TWIST - This Week in State Tax

The Colorado Department of Revenue recently issued a Private Letter Ruling (PLR) concluding that an operator of retail grocery stores was entitled to a manufacturing exemption for purchases of equipment used in the stores’ bakeries. Each store’s bakery production facilities were segregated within a portion of the store that was physically inaccessible to customers. Daily, each bakery produced, from raw ingredients, thousands of units of freshly baked products, including muffins, croissants, rolls, bagels, bread, cookies, danishes, cakes, mini-cakes, pound cakes, and pies. Substantial industrial baking equipment was required to satisfy its largescale production needs. Under Colorado law, a state level sales tax exemption applies to purchases of machinery or machine tools, or parts thereof, in excess of $500 to be used in Colorado directly and predominantly in manufacturing tangible personal property, for sale or profit. “Machinery” means any apparatus consisting of interrelated parts used to produce an article of tangible personal property. “Manufacturing” means the operation of producing a new product, article, substance, or commodity different from and having a distinctive name, character, or use from the raw or prepared materials. Finally, the machinery must be used directly in manufacturing, which is deemed to begin at the point at which raw material is moved from plant inventory on a contiguous plant site and to end at a point at which manufacturing has altered the raw material to its completed form.

The Department concluded that the bakeries were engaged in manufacturing.  The taxpayer used both raw and prepared ingredients, the use of which resulted in new products that were different from the raw and prepared ingredients. Further, the machinery at issue and its adjuncts were used directly in this operation of producing these new products. Finally, the machinery was used directly in manufacturing. As required under the statute, the building space, the machinery, and the other fixtures dedicated to the operation of producing constituted a contiguous plant site. Notably, the bakeries were segregated areas within the store where this manufacturing operation takes place. This space, and the equipment therein, was employed exclusively for largescale production of goods, which the Department concluded made these bakeries “plants” within the common meaning of that term. The Department noted at the end of the ruling that it had assumed, per the taxpayer’s request, that the purchase of the machinery would have qualified for the federal investment tax credit, and that each piece of equipment was purchased new for a price in excess of $500. The Department also confirmed that its ruling applied to state level and state administered local sales and use taxes only; there might be a different result in home rule jurisdictions. Please contact Steve Metz with questions on PLR 23-08.    

On March 6, 2024, a comprehensive tax bill (House Bill 252) was signed into law in New Mexico. The bill makes changes to the state’s individual income tax laws and adopts various new income tax credits and gross receipts tax deductions. For corporate taxpayers, there are a couple of key changes in the bill.  The first is that the bill adopts a flat 5.9 percent corporate income tax rate effective January 1, 2025. Currently, the state’s highest corporate income tax rate of 5.9 percent applies to taxable income over $500,000 only.  The bill also makes certain changes to the definition of “base income” for corporate income tax purposes; the bill eliminates the current subtraction for Subpart F income. Further, the statutory language allowing a deduction for 100 percent of GILTI is clarified to allow a deduction only of the amount included in income under IRC section 951A less the amount deducted under IRC section 250.  House Bill 252 maintains the state’s current three factor evenly weighted apportionment formula for general taxpayers. Certain manufacturers can elect to use single-sales factor apportionment. A generator of electricity was considered a manufacturer able to elect the use of single sales factor apportionment through the 2023 tax year. House Bill 252 permanently provides that manufacturing includes electricity generation at certain types of facilities.  

Finally, New Mexico has imposed mandatory unitary combined reporting since 2020. The bill revises the makeup of the water’s-edge combined group to exclude only “foreign” corporations with less than 20 percent of their property, payroll and sales sourced to locations within the United States. Currently, the exclusion applies to all such corporations, wherever organized or incorporated, with less than 20 percent of their property, payroll or sales sourced to the United States. The corporate income tax changes are all effective January 1, 2025.  On the personal income tax side, one key change is that beginning in 2025, the deduction for capital gains will be the greater of $2,500 or 40 percent of up to $1 million from the sale of a business that is allocated or apportioned to New Mexico.  Currently, the deduction is the greater of $1,000, or 40 percent of the net capital gain. Please contact Nick Palmos with questions on these changes. 

The New York Supreme Court, Appellate Division recently upheld a Tax Appeals Tribunal decision concluding that a taxpayer’s service was a taxable information service. The taxpayer provided services that measured the effectiveness of advertising campaigns. Specifically, the service at issue gauged the effectiveness of a particular advertisement by surveying those who viewed the advertisement and those that did not; clients were provided with a report analyzing the results. The reports compared a client's advertising campaign results to industry-specific benchmarking data contained in the taxpayer’s own database.  Under New York law, sales tax is imposed on “the furnishing of information … including the services of collecting, compiling, or analyzing information of any kind or nature and furnishing reports thereof to other persons, but excluding the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to others.” The taxpayer asserted that the Tax Appeals Tribunal erred when it concluded that the taxpayer was providing taxable information services and did not qualify for the exclusion for information personal or individual in nature that is not incorporated in reports provided to others.

The taxpayer first argued that it was providing a nontaxable consulting service when it provided customers with advice and recommendations to improve their advertising campaigns.  However, the court found that the primary function of the service was the collection and analysis of information.  Specifically, after the surveys were conducted the taxpayer’s employees analyzed the information and presented the survey data through graphs, tables, and charts. These graphic data presentations, the court observed, were the predominant feature of the reports. Although the reports contained advice and/or recommendations, the court determined the recommendations were drawn from the data collected. In other words, without the data, there would be no recommendations. The court concluded that the Tribunal did not err when it concluded the taxpayer’s service was an information service.  The next issue before the court was whether the Tribunal erred when it concluded that although the information at issue was personal and individual in nature, the taxpayer did not qualify for the exclusion. In the Tribunal’s view, the exclusion did not apply because the results of the taxpayer’s surveys became part of the taxpayer’s database. Recall, in the taxpayer’s reports, a particular client's advertising campaign results were compared to the benchmarking data contained in the taxpayer’s database. As such, the Tribunal had concluded a client’s information might be substantially incorporated into reports furnished to others; the court found nothing irrational in this conclusion. Please contact Judy Cheng with questions on Matter of Dynamic Logic, Inc.