State income tax law changes for the first quarter of 2024

ARTICLE | April 09, 2024

Authored by RSM US LLP

Executive summary: State tax ASC 740 Q1 update

The following state tax developments were enacted during the first quarter of 2024 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, income taxes, for the quarter ended March 31, 2024. This information summarizes the listed developments and may not provide additional nuanced considerations that may be relevant for provision purposes. For questions about these quarterly updates or other recent legislative and regulatory developments, please reach out to your tax adviser for more information.

Alabama Tax Tribunal addresses “subject to tax” exception for intercompany intangible expenses

In Huhtamaki, Inc. v. State of Alabama Dept. of Revenue (Docket Nos. BIT. 19-890-JP and BIT-1091-JP, Ala. Tax Trib., Feb. 26, 2024), the Alabama Tax Tribunal held the taxpayer was entitled to deductions of intangible expenses paid to a foreign affiliate. In Huhtamaki, the taxpayer filed Alabama corporate income tax returns on a separate entity basis. For the tax periods at issue, the company had made interest and royalty payments to its parent company, which were then paid to foreign (OUS) affiliates. Under Alabama law, taxpayers must add back to taxable income any intangible expenses paid to a related party, unless the taxpayer can demonstrate it qualifies for one of the exceptions. For example, a taxpayer is not required to add back to taxable income any related-party intangible expenses that are paid to a related member who is “subject-to-tax” on the corresponding income. The tribunal found that the intercompany intangible expenses at issue were “subject to tax” by foreign jurisdictions that have income tax treaties with the United States, even though some of the foreign affiliates were allowed to deduct a portion of these intercompany payments in calculating their jurisdictions’ taxable income.

Arizona updates conformity to Internal Revenue Code (IRC)

On March 18, 2024, Arizona Gov. Katie Hobbs signed House Bill 2379, updating Arizona’s conformity to the IRC . For tax years beginning on or after Dec. 31, 2023, “Internal Revenue Code” means the IRC as in effect on Jan. 1, 2023, “including those provisions that became effective during 2023 with the specific adoption of all retroactive effective dates.” The definition of the IRC under House Bill 2379 specifically excludes any changes to the IRC enacted after Jan. 1, 2024.

California Superior Court declines to vacate order holding FTB’s P.L. 86-272 guidance as invalid

A California superior court has denied a motion by the Franchise Tax Board (FTB) to vacate the court’s order from Dec. 13, 2023, which held that the FTB’s Technical Advice Memorandum (TAM) 2022-01 and Publication 1050, were invalid under procedural grounds. The court previously concluded that TAM 2022-01 and Publication 1050 (which attempted to expand unprotected activities under P.L. 86-272 to certain internet activities) were void because they constituted regulations required to be adopted pursuant to the Administrative Procedure Act. See American Catalog Mailers Association v. Franchise Tax Board, Superior Court, San Francisco County (California), No. CGC-22-601363 (Feb. 13, 2024). The FTB subsequently did not further appeal the court’s Dec. 13, 2023 decision. Please read our article, California court strikes down new P.L. 86-272-guidance, for more information.

Florida court rules that state section 382 limitation on net operating losses is the same as federal

A Florida District Court of Appeal ruled in Florida Department of Revenue v, Verizon Communications, Inc. & Affiliates (Fla. Distr. Ct. App., 1st Dist., No. 1D2022-2096, Feb. 28, 2024) that the Florida section 382 limitation on net operating loss carryforwards is the same as for federal purposes, meaning that the section 382 limitation was not subject to Florida apportionment. The Court found that the plain language of both the statute (Fla. Stat. section 220.13(1)(b)1.a) and an administrative law (Rule 12C-1.013(15)(j)) led to the conclusion that the Florida section 382 limitation for state tax purposes “is the same amount as under federal law.”

Idaho updates conformity to IRC

On Feb. 2, 2024, Gov. Brad Little signed House Bill 385, updating Idaho’s conformity to the IRC. The term ‘Internal Revenue Code’ is now defined as the IRC as amended and in effect on Jan 1. 2024, and is retroactively effective to Jan. 1, 2024.

Idaho reduces corporate income tax rate

On March 29, 2024, Gov. Brad Little signed House Bill 521, reducing the corporate income tax rate to 5.695% from 5.8%, retroactively effective to Jan. 1, 2024.

Indiana issues guidance on section 174

In January 2024, the Indiana Department of Revenue updated Income Tax Information Bulletin #116, which discusses Indiana provisions related to the Tax Cuts and Jobs act (TCJA). The Bulletin was updated to reflect that Indiana remains decoupled from IRC section 174 and allows full expensing for specified research and experimental expenses. The Bulletin also clarifies changes related to the net operating loss treatment of excess business losses and nonprofit separate line losses.

Michigan court finds that holding company has Detroit nexus

In Apex Laboratories International, Inc. v. City of Detroit (No. 363984, Mich. Ct. App. Jan. 4, 2024), the Michigan Court of Appeals reversed a decision from the Michigan Tax Tribunal regarding corporate income tax nexus of a holding company. The Michigan Court of Appeals concluded that a holding company was subject to Detroit income tax because the company’s officers were located Detroit, took several actions on the company’s behalf, and performed their work primarily within Detroit. While the court noted that certain exceptions may exist where officers or agents of the company are working from home or traveling in Detroit, the taxpayer failed to demonstrate that the company’s principal place of business was anywhere other than Detroit.

