16 January 2020 State and Local Tax Weekly for January 10 Ernst & Young's State and Local Tax Weekly newsletter for January 10 is now available. Prepared by Ernst & Young's State and Local Taxation group, this weekly update summarizes important news, cases, and other developments in U.S. state and local taxation. Utah governor signs bill providing income tax rate cuts and expanded sales tax, but referendum petition could prevent provisions from taking effect On Dec. 18, 2019, Utah Governor Gary Herbert signed SB 2001 (the bill), which cuts corporate and individual income tax rates, expands Utah's sales and use tax to various services, repeals certain sales and use tax exemptions, and increases the tax on food and gas, among other changes. Although Governor Herbert signed the bill, the tax law changes in SB 2001 may not become effective because it was not approved by a two-thirds majority in both the Utah House and the Utah Senate. Under Utah's constitution, any law which did not receive such a super majority vote in both houses of the legislature could be subject to referendum.1 Such petition has been filed.2 If the referendum petition fails to be certified for the ballot, the bill will take effect 60 days after being signed by the governor. The income tax changes will be effective for tax years beginning on or after Jan. 1, 2020, and the sales and use tax changes will take effect April 1, 2020. If the referendum is certified for the November 2020 election, the bill's provisions will be placed on hold and will not take effect unless approved by voters. For additional information on this development, see Tax Alert 2020-0044. The Federal Further Consolidated Appropriations Act, 2020 creates employee retention credits for major 2018 — 2019 disasters and extends key employment-related tax credits On Dec. 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (P.L. 116-94 (H.R. 1865)) (Act), which includes a variety of important tax provisions such as disaster tax relief and extensions of certain employment-related federal income tax credits. Employers impacted by certain major disasters in 2018 and 2019 may be entitled to take an employee retention credit (DZ Credit) of up to $2,400 per employee if:
Employers must claim the general business credit in the tax year qualified wages were paid to the employee. This credit equals 40% of wages (maximum of $6,000 per employee) paid to or incurred for an eligible employee:
The new DZ Credit is similar to the employee retention credits created by the Disaster Tax Relief and Airport and Airway Extension Act of 2017 and the Bipartisan Budget Act of 2018 in the aftermath of hurricanes Harvey, Irma, and Maria, and the 2017 California wildfires. In addition, the Act extends the Work Opportunity Tax Credit (WOTC), which was set to expire for wages paid to or incurred for individuals who began work after Dec. 31, 2019, through Dec. 31, 2020. Similarly, the employer-provided paid family and medical leave (PFML) credit, which was set to expire for wages paid in tax years beginning after Dec. 31, 2019, is extended to include wages paid in tax years beginning on or before Dec. 31, 2020. Lastly, the Act retroactively extends the Federal Empowerment Zone credit as well as the Indian Employment Credit both of which expired on Dec. 31, 2017, to Dec. 31, 2020. For additional information on this development, see Tax Alert 2020-0060. Arkansas: A foreign corporation that engaged in intercompany loans with multiple affiliates is not entitled to deduct interest on those loans under the statutory related party interest exception because the corporation failed to demonstrate that the loans were the result of arm's-length transactions between affiliated entities. In making this determination, an administrative law judge for the Arkansas Department of Finance and Administration's Office of Hearings and Appeals found the corporation's summary of various intercompany loans between affiliates to be unpersuasive, since the summary could not provide each affiliate's financial position, associated risks, and appropriate borrowing rate. In re: Acct. No. [Redacted], Nos. 20-109 (2015) and 20-110 (2016) (Ark. Dept. of Fin. and Admin., Ofc. of Hearings and App., Dec. 9, 2019). Illinois: The Illinois franchise tax payments made by the surviving entity of a merger (a non-Illinois-registered Ohio corporation) that were incorrectly attributed to the entity that stopped existing after the merger (an Illinois-registered Delaware corporation), satisfied the Ohio corporation's franchise tax obligations. In so holding, the Illinois Appellate Court (Court) explained that Delaware law controlled as the state of incorporation of the entity at issue and under Delaware law the Delaware corporation ceased to exist after the merger. Thus, franchise tax payments the Ohio corporation paid should have been credited to the Ohio corporation, even if they were improperly designated as being paid for the Delaware corporation, since the Ohio corporation actually paid the taxes and was the only entity that could have possibly exercised the privilege of doing business in Illinois during the period at issue. In addition, the Court affirmed the circuit court's ruling that the Ohio corporation could file a statement of correction for its annual reports for years after the merger to reflect Ohio as the entity's state of incorporation. Additionally, aside from the Ohio