28 May 2020 State and Local Tax Weekly for May 15 Ernst & Young's State and Local Tax Weekly newsletter for May 15 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. Louisiana Governor John Bel Edwards declared a Public Health Emergency that included a strict shelter-in place order aimed at limiting the spread of the COVID-19 virus. This order has caused significant disruption to businesses across the state, with many businesses becoming non-operational. Consequently, property owners may be eligible for property tax relief in the 2020 assessment year and possibly the 2021 assessment year as well. Under La. Rev. Stat. § 47:1978.1(A)(1), "if lands or property, including buildings, structures or personal property, are damaged or destroyed, non-operational, or uninhabitable due to an emergency declared by the governor or to a disaster or fire, the assessor or assessors within such parish shall assess such lands or property for the year in which damage has occurred at the percentage of fair market value provided in the Constitution of Louisiana by taking into consideration all the damages to the lands or other property, including obsolescence, and the depreciation of value of such land or other property caused by the disaster, fire, or emergency described in this Section" (emphasis added). Many business properties within each parish would appear to be non-operational due to the Governor's emergency declaration. All parishes in Louisiana are reassessing taxable real property this year due to the timing of their four-year reassessment cycle. This presents taxpayers with a unique opportunity to argue economic obsolescence (the loss of property value due to external factors) in their reassessment, thereby obtaining property-tax relief. After such values are released, taxpayers can present a written appeal to the local assessor stating the impact of Governor Edwards' declared Public Health Emergency. The appeal should include facts and data to support the impact of being non-operational during the period in which the shelter-in-place order is in effect. Given the timing of these orders, taxpayers should be able to provide evidence of the market value well beyond the lien date (January 1 for all parishes except for Orleans Parish, which is August 1). This creates a potential opportunity for reductions in the 2020 assessment year; if the impact continues, additional relief could be provided in the 2021 assessment year. Taxpayers are encouraged to work proactively with local assessors for the most optimal outcome. In general, property taxes must be paid while claims are pending. Due to the circumstances, however, some property tax payment deadlines have been postponed without penalty. Given the uncertainty surrounding the COVID-19 emergency, regular roll appeals for 2020 and 2021 lien dates should be filed to fully preserve taxpayer rights. For additional information on this development, see Tax Alert 2020-1279. California: The California Franchise Tax Board (FTB) in the May 2020 issue of TaxNews provided preliminary information on the state's conformity to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), while it analyzes and considers the impacts of the CARES Act on California taxpayers. The FTB explained that California generally conforms to the pension-related items (e.g., early withdrawal penalty waiver, minimum distribution rule change), but does not have automatic conformity to the changes made with regard to loans from qualified retirement accounts. Further, California does not conform to: the exclusion from gross income of loan forgiveness related to the Paycheck Protection Program, the provision of net operating loss carrybacks, changes to the business interest expense limitations under IRC §163(j), modification of the prior year alternative minimum tax rules for corporations, among other changes made by the CARES Act. Cal. FTB, TaxNews (May 2020). Iowa: The Iowa Department of Revenue (IA DOR) in its COVID-19 FAQs explained the taxability of the proceeds of a forgiven federal Paycheck Protection Program (PPP) loan. If the loan is excluded from gross income for federal income tax purposes under Section 1106 of the CARES Act in a tax year beginning on or after Jan. 1, 2020, the forgiven loan amount also is excluded for Iowa income tax purposes. If, however, the PPP loan is forgiven for a tax year beginning before Jan. 1, 2020, the forgiven loan amount (e.g., a discharge of indebtedness) may be taxable for Iowa income tax purposes, because Iowa does not conform to Section 1106 of the CARES Act for tax years beginning before Jan. 1, 2020. IA Dept. of Rev., COVID-19 FAQs - Income Tax (May 2020). Iowa: The Iowa Department of Revenue (IA DOR) in its COVID-19 FAQs announced nexus relief for out-of-state companies as a result of employees temporarily telecommuting from Iowa solely as a result of states of emergency declared in response to the COVID-19 pandemic. Specifically, the IA DOR will not consider the presence of such employee(s), by itself, sufficient business activity within the state to establish Iowa corporate income tax nexus