Tax News Update    Email this document    Print this document  

Ernst & Young's State and Local Tax Weekly newsletter for February 7 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

Governors propose a variety of state tax law changes impacting businesses and individuals

A majority of the states' Governors have presented their State of the State addresses and put forth their budget proposals for the upcoming year. From a tax perspective, the proposals present wide-ranging tax policy proposals that could potentially impact corporate and individual income taxes, sales and use taxes, property tax, excise tax, and real estate transfer taxes, among others. Below, we present a summary of some of these proposals.

Pennsylvania Governor Tom Wolf (D) has proposed enacting mandatory combined reporting while reducing the commonwealth's corporate income tax rate from 9.99% to 5.99% over a five-year period and capping the net operating loss deduction at 40%. He also proposed enacting a severance tax on natural gas.

Connecticut Governor Ned Lamont's (D) proposed 2021 budget would retain the 10% corporate surcharge, delay the capital base tax reduction, limit the carryforward of new R&D credits to 15 years, cap credits claimed against the public utilities tax at 50.01% of the tax liability (this would bring it in line with corporate income tax credits), impose a convenience fee for the use of credit and debit cards, repeal certain fee increases enacted in prior legislative sessions and establish the JobsCT Tax Rebate Program, among other changes.

In regard to sales and use taxes, Massachusetts Governor Charlie Baker (R) as part of his 2021 budget proposal again has put forward a "Sales Tax Modernization" initiative that includes a "real-time" sales tax remittance requirement. Iowa Governor Kim Reynolds (R) proposed increasing the sales and use tax rate from 6% to 7%, while Tennessee Governor Bill Lee (R) is seeking to expand the reach of the sales and use tax to marketplace facilitators. Kansas Governor Laura Kelly (D) also is seeking to extend the state's sales tax to marketplace facilitators as well as imposing sales and use tax on sales of digital property and subscription services.

Rhode Island Governor Gina Raimondo's (D) proposed budget would expand the sales and use tax base to select services (such as lobbying and courier and messenger services) and revise the definition of "software as a service" to include computer software and design. Governor Raimondo also proposed increasing the real estate conveyance tax on properties over $500,000, increasing the state portion of the hotel tax, restoring the state hospital licensing fee to 6% (from 5%) of net patient-services, increasing tobacco taxes, legalizing and taxing the sale of marijuana, and allowing the Rhode Island Division of Taxation to participate in the U.S. Department of Treasury's data sharing program related to taxes owed, among other changes.

New York Governor Andrew Cuomo (D) has proposed reducing the corporate income tax rate for small businesses (i.e., those with less than 100 employees and less than $390,000 in income), from 6.5% to 4% and repealing the penalty on small business for underpayment of estimated taxes. In addition, Governor Cuomo is focused on the expansion of the green economy by establishing the Green Jobs Tax Credit and the Green Investment Tax Credit and increasing eligible investment for R&D in qualifying green economy projects.

Maine Governor Janet Mills (D) proposed tax incentives to increase R&D investment levels and an increase in the ceiling on the Seed Capital Tax Credit. Vermont Governor Phil Scott (R) would support the creation of energy innovation jobs by exempting these companies from the corporate income tax.

West Virginia Governor Jim Justice (R) indicated a possible elimination of the business inventory and machinery tax. Tennessee Governor Lee (R) is seeking to cut the professional privilege tax in half, while Wisconsin Governor Tony Evers (D) is seeking to close the "dark store" property tax valuation loophole.

Individual income tax relief is being sought by the Governors of Colorado, Hawaii and Iowa. While property tax relief is being proposed by Governors of Illinois, Iowa, Kansas, Nebraska, New Jersey and North Dakota.

These are just a sample of the governors' budget proposals announced thus far. We anticipate additional state budget proposals as other Governors make their state or the state addresses in March.

Washington Supreme Court rules retailer entitled to a refund of sales and B&O taxes paid on bad debts from private label credit cards

The Washington Supreme Court (Court) in its decision in Lowe's Home Center ¹ reversed an appellate court and held that a retailer is entitled to a refund of sales tax and Business & Occupation tax (B&O) paid on uncollectible debts from private label credits cards when the retailer contractually guaranteed the debt up to a certain percentage of sales.

Under Washington law to qualify for a sales tax refund on bad debts under RCW § 82.08.037(1) in effect for the tax years at issue, all of the following conditions must be met: (1) the taxpayer is a seller, (2) the taxpayer makes sales at retail, (3) the taxpayer is entitled to a refund for sales tax previously paid on bad debts, and (4) the bad debts are deductible for federal income tax purposes.

The Washington Department of Revenue (DOR) agreed that the retailer satisfied the first and second requirements. In regard to the third requirement, the retailer argued that its contractual payments to the banks covering the banks' losses qualified as "sales taxes previously paid." The Court agreed, reasoning that Washington law does not require the tax paid to be "directly attributed" to the sale, as the DOR argued. Since the retailer remitted tax from a retail sale and guaranteed the banks for unpaid sales tax, the Court found the third requirement satisfied. As to the fourth requirement, the Court determined the retailer satisfied this requirement because the contractual guarantee the retailer provided to the banks subjected the retailer to an enforceable legal duty for the payment that is "treated as a business debt becoming worthless in the taxable year in which the payment is made" under IRC §166(a)(1).

