Ernst & Young's State and Local Tax Weekly newsletter for January 24 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.

TOP STORIES

Maryland and Nebraska propose taxing revenues from digital advertising, while New York would tax income from the use of certain data collected from residents of the state

In the first weeks of 2020, legislators in Maryland and Nebraska introduced bills seeking to tax revenues from digital advertising, while a New York legislator proposed a new tax on revenue corporations earn from using certain data obtained from residents of the state.

Maryland SB 2, introduced on Jan. 8, 2020, would create a new state tax called the Digital Advertising Gross Revenues Tax (DAGRT). Under SB 2 the DAGRT would apply to a person's annual gross revenues (if the person has revenues of at least $100 million) from digital advertising services¹ in Maryland. A progressive tax rate schedule would apply, ranging from 2.5% of the annual gross revenues derived from digital advertising services in Maryland (i.e., the assessable base) for persons with annual gross revenue of $100 million through $1 billion, and to 10% of the assessable base for persons with global annual gross revenues exceeding $15 billion. If enacted as currently drafted, the DAGRT would apply to tax years beginning after Dec. 31, 2020.

Nebraska LB 989, introduced Jan. 14, 2020, would amend Nebraska's existing sales and use tax law by expanding the definition of taxable gross receipts to include retail sales of digital advertisements. This provision would specifically define "digital advertisement" for these purposes to mean "an advertising message delivered over the Internet that markets or promotes a particular good, service, or political candidate or message." This change, if enacted, would become effective Oct. 1, 2020.

New York AB 9112 and SB 6102 (introduced Jan. 21 and Jan. 8, 2020, respectively) would impose a 5% corporate franchise tax on gross income on every corporation deriving income from data New York individuals share with such corporations.

Such state action may mark the beginnings of legislative attempts in other states to expand the state taxation of digital revenue and may mimic similar actions taken by governments around the world, highlighted by the French digital services tax enacted in 2019.

Businesses should be aware of these developments and understand the direction and nuances of the three proposals. They raise an assortment of complex and novel federal and state constitutional and statutory questions that will have to be answered.

For additional information on the Maryland and Nebraska proposals, see Tax Alert 2020-0150.

EY QUEST study offers insights into US city, state and industry investment trends

2018 was a strong year for US investment, with more than $139 billion of announced mobile capital investment and nearly 437,000 new and retained jobs in the United States, according to the findings of the 14th edition of the US Investment Monitor (USIM).

The USIM studies corporate investment trends in the United States, tracking corporate investment in facilities that involve a location choice (e.g., headquarters, manufacturing and research facilities, and distribution centers). Published annually by Ernst & Young LLP's Quantitative Economics & Statistics Group (QUEST), the USIM offers insights into longer-term economic trends for US cities, states and industries. A copy of the report is available here.

INCOME/FRANCHISE

Indiana: Emergency rule (LSA Doc. # 19-688(E)) provides guidance on market-based sourcing provisions for receipts from the provision of services and the sale of intangibles, referencing the Multistate Tax Commission Multistate General Allocation and Apportionment regulations (MTC reg).² The rule addresses various transactions, including those involving: real property; tangible personal property; services delivered to a customers by physical or electronic means; provision of professional services to individual and business customers; licensing of rights to use intangible property, production intangibles and marketing intangibles; airline transportation; railroad transportation; trucking or transportation services; construction contracts; newspapers and magazine publishers; and the sale, exchange, or assignment of tax credits or from the refundable portion of a tax credit included in federal taxable income. The provisions in the rule do not apply to receipts from: (1) insurance premiums, (2) motorsports, (3) repatriated foreign dividends under IRC §965 or global intangible low-taxed income under IRC §951A, (4) broadcast services, or (5) telecommunications services; or receipts attributable under Ind. Code §6-3-2-2.2 (regarding certain interest income, discounts, and receipts). The rule is retroactively effective to Jan. 1, 2019. Ind. Dept. of Rev., LSA Doc. #19-688(E) (filed Dec. 23, 2019).

