PODCAST

TWIST - This Week in State Tax

Summary of state tax developments in Colorado, Iowa, Texas and West Virginia.

Click on the tabs for the detailed developments:

  • Weekly TWIST recap
  • Colorado
  • Iowa
  • Texas
  • West Virginia

Weekly TWIST recap

Welcome to TWIST for the week of October 3, 2022, featuring Sarah McGahan from the KPMG Washington National Tax state and local tax practice.

The first development we are covering today is the Colorado Department of Revenue recently proposed an 11-page rule addressing the state’s relatively new retail delivery fee.  The proposed rule addresses various aspects of the new fee, including but not limited to, application of the fee to certain types of retail sales, presentation of the fee on an invoice, types of sales not subject to the fee, and administration and enforcement of the fee by the Department. A virtual hearing on the proposed rule will be held on November 3, 2022.

In Iowa, the Iowa Department of Revenue recently announced that the state’s corporate income tax rate applicable to income exceeding $100,000 will be reduced to 8.4 percent effective for tax years beginning on or after January 1, 2023. The rate reduction results from legislation enacted earlier this year that implemented a formula for reducing the corporate income tax rate if net corporate income tax receipts exceeded $700 million for the immediately preceding fiscal year.  This process will continue each year until the rate is 5.5 percent on all corporate income.

In Texas, a Travis County district court judge issued two orders related to aspects of the rules addressing the Texas Research and Development Activities Credit and the Qualified Research sales tax exemption. In the orders, the judge struck down the requirement that taxable entities must establish by clear and convincing evidence that they qualify for the research sales tax exemption or are entitled to the research and development activities credit. In addition, the judge ruled that revised rules published in October 2021 may not be applied retroactively.

Finally, an ALJ for the West Virginia Office of Tax Appeals concluded that a company operating a franchised tax preparation service was not providing professional services and was therefore required to collect sales tax. The West Virginia Code of Regulations lists numerous service providers that perform activities recognized as “professional,” as well as guidance to determine whether an unlisted activity falls within the “professional” classification. Notably, services rendered by certified professional accountants are included in the list of exempt professional services, but tax preparation services are not. The Tax Commissioner has discretionary authority when determining whether an unlisted activity is “professional” and will consider the level of education required for the activity, the nature and extent of nationally recognized standards for performance, licensing requirements on the state and national level, and the extent of continuing education requirements. The ALJ concluded that the taxpayer’s employees, who were not CPAs, were not performing professional services.

Colorado

Colorado: Department Proposes Rule on Retail Delivery Fee

The Colorado Department of Revenue recently proposed an 11-page rule (Rule 43-4-218) addressing the state’s relatively new retail delivery fee.  Recall, a retailer or marketplace facilitator making a retail delivery to a Colorado customer on or after July 1, 2022, must collect the $0.27 fee from the purchaser, and remit the fee to the Department. The proposed rule addresses various aspects of the new fee, including but not limited to, application of the fee to certain types of retail sales, presentation of the fee on an invoice, types of sales not subject to the fee, and administration and enforcement of the fee by the Department. Certain of the information in the proposed rule has been issued by the Department in FAQs, such as the confirmation that retail sales delivered by the U.S. Postal Service and shipping companies are subject to the fee.

A virtual hearing on the proposed rule will be held on November 3, 2022, at 10:00 am Mountain Time. The Department’s website provides guidance on participation in the rulemaking hearing. The Department will accept oral comments at the hearing. Written comments may be submitted to dor_taxrules@state.co.us in advance or in lieu of oral commentary at the hearing and will be accepted until 5:00 P.M. on November 3, 2022.  Please stay tuned to TWIST for additional updates on the Colorado retail delivery fee.

