This Week in State Tax

The Arizona Cardinals (team) dropped the ball by failing to collect state and city Transaction Privilege Tax (TPT) on a ticket surcharge, the Arizona Tax Court held in a recent ruling. The team entered into a Facility Use Fee Agreement with the Arizona Sports and Tourism Authority, requiring it to collect and remit to the Authority a fee for use of State Farm Stadium. The fees at issue here were per-ticket surcharges for events held at the stadium, including the team’s home games and tickets sold through the stadium box office to other events. The fees were used to retire bonds issued by the Authority to finance the stadium.

Arizona state and city TPTs are imposed on businesses for the privilege of engaging in various types of economic activity, including amusements, the classification assigned to the team. The base of the TPT is generally defined as “the gross receipts of a taxpayer derived from trade, business, commerce or sales ... without any deduction on account of losses.” In its assessment, the Department of Revenue alleged that the facility use fee fell within the definition of gross income, meaning the team should have collected TPT on the fee in addition to any tax due on the tickets.

The team contended that the facility use fee should not be included in its gross income because it acted as an agent for the Authority in collecting the fee and that the fee was imposed on ticket purchasers, not the Cardinals. Additionally, the team claimed the fee was not booked as either an expense or revenue for income tax purposes and was not subject to the NFL revenue sharing obligation. The tax court, however, determined that the definition of "gross receipts" includes all receipts from sales without deductions for expenses and that the taxpayer had cited to no authority allowing an exemption or deduction. Therefore, the tax court determined the facility use fee should be included in the TPT tax base. For further information on Arizona Cardinals Football Club LLC v. Department of Revenue, contact Eric Gee.

Illinois Governor Pritzker recently signed Senate Bill 3362 changing the sourcing obligations of certain Illinois retailers, and Senate Bill 3282, amending requirements for direct pay permit holders. Senate Bill 3362 adopts destination-based sourcing for in-state retailers maintaining a place of business in Illinois when they make sales that originate from inventory outside Illinois to customers in the state. Previously, businesses selling tangible personal property originating from inventory outside Illinois into Illinois were not considered retailers subject to state and local retailers’ occupation taxes and were only required to collect only the 6.25 percent Illinois use tax. Under the new bill, effective January 1, 2025, retailers maintaining a place of business in Illinois must now source sales to Illinois customers when such sales are from inventory originating outside the state as if they were made at the Illinois location where the goods are shipped, delivered, or where the purchaser takes possession (i.e., destination sourcing).

Senate Bill 3282 mandates that each direct pay permit holder review its purchase activity by March 31, 2025, and annually thereafter by March 31, to verify that purchases made during the 12-month period ending December 31 of the prior year were correctly sourced and taxed at the appropriate rate. If a sourcing error is found, permit holders must file an amended return to correct it. Failure to do so will result in a $6,000 penalty. However, this penalty will not be imposed if the Department determines that at least 95 percent of the transactions for the review period were correctly sourced. For information on Senate Bills 3362 and 3282, contact Drew Olson.

The Kansas Department of Revenue issued guidance addressing the decoupling from IRC section 163(j). Under 2024 Senate Bill 410, Kansas decoupled from section 163(j) and allows a deduction for the current year’s interest expense in its entirety for tax years beginning after December 31, 2020, without regard to any amount disallowed under the IRC. This is done through a subtraction modification for any amount of disallowed interest expense and an addition modification for any amount deducted by reason of a carryforward of disallowed interest from prior years under section 163(j).

In addition to allowing taxpayers to amend their 2021 state income tax return to adjust the amount of interest deduction now allowed for that year, the bill allows taxpayers to include in their 2021 amended return a recapture of any interest expense disallowed under IRC section 163(j) in tax years 2018, 2019, and 2020. This will be accomplished by including on the amended 2021 return an amount equal to the sum of any interest expenses paid or accrued in tax years 2018, 2019 and 2020, less the sum of amounts previously allowed on the federal return (including carryforwards) for such tax years. Taxpayers will need to amend their 2021 return to claim this recapture, as the statute of limitations is three years. Taxpayers that file a 2021 Kansas amended return must include a copy of federal form 8990 for each of tax years 2018 through 2021 and a worksheet showing the computation of the interest expense claimed for each of the respective tax years. Please contact Alexander Karscig with questions on Notice 24-16.