or sufficient, by itself, to cause a corporation to lose P.L. 86-272 protection. This relief will be in place while Iowa's state of emergency in response to the COVID-19 pandemic, or similar emergency declared in the state where the employee normally worked prior to the declaration of states of emergency in response to the COVID-19 pandemic, remains in effect. IA Dept. of Rev., COVID-19 FAQs - Income Tax (May 2020). Maryland: New law (SB 523) allows certain pass-through entities (PTEs) to elect to pay tax with respect to the shares of all resident members and modifies the definition of "worldwide headquartered company" for apportionment purposes, both changes are applicable to all tax years beginning after Dec. 31, 2019. Under the revised law, a PTE must pay tax with respect to the distributive or pro rata shares of its nonresident and nonresident entity members, or the PTE can elect to pay tax with respect to the distributive or pro rata shares of its resident members. If the PTE elects to pay the tax for resident members, the tax imposed is the overall sum of both the sum of the individual rate of the lowest county income tax rate set by any Maryland county and the top marginal state tax rate applied to the sum of each individual member's distributive or pro rata share of the PTE's taxable income and the corporate tax rate applied to the sum of each corporation member's distributive or pro rata share of the PTE's taxable income. For PTEs that make the election, the tax required to be paid for any tax year may not exceed the sum of all of the members' shares of the PTE's distributable cash flow. Members of the PTE may claim a credit against the tax imposed on the member for the member's proportionate share of tax paid by the PTE. The law also modifies the definition of a "worldwide headquartered company" which can elect to use a three-factor apportionment formula instead of a more heavily weighted sales factor formula. Specifically, a corporation could qualify as a "worldwide headquartered company" by employing at all times between July 1, 2017 and June 30, 2020 at least 500 full-time employees at the parent corporation's principal executive office located within Maryland or, if the parent corporation is a franchisor by employing at all times between July 1, 2017 and June 30, 2020 at least 400 full-time employees at the parent corporation's principal executive office located in Maryland. (New provision italicized.) Md. Laws 2020, ch. 641 (SB 523), became law without the governor's signature on May 8, 2020. New Jersey: The New Jersey Division of Taxation (Division) expanded on its March 30, 2020 guidance concerning the assertion of nexus and the income tax withholding requirements that apply for employees temporarily working in the state due to the COVID-19 emergency. In its March 30th guidance, the Division explained 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. It also stated that if employees are working from home solely as a result of closures due to the COVID-19 emergency and/or the employer's social distancing policy, no threshold will be considered to have been met. Under the normal rules, New Jersey law dictates that income is sourced to the state based on where the service or employment is performed using a days' method of allocation. However, during the temporary period of the COVID-19 pandemic, the Division said that wage income will continue to be sourced as determined by the employer in accordance with the employer's jurisdiction. For additional information on this development, see Tax Alert 2020-1264. New York: In reversing an administrative law judge for the New York Division of Tax Appeals, the New York Tax Appeals Tribunal (TAT) held a corporation that sells energy generated by a member of its combined group is a "qualified New York manufacturer" (QNYM) entitled to the corporate franchise tax capital base's $350,000 liability cap1 for the tax years at issue (2010, 2011 and 2012) because generation of electricity is an activity that qualifies as the "production of goods by manufacturing [or] processing." In reaching this conclusion, the TAT held that the liability cap applicable to a QNYM is an imposition provision, and not a credit or exemption; thus, the New York Division of Taxation (Division) must demonstrate that the tax liability cap does not apply to a corporate taxpayer. Further, the cap provision must be "construed most strongly against the government and in favor of the citizen." To qualify for the cap, the TAT explained that the corporation must (1) be a manufacturer, (2) have property in New York as described in N.Y. Tax Law former § 210 (12)(b)(i)(A), and (3) either the adjusted basis of that property for federal income tax purposes at the close of the tax year is at least $1 million or all of its real and personal property is located in New York (the parties agreed that this requirement was met). The TAT first considered whether corporation is a manufacturer — specifically, is the generation of electricity an activity that qualifies as the production of goods by manufacturing or processing? The