TWIST - This Week in State Tax

Welcome to TWIST for the week of September 12, 2022, featuring Sarah McGahan from the KPMG Washington National Tax state and local tax practice.

First up today, as an update to an earlier TWIST, the Mayor of Denver recently signed an amendment to Denver’s municipal code exempting from the City’s sales and use tax base any government fee imposed directly on a consumer and separately stated on an invoice. In particular, the exemption will apply to the state retail delivery fee and the City’s disposable bag fee.

Legislation was recently signed into law that reduces Idaho’s corporate income tax rate from 6.0 percent to 5.8 percent effective January 3, 2023. The legislation, House Bill 1, also reduces the individual income tax rate and provides for rebates for individual taxpayers.

A newly amended regulation addressing when a taxpayer is subject to tax in a foreign country for the purposes of applying throwback or throwout was published in the Illinois Register on September 9, 2022. As amended, for taxable years ending on or after December 31, 2022, if jurisdiction is otherwise present, a taxpayer will be considered subject to tax in that foreign county even if the taxpayer is protected from taxation in the foreign country due to a tax treaty with the U.S.

Finally, New Jersey Governor Phil Murphy has released proposed legislation that is intended to (1) alleviate the tax burdens imposed on New Jersey residents who are assigned to work locations outside of the state and (2) reduce the tax credits provided to residents who pay income taxes to other states. First and foremost, the proposed legislation would adopt a so-called “convenience of the employer” test for sourcing nonresident employee wages. The proposed legislation would also award tax credits to incentivize New Jersey residents to file legal actions against other states that collect taxes from them for services they perform while physically located in New Jersey. Finally, the legislation establishes a pilot program to award grants to businesses that assign New Jersey resident employees to New Jersey business locations. It appears that the bill has bipartisan support.

Colorado: City of Denver Exempts Retail Delivery Fee

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As an update to an earlier TWIST, the Mayor of Denver recently signed an amendment to the City’s municipal code exempting from the City’s sales and use tax any government fee imposed directly on a consumer and separately stated on an invoice. In particular, the exemption applies to Colorado’s retail delivery fee and the City’s disposable bag fee. Previously these fees were part of the “purchase price” subject to home rule local sales and use tax. The ordinance change does not appear to have a specific effective date, so arguably is effective from the date the amendment was signed by the mayor on August 23, 2022. Please stay tuned to TWIST for more updates on Colorado’s retail delivery fee.

Idaho: Corporate Rate Reduction Enacted

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As a result of a recent special session, Idaho House Bill 1 was signed into law. This bill reduces Idaho’s corporate and individual income tax rates and is the second Idaho tax rate reduction enacted in 2022. Earlier this year, House Bill 436 reduced the corporate income tax rate from 6.5 percent to 6.0 percent effective January 1, 2022.  House Bill 1 further reduces the corporate and individual income tax rate to 5.8 percent effective January 3, 2023. The bill also provides for tax rebates for individual taxpayers. Please stay tuned to TWIST for additional tax rate changes.

Illinois:  Rule Addressing when a Taxpayer is Subject to Tax in Foreign Country Revised

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On September 9, 2022, a newly amended regulation (86 Ill. Adm. Code 100.3200) addressing when a taxpayer is subject to tax in a foreign country for the purposes of applying throwback or throwout was published in the Illinois Register.  Prior to the amendments, the rule provided that a taxpayer was not considered subject to net income tax in a foreign country (so that it could avoid throwback or throwout) if it was protected from taxation due to a treaty provision. As amended, for taxable years ending on or after December 31, 2022, if jurisdiction is otherwise present due to income producing activities being conducted by the taxpayer, that foreign country or political subdivision is not considered as being without jurisdiction by reason of the provisions of a treaty between that foreign country or political subdivision and the United States. The amended rule notes that Illinois’ former policy was contrary to the Multistate Tax Commission’s model rule provision.  Please contact Brad Wilhelmson with questions.

New Jersey: Governor Proposes Adoption of Convenience of the Employer Rule

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New Jersey Governor Phil Murphy has released proposed legislation that is intended to (1) alleviate the tax burdens imposed on New Jersey residents who are assigned to work locations outside of the state and (2) reduce the tax credits provided to residents who pay income taxes to other states. First and foremost, the proposed legislation would adopt a so-called “convenience of the employer” test for sourcing nonresident employee wages. New York currently applies a convenience of the employer rule, which results in nonresident employees having New York income taxes withheld on days when employees are working remotely (other than when the remote work is at the necessity of the employer). According to the Governor’s press release, the legislation is intended to create parity with New York and other states that maintain the same legal rule. Under the proposed legislation, if an employee’s state of residence uses a “convenience of the employer” test to determine the source of income of a nonresident, then New Jersey would apply such a test. As such, income or wages earned by a nonresident (e.g., a New York resident) would be allocated to the employer’s location in New Jersey, unless the nonresident worked from an out-of-state location due to the necessity of the employer, rather than the convenience of the employee. The proposed legislation would also award tax credits to incentivize New Jersey residents to file legal actions against other states that collect taxes from them for services they perform while physically located in New Jersey.

Specifically, a tax credit would be available to resident taxpayers who: (1) pay any income tax or wage tax imposed for the taxable year by another state of the United States, or political subdivision of such state, or by the District of Columbia; (2) apply for and are denied a refund from such state or jurisdiction for taxes paid to that state or jurisdiction on income derived from services rendered while the resident taxpayer was within New Jersey; (3) file an appeal with a tax court or tribunal through which the resident taxpayer formally protests the denial by another state or jurisdiction of the refund requested by the resident taxpayer for taxes paid on income derived from services rendered while the resident taxpayer was within New Jersey; and (4) obtain a final judgement from the tax court or tribunal resulting in the resident taxpayer being refunded taxes paid to another state or jurisdiction on income derived from services rendered while the resident taxpayer was within New Jersey.  The amount of the tax credit would be equal to 50 percent of the amount of taxes which are refunded by such tax court or tribunal and allocated to this State. This credit would be applicable for tax years beginning on and after January 1, 2020 and before January 1, 2024.  Finally, the legislation establishes a pilot program to award grants to businesses that assign New Jersey resident employees to New Jersey business locations. It appears that the bill has bipartisan support. Please stay tuned to TWIST for future updates and contact John Montgomery or John Seery with questions.