In contemplation of the June 30 budget year about to close for many states, significant legislative enactments with broad SALT effects came to fruition. Connecticut enacted budget legislation that extends the corporate surcharge for three years and makes its pass-through entity tax optional. The Florida tax legislation advanced its Internal Revenue Code conformity and adopted several new income tax credits and sales tax exemptions. Oklahoma decided to repeal its franchise tax beginning with the 2024 tax year. Wisconsin enacted legislation that repeals its personal property tax and authorizes the City of Milwaukee and Milwaukee County to impose local sales and use taxes.
On the litigation front, the Colorado Supreme Court issued four related opinions holding that the COVID-19 pandemic did not constitute an unusual condition requiring a property tax revaluation. The Michigan Court of Appeals decided a case that emphasizes the importance of formally requesting a refund in order to be eligible to receive interest from the state. Also, the Virginia Court of Appeals held that manufacturers may elect to use a single sales factor apportionment formula on an amended income tax return. Find out more about these and other stories in our roundup of SALT news for June 2023.
Colorado Supreme Court holds pandemic did not require property revaluation
On May 30, 2023, the Colorado Supreme Court decided four cases holding that the COVID-19 pandemic and the various health orders issued in response during the 2020 property tax year were not “unusual conditions” that required the revaluation of commercial property. In two of the cases, MJB Motels LLC v. County of Jefferson Board of Equalization and Hunter Douglas Inc. v. City and County of Broomfield Board of Equalization, the court determined that the pandemic was not an unusual condition. In the other two cases, Larimer County Board of Equalization v. 1303 Frontage Holdings LLC and Educhildren LLC v. County of Douglas Board of Equalization, the court also addressed the timing of the revaluation during the property tax assessment cycle.
Colorado law generally requires that property valuations be conducted only once every two years. As relevant to these cases, 2019 was the assessment year and 2020 was the second, or intervening, year in the property tax cycle. Colorado law instructs assessors to revalue property before the next assessment date under certain limited circumstances, including where “unusual conditions in or related to any real property . . . would result in an increase or decrease in actual value.” The unusual conditions are expressly limited to certain events that include, in relevant part, “any new regulations restricting or increasing the use of the land” or “any detrimental acts of nature.”
In MJB Motels, taxpayers owning commercial real property filed suit in district court against the county board of equalization and assessor arguing that the COVID-19 pandemic and the resulting various executive orders and other regulations restricting the use and access to their property constituted “unusual conditions” requiring the revaluation of their property for the 2020 tax year. The taxpayers’ arguments focused on the two enumerated unusual conditions mentioned above.
First, they argued that the COVID-19 pandemic was a detrimental act of nature. Second, they contended that the public health orders issued in response to the pandemic constituted new regulations restricting the use of the land. The taxpayers provided property valuation estimates for the 2020 tax year that generally were 50% less than the assessor’s valuations.
The district court dismissed the taxpayers’ complaint on the ground that the pandemic and public heath orders did not qualify as unusual conditions. Specifically, the court held that the pandemic was not a detrimental act of nature such as a forest fire because the pandemic’s impacts on real property were “indirect and intangible.” Also, the district court found that the public health orders did not qualify as regulations restricting the use of the land because the orders did not regulate the land itself. After the taxpayers appealed this decision, the court of appeals filed a motion to change the jurisdiction of the four related property tax cases to the Colorado Supreme Court, because they raised issues of significant public importance. The Colorado Supreme Court granted the motion and accepted jurisdiction.
In affirming the district court, the Colorado Supreme Court agreed that the pandemic was not an unusual condition requiring a revaluation of the property. The court considered the “acts of nature” provision and determined that the unusual condition must be both an “act of nature” and “in or related to any real property.” According to the court, the pandemic was not an act of nature such as earthquakes, floods, or tornadoes. Also, the pandemic was not “in or related to any real property” because even though COVID-19 may have infected people who were on the property, it did not infect the property itself. The pandemic did not constitute a detrimental act of nature as it did not directly affect the use or availability of real property, affect property in a limited geographic area, or occur during a defined window of time. Furthermore, the court determined that the public health orders were not regulations restricting the use of the land because they regulated the operation of commercial activity on the land rather than the use of the land itself. Unlike a typical regulation restricting the use of land such as a change in zoning, the pandemic public health orders were intended to be temporary. Finally, the court explained that its conclusion that the pandemic did not constitute an unusual condition was consistent with cases holding that changed economic conditions did not constitute unusual conditions for purposes of the statute.
