This transcript has been edited for length and clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: State status update.

As 2024 gets underway with resolutions and new beginnings, we're taking a look at what we can expect from state tax policy here in the U.S. this year. There are several issues to keep an eye on, and here to tell us more about them is Tax Notes senior reporter Paul Jones. Paul, welcome back to the podcast.

Paul Jones: Thanks, Dave. It's good to talk to you again.

David D. Stewart: Now, I understand you recently talked to someone about issues to keep an eye on this year. Who did you talk to?

Paul Jones: That's right. We spoke with Stephanie Do, who is senior tax counsel for the Council On State Taxation.

David D. Stewart: And what sort of things did you get into?

Paul Jones: Well, we spoke about a number of tax policy debates and trends that are likely to see action in 2024, from continued efforts to determine how states should pursue taxation of foreign earnings, to how state lawmakers will prepare for the scheduled expiration of many provisions of the Tax Cuts and Jobs Act to which their states do and don't conform.

David D. Stewart: All right, let's go to that interview.

Paul Jones: Hi, Stephanie. Thanks for agreeing to talk with us about some of the key state and local tax issues and trends that you think might see some more attention and possibly some action in 2024.

Stephanie Do: Hi, Paul. It's so good to join you to talk about my favorite tax topic. Looking forward to the new year.

Paul Jones: Yeah, and we spoke before this recording just to catch up on some of these issues, and one of the things that you talked to me about when we spoke is that the time is obviously drawing near when some of the provisions of the Tax Cuts and Jobs Act are set to expire. Obviously, there's been some talk in Congress about potentially raising the SALT cap or just letting it die, and there are other provisions that are coming to a close or that may be extended.

And state lawmakers obviously put a lot of time after the Tax Cuts and Jobs Act passed determining how to conform, whether to conform, or how not to conform to the Tax Cuts and Jobs Act. As we come up on the expiration date, how is this going to impact states? What are some of the decisions that they may have to make, and what are some of the implications for taxpayers that you think we might see some work get done on in 2024?

Stephanie Do: Just as the states were beginning to settle on how they were going to address all of the various Tax Cuts and Jobs Act provisions, states have to go back to the drawing board and figure it all out again. And legislators are beginning to proactively look at the impact of these looming sunset dates and preparing for what could possibly be in store at the federal level. And for the sunsetting provisions, almost all of the individual, estate, and passthrough provisions will expire. The collective impact for states that conform to the Tax Cuts and Jobs Act is that individuals are going to get hit with larger income tax bills, so state legislators are beginning to review the impact of these provisions on a provision-by-provision basis.

For example, we've seen Utah's interim tax committee begin this process publicly, including setting up a general timeline needed for the state to act on these sunsetting provisions, if Utah decides to do anything at all. For businesses, the sunsetting provisions for 2025 won't nearly have as big as an impact as for individuals.

For the C corporations, the corporate tax provisions with the largest federal tax impact that is sunsetting is probably the section 168(k) bonus depreciation provisions. States generally have already decoupled from these bonus depreciation provisions; it's not like some of the monumental shifts in corporate taxation, such as the way foreign earnings are treated on an ongoing forward basis with the existing TCJA provisions.

That said though, the big question mark is what is Congress going to do about these sunsetting provisions? Is Congress just going to extend out these provisions? Will Congress see this as an opportunity to evaluate the internal revenue code again? Or maybe some pay-fors for extending certain TCJA provisions? There's quite a bit that could be up for consideration, and I'd assume that that includes some of the tax policy ideas from Biden's tax proposals from a couple of years ago.

And the second big question mark is timing. We've seen Congress work right up to the eleventh hour, and even past the deadline, which is becoming more and more the standard of operations. Regardless of what Congress decides, the later these decisions are made, the shorter the runway states have to react, and that will be a significant challenge for states, and will always make it harder for states to legislate and to administer. So even though state legislators are preparing for these sunsetting provisions, what Congress does is out of their hands, and the timing of it is completely out of their hands as well. So we'll see what that looks like, but we are seeing states prepare for it in this upcoming year.

Paul Jones: Yes, and as you mentioned with the timing, it can't be helping things that we're also obviously heading into an election year.

Stephanie Do: No, it always adds one layer of complication to throw in an election as well.

Paul Jones: So continuing to talk about the Tax Cuts and Jobs Act, one key feature of it was that it did change the way the U.S. treats foreign earnings, in some respects, but states are still working out how they tax foreign-source income, and when we spoke, you said there will probably be continued action by states to address that.

Can you talk a little bit about what states have done thus far, and also what other actions they may take in 2024? Are we going to see states moving to adopt more conformity to GILTI? Will we see potentially states turning back to things like tax haven laws? And also, if you care to, can you talk a little bit about what motivates states to continue working in this area?

