SALT Select Developments - September 2023

Baker Donelson

Baker Donelson

State and local taxes impact almost every taxpayer, and developments in any one jurisdiction can be frequent and sometimes confusing. ln this newsletter edition, we will briefly summarize selected state and local tax (SALT) developments in several states which may be important to you.

Alabama – Updates Reported

Sales Tax Rate Reduction for Food: The Alabama Department of Revenue (Department) recently posted a reminder notice stating that, in accordance with Act 2023-554 signed by Governor Ivey on June 16, 2023, the state sales and use tax rates on food will be reduced from four percent to three percent effective September 1, 2023. This reminder notice also referenced that the state sales and use tax rates will be further reduced to two percent on September 1, 2024, if there is sufficient growth in the state Education Trust Fund. The notice also provided that city and county sales and use tax rates on food will be equal to their general sales tax rate in effect as of June 15, 2023; and that local governments can reduce their rate on food in 25 percent increments in any year when there is sufficient growth in their local General Fund. The notice further provided that the word "food" has the same meaning as defined in 7 U.S.C. Section 2011, for purposes of the federal Supplemental Nutrition Assistance Program (SNAP). Further, the Notice referenced that SNAP-eligible food items generally include any food or food product for home consumption, except alcoholic beverages, tobacco, hot foods, or food products ready for immediate consumption. Contact information is provided in this notice for additional information on SNAP-eligible and ineligible items. More information can be found here.

District of Columbia – Updates Reported

Filing/Paying Responsibility: The Office of Tax and Revenue (OTR) has published a reminder that taxpayers are responsible for filing their tax returns on time and paying the full amount owed. The OTR stated in this reminder that if a tax is not fully paid, a notice of tax due will be mailed; and, in addition to the amount of delinquent tax owed, taxpayers will be charged interest (ten percent compounded daily) and a failure to pay penalty (five percent monthly up to 25 percent). The reminder also referenced that if the full payment is not received within 15 days from that notice date, the OTR will send a notice of enforcement by certified mail, and thereafter, will initiate enforcement action against the delinquent taxpayer. Further, if the taxpayer does not respond promptly to these notices, a representative from OTR's Tax Division will contact the taxpayer by telephone or in person concerning their tax problem. This reminder noted that taxpayers will be expected to make all necessary arrangements to immediately bring their account up-to-date so there will be no need for further enforcement action to be taken by OTR. More information can be found here.

Florida – Updates Reported

Motor Fuel Tax Rate Adjustments: In August 2023, the Florida Department of Revenue (Department) issued Tax Information Publication No: 23B05-02 addressing adjustments in the fuel tax rates for the period from September 1, 2023, through December 31, 2023. According to this Publication, the minimum statewide motor fuel tax rate decreased from 35.225 cents per gallon to 26.325 cents per gallon during that time period. The Publication stated that the inspection fee on motor fuel will remain at 0.125 cents per gallon. This Publication also references the local option rates that vary by county, as well as the rate to be collected by terminal suppliers. Additionally, the Publication noted that due to the reduction in the statewide gasoline rate, wholesalers that purchase fuel in August 2023, and carry that inventory into September 2023, will pay an additional 0.089 cents per gallon; likewise, a wholesaler's inventory that is purchased in December 2023, and carried over to January 2024, will receive an additional 0.089 cents per gallon when the fuel is sold. More information can be found here.

Georgia – Updates Reported

Motor Fuel Tax Suspension: On September 12, 2023, and in response to the adverse effects of continuing inflation, Governor Kemp signed Executive Order that suspends the collection of motor fuel excise taxes from September 13, 2023, through October 12, 2023. According to information published by the Georgia Department of Revenue (Department), the Executive Order suspends fuels subject to the Georgia motor fuel excise tax under O.C.G.A. Section 48-9-3, including, but not limited to; gasoline, clear diesel, aviation gasoline, liquid propane gas, gasohol, ethanol, liquified natural gas, and compressed natural gas; as well as fuel sold to or used by a contract or common carrier regulated by the United States Surface Transportation Board for use exclusively in the operation of locomotives by such carrier. The Department's published information states that the prepaid local sales tax and other local taxes have not been suspended. The Department's information, which includes access to the Executive Order and addresses various other information about this suspension, can be found here.

