10 big trends in SALT for 2024

February 13, 2024 12:45 PM

Sometimes, to look forward, you have to start by looking back.

The issues that are most likely to impact the world of state and local tax during the year ahead are naturally reflective of past developments. Each year, Jamie Yesnowitz, leader of the SALT team in the Washington National Tax Office of Top 10 Firm Grant Thornton, focuses on the issues they believe will be of primary interest to policymakers, courts, and taxpayers in the coming year.

Last year's major developments include:

New Jersey and Minnesota enacted major tax reform;
States reacted to "new" IRC Section 174;
Maryland's digital advertising tax remained in effect, with litigation continuing;
The trend of adopting elective pass-through entity taxes continued;
Apportionment litigation proliferated;
The state budget dichotomy caused tax rate fluctuations;
States expanded their indirect tax bases to nontraditional transactions;
State consideration of Multistate Tax Commission statement on P.L. .86-272;
The Washington Supreme Court holding individual capital gains tax; and,
The Colorado Supreme Court considering property revaluation due to the pandemic.

With all that in mind, here are 10 predictions for 2024 from Yesnowitz and his team:

1. PTE taxes

States have continued to follow the trend of adopting pass-through entity tax regimes as a workaround to the federal $10,000 SALT deduction limitation adopted under the Tax Cuts and Jobs Act, with seven states doing so in 2023. Yesnowitz expects this trend to continue in 2024 in the small number of jurisdictions that have considered the issue but have not yet acted.

Even though the TCJA's SALT deduction limitation is currently scheduled to expire at the end of 2025, "We predict that at least two more states will enact elective PTE taxes, despite the looming expiration of the federal SALT cap."

2. Income tax rate fluctuations

States are facing a very uncertain and non-uniform fiscal environment at the moment, affording some states — but by no means all — the ability to reduce state income tax rates. As a result of their strong fiscal positions, some states were able to continue the trend of reducing their income tax rates during 2023.

"Based on recent trends and fiscal projections, we think that it is likely that some states will continue to enjoy budget surpluses in 2024 and further reduce their income tax rates," said Yesnowitz. "We already see activity in some state legislatures addressing tax rate reduction plans. In contrast, we are seeing states such as Caiifornia and New York consider how to deal with significant budget deficits. We predict that at least three states will reduce their tax rates or extend income tax rate reductions, while at least three states will need to increase tax rates to address budget shortfalls."

3. Developments in taxing digital advertising

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Maryland has generated considerable litigation and garnered significant attention because it was the first state to specifically design and enact a tax on digital advertising services. In 2023, the Maryland Supreme Court vacated a trial court's ruling striking down the tax, but did not address the merits of the arguments challenging the tax's validity. Apple Inc., in response to the earlier state lawsuit, appealed to the Maryland Tax Court that it is due a refund of the digital advertising tax paid to Maryland for the 2022 tax year.

"We think that the Maryland Tax Court will undertake a substantive review of the digital ad tax, and ultimately invalidate that tax," said Yesnowitz. "That decision will be appealed by Maryland. In the meantime, we expect at least three states to propose legislation trying to tax digital ads or services or data collection."

4. Conformity to the new interpretation of P.L. 86-272

States have begun to adopt the Multistate Tax Commission's revised statement of information interpreting longstanding federal protections from the imposition of state income tax originally developed under P.L. 86-272.

"We think that at least two more states will formally adopt the MTC's guidance on P.L. 86-272, and courts will become more active in considering whether states can formally interpret P.L. 86-272," Yesnowitz predicted.

5. Adoption of economic presence nexus

Justices of the U.S. Supreme Court pose during their formal group photograph in the East Conference Room of the Supreme Court in Washington, D.C. Seated from left: Associate Justice Stephen Breyer, Associate Justice Clarence Thomas, Chief Justice John Roberts, Associate Justice Ruth Bader Ginsburg and Associate Justice Samuel Alito Jr. Standing behind from left: Associate Justice Neil Gorsuch, Associate Justice Sonia Sotomayor, Associate Justice Elena Kagan and Associate Justice Brett Kavanaugh.

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A number of states adopted a bright-line economic presence nexus standard for their income tax following the Supreme Court decision in Wayfair, in which the court approved such a standard for sales tax.

Bright-line nexus standards may provide some clarity regarding whether an out-of-state corporation is subject to income tax, but a low sales threshold may result in additional companies becoming subject to tax, according to Yesnowitz: "For purposes of income tax, we expect at least three more states to adopt bright-line nexus standards, and at least one of those states will adopt a standard lower than $500,000."

6. Courts consider pandemic fact patterns

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The requirement that many employees work remotely from home during the COVID pandemic had an impact on personal income tax in many jurisdictions. In some cases, employees worked in a state that was different from the state where their office and employer were located. Although employees are no longer required to work from home, many are continuing to do so.

"Given the changes in work and living arrangements resulting from the pandemic, many people have either tried to change or have actually changed their residency," Yesnowitz explained. "We think that several courts or tribunals will weigh in on residency issues that have arisen during the pandemic."

7. Remote seller economic nexus sales tax thresholds

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After the Wayfair decision, every state with a sales tax eventually enacted some version of an economic nexus statute for remote sellers. While many states that adopted sales tax nexus standards generally followed the South Dakota statute, others eliminated the transactional threshold or adjusted the amount of the dollar threshold, including South Dakota itself. The elimination of the transaction threshold provides relief to remote sellers that engage in sales transactions in a state at a relatively low selling price.

"We predict that at least three more states will enact legislation dropping the transaction threshold from their sales tax economic nexus provisions," said Yesnowitz.

8. Sales tax centralization

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States such as Colorado and Louisiana pose a problem for remote sellers due to the multiple local jurisdictions that layer their own sales taxes on top of state sales taxes. Louisiana, for example, has 64 separate parishes, each of which administers its own sales taxes. In 2023, Louisiana provided some relief by enacting legislation to direct the Louisiana Uniform Sales Tax Board to design and implement a single remittance system for state and local sales and use taxes.

"We think that at least one state will review its sales tax and enact legislation to simplify the tax, with Colorado and Louisiana potential examples," said Yesnowitz.

9. Expanding the sales tax base

Fuel prices at a gas station in Woodbridge, New Jersey, U.S., on Tuesday, May 17, 2022. From record prices to blowout spreads and falling stockpiles, a handful of financial and physical indicators are pointing to expensive and possibly tighter gasoline markets across the US this summer.

Stephanie Keith/Bloomberg

In recent years, many states have expanded their indirect tax base to include nontraditional transactions and services. At the same time, states are considering more targeted taxes aimed at certain industries. For example, due to a stagnation in gasoline tax revenue caused by the greater number of electric and hybrid vehicles and an uncertain oil market, some states are implementing taxes directed at services involving transportation

According to Yesnowitz, "We predict that at least two states will expand their sales tax base through taxation of digital goods and services, and at least two states will start taxing transportation service."

10. Unclaimed property legislation

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The Supreme Court decision in 2023 in the MoneyGram case (Delaware v. Pennsylvania) held that MoneyGram's agent checks and teller's checks should be escheated to the state where they were purchased — the federal statutory rule — instead of to Delaware, the state where MoneyGram was incorporated. The case resolved a longstanding dispute between Delaware and 30 other states.

"Based on the Supreme Court's MoneyGram decision, at least two states will adopt unclaimed property legislation intended to reduce escheat exemptions or accelerate reporting requirements," Yesnowitz and his team predicted.