As we complete 2023 returns, please take a moment to review the year over year changes in wages. If you see a significant increase, your client may qualify for the consulting opportunity – SC Jobs Tax Credits. In most cases, an employer only needs to add 2 jobs to qualify.

Depending on the county, credits can be up to $25,000 per job for 5 years if the employment levels are maintained. In this scenario, the credits would total $250,000 across 5 years for just 2 jobs.

If you see a big increase in wages, reach out to the SALT team!

Refund Opportunity – Tennessee DOR Issues Notice on Repeal of Property Measure of Franchise Tax

The Tennessee Department of Revenue (DOR) May 1 issued a notice on repealing the property measure of the franchise tax. The notice includes: 1) eliminating the Schedule G property measure for tax years ending on or after Jan. 1, 2024; 2) franchise tax reporting on 2023 calendar year returns and 2024 fiscal year returns; 3) that taxpayers may request refunds for the tax year ending on or after March 31, 2020; and 4) the refund procedure and other refund considerations. [Tenn. Dep’t of Revenue, Notice No. 24-05, 05/01/24]

WR SALT is running data scans to identify clients who may benefit from filing a refund claim for this. There is a limited window of time to file these refund claims (5/15/2024-11/30/2024), and specific procedures must be followed so we recommend that you involve WR SALT. Please reach out to WR SALT if you are aware of a client who may qualify to for a refund based on this change.

Georgia Governor Signs Law Updating Income Tax Conformity to Internal Revenue Code

The Georgia Governor signed a law updating income tax conformity to the Internal Revenue Code. The conformity date was updated from Jan. 1 2022, to Jan. 1 2023. The law took effect April 22 and is applicable for taxable years beginning on or after Jan. 1, 2023. [H.B. 1162, enacted 04/22/24]

Georgia Implements Structurally Sound Tax Changes

From the Tax Foundation

On April 18, Georgia Governor Brian Kemp (R) signed several bills into law that will make the state’s tax code more structurally sound. The two most significant amendments lower the flat individual income tax rate and align the corporate income tax rate with the individual income tax rate.

Individual Income Tax Reduction

H.B. 1015 (Act 378) lowers the flat individual income tax rate for 2024 from 5.49 percent to 5.39 percent. The bill also accelerates the speed of future individual income tax rate reductions, with the possibility that the rate could now reach the target of 4.99 percent by 2028 instead of 2029.

Schedule of Individual Income Tax Rate Reductions in Georgia

Note: This schedule, per H.B. 1015, is subject to potential delays if certain fiscal conditions are not met.

The schedule shown above can, however, be delayed (by one year at a time) under three conditions: (1) if the governor’s revenue estimate for the next fiscal year is not at least 3 percent above the respective estimate for the present fiscal year, (2) if the net revenue collection in the prior fiscal year was not higher than in each of the preceding three fiscal years, or (3) if the amount of the Revenue Shortfall Reserve is not sufficient to cover a projected decrease in state revenue.

This policy is incremental and relatively conservative, aiming to prevent revenue shortfalls that might result from reducing the individual income tax rate. However, other states are not standing still; they are actively reducing individual income taxes. Even if Georgia achieves its target in 2028, it will likely only have the 17th lowest individual income tax rate in the nation (currently the 19th lowest), without considering potential changes in other states. Among its neighbors, Georgia’s rate is the second highest after South Carolina (currently at 6.3 percent).

Matching the Corporate Income Tax Rate with the Individual Income Tax Rate

H.B. 1023 (Act 376) aligns Georgia’s corporate income tax rate with the individual income tax rate, effective this year. Consequently, this year’s corporate income tax rate in the state will be 5.39 percent instead of 5.75 percent. With this policy change, Georgia expands the ranks of states where individual and corporate income tax rates are equal. This group includes Colorado (both tax rates at 4.4 percent), Idaho (5.9 percent), Nebraska (5.84 percent), New Mexico (5.9 percent), and Utah (4.65 percent). Such a policy satisfies the principle of neutrality, as business decisions and the choice of the organizational form of a business become less dependent on tax policy considerations when individual and corporate income tax rates do not differ.

Other Tax Changes

H.B. 581 (Act 379), signed by Governor Kemp along with the bills mentioned above, allows counties to limit the growth of property values to the inflation rate (this provision is subject to a constitutional amendment) and institutes an additional local option sales tax of up to 1 percent for local governments to pay for the property tax relief measure, effective January 1, 2025. Also, the bill imposes a stricter limit on the combined local sales and use tax rate: the general rate should not exceed 2 percent, while specific rates for educational purposes (1 percent), transportation purposes (up to 1 percent), and property tax relief (up to 1 percent) are authorized in addition to the general rate.

A cap on assessment limits, while well-intentioned, creates significant inequities over time and distorts property markets. Levy limits, which roll back millages (rates) in response to rising property values rather than suppressing valuations—benefitting long-time owners at the expense of newer ones and locking people into their existing homes—would have been a far superior approach to legitimate concerns about rising property taxes.

H.B. 1019, which was sent to the governor in early April and is still subject to a voter referendum, would double the statewide homestead exemption from $2,000 to $4,000 for owner-occupied houses, the first increase in more than four decades.

H.B. 808, passed by both chambers but not yet signed by the governor, would increase the tangible personal property de minimis exemption from $7,500 to $20,000. This is a positive development, but the amount of the exemption is still much lower than in some states that recently modified their personal property tax regimes. For instance, Arizona, Colorado, Idaho, Indiana, Michigan, Montana, and Rhode Island all have exemptions of $50,000 or more.

