Executive summary: State tax ASC 740 Q4 update
The following state tax developments were enacted during the fourth quarter of 2023 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, income taxes, for the quarter ended Dec. 31, 2023. 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.
State income tax law changes for the fourth quarter of 2023
California court upholds single-sales factor apportionment
The California Court of Appeals upheld Proposition 39, which was approved by voters on a ballot initiative and enacted in 2012. Proposition 39 required the use of single-sales factor apportionment for taxpayers and eliminated the use a three-factor apportionment formula. Proposition 39 also provided a special apportionment rule for cable companies and created a fund for clean energy projects. The taxpayer argued in One Technologies LLC. v. Franchise Tax Board (Cal. Ct. App. (2nd) No. B318787, Oct. 23, 2023), that Proposition 39 violated the state’s single-subject rule for ballot initiatives due to the exceptions noted above. The Court found that Proposition 39 did not violate the state’s single-subject rule and as a result, the taxpayer was required to use the single sales factor apportionment formula.
California court rejects FTB’s attempt to limit PL 86-272 protections on procedural grounds
On Dec. 13, 2023, a California Superior court found Technical Advice Memorandum (TAM) 2022-01 and related Franchise Tax Board (FTB) Publication 1050 to be invalid. American Catalog Mailers Association v. Franchise Tax Board, Case No. CGC-22-601363 (Cal. Superior Ct., San Francisco Cnty., Dec. 13, 2023). Both pieces of guidance clarified the FTB’s interpretation of the protections of P.L. 86-272 for internet-based activities, which were intended to closely follow the guidance issued by the Multistate Tax Commission (MTC) in August of 2021. The court did not rule on the merits of the case, finding instead that TAM 2022-01 and Publication 1050 were invalid because they constituted regulations that were required to be adopted pursuant to the California Administrative Procedure Act (APA), which would have required notice and a period for public comment.
Colorado updates conformity rules
On Nov. 8, 2023, the Colorado Department of Revenue repealed Colo. Regs. Section 39-22-103(5.3), which had clarified that Colorado’s definition of the IRC incorporated federal changes on a prospective basis only. Colorado conforms to the IRC on a rolling basis, and the change was in response to prior legislation and a Colorado Court of Appeals ruling in 2022.
Kansas provides guidance on corporate tax rate reduction
On Oct. 24, 2023, the Kansas Department of Revenue issued Notice 23-10: Change to Corporate Income Tax Rate with guidance on the rate reduction that previously was announced on Aug. 31, 2023. The department explained that, prior to rate reduction of Kansas Stat. Ann. Section 74-50,321, Kansas imposed a corporate income tax rate of 4%, with a surtax of 3% on Kansas taxable income exceeding $50,000. While section 74-50,321 reduces the rate from 4% to 3.5% for tax years beginning on or after Jan. 1, 2024, the 3% surtax continues to apply.
Maine court requires taxpayer to look-through to pharmacy location in sourcing receipts from claims adjudication services
On Nov. 7, 2023, the Maine Supreme Judicial Court held that the receipts the taxpayer received from claims adjudication services in connection with the sale of pharmaceuticals were sourced to the pharmacy location. Express Scripts Inc. et al. v. State Tax Assessor, Me. Sup. Jud. Ct., No. 2023 ME 68 (Nov. 7, 2023). In Express Scripts, Inc., the taxpayer’s clients included health insurers, health maintenance organizations (HMOs), employers, governmental health programs and union-sponsored benefits plans. The clients’ members were individuals and employees covered by the health plans. Maine’s market-based sourcing rules require that receipts from services are sourced to the location that the benefit of the services are received. The taxpayer argued that benefit of the service is received at the location of its business customer (i.e., the headquarters or commercial domicile of the health insurer). The Court disagreed, finding that the services ultimately were received by the individuals at the pharmacy location. In its ruling, the Court pointed to language within the company’s public filings and contracts that indicated the ultimate recipients of the services were the client members of the taxpayer.
Massachusetts enacts single-sales factor apportionment for all business taxpayers
On Oct. 4, 2023, Gov. Maura Healey signed into law House Bill 4101, enacting a comprehensive tax relief measure. Most notable for business taxpayers, the law adopts a single-sales factor apportionment formula for taxpayers of all industries, effective for tax years beginning on or after Jan. 1, 2025. Previously, single-sales factor apportionment was required only for manufacturers and mutual fund service companies, while all other corporations and financial institutions were required to apportion income and non-income taxes to Massachusetts using a three-factor double-weighted sales apportionment formula.
