State Tax Updates 2024: Key Changes for Asset and Wealth Management
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- On December 19, 2024
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As 2024 commences, U.S. tax departments have initiated the examination of forthcoming alterations that could impact their state tax computations and reporting obligations. Across various states and taxpayer categories, this endeavor can be overwhelming. To assist in navigating these changes, this newsletter concentrates on pivotal developments affecting individuals in asset and wealth management, along with noteworthy elements to track throughout 2024. While not exhaustive, this list aims to underscore significant state tax considerations for those engaged in asset management.
A. Pass-through entity taxes (PTET)
| New tax for 2023 | Five states have introduced a new pass-through entity tax (PTET), with four allowing retroactive application. Indiana, Iowa, Kentucky, and West Virginia retroactively apply to tax years beginning on or after January 1, 2022. Hawaii has also implemented a PTET, effective for tax years beginning after December 31, 2022. Taxpayers should be attentive to the specific deadlines for PTET elections in each of these states.
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| Colorado | Beginning from tax years commencing on or after January 1, 2018, but before January 1, 2022, an S corporation or partnership can retroactively make a PTET election between September 1, 2023, and July 1, 2024, as part of a comprehensive amended tax return covering all applicable years.
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| Connecticut | Enacted on June 12, the Connecticut budget bill, H.B. 6941, stipulates that the PTET is now optional, rather than mandatory, for tax years beginning on or after January 1, 2024.
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B. Apportionment Changes
| Arkansas | On April 10, Governor Sanders signed H.B. 1045, initiating the phase-out of the sales factor throwback rule starting in 2024.
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| Louisiana | Enacted on June 27, H.B. 631 eliminates corporate income tax throwout related to intangibles and sales throwout that cannot be assigned to a state. The legislation also removes statutory language regarding the apportionment treatment of the rental, lease, or license of tangible, intangible, and immovable personal property. These modifications are effective for tax years commencing on or after January 1, 2024. |
| Maine | The Maine Supreme Court’s ruling states that revenue from Express Script Inc.’s (ESI) claims adjudication services is considered received at the location of retail pharmacies, not sourced to the location of ESI’s clients. This decision sheds light on how services are “received” and may serve as a reference for other states addressing similar issues.
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| Massachusetts | Enacted on October 4, H. 4101 introduces a single sales factor apportionment formula for all corporations and financial institutions. It also outlines a method for receipts factor sourcing of a financial institution’s income from investment and trading activities, effective January 1, 2025. |
| New Hampshire | Starting for tax years ending on or after December 31, 2022, the Business Profits Tax will adopt a single sales factor.
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| New Jersey | For tax years beginning on or after January 1, 2023, taxpayers subject to the Gross Income Tax Act, or those who are partners or shareholders in partnerships or S corporations, must apportion receipts using a single sales factor formula with market-based sourcing for service revenue. The regulations also impact corporate net income, applicable for tax years ending on or after July 31, 2023. The changes relate to the Finnigan apportionment method for water’s edge and worldwide filers. |
| New York | The New York Department of Taxation and Finance published final regulations on December 27, implementing the 2014 corporate tax reform legislation and subsequent legislative changes. The regulations adopt proposed changes from August with minor adjustments.
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| Tennessee | Enacted on May 11, H.B. 232 introduces a phased approach to single sales factor apportionment over a three-year period, starting for years ending on or after December 31, 2023.
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| Vermont | For tax years beginning on or after January 1, 2023, Vermont implements a single-sales factor apportionment formula. Additionally, Vermont no longer requires the inclusion of sales in the sales factor numerator relating to property shipped from Vermont to a state where the taxpayer is not taxable. |
| Wisconsin | As stated in its July 2023 Bulletin, Wisconsin now allows, in certain instances, the department to refuse the substitution of net gains for gross receipts in the receipts factor if the use of gross receipts substantially distorts the taxpayer’s receipts factor. S.B. 70, enacted on July 5, 2023, establishes this rule. Moreover, prior to January 1, 2023, if a taxpayer elected the customer billing address method for sourcing sales of trading assets and has not revoked the election, the Department of Revenue may not require the taxpayer to use any other method.
