2024 year-end tax planning: State and local tax update

The following is a verbatim output of transcribing from a video recording. Although the information in this transcription is largely accurate, in some cases it may be incomplete or inaccurate due to inaudible passages or grammatical, spelling and transcription errors.

Kristina Stibrich: Okay, hello everyone and welcome to our tax trends SALT update. I am Kristina Stibrich and I am joining you from our San Jose office representing the state and local tax practice. And today we also have Shannon Bonner with us.

Shannon Bonner: Yes. Hi, everyone. I'm Shannon Bonner. I am a director in the Washington Tax Council Group, and I am in New Jersey.

Kristina Stibrich: Well, we are excited to have our our clients, our friends of the firm and our colleagues with us today to speak about some trends and some 2024 updates that occurred on the state and local tax side by the last couple of years. Standards. From a state perspective, this has been a kind of quiet quarter, quiet year, if you would, but there have been some developments focusing on kind of some oldies, but goodies, revisiting some public law, 86 to 72 cases and some other things we wanted to bring to your attention so you can plan through your year and that's upcoming.

Kristina Stibrich: So, we'll go ahead and get started.

Shannon Bonner: Yeah. Thanks for doing this. So, I think we're going to start with some legislative updates relating to some rates. And actually, so starting with California, California has done this in the past and over this year, in the middle of the year, they passed legislation again suspending the NOL deduction. So, for specific tax payers, so for taxpayers with 1 million or more in net business income or modified adjusted gross income, the NOL deduction is currently suspended for tax years, beginning on or after January 1st, 2024, and before January 1st, 2027.

Shannon Bonner: So it is a period of time, but the NOL deductions are suspended during that time. If you meet the criteria, if you have an NOL that the deduction is denied, the carryover period will be extended depending on the year of the losses incurred. So just make sure you're aware of that. If any of your NOLs are not allowed, just capture that for your carry forward schedules.

You don't respond to it because it will be extended. In addition to the NOL deduction limitation, there are suspension, there is a credit limitation as well for the same time period. But California limits the use of business credits to no more than 5 million in one taxable year unless an exemption applies. So, if you do have credits in California, please be sure to look at what type of credits you have to see if any exemption applies.

It will say the exemptions are pretty narrow. So low housing, income credits, things like that, the PGA credit. But like I said, it is narrow. So, make sure if you have credits, you're looking at them. If you do exceed that 5 million potentially and this does apply to the combined returns as well. And then additionally, there is this option for the same time period. If you have a credit that you're not able to take, the taxpayer can make an irrevocable election to receive an NOL refundable credit. That amount is equal to 20% of the qualified credits that would have been available during that time. If that's something that you're interested in, make sure you're talking to your tax team because there are some nuances related to that and how you make the election and the timing of it.

So, but that is available, I will say, for both of these limitations here. California has the ability to list them earlier than the time period that's listed, but it will depend on their revenue forecast and their big picture financials. So, I don't know that it's guaranteed, but it is a possibility through the legislation itself.

Kristina Stibrich: Yeah. Thank you, Shannon. I think I wanted to call out that this $1 million threshold is applied on a combined group basis. So, although California makes you track your Anna Wells on a separate entity basis and utilize them on a separate entity basis, if you are participating in a combined unitary return with California, the million dollars is on a combined basis and that is after apportionment.

So that's pretty high. You know, if you have 10% of your business done in California. So that's your total taxable income, times the 10% apportionment to get to that threshold. So, it is a pretty high threshold. A lot of taxpayers will still be entitled to use their NOLs. But if you're on the course, you're going to want to pay close attention and do some refined calculations as we look into year-end so that you can make your payments on time.

This is going to have a cash tax impact to you if you're right on that threshold, whether you're under or below something you want to keep in mind. Also, the impacts on financial reporting and considering any planning ideas you might have if you have an opportunity to refine your research and development credit in California, now would be a good time because you can use up to $5 million of those credits.

So, thinking about planning ideas around what maybe you can do that work best for you in discussing that with your engagement team and being ready for any cash and cash tax impacts that are a result of this suspension over the next couple of years.

Shannon Bonner: Thanks for sure. So then moving on to Pennsylvania. So, Pennsylvania also had some legislation that changed their NOLs different than California in that they're actually gradually increasing their NOL on deduction limitation from 40% of taxable income to 80% for NOLs incurred in taxpayer beginning after December 31st, 2024. They're increasing it in increments of ten over the next few years.

But there is a calculation associated with the NOLs. You'll see on the screen here. The calculations, I think big picture takeaway here is that the NOLs incurred before January 1st, 2025, will still be limited to 40%. So, if you NOLs that are going to straddle those years, you should be aware of that because then there'll be a calculation to understand what amount you can take related to the pre 25 NOLs and then the post 25 NOLs.

So that's really just something to keep in mind. If you have NOLs in Pennsylvania, the limitation is going to increase. You need if you have historical NOLs, you might want to take a deeper dove into what this calculation means for your overall ability to use them prospectively.

