TWIST - This Week in State Tax

Minnesota: Conformity Legislation Signed into Law

Under prior law, Minnesota conformed to the Internal Revenue Code in effect on December 31, 2018. House File 31, which was signed into law on January 12, 2023, updates the state’s conformity to generally adopt the Internal Revenue Code as amended through December 15, 2022 for both individual and corporate franchise tax purposes. The change is effective upon enactment, but “the changes incorporated by federal changes are effective retroactively at the same time the changes were effective for federal purposes.”  Because of Minnesota’s prior conformity date, the state did not conform to any of the taxpayer-favorable changes in the CARES Act, or any of the tax changes in the six other federal bills enacted since the end of 2018 (e.g., Consolidated Appropriations Act, American Rescue Plan Act, Inflation Reduction Act, etc.). House File 31 generally adopts all the tax changes included in those federal enactments retroactively, with certain exceptions. Those exceptions include, but not limited to, the expanded deductions for business interest and NOLs included in the CARES Act, the increased charitable contributions deduction for C Corporations, and the temporary 100 percent deduction allowed for business meals.

For corporate franchise (income) tax purposes, a new addition is required under Minn. Stat. section 290.0133, subdivision 15 for each taxable year beginning after December 31, 2018 and before January 1, 2021 for the amount of business interest deducted under the special rules in IRC section 163(j)(10)(A) and (B). These are the provisions in the CARES Act that allowed taxpayers to (1) deduct interest up to 50 percent of Adjusted Taxable Income (ATI) for taxable years beginning in 2019 and 2020, and (2) elect to substitute the taxpayer's 2019 ATI for the 2020 ATI in determining the taxpayer's section 163(j) limitation.  House File 31 then creates a new subtraction for each taxable year an addition is required under section 290.0133, subdivision 15. The subtraction is found in Minn. Stat. section 290.0134, subdivision 20 and equals the amount of interest added back, less the sum of all amounts subtracted in all prior taxable years that does not exceed the limitation on business interest in section 163(j) of the Internal Revenue Code of 1986, as amended through December 15, 2022, notwithstanding the special rule in IRC section 163(j)(10). Any excess interest carryforward is a “delayed business interest carryforward,” the entire amount of which must be carried to the earliest taxable year. No subtraction is allowed under this paragraph for taxable years beginning after December 31, 2022. For each of the five taxable years beginning after December 31, 2022, there is a subtraction allowed equal to one-fifth of the sum of all carryforward amounts that remain.

House File 31 also adopts five new temporary additions and two subtractions for corporations.  The subtractions include wages used to calculate employee retention credits and various payroll credits to the extent not deducted from income and amounts required to be added back to gross income to claim the credit in IRC section 6432.  The additions include the amount of meals expenses in excess of the 50 percent limitation under IRC section 274(n)(1) and the amount of charitable contributions deducted for tax year 2020 under P.L. 116-136 (CARES Act), which temporarily suspended limits on the deductibility of charitable contributions.  These temporary additions and subtractions apply retroactively to the same time the changes were effective for federal tax purposes.

For individual income tax purposes, the bill likewise requires an addback for the amount of business interest allowed to be deducted under the CARES Act, but then allows a subtraction over five years for the disallowed business interest expense. Also for individual tax purposes, additional net operating losses under the CARES Act must be added back as do excess business losses allowed for federal purposes under IRC section 461(l). These losses can be carried forward for up to 20 years.  A subtraction will be allowed for excess business losses subject to federal limitation in Section 461(l)(1) of the Internal Revenue Code in tax years 2026-2028.

The conformity update will likely require a number of taxpayers to file amended returns. Taxpayers whose liability is affected by the updated conformity legislation will have until December 31, 2023 to file an amended return.  Please contact Caroline Balfour with questions.

Missouri: The New Year Brings New Sales Tax Changes to Missouri

Several significant sales and use tax changes to Missouri’s tax code took effect on January 1, 2023.  Senate Bills 153 and 97, which were enacted during the 2021 legislative session, adopted economic nexus provisions for sellers of tangible personal property delivered to customers in the state. A seller is deemed to be engaged in business activities within the state, and therefore required to collect use tax, when the seller’s gross receipts from taxable sales of tangible personal property into the state in the current or previous calendar year exceed $100,000. The bills also adopt a definition of “marketplace facilitator” and provide that marketplace facilitators engaged in business activities within the state shall register to collect and remit use tax on sales made through their marketplaces that are delivered to customers in the state. 