The Court also found that the retailer qualified for the bad deduction for B&O taxes on retail sales under RCW § 82.04.4284, because "similar to its 'sales tax' payments, the retailer incurred bad debt."

For more on this development, see Tax Alert 2020-0279.

INCOME/FRANCHISE

Illinois: The Illinois Department of Revenue proposed amendments to 86 Ill. Adm. Code Section 100.2430 (Proposed Regulation) clarifying the interaction of the 30% business interest expense limitation rules under IRC § 163(j) and Illinois's related-party interest expense add-back rules, focusing on 80/20 companies. In short, the Proposed Regulation would apply the federal business interest expense limitation first before determining the Illinois interest expense add-back. For more on this development, see Tax Alert 2020-0329.

Michigan: The Michigan Department of Treasury (Department) issued guidance on the tax treatment of global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII) for purposes of computing Michigan corporate and individual income, trust and estate taxes. In regard to C corporations, the Department explained that since the starting point of the Michigan corporate income tax (CIT) is federal taxable income (FTI), GILTI, IRC §78 gross-up and IRC §250 GILTI and FDII deductions are included in the starting point of the CIT return to the extent included in FTI. The amount of business income is adjusted in determining the CIT bases before allocation and apportionment. Specifically, business income is adjusted to remove GILTI, IRC §78 gross-up and IRC §250 GILTI deduction to the extent included in or deducted from FTI. (No adjustment is made to the CIT for the IRC §250 FDII deduction.) The Department further explained that while most corporations will not include GILTI or IRC §78 gross-up in their sales factor because they are engaged in business activities beyond MCL §206.609(4)(e), for those with no other activity, GILTI and IRC §78 gross-up attributable to GILTI are income from an investment activity and thus included in the sales factor. Unitary businesses group should consider each member's respective business activity to determine if the income from investment activity is included in sales. This income is sourced under MCL §206.665(10(b). The Department also provides detailed guidance for individuals, trust and estates. An individual's treatment of GILTI depends on whether the individual has GILTI from direct ownership of a foreign corporation to the extent included in adjusted gross income (intangible nonbusiness income) or if GITLI flows through from a pass-through entity (business income subject to allocation and apportionment). The guidance includes illustrative examples. Mich. Dept. of Treas., Notice: Income Tax Guidance on GILTI for Corporations, Individuals, Trusts and Estates (Jan. 28, 2020).

North Carolina: The North Carolina Department of Revenue said that as a result of the recent enactment of market-based sourcing provisions for sales of non-tangible personal property, corporate and individual income tax private letter rulings addressing sourcing of receipts that are modified or changed by the new law are void and do not apply to tax years beginning on or after Jan. 1, 2020. N.C. Dept. of Rev., Important Notice: Impact of Market Based Sourcing on Private Letter Rulings Issued Prior to January 1, 2020 (Jan. 31, 2020).

SALES & USE

Nebraska: The Nebraska Department of Revenue (Department) issued guidance to food delivery service companies, including those that make sales through an app, website or similar platform, advising them on their Nebraska sales and use tax collection and remittance responsibilities. The guidance addresses the taxability of the following types of food delivery service transactions: (1) restaurant — free delivery and delivery fee charged; (2) third party food delivery services — delivery fee charged; and (3) multivendor marketplace platform (MMP) — delivery fee charged. The Department explained that an MMP is responsible for collecting and remitting sales tax on the entire sales price, including delivery charge, of any prepared food sold through its platform, including delivery charges, gratuities or service charges or fees. An MMP also must collect and remit the local occupation tax which a restaurant passes on to the end customer and is separately stated on the receipt. Restaurants are relieved of sales tax collection and remittance responsibilities if the MMP has collected and remitted tax on the sales price to the Department. General sourcing rules apply to these transactions. Neb. Dept. of Rev., Information Guide No. 6-535-2020 (Jan. 1, 2020).

North Carolina: The North Carolina Department of Revenue (Department) issued sales and use tax collection and remittance guidance to auctioneers meeting the definition of a marketplace facilitator and either the $100,000 gross sales or 200 separate transactions nexus reporting and payment thresholds. Starting Feb. 1, 2020, an auctioneer that is a marketplace facilitator is liable for sales and use tax on sales it facilitates when it directly or indirectly (and whether through one or more affiliates), does both of the following: (1) lists or otherwise makes available for sale a marketplace seller's items through a marketplace owned or operated by the marketplace facilitator; and (2) either collects the sales price or purchase price of a marketplace seller's items or otherwise processes payment or makes payment processing services available to purchasers for the sale of a marketplace seller's items. Such an auctioneer is considered the retailer of each marketplace sale it facilitates and is liable for collecting and remitting the sales and use tax due on such sales. The guidance includes definitions of key terms and provides registration information. N.C. Dept. of Rev., Important Notice: Auctioneers (Feb. 6, 2020).