corporation's belated initial franchise tax payment, the Ohio corporation did not owe monthly interest as an additional penalty (2% per month for 134 months) on its late applications to transact business in Illinois because such interest as an additional penalty is not provided for under Illinois law. Global Mail, Inc. v. White, 2019 IL App (1st) 181778 (Ill. App. Ct., 1st Jud. Dist., Dec. 6, 2019). Iowa: On Jan. 1, 2020, the Iowa Department of Revenue (Department) published proposed amendments to its administrative rules (proposed rule) addressing the treatment of global intangible low-taxed income (GILTI) under IRC § 951A and the corresponding GILTI deduction under IRC § 250 for determining the sales factor for Iowa apportionment purposes. The proposed rule incorporates much of the same guidance the Department issued in December 2019 (see Tax Alert 2019-2137). In the purpose and summary statement attached to publication of the proposed rule, the Department states that GILTI does not neatly fit into any of Iowa's existing apportionment rules because it is a new category of income. The proposed rule would amend Iowa Admin. Code r. 701-54.2(422) to provide a formula for apportioning GILTI within and outside Iowa. The proposed rule also provides additional guidance about when investment income must, or by election may be, included in the Iowa apportionment factor. The public comment period for the proposed rule ends on Jan. 21, 2020. For more on this development, see Tax Alert 2020-0046. Maryland: An out-of-state company that has nexus with Maryland based on the in-state activities of its employees is not entitled to a refund of corporate income tax because it is not immune from such tax as some of the employees' activities exceeded the protections of P.L. 86-272 and were not de minimis when viewed in the aggregate.The Maryland Court of Special Appeals found the following activities went beyond the solicitation of orders within the meaning of P.L. 86-272: gathering competitive information and market data; engaging in quality control; and inventory issues. While some of these activities when considered alone were de minimis, the account manager's collection of competitive information during trainings and retailer meetings was both substantial and deliberate and the activity was carried out on a regular basis as a continuing matter of company policy. Blue Buffalo Co., Ltd. v. Comptroller of Treasury, No. 495 (Md. Ct. of Special App. Dec. 20, 2019). Massachusetts: The Massachusetts Department of Revenue issued guidance explaining that for purposes of the income tax component of the corporate excise the commonwealth will generally follow the federal business interest expense deduction limitation under IRC §163(j), with certain modifications to account for differences in commonwealth and federal computational and filing requirements. The guidance addresses the following: (1) the calculation and application of the IRC §163(j) limitation to a business corporation in Massachusetts or a member of a Massachusetts combined group, (2) the carryforward of business interest expense, and (3) interactions between the Massachusetts intercompany interest expense add back rules and the IRC §163(j) business interest expense deduction limitation. The guidance includes illustrative examples. Mass. Dept. of Rev., TIR 19-17: Application of IRC §163(j) Interest Expense Limitation to Corporate Taxpayers (Dec. 18, 2019), Montana: This year, calendar year taxpayers have until March 30, 2020 to make a water's edge election. Montana's corporate income tax requires members of a unitary business to file returns on a worldwide combined basis, unless a water's-edge election is made to exclude foreign affiliates from the combined group. A Montana water's-edge group pays tax at a rate of 7% instead of the regular rate of 6.75%. While many states require a water's-edge election to be made by the due date or extended due date of the return for the year for which it is intended to be effective, Montana is unique in that a water's-edge election must be made within 90 days of the beginning of the first year in which it is first intended to become effective. Accordingly, because 2020 is a leap year, a corporation wishing to make a new water's-edge election or renew an existing election applicable to the 2020 tax year must file a Form WE-ELECT by March 30, 2020 (instead of March 31 in non-leap years). For more on this development, see Tax Alert 2020-0033. Alaska: The Alaska Remote Seller Sales Tax Commission (commission) has approved rules governing the central administration of local sales and use taxes on remote sales. (Alaska does not impose a statewide sales tax but Alaska municipalities have enacted their own sales and use taxes. The commission is not an agency of state government but comes under the umbrella of the Alaska Municipal League, a corporation whose members consist of many of Alaska's municipalities.) The new process is expected to take effect during the first half of 2020. Under the new rules, to be titled the "Uniform Alaska Remote Seller Sales Tax Code" (Code), the commission will be responsible for administering and enforcing sales and use tax on remote sales made into local taxing jurisdictions that approve the Code. The Code requires remote sellers and marketplace facilitators to register with the commission and collect and remit the tax on their sales into