And this is really welcome news. I'm excited to see this increase, although they could have, you know, maybe done it in a simpler manner. This is very welcome because the NOLs have been limited in Pennsylvania since 2018. So, we do see a lot of taxpayers that have built up large NOL balances in Pennsylvania. Maybe they've been utilizing them all through in other states, too.

Kristina Stibrich: They've only got Pennsylvania NOLs built up because of this limitations is 2018 now. So this is really exciting news and by 2029, they're going to be in line with the federal 80% net operating loss limitation simultaneously. Pennsylvania is also dropping their tax rate from a pretty high 8.9 down to a 4.99% tax rate. So, considering the value of those NOLs when they're going to be used at the same time is something worth considering when you're valuing your deferred tax assets that you have on your financial statements going into this year and.

Shannon Bonner: The next one making adjustments would be Illinois. So, Illinois not as complicated as Pennsylvania, thankfully. But in June of this year, legislation was enacted limiting the net loss deductions for corporations other than escorts. So that's important for taxpayers ending on or after December 31st, 2024, and before December 31st, 2027. So, the NOLs limited now to 500,000 when previously it was 100,000.

So that has been raised. And then Minnesota. So, this one happened. Hopefully you all captured this, or you caught it this year, but if not, we just wanted to flag it for you in that earlier this year, Minnesota retroactively changed the effective date, they're going to reduce the corporate net operating loss deduction limitation. So, you know, we're going to change the state, but they retroactively changed it.

That made it a little bit confusing. But for taxes beginning on around 31st, 2017 and before January 1st, 2024, the NOL deduction is limited to 80%. And then after that, it goes to 70%. So, something to just keep in mind, if you had NOLs in Minnesota. So that brings us to our first polling question, which is, does your company have in or else.

Kristina Stibrich: We wanted to lead off with the NOL suspensions just because that does impact our extension filings that are going to be upcoming or financial statements and any tax planning ideas that you can do around maybe some of your activities in these states.

Shannon Bonner: Okay. So it seems like a fair amount of people on the presentation here. Do have an allowed so, you know, to take the time to look at all of these changes in addition to some other states that have extended their NOL carryforwards, which is Connecticut in Rhode Island. And, you know, just be sure to update your NOL carry for its schedules or schedules, you know, like in real time, it's usually a little bit easier to do that as you're in the weeds of the legislation.

But of course, reach out if you have any questions related to that. So, I think we can move forward. So, turning over to a little bit of more of a rate change kind of perspective here. So, New Jersey previously had a corporate surtax. It had sunset and now this year, again, it has reinstituted the corporate surtax, but in a little different manner in that hopefully it will touch upon much last group of taxpayers because the threshold is much different this time, but specifically for tax years, beginning on or after January 1st 24 and through December 31st, 28,

the two-and-a-half-year tax is back.

But it is only for taxpayers that have Jersey allocated taxable net income in excess of 10 million. So, this is in addition to the normal CBT rate. The second half percent is on top of it, but it should, like I said, be less taxpayers this time because of the 10 million thresholds as opposed to the previous 3 million threshold.

The surtax is not imposed on any groups of public entities. So just keep that in mind if that is your business. But if you do meet that threshold, just keep it in mind because it's back again for New Jersey. That's the biggest probably discrepancy there. But there have been other states that have enacted corporate rate changes in 24.

So just what you're going through here and planning, make sure you're just capturing the most recent rate changes over the years. I think, A, it would be Arkansas, Colorado, Georgia, Idaho, New Mexico and Utah. But make sure you're looking at all of them. Do not probably be as big of a swing as New Jersey, for instance, but it will be something to keep in mind.

Kristina Stibrich: Yeah. Thanks. Well, New Jersey is really intending to focus on those largest taxpayers in the state. Again, like I said, for California, this is a portion, $10 million. So, this is quite a large threshold here to which it would apply to a hopefully a smaller population of taxpayers. If you had been paying the New Jersey surtax, maybe you no longer have to use it.

We wanted to get that onto your radar while these other states are kind of a mixed bag, some are increasing their tax rate, some decreasing their tax rate. But generally, I have seen kind of a trend of some decreasing tax rates. And there is some exciting news in Louisiana, which just finished its special tax session last week, didn't even make it onto this chart yet and expected to be signed by the governor in the next couple of days, which is bringing that to a flat tax rate as well, a reduced flat tax rate. So good news there.

Shannon Bonner: Yeah, definitely. Okay. So, moving on from, you know, attributes and rates, just some more legislative updates but more really to define composition. So, for Washington, D.C., they are transitioning to the Finnigan method of apportionment. A few states have been trying to change from the choices of Finnigan, and DC is now, one of them as well. It is for tax years beginning after December 31st, 2025.

