On March 15, 2022, Indiana Gov. Eric Holcomb approved legislation that makes numerous amendments to Indiana tax law. Specifically, S.B. 382 provides an apportionment election for certain taxpayers, revises the computation of adjusted gross income (AGI) for corporations and individuals, clarifies the continuation of a consolidated return election when there are changes in ownership, enacts an affordable and workforce housing credit, and amends various sales tax provisions.1 H.B. 1002 reduces the individual income tax rate and repeals the utilities receipt tax.2 Finally, S.B. 361 amends various tax credits and enacts a credit for film and media production.3
Corporate income tax
Apportionment election
Effective July 1, 2022, S.B. 382 adds a new a statute providing a limited apportionment election to eligible corporations with more than $1 billion of tangible personal property sales in the Indiana sales factor numerator and more than 10% apportionment to Indiana to exclude certain qualifying distribution sales (QDS).4 The election is available for tax years ending after 2018 and lasts for a period of 10 years.5
Electing corporations are required to follow a prescribed five-step method for determining their tax.6
- Step One: Determine the apportionment percentage under the standard provisions, treating QDS as if they were not receipts for purposes of the apportionment numerator, but treating the portion where the ultimate customer would be located in Indiana as part of the numerator.
- Step Two: Determine Indiana AGI applying the apportionment percentage from Step One.
- Step Three: Determine the tax due on the amount computed in Step Two, reduced by nonrefundable credits, but not less than zero.
- Step Four: Determine a percentage of the QDS that varies according to the amount of the QDS.7
- Step Five: Add the amounts determined under Steps Three and Four.
Notwithstanding the computations above, to provide some level of certainty as to the amount of tax paid by electing corporations, the minimum tax payable by an electing corporation must be at least $26 million, and for tax years ending in 2019 through 2024 cannot be greater than $40 million.8
Adjustments to AGI for small business health insurance deduction
For tax years beginning after Dec. 31, 2022, taxpayers may subtract the amount of the deduction for health insurance expenses disallowed under Internal Revenue Code (IRC) Sec. 280C(h) associated with the federal small business health care credit.9
Consolidated return election continuation
Effective July 1, 2022, S.B. 382 clarifies that an election to make a consolidated return continues to apply following a corporate reorganization or sale.10 According to the fiscal impact statement, this is intended to remove ambiguity in the filing status of an entity after changes in its ownership status.
Individual income tax
Tax rate reduction
H.B. 1002 reduces the individual AGI tax rate from 3.23% for the 2022 tax year to 3.15% for tax years beginning in 2023 and 2024.11 Also, if certain revenue thresholds are satisfied, the individual income tax rate would be further reduced as follows: 3.1% for tax years beginning in 2025 and 2026; 3.0% for tax years beginning in 2027 and 2028; and 2.9% for tax years beginning after 2028.12
Adjustment to AGI for discharge of indebtedness
Effective Jan. 1, 2021, if an amount would have been excludible under IRC Sec. 108(f)(5) (exclusion of income from discharge of debt from certain education loans between 2021 and 2025) as in effect on Jan. 1, 2020, the amount is not required to be added back for purposes of Indiana individual AGI tax.13
Sales and use tax
Effective July 1, 2022, S.B. 382 amends sales tax provisions relating to nonprofit organizations, aircraft rental or leasing, exemptions for utilities, and marketplace facilitators. Specifically, the legislation changes the threshold for which a nonprofit organization’s sales are tax exempt from having sales for less than 30 days in a calendar year to less than $20,000 in sales in a calendar year.14 The statute imposing sales tax on aircraft rental or leasing is amended to clarify when a taxpayer is required to pay tax when the aircraft is sold within 13 years of its purchase.15 Also, the legislation clarifies and expands exemptions relating to the provision of certain utility services.16 Finally, a marketplace facilitator is considered a retail merchant regardless of whether the marketplace facilitator has a contractual relationship with the seller.17
Credits and incentives
For tax years beginning on or after Jan. 1, 2024, S.B. 382 provides a new Affordable and Workforce Housing Tax Credit.18 Effective July 1, 2022, S.B. 361 amends a variety of tax credits. A Film and Media Production Tax Credit is enacted for taxpayers who make qualified media production expenditures.19 The total amount of “applicable tax credits” that the Indiana Economic Development Corporation (IEDC) may award to all taxpayers during a state fiscal year is limited to $300 million.20
