TWIST - This Week in State Tax

Welcome to TWIST for the week of April 25th, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

First up today is a legislative update on a couple recently enacted state tax bills. In Virginia, House Bill 1006 increases the deduction for disallowed business interest from 20 percent to 30 percent of the amount disallowed as a deduction under IRC section 163(j). This change is effective for taxable years beginning on and after January 1, 2022.  Another Virginia bill adopts a SALT cap workaround by allowing a qualifying passthrough entity to elect to pay tax at the entity level. Although the new law is effective for tax years beginning on and after January 1, 2021,  the Virginia Department of Taxation has announced that is delaying the implementation of the elective pass-through entity tax until at least October 15, 2023.  In West Virginia, House Bill 4511, which was signed into law on March 28, 2022, reduces the unclaimed property dormancy periods for certain property types and extends coverage of the West Virginia unclaimed property law to virtual currency.  Finally, in sales and use tax news, a Texas Administrative Law Judge determined that a minor league baseball team owed use tax on certain promotional items and services provided to attendees. The baseball team argued that the sale for resale exemption applied to its purchases of “giveaway” items and that the price it charged for tickets to its games included a charge for the souvenirs transferred to ticket holders. The ALJ rejected this argument on the basis that the taxpayer had not established that its ticket prices included a specific amount for the promotional items. The ALJ also determined that the taxpayer did not purchase cleaning and security services for resale to customers that attended its games.

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Texas: Baseball Team Owed Use Tax on Promotional Items  

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Recently, a Texas Administrative Law Judge (ALJ) determined that a minor league baseball team owed use tax on certain promotional items and services provided to attendees. The baseball team argued that the sale for resale exemption applied to its purchases of “giveaway” items and that the ticket price to its games included a charge for souvenirs transferred to ticket holders. As support for its position, the taxpayer cited to DTWC v. Combs in which a Texas appeals court held that a hotel was exempt on its purchases of items, such as shampoo, provided to guests.  However, in that case, the parties stipulated that the hotel guests had paid for the in-room consumables and the evidence established that the cost of the consumables represented 2 percent of the room rate charge. Therefore, the guest’s payment of the overnight-lodging fee constituted consideration for the hotel consumables. In contrast, the giveaways at issue may have been used to promote attendance at certain games, but no evidence was provided that identified the specific amount or percentage of the ticket price that was attributable to the promotional items at issue. The taxpayer also argued that its purchases of security services and cleaning services were transferred to customers and were therefore exempt from sales tax as sales for resale. The ALJ again disagreed, noting that although the security and cleaning services may have been necessary to provide to patrons, the taxpayer had not established that it was reselling these services to baseball game attendees. Finally, the ALJ rejected the taxpayer’s argument that the federal Homeland Security Act of 2002 preempted the state from imposing sales and use tax on security services provided at the baseball games.  Please contact Sarah Vergel de Dios with questions on the Comptroller’s decision.  

Virginia: 163(j) Deduction Revised; Pass-Through Entity Election Enacted

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Recently two tax bills of interest were signed into law in Virginia. House Bill 1006 increases the Virginia individual and corporate income tax deduction for business interest from 20 percent to 30 percent of the amount disallowed as a deduction under IRC section 163(j). This change is effective for taxable years beginning on and after January 1, 2022.  Virginia House Bill 1121 provides a qualifying passthrough entity (or PTE) an option to pay tax at the entity level equal to 5.75 percent. To qualify to make the election, the PTE must be 100 percent owned by natural persons or other individuals eligible to be shareholders in an S corporation. The election must be made annually on or before the original or extended due date of the applicable state return. An individual owner of a qualifying PTE is entitled to claim a subtraction for any amount of income derived from a PTE having Virginia taxable income if the PTE makes the election and pays the entity level tax.

