TWIST - This Week in State Tax

Arkansas: Corporate Rate Reduction; Throwback Phaseout Enacted

On April 10, 2023, two bills were signed into law in Arkansas that (1) reduce the corporate income tax rate and (2) phaseout the throwback rule. Senate Bill 549 reduces the state’s highest corporate income tax rate that applies to net income exceeding $25,000 from 5.3 percent to 5.1 percent effective for tax years beginning on or after January 1, 2023. The bill also reduces individual rates.  House Bill 1045, enacted on April 10, 2023, strikes the statutory language sourcing sales of tangible personal property (TPP) to the U.S. Government to the state where the shipment originated. As such, effective for tax years beginning on or after January 1, 2024, such sales will be sourced to the destination state.  The bill also slowly phases out the throwback rule that applies to receipts from sales of TPP shipped from Arkansas when the taxpayer is not taxable in the destination state. For tax years beginning on or after January 1, 2024, 85.71 percent of such “throwback sales” will be sourced to Arkansas, and 14.29 percent will be sourced outside Arkansas. Those percentages change in subsequent years as follows: for the 2025 tax year, 71.42 percent in Arkansas and 28.58 percent outside Arkansas; for the 2026 tax year, 57.13 percent in Arkansas and 42.87 percent outside Arkansas; for the 2027 tax year, 42.84 percent in Arkansas and 57.16 percent outside Arkansas; for the 2028 tax year, 28.55 percent in Arkansas and 71.45 percent outside Arkansas; for the 2029 tax year, 14.26 percent in Arkansas and 85.74 percent outside Arkansas; and for tax years beginning on or after January 1, 2030, throwback sales will be sourced 100 percent outside Arkansas. Please contact Jennifer Knickel with questions on these law changes.

Kentucky: Social Media Communications Removed from Telemarketing Services Definition

Kentucky House Bill 360, enacted on March 24, 2023, revised the definition of telemarketing services effective retroactively to when they became taxable on January 1, 2023. Previously “telemarketing services” meant services provided via telephone, facsimile, email and other modes of communication, to another person, which are unsolicited by that person, for the purposes of (a) promoting products or services; taking orders; or providing information or assistance regarding the products or services; or (b) soliciting contributions. House Bill 360 revised the definition of “telemarketing services” to include services provided via text messages and specifically noted that services provided via “other modes of communication” included, but was not limited to, “various forms of social media.”  House Bill 5, enacted a mere week later, removed the reference to various forms of social media. Please stay tuned to TWIST for future legislative updates.

Washington State: Investment Funds Do Not Qualify for Investment Income Deduction

In a recent published opinion, a Washington State appellate court held that several investment fund LLCs did not qualify for a B&O deduction for investment income. Under RCW 82.04.4281(1)(a), a deduction is allowed in computing B&O liability for “amounts derived from investments.” The LLCs filed B&O refund claims on the basis that all of their income, which was agreed to be income from investments, qualified for the investment income deduction. The refunds were subsequently denied and the LLCs filed suit. After a trial court granted summary judgment in favor of the Department of Revenue, the LLCs appealed, arguing that under the plain language of the law they were entitled to the investment income deduction.

On appeal, the court observed that it was undisputed that 100 percent of the  income of the taxpayers, which were investment funds, was investment income and that the plain language of the statute appeared to support their position. However, the Department’s position was that the deduction did not apply when the investment was not incidental to the main purpose of the taxpayer’s business or when the investment income was more than five percent of the taxpayer’s gross income. This position was based on a 1986 Washington State Supreme Court ruling, O’Leary, in which the court held that an investment must be incidental to the main purpose of the taxpayer’s business to qualify for the investment income deduction. The appeals court held that because the LLCs’ investments was their only business, they were not entitled to the investment income deduction under O’Leary. The court next rejected the taxpayer’s position that amendments to the law superseded the definition of “investment” in O’Leary.  Notably, the court found that the amendments, in the form of findings of subsequent legislation, were intended to ensure that certain “other financial businesses” were not restricted from claiming the deduction, but they did not change the meaning of the term “investments” as interpreted by the O’Leary court in 1986. The LLCs also argued that the Department was bound by published guidance on its website that private investment funds (such as the LLCs) are entitled to the B&O deduction. In the court’s view, the guidance on the Department’s website did not control over the statutory language and a Supreme Court decision interpreting that language. Please contact Michele Baisler with questions on in Antio, LLC v. Washington State Dep’t of Revenue.