NO MORE CITY SALES TAX ON RESIDENTIAL RENTALS!
Beginning January 1, 2025, Arizona lessors will no longer be required to collect and remit city Transaction Privilege Tax (TPT) on residential rentals. Senate Bill 1131, Chapter 204, Laws 2023 amended Ariz. Rev. Stat. Ann. § 42-6004, which precludes cities from taxing residential rentals. This preclusion does not apply to health care facilities, long-term care facilities, or hotel, motel or other transient lodging businesses
What Is Changing?Under prior law, most cities taxed residential long term (30 days or more) rentals with rates varying depending on the local jurisdiction. This law standardizes and simplifies the tax landscape by prohibiting the imposition of TPT on residential rental income statewide, as residential rentals were already excluded from state and county TPT.
Who Is Affected?• Property owners currently paying TPT on residential rentals in cities and towns that taxed residential rentals.• Tenants should also see a reduction in overall costs as landlords can no longer pass the tax through to their tenants. What Does This Mean for Property Owners?After January 1, 2025, property owners will no longer be required to collect and remit TPT on residential rentals. Property owners should continue to collect and remit municipal TPT on residential rentals through December 31, 2024. If property owners are charging residential tenants for the cost of the TPT, this practice must stop on January 1, 2025.
Next Steps for Property Owners• Review current compliance requirements and ensure that all TPT filings and payments for 2024 are accurate and up to date.• Prepare for the transition by updating lease agreements, billing systems, and accounting practices to remove TPT charges passed through to tenants effective January 1, 2025.• Notify tenants of any changes in rent amounts, if applicable.
What to Expect from the ADORThe Arizona Department of Revenue will automatically cancel all TPT licenses that exclusively list Business Code 045 (Residential Rental) on the account. For licenses with other business activity codes, the residential rental code will be removed, but other business codes will remain active. Property owners do not need to take any action to close or cancel these TPT licenses. However, the cancellation of TPT licenses and/or business codes does not relieve taxpayers of any outstanding tax liabilities or filing obligations for periods before January 1, 2025.
Property Tax Legislation and Court Decisions
LEGISLATION1
Property Tax on Destroyed Property Must be Prorated (Laws 2024, chapter 34)County assessors are required to prorate the value of properties destroyed after they were valued for the year and county treasurers are required to prorate the tax bills.
Property Tax Refunds for Expenses to Mitigate Effects of Illegal Camping and Loitering (HCR 2023-2024)The Arizona Legislature authorized putting to the voters at the 2024 November general election, the approval of a law that would provide for city and county (when property is located in unincorporated county area) property tax refunds to owners who have incurred expenses to mitigate the effects of illegal camping, loitering, panhandling, public consumption of alcoholic beverages or the use of illegal drugs on their property when a city or county adopts or follows a policy declining to enforce such laws. The refund is limited to the city or county portion of the property tax paid (and does not include school taxes). This measure was approved by the voters, to begin in 2025. The purpose of this measure was to force cities and counties to enforce existing laws against camping, loitering, etc.
Taxpayers Are Entitled to Receive the Equity in their Property When Sold for Delinquent Taxes (Laws 2024, chapter 176)When a property is sold for delinquent property tax, the owner is entitled to request that the equity in their property over and above the delinquent tax amount be refunded to them rather than just losing their property in an action to foreclose.
Valuation of Golf Courses (Laws 2024, chapter 8). Golf course land is valued at $500 per acre, fairways and tees are valued based on the Department’s per hole cost, and improvements like clubhouses and other structures are valued based on replacement cost new, less depreciation. To obtain this favorable valuation treatment, the owner of the golf course must record a deed restriction that restricts the use of the property as a golf course for at least 10 years. This legislation provides that to continue to be valued as a golf course, the deed restriction must be refiled when the properties are split or combined. It also requires the owner to notify the county assessor within 30 days of converting any portion of the property to a different use.
Military Reuse Zone Status Renewed for Phoenix-Mesa Gateway Airport (House Joint Resolution 2001). Phoenix-Mesa Gateway Airport was formerly Williams Air Force Base and its status as a military reuse zone was renewed through October 19, 2031. There are both TPT and property tax incentives available for military reuse zones.
Department of Revenue Now Has Responsibility for Military Reuse Zones Laws 2024, chapter 43). The responsibility for designating military reuse zones and certifying taxpayers’ eligibility for military reuse zone incentives is transferred from the Arizona Commerce Authority to the Department of Revenue.
COURT DECISIONS
Mesquite Power, LLC v. ADOR, 2024 Ariz. LEXIS 179 (2024). Income From Power Purchase Agreement Is to Be Taken into Account when Valuing Electric Generation Plant.
While there is a statutory method the value electric generation plants (basically a cost approach), the statutory value cannot exceed its fair market value. Mesquite argued that the statutory value was indeed higher than the plant’s fair market value because the statutory value included the value of a power purchase agreement. Mesquite’s position was that the power purchase agreement was an intangible and under Arizona law intangibles cannot be taxed. The Arizona Supreme Court though observed that the power purchase agreement itself was not being valued but rather under an income approach, the income from that contract should be considered when valuing the plant and remanded to the Arizona Tax Court so the owner’s appraiser could recalculate the value of the facility taking the income from the power purchase agreement into consideration.
Agua Caliente Solar, LLC v. Arizona Dep’t of Revenue, 257 Ariz. 437 (Ct. App. 2024). Full Amount of ITC Attributable to Solar Plant Is to Be Used to Reduce the Plant’s “Original Cost” Although the Credits Had Not Yet Been Utilized.
Solar Generation Facilities are valued at 20% of their “original cost” with a reduction for the value of any investment tax credits applicable to the plant. Aqua Caliente though was not able to utilize the full amount of the ITC on its federal income tax return because it didn’t have sufficient taxable income to absorb the ITC. The Department took the position that since Aqua Caliente did not utilize the ITC, it was not entitled to use it to reduce the plant’s original cost. The Arizona Court of Appeals held that the value should be reduced by the value of federal investment tax credits not yet utilized.
