TWIST - This Week in State Tax

Welcome to TWIST for the week of August 15, 2022. This is Sarah McGahan from the KPMG Washington National Tax State and local tax practice.

First up today, in corporate income tax news, legislation has been enacted in Arkansas that accelerates a phased-in corporate rate reduction. Specifically, for tax years beginning on or after January 1, 2023, the highest corporate rate imposed on income exceeding $25,000 will drop to 5.3 percent. Previously, this rate was to be 5.7 percent.  There are no additional planned corporate income tax rate reductions, contingent or otherwise. Effective for tax years beginning on or after January 1, 2022, Arkansas has updated its conformity to IRC section 179 as it exists on January 1, 2022.

On the sales and use tax side, Assembly Bill 1951 is heading to a full vote in the California Senate. Importantly, this bill would make the current partial sales and use tax exemption for manufacturing and R&D equipment into a full exemption from both state and local sales and use taxes on and after January 1, 2023, and before January 1, 2028.   

The New Mexico Taxation and Revenue Department has noticed proposed Gross Receipts Tax rules addressing the taxability of digital advertising under current law. New Mexico does not impose a traditional sales and use tax, but imposes a Gross Receipts Tax on persons engaged in business in New Mexico.  The proposed rules state that the “receipts of a provider of digital advertising services, whose digital platform may be accessed or viewed from within New Mexico, from the sale of advertising services to advertisers within and without New Mexico are subject to the gross receipts tax.” The rules also state that the levy of gross receipts tax on such advertising receipts “does not impose an unconstitutional burden on interstate commerce.” A public hearing on the proposed rules is scheduled to be held on September 8, 2022, and interested parties may submit written comments to the Department on or before the date of the hearing.

Thank you for listening to TWIST and stay well!

Arkansas: Legislature Approves Additional Income Tax Cuts

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Act 2, which was recently signed into law in Arkansas following a special legislative session, accelerates scheduled reductions to the state’s individual and corporate income tax rates. In December 2021, the Arkansas legislature adopted incremental corporate rate reductions that would have reduced the highest corporate income tax rate to 5.3 percent for tax years beginning on or after January 1, 2025, provided certain fiscal conditions were met. Under Act 2, for tax years beginning on or after January 1, 2023, the highest corporate rate imposed on income exceeding $25,000 will drop to 5.3 percent. Previously, this rate was to be 5.7 percent.  There are no additional planned corporate income tax rate reductions, contingent or otherwise. Effective for tax years beginning on or after January 1, 2022, Act 2 conforms Arkansas to IRC section 179 as it exists on January 1, 2022. Previously, Arkansas adopted IRC section 179 as in effect on January 1, 2009. Also effective for tax years beginning on or after January 1, 2022, the highest personal income tax rate is reduced from 5.5 percent to 4.9 percent. Please contact Jennifer Knickel with questions on the rate reductions.

California: Full Sales Tax Manufacturing Exemption Legislation Advances

UPDATED August 30, 2022

California Assembly Bill 1951 is enrolled and should be presented to Governor Newsom shortly for signature. This bill would make the current partial sales and use tax exemption for manufacturing and R&D equipment into a full exemption from both state and local sales and use taxes on and after January 1, 2023, and before January 1, 2028.  Effective January 1, 2028, the partial exemption would be reinstated. Businesses planning on investing in qualifying equipment in California may wish to consider delaying purchases pending the enactment of the bill or consider other opportunities to defer acquisition until next year. 

The partial exemption, which was adopted in 2013, exempts qualifying purchases from 3.9375 percentage points of the overall California sales and use tax. The 3.9375 percent represents the general fund component of the sales tax. Other mandatory components of California’s overall sales and use tax rate are the 1.25 percent Bradley-Burns local rate that goes to cities and counties, and three sales tax rates designated to fund specific programs. In addition, local governments may levy optional local rates. The fiscal note for Assembly Bill 1951 estimates that the expanded exemption would result in a revenue loss of approximately $533 million for local governments which is expected to be funded, at least in part, with California’s current surplus of nearly $100 billion.  Assembly Bill 1951 maintains the current cap on the exemption, which is $200 million in qualifying purchases annually per taxpayer. 