In 1303 Frontage Holdings, the court held that an assessor is not required to revalue real property when an unusual condition occurs in the middle of the intervening year. For an unusual condition to trigger a revaluation during for the intervening year, the condition must have occurred before the Jan. 1 assessment date for the year. Because COVID-19 and the public health orders occurred in March 2020, the taxpayers had no statutory right to have their property revalued for the 2020 intervening tax year. An unusual condition that occurs after the intervening Jan. 1 tax assessment date is properly considered in the next property tax year. Also, the court held that taxpayers bear the burden of proving that the unusual condition existed before the relevant Jan. 1 assessment date, the unusual condition impacted their properties, and that the assessed value of their properties was thus incorrect. Finally, the court concluded, consistent with MJB Motels and Hunter Douglas, that the pandemic was not an unusual condition requiring property revaluations for 2020.
Connecticut extends corporate surcharge, makes PTE tax optional
On June 12, 2023, Connecticut enacted budget legislation, H.B. 6941, which extends the corporation business tax surcharge for three years. Also, the legislation makes the currently mandatory pass-through entity (PTE) tax optional and includes other significant changes to the PTE tax.
The budget legislation extends the 10% corporation business tax surcharge for three additional years to the 2023, 2024 and 2025 tax years. Under existing law, the surcharge applies to taxpayers that have more than $250 in corporation tax liability and either: (i) have at least $100 million in annual gross income; or (ii) are taxable members of a combined group, regardless of the amount of their annual gross income. Taxpayers must calculate their surcharge based on their tax liability, excluding any credits. As the extension occurred in the middle of a tax year in which the surcharge would not have been in effect, the legislation exempts taxpayers from interest on underpayments of estimated tax for the 2023 tax year due prior to June 12, 2023, that resulted from the surcharge extension.
Under current law, Connecticut imposes a mandatory PTE tax on entities that do business in Connecticut or have income derived from or connected with Connecticut sources. Although many states have enacted elective PTE taxes, Connecticut is the only state that adopted a mandatory PTE tax in response to the federal enactment of a $10,000 annual limitation on the deduction for state taxes paid. Beginning with the 2024 tax year, the PTE tax will become elective, and taxpayers making the election must provide the state with written notice for each tax year they make the election no later than the due date for filing the return.
A PTE entity calculates its tax under current law using either the standard base method or an alternative base method, multiplied by 6.99%. Under the standard base method, the PTE is taxed on all of its Connecticut source income (less any source income from subsidiary PTEs). Under the alternative base method, the PTE is taxed on: (i) the portion of its Connecticut source income (less any source income from subsidiary PTEs) that flows through to members who are resident or nonresident individuals, trusts, or estates; plus (ii) the portion of its total income that is not sourced to any state with which the PTE has nexus and that directly flows through to members who are resident individuals. The recent legislation eliminates the standard base method and requires all electing PTEs to use the alternative base method beginning with the 2024 tax year.
A PTE’s nonresident members generally are not required to file a Connecticut personal income tax return under current law for tax years in which the PTE is the only source of Connecticut income for the member and the PTE tax credit fully covers the member’s income tax liability. Beginning with the 2024 tax year, the legislation repeals these provisions and requires that PTEs file a composite return and pay the tax for any nonresident member if the business is the only source of the member’s Connecticut income. Also, PTEs must make income tax payments for the nonresident members if their share of the PTE’s income derived or connected with Connecticut sources is at least $1,000. Furthermore, the legislation repeals the corporation business tax credit for PTE taxes paid but continues to provide the personal income tax credit. Finally, the legislation eliminates the option for PTEs to file combined returns with other PTEs that are commonly owned.
Florida advances IRC conformity, adds new income tax credits
On May 25, 2023, Florida enacted tax legislation, H.B. 7063, which advances the Internal Revenue Code (IRC) conformity date, enacts new income tax credits, provides sales tax exemptions, lowers the business rent tax, and delays imposition of the natural gas fuel tax.
Effective retroactively to Jan. 1, 2023, Florida adopted the IRC in effect on Jan. 1, 2023 (previously, Jan. 1, 2022). However, Florida continues to specifically decouple from certain federal provisions. H.B. 7063 also provides new income tax credits for: (i) developers or homebuilders for up to 50% of the cost of certain certified noncommercial, residential graywater systems purchased during the tax year; and (ii) 50% of the cost of manufacturing equipment purchased for use in the production of human breast milk derived human milk fortifiers in Florida.