Michigan: In reversing a Court of Claims ruling, the Michigan Court of Appeals (Court) held two financial institutions that were the designated members of unitary business groups (UBGs) that filed combined returns for their respective UBG must be recognized and treated as single taxpayers subject to the Michigan Business Tax Act (MBTA). In so holding, the Court rejected the Court of Claims' declaration that UBGs do not exist and that a statutory averaging provision must be applied at the member level in determining their franchise tax due. Reading several statutes together, the Court found the statutes indicate that the legislature intended "financial institution" to mean a UBG when a UBG taxpayer's franchise tax liability is at issue. Additionally, the legislature's use of "the" (i.e., "the tax base of the financial institution") shows that the tax applies to a singular tax base of a singular taxpayer. Further, a UBG's tax base may not be derived from applying the MCL 208.1265 averaging formula to each individual member and then adding the calculation together. Rather, the averaging provisions apply to the UBG. (The individual members' net capital determinations, after elimination of intramember investments, are added to equal the UBG's net capital, which is the UBG's tax base.) TCF National Bank v. Mich. Dept. of Treas., No. 344892 (Mich. Ct. App. Dec. 12, 2019) consolidated with Flagstar Bancorp, Inc. v. Mich. Dept. of Treas., 344906 (Mich. Ct. App. Dec. 12, 2019).

New Jersey: The U.S. Supreme Court has been asked to review the New Jersey appeals court ruling that the gain on an out-of-state resident's deemed sale of assets from a New Jersey S corporation for which an IRC §338(h)(10) election was made is nonoperational (nonbusiness) income under the New Jersey gross income (personal income) tax law wholly allocated to New Jersey as the S corporation's domiciliary state. Paz v. N.J. Dir., Div. of Taxn., No. A-4452-16T4 (N.J. Super. Ct., App. Div., Jan. 31, 2019) pet. for cert. denied No. 082574 (N.J. S.Ct., Sept. 20, 2019), petition for cert. filed, U.S. S.Ct. Dkt. No. 19-921 (filed Jan. 17, 2020).

New Jersey: The New Jersey appeals court (appeals court) affirmed the New Jersey Tax Court's ruling in Xpedite Systems, Inc., upholding the New Jersey Division of Taxation's (division) application of the "25-50-25" allocation method³ to source a corporation's receipts from providing fax blast services, concluding that the tax court's findings are supported by adequate facts in the record. The appeals court reasoned that the corporation's services are performed at its New Jersey headquarters and under the ruling in United Parcel⁴ 100% of the receipts from performing these services could be sourced to New Jersey under NJAC 18:7-8.10(a). However, since the corporation (unlike the taxpayer in United Parcel) used out-of-state phone lines to provide its fax message service, the 100% receipts allocation to New Jersey may not properly reflect the corporation's business activities in the state. Thus, the division's use of the 25-50-25 method "may more accurately reflect the way [the corporation] earns receipts from its services." Xpedite Systems, Inc. v. N.J. Dir., Div. of Taxn., No. A-0789-18T3 (N.J. Super. Ct., App. Div., Jan. 9, 2020) (unpublished).

SALES & USE

Illinois: New law (SB 119) modifies economic nexus provisions for remote retailers and marketplace facilitators, and makes other sales and use tax changes. For Use Tax purposes, the law amends the definition of "marketplace facilitator" and the liability provisions for sales over the marketplace. Further, SB 119 amends a law change enacted under Pub. Act 101-0031 that would have required remote retailers meeting the economic nexus threshold to collect and remit state and local Retailers' Occupation Taxes (ROTs) instead of the Use Tax (establishing a Use Tax collection date of Oct. 1, 2018 through July 1, 2020). SB 119 deletes the "through July 1, 2020" date restriction, thus leaving in place the Use Tax collection obligation. In addition, the law revises the Use Tax definition of "retailer maintaining a place of business in this State" by reinstating click-through nexus provisions that were deleted by Pub. Act 101-0031. Provisions of SB 119 also amend the ROT law by providing that effective Jan. 1, 2021, remote retailers (effective date changed from July 1, 2020 as originally enacted under Pub. Act 101-0031) and marketplace facilitators, meeting the applicable economic nexus thresholds are deemed retailers doing business in the state and are required to remit state and locally imposed ROTs administered by the Illinois Department of Revenue. (In addition, for ROT purposes, the law adds definitions of "marketplace", "marketplace facilitator", and "marketplace seller".) The law provides guidance on: 1) how to calculate whether the economic nexus threshold is met, 2) entitlements of marketplace facilitators (e.g., credits, deductions, adjustments to the sales price), 3) collection and 4) remittance obligations and liabilities, among other provisions. The law retains (but revises) the destination sourcing provisions for remote retailers and adds similar provisions for marketplace facilitators and marketplace sellers. (For more guidance on who is considered a marketplace facilitator, calculating the economic nexus threshold, and obligations of marketplace facilitators and marketplace sellers, see emergency regulation 86 Ill. Admin. Code 150.804). Lastly, the law modifies provisions related to certified service providers, data centers, manufacturing and assembly machinery and equipment, aviation fuel, and motor vehicles. Ill. Laws 2019, Pub. Law 101-0640 (SB 119), enacted on Dec. 13, 2019.