member Alaska localities if the sellers or facilitators have $100,000 or more in annual gross receipts from sales, or 200 or more sales annually into the state. Sellers and marketplaces will be notified that they have 30 days to begin complying, once the specific localities adopt the Code. The commission has contracted with two companies — MUNIRevs and Transaction Tax Resources Inc. (TTR) — to provide remote sellers and marketplaces with compliance software. Additional information, including a copy of the Code approved on Jan. 6, 2020, can be found here. Illinois: New regulation "Wayfair Nexus — Nexus Without Physical Presence" (86 Ill. Admin. Code 150.803) sets forth economic nexus rules for sales and use tax purposes in Illinois. The provisions implement P.A. 100-587, which enacted economic nexus standards (threshold of $100,000 or more of gross receipts from sales of tangible personal property to Illinois purchasers or 200 or more separate transactions to Illinois purchasers), effective Oct. 1, 2018. The regulation: (1) provides information about how often remote retailers must determine whether they have economic nexus with Illinois, (2) advises how to determine the obligation to begin tax collection, (3) addresses filing requirements, (4) explains when the economic nexus provisions do and do not apply, and (5) defines key terms. Remote retailers are required to apply certain rules regarding whether a transaction should be included or excluded when determining if either economic nexus threshold is met. Exclusions include sales for resale, sales of tangible personal property that are required to be registered with state agency (e.g., motor vehicle) or that are made from locations outside the state to Illinois purchasers, occasional sales, among others. The regulation includes explanatory examples. Ill. Dept. of Rev., new 86 Ill. Admin. Code 150.803 (adopted Nov. 1, 2019). Massachusetts: Three businesses that sold or licensed computer software to an entity for use by the entity's employees at various locations inside and outside of Massachusetts, are entitled to abatement and refund of sales and use tax consistent with usage data and uncontested apportionment percentages provided by the entity. In reaching this conclusion, the Massachusetts Appellate Tax Board found that (1) Massachusetts law permits taxpayers to apportion sales tax on the sale or license of taxable software that is "transferred for use in more than one state"; (2) the abatement provisions do not prohibit apportionment through the abatement process after collecting, remitting, and reporting sales tax; (3) the plain terms of the abatement regulation do not time-bar the apportionment request; and (4) both direct pay permit holders or their vendors (i.e., the businesses) could seek apportionment through the abatement process. In this case, the entity paid sales tax on the entire purchase price, later informed the businesses of its intended and actual use of the software in multiple locations, provided data that showed the percentage of use outside of Massachusetts (according to regulatory guidance on appropriate apportionment methodologies), and then the businesses timely sought apportionment through the abatement process. Oracle USA, Inc. et al. v. Mass. Comr. of Rev., Nos. C318441, C318442 and C327798 (Mass. App. Tax Bd. Nov. 27, 2019). Massachusetts: The Massachusetts Department of Revenue (Department) adopted 830 CMR 64H.1.9, a new regulation addressing the sales and use tax registration and collection obligations of remote retailers, which include marketplace facilitators and marketplace sellers, as of Oct. 1, 2019. Under Massachusetts statutory law, remote retailers are required to collect and remit sales and use tax as a vendor if the retailer's Massachusetts sales in a calendar year exceed $100,000. Similarly, marketplace facilitators are required to collect and remit sales or use tax on direct sales and sales they facilitate on behalf of marketplace sellers (including remote sellers and in-state retailers), when such sales exceed $100,000 in total Massachusetts sales in a calendar year. The new regulation: (1) defines key terms; (2) provides general rules; (3) lists marketplace facilitator exceptions; (4) provides administrative rules for marketplace facilitators; (5) explains waiver provisions available to marketplace facilitators and marketplace sellers; (6) discusses tax registration, return and payment requirements; and (7) explains when marketplace facilitators may be relieved from liability. In addition, effective Oct. 1, 2019, the Department repeals 830 CMR 64H.1.7, the regulation adopted in 2017 regarding taxability of vendors making internet sales (which included the commonwealth's "cookie nexus" provisions). Adoption of the new regulation, 830 CMR 64H.1.9, does not affect tax liability accrued prior to Oct. 1, 2019, including on the part of a marketplace seller that had in-state vendor contacts when its inventory was stored in a Massachusetts warehouse maintained by a marketplace facilitator, or under 830 CMR 64H.1.7. Mass. Dept. of Rev., adopted 830 CMR 64H.1.9 (promulgated Dec. 13, 2019). Texas: The Texas Comptroller of Public Accounts certified that the single local use tax rate for remote sellers is 1.75%, effective Jan. 1, 2020 through Dec. 31, 2020. The single local use tax rate is based on the estimated average rate of local sales and use taxes