13 March 2020 State and Local Tax Weekly for March 6 Ernst & Young's State and Local Tax Weekly newsletter for March 6 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. The 2020 state legislative sessions are in full swing. Although most state sessions are just two months in, several legislative trends have developed. Many of these trends continue to follow ongoing state tax themes, such as promoting mandatory unitary combined reporting and developing marketplace facilitator legislation for state sales tax purposes. Other trends, such as state digital service tax proposals, represent new state tax policy efforts. Mandatory unitary combined reporting and worldwide combination: Following on existing trends, state legislative efforts to enact mandatory unitary combined reporting in the remaining separate return states are once again prevalent around the country. Significant proposals are being considered in (1) Maryland, where the Democrat-controlled legislature is seeking to generate additional revenue for education funding initiatives; (2) Pennsylvania, where the Governor has renewed his perennial call for combined reporting; (3) Florida; and (4) Virginia, where, after Democrats took full control of the executive and legislative branches of state government for the first time in 25 years, mandatory combined filing bills were introduced for the first time in many years. Meanwhile, states that already have combined filing requirements, such as Maine, Massachusetts, New Hampshire, and Kentucky, are revisiting their statutes with proposals to expand the scope of combined reporting by enacting so-called "tax haven" provisions or by eliminating "water's-edge" filing requirements in favor of mandatory worldwide combined reporting, a trend that has been somewhat absent in recent years. Marketplace facilitator legislation: While proposals to impose sales tax collection responsibilities on marketplace facilitators dominated the 2019 legislative cycle, the issue has picked up steam into the 2020 sessions as well. In January 2020, Georgia enacted marketplace facilitator legislation, leaving just six states — Florida, Kansas, Louisiana, Mississippi, Missouri, and Tennessee — without such provisions. Each of these states has proposed marketplace facilitator legislation. In addition, the legislatures of Florida and Missouri, the only two states with a sales and use tax but no economic nexus provisions for remote sellers, have introduced proposals to establish such provisions. Meanwhile, even the US Congress has shown renewed interest in the issue; the House Small Business Subcommittee on Economic Growth, Tax, and Capital Access conducted a hearing on March 3, 2020, addressing the complex challenges small businesses face in dealing with multistate sales tax registration, collection and remittance requirements, and state tax audits following South Dakota v. Wayfair, Inc.1 (Wayfair), in which the US Supreme Court eliminated the physical presence requirement for sales tax nexus. Digital advertising taxation: What may be the least expected and most surprising state tax trend emerging in 2020 is the proliferation of various iterations of state efforts to tax the digital economy, with digital advertising and data usage directly in state legislators' sights. This trend is seemingly aligned with discussions at the global Organisation for Economic Development and Cooperation (OECD) to propose changes to the international tax system in response to the disruption of the digital economy and ongoing efforts in nations around the world to impose new tax regimes. Leading the charge was Maryland with a measure that would impose a new gross receipts tax on digital advertising sourced to the state. Soon after, Nebraska introduced a measure to subject digital advertising to the state's sales tax. Meanwhile, members of the New York legislature introduced a bill that would impose a 5% corporate franchise tax on companies that derive income from New York residents' data shared with the company. Similar bills focusing on various aspects of the digital economy failed in West Virginia (would have imposed a new tax on data mining) and in South Dakota (would have eliminated all advertising services from an existing exemption to the state's sales tax), and are still under consideration in Minnesota (would impose a social media registration fee). These measures represent a new avenue for both revenue-raising and social impact legislation. Transfer taxes: Another trend that has taken root in 2020 is a wave of proposals to increase state or local real estate transfer and recordation taxes. Proposals have included creation of high-value thresholds for increased rates in Oregon and Rhode Island. In Massachusetts