TWIST - This Week in State Tax

California: Guidance Issued on Steps to Apply for New Unclaimed Property Voluntary Compliance Program

In September 2022, legislation (Assembly Bill 2280) was signed into law authorizing the California Controller to establish an unclaimed property Voluntary Compliance Program (VCP) for businesses holding past due unclaimed property. Under the VCP, approved holders that fulfill all program requirements, including completing a training program and meeting reporting deadlines, will be eligible for waived interest on past-due unclaimed property. The enactment of legislation authorizing such a program was welcome news, as California had not held an unclaimed property amnesty for almost 20 years and the state imposes interest on past due property at 12 percent per year. The establishment of the VCP was also particularly timely given that certain 2021 California income tax forms (e.g., Form 100, Form 100W, Form 565, Form 568) included new questions seeking information related to a company’s California unclaimed property filings. Specifically, taxpayers were required to indicate on their income tax forms whether they previously filed an unclaimed property report with the State Controller’s Office. Recently, the Controller’s website was updated to include details of the program and a form for interested holders to start the process of applying for participation in the VCP.

Action Steps:  Companies interested in participating in the VCP should complete the VCP interest form, which is necessary to receive an application. The application must identify the individual(s) in the business that will attend the required training and will be responsible for submitting the reports. The application must also include an estimated value of the business’ inactive properties and accounts. After reviewing applications and approving enrollment, the Controller’s Office will provide due dates for required deliverables that coincide with the standard unclaimed property reporting cycle. The dates below will be assigned to initial enrollees for the upcoming report year:

• July 30, 2023 – Required training completed
• September 30, 2023 – Due diligence completed
• Before November 1, 2023 – Notice Report submitted
• June 1-15, 2024 – Remit Report and remittance submitted

As a reminder, the Controller’s Office will not consider applications from holders that:

 —   Are currently undergoing a California unclaimed property examination or have been notified that such an examination will occur;

 —   Are the subject of a civil or criminal prosecution involving unclaimed property compliance; or

 —   Have been notified by the Controller of an interest assessment within the past five years, and the assessment is unpaid.

Next Steps: Companies interested in participating in the VCP may wish contact a professional in KPMG’s Unclaimed Property Practice for assistance with the initial application and the extensive review of books and records that will likely be required to remit the report in a timely manner Please contact Will King | +1 (214) 840-6107 | williamking@kpmg.com or  Marion Acord | +1 (404) 222-3053 |marionacord@kpmg.com.

Colorado: Real Estate Sales Generated Apportionable Income, but Not Receipts

The Colorado Department of Revenue has issued a Private Letter Ruling addressing whether receipts from real estate sales were included in the Colorado receipts factor. The taxpayer was a limited partnership engaged in renting real estate. Historically, the taxpayer had held its properties for long term rental with very few property sales. For the 2022 tax year, the taxpayer elected to apportion its income using the market-based sourcing rules applicable to corporations.  The taxpayer made two real estate sales during 2022, including one Colorado property, and requested a ruling as to whether the receipts from these sales would be included in the receipts factor.

Under Colorado law, the term “receipts” is generally defined to mean all gross receipts of the taxpayer that are not allocated and that are received from transactions and activity in the regular course of the taxpayer's trade or business. The Department determined that because the taxpayer’s regular trade or business was renting real estate and the taxpayer’s history demonstrated infrequent real estate dispositions, the 2022 sales were not in the regular course of the taxpayer’s trade or business. As such, they were not “receipts” included in the Colorado receipts factor. However, the Department observed that the two properties sold in 2022 were related to the operation of the taxpayer's trade or business and had produced apportionable rental income. Therefore, the income arising from the sale of the two properties was apportionable income.  Please contact Amanda Bennett with questions on PLR-23-002. 

Florida: Court Rejects Department’s Market-Based Interpretation of the IPA Rule

The Florida Circuit Court for the Second judicial Circuit recently granted a motion for summary judgment in favor of a group of taxpayers in a dispute over the proper interpretation of the Florida rule that governs the sourcing of service receipts. The taxpayers were providers of financial technology services that sourced their income under Fla. Admin. Code Ann. 12C-1.0155(2)(l). That rule provides that “other” receipts are sourced to Florida if the income-producing activity giving rise to the receipts is performed wholly within Florida or if a greater proportion of the income-producing activity is performed in Florida, based on the costs of performance (IPA/COP rule).  Application of the IPA/COP rule resulted in the taxpayers’ receipts being sourced to the states where the majority of their costs to provide the services were incurred.  The taxpayers were subsequently audited; while the auditors interpreted the IPA/COP rule somewhat differently, they generally took the position that the relevant income producing activity associated with the sale of services at the location of the customer, meaning that the income producing activity occurred in Florida when the taxpayer’s customer was in Florida. Applying this “market-based” approach resulted in assessments for the out-of-state taxpayers, as well as a refund for one Florida-based company.