Iowa

Iowa: Corporate Income Tax Rate to Drop in 2023

On September 27, 2022, the Iowa Department of Revenue announced that the state’s corporate income tax rate applicable to income exceeding $100,000 will be reduced to 8.4 percent effective for tax years beginning on or after January 1, 2023.  Currently, income up to $100,000 is taxed at a 5.5 percent rate, income from $100,000 to $250,000 is taxed at a 9.0 percent rate, and income over $250,000 is taxed at a 9.8 percent rate. The rate reduction results from legislation enacted earlier this year that implemented a formula for reducing the corporate income tax rate if net corporate income tax receipts exceeded $700 million for the immediately preceding fiscal year.  This process will continue each year until the rate is 5.5 percent on all corporate income. Please contact Caroline Balfour with questions.

Texas

Texas: Taxpayer Favorable R&D Credit and Exemption Rulings

On September 13, 2022, two district court orders related to the Texas Research and Development Activities Credit and the Qualified Research sales tax exemption were issued by a Travis County district court judge on a motion for summary judgement. Under Texas law, taxpayers may claim either a sales tax exemption or a franchise tax credit for qualifying research expenses that occur in Texas. In October 2021, the Comptroller finalized extensive amendments to 34 TAC §3.599 that in many instances limited a taxpayer’s ability to qualify for research activities credits.

In the orders, the judge struck down the requirement in TAC §§ 3.340 and 3.599 requiring taxable entities to establish by clear and convincing evidence that they qualify for the research sales tax exemption or are entitled to the research and development activities credit.  However, the judge did not strike down the requirement in the rules that all qualified research expenses and activities be supported by contemporaneous business records. In addition, the judge ruled that the revised rules published in October 2021 may not be applied retroactively. This is a significant development, as the revised rules narrowed the scope of expenses that qualify, and the Comptroller has been applying the revised rules to earlier years on audits. It remains to be seen whether these rulings will be appealed. Please contact Jeff Benson with questions on these rulings.

West Virginia

West Virginia: Tax Preparation Services Not Exempt Professional Services

An Administrative Law Judge (ALJ) for the West Virginia Office of Tax Appeals recently concluded that a company operating a franchised tax preparation service was required to collect sales tax on its services. The taxpayer did not employ CPAs to prepare and process returns. Under West Virginia law, sales tax is generally imposed on services, but there is an exception for furnishing professional or personal services.   The dispute at issue centered on whether the taxpayer was providing an exempt professional service. The West Virginia Code of Regulations lists numerous service providers that perform activities recognized as “professional,” as well as guidance to determine whether an unlisted activity falls within the “professional” classification. Notably, services rendered by certified professional accountants are included in the list of exempt professional services, but tax preparation services are not. The Tax Commissioner has discretionary authority when determining whether an unlisted activity is “professional” and will consider the level of education required for the activity, the nature and extent of nationally recognized standards for performance, licensing requirements on the state and national level, and the extent of continuing education requirements.         

The opinion limited its analysis to the enumerated four-part test as “tax preparation” services are not among the exempt professional services listed in the regulation. With respect to the level of education, the taxpayer argued that real life work experiences should stand in for the education requirements in the four-part test. However, the ALJ noted that the taxpayer testified that there was no certain level of education required to work as a tax preparer, and many of the company’s preparers had a GED or high school education, but even that was not required. The ALJ was also not convinced that the tax return preparers were subject to licensing and continuing education requirements.  Although the company as a franchise was required to obtain 25 hours of continuing education each year, the taxpayer testified that there were no licensing requirements to file federal and West Virginia state tax returns and no specific continuing education requirements. Finally, the taxpayer argued that tax preparation services were akin to those provided by certified professional accountants and differentiating between the two was unfair. The presiding judge acknowledged the argument’s merit in part, but highlighted the differences in education, licensing requirements, and the complexity of work performed by CPAs. As an administrative tribunal, the Office of Tax Appeals declined to address any constitutional arguments challenging the alleged disparate treatment of tax preparers.  In conclusion, the ALJ determined that the Petitioner was not providing exempt professional services and thus was required to collect sales tax for its services.  Please contact Mark Balistrieri with questions on this determination.

Podcast host

Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US

+1 213-593-6769