TWIST - This Week in State Tax

Colorado: Retroactive CARES Act Changes Applied Despite Emergency Conformity Rule

In a recent published opinion, the Colorado Court of Appeals ruled that the state’s income tax code incorporates retrospective federal changes, despite a regulation to the contrary. The dispute involved two individual taxpayers who filed an amended return for the 2018 tax year claiming a refund of Colorado income taxes related to a federal tax change in the CARES Act. Specifically, the CARES Act change at issue suspended the excess business loss deduction limits for the 2018 through 2020 tax years. This allowed taxpayers, such as those involved, with losses in excess of the threshold, to retroactively reduce their federal taxable income for the 2018 and 2019 tax years. In June 2020, a few months after the enactment of the CARES Act, the Colorado Department of Revenue adopted an Emergency Rule (later this regulation became Permanent Rule CRS 39-22-103(5.3)) stating that the “Internal Revenue Code” does not, for any taxable year, incorporate federal statutory changes enacted after the last day of that taxable year, meaning that federal statutory changes enacted after the end of a taxable year do not affect a taxpayer’s Colorado tax liability for that taxable year.  The General Assembly later enacted a law preventing taxpayers (both individuals and corporations) from benefitting from certain CARES Act changes for income tax years beginning or ending on or after the enactment of the CARES Act (March 27, 2020), but before January 1, 2021.  The taxpayers filed amended Colorado returns claiming the entirety of their excess business losses and seeking Colorado income tax refunds. The Department denied the refunds because of the Emergency Rule. After a district court ruled in the Department’s favor, the taxpayer appealed.

The appeals court noted at the outset that there was no ambiguity in the state law as written and changes to the Internal Revenue Code apply for Colorado purposes without any limitation as to when the amendment is enacted or when it goes into effect. Specifically, the law incorporates the IRC and other federal laws relating to federal income taxes “as the same may become effective at any time or from time to time, for the taxable year.” Further, the language that the Department used in its Emergency Rule did not appear in the plain language of the state income tax code and read words into the statute that were not present. In fact, had the statute provided for prospective application only, the court noted that there would have been no need for the Department to issue the Emergency Rule. Given that the Emergency Rule’s interpretation was contrary to the statute’s plain language, the court declined to defer to it. Additionally, the subsequent amendments to the statute to disallow certain CARES Act benefits did not change the result for the 2018 and 2019 tax years, as the law change applied to only 2020 and 2021. The court reversed the district court’s judgment and remanded the case for further proceedings. Please contact Derek Weisbruch with questions on Anschutz v. Department of Revenue.

Colorado:  Department Prevails in Dispute Over Property and Payroll Calculation for Includable Corporations

The Colorado Court of Appeals recently addressed whether a subsidiary was an includable corporation required to be included in the taxpayer’s Colorado unitary combined group for the tax years at issue. Under Colorado law, the term “includable C corporation” means any C corporation which has more than twenty percent of its property and payroll as determined by the state’s sourcing rules assigned to locations inside the United States. The subsidiary had property in the U.S, but no payroll. The taxpayer argued that the language in question meant it had to have more than 20 percent of its property and 20 percent of its payroll in the U.S. to be included. As support for this position, the taxpayer noted that the statute used the term “determined” as opposed to “averaged” or “added” and referred to the property, payroll, and sales factor sourcing provisions whereby each factor was calculated separately. The Department, on the other hand, argued that “more than 20 percent” meant a single aggregate number representing combined separate calculations of the property and payroll factors.

The court was not persuaded by the taxpayer’s interpretation of the statute. It noted that the use of the term “determined” in the statute did not preclude averaging or adding. Further, the court noted that although the property and payroll factors were computed separately, they were later averaged into a single factor. Finally, the court looked at a reciprocal statute that excludes from the combined group corporations with 80 percent or more foreign property and payroll and determined it needed to be interpreted consistently with the statute including corporations with more than 20 percent U.S. property and payroll.  In conclusion, the court agreed with the district court that the statute unambiguously applied its twenty percent figure to one number calculated by combining the results produced by property and payroll factoring.  Please contact Derek Weisbruch with questions on Avnet, Inc. and subsidiaries v. Department of Revenue.

Wisconsin: Unclaimed Property VDA Program Ends Shortly

Wisconsin is currently offering a time-limited unclaimed property voluntary disclosure program for businesses, organizations, and governmental units that are not in compliance with Wisconsin’s unclaimed property laws to voluntarily come forward to report and remit unclaimed property without late fees or penalties. The program is available from February 1, 2022 through February 28, 2023 and eligible businesses must apply in order to initiate participation.  To be eligible to participate, an unclaimed property holder must have unclaimed property to report from any of the five most recent reporting periods and must not have been audited for unclaimed property since July 1, 2016 or have received a notice of audit. In addition, the holder cannot have a balance on their unclaimed property holder account. Under the voluntary disclosure agreement, holders must (1) attempt to contact owners of the property within 30 days of execution of the agreement. If the property is worth $50 or more, the contact must be in the form of a notification letter; (2) within 120 days of entering into the agreement, electronically file a report and deliver property for at least the five previous reporting periods (July 1 through June 30); and (3) continue to report and deliver all unclaimed property for at least four future annual reporting periods. This is a “one time” opportunity and holders that are out of compliance with Wisconsin’s unclaimed property laws should consider participation. For more information, please contact via email or phone Will King at (214) 840-6107 or Marion Acord at (404) 222-3053.

Wyoming: State Supreme Court Addresses Taxation of Repair Services

The Supreme Court of Wyoming recently held that certain roadside services provided by Big Al’s Towing and Recovery were not subject to state excise tax (sales tax). Under Wyoming law, excise tax is levied on the sales price for services performed for the “repair, alteration, or improvement of tangible personal property.”  The issue before the court was whether jumping-starting, unlocking a vehicle, or replacing a flat tire with a vehicle’s spare tire sufficiently altered or improved the customer’s vehicle so that these services were subject to tax. No one suggested that the services at issue constituted “repairs.”  Although the terms “altered” or “improved” were not defined by statute, the Wyoming Supreme Court determined the statute was unambiguous, and so the undefined terms were to be interpreted in a manner consistent with their common dictionary definitions.

The DOR’s stance that was any degree of change, even if small or temporary, was sufficient to bring the activity within the language of the statute. The court rejected this notion and held that alteration, commonly defined as the act or process of making something different without changing it into something else, was not intended to include temporary or de minimis changes. Similarly, court rejected the Department’s contention that an improvement did not necessarily need to accompany an increase in value. In the court’s view, to improve a vehicle, the service must increase its value. Applying these parameters, the court concluded that the services at issue did not alter or improve a vehicle. Jumpstarting a battery from an outside source neither increased the vehicle’s value nor changed the vehicle’s “nature, form, or quality” from how it was prior to service. Also, without any additional services, jumping a car battery so that the vehicle started was likely a temporary change. Similarly, disengaging the locking mechanism neither increased the value of the vehicle nor changed its “nature, form, or quality.” If this was the case, the vehicle would increase in value or change its nature every time the owner unlocked it. Replacing a flat tire with the vehicle’s spare also did not improve or alter the vehicle. The court found it important that Big Al’s did not attempt to repair the flat. In other words, before the services were performed, the vehicle had one flat and four functioning tires. The same was true after Big Al’s replaced a tire with a spare; the only difference was that the flat tire and spare tire changed locations on the same vehicle. As a result, the court concluded that the roadside services at issue did not alter or improve vehicles in a manner that subjected the service provider to excise tax.  Please contact Steve Metz with questions on Big Al’s Towing and Recovery v. State, Department of Revenue.