So, a combined group of entities will be treated as one taxpayer for sourcing of unitary receipts. And the apportionment factor, the numerator will be from all members of the combined group, regardless of whether a member has nexus in DC. So just, you know, standard Finnigan really approach here. But they're moving from Joyce to Finnigan. So, if for your combined reporting, that's something to definitely keep in mind in D.C. in the future.

Kristina Stibrich: For anyone who might want a little bit more background on Joyce and Finnigan, apportionment happens to be one of my most favorite topics to speak about. I could probably do this entire remainder of the hour on apportionment. Enjoy something again. But I'm going to not do that. But I'll touch a little bit on Joyce. And then again in the history there, Joyce and Finnegan both were California cases.

So, California, like Washington, had flipped. It was Joyce meaning that each separate entity was respected as an entity back in 1966 in California. So, if maybe only one of your entities had that nexus with California, the only that entity contributed to the apportionment that's applied there. So really a separate entity, if you had a public law, 86 to 72 protected entities, that entity would not be subject to tax under the Joyce rule, which is historically the District of Columbia's rule.

So now they're moving to Finnigan. Finnigan, also California case, but applied throughout all of the states says you look at the combined group of entities as a single taxpayer, so once one entity has annexes, then all entities are contributing to the numerator and denominator of the apportionment factor. So, I like to think of this as then again as equal family.

So, you look at it as one taxpayer where Joyce you respect the nature of each individual entity. So, in District of Columbia factor right now, if you had only one entity previously subject to tax, only that entity was contributing to the numerator. Now, under the Finnegan rule, if one entity is subject to tax, they all are subject to tax to the full family of entities and they're going to get pulled into the apportionment there. So, this could really have some impact, especially if you have any public law protected entities within your combined unitary reporting group.

Shannon Bonner: Yep. So then moving on to South Carolina, so they made a combined

reporting change. They're a separate state. But, you know, South Carolina did have the ability

and the DA had pretty broad discretion to require combined reporting if it felt that the affiliated group wasn't very representing its business in South Carolina. But due to that broad discretion, you know, it posted on it.

And there had been some recent cases related to that. But this legislation now kind of put a little bit of a stop to that in that it raised the bar a little bit and made a little more clarity. And when you do that for South Carolina purposes, so it revises corporate income tax law relating to the process for required combined reporting.

It provides guidance for alternative allocation and apportionment and details when the DOJ can require that. And now the taxpayer will also be involved in understanding what entities will be pulled in, so it won't be as broad discretion is anymore, and it does provide a much more comprehensive framework for requiring combined reporting. And these changes do apply to all open periods, excluding assessments under judicial law.

As of March 11, 2024. So this happened earlier this year. So again, South Carolina is a separate state, but it is something to keep in mind if you have a large, affiliated group that, you know, under audit, they may look at that holistically as the big picture.

Kristina Stibrich: We are generally of the opinion that this is a really positive development. So, across the states, almost all of them have the ability to adjust income, require alternative apportionment or combined groups, should they determine that your filing does not fairly reflect your actual business activity in the state? Almost all of the states reserve that authority to do that.

So really giving them procedures, requirements and hopefully bringing some equity into when they can and can't on behalf of the taxpayers and require this combined reporting or alternative apportionment.

Shannon Bonner: Okay. Colorado is another state here, but this one is with the combined reporting rule change. Historic. This was earlier this year legislation was signed. Historically, Colorado has employed these three of six unity tests. This is a unique test to Colorado. It's often difficult to apply for taxpayers. So, this, again, is likely a positive change for taxpayers in that his will be much more simplified.

Now that three of unit six units has previously had it for the current year in the two previous years. And then from that, you can understand whether or not a combined return would be filed with specific entities. So, this legislation enacted a new combined reporting set standard which simplified this, and it really brings it in line with other states that have similar reporting combined reporting standards.

So again, this test was unique to Colorado. And now with this new legislation, it should be much simpler to understand what entities should be included in the combined return.

Kristina Stibrich: Yeah, this is moving to a much more standardized multi state tax commission model rule approach that now allows instant unity. Previously, the concept of instant unity, meaning you acquire an entity, it merges into your group, you have management, functional integrations, all of the common things with a unitary relationship. But in Colorado, you weren't able to participate in the unitary return for that acquired entity until you had met these three of six passives unitary in the current year and previous to.

So, the Instant Unity concept didn't previously really exist in Colorado. Now that we're moving into more of the model Multistate Tax Commission rule, instant unity can occur and an entity acquired would, if it meets the test of unity. Generally, may become instantly unitary with the remainder of the group in Colorado.

Shannon Bonner: Yeah. So the next legislative change is really in response to this Microsoft decision in California. So we're just going to take a couple of minutes here to discuss the actual decision, and then we'll talk about the legislative apportionment change that was in response to it. So this Microsoft decision, it was of last year, the Office of Tax Appeals in California ruled in favor of Microsoft.

