TWIST - This Week in State Tax

Welcome to TWIST for the week of January 31st, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

First up today, the Florida Department of Revenue recently issued a Technical Assistance Advisement or TAA addressing how a service provider should source its receipts for Florida corporate income tax purposes.  In prior rulings, the Department of Revenue has stated that “in analyzing the income producing activity, the most important factor to determine is where the customer is located.” In those TAAs, the Department concluded that receipts from services provided to customers located in Florida should be included in both the numerator and denominator of the Florida sales factor. In the most recent TAA, however, the Department looked to more “on point” provisions in the state’s sales factor rule and concluded that the taxpayer’s service receipts should be included in the numerator of the sales factor to the extent that the deliverables from those services were forwarded, sent, delivered, or provided to a location in Florida.

In other news, certain states have recently introduced bills that, if enacted, would expand the use of NOLs. In California, recently introduced Assembly Bill 1708 would reinstate the NOL deduction for taxable years beginning on or after January 1, 2021.  In Pennsylvania, House Bill 1960 would increase the current limitation on the use of NOLs by 10 percent each year until NOLs could offset 80 percent of taxable income for tax years beginning after December 31, 2024.  Finally, New Hampshire Senate Bill 435 would eliminate the double apportionment of NOLs.

In addition, lawmakers in Maryland and West Virginia have recently proposed legislation that would allow publicly traded companies a deduction over a ten-year period to offset changes in deferred tax assets and liabilities stemming from recent apportionment law changes. 

Thank you for listening to TWIST!

Florida: Department Issues Guidance on Market Sourcing

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The Florida Department of Revenue recently issued a Technical Assistance Advisement (TAA 21C1-005) addressing how a service provider should source its receipts for Florida corporate income tax purposes. Florida’s administrative rule addressing the sales factor, Rule 12C-1.0155, F.A.C., provides guidance on sourcing sales of tangible personal property and sets forth specific rules that govern certain types of taxpayers and transactions. Gross receipts from all “other sales” not specifically addressed are attributed to the state if the income producing activity is performed entirely in Florida, or the greater proportion of the income producing activity is performed in Florida based on costs of performance. “Income producing activity” applies to each separate item of income and means “the transactions and activity directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profits.” The taxpayer at issue was not providing personal services and was not a financial organization.

In prior TAAs, the Department of Revenue has stated that “in analyzing the income producing activity, the most important factor to determine is where the customer is located.” In those TAAs, the Department concluded that receipts from services provided to customers located in Florida should be included in both the numerator and denominator of the Florida sales factor. In this most recent TAA, however, the Department did not apply the income producing activity test. Rather, the Department pointed to a provision in Rule 12C-1.0155, F.A.C. that requires receipts from services to be included in the sales factor and another provision generally stating that the numerator of the sales factor includes gross receipts attributed to Florida that are derived by the taxpayer from transactions and activities in the regular course of its trade or business. In the Department’s view, these provisions were collectively “on point” and more appropriately applied to the service receipts in question than the income producing activity test.  As such, the Department concluded that the taxpayer’s service receipts should be included in the numerator of the sales factor to the extent that the deliverables from those services were forwarded, sent, delivered, or provided to a location in Florida for the customer. The Department noted that Florida is frequently referred to as a “market state” because its “sales apportionment is based on where the sales transaction takes place rather than where contracts are approved, where data is processed or stored, where payment is made, or where the customer’s headquarters is located.” Please contact Henry Parcinski with questions on TAA 21C1-005. 

Multistate: Proposed Bills Would Increase Ability to Use NOLs

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What time of year is it? It’s legislative time. Hundreds of state tax proposals are being introduced in state legislatures. In addition to the many state tax cuts proposed in light of the prosperous position of most state treasuries, several states have recently introduced bills that, if enacted, would expand the use of NOLs. In the Golden State, things were not so golden in summer of 2020 when the legislature suspended the use of NOLs for taxpayers with net business income of $1 million or more for taxable years beginning on or after January 1, 2020 and before January 1, 2023. California’s fiscal woes have turned around, to put it mildly, and Governor Newsom recently announced that his fiscal year 2022-2023 budget includes reinstating the use of NOLs, as well as lifting limits imposed on the use of business credits. Recently introduced Assembly Bill 1708 would reinstate the NOL deduction for taxable years beginning on or after January 1, 2021, and would continue to allow the additional one-year carryover period for a net operating loss incurred in taxable years beginning on or after January 1, 2021, and before January 1, 2022.  A bill to restore the use of business credits is expected to be introduced soon.

In Pennsylvania, the NOL deduction is currently limited to 40 percent of taxable income. House Bill 1960 would increase the limitation by 10 percent each year beginning with the 2022 tax year until the limit is 80 percent of taxable income for tax years beginning after December 31, 2024.  In New Hampshire, Senate Bill 435 would eliminate the double apportionment of NOLs. Under New Hampshire law, an NOL is apportioned in the year it is generated and then apportioned again in the year the loss is used.  The bill would eliminate the requirement to apportion the NOL in the year it is used. Currently, New Hampshire conforms to IRC section 172 as in effect on December 31, 1996 for purposes of determining the New Hampshire NOL amount. As recently amended in Committee, Senate Bill 435 would also eliminate the tie to the Code of 1996. Unfortunately, the amended version of the bill reinstates the $10 million limit on use of NOLs and the 10-year carryforward period, both of which had been struck in the introduced version of the bill.   Please stay tuned to TWIST for updates on these taxpayer favorable proposals!

Multistate: States Consider Adopting Financial Statement Fixes

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At least two states have recently proposed legislation that would allow publicly traded companies a deduction to offset changes in deferred tax assets and liabilities stemming from apportionment law changes. Similar legislation has been enacted in recent years in certain states that have implemented  unitary combined reporting. In West Virginia, proposed House Bill 4352 would provide a subtraction equal to one-tenth of the amount necessary to offset the increase in the net deferred tax liability or decrease in the net deferred tax asset, or the aggregate net change thereof, that resulted from (1) the change to single-sales factor apportionment for tax years beginning on or after January 1, 2022, (2) the repeal of the throwout rule that applies to sales of tangible personal property, and (3) the move to market-based sourcing, the last two of which became effective January 1, 2022. If enacted, the deduction would be allowed for the 10-year period beginning with the taxpayer’s taxable year that begins on or after January 1, 2027.

In Maryland, House Bill 321 would provide a similar subtraction for publicly traded companies to offset changes to the corporation’s deferred tax assets or liabilities that result from the phase-in of single sales factor apportionment.  As in West Virginia, the Maryland deduction would be taken over a 10-year period; the deduction is allowed beginning with the first tax year that begins after December 31, 2031.  Please stay tuned to TWIST for updates on these bills.