By Celine Park
Listed below are notable State Corporate Tax updates as of April 2023 that may be relevant to business and estate planners, categorized by state.
Colorado
Colorado’s recently enacted House Bill 23-1006 mandates employers to inform their employees about certain state and federal tax credits on an annual basis, applying to income tax years commencing on or after January 1, 2023. Apart from the annual withholding tax notice, employers must give written notice to all employees about the availability of the federal earned income tax credit, federal child tax credit, state-earned income tax credit, and state child tax credit. The notice can be transmitted electronically or via text message and should be in English as well as any other language that the employer regularly uses to communicate with the employee. The Department of Revenue may establish rules that specify additional information that employers must include in the notice.
West Virginia
West Virginia has implemented single sales factor apportionment for tax years beginning on or after January 1, 2022. Additionally, market-based sourcing for service and intangible receipts has been adopted, and the throwout rule has been eliminated for sales made on or after January 1, 2022. Given these changes, House Bill 3286 will relieve taxpayers facing a net deferred tax liability or asset impact. The bill introduces a new subtraction to offset the financial statement effect of the apportionment changes. To be eligible for this subtraction, a taxpayer must be a publicly traded company and file a statement with the Tax Commissioner by July 1, 2024, specifying the total amount of the subtraction. The Commissioner will determine the form and manner of the statement. The subtraction will be taken over a 10-year period beginning with the taxpayer’s tax year starting on or after January 1, 2033. The subtraction amount will be one-tenth of the total required to offset the rise in net deferred tax liability or the drop in net deferred tax asset. Overall, the legislation aims to alleviate the financial burden for taxpayers who may be adversely affected by the changes in apportionment rules.
Arkansas
Arkansas signed two bills into law on April 10, 2023. Senate Bill 549 brings down the highest corporate income tax rate from 5.3% to 5.1%, effective for tax years commencing on or after January 1, 2023, for net income exceeding $25,000, and also decreases individual rates. House Bill 1045 strikes statutory language regarding the sourcing of tangible personal property (TPP) sales to the state where the shipment originated when selling to the U.S. Government. Instead, sales will be sourced to the destination state starting from tax years beginning on or after January 1, 2024. Additionally, the bill slowly phases out the throwback rule applicable to sales of TPP shipped from Arkansas when the taxpayer is not taxable in the destination state. For tax years beginning on or after January 1, 2024, 85.71% of these “throwback sales” will be sourced to Arkansas and 14.29% to the destination state. The percentages shift in subsequent years until all throwback sales will be sourced outside of Arkansas for tax years beginning on or after January 1, 2030.
Washington State
A Washington State appellate court ruled that several investment fund LLCs did not qualify for a Business and Occupation (B&O) deduction for investment income. As a result, the LLCs claimed a B&O refund, stating that all of their income was eligible for the investment income deduction under RCW 82.04.4281(1)(a). However, the refunds were denied, and the LLCs filed a lawsuit. During the trial, the Department of Revenue contended the deduction did not apply if the investment was not incidental to the primary purpose of the taxpayer’s business or if the investment income exceeded five percent of the taxpayer’s gross income. The Department referred to a 1986 ruling by the Washington State Supreme Court in O’Leary, which held that investments be incidental to the primary purpose of the taxpayer’s business to qualify for the investment income deduction. The LLCs argued the statute’s plain language supported their position that they were entitled to the deduction. The court acknowledged that the LLCs’ income was entirely investment income, and the statute appeared to support their claim on appeal but also held that because the LLCs’ investment was their sole business, they were not entitled to the investment income deduction under O’Leary. The court also rejected the LLCs’ argument that amendments to the law superseded O’Leary’s definition of “investment,” noting that the amendments aimed to ensure that specific “other financial businesses” could claim the deduction without restriction. Additionally, the LLCs argued the Department was bound by its published guidance on its website, which stated LLCs were eligible for the B&O deduction. According to the court, the website’s guidance did not override the statutory language and a Supreme Court decision interpreting that language. In summary, the court ruled that the LLCs were not entitled to the investment income deduction, even though their entire income was investment income, because their investment was their only business, and the investment was not incidental to the primary purpose of their business.
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