It had allowed the 100% of its qualifying core and dividend receipts to be in the California sales factor denominator. So not the net amount after the drop, but the full hundred percent was included in the denominator on its waters edge return. And as a result, Microsoft was entitled to about 94 million corporate tax refund. So that was a really big taxpayer win at that time.

And then so assets in turn have to be filed a petition for a hearing. But earlier this year it was denied. So they upheld their original ruling that Microsoft couldn't include the full 90% of dividends in the denominator. So this, like I said, was a big taxpayer win. But it did decide to deem this non-presidential. So in other words, it was specific to Microsoft.

And for that reason, you know, that added some complexities to it because, you know, a lot of taxpayers saw it as a great opportunity. But then in response to that, there was legislation. Kristina, do you want to add anything to the case before we head to the legislation.

Kristina Stibrich: No, I think that's great. Let's go.

Shannon Bonner: Okay. So then in response to this legislation, California wanted to solidify their position on this. So they passed a law that modified the enforcement language stating that a transaction or activity extent that generates income or loss and that's not included in that income. So that apportionment will be excluded from the apportionment factor. So essentially, they said that this was not it was in there.

They said that this is always their policy essentially based on this legal ruling. This is just clarifying it for everyone. And now it's here in the legislation. The legislation does say that it's for taxable years before, on or after the effective date of legislation. So essentially it's retroactive without a timeline. So for that, there's been a lot of response to this.

There's a few cases being tried in court now that's brought against this legislation for a few different reasons, one being the retroactive nature of it without a timeline. So we'll have to see what happens with that. But this has been a big case in California for the last couple of years here. And then, you know, their response.

Kristina Stibrich: This is a big deal for taxpayers with foreign dividends coming in. You know, when Microsoft originally passed, I think everyone was thrilled with this idea that we can include our entire dividend distribution in the denominator of our apportionment factor. You know, maybe not something that was immediately clear on the face of the statute.

So we're all excited to see this up, but also, you know, hesitant like, oh, okay, maybe maybe this is going to get challenged. The Franchise Tax Board has a bit of a history of maybe issuing guidance outside of its authority to do so. This isn't the first time we've seen California do that. There's another challenge later on that we're going to talk about with regard to public liability, 60, 72 in California.

So I'm excited to see how this shakes out after the taxpayers challenged it. I'm glad to see taxpayers, you know, challenging things right now in California that really are taxpayer friendly. Microsoft won this case on its merits. That's what the statute said. And so for the Franchise Tax Board to go back and retroactively change legislation, it does seem like it could use a little bit more of a judicial review here.

So I'm excited to see how this shakes out. And we will be ready to share with you as soon as it does.

Shannon Bonner: Yep. And it will take some time, but as soon as it does and we'll be tracking it in the meantime. So moving on to just another compliance updates and then just a couple reminders as well as we're looking towards the end of the year here. But so related to bonus depreciation. Nebraska earlier this year decouples from federal law and it provided for immediate deduction is 50% for property placement service after December 31st 2024 and then for 163(j) this is an opportunity for taxpayers in that for tax years 2021 and beyond.

Kansas is now decoupled from the Federal Code and allows a deduction for the current year interest expense in its entirety rather than the amount that was previously just under TCJA a tax cut. As a result of that can transfer guidance. The taxpayer can amend its 2021 return to adjust the amount of interest deduction for that year and in one time receive the amount that it would have received in the current year provisions and had it been operating in earlier years.

So that one is an opportunity in addition to just an update. So something to keep in mind if that applies here to you.

Kristina Stibrich: It's the bonus depreciation has historically not been you know, the most challenging concept is state adopts the state doesn't adopt bonus depreciation, but now we're seeing it get a little bit all over the place. So some states are still allowing 100% bonus while federally you're only allowed 80, some states are not allowing bonus at all. So we're seeing these modifications related to bonus depreciation, not just in Nebraska, but in other places as well.

Get a little bit and a little bit more complex. So thinking about other states such as Mississippi and Oklahoma that are allowing at 100%. But while federally you only get 80, Nebraska changing its position here as well. So it is something to consider because it's really not as standardized as it has been over the past couple of years where the states either all adopt or they decouple.

Now we've got a little bit more of these state specific calculations that need to be performed, encapsulated and tracked for various purposes, you know.

Shannon Bonner: Okay, so this will quickly hit upon, but just wanted to make sure everyone's aware of it in the event that it does apply. So obviously over the past year there's been, you know, some hurricanes, Helene, built in other natural disasters of course, but this one really focuses on that in that those taxpayers in those states Alabama, Florida, Georgia, North Carolina, South Carolina and then parts of Tennessee and Virginia, they're eligible for disaster relief.

These taxpayers, they'll have till May of next year to file various federal individual business returns. And then this does include the 2023 filings, but then also the ones in the spring. So just wanted to make sure that you make everyone aware of that, that this is still ongoing for future filings as well in the spring. There are additional disaster reliefs on the IRS website as well.