Note that the change to apportionment impacts not only the calculation of a taxpayer’s measure of income tax within the state, but also the measure of non-income tax, which is based either on the taxpayer’s Massachusetts tangible personal property or net worth. Additionally, the law makes changes to the sourcing of certain receipts from investment and trading activities for financial institutions. Please read our article, Massachusetts passes comprehensive tax relief for more information.
Minnesota court affirms decision that the gain on the sale of goodwill is apportionable business income
On Nov. 22, 2023, the Minnesota Supreme Court affirmed the Minnesota Tax Court’s decision in Cities Management Inc., vs. Comm’r of Rev. (Case No. A23-0222, Nov. 22, 2023) that the income earned by a nonresident individual resulting from the sale of her stock ownership interests in two S corporations was business income subject to apportionment. In Cities Management, Inc., the taxpayer made an election under section 338(h)(10) to treat the stock sales as sales of the underlying corporate assets, with a significant portion of the value being goodwill. The Court found that the value of the goodwill could be attributed to the corporation’s business operations and as a result, the gain from the sale was derived from a unitary asset that is treated as business income and subject to apportionment.
Mississippi issues guidance on the election for immediate expensing of certain expenditures
On Oct. 20, 2023, the Mississippi Department of Revenue issued guidance on House Bill 1733, which amended Miss. Code Ann. Section 27-7-17 to revise the methods of depreciation that may be used for certain expenditures and property. House Bill 1733 is effective for tax years beginning after Dec. 31, 2022. The department clarified that:
- Taxpayers may elect to immediately deduct qualified research and experimental expenses that must be capitalized and amortized for federal purposes pursuant to section 174;
- Expenditures for business assets that are qualified property or qualified improvement property (QIP) are eligible for 100% bonus depreciation and may be deducted as an expense incurred by the taxpayer during the tax year in which the property was placed in service. Taxpayers may elect to take a bonus depreciation deduction in accordance with section 168;
- Taxpayer may elect to treat the cost of any section 179 property that was placed in service during the taxable year as an expense that is deductible in the current year.
New Jersey issues several bulletins providing guidance for previously enacted legislation
The New Jersey Department of Taxation issued new and updated tax bulletins throughout Q4 2023 intended to provide guidance on legislation enacted on July 3, 2023, that made significant changes to the corporate income tax. The guidance covers topics including but not limited to:
- Changes to the rules related to the dividend exclusion, and the ordering of the net operating loss (NOL) deduction, dividend exclusion and international banking facility deduction;
- Changes to the calculation of the combined group’s NOL deduction;
- Changes impacting forms and schedules that must be included with the corporate income tax return; and
- Changes impacting income reporting and accounting methods for non-US corporations that are included in a combined return claiming treaty protection.
For more information please see our article on the legislation, New Jersey enacts most significant tax changes in years and consider reviewing the more recent relevant bulletins: TB- 86R; TB-91R; TB 94R; TB 95R; TB-99R; TB 101R; TB-103R; TR 111; TB-112; TB-113
New York State adopts final regulations related to corporate franchise tax reform of 2014
On Dec. 27, 2023, the New York Department of Taxation formally adopted regulations related to Article 9-A corporate franchise tax and Article 33 insurance corporation franchise tax that were proposed on Aug. 9, 2023. Years in the making, the final regulations provide guidance as it relates to comprehensive franchise tax reform that was enacted in 2014 and as amended in 2015 and 2016. The final regulations cover several topics including but not limited to economic nexus (including protected and unprotected activities under PL 86-272), apportionment, computation of the tax, certain credits, combined unitary reporting and rules impacting specific industries (such as qualified New York manufacturers). The department clarified that the regulations, effective as of Dec. 27, 2023, interpret statutory amendments that are effective for periods beginning on or after Jan. 1, 2015 and thus will apply for the same periods (retroactively as of Jan. 1, 2015). Documents relating to the adoption of the final regulations can be found on the department’s website.
