21 May 2020 State and Local Tax Weekly for May 1 Ernst & Young's State and Local Tax Weekly newsletter for May 1 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. 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. On April 8, 2020, the New Jersey Division of Taxation (NJ DOT) filed special adoption regulations (SARs) relating to statutory changes to the Corporation Business Tax Act (CBTA) which were enacted in 2018. These regulations cover: (1) the treatment of previously taxed income (PTI) in the context of dividends received from subsidiaries; (2) a revised unreasonableness exception to the state's addback rules for interest and royalties paid to related parties; and (3) the treatment of global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII).The SARs will expire on Oct. 5, 2020 but are expected to be adopted as permanent regulations before expiring. Previously taxed income: Perhaps the most materially different provision in the SARs from previously issued NJ DOT guidance relates to the treatment of federal PTI for CBTA purposes. According to the SARs, the NJ DOT will only extend PTI treatment to deemed and actual dividends to the extent that a taxpayer filed a New Jersey tax return which included the dividend in the entire net income (ENI) base and paid greater than minimum tax during the previous tax period.1 Literal application of this provision would seemingly allow New Jersey to indirectly tax the same distribution twice. For example, in Year One, the deemed distribution might offset losses under the CBTA (causing a loss of attributes); and in Year 2, the receipt of the cash dividend could be taxed despite its federal PTI status. Taxpayers should be prepared to petition for relief if they fall into a double taxation situation. Special allocation factor for certain dividends: The SARs address the appropriate allocation factor to apply to actual and deemed dividends taxed during privilege periods beginning on or after Jan. 1, 2017, and those beginning before Jan. 1, 2019. The SARs added a new regulation, N.J.A.C. 18:7-3.25, which provides for the apportionment of the 5% of the residual dividends left after applying the 95% dividends received exclusion (available to distributions from 80%-or-greater owned subsidiaries) enacted as part of the tax reform bills enacted in 2018. Under this regulation, a taxpayer is required to allocate the taxable portion of the dividends received by the lower of its three-year average allocation factor to New Jersey or 3.5%. For privilege periods beginning on Jan. 1, 2019, the special allocation formula set forth in this regulation will not be available. This regulation seems a faithful interpretation of the CBTA changes made by the 2018 state tax reform bills. Related-party expenses: The SARs also modify the rules for the CBTA treatment of related-party interest and intangible property licensing transactions set forth in N.J.A.C. 18:7-5.18. These provisions have recently been the subject of significant litigation.2 The SARs alter the language of the existing regulation to change the so-called unreasonable exception to the related-party addback rule from a requirement (shall) to a permissive (may), seemingly to grant the NJ DOT Director greater discretion to not allow the exception. The SARs also analyze the change in the treaty-nation addback exemption, which now requires taxpayers to provide documentation proving that such payments were taxed in the payee's home country at an effective tax rate within three percentage points of the New Jersey rate. The remainder of the change relates to some of the possible instances that might establish exceptions to the interest and intangible expense addback rules. The SARs also mention that, if a taxpayer claiming an unreasonable exception included GILTI in its entire net income (ENI) from a related party, the expenses from the same related party would otherwise have to be added back. GILTI and FDII: The SARs further examine the treatment of GILTI and FDII, appearing to be consistent with previously issued NJ DOT guidance. Of note, the SARs allow a NJ combined group that includes GILTI from a foreign affiliate to apply the offsetting GILTI deduction provided in IRC § 250(a) for CBTA purposes as well. In addition, the SARs make clear that GILTI is not included in the tax base if the foreign controlled corporation to which the GILTI is attributed is already a member of the same combined group and its income is included in the ENI of the combined group. Finally, the SARs outline when GILTI and FDII may be included in the sales factor numerator of the taxpayer's or combined group's allocation factor (New Jersey's reference to apportionment). The SARs codify a significant amount of guidance that the NJ DOT has previously