New Mexico enacts several changes to the corporate income tax

On March 6, 2024, Gov. Michelle Lujan Grisham signed into law House Bill 252 making several changes to the corporate income tax effective for tax years beginning on or after Jan 1. 2025, including the following:

• Eliminates the 4.8% tax rate that applies to New Mexico taxable income below $500,000 and applies a flat 5.9% tax rate to all New Mexico corporate income.
• Expands the corporate income tax base to include subpart F as taxable income. Prior to Jan. 1, 2025, taxpayers are allowed a 100% subtraction of subpart F income.
• Limits the definition of an ‘80/20 company’ to include only corporations organized or incorporated outside of the United States that have 20% or more of their payroll, property or sales to locations within the US in determining whether the 80/20 company must be excluded from the water’s edge group. Prior to Jan. 1, 2025, an 80/20 company many also include an entity incorporated within the United States.

New York rules that California headquartered winery meets the definition of a qualified New York manufacturer

An administrative law judge (ALJ) found that a California-headquartered winery met the definition of a qualified New York manufacturer (QNYM) in Matter of E & J Gallo Winery, (DTA No. 830227 and 850146, N.Y. Div. of Tax App., Feb. 15, 2024). The taxpayer acquired a vineyard in New York and hired a land management contractor to work and maintain the New York vineyard. For the tax periods at issue, the company filed as a QNYM pursuant to N.Y. Tax Law Section 210(1)(a)(vi), which allows a QNYM to apply a reduced corporate income tax rate to its New York taxable income. The New York Division of Taxation found that the company failed to meet all the requirements to be eligible as a QNYM, specifically that the taxpayer was not using the vineyard in the productions of goods because it was outsourcing those functions to a contractor. The ALJ disagreed, finding that the vineyard was in fact “used” by the taxpayer in manufacturing activities, and that outsourcing labor activities to a third party did not negate that use for purposes of qualifying as a New York manufacturer. While the decision is non-binding and may be appealed by the division, the ruling provides opportunity both for taxpayers in industries that may not be considered traditional “manufacturing” and taxpayers who outsource manufacturing functions, to consider whether they may be eligible for tax benefits as a QNYM.

New York City increases the bright-line receipts threshold for Business Corporation Tax filing requirement

The New York City Department of Finance issued a finance memorandum in March 2024 increasing the bright-line receipts threshold for purposes of determining when a corporation or unitary group is deriving receipts from activity within New York City and must file a Business Corporation Tax return. The revised threshold is $1,128,000 and is applicable for tax periods beginning on or after Jan. 1, 2024. The finance memorandum also states that a member of a unitary group is considered to be deriving receipts from activity in New York City if the combined member meets the ownership requirements and has $11,000 or more of receipts from New York City. However, the receipts of all members of the combined group must be at least $1,128,000 in the aggregate for any member of the group to be treated as deriving receipts from activity in New York City.

Pennsylvania issues guidance on sourcing of sales other than tangible personal property

On Jan. 5, 2024, the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2024-01 (Bulletin 2024-01) providing guidance on the market-based sourcing rules enacted by the Pennsylvania legislature in 2022. Bulletin 2024-01 provides comments and examples interpreting the new statutory provisions addressing sourcing receipts from intangible income, including receipts from patents, royalties, franchise fees, securities and interest.

The market-based sourcing statute also provides a catch-all throwout rule stating that receipts received from goodwill or intangible property not otherwise described in the statute are excluded from the numerator and denominator of the sales factor. Bulletin 2024-01 clarifies that the sales factor exclusion applies but is not limited to: “workforce in place, contracts in place, going concern value, patents and copyrights, customer lists, and any covenant not to compete entered into in connection with the acquisition of an interest in a trade or a business.” Such receipts are excluded from both the numerator and denominator of a taxpayer’s Pennsylvania sales factor for tax years beginning on or after Jan. 1, 2023. Please read out article Pennsylvania issues guidance on market-based sourcing for more information.

South Carolina amends apportionment and combined reporting requirements

On March 11, 2024, Gov. Henry McMaster signed Senate Bill 298, providing guidance as to when the South Carolina Department of Revenue can require a taxpayer to file on a combined reporting basis under South Carolina’s alternative apportionment method. The law is effective immediately for all open tax periods (except for cases currently under review by a South Carolina Administrative Law Judge). The department historically has utilized alternative apportionment under audit to require taxpayers to file corporate income taxes on a combined basis even though South Carolina generally requires taxpayers to file corporate income tax returns on a separate entity basis. Senate Bill 298 also sets guidelines for when and how the department must provide notice to taxpayers and establishes a process for the taxpayer to appeal the department’s findings.

South Dakota updates conformity to IRC

On Feb. 5, 2024, Gov. Kristi Noem signed House Bill 1018, updating South Dakota’s conformity to the IRC for purposes of the bank franchise/financial institution tax return. Effective July 1, 2024, the ‘Internal Revenue Code’ is now defined as the IRC as amended and in effect on Jan. 1, 2024.

Utah reduced corporate income tax rate

On March 14, 2024, Utah Gov. Spencer Cox signed Senate Bill 69 which reduces Utah’s corporate income tax rate from to 4.55% from 4.65%. Senate Bill 69 becomes effective on May 1, 2024, with a retroactive application to tax years beginning on or after Jan. 1, 2024.

West Virginia updates conformity to IRC

On Feb. 7, 2024, Gov. Jim Justice signed Senate Bill 462, which updates West Virginia’s conformity to the IRC to include all amendments made to the IRC after Dec. 31, 2022, and before Jan. 1, 2024. West Virginia will not adopt any federal amendments made to the IRC after Jan. 1, 2024. The change is retroactively effective as allowed under federal law.