Welcome to TWIST for the week of May 8, 2023, featuring Sarah McGahan from the KPMG Washington National Tax state and local tax practice.
Today in TWIST we are covering the worldwide combined reporting provisions being debated in Minnesota, the tax changes as a result of the New York budget agreement, and a corporate income tax bulletin issued in Pennsylvania that addresses the characterization of electricity.
Provisions to adopt mandatory worldwide combined reporting effective for tax years beginning after December 31, 2023 were included in omnibus tax bills introduced in both the Minnesota House and Senate. A conference committee has been convened to address differences in the overall bills. It was reported over the weekend that the Senate’s support for worldwide combined reporting was withdrawn.
On May 3, 2023, legislation necessary to implement New York’s fiscal plan for the coming year was signed into law. One of the key tax changes affecting business taxpayers is the three-year extension of the additional 0.75 percent rate applicable to entire net income if the taxpayer’s business income base, as apportioned, exceeds $5 million. The bill also extends the State’s business capital tax, which was previously scheduled to be phased out at the end of 2023. There are numerous other tax changes in the bill.
The Pennsylvania Department of Revenue recently announced in a bulletin that it will treat electricity as tangible personal property for the purpose of apportioning income under the state’s Corporate Net Income Tax. The Department intends to follow this position for all open tax periods.
Provisions to adopt mandatory worldwide combined reporting effective for tax years beginning after December 31, 2023 were approved by both the House and Senate in versions of an omnibus tax bill (House File 1938 and Senate File 1811) that were sent to a conference committee in Minnesota. According to press reports, the state Senate withdrew its support for the worldwide combined reporting provisions at the first committee meeting. The committee is expected to resume its deliberations this week.
As sent to the conference committee, the bills would amend Minnesota Statutes 2022, section 290.17, subdivision 4, which addresses the unitary business principle, to make clear that the entire worldwide income of the unitary business would be subject to apportionment in Minnesota. Foreign entities and corporations not subject to a federal income tax filing requirement would be required to determine net income under normal rules for corporations. The bills strike provisions that currently exclude the net income and apportionment factors of foreign businesses from the unitary group. The other rules that apply to current unitary groups appear to remain the same. For instance, on the combined reports, all intercompany transactions between entities included in the group are eliminated and the entire net income of the unitary business is apportioned among the entities by using each entity's Minnesota factors for apportionment purposes in the numerators of the apportionment formula and the total factors for apportionment purposes of all entities included in the denominator. A new section of law would dictate how the federal taxable income of a foreign corporation or entity must be computed. Notably, a profit and loss statement must be prepared in the currency in which the books of account of the foreign corporation or other foreign entity are regularly maintained. Adjustments would then be made to the profit and loss statement to conform it to U.S. GAAP. Further adjustments must be made to the profit and loss statement to conform it to the tax accounting standards required by the Commissioner. Unless otherwise authorized by the Commissioner, the profit and loss statement of each member of the combined group, and the apportionment factors related to the combined group, whether domestic or foreign, must be converted into U.S. dollars and income apportioned to Minnesota must be expressed in U.S. dollars. Importantly, if the Commissioner determines that the information required of foreign corporations or entities may be obtained only through a burdensome effort and expense, the Commissioner may allow reasonable approximations of the information. If these changes are enacted, which appears less likely with the Senate’s support withdrawn, Minnesota would be the only state in the U.S. that mandates worldwide combined reporting. Please contact Caroline Balfour, Dale Busacker or John O’Mahoney with questions.
On May 3, 2023, Governor Kathy Hochul signed legislation (S. 4009) necessary to implement the state’s fiscal plan for the FY 23-24 year. That bill was then officially designated as Chapter 59 of the NYS Laws of 2023. The budget legislation represents a compromise between Governor Hochul (herself a Democrat) and the more progressive Democratic-controlled legislature.
One of the key tax changes affecting business taxpayers is the three-year extension of the additional 0.75 percent rate applicable to entire net income if the taxpayer’s business income base, as apportioned, exceeds $5 million. The rate increase continues to be structured as a “cliff” rate, rather than a graduated rate, so that all income is subject to the 7.25 percent rate (rather than the 6.5 percent rate) if the $5 million income base is exceeded. Originally scheduled to sunset for tax years beginning after January 1, 2024, the additional rate will be in place through the 2026 tax year.