Division argued that since the statutory language defining "manufacturer" for purposes of the liability cap is leveraged from the New York investment tax credit (ITC) provision and the ITC provisions specifically excludes the property of a manufacturer principally engaged in producing electricity, such exclusion also is incorporated into the QNYM requirements. In rejecting this argument, the TAT found that the legislature's "express exclusion of electricity generators from the definition of manufacturer under the ENI tax cap and the absence of similar language under the capital base tax cap indicates a legislative intent to exclude such electricity generators from the benefit of the ENI cap but not from the capital base cap." The TAT next considered whether the corporation has property in New York as described in N.Y. Tax Law former §210(12)(b)(i)(A) — specifically, did the legislature intend to exclude electric generators from the definition of QNYM by referring to the description of property in the ITC subdivision? The TAT looked to legislative history of the ITC limitation sentence, finding that the nothing in the history suggests that the legislature intended the limitation to apply outside of the provisions dealing with eligibility for the ITC. Rather, the legislature defined the property requirement for a QNYM narrowly, avoiding the ITC limitation sentence. It should be noted that this decision is precedent and binding on the state and, under New York law, the Division cannot appeal this decision. Matter of Transcanada Facility USA, Inc., DTA No. 827332 (N.Y. Tax App. Trib. May 1, 2020). Alabama: A manufacturer's sales of coffee and tea brewers, cappuccino mixers, frozen beverage dispensers and related items to an Alabama company that sells the manufacturer's equipment along with products it sells (i.e., packaged coffee, tea, cappuccino mix, juice concentrate), are subject to Alabama state and local seller's use tax at the reduced machine rate because the manufacturer's dispensers qualify as machines used to process tangible personal property. The Alabama Tax Tribunal found that the dispensers by converting the dry coffee and tea, cappuccino base, and pre-mixed base concentrate into consumable drinks, "performed 'an integral function in the procedure by which the consumable drinks were produced and played 'a direct part in the processing program.'" Bunn-O-Matic Corp. v. Ala. Dept. of Rev., Dkt. No. S. 17-614-JP (Ala. Tax Trib. April 30, 2020). Illinois: An Illinois appeals court upheld the assessment of use tax on a company's out-of-state purchases of virgin solvent that was received and stored in Illinois, blended with used solvent at its Illinois plant, and subsequently distributed and used outside the state, finding the purchases do not qualify for a temporary storage exemption when the used solvent is returned to Illinois to be recycled into usable solvent. Under Illinois law, the temporary storage exemption applies to property (1) acquired outside the state, (2) that is temporarily stored in the state, and (3) then used solely outside the state. Citing Shared Imaging,2 the court further explained that a "taxpayer is limited to a single Illinois exempt use" and if the property is brought back into the state for temporary storage, it is subject to use tax. Similar to the taxpayer in Shared Imaging, the company purchased the virgin solvent outside the state, initially stored it in Illinois before sending it to its customers, brought the used solvent back to Illinois, converted the used solvent into a recycled usable solvent and stored it in Illinois until sent to customers. Because the company stored the solvent in Illinois after its "initial post-purchase storage in Illinois," the temporary storage exemption does not apply. Further, the court rejected the company's contention that the used solvent returned to Illinois is different property than the virgin solvent that was sent outside the state, noting that the company's intended use of the solvent did not fundamentally change when the property re-entered Illinois. Safety-Kleen Systems, Inc. v. Ill. Dept. of Rev., 2020 IL App (1st) 191078 (Ill. Ct. App. April 28, 2020). Maryland: New law (SB 185) provides a sales and use tax exemption for the purchase of certain construction materials or warehousing equipment used on certain property in qualified opportunity zones in Baltimore County and a target redevelopment area in Washington county, as defined in the law. The exemption will apply if (1) the construction material or warehousing equipment is purchased by a person for sole use in the qualified opportunity zone or target redevelopment area, and (2) the buyer provides the vendor with proof that it is eligible for the exemption. The exemption will be effective July 1, 2020 through June 30, 2030. Md. Laws 2020, ch. 639 (SB 185), became law without the governor's signature on May 8, 2020. New Jersey: The New Jersey Division of Taxation (Division) expanded on its March 30, 2020 guidance concerning the assertion of nexus for employees temporarily working in the state due to the COVID-19 