17 April 2020 State and Local Tax Weekly for April 17 Ernst & Young's State and Local Tax Weekly newsletter for April 17 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 Indirect Tax COVID-19 state response matrix provides updates on the latest state tax agency responses related to the COVID-19 emergency, and is accessible directly through this link or on ey.com where other important tax-related information pertaining to the COVID-19 emergency is available. The Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act) includes modifications to sections of the Internal Revenue Code of 1986, as amended (IRC). Certain CARES Act modifications to the IRC relax limitations on certain business deductions that were enacted as part of the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) in December 2017, some of which have retroactive effect. Since states with an income tax rely in some way, shape or form on the IRC, these changes may impact state corporate income taxes although how, when and if the state incorporates them will vary from state to state. From a state corporate income tax perspective, the CARES Act modifications to the net operating loss (NOL) rules under IRC Section 172 and the temporary changes to IRC Section 163(j) limitation are of particular interest. The CARES Act temporarily suspends the 80% taxable income limitation on the use of a NOL deduction against taxable income incurred for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2021 (i.e., the 2018, 2019 and 2020 tax years for a calendar year-end taxpayer).1 Additionally, taxpayers may:
A taxpayer may not use the NOL carryback to directly reduce the amount of IRC Section 965 transition tax incurred in a transition year. A taxpayer may, however, still carry forward NOLs from taxable years beginning after Dec. 31, 2017 indefinitely if it elects against carrying them back. The carryback or carryforward of an NOL may affect a taxpayer's (1) allowable IRC Section 250 deduction (both against foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI)); (2) allowable foreign tax credits (FTCs); (3) base erosion anti-abuse tax (BEAT) liability under IRC Section 59A, and (4) in some cases, the taxpayer's IRC Section 965 transition tax liability. The CARES Act amendments to the IRC Section 163(j) business interest expense limitation generally allows taxpayers to increase the 30% of adjusted taxable income (ATI) limitation on the business interest expense deduction to 50% of ATI for tax years beginning in 2019 or 2020. Taxpayers, however, may elect not to apply the higher 50% limitation. In addition, taxpayers may elect to use their ATI for the 2019 tax year (in lieu of their ATI for the 2020 tax year) in calculating their IRC Section 163(j) limitation for the 2020 tax year. If the additional deduction yields negative tax consequences for another tax provision (such as the federal BEAT), taxpayers can elect not to apply the increased IRC Section 163(j) percentage limitation. The modifications to the IRC by the CARES Act can affect the corporate income taxes imposed by state governments depending upon how each such state conforms to amendments to the IRC. Generally, most state corporate income tax systems use some measure of income determined under the IRC, including federal taxable income (FTI) or adjusted gross income (AGI), as a starting point for state corporate income tax computations. The immediate impact of changes under the CARES Act to the calculation of FTI or AGI will depend on how and when each state conforms and incorporates changes to the IRC. Some will instantly conform to these federal changes. Others will not be affected by the amendments until the state's legislature enacts new law to conform, such as by advancing the state's IRC conformity date to incorporate the changes brought about by the CARES Act (i.e., advancing the IRC conformity date to March 27, 2020, or after). In some cases, state conformity or decoupling to these IRC changes could be retroactive. Tax Alert 2020-0784 highlights the significant changes to the IRC made by the CARES Act and broadly analyzes how these changes could affect state corporate income taxes generally. On April 1, 2020, Treasury released corrections (85 FR 19082) to the final qualified Opportunity Zone (OZ) regulations (TD 9889). The corrections clarify the following issues:
For more on this development, see Tax Alert 2020-0992. Multistate: The latest summary of the significant legislative, administrative, and judicial actions that affected state and local income/franchise and other business taxes for the first quarter of 2020 is now available. These developments are compiled from the EY Indirect/State Tax Weekly and Indirect/State Tax Alerts. Highlights include: (1) a summary of the state considerations of the CARES Act; (2) a summary of legislative developments in Arizona, Idaho, Indiana, Maine, New Mexico, South Dakota, Utah, Virginia, West Virginia and Wisconsin; (3) a summary of judicial developments in New Jersey, Oregon and Wisconsin; (4) a summary of administrative developments in Iowa, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Rhode Island and Texas; (5) a discussion of state and local tax items to watch in Hawaii, Illinois and New Jersey. For a copy of the summary, see Tax Alert 2020-0902. Arizona: New law (SB 1296) updates the state's conformity date to the Internal Revenue Code of 1986, as amended (IRC), in effect on Jan. 1, 2020. This change applies to tax years beginning from and after Dec. 31, 2019. Ariz. Laws 2020, Ch. 40 (SB 1296), signed by the governor March 24, 2020. Maine: New law (LD 2126) updates Maine's date of conformity to the Internal Revenue Code of 1986, as amended (IRC) to Dec. 31, 2019 (from Dec. 31, 2018). This change applies to tax years beginning on or after Jan. 1, 2019 and to any prior tax years as specifically provided by the IRC. Maine Laws 2020, Ch. 616 (LD 2126), enacted March 18, 2020. New Jersey: The New Jersey Division of Taxation (DOT) released Form DT-1, Statement of Net Deferred Tax Liability Deduction (Form DT-1), which all taxpayers claiming a net deferred tax liability deduction (NDTLD)2 on their Corporation Business Tax (CBT) returns are separately required to submit on or before July 1, 2020.3 Form DT-1 incorporates the guidance the DOT published in Technical Bulletin 96, Net Deferred Tax Liability Deduction and Combined Returns (TB-96) on Feb. 24, 2020. In addition to providing instructions on how to mechanically compute the NDTLD, Form DT-1 and TB-96 provide significant substantive guidance that was not included in the July 1, 2018 revision of the CBT Act (see Tax Alert 2018-1342), including the following:
For more on this development, see Tax Alert 2020-0824. Ohio: New law (HB 197) was originally intended as legislation to make technical corrections to Ohio's tax law but instead was used as a vehicle to enact tax relief provisions in response to the COVID-19 national health emergency. HB 197 declares a state of emergency, so many of the provisions, unless otherwise specified, take immediate effect. HB 197 authorizes the Ohio Tax Commissioner (Commissioner), for the duration of the declared COVID-19 state of emergency, to do the following: (1) extend state filing and payment deadlines on state taxes and fees administered by the Commissioner and suspend penalties on those delayed filings and payments; (2) waive the accrual of interest on extended tax payments; and (3) extend filing and payment deadlines, suspend penalties, and waive interest for municipal income taxes on the net profits of businesses that file those taxes via the centralized compliance system administered by the Ohio Department of Taxation. Neither HB 197 nor guidance from the Commissioner extend the time for filing returns for or paying Ohio's Commercial Activity Tax or sales/use tax. For Ohio municipal income tax purposes, HB 197 treats income earned by an employee required to work at a temporary worksite because of the emergency as earned at the employee's principal place of work during the duration of the declared COVID-19 emergency. HB 197 also updates the state's conformity to the Internal Revenue Code of 1986, as amended (IRC) to March 27, 2020, incorporating several individual income tax changes to the federal tax law into Ohio's tax law. Ohio Laws 2020, HB 197, signed by the governor on March 27, 2020. For additional information on this development, see Tax Alert 2020-0888. Wisconsin: The Wisconsin Circuit Court affirmed the Wisconsin Tax Appeals Commission (Commission) decision in Deere and Company, allowing a corporate taxpayer to claim the state's dividends received deduction (DRD) relating to distributions received from a foreign limited partnership that had elected to be treated as a corporation for federal income tax purposes. The Commission rejected the Wisconsin Department of Revenue's position that the interests in the electing partnership did not constitute "stock", a prerequisite for eligibility for the state's DRD. Wisconsin Dept. of Rev. v. Deere and Co., No. 2019CV002596 (Wis. Cir. Ct., Dane Cnty., March 9, 2020). For more on this development, see Tax Alert 2020-0819. Multistate: The EY Sales and Use Tax Quarterly Update provides a summary of the major legislative, administrative, and judicial sales and use tax developments. Highlights of this edition include a review of the most recent developments involving nexus, tax base and exemptions, technology, and compliance and controversy. See Tax Alert 2020-0983 for a copy of the summary. New York: The New York Supreme Court, Appellate Division (court), held that a telecommunication services provider was not entitled to a refund of sales tax paid on the purchase of electricity used to power and deliver its telecommunications services. The taxpayer, XO Communications (XO), had argued that its electricity purchases were exempt from New York sales tax as a component part of the telecommunication