The bill also extends the State’s business capital tax, which was previously scheduled to be phased out at the end of 2023. Notably, for tax years beginning prior to January 1, 2027, the business capital tax will continue to be imposed at a 0.1875 percent rate.
Currently, the New York corporate franchise tax Metropolitan Transit Authority surcharge rate is set each year by the Commissioner of Taxation and Finance. Under the bill, the current 30.0 percent rate (applicable to the Article 9-A tax computed on form CT-3 or CT-3-A, and then apportioned to the MTA region) will remain in place indefinitely.
The Chapter 59 bill allows the Commissioner of Taxation and Finance to seek judicial review of decisions of the State’s Tax Appeals Tribunal, under certain circumstances. Those circumstances are when the Tribunal’s decision is premised on an interpretation of Federal or New York State constitutional analysis, international law, Federal law, the law of other states, or other legal matters that are beyond the purview of the New York State Legislature. When the Commissioner petitions for judicial review, any interest and penalty that would otherwise continue to accrue on the underlying tax liability will be stayed until 15 days after the issuance of a final judicial decision that cannot be appealed any longer. This change takes effect immediately and applies to decisions and orders of the Tax Appeals Tribunal issued on or after May 3, 2023. The bill also makes numerous changes to New York tax credits and incentives law and increases cigarette taxes.
Another bill (S. 4008) – designated as Chapter 58 of the NYS Laws of 2023 – and also signed into law by the Governor on May 3, 2023, increases the Metropolitan Commuter Transportation Mobility Tax (MCTMT) from 0.34 percent to 0.60 percent for payroll expense above $437,500 for employers who do business in the Bronx, Kings, New York, Queens, and Richmond Counties (i.e., the five counties that comprise New York City), effective for the quarter beginning July 1, 2023. The Mobility Tax on self-employment income of individuals earning at least $50,000 of such income sourced to the New York City counties is increased to 0.47 percent as of the quarter beginning July 1, 2023, and then to 0.60 percent as of the quarter beginning July 1, 2024. All other MCTMT rates remain the same relative to the other seven counties that comprise the overall twelve county MCTMT region.
With respect to the New York State and New York City “pass thru entity taxes” (which are elective “PTETs”, designed as workarounds of the Federal income tax SALT itemized deduction limitation), the bill codifies existing Tax Department policy regarding the PTET-addback of substantially similar PTETs paid to other jurisdictions.
The New York State film production credit benefits and those under the New York City musical and theatrical production tax credit regime are also substantially expanded under the Chapter 59 bill.
The bill expands the State’s “False Claims Act” (a whistleblower rewards law) beyond tax returns that were actually filed, to now also encompass the non-filing of a New York State or local tax return which decision was knowing concealment or knowingly the improper avoidance of a tax obligation. This provision applies to actions occurring on or after May 1, 2020 as to such non-filed tax obligations knowingly concealed or knowingly avoided.
Provisions in the Assembly and Senate to raise individual income tax rates, impose retail delivery fees, and/or tax digital products were not included in the final budget. Please contact Russ Levitt or Aaron Balken with questions on these changes.
The Pennsylvania Department of Revenue recently announced that it will treat electricity as tangible personal property for the purpose of apportioning income under the state’s Corporate Net Income Tax (CNIT). Prior to announcing this decision, the Department had identified three methods by which receipts relating to electricity are treated in other states: (1) as receipts relating to tangible personal property; (2) as receipts relating to a service; or (3) as receipts relating to intangible property. The Department first repeated its previously stated position that a sale of electricity more closely resembles the sale of a commodity than of a service. The Department then declared its intention to conform to recent decisions of the Board of Finance and Revenue by treating electricity as tangible personal property (rather than as intangible property.) Under this determination, receipts relating to the provision of electricity will be sourced to Pennsylvania if the electricity is delivered or shipped to a purchaser within Pennsylvania, regardless of the f.o.b. point or other conditions of the sale. The Department also clarified that receipts earned by partnerships would flow up to corporate partners in the same manner as any other sale of tangible personal property. The Department intends to follow this rule for all open CNIT periods. Please contact Mark Achord with questions on Corporation Tax Bulletin No. 2023-01.