Tax News Brief

Weaver’s Specialty Tax Services team brings you this update of current issues in State and Local Tax (SALT), International Tax and Transfer Pricing, Transaction Tax Advisory, Tax Provisions, and Tax Credits and Incentives.

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©2024

State and Local Taxes

Income Taxes | Sales Taxes | Property Taxes | Fuel Taxes

Income Taxes

New Jersey Updates Convenience of the Employer Sourcing Rule

New Jersey clarified that its “convenience of the employer test” does not apply to employees who are residents of states that have a similar rule. New Jersey enacted the rule in July 2023 whereby a nonresident employee’s compensation from a New Jersey employer would be sourced to the employer’s location if the employee works from an out-of-state location for the employee’s convenience rather than out of necessity for the employer.

Sales Taxes

Arizona Supreme Court Held Business Owners Personally Liable

The Arizona Supreme Court held that business owners can be personally liable for unremitted Transaction Privilege Tax (TPT). TPT is Arizona’s name for its “Sales Tax.” The Arizona Department of Revenue (ADOR) sued a taxpayer as a responsible person for the unremitted TPTs. The taxpayer argued that the ADOR failed to assess the unpaid TPTs against him within the four-year statute of limitation period. The Supreme Court held that the ADOR was collecting additional taxes but collecting taxes already reported by the LLC.

Arizona Repeals Local Transaction Privilege Taxes on Residential Property Rentals

Arizona Gov. Katie Hobbs signed into law S.B. 1131 prohibiting local taxes and fees on residential property rentals. The ban takes effect on January 1, 2025. Specifically, the Transaction Privilege Tax (TPT) has been repealed and no longer due by landlords of real property rented or leased in a town, city, or other taxing jurisdiction that levies a TPT on the business of renting or leasing real property for residential purposes.

California Clarifies Marketplace Facilitator Regulation

The California Department of Tax and Fee Administration (CDTFA) approved the adoption of California Code Regulations 1684.5 clarifying Marketplace Facilitators’ responsibilities. California defines a marketplace facilitator as a person who owns and operates a marketplace and contracts with marketplace sellers to facilitate the sale of the sellers’ products through that marketplace. The new regulation is largely the same as the emergency regulation issued in June 2020. The regulations implement the Marketplace Facilitator Act, which provides that a marketplace facilitator is generally responsible for collecting, reporting, and paying the tax on retail sales made through their marketplace for delivery to California customers. A marketplace facilitator is deemed to be “engaged in business” in California if the sales of its property and sales of items on behalf of marketplace sellers for delivery into California exceed $500,000 annually. Both taxable and nontaxable sales should be included in determining sales into California for this purpose.

California Lowers Threshold for Use Tax Collection

California enacted A.B. 1097 amending the registration requirements for use tax collection. Purchasers are required to register for use tax if making more than $10,000 in taxable purchases during a calendar year if the tax has not been paid to a retailer. Previously, the threshold was at least $100,000 in gross receipts per calendar year. Purchases of vehicles, vessels, or aircraft are excluded from this threshold.

California Extends Sales Tax Exemption for Fuel Sold to Water Common Carriers

California enacted A.B. 543 extending the sales and use tax exemption for fuel and petroleum products sold to water common carriers through December 31, 2028. This exemption applies to fuel purchased by a water common carrier after reaching its first out-of-state destination. To qualify for an exemption, the fuel must be for immediate shipment outside California, consumed after the first out-of-state destination, and sold to a water common carrier holding a seller’s permit or fuel exemption registration number. Fuel vendors need to obtain an exemption certificate from the purchaser to document the exempt sale.

Colorado Adopts Rules on Retail Delivery Fee

The Colorado Department of Revenue adopted two rules relating to the state’s retail delivery fee. Rule 43-4-218 sets forth the manner in which retail delivery fees are collected, administered, and enforced. Rule 39-21-116.5 adds the retail delivery fees to the list of fees to which the penalties apply.

Hawaii Revises Tax Guidance on Medical and Dental Services

The Hawaii Department of Taxation issued a revised tax facts publication on how the state’s general excise tax (GET) applies to medical and dental services. The GET is a privilege tax imposed on the gross income received by the person engaging in business activity in the state. Gross income from medical and dental services is taxed at the rate of 4 percent (plus the county surcharge if applicable). The guidance includes updated common questions on the GET as it applies to medical services.

