2022 brought several significant Nebraska state and local tax developments that are likely to affect many of your clients. We’ve highlighted some key statutory changes and case developments you will want to know.

Income Tax

Social Security Income Exemption. In 2021, Nebraska passed a bill that would exempt a portion of the Social Security benefits received by Nebraska seniors. The exemption percentage would increase through 2025, until 50% of those benefits were exempt from Nebraska tax.

In 2022, the Legislature stepped up that exemption, so that 100% of Social Security benefits would be exempt from Nebraska income tax by 2025.

Individual Income Tax Rate Reductions. In 2022, the Legislature acted to gradually reduce the top income tax rates paid by individuals and fiduciaries. For individuals and fiduciaries, the top rate will be decreased from its current 6.84% to 5.84% for 2027 and later years, via an annual reduction of 0.2% beginning in 2023.

Corporate Income Tax Rate Reductions. The Legislature also acted to gradually reduce the top income tax rates paid by corporations. For corporations, the top rate will be decreased from its current 7.81% to 5.84% via a series of annual reductions beginning in 2023.

Military Retirement Income. In an attempt to incent retired military members to stay in Nebraska, the Legislature acted to exempt 100% of military retirement benefits from Nebraska income tax.

Department of Revenue Residency Challenges. The Nebraska Department of Revenue has continued to focus on the tax residency of persons who maintain homes in multiple states. In the Dec. 9, 2022, decision in Acklie v. Department of Revenue, the Nebraska Supreme Court decided the Acklies remained Nebraska residents for tax purposes for several reasons, including their travel schedule.

In the Acklie decision, the Nebraska Supreme Court declined to review, and thus did not overturn, a Department of Revenue test for determining the number of days spent in a location when a person is travelling. This leaves undecided how the Department of Revenue should count partial days.
We like to use a “Declaration of Abandonment” in pre-planning when a client decides to change residency.

Foreign Income. The Department has continued to press its position, which is an outlier among states, that Nebraska should be able to tax a percentage of income earned by an international company’s foreign subsidiaries (so-called 965 income and GILTI income). The Department’s position is being challenged in a case filed in 2022: Precision Castparts Corp. v. Department of Revenue.

E-Verify. In 2022, the Department began to issue proposed assessments (60-day letters) to companies that have utilized Nebraska incentives and R&D credits, on the grounds that they failed to fully E-Verify every new employees’ work status. There are a number of legal grounds being overlooked in defending against the Department’s position, which we believe should be amended into existing protests or included in new protests.

Property Tax

Funding for Existing Property Tax Credit. In 2022, the Legislature locked in the funding for the existing Real Property Tax Credit, which was funded at $548 million in 2022 but was scheduled to be reduced to $375 million in 2024. The Legislature kept the $548 million funding for 2022, increased this to $560 million in 2023, and then increased the funding by up to 5% annually for later years.

Additional Property Tax Credit. In 2022, the Legislature also created a second refundable credit to refund a part of the community college property taxes paid by Nebraska landowners. This credit would be funded with $50 million in 2022, but that would increase to $195 million for 2026. For later years, that credit would be increased up to 5% annually.

Significant Failure to Claim These Credits. Unfortunately, a significant percentage of these credits are not claimed by Nebraska landowners. In September 2022, the state estimated that approximately 40% of the available credits were unclaimed—meaning the state was keeping about $200 million of the $500 million available.

Isolated Mistake Is Not an Equalization Violation. There are normally two ways to challenge a property tax assessment: actual value and equalization.

In Lancaster Cty. Bd. of Equalization v. Moser, the Mosers owned irrigated agricultural land in Lancaster County. The land was valued as irrigated land. However, the neighboring land was also irrigated, but that land was mistakenly not valued as irrigated. The Mosers thus challenged the value of their property for property tax purposes, claiming their land value was not equalized with their neighbor’s property.

The Nebraska Supreme Court rejected this argument, finding that an isolated error in the valuation of one property need not be replicated through the equalization process.

Sales Tax

While the Legislature did not make significant changes to Nebraska’s sales tax statutes in 2022, there were a few sales and use tax court decisions of importance.

Potential Corporate Officer Liability. In the case Crow v. Department of Revenue, a company was assessed Nebraska use tax on its purchase of items used in its business. The assessment was protested. After the date of protest, the company went out of business and did not keep money sufficient to pay the assessment. The Department then issued a Demand for Payment to an officer of that company, alleging that the officer was personally liable for the tax at issue because the officer paid other creditors of the company while the assessment was still under protest. The Department alleged this was willful nonpayment of taxes, even though the Department’s assessment was still under protest.

This matter is still under consideration by the Lancaster County District Court. However, if the Department’s position is upheld, this could create significant personal risk for responsible officers of companies. Those officers could be held personally liable for a company’s tax if they simply knew about the assessment, even though it was under protest, and paid other creditors instead of the Department of Revenue.

Effect of Prior Guidance From NDOR. The case NPPD v. Department of Revenue involved a narrow issue regarding the classification of certain electric distribution systems as real versus personal property. The tax commissioner held that the systems constituted personal property, so the lease of those systems was taxable.

The bigger issue for most taxpayers was the Department’s treatment of its prior guidance to NPPD. The Department had previously treated the systems at issue as real property and reversed its position in this assessment. The commissioner did not require the Department to follow its prior guidance. Instead, the commissioner simply found that NPPD did not need to pay penalties on the transaction because the Department changed its position. This was appealed to the District Court, which has not yet ruled.

We’ve seen a number of times in which the Department’s current legal staff has decided to reverse the Department’s prior positions on certain matters. While results of a legal challenge vary based on specific facts of a situation, there can be a number of legal defenses that can apply in those cases.

Procedure and Practice

Standard of Review. The Acklie decision also highlighted another important legal principle—that the Nebraska Supreme Court will give a certain amount of deference to the District Courts, which in turn gives a certain amount of deference to the tax commissioner. So, to win or reach an optimal settlement, it’s critical that the legal positions and legal defenses be fully and properly expressed as early in the process as possible. Where this hasn’t been done in pending audits, claims, and appeals, the protest or refund claim should be amended to cover this.

Looking Ahead

As we move to 2023, expect to see the Department of Revenue, and possibly the Nebraska Legislature, further addressing remote workforce issues.