emergency. The Division states that pursuant to the COVID-19 pandemic, it will temporarily waive the sales tax nexus standard that is generally met if an out-of-state seller has an employee working within New Jersey. Accordingly, as long as the out-of-state seller did not maintain any physical presence other than employees working from home in New Jersey and is below the economic thresholds, the Division will not consider the out-of-state seller to have nexus for sales tax purposes during the period of the COVID-19 emergency. For additional information on this development, see Tax Alert 2020-1264. South Carolina: A book seller's club memberships are included in its gross proceeds of sales and, therefore, are subject to South Carolina's sales tax. In affirming an administrative law court (ALC) ruling, the South Carolina Court of Appeals (court) explained that state "case law provides that gross proceeds of sales includes all value that comes from or is a direct result of the sale of tangible personal property." In this case, the court agreed with the ALC, that the sales of membership fees are a direct result of the sales of tangible personal property; reasoning that without the sale of the tangible personal property, the book seller would not be able to sell memberships. Accordingly, the court found the ALC did not err in concluding that amounts charged for the club membership are subject to sales tax. In addition, the court found the ALC correctly determined that membership renewals are subject to sales tax, and it rejected the book seller's arguments that the applicable statutes are ambiguous regarding whether optional membership fees are included in the sales tax base and such ambiguity should be construed in its favor. Books-A-Million, Inc. v. S.C. Dept. of Rev., Op. No. 5721 (S.C. App. Ct. April 29, 2020). Utah: New law (SB 81) modifies the motion picture incentives by removing the $500,000 cap on cash rebate incentives allowed per state approved motion picture. This change took effect May 12, 2020. Utah Laws 2020, SB 81, signed by the governor March 30, 2020. West Virginia: New law (HB 4585) establishes the high-wage growth business tax credit that can be claimed against the West Virginia corporate or personal income taxes. The total amount of credit allowed per year is capped at $5 million, and the total amount of credit that may be awarded or used in a tax year by a qualified taxpayer in combination with the owners of the qualified taxpayer may not exceed more than 10% of the salaries for the new direct jobs. An eligible employer must file an application with the Development Office prior to the tax year in which it is seeking the credit. If an employer receiving the credit creates new direct jobs, it may apply for additional tax credits. The law explains when a new high-wage job is not eligible for the credit, provides that unused credit (except to the extent the excess credit is refunded) can be carried forward 10 years, defines key terms, among other provisions. HB 4585 takes effect June 5, 2020. W.Va. Laws 2020, ch. 337 (HB 4585), signed by the governor on March 25, 2020. Iowa: The Iowa Department of Revenue (IA DOR) in its COVID-19 FAQs explained that Iowa individual income tax filing and withholding requirements have not changed as a result of an individual temporary telecommuting from Iowa or another state due to the COVID-19 pandemic. The IA DOR noted that nonresident individuals who normally work in Iowa but are temporarily telecommuting in another state, or who normally work outside Iowa but are temporarily telecommuting in Iowa, may need to adjust their income apportioned to Iowa. IA Dept. of Rev., COVID-19 FAQs - Income Tax (May 2020). Georgia: The Georgia Department of Labor has issued emergency rules that expand the unemployment insurance (UI) benefit program to allow workers as they return to work to earn up to $300 in wages per week (up from $50 per week) without causing a reduction in their weekly UI benefit amount. It also allows workers to collect the additional $600 in federal pandemic unemployment compensation under the federal CARES Act. Any amount earned over $300 will be deducted from a claimant's weekly benefit amount. For additional information on this development, see Tax Alert 2020- 1254. Iowa: The Iowa Department of Revenue announced that its Small Business Relief Program, that originally ran from March 23, 2020 to April 30, 2020, is extended for a second round from May 1, 2020 through June 30, 2020. For additional information on this development, see Tax Alert 2020- 1255. Mississippi: Governor Reeves recently ordered that Mississippi employer accounts not be charged with workers' unemployment insurance (UI) benefits attributable to the COVID-19 pandemic. The noncharge provision applies to both contributory and reimbursing employers and is effective retroactively from March 8, 2020 to June 27, 2020. For additional information on this development, see Tax Alert 2020-1312. Mississippi: Governor Reeves recently ordered that the first-quarter 2020 state unemployment insurance (SUI) contribution deadline