PODCAST

TWIST - This Week in State Tax

Summary of state tax developments in Colorado, Tennessee, and Washington State.

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  • Weekly TWIST recap
  • Colorado
  • Tennessee
  • Washington State

Weekly TWIST recap

Welcome to TWIST for the week of May 23th, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

The Tennessee Department of Revenue recently issued guidance addressing a new Business Tax Wholesaler/Retailer certificate available to taxpayers beginning January 1, 2023. The Tennessee Business Tax is state and local privilege tax imposed on businesses making sales of tangible personal property and services to customers within the state. To establish their business tax rate, taxpayers must determine whether they are primarily engaged in business as a retailer or as a wholesaler. On audit, taxpayers have found it difficult to prove wholesaler-to-wholesaler transactions. Under a new law, the Department must make available to each taxpayer that files a business tax return a certificate that indicates whether the taxpayer filed a business tax return at the wholesaler rate or at the retailer rate for each of a taxpayer’s locations. A vendor may request the certificate from its customers and can rely on the certificate for transactions occurring during the certificate’s effective period for purposes of determining the vendor’s business tax liability.

In Colorado, the Governor recently signed the SALT Parity Act, which revises the state’s pass-through entity tax election to allow an S corporation or partnership to elect to pay tax at the entity level retroactively to tax years beginning on or after January 1, 2018. Originally, the election could be made only for tax years beginning on or after January 1, 2022. For tax years prior to January 1, 2022, the retroactive election can be made for each taxable year by filing an amended composite return on or after September 1, 2023, but before July 1, 2024.

Finally, in Washington State a Tax Review Officer concluded that a taxpayer was subject to B&O at the service rate for amounts received as damages when customers rented and then caused damage to the taxpayer’s RVs. In general, all gross receipts “actually received” by a business are subject to B&O tax. The Review Officer concluded that under the rationale of prior determinations, the amounts were taxable because they were compensation to repair RVs damaged by drivers that were necessarily related to the taxpayer’s ongoing business of renting RVs. 

Thank you for listening to TWIST and stay well!

Colorado

Colorado: Pass-through Entity Election Made Retroactive

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Recently enacted Senate Bill 124 revises the state’s pass-through entity tax (PTET) election to allow an S corporation or partnership to elect to pay tax at the entity level for taxable years beginning on or after January 1, 2018. Originally, the election could be made only for tax years beginning on or after January 1, 2022. The retroactive election must be made for each taxable year by filing an amended composite return on or after September 1, 2023, but before July 1, 2024. Filing an amended return for this purpose, without other changes, does not extend the statutes of limitations for assessments or refunds.

The tax is imposed at a rate equal to the corporation tax rate for the applicable tax year. Previously, the tax was imposed at a set 4.55 percent rate, which is the tax rate for 2022. However, the rates varied for tax years 2018 through 2021, so this change will make the PTET rate consistent with the corporate tax rate for each year. No estimated payments are required for tax years beginning before January 1, 2023.

Each PTE owner is entitled to claim a refundable credit equal to its share of tax paid by the electing PTE. Previously, the entity owner’s distributive share of the electing PTE income was subtracted from federal taxable income. A resident may be entitled to a credit for taxes paid to other states if the other state allows a credit for the PTET paid to that state. But it appears a resident may not take the credit for taxes paid if the state allows a deduction for the income of the PTE instead of a credit. Please contact Brad Wilhelmson with questions on the PTET election. 

Tennessee

Tennessee: New Wholesaler/Retailer Certificates Indicate Business Tax Status

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The Tennessee Department of Revenue recently issued guidance addressing a new Business Tax Wholesaler/Retailer certificate available to taxpayers beginning January 1, 2023. The Tennessee Business Tax is state and local privilege tax imposed on businesses making sales of tangible personal property and services to customers within the state. To establish their business tax rate, taxpayers must determine whether they are primarily engaged in business as a retailer or as a wholesaler. Generally, a business is a retailer if 50 percent or more of taxable gross sales are retail sales, and a wholesaler if more than 50 percent of taxable gross sales are wholesale sales. In addition, sales made from one wholesaler to another are not subject to the business tax. Therefore, it is important for taxpayers to know whether their customer is a wholesaler, retailer, or consumer.

On audit, taxpayers have found it difficult to prove wholesaler-to-wholesaler transactions. Under Public Chapter 683 (2022), effective January 1, 2023, the Department must make available to each taxpayer that files a business tax return a certificate that indicates whether the taxpayer filed a business tax return at the wholesaler rate or at the retailer rate for each of a taxpayer’s locations. Certificates will be valid for one year and will be made available annually to taxpayers through the Department’s TNTAP portal after the business tax return is filed.  The Department’s guidance notes that a vendor may request the certificate from its customers and can rely on the certificate for transactions occurring during the certificate’s effective period for purposes of determining the vendor’s business tax liability. The guidance also provides that vendors that receive a certificate will not owe additional tax and will not receive a refund based on a retroactive change to a customer’s status as a wholesaler or retailer for the period covered by the certificate. Please contact Justin Stringfield with questions on Notice 22-04.

Washington State

Washington State: Charges for Damages to Taxpayer’s RVs Taxable as Service Income

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A Tax Review Officer for the Administrative Review and Hearings Division of the Washington State Department of Revenue recently addressed whether amounts received from customers related to damaged RVs were subject to retail B&O tax.  The taxpayer rented RVs to drivers in Washington State. At times, customers damaged the taxpayer’s RVs and, per the rental agreements, were charged for the damage. On audit, the Department included the damage payments in the taxpayer’s gross income and assessed retail B&O and retail sales tax. The taxpayer protested the assessment.

The Tax Review Officer first considered whether the amounts received as damages constituted part of the taxpayer’s taxable income. In general, all gross receipts “actually received” by a business are subject to B&O tax, without any deductions for costs such as labor, materials, taxes, or any other expense. In previous determinations, the Department addressed the taxability of settlement proceeds, which it determined were similar in “some respects” to the proceeds in this case. In one decision, the Department held that “settlements related to a business purpose” are taxable, while “settlements that make an injured party whole,” are not taxable. Payments for the early termination of a vehicle lease were determined to be related to a taxpayer’s business purpose, while proceeds paid to compensate the taxpayer for relocating utility lines were to make an injured party whole. The Review Officer concluded that under the rationale of the prior determinations, the proceeds at issue were taxable because they were compensation to repair RVs damaged by drivers that were necessarily related to the taxpayer’s ongoing business of renting RVs. In the Review Officer’s view, the income was not related to the settlement of a claim outside the contractual business relationship between Taxpayer and its customers. With respect to the classification of the income, the Review Officer concluded that damage charges were not subject to retail B&O or sales tax because they were not received for renting tangible property. Instead, the proceeds were subject to service B&O. Please contact Michele Baisler with questions on Det. No. 20-0268. 

Podcast host

Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US

+1 213-593-6769