TWIST - This Week in State Tax

Illinois: Department Responds to New Survey Questions on Cryptocurrency

The Illinois Department of Revenue issued a general information letter (IT 22-0010-GIL) responding to an annual survey on state corporate income tax policies.  In the letter, the Department answered certain new survey questions around cryptocurrency, including confirming that Illinois conforms to the federal treatment of cryptocurrency as property. Further, the Department confirmed that sales of cryptocurrency are treated as sales of intangibles for purposes of apportionment and the application of Public Law 86-272. In other words, sellers of crypto would not be able to claim protection under Public Law 86-272.  The Department also responded yes to confirm that if an employee is paid with cryptocurrency, the fair market value of the cryptocurrency paid as wages is subject to Illinois income tax withholding and payroll taxes. However, the Department responded “no” to a question on whether a payment made using cryptocurrency is subject to information reporting requirements to the same extent as any other payment made in property.  In other parts of the extensive survey, the Department also changed its response to a question on bonus depreciation since beginning with the 2022 tax year Illinois decouples from 100 percent bonus depreciation. The state further confirmed that Illinois conforms to the Tax Cuts and Jobs Act changes to IRC section 174 that apply for tax years beginning after December 31, 2021. Please contact Brad Wilhelmson with questions on IT 22-0010-GIL.

Maryland: Digital Ad Tax Struck Down

On October 17, 2022, an Anne Arundel County Circuit Court judge struck down Maryland’s digital advertising tax after a hearing on certain motions associated with the case. It has been reported that the judge ruled from the bench that the digital advertising tax violated the Internet Tax Freedom Act, the Commerce Clause, and the First Amendment. It remains to be seen as to whether the ruling will be appealed. Although the Maryland Senate President indicated the state would appeal, Peter Franchot, the Maryland Comptroller, issued a statement appearing to question whether an appeal should be filed. “I firmly believe that instead of continuing to expend public resources to defend a law that was constitutionally questionable at the time of enactment, the incoming governor and the incoming legislature should instead be given the opportunity to revisit this law.”  Please stay tuned to TWIST for additional updates on Maryland’s digital advertising tax.

Multistate: Tax Ballot Measures to Watch

On November 8, 2022, voters will be asked to decide on certain tax related ballot measures. In California, Proposition 30 would impose an additional 1.75 percent tax on annual personal income in excess of $2 million for each taxable year beginning on or after January 1, 2023.  This would effectively tax the income that exceeds the $2 million threshold at a 15.05 percent rate. The revenues generated from the additional tax would be deposited into the Clean Cars and Clean Air Trust Fund and would be used to improve air quality and reduce emissions from the state’s two primary sources of greenhouse gases, transportation and wildfires. If approved by voters, Proposition 30 would sunset either on January 1, 2043, or when statewide greenhouse gas emissions are at least 80 percent below the statewide 1990 level of greenhouse gas emissions for three consecutive years on or after January 1, 2030.

In Colorado, Proposition 121 would reduce the state’s current 4.55 percent corporate and personal income tax rate to 4.40 percent. This change would be effective for tax years commencing on or after January 1, 2022.

In Massachusetts, voters will determine the fate of a constitutional amendment that, if approved, would increase the state’s flat individual income tax rate from 5 percent to 9 percent on income above $1 million. The tax rate increase would apply for taxable years beginning on or after January 1, 2023. The additional revenue generated would be used for quality public education and for the repair and maintenance of roads, bridges and public transportation. Under the Massachusetts Constitution, all income must be taxed at a unform rate, hence the need for voters to approve the amendment.

The tax rate increase would also apply to owners of pass-through entities, including S Corporations that are already subject to an entity level tax. Recall, Massachusetts is unusual in that it requires S corporations to pay the non-income measure of the corporate excise tax on either taxable tangible personal property or on net worth. In addition, S corporations with at least $6 million, but less than $9 million, in gross receipts are required to pay a tax on income at a rate of 2 percent, and S corporations with $9 million or more in gross receipts are required to pay a tax on income at a rate of 3 percent. 

Currently, the City of Los Angeles imposes a real estate transfer tax at a rate of 0.45 percent. Los Angeles Proposition ULA would impose an additional real estate transfer tax of 4 percent on transfers that are valued at more than $5 million. The additional transfer tax rate would increase to 5.5 percent on the sale or transfer of property that is valued at more than $10 million.  Some transferees, such a Qualified Affordable Housing Organization, are specifically exempted from the levy. If approved, revenue generated by Proposition ULA would fund affordable housing under the Affordable Housing Program and tenant assistance under the Homeless Prevention Program.  Please stay tuned to TWIST for additional updates after Election Day.