Tax News Brief: 2024 Third Quarter

Welcome to Weaver’s Specialty Tax Services quarterly newsletter. This newsletter covers the top issues across our Specialty Tax Services, including State and Local Tax (SALT), Fixed Assets, Motor Fuels, Tax Provisions and Transaction Tax Advisory.

©2024

State and Local Taxes

Colorado Harmonizes Administration of Local Sales and Use Taxes

The Colorado legislature passed SB24-025, which revises, modernizes, and harmonizes the separate statutes that govern the state administration of local sales or use tax. Under the bill, the department will collect, administer, and enforce a local government sales or use tax in the same manner as it does the state sales tax.

Iowa Exempts Certain Leases or Rentals between Affiliates from Sales and Use Tax

Iowa enacted House File 664, which exempts the lease or rental of a vehicle between affiliates from Iowa sales and use tax when Iowa’s sales or use tax or fee for new registration for the vehicle has been paid by the lessor or entity providing the vehicle prior to such lease or rental. The bill also exempts vehicles leased between affiliates from the state’s fee for new registration when the new registration has been paid by the lessor prior to the lease.

Louisiana Appeals Court Confirms Online Hotel Reservation Fees Not Taxable

The Louisiana Court of Appeals affirmed a trial court decision that online hotel reservation fees were not taxable under state and local tax ordinances. In Louisiana, only services defined as “sales of services” are taxable. This includes such hotel services as furnishing rooms, cottages, or cabins. The court affirmed that the online travel company was not a hotel under the law and did not provide taxable “sales of services.” The court also upheld the finding that the travel company was not a dealer responsible for remitting the taxes and did not have a fiduciary duty to remit the taxes and fees from the buyer to the taxing authorities.

Michigan Clarifies Taxation of Payment-Processing Fees

The Michigan Department of Treasury clarified that payment-processing fees are subject to sales tax. A payment processor provides a financial service for the seller for which it imposes a fee, or a “surcharge,” on the seller. That fee represents a cost or expense for which the seller is responsible and that is fairly characterized as a “service cost” or an “expense of the seller.” The fee is therefore part of the sales price and part of the tax base.

Mississippi Exempts Fixed-Wing Aircraft from Sales Tax

Mississippi’s sales tax exemption for fixed-wing aircraft took effect April 25, 2024. H1855 exempts sales, leases, or other retail transfers of certain fixed-wing aircraft used by certified common carriers in the transport of persons or property in interstate, intrastate, or foreign commerce. The exemption also applies to engines, accessories, and spare parts for such fixed-wing aircraft and for related purposes.

“Primary Function” Analysis Often a Key in New York Sales Tax Disputes

Sales tax controversies often involve the taxability of a transaction that has both taxable and nontaxable components. In determining whether these transactions are taxable, New York tax courts have focused on the “primary purpose of the transaction” as opposed to its individual components. Two recent sales tax disputes in New York illustrate the way the courts apply this “primary function” analysis.

In Dynamic Logic Inc. v. Tax Appeals Tribunal of the State of New York (2024), the Tax Appeals Tribunal of the State of New York (the “Tribunal”) applied the “primary function” test in the context of the taxability of a service. In Strata Skin Sciences Inc v. New York State Tax Appeals Tribunal (2024), however, the Tribunal dismissed the use of this test in the sale of tangible personal property. Together, these cases show how taxpayers operating in New York should consider the impact of a possible “primary function” analysis when commencing a variety of transactions.

Read Weaver’s full article here

Oklahoma Exempts Digital Asset Mining from Sales Tax

Oklahoma Governor Kevin Stitt signed into law HB 1600, which exempts from sales tax sales of machinery and equipment used for commercial mining of digital assets. The exemption is effective from November 1, 2024 until December 31, 2029. Items exempt from sales tax include servers and computers, racks, power distribution units, cabling, switchgear, transformers, substations, software, network equipment, and electricity.

Washington Issues Exemption Guidance on Data Centers

Washington Department of Revenue explained in new guidance that qualifying tenants are eligible to make tax-exempt purchases of eligible server equipment and eligible power infrastructure. A qualifying tenant is a business entity that exists for the primary purpose of engaging in commercial activity for profit and that leases space from a qualifying for-profit business within an eligible computer data center. The guidance also states that, for a multi-building data center, a taxpayer submitting a data center exemption must provide the Department with documentation substantiating that it qualifies for the data center exemption. This includes a description of all the buildings that are contemplated at the outset of construction and what will be located at the data center. The taxpayer must affirm that the buildings referenced in their application are all the buildings contemplated and that no further buildings are planned or contemplated. The guidance also clarifies that one measure of duration applies for a data center consisting of multiple buildings falling within one exemption certificate.

Transactions

IRS Updates Private Letter Rulings Procedure

The IRS released Rev. Proc. 2024-24, updating procedures for requesting private letter rulings related to “spin off” transactions under IRC Section 355. The revenue procedure discusses the representations, information, and analysis that taxpayers must submit to request PLRs related to Section 355 transactions and additional representations, information, and analysis that taxpayers must submit to request rulings regarding a divisive reorganization.