and Illinois, the legislatures are being asked to authorize or increase local transfer taxes to benefit Boston and Chicago, respectively. These bills represent the larger picture of states and localities continuing to hunt for additional revenue to fund their budgetary needs. Incentives compact: One last trend worthy of attention is an effort to establish a multistate compact to eliminate company-specific incentives. Legislation has been introduced in at least 14 states2 to join this new interstate compact, which would prohibit its members from offering or providing financial development incentives to specific companies to attract them from one state to the next. For additional information on this development, see Tax Alert 2020-0542. Iowa: Proposed bill (House Study Bill (HSB) 708) would continue to allow a deduction for foreign dividend income but directs the deduction to be on the "net foreign dividend income" and based on the percentage of ownership set forth in IRC § 243. The deduction would also be expanded to include a similar deduction for net global intangible low taxed income (GILTI) under IRC §§951A and 250. HSB 708 also would effectively decouple Iowa's tax law from the IRC § 163(j) limitations on the deduction for business interest. To the extent a taxpayer's income increased or decreased due to the application of IRC § 163(j), the taxpayer would have to recompute its Iowa taxable income under rules to be prescribed by the Iowa Director of Revenue. In addition, the legislation is drafted so that the decoupling from IRC § 163(j) would not apply during any tax year in which the additional first-year depreciation allowance under IRC § 168(k) applies. Except for one period from 2003 to 2004, Iowa has always decoupled from federal bonus depreciation and is anticipated to continue doing so in the future. If enacted as currently drafted, HSB 708 would take immediate effect and apply retroactively to Jan. 1, 2019.For more on this development, see Tax Alert 2020-0514. Iowa: On Feb. 26, 2020, the Iowa Department of Revenue published approved amendments to its administrative rules addressing the treatment of global intangible low taxed income (GILTI) under IRC § 951A and the corresponding GILTI deduction under IRC § 250 for purposes of determining the sales factor for Iowa apportionment purposes. The amended rule becomes effective on April 1, 2020. For additional information on this development, see Tax Alert 2020-0514. New Jersey: The owner of a single-member limited liability company (SMLLC) properly characterized the SMLLC's distributive share of losses generated by a 50%-owned partnership as partnership loss for state gross income tax (GIT) purposes. In so holding, the New Jersey Tax Court rejected the New Jersey Division of Taxation's (Division) argument that the loss should have been recharacterized as a business loss since the SMLLC is treated as a disregarded entity, and so as a sole proprietorship in this instance, for both state and federal purposes. The Court determined that relevant federal guidance did not control the outcome of the case for New Jersey GIT purposes and agreed with the owner's argument that notwithstanding whether the SMLLC was properly classified as a sole proprietorship, the Division failed to properly apply its sole proprietorship regulations. Stanard v. N.J. Dir., Div. of Taxn., No. 008149–2018 (N.J. Tax Ct. Feb. 24, 2020.) West Virginia: New law (SB 300) for corporate net income tax purposes updates West Virginia's date of conformity to the Internal Revenue Code of 1986, as amended (IRC) to the IRC in effect on Dec. 31, 2019. This change is effective retroactive to the extent allowable under federal income tax law. W.V. Laws 2020, SB 300, signed by the governor on March 2, 2020. West Virginia: New law (SB 310) for personal income tax purposes updates West Virginia's date of conformity to the Internal Revenue Code of 1986, as amended (IRC) to the IRC in effect on Dec. 31, 2019. This change is effective retroactive to the extent allowable under federal income tax law. W.V. Laws 2020, SB 310, signed by the governor on March 2, 2020. New York: A business that purchases and delivers telephone directories throughout the U.S., including New York, free of charge did not qualify for the sales and use tax exemption on costs associated with shipping by two specialized delivery service companies that are not "common carriers" or "like delivery services". Consequently, the business was assessed additional sales and use tax associated with the directories delivered by these shipping companies. In so holding, the New York Supreme Court, Appellate Division (Court), explained that unlike the U.S. Postal Service and other global package delivery