So just make sure that you're always tracking that in case it does impact you. And then this is the federal relief. So then what's the state's response? Most of the time, the states will follow, sometimes will put out their own guidance, while others you do have to request it. So that's just something to keep in mind. If your tax if you do qualify for that, you know, you might have to reach out to the state to understand their process for getting the same extension as the federal one.

But generally they'll follow if they haven't already put out their own guidance. And then here's just a couple more reminders.

Kristina Stibrich: A couple more reminders that we're seeing big impacts to taxpayers as we look at our year end planning. Massachusetts, they passed a law a couple of years ago that they're going to move to a single sales factor for apportionment from its historic three factor in some cases. And if you're in a special industry, you may have already been on a single sales factor apportionment in Massachusetts, such as manufacturers.

But this is a big impact for other taxpayers who are now going to be sourcing solely based on sales apportionment. So you may have been enjoying the benefit of the relief of maybe you're not a property heavy company in Massachusetts, maybe you don't have a lot of payroll in Massachusetts. So using a multiple factor apportionment formula is kind of served for some dilution.

Now that that's going to be going away in 2025, we want to make sure that this is on everyone's radar just to recalculate that apportionment factor, because I am and, you know, on our client that we're actively working on seeing big changes in apportionment. The other interesting thing that's come out is Massachusetts has issued a technical information release classifying software developers as manufacturers.

Now that that's going to be going away in 2025, we want to make sure that this is on everyone's radar just to recalculate that apportionment factor, because I am and, you know, on our client that we're actively working on seeing big changes in apportionment. The other interesting thing that's come out is Massachusetts has issued a technical information release classifying software developers as manufacturers.

And they succeeded in that and did get to use a single sales factor. Well, that's great for our Massachusetts companies, but for those who are outside, it's not necessarily a benefit to go to single sales factor. So Massachusetts has been auditing software manufacturers, has been assessing a single sales factor that they are a manufacturer, in fact, and should have historically been using single sales factor.

So this comes up if Massachusetts reached out, if Massachusetts has questioned you please please let us know. But it's something to keep on the radar that Massachusetts is applying this to our software manufacturers and developers as single sales factor. But everyone's moving to single sales factor in 2025 and we're seeing some big impacts. I just wanted to offer that reminder.

Shannon Bonner: And sticking with Massachusetts, in the event that you are reviewing you, you there is an amnesty program. So if you notice something that maybe isn't right or if you received a letter from Massachusetts because they did send out letters to taxpayers that may be eligible for the amnesty program, the amnesty program is a short period. So it's going on right now starting in November, ending at the end of December.

Kristina Stibrich: And it does offer a lot of benefits if you for a lot of different taxpayers. This encompasses most tax types in Massachusetts and it does, you know, have penalty relief if applicable. And, you know, it does way to look back, things like that. So to the extent that you're looking at anything in Massachusetts and you notice maybe you need to clean something up there is this amnesty program going on right now.

Shannon Bonner: So it is a very truncated period of time. So you don't have to jump on it pretty quickly, but it's just something to be aware of. And if you did receive a letter, that's why they're sending out letters relating to the program. Okay. So shifting a little bit to PTET much spend too much time here either. We will talk about PTE regime later on, just maybe what the future looks like a little bit, but just some quick reminders about it.

Rhode Island recently had legislation that after January 1st, 2025, the credit for owners of a PTE is reduced to 90% from 100% of the amount of tax paid by the PTE that passes through to the owner on a pro-rata basis. So while the PTE regimes have been in place for a little bit, states are still making adjustments to the regime and what that looks like.

It might be a rate, it might be the credit. So definitely keep an eye out for any changes that have happened because they are ongoing as the states continue to work through this. Nebraska had previously enacted their PTE regime but allowed for retroactive back to 2018. So if you're still contemplating that for Nebraska, those elections must be made by the end of next year.

Essentially. So there are still states allowing for retroactive. I think Nebraska may be one of the last ones, but just something to keep in mind. And then the election due date, that's something to just be aware of in these regimes in that some states have some quirky election due dates. You want to make sure that you're mindful of them in that New York is March 15th and then California has that rule where you have to make up for the initial payment by June 15th, be able to elect into the party.

There were some bills this year relating to that California provision because acknowledging essentially that this is burdensome on taxpayers, but they didn't go anywhere. So that is still in place right now. So again, if you file any returns or not, just be aware of any changes that happened this year as it has been ongoing with some rate changes and things of that nature. So now in our next question, did your business utilize a disaster relief filing extensions?

Kristina Stibrich: Looks like there’s a few who did. Glad that's available to those who are impacted. It was a crazy year.

Shannon Bonner: Yeah, for sure. We'll give it a couple more seconds before we move on. Okay. I think we'll move on if you're finishing up the poll. But the next discussion I would have, as Kristina indicated earlier, is around 86 to 72. So this topic is actually very old. The law was in place back in I think is 1959.

