Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: What state’s Supreme Court recently found that the state’s combined reporting statute requiring taxpayers to include certain foreign affiliates in its income tax return was constitutional?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. Answers will be posted on Saturdays in our SALT Shaker Weekly Digest. Be sure to check back then!

In just the first few months of the 2022 tax year, we have already seen several states introduce legislation that would decrease corporate and individual income tax rates.  Idaho became the first state to pass such legislation this year, on February 4.  The Eversheds Sutherland SALT team expects other states to follow and will provide updates here as new changes are made.

The Latest Updates

On August 11, Arkansas Governor Hutchinson signed into law SB 1 and HB 1002, which will reduce the top corporate income tax rate from 5.9% to 5.3% beginning on January 1, 2023.  In addition, the bills will reduce the state’s top income tax rate for residents, individuals, trusts, and estates from 5.5% to 4.9% in 2022.

On July 8, Pennsylvania Governor Wolf signed into law HB 1342, which will reduce the corporate net income tax rate from 9.99% to 8.99% beginning on January 1, 2023.  The bill will also phase the corporate net income tax rate down by half a percentage point annually, until it reaches 4.99% in 2031.

On June 27, Philadelphia Mayor Kenney signed Bill No. 210284, which will lower the city’s business income and receipts tax on net income from 6.20% to 5.99% beginning with the 2023 tax year.

On June 17, New Hampshire Governor Sununu signed into law HB 1221, which will reduce the rate of the state’s business profits tax from 7.6% to 7.5% for tax years ending on or after December 31, 2023.

On April 13, Nebraska Governor Ricketts signed into law LB 873, which will gradually decrease the top rate on individual and corporate income tax rates.  Specifically, the legislation reduces the corporate income tax rate for taxable income in excess of $100,000 from 7.5% to 7.25% in 2023, 6.5% in 2024, 6.24% in 2025, 6% in 2026 and 5.84% in 2027.  In addition, the state’s individual top tax rate of 6.84% will be reduced annually from 2023 through 2027, ultimately resulting in a top tax rate of 5.84% in 2027.

On April 13, the Kentucky General Assembly voted overrode Governor Beshear’s veto of HB 8, which will reduce the state’s 5% individual income tax rate if certain revenue targets are met.  Specifically, if the balance of the state’s budget reserve trust fund account at the end of a fiscal year is greater than 10% of the receipts deposited in the general fund for that fiscal year, and such deposited receipts are equal to or greater than the authorization by the General Assembly to expend such receipts for that fiscal year, then the tax rate will be reduced by 0.5%.

On April 5, Mississippi Governor Reeves signed into law HB 531, which will gradually decrease the top rate on individual income in excess of $10,000 to from 5% to 4% by 2026 and eliminate the current 4% tax bracket on income between $5,000 and $10,000 in 2023.  Specifically, the legislation reduces the individual income tax rate for income in excess of $10,000 from 5% to 4.7% in 2024, 4.4% in 2025 and 4% in 2026.

On March 15, Indiana Governor Holcomb signed into law HB 1002, which will decrease individual income tax rates annually.  Specifically, the legislation reduces the gross income tax rate from 3.23% to 3.15% in 2023 and 2024.  In addition, the gross income tax rate will further decrease provided state revenue fund collections meet certain targets annually.

On March 1, Iowa Governor Reynolds signed into law HF 2317, which will decrease individual and corporate income tax rates annually for tax years 2023 through 2025.  Specifically, the legislation reduces the corporate income tax rate over time based on the net corporate income tax receipts for the preceding year.  If net corporate income tax receipts for the preceding fiscal year exceed $700 million, the corporate income tax rate will be adjusted in such a way that when combined with all other applicable rates, the tax rates would have generated net corporate income tax receipts that equal $700 million in the preceding fiscal year.  Such adjustments will take place at the end of each tax year until the corporate income tax rate is reduced to a cap of 5.5%.  In addition, the state’s individual top tax rate will be reduced annually from 2023 through 2026, ultimately resulting in a 3.9% flat tax being imposed in 2026.

On February 11, Utah Governor Cox signed into law SB 59, which will decrease individual and corporate income tax rates.  Specifically, the legislation lowers the individual and corporate income tax rates in Utah from 4.95% to 4.85%.  These individual and corporate income tax changes are retroactive to January 1, 2022.  Utah is the second state to pass such legislation this year.

On February 4, Idaho Governor Little signed into law HB 436, which will decrease individual and corporate income tax rates.  Specifically, the legislation lowers the corporate income tax rate from 6.5% to 6% and consolidates the personal income tax brackets from five brackets to four and lowers the rates as well.  HB 436 also provides a one-time tax rebate totaling $350 million of personal income taxes (returning approximately 12% of an individual’s 2020 Idaho personal income tax or $75 per individual taxpayer and dependents, whichever is greater).  These individual and corporate income tax changes are retroactive to January 1, 2022.