services that it provides. However, the Tax Appeals Tribunal (Tribunal) concluded that XO had failed to meet its burden of proving that it purchased electricity for resale to justify the assertion that it was entitled to the sales tax exclusion or that imposition of the tax resulted in double taxation. On appeal, the court noted that in order to claim the resale exemption under N.Y. Tax Law §1105(a) or 20 N.Y.C.R.R. §526.6(c), the item that is to be resold "must constitute tangible personal property," and under N.Y. Tax Law §1101(b)(6), tangible personal property is defined to specifically exclude "gas, electricity, refrigeration and steam." The court also agreed with the Tribunal's conclusion that the transactions did not constitute resale transactions as a matter of law. Under 20 N.Y.C.R.R. §527.2(e), "[p]urchases of utility services by a utility for resale as such may be made without payment of the sales tax." Here, the court noted, XO had failed to demonstrate that the electricity purchases that it made were, in fact, made for "resale as such" (i.e., that it purchased electricity to then resell to its customers for consumptive use as electricity) because it was "in the business of selling telecommunication services, not electricity." Finally, the court agreed with the Tribunal that XO's refund claims were properly denied, as it had failed to adequately establish the quantity of electricity that it purportedly resold to its customers. In the Matter of XO Communications Services, LLC v. Tax Appeals Tribunal,2020 NY Slip Op 02213 (N.Y. App. Div., Third Dept., April 9, 2020). Tennessee: New law (SB 2182) adopts marketplace facilitator provisions. Effective Oct. 1, 2020, the definition of "retailer" is expanded to include "every marketplace facilitator" and the definition of "sale" is expanded to include any sale made or facilitated by a marketplace facilitator. Generally a marketplace facilitator is liable for sales tax on sales it makes and facilitates, however, a marketplace seller may be liable for the tax if: (1) the marketplace facilitator made or facilitated total sales to Tennessee consumers of $500,000 or less in the prior 12-month period; (2) a marketplace facilitator demonstrates that substantially all of the marketplace sellers for whom it facilitates sales are Tennessee registered dealers and upon such demonstrations the commissioner waives the marketplace facilitator's liability requirement; the marketplace facilitator and marketplace seller contractually agree that the marketplace seller will collect and remit tax, if (a) the marketplace seller has annual U.S. gross sales of over $1 billion (including gross sales of related entities), (b) evidence that the marketplace facilitator is registered in the state is provided, and (c) the commissioner is notified that the marketplace seller will collect and remit tax on its sales made through the marketplace facilitator. A marketplace facilitator does not include a person who exclusively provides advertising services, a person whose activity is limited to providing payment processing, a delivery network company, and certain commodity futures trading commission registered platforms. For the sole purposes of this provision, including registering with the Tennessee Department of Revenue, a marketplace facilitator is considered the seller and retailer for each sale it facilitates on its marketplace. Tenn. Laws 2020, Pub. Ch. No. 646 (SB 2182), signed by the governor on April 1, 2020. Virginia: New law (HB 748 / SB 110) extends the sunset dates of Virginia's research and development tax credit and the major research and development expenses tax credit from Jan. 1, 2020 to Jan. 1, 2025. Va. Laws 2020, ch. 469 (HB 748) / ch. 470 (SB 110), signed by the governor March 25, 2020. California: Actions aimed at limiting the spread of the novel coronavirus (COVID-19), such as California's state and local shelter-in-place orders, are causing significant disruption to normal business activity. As a result, disaster relief for 2020 assessments may be available to business personal property and real property taxpayers under California Revenue & Taxation Code (CRTC) Section 170 (Section 170). Depending on local county ordinances, assessment reductions may be available for damage caused by misfortune or calamity in an area subsequently proclaimed by the Governor to be in a state of disaster. In some jurisdictions, "damage" may include a diminution in value caused by restricted access resulting from the misfortune or calamity. Section 170 claims generally must be filed within 12 months of the misfortune or calamity causing the damage. A written appeal must be filed with the county assessor stating the condition and value of the property immediately before and after the damage. Given the timing of the shelter-in-place orders, disaster relief claims may allow California property taxpayers to provide evidence of market value well beyond the January 1 lien date, potentially