Finally, the bills expand a manufacturing exemption, RSMo. § 144.054, that applies to a taxpayer’s purchases of machinery, equipment, materials, chemicals, and energy sources that are used or consumed in the manufacturing, processing, compounding, mining or producing of any product, or used in research and development related to the manufacturing, processing, compounding, mining, or producing of any product. Previously, the exemption applied to state sales and use tax, as well as local use tax, but did not apply to local sales tax. The expanded exemption now provides that purchases qualifying for the exemption are also exempt from local sales tax. For questions regarding the changes effective January 1, 2023, please contact John Griesedieck. 

Ohio: Tax Amnesty Legislation Signed

On January 6, 2023, House Bill 45 was signed into law in Ohio. The new law authorizes the Tax Commissioner to establish and administer a tax and fee amnesty program with respect to qualifying delinquent taxes and fees. “Qualifying delinquent taxes and fees" include any unreported, underreported or unpaid tax or fee that was due and payable as of the effective date, but does not include any tax or fee for which a notice of assessment or audit has been issued, for which a bill has been issued, which relates to a period that ends after the effective date of the bill, or for which an audit has been conducted or is currently being conducted. During the program, if a person pays the full amount of qualifying delinquent taxes and fees owed, the Tax Commissioner will waive or abate all applicable interest and penalties that accrued on the qualifying delinquent taxes and fees.

Taxpayers with Ohio exposure should temper their ardor for the amnesty opportunity as it will be implemented only if the Director of Budget and Management determines that it is necessary to meet the obligations required to be paid from the state general fund in 2023.  If that determination is made, the amnesty program will operate during two consecutive months in 2023, as designated by the Commissioner. Please contact Dave Perry with questions. 

Washington: Taxpayer Not Entitled to Sales Tax Bad Debt Deduction

The Washington Board of Tax Appeals (Board) recently addressed whether a retailer taxpayer was eligible to claim the bad debt sales tax credit and B&O tax deduction on uncollectible amounts charged to the store’s branded private label credit card. In its agreement with the card issuer, the taxpayer accepted the card for store purchases, including any sales tax owed. The agreement stipulated that the bank alone was the owner of all the branded credit card accounts, account documentation, and any other related interests. However, important to the dispute at hand, the taxpayer received monthly compensation for performing certain credit account services.  The compensation was essentially adjusted to account for uncollectible amounts.

The appeal came before the Board on remand after the Washington Supreme Court decision in Lowe’s Home Centers, LLC v. Dept. of Revenue (2020). In that case, the court held that a retailer qualified for the bad debt credit and deduction in part because the retailer had contracted with the banks to act as a guarantor for its customers that defaulted on credit payments. The Board applied the following requirements for claiming an uncollectable debt credit or deduction from Lowe’s: “(1) an eligible taxpayer must be a seller (2) making sales at retail (3) which are entitled to a refund for sales taxes previously paid on bad debts (4) that are federally deductible.”  This last criterion was important as the federal deduction is available to the guarantor of the debt.

The taxpayer argued it was indirectly compensating the bank and was in essence guaranteeing the debts (as was the case in Lowe’s) because the payments it received for credit servicing activities were reduced to account for uncollectible debts. The Board, however, disagreed, concluding that simply because the taxpayer’s payments for performance of account services were reduced for uncollectible amounts did not give rise to a guarantor’s obligation. Per the agreement with the bank, the taxpayer had no interest or obligation associated with the accounts. The taxpayer did not have an enforceable legal duty to make any related payments to the bank, nor did the taxpayer have any intention of making a claim against its customers for any payments made in discharge of the debt. As such, the Board concluded that because the taxpayer was not the guarantor of the uncollectible debts, it was ineligible to qualify for either the sales tax credit or B&O tax deduction.  Please contact Michele Baisler with questions on Kohl’s Department Stores, Inc. v. Washington Department of Revenue.