released through technical bulletins since 2018. While most of the guidance is consistent with the NJ DOT's previously issued guidance, certain topics are new, including the possible inclusion of GILTI and FDII in the New Jersey sales factor numerator, the application of the IRC § 250(a) deduction despite eliminating GILTI from the ENI base in certain circumstances, and limitations on federal PTI. Applying these new rules, particularly those on PTI treatment, may result in incongruous tax results, requiring taxpayers to seek specific relief in the event of a double taxation situation. Although taxpayers are currently unable to submit public comments, a 60-day comment period will commence once the NJ DOT submits the SARs as permanently promulgated regulations. Further, the NJ DOT told EY that it would welcome comments on the SARs at any time, not just during the 60-day comment period. For more on this development, see Tax Alert 2020-1131. District of Columbia: The District of Columbia Office of Tax and Revenue (DC OTR) will not assert nexus for purposes of corporation franchise tax or unincorporated business franchise tax solely because employees are working temporarily from home within the District during the period of the Mayor's COVID-19 emergency declaration. The DC OTR also said that nexus will not be asserted solely because of the temporary presence of business property (e.g., computers, computer equipment or similar property) used by employees to work from home within the District under these circumstances. D.C. OTR, OTR Tax Notice 2020-05 COVID-19 Emergency Income and Franchise Tax Nexus (April 10, 2020). Georgia: The Georgia Department of Revenue (GA DOR) in COVID-19 FAQs said that it will not use someone's relocation "that is a direct result" of temporary remote work requirements arising from and during the COVID-19 pandemic as a basis for establishing Georgia nexus or for exceeding the protections of P.L. 86-272 for the employer of the temporarily relocated employee. Wages of such employee would not be considered Georgia income and, thus, the employer would not be required to withhold Georgia income tax on such income. These temporary protections extend for the periods of time where: (1) there is an official work from home (WFH) order issued by an applicable federal, state or local governmental unit; or (2) the employee is working at home pursuant to a physician's order in regard to the COVID-19 outbreak or due to an actual COVID-19 diagnosis- — an additional 14 days are added to the time period to allow for return to normal work locations. The normal rules for determining nexus, employee wages, and employer withholding apply if the person remains in Georgia after the temporary remote work requirement ends. The GA DOR further noted that a company would not be able to assert that solely having a temporarily relocated employee in Georgia due to the conditions described above, creates nexus for the company or exceeds the protections of P.L. 86-272 for the company Ga. Dept. of Rev., Coronavirus Tax Relief FAQs If my employees are working from home due to the Corona Virus pandemic, does that modify my company's nexus determination or the amount of my employee's Georgia wages and therefore my company's Georgia income tax withholding obligation? (April 2020). Massachusetts: In TIR-20-5, the Massachusetts Department of Revenue (MA DOR) announced that it will not assert nexus for corporate excise tax purposes solely because employees are temporarily working remotely in the commonwealth due to the COVID-19 emergency. Further, such presence, itself, will not cause a corporation to lose the protections of P.L. 86-272. The MA DOR also said that services performed by these temporary remote workers will not be considered to increase the numerator of the employer's payroll factor for apportionment purposes. This nexus and apportionment relief applies for the duration of the COVID-19 state of emergency. In addition, in emergency regulations updating 830 CMR 62.5A.3, the MA DOR provides guidance concerning personal income tax withholding for employees working temporarily in the state due to the COVID-19 emergency. For additional information on income tax withholding on wages paid to employees working in the state, see Tax Alert 2020-1081. Mass. Dept. of Rev., TIR-20-5 (April 21, 2020). Pennsylvania: The Pennsylvania Department of Revenue said that it will not assert corporate net income tax nexus on a business that otherwise does not have nexus with the commonwealth solely on the basis of an employee temporarily working from home as a result of the disaster emergency issued by Governor Tom Wolf as a result of the COVID-19 pandemic. Pa. Dept. of Rev., COVID-19 FAQs (April 3, 2020). Wisconsin: New law (AB 1038) provides COVID-19 emergency tax relief and conforms to select provisions of the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act). Under AB 1038 Wisconsin's date of conformity to the Internal Revenue Code of 1986, as amended (IRC) remains Dec. 31, 2017 with certain exceptions, and is modified to incorporate the following select provisions of the CARES Act:
With respect to changes made by the CARES Act to the federal net operating loss (NOLs) provisions and IRC § 163(j) business interest expense limitation provisions, AB 1038 does not include provisions that would couple to the federal changes to the NOL rules. Further, in 2017 Wisconsin decoupled from the business interest expense limitations under IRC § 163(j) and the state continues to do so. AB 1038 is effective as of April 16, 2020, the date of publication. 2019 Wisc. Act 185 (AB 1038), signed by the governor on April 15, 2020. For additional information on this development, see Tax Alert 2020-1038. Massachusetts: In TIR-20-5, the Massachusetts Department of Revenue announced that it will not assert nexus for sales and use tax purposes solely because employees that previously worked in another state are working in the commonwealth solely due to the COVID-19 emergency. This relief applies for the duration of the COVID-19 state of emergency. Mass. Dept. of Rev., TIR-20-5 (April 21, 2020). Pennsylvania: The Pennsylvania Department of Revenue said that it will not assert sales and use tax nexus on a business that otherwise does not have nexus with the commonwealth solely on the basis of an employee temporarily working from home as a result of disaster emergency issued by Governor Tom Wolf as a result of the COVID-19 emergency. Pa. Dept. of Rev., COVID-19 FAQs (April 3, 2020). Utah: New law (HB 49) provides when a dealer that does not have a business location in the state sells an aircraft, motor vehicle, watercraft, or manufactured mobile or modular home, the location of the sale is the location where the purchaser takes receipt of the property. This bill takes effect May 12, 2020. Utah Laws 2020, HB 49, signed by the governor on March 24, 2020. Utah: New law (SB 114) provides that marketplace facilitators are not required to collect and remit sales tax on sales facilitated for a seller that is a restaurant. The law also provides a sales and use tax exemption for certain purchases and leases of machinery, equipment, or normal operating repair or replacement parts (collectively "parts") of an occupant of a qualifying data center if the parts are used in the occupant's operations in the qualifying data center and the parts have an economic life of one or more years. The law also amends the definition of a qualified data center. These changes take effect July 1, 2020. Utah Laws 2020, SB 114, signed by the governor on March 31, 2020. West Virginia: New law (SB 530) exempts from consumers sales and service tax the sale of an aircraft sold in West Virginia on or after July 1, 2020 and registered outside the state, if the aircraft is moved out of the state within 60 days of the date of purchase on the bill of sale. Further, the time between the date of purchase and removal of the aircraft from the state will not be counted for purposes of whether the aircraft is subject to use tax. W.Va. Laws 2020, ch. 325 (SB 530), signed by the governor on March 25, 2020. Rhode Island: New law (HB 7247 Sub. A) expands the motion picture production company tax credit to allow the credit to be claimed by a motion picture production company if the motion picture production incurs and pays a minimum of $10 million in state certified production costs within a 12-month period. This provision took effect upon passage. R.I. Laws 2020, HB 7247 Sub. A, signed by the governor on March 17, 2020. West Virginia: New law (HB 4019) establishes the downstream manufacturing tax credit. Eligible taxpayers are allowed a credit against the corporate net and personal income taxes attributable to and as a result of its qualified investment in a new or expanded downstream natural gas manufacturing facility in West Virginia that creates new jobs. The amount of the credit is determined by multiplying the amount of the taxpayer's qualified investment in property purchased or leased for a new, or expansion of an existing, downstream natural gas manufacturing facility by the taxpayer's new jobs percentage. The amount of allowable credit must be taken over a 10-year period starting with the tax year in which the qualified investment is placed in service or use in West Virginia (a taxpayer can elect to delay the start of the 10-year period until the next tax year; this election cannot be revoked). For purposes of the credit, property is deemed to be placed in service or use in the earlier of the following: (1) the tax