TWIST - This Week in State Tax

Welcome to TWIST for the week of January 30, 2023, featuring Sarah McGahan from the KPMG Washington National Tax state and local tax practice.

The state legislative sessions are underway in many states and, as always, there are proposals in certain separate reporting states to move to combined reporting. In Maryland, House Bill 46 would adopt mandatory unitary combined reporting effective for tax years beginning after December 31, 2024. The default filing methodology for the combined group would be worldwide filing, but combined groups would be allowed to make an election to file on a water’s-edge basis. In Pennsylvania, Senate Bill 161 would adopt water’s-edge combined reporting for tax years beginning after December 31, 2023. The water’s-edge group would include certain members incorporated in or doing business in certain enumerated tax haven jurisdictions. In addition to the bills that would implement combined reporting, there are bills pending in Hawaii, Oregon, and New Hampshire that would adopt a worldwide combined reporting methodology.

In other news, the Illinois Independent Tax Tribunal recently addressed whether an amended return was timely filed during the height of the COVID-19 pandemic. Under Illinois law, a taxpayer can provide competent evidence to prove the date a return was mailed if the postmark is absent, illegible, or erroneous. The taxpayer wished to offer an affidavit identifying the steps taken to have the amended return signed and mailed with sufficient postage as evidence that the return was filed in a timely manner. The DOR, on the other hand, asserted that the taxpayer could offer evidence of timely mailing only in instances when the return was not received or there was a mailing envelope without a legible postmark, which was not the case here.  The Tribunal ruled in the taxpayer’s favor and concluded that the taxpayer had “presented unrebutted evidence of timely mailing that was reasonable and credible in the context of the highly unusual circumstances surrounding business and governmental operations during the height of the COVID-19 pandemic.” 

Finally, the Texas Comptroller Tax Policy Division recently published a policy letter confirming that a taxpayer may not amend a franchise tax report for an out-of-statute report period to create a research and development credit carryforward for use in an open report year.

Illinois: Taxpayer Established Amended Return was Timely Filed During COVID-19

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The Illinois Independent Tax Tribunal recently addressed whether an amended return was timely filed during the height of the COVID-19 pandemic. The amended return was received at the Springfield, Illinois Payment Center four business days and six calendar days after the due date. The taxpayer asserted it was timely mailed the day before the October 16, 2020 due date by an employee. However, the return was not sent via certified mail because the employee was concerned with entering the post office due to the severity of the COVID-19 pandemic and the risk of exposing her four children. The Department of Revenue did not have the mailing envelope in the file and asserted that the amended return was not timely filed.

Under Illinois law, a taxpayer can provide competent evidence to prove the date a return was mailed if the postmark is absent, illegible, or erroneous. The taxpayer wished to offer an affidavit identifying the steps she took to have the amended return signed and mailed with sufficient postage as evidence that the return was filed in a timely manner. The Department, on the other hand, asserted that the taxpayer could offer evidence of timely mailing only in instances when the return was not received or there was a mailing envelope without a legible postmark, which was not the case here.  The Tribunal determined that the Department’s interpretation of the statute was absurd, and that there was no prohibition on introducing other evidence as proof of timely mailing when the envelope was absent and was most likely last possessed by the government. The Department also claimed that only evidence of certified mail was permitted if evidence other than a postmark was considered as proof of mailing. The Tribunal again rejected this notion, observing that the dispute at issue did not involve certified mail and that the language relied on by the Department did not bar additional types of evidence. Because the taxpayer was not prohibited from introducing the affidavit in support of its position, the Department was required to produce other evidence to rebut the taxpayer’s position that the return was timely filed. The Department failed to do so, and the Tribunal concluded that the taxpayer had “presented unrebutted evidence of timely mailing that was reasonable and credible in the context of the highly unusual circumstances surrounding business and governmental operations during the height of the COVID-19 pandemic.”  Please contact Brad Wilhelmson with questions on Mitutoyo America Corp. v. Illinois Department of Revenue.

Multistate: A Roundup of Combined Reporting Bills

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Legislative sessions are underway in many states and, as always, there are proposals in some separate reporting states to adopt combined reporting. In Maryland, House Bill 46 would adopt mandatory unitary combined reporting effective for tax years beginning after December 31, 2024. The default filing methodology for the combined group would be worldwide filing, but combined groups would be allowed to make an election to file on a water’s-edge basis. The combined reporting provisions are fairly similar to combined reporting laws in other states in terms of adopting a more than 50 percent direct or indirect ownership test for inclusion in the combined group, and a fairly broad definition of a unitary business. House Bill 46 would allow a publicly traded corporation a deduction if the enactment of combined reporting results in an aggregate increase to the combined group’s deferred tax liability, an aggregate decrease to the combined group’s deferred tax assets, or a change from a net deferred tax asset to a net deferred tax liability. The deduction would be pro-rated over 10 consecutive years beginning with the first taxable year after December 31, 2029.  A hearing will be held on the bill on February 2, 2023.

In Pennsylvania, Senate Bill 161 would adopt water’s-edge combined reporting for tax years beginning after December 31, 2023. The water’s-edge group would include certain members incorporated in or doing business in certain enumerated tax haven jurisdictions unless the member can establish that the member’s income was subject to a certain effective rate of tax by such country.  Senate Bill 161 would also revise the state corporate net income tax rates, which are currently scheduled to be reduced to 4.99 percent in 2031. The bill would continue the 9.99 percent rate for the 2023 tax year and would phase in a reduced rate of only 6.99 percent beginning in tax year 2026. In addition to the proposals to move to combined reporting, three states- Hawaii (House Bill 149 and Senate Bill 986), Oregon (House Bill 2674) and New Hampshire (House Bill 121)- are considering bills to adopt a form of worldwide combined reporting. Please stay tuned to TWIST for future updates on these proposals.

Texas: R&D Credits Cannot be Created Outside Statute of Limitations

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The Texas Comptroller’s Tax Policy Division recently published a policy letter addressing whether a taxpayer may amend a report for an out-of-statute report period to create a research and development (R&D) credit and credit carryforward.  The taxpayer was not requesting a refund for any of the closed years but would be requesting a refund in open years related to the carryforward of the credit the taxpayer was attempting to create in the closed tax year.

The Comptroller concluded that once the statute of limitations for a tax year closes, a taxpayer may not create an R&D credit by amending a closed year report to reflect previously unreported eligible expenses. The letter acknowledged that the Comptroller is permitted verify the qualified research expenses claimed in a closed year, but only to substantiate a credit carryforward claimed on an open report. Please contact Jeff Benson with questions on Texas Policy Letter Ruling No. 202301007L (Jan. 19, 2023).