TWIST - This Week in State Tax

Georgia House Bill 1023, which was signed into law on April 18, 2024, permanently matches the corporate income tax rate to the individual income tax rate in effect for the corresponding tax year. This change is applicable to all tax years beginning on or after January 1, 2024. The bill also matches the rate of tax imposed on electing S Corporations and Partnerships to the individual rate. House Bill 1015, which was also enacted, accelerates already enacted individual income tax cuts (assuming revenue targets are met) and reduces the individual income tax rate to 5.39 percent effective for 2024. As such, Georgia’s corporate income tax rate has been retroactively reduced to from 5.75 percent to 5.39 percent for the 2024 tax year. Effective for tax years beginning on or after January 1, 2025, House Bill 1023 also allows corporate taxpayers the federal extension period, plus an additional month to file their state tax returns.  Please stay tuned to TWIST for additional rate changes. 

Under Illinois’ Level the Playing Field Act, fully in-state retailers are required to collect Retailer’s Occupation Tax (ROT) on sales to Illinois customers at the origin tax rate, i.e., where the selling activity takes place. Out-of-state retailers with some physical presence in Illinois, but no selling activities occurring in Illinois for a particular transaction, collect the 6.25 percent state use tax rate and the Chicago use tax (if applicable). Out-of-state retailers with physical presence and selling activities occurring in Illinois for the particular transaction collect ROT at the origin rate. Finally, remote retailers with no physical presence collect ROT at the destination rate (assuming the retailer meets the state’s economic nexus threshold).  Under Senate Bill 3362, beginning on January 1, 2025, a “retailer maintaining a place of business in Illinois” (as defined in the Use tax Act) that makes retail sales of tangible personal property to Illinois customers from a location or locations outside of Illinois is liable for all applicable state and local ROT administered by the Department.  Further, also beginning January 1, 2025, for sales that would otherwise be sourced outside Illinois, a retailer maintaining a place of business in Illinois that makes sales of tangible personal property to Illinois customers from a location outside Illinois is engaged in the business of selling at the Illinois location where the property is shipped or delivered, or at which possession is taken by the purchaser. This means that retailers with some physical presence, but that are making sales into Illinois from outside the state will no longer collect use tax. Rather, these retailers will be required to collect ROT at the destination rate. The bill does not change the fact that retailers making intrastate sales use origin sourcing, while out-of-state retailers use destination sourcing. This in-state vs. out-of-state issue is being challenged in the Pet Meds case pending before the Illinois Tax Tribunal. Please stay tuned to TWIST for updates on this bill. 

New Jersey adopted market-based sourcing effective for tax years ending on or after July 31, 2019. Prior to that time, corporate taxpayers used cost of performance (COP) sourcing to source their service receipts. Specifically, under a New Jersey regulation, if a service was performed both within and outside New Jersey, the numerator of the receipts fraction included receipts from services based upon the cost of performance or amount of time spent in the performance of such services or by some other reasonable method that should reflect the trade or business practice and economic realities underlying the generation of the compensation for services. In a recently released unpublished opinion, the New Jersey Tax Court held that a service provider was entitled to a refund of Corporation Business Tax (CBT) because market-based sourcing better reflected the economic realities of the taxpayer’s business for the 2011 and 2012 tax years. The taxpayer provided services to various government entity customers in multiple states.  The taxpayer’s services included serving as the third-party administrator for its government customers for two government subsidy programs (Lifeline and E-Rate) and included such activities as application intake, evaluation, eligibility determination, as well as various financial accounting. It relied heavily on web-based programs it developed for this purpose, and the various applications were housed largely on servers in New Jersey.  While most of the taxpayer’s infrastructure and 90 percent of its payroll was in New Jersey, the facts indicated that most of the employees performed services outside of the state for the taxpayer’s customers, who were also primarily located outside New Jersey. Based on the New Jersey payroll factor, the Division rejected the taxpayer’s use of market-based sourcing on amended returns. In the Division’s view, the COP method was the appropriate method for sourcing the taxpayer’s service receipts, and market-based sourcing was allowed only if the taxpayer requested an alternative apportionment method. The taxpayer had not affirmatively requested to use market-based sourcing.

The tax court was “unpersuaded” that market-based sourcing was forbidden prior to 2019.  Although the law required receipts from sales of services performed in the state to be included in the sales factor numerator, in the court’s view, “Taxation’s preference for the COP method does not foreclose consideration of the alternative methods permitted under the regulation.” Notably, the regulation addressing the COP method specifically allowed for use of some other reasonable method to reflect the “economic realities underlying the generation of the compensation for services.” As such, if market-based sourcing reflected the economic realities underlying the generation of the income, then it was permissible.  The tax court also noted that New Jersey and other state courts had applied market-based sourcing in the past to treat sales of intangible property and services the same as sales of tangible personal property when appropriate.  The fact that the law was changed to mandate market sourcing after 2018 was simply clarifying that market sourcing should be the required method. The tax court also rejected the Division’s argument that the taxpayer should have requested to use an alternative apportionment method. If this were the case, the court noted, then any appeal in which Taxation disagreed with the taxpayer on an apportionment issue would be futile because the taxpayer’s only option would be to request relief. Further, in the court’s view, the taxpayer did request an alternative method when it filed the amended returns. “It is also not credible for Taxation to contend that market-based sourcing is unavailable by law yet would be available under Section 8.” The court concluded that the taxpayer was entitled to the refunds requested on the amended CBT returns at issue and noted that “for tax years prior to 2019, there is no hard-and-fast rule as to the use of COP method.”  Please contact Jim Venere with questions on Solix Inc. v. Director, Division of Taxation.