South. Point Energy Ctr. LLC v. Arizona Dep’t of Revenue, 257 Ariz. 189 (Ct. App. 2024). Power Plant on Indian Reservation Subject to Property Tax.
South Point owned an electric generation plant located on the Fort Mohave Indian Reservation in northwest Arizona. The land was leased from the Indian Tribe under a ground lease approved by the BIA. South Point built the plant and owned it, but the Tribe owned the underlying land. South Point argued that under the 9th Circuit Court of Appeals decision in the Chehalis case, the state and county could not impose property tax on the plant because it became a permanent improvement to the land owned by the Tribe and Tribal property cannot be taxed. The Arizona Supreme Court in a prior decision refused to apply the Chehalis case and remanded to the Court of Appeals to consider an additional argument that under the Bracker balancing test, the state cannot tax the plant. In this decision, the Arizona Court of Appeals held that under Bracker, the plant was also subject to property tax because the: (1) extent of the federal and tribal regulations did not weigh in favor of implied federal preemption, (2) economic burden of the tax fell on the lessee rather than on the tribe, and (3) taxes were not impliedly preempted by federal law because the state had substantial interests that justified the tax.
San Diego Gas & Elec. Co. v. ADOR, 256 Ariz. 344 (App. 2023). (Review granted by Arizona Supreme Court.) Statutory Value for Electric Transmission Property Cannot be a Negative Value.
Electric transmission facilities are valued using a statutory cost approach with a reduction for accumulated depreciation. As a part of Federal Energy Regulatory Commission regulations, electric utilities must include as a part of accumulated depreciation, the future cost of removing the transmission lines. San Diego Gas & Electric included the accumulated cost of decommissioning, which reduced the statutory formula value below zero and used the negative amount to reduce the value of construction work in progress. the Court of Appeals held that the full cash value includes the accumulated depreciation of the future cost of removal but that the full cash value cannot be a negative value and that the negative amount cannot be used to reduce the value of construction work in progress.
Sales and Use Tax Legislation and Court Decisions
2024 LEGISLATION
Senate Bill 1370, Chapter 237. Youth Businesses (Lemonade Stands) Don’t Need Sales Tax Licenses. Persons under 19 no longer need a transaction privilege (sales) tax (TPT) license if their gross receipts don’t exceed $10,000 per year.
Senate Bill 2382, Chapter 142. Department of Revenue to Certify Third Parties for Sourcing City and County Transaction Privilege Tax (TPT). The Department of Revenue is required to certify third-party companies to provide sourcing services for purposes of sourcing city and county TPT by January 1, 2028 (extended from January 1, 2026 by House Bill 2909, below). Taxpayers that use certified sourcing services will not be liable for any additional tax due to sourcing errors.
House Bill 2875, Chapter 44, Electronic Funds Payments Deemed to be Made When Authorized. Taxpayers’ electronic funds payments will be deemed to be made on the date and at a time when the taxpayer successfully authorized an electronic funds transfer. The transfer must be evidenced by e-payment confirmation from their financial institution.
House Bill 2380, Chapter 33, Cities Can’t Audit Taxpayer Engaged in Business in More than One City, Unified Audit Committee Must Publish City Audit Guidelines. This legislation prohibits a city from auditing a taxpayer engaged in business in more than one city or town unless that city obtained prior approval from the Department. This bill also requires the Unified Audit Committee (composed of representatives from cities and the Department of Revenue) to publish uniform audit guidelines applicable to all cities and towns.
House Joint Resolution 2001, Military Reuse Zone Status Renewed for Phoenix-Mesa Gateway Airport. Phoenix-Mesa Gateway Airport was formerly Williams Air Force Base and its status as a military reuse zone was renewed through October 19, 2031. There are both TPT and property tax incentives available for military reuse zones.
House Bill 2634, Chapter 43, Department of Revenue Now Has Responsibility for Military Reuse Zones. The responsibility for designating military reuse zones and certifying taxpayers’ eligibility for military reuse zone incentives is transferred from the Arizona Commerce Authority to the Department of Revenue.
House Bill 2909, Chapter 221, Extended Third-Party Sourcing Date and Extends Exemption for Qualifying Forest Products Equipment. In order to give the Department of Revenue more time to certify third parties for sourcing city and county TPT, this bill extended the date from January 1, 2026 to January 1, 2028. Also extended the sales and use tax exemptions for the purchase of harvesting or processing qualifying forest products equipment through December 31, 2026. This bill was passed with an emergency clause, so it went into effect on June 18, 2024 when signed by Governor Hobbs.
COURT DECISIONS
9W Halo Opco, LP v. ADOR, No. 1 CA-TX 23-0003 (11-7-2024). Laundry Rental Business Not Engaged in Processing; Machinery and Equipment Used in Laundry Operations Not Exempt M&E. Taxpayer launders and sanitizes textiles (sheets, etc.) and rents them to entities in the healthcare industry. Taxpayer sought a refund of use tax paid on their purchases of the laundry equipment used in their laundry and sanitization activities. The Department of Revenue denied the refund claim and the taxpayer appealed. The Court reasoned that the term “processing” as is commonly understood within its ordinary meaning does not fall within the meaning of processing. In denying the taxpayer’s claim for refund, the Court relied upon the definition of “processing” contained in Moore v. Farmers Mut. Mfg. & Ginning Co., 51 Ariz. 378 (1938), which stated: “to subject (especially raw material) to a process of manufacturing, development, preparation for market, etc.; to convert into marketable form, as livestock by slaughtering, grain by milling, cotton by spinning, milk by pasteurizing, fruits and vegetables by sorting and repacking.”RockAuto, LLC v. Ariz. Dept. of Revenue (App 2024) (petition for review to Arizona Supreme Court pending); In-State Distributors Provided Nexus for Sales Tax Collection.