imposed by Texas municipalities during the preceding state fiscal year ending Aug. 2019. Tex. Comp. of. Pub. Accts., Certification of the Single Local Use Tax Rate for Remote Sellers — 2020 (Tex. Reg., Vol. 44, No. 50, Dec. 13, 2019). Federal: The Taxpayer Certainty and Disaster Tax Relief Act of 2019 (Act), which was part of the tax legislation signed into law on Dec. 20, 2019, extends the New Markets Tax Credit by one year and increases the allocation limit to $5 billion. For more on this development, see Tax Alert 2020-0027. Federal: Tax legislation enacted at the end of 2019 included the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (Act), which extended the tax credit for wind turbines for another year. Consequently, a federal tax credit is now available for projects for which construction begins in calendar year 2020. The production tax credit (PTC) provides a 2.3¢ per kilowatt-hour tax credit for the first 10 years of electricity generation for wind. The PTC was supposed to be completely phased out by the end of 2019. The Act extended the PTC as follows: (1) changes the definition of "qualified facilities" as set forth in IRC § 45(d)(1) to include facilities for which construction begins before Jan. 1, 2021 (previously Jan. 1, 2020); and (2) introduces a new phase-out schedule so that projects for which construction begins in 2020 can now benefit from a 60% PTC (a 40% PTC applies to projects for which construction began in 2019). For additional information on this development, see Tax Alert 2020-0028. Alabama: The Alabama Department of Revenue (Department) announced new procedures, beginning Jan. 21, 2020, to claim the following credits: the 2013 and the 2017 Alabama Historic Rehabilitation Tax Credits, Investment Credit (Alabama Jobs Act), Growing Alabama Credit (reserving a credit), Apprenticeship Tax Credit, Alabama Film Rebate, and the Income Tax Capital Credit. Before any taxpayer (including any one receiving income from pass-through entities) can claim these incentives on its returns, it must be registered to use My Alabama Taxes (MAT) and must submit an online form that provides information about the credits as it relates to the specific taxpayer. This information includes certification (if applicable) from the credit's administering agency that the taxpayer qualifies for the credit, attachments that support the credit claim, and other documents that attest that the credit is allowable. After Jan. 21, 2020, the Department will not process these credits if they are not submitted through the online form before being claimed on the taxpayer's tax return. The Department also announced that on Jan. 21, 2020 it will post on its website detailed instructions on how to file an online claim for each of the affected incentives. Ala. Dept. of Rev., Ala. Tax Incentives 2020 Procedure (updated Jan. 2020). New Jersey: The New Jersey Division of Taxation announced an automatic extension for 2019 Corporate Business Tax (CBT) returns for fiscal year filers with accounting periods that end between July 31, 2019 and Nov. 30, 2019. Such taxpayers have until April 15, 2020 to file their 2019 CBT returns (Forms CBT-100, CBT-100U, BFC-1, BFC-1-F, and CBT-100S). The extension applies only to filing the return and does not extend the time to make required payments. Click here for additional information, including due dates if an Application for Extension of Time to File is submitted. N.J. Div. of Taxn. "Notice: Automatic Extension for 2019 CBT Returns for Certain Fiscal Tax Year Filers" (last updated Jan. 9, 2020). Multistate: Similar to the federal supplemental income tax withholding rate, most states also allow for an optional flat percentage of income tax withholding for wages that are in addition to regular pay. Where allowed, the supplemental rate greatly simplifies income tax withholding calculations on irregular payments such as bonuses, equity compensation and separation pay. The state supplemental income tax withholding rates that have thus far been released for 2020 are listed in Tax Alert 2020-0021. Indiana: The Indiana Department of Revenue announced that the counties of Cass, Decatur, Fulton, Gibson, Hamilton, Henry, Jefferson, Jennings, Knox and Tippecanoe changed their local withholding income tax rates effective Jan. 1, 2020. For additional information on this development, see Tax Alert 2020-0005. Massachusetts: The Massachusetts Department of Revenue (Department) announced that due to meeting a target revenue trigger, on Jan. 1, 2020 the commonwealth's flat income tax rate drops from 5.05% (effective for 2019) to 5.00%. As a result, the Department issued revised income tax withholding tables for calendar year 2020. Since the commonwealth has a flat income tax rate, the supplemental withholding rate for 2020 is also reduced to 5%. For more information on this development, see Tax Alert 2020-0008. Minnesota: The Minnesota Department of Revenue released the 2020 state income tax withholding guide that contains the 2020 wage-bracket tables and computer formula. The tables and formula must be used with wages paid on and after Jan. 1, 2020. For more on this development, see Tax Alert 2020-0006. New Mexico: The New Mexico Taxation and Revenue Department released the 2020 wage-bracket and percentage method tables for state income tax withholding. Employers are required to file calendar year 2019 Forms W-2 with the Department by Jan. 31, 