It's a federal statute that limits the state's ability to impose an income tax on specific taxpayers, namely those that are there for solicitation of tangible personal property only. And then if it's fulfilled in a very specific manner. So this statute has been in place. It still is in place unchanged. But you know, what is solicitation and what does that mean? Has really been an area of concern and a bit of, you know, uncertainty in that there's different interpretations. And we'll through those as we go through the next few slides here. But, you know, the NTC has given guidance historically about what would be protected activity and what they're not protected activity. The states generally have their own guidance as well.

But when this law was instituted, it didn't contemplate businesses. Now, this type of economy where we're doing a lot of online things and we're interacting with customers in different ways as opposed to specifically going into the state or soliciting orders face to face. So with that, the NTC back in 2021, you know, they had put out a revised statement that discussed the Internet activities related to 86, 72 and what examples could be on protected and protected activity as a result of that statement?

It's been a bit controversial and some states have put out their own guidance, generally adopting it. While most are very silent on the matter. But, you know, because of this, it's led to some uncertainty in the area applying this. So California started with California and this is what Christine was referring to earlier, had previously issued two different guidance, the ten, 22, a one, and then publication 1050 a few years ago.

And then a group of taxpayers, the American Catalog Mailers Association. So ACMA, you know, they filed suit against this for a few different reasons, but ultimately the guidance was found and deemed to be invalid in that on a procedural matter, essentially it wasn't adopted in the appropriate manner in the APA requirements. So that guidance at this time, this current year, they no longer appealed.

It has been invalid, it's still is, it's void. But this was based on a procedural kind of overturning the guidance as opposed to technically whether or not it should be applied on the face of 86 to 72 itself. So with that, we moved to New York. So the end of last year, New York had put out their regs that had gone with their corporate tax reforms in the back of 2015.

So it was definitely a substantial gap. But within there they had guidance for lean to 86 to 72, and it generally was in line with that entity statement related to Internet activities. So in response, this same group, American Catalog Mailers Association, had filed a complaint this year requesting that the revised regulations be deemed invalid, so for a few different reasons.

But one of them being that New York has made these regs retroactive so for a pretty long time retroactive even past when this MTC statement came out. So we're retroactively applying something that the guidance wasn't even out at. And then just holistically, you know, the argument is that the states are trying to rewrite in 60, 72 when they don't have the ability to do that.

But one of them being that New York has made these regs retroactive so for a pretty long time retroactive even past when this MTC statement came out. So we're retroactively applying something that the guidance wasn't even out at. And then just holistically, you know, the argument is that the states are trying to rewrite in 60, 72 when they don't have the ability to do that.

That's not in their power. This will take some time to get through the court system, obviously, but it is something to watch because this one, hopefully we'll be able to get more information. As far as the technical answer relating to applying a 67 to as opposed to California, that was overturned on a procedural matter. So this one is just started this current year in April and it is working its way through.

So we'll be you really waiting for the outcome of this to see what happens. But it will take some time. But it's interesting in New Jersey, the only other state that I believe that has formal guidance related to this. So these are the three right now and two of which are contested. So we'll see what happens with that and we'll talk about it a little bit further after these two cases.

So now there are those two related to the MTC and related to Internet activities. There are still cases that are contested relating to taxpayer and just their solicitation activities in a state. So just on the simple grounds of age 67 to itself, this Minnesota case was one of them. So a new line. So just a little bit of a background.

The taxpayer was and as corporate, it's all products of personal property essentially that were shipped in Minnesota and had no offices at facilities in Minnesota, but it did employ sales reps to go visit Minnesota customers and solicit sales. So among their activities in soliciting sales, they prepared market news reports. So that was a big focus of the case because the market news reports included detailed product information and such as manufacturer and brand competitors, products, pricing, lead time payment terms, a lot of different information outside of what you may use just to solicit sales.

And what's important here is also these market reports were used by the sales team, but other departments as well. So it was not just for soliciting sales. Obviously, if other departments were using that information as well. And they were pretty systematic. There were a lot of them. It wasn't a one off thing. So all in this, the court concluded the Supreme Court of Minnesota explained that those market restraints assigned to the sales team went beyond solicitation of orders, and because of that, they were not protected by age 60, 72, and then subject to tax.

So this is more of a different look at 80 602 where this is purely interpreting solicitation in the sales of those activities. But they work together and it's still under the same statute. So that's just a look at what, 80, 67 two case and a recent one that came out may look like. And what that could have impact for all taxpayers depending on their activities are a similar case was in Oregon in that the Oregon Supreme Court affirmed a tax court decision holding that cigarette manufacturer activities which included taking pre-book orders from Oregon.

Real time retailers exceeded the protection to be 6072. So for that reason they resorted to income tax essentially the previous orders facilitated the sale on behalf of the wholesalers and for practical purposes, Arnie committed to the sales once they made this pre-pack order. So for that reason the court found them to exceed the protection really. 1672 This case is interesting because actually they petitioned the Supreme Court about a month ago to review this case and that's honestly huge, whether or not the Supreme Court takes it up or not.