RockAuto is an internet seller of auto parts throughout the United States. It used local distributors to fulfill their internet orders. It had no physical presence in Arizona but had local distributors in the state that fulfilled RockAuto’s orders for orders to be shipped to Arizona customers. The Court of Appeals found that the local Arizona distributors acted on RockAuto’s behalf and constituted the sufficient physical presence requiring RockAuto to collect and remit the Arizona sales tax. It should be noted that the years at issue in this case were prior to Arizona’s adoption of economic nexus, so that the applicable test used in this case was “physical presence.”Dove Mountain Hotelco, LLC v. Arizona Dep’t of Revenue, 257 Ariz. 366 (2024). Compensation Received from a Hotel Rewards Program for Complimentary Stays is Subject to TPT. Marriott, as most hotels, has a loyalty marketing program that Dove Mountain, a Marriott branded hotel, participated in. The Marriott rewards program was administered by Marriott Rewards, LLC. When a guest would use points for a complimentary stay at Dove Mountain, Marriot Rewards would compensate Dove Mountain. The issue is whether that compensation was subject to the transaction privilege tax under the hotel classification. The Arizona Supreme Court held that the compensation for the complimentary stays was taxable.
City of Tucson v. Orbitz Worldwide, Inc., No. 1 CA-TX 23-0001, 2024 WL 123640 (Ariz. Ct. App. Jan. 11, 2024). (Memorandum decision. Review denied by Arizona Supreme Court.) Orbitz is Not an “Operator” of Hotels.
Tucson has an occupational license tax on persons that “operate or cause to be operated a hotel.” Tucson assessed Orbitz for that tax, but the Court of Appeals held that Orbitz was not subject to the tax because it did not operate or cause hotels to be operated.
Income Tax Legislation
Senate Bill 1358, Chapter 55. Can Request Arizona Withholding on Distributions from Pension and Retirement Accounts. A recipient of a distribution from a pension or retirement account may request that Arizona income tax be withheld and the distribution is treated as if it were a payment of wages by an employee for a payroll period.
House Bill 2379, Chapter 7. Internal Revenue Code Conformity. This is the annual bill that conforms the Arizona income tax statutes to the Internal Revenue Code as amended and in effect as of January 1, 2024. According to the Arizona Department of Revenue, there is no anticipated fiscal impact to the state General Fund since no enacted federal acts modified the U.S. IRC in 2023.
House Bill 2875, Chapter 44, Electronic Funds Payments Deemed to be Made When Authorized. Taxpayers’ electronic funds payments will be deemed to be made on the date and at a time when the taxpayer successfully authorized an electronic funds transfer. The transfer must be evidenced by e-payment confirmation from their financial institution.
House Bill 2909, Chapter 221. Caps Corporate Tuition Tax Credit at $135 Million Annually, Eliminated Inflation Adjusted Increase. Caps the aggregate dollar level of the Corporate Low Income Student Tuition Tax Credit at $135 million annually, beginning in FY25. Previously, the aggregate cap was $10 million to be increased annually 2020 through 2024 by set percentages and thereafter by the greater of 2% or the percentage of the annual increase in the Metro Phoenix consumer price index.
Other Tax Legislation
Senate Bill 1636, Chapter 242. Expands Definition of Jet Fuel. An excise tax is imposed on the retail sale of jet fuel. Jet fuel was previously defined based on reference to “crude oil.” This definition is expanded to include (a) aviation turbine fuel that consists of conventional and synthetic blending components that can be used without the need to modify aircraft engines and existing fuel distribution infrastructure; and b) jet fuels derived from coprocessed feedstocks at a conventional petroleum refinery.
House Bill 2909, Chapter 221. Department Can Assess and Collect Fees from Cities, Counties and Other Governmental Bodies to Pay for Department’s Tax System Modification. Provides that the amount to be charged to counties, cities, towns, Council of Governments and regional transportation authorities with a population greater than 800,000 for the Integrated Tax System Project, may not exceed $6,626,900 for FY25.
Allows Property Tax Districts to Issue Tax Anticipation Notes to Cover Qasimyar Refunds. Taxing jurisdictions, including school districts, that are liable for tax refunds in the Qasimyar v. Maricopa County litigation where the refunds would result in a property tax increase of 4% or more may issue tax anticipation notes that mature in four years to pay the refunds.
Fixed Price Contracts: Government Contractors Beware
Many predict that, among other procurement and regulatory reforms, the new administration will implement policies favoring the award of fixed-price government contracts and grants. Throughout the years, the procurement pendulum has swung back and forth in favor of and against fixed-price contracting. For example, in 2017, the Department of Defense (“DoD”) implemented a preference for fixed-price contracting and required approval of cost-reimbursement contracts in excess of $25 million by the head of the contracting agency. In 2022, DoD reversed course and removed both the preference and approval requirement.
For taxpayers, fixed-price contracting may seem appealing; however, for government contractors, fixed-price contracts present significant risk. Fixed-price contracting is often criticized because it deprives the government from receiving the best solutions and performance and instead results in awards to the lowest price, technically acceptable offeror. The federal government typically prefers fixed-price contracts because of budget and funding certainty, and because a fixed-price contract assigns all performance risk to the contractor.
Absent actual or constructive changes to the contract requirements, a contractor generally is not entitled to a cost or price increase under a fixed-price contract. This applies to large and small business contractors. A large government contractor recently reported it will recognize a significant loss on fixed-price space and defense programs, which already caused the company years of losses, due to issues such as increased production costs and disruptions from a recent strike. However, the impact on small businesses that cannot absorb the level of losses of a large business can have much more dire consequences.
