February 2024 state and local tax update

While state income tax is generally the focus for most taxpayers, there are many additional non-income-based taxes imposed at both the state and locality level which can be material, depending on the facts of a taxpayer.

Two significant non-income-based taxes with notable updates include the Ohio Commercial Activity tax and the Washington Capital Gains tax.

Ohio Commercial Activity Tax (OH CAT)

House Bill 33 enacted multiple changes to the OH CAT beginning in 2024. Specifically:

Annual exclusion

• For calendar year 2024, the exclusion amount is increased from $1 million to $3 million.
• For calendar year 2025 and thereafter, the exclusion amount is increased to $6 million.

Annual filings eliminated

• Annual filings are eliminated after the 2023 annual return, which is due May 10, 2024.
• Only quarterly returns may be filed for tax periods beginning on and after Jan. 1, 2024.

Minimum tax eliminated

• Effective for tax periods beginning on and after Jan. 1, 2024, the OH CAT annual minimum tax is eliminated.

Impact to taxpayer’s account/returns

Annual taxpayer’s

• An annual taxpayer that anticipates having $3 million or less in taxable gross receipts in 2024, should cancel its account effective Dec. 31, 2023.
• An annual taxpayer that cancels its OH CAT account must file a final return for 2023 due May 10, 2024.
• If an annual taxpayer expects to exceed the $3 million threshold in 2024, quarterly tax returns will be required.

Quarterly taxpayer’s

• Any quarterly taxpayer that anticipates having $3 million or less in taxable gross receipts during calendar year 2024, should cancel its OH CAT account effective Dec. 31, 2023.
• A quarterly taxpayer that cancels its account as of December 31, 2023, needs to final a final OH CAT return. For a quarterly taxpayer, that is the 2023 fourth quarter return which is due Feb. 12, 2024.
• Note: if a taxpayer exceeds the exclusion amount in a subsequent year after cancelling its OH CAT account, the taxpayer must reactivate its OH CAT account and resume filing.

Group taxpayer

• The exclusion amount is applicable to a taxpayer’s taxable gross receipts. Combined and consolidated elected taxpayers are treated as one taxpayer and must consider the taxable gross receipts of all members of the group in determining whether the taxpayer group will exceed the exclusion amount detailed above.
• Note: excluded intermember receipts are not considered when determining whether the taxpayer has exceeded the exclusion amount.

Observations: Historically, many taxpayers were subject to the OH CAT due to the imposition of a minimum tax and a low receipts exclusion of $1 million. However, the changes detailed above may eliminate the requirement to file the OH CAT entirely, depending on a taxpayer’s facts. As such, every taxpayer should review the state guidance and consult with its tax advisor to understand its OH CAT filing requirements including whether cancellation of its OH CAT account is appropriate.

• State Guidance: Commercial Activity Tax – Information Release 2023-01 and CAT Filing Reminder issued Jan. 11, 2024

Washington Capital Gains Tax

Effective Jan. 1, 2022, Washington enacted a capital gains tax equal to 7% on the sale or exchange of long-term capital assets (e.g. stocks, bonds, business interests). The tax applies to individuals, including owners of pass-through entities and disregarded entities. Further, there are various deductions and exemptions available, including a standard deduction per individual.

U.S. Supreme Court declined to review the validity of the tax

Washington state requires a property tax be imposed uniformly and at a rate of no more than one percent. However, the uniformity requirements apply only to property taxes, not excise taxes. As such, the Washington Capital Gains tax was approved as an excise tax rather than a property tax to warrant its legality.

The tax was challenged at both the Superior Court and the Washington Supreme Court. The Superior Court struck down the tax finding it violated uniformity and levy limitation requirements of the Washington State constitution. However, in March 2023, the Washington Supreme Court reversed the Superior Court decision and found the tax to be valid. Specifically, the Washington Supreme Court found the capital gains tax was appropriately characterized as an excise tax rather than a property tax on income and therefore did not violate the Washington State constitution.

In August 2023, opponents of the tax sought U.S. Supreme Court review. However, on Jan. 16, 2024, the U.S. Supreme Court denied cert in Quinn v. Washington and as a result, the Washington Supreme Court decision stands upholding the tax.

Deduction Updates

Per RCW Sec. 82.87.150, Washington must adjust specific provisions related to the tax annually beginning December 2023 and the adjustments must be published on the department's public website by Dec. 31. As such, per the department’s website, the following amounts have changed for 2023 tax year:

• Standard deduction: $262,000 (Increase from $250,000 in 2022)
• Charitable donation deduction threshold: $262,000 (Increase from $250,000 in 2022)
• Cap on amount of charitable donation deduction: $105,000 (Increase from $100,000 in 2022)
• Worldwide gross revenue limit for qualified family-owned small business deduction: $10,480,000 (increase from $10,000,000 in 2022)

See: Washington Capital Gains Website - Tax Alert

Observations: The Supreme Court’s decision to deny the request to review the validity of the Washington Capital Gains tax means the tax is upheld. As such, taxpayers should review the updated deduction amounts and discuss any potential impact with their tax advisor.

Conclusion

In addition to the taxes discussed above, states impose many additional non-income-based taxes at both the state and local levels (e.g., Tennessee Business Tax and San Franscisco Gross Receipts tax). On top of non-income-based taxes, specific localities also impose an income tax (e.g., Ohio localities). The imposition of these types of taxes can be overlooked as they may fall outside the standard income tax purview. As such, it is important for each taxpayer to discuss with its tax advisor the imposition of any non-income or locality-based income taxes based on each taxpayer’s specific facts to ensure compliance with all applicable state filings and mitigate any exposures.