service companies, the two specialized delivery service companies were substantially similar to "contract carriers" since they specialize in "directories solely or other advertising products" and they do not affirmatively state that they will carry for all members of the public as a carrier. A common carrier, in contrast, agrees to transport personal property for all persons that want to use the service and it holds itself out to the public as a carrier. Dex Media, Inc. v. N.Y. Tax App. Trib. Of the Dept. of Taxn. and Fin., No. 528226 (N.Y. S.Ct., App. Div., 3rd Jud. Dept., Feb. 27, 2020). Wyoming: New law (HB 134) imposes a 5% state sales tax on lodging services, effective Jan. 1, 2021. The tax does not apply to the sale of lodging services offered by any county fair board during a county fair or other board authorized event. The law specifies how this new tax revenue will be distributed. Wy. Laws 2020, Ch. 14 (HB 134), signed by the governor March 6, 2020. Wisconsin: New law (AB 532) provides income and franchise tax benefits to corporations, individuals, tax-option S corporations and insurance companies investing in a Wisconsin qualified opportunity fund (WQOF) that invests in a Wisconsin qualified opportunity zone (WQOZ). Such corporations (excluding tax-option S corporations) will have their Wisconsin capital gain basis adjusted, with the basis increase allowed under federal law for an investment in a WQOF being increased by 10% of deferred gains from this investment if held for at least five years (increased to 15% if held for at least seven years). Individuals (including individual partners and members of pass-through entities (PTE)), tax-option S corporations and insurance companies that invest in a WQOF that invests in a WQOZ will be able to subtract from federal adjusted gross income (individuals and S corporations) or federal taxable income (insurance companies) 10 % of the deferred gains from such investment if held for at least five years (increased to 15% if held for at least seven years). This subtraction does not apply to capital gains excluded or deferred under certain qualified Wisconsin business programs and individual partners, shareholders and members cannot claim the subtraction if the PTE makes an election to pay tax at the entity level. The Wisconsin basis increase and income subtraction are in addition to the federal increase and exclusion. In addition, a WQOF that is liable for the penalty under IRC § 1400Z-2(f) is subject to a Wisconsin penalty equal to 33% of the federal penalty. These provisions first apply to tax years beginning after Dec. 31, 2019. Wis. Laws 2020, Act 136 (AB 532), signed by the governor on March 3, 2020. See also, Wis. Dept. of Rev., Fact Sheet 1121 "Capital Gain Exclusion — Investment in a Wisconsin Qualified Opportunity Fund" (last updated March 6, 2020). New York: Effective Jan. 1, 2020, all electric generating facilities in the state of New York must file Form RP-575, Annual Report for Electric Generating Facilities (Report), by April 30 to the Office of Real Property Tax Services (ORPTS) of the New York Department of Taxation and Finance. The reporting requirement applies to power-generating facilities with a nameplate capacity of 1MW or more, including facilities that are exempt from property tax and/or have payments in lieu of taxes (PILOTS). Electric-generating facilities within New York City that submit Real Property Income and Expense (RPIE) statements with the New York City Department of Finance are exempt from the reporting requirement. The Report form can be found at RP-757 (Fill-in) and instructions at RP-575-I (Instructions). Facilities that fail to timely submit the Report will be subject to a $10,000 penalty for each failure and an additional $1,000 penalty for each day that the failure occurs. For more on this development, see Tax Alert 2020-0490. Texas: In PRSI Trading, LLC, the Texas Supreme Court reversed the decision of the Texas Court of Appeals and held that a refinery and its connected storage facilities for imported crude oil and refined petroleum products qualified for the federal foreign trade zone (FTZ) ad valorem tax exemption under the federal Foreign-Trade Zones Act of 1934.3 U.S. Customs and Border Protection (Customs) deactivated the FTZ in August 2013 following five years of administrative appeals addressing whether the refinery operator was a new or continuing operator following a series of mergers. The Court rejected the county's argument that since Customs ultimately deactivated the FTZ because the refinery did not qualify as a continuing operator, the refinery was not entitled to the FTZ ad valorem exemption and, therefore, owed tax dating back to 2011. The Court reasoned that Customs