Top 10 SALT Stories of 2022


While the pandemic casts a smaller shadow in 2022 than the prior year, it has changed behavior that is dramatically affecting state and local tax (SALT) outcomes for businesses, individuals, and state and local governments in an endless number of ways. For example, the pandemic required many businesses to shift to remote and hybrid work arrangements in which their employees visit the office far less frequently.


For many businesses, this change has resulted in reconfiguring their physical footprint, with implications affecting where they are subject to SALT, and how much corporate income tax liability they ultimately owe across multiple jurisdictions. For many employees that obtained the flexibility to work from anywhere, they have reconsidered where to live. To the extent they acted on this flexibility and moved to a different state or locality, that decision affected their personal income tax profiles.


With this backdrop in mind, we cannot forget that those interested in SALT are still dealing with uncertainty wrought by historic and current factors unrelated to the pandemic. Think sweeping federal income tax laws, numerous state-specific tax reform initiatives, ambiguously drafted SALT statutes, regulations that often go well beyond the intent of the statutes, a lack of uniformity throughout the country, and case law from both federal and state courts that try to make sense of the matters in front of them, but often provide surprising results.


In our continuing effort to track what’s important in the SALT world, our Grant Thornton SALT team in the Washington National Tax Office considered what happened this year, and then ranked the 10 most important SALT stories of 2022 in order of perceived importance.  Below is an introduction to these topics; the full story of this year in SALT can be read here.




1. Adoption of state PTE taxes continues


The adoption by states of pass-through entity (PTE) tax regimes as a workaround to the federal $10,000 SALT deduction limitation adopted under the Tax Cuts and Jobs Act (TCJA) has continued to take hold, with a clear majority of states now offering this option to PTEs and their owners.


Seven states had enacted PTE taxes by November 2020, when the IRS first confirmed that state PTE tax regimes would be respected for federal purposes, therefore providing an acceptable framework for partnerships and S corporations to deduct the tax at the entity level. In response, 15 states moved rapidly to adopt their own elective state PTE regimes in 2021. The trend did not let up in 2022, with eight additional jurisdictions acting to adopt PTE taxes to date, bringing the total number to 30. Notably, New York City became the first locality to enact a PTE tax. Virginia’s adoption of an elective PTE tax regime was distinctive due to its retroactive effect to tax years beginning on or after Jan. 1, 2021.


While the states continued to adopt PTE tax regimes at a speedy pace during 2022, the lack of uniformity in these efforts has continued to present complexity for multistate PTEs deciding whether to elect into such regimes. Making the election on a return generally filed months after the end of a tax year has raised questions for PTEs with respect to whether they have made a valid election for the applicable tax year to support claiming the federal deduction for state PTE taxes paid in that year.


Certain states enacted corrective legislation in 2022 to address significant and often unintended technical shortcomings in their PTE tax regimes that became apparent during what for most was the first year of implementation in the 2021 tax year. With perhaps the most ambitious PTE tax legislation to date, Colorado amended its PTE tax law to allow for retroactive elections going back to the 2018 tax year.


While state PTE taxes continue to be a popular revenue-neutral workaround to the federal SALT deduction limitation, the differing nature of each state PTE tax regime requires a thorough analysis. Leaders of PTEs are faced with making elections that will impact the tax liability of their owners, some of which may benefit more than others due to factors such as their resident state and their ownership interest in the PTE.




2. Maryland digital advertising tax invalidated by state trial court


In February 2021, Maryland became the first state to enact a tax on gross proceeds derived from digital advertising services in the state. Enacted by the state legislature following an override of a veto by the Maryland governor, the tax is imposed on entities with global gross revenues of at least $1 billion. Entities having annual gross revenues derived from digital advertising services in Maryland of at least $1 million in a calendar year are required to file a tax return. The tax rate ranges from 2.5% to 10% based on the amount of the entity’s annual global gross revenue.


Although the initial legislation intended for the tax to be effective beginning with the 2021 tax year, subsequent emergency legislation delayed the effective date to the 2022 tax year. The delayed effective date resulted from concurrent lawsuits filed in both state and federal court alleging a violation of electronic commerce under the Internet Tax Freedom Act (ITFA), the Commerce Clause and Due Process Clause of the U.S. Constitution, and the First Amendment to the U.S. Constitution.


In the federal lawsuit, four business groups sought a declaration and injunction from a Maryland federal district court against enforcement of the tax. In March 2022, the federal court dismissed much of the lawsuit, ruling that the federal Tax Injunction Act (TIA) bars a challenge to the tax itself because Maryland state courts provide a speedy remedy to challenge the tax. However, the federal court ruled that the plaintiffs could challenge the pass-through provision of the tax, the remaining issue being whether the provision violates companies’ free speech rights under the First Amendment as opposed to merely regulating their conduct.


In the state lawsuit, Comcast and Verizon filed a complaint in a state trial court, seeking a declaration that the tax is illegal under the ITFA, also alleging constitutional violations. After the litigation cleared various procedural hurdles, the state trial court struck down the tax in a bench ruling in October at the conclusion of oral arguments from both parties in support of their summary judgment motions.


