20 February 2020 State and Local Tax Weekly for February 14 Ernst & Young's State and Local Tax Weekly newsletter for February 14 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. Massachusetts Governor again proposes "real-time" sales tax remittance by third-party payment processors Massachusetts Governor Charlie Baker (R), as part of his 2021 budget proposal (the proposal, HB 2), again put forward a "Sales Tax Modernization" initiative that includes a "real-time" sales tax remittance requirement. This requirement, if enacted, would affect both retailers and financial service companies that process credit card transactions. (Governor Baker advanced similar accelerated sales tax remittance provisions in his 2017, 2018 and 2019 budget proposals.)
Effective July 1, 2020, the proposal would authorize the Department to require estimated sales tax prepayments for taxpayers or specific groups of taxpayers with over $100,000 in annual sales and would extend the general sales tax return filing deadline from 20 to 30 days after the relevant reporting period. The Governor's fiscal projections for these "sales tax acceleration" provisions forecast up to $317 million in new revenue.1 Accelerated sales tax remittance proposals have become ubiquitous in state legislatures around the country over the past several years, with Arizona, Connecticut, Missouri and New York considering legislation in prior years. This trend is expected to continue as states seek to identify and implement avenues for sales tax modernization. These proposals raise concerns for taxpayers and states alike, including substantial implementation and increased compliance costs, expanded record-keeping and reconciliation requirements, confidential data security risks, expanded audit and risk exposure, and additional strains on state tax administrative resources. These proposals, coupled with expanded state efforts in applying nexus standards following the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc., present a risk of substantial new exposures for unwary taxpayers; their vendors; and financial services companies, credit card processors, and anyone else involved in collection and remittance of payments to vendors. For additional information on this development, see Tax Alert 2020-0344. Iowa: The Iowa Department of Revenue (Department) issued updated guidance on the state's conformity and non-conformity to the new federal business interest expense limitations under IRC §163(j). Iowa does not conform to IRC §163(j) for tax year 2018 but fully conforms to the provision starting with tax year 2019 and beyond.2 Guidance "Business Interest Expense Conformity for Tax Year 2019 and Later" focuses on adjustments that corporations and corporate consolidated groups will need to make, including 2018 carryforward amounts. Starting in 2019, Iowa taxpayers are not allowed to deduct business interest expense amounts that represent a carryforward of the federal disallowed amounts from tax year 2018 and that were already allowed as a deduction for Iowa tax purposes in 2018. Rather, taxpayers are required to add back such amounts in the year they are actually deducted for federal income tax purposes on their Iowa corporate income tax returns. With respect to corporate consolidated groups, the Department said that they "will likely need to recalculate the business interest expense limitation deduction for Iowa purposes." (Taxpayers making an adjustment, see the 2019 IA 101 Nonconformity Adjustments form.) The Department also updated "Reform Guidance — Partnership Interest Expense Nonconformity Adjustment," which describes the special rules for reporting the disallowed business interest expense deduction carryforward that applies to partnerships and S corporations and their partners and shareholders. The guidance addresses (1) 2018 nonconformity adjustments for partners and shareholders who receive Iowa Forms K-1 and those who do not receive Iowa Forms K-1, and (2) 2019 and later reporting requirements and nonconformity adjustments for partnerships and partners. (The Department noted that S corporation shareholders will not have to make the same adjustments in 2019 as partners due to the difference in how the disallowed business interest expense is treated for partnerships compared to S corporations at the federal level, with S corporations making the adjustment at the entity level.) These documents were revised on Dec. 31, 2019. Ohio: In Willacy v. Cleveland Bd. of Income Tax Rev., the Ohio Supreme Court (Court) held the City of Cleveland can tax a former resident individual's income from stock options that were earned when the individual lived and worked in Cleveland but were exercised after the individual retired and relocated to Florida. In 2007, the taxpayer, Ms. Willacy, was issued stock options as compensation for employment services within Cleveland. Following her 2009 retirement, she moved to Florida, and in 2014–2015 she exercised some of these options. As required by Cleveland regulatory law, the former employer withheld and remitted municipal income tax to the city. The taxpayer's refund requests were rejected and before the Court, she argued