Contractors have limited options to mitigate the risk associated with fixed-price contracts. First, notwithstanding the fixed-price label, a contractor should seek to include in its fixed-price contract the ability to request equitable price adjustments (“EPA”) for circumstances beyond what a contractor can reasonably assume/predict. For example, while a contractor generally can make assumptions regarding supply chain risk, contractors could not reasonably assume supply chain costs or the cost of certain materials would increase as much as 25 percent or 50 percent, as occurred during the COVID pandemic. A contractor could seek inclusion of an EPA clause that is triggered only when costs exceed a high threshold, such as 25 percent. To be clear, the applicable contracting officer will resist including any sort of EPA clause in a fixed-price contract. And contractors need to be careful conditioning their quotes or proposals on inclusion of an EPA clause as their offer could be deemed non-responsive and eliminated from consideration.
Second, when possible, contractors should negotiate statements of work (“SOWs”) and Performance Work Statements (“PWS”) that include reasonable, achievable performance. For example, for research and development contracts, a contractor should never promise or guarantee successful performance. This would include guaranteeing Food and Drug Administration approval of a drug under a government grant or 100 percent completion of a project. Rather, contractors should attempt to negotiate milestones and goals that do not guarantee success. Obviously, this approach would not apply to some contracts such as construction contracts or the sale of existing products that require no development.
Third, a contractor can seek to negotiate a dollar cap on what it is required to spend to complete performance of a fixed-price contract. Yes, this sounds similar to a time and materials (“T&M”) contract, but the dollar cap in this case would go beyond the funds available under a T&M contract. At the same time, the dollar cap gives the contractor a level of certainty that failure to achieve a specific result will not drive the contractor into bankruptcy.
Many contracting officers will resist and reject the contractor requests discussed above. But contracting officers should consider that the approaches allow more companies to compete for awards, and ensures the government has access to more companies, including small businesses, willing to contract with the government. Absent such measures, competition is reduced and those that opt to compete will propose higher prices to mitigate risk. Bottom line, if the predictions are accurate and the government shifts its contracting preferences to fixed-price contracts, contractors need not immediately throw-in the towel. In most procurements, so long as a company submits a compliant offer, offerors can submit an alternative proposal that includes one or more of the approaches above. These are novel approaches that could mitigate the contractor’s risk in fixed-price contracting to more acceptable levels.
One Week to Go Until HM Treasury’s UK Green Taxonomy Consultation Closes
HM Treasury published the UK Green Taxonomy Consultation (the ‘‘Consultation’’) on 14 November 2024, and there is one week to go until the consultation window closes on 6 February 2025. The Consultation seeks views on the value of the UK government implementing a UK green taxonomy (the ‘‘Green Taxonomy’’) into its wider sustainable finance framework.
The Green Taxonomy — if introduced — is envisaged by the UK government to serve as a tool for financial market participants as a reference book for which economic activities are deemed to support climate, environmental or wider sustainability objectives and, in turn, increase sustainable investments and reduce greenwashing. The UK government’s proposed implementation of the Green Taxonomy forms part of its wider ambitions for the UK to be a leader in sustainable finance. Please see our alert here for further information: UK Doubles-Down on Sustainable Finance – Insights – Proskauer Rose LLP.
Notwithstanding the potential benefits of the Green Taxonomy on the UK investment industry, the UK government has noted that introducing a Green Taxonomy can be complex and that feedback the UK government has received on its value is ‘‘mixed’’.
The Consultation therefore seeks feedback on any market and regulatory use cases for the Green Taxonomy, as well as potential design features and characteristics which would maximise its usability and efficiency for investors and those seeking investment.
The UK government is also looking to understand whether the Green Taxonomy would complement existing sustainable finance policies and how best to facilitate its implementation. In particular, the Consultation focuses on whether and how the Green Taxonomy could achieve the following objectives:
mitigate greenwashing;
channel capital towards increased sustainable investments;
complement the UK’s existing sustainable finance framework; and
include design features to ensure maximum usability and efficiency, including:
interoperability with existing international taxonomies;
addressing the scope of the Green Taxonomy in terms of environmental objectives and sectors to be covered;
incorporation of the “Do no significant harm” principle, which states that progress towards one environmental objective should not cause significant harm to other environmental objectives; and
governance of the Green Taxonomy along with regular updates to it.
Stakeholders have until 6 February 2025 to provide their responses, which is now imminent.
SECURE 2.0: Guidance on Roth Catch-Up Contributions
The long-awaited guidance on the provisions of the SECURE 2.0 Act of 2022 (SECURE 2.0) impacting catch-up contributions has been issued and answers questions plan practitioners have been asking. SECURE 2.0 added a requirement that employees who made $145,000 or more in the previous year must designate any catch-up contributions as Roth (after-tax) deferrals.
Plans That Do Not Currently Permit Roth Contributions
The guidance does not require a plan to allow Roth deferrals. However, if the plan does not allow Roth deferrals, the limit on catch-up contributions for those who made $145,000 in the prior year is $0. To pass testing, a highly compensated employee (HCE) who is not subject to Roth catch-up contributions may need to be precluded from making catch-up contributions. This could happen if the top-paid group election is made for the definition of HCE or if a participant is an HCE because the employee is a 5% owner.
Compensation Limit
The guidance specifies that the $145,000 compensation limit is determined based on Federal Insurance Contributions Act wages (FICA wages) for the previous year. This excludes self-employment income, which is not FICA wages. The compensation limit is determined without prorating wages for employees hired midyear. Only wages paid by the common law employer responsible for the employee’s compensation are considered, regardless of whether employers are aggregated under the controlled group rules.
Deemed Roth Elections
After a participant is required to make Roth catch-up contributions, the plan may deem the participant’s pre-tax deferral election to be a Roth deferral election; the plan is not required to obtain a new deferral election. The participant must still be provided the opportunity to change the participant’s deferral election if the participant no longer wants to defer. If a participant makes Roth deferrals during the year equal to the catch-up limit, but before the participant’s deferrals have reached the catch-up limit, the plan may count the amount of the Roth deferrals toward the required amount of Roth catch-up contributions.