Stephanie Do: Well, foreign earnings is such a huge tax policy issue to unpack. I think aside from revenue, the policy concern is profit shifting. And if I could just jump to the moral of this story, it's that patience is a virtue. You have the OECD, the Organization for Economic Cooperation and Development, working on multilateral tax treaty agreements to address base erosion and profit shifting — a huge, monumental, and ongoing task that is continuously being addressed at the international stage, and rightfully so.

But this is where impatience has set in and has led to fractured unilateral actions, and those unilateral actions are seen at the international level, but also states as well, and these are where we're seeing various different state legislative ideas and initiatives. And many of these state legislative ideas have come from what we've seen transpired within this international debate, but have been taken in a snapshot of time that doesn't really account for the broad understanding of where these ideas and initiatives came from.

So for example, one of which you mentioned is tax haven laws, which is, in essence, requires the inclusion of income stemming from a certain listed country or jurisdiction that is deemed to be a tax haven for companies who use these jurisdictions for profit-shifting purposes. And this tax haven list came from the OECD's list of uncooperative tax havens, but that is defunct now because jurisdictions on that list have been removed from the list because they have made changes to get removed from what I call the "OECD's naughty list."

But some states still consider this old defunct list a great place to start addressing profit shifting. It's a simple idea and it's very digestible. If you're on this list, you're considered a bad jurisdiction that facilitates profit shifting, so we should try to correct that. And if it was good enough for the OECD, then it must be good enough for us, and I think that's absolutely wrong.

You can't take a defunct list that has already outlived its use, but we still see this legislation pop up. Tax haven legislation is really demonstrative of why profit shifting is best addressed at that international level, because profit shifting is, first and foremost, an international issue.

And we've already seen that it isn't a great idea when states try to address profit shifting unilaterally, such as when states tried moving to reporting corporate income taxes on a worldwide basis in the 1980s, where even though mandatory worldwide combined reporting for state corporate income tax purposes was upheld by the U.S. Supreme Court, the practical implications of international governments was that they wanted to retaliate on the United States, and it resulted in states having to walk away from the mandatory worldwide combined reporting debate.

But nevertheless, we saw, this year, a few states consider moving from a water's-edge-based filing to mandating a worldwide-based filing for corporate income tax purposes. Notably, in 2023, Minnesota and New Hampshire both considered shifting to a mandatory worldwide combined reporting, and both of which failed.

Minnesota, instead of moving to a worldwide filing system, changed its treatment of global intangible low-taxed income, GILTI. And in Minnesota, GILTI is now treated as dividend income without any factor representation, so it's not included in the apportionment calculation, and raises huge constitutional concerns. And prior to this change on the treatment of GILTI, Minnesota had subtracted GILTI when computing Minnesota's corporate franchise tax.

I think TCJA's foreign income provisions, such as GILTI, has spurred a renewed discussion on profit shifting at the state level, and I don't see that waning anytime soon. The mechanisms will vary, whether it be tax havens, conformity to GILTI provisions, or adopting worldwide combined reporting. And if anything, the sunsetting provisions, even though they don't relate to foreign income provisions for corporations, will still be an opportunity to discuss profit shifting that many legislators just can't resist missing. But this is such a monumental issue that it really is best left for the international community to resolve first.

Paul Jones: Let's switch to a different ongoing trend. This relates to the growing efforts by state governments, and also other organizations, including, notably, the Multistate Tax Commission, to work on how states can or should go about taxing digital products and digital services. Obviously, a high-profile example is the controversy over Maryland's digital ad tax law. So regarding this topic, what developments on this front do you think we're going to see in 2024? And also, since I believe this is a topic that COST is working on, what are your interests in this, and how is your organization pursuing them?

Stephanie Do: Paul, this is a perfect segue, because Maryland's digital advertising tax is based on digital services tax regimes that were unilaterally created by some foreign jurisdictions as a result of the pace of the OECD's project to build consensus on how to deal with the digital economy. Again, similar to how we've been dealing with foreign earnings, patience is a virtue.

There's a lot of layers to unpeel on this onion, but I would put Maryland's digital ad tax, and other digital services taxes, such as data taxes, separate from state taxation of digital products and services within a traditional sales and use tax framework. But there are definitely overlapping issues, such as how it is challenging to capture what it is, how to measure it, and where the value is created. But there are fundamental differences between digital services taxes, such as what we've seen in Maryland, and dealing with the digital economy within a sales and use tax framework.

What we saw in Maryland on creating a new digital advertising tax that is separate from the sales and use tax system shouldn't be up for debate, but unfortunately, it was, and still is. I think it's important to understand that Maryland's digital ad tax came from international jurisdictions unilaterally trying to address the digital economy, with a huge handicap of not having the same mechanisms that states here in the United States generally have to address the digital economy.

