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Welcome to TWIST for the week of July 15, 2024 featuring Sarah McGahan from ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø’s Washington National Tax State and Local Tax practice.

Today we are covering rate changes and potential rate changes in New Jersey and Oregon. We have also summarized a recently-signed bill in Pennsylvania that increases the amount of NOLs that may be deducted in computing Pennsylvania corporate income tax liability, and a recently filed corporate income tax sourcing lawsuit in Florida.

Assembly Bill 4704, which was signed into law on June 28, 2024, adopts a new, temporary 2.5 percent “Corporate Transit� fee that applies for privilege periods beginning on and after January 1, 2024 through December 31, 2028. The corporate transit fee is imposed on corporation business tax taxpayers that have New Jersey allocated taxable net income in excess of $10 million.

Oregon voters will likely be deciding the fate of a measure that would increase taxes on corporations. Initiative Petition 17, which reportedly has qualified for the November ballot, proposes to increase minimum taxes for corporations with Oregon sales exceeding $25 million. Specifically, corporations with Oregon sales of $25 million or more would be required to pay the current existing minimum tax for their applicable tax bracket, plus three percent of the excess over $25 million. The tax increase would be applicable to tax years beginning on or January 1, 2025.

On July 10, 2024, a complaint was filed in the Leon County Circuit Court once again challenging the Florida Department of Revenue’s interpretation of the sourcing rule that applies to sales of other than tangible personal property. Recall, “other receipts,� are sourced to Florida if the income-producing activity giving rise to the receipts is performed wholly within Florida or if a greater proportion of the income-producing activity is performed in Florida, based on the costs of performance (IPA/COP rule).  On audit, the Department has consistently interpreted the IPA/COP rule in a manner that essentially results in customer-based sourcing (i.e., receipts attributable to Florida-based customers/sources are included in the Florida sales factor numerator).  In two relatively recent decisions, the Leon County Circuit Court has essentially held that Florida is not a market sourcing state and that under the plain language of Florida’s IPA/COP rule, receipts are sourced focusing on the transactions and activities of the taxpayer, not of the taxpayer’s customer.

In the most recent suit, Apple Inc. v. Department of Revenue, the taxpayer argues that the Department applied a market-based methodology to source  its revenue from sales of digital music and subscriptions, books and apps, and licensing fees. The taxpayer alleges that its receipts should be sourced under the IPA/COP rule and that all its costs of performance occurred outside Florida. The lawsuit also challenges the Department’s exclusion of certain service revenues and other income from the denominator of the Florida sales factor. 

Finally, for the current tax law,  the use of NOL carryforwards is limited to 40 percent of a corporation’s taxable income. Senate Bill 654, was signed into law on July 11, 2024, gradually increases the limitation to 80 percent of taxable income for certain NOLs incurred after 2025.