TWIST - This Week in State Tax

Iowa: Corporate Rate Reduction Announced

On September 22, 2023, the Iowa Department of Revenue certified the calculation of a new corporate income tax rate for tax years beginning on or after January 1, 2024. Specifically, the top two Iowa corporate income tax rates applicable to income over $100,000 and $250,000 will be reduced from 8.4 percent to 7.1 percent. The rate reduction results from legislation enacted in 2022 that implemented a formula for reducing the corporate income tax rate if net corporate income tax receipts exceeded $700 million for the immediately preceding fiscal year.  The net corporate income tax receipts for fiscal year 2023 were $838,064,990.88. This process will continue each year until the rate is 5.5 percent on all corporate income.  Please contact Caroline Balfour with questions.

Massachusetts: Tax Conference Agreement Includes Corporate Tax Changes

After weeks of negotiations, the Massachusetts House and Senate agreed to a tax compromise plan that includes components of earlier House and Senate tax proposals. The legislation, H. 4104, was quickly passed by both chambers and as of Monday, October 2, 2023, was awaiting action by Governor Healey.

The final agreement incorporates changes to the corporate excise tax law that were included in the earlier House tax bill and reduces the tax rate on short-term capital gains. The legislation also includes many provisions aimed at providing tax relief for individuals, including but not limited to, an expanded tax credit for children, disabled adults, and seniors, an expanded estate tax exemption, and tax breaks for renters and senior citizens.

General Corporation Apportionment Changes: Under current law, the income of a corporation is apportioned to the Commonwealth by multiplying net income by a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four. Certain entities- manufacturing corporations, mutual fund service providers, and defense corporations- use single sales factor apportionment. Effective January 1, 2025, all corporations will apportion net income to the Commonwealth by use of the sales factor only. Oddly, the effective date does not address the specific “tax years” to which the move to single-sales factor apportionment applies.

The bill also makes changes to reflect that all corporations will now be using single sales factor apportionment.

Financial Institution Apportionment Changes: Currently, financial institutions apportion receipts to Massachusetts using an evenly weighted three factor property, payroll, and receipts factor formula. Effective January 1, 2025, financial institutions will apportion net income to the Commonwealth using the receipts factor only. The bill also revises the provisions addressing how financial institutions source interest, dividends, net gains and other income from investment assets and activities and from trading assets and activities under Mass. G.L. c. 63 § 2A(d)(xii).  Currently, this amount is determined by multiplying various categories of income from such assets and activities by a fraction, the numerator of which is the average value of the assets assigned to a regular place of business of the taxpayer within the Commonwealth and the denominator of which is the average value of all such assets of the institution.

Effective January 1, 2025, the amount of such receipts included in the Massachusetts numerator will be determined by multiplying all income from such assets and activities by a fraction. The numerator of the fraction is the total receipts included in the numerator pursuant to Mass. G.L. c. 63 § 2A(d)(i) through (x), which are the statutory sourcing rules for various types of income of a financial institution, and paragraph (xii). The denominator of the fraction is all total receipts of the taxpayer included in the denominator other than interest, dividends, net gains, but not less than zero, and other income from investment assets and activities and trading assets and activities. While the intent of the law appears to be to source interest, dividends, net gains, and other income from investment assets and activities and from trading assets and activities based on a financial institution’s other Massachusetts receipts, the reference to including receipts from paragraph (xii) in the numerator is somewhat circular; paragraph (xii) informs a financial institution how such receipts should be attributed to the Commonwealth.

The bill strikes language in the statute that addresses the computation of the property and payroll factors for a financial institution.

Individual Tax Changes: Currently, individuals are taxed on their short-term capital gains at a rate of 12 percent. H. 4101 reduces the rate on the gain from the sale or exchange of capital assets held for one year or less to 8.5 percent effective for tax years beginning on or after January 1, 2023.  In addition, the individual income tax code has been revised to require married persons to file a joint tax return if they file a joint federal tax return. The purpose of this change is to ensure that married couples cannot avoid the new so-called Millionaire’s Tax, which was approved by voters last November. Under the revised law, effective for tax years beginning on or after January 1, 2023, the flat individual income tax rate was increased from 5 percent to 9 percent on income above $1 million. It should be noted that a working draft TIR was recently issued in Massachusetts that indicates a nonresident’s income would be subject to the 4 percent surtax on income over $1 million if the nonresident’s Massachusetts source income exceeded the threshold. This provides clarity as there was concern that a proportional amount of Massachusetts income might be subject to the surtax if the nonresident’s federal income exceeded $1 million.