Louisiana – Updates Reported

Credit for Taxes Paid to Other States: On August 17, 2023, the Louisiana Department of Revenue (Department) issued Revenue Information Bulletin No. 23-024 addressing the credit allowance for taxes paid in other states in regard to computing the Louisiana individual income tax. Initially, the Department noted that certain safeguards regarding the credit allowance were established in the 2015 Regular Session of Legislature, and subsequently, the Legislation provided certain clarifications as a result of legislation enacted in the 2023 Regular Session. The purpose of this Revenue Information Bulletin, according to the Department, is to provide additional guidance concerning eligibility and the calculation of the credit in light of changes made by the 2023 enactment. The Department then notes that, following such 2023 enactment, Louisiana residents with out-of-state income may take a credit against the Louisiana individual income taxes for the amount of tax paid to the other state on that out-of-state income subject to the following safeguards: (i) the credit is limited to the amount of Louisiana income tax that would have been imposed if the income earned in the other state had been earned in Louisiana; (ii) the credit is not allowed for tax paid on income not subject to tax in Louisiana; (iii) the credit is not allowed for income taxes paid to a state that allows a non-resident a credit against income taxes imposed by that state for taxes paid in the state of residence; and (iv) a taxpayer cannot claim both a credit and a deduction under Louisiana law. Further, the Department noted in the Bulletin that Louisiana residents may take a deduction for another state's entity-level tax that is based solely on income included in the entity's federal taxable income without any capital component, provided that the entity's income is included in the resident's Louisiana income and is subject to Louisiana income tax. The Department then reviewed such credit provisions as they relate to the Texas franchise tax paid on income that flowed through to the Louisiana resident. Thereafter, the Department clarifies in this Bulletin that taxpayers who claim a deduction for federal purposes with respect to state and local taxes paid are not prohibited from claiming a credit for Louisiana purposes – that is, qualifying state taxes that are paid and deducted under a qualifying federal provision remain eligible and may be utilized for purposes of claiming the credit for taxes paid under Louisiana law. However, the Department noted that no credit or deduction is allowed for resident individual taxpayers paying another state's entity-level tax if the entity's operations resulted in a net loss for federal income tax purposes for the taxable year. More information can be found here.

Maryland – Updates Reported

Business Information for Adult-Use Cannabis: The Comptroller of Maryland (Comptroller) has published information regarding the recently enacted Cannabis Reform Act signed by Governor Moore on May 3, 2023. According to that published information, sales of adult-use cannabis are permitted beginning July 1, 2023; and, in that regard, the published information states that Maryland will impose a nine percent sales and use tax on retail sales of adult-use cannabis and cannabis products, which reportedly, is the same rate that applies to the sale of alcoholic beverages. As part of that published information, the Comptroller also published a Tax Alert dated July 28, 2023, that sets forth questions and answers for cannabis businesses addressing a wide variety of questions pertinent to such business. More information can be found here.

Mississippi – Updates Reported

Electing Pass-Through Entity FAQs: On April 13, 2023, the Mississippi Department of Revenue (Department) published Notice 80-23-002 addressing House Bill 1668 of the 2023 Legislative Session that was signed into law on March 27, 2023, such law amending the method by which a partnership, S corporation or other similar pass-through entity may elect to become an "electing pass-through entity" for state income tax purposes. (See our April 19, 2023, Newsletter.) On September 11, 2023, the Department issued frequently asked questions (FAQ) regarding this new law. Such questions addressing a wide variety of issues such as: what entity types can elect to be treated as a pass-through entity; how does a pass-through entity make an election to be treated as an electing pass-through entity; when is a pass-through entity required to make an election; and will the entity be penalized if estimated tax payments are not made, are among many other issues addressed in this FAQ. More information can be found here.

