10 April 2020 State and Local Tax Weekly for April 10 Ernst & Young's State and Local Tax Weekly newsletter for April 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. The COVID-19 pandemic has created significant uncertainty for businesses and governments alike. As a result, many businesses and state and local governmental agencies are executing contingency plans and considering the various ways governmental "stay in place" orders will impact their operations. (Hereafter, unless specifically indicated, state agencies will refer equally to state and local governmental agencies.) State tax agencies are also responding to the impact this public health crisis is having on their employees and taxpayers alike and are releasing new guidance on a regular basis. Moreover, many tax policy issues have arisen that taxpayers should consider. The state tax challenges for companies responding to the COVID-19 pandemic range from meeting upcoming tax return filing and payment deadlines, to scheduling audits and protest hearings, to routine tax-planning and compliance. Specifically, taxpayers should consider the following issues:
Because many more issues will emerge as governmental responses to the COVID-19 pandemic unfolds, taxpayers should regularly monitor developments in all of the states in which they file returns and are subject to tax as well as quickly begin the process of identifying and addressing practical issues of state tax compliance to prepare if governmental orders require either taxpayers or state tax agency personnel to shelter in place and shutter operations. The Indirect Tax COVID-19 state response matrix provides updates on the latest state tax agency responses related to COVID-19 emergency. EY's site is accessible directly through this link, or on ey.com where other important tax-related information pertaining to the COVID-19 emergency is available. Federal: On March 20, 2020, the Treasury Department published final regulations (Final Regulations) providing guidance on determining the creditability of foreign taxes following covered asset acquisitions (CAAs) under IRC Section 901(m). The Final Regulations are generally consistent with the prior temporary and proposed regulations published on Dec. 7, 2016. The Final Regulations include three categories of transactions that are treated as CAAs, in addition to those contained in the proposed regulations. These new categories are: (1) any transaction that is treated as (A) an asset acquisition for US federal income tax purposes and (B) an acquisition of an interest in a fiscally transparent entity for foreign income tax purposes; (2) any transaction that is treated for US federal income tax purposes as an asset distribution from a partnership and causes an increase in the basis of either the distributed assets or the remaining partnership assets; (3) any transaction treated as an asset acquisition for both US federal and foreign income tax purposes. The second and third categories apply only if US tax basis increases without a corresponding increase to foreign tax basis. For additional information on this development, see Tax Alert 2020-9007. Indiana: New law (SB 408) updates Indiana's date of conformity to the IRC to Jan. 1, 2020 (from Jan. 1, 2019). Ind. Laws 2020, P.L. 146 (SB 408), signed by the governor March 21, 2020. New Jersey: The U.S. Supreme Court will not review the New Jersey appeals court ruling that the gain relating to goodwill of an out-of-state resident's deemed sale of assets from a New Jersey S corporation for which an IRC Section 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. denied, Dkt. No. 19-921 (U.S. S.Ct. March 23, 2020). New Jersey: On Feb. 18, 2020, the New Jersey Division of Taxation (NJ DOT) issued TB-95 Net Operating Losses and Combined Groups to provide guidance on prior net operating loss (NOL) conversion carryovers (PNOLs), post-allocation NOLs, and NOL carryovers in a combined group. On the same day, the NJ DOT also issued revised TB-94(R) General Information on the New Net Operating Loss Regime for Tax Years Ending on and After July 31, 2019, which provides guidance on New Jersey's new CBT NOL and NOL carryover provisions for separate return filers. New Mexico: New law (HB 326) modifies the definition of "manufacturing" for business income apportionment purposes to include generation of electricity at a facility that does not require location approval and a certificate of convenience and necessity before construction or operation of the facility begin pursuant to the Public Utility Act. This change applies to tax years beginning before Jan. 1, 2024. N.M. Laws 2020, HB 326, signed by the governor on March 9, 2020. Oregon: An airline is required to include flight data from a unitary affiliate airline in its departure ratio for determining its Oregon transportation sales included in its sales factor for apportionment purposes. In so holding, the Oregon Tax Court (tax court) reasoned that the industry-specific apportionment provisions applied to include both airlines' data in the sales factor because both airlines are part of a single unitary group despite the airline's argument that each airline should be considered separately due to statutory and regulatory language that referred to "airline" and "taxpayer" in the singular. The tax court also determined that both "codeshare" revenue the airline earned from customers purchasing seats through third-party vendors and passive income the airline earned from rents, interest and the retirement of aircraft