Effective July 1, 2023, Florida will provide the following permanent sales and use tax exemptions: (i) renewable natural gas machinery and equipment; (ii) specific baby and toddler products and clothes; (iii) adult incontinence products; (iv) oral hygiene products; (v) firearm safety devices; (vi) small private investigative agency services; and (vii) materials used to construct or repair permanent or temporary fencing used to contain cattle. Also, temporary sales tax exemptions from July 1, 2023, through June 30, 2024, are provided for the retail sale for noncommercial use of certain new ENERGY STAR appliances as well the retail sale of gas ranges and cooktops.
Florida is distinctive among states in that it imposes a sales tax on rentals of commercial real property. Commercial real property includes land, buildings, office or retail space, convention or meeting rooms, airport tie-downs, and parking and docking spaces. In 2021, Florida enacted a reduction in the state component of the business rent tax from 5.5% to 2%, effective on the first day of the second month after the Unemployment Compensation Trust Fund reaches its pre-pandemic balance. According to the Florida House of Representatives Final Bill Analysis for H.B. 7063 that was issued on June 1, 2023, the business tax rate is expected to be lowered to 2% beginning Aug. 1, 2024. The recent legislation automatically decreases the state component of the business rent tax from 5.5% to 4.5% effective Dec. 1, 2023, and will remain in effect until the 2% rate takes effect. Finally, the imposition of the natural gas fuel tax will now become effective Jan. 1, 2026 (changed from the previous Jan. 1, 2024, effective date).
Michigan Court of Appeals holds taxpayer failed to adequately request refund
On June 15, 2023, in United States Steel Corp. v. Department of the Treasury, the Michigan Court of Appeals held that the taxpayer’s email to the Michigan Treasury Department did not constitute a claim for refund for purposes of determining the starting date from which to receive interest due. Under Michigan law, in order to trigger the accrual of interest, a taxpayer is required to: (i) pay the disputed tax; (ii) make a “claim” or “petition” for a refund; and (iii) “file” the claim or petition. A “claim” or “petition” does not need to take any specific form, but it must clearly demand, request, or assert a right to a refund of tax payments made to the Department that the taxpayer asserts are not due. Also, to “file” the claim or petition, a taxpayer must submit the claim to the Department in a manner to provide it with adequate notice of the taxpayer’s claim. Interest on refunds is added beginning 45 days after the claim is filed or 45 days after the date established by law for filing the return, whichever is later.
In this case, the Department agreed that the taxpayer was entitled to a refund, but the Department and the taxpayer disagreed about the date on which the taxpayer filed its claim of refund for purposes of determining the starting date for the interest due. The taxpayer sent an email to an audit supervisor contending that the state had mistakenly omitted one of its subsidiaries from its unitary business group (UBG). Because the subsidiary had incurred losses, including the subsidiary in the UBG would reduce the taxpayer’s business income. The email claimed that the subsidiary should be included, but it did not explain the effect that the inclusion of the subsidiary would have on the taxpayer’s corporate income tax liability. Also, the email did not contain an express request for a refund. The taxpayer argued that interest should begin to accrue when it sent the email, but the Department contended that the interest should not accrue until the taxpayer’s written request for an informal conference was received 21 months later. After the Department rejected the taxpayer’s argument, the taxpayer initiated this action. The Michigan Court of Claims denied the taxpayer’s motion for summary disposition and granted summary disposition for the Department. The taxpayer appealed this decision to the Michigan Court of Appeals.
The Michigan Court of Appeals affirmed the lower court and determined that the taxpayer’s email to the Department did not constitute a refund claim for purposes of accruing interest. The taxpayer argued that the email, along with contemporaneous oral communications with the audit supervisor, satisfied the requirements of making and filing a claim for refund that triggered the interest. In rejecting the taxpayer’s argument, the court noted that the taxpayer’s email did not contain any request or demand for a refund. The only evidence of a clear demand, request, or assertion to a tax refund made to the Department was the taxpayer’s claim of an oral request for a refund in discussions with the audit supervisor. Because the claim or petition for a tax refund must be in writing, the oral communication was insufficient. The court held that the taxpayer’s email was not an explicit demand or request for a tax refund, requiring that all formalities of the refund statute be satisfied in order to start the clock on the payment of interest.