New Jersey: Following the New Jersey Tax Court's ruling in Liscio's Italian Bakery⁵ that mobile baking pan racks purchased by a bakery are exempt from state sales and use tax when the racks were used almost continuously during the bread production process, the New Jersey Division of Taxation (Division) issued a notice to clarify application of the exemption for machinery, apparatus, or equipment used directly and primarily in manufacturing to such racks. The Division explained that when baking pan racks are used more than 50% of the time in the production of bakery products, the racks qualify for the exemption. If, however, the racks are used to merely to store raw material before the production process or are used less that 50% of the time in actual production, the racks will not qualify for the exemption. N.J. Div. of Taxn., Notice: Manufacturing Exemption — Bakery Racks (last updated Jan. 16, 2020).

West Virginia: The West Virginia State Tax Department issued general guidance to marketplace facilitators required to collect and remit the state's sales and use tax. Under West Virginia's law, effective July 1, 2019, marketplace facilitators that meet the state's economic nexus threshold (e.g., $100,000 or more in gross revenue or 200 or more separate transactions in West Virginia) are required to collect and remit sales and use tax on sales to West Virginia customers. The guidance includes a definition of marketplace facilitator (as well as other terms); explains the different types of marketplace facilitators, when they have a duty to collect tax, and when they are deemed to be an agent of a marketplace seller; and discusses registration and record keeping requirements. W.Va. Tax Dept., TSD-442 "Marketplace Facilitators" (Dec. 2019).

CONTROVERSY

Oklahoma: In reversing a lower court ruling, the Oklahoma Supreme Court (Court) held that a company's failure to timely pay a 2018 ad valorem tax assessment within 30 days of a ruling from the Board of Tax Roll Corrections (BTRC) was not a jurisdictional bar for the company's appeal of the ruling, because the pay-to-play requirement in Okla. Stat. tit. 68, § 2884 does not apply to appeals from the BTRC under Okla. Stat. tit. 68, § 2871. In so holding, the Court found Okla. Stat. tit. 68, § 2884 to be ambiguous after 1988 amendments removed language limiting applicability to appeals from boards of equalization while a 1997 addition specifically mentioned boards of equalization and Okla. Stat. tit. 68, § 2871. The Court found that construing "state board of equalization from whose order the appeal was taken" as including appeals from orders of the BTRC would be contrary to the statute's plain and ordinary meaning. Therefore, the Court resolved the statutory confusion in the company's favor, finding that Okla. Stat. tit. 68, § 2884 applies only to appeals from orders of a board of equalization. Video Gaming Tech. v. Tulsa Cnty. Bd. of Tax Roll Corrections, 2019 OK 84 (Okla. S.Ct. Dec. 17, 2019).

PAYROLL & EMPLOYMENT TAX

Federal: Tax Alert 2020-0128 discusses the federal income tax treatment of paid family and medical leave (PFML) contributions and benefits under certain state business and personal income tax regimes. These questions are arising as a growing number of states enact laws to provide income replacement for employees who take leave from work due to their own illness or life event or that of a family member.