is excluded from transportation revenue. Alaska Airlines, Inc. v. Ore. Dept. of Rev., No. TC-MD 180065N (Ore. Tax Ct., Magistrate Div., Feb.8, 2020) (Unpublished). Indiana: New law (SB 408) deletes the reference to "a retail merchant engaged in business in Indiana" under the definition section of the use tax and modifies the sales tax nexus provisions to make clear that a retail merchant is obligated to collect tax on behalf of the state when it has either a physical presence in the state or meets the economic/transaction nexus threshold. (The new definition of when "a retail merchant is physically present in Indiana" is similar to the deleted use tax definition of "a retail merchant engaged in business in Indiana".) Additionally, the law authorizes the Indiana Department of Revenue to allow an out-of-state merchant to collect sales tax (formerly use tax) when it has not met the economic/transaction nexus threshold. The law also makes clarifying and technical changes to the definitions of "unitary transaction", "bundled transaction" and "gross retail income". These changes take effect July 1, 2020. Ind. Laws 2020, P.L. 146 (SB 408), signed by the governor March 21, 2020. Maryland: Pending bill (HB 732), as approved by the General Assembly, would impose a new tax on digital advertising. Specifically, effective for tax year 2021, HB 732 would impose a tax on the annual gross revenue derived from digital advertising in the state. The tax would apply a graduated rate, based on globalannual revenues, as follows: (1) for persons with global annual gross revenues of $100 million through $1 billion, the rate would be 2.5% of the assessable base; (2) for persons with global annual gross revenues of more than $1 billion through $5 billion, the rate would be 5% of the assessable base; (3) for persons with global annual gross revenues of more than $5 billion through $15 billion, the rate would be 7.5% of the assessable base; and (4) for persons with global annual gross revenues exceeding $15 billion, the rate would be 10% of the assessable base. Any person with annual gross revenues1 derived from digital advertising services within Maryland of at least $1 million would be required to file a return with the Office of the Maryland Comptroller of Treasury on or before April 15 of the next year, and each person that reasonably expects their annual gross revenues derived from digital advertising services in the state to exceed that amount must file a declaration of estimated tax on or before April 15 of that year and pay quarterly estimated taxes. HB 732 was approved by the General Assembly on March 18, 2020 and has been sent to Governor Hogan for his consideration. For more on this development, see Tax Alert 2020-0744. Maryland: Pending bill (HB 932), as approved by the General Assembly, would extend Maryland's existing 6% sales and use tax to digital products, including digital code, streaming, music, ring tones, e-books and audio books, movies, online newspapers, and cable, satellite and pay-per-view television programming. If enacted, HB 932 would align Maryland sales tax law with more than 30 other state-level jurisdictions that also impose their sales and use tax on such goods. HB 932 was approved by the General Assembly on March 18, 2020 and has been sent to Governor Hogan for his consideration. For additional information on this development, see Tax Alert 2020-0744. Missouri: In DI Supply I, LLC, the Missouri Supreme Court (Court) reversed a long-standing policy of the Missouri courts to apply use tax definitions contained in the Missouri statutes for sales tax purposes to determine that a company's sales of room furnishings and supplies to a related hotel chain were not exempt sales for resale. In prior decisions, Missouri courts defined a "sale" as (1) a transfer, barter or exchange (2) of title or ownership of tangible personal property or the right to use, store or consume the same and (3) for a consideration paid or to be paid. However, as the Court noted and the company acknowledged, these elements derived from the Missouri use tax statutes rather than the Missouri sales tax statutes. While both the sales tax and the use tax statutes contain resale exemptions, the Court noted that there is a distinction. The use tax exemption defines a "resale" based on the use tax definition of "sale". That provision includes as a "sale" any transfer of the right to use, store or consume tangible personal property. Conversely, the Missouri sales tax statutes define a resale based on the sales tax definition of a "sale at retail", which requires the transfer of title or ownership for the purchaser's use or consumption. The Court noted its more than 25-year history of "applying use tax definitions in sales tax cases," but explained that such mixing of statutory definitions was in error and, given that the sales tax and use tax resale exclusions "derive from separate and distinct statutes requiring independent analysis," application of the statutorily correct exemption requires application of the sales tax exemption to this sales tax case. The Court further noted that, while its own "muddled analysis" has caused understandable confusion, the language of the statutes is clear, and the sales tax and use tax statutory "definitions of 'sale,' though similar, have different requirements." Accordingly, the Court concluded, employment of the use tax definition of "sale" in sales tax resale exemption cases must no longer be followed. Applying this new standard, the Court ultimately held that it could not consider whether the hotel customers' right to use the room furnishings implicated the resale exemption to sales tax because the sales tax statutes do not include the transfer of the right to use, store, or consume as a "sale at retail." DI Supply I, LLC v. Mo. Director of Rev., No. SC97932 (Mo. S.Ct. March 17, 2020). For more on this development, see Tax Alert 2020-0686. New Mexico: New law (HB 326) modifies the destination sourcing rules for reporting gross receipts and compensating tax enacted in 2019. Under the revised rules, a person that has gross receipts and a person using property or services in New Mexico in a taxable manner is required to report the gross receipts to the proper business location. Under the new statute, the proper business location for gross receipts from:
Compensating tax is reported consistent with these provisions. The New Mexico Secretary of Taxation and Revenue is required to designate codes to identify the business locations for gross receipts/compensating tax (and related deductions) and develop and provide a location-code database and location-rate database that sets out the applicable tax rates to business locations within the state. These provisions take effect July 1, 2021. N.M. Laws 2020, HB 326, signed by the governor on March 9, 2020. Arizona: New law (HB 2771) extends to Dec. 31, 2030 the sunset dates for the corporate income tax credits for qualifying investment and employment in qualified facilities and for qualified research activity. The law also provides that unused qualified research activity credits claimed in tax years beginning before Jan. 1, 2022 are carried forward 15 years and provides a 10-year carryforward period for such credits claimed in tax years beginning Jan. 1, 2022. Ariz. Law 2020, HB 2771, signed by the governor on March 13, 2020. Indiana: New law (SB 408) makes clear that a taxpayer granted a historic rehabilitation tax credit before Jan. 1, 2016, for a qualified expenditure made before June 30, 2016, for use is a tax year other than the year in which the preservation/rehabilitation was performed and the certification provided, is entitled to claim the credit notwithstanding the expiration of the historic rehabilitation tax credit chapter on Jan. 1, 2019 and the cap on the amount of credits in fiscal years beginning after June 30, 2016. Under the law taxpayers are allowed to carryforward unused credit 15 years; unused credit is nonrefundable and a carryback is not allowed. These changes are retroactively effective Jan. 1, 2016. Ind. Laws 2020, P.L. 146 (SB 408), signed by the governor March 21, 2020. Virginia: New law (HB 784 / SB 110) extends the sunset dates of the research and development tax credit and the major research and development expenses tax credit from Jan. 1, 2020 to Jan. 1, 2025. In addition, the annual application date is changed from July 1 to September 1. These changes take effect July 1, 2020. Va. Laws 2020, Ch. 469 (HB 784) and Ch. 470 (SB 110), enacted March 25, 2020. Indiana: New law (SB 408) allows the Indiana Department of Revenue (IN DOR) to require a power of attorney (POA) relating to a listed tax be completed on an IN DOR provided form, and allows the IN DOR to accept a POA that names an entity as a representative of the taxpayers. The IN DOR can adopt rules to allow a change in individuals acting on behalf of an entity that is representing the taxpayer without requiring a new or amended POA be completed by the taxpayer. The law also allows a taxpayer to request a secondary review of any adjustment made by the IN DOR or by the taxpayer within 60 days from the date of notice of the adjustment based on: (1) the IN DOR's audit, investigation, or review; or (2) the amended return filed by the taxpayer. This secondary review request applies to IN DOR audits, investigations, or reviews and taxpayer filed amended returns that result in an adjustment to a net operating loss, capital loss, credit, or other tax attribute that does not result in an assessment or refund denial for any tax year at the time of adjustment. These changes take effect July 1, 2020. The law also requires partnership audit adjustment reporting, requiring a modification under IRC Sections 6221 through 6241 be included in the federal taxable income/federal adjusted gross income of the partner and the partnership. These provisions apply to partnerships whose tax year (1) begins after Dec. 31, 2017; (2) ends after Aug. 12, 2018; or (3) begins after Nov. 2, 2015 and before Jan. 1, 2018, and for which a valid election under Treas. Reg. 301.9100-22 is in effect, as well as the partners of the partnership. Further, the law provides that the IN DOR cannot issue an assessment resulting from the partnership audit adjustment before Dec. 31, 2021. This provision took effect April 1, 2020. Ind. Laws 2020, P.L. 146 (SB 408), signed by the governor March 21, 2020. New Mexico: New law (HB 326) allows the New Mexico Taxation and Revenue Department (TRD) to credit against the amount owned by a person, who as a result of a TRD audit or managed audit is determined to owe gross receipts tax on receipts from the sale of property or services, the amount of compensating tax paid by the purchaser. The credit applies if the person can show that the purchaser timely paid the compensating tax on the same property or services, and the credit cannot be denied solely because the purchaser cannot timely file a refund claim for the compensating tax paid. If the TRD grants the credit, the purchaser