Roth Elections for All Participants
If Roth elections are permitted for some participants, they must be permitted for all participants. A plan may not require all catch-up contributions to be Roth contributions. Participants must have a choice between designating deferrals as pre-tax or Roth.
Correction Methods
The guidance provides correction methods for failure to follow the Roth catch-up contribution rules accurately. To follow the correction methods, the plan must have practices and procedures in place to prevent failures, including providing for deemed Roth election at the time catch-up contributions start for affected participants or when deferrals exceed the Code §415(c) limit. The methods and deadlines for correction vary depending on the failure.
Effective Date
For plans that are not collectively bargained, the rules apply for contributions in taxable years that begin more than 6 months after the final regulations are issued. If final regulations are issued before the end of 2025, the rules would apply beginning January 1, 2027. However, plans are permitted to apply these rules to taxable years beginning after December 31, 2023.
For collectively bargained plans, the deadline is extended to the first taxable year beginning more than 6 months after the final regulations are issued or, if later, the first taxable year beginning after the termination of the last collective bargaining agreement related to the plan that is in effect on December 31, 2025, excluding any extensions.
President Trump Issues “America First Trade Policy”: Five Things to Know
Immediately upon taking office and in the early days of his administration, President Trump has laid out his “America First” trade policy and signaled certain measures that provide critical indicators for how trade-related actions might unfold. These early developments are crucially important for cross-border operators seeking to anticipate future policy changes and plan strategically, and have included the following:
On January 20, President Trump issued an Executive Order (“EO”) directing the Secretary of State to “issue guidance bringing the Department of State’s policies, programs, personnel, and operations in line with an America First foreign policy, which puts America and its interests first.”
In a related memorandum (the “Memorandum”) issued to various department heads the same day, President Trump outlined his directives for an “America First” trade policy.
The President delivered remarks to the World Economic Forum in which he stated that any company that does not make its products in the United States will be subject to tariffs, and followed this up with comments at another appearance in which he mentioned that he is considering tariffs on computer chips, pharmaceuticals, steel, aluminum, and copper.
President Trump has signaled a willingness to use tariffs to pursue non-economic foreign policy goals, which will have significant implications for global trade.
This alert sets out five points for companies to note as they navigate the cross-border landscape:
The Memorandum does not usher in any immediate policy changes.
While sweeping in scope—as explained below—the Memorandum does not implement any immediately binding changes to applicable law. Rather, it directs various federal departments to review certain key trade issues and make recommendations to the President in relatively short order, in most cases by April 1. That sets up a critical period in the spring in which the White House will receive such recommendations and potentially take action.
The Memorandum sets the stage for a range of tariffs, trade remedies, and review of trade agreements.
The Memorandum directs executive branch review of, among other things:
the cause of annual trade deficits and whether measures such as a “global supplemental tariff” or other policies can remedy them;
the feasibility of establishing the best methods for designing, building, and implementing an External Revenue Service to collect tariffs, duties, and other foreign trade-related revenues;
any unfair trade practices by other countries and recommend appropriate actions to remedy such practices;
commencement of a public consultation process with respect to the United States-Mexico-Canada Agreement (“USMCA”) in preparation for the July 2026 review of the USMCA;
policies and regulations regarding the application of antidumping and countervailing duty laws;
the impact of all trade agreements on the United States, including the World Trade Agreement on Government Procurement;
current exclusions and exemptions from the Section 232 tariffs on steel and aluminum;
migration and fentanyl flows from Canada, Mexico, and China;
whether China is living up to the U.S.-China Phase One trade agreement;
whether additional tariffs would be appropriate in response to China’s alleged unfair trade practices, including its circumvention of “Section 301” tariffs by exporting items to the United States through third countries; and
whether it is necessary to launch investigations to “adjust” imports that threaten U.S. national security.
Directionally, the Memorandum paves the way for robust tariffs, actions targeting China, Canada, and Mexico, and rigorous review of the USMCA and other U.S. trade agreements.
The Trump Administration also is reviewing export controls and other national security-related regulations.
The Memorandum calls for review of the following:
U.S. export controls, including how to “eliminate loopholes,” preserve U.S. technological leadership, and drive enforcement;
whether President Biden’s EO on U.S. outbound investment into China and Chinese-linked entities, and related regulations, are sufficient to safeguard U.S. national security; and
the effectiveness of the U.S. Department of Commerce’s rule on connected vehicles under the Information and Communications Technology and Services (“ICTS”) rules, and whether other ICTS rulemakings would be appropriate.
Not surprisingly, these directives likely signal further restrictive measures in these areas—more export controls (particularly in connection with leading-edge and emerging technologies), more restrictions on U.S. outbound investment supporting China, and more controls on imported ICTS with links to China.
President Trump has made remarks in key settings laying out his tariff philosophy and identifying potential early targets.
On January 23, while delivering remarks at the World Economic Forum, President Trump highlighted his strategy, telling attendees:
“My message to every business in the world is very simple: come make your product in America and we will give you among the lowest taxes of any nation on Earth . . . But if you don’t make your product in America, which is your prerogative, then, very simply, you will have to pay a tariff.”
Shortly thereafter, at a Republican retreat, President Trump stated that his administration was going to place tariffs on computer chips, pharmaceuticals, steel, aluminum, and copper to return production of these goods to the United States.
In addition to the directives set out in the “America First Trade Policy,” President Trump’s actions demonstrate a willingness to threaten and perhaps use tariffs as a stick in the pursuit of non-economic foreign policy goals.
On his first day in office, President Trump announced plans for a 25 percent tariff on products from Canada and Mexico, effective February 1, asserting that America’s neighbors were allowing “mass numbers of people and fentanyl” to come into the United States. Leaders in Canada have suggested that Canada will retaliate, while officials in Mexico have signaled that they will respond “step by step.”