But they, you know, are asking the court to look at both their tax, their activities in the state, whether or not they're protected. But then as a whole is 60, 72, you know what's going on. It's very inconsistently applied among the states. You know, within statement, it's causing confusion. You know, just really want some more clarification in what truly is protected activity and what is not.

As you can see from, these last few slides, you know, a very old statute is having a lot of focus on it lately because it is consistently inconsistently applied among the states and it is difficult for taxpayers at times to apply it correctly. So clarification will be huge, especially in the Supreme Court. And then interestingly enough, there was a bill, a federal bill this year to mend the definition or create a definition, rather, of solicitation of order or solicitation, but that didn't go anywhere at this point.

So we're kind of left in this holding pattern right now, seeing what happens. But it is an area to watch because it is inconsistently applied, like I've said. And it's, you know, it's very fact based analysis for taxpayers and clients and yourself to understand whether or not. This does apply to your business. And if you don't apply it correctly, it could have legitimacy. So we're definitely tracking where it's going. And there has been a lot of movement lately.

Kristina Stibrich: Yeah, I think this is I mean, getting feedback very public like 60, 72 has been around since 1959. As you said, to see four cases in one year addressing it is a bit unique. I don't think there's been four cases per year in some time addressing public i.t. 1672. But this is a protection for taxpayers and taxpayers. And if you're entitled to this protection, we want to make sure you're getting it.

If you've been taking it, it's something you really need to review regularly. We can't set this and forget it because this is very narrowly applied by the state law. And in Minnesota, the Uihlein case where the market report exceeded it, a commitment to an ordering or against Internet activities in New York. Internet activity is going to include answering the customer inquiry on a chat.

So if you have a chat function in your website and a customer reaches out for a question, if you remotely answer that through the Internet, that's exceeding activity. That's purely solicitation in the state, that's providing post-sale support at that point, which would be outside of protection. So it's something that we really want to just urge taxpayers who are taking this position to take it cautiously and to document the reasons fully why?

Because if a state does choose to disagree with the position, it could be a costly event at that point. So it's not a set it and forget it. It should be taken with caution. The state will very narrowly apply it. And we just want to make sure that that's on your radar. If you have been taking it, maybe it's time for a review of what you're doing in a state.

If your business has changed, if you've maybe tipped over the threshold of what is up, your solicitation of sales at all and make sure that it's regularly reviewed. But if you do qualify for this, you also want to make sure that you get it because it is something been in place to protect taxpayers since 1959.

Shannon Bonner: Yeah, thanks for that. And just to add to that, some states might not have clear guidance specifically related to the Internet activities, but they may apply it either. So just make sure that when you're going through those type of processes that you're reaching out and understanding what the questions are being asked and what the implications of the answers may be.

Oh, third point question do you claim I to protection in any state is no, there are some yeses, so definitely keep an eye on all of this that's happening in addition to a clear headset as far as review of the activities.

Kristina Stibrich: The Supreme Court picks this up. This might be our state tax Super Bowl over here.

Shannon Bonner: We I think there's still some responses trickling in, but definitely that's fine if you do have the CPE. But we will just keep growing in the interest of time while you finish responding. Okay. So the election tax trends, so obviously for good reason, the election is at the forefront of a lot of discussions. The federal election will results will have obviously an impact at the federal level.

But it will also have an impact at the state level depending on what happens at the federal level. So while the state level, you know, does it has different laws related than the federal two states often will follow, you know, on these returns different rules from at the Fed level. They do that through IRS conformity. So states may be rolling conformity in that.

They just continually agree with the IRS. They have selective conformity. So there's different ways or fix conformity. So there's different ways that the state can adopt the RC. And depending on what changes are made in the Internal Revenue Code, it will depend on whether the State it. So it's important that we know what that is so that when we're applying certain rules in our returns or understanding if there's any modifications required or not, depending on the states conforming, another hot topic is the salt cap.

So the salt cap is also at the forefront of discussions in that, you know, it may be in the sense that may happen. It may happen at the end of next year or it may change completely. They may just adjust the cap still TBD. But what does that mean for us? It means that all these regimes have been put in place in response to this.

You know what does that look like? Some of them legislatively tie into the sunset from the federal perspective, while others have their own sunset legislatively, maybe a year or two later. So we just seem to understand that if you filed returns prospectively, what does that look like and where is that? Where does the state statute stand as far as if it sunsets or not, in what those implications look like is it's still beneficial, essentially.

Kristina Stibrich: While this year has been a little bit of a holding, holding pattern, addressing some old cases like public law, 82, 80, 60, 72, we are likely not going to see the same next year and there will be a load of updates. We might even have to make this to hours next year. But the way the states are going to adopt what happens federally is is generally within three buckets of state.