must give up any right to a refund of the compensating tax paid. This change takes effect July 1, 2021. N.M. Laws 2020, HB 326, signed by the governor on March 9, 2020. Federal: The Families First Coronavirus Response Act (H.R. 6201, enacted March 18, 2020) provides affected individuals with paid sick and family leave and creates tax credits for affected employers, expands food and nutrition services, allows for emergency state unemployment insurance grants, and increases Medicaid funding to states, among other things. For additional information on this development, see Tax Alert 2020-0598. Pennsylvania: The City of Pittsburgh, Pennsylvania's paid sick leave ordinance, which was enacted in 2015 and upheld by the Pennsylvania Supreme Court in July 2019, took effect on March 15, 2020. Under the ordinance, Pittsburgh employers with 15 or more employees are required to provide up to 40 hours of paid sick leave per year (24 hours for employers with fewer than 15 employees). Employees must accrue a minimum of one hour of paid sick leave for every 35 hours worked within Pittsburgh (up to the maximum of 40/24 hours per year). For the first year after the effective date of March 15, 2020, employers of fewer than 15 employees are required only to provide unpaid sick leave to accrue at one hour for every 35 hours worked. Effective March 15, 2021, these employees must begin to accrue paid sick leave. For additional information on this development, see Tax Alert 2020-0522. Vermont: The Vermont Department of Taxes has updated for 2020 its Publication GB-1158, Guide to the Health Care Fund Contribution (HCC) Assessment and Forms HC-1, Health Care Fund Contributions Assessment, and WHT-436, Quarterly Withholding Reconciliation. Effective March 31, 2020 and through Dec. 31, 2020, the HCC is $184.42 (up from $167.02 for the same period in 2019 and $163.20 for the same period in 2018) per uncovered full-time equivalent (FTE) above the four FTE exemptions. For additional information on this development, see Tax Alert 2020-0529. Indiana: New law (SB 408) amends the Financial Institutions Tax to define "loans arising in factoring" as a loan or extension of credit secured by one or more accounts receivable or a sale of one or more accounts receivable in which the purchaser has recourse against the seller for an uncollected accounts receivable. The term does not include an assignment of an account receivable or a sale of an accounts receivable without recourse. The new definition takes effect Jan. 1, 2021. Ind. Laws 2020, P.L. 146 (SB 408), signed by the governor March 21, 2020. International: The United States (US)-Mexico-Canada Free Trade Agreement (USMCA or Agreement) was formally ratified by Canada on March 17, 2020. Canada's ratification of the USMCA now allows the parties to begin the formal notification and certification processes, which are the final steps necessary for the agreement to formally enter into force. The new Agreement will replace the North American Free Trade Agreement (NAFTA), which has been in force since 1994. Significant hurdles remain before implementation, including the drafting of the Uniform Regulations by the three countries. These regulations will assist the trade community prepare for the considerable changes in the rules and regulations from the current NAFTA regulations. For additional information on this development, see Tax Alert 2020-0656. International: On March 25 and 26, 2020, the United States Trade Representative (USTR) published in two separate announcements newly granted exclusions to Chinese-origin goods subject to punitive tariffs under Section 301 of the Trade Act of 1974 (Section 301). The first set of published exclusions apply to items subject to 7.5% punitive duties on List 4A, covering US$115 billion worth of Chinese-origin goods. The second set of published exclusions apply to items subject to 25% punitive duties on List 3, covering US$200 billion worth of Chinese-origin goods. China, on Feb. 17, 2020, following commitments made to the US under the Phase One Trade Agreement announced an exclusion process for specified goods necessary to increase China's purchases from the US. The program provides exclusion of any punitive tariffs previously imposed that range from 2.5% to 25%. In addition, it was announced on March 27, 2020 that 16 World Trade Organization (WTO) member countries, notably excluding the US, had implemented an agreement to provide an interim alternative to the now defunct Appellate Body to those countries party to the agreement. For additional information on this development, see Tax Alert 2020-0800. International: In Case C-94/19 issued on March 11, 2020, the European Court of Justice (ECJ) ruled that the lending or secondment of staff of a parent company to its subsidiary is relevant for VAT purposes, even if it is carried out with the recharge of the cost of the assigned employees. The decision may have a significant impact on a broad range of businesses that have in place intercompany agreements for the supply of staff by way of secondment and it could renew interest in Italian VAT grouping in order to eliminate the friction of unrecoverable VAT on intercompany transactions. For additional information on this development, see Tax Alert 2020-0561. 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 HB 732 defines "annual gross revenues" to mean income or revenue from all sources, before any expenses or taxes, computed according to generally accepted accounting principles. Document ID: 2020-1348 |