2020. Employers of 25 or more employees must file electronically. For more information on this development, see Tax Alert 2020-0011. Rhode Island: The Rhode Island Division of Taxation has released the state income tax withholding tables for tax year 2020. Employees must require employees to submit a state Form RI W-4 if hired in 2020 or when making withholding tax changes in 2020. For more on this development, see Tax Alert 2020-0012. California: Retailers of aviation or jet fuel must report fuel sales by airport location for return periods beginning Jan. 1, 2020. The requirement stems from a 2014 rule clarification3 from the Federal Aviation Administration (FAA) that limits the proceeds from taxes imposed on jet fuel by state and local governments to airport-related expenses, such as airport capital and operating costs and state aviation programs. Such retailers should track and report jet fuel sales by airport location using the new supplementary form CDTFA-531-JF, Aircraft Jet Fuel Retailers — Sales by Airport Location. The form will automatically appear when taxpayers file the fuel retailer return online. Cal. Dept. of Tax and Fee Admin., Special Notice L-712: New Reporting Requirement for Sales of Jet Fuel at Airport Locations (Nov. 2019). Federal: The Office of the U.S. Trade Representative (USTR) held a public hearing on Jan. 7, 2020 regarding tariffs proposed under Section 301 — of up to 100% on $2.4 billion in French goods — in response to France's 3% Digital Services Tax (DST). For more on this development, see Tax Alert 2020-0029. Federal/Multistate: On Jan. 29, 2020, from 2:00-3:00 p.m. EST New York; 11:00-12:00 p.m. PST Los Angeles, Ernst & Young LLP will host a webcast providing an update on various federal tax extenders and the disaster zone employee retention credit. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 extended and created several key federal tax credits. These federal tax credits encourage employers to hire and retain individuals who face hiring barriers (Work Opportunity Tax Credit (WOTC) and Indian Employment Credit), conduct business and invest in distressed areas (New Markets Tax Credit (NMTC) and Federal Empowerment Zone incentives), provide employees with paid family and medical leave and continue to pay employees during and in the aftermath of major disasters (2018–2019 Disaster Zone Credit). These credits can provide substantial potential savings for taxpayers. During this webcast, the panelists will explore the following topics: (1) the Disaster Zone Credit for 2018 and 2019; (2) extension of the WOTC; (3) retroactive renewal of the Federal Empowerment Zone and Indian Employment credits; (4) extension of the tax credit for employer paid family and medical leave; and (5) extension of the NMTC and other important business tax credits. Register for this event here. Federal/Multistate: A replay of the Dec. 5, 2019, Ernst & Young LLP (EY) webcast on preparing for payroll year-end and 2020 is now available. On this webcast, EY professionals discussed the federal, state and local payroll/employment tax developments and trends that are shaping the goals and priorities of businesses as they close the year and prepare for 2020. Topics discussed included: (1) changes to the 2020 federal Form W-4 and their impact on employers and employees; (2) changes in the federal overtime rules for salaried exempt employees and their employment tax consequences; (3) form W-2 reporting considerations for 2019; (4) state developments in paid family and medical leave insurance and the employment tax compliance challenges they create; (5) other state and local payroll tax developments; (6) state unemployment insurance cost outlook for 2019 and 2020; (7) federal, state and local taxability — myths, facts and leading practices; and (8) 2019 payroll year-end checklist. Access a replay of this webcast here. Multistate: A replay of the Dec. 12, 2019, Ernst & Young LLP (EY) quarterly webcast focusing on state tax matters is now available. For our final webcast in 2019, panelists from our Indirect, State and Local Tax practice looked back on 2019 and the decade that was the 2010s and looked forward to 2020 and what that decade could bring. Looking back, the panelists highlighted the most important developments affecting state income, sales and use, property and payroll taxes as well as federal and state business credits and incentives. As panelists looked forward to the upcoming year and the forthcoming decade, they highlighted trends likely to carry over from 2019 and into the new year and decade to come. They also identified emerging developments that deserve every tax practitioner's attention along with the potential disruptions on the horizon. Access a replay of this webcast here. Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor. 1 Utah Const. art. IV, §1(2)(i)(B) ("The legal voters of the State of Utah, in the numbers, under the conditions, in the manner, and within the time provided by statute, may: … (B) require any law passed by the Legislature, except those laws passed by a two-thirds vote of the members elected to each house of the Legislature, to be submitted to the voters of the State, as provided by statute, before the law may take effect.") 2 See Vote.Utah.gov for the petition (currently titled "Tax Restructuring Revisions Referendum") and current signature totals required by county. Document ID: 2020-0107 |
