State Tax Legislation Update

Among the latest developments in state and local tax, Connecticut has enacted market-based sourcing of sales, and Tennessee will become a truly income-tax-free state for individuals.

By Jeff Glickman, SALT partner

This article summarizes recent state tax legislation that was enacted affecting corporate income, withholding, personal income and sales/use taxes.

Connecticut Enacts Market-Based Sourcing

On June 2, 2016, Connecticut Governor Dannel Malloy signed SB 502, which adopts market-based sourcing rules for sourcing sales under Connecticut’s single sales factor for corporate income taxes. [1] This rule is effective for tax years beginning on or after Jan. 1, 2016. Prior to the legislation, for example, Connecticut sourced sales of services based on where the service was performed. Now, sales of services are sourced to Connecticut if the market for the services is in the state, which is the case if and to the extent the service is used at a location in Connecticut.

If the taxpayer is unable to reasonably determine the sourcing of its receipts under any of the new rules adopted by this legislation, the taxpayer may petition the commissioner for approval. The petition must be submitted not later than 60 days prior to the due date of the return for the first income year to which the petition applies, determined with regard to any extension of time for filing such return. The commissioner shall grant or deny such petition before such due date.

In addition, effective for tax years beginning on or after Jan. 1, 2017, SB 502 extends the market-based sourcing rules to personal income taxes as well as to pass-through entities. [2]

Michigan Eliminates Flow-Through Entity Withholding

On June 8, 2016, Michigan Governor Rick Snyder signed HB 5131, which eliminates the requirement of a flow-through entity (“FTE”) to withhold on its owners (e.g., corporate, non-resident individuals, etc.), effective for tax years beginning on or after July 1, 2016. This is a departure from the withholding rules in most states, which typically require certain FTEs to withholding income taxes on amounts allocated or distributed to nonresident owners. Michigan still allows for composite returns, in which case the FTE would be required to make composite estimated payments on behalf of those included in the composite filing. Otherwise, the burden for making estimated tax payments shifts from the FTE to its owners.

Tennessee Eliminates the Hall Tax

On May 20, 2016, Tennessee Governor Bill Haslam signed SB0047, which effectively eliminates the state’s personal income tax on dividends and certain interest (known as the Hall Tax) for tax years beginning on or after Jan. 1, 2022. This is accomplished through a rate reduction from six percent to five percent for tax years beginning on or after Jan. 1, 2016 and a provision in the bill stating the legislative intent that during each subsequent legislative session, the General Assembly enact a bill to reduce the tax by an additional one percent. In any event, the tax will be eliminated for tax years beginning on or after Jan. 1, 2022. This is the only state personal income tax, so upon its elimination, Tennessee will join the ranks of states that do not impose a personal income tax.

Louisiana Enacts Remote Seller Use Tax Notification Requirements

On June 17, 2016, Louisiana Governor John Bel Edwards signed HB 1121, which establishes certain notification requirements for remote sellers. This bill is similar to Colorado’s legislation that was enacted in 2010 and was the subject of much litigation that ended earlier this year with the Tenth Circuit Court of Appeals upholding the law (see our March 2016 SALT Newsletter for a summary of that case).

The law is effective for tax years beginning on or after July 1, 2017, and requires remote retailers to (i) notify Louisiana purchasers of their use tax obligations at the time of the sale, (ii) send a notification to each of its Louisiana purchasers by Jan. 31 of each year showing the total amount of sales made during the prior calendar year and (iii) provide a statement to the Department of Revenue (“DOR”) by March 1 of each year showing the amount of sales made to each Louisiana purchaser for the preceding calendar year. For purposes of this law, a “remote retailer” is a retailer that (i) is not required to register with the DOR and thus is not required to and does not collect/remit the state’s sales/use taxes and (ii) has sales of goods/services to Louisiana that exceeds $50,000 during the calendar year (this includes sales made by any affiliate of the retailer).

Aprio’s SALT team can assist you in determining the impact of any of these new rules on your state tax liabilities and compliance obligations. We continue to monitor legislative and other significant state tax developments and will include updates in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the July 2016 SALT Newsletter. To view the newsletter, click here.

[1] SB 502, sec. 199.

[2] SB 502, sec. 200 and sec. 201.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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