State and Local Tax Updates
Alabama enacted legislation exempting monies received from federal coronavirus relief bills for income tax purposes. Additionally, Alabama enacted legislation (1) establishing a single sales factor apportionment formula and repealing the state’s “throwback rule”; (2) declaring additional decoupling from various IRS code sections; (3) changing the business interest expense limitation; and (4) allowing pass-through entities to elect to be taxed at the entity level.
On August 30, 2021, Alaska’s legislature proposed a 2% statewide sales tax. (If enacted, this will leave New Hampshire, Oregon, Montana, and Delaware as the only remaining states that do not impose sales and use tax.)
Effective for tax years beginning on or after January 1, 2022, Arkansas passed legislation imposing a pass-through entity (“PTE”) tax, while excluding certain items of income.
California passed a bill creating an elective pass-through entity (PTE) tax. Additionally, new sales and use (“S&U”) tax rates took effect April 1, 2021, in certain California cities and counties.
Effective in tax year 2022, Colorado legislation allows pass-through entities to elect to pay state income tax at the entity level. Additionally, Colorado signed legislation amending various tax provisions, including adding digital goods to the definition of tangible personal property (“TPP”) for sales and use tax purposes and modifying the computation of the corporate income tax (“CIT”) receipts factor.
The Florida corporate income tax rate was reduced to 3.535% from 4.458% for the period January 1, 2021, through January 1, 2022. On or after January 1, 2022, the tax rate will rise to 5.5%. Effective July 1, 2021, persons not located in Florida who make a substantial number of remote sales for delivery into Florida became required to register with the Florida Department of Revenue and to collect and remit sales and use tax. Marketplace providers with either a physical presence in Florida, or who make or facilitate a substantial number of remote sales through a marketplace, are required to register with the Department and collect and remit tax.
In addition to enacting an elective PTE tax (annual election), effective retroactively to January 1, 2021, Idaho lowers the corporate income tax rate to 6.5% and decreases the personal income tax rates ranging from 1% to 6.5%.
Illinois enacted legislation introducing an elective PTE tax (annual election) that, once made, is irrevocable. The tax rate will be 4.95% of the taxpayer’s net income, and special rules are provided for tiered partnerships.
Effective July 1, 2021, Iowa requires PTEs to file composite returns on behalf of all nonresident (“NR”) members and to report and pay the income or franchise tax imposed at the maximum state tax rate applicable to the member.
Kansas enacted legislation requiring marketplace facilitators to collect and remit sales and use tax. Effective July 1, 2021, retailers, out-of-state sellers, and marketplace facilitators that have an excess of $100,000 in gross receipts in the state are required to collect and remit sales tax in Kansas.
Effective September 13, 2021, Massachusetts non-residents will only be subject to the state’s personal income tax on actual Massachusetts workdays following the sunset of the special COVID rules.
Effective March 14, 2021, Maryland imposes a 6% sales and use tax on digital products received or used by purchasers in the state. Additionally, Maryland now permits an election for a PTE tax.
Minnesota enacted legislation that, beginning December 31, 2020, introduces an elective PTE tax, which once made is irrevocable.
New York tax authorities are focusing on auditing 2020 income tax returns filed by non-residents who work for New York employers, and have started issuing desk audit notices in an effort to clawback missed tax revenue. Additionally, New York passed measures for a PTE tax as well as tax relief for middle-class taxpayers, while two new tax brackets have been introduced for New York’s top income taxpayers.
South Carolina enacted legislation, effective for tax years beginning after 2020, introducing an elective PTE tax which must be elected annually.
Virginia signed legislation effective July 7, 2021, requiring unitary businesses to file a one-time corporate income tax informational report.