It’s still early into 2024, but we’ve already seen several significant developments in the areas of multistate income/franchise and gross receipts taxes. The state legislatures and courts have been active in introducing new legislation and releasing important decisions. In addition to the tax law changes the states are considering/implementing, Congress is considering the Tax Relief for American Families and Workers Act of 2024, which could have significant state income tax impacts. Here are just a few highlights from early 2024:
Ohio
In January, we saw the introduction of Senate Bill 216, which, if enacted, would eliminate the Ohio Commercial Activity Tax (“CAT”) after 2029 and phase out the state income tax on nonbusiness income over six years. A similar bill was introduced in the House, House Bill 386, and was referred to the House Ways and Means Committee. Ohio is not alone in its attempt to reduce or eliminate the state income tax. On January 23, 2024, North Dakota Governor Burgum also called for eliminating the state income tax, joining a handful of other states looking to do the same.
On February 14, 2024, the Ohio Supreme Court released its long-awaited decision in the Schaad v. Alder case. In this case, the Court was asked to rule on the constitutionality of the temporary state law, passed during the COVID-19 pandemic, that provided for Ohio workers to continue to be taxed by the municipality that was their principal place of work instead of by the municipality in which they were actually working. The Court ruled that the temporary law was constitutional, and in doing so, denied taxpayers the ability to claim 2020 municipal income tax refunds. The Court reasoned that the temporary law did not violate various sections of the Ohio Constitution and that any federal constitutional limits do not apply to this intrastate taxing regime.
On February 16, 2024, the Ohio Department of Taxation updated information release CAT 2005-23 – Excluded Person – Consolidated Elected and Combined Taxpayer Groups. Given recent changes to the Ohio CAT enacted in House Bill 33, the revised information release clarifies when consolidated or combined groups must register for and pay CAT when total taxable gross receipts fall below certain thresholds.
Tennessee
In January, we saw the Tennessee legislature introduce House Bill 1893 and companion Senate Bill 2103, which would repeal the portion of the state’s franchise tax that is calculated based on the value of real and tangible personal property located in the state. Under current law, the franchise tax due is the greater of the tax due on (i) apportioned net worth or (ii) the value of real and tangible personal property in the state. The proposed legislation would also allow taxpayers to claim refunds for all open years of franchise tax paid on the property base, but only to the extent the refund exceeds the amount that would have been due under the apportioned net worth base. Early estimates show that the franchise tax refunds would cost the state roughly $1.2 billion, and the change in franchise tax base would save business taxpayers approximately $400 million annually.
Virginia
At the beginning of the year, the Virginia Department of Taxation issued its Final Elective Pass-Through Entity Guidelines. Issued on January 4, 2024, the guidelines explain how to make the state’s pass-through entity tax election, which entities qualify for the election, how to file the annual PTET return and various other nuances of this taxing regime. We will likely see continued guidance from other states as well on their PTETs throughout 2024.
Washington
On January 16, 2024, the U.S. Supreme Court denied certiorari in a case challenging the constitutionality of the state’s relatively new capital gains tax. The tax, enacted in 2021 and effective January 1, 2022, is a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests, or other investments and tangible assets. Opponents of this much-debated tax are leading efforts to repeal it through a statewide vote on the November 2024 ballot.
The above highlights some of the biggest state tax developments of 2024 so far, with more to follow. GBQ’s SALT team is monitoring all of these issues. If you have questions about these developments and how they will impact you or your business, contact your GBQ SALT advisor.