With the state court ruling, the future of Maryland’s digital advertising tax remains uncertain. Maryland appealed the state court’s ruling invalidating the tax and continues to defend the tax in federal court despite objections to the tax from the outgoing Maryland governor and comptroller. In the meantime, following a hearing, the federal court issued an order dismissing the case on the grounds that the pass-through provision issue had become moot in light of the state court’s decision to invalidate the tax.




3. Continued corporate and personal income tax rate reductions


Most states found themselves in an unusually strong fiscal position in 2022 as tax collections significantly exceeded projections and states received substantial federal funding under the American Rescue Plan Act (ARPA) to combat the adverse economic effects of the pandemic. However, the increases in interest rates to combat inflation and the possibility of an economic recession in the next year may substantially imperil future growth. California and New York already are predicting an end to their budget surpluses.


One of the biggest corporate income tax reductions was enacted by Pennsylvania. Also, Arkansas and Nebraska enacted legislation to lower corporate income tax rates in 2021 and enacted legislation in 2022 to further reduce rates. New Hampshire enacted Business Profits Tax rate reductions in both years. Idaho enacted two separate laws in 2022 to reduce corporate income tax rates. Utah also enacted corporate tax rate reductions in 2022. States such as Iowa and Kentucky enacted income tax rate reductions contingent on meeting certain revenue goals. Finally, in the 2022 general election, Colorado voters approved a proposition that reduces the state income tax rate.




4. ARPA tax mandate litigation


In an effort to address the economic effects of the COVID-19 pandemic, ARPA was enacted in March 2021 and provided substantial funds for distribution to state and local governments. Under ARPA, states are required to use the funds for either a wide variety of pandemic-related purposes, or to make necessary infrastructure investments. Specifically, states are prohibited from using the funds to offset a reduction in state net tax revenue resulting from a change in law, regulation or administrative interpretation during a “covered period” that reduces any tax (commonly known as the offset provision), or from depositing the funds into a pension fund.


In response to numerous requests by states for information on the scope of this provision, the Treasury Department issued a final rule which became effective on April 1, 2022. The final rule generally provides that states are considered to impermissibly use ARPA funds to offset a reduction in net tax revenue where they fail to offset the reduction through means unrelated to ARPA funds.


Approximately 20 states have filed six lawsuits challenging the ARPA offset provision. States typically argue that the offset provision violates the U.S. Constitution’s Spending Clause. These cases are at various stages in the federal court system, with four decisions on ARPA challenges decided by federal appellate courts in 2022. There is a possibility that the U.S. Supreme Court will ultimately consider the issue of whether states have standing to challenge ARPA in response to the conflicting results among different circuits of the federal appellate court.




5. Sales tax inventory nexus litigation


Several states have asserted inventory nexus for remote sellers participating in the Fulfillment by Amazon (FBA) program prior to the South Dakota v. Wayfair decision in 2018 and the subsequent enactment of marketplace facilitator laws. Under the FBA program, as a means to facilitate transport of a remote seller’s inventory to the customer, the inventory may be temporarily relocated to an intermediate state without the seller’s knowledge. Relocating the inventory can give retailers physical presence in a state where they may not be registered to collect sales tax. As a result, states including California, Pennsylvania and Washington have begun asserting nexus and sales tax collection and remittance obligations based on such tangential physical presence.


California has aggressively pursued unpaid sales taxes from remote sellers participating in the FBA program by assessing FBA sellers for periods before the enactment of the state’s marketplace facilitator law in 2019. The Pennsylvania Department of Revenue (DOR) has taken a slightly more measured approach by mailing notices and registration demand letters to FBA sellers identified as having sales tax collection and remittance obligations owing to the storage of inventory in the state.


In response to these state actions, the Online Merchants Guild, a trade association for independent online retailers, filed a lawsuit on behalf of the FBA sellers in a California federal court challenging California’s authority to issue sales tax assessments against FBA sellers. Likewise, the Guild filed a lawsuit in a Pennsylvania federal court challenging the registration demands and seeking declaratory and injunctive relief. However, both federal cases were dismissed on jurisdictional grounds.


The Guild has fared better in Pennsylvania after re-filing its lawsuit against the Pennsylvania DOR in state court. In September 2022, the Pennsylvania Commonwealth Court ruled that the Pennsylvania DOR failed to establish that FBA sellers had sufficient minimum contacts with the state under the Due Process Clause of the U.S. Constitution to mandate the collection and remittance of sales tax. With this decision, the Pennsylvania court became the first to rule against a state based on the merits of an inventory nexus case.




6. State reaction to MTC’s revised statement on Public Law 86-272


In August 2021, the Multistate Tax Commission (MTC) adopted revised guidance interpreting longstanding federal protections against state income tax to reflect the modern economy and internet business activities. Specifically, the MTC approved an updated statement on Public Law 86-272 (P.L. 86-272), the 1959 federal law that limits the state taxation of income from sales of tangible personal property if the taxpayer’s only business activities in the state are the solicitation of orders that are approved and shipped from outside the state.


