Legislative Update: Alabama and Kansas Amend Pass-Through Entity Tax; Vermont to tax SaaS

At a glance

• The main takeaway: Alabama and Kansas enacted several significant changes that will impact each state’s pass-through entity tax, and Vermont will start subjecting software-as-a-service (SaaS) to sales tax. 
• Assess the impact: If your business is considering making a PTE tax election in either Alabama or Kansas, or if you provide SaaS to Vermont customers, read on to find out how these legislative amendments may affect you.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help your business understand the benefits and pitfalls of making a PTE tax election, and we can advise you on your sales tax compliance obligations. 

Schedule a free consultation today to learn more!

The full story:

Alabama and Kansas enacted substantial changes to their pass-through entity (PTE) taxes, and Vermont will begin subjecting SaaS to sales tax. Below is a summary of each state’s legislative PTE tax changes.

Alabama PTE tax

On April 26, 2024, Alabama Governor Kay Ivey signed HB 187, which changed the due date for making a PTE tax election. As originally enacted, Alabama’s PTE tax required that qualified PTEs choosing to pay PTE tax must make an election no later than March 15^th following the close of the taxable year. The election was binding for all future tax years unless revoked by that same March 15^th date.

The new legislation amends the election/revocation date. For tax years beginning on or after January 1, 2024, a qualified PTE “shall submit the appropriate form to the Department of Revenue on or before the due date for filing the applicable income tax return, including any extensions which have been granted following the close of that tax year for which the entity elects to be taxed as a pass-through entity.” Any revocation for such tax year can now be made on the appropriate form submitted or before the due date of the return, including any granted extension.

For tax years beginning on or after January 1, 2025, “the election or revocation shall be made on the timely filed return, including any extensions which have been granted.” Thus, it appears that the main different between 2024 and 2025 is that the election/revocation for 2024 will be made on a specific form, whereas for 2025 it can be made on the tax return.

Following the signing, the Alabama Department of Revenue posted guidance explaining that “in the spirit of recent legislation,” it is extending the PTE tax election deadline for the 2023 tax year for taxpayers that showed an intention to make a PTE tax election but that erroneously failed to do so by the March 15, 2024 due date. The state will recognize a valid PTE tax election for the 2023 tax year if taxpayers filed using My Alabama Taxes no later than the due date of the PTE’s tax return with applicable extensions, provided that the PTE meets one of the following requirements:

• The PTE timely filed the required PTE tax return, as if the election had been properly made for the tax year;
• The PTE made a timely PTE tax extension payment; or
• The PTE made an PTE tax payment prior to the due date of the respective return.

Alabama PTEs should review their 2023 PTE tax election to ensure that it was made properly and timely. If not, this guidance may provide those PTEs with an opportunity to cure that error.

Kansas PTE tax

On April 24, 2024, Kansas Governor Laura Kelly signed SB 410, which made several changes to the state’s PTE tax, including making these changes retroactively applicable to tax years beginning on or after January 1, 2022 (the first year that the state’s PTE tax was effective).

• First, the rate of PTE tax changed from a static 5.7% to the highest marginal resident individual income tax rate (which is currently 5.7%). This amendment puts the PTE tax in sync with future changes to individual income tax rates.
• Second, income tax credits related to activities of an electing PTE are now eligible to be passed through PTE owners. Previously, those credits were required to be claimed by the PTE.
• Third, in calculating the PTE’s income for resident owners, the PTE may elect to use either (i) all of the PTE’s income (i.e., from sources within and outside Kansas) or (ii) the PTE’s income attributable to Kansas. All resident owners must use the same method. Previously, the PTE was permitted to use only method (i). This change allows S corporations to use the same method for residents and nonresident owners (who are always allocated as only Kansas source PTE income), thereby eliminating the potential federal non pro rata distribution issues for S corporations with resident and nonresident owners.

Finally, for purposes of calculating the PTE’s income, any modifications to federal taxable income under Kansas code sections 79-32,117 and 79-32,138, as well as any expensing deduction under Kansas code section 79-32,143a that are attributable to the PTE’s activities, shall be claimed on the PTE return and on each PTE owner’s return in the same proportion and manner as would have applied had the PTE tax election not been made.

Kansas PTEs should review these changes and determine if amended returns may need to be filed.

Vermont Sales Tax

Effective July 1, 2024, Vermont will subject licenses of remotely-accessed software (i.e., SaaS) to sales tax. Vermont HB 887 repealed the state’s sales tax exemption for remote-accessed prewritten software, and now defines “tangible personal property” to include “prewritten computer software regardless of the method in which prewritten computer software is paid for, delivered, or accessed.”[1]

Businesses that license software to Vermont customers that is remotely-accessed should evaluate their potential nexus in Vermont and whether they have a sales tax collection and filing obligation.

The bottom line

Aprio’s SALT team has experience with state PTE taxes, and we can help your business understand the potential benefits and pitfalls of making a PTE tax election. In addition, we can assist your business in understanding its sales tax obligation to ensure that it remains in compliance and does not incur unexpected liabilities and penalties. 

We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] HB 887, Sections 3 and 4.  The italicized language was added by the legislation.  Vermont Governor Philip Scott vetoed the legislation on June 6, 2024, but the legislature overrode the veto on June 17, 2024.