The landscape of State and Local Taxes (SALT) is constantly evolving, influenced by legislative changes, economic factors, and technological advancements. As we delve further into 2023, businesses must be well-informed about changing issues that will continue to shape SALT. In this article, we will explore 10 such issues and how they impact businesses operating in various states.
1. Market-Based Sourcing for Services:
States are increasingly adopting market-based sourcing rules for services. In the past, businesses paid taxes on services based on where the work was performed. Now, they must determine the state where the benefit of the service is received by the customer. This shift has major implications for service-oriented businesses operating in multiple states.
As an example, California’s market-based sourcing regulations took effect January 1 of 2023 which addresses how to treat sourcing of services for professional services, asset management services, and services related to tangible and intangible property in the state.
2. Remote Sales Tax Nexus:
The growth of e-commerce and the increasing number of businesses conducting transactions across state lines have created complex sales tax nexus issues. States continue to refine their remote sales tax laws, affecting businesses that may not have a physical presence but conduct substantial online sales. Complying with these regulations requires careful monitoring of thresholds and potential registration requirements in multiple jurisdictions.
Furthermore, the taxability of transactions changes over time, for example, Maryland has recently enacted legislation that takes effect July 1 of 2024 that imposes the state’s 6% sales tax on rentals of home amenities such as swimming pools and event spaces. Changes like these can require businesses who previously didn’t have nexus with a taxing authority to now have to submit regular filings.
3. Digital Advertising Taxes:
Some states have introduced new taxes specifically targeting digital advertising services. These taxes are often based on a company’s advertising revenue derived from users within the state. Businesses relying heavily on digital advertising must now assess their tax liability in these jurisdictions and plan for potential cost adjustments.
New York and Connecticut proposed bills in their 2023 legislative sessions in an attempt to tax digital advertising revenue. Connecticut proposed to establish a 10 percent tax on the annual gross revenues of any business with annual gross revenues exceeding $10 billion from digital advertising services. New York proposed the imposition of a 5 percent tax on the gross income of every corporation that derives income from the data New York individuals share with such corporations.
4. Pass-Through Entity Taxes:
Several states have enacted or expanded pass-through entity taxes. Instead of taxing income at the entity level, these states impose taxes on the individual members’ share of the income. This development can create new tax planning opportunities for businesses structured as pass-through entities.
Virginia’s 2023 General Assembly enacted legislation via HB 1456 and SB 1476 relaxing the requirements to qualify for the Pass-Through Entity Tax (PTET) election and altered how the PTET is calculated.
5. Remote Workforce Tax Implications:
The rise of remote work has complicated tax obligations for businesses. States are now reevaluating the criteria that establish an employer’s nexus, impacting income tax withholding requirements. Employers need to carefully analyze their workforce distribution to comply with varying state tax rules.
States are continuously divided on whether to apportion work performed remotely to the state/locality the work is conducted in or the state/locality who receives benefit from the work. This has resulted in local and state court appeals often by individual filers claiming refund of income tax withheld by outside localities such as in the 2022 case of Curcio v. Hufford, 2022-Ohio-4766, where Ohio residents/nonresidents of cities of Oregon and Toledo challenged Section 29 (emergency legislation enacted in 2020 by Ohio GA via H.B. 197) addressing municipal taxation for telecommuting employees for violation of Due Process Clause and Ohio Constitution for authorizing extraterritorial taxation, seeking a refund of Oregon and Toledo income taxes on their telecommuting wages during the pandemic period.
6. Marketplace Facilitator Laws:
Many states have updated or implemented marketplace facilitator laws. These laws require online platforms to collect and remit sales tax on behalf of third-party sellers. Companies using such platforms must understand their obligations and account for potential changes in tax collection and reporting.
In Oklahoma effective January 1 of 2023, the term “marketplace facilitator” was modified via SB 1339 to include persons that sell all products that are taxable under Oklahoma’s sales tax code rather than solely taxable “tangible personal property” as it relates to collecting Oklahoma sales taxes from the marketplace. Additionally, the new law broadens the collection responsibilities of marketplace facilitators. It now includes certain other taxes administered by the Oklahoma Tax Commission, extending beyond just state sales and use taxes to those levied by local jurisdictions.
7. Digital Goods and Services Taxation:
With the rise of digital products and services, states are reevaluating their tax treatment. Some have expanded their sales tax to include various digital goods and services, leading to new compliance challenges for businesses distributing digital products across state lines.
On May 2, 2023, Georgia Senate Bill 56 (S.B. 56) was enacted into law. Effective January 1, 2024, the legislation makes certain amendments to the state’s sales and use tax provisions. This includes imposing tax on specified digital products, other digital goods, and digital codes sold to users in Georgia.
8. Corporate Income Tax Apportionment:
States are reassessing their apportionment formulas for corporate income tax. Some are moving towards single-sales factor apportionment, which bases tax liability on the percentage of sales within the state. Businesses must adapt their tax planning strategies to these evolving methodologies.
Montana passed MT SB 124, which adopted single sales factor apportionment. The bill was signed into law by Governor Greg Gianforte (R) on March 14, 2023. Tennessee also modified its apportionment method with HB 323. The bill largely implemented Governor Bill Lee’s (R) budget plan and phased in single sales factor apportionment by December 31, 2025.
9. Tax Haven Legislation
In an effort to prevent tax avoidance, certain states have enacted ‘tax haven’ legislation. This includes disallowing certain deductions and imposing additional taxes on income routed through low-tax jurisdictions. Multistate businesses need to be cautious about transactions involving these jurisdictions to avoid unintended tax consequences.
A most recent development on a global front, 136 countries have signed a deal aimed at ensuring companies pay a minimum tax rate of 15%. The countries behind the global minimum tax rate account for over 90% of the global economy collectively.
10. Combined Reporting Requirements:
A growing number of states are adopting combined reporting rules. These rules require affiliated companies to file a single tax return, consolidating their income and apportionment factors. This change impacts businesses with related entities, altering their reporting and potential tax liabilities.
In Pennsylvania’s 2023 legislative session, Senate Bill 161 proposed a mandate of combined reporting for unitary businesses on a water’s edge basis under the state corporate income tax. The bill also included a tax haven provision requiring corporations to include related parties operating in designated tax havens in the combined report. Although the bill didn’t pass, it demonstrates mandated combined reporting requirements will continue to be a hot button topic for those states without existing mandates.
From the aftermath of the pandemic to the rise of the digital economy, new technologies are emerging. Policymakers and taxpayers must diligently address these developments in state and local taxation (SALT). To navigate this complex landscape successfully, companies must remain vigilant, proactive, and well-informed. Seeking guidance from experienced tax consultants is paramount to ensure compliance, minimize tax burdens, and optimize tax strategies. State and local tax laws are continuously evolving. To thrive in this complex tax environment, businesses must maintain adaptability. Partnering with a tax professional involves a nominal cost. This minimally compares to the expense of executing a state and local tax strategy poorly.
