TWIST - This Week in State Tax

Alabama has enacted legislation (Senate Bill 150) that requires accommodations intermediaries to collect state and local transient occupancy taxes effective January 1, 2025. An “accommodations intermediary” is defined as “any person, firm, or corporation, other than an accommodations provider,” that facilitates renting, furnishing, lodging, or accommodation transactions subject to the transient occupancy tax and charges a room fee or an accommodations fee to the customer, which it retains as compensation for such facilitation.” “Facilitating transactions” includes brokering, coordinating, or in any other way arranging for the purchase of the right to use accommodations via a transaction directly, including via one or more payment processors, between a customer and an accommodations provider. Under the bill, an accommodations intermediary must collect on taxes on the “room charge,” which is the full retail price paid by the guest for an accommodation, including any accommodations fee and any other fees or charges. This includes the charge for use or rental of personal property and services furnished in the room or accommodation. When an accommodations intermediary facilitates the transaction on behalf of an accommodations provider, the taxes collected may be remitted to the accommodations provider when there is an executed written agreement or contract specifying the responsible party for remitting such taxes. In any accommodation in which an accommodations intermediary facilitates the sale of the accommodation, the accommodations intermediary must separately state the amount of the tax on the bill, invoice, or similar documentation.  The bill provides that certain entities will be exempt from the provisions in the bill including, but not limited to, hotels that collect and remit the transient occupancy tax, and certain providers of accommodations in campers and RVs.  The bill also requires annual reporting. Specifically, every accommodations intermediary and accommodations provider (including property management companies that collect and remit the accommodations tax and hotels) must annually submit a report prescribed by the Department of Revenue that includes the physical address of each accommodation that was rented or furnished greater than 14 days during the previous year. Please contact Sarah McGahan with questions.

Governor Newsom of California recently released his May budget revisions. Importantly, the revised budget contemplates clarifying the law to address the recent Office of Tax Appeals (OTA) decision in Microsoft. Recall, in Microsoft, the OTA concluded that the full amount of qualifying dividends deducted from income under R&TC section 24411 were includable in the taxpayer’s sales factor. As revised, the budget legislation would “clarify” existing law to provide that when a corporation receives income excluded from taxable business income, that income must likewise be excluded from the corporation’s apportionment factor. There is no specific effective date associated with this change in the Governor’s revised budget.  The budget revisions also propose suspending NOL carryover deductions for businesses with California income over $1 million and limiting business credit usage to $5 million for tax years 2025, 2026, and 2027. The credit limitation does not apply to the Low-Income Housing and Pass-through Entity Elective tax credits. This is consistent with actions the legislature took for the 2020 and 2021 tax years in light of the COVID-induced budget deficit. The budget notes that if sufficient revenues are determined to be available, the limitations will be reconsidered, as they were for the 2022 tax year when the legislature reinstated the use of NOLs and suspended the limitation on the use of credits.  Both the NOL and credit carryover periods would be extended by three years during the period of suspension/limitation. Before the May revisions, Governor Newsom had proposed conforming to the federal 80 percent limitation on the use of NOLs. Please stay tuned for future updates as California’s budget negotiations continue. 

Tennessee is one of a handful of states that impose sales and use tax on food; the state rate is currently four percent, which is lower than the general 7 percent state sales tax rate. Currently, municipalities may impose an additional 2.75 percent rate on sales of food and food ingredients.  If the county imposes tax at the 2.75 percent rate, then the City rate is zero. Effective October 1, 2024, House Bill 2641 allows certain incorporated cities the ability to exempt sales of food and food ingredients from municipal sales tax, or impose a tax at a reduced rate. “Food and food ingredients” are defined as substances, whether in liquid, concentrated, solid, frozen, dried, or dehydrated form, that are sold for ingestion or chewing by humans and are consumed for their taste or nutritional value.  The definition does not include alcoholic beverages, tobacco, candy, dietary supplements, or prepared food.  “Prepared food” means: (1) food sold in a heated state or heated by the seller, such as rotisserie chickens; (2) two or more food ingredients mixed or combined by the seller for sales as a single item, such as cakes from a bakery; or (3) food sold with eating utensils provided by the seller, including plates, knives, forks, spoons, glasses, cups, napkins, or straws.  Note, utensils provided by the manufacturer, as opposed to the seller (e.g., tuna lunch kits), are still classified as food and food ingredients.

As noted above, the maximum combined local sales tax rate for cities and counties in Tennessee is 2.75 percent.  If a county imposes a 2.75 percent local sales tax rate, then the city tax rate must be 0 percent.  This means that House Bill 2641 is relevant to cities located in counties that impose a local sales tax rate less than 2.75 percent.  A city must provide a certified copy of the adopted ordinance or resolution to the Department of Revenue and the passage of an exemption or reduced rate may take effect only on the first calendar day of the month occurring at least 60 days after the Department receives the certified copy. Because of the potential for varying rate changes, businesses that sell food and food ingredients will need to monitor local ordinance changes. Please contact Justin Stringfield with questions.