This Week in State Tax

The Illinois Department of Revenue (Department) recently issued two rulings applying the destination sourcing rule for sales of tangible personal property under the state corporation income tax.  In a Private Letter Ruling, the Department addressed the sales factor sourcing of taxpayer’s sales of gaming content and machines that were shipped to an Illinois distribution center to then be further shipped to a customer outside the state. The taxpayer, which manufactured and assembled its products outside Illinois, shipped its products to a centrally located third party distribution center in Illinois. The taxpayer used the distribution center solely to accommodate further shipping, and no modifications or product changes occurred at the distribution center. No inventory was stored at the distribution center, and none of the taxpayer’s other businesses utilized the center. Products came to rest in the distribution center for periods ranging from a few hours to several days. Illinois generally follows the Uniform Division of Income for Tax Purposes Act for including sales of tangible personal property in the sales factor. Here, the Department determined that delivery to the Illinois distribution center would not be an Illinois sale because the sales were to customers outside Illinois, the Illinois distribution center was used solely for further shipping, and the shipment did not terminate in Illinois. 

In a General Information Letter with different facts, however, the Department concluded that products shipped to Illinois-based distributor locations and storerooms are sales that terminate in Illinois and would be sourced to Illinois for sales factor purposes. Unlike the PLR, the third-party Illinois distributors and storeroom here resold the taxpayer’s products to other distributors or retail stores located in various states, including Illinois. In finding that the destination of the sales was Illinois, the Department noted that the taxpayer’s control of and responsibility for future sales and movement of its product was fully transferred to the third-party distributor at the Illinois distributor locations. The taxpayer was no longer involved in the sales process once the products were ordered by the distributor and shipped to storerooms. In addition, the distributor would create new pallets of the taxpayer’s products, package and label the pallets, and ship the product onward using its own truck or third-party carriers. The taxpayer is not made aware of the subsequent destination of its products. Thus, the Department found that the taxpayer’s sales terminated in Illinois, regardless of whether the third-party distributor subsequently moved the goods outside the state.  For more information about IT 24-0001-PLR or IT 24-008-GIL, please contact Brad Wilhelmson.

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The Minnesota Supreme Court recently ruled that rebate amounts paid to customers by a wholesale drug distributor were properly excluded from the distributor’s gross receipts. Minnesota imposes a Wholesale Drug Distribution Tax on gross receipts earned from the sale of drugs to support the MinnesotaCare subsidized health care system. The taxpayer invoiced customers for the full price the drugs it sold but returned certain amounts as part of contractual rebate agreements with its customers. Some customers deducted the rebate from the amount paid to the taxpayer, treating it as credit; others paid the full invoiced amount and received the rebate amount as a check. The issue was whether the value of these rebate amounts should be excluded from "gross revenues" subject to the excise tax. The taxpayer excluded the rebates on its original returns, but the Commissioner of Revenue (Commissioner) added them back on audit. The taxpayer appealed, and the Tax Court ruled that the taxpayer never "received" the rebate amounts because it was contractually required to return them to its customers.

On appeal, the Supreme Court applied dictionary definitions to interpret the statutory language, ruling that “gross revenues” means “total amounts received in money or otherwise,” and that “received” means “’to come into possession of’ or ‘acquire.’” The court noted the taxpayer did not have discretion in paying the rebates, meaning it did not “come into possession of” these amounts. The court further determined that there was no statutory basis for the Commissioner’s position that gross receipts should be measured using the full invoiced amounts, noting that this interpretation would require a taxpayer to include as gross receipts invoiced amounts even if a customer refuses to pay. The court characterized the Commissioner’s approach as “form-over-substance”, noting that if the taxpayer had applied the rebates on an invoice-by-invoice basis, it would have reached an economically equivalent outcome while undoubtedly excluding the rebated amounts from its gross receipts. Finally, the court rejected an argument that the customer loyalty “purchased” by the rebates should be treated as receipts earned by the taxpayer with a value equal to the rebate amounts, because the rebate is based on historical purchasing patterns, not on any obligation to make future purchases. Please contact Matthew Saunders with questions on Dakota Drug v. Commissioner of Revenue.