did not expressly or implicitly deactivate the FTZ while determining whether the refinery was an authorized operator until it formally deactivated the zone in August 2013. Further, the Court said, the refinery continued to uphold its operations and obligations during the pendency of its administrative appeal with Customs, and its responsibilities (and corollary tax benefits) terminated "only after deactivation was approved by Customs and all inventory was removed." PRSI Trading, LLC v. Harris County, No. 18-0664 (Tex. S.Ct. Feb. 28, 2020). Wisconsin: In affirming a lower tribunal ruling, the Wisconsin Court of Appeals (Court) held that two airlines are not entitled to Wisconsin's "hub facility" exemption from property tax for the 2013 or 2014 tax years because neither met the hub facility exemption's requirement of operating at least 45 common carrier departing flights each weekday in the prior year. In so concluding, the Court rejected the airlines' arguments that they (1) "substantially met the statutory requirements for being a hub facility," (2) needed only to "schedule" departing flights rather than actually have departing flights, and (3) only needed an average of 45 departing flights each weekday rather than 45 flights that actually depart. The Court noted that the statute does not provide for exceptions to the weekday minimum number of flights for holidays and bad weather, it does not allow for consideration of the average number of weekday flights, and it does not permit use of scheduled flights. Rather, in determining whether the minimum flight threshold has been met, only the number of flights that actually departed are counted. Southwest Airlines Co. and AirTran Airways, Inc. v. Wis. Dept. of Rev., No. 2019AP818 (Wis. Ct. App., Dist. I, March 3, 2020). New York: A recent appellate court decision (Reardon v Global Cash Card, Inc., No. 526973 (NY App. Div. 3d, Jan. 9, 2020)) held that the regulations finalized in 2016 that govern the payment of wages by direct deposit or payroll debit card are valid and enforceable by the New York Department of Labor. It is unknown at this time whether there will be a further appeal to the New York State Court of Appeals, the state's highest court. For additional information on this development, see Tax Alert 2020-0478. Puerto Rico: The Puerto Rico Treasury Department (PRTD) has announced (Informative Bulletin (IB) 20-05) that it will not impose penalties for 2019 informative returns filed after the March 3, 2020 due date, provided the returns are filed no later than March 31, 2020. Penalties will not be waived for withholding taxes that are not timely deposited with the PRTD. IB 20-05 also points out existing guidance on how taxpayers may claim a credit for income tax withheld if they do not receive an informative return from the withholding agent. For additional information on this development, see Tax Alert 2020-0483. Federal/State: On Thursday, April 2, 2020 from 2:00-3:00 p.m. EDT New York; 11:00-12:00 p.m. PDT Los Angeles, Ernst & Young LLP will host a webcast on federal and state Form W-4 compliance under the latest rules. The IRS implemented changes under the Tax Cuts and Jobs Act that significantly required modification of the Form W-4, Employee Withholding Certificate and the related income tax withholding tables and methods. These changes were effective in 2020 and have had a cascading impact at the state level, further challenging employers and employees to comprehend and comply with varying rules. Just this year, the IRS issued proposed regulations to document its guidance and to clarify other aspects of the new withholding requirements. Some states have also made rule changes in recent weeks in response to a federal Form W-4 that no longer includes personal allowances. Before the April 15 federal tax filing deadline, employers need to review the latest federal and state rules governing employee withholding certificates and withholding methods. Join us and hear our team of professionals discuss: (1) Form W-4 fields: 2019 compared to 2020, (2) what to watch for when employees claim additional withholding, (3) the special rules applicable to US nonresident aliens, (4) the modified rules governing lock-in letters, (5) the elements to include in sample Form W-4 employee communications, (6) the requirements to consider in employee self-service Form W-4 systems, and (7) how states have changed their rules in response to the new federal Form W-4, among other topics. Register for this event 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. 2 Alabama, Arizona, Connecticut, Delaware, Florida, Hawaii, Illinois, Iowa, Maryland, New Hampshire, New York, Rhode Island, Utah, and West Virginia. Document ID: 2020-0549 |