Interestingly, the solution internationally within the OECD building unilateral consensus though are the same mechanisms that the states in the United States have generally already adopted here that capture the digital economy, primarily economic nexus and market-based sourcing. So the states trying to adopt digital advertising taxes are a solution really trying to find a problem, and ultimately, I don't think that's based on tax policy. The underlying reason I think states are considering digital services taxes, such as seen in Maryland, are new sources of revenue. Maryland has reportedly already received over $100 million from companies subject to the tax.

On the second part, which is the digital economy within a sales and use tax context, I think the focus has been on the central issues related to the challenges of capturing, again, what it is, how to measure it, and where the value is created, which is where, as you mentioned, organizations like the Multistate Tax Commission have taken a proactive role.

But it's clear that when they have tried to tackle the issues head on, it's been very difficult as a starting place, such as at the beginning of the project, the state administrators participating in the MTC's digital product uniformity project were trying to address the question of, what is it? And they found it extremely difficult to define. So instead, they had to take a different approach and start off first with, what are the states doing? Are they broadly or narrowly taxing digital products and services? We'll have to see where the project evolves, but I suspect that there will be many, many stages of this project.

And within this debate, COST has been highly involved in it. Our priority is emphasizing that, in a sales and use tax context, the tax imposition is supposed to be on the retail sale. Sales taxes are about consumption, so there needs to be a broad business-to-business exemption to avoid tax pyramiding. From what I've seen, I don't think that there's pushback on this idea from a tax policy perspective, rather it's from a revenue perspective, and also, that it's a Pandora's box that you can't get back in. So once the state has revenue from business-to-business transactions, it can't do an about-face and walk away from it. The dollars are just too big to cut out.

Paul Jones: So there's obviously a lot of complexity and nuance to taxing the digital economy, and we're maybe not necessarily going to see a resolution of that in 2024, but definitely continued action to debate and explore that.

This isn't the same issue, but there is also, as we've discussed, an ongoing effort to sort out taxation of online transactions, not focusing on digital goods rather, but sales of things and services. It's been a number of years since the South Dakota v. Wayfair decision, and states have obviously adopted remote seller nexus laws and marketplace facilitator laws which neatly address the bulk of sales of goods to purchasers from an out-of-state retailer.

But there is still an issue with the broader question of taxing online transactions and applying local taxes, not necessarily just sales and use taxes, to those transactions, and that sounds like that is also a continuing challenge for governments, both state governments and the local governments that are looking to figure out how to assess those taxes, how to enforce them, audits, etc., and, of course, for the business community that's attempting to comply.

So moving from the question of taxing the digital economy to just getting back to taxing the online economy, can you talk about that and how the local tax issue is still something that has to be addressed, and if we're going to continue to see action on that this year?

Stephanie Do: Similar to the discussion on digital products and digital services and digital services taxes, I think we're going to have lots of discussion on it, but not any action that's going to have any real impact, unfortunately. And this is a unique state and local tax issue and really highlights why organizations like COST exist. The challenges with state tax sovereignty and the digital economy are minimal when you compare it to what's happening at the local level, especially now post-Wayfair. The biggest problem to resolve is making sure that, at the local level, that there is not discrimination and undue burdens on interstate commerce.

I'm not going to go into a constitutionality exercise, but I think it's very safe to say that dealing with localities for any multi-jurisdictional business is a burden. And when states and localities adopting the economic nexus thresholds that are similar to the ones sanctioned by the U.S. Supreme Court in Wayfair, there are so many more jurisdictional businesses now, and this increase in additional taxpayers has really highlighted the practical problems with local taxation.

They already existed before Wayfair, and now they're just augmented. The more localities that have their own separate schemes, filing systems, definitions, information requirements, filing periods, thresholds, and audit practices, the larger the burden it is on a business that needs to comply with all of these localities, and the more expensive it becomes.

So in states that don't have high levels of uniformity and ease of compliance at the local levels are getting more and more pressure to address these problems, but there's a lot of pushback and resistance from the municipalities, and you need buy-in to really make traction. Just as it's taken the OECD a very long time to build multilateral consensus, it's the same difficult and slow traction with localities, such as what we've seen in Colorado.

And although I would hope that there was a Wayfair 2.0 to address localities, I don't think litigation and new case law will be able to drive a solution. I think states will continue to hear more and more businesses of all sizes who are frustrated by local tax systems and demanding ease for compliance purposes, and states struggling with addressing this problem.

Paul Jones: There's another local tax issue, obviously, as well, we've seen in states like California, Washington, and Oregon, an increasing number of localities, that are also pursuing business taxes and taxes on individuals that are similar to what have traditionally been the types of taxes that states have pursued, so gross receipts taxes, taxes on income and payroll.

