TWIST - This Week in State Tax

Connecticut: Budget Agreement Includes Corporate Surcharge Extension and More

Recently, Connecticut House Bill 6941, the state’s budget bill, was presented to Governor Ned Lamont for signature and he is reportedly signing the bill on June 12, 2023. On the individual tax side, the budget agreement includes reducing the bottom two marginal individual income tax rates and expanding the state’s earned income tax credit. For corporate taxpayers, the bill revives the 10 percent corporation business tax surcharge that expired at the end of 2022. Under the bill, the surcharge is extended through tax years beginning prior to January 1, 2026.  Recall, the surcharge does not apply to taxpayers that pay the $250 minimum tax or that have less than $100 million in gross income for the tax year. However, taxpayers filing a unitary combined return are subject to the surcharge regardless of income level. The bill provides that taxpayers will not be liable for interest associated with underpayments of estimated taxes as a result of the surcharge being extended.

House Bill 6491 makes numerous changes to certain Connecticut credits, including “fixing” the holding in Marmon Wire & Cable, Inc. v. Commissioner. In Marmon Wire, a court held that a corporation that was the sole member of two LLCs treated as disregarded entities under the federal check the box rule was not entitled to fixed capital investment tax credits for purchases made by the disregarded entities. The language of the credit statute required that the assets be held and used by a corporation in Connecticut, and the statute did not explicitly allow for indirect attribution of eligibility of the tax credit.  Under House Bill 6941, for income years starting on or after July 1, 2025, corporations may earn fixed capital investment tax credits for investments made by certain LLCs they own. Specifically, corporations may do so if they are (1) headquartered in Connecticut; (2) own, directly or indirectly, at least 80 percent of an LLC that, for federal tax purposes, is treated as a partnership or disregarded as an entity separate from its owner; and (3) provide telecommunications services.

Finally, the bill makes Connecticut’s mandatory pass-through entity tax optional for tax years beginning on or after January 1, 2024. Numerous additional changes are made to implement the optional tax. Electing pass-through entities must give the Commissioner written notice for each tax year they make the election no later than the due date for filing the return (or the extended due date). The tax base shall be equal to the resident portion of unsourced income plus modified Connecticut source income, and the rate remains 6.99 percent. Additional details will be forthcoming on the new optional tax. Please contact Cheryl Ladyzhets or Michael Rylant with questions on Connecticut House Bill 6941.

Illinois: Investment Partnership Status Changes Enacted

On Wednesday, June 7, 2023, Governor Pritzker signed an income tax omnibus bill, Senate Bill 1963, which includes changes to the Illinois Investment Partnership test and new requirements for certain Illinois Investment Partnerships.  These changes are effective for tax years ending on or after December 31, 2023, which means payments that will become due on April 15, 2024 may be impacted. 

For tax years ending before December 31, 2023, the test for Illinois Investment Partnership status has had three elements that all needed to be met to qualify. These elements are:

1) no less than 90 percent of the partnership's cost of its total assets consists of qualifying investment securities, deposits at banks or other financial institutions, and office space and equipment reasonably necessary to carry on its activities as an investment partnership,

2) no less than 90 percent of the partnership's gross income consists of interest, dividends, and gains from the sale or exchange of qualifying investment securities, and

3) the partnership is not a dealer in qualifying investment securities.

As defined in Illinois authority, the term “qualifying investment securities” has only included the holding of another partnership if that partnership itself was an Illinois Investment Partnership.  In addition, partnerships that qualified as Illinois Investment Partnerships were excluded from the general requirement for partnerships to withhold on the Illinois sourced portion of the distributive shares of nonresident partners.

Effective for tax years ending on or after December 31, 2023, Article 50 of this legislation has three primary components that change the Illinois Investment Partnership rules.  These components impact the third element of the test, permit additional partnership interests held to qualify as “qualifying investment securities,” and create a new withholding requirement for certain income of Illinois Investment Partnerships. 

Specifically, the third prong of the test, which prohibited the partnership from being a dealer in qualifying investment securities, will be removed.  However, after the changes, “qualifying investment securities” will not be permitted to include securities with respect to which the taxpayer is required to apply the rules of Internal Revenue Code section 475(a).  As such, the focus has changed from the dealer status of the partnership entity to a focus on the assets it holds.  This distinction will need to be considered when performing the 90 percent asset and gross income tests.

Another change is that the definition of “qualifying investment securities” was expanded to also include a partnership interest that, in the hands of the partnership that is determining its status as an Illinois Investment Partnership, qualifies as a security within the meaning of subsection (a)(1) of Subchapter 77b of Chapter 2A of Title 15 of the United States Code.  The 90 percent  gross income tax was adjusted to provide that no less than 90 percent of the partnership's gross income consists of interest, dividends, gains from the sale or exchange of qualifying investment securities, and the distributive share of partnership income from lower-tier partnership interests (not including lower-tier partnerships that are operating at a federal taxable loss) meeting the definition of qualifying investment security because of classification as a security under subsection (a)(1) of Subchapter 77b of Chapter 2A of Title 15 of the United States Code.  Along with continued testing to determine if the 90 percent asset and gross income tests are met, a partnership considering its Illinois Investment Partnership status may need to perform additional analysis to determine if its holdings of other partnerships would meet the specified standard.