IRS Addressing Abusive Partnership “Basis-Shifting” Transactions

The Internal Revenue Service (IRS) will propose regulations on basis-shifting transactions that use the partnership rules to inflate the basis of the underlying assets. These multi-year transactions often use sophisticated tax technology and several steps to reduce the amount of tax paid while “stripping” large amounts of tax basis from certain assets and shifting it to other assets. They allow increased depreciation deductions or reduced gain on the sale of an asset but have little or no substantive economic substance. The proposed regulations would treat certain partnership related-party basis adjustment (RPBA) transactions as transactions of interest that require disclosure.

Tax Provisions

Interim Reporting Requirements

June 30 marks the end of a quarter for many public companies, triggering the need for an interim tax provision.   While the assumption is often that a quarterly income tax provision requires a less strenuous exercise than year end, there are changes within a business that can cause complexity and increased risk.  Some of these business changes are:

• Changes in forecasted income between income and loss
• Significant changes in estimates of material items
• Acquisitions or divestitures of a business
• Repatriations of income from foreign subsidiaries
• Significant return to provision adjustments
• Significant changes in operating jurisdictions
• Significant stock or other equity issuances or other transactions involving the Company’s equity

These changes, combined with changes in legislation that occur during the quarter, can make an interim tax provision anything but simple. Our provision team can help.

Click here for more information.

Tax Credits

IRS Simplifies Research Credit Refund Claim Requirements

The Internal Revenue Service (IRS) is simplifying the process for research credit refund claims by reducing documentation requirements and moving toward greater efficiency in tax administration. As stated in the IRS news release, dated June 18, 2024, the reduced requirement is based on the IRS’s “significant experience with the Research Credit refund claims process.” This change is effective for claims postmarked on or after June 18, 2024.

Read Weaver’s full article here

International Taxes

Supreme Court Upholds Mandatory Repatriation Tax

On June 20, 2024, in Moore v. United States, the U.S. Supreme Court upheld the Mandatory Repatriation Tax (MRT) under IRC Section 965, which attributes the undistributed income of U.S. controlled foreign corporations (CFCs) to U.S. shareholders and taxes their portions of that income. The Moores had argued that such a tax was unconstitutional, as Congress did not have Constitutional authority to tax “unrealized” income. The Court held that the MRT taxes the corporation’s realized income, which the MRT attributes to the shareholders. The Court noted the longstanding precedents and practice that allow Congress to attribute an entity’s realized and undistributed income to the entity’s shareholders or partners and then tax the shareholders or partners on their portions of that income. The decision did not address the issue of whether realization is a constitutional requirement for an income tax.

U.S. Increases Tariffs on Chinese Imports

On May 14, 2024 the Biden administration announced tariff hikes on an additional $18 billion of Chinese goods. The new tariff rates range from 25 percent to 100 percent on certain batteries and battery parts, electric vehicles, medical goods, natural graphite and other critical minerals, magnets, semiconductors, cranes, solar cells, and steel & aluminum products. The effective dates of the increases vary with some taking effect immediately while others are scheduled for 2025 or 2026.

Fuel Taxes

Treasury Recommends Enforcement Changes for Biofuel Tax Credits

A Treasury Inspector General report found that the Internal Revenue Service (IRS) has flawed enforcement procedures and limited power to combat fraud in biofuel tax credits. In a recent analysis of credit claims, the Treasury Inspector General for Tax Administration (TIGTA) concluded that the Treasury erroneously paid more than $30 million in biofuel tax credits. TIGTA also made several recommendations to improve enforcement.

Illinois Posts Fuel Tax Rates

Illinois announced its fuel tax rates for 2024-2025, effective July 1, 2024 through June 30, 2025. The rates are as follows:

• Gasoline/gasohol – $0.470 per gallon
• Diesel fuel – $0.545 per gallon
• Liquefied petroleum gas (LPG) – $0.545 per gallon
• Liquefied natural gas (LNG) – $0.545 per gallon
• Compressed natural gas (CNG) – $0.470 per gallon

Iowa Updates Fuel Tax Rates

Iowa released updated fuel tax rates that take effect on July 1, 2024:

• Biodiesel B11 to B19 will be $0.325 per gallon;
• Biodiesel B20 or higher undyed will be $0.295 per gallon
• Ethanol Blended Gasoline E-15 or higher and Alcohol will be $0.255 per gallon.

All other rates remain unchanged.

45Z Registration Requirements Offer Insight into Clean Fuel Production Credit Qualifications

The IRS issued guidance on the registration requirements for producers under the Clean Fuel Production Credit in IRC § 45Z, which begins on January 1, 2025. Notice 2024-49 states that producers must be registered on or before January 1, 2025, to be eligible to claim the credit beginning on that date. The IRS urges producers to apply for registration as soon as possible, noting that the IRS “intends to process completed applications for registration received by July 15, 2024, such that an eligible taxpayer can receive its letter of registration by January 1, 2025.”

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