be extended to July 31, 2020 for both contributory and reimbursing employers. As a result, employers that were unable to pay these SUI contribution or UI benefit reimbursements by the April 30, 2020 deadline due to the COVID-19 emergency will not be charged with late payment penalties. For additional information on this development, see Tax Alert 2020-1306. Oregon: The Oregon Employment Department (Department) announced that if employers were late in paying their 2020 first-quarter state unemployment insurance (SUI) contributions (due April 30, 2020) due to the COVID-19 pandemic, it will abate penalties and interest provided the payments are made within 30 days of the date that Governor Kate Brown's Executive Orders are no longer in effect or later if a payment arrangement is reached with the Department. (Governor' Brown's Executive Orders were issued in the weeks following her March 8 emergency declaration and address the health and safety of Oregon citizens.) Employers must apply for the interest and penalty abatement by filing the Application for Interest and Penalty Relief. The Department emphasizes that the first-quarter 2020 SUI returns must be timely filed. For additional information on this development, see Tax Alert 2020-1281. Philadelphia, PA: The Philadelphia Department of Revenue (Department) has updated its guidance for withholding the Wage Tax from nonresident employees who are working in the city temporarily due to the COVID-19 pandemic. In the updated guidelines, the Department states that an employer may continue to withhold the Wage Tax from 100% of a nonresident employee's wages; however, this is a business decision, not a requirement. Nonresident employees who had Wage Tax withheld during the time they were required to perform their duties from home (outside of the city) in 2020 can request a refund through the Department by completing a Wage Tax refund petition in 2021. The Department also clarified that employers are required to withhold and remit Wage Tax for all of their employees who are Philadelphia residents, regardless of where they perform their duties. For more on this development see Tax Alert 2020-1227. Washington: The King County Superior Court in granting the Washington Bankers Association's motion for summary judgement held that the additional 1.2% business and occupation tax rate imposed on specified financial institutions enacted in 2019 under HB 21673 violates the Commerce Clause of the US Constitution by discriminating against interstate commerce. It is expected that the state will appeal this ruling. Washington Bankers Assn et ano. v. Washington et al., Cause No. 19-2-29262-8 SEA (Wash. Super. Ct., King Cnty., May 8, 2020). Virginia: New law (HB 534) allows counties or cities to impose by a duly adopted ordinance a five-cent bag tax on each disposable plastic bag provided to consumers by grocery stores, convenience stores or drugstores. Plastic bags not subject to tax include (1) durable plastic bags with handles that are designed and manufactured for multiple reuse and that are at least four mils thick; (2) plastic bags solely used to wrap, contain, or wrap certain foods; (3) plastic bags used to carry dry cleaning or prescription drugs; and (4) multiple plastic bags sold in packages and intended to collect waste. Retailers collecting the tax will be allowed to retain a portion of the tax collected. Lastly, the adopting local ordinance will set the effective date of the new tax for the first day of any calendar quarter; however, such tax cannot become effective before Jan. 1, 2021. Va. Laws 2020, ch. 1022 (HB 534), signed by the governor on April 10, 2020. Multistate: On Tuesday, June 9, 2020, from 4:00-5:15 p.m. EDT New York; 1:00-2:15 p.m. PDT Los Angeles, Ernst & Young LLP (EY) will host its quarterly webcast focusing on state tax matters. For our second quarterly webcast, panelists from EY's Indirect (State and Local) Tax practice will focus on state and local tax issues related to the COVID-19 pandemic, as well as conformity issues relating to the CARES Act. We'll also cover other key state and local tax developments unrelated to the COVID-19 emergency. Topics include: (1) state and local tax-specific responses to the COVID-19 pandemic, including the latest update on state extensions, nexus, credits and incentives considerations; (2) CARES Act state income tax conformity issues connected to net operating losses, the relaxation of the business interest expense limitation rules under Section 163(j), the application of Section 280C(a) to the employee retention credit, and state considerations related to loan forgiveness under the Paycheck Protection Program; (3) state and local tax compliance challenges, especially focused on audits and appeals, facing state tax agencies and taxpayers; and (4) other significant state and local judicial, legislative and administrative developments from the past quarter. To register for this event, go to State tax matters. 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. 3 For more information on this tax, see Tax Alert 2019-0922. Document ID: 2020-1399 |