The following day, President Trump announced efforts to impose a 10 percent tariff on China because of its alleged role in the U.S. fentanyl crisis. Although the 10 percent tariff is substantially smaller than the 60 percent tariff initially threatened during President Trump’s campaign, China’s stock market and currency fell following President Trump’s announcement.
Over the weekend of January 26-27, President Trump threatened 25 percent tariffs against Colombian exports to the U.S. in response to Colombia’s refusal to accept planeloads of deported Columbians. Shortly thereafter, Colombia reached an agreement with the United States to accept U.S military flights of deported migrants.
We will continue to monitor developments regarding implementation of the Trump administration’s trade policy.
GeTtin’ SALTy- Episode 45: 2025 SALT Outlook with MultiState’s Joe Crosby [Podcast]
In this episode of GeTtin’ SALTy, host Nikki Dobay sits down with Joe Crosby, CEO of MultiState Associates, to explore the complex landscape of state and local tax policy in 2025. With a new federal administration and shifting economic forecasts, states are facing both potential opportunities and challenges in crafting their fiscal year ’26 budgets.
Joe delves into the political dynamics affecting tax policy decisions, particularly in states grappling with budget deficits and expanding social programs.
The conversation touches on the potential for tax increases, the debate over mandatory worldwide combined reporting, and whether there will be a continued interest in digital advertising taxes.
Nikki and Joe also discuss the incremental approaches some states are taking to reduce income taxes.
They wrap up the episode with a surprise non-tax question about sailing, revealing Joe’s extensive nautical adventures.
Collection Due Process Litigation Not Moot After Tax Liability Is Paid
Jennifer and Patrick Zuch were married from 1993 to 2014 and filed joint tax returns until 2009. For 2010, Jennifer and Patrick filed separate tax returns. The couple submitted $50,000 of estimated tax payments for 2010 but made no designation whether the payments should be allocated to Jennifer’s tax liability or to Patrick’s tax liability.
After processing Patrick’s return, the IRS sent a notice that it applied $50,000 of estimated tax payments all to Patrick’s return. Jennifer then filed an amended return claiming a refund where her return showed total tax of $27,682, less $50,000 of estimated tax payments. Patrick also filed an amended return agreeing that the $50,000 of estimated tax payments should be allocated all to Jennifer.
Despite the couple’s agreement on the allocation of the estimated tax payments, the IRS did not adjust the allocation of the $50,000 from Patrick to Jennifer. Instead, the IRS issued Jennifer a Final Notice of Intent to Levy and Notice of Your Right to a Hearing as to her $27,682 tax liability for 2010.
If a taxpayer does not pay the amount the IRS says is due, the IRS can levy. But, before it does so, it must provide the taxpayer notice and an opportunity for a hearing to contest the levy. The taxpayer has 30 days to request a hearing. The hearing is known as a Collection Due Process (CDP) hearing.
Jennifer requested a CDP hearing. After the hearing, the IRS Appeals Officer determined that her tax liability was correct. Jennifer filed a petition to the Tax Court disputing the IRS Appeals Officer’s determination and to challenge her underlying tax liability. While the case was pending in Tax Court, the IRS credited Jennifer’s 2018 overpayment to 2010 which reduced Jennifer’s balance due to $0. The Tax Court then granted an IRS motion to dismiss because there was no longer an unpaid tax liability and therefore the case was moot. Jennifer filed an appeal.
The Court, in Zuch v. Commissioner, 97 F. 4th 81 (3d Cir. 2024), remanded the case back to the Tax Court to adjudicate whether Jennifer is entitled to receive credit for the estimated tax payments. The Court ruled that a live dispute as to an underlying tax liability does not become moot based upon payment of the unpaid tax. The Court reasoned that the IRS may not unilaterally oust the Tax Court from jurisdiction and take away a taxpayer’s protection from a CDP hearing.
The IRS disagreed with the decision of the Appeals Court and on January 10, 2025, the U.S. Supreme Court agreed to review the case.
The Zuch case reveals the excessive bureaucracy that taxpayers may confront in dealing with the IRS.
Michigan Flow-Through Entity Tax Election Deadline Extended
For tax years beginning on or after January 1, 2024, eligible Michigan taxpayers who wish to make the flow-through entity (FTE) tax election now have until the last day of the ninth month after the end of their tax year. For example, for a calendar year, FTE must file the election with the department on or before September 30, 2025, for the 2024 tax year. Before the amendment in House Bill 5022, the same entity would have had to file its FTE tax election by March 15, 2024.
Taxpayers who make or have made the FTE tax election, and reasonably expect to owe tax for the year, are required to file quarterly estimated returns and make payments. House Bill 5022 includes the following situations in which elective taxpayers will not be subject to penalties and interests:
Penalties and interest will not be assessed for tax years beginning on or after January 1, 2024, as long as the taxpayer submits four equal payments that total:
90% of the taxpayer’s current-year liability, or
100% of the taxpayer’s previous year’s liability.
Penalties and interest will not be assessed for tax years 2022 and 2023 as long as:
The preceding year’s tax liability was $20,000 or less, and
The taxpayer submitted four equal payments totaling the immediately preceding tax year’s tax liability.
Penalties and interest will not be assessed for any quarterly estimated payment due before the taxpayer makes the FTE tax election for that tax year.
A member may claim credits on their personal or corporate tax returns for FTE payments. Under House Bill 5022, for tax years beginning after January 1, 2024, the member’s share of FTE tax is creditable if the payment was made before the filing date of the annual return. This is an extension from the previous cutoff of the 15th day of the third month after the close of the FTE’s tax year.
Complying with the ACA Disclosure Requirements Just Got a Whole Lot Easier!
New legislation liberalizing certain disclosure requirements under the Affordable Care Act (“ACA”) was passed at the end of 2024.
Effective for 2024 reporting, mailing a paper copy of Forms 1095-C/1095-B is no longer required if the employer timely provides employees with proper notice by January 31, 2025.