Louisiana Drops Transaction Threshold for Out-of-State Sales

Louisiana Gov. John Bel Edwards signed into law H.B. 171, eliminating the state’s 200-transaction threshold for economic nexus for out-of-state remote sellers. The law leaves the $100,000 sales threshold in place for economic nexus. The changes took effect August 1, 2023.

Louisiana Exempts Promotional Samples from Tax

Louisiana Gov. Jon Bel Edwards signed into law H.B. 127 exempting from state excise and sales taxes certain items given free of charge as samples at conventions, trade shows, and similar events.

Minnesota Implements Retail Delivery Fee

Minnesota Gov. Tim Walz signed into law H.F. 2887, an omnibus transportation bill that includes a 50-cent fee on retail delivery transactions, effective July 1, 2024. The retailer may, but is not required to, collect the fee from the purchaser and must show the fee as separate from the sales price in the calculation of sales tax. The law exempts from the collection requirement retailers.

New Mexico Reduces Gross Receipts Tax Rate

New Mexico reduced the statewide portion of the Gross Receipts Tax from 5.125 percent to 4.875 percent. The rate change is effective July 1, 2023. The rate reduction was enacted as part of legislation signed by Gov. Michelle Lujan Grisham in 2022.

New York Division of Tax Appeals Rules that Vendor Management Fees are Taxable

The New York Division of Tax Appeals ruled that vendor management fees were a taxable sale of pre-written software. The company argued that its web-based application that manages and procures staffing services had a primary purpose to act as a “matching” agent for suppliers of temporary labor and customers needing such labor and not the license of software. The Division of Tax argued that it is licensing pre-written software, which is a taxable service. It claimed that petitioner licensed its software to its customers and that it is billed separately from other consulting services.

Ohio Court Says Fracking Equipment Qualifies for Ohio Oil and Gas Production Exemption

The Ohio Supreme Court held that hydraulic fracturing equipment qualified for the state’s sales and use tax exemption. The equipment qualified as that used directly in the production of crude oil and natural gas.

South Dakota Removes 200-Transactions Threshold from Economic Nexus Law

South Dakota Gov. Kristi Noem signed into law S.B. 30, removing the 200-transactions threshold for the state’s economic nexus provisions for out-of-state remote sellers. Sales tax remittance is required only if a seller’s gross revenue from the sale of tangible personal property, electronically transferred products, or services delivered into South Dakota is more than $100,000.

Tennessee Rules Municipality’s Purchases of Materials, Equipment Exempt from Sales Tax

The Tennessee Department of Revenue (TDOR) issued a letter ruling determining that purchases of materials by a municipality and its contractors were purchases of industrial machinery that are exempt from the state sales and use tax. The TDOR ruled that (1) the contractor’s purchases of materials for construction of a pump station and equipment to be used in the pump station were tax exempt; (2) materials for the construction of a pilot treatment facility were tax exempt and equipment to be used in the pilot treatment facility were tax exempt; and (3) the municipality qualifies for the governmental entity exemption under the Tennessee Code as long as the municipality complies with the requirements listed in the official rules and regulations of the state.

Texas Comptroller Rules that Taxpayer Cannot Use Parent Company’s Sales Tax Exemption for R&D Purchases

The Texas Comptroller of Public Accounts issued a letter ruling on whether a taxpayer may use a parent company’s Texas qualified research registration number or research activities to qualify for the research and development (R&D) sales tax exemption on the taxpayer’s purchases. The comptroller found that the taxpayer cannot use the parent’s qualified research registration number or its research activities to qualify for the R&D sales tax exemption to make its purchases tax-free. Only an entity engaging in qualified research is eligible for the sales tax R&D exemption.

Texas Comptroller Issues PLR on Oil Well Servicing Company’s Local Tax Sourcing

The Texas Comptroller of Public Accounts issued a private letter ruling on the local sales and use tax sourcing for an oil well servicing company. The taxpayer provided rentals of tangible personal property and repairs to tangible personal property and non-residential property. The Comptroller ruled that the taxpayer must charge its customers the local sales and use tax rate at the equipment yard on its charges for rentals and repairs/restoration of tangible personal property. On charges to repair/remodel nonresidential real property, taxpayer should charge local tax at the job location. On taxpayer’s purchases, taxpayer’s vendors should collect local tax based on the consummation of sale rules. The taxpayer is responsible for any local tax that the vendor does not collect. The Comptroller noted that the changes to Rule 3.334 of the Texas Administrative Code, effective October 1, 2023, did not affect the ruling.