Another change affecting individuals involves the so-called “Chapter 62F refunds.” Under Massachusetts law, when tax revenues exceed a certain amount in a given fiscal year, the excess revenue is refunded to individual taxpayers. Historically, a taxpayer’s refund was based on a percentage of their personal income tax liability for the given year. Effective for tax years beginning on or after January 1, 2023, the refund will be provided based on the number of personal income taxpayers filing an income tax return in the previous taxable year. In other words, each personal income taxpayer will receive the same refund amount, regardless of their personal income tax liability. Persons that are married filing jointly count as two taxpayers. Please contact George Burns or Jamie Posterro with questions on H. 4101.

Oregon: City of Portland Approves New Tax Credit

The Portland City Council recently approved of a new incentive for businesses that are located within certain boundaries of the downtown Portland, Oregon area. Per the City’s website, a significant number of businesses have left Portland’s central city since 2019 and the vacancy rate for office space is approximately 26 percent, which is expected to increase. The new Downtown Business Incentive credit program is a temporary nonrefundable tax credit designed to incentivize commercial lease signings and lease renewals that will contribute significantly to the recovery and revitalization of Portland’s central city. The credit may be first taken on the 2023 or 2024 Portland Business License Tax Return.

To qualify for the credit, the taxpayer must first enter into a new lease or extend a current lease for a period of four years or more during the 2023 or 2024 calendar year in one of four designated sub-districts within the central city area. Alternatively, the taxpayer must own and occupy space within the sub-districts. Second, the taxpayer must maintain at least 15 employees with each employee working at least half their time in the leased or owned space in the qualifying sub-district over the four-year credit period. The taxpayer must file/provide an attestation for each tax year that they claim the credit. The maximum credit is $250,000 in the year of origination and the credit limited to the lesser of (1) 100 percent of City of Portland Business License Tax (BLT) as shown on the BLT return, Section IV; (2) One percent of “income subject to tax” as shown on the BLT return, Section IV; or $30 per square footage of building space covered in the lease/extension or building space used by a building owner’s staff. The credit will be claimed on the BLT return in the origination year (either 2023 or 2024) and the succeeding consecutive three years. If a taxpayer breaks the lease/extension prior to the end of the lease/extension period, sells the building sold before the four-year period of the credit, or fails to meet the other requirements during the four-year period of the credit, the entire credit previously claimed must be repaid with interest. No penalty will apply to the tax due related to the lost credit. A taxpayer must apply to the Revenue Division for preapproval of the credit amount the taxpayer may claim. The total amount of credits the Revenue Division can approve for all taxpayers is limited to $25 million over the two years of the program. If the total amount of the credits claimed exceeds this limit, the Revenue Division will reduce the amount of the credit each qualifying taxpayer may claim on a pro rata basis. Please contact Rob Passmore with questions on the Downtown Business Incentive Credit.

Texas: Comptroller Issues Guidance on Taxability of Electronic Games and Content

Under Texas law, taxable amusement services include the provision of amusement, entertainment, or recreation. Amusement services also include membership in a private club or organization that provides entertainment, recreational, sports, dining, or social facilities to its members. On September 25, 2023, the Texas Comptroller updated a policy memo reiterating that the purchase of electronic games, subscriptions, and membership fees for electronic games and game communities are taxable as amusement services. Electronic games may be operated on or through the use of a personal computer, game console, mobile telephone, or other device by which gameplay is accomplished through a connection to the Internet. Electronic games do not include video games received entirely on physical media, free-to-play video games, or Internet access services.

The new policy memo augments current guidance. It starts by noting that electronic games have evolved into more of an interactive virtual gaming experience by offering “associated content” to enrich gameplay. Purchases of associated content for electronic games, such as virtual goods for use within a game, additional game content, gameplay enhancements, and aesthetic enhancements within a game are also taxable as amusement services. The guidance further notes that purchases of electronic games and associated content through the use of redeemable, physical cards are taxable as amusement services. Finally, the previous policy memo did not directly address the taxability of virtual currencies that may be used in an electronic game; the updated guidance makes clear that purchases of such virtual currencies are taxable as amusement services. Please contact Sarah Vergel de Dios with questions on the updated policy memo addressing the Taxability of Electronic Games and Associated Content.