This Week in State Tax

The Ohio Board of Tax Appeals (Board) recently ruled that a locally instituted Joint Economic Development Zone (JEDZ) was not authorized to impose a municipal net income tax on an electric light company. Under Ohio law, a township and municipal corporation may designate a JEDZ, governed by a board of directors, to aid in facilitating commercial and economic development. The board of directors are authorized to levy an income tax within its boundaries under Chapter 718 of the Revised Code of Ohio. The tax imposed is generally apportioned and applies to a taxpayer engaged in a business or profession in the municipal corporation, unless “the taxpayer is an electric company . . . that is subject to . . . and required to file reports under Chapter 5745.” Chapter 5745 provides special rules for the taxation of an “electric light company” by one or more municipalities but makes no mention of taxation by a JEDZ.  The taxpayer, an electric light company that filed returns under Chapter 5745, objected to the imposition of tax by a JEDZ. A municipal board of review found in favor of the taxpayer, and the JEDZ appealed to the state Board of Tax Appeals.

The dispute centered on the interaction between chapters 718 and 5745. The Board held that R.C. 718.02 specifically exempts the taxpayer from imposition of a municipal net profits tax by a JEDZ. The JEDZ argued that that R.C. 718.02 was an apportionment statute and that Chapter 5745 merely provides an alternative computation method for taxation of an electric company, and does not operate to deprive a JEDZ of taxing jurisdiction. The taxpayer argued that a JEDZ is only authorized to impose taxes under the provisions of Chapter 718 and could not impose taxes under the separate provisions of Chapter 5745. The Board ruled that Chapter 5745 was “more than simply an apportionment formula.” Rather, it provided an entirely separate structure for taxation that did not provide for taxation by a JEDZ. In particular, the Board noted that Chapter 5745 provides for central administration by the Tax Commissioner and prohibits a municipality from requiring a separate local filing. Thus, permitting a JEDZ to require a separate local filing would contradict this provision. Because Chapter 5745 is the exclusive method by which municipal taxes can be imposed on an electric light company, and Chapter 5745 does not provide for taxation by a JEDZ, a JEDZ is not permitted to impose tax on such a company. Please contact Brandon Erwine with questions about Clinton-Grandview Heights JEDZ v. City of Grandview Heights.

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The Washington State Department of Revenue (Department) issued informal guidance on its interpretation of the recent state supreme court decision in Antio LLC v. Department of Revenue. In Antio, the court upheld the Department’s position that the Business and Occupation Tax deduction from gross income of “amounts derived from investments” was available only for income from “incidental investments.” Prior to Antio, many taxpayers had understood the deduction as applying to all investment income, even when investing was the taxpayer’s primary activity.

Under the Department’s guidance, most taxpayers will be eligible for a safe harbor under which investment income will be considered deductible (i.e., investment activity will not be considered the main activity of the business) if it amounts to less than five percent of the taxpayer’s annual gross receipts. If a taxpayer exceeds this threshold, the deduction will be available only if the business can establish that, under its specific facts and circumstances, the income was generated from an “incidental investment of the taxpayer’s surplus funds.” In addition, the deduction will not apply to amounts received from loans, the extension of credit, revolving credit arrangements, installment sales, and similar interest income; neither will the deduction be available to a banking business, lending business, or security business. Please contact Michele Baisler with questions about this guidance.

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All but a handful of state legislatures have convened their 2025 sessions, and governors have begun to deliver their state of the state and budget messages. This has occasioned the introduction of the usual avalanche of state tax bills and proposals – most of which will not be enacted, but all of which will provide grist for the mill. A comprehensive census of the tax bills introduced is not possible here, but this abbreviated discussion may be helpful in fostering a sense of likely topics for discussion with respect to business taxes as the legislative sessions unfold.

Combined Reporting – Maryland Governor Moore, as part of a larger package to address a budget deficit, has proposed adoption of worldwide combined reporting with a water’s edge election, accompanied a modest corporate rate reduction (HB 352). Legislation that would require worldwide combined reporting has also been introduced in Hawaii (SB 314). Similar proposals have been made in prior years in both states.

Miscellaneous Corporate Measures – The Idaho legislature has already sent to the Governor a bill to update its conformity to the Internal Revenue Code to the Code in effect as of January 1, 2025 (HB 3). Virginia Governor Youngkin has again proposed that the Commonwealth adopt market-based sourcing for sales of other than tangible personal property (HB 1866). Utah legislators have proposed two different corporate income tax rate reduction bills – one reducing the rate by 0.5 percent (SB 116) and the other making a reduction contingent on revenue performance (SB 85). A New York measure increases the corporation tax rates and reduce the amount of certain foreign income (i.e., GILTI) from 95 percent to 50 percent (S 953). The Missouri legislature has formed a special committee on tax reform to consider a variety of broad measures, including at least one to phase out the corporate income tax by 2029 (HB 425). Finally, in Washington State, a bill to increase many Business and Occupation Tax rates by about 10 percent has been introduced at the request of the Department of Finance and Management (HB 1320).

Retail Delivery Fees – In the past few years, Colorado and Minnesota have enacted a retail delivery fee on each delivery shipped to a customer in the state to be collected in conjunction with the state retail sales tax. Revenues are generally dedicated to transportation funding. This year, similar measures have been introduced in Maryland ($.75 per delivery) (HB 325) and Mississippi ($.30 per delivery) (HB 530). A measure has been introduced in Indiana to authorize counties to adopt a county-level retail delivery fee of $.50-$1.00 per qualified delivery with collection handled by the Department of State Revenue HB 1461). In Minnesota, there is a proposal to impose the fee only on deliveries involving items subject to the retail sales tax, as well as one to repeal the existing fee.

Digital Advertising Taxes – Rhode Island Governor McKee, facing a moderate budget deficit, has proposed adoption of a 10 percent excise tax on digital advertising companies with greater than $1 billion in worldwide receipts, modeled on the tax enacted in Maryland in 2021. Similar measures have also been proposed by individual legislators in Massachusetts (HD 3914) and New York (S 173).

Miscellaneous Sales Tax Measures – Minnesota Governor Walz has proposed a modest reduction in the state sales and use tax rate, with revenues to be offset by extending the tax to investment, banking and legal services provided to individuals. The Mississippi House has passed a bill (HB 1), a larger package calling for elimination of the personal income tax, that includes an additional 1.5 percent statewide local sales tax (in addition to current 7 percent state sales tax). Localities would have until July 1, 2026, to opt out of the local tax. The measure also reduces the sales tax rate on food for home consumption and imposes a 5 percent sales tax on sales of motor fuels. The Utah legislature is also considering a proposal to remove state sales and use taxes on food for home consumption (SB 122), and the Virginia legislature is considering a proposal to impose the sales and use tax on streaming services and digital personal property (HB 1755). Please stay tuned to TWIST for more information on state tax legislation as it moves through the process.

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