2023 Marcum Year-End Tax Guide

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Businesses classified as pass through entities for tax purposes (generally S corporations, Partnerships, and LLCs treated as partnerships) and operating in one or more of these states should assess whether to make a pass-through entity tax election on behalf of their partners or shareholders. 2023 UPDATE ON PUBLIC LAW (“P.L.”) 86-272 One of the more impactful state income tax updates in 2023 has been the consequences stemming from California’s adoption of the Multistate Tax Commission’s (“MTC”) fourth revision to the “Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272” (the Statement). The fourth revision expanded the activities that would break P.L. 86-272 protection Since the Statement is a change of interpretation rather than a change in law, it behooves taxpayers to review how California applies P.L. 86-272. Taxpayers should assess whether this new interpretation puts them in a new tax position, whether favorable or not, by calculating the tax impact the Statement will have on certain tax items, such as California’s throwback rule for sales factor apportionment purposes. In some instances, a business may reduce its tax liability for goods shipped from California by claiming it is taxable in the destination state because of the unprotected activities to include certain activities conducted via the internet.

performed via its website. However, the same could be true of any other state with throwback rules for sales factor apportionment that adopts the Statement in the future. Importantly, if a taxpayer takes the position that it does not have to throw back sales into its origin based state (like California , to keep with the above example), then it might have a filing obligation and tax liability in the destination state. In addition to California, New Jersey is the only other state to have adopted language from the Statement into its laws. On September 5, 2023, the New Jersey Division of Taxation issued TB-108, stating that New Jersey will generally follow the MTC’s guidelines concerning unprotected internet activities under the reinterpretation of P.L. 86-272. However, it is essential to note that there are some nuanced differences between the division’s guidance and that of the MTC. Taxpayers that engage in internet activities with New Jersey customers should assess their exposure under TB-108. After amending its draft of the corporate tax regulations, New York released the draft for public comment on August 9, 2023. The proposed rules are subject to a 60 day public comment period, which ends on October 10, 2023. The draft corporate tax regulations include the MTC’s revised interpretation of P.L. 86-272 or the Statement. Assuming there are no setbacks, it is expected that the Statement will be included,

in whole or in part, as part of New York law at some point after the comment period. Oregon has indicated its intentions to amend its regulations to adopt the MTC’s Statement but has not yet released any guidance or legislative drafts. Taxpayers should keep monitoring state reactions to the Statement and expect additional states to incorporate it, in whole or in part, into law. 2023 SOURCING UPDATES Continuing with the trend towards a single-sales factor, legislators in both Montana and Tennessee have recently changed the state’s apportionment computation by adopting the single-sales factor apportionment methodology. Additionally, several recent significant cases have arisen in other states that have been recently decided, which have affected the sourcing of receipts for apportionment purposes. Florida Sourcing The Florida sourcing rules can often cause confusion because the sourcing of services for Florida income tax purposes is ostensibly based upon a Cost-of-Performance method. However, rulings from the state have historically taken more of a Market-Based approach, often concluding that the sourcing of sales other than tangible personal property should be sourced to the location where the customer receives the benefit of the transaction.

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