Texas Rules on Taxability of Employee Health Benefit and Retirement Administration Services

The Texas Comptroller of Public Accounts issued a private letter ruling that the taxpayer’s Flex Spending Account and the Consolidated Omnibus Budget Reconciliation Act (COBRA) administration services are not taxable services; Affordable Care Act (ACA) Comprehensive and Eligibility Verification Audit services are taxable insurance services; and the ACA Reporting-Only service is a taxable data processing service. The Comptroller ruled that the taxpayer’s Retirement Plan Administration and 401(k) Plan Recordkeeping services are not subject to sales and use tax.

Property Taxes

Texas Voters Authorize Legislature to Cut Property Taxes

Texas voters approved Proposition No. 4, amending the state’s constitution to “authorize the legislature to establish a temporary limit on the maximum appraised value of real property other than a residence homestead for ad valorem tax purposes; to increase the amount of the exemption from ad valorem taxation by a school district applicable to residence homesteads from $40,000 to $100,000; to adjust the amount of the limitation on school district ad valorem taxes imposed on the residence homesteads of the elderly or disabled to reflect increases in certain exemption amounts; to except certain appropriations to pay for ad valorem tax relief from the constitutional limitation on the rate of growth of appropriations; and to authorize the legislature to provide for a four-year term of office for a member of the board of directors of certain appraisal districts.”

Fuel Taxes

IRS Disallowance of Alcohol Mixture Credit Upheld by District Court

In Chemoil Corp. v. U.S., the Internal Revenue Service’s (IRS) disallowance of the ethanol mixture tax credit upheld by the U.S. District Court for the Southern District of New York upheld because the taxpayer had no legitimate basis for engaging in the transactions in question and did so only to claim the tax credit. The Court upheld the IRS’s decision under the economic substance doctrine, which disallows the tax benefits of a transaction if the transaction lacks a business purpose. The Court reasoned that Chemoil sold ethanol at a pre-tax loss in each of the transactions in question and had no reasonable expectation of profit from the sale, and there was no evidence that Chemoil had any motivation to enter into the transactions other than potential tax benefits that could be reaped from obtaining the alcohol mixture excise tax credit.

International Tax and Transfer Pricing

International Tax | Transfer Pricing

International Tax

The Export Incentive Under FDII (Podcast)

Weaver’s Vince Houk and Josh Finfrock dive into the export incentive under FDII and what means for your organization. Their discussion covers often overlooked opportunities to help maximize FDII, including analyzing the general and administrative expense allocation and allocating it in accordance with arm’s length principles based on the underlying activities and the genuine beneficiary. Other opportunities they discuss include looking at services provided by U.S. companies that may qualify for the FDII benefit and reviewing the IP structure related to potentially moving IP into the U.S.

Leveraging Export Incentives to Reduce Taxes (Podcast)

Weaver’s Colby Horn and Kurtis Dixon examine the world of export incentives with Vince Houk, Weaver’s partner-in-charge, International Tax Services. They discuss how companies can leverage these incentives to reduce taxes, offset costs and ways to optimize the benefit.

IRS to Interpret NAFTA as USMCA in Tax Treaties with Denmark, Luxembourg, Malta, and Mexico

On July 31, 2023, the IRS published competent authority arrangements (CAA) with Denmark, Luxembourg, Malta, and Mexico regarding the interpretation of the term “North American Free Trade Agreement” (NAFTA) in the Limitation of Benefits articles of the respective U.S. income tax treaties with these countries. The Treasury and each party agreed to interpret references to NAFTA in the Limitation of Benefits articles of their respective tax treaties as references to the United States-Mexico-Canada Agreement (USMCA).

Sub-Part F Reporting Obligations

The Treasury Department and IRS published final regulations related to the treatment of subpart F income and Section 956 inclusions for controlled foreign corporations (CFCs) owned by partnerships and S-corporations. Section 956 treats CFC investments of earnings in U.S. property the same as a CFC earnings repatriation. These regulations are effective for tax years of foreign corporations beginning on or after January 25, 2022 and to tax years of U.S. persons in which or with which such tax years of foreign corporations end. These regulations have the effect of treating Subpart F income and Section 956 inclusions as a partner level item, similar to GILTI. From a compliance perspective, this generally means that subpart F income and Section 956 inclusions are reported to partners on Schedules K-3, instead of the face of the K-1. Partners need to be aware of this change to correctly recognize subpart F income and Section 956 inclusions on their personal income tax returns.