California: California employees are now required to submit both a federal Form W-4, Employee's Withholding Certificate, and state Form DE 4, Employee's Withholding Allowance Certificate, when beginning new employment or changing their state withholding allowances. Previously, an employer could mandate use of state Form DE 4 only when an employee wished to use additional allowances for estimated deductions to reduce the amount of wages subject to state withholding. For additional information on this development, see Tax Alert 2020-0096.

Maine: Maine Revenue Services (MRS) released the 2020 employer withholding tax guide, which contains the income tax withholding wage-bracket and percentage method tables that are effective with wages paid on and after Jan. 1, 2020. For more on this development, see Tax Alert 2020-0133.

Michigan: Governor Gretchen Whitmer announced that Michigan employers will see a state unemployment insurance (SUI) tax rate reduction for 2020 thanks to the early payoff of the bonds used by the Michigan Unemployment Insurance Agency (UIA) to repay its federal SUI loan. As a result, the Obligation Assessment (OA) added to employer SUI tax rates since 2012 is eliminated. For additional information on this development, see Tax Alert 2020-0131.

Missouri: The Missouri Department of Revenue released its 2020 Missouri Employer's Tax Guide, which includes the 2020 withholding computer formula and wage-bracket tables. Also released is the 2020 Form MO W-4. The Missouri net general revenue amount for fiscal year 2019 did not exceed the trigger needed to reduce the top income tax rate by 0.1% for 2020, leaving the maximum withholding tax rate 5.4% for calendar year 2020. For additional information on this development, see Tax Alert 2020-0132.

New Jersey: New law (S 3170) mandates severance payments to employees who are part of a mass layoff and requires a 90-day notice to employees of an upcoming mass layoff. A "mass layoff" is defined as a reduction in force that is not the result of a transfer or termination of operations and that results in the termination of employment at an establishment during any 30-day period for 50 or more full- or part-time employees working at or reporting to the establishment. Under prior law, the term "mass layoff," as used for notice purposes, referred to an employer of 500 or more full-time employees laying off employees representing one-third or more of the full-time employees. The bill extends the current 60-day employee notice requirements to 90 days prior to the mass layoff for employers of 100 or more employees. The 100-employee threshold include part-time and full-time employees. N.J. Laws 2019, P.L. 2019, c.423, enacted on Jan. 21, 2020. For additional information on this development, see Tax Alert 2020-0113.

MISCELLANEOUS TAX

Federal: On Jan. 21, 2020, the U.S. Supreme Court denied motions to expedite its decision whether to hear a case on the constitutionality of the Affordable Care Act's individual mandate. Specifically, the petition for certiorari asked the U.S. Supreme Court to decide whether reducing the individual mandate to zero made that provision unconstitutional, and if so, whether that provision was severable from the rest of the ACA. As a result of this denial, if the justices decide to hear the case, it likely will not be before the October 2020 term. For more on this development, see Tax Alert 2020-0157.

Maine: New law (LB 793) establishes the "Opioid Use Disorder Prevention and Treatment Fund" which will be funded by new fees imposed on opioid manufacturers. The new fees include: (1) a $55,000 fee on manufacturers of an opioid medication (with a limited exemption for manufacturers whose opioid medication is for use only in veterinary medicine); and (2) a $250,000 annual registration fee for manufacturers that sell, deliver or distribute an opioid medication in Maine (with a limited exception for manufacturers that do not sell, deliver or distribute two million or more units of an opioid medication within Maine in the year the fee is due ). The law takes effect 90 days after the adjournment of the 2nd regular session of the Maine legislature, which is currently set for April 15, 2020. Me. Laws 2019, ch. 536 (LD 793), bill became law without governor's signature on Jan. 12, 2020.

Oregon: Taxpayers may have to register for Oregon's new Corporate Activity Tax (CAT) as early as Jan. 31, 2020. Any person or unitary group with Oregon commercial activity exceeding $750,000 must register with the Oregon Department of Revenue within 30 days of exceeding $750,000. This means if a person's or unitary group's commercial activity exceeds $750,000 on Jan. 1, 2020, they have to register by Jan. 31, 2020. Persons obligated to register for the Oregon CAT can do so on the Oregon Department of Revenue's website. A taxpayer must provide its mailing address, the date it exceeded or expects to exceed $750,000 in Oregon commercial activity, a valid email address or current log-in, and its North American Industry Classification System (NAICS) code, which is often included on a taxpayer's federal income tax return. For more on this development, see Tax Alert 2020-0170.