The principle of nondiscrimination plays a pivotal role in the field of state and local taxation. Discriminatory taxes are said to deter cross-border activity, distort competitive neutrality, and hinder economic efficiency by placing a thumb on the scale of the competitive marketplace. Recognizing these issues, federal and state governments have prohibited discrimination since the founding of our country.

Despite the many barriers to tax discrimination, state and local governments often are unable to restrain themselves from pursuing additional revenue or favoring some businesses over others. Over the last century, state and local governments have continuously been found to have engaged in impermissible tax favoritism or punishment. One avenue of curtailing that behavior is Congress’ affirmative grant of legislative authority to regulate interstate commerce under the Commerce Clause of the US Constitution.

In this installment of A Pinch of SALT for Tax Notes State, Eversheds Sutherland attorneys Maria Todorova, Eric Tresh and Fahad Mithavayani focus on state and local tax discrimination under the affirmative Commerce Clause, which has played a critical role in harnessing state and local taxes that impermissibly target inherently interstate industries and activities.

Read the full article here.

Meet little miss Emmy! Our August Pet of the Month is a rescue pup of Chris Emigholz, Vice President of Government Affairs at the New Jersey Business & Industry Association.

Emmy is three and a half years old, and was welcomed into the Emigholz family several years ago as a Christmas gift to Chris’ kids. They aren’t quite sure of her breed, but they do think she’s a mix of a retriever and some sort of hound!

As inappropriate as it may be, she loves anything sweet, including Twizzlers, gummy bears and marshmallows.

Her affinity for sweet treats is matched by her love for walks with her family, as well as long car rides. She’s very loving, and has no concept of her size, often wanting to jump into your lap or next to you in bed.

When she was a young puppy, she ran out of the front door in front of Chris. A pursuit ensued, and Chris followed her for two hours until he finally was able to lure her with a piece of meat into someone else’s backyard about a mile from home. The police even got involved and laughed at how fast she was.

We’re excited to welcome troublemaking Emmy into the Pet of the Month crew!

 

On July 21, 2022, the Regular Division of the Oregon Tax Court ruled that flights operated by all members of a unitary group are included in a taxpayer’s departure ratio and that receipts for selling tickets on flights operated by third parties do not constitute transportation revenue under the state’s special industry apportionment rules for airlines.

Alaska Airlines entered into capacity purchase agreements with an affiliate airline, Horizon Air Industries, to purchase all of Horizon’s seat capacity. However, Alaska eliminated Horizon’s flight data in calculating its departure ratio (one component used to compute an airline’s sales factor in Oregon) on amended returns for 2012-2014, arguing that each separate airline entity must compute its own departure ratio regardless of whether the entities are part of a single unitary group and apply that ratio to its own transportation revenue. The Department of Revenue rejected Alaska’s amended position at audit and included Horizon’s flight data in the filing group’s departure ratio. Alaska also sold tickets for flights on aircraft operated by other, non-affiliated airlines, excluded the receipts from its transportation revenue, and instead sourced the receipts using the standard cost-of-performance rule. Here the Department disagreed on the ground that all revenue from airline ticket sales is included as transportation revenue, regardless of which airline operates the plane.

On appeal, the Court first held that the “taxpayer” in Oregon’s consolidated reporting regime includes all corporations included in the consolidated state return, such that the departure ratio used in the special airline apportionment rules necessarily includes the aggregate flight data for all airlines filing as part of a single return. The Court then ruled that transportation revenue only includes revenue from operating aircraft that move passengers or freight, such that Alaska’s receipts from tickets for flights operated by other airlines was properly excluded from transportation revenue and sourced based on costs of performance.

State of Oregon v. Alaska Airlines, Inc., TCs 5406, 5407 (Or. Tax Ct., 07/21/2022).

The Oregon Tax Court, Regular Division, held that P.L. 86-272 did not preclude Oregon from imposing its excise (income) tax on an out-of-state manufacturer of cigarettes and other tobacco products based on two activities. First, the court held that the manufacturer’s mandate that the in-state wholesalers accept product returns was not a protected activity. The manufacturer contractually required in-state wholesalers of its products to accept returns of all of the products.  If the products were unsalable, the manufacturer would provide the wholesaler with a credit. Rejecting a common law “agency” analysis, the court found that these activities were performed, under the language of P.L 86-272, “on behalf of” the manufacturer. The court therefore treated the activities as if the manufacturer had performed them itself. As the court explained, “The absence of a right to control might negate an agency relationship, but it does not negate the possibility of action on behalf of another.” Second, the court held that the manufacturer’s “Pre-Book Order” process was not a protected activity. The manufacturer’s employees solicited sales for in-state wholesalers and used the “Pre-Book Order” process to help ensure the retailers completed the sales. Specifically, the court found that “addressing Retailers’ failure to follow through” with orders by implementing the process was something the manufacturer had reason to do apart from soliciting orders and was thus unprotected.