S.B. 361 amends the Hoosier Business Investment (HBI) Tax Credit, the Economic Development for a Growing Economy Credit (EDGE) Tax Credit, the Headquarters Relocation Tax Credit, and the Redevelopment Tax Credit. Specifically, the legislation removes the annual $55 million cap for the HBI Tax Credit.21 In addition to no longer requiring EDGE Tax Credit applicants to propose a qualified project that has a physical location in the state, the legislation allows EDGE Tax Credit recipients to request a payment equal to the credit rather than claiming the credit against their tax liability.22 The Headquarters Relocation Tax Credit is amended by removing the minimum number of employees requirement and the $5 million annual limit on the credit.23 Also, the Redevelopment Tax Credit is amended to require the IEDC to determine whether a site is a qualified redevelopment site, increases the maximum credit percentage to 30%, removes the repayment provision for projects with at least $100 million in qualified investment, and removes the $50 million annual limit on the credit.24
Utility receipts tax repealed
Effective July 1, 2022, H.B. 1002 repeals the Utility Receipts Tax (URT), including the Utility Services Use Tax (USUT).25 Utilities that are subject to the URT on Jan. 1, 2022, must adjust their rates and charges imposed on customers to reflect the repeal of the URT.26
Commentary
The legislation that Indiana enacted on March 15, 2022 provides an apportionment election that is likely to be extremely limited in scope, due to the requirement that eligible taxpayers have at least 10% of their sales and $1 billion of sales of tangible personal property sourced to Indiana. Thus, the election generally is directed at regional companies with a significant presence in Indiana. The fiscal impact statement indicates that the provision will likely reduce the corporate income tax liability of corporations that make the election, but the reduction in the state’s tax revenue caused by this provision is an “indeterminable amount.”27 However, the fact that the legislation requires that electing corporations pay a substantial minimum tax with a limit on the maximum amount of tax should provide some level of certainty regarding the impact on tax revenue. Corporations that meet the criteria will need to gauge whether it would be advantageous to make the apportionment election, in part because the election lasts for 10 years and mandates a substantial minimum tax. Due to uncertain financial conditions and the possibility that the federal income tax base and/or state-specific income tax rules could change during this period, corporations may be reluctant to commit to the lengthy election.
Broader relief should come to individuals in the form of an income tax rate reduction beginning with the 2023 tax year and potential further rate reductions beginning with the 2025 tax year if the state meets revenue thresholds, and both individual and busines utility customers will benefit from the repeal of the URT. On the sales tax front, the amendment providing that marketplace facilitators are not required to have a contractual relationship to be considered the retail merchant of the sales that they facilitate could increase the number of marketplace facilitators subject to a tax collection obligation. Finally, the provision of two new tax credits and amendments to several existing tax credits should encourage further investment in the state.
1 P.L. 137 (S.B. 382), Laws 2022. This SALT Alert focuses on the major changes enacted by this legislation.
2 P.L. 138 (H.B. 1002), Laws 2022.
3 P.L. 135 (S.B. 361), Laws 2022.
4 S.B. 382, adding IND. CODE § 6-3-2-1.7. An “eligible corporation” is a corporation subject to corporate AGI tax (other than an S corporation or a corporation subject to financial institutions tax). IND. CODE § 6-3-2-1.7(a)(2). A QDS is defined as a sale of tangible personal property by an eligible corporation to a distributor that: (i) is a purchase for resale by the distributor; and (ii) for which the sourcing of the sale of the property to an ultimate consumer outside Indiana is agreed to by the Indiana Department of Revenue and the eligible corporation, or, in the absence of an agreement, sourced by the ratio of the population of Indiana compared to the population of all states in which the qualified distribution sales are sold to an ultimate consumer. IND. CODE § 6-3-2-1.7(a)(3). A “distributor” is an entity located in Indiana that purchases tangible personal property from an eligible corporation for purposes of resale. IND. CODE § 6-3-2-1.7(a)(1).
5 IND. CODE § 6-3-2-1.7(c), (d).
6 IND. CODE § 6-3-2-1.7(b).
7 If QDS do not exceed $2 billion: 0.5% of the QDS. If QDS exceed $2 billion but not $3 billion: 0.375% of the QDS over $2 billion plus $10 million. If QDS exceed $3 billion but not $4 billion: 0.25% of the QDS over $3 billion plus $13,750,000. If QDS exceed $4 billion: 0.125% of the QDS in excess of $4 billion plus $16,250,000. IND. CODE § 6-3-2-1.7(b). If the eligible corporations are part of a consolidated or combined return, the computation under Step Four is determined separately for each corporation. IND. CODE § 6-3-2-1.7(f).
