennessee. The department also rejected that the de minimis standard applies to this fact pattern relating to the number of days the distributor held the inventory before the subsequent sale of product to ultimate customers.
West Virginia issues guidance on voluntary disclosure agreements
On July 1, 2024, the West Virginia State Tax Department issued TSD 412, addressing the state’s program for voluntary disclosure agreements. The guidance provides general information and is not meant to substitute or supersede any other tax statutes or regulations.