Based on the court’s broad reading of the phrase “on behalf of,” and narrow reading of “solicitation,” taxpayers relying on P.L. 86-272 for Oregon purposes should evaluate their facts in light of the Santa Fe decision.

Santa Fe Natural Tobacco Co. v. Dep’t of Revenue, TC 5372 (Or. Tax Court, Rev. Div., Aug. 23, 2022).

In this episode of the SALT Shaker Podcast, Eversheds Sutherland Associate Jeremy Gove welcomes Partner Jeff Friedman for a special edition of the podcast, filled with Jeremy’s favorite concept – is something overrated, or underrated? This time, all of his questions deal with state and local tax, from P.L. 86-272 to digital advertising taxes. Plus, Jeff drops a special challenge for our listeners!

Jeremy doesn’t sway too far from the norm, and ends this episode with a non-tax overrated or underrated question – how do you feel about food expiration dates?

Questions or comments? Email SALTonline@eversheds-sutherland.com. You can also subscribe to receive our regular updates hosted on the SALT Shaker blog.

 

 

 

 

 

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Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which state recently introduced a video game tax credit?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. Answers will be posted on Saturdays in our SALT Shaker Weekly Digest. Be sure to check back then!

The Alaska Supreme Court found that Alaska’s combined reporting statute requiring taxpayers to include certain foreign affiliates in its income tax return was constitutional. The court rejected the taxpayer’s arguments that Alaska’s tax haven corporation reporting statute was (i) void for vagueness as it violated the Due Process Clause, (ii) discriminated against interstate commerce in violation of the Commerce Clause, and (iii) was arbitrary and irrational under the Due Process Clause.

The statute in question, AS 43.20.145(a)(5), requires Alaska taxpayers to include in their combined return:

  • (5) a corporation that is incorporated in or does business in a country that does not impose an income tax, or that imposes an income tax at a rate lower than 90 percent of the United States income tax rate on the income tax base of the corporation in the United States, if
    • (A) 50 percent or more of the sales, purchases, or payments of income or expenses, exclusive of payments for intangible property, of the corporation are made directly or indirectly to one or more members of a group of corporations filing under the water’s edge combined reporting method;
    • (B) the corporation does not conduct significant economic activity.

Subpart A and Subpart B are only separated by a semicolon – but neither “and” nor “or”, as is common –  giving rise to the dispute that this provision was unconstitutionally void for vagueness as the statute did not provide notice as to what affiliates are required to be included in the return.

The Alaska Supreme Court rejected the taxpayer’s vagueness argument, finding that when evaluating whether a statute is void for vagueness, a court is tasked with looking beyond the terms in the statute to its history, case law, and other provisions that can assist in establishing a reasonably clear meaning. The court also noted that because the statute in question is a civil statute, and not a criminal one, a more lenient vagueness standard applies. Given these interpretive tools, and the more lenient vagueness standard, the court determined that the law was not unconstitutionally vague, and using the disjunctive “or” between Subparts A and B was appropriate.

The court also rejected the taxpayer’s Commerce Clause challenge, finding that the law was not facially discriminatory because filing a return was not a discriminatory burden, and the law had no discriminatory effect on interstate commerce—which depends on the apportionment formula, which was not challenged.  Finally, the court found that the law was not arbitrary and irrational under the Due Process Clause, noting that the law was based on the reporting threshold used by the IRS, and simply because a law is characterized as numerically arbitrary does not make it constitutionally arbitrary.

Department of Revenue v. Nabors International Finance Inc. & Subsidiaries, No. S-17883/17903 (Alaska, Aug. 5, 2022).

 

TEI has designed a unique seminar for those who manage state tax audits. This in-person program includes sessions on best practices to manage audits, a panel of current and retired state tax court judges, a panel of state DOR audit directors, and a session led by an expert on written advocacy.

Eversheds Sutherland is proud to sponsor the 2022 State and Local Tax Controversy Program, an essential day and a half event for in-house tax professionals, and part of TEI’s 3-day Audits and Appeals Annual Seminar, covering US federal and SALT controversy matters.

We hope you can join us! Register today: https://bit.ly/3NTWanS