Moore v. United States of America

In a milestone Supreme Court tax case, taxpayers Charles and Katherine Moore have appealed a Ninth Circuit dismissal of their challenge to IRC Section 965, as amended by the Tax Cuts and Jobs Act (TCJA) and the Supreme Court took up the appeal. While historically U.S. taxpayers could defer the earnings and profits of a CFC that was not otherwise subject to the Subpart F or PFIC regimes, the TCJA amendment to Section 965 eliminated such deferral. Under the TCJA amendment, certain U.S. taxpayers were subject to a toll tax, which effectively taxed the historic earnings and profits of CFCs, while also modifying and introducing what is colloquially known as GILTI (IRC Sections 951 and 951A). The Moores, citing Supreme Court precedent from the 1920’s, argued that the toll tax violates their rights because it applies a tax on something other than income. Under the Moores’ reading of Supreme Court precedent, the toll tax was levied by the U.S. government on amounts that were not realized, and over which taxpayers do not have complete control. This is an important, possibly precedential case, regarding the concept of a realization event, with potential consequences related to business entities, exempt organizations and other provisions related to foreign entities. Oral arguments were held December 5, 2023, with an estimated $340 billion in tax revenues (government estimate) in the balance. A decision from the Supreme Court is expected in the spring or summer 2024.

Proposed Regulations Amend Earlier Proposed Regulations Regarding Section 987

The Treasury Department and the IRS issued proposed regulations providing guidance under IRC Section 987 and related provisions under Sections 861, 985 through 989, and 1502. These proposed regulations relate to determining taxable income or loss and foreign currency gain or loss with respect to a qualified business unit that has a functional currency different from its owner (a “Section 987 QBU”). An election to treat all items of a Section 987 QBU as marked items (subject to a loss suspension rule), an election to recognize all foreign currency gain or loss with respect to a Section 987 QBU on an annual basis, and a new transition rule were included in the proposed regulations. These supplant the earlier 2016 proposed regulations by (a) providing several simplifying elections that permit Section 987 to be applied in a way that more closely conforms to the financial accounting rules and reduce the compliance burden and (b) providing additional guidance regarding the determination of Section 987 taxable income or loss and Section 987 gain or loss. Once finalized, the 2023 proposed regulations are generally applicable to taxable years beginning after December 31, 2024. A taxpayer may choose to apply the proposed regulations for taxable years beginning on or before December 31, 2024 and ending after November 9, 2023. These proposed regulations provide applicability dates to taxpayers who wish to apply the earlier-published 2016 and 2019 Section 987 regulations; in the absence of any additional deferments from the IRS, the 2023 regulations are due to apply to taxpayers with taxable years beginning after December 31, 2024.

Transfer Pricing

Microsoft’s $28.9 Billion Proposed Transfer Pricing Adjustment

On October 11, 2023, Microsoft Corporation (Microsoft) announced it received a series of Notices of Proposed Adjustment (NOPAs) from the IRS related to its decade-long transfer pricing tax audit spanning tax years 2004 to 2013. The primary focus of the audit is Microsoft’s intercompany transfer pricing, particularly the cost-sharing arrangement with its Puerto Rican affiliate, which Microsoft and this affiliate shared the costs of developing certain intellectual property. The IRS disagrees with Microsoft’s transfer pricing structure related to the cost-sharing arrangement arguing Microsoft shifted taxable profits outside the United States, thus owing an additional $28.9 billion in tax for 2004 to 2013, plus penalties and interest.

Transfer Pricing in Unexpected Places – State and Local Income Tax

Transfer pricing is commonly viewed as an international issue, but certain state tax authorities are scrutinizing domestic related-party transactions. These transactions include supply chains for materials or finished goods, services, equipment leasing, licensing software and intellectual property (royalties) or loans among domestic related parties.

United States – Interim Guidance on APA Requests

The IRS issued interim guidance providing new processes and criteria for evaluating the suitability of Advanced Pricing and Mutual Agreement (APMA) for acceptance. Additionally, the IRS offers an optional pre-request process to provide taxpayers with advice before they make a formal Advanced Pricing Agreement (APA) request. Although further guidance is anticipated the interim guidance clarifies IRS’s intentions to enhance its selectivity when accepting APA requests by highlighting heightened scrutiny and early deselection process to avoid tying up APMA and taxpayer resources unproductively pursuing APA requests with low probability of completion or desired outcome.