Under the ACA, Applicable Large Employers (ALEs) are required to provide minimum essential health care coverage to at least 95% of their full-time employees that meets “minimum value” and “affordability” standards, or potentially pay a penalty to the Internal Revenue Service (“IRS”) under the ACA’s employer shared responsibility provisions. In connection with this requirement, health insurers and ALEs are required to provide full-time employees and employees with health care coverage with an annual IRS Form 1095-C/1095-B that discloses the coverage.
ALEs are no longer required to do a mass mailing of these forms to their employees if the employer meets certain notice requirements. If an employer posts a clear, conspicuous and accessible notice informing employees that any individual to whom Form 1095-C/1095-B would otherwise be required to be provided may request a copy of the applicable forms, a broad mailing to all employees is not required. There has not been subsequent guidance on what will qualify as “clear, conspicuous and accessible,” so for purposes of complying with the notice condition this year, employers are left to make a good-faith and reasonable interpretation of the standards.
Deadline – January 31: The notice must be posted no later than January 31 following the year of the reporting. For the 2024-year reporting, the notice must be posted by Friday, January 31, 2025.
Responding to Requests: Upon request, employers must provide the requested IRS Form 1095-C/1095-B to the employee by the later of January 31 or 30 days after receiving the employee’s request.
Employers still need to complete and file Forms 1095-C and 1094-C with the IRS. If filed electronically, the forms are due no later than March 31, 2025; if filed in paper form, the forms are due no later than February 28, 2025.
Next Steps for Employers:
If an employer wishes to take advantage of this reprieve, the employer should prepare and conspicuously post an accessible notice to employees informing them of their right to request a Form 1095-C/1095-B. The notice must be posted by January 31, 2025.
Employers should adopt a process for managing employee requests for forms.
Employers should continue to prepare and submit required ACA forms with the IRS.
DOJ Announces Largest Employee Retention Credit Fraud Indictment
Overview
On January 22, 2025, the US Department of Justice (DOJ) announced the indictment of seven individuals in the largest Employee Retention Credit (ERC) fraud scheme to date. According to the indictment, the defendants filed more than 8,000 refund claims for ERCs and Sick and Family Leave Credits (SFLCs), totaling more than $600 million.
In Depth
The ERC and SFLC programs were designed to help businesses retain employees on the payroll during the COVID-19 pandemic. Prosecutors allege that the defendants exploited these programs by submitting fraudulent claims on behalf of ineligible businesses, inflating employee numbers, and misrepresenting wages. DOJ asserted that the defendants concealed their involvement by not identifying themselves as preparers on the returns, using virtual private networks and through other means.
ERC fraud has been a top priority of DOJ and the Internal Revenue Service (IRS), and this indictment can be added to a growing list of ERC-related enforcement actions. As of October 2024, the IRS Criminal Investigation division initiated 504 criminal investigations involving more than $5.5 billion in ERC claims. There have been more than 45 cases resulting in federal charges, with 27 resulting in convictions. A specialized unit within DOJ, called the “Fraud Strike Force,” has also been initiating investigations into potential ERC fraud, stating that such enforcement will “occupy a substantial portion of DOJ attention for years to come.”
On the civil enforcement front, the IRS has strengthened its efforts to examine and disallow improper ERC claims. The IRS announced in mid-2024 that it had issued approximately 28,000 disallowance notices on claims aggregating $5 billion. According to the IRS, these claims “showed a high risk of being incorrect.” The IRS described these disallowances as the “first significant wave,” and with at least 1 million claims still outstanding, practitioners expect more disallowances. The IRS has also announced that it will be sending 30,000 “clawback” letters seeking to reclaim ERC funds that have already been paid.
We have seen an aggressive examination campaign from the IRS targeting ERC claims. These exams, numbering into the thousands, have often involved more typical questions of taxpayer eligibility (e.g., number of employees and wages amount) but have also inquired about whether there has been “double dipping” with respect to other COVID-19-era stimuli, such as the Paycheck Protection Program. The IRS is also focused on governmental orders and the effects these orders had on taxpayers’ business operations.
Besides taxpayers, accountants and other tax professionals have also been a target of IRS enforcement activity. The IRS Office of Promoter Investigations “has received hundreds of referrals from internal and external sources” concerning individuals and businesses that it deems as potentially having facilitated fraudulent ERC claims. The IRS has the authority to impose civil penalties on alleged promoters under Internal Revenue Code Section 6700. DOJ may pursue criminal cases against individuals and entities it believes are promoting false ERC claims. This enforcement activity may even target individuals or principals of a firm after it has long ceased operations.
Practice Point: DOJ’s announcement makes clear that ERC fraud remains an enforcement priority for 2025. Taxpayers and tax professionals should prepare now to defend their ERC claims, including by compiling and maintaining substantiation to support each claim, and be ready to take immediate steps should they receive an IRS audit notice, a request for documentation or information, or are otherwise contacted by the government.
Louisiana Department of Revenue Announces an “Extraordinary Measure” to Continue Certain Sales Tax Exemptions for Non-Profits and Educational Institutions
On January 16, 2025, the Louisiana Department of Revenue issued Revenue Information Bulletin No. 25-009 announcing the “extraordinary measure” of continuing to administratively recognize two exemptions related to nonprofits and school-related admissions to athletic and entertainment events that apparently were inadvertently repealed (effective January 1, 2025) during the recent special session of the Louisiana Legislature.
Even though the Louisiana Legislature could correct these apparent oversights in the 2025 Regular Session, in the interim the Department will continue to recognize the two exemptions. The Bulletin urges Louisiana local tax administrators to recognize the same relief for eligible nonprofit organizations and educational institutions.