GLOBAL TRADE

International: The Canada Border Services Agency (CBSA) released its semi-annual list of trade compliance verification (audit) priorities on Jan. 7, 2020. The list is designed to update the importing community on ongoing verification priorities and set the stage for new priorities for the upcoming calendar year. The CBSA continues to focus on tariff classification as a priority audit area, with the introduction of four new rounds to the list of tariff classification priorities. For more on this development, see Tax Alert 2020-0124.

International: The Nicaraguan General Directorate of Customs (DGA) published Technical Circular 167-2019, which affirms CT/254/2009, granting the exclusive right to register the Central American Single Declaration (DUCA) under the international land customs transit regime and internal customs transit on behalf of third parties to the Cargo Transport Cooperative. The technical circular went into effect on Jan. 1, 2020. For more on this development, see Tax Alert 2020-0171.

VALUE ADDED TAX

International: The Thai Revenue Department first introduced a draft bill to amend Thai value-added tax (VAT) law, related to the collection of VAT on services rendered by e-business operators in foreign countries (digital services) to individuals in Thailand, back in January 2018. The draft VAT bill was opened for public consultation and then passed to the Council of State of Thailand for consideration and comments. The Thai Revenue Department has now published an amended version of the proposed VAT bill on its website and has re-opened it for public consultation until Jan. 29, 2020. For additional information on this development, see Tax Alert 2020-0161.

UPCOMING WEBCASTS

Federal: On Thursday, Feb. 6, 2020, from 1:00-2:00 p.m. EST New York; 10:00-11:00 a.m. PST Los Angeles, Ernst & Young LLP (EY) will host a webcast on the final federal opportunity zones regulations. During this webcast, a panel of experienced EY professionals will discuss the key issues addressed in the regulations. Topics will include: (1) new rules promulgated in the final regulations, (2) key changes between the proposed and final regulations, (3) implications of the key changes, and (4) transition rules. To register for this event, go to Federal Opportunity Zones.

Multistate: On Wednesday, Feb. 12, 2020, from 1:00-2:30 p.m. EST New York; 10:00-11:30 a.m. PST Los Angeles, Ernst & Young LLP (EY) will host its quarterly webcast focusing on state tax matters. For our first webcast in 2020, we welcome Joe Crosby, CEO of MultiState Associates, and Brian Hamer, counsel to the Multistate Tax Commission (MTC), who will join EY panelists to discuss the following: (1) the status of the MTC's current project to update its guidance on Public Law 86-272, in response to the digital economy; (2) an overview of upcoming 2020 state legislative sessions and the state tax proposals already presented; (3) the current economic trends among the states and around the nation and the impact they may have on state tax policy; (4) a summary of the most significant state tax budget proposals that have been presented so far this year and have a state and local tax impact; (5) an advanced overview of the upcoming federal and state 2020 elections, focusing specifically on proposed and certified ballot measures that will directly affect state taxation if enacted; and (6) significant state and local judicial, legislative and administrative developments from the past quarter. To register for this event, go to State tax matters.

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.

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ENDNOTES

¹ "Digital advertising services" would be defined as "advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services."

² Specifically, the MTC reg. adopted Feb. 21, 1973 as amended through Feb. 24, 2017, including Section 18(c) adopted July 25, 2018.

³ Under this method 25% of receipts are allocated to the state in which the costs originate, 50% of the receipts are allocated to the state in which the service is performed, and 25% of the receipts are allocated to the state in which the transaction terminates.

⁴ United Parcel Serv. Gen. Serv. Co. v. N.J. Dir., Div. of Taxn., 25 N.J. Tax 1 (Tax 2009), aff'd, 430 N.J. Super. 1 (App. Div. 2013), aff'd, 220 N.J. 90 (2014).

⁵ Liscio's Italian Bakery, Inc. v. N.J. Dir., Div. of Taxn., Dkt. No. 009658–2017 (N.J. Tax Ct. Sept. 27, 2019). For more information on the Tax Court ruling, see Tax Alert 2019-1778.