Most recently, in 2023, Salem, Oregon tried to create a local payroll tax that was rejected by voters in November, but obviously that presents a lot of complications for businesses. It also appears to be driven, at least in part, by a desire by these localities to generate revenue to address some of the challenges they're facing.

Do you think that's going to stay isolated to those states? Is there a potential national trend here where we're going to see this happening more? And if so, what do taxpayers have to be concerned about? What might be some ways that states should look to pursue that while minimizing the challenges to businesses from a compliance standpoint, et cetera?

Stephanie Do: I definitely think this trend will continue, and unlike some of the topics that we've talked about, we'll see past ordinances and new taxes in this arena. I don't think it's limited to the West Coast. We're going to see these come as revenue solutions, especially for localities addressing specific projects, such as homelessness and housing.

Wildfire spreads to your neighbors first, and this is the case here, so even though this has been predominant in the Western states, this will continue to expand. And gross receipts and payroll taxes are popular options for stable revenue purposes, but we're seeing flaws in that recently, such as in San Francisco, which has a very complicated business tax system that now has instability because of businesses leaving the city and less employees working in the city. And now, the city is trying to revisit its calculation to rely less on businesses and their employees that are physically located in the city itself.

And on a related issue, I think states and localities are going to continue to try to tax or penalize specific businesses or industries. We've seen that with the Maryland digital ad tax, which we've talked about, but other types of taxes that we haven't touched upon are the capital gains taxes in Washington, or even California's penalty on excess oil refinery profits.

Paul Jones: So let's shift to our last question here. We've talked a lot about taxes and their impacts on governments and businesses, but there's one area that I think we've seen some action on in 2023, and we may see some continued action on, that has a much more direct effect on ordinary people as well as businesses, which is property tax cuts. We've obviously seen tax cuts in recent years when a lot of states were looking at large surpluses.

Some of those were one time, some of those were structural. But I know that I covered efforts by, for example, Texas this year, and I've seen a couple of other states in which legislatures are also looking at reducing property taxes, or even controlling the growth of property taxes for residents. I don't know if this is an area that you focus on, but what do you think we might see in 2024 with respect to property taxes? Business property taxes, sure, but also just for regular people in states where property taxation is a major source of local revenue and potentially also helps offset state costs.

Stephanie Do: Property tax relief is going to take more of a front stage this upcoming legislative session, especially for states that are still doing well financially, and especially because of the upcoming elections. This has been a double-edged sword resulting from COVID, and I don't think it will ever go back to a complete return to office protocols.

So we have out-of-state residents who have moved to other states, and the overall influx of residential property transactions over the past few years has really driven property valuations up. If states can give it, we'll see more proposals for property tax relief. I think we'll also see states trying to do more with less in the space. Delayed valuations are stretching assessors thin, so I think we'll see states trying to find solutions around that, such as extending valuation cycles.

But a big question is whether or not this property tax relief will include businesses, or if businesses will be outside of that conversation. We saw, in 2023, Colorado have a special session to provide a short-term relief on property taxes, but unfortunately, there was no property tax relief given to businesses. And Colorado has set up a special commission to try to provide a more holistic property tax relief, but it's really to be seen whether or not businesses will be included as part of that discussion, so to be seen in this upcoming legislative session.

Paul Jones: Yes, and obviously that, and the other issues we've discussed and many more, will be of interest, and hopefully we can connect again soon and talk about those as they happen.

Stephanie, I've really appreciated it, I'm sure our listeners have as well, and just wanted to thank you again for sharing your insights.

Stephanie Do: Thank you so much for having me, Paul.

David D. Stewart: And now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what do you have for us?

Paige Jones: Thanks, Dave. In Tax Notes Federal, Tom Cullinan examines how IRS settlement initiatives can improve compliance. Kathleen DeLaney Thomas proposes a new quarterly form sent to independent contractors that would inform them of their quarterly earnings and their obligation to remit estimated taxes on that income.

In Tax Notes State, three Eversheds Sutherland practitioners provide an overview of incentives available for data centers. Four practitioners review state tax developments from 2023 and make predictions for 2024.

In Tax Notes International, four tax professionals provide their opinions on Moore v. United States and the taxation of foreign earnings. Oliver Hoor examines the European Commission's directive proposal on transfer pricing and evaluates its purpose and potential.

And before we go, a special announcement. We're excited to announce professor Reuven Avi-Yonah as our newest columnist here at Tax Notes. His weekly column, Reflections With Reuven Avi-Yonah, will feature his take on the latest trends and topics in international taxation. Read his first installment titled, "What is the Best Candidate for a Post-Moore Constitutional Challenge?" in the January 1 issues of Tax Notes Federal and International.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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