The Division of Taxation has issued a revised Tax Bulletin TB 105-(R) implementing changes to the Corporation Business Tax for S Corporations and Qualified Subchapter S Subsidiaries (QSSS) that were enacted in December 2022. The law eliminated the requirement for a separate New Jersey S corporation election for a federal S corporation for privilege periods beginning on or after December 22, 2022. The guidance provides the procedures for a federal S Corporations or QSSS with a federal approval letter for its status. For federal approval letters dated on or after December 22, 2022, the S corporation must file a Shareholder Jurisdictional Consent and a copy of the federal approval. If the federal S Corporation or QSSS elects to be treated as a C Corporation for New Jersey purposes (known as a “hybrid corporation”), shareholder consent is still required. For federal approval letters dated before December 22, 2022, Shareholder Jurisdictional Consent and proof of federal S corporation status must be submitted for privilege periods on or after December 22, 2022. For periods beginning before December 22, 2022, the corporation must make a retroactive election.

The guidance also includes details on the procedures for election into and revocation of the election to be treated as a C Corporation for New Jersey purposes. The election is made by indicating the entity is a hybrid corporation on its tax return, either Form CBT-100 or Form CBT-100U (not Form CBT-100S), by the later of the original due date or extended due date. Revocation of the election must be finalized on or before the 15^th day of the third month of the current privilege period. The Division has also released an FAQ on December 2022 law changes. Please contact Jim Venere or Andrew Eskola with questions on TB-105(R).

A Washington State Court of Appeals recently issued an unpublished decision holding that cleaning and repair services for a taxpayer’s cargo ship containers and motor generators were not exempt from the retail sales tax. The taxpayer, a transportation company operating out of Seattle and Tacoma, hired a company to inspect, clean, and repair its shipping containers and motor generators and paid tax on the service. The containers were used on ocean-faring container ships, railroad cars, and motor carrier trailers to transport various goods. Some containers contained refrigerating units. When these containers were placed on trailers for land transport, motor generators mounted under the trailer generated electricity to power the cooling system. Neither the containers nor the generators were permanently attached to a particular piece of carrier property.

Washington law provides a sales tax exemption for sales of carrier property, such as railroad cars, watercraft, motor vehicles, and trailers used in interstate commerce. The exemption includes tangible personal property that becomes a component part of such pieces of carrier property, as well as cleaning and repair services for such component parts. The taxpayer filed a refund claim for the sales tax paid on cleaning and repair services, taking the position that the containers and generators were component parts of the cargo ships, trailers, and other property on which they were used.

The Department of Revenue denied the claims, and the taxpayer appealed to the Board of Tax Appeals, which upheld the Department's determination. The Board concluded that the shipping containers were not attached to and a part of the container ships, noting that while the containers were integral to the usefulness of the ships for transportation services, they did not affect the operation, seaworthiness, or other essential purposes of the ships. In addition, the containers could be used on various modes of transportation. Similarly, the Board found that the generators, while integral to the safe transport of perishable items on trailers, were not permanently attached to the trailer chassis and did not become an integral part of the motor vehicle or trailer's operation or roadworthiness. A state superior court affirmed the Board, and the taxpayer further appealed. On appeal, the taxpayer argued the Board had erred in adding requirements to the statute (e.g., seaworthiness and permanent attachment) and was incorrect in finding the containers and generators were not attached to and component parts of the carrier property.

The Court of Appeals was not persuaded and affirmed, agreeing that the cargo containers and refrigeration generators were not attached to the carrier property within the meaning of Washington's law, meaning they could not be a component part of the property. Consequently, the cleaning and repair services for these items were ineligible for the tax exemption. For further information on Matson Navigation Co., Inc. v. Department of Revenue, please contact Michele Baisler.