This Week in State Tax

On November 5, voters will be tasked with deciding on a number of ballot measures related to state and local taxation with significant implications for business taxpayers. They include measures to establish new taxes, adopt rate increases, and make other changes.

•       Colorado Proposition KK  would impose a 6.5 percent excise tax on firearm and ammunition sales by manufacturers, dealers, retailers, and vendors effective April 1, 2025. Businesses with annual sales under $20,000 would not be subject to the tax, and sales to peace officers, law enforcement, and active-duty military would be exempt.

•       Georgia Amendment 2 would create the Georgia Tax Court, which would have statewide jurisdiction, concurrent with the state business court and superior courts. Currently, Georgia has a Tax Tribunal, which is not part of the state judiciary and has limited jurisdiction pertaining only to tax matters that involve the state Department of Revenue.

•       Nevada Question 5 would create a sales and use tax exemption for child and adult diapers, effective January 1, 2025. Exemptions to the state sales and use tax require approval of the voters.

•       North Dakota Initiated Measure 4 would prohibit the state and its political subdivisions from imposing any tax based on the assessed value of real and personal property, except as needed for the payment of bonded indebtedness; it also imposes limitations on the level of debt that may be incurred for various purposes. Finally, the measure requires the state to provide replacement revenues to local governments in an amount not less than the amount of tax imposed on real property for other than bonded indebtedness in the year the amendment is passed.

•       Oregon Measure 118 is an initiated law that would impose a minimum tax on corporations with Oregon sales exceeding $25 million applicable to tax years beginning on or January 1, 2025. The tax would be equal to the current minimum tax for the applicable bracket, plus three percent of the excess over $25 million. Proceeds from the increased tax would be used to provide annual rebates to Oregon residents. For further detail, see our August 5 TWIST.

•       In San Francisco, Proposition L would create a new gross receipts tax on “ride-hail business activities,” which includes transportation network company services and autonomous vehicle businesses. Proposition M would amend several different gross receipts-based taxes, including the general business tax, homelessness tax, overpaid executive tax, and administrative office tax as well as the business registration fee. For more details on Propositions L and M, see our September 16 TWIST.

•       South Dakota Initiated Measure 28 would create a state sales and use tax exemption for “anything sold for human consumption,” except alcoholic beverages and prepared food (food sold heated or with utensils). The exemption would not be applicable to municipalities. The term “human consumption” is not currently defined in state law; judicial and legislative clarification would be expected.

•       Washington Initiative 2109 would repeal the capital gains tax that was passed by the state legislature in 2021 and was first due on April 18, 2023. Currently, an individual’s Washington capital gains above $250,000 are taxed at a rate of 7 percent. Recall, the Washington Supreme Court in 2023 ruled the capital gains tax constituted an excise tax and did not violate the constitutional prohibition on income taxes.

•       Wyoming Constitutional Amendment A would add residential real property as a fourth, separate class of property and authorize the legislature to create a subclass for owner-occupied primary residences, potentially assessed at a different rate than that generally applied to other residential property.

Indiana and Missouri issued letter rulings determining whether taxpayers qualified for their respective manufacturing exemptions.

Indiana Ruling: The Indiana Department of Revenue ruled that an excavation company that provided certain services at surface mines could not claim a sales and use tax mining exemption on certain of its purchases, finding that the equipment and supplies in question were not directly involved in the mining process. The taxpayer provided services to surface coal mine operators, disposing of waste materials remaining after the coal was processed. Specifically, after the coal was removed, processed, washed, and sorted, the taxpayer removed waste materials (primarily dirt and rock) from the site and transported them to a location specified by the operator.

Indiana law exempts sales of machinery, tools, and equipment directly used by the purchaser in extraction or mining from state gross retail sales tax, provided the property is acquired for direct use in the production of tangible personal property in the business of mining. The Department found that the taxpayer’s activities did not meet the criteria for exemption because the equipment and supplies were used for post-processing waste management, not directly in the mining process. The Department viewed the taxpayer as a service provider fulfilling contracts and not directly engaged in the extraction or processing of coal. For information on Indiana Letter of Findings: 04-20241336, please contact Dave Perry.

Missouri Ruling: The Missouri Department of Revenue recently issued a letter ruling informing the applicant that it did not qualify for the manufacturing sales and use tax exemption. The company performed custom machining and laser services to produce custom products for its customers. Most orders were shipped out of Missouri, but the company often did not know the end use of its products due to the custom nature of the orders. The applicant inquired whether it qualified as a manufacturer and could avail itself of the manufacturing exemption for certain of its purchases.

Missouri law exempts machinery, equipment, and parts used directly in manufacturing, mining, fabricating, or producing a product intended for sale for final use or consumption. Manufacturing is defined as creating new and distinct items through alteration or physical change, adapting something unsuitable for common use into something suitable, or producing new articles with different applications. In assessing the company's activity, the Department noted that the state supreme court had held that to qualify for the manufacturing exemption, the taxpayer must show that its product could be marketed to multiple buyers, having market value and being an output the price for which is set by competing buyers and sellers.

The Department concluded that the applicant did not qualify for the manufacturing exemption because the company's activities did not produce marketable products with distinct use, identity, and value from the original materials. Neither did they meet the marketability requirement outlined by the Missouri Supreme Court. For questions on Missouri Letter Rulings - LR 8310, please contact John Griesedieck.

The Virginia Tax Commissioner recently ruled that a disregarded LLC was not subject to the Business, Professional and Occupational License (BPOL) tax because it did not have a definite place of business in Virginia. The BPOL is a tax imposed on businesses and professionals for the privilege of doing business in a locality and is imposed on a separate entity basis. The disregarded LLC, LLC A, performed manufacturing and export activities entirely outside Virginia. It was owned by Parent, a Virginia-based entity, that provided legal, accounting and tax services to LLC A for a fee. In concluding that the disregarded LLC was not subject to the BPOL, the Commissioner first noted that the disregarded status of LLC A was not relevant to the determination of whether the entity was subject to BPOL. The Commissioner ultimately held that the LLC did not have a definite place of business in Virginia because it did not have an office or location at which a regular and continuous course of dealing occurred in Virginia. The fact that Parent’s employees were performing services for LLC A from its Virginia headquarters was not material to the determination of whether LLC A had a definite place of business in Virginia. Please contact Jeremy Jester for more information about Ruling 24-75.

The U.S. Supreme Court recently declined to review a South Dakota case involving the imposition of use tax on construction equipment brought into the state for use in various projects. Recall, in Ellingson Drainage, South Dakota assessed use tax on the depreciated value of equipment that Ellingson, a Minnesota-based company, had brought into the state for its work on about 30 different projects; no tax had been paid been at the time of purchase in Minnesota. Ellingson contested the assessment on the basis that it was disproportionate to the activity in the state and violated the Due Process and Commerce Clause as nearly 90 percent of the use of the equipment occurred in states other than South Dakota. The state supreme court upheld the assessment noting that no tax had been paid elsewhere, the company was free to continue to use the equipment in South Dakota, and it received the full benefits of doing business in the state.

On appeal to the High Court, the taxpayer argued the matter represented a case of first impression as being an unapportioned use tax on movable property and violated the Due Process and Commerce Clause. The Supreme Court denial was issued without comment. For further information on Ellingson Drainage, contact Nicole Kirk.