The 2024 Third Extraordinary Session resulted in substantive reforms to hundreds of tax–related statutes with an effective date of January 1, 2025. During the legislative process, over two hundred sales tax exclusions and exemptions were modified. * * * Given the scale of these changes, technical oversights are inevitable. In reviewing the repealed exemptions and exclusions, we have identified certain exemptions that appear to have been repealed in a manner inconsistent with legislative intent. As a result, the Department will continue to recognize the following exemptions: 1. La. R.S. 47:305.14 – Certain sales by nonprofits organizations 2. La. R.S. 47:305.6(5) – Admissions to athletic or entertainment events of educational institutions.
New President Offers Opportunities for Local and Foreign Investors
On January 13th, 2025, President Sheinbaum presented the Mexico Plan (MP), which details tax incentives, provides for greater efficiency in administrative processes, and outlines investment goals for infrastructure related to energy, urban mobility, and housing, among others.
Nearshoring
Under the MP, the Mexican government intends to incentivize new investments that promote organizational training as well as innovation by encouraging relocation of companies and restructuring of supply chains related to manufacturing.
The MP enables accelerated depreciation of new investments in fixed assets (41% – 91%) as well as additional deductibility of expenses related to training and innovation (25% of the increase in expenses over the average of the last three fiscal years).
These new tax incentives will be subject to assessment by an Evaluation Committee that will certify compliance of investment milestones. The referred Committee will annually set the cap of incentives that compliant taxpayers may benefit from. The referred benefits will be available beginning January 22, 2025, and will apply to fixed assets acquired up to September 30, 2030, and to training and innovation expenses incurred up to and including tax year 2030.
Investment Zones
The MP promotes 12 new geographical investment areas (Tamaulipas, Puebla, AIFA-Tula, Bajío, Piedras Negras, Nuevo Laredo, Hermosillo, Puerto Lázaro Cárdenas, among others), in addition to those implemented by former President Lopez Obrador, by providing tax incentives to investors operating in Strategic Sectors (semiconductors, electronics, energy, logistics, tourism, agroindustry, infrastructure, IT, electromobility and automotive, medical devices, and pharmaceuticals), who relocate or open operations in these areas. Tax incentives available to qualifying companies include:
100% tax credit on income tax generated during the first three years.
A tax credit of 50% to 90% of the income tax generated during the following three fiscal years, which will be granted if the employment levels, to be determined in accordance with guidelines to be issued by the Ministry of Finance, are met.
Immediate 100% deduction of investments made during the first six years in new fixed assets used for production, excluding furniture, office equipment, automobiles, armored vehicles, and unidentifiable fixed assets.
100% tax credit of the VAT resulting from the sale of assets, rendering of services, or lease of assets between companies located within the investment areas.
These tax incentives are not applicable to taxpayers under the maquila regime; the optional regime for controlled groups; Real Estate Investment Trusts; or companies participating in cinematographic or theater production or distribution, music, dance, visual arts, or research and development of technology related to high performance sports.
Government Banks
To further incentivize companies operating in the outlined Strategic Sectors, the MP provides for Government banks to provide: (A) preferential loans (with competitive interest rates) to companies within the Strategic Sectors. The specific fund for these loans will be announced on February 7, 2025; (B) preferential long-term loan rates for small- and medium-sized companies to increase their working capital, technology, and exportation capabilities, enabling reverse factoring (supply chain finance) at an annual rate of 3.5%; (C) dedicated loans to incentivize acquisition of new technologies and machinery; (D) subsidies and loans to include Mexican incorporated companies (no limit on whether they are foreign owned) into international supply chains (e.g., automobile, aerospace, and electronics); and (E) preferential loan rates for long-term infrastructure projects (e.g., highways, airports, and telecommunications networks) in underserved areas.
IMMEX 4.0
The MP provides for the implementation of the IMMEX 4.0 Program to consolidate, within the Ministry of Economy, application processes to obtain authorization to operate under an IMMEX program (deferral of import duties on temporary imports) and VAT Certificate (100% credit of VAT on temporary imports). The referred consolidation is intended to significantly reduce application times (currently fluctuating for up to two years) and ease compliance with requirements.
Public Investment
Additionally, the MP creates a public investment project that prioritizes five specific sectors: Energy, PEMEX (State-Owned Petroleum Company), Water, Transportation and Mobility, and Public Housing.
Energy: US$23.4 billion will be allocated for electricity generation, transmission, and distribution; US$12.3 billion for new power plants; US$7.5 billion to strengthen the transmission network; and US$3.6 billion for the distribution network.
PEMEX:MX$2.07 trillion with an annual average of MX$345.5 billion will be allocated to strengthen exploration, production, and oil & gas.
Water: MX$20 billion will be invested in water projects in 2025, which will focus on cleaning up key rivers and modernizing irrigation systems covering 200,000 hectares of land. The primary watershed area includes the Lerma-Santiago, Atoyac, and Tula rivers. This section also includes the implementation of 16 infrastructure projects under the Mexican National Agreement for the Human Right to Water and Sustainability (as published on December 12th, 2024) that will include more than MX$16.4 billion of private investment.
Transportation and Mobility: To improve urban mobility and infrastructure, an investment in more than 3,000 km of railroads for passenger and cargo transportation is planned.
Public Housing: The plan contemplates the construction of one million homes (CONAVI and INFONAVIT) for which MX$513 billion will be allocated.
Additionally, the development of a National Technical Certification Program for 150,000 professionals and technicians per year is also being proposed as part of public investment in strategic sectors.
This entire investment plan, along with the adjustments in government budgets, represents a unique opportunity for foreign suppliers that engage in these strategic areas, to be considered by the Mexican Government for public procurement. Therefore, in addition to the benefits that this investment model offers suppliers eligible for public/state-banking funding and other incentives, this investment scheme results into an attractive option for both parties.
Digitalization and Efficiency in Administrative Processes
The MP proposes a complete digitalization and on-line channel for administrative applications to promote efficiency in obtaining authorizations for participation in commercial programs and investment projects. A launch date for this has not been announced yet. Our Firm has the team and capabilities to assist our clients in the design and implementation of strategies that allow them to benefit from the development of the proposed measures under the Mexico Plan.