year in which the period for depreciation with respect to the property begins, or (2) the tax year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function. The law addresses the application of the annual credit allowance and provides that unused credits can be carried forward to each ensuing tax year until used or until the expiration of the 10th taxable year subsequent to the end of the initial 10-year credit application period. Unused credit remaining after the 20th year is forfeited. Carryback of unused credit is not allowed. In addition, the law addresses the following: (1) qualified investment, (2) the new jobs percentage, (3) forfeiture of unused tax credits, (4) recapture and redetermination of the credit, (5) transferring qualified investments to successors, (6) documentation needed to identify investment credit property, (7) tax credit review and accountability, and (8) definitions of key terms, among other provisions. The credit is allowed for qualified investment property placed in service or use on or after July 1, 2020. W.Va. Laws 2020, ch. 332 (HB 4019), signed by the governor March 25, 2020. Virginia: New law (HB 724/SB 273) extends to June 30, 2029 (from June 30, 2019) the sunset date for the classification of tangible personal property used in manufacturing, testing, or operating satellites within a Multicounty Transportation Improvement District as a separate class of property. This change is retroactively effective to Jan. 1, 2019. Va. Laws 2020, ch. 247 (HB 724) and ch. 64 (SB 273), signed by the governor on March 10, 2020 and March 2, 2020. Wisconsin: New law (AB 1038) provides COVID-19 emergency tax relief. Generally late installment payments of property taxes are subject to interest and penalties, with the interest accruing from February 1 of the year in which the taxes are due. For property taxes payable in 2020, the AB 1038 provides that, after making a general or case-by-case finding of hardship, a municipality may provide that an installment payment due after April 1, 2020, that is not timely received, will not accrue interest or penalties if the total amount due is received on or before Oct. 1, 2020. Interest and penalties will accrue from Oct. 1, 2020, for any property taxes payable in 2020 that are delinquent after Oct. 1, 2020. A person may file a claim to recover the unlawful imposition or excessive assessment of property taxes. Under current law, a person may file such a claim only if the person has paid his or her property taxes on time. AB 1038 provides that this restriction does not apply to taxes due and payable in 2020 if paid by Oct. 1, 2020, or by any installment date for which taxes are due after Oct. 1, 2020. AB 1038 is effective as of April 16, 2020, the date of publication. 2019 Wis. Act 185 (AB 1038), signed by the governor on April 15, 2020. For additional information on this development, see Tax Alert 2020-1038. Maryland: The Comptroller of Maryland (Comptroller) provided guidance concerning the assertion of nexus and the income tax withholding requirements applicable to employees working temporarily in the state due to the COVID-19 emergency. Although the Comptroller stated it does not intend to change or alter the facts-and-circumstances it consistently uses to determine nexus or income sourcing, it does understand that many businesses have had to temporarily alter how they deploy employees due to the COVID-19 emergency. Accordingly, the Comptroller will take into account the temporary nature of work within the state due to the COVID-19 emergency in making a nexus determination, considering also whether the business correctly sourced income and whether the business properly withheld and reported employees' Maryland state income tax withholding. The Comptroller added FAQs to its guidance. Md. Compt. of Treas., Tax Alert 05-04-20 (May 2020). Pennsylvania: The Pennsylvania Department of Revenue when asked if a Pennsylvania employer is required to withhold Pennsylvania nonresident income tax for an employee who is not a resident of commonwealth where there is a reciprocal agreement and who is working in the commonwealth temporarily due to the COVID-19 emergency, said that it will not consider a change to its sourcing rules for compensation. Accordingly, the nonresident employee's compensation remains Pennsylvania source income and is subject to Pennsylvania nonresident income tax and withholding. Pa. Dept. of Rev., COVID-19 FAQs (April 3, 2020). 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 See Morgan Stanley & Co. Inc. v. Director, Div. of Taxn., 28 N.J. Tax 197 (Tax 2014); Kraft Foods Global, Inc. v. Director, Div. of Taxn., 29 N.J. Tax 224 (Tax 2016), aff'd 2018 WL 2247356 (App. Div. 2018), cert. denied 236 N.J. 230 (2018). Document ID: 2020-1353 |
