TWIST - This Week in State Tax

Minnesota: Worldwide Combined Reporting Update

The Arizona Tax Court recently held that a laundry business was not entitled to state and city sales tax exemptions for purchases of equipment and chemicals used to transform unusable, soiled linens into clean, disinfected linens suitable for use in healthcare facilities. Under Arizona law, a Transaction Privilege Tax (sales tax) exemption applies to purchases of “machinery, or equipment, used directly in manufacturing, processing, fabricating, job printing, refining or metallurgical operations.”  The issue before the court was whether the taxpayer’s laundry business was a “processing” operation entitled to the exemption. The term "processing," is defined to include operations commonly understood to be within the ordinary meaning of the term. The Department of Revenue asserted that the taxpayer did not qualify for the exemption because it was not preparing raw materials for conversion into marketable form, as the Department asserted was necessary to qualify for the exemption.  The tax court did not find the issue of whether the taxpayer prepared raw materials to be determinative. Rather, the court concluded that although the taxpayer’s business included some processing of the linens as they were cleaned and disinfected, it was required to look to the taxpayer’s business as a whole to determine whether it was commonly understood to be a processing operation. In the court’s view, a linen rental business that used equipment to clean and disinfect linens for healthcare facilities was not commonly understood to be a processing operation, but a laundry. In reaching this conclusion, the court cited to an earlier case addressing whether a pizzeria was entitled to the processing exemption for equipment used to prepare dough and make pizza. The appeals court in that instance similarly found that as a matter of law, a restaurant that uses machinery or equipment to make pizza dough from scratch is not commonly understood to be a processing operation. In a bit of rhetorical flourish, the tax court ended by citing an earlier state supreme court decision indicating that when the legislature creates a tax exemption, “it does so notoriously enough to attract investors, not surreptitiously enough to evade detection.”  Although the fact that laundries had not attempted to avail themselves of the processing exemption for over 30 years was not dispositive, in the court’s view, it did buttress the Department’s argument. Please contact Stacey Matthew with questions on 9W Halo Opco LP v. Dep’t of Rev.

New York: Budget Agreement Includes Franchise Tax Additional Rate Extension and More

On May 3, 2023, Governor Kathy Hochul signed legislation (S. 4009) necessary to implement the state’s fiscal plan for the FY 23-24 year. That bill was then officially designated as Chapter 59 of the NYS Laws of 2023. The budget legislation represents a compromise between Governor Hochul (herself a Democrat) and the more progressive Democratic-controlled legislature.

One of the key tax changes affecting business taxpayers is the three-year extension of the additional 0.75 percent rate applicable to entire net income if the taxpayer’s business income base, as apportioned, exceeds $5 million. The rate increase continues to be structured as a “cliff” rate, rather than a graduated rate, so that all income is subject to the 7.25 percent rate (rather than the 6.5 percent rate) if the $5 million income base is exceeded. Originally scheduled to sunset for tax years beginning after January 1, 2024, the additional rate will be in place through the 2026 tax year.

The bill also extends the State’s business capital tax, which was previously scheduled to be phased out at the end of 2023. Notably, for tax years beginning prior to January 1, 2027, the business capital tax will continue to be imposed at a 0.1875 percent rate.

Currently, the New York corporate franchise tax Metropolitan Transit Authority surcharge rate is set each year by the Commissioner of Taxation and Finance. Under the bill, the current 30.0 percent rate (applicable to the Article 9-A tax computed on form CT-3 or CT-3-A, and then apportioned to the MTA region) will remain in place indefinitely.

The Chapter 59 bill allows the Commissioner of Taxation and Finance to seek judicial review of decisions of the State’s Tax Appeals Tribunal, under certain circumstances. Those circumstances are when the Tribunal’s decision is premised on an interpretation of Federal or New York State constitutional analysis, international law, Federal law, the law of other states, or other legal matters that are beyond the purview of the New York State Legislature. When the Commissioner petitions for judicial review, any interest and penalty that would otherwise continue to accrue on the underlying tax liability will be stayed until 15 days after the issuance of a final judicial decision that cannot be appealed any longer. This change takes effect immediately and applies to decisions and orders of the Tax Appeals Tribunal issued on or after May 3, 2023. The bill also makes numerous changes to New York tax credits and incentives law and increases cigarette taxes.

Another bill (S. 4008) – designated as Chapter 58 of the NYS Laws of 2023 – and also signed into law by the Governor on May 3, 2023, increases the Metropolitan Commuter Transportation Mobility Tax (MCTMT) from 0.34 percent to 0.60 percent for payroll expense above $437,500 for employers who do business in the Bronx, Kings, New York, Queens, and Richmond Counties (i.e., the five counties that comprise New York City), effective for the quarter beginning July 1, 2023.  The Mobility Tax on self-employment income of individuals earning at least $50,000 of such income sourced to the New York City counties is increased to 0.47 percent as of the quarter beginning July 1, 2023, and then to 0.60 percent as of the quarter beginning July 1, 2024. All other MCTMT rates remain the same relative to the other seven counties that comprise the overall twelve county MCTMT region.

With respect to the New York State and New York City “pass thru entity taxes” (which are elective “PTETs”, designed as workarounds of the Federal income tax SALT itemized deduction limitation), the bill codifies existing Tax Department policy regarding the PTET-addback of substantially similar PTETs paid to other jurisdictions.

The New York State film production credit benefits and those under the New York City musical and theatrical production tax credit regime are also substantially expanded under the Chapter 59 bill. 

The bill expands the State’s “False Claims Act” (a whistleblower rewards law) beyond tax returns that were actually filed, to now also encompass the non-filing of a New York State or local tax return which decision was knowing concealment or knowingly the improper avoidance of a tax obligation.  This provision applies to actions occurring on or after May 1, 2020 as to such non-filed tax obligations knowingly concealed or knowingly avoided.     

Provisions in the Assembly and Senate to raise individual income tax rates, impose retail delivery fees, and/or tax digital products were not included in the final budget.  Please contact Russ Levitt or Aaron Balken with questions on these changes. 

Pennsylvania: Electricity Sourced as Sale of Tangible Personal Property

The Pennsylvania Department of Revenue recently announced that it will treat electricity as tangible personal property for the purpose of apportioning income under the state’s Corporate Net Income Tax (CNIT). Prior to announcing this decision, the Department had identified three methods by which receipts relating to electricity are treated in other states: (1) as receipts relating to tangible personal property; (2) as receipts relating to a service; or (3) as receipts relating to intangible property. The Department first repeated its previously stated position that a sale of electricity more closely resembles the sale of a commodity than of a service. The Department then declared its intention to conform to recent decisions of the Board of Finance and Revenue by treating electricity as tangible personal property (rather than as intangible property.) Under this determination, receipts relating to the provision of electricity will be sourced to Pennsylvania if the electricity is delivered or shipped to a purchaser within Pennsylvania, regardless of the f.o.b. point or other conditions of the sale. The Department also clarified that receipts earned by partnerships would flow up to corporate partners in the same manner as any other sale of tangible personal property. The Department intends to follow this rule for all open CNIT periods. Please contact Mark Achord with questions on Corporation Tax Bulletin No. 2023-01.