We're going to have our rolling conformity states. And these states always adopt whatever the Internal Revenue Code is always at any time. If it changes on December 27th, on December 27th, they will adopt that code and then they may or may not specifically then decouple further. So just because it always adopts the Internal Revenue Code, it doesn't mean that the state may not then decide to decouple from a specific provision our next bucket of state type of state conformity, and that requires the state to legislatively act in order to adopt the code as a specific date.

So they may adopted as of one 125 one 124 one 120 311. I think California still in 2016 adopting the internal revenue code as of that date. So those are state conformity buckets. And then we have our selective conformity bucket of states. These are the fewer there's a fewer amount of states in this bucket and they only adopt specific provisions of the Internal Revenue Code.

So we want to be sure that we are kind of keeping track of when a federal change happens, whether that state's going to immediately adopt it, whether they need to legislatively adopt it, and what needs to happen there. So we're going to be watching a lot of things very closely into next year and how it impacts our states, our state filings, the complexity around states.

Some of you might remember the TCJA ad that was the gift that gave us Christmas 2017, and we were all here trying to figure out not only the impacts from a federal perspective, but from the state perspective as well. And this really the way the states adopt the Internal Revenue Code is really the driver for how that happened, and we will be keeping an eye on it very closely as we move forward.

Shannon Bonner: Yeah, thanks for that. So moving from the federal piece of this, you know, the states did have elections obviously in each state as well. And on those ballots included a lot of state tax initiatives. You know, there's a broad range of what they included, you know, sales tax, property tax, income tax. You know, that was different. Each state depending on what was in there.

But there were a few that were pretty large ones with the central California proposition. And so this related to the city of San Francisco. So San Francisco itself has a lot of it, taxes imposed at the San Francisco level being Grocery C taxes. So this proposition was approved by voters and it does take effect on January 1st, 25.

So relatively soon actually. And it had a lot of changes. The gross receipts tax increase, the exemption for small businesses to 5 million. It changed the calculation of. GROSS So it's based more on sales, less on payroll. So, you know, historically, if you had people working there that had a big impact, so now that's a little bit of a shift.

And then the business activity classifications were reduced to seven and then the adjustment of tax rate that in most categories the tax rate was adjusted. So the Home Office gross receipts, so they did adjust the tax rate, but they also decreased the applicability of this threshold from 50 million to 25 million. And then the overpaid executive tax, the modified the calculation of it and the changes in applicability.

So I mean, this is very, very detailed. So I would just kind of suggest that if you do business in San Francisco and you file these these taxes, or maybe you should be just take a look at it, maybe model it out. What does that look like for you prospectively with these rate changes and the classification differences in the thresholds?

Because a reduction in threshold, maybe you don't have to file anymore or the increasing in the threshold, you don't spend more. You just have to look at what happened there and you applicability to the business and then Illinois. So this one was a non-binding measure, but Illinois had asked whether just to gauge the public opinion, if Illinois Constitution should be amended to create an additional 3% tax on income exceeding $1,000,000 to generate revenue for property tax relief.

So they did approve this. Voters approved this. So we would just have to see what happens in the future relating to that. But that one was approved. The next two were rejected, but they were pretty large measures. The first one was Washington. So the Washington capital gains tax that was with this question related to whether or not that should be repealed or if it should continue to remain.

It was rejected. So the capital gains tax still remains. The voters chose to keep the capital gains tax, which currently applies to certain long term capital assets, going to individuals over specific thresholds. So that one was rejected so that the Washington capping tax has remained there, maybe changes to it. We'll keep an eye on that in the future now that the state knows the voters to approve it and it is approved by the public.

Another one was Oregon. It was rejected. So this one was whether or not to create a new 3% tax on businesses approved sales exceeding 25 million. This would have been in addition to the other taxes in Oregon. Oregon has a few different taxes, so this would have been in addition to it that was rejected. So that did not pass.

There were many other ballot initiatives, but, you know, those were some of the larger ones. So we just really wanted to discuss that. Obviously, the federal election was hugely important, but also the state, local ballot initiatives can have a huge impact as well. From the state perspective, I think we're in our last polling question in case anyone miss one, would you like someone, somebody to reach out to you?

Kristina Stibrich: And since they're very we're right on time today. Shannon, there's a question that came in about requiring clients to report a liability in California if they're not currently registered in California. And I think this is easier to just speak through rather than out. But it depends, which is a very stateful answer of me. But it depends, our standard is if you're more likely than not that the liability has been incurred in the state if the liability is above a posting threshold.

So there is a couple depending factors there on if a liability would be required to be recorded if you're not currently registered in California. Happy to chat through it if you have specific questions in your engagement team.

Shannon Bonner: So I think everyone is still answering but we're almost there, but this is the end of our presentation. So you know, thanks everyone for joining today. If you have any questions, feel free to reach out to personal privacy. I really appreciate you taking the time.

Kristina Stibrich: Yeah, thank you very much. Enjoy the rest of your day. Thank you.

Shannon Bonner: Thanks.