Although the new law is effective for taxable years beginning on and after January 1, 2021, but before January 1, 2026, the Virginia Department of Taxation has announced that is delaying the implementation of the elective PTE tax until at least October 15, 2023.  The Department explained that, due to the timing of the legislation and because the 2021 filing season is already under way, the Department is unable to accept or process PTET returns at this time. Therefore, qualifying PTEs will not be able to make an election to pay the tax and owners of a qualifying PTE will not be allowed to claim the refundable income tax credit until further guidance is released by the state. As a result, the Department advised qualifying PTEs and their owners to file their 2021 returns and make any required tax payments as they normally would by the applicable due dates under current law.  If an individual attempts to claim this credit on their 2021 return, the Department will deny the credits and assess applicable interest and penalties.  The Department indicated that it would release guidance on or before October 15, 2023 that explains the procedures for making the election and taking the credit, which may be made retroactively on amended returns to include the years prior to the release of the guidance (i.e., tax years beginning on or after January 1, 2021).  Nevertheless, the Department indicated that the provisions allowing a credit for PTE taxes paid to other states is not delayed.  Therefore, taxpayers may take a credit on their 2021 tax returns for taxes paid by a PTE under the law of another state that is substantially similar to the Virginia PTE tax. The Department acknowledged that the legislation effectively overrules Public Document 21-156 (which was issued December 29, 2021), which generally denied a credit for the Maryland elective PTE tax. Although the current guidance does not provide a list of states with “substantially similar” taxes, the guidance indicates that the credit does not apply to other states’ franchise, privilege, business, license, or occupation taxes. Taxpayers who have already filed their 2021 return may file an amended return to claim the credit. Please contact Diana Smith with questions on these Virginia law changes.   

West Virginia: Unclaimed Property Law Amended to Include Virtual Currency; Dormancy Periods Revised

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West Virginia House Bill 4511, which was signed into law on March 28, 2022, reduces the unclaimed property dormancy periods for certain property types and extends coverage of the West Virginia unclaimed property law to virtual currency.  The bill is effective 90 days from the date of passage, which is June 10, 2022. First, the dormancy period for (1) certain debts of a business association or financial organization and (2) property held by fiduciaries is reduced from five to three years.  Deposits or refunds owed to a subscriber by utilities have a new one-year dormancy period (formerly 2 years).  Further, the legislation lowers the dormancy period from 5 years to 3 years for all property types that fall into the “catchall” provision, such as outstanding mineral interest-related payments, health savings account disbursements, certified and cashier’s checks, etc.  The amended law also adopts new definitions of “electronic” and “electronic mail” and limits to $150 the amount the state will reimburse a financial organization for costs associated with opening safe deposit boxes and unpaid rent.

Under the revised law, “virtual currency” is now specifically listed as a type of abandoned property subject to the state’s unclaimed property laws. The definition of virtual currency means “a digital representation of value, including cryptocurrency, used as a medium of exchange, unit of account, or store of value, which does not have legal tender status recognized by the United States.”   The definition excludes software or protocols governing the transfer of the digital representation of value, game-related digital content, and loyalty or gift cards.  Virtual currency is assigned a 3-year dormancy period initiated by the owner’s last indication of interest in the property.  Under the amended statute, once the dormancy period has run, the holder is required to liquidate the virtual currency anytime within 30 days of filing the report and remit the proceeds to the unclaimed property administrator.  The virtual currency owner has no recourse against the holder or the unclaimed property administrator for any gain in value of the virtual currency after the required liquidation.

The West Virginia definition and treatment of virtual currency follows an emerging trend by states to specifically include coverage and treatment of virtual currency in their unclaimed property statutes.  The trend began in 2018 and 2019 when Kentucky enacted legislation covering virtual currency and outlining its treatment.  Illinois, Delaware, and Wisconsin have subsequently followed suit.

KPMG’s National Unclaimed Property practice has reviewed the impacts of these changes in the West Virginia unclaimed property law. For more information, contact a KPMG professional in our Unclaimed Property Practice:

Nina Renda | +1 (973) 912-6528 | akrenda@kpmg.com

Marion Acord | +1 (404) 222-3053 | marionacord@kpmg.com

Will King | +1 (214) 840-6107 | williamking@kpmg.com

Jenna Fenelli | +1 (973) 912-4546 | jfenelli@kpmg.com