Oklahoma repeals state franchise tax
On June 2, 2023, Oklahoma enacted legislation, H.B. 1039, without the governor’s signature, eliminating the franchise tax beginning with the 2024 tax year. Under current law, Oklahoma imposes an annual franchise tax on every corporation, association, joint-stock company and business trust organized under Oklahoma law or doing business in the state that equals $1.25 for each $1,000, or fraction thereof, of the amount of capital used, invested or employed in the state. The repeal of the tax is estimated to reduce annual state revenue by nearly $56 million. This development follows a trend of states modifying or eliminating their historic franchise tax regimes.
Virginia court holds apportionment election may be filed on amended return
On May 23, 2023, in Department of Taxation v. 1887 Holdings, Inc., the Virginia Court of Appeals held that the taxpayer could elect to use the apportionment method for manufacturing companies for the first time on an amended return. Based on a plain reading of the statute, the option to elect the manufacturer’s apportionment method is not limited to original tax returns.
Virginia typically requires taxpayers to apportion income using a three-factor formula with a double-weighted sales factor, but manufacturers that meet certain requirements may elect to use a single sales factor. In this case, during the audit process, the taxpayer advised the Virginia Department of Taxation that it wanted to elect the manufacturer’s apportionment method. The Department denied this request after concluding that a taxpayer cannot make this election on an amended return. The taxpayer appealed these assessments to the Tax Commissioner. After the Tax Commissioner upheld the assessments, the taxpayer filed a complaint in the circuit court. The circuit court determined that the statute was silent regarding whether the election must be made on an original return. By requiring the election to be made on an original return, the Department imposed a requirement not included in the statute. Also, the court held that the purpose of the apportionment election was to promote manufacturing jobs in Virginia regardless of whether the election is made on an original or amended tax return. The circuit court granted the taxpayer’s motion for summary judgment.
On appeal, the Department argued before the Virginia Court of Appeals that the circuit court incorrectly held that the taxpayer could claim the manufacturer’s apportionment method for the first time on an amended return. In affirming the circuit court, the appellate court explained that the plain language of the manufacturer’s apportionment election statute does not prevent a company from electing to use the method through an amended return, and it is not the role of the reviewing court to add such a restriction. The Department urged the appellate court to defer to its interpretation of the statute because it is the agency that administers the tax laws. The court noted that courts may afford greater weight to an agency’s position if a statute is ambiguous, but the manufacturer’s apportionment statute at issue in this case is not ambiguous. According to the court, the plain language of the statute does not prevent a taxpayer from electing to use the manufacturer’s apportionment method on a timely filed amended return. This omission is not ambiguous in light of the legislature’s liberal acceptance of amended returns elsewhere in the tax code. The court held that the Department’s interpretation did not merit added weight because the statute is not ambiguous. Because the Department apparently is not appealing this case, manufacturers that did not make the apportionment method election on an original Virginia return should consider whether upon further review it might be beneficial to make the election on a timely amended return.
Wisconsin repeals personal property tax, authorizes local sales taxes
On June 20, 2023, Wisconsin enacted legislation, A.B. 245, which repeals the personal property tax beginning with assessments as of Jan. 1. 2024. The legislation also authorizes the City of Milwaukee and Milwaukee County to impose local sales and use taxes.
Under existing Wisconsin law, personal property generally is subject to tax, but an exemption is provided for machinery, tools, and patterns, not including those used in manufacturing. This exemption for machinery was effective beginning with assessments as Jan. 1, 2018. Beginning in 2019, the state annually pays each taxing jurisdiction for the amount that was imposed on this exempt property based on assessments as of Jan. 1, 2017.
Beginning with property tax assessments as of Jan. 1, 2024, the exemption from personal property tax is expanded to include all items defined as “personal property.” However, a new statute is enacted to provide that manufactured and mobile homes not otherwise exempt from tax as well as buildings, improvements, and fixtures on leased lands, exempt lands, forest croplands, and managed forest lands are assessed as real property. For purposes of this statute, the definition of “buildings, improvements, and fixtures” does not include any items defined as “personal property.” Beginning in 2025, the state is required to annually pay each taxing jurisdiction an amount equal to the taxes that were levied on personal property based on the assessments as of Jan. 1, 2023. The state estimates that this exemption will have an overall cost to the state of over $183 million in the next two fiscal years.
The legislation authorizes the City of Milwaukee to impose a 2% sales and use tax and Milwaukee County to impose an additional sales and use of 0.4% subject to certain conditions. The new taxes must be approved by a two-thirds majority vote of the local government and the revenue may only be used for specified purposes such as pension-related costs. Under existing law, municipalities cannot impose a general local sales and use tax. Counties currently are authorized to impose a sales and use tax of 0.5% for the purpose of reducing their property tax levy.
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