obtaining reductions for the 2020 assessment year that would otherwise be unavailable. For additional information on this development, see Tax Alert 2020-0882. Michigan: On April 1, 2020, the Michigan Department of Treasury (Department) published a response to a telecommuting frequently asked question to address the applicability of Michigan city income tax when employees are temporarily working from home outside of their normal work location. The Department confirms that if employees are temporarily working from home outside of the Michigan city where they normally perform services, nonresident income tax does not apply in the Michigan city where those employees normally work. For additional information on this development, see Tax Alert 2020-0840. Mississippi: The Mississippi Department of Revenue (DOR) announced on March 26, 2020, that during the period of the COVID-19 national emergency it will not impose nexus or alter apportionment of income for any business while its employees are temporarily on telework assignments within the state. Mississippi law requires that income tax be withheld from wages paid to all Mississippi residents regardless of where they work if the employer has business operations (nexus) within the state. Pursuant to the DOR's announcement, the state will not assert nexus merely because an employee is temporarily on a telework assignment within the state due to COVID-19. For additional information on this development, see Tax Alert 2020-0792. New Jersey: The New Jersey Division of Taxation (DOT) announced on March 30, 2020 that during the period of the COVID-19 national emergency it will temporarily waive the impact of the legal threshold within N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.9(a) that treats employee work from within New Jersey as sufficient nexus for out-of-state corporations. The announcement states that for employees working from home solely as a result of closures due the COVID-19 emergency and/or the employer's social distancing policy, no threshold will be considered to have been met. New Jersey requires that income tax be withheld from wages paid to all New Jersey residents, regardless of where they work, if the employer has business operations (nexus) within the state. Pursuant to the DOT's announcement, the state will not assert nexus merely because an employee is temporarily on a telework assignment within the state due to the COVID-19 emergency. For additional information on this development, see Tax Alert 2020-0797. Philadelphia, PA: The City of Philadelphia Department of Revenue announced on March 26, 2020, that nonresident employees based in Philadelphia are not subject to the Philadelphia Wage Tax during the time they are ordered to work outside of Philadelphia. The guidance was published to address the situation that many employees have been forced to work from home, many for the first time. For additional information on this development, see Tax Alert 2020-0751. Oregon: The Oregon Department of Revenue has not extended the due date of the first payment for its new Corporate Activity Tax (CAT). Accordingly, the first CAT payment is due April 30, 2020. For additional information on this development, see Tax Alert 2020-0874. International: Kenya's Tax Appeals Tribunal (TAT) on March 31, 2020, following an appeal filed by NIC Group PLC and NIC Bank PLC against the Commissioner of Domestic Taxes, made a determination that interchange fees received by issuing banks are not subject to value-added tax (VAT). For additional information on this development, see Tax Alert 2020-0891. 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 For fiscal year-end taxpayers with an NOL generated from a 2018 tax year return, a CARES Act technical correction retroactively places such loss under the pre-TCJA NOL regime. 2 N.J. Rev. Stat. § 54:10A-4(k) provides that a combined group is eligible for a NDTLD if, in addition to being part of a publicly-traded company's consolidated financial statement, it incurs an "increase in the net deferred tax liability or decrease in the net deferred tax asset, or aggregate change from a net deferred tax asset to a net deferred tax liability" solely as a result of combined filing. 3 Form DT-1 states that "[f]ailure to file this statement by this date will result in a loss of the NDTLD" and "[n]o extensions of time to file this statement will be granted." In addition, the instructions to Form DT-1 state the following: "Form DT-1 and any accompanying riders must be electronically uploaded at https://www.njportal. com/DOR/TCM/#/. The system will be available on or before May 15, [2020]. Use 'Business Tax' for the account type and select PO Box 258 '-Net Deferred Tax Liability — Form DT-1.['] This is a virtual PO Box and cannot be used to mail documents to the [DOT]. The [DOT] will not accept paper copies through the mail. Submission of Form DT-1 does not guarantee the [NDTLD] will be granted." Document ID: 2020-1349 |