The taxpayers subsequently protested the assessments and the court, in its order for summary judgment, rejected the Department’s position, citing to its recent decision in Target Enterprise, Inc. v. Florida Department of Revenue. The court noted at the outset that “cost of performance” and “market-based” are two competing methods applied by states to source service receipts. Under the plain language of Fla. Admin. Code Ann. 12C-1.0155(2)(l) receipts are sourced using a cost of performance method that focuses on the transactions and activities of the taxpayer (not of the taxpayer’s customer.)  In the court’s view, the Department’s focus on the location or actions of the taxpayers’ customers contradicted the plain language of the IPA/COP rule.  Even if the language of the IPA/Cop rule was ambiguous, the court noted that ambiguous tax laws should be construed in favor of the taxpayer. The court also expressed concern that the Department’s inconsistent application of rule might run afoul of the state’s Taxpayers’ Bill of Rights. Please contact Henry Parcinski with questions on Billmatrix Corp., et. al. v. Florida Department of Revenue.

Louisiana: Report Addresses Feasibility of Centralized Return and Daily Local Tax Distributions

Recently, the Louisiana Department of Revenue, the Louisiana Uniform Local Sales Tax Board, and the Commission for Remote Sellers (RSC) submitted an informational report to the Legislature addressing the potential creation of a centralized processor of state and local sales and use tax, a combined state and local sales and use tax return, and the feasibility of collecting and distributing local sales and use tax revenues on a daily basis. The report was required under Act 685 of 2022, which expanded the authority of the RSC to collect non-remote sales and use tax on behalf of state and local sales tax collectors that contract with the RSC to do so. Currently, the RSC collects state and local tax for sellers without a physical presence in Louisiana only.  Representatives from the DOR, Board, and RSC collaboratively examined the current sales tax collection practices of the four other states (Colorado, Alabama, Alaska and Arizona) where local jurisdictions independently administer sales and use taxes and where there has been movement toward centralized collection. The first part of the report summarizes the current sales tax collection mechanisms in place in Louisiana, including the remote sellers filing portal that currently facilitates secure electronic filing of a single return in Louisiana for state and local sales and use tax exclusively for remote sellers, as well as the Parish E-file system operated by the DOR that allows the filing of state and local sales and use and hotel/motel returns. It also included a set of criteria for an effective centralized collection and remittance system.

The report then moves to the efforts undertaken in Colorado, Alabama, Alaska, and Arizona to centralize collection of local taxes.  As required, the report also addresses the feasibility of sales and use tax revenues being distributed daily to local collectors. The report notes that the “general sentiment” regarding daily distributions is that currently there would be no way to distribute funds to local collectors while completing the necessary reconciliations to ensure accurate collection. The frequency of distribution to state and local collectors from centralized processors in other states varies from once or twice a week to once a month. Apparently, Alabama tried to distribute funds more than once or twice a week and local governments were overwhelmed. The report further notes that it has not been established that the funding needs of the locals require daily distributions.

In its conclusion, the report states that creation of a centralized state and local sales and use tax processor and combined state and local sales and use tax return is feasible and that Louisiana currently employs sales and use tax collection tools with many of the desired functions of a centralized processor, and the look and feel of a combined return. What must be decided is the combination of these functions best suits the needs of Louisiana taxpayers. The report notes that based on the discussions with other states, the greatest benefits to taxpayers and governmental entities appear to come when the hard work of unifying various aspects of tax administration is undertaken; it makes particular note of the unified state and local tax base in each of these states.  Please contact Randy Serpas with questions.

Montana: Single-Sales Factor Legislation Enacted

Currently income is apportioned to Montana using a three factor double weighted receipts formula. Under Senate Bill 124, signed into law on March 13, 2023, all apportionable income will be sourced to Montana by use of a single receipts factor. This change applies to tax years beginning after December 31, 2024. Please contact Rob Passmore with questions on Senate Bill 124.