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This Week in State Tax

Recent state tax news includes two Department of Revenue rulings in Indiana, a non-business income development in Michigan, and an ERISA unclaimed property development for multiple states. 

State and Local Tax developments for the week of February 3, 2025

Indiana: Video Game Revenue Streams not Taxable

The Indiana Department of State Revenue (Department) held that a taxpayer’s service offerings were not subject to sales and use tax. The taxpayer sold video games through a related entity, as well as third party vendors; it did not sell video games directly to customers. The taxpayer did offer three items to enhance the purchasers' gaming experience: 1) monthly online subscriptions; 2) in-game items that may be purchased; and 3) virtual currency. The monthly online subscription is required to play the game online, including in a multiplayer setting. Without the subscription, purchasers can play the game only on their individual devices. The in-game items allowed purchasers to customize their character’s appearance through cosmetic items, save time through gameplay advantages or shortcuts, change the name of their character, and expand the realms of the originally purchased video game through expansion packs. The virtual currency allowed purchasers to pay for their online subscription or purchase in-game items but could not be exchanged for legal tender.

 

The Department explained that Indiana imposes sales tax on retail transactions that involve the transfer of tangible personal property in the ordinary course of a taxpayer’s business for consideration. Tangible personal property includes prewritten software, charges for access to prewritten computer software electronically via the internet where no permanent ownership interest, control, or possession is acquired are not subject to tax. Sales and use tax are also imposed on products transferred electronically only if the products are specified digital products, defined as electronically transferred digital audio works, digital audiovisual works, or digital books. The DoR determined that the taxpayer’s services were not subject to Indiana sales tax because they were not tangible personal property or specific digital goods. For more information on Indiana Revenue Ruling RST 2024-04, contact Dave Perry.  

 

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Indiana: DoR Issues Ruling on Toll Manufacturing, Treaty Protection, and Apportionment Factors

The Indiana Department of State Revenue (Department) recently addressed the corporate tax treatment of finished goods sold as part of a toll manufacturing process. The taxpayer, a foreign corporation, was a partner in U.S. partnership which operated a manufacturing facility in Indiana. The taxpayer entered into a toll manufacturing arrangement with the partnership (Toll Manufacturer) under which the Toll Manufacturer manufactured goods in the U.S. using raw materials and work-in-process inventory that remained owned by the taxpayer for the duration of the manufacturing process. Once complete, the taxpayer sold the finished goods to the Toll Manufacturer, which then resold the goods to customers. The taxpayer was generally protected from U.S. income tax under a tax treaty.

For corporate adjusted gross income tax purposes, Indiana uses federal taxable income as its starting point. The Department found that because the taxpayer was treaty protected, and the profit/loss from the finished goods sales were not included on the taxpayer’s federal taxable income, the profit/loss from the finished good sales would also be excluded for purposes of Indiana adjusted gross income. However, taxpayer was not treaty protected on its income that flowed-up from the Toll Manufacturer. As a result, the income it received from its ownership interest in the Toll Manufacturer was required to be included in federal taxable income, and consequently in Indiana corporate adjusted gross income. The Department further ruled that the Indiana apportionment percentage must be based entirely on the partnership’s receipts; the taxpayer’s treaty-protected income was not included in the calculation. Please contact Marc Caito with questions about Revenue Ruling 2024-02CCP.

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Michigan: Mother May I? – Treasury Requires Pre-Filing Permission for Nonbusiness Income

In an Administrative Bulletin, the Michigan Department of Treasury (Department) updated the requirements for requesting allocation of non-business income for the Individual Income Tax, Corporate Income Tax, and Michigan Business Tax.  The bulletin was issued in response to the Michigan Supreme Court decision in Vectren Infrastructure Servs Corp v. Dep’t of Treasury. The revised requirements treat the allocation of nonbusiness income as a form of alternative apportionment and indicate that a request for alternative apportionment must be filed prior to a taxpayer allocating nonbusiness income on a return. The guidance includes an example of a corporate taxpayer with nonbusiness income – generated by the sale of an investment in a nonunitary subsidiary – and notes that the Department would approve a request for alternative apportionment to exclude the associated gain from the Michigan apportionable tax base if requested through the procedure laid out in the bulletin. The guidance further provides that there is a presumption that the statutory apportionment method is valid, and the taxpayer must demonstrate either that the attributed business activity as determined per the statute is out of all appropriate proportion to its actual business activity within the state and causes a grossly distorted result, or that the statutory formula would unconstitutionally tax extraterritorial activity of the taxpayer.

A taxpayer must request approval to use alternative apportionment 90 days before the due date (including extensions) for the return on which the alternative apportionment method will be used. Similarly, for amended returns on which alternative apportionment will be used, a taxpayer must request approval 90 days prior to the filing the return. In addition to demonstrating by “clear and convincing evidence” that the statutory formula does not fairly represent business activity in the state, a request must also include a proposed alternative apportionment formula and a rationale as to why it is a reasonable alternative. The bulletin also notes that the Department will try to respond to the request in 60 days. If no response is received within this time, the taxpayer may treat the request as denied. A taxpayer may appeal the denied alternative apportionment request only to the Michigan Court of Claims. Please contact Dan De Jong with questions about Revenue Administrative Bulletin 2024-24.

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Multistate: ERISA Says Small IRA Payments Can Be Escheated as Unclaimed Property

On January 14, 2025, the U.S. Department of Labor (Department) issued Field Assistance Bulletin 2025-01 outlining its temporary enforcement policy under the Employee Retirement Income Security Act of 1974 (ERISA) as it applies to small retirement benefit payments owed to missing participants or beneficiaries. Pending further guidance, the Department will not pursue an ERISA violation involving a voluntary decision by a plan fiduciary to transfer small retirement benefit payments (under $1,000) of missing participants or beneficiaries to an “eligible” state unclaimed property division.  The state unclaimed property program must meet certain conditions, including providing streamlined processing for small claims (e.g., claims of $1,000 or less); diligently searching at least annually for an updated address for missing participants and beneficiaries for amounts exceeding $50; and, upon obtaining an updated address, notifying the owner in writing that the state fund is holding the owner's asset.

For missing participants or beneficiaries, ERISA requires plan fiduciaries to exercise prudent and loyal judgment in handling retirement benefit payments. The Department previously identified "individual retirement plans" (IRAs) as the preferred destination for a distribution from a retirement account or benefit owed to a missing participant or beneficiary from a terminated defined contribution plan. As noted in the bulletin and pending further guidance, the Department will not pursue violations under ERISA for plan fiduciaries that voluntarily decide to transfer retirement benefit payments (including uncashed checks) owed to a missing participant or beneficiary from an ongoing plan to a state unclaimed property fund, if the value of the participant's or beneficiary's nonforfeitable benefit is $1,000 or less and the plan fiduciary complies with conditions outlined in the bulletin. This is a significant change in the handling of certain ERISA-covered benefits and may alter the compliance obligations of plan fiduciaries. For more information please contact: Will King, Marion Acord, Ryan Hagerty, Keela Ross, Karen Anderson, or Quin Moore.

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