that Cleveland's tax laws violate her due process rights. The Court disagreed, holding there was sufficient connection between the taxpayer and Cleveland as the tax was imposed on income arising from work performed in the city. Further, because all income was compensation for her work, it was fairly attributable to her activity in Cleveland. In addition, the Court rejected the taxpayer's argument that there is a due process issue because of the time gap between when the income-producing work was performed and when the options were exercised, reasoning that the income-producing event need not coincide with the taxable event. For additional information on this development, see Tax Alert 2020-0352. Illinois: The Illinois Department of Revenue (Department) issued guidance to marketplace sellers making marketplace sales on when they are required to remit Retailers' Occupation Tax (ROT) to the Department under marketplace facilitator provisions enacted in 2019. Under Illinois law when Illinois Use Tax (UT) is the tax required to be remitted to the Department on a marketplace sale, a marketplace facilitator meeting the nexus threshold is the retailer for the sale and as such is required to collect and remit UT to the Department. If, however, the ROT is the tax required to be remitted to the Department on marketplace sales, the marketplace seller is the retailer for the sale and as such is required to register, file a return and remit ROT on the sale; this requirement applies to applicable local taxes as well. (According to the Department, marketplace sellers most often incur ROT when purchases are filled from inventory in Illinois.) The Department is aware that tax calculation systems used by marketplace facilitators may not be able to calculate both ROT and UT at the time of sale. As a result, when ROT is due, a marketplace facilitator may not be able to collect the correct amount of tax from the purchaser at the time of sale and transmit it to the marketplace seller for remittance to the Department. Despite this limitation, the marketplace seller remains liable for the ROT due. The Department noted that it does not have the "authority to provide [a marketplace seller] with a credit against your ROT liability for the UT remitted by the marketplace facilitator." The Department indicated that marketplace facilitators are working to fix this limitation. Ill. Dept. of Rev., Compliance Alert — Tax Obligations of Marketplace Sellers Making Marketplace Sales Subject to ROT (Feb. 10, 2020). Massachusetts: The Massachusetts Supreme Judicial Court (Court) affirmed the ruling of the Massachusetts Appellate Tax Board (Board) that a company's sales of subscriptions for online software products are subject to sales tax because the software constituted the sale of taxable tangible personal property. In so holding, the Court explained that a 2005 statutory change broadened the definition of tangible personal property to include "[a] transfer of standardized computer software, including but not limited to electronic, telephonic, or similar transfer," and the Massachusetts Revenue Commissioner subsequently adopted a regulation (830 CMR 64H.1.3(3)), construing the application of sales tax to sales of prewritten software to include "transfers of rights to use software installed on a remote server." The Court found that when customers purchase a subscription to the company's online product, they gain access to company servers, which are running proprietary software that is necessary for the company's product to properly function. Because the company's subscription includes the transfer of a right to use software installed on a remote server, charges for the subscription are subject to sales tax. In addition, the Court rejected the company's alterative argument that the true object of the transaction was the provision of a remote connection service that should be treated as a nontaxable sale of service. Instead, the Court agreed with the Board that the company's sales of subscription for online products constituted a sale of tangible personal property. Citrix Systems, Inc. v. Mass. Comr. of Rev., No. SJC-12741 (Mass. Sup. Jud. Ct. Feb. 5, 2020). New Jersey: New law (AB 5580) extends and expands the New Jersey Film and Digital Media Tax Credit program. As modified, the 30% credit for qualified film production expenses and the 20% credit for qualified digital media content production expenses are available through privilege periods commencing before July 1, 2028 (formerly July 1, 2023). The cumulative total value of the film tax credits (including credits allowed through a tax credit transfer certificate) is capped at $100 million (from $75 million) in fiscal year 2019 and each fiscal year thereafter prior to fiscal year 2029 (formerly 2024). If the cap is not reached, the certified remaining amount of credit (unredeemed or non-transferred) can be carried forward to the following fiscal year; the carryforward amount is capped at $50 million. The $10 million cap on the digital media tax credit remains, but is extended, through each fiscal year prior to fiscal year 2029. These changes took immediate effect. N.J. Laws 2019, c. 506 (AB 