TWIST - February 3, 2020

Welcome to TWIST for the week of February 3rd. This is Sarah McGahan from KPMG’s Washington National Tax state and local tax practice. If you are a regular reader or listener of TWIST, you probably noticed we are trying something new this year. Instead of reading longer summaries of each development, we are doing a round-up of the week’s happenings in our podcast and longer write-ups on the developments we discuss are available on the TWIST webpage.

So, first up this week. Back in December, “tax reform” legislation was signed into law in Utah that generally expanded the sales tax base to include certain services, increased the sales and use tax rate imposed on food and food ingredients, and reduced the individual and corporate income tax rate from 4.95 percent to 4.66 percent.  The bill was not passed with a 2/3 majority in each house and was therefore subject to a citizen’s referendum. Opponents of the measure were able to gather the required number of signatures to place a repeal measure on the November ballot. Almost immediately after the signatures were verified, legislation was signed into law that repealed the tax reform measure entirely. So, all of the sales tax changes and income tax rate reduction are no longer pending.

Legislation enacted last year adopted a new Business and Occupation (B&O) Tax Workforce Education Surcharge on specified persons that are taxable under the services and other activities B&O classification. The surcharge, which was to be used to fund higher education, was to apply to business activities occurring on or after January 1, 2020.   There are bills pending in the Washington legislature that would make certain changes to the surcharge provisions. As a result, the Department of Revenue recently announced that implementation of the surcharge will be delayed until further notice, and the line for computing the surcharge will not appear on the January 2020 return.

In other legislative news, lawmakers in several states have proposed bills to establish an interstate compact aimed at limiting the use of tax and other incentives to encourage a particular company to relocate from one state to another. States entering into the compact would be prohibited from offering company-specific incentives or grants to entice a business to relocate a facility in any other member state to relocate that facility to the offering member state.

In other news, The Kansas Court of Appeals recently held that electricity consumed by a telecommunications provider to power HVAC units used to cool telecommunications transmission and switching equipment was exempt from sales tax. Kansas law provides an exemption for tangible personal property (including electricity) which is consumed in “the providing of services” for sale at retail. To be “consumed,” the property must be “essential or necessary to” and be used in the “actual process” of providing the service. Without the HVAC units serving their climate control function, the transmission and switching equipment could operate for only two hours before failing, making it impossible to generate a continuous and reliable telecommunications signal.  As a result, the court concluded that the HVAC units were in fact “essential or necessary to” the taxpayer’s provision of telecommunications services and the electricity they consumed was exempt from tax. 

Please stay tuned to TWIST for additional state tax updates!