The bill does not make changes to the scope of the exemption or extend expiring provisions that expanded the partial exemption to power generators and agricultural businesses. Currently, the partial exemption applies to purchases of:

1. Qualified tangible personal property used primarily (more than 50 percent of the time) by a qualified person in any stage of manufacturing, processing, refining, fabricating, or recycling of tangible personal property, beginning at the point any raw materials are received by the qualified person and introduced into the process and ending at the point at which the manufacturing, processing, refining, fabricating, or recycling has altered the tangible personal property to its completed form, including packaging, if required.
2. Qualified tangible personal property purchased by a qualified person to be used primarily in research and development.
3. Qualified tangible personal property to be used primarily to maintain, repair, measure, or test any qualified property in (1) or (2).
4. Qualified tangible personal property purchased by a contractor for use in the performance of a construction contract for a qualified person that will use the property as an integral part of the manufacturing, processing, refining, fabricating, or recycling activity, or as a research or storage facility for use in connection with those processes.
5. Qualified tangible personal property purchased for use by a “qualified person” to be used primarily in the generation or production, or storage and distribution, of electric power.

A “qualified person” means a person that is primarily engaged in those lines of business described in Codes 3111 to 3399 (inclusive), 541711, or 541712 of the North American Industry Classification System (NAICS).   A “qualified person” generally does not include a business that is required or would be required to use a three-factor evenly weighted apportionment formula (e.g., financial corporations and extractive businesses). As noted above, certain businesses that are currently considered “qualified persons” under legislation enacted in 2017 (various types of power generators primarily described in NAICS codes 22111 to 221118, inclusive, and 221122, and agricultural businesses described in Cal. Rev. & Tax Cd. §25128(c)(1)) will no longer be so considered beginning January 1, 2023. Please contact Jim Kuhl at 916-551-3168 with questions on Assembly Bill 1951.

New Mexico: Draft Regulations Address the Taxability of Digital Advertising

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The New Mexico Taxation and Revenue Department has noticed proposed Gross Receipts Tax rules addressing the taxability of digital advertising under current law. New Mexico does not impose a traditional sales and use tax, but imposes a Gross Receipts Tax on persons engaged in business in New Mexico. The Gross Receipts Tax base applies to the sale of tangible personal property as well as generally to all receipts from services performed in New Mexico, the leasing or licensing of property in New Mexico, and the granting of a right to use a franchise employed in New Mexico.

The proposed rules state that the “receipts of a provider of digital advertising services, whose digital platform may be accessed or viewed from within New Mexico, from the sale of advertising services to advertisers within and without New Mexico are subject to the gross receipts tax.” The rules also state that the levy of gross receipts tax on such advertising receipts “does not impose an unconstitutional burden on interstate commerce.” The term “digital advertising services” is defined, as “advertisement services on digital platforms, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” This definition is very similar to the definition in Maryland’s digital advertising tax law.  A “digital platform” means “any type of website, including part of a website, or application, that a user is able to access or view.” A “seller or advertiser” means “a person whose identity, business, service, product or products are the primary subject of the advertising message.”

The proposed rules provide a deduction of receipts from certain digital advertising services when the receipts “(i) are from a national or regional advertiser not having its principal place of business in New Mexico, or that is not incorporated under the laws of New Mexico, or (ii) are from an advertising agency which purchases the display of advertisements on the platform on behalf of, or for subsequent sale to, a seller defined in (i) above. However, the commissions of advertising agencies from performing services in this state may not be deducted.” The terms “regional” and “principal place of business” are also defined in the proposed rules.

For sourcing digital advertising services, the proposed rules provide an example in which “Company X” provides a digital advertising service “that can be viewed in New Mexico, and is intended to be viewed only in New Mexico, through access to Company X’s digital platform….The product of the digital advertising service is delivered to the locations of all persons viewing or accessing the advertising.” To determine the proper reporting location for Company X’s receipts, the example refers to provisions in the rules which provide that the reporting location is determined based on the seller’s knowledge or possession of information concerning the location of the purchaser, or where the purchaser receives the seller’s product or service. In the circumstance when a seller is without sufficient information to apply those provisions, the default rule is that the reporting location is the location from which the property or product of the service was shipped or transmitted to the purchaser. Applying these rules, the example states that the reporting location of Company X’s gross receipts and related deductions from the service is “the location of the server of Company X hosting the digital platform from which the advertising is accessed.”

A public hearing on the proposed rules is scheduled to be held on September 8, 2022, and interested parties may submit written comments to the Department on or before the date of the hearing. Please contact Brandon Jumonville or Carolyn Owens with questions on the proposed rules.