5580), signed by the governor Jan. 21, 2020. Louisiana: The Louisiana Department of Revenue (Department) issued information on the resolution process for 2014–2018 claims for the credit for taxes paid to other states. The credit statutory provision (La. Rev. Stat. §47:33) was amended in 2015 and 2018 and, in 2018, the statute, in part, was found unconstitutional (see the Louisiana Supreme Court's opinion in Smith3). With this release, the Department provides guidance on filing original and amended returns for tax years affected by these changes, explains procedural requirements for obtaining returns of tax previously paid following the decision in Smith, and provides examples and a list of states for which a credit for taxes paid to the state may be claimed. La. Dept. of Rev., Revenue Info. Bulletin No. 19-023 (Dec. 18, 2019). Multistate: Beginning with the 2019 tax year, employers with employees who are residents of the District of Columbia or New Jersey must provide employees and the jurisdictions with details of their employees' health coverage to comply with new state individual health coverage mandates. Employers must also continue reporting similar information in Massachusetts and complying with federal Affordable Care Act (ACA) requirements. Residents in these three jurisdictions — Massachusetts, the District of Columbia and New Jersey — must demonstrate they have minimum essential coverage, as defined by the state, or pay a penalty. For additional information on this development, see Tax Alert 2020-0312. Arkansas: In a legal counsel opinion, the Arkansas Department of Finance and Administration (Department) ruled that the wages earned by a remote employee providing clerical services out of her home for an out-of-state contractor are subject to Arkansas income tax but are not subject to Arkansas income tax withholding, corporate income tax or sales and use tax. The Department's counsel in its opinion suggested that the out-of-state employer voluntarily withhold Arkansas income tax from the employee's wages, and if that is not possible, the employee could make estimated tax payments. Ark. Rev. Legal Counsel, Opinion No. 20190514 (Feb. 3, 2020). For additional information on this development, see Tax Alert 2020-0349. Oregon: Beginning in tax year 2020, the Oregon Department of Revenue will add the statewide transit tax program to Form OR-OTC-V, Oregon Combined Payroll Tax Payment Coupon and discontinue use of Form OR-STT-V, Statewide Transit Tax Payment Voucher. This will allow employers to use one payment voucher to report payments of the statewide transit tax in addition to the taxes already reported on Form OQ, Oregon Combined Quarterly Employer Payroll Tax Report, which currently includes Unemployment Insurance, Withholding, TriMet, Lane Transit, and Workers' Benefit Fund programs. For additional information on this development, see Tax Alert 2020-0285. Wisconsin: The Wisconsin Department of Revenue (Department) announced that it will conform to IRS final regulations that provide, effective with the 2020 Forms W-2 filed in 2021, a truncated Social Security Number (SSN) which may be used on copies provided to employees. The Department clarifies that: (1) employers may not truncate the employee's SSN on copies of Forms W-2 filed with the Department, and (2) employers may not truncate their own taxpayer identification number on any forms given to employees or filed with the Department. For additional information on this development, see Tax Alert 2020-0319. International: Ecuador's tax reform, enacted on Dec. 30, 2019, eliminates the tax exemption applicable to dividends and modifies the country's value-added tax (VAT) and outflow tax (i.e., currency exportation tax) rules. Specifically, the tax reform adds certain goods to the list of transferred or imported goods that are subject to a 0% VAT rate and amends the list of VAT withholding agents. In addition, the tax reform imposes a 12% VAT rate on digital services when the consumer is an Ecuadorian resident. Nonresidents may act as collection agents for VAT by registering with the Ecuadorian tax authority. The tax reform went into effect on Jan. 1, 2020. For more information on this development, see Tax Alert 2020-0375. International: The United Kingdom (UK) left the European Union (EU) on Jan. 31, 2020 (commonly referred as Brexit) and entered into transitional trading arrangements with the EU. The transitional period is due to end on Dec. 31, 2020. After that date, unless a further extension to the transitionary period is agreed, the UK will cease to be treated as an EU Member State for all trade purposes. The UK Government has announced that after the transitional period, all exports and imports will be treated equally. For more on this development, see Tax Alert 2020-0365. 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. 2 This is a result of different IRC conformity dates for 2018 (i.e., IRC in effect on Jan. 1, 2015) and 2019 (i.e., IRC in effect on March 24, 2018). 3 See Smith v. Robinson, No. 2018-CA-728, 265 So. 3d 740 (La. S.Ct. Dec. 5, 2018) aff'd as amended 265 So. 3d 740. 754 (La. S.Ct. Feb. 27, 2019). Document ID: 2020-0412 |