The revised statement includes a new subsection to determine what constitutes protected or unprotected activities under federal law, specifically addressing activities conducted using the internet. The statement provides a listing of 11 different activities conducted by internet businesses and explains whether they are protected for P.L. 86-272 purposes. States are not bound by the MTC’s revised statement and are responsible for individually adopting its principles.


During 2022, California and New York became the first states to react to the MTC’s revised statement. On Feb. 14, 2022, the California Franchise Tax Board (FTB) released administrative guidance to explain its application of P.L. 86-272 protection in the modern economy. The FTB’s guidance does not explicitly adopt or reference the MTC’s revised statement, but the guidance generally is consistent with the positions set forth in the statement.


In April 2022, the New York Department of Taxation and Finance posted a revised draft regulation adding “[n]ew provisions, largely modeled after the MTC model statute” that “address PL 86-272 and activities conducted via the internet.” While the New York draft regulation generally adopts the MTC’s statement, the draft regulation adds language that conceivably could be used to further reduce the P.L. 86-272 protection for internet sellers beyond the intent of the MTC’s statement.




7. Market-based sourcing developments


There have been numerous apportionment sourcing developments during the past 15 years as many states changed from a cost-of-performance method for sourcing sales other than sales of tangible personal property to a market-based sourcing method. Continuing this trend, there were significant decisions in 2022 concerning the sourcing of revenue from services.


Perhaps the most significant apportionment development in 2022 was the Texas Supreme Court decision in Sirius XM Radio v. Hegar. This case concerned the proper sourcing of subscription receipts by a satellite radio producer and distributor that incurred most of its production costs outside Texas. In 2020, the Texas Court of Appeals agreed with the Texas Comptroller of Public Accounts that a service is performed in Texas if there is a “receipt-producing, end-product act” in the state. This market-based approach sourced service receipts to Texas if the subscriber’s radio was in the state. In reversing the Court of Appeals, the Texas Supreme Court held that the receipts should be sourced to the state where the radio programming is produced. The court remanded the case to the Texas Court of Appeals to determine the fair value of the taxpayer’s receipts that were performed in the state. On remand, the Texas Court of Appeals affirmed the trial court’s conclusion that the taxpayer properly used of cost-of-performance data to source the fair value of its service revenue in Texas.


In Florida, a circuit court ruled in Target Enterprise, Inc. v. Department of Revenue that a taxpayer’s use of the cost-of-performance method to source service revenue for purposes of the Florida corporation income tax was correct.




8. Gain sourcing litigation


Several significant cases in California, Massachusetts, and New York addressed the sourcing of gains from sales by out-of-state entities. In 2009 Metropoulos Family Trust v. California Franchise Tax Board, the California Court of Appeal held that a nonresident shareholder’s California source income from an S corporation’s sale of goodwill was partially from California sources and not sourced entirely to the shareholders’ states of domicile. The court concluded that the nonresident S corporation shareholders were taxable on their pro rata share of the gain, because it was business income partially sourced to California under the state’s Uniform Division of Income for Tax Purposes Act (UDITPA) statutes. 


In VAS Holdings & Investments LLC v. Commissioner of Revenue, the Massachusetts Supreme Judicial Court held that the state did not have statutory authority to tax an out-of-state S corporation on the capital gain it received from selling its 50% membership interest in an in-state limited liability company (LLC). The court determined that taxation of the gain was permissible under both the Commerce Clause and Due Process Clause of the U.S. Constitution because the S corporation received financial benefits from the LLC whose growth was tied to the protections, opportunities and benefits provided by Massachusetts.


The New York Supreme Court Appellate Division held in Goldman Sachs Petershill Fund Offshore Holdings (Delaware) Corp. v. New York City Tax Appeals Tribunal that the capital gain arising from a Delaware corporation’s sale of its minority interest in an LLC conducting business in the city was subject to the city’s General Corporation Tax even though the Delaware corporation itself had no other presence in the city.




9. The MoneyGram case


Although the U.S. Supreme Court has not taken up a state tax case since the landmark South Dakota v. Wayfair ruling in 2018, the court is currently considering its first unclaimed property case in over 30 years. Commonly known as the MoneyGram case, the consolidated cases involve a long-standing dispute between Delaware and 30 other states over which state is entitled to escheat approximately $300 million in uncashed checks issued by MoneyGram Payment systems. The outcome of the litigation is likely to have an important bearing on which states may claim uncashed checks under existing state escheatment rules.




10. Rollout of the Colorado retail delivery fee


In 2021, Colorado became the first state to enact legislation imposing a state-level retail delivery fee on certain motor vehicle deliveries to a Colorado location with at least one item of tangible personal property subject to state sales tax. While the fee did not become effective until July 1, 2022, the Colorado Department of Revenue issued guidance on the implementation of the fee only shortly before the effective date, giving retailers and marketplace facilitators little time to comply with the new requirements. The compliance difficulties associated with the collection of this complex fee have caused confusion for both in-state and remote sellers in determining the extent to which they are required to collect the fee and how to do so.





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