Finally, partnerships that qualify as Illinois Investment Partnerships remain excluded from the general nonresident withholding rules on nonresident partners but will be subject to a new set of withholding rules specific to Illinois Investment Partnerships.  For nonresident partners, other than exempt organization and retired partners, an Illinois Investment Partnership will be required to withhold on a base including the income apportioned to Illinois under rules for non-qualifying partnerships.  This withholding base also includes nonbusiness income allocated to Illinois, excluding the types of nonbusiness income that are allocated based on commercial domicile (e.g., interest, dividends, capital gains and losses from sales or exchanges of intangible personal property).  The tax rates used for withholding are the Income and Replacement Tax rates relevant to the nonresident partner, except when the partner is an S corporation or another partnership then the individual rate (currently 4.95 percent) would be used.  The amount withheld on a nonresident partner can be reduced by the partner’s distributive share of Illinois tax credits.  Under the standard withholding rules, Illinois permits certain partners to provide waivers that remove the partnership’s withholding requirement, but the withholding rules for Illinois Investment Partnerships do not permit these waivers.  In general, a nonresident partner is not permitted to claim the amount withheld by an Illinois Investment Partnership if it files an Illinois tax return, though these owners might not be required to file in Illinois based on other rules.  The specific withholding rules for Illinois Investment Partnerships will require a qualifying entity to prepare additional computations of the withholding amount due and make related payments of this withholding. Please contact Brad Wilhelmson with questions.

Louisiana: Sales Tax Economic Nexus Threshold Change; Other Key Bills Pending

On May 30, 2023, Governor Jon Bel Edwards signed House Bill 171, which makes certain changes to the state marketplace facilitator and remote seller statutes.  Currently, a dealer or a marketplace facilitator includes a person that has over $100,000 of gross revenue from sales into the state, or that sold for delivery into the state more than 200 separate transactions of tangible personal property, services, or products transferred electronically. House Bill 171 removes the 200 transactions threshold.  In addition, in measuring whether a marketplace facilitator meets the over $100,000 of gross revenue economic nexus threshold, House Bill 171 provides that only “retail sales” are considered. In franchise tax news, Senate Bill 1 was recently sent to the governor for signature. Effective for tax periods beginning on or after January 1, 2025 and before January 1, 2031, this bill would reduce the franchise tax rate by 25 percent each year that sufficient revenues were deposited into the state Revenue Stabilization Trust Fund. If sufficient revenues were deposited, the rate reduction would be effective January first of the year following the money being deposited into the Fund. Finally, House Bill 631, if signed, would repeal the throwout rule that excludes from the numerator and denominator of the sales factor (1) receipts assigned to a state where the taxpayer is not taxable, or (2) receipts where the state of assignment cannot be determined or reasonably approximated. The throwout rule repeal would be effective for tax years beginning on or after January 1, 2024. Please stay tuned to TWIST for additional Louisiana legislative changes.

Mississippi: No Good Faith Basis for Exempt Sales

The Mississippi Court of Appeals recently addressed whether a taxpayer was liable for uncollected sales tax on supplies and equipment sold to oilfield service companies that held Mississippi retail sales tax permits.   On audit, the Department of Revenue asserted that the purchased supplies and equipment were consumed by the companies, rather than resold to customers. After the Board of Review and Board of Tax Appeals determined the taxpayer did not exercise the requisite "good faith" in determining at the time of the sale that the items it sold to its customers were to a retailer regularly selling or renting that property, the taxpayer appealed to a trial court. The trial court ruled in the Department of Revenue’s favor, and this appeal followed.

Under Mississippi law, two statutory requirements must be met before a purchase of tangible personal property is "excepted" from the 7 percent retail sales tax. First, the purchaser must be licensed if it is located in Mississippi. Second, the purchaser must be a retailer making the purchase to sell or rent the items purchased in the regular line of its business. While possession of the permit itself satisfies the first requirement, it does nothing on its face to satisfy the second requirement. Instead, that determination must be made at the time of each purchase or sale by the entity making the sale. On review, the court noted that the taxpayer’s business practice was to accept the presentation of a sales tax permit as a representation by the purchaser that it did not have to pay any retail sales tax on its purchases. The permit would then be sent to the taxpayer’s office in Wyoming and would be entered into its accounting and point-of-sale system. Thereafter, anytime the holder of that permit made a purchase, the system would not charge retail sales tax for that purchase. In fact, the Mississippi location could not override the system to charge retail sales tax on any purchase by the permit holder once it was entered into the system. For the sales at issue, the court concluded that there was no evidence that the purchasers were ever asked any questions about the nature of their business or the purpose for which each specific purchase was being made, either before or after having presented the permit. The court concluded that the taxpayer did not have a good faith basis to believe that the sales at issue were wholesale sales. Please contact Randy Serpas with questions on Toolpushers Supply Co. v. Miss. Dep't of Revenue.

Oklahoma: Franchise Tax Repealed

Oklahoma House Bill 1039, which became law without signature on June 2, 2023, repeals the state’s corporate franchise tax effective beginning with the 2024 tax year.  The tax, which continues to be imposed for 2023 and previous tax years, is assessed upon every corporation, association, joint-stock company, and business trust, doing business in this state, at a rate of 1.25 for each $1,000.00 of capital used, invested or employed within Oklahoma. Per the Fiscal Impact Statement for the bill, eliminating the franchise tax will decrease annual tax collections by an estimated $55 million. Please contact Asad Markatia with questions.