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The Wisconsin Department of Revenue (Department) recently issued Publication 305, providing guidance on the new electric vehicle (EV) charging tax that becomes effective January 1, 2025. The tax is set at $.03 per kilowatt-hour on electricity delivered by a level 3 charger, as well as by level 1 or level 2 chargers installed on or after March 22, 2024, into an EV battery or energy storage device.

Any person who delivers, places, or offers to deliver electricity from an EV charging station they own, operate, manage, or lease is required to register with the Department for collection and remittance of the tax. In some circumstances, multiple parties may be liable for registration. For example, if a grocery store owns EV chargers in its parking lot for the public to use, but the chargers are managed under an arrangement with a charger company that delivers the electricity and facilitates payments from consumers through its software, both entities would be obligated under the law to register. In such situations, the Department advises that only one party should register and pay the tax. Both parties will be liable for the tax for nonpayment, but the Department will not impose the tax on another party if the tax is paid.

The excise tax applies to the total kilowatt-hours delivered by an EV charging station, regardless of whether the consumer is charged for the electricity. The excise tax does not apply to electricity delivered by an EV charging station located at a residence, or by level 1 or level 2 chargers installed prior to March 22, 2024. The reporting period for the tax is semiannually with due dates of July 31 and January 31, and returns must be filed online using the Department’s online filing application. Finally, the sale of electricity that is subject to the excise tax is exempt from sales tax, and a seller need not collect exemption certificates from consumers to support the exemption. For more information on Publication 305, contact Dave Perry. 

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On November 5, voters in eight states considered significant ballot measures related to state and local taxation. The measures included the creation of a dedicated Tax Court, the establishment of new taxes, adoption of increased rates, and other changes, but several far-reaching initiatives were rejected by the voters.

• California
  • Santa Cruz voters approved Measure Z, which imposes a $.02 per ounce tax on the wholesale distribution of sugary drinks and sweeteners. The proceeds of the tax will be used for general government purposes, and it goes into effect on May 1, 2025. The specifics of the proposal are also available in the link above.
  • San Francisco—Proposition M was approved by voters. It will 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. The amendments have varying effective dates in 2025 and 2026.
• Colorado—Proposition KK was approved by voters and will impose a 6.5 percent excise tax on firearm and ammunition sales by manufacturers, dealers, retailers, and vendors effective April 1, 2025.
• Georgia—Voters approved Amendment 2. The amendment creates the Georgia Tax Court as part of the judicial system. The Tax Court will have statewide jurisdiction, concurrent with the state business court and superior courts. The most notable change is that appeals from the Tax Court will be directly with the state Court of Appeals. Appeals of decisions from the current Tax Tribunal (an executive branch agency) are to the state superior court system.
• Illinois—A majority of voters expressed support for Illinois’s Income Tax Advisory Question, a non-binding measure which asked voters if the state constitution should be amended to create an additional 3 percent tax on income exceeding $1 million in order to generate new revenue for property tax relief.
• Nevada—Question 5 was approved by voters and will create a sales and use tax exemption for child and adult diapers commencing on January 1, 2025. The state constitution requires voter approval of sales and use tax exemptions.
• North Dakota—Initiated Measure 4 was rejected by the voters. It would have prohibited 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.
• Oregon—Measure 118 was rejected by the voters. It would have revamped the corporate minimum tax and imposed a minimum tax of 3 percent on corporations with Oregon sales exceeding $25 million applicable to tax years beginning on or January 1, 2025. Proceeds from the increased tax would have been used to provide annual rebates to Oregon residents.
• South Dakota—South Dakota voters rejected Measure 28 which would have created a state sales and use tax exemption for “anything sold for human consumption,” except alcoholic beverages and prepared food. The exemption would not have been applicable to municipal taxes.
• Washington—Initiative 2109 was rejected by voters. It would have repealed the capital gains tax that was passed by the state legislature in 2021 and was first due on April 18, 2023. The tax excludes gains on real estate and applies only to gains in excess of about $270,000 per year.
• Wyoming—Amendment A was approved by voters. The Amendment adds residential real property as a separate class of property and permits the legislature to create a subclass for owner-occupied primary residences that may be assessed at a different rate than other residential property. Currently, all non-mineral and non-industrial property is assessed at the same rate, and this will allow the legislature to provide a preferential assessment rate for owner-occupied residential property.
  

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