New York City revives tax credit for qualified emerging biotechnology companies
On Dec. 4, 2023, New York City Mayor Eric Adams signed legislation that revives a tax credit for qualified emerging biotechnology companies. The credit may be used to offset the general corporation business tax, the unincorporated business tax, and the corporate tax of 2015. The enacted law has immediate effect and will be available for taxpayers to claim for tax periods beginning on or after Jan. 1, 2023 and prior to Jan. 1, 2026. For additional details on the credit and taxpayer eligibility requirements, please see our article, New York City biotech tax credit revived.
North Carolina enacts changes to the franchise tax and expands the pass-through entity tax
Enacted on Oct. 3, 2023, House Bill 259 caps the franchise tax at $500 on the first $1 million of a corporation’s franchise tax base. For the tax base exceeding $1 million, the rate is $1.50 per $1,000. This change is effective for tax years beginning on or after Jan. 1, 2025 (as reported on the corporate tax return for the 2024 tax year).
The bill also expands the elective pass-through entity tax provisions retroactively for tax years beginning on or after Jan. 1, 2022. Specifically, the legislation expands the list of eligible owners to include entities classified as corporations for federal income tax purposes and partners that are a trust provided that the beneficiary of the trust is limited to any person other than an individual, an estate, a trust or an organization described in section 1361(c)(6) of the IRC.
For additional information, please read our tax article, North Carolina budget passes with tax cuts and other modifications.
Pennsylvania issues guidance on sections 381, 382 and 163(j)
On Oct. 11, 2023, the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2008-03 which provides revised guidance on the application of sections 381 and 382. The guidance explains that taxpayers are required to consider the impact of section 163(j) in determining the net operating loss deductible for a given tax year. In calculating the applicable section 382 limitation for Pennsylvania purposes, the limitation is equal to the federal section 382 amount multiplied by the Pennsylvania apportionment percentage for the tax period immediately preceding the change. The guidance provides a detailed explanation on the application of sections 382 and 163(j) for purposes of the Pennsylvania corporate income tax return.
On Oct. 12, 2023, the Pennsylvania Department of Revenue issued an updated state corporate net income Corporation Tax Bulletin 2019-03 addressing the application of section 163(j). The bulletin clarifies that where a Pennsylvania taxpayer is part of a consolidated federal return that is subject to interest deduction limitations under section 163(j), each member of the consolidated group that is subject to Pennsylvania corporate income tax must calculate a section 163(j) limitation for Pennsylvania purposes on a pro-forma basis. However, to the extent that the federal consolidated group is not subject to any section 163(j) limitations, there shall be no interest deduction limitations for Pennsylvania purposes. Additionally, the bulletin clarifies that in most instances where there was a federal consolidated section 163(j) limitation for previous periods and a separate company limitation calculated for Pennsylvania purposes, taxpayers that join in the filing of a current year federal consolidated return with no section 163(j) limit may can fully deduct interest expense, plus the interest expense carryforward from prior years for calculating their Pennsylvania corporate income tax.
Texas guidance on compensation deduction
On Oct. 13, 2023, the Texas Comptroller of Public accounts issued 202310005L with guidance on costs that are allowable as benefits in determining the compensation deduction from the Texas Margin tax. For purposes of calculating the compensation deduction, the cost must:
- Be similar to the items listed in Texas Tax Code section 171.1013(b)(2) (i.e., workers’ compensation benefits, health care, employer contributions HSAs) such that it provides value to an employee in a personal capacity;
- Be deductible for federal income tax purposes;
- Not already be included in wages and cash compensation; and
- Meet the other requirements of title 34 Tex. Admin. Code section 3.589(e).
The comptroller also provided several examples that may be included as benefits in the compensation deduction including but not limited to sports club memberships, health check-ups, cell phones, professional dues, tuition reimbursement, and personal use of a company-owned vehicle. Additionally, the guidance provides examples of costs that must be excluded from the compensation deduction, such as recruiting referral fees, training, travel per diems, and the business use of a company-provided vehicle.
Wisconsin updates conformity to IRC
On Oct. 25, 2023, Wisconsin Gov. Tony Evers signed Assembly Bill 406, updating Wisconsin's conformity to the IRC. For tax years beginning after Dec. 31, 2022, Wisconsin retroactively conforms to the IRC as amended to Dec. 31, 2022, but not including any amendments to the IRC that are enacted after Dec. 31, 2022. However, note that Wisconsin continues to have exceptions to federal conformity for several provisions of the IRC prior to 2021. Wisconsin issued Tax Bulletin 223 with more explanation of the changes.
