TWIST - This Week in State Tax

Colorado: Department of Revenue Revises CARES Act Guidance

The Colorado Department of Revenue recently revised a guidance document entitled the CARES Act Law Changes & Colorado Impact. The guidance addresses both individuals and corporate taxpayers. Recall, a few months after the enactment of the CARES Act, the Colorado Department of Revenue adopted a rule (Rule 39-22- 103(5.3)) stating that federal statutory changes enacted after the end of a taxable year do not affect a taxpayer’s Colorado tax liability for that taxable year (even though Colorado is a rolling conformity state). This meant the state effectively decoupled from retroactive CARES Act changes. Later, the legislature specifically decoupled from certain CARES Act provisions for tax years beginning or ending on or after the enactment of the CARES Act (March 27, 2020), but before January 1, 2021.   However, the legislature enacted House Bill 21-1002, which allowed taxpayers a subtraction (the House Bill 21-1002 subtraction) for the difference between the corporation’s reported taxable income and the amount that the corporation’s Colorado taxable income would have been had the CARES Act applied. The subtraction was first taken on the 2021 return.  In November 2022, in the Anschutz case, a Colorado appeals court invalidated the Department’s rule disallowing the retroactive CARES Act changes.

The Department’s revised guidance notes that under the Anschutz decision, certain of the retroactive CARES Act changes should have been reflected on prior year returns and therefore corporate taxpayers must amend these returns. Taxpayers must also amend the 2021 return to adjust the subtraction in House Bill 21-1002, so that it does not reflect any of the CARES Act changes that will now be reported on amended prior year returns.  Notably, the changes that should have been reported on a corporation’s prior returns were the retroactive section 163(j) CARES Act changes that affected the 2018 and 2019 tax years, the retroactive amendments to the depreciation of Qualified Improvement Property (QIP), revisions to the rules for depreciating residential real estate, and certain changes around allowing deductions paid with PPP loans and EIDL grants.  The Colorado House Bill 21-2002 subtraction will continue to reflect the statutory addback for tax years beginning or ending between March 27, 2020 and December 31, 2020 that applies to business interest expenses taken in excess of the section 163(j) limits prior to the CARES Act. Please contact Amanda Bennett with questions.

Missouri: Telecommunications Company Qualifies for Manufacturing Sales Tax Exemption

The Missouri Supreme Court recently affirmed an Administrative Hearing Commission determination holding that a telecommunications service provider qualified for the sales and use tax manufacturing exemption. The case involved the taxpayer’s purchases of replacement equipment for use in its network in Missouri. The first issue on appeal was whether the taxpayer’s provision of telecommunications services qualified as manufacturing under Missouri law. Since 2018, the term “manufacturing” has been expressly defined to include the provision of telecommunications services. The director asserted that the Commission erred because it retroactively applied the 2018 amendments to the 2011 and 2012 tax periods at issue. The court, however, did not find that the Commission applied the 2018 amendments retroactively. Rather, in the court’s view, the pre-2018 definition of “manufacturing” captured the taxpayer’s act of transforming an input into an output with a separate and distinct value from the original. The court rejected the director’s reliance on the IBM case where the Missouri Supreme Court concluded that the transmission and analysis of credit card data was not manufacturing. In the court’s view, the issue in IBM was different, and the statement in IBM regarding whether the electronic transfer of voices qualified as “manufacturing” was obiter dictum and not binding. The court next held that under the “integrated plant doctrine” all of the replacement equipment was used directly in manufacturing and therefore qualified for the exemption.  The director’s position that the equipment had to also be “substantially used” in manufacturing was rejected. Please contact John Griesedieck with questions on Charter Communications Entertainment I, LLC. V. Director of Revenue.

Virginia: Commonwealth Moves to Rolling Conformity (Sort of)

Identical bills (House Bill 2193 and Senate Bill 1405) signed into law on April 12, 2023, move Virginia from a fixed-date conformity state to a rolling conformity state- with a caveat. Specifically, for tax years beginning on or after January 1, 2023, Virginia conforms to the Internal Revenue Code on a rolling basis. However, subject to certain exceptions, the Commonwealth will not adopt any federal amendment enacted after January 1, 2023 that would increase or decrease General Fund revenues by more than $15 million in the fiscal year in which the amendment was enacted or any of the succeeding four fiscal years. Virginia will also decouple from amendments enacted on or after January 1, 2023 and occurring between adjournment sine die of the previous regular session of the General Assembly and the first day of the subsequent regular session of the General Assembly if the cumulative impact of such amendments would increase or decrease General Fund revenues by more than $75 million in the fiscal year in which the amendments were enacted or any of the succeeding four fiscal years. There is an exception to these limitations for any federal extenders, which are provisions that extend the effective date of federal law that as previously adopted in Virginia.  The Secretary of Finance shall annually provide a report on or before November 15 of each year on the fiscal impact of amendments to federal income tax law occurring since the adjournment sine die of the preceding regular session of the General Assembly to the Chairmen of the Senate Committee on Finance and Appropriations and the House Committees on Appropriations and Finance. The Secretary of Finance shall also provide updates to the same Chairmen on any further amendments to federal income tax law occurring between submission of the required report and the first day of the subsequent regular session of the General Assembly. Please stay tuned to TWIST for additional legislative updates.