This Week in State Tax

The City Council recently approved the FY 2025 Budget Support Act over the objections of Mayor Muriel Bowser who considered the budget to be “unsustainable.” Major changes in the budget include an increase in the sales and use tax rate and a shift of the corporate franchise tax to Finnigan-style apportionment. Additional changes address personal income, property, and motor vehicle excise taxes, as well as sports wagering.

Effective October 1, 2025, the sales and use tax rate will increase from 6 percent to 6.5percent. On October 1, 2026, the rate will increase further to 7 percent. For tax years beginning after December 31, 2025, corporation franchise taxpayer members of a combined group will be required to sum the sales figures for all group members, including those without nexus to the District, when determining a single apportionment factor for the entire group. Under current law, D.C. uses the Joyce method of apportionment, which requires each group member to compute its  apportionment factor separately. The District switched to single sales factor apportionment in 2015.

Even though unsigned by the mayor, the budget can take effect. The budget itself is subject to review by the U.S. Congress, but the recently approved Budget Support Act is in effect during the congressional review. Contact David Meyer for further information on Legislative Bill 875.

The New Mexico Court of Appeals recently held that certain employment and payroll services and the associated markup were not exempt from Gross Receipts Tax (GRT) as either receipts from a disclosed agent or services performed outside the state. The taxpayer, a Texas-based employment agency with no physical office in New Mexico, entered a service contract in which it performed a variety of employment services for its client’s workers. The client recruited, hired, set compensation levels, and controlled all the employees’ work. Later, the taxpayer began providing payroll services for certain of the workers based in New Mexico. Under the contract, the workers were on the taxpayer’s payroll, and the taxpayer paid their salaries, withheld taxes, and provided other benefits for them. The client reimbursed the taxpayer for the compensation and paid a markup fee on the payroll services.

On audit, the Taxation and Revenue Department (Department) assessed unpaid GRT on the taxpayer’s services and its markup; on its GRT returns, the taxpayer had deducted 100 percent of the receipts. The taxpayer argued that the receipts were received as reimbursement for performing a service as a disclosed agent of another, making them exempt from GRT. In addition, it argued the markup was exempt because its services were performed exclusively outside New Mexico. An Administrative Hearing Officer (AHO) held that the taxpayer failed to establish it was acting as a disclosed agent and upheld tax on the reimbursement and related services but did agree that the markup was exempt as related to a service performed outside New Mexico. The taxpayer and the Department appealed the adverse parts of the AHO determination.

The appellate court first addressed the markup issue. New Mexico law and regulations exempt services performed out of state from GRT unless they are incidental to a service performed in the state. The court found that the taxpayer was the employer of the workers, even though it did not recruit, hire, or control these workers. As such, the payroll services were merely incidental to the taxpayer’s service of employing the workers in New Mexico, and the hearing officer had erred in finding that the markup was exempt as a service performed outside the state. The court also rejected the taxpayer’s argument that it was exempt from tax as a disclosed agent of its client. The court explained that even if it accepted that the taxpayer was an agent of the client, it had failed to present any evidence of affirmatively disclosing the relationship to the workers. Therefore, the court held that the taxpayer was responsible for the assessed GRT. For questions regarding Talbridge Corporation v. New Mexico Taxation & Revenue Department, please contact Patrick Loynes.

Governor Josh Shapiro recently signed Senate Bill 656 into law; the bill clarifies and modifies the current regime for taxing electricity used to power vehicles for both operators of public charging stations and individual owners charging at private residences. Under current law, electricity is considered an alternative fuel (along with propane, natural gas, and others) when used to power a vehicle on public roads. An “Alternative Fuel Dealer-User” (defined as “any person who delivers ... alternative fuels into ... a vehicle for use on the public highways”) is required to remit the alternative fuel tax due on the fuel consumed on public roads to the Department of Revenue (Department). The alternative fuel tax rate is based on the state gasoline tax rate and the alternative fuel equivalent to the propulsion power of gasoline; for 2024, the alternative tax rate for electricity is $0.0172 per kilowatt hour.

Notably, SB 656 states that “a person that provides an electric vehicle charging station for public use, regardless of whether compensation is received for the public use” is an alternative fuel dealer-user responsible for remitting the alternative fuel tax to the Department. The tax is in addition to any other tax imposed on the electricity delivered to the charging station, and it may be passed on to the consumer by the charging station operator.

Current law makes an individual charging a vehicle at their residence responsible for remitting the alternative fuel tax to the Department, a process considered burdensome and prone to non-compliance. Under SB 656, individuals who provide EV charging stations used exclusively at private residences or common interest developments (e.g., apartment complexes) are no longer considered alternative fuel dealer-users. In lieu, EV owners, with to certain exemptions, will be subject to an annual Electric Vehicles Road User Charge, set at $200 in 2025, $250 in 2026, and escalating annually thereafter. The fee will be paid along with the vehicle registration. For additional information, contact Mark Achord.

Two governors are using the legislative interim to urge consideration of major state and local tax reforms. Nebraska Governor Jim Pillen has convened a special legislative session to consider reducing property taxes by 40-50 percent, while Governor Landry is mulling approaches for reducing or eliminating personal income and business taxes in Louisiana.

Governor Pillen’s proposal to the special session (LB 1) would reduce local property taxes by substantially increasing state funding for K-12 education. Resources to finance the increased education costs would be generated principally by broadening the sales and use tax base, adopting an Advertising Services Tax, increasing some excise taxes, and implementing other miscellaneous measures. The sales tax base would be expanded to include several noteworty items: (a) certain professional and business services such as legal, accounting, tax preparation, real estate, lobbying, telemarketing, public relations, and investment advisory services; (b) several computer-related items, including information services, data processing, and mainframe computer access; (c) various maintenance, repair, and labor services; and (d) select personal services. Additionally, current exemptions for agricultural and manufacturing machinery and equipment would be eliminated, and these items would be subject to a reduced levy of 2 percent (as opposed to the standard rate of 5.5 percent). They would, however, become exempt from personal property taxes.

The Governor’s proposal also imposes a new Advertising Services Tax on all forms of advertising, including digital advertising. The definition of taxable advertising services covers a wide spectrum of activity, and the tax would be imposed at 7.5 percent on advertising services delivered in Nebraska as apportioned based on viewers of the advertising in Nebraska to viewers in “other states.”  The tax applies only to entities with over $1 billion in gross advertising revenues sourced to the U.S. There is no deadline for the special session of the Unicameral to end, and at least 30 other bills related to property and other taxes have been introduced.

Matters have not progressed as far in Louisiana. Besides Gov. Landry’s keen interest in reducing personal income and business taxes, certain previously enacted tax increases are scheduled to expire on July 1, 2025, which would create a substantial budget shortfall (known locally as the “fiscal cliff”). Most information about the Governor’s plans comes from a legislative presentation by the Department of Revenue in which they put forward alternatives to restructure and reduce the personal income tax, adopt a flat rate corporate income tax, eliminate the corporate franchise tax, and modify the business inventory tax. Financing for such measures focused primarily on expanding the sales tax base by curtailing exemptions and taxing items such digital goods and personal services. The next steps in the Pelican State are uncertain and may not occur until the legislature convenes in Spring 2025. Please stay tuned to TWIST for updates on these and other tax reform developments.