North Carolina – Updates Reported

Proper Sourcing of Contract Manufacturing Service Fees: The North Carolina Department of Revenue (Department) has recently published a redacted version of Private Letter Ruling 2023-02, dated June 20, 2023, that addresses a taxpayer's question as to the proper sourcing of contract manufacturing service fees received by the taxpayer for North Carolina income tax purposes. Essentially, the taxpayer provides manufacturing services to a related multinational company, for which the taxpayer is paid various fees for such services. The taxpayer's manufacturing facilities are located in North Carolina, but the taxpayer has employees conducting business activities in a number of other states. The service fees paid to the taxpayer by the related company were approved by the IRS pursuant to a current Advance Pricing Agreement. The taxpayer receives raw materials necessary for production from the related party and uses those raw materials for manufacturing the agreed upon semi-finished and finished products to the specifications set forth in the agreement between the taxpayer and the related company. Upon completion of the manufacturing process, the taxpayer moves the products from the manufacturing facility to a temporary warehousing facility where the products await distribution as coordinated by the related company. Final sale and delivery of the product is not handled by the taxpayer but rather by the related company; and the manufacturing service fees are not dependent upon the market success or failure of the product or on the volume of the product sold. In response to the question raised by the taxpayer as to the proper sourcing of the service fees the taxpayer receives for such manufacturing activities, the Department stated that based upon its review of the information provided and the pertinent North Carolina laws, the service fees should be sourced to North Carolina if the finished product is ultimately delivered by a related entity to a customer located in North Carolina, regardless of the F.O.B. terms; and that if the ultimate destination cannot be determined, then the service fees should be sourced to North Carolina where the manufacturing services are performed. The Department discusses in this Ruling the justification for such determinations. More information can be found here.

South Carolina – Updates Reported

Significant 2023 Tax Changes Summarized: On August 29, 2023, the South Carolina Department of Revenue (Department) issued Information Letter #23-11 that provides a brief summary of the significant changes in tax and regulatory laws enacted during the 2023 Legislative Session. As noted in this Information Letter, the summary is divided into categories by subject matter, including income taxes, bank taxes, withholding, and corporate license fees; property taxes and fees in lieu of property taxes; sales and use taxes; and miscellaneous filings. Further, a link is included within this Information Letter to a complete copy of the legislation discussed in the summary. More information can be found here.

Tennessee – Updates Reported

Sales/Use Tax Exemption for Firearm Safes: During an Extraordinary Session of the Tennessee Legislature that convened and adjourned during August 2023, one of the few bills passed by the Legislature and signed by Governor Lee was Senate Bill 7085, now 2023 Public Chapter (Extraordinary Session) 0001, which creates a permanent sales and use tax exemption for "firearm safes" and "firearm safety devices," effective November 1, 2023. In conjunction with this new law, the Tennessee Department of Revenue (Department) issued Notice #23-16 in late August 2023, which addresses the definition of "firearm safe" and "firearm safety device" for purposes of this exemption. A firearm safe is defined as a locking container or other enclosure, including glass-faced containers, equipped with a padlock, key lock, combination lock, or other locking device, and intended for the secure storage of one or more firearms. As referenced in the Department's Notice, a firearm safety device is defined as: (i) a device that, when installed on a firearm, is designed to prevent the firearm from being operated without first deactivating the device, or (ii) a device to be equipped or installed on a firearm that is designed to prevent the operation of a firearm by anyone who does not have the authorized access to the firearm. This Notice also addresses the reporting requirements for dealers making exempt sales of firearm safes and firearm safety devices. More information can be found here.

Texas – Updates Reported

Private Letter Ruling Involving R&D Sales Tax Exemption: As referenced in a Tax Policy News issued by the Comptroller's Office (Comptroller), the Comptroller previously issued a Private Letter Ruling involving the application of the sales and use tax exemption for research and development (R&D) purchases. In this Ruling, the taxpayer is a wholly owned subsidiary of a parent entity. The taxpayer was established to purchase vacant land and construct facilities in Texas for the parent entity. The parent's Texas operations and its Texas employees are located at the taxpayer's facility. The taxpayer however does not have any employees, nor does it generate, or plan to generate, any revenue. The parent entity funds all of the taxpayer's activities by transferring cash to the taxpayer. The taxpayer purchased items that are used by the parent entity in the parent entity's research and development activities. The parent entity applied for and received a Texas Qualifying Research Registration Number that allows for the parent entity to claim an exemption from the sales and use tax when purchasing qualified tangible personal property to be used in qualified research. The taxpayer has not applied for a Texas Qualified Research Registration Number. Upon review by the Comptroller's Tax Policy personnel, and in response to the Ruling request, the Comptroller ruled that the taxpayer may not use the Qualified Research Registration Number assigned to the parent entity nor would the research activities of the parent entity qualify for the R&D sales tax exemption to make taxpayer's purchases tax-free. As stated in the Ruling, only an entity engaging in qualifying research is eligible for the sales tax R&D exemption. The Ruling then sets forth the reasoning for such determination. More information can be found here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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