COMPLIANCE & REPORTING

Louisiana: The Louisiana Department of Revenue (Department) adopted regulations and issued guidance to address administrative issues related to an S corporation or other entity taxed as a partnership for federal income tax purposes (collectively, entity) making an election to be taxed as if the entity had been required to file a federal income tax return as a C corporation. The regulation explains the types of documentation required to make an election, how to file a return after an election has been made, and how to terminate an election. The guidance addresses remaining administrative issues with making an election, including how and when to make an election, eligibility for the entity exclusion for shareholders, members or partners (available to individuals but not to corporations, estates, or trusts), and the franchise tax implications of the exclusion. La. Dept. of Rev., La. Admin. Code 61:I.1001 (La. Register, Vol. 46, No. 01, Jan. 20, 2020); Revenue Information Bulletin No. 19-019 (Feb. 5, 2020).

PAYROLL & EMPLOYMENT TAX

Arkansas: The Arkansas Department Finance and Administration released revised income tax withholding wage bracket tables, low income tax tables, and withholding formula methods that are effective March 1, 2020. A revised employer withholding guide is also available. For additional information on this development, see Tax Alert 2020-0213.

Connecticut: The Connecticut Department of Revenue Services released its 2020 income tax withholding calculation rules and wage-bracket tables on its website. According to the guidance, the 2020 withholding calculation rules and 2020 withholding tables are unchanged from 2019. There is no percentage method available to determine Connecticut withholding. For more on this development, see Tax Alert 2020-0234.

Delaware: In late December 2019, the Delaware Division of Revenue published to its website a new Form DE W-4 that Delaware employees must use, starting in 2020, for state income tax withholding purposes. Previously, the state used the federal Form W-4. For more on this development, see Tax Alert 2020-0275.

Illinois: The Illinois Department of Revenue issued Publication IL-700-T, Illinois Withholding Tax Tables, to be used effective with wages paid on and after Jan. 1, 2020. The flat and supplemental income tax rate continues to be 4.95% for 2020 and the state annual exemption amount per allowance is $2,325. For additional information on this development, see Tax Alert 2020-0197.

Mississippi: The Mississippi Department of Revenue released 2020 wage-bracket withholding tables to its website. Publication 89-700, Withholding Income Tax Tables and Employer Instructions is not updated for 2020. There is no percentage method available to determine Mississippi withholding; however, the Department does provide a computer payroll flowchart for 2020. For additional information on this development, see Tax Alert 2020-0256.

MISCELLANEOUS TAX

Maryland: The City of Baltimore's excise tax on outdoor advertising is a constitutional tax on the privilege of continuing in business, rather than an unconstitutional tax on the exercise of free speech. In so holding, the Maryland Court of Special Appeals (court) determined that the tax is rationally related to a legitimate governmental purpose of raising revenue from the privilege of exhibiting outdoor advertising displays, it does not impose a burden on speech when the tax is directed toward a means of expression rather than the expression's substance, the Ordinance imposing the tax is content neutral as it is applied when the outdoor advertiser charges a third party to use its space (and not when it displays is own messages). Clear Channel Outdoor, Inc. v. Baltimore City Dept. of Finance, No 2910 (Md. Ct. Special App. Jan. 29, 2020).

UNCLAIMED PROPERTY

Maine: New law (LD 1612) phases out the 60% presumption of abandonment for gift card obligations. The amount unclaimed of a gift obligation is as follows for a gift obligation whose issuance or whose most recent transaction, whichever is later, occurred during calendar year 2019 or earlier, 60% of the net obligation value at the time it is presumed abandoned. The presumption is reduced to 40% in 2020, 20% in 2021, and 0% in 2022. Maine Laws 2020, Ch. 553 (LD 1612), signed by the governor Jan. 30, 2020.

GLOBAL TRADE

International: Beginning Jan. 1, 2020, China's import tariff rates for certain commodities have been adjusted in accordance with the "Notice of the Customs Tariff Commission of the State Council on the 2020 Adjustment Plan for Import Tentative Tax Rates and Other Adjustments" (CTC Public Notice [2019] No. 50). In addition, China's interpretation of domestic subheading of import and export tariffs has been revised as per the "Notice of the Customs Tariff Commission of the State Council on Adjusting Interpretation of Certain Domestic Subheadings" (CTC Public Notice [2019] No. 51). For additional information on this development, see Tax Alert 2020-0317.

VALUE ADDED TAX

International: Persons carrying out business outside the Kingdom of Bahrain (Bahrain) that incur value added tax (VAT) in Bahrain should review their eligibility to claim a refund of the VAT paid. For VAT incurred during 2019, the deadline to apply for a refund is March 31, 2020, in accordance with Article 90 of the VAT Executive Regulations. For additional information on this development, see Tax Alert 2020-0305.

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.

———————————————
ENDNOTES

¹ Lowe's Home Centers, LLC v. Wash. Dept. of Rev., Dkt. No. 96383-5 (Wash. S.Ct. Jan. 16, 2020).