Transaction Tax Advisory

IRS Proposes Rules on Partnership Transactions

The IRS issued proposed regulations limiting tax benefits for transactions between partnerships and related persons. Internal Revenue Code (IRC) Section 267 prohibits partnerships from claiming losses on transactions with related persons. The proposed regulations affect partnerships transactions with related persons that result in gain or loss on a sale or exchange of property or result in a timing difference for which income and deduction are recognized because of varying methods of accounting. The rule changes keep up with laws passed by Congress, as definitions of related persons have changed.

Capitalization & Cost Recovery

Bonus Depreciation Phase Out for 2024

As of January 1, 2024, bonus depreciation under IRC Section 168(k) enters the second year of its five-year phase out. The Tax Cuts and Jobs Act increased the bonus depreciation from 50 percent to 100 percent for qualified property placed in service after September 27, 2017, and before January 1, 2023. Beginning on January 1, 2023, the bonus depreciation rate is reduced by 20 percent each year. The rate was 80 percent for property placed in service after January 1, 2023 and before January 1, 2024. The bonus depreciation is reduced to 60 percent beginning on January 1, 2024.

Tax Provisions

Accounting Standards Update Creates Additional ASC 740 Reporting Burden

On December 14, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2023-09 to enhance the transparency of income tax disclosures. The Update largely affirms the rules and requirements enumerated in Exposure Draft (ED) 2023-ED100 (Topic 740), which primarily addressed proposed changes to the effective tax rate reconciliation presentation and the tax payment information reported in the statements of cash flows. The amendments in this Update require that public companies include specific categories of reconciling items, as well as additional qualitative and quantitative information, in their rate reconciliation. Private companies face enhanced effective tax rate related disclosure requirements as well. Further, all entities will soon be required to comply with additional jurisdictional reporting requirements related to income tax payments.

Accounting for Income Taxes – ASC 740 Income Tax Provision Services

Public companies filing under the ASC 740 income tax provision reporting standards face complex financial reporting requirements that challenge even the best tax departments. As a result, Accounting for Income Taxes remains one of the most frequent drivers of financial statement restatements, and control deficiencies and weaknesses. Weaver can help. Our team has extensive experience assisting public and private companies with technical issues and offer a variety of services. We provide the technical knowledge and experience of a Big 4 with the personalized touch of a regional firm.

Tax Credits and Incentives

IRS Releases Interim Guidance on Amortization of Section 174 Expenses

The IRS released interim guidance clarifying the application of research and experimental amortization pursuant to IRC Section 174 incorporating changes made by the Tax Cuts and Jobs Act (TCJA) that took effect for tax year 2022. The TCJA requires taxpayers to capitalize Section 174 research and experimental expenditures (including software development costs) for tax years beginning after January 1, 2022 and amortize domestic expenditures over five years (15 years for qualified foreign expenditures).

Inflation Reduction Act Increases Available R&D Tax Credit Payroll Tax Offset to $500,000

The Inflation Reduction Act (IRA) significantly enhanced the R&D payroll tax credit by doubling it to $500,000 from $250,000. Qualified businesses can use their R&D tax credit to offset the 6.2% employer portion of Social Security payroll tax liability up to $250,000 and now an additional $250,000 can be used to offset 1.45% employer portion of Medicare payroll tax liability. The R&D payroll tax credit is available to qualified small businesses that meet the gross receipts tests and claim the credit and election on a currently filed return.

IRS Issues Additional Guidance on Section 45L New Energy Efficient Home Credit

The IRS issued Notice 2023-65 on September 27, 2023, providing additional guidance on the §45L New Energy Efficient Home Credit. Originally enacted as part of the 2005 Energy Policy Act, the credit was recently modified as part of the IRA. This Notice has been widely anticipated by industry to address outstanding questions on eligibility.

IRS Stops Processing Employee Retention Credit Claims

On September 14, 2023, the IRS ordered an immediate moratorium on the processing of new Employee Retention Credit (ERC) claims through at least the end of 2023. The agency cited a “flood of improper” claims, concerns from tax professionals, and the “aggressive marketing to ineligible applicants” as reasons for the moratorium. The IRS continues to work on previously filed ERC claims, but stricter compliance reviews extend the processing time from approximately 90 days to 180 days or longer.