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C. New Taxes on Individuals
| Georgia | Enacted on April 26, 2022, H.B. 1437 stipulates that starting January 1, 2024, individual income tax marginal rates will be eliminated, and a flat tax of 5.49% will be imposed.
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| Massachusetts | Beginning January 1, 2024, H.4104 mandates taxpayers to file a joint Massachusetts return for any year they file a joint federal return. Following the imposition of the 4% surtax on taxpayers with income exceeding $1 million, it was noted that a couple with a combined income surpassing $1 million might have the ability to reduce or eliminate the 4% surtax by filing Massachusetts returns on a married filing separate basis.
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| Minnesota | For post December 31, 2023, Minnesota introduces a 1% tax on an apportioned amount of net investment income for individuals, estates, and trusts exceeding $1 million. “Net investment income” follows the definition in IRC Section 1411(c), encompassing Interest, dividends, annuities, royalties, and other profits not originating from a business or trade. However, Minnesota allows for the exclusion of net gain attributable to the disposition of certain agricultural land. |
D. Compliance Changes
| California | Despite being postponed for the 2021 and 2022 tax years, California now mandates tax capital reporting for the tax year 2023. Partnerships will encounter complexities in adhering to California’s tax capital reporting, involving the intricacies of California’s alignment with various federal code provisions. A significant challenge lies in the necessity to gather data dating back to the partnership’s inception to facilitate the calculation.
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| New Jersey | Starting with privilege periods concluding on or after July 31, 2023, if a member of a combined group receives income from the unitary business through a partnership, the entire net income of the combined group will encompass the member’s direct and indirect distributive share of the partnership’s unitary business income. Furthermore, the unitary partnership will not be held responsible for the portion of the partnership payment attributed to that member. New Jersey’s historical limitations on exemptions from nonresident partner withholding tax are being revised, potentially simplifying compliance obligations for many partnerships by eliminating the requirement to withhold for certain nonresident corporate partners. |
| Texas | Enacted on December 18, SB 3 raises the ‘no tax due’ threshold to $2.47 million and removes the obligation for entities with annualized total revenue at or below the threshold to submit a ‘No Tax Due Report.’ This change is applicable for reports initially due on or after January 1, 2024. It is important to be aware that despite these modifications, entities filing no tax due returns with nexus in Texas will still be obligated to submit public information reports (PIRs). |
E. Other Significant Developments
Illinois Enacts Changes to Investment Partnerships
Effective for tax years concluding on or after December 31, 2023, Illinois has implemented several amendments impacting investment partnerships. Similar to several other states, Illinois grants favorable tax treatment to qualifying investment partnerships (QIPs), exempting them from replacement tax, among other benefits. The recently enacted S.B. 1963, in June 2023, modifies the definitions of “investment partnership” and “qualifying investment securities” and broadens two qualifying tests. The 90% asset test now encompasses partnerships as qualifying securities, and the 90% income test includes partnership income from lower-tier partnership interests as qualifying income. Additionally, the legislation mandates QIPs to report and withhold Illinois-sourced income for nonresidents. These changes are effective for tax years concluding on or after December 31, 2023.
Washington Supreme Court to Hear Case Affecting Investment Funds
Washington Supreme Court to Hear Case Affecting Investment Funds – The Washington Supreme Court is set to hear an appeal from the Washington Court of Appeals decision in Antio LLC v. Department of Revenue. The Court of Appeals validated the trial court’s summary judgment in favor of the Revenue Department. The judgment concluded that a collection of investment funds, operating in the form of limited liability companies, were not qualified to deduct “amounts derived from investments” in the computation of their business and occupation taxes.
US Supreme Court Declines to Review Washington Capital Gains Tax Decision
The US Supreme Court has opted not to review the Washington Supreme Court’s decision in Quinn v. Washington Department of Revenue. The Washington Supreme Court, in a 7-2 ruling on March 24, upheld the validity of the capital gains tax enacted in 2021, effective from the 2022 tax year. The court categorized the tax as an excise, levied on the sale/exchange of capital assets rather than on the assets or gains themselves. Consequently, the Washington Department of Revenue can continue administering the tax, with the first annual return due on April 18, 2023.
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