South Carolina DOR Announces Excise Tax Responsibilities of Licensed Beer Importers, Wholesalers

The South Carolina Department of Revenue (DOR) May 1 announced the excise tax responsibilities of licensed beer importers, producers, wholesalers, and breweries. The announcement includes: 1) excise tax filing requirements for beer importers, producers, wholesalers, and breweries; 2) a tax rate of $0.006 per ounce for beer; 3) a tax rate of $0.77 per gallon for brewpub; and 4) filling due dates and payment methods. [S.C. Dep’t of Revenue, South Carolina Beer, 05/01/24]

South Carolina DOR Issues Information on Excise Tax for Liquor Sales

The South Carolina Department of Revenue (DOR) May 1 issued information on excise tax for liquor sales by a liquor retailer to a customer for on premise consumption. The information includes: 1) a tax rate of 5 percent for Liquor by the Drink; 2) the monthly payment of sales tax, local option tax, and hospitality tax; and 3) all liquor retailers must file the Liquor by the Drink Excise Tax Report (L-2172) and pay electronically within 20 days from the close of each month. [S.C. Dep’t of Revenue, South Carolina Liquor by the Drink, 05/01/24]

SALT Map of the Week – Apportionment – Sales Factor – Throwback and Throwout Rules

From The Tax Foundation:

This week, we examine the extent to which states adopt a harmful set of tax policies known as throwback and throwout rules. Although these rules may be unfamiliar and seem arcane, they can substantially increase corporations’ tax liability, influence business decision-making, and erode state competitiveness. Eliminating these provisions creates headway for sound tax policy, eliminating a significant disincentive for in-state investment. States have generally tried to encourage capital investment. Throwback and throwout rules are an unfortunate example of penalizing it.

Today’s tax map examines the extent to which states adopt a harmful set of tax policies known as throwback and throwout rules. Although these rules may be unfamiliar and seem arcane, they can substantially increase corporations’ tax liability and influence business decision-making. Throwback rules have multiple negative effects on state business activity, including reduced new corporate investment and lower rates of economic efficiency. Throwback rules and throwout rules erode the competitiveness of states that impose them by incentivizing firms to relocate to non-throwback and throwout states to avoid higher corporate income tax burdens.

Throwback rules were originally designed to capture foregone corporate income tax revenue generated as a result of the Interstate Income Act of 1959. More commonly known as Public Law 86-272, the statute establishes limits on states’ ability to assert nexus over certain business activity. To make sense of this, it is necessary to discuss how corporate income is apportioned to states for tax purposes.

The standard apportionment method began by requiring corporations to apportion their profits by three unique factors relevant to nearly all business models: payroll, property, and sales. Thirty-four states utilize single sales factor apportionment, which requires companies to only take sales into consideration when apportioning their profits to each state in which they have an established economic nexus. The remaining states either use a traditional, evenly weighted three-factor apportionment method or use all three factors but with additional weight on sales. In all cases, a state can only apportion income if it has economic nexus, which is defined as an adequate connection that corporations must meet for states to impose a corporate income tax collection obligation.

P.L. 86-272 prohibits states from taxing income that arises from the sale of tangible property into the state by a company that has no other activity in that state other than soliciting sales. When companies sell into a state where they do not have nexus, that destination state lacks jurisdiction to tax the company’s income. This results in what is known as “nowhere income”—income that cannot legally be taxed by the state where the income-producing sale occurs.

Under throwback rules, sales of tangible property that are not taxable in the destination state are “thrown back” into the state where the sale originated, even though that is not where the income was earned. This means that if a company located in State A sells into State B, where the company lacks economic nexus, State A can require the company to “throw back” this income into its sales factor.

The single sales factor mentioned above is a part of the numerator of the fraction used when firms calculate their apportionment for each state in which they meet economic nexus requirements. Throwback rules increase corporations’ tax liability by increasing the numerator of this fraction, thus causing a firm to be on the hook for more sales than if the nowhere income were not thrown back into the numerator of the apportionment formula.

Even if it might be fairer for a company to pay taxes on this nowhere income (although it is also unfair that they face double taxation on other income), throwback rules are a case of the wrong tax, at the wrong rate, in the wrong state. They cause businesses to be taxed at potentially many multiples of the income they have in the state imposing the throwback rule, motivating these businesses—or at least certain aspects of their business—to locate elsewhere. This effect is so robust that studies find throwback rules actually decrease tax revenue over time, since they do more to drive out business activity than they do to tax the nowhere income from remaining businesses with exposure to the provision.

Throwback rules include out-of-state sales of tangible personal property in the numerator of the apportionment fraction. This increases the share of sales included in the numerator of the apportionment formula. As a result, states with throwback rules increase firms’ corporate income tax liability. Meanwhile, Maine has what is known as a throwout rule for sales of tangible personal property, where it requires corporations to exclude, or throw out, these nowhere income-creating out-of-state sales of tangible personal property from the denominator of the apportionment fraction. This has a similar effect of increasing the corporate tax liability of a particular firm located there. Finally, 27 states and the District of Columbia require firms to throw out sales of intangible personal property from the denominator of total executed sales in their apportionment formula.

State throwback and throwout rules increase businesses’ tax liability in states that impose them, often dramatically. They are also structurally unsound as they distort firms’ economic decision-making and investment decisions. Eliminating these provisions creates headway for sound tax policy, eliminating a significant disincentive for in-state investment. States have generally tried to encourage capital investment. Throwback and throwout rules are an unfortunate example of penalizing it.