8 IND. CODE § 6-3-2-1.7(c). For tax years ending in 2025, the maximum tax is $42 million. For tax years ending after 2025, the tax is limited to $42 million plus $1 million for each tax year ending after 2025.
9 S.B. 382, adding IND. CODE § 6-3-1-3.5(b)(19). A corresponding subtraction is provided for individuals, insurance companies, trusts, and financial institutions. IND. CODE §§ 6-3-1-3.5(a)(34), (d)(19), (e)(18), (f)(16); 6-5.5-1-2(a)(2)(J).
10 S.B. 382, adding IND. CODE § 6-3-4-14(e); S.B. 382 Fiscal Impact Statement, Indiana Legislative Services Agency, Office of Fiscal and Management Analysis, March 11, 2022.
11 H.B. 1002, amending IND. CODE § 6-3-2-1(b)(3), (4).
12 H.B. 1002, amending IND. CODE § 6-3-2-1(b)(5)-(7). The rate reductions after 2024 are contingent on the state general revenue fund collections for the state fiscal year ending June 30 prior to the year of the rate reduction exceeding the state general revenue fund collections for the prior state fiscal year by at least 2%.
13 S.B. 382, amending IND. CODE § 6-3-1-3.5(a)(30).
14 S.B. 382, amending IND. CODE §§ 6-2.5-5-21(b)(1); 6-2.5-5-25; 6-2.5-5-26. The fiscal note provides that this amendment could change the tax status of some nonprofit entities. S.B. 382 Fiscal Impact Statement, Indiana Legislative Services Agency, Office of Fiscal and Management Analysis, March 11, 2022.
15 S.B. 382, repealing IND. CODE § 6-2.5-5-8(e)-(j); adding IND. CODE § 6-2.5-5-8.2.
16 S.B. 382, adding IND. CODE §§ 6-2.5-1-22.5; 6-2.5-1-25.5; 6-2.5-5-5.1(e); 6-2.5-5-8.5; amending IND. CODE § 6-2.5-4-5.
17 S.B. 382, amending IND. CODE § 6-2.5-4-18.
18 S.B. 382, adding IND. CODE § 6-3.1-35.
19 S.B. 361, adding IND. CODE § 6-3.1-36.
20 S.B. 361, adding IND. CODE §§ 5-28-2-1.5; 5-28-6-9. “Applicable tax credits” include: (i) HBI Tax Credit; (ii) EDGE Tax Credit; (iii) Headquarters Relocation Credit; (iv) Community Revitalization Enhancement District Tax Credit; (v) Redevelopment Tax Credit; and (vi) Film and Media Production Tax Credit.
21 S.B. 361, amending IND. CODE § 6-3.1-26-20.
22 S.B. 361, amending IND. CODE §§ 6-3.1-13-17; 6-3.1-13-20.
23 S.B. 361, amending IND. CODE § 6-3.1-30-8.
24 S.B. 361, amending IND. CODE §§ 6-3.1-34-6; 6-3.1-34-17; 6-3.1-34-18; repealing IND. CODE § 6-3.1-34-22.
25 H.B. 1002, § 3, repealing IND. CODE § 6-2.3 (URT). The URT is imposed on the gross receipts of entities providing the retail sale of utility services in Indiana. IND. CODE § 6-2.3-2-1. If the URT is not paid by the utility, the USUT is imposed on the retail consumption of utility services in Indiana. IND. CODE § 6-2.3-5.5-1. Both taxes historically were imposed at a rate of 1.4%, and the rate was increased to 1.46% for the 2022 tax year. IND. CODE §§ 6-2.3-2-2; 6-2.3-5.5-3; General Tax Information Bulletin #201, Indiana Department of Revenue, Aug. 2020, revised Aug. 2021.
26 H.B. 1002, adding IND. CODE §§ 8-1-2-4.2; 8-1-2-4.3.
27 S.B. 382 Fiscal Impact Statement, Indiana Legislative Services Agency, Office of Fiscal and Management Analysis, March 11, 2022.
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