05 June 2020 State and Local Tax Weekly for May 29 Ernst & Young's State and Local Tax Weekly newsletter for May 29 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. California Governor Gavin Newsom's Revised Budget summary (Revised Budget) proposes suspending California net operating loss (NOL) utilization and imposing a cap on the amount of business incentive tax credits companies can utilize. Specifically, the Revised Budget proposes to:
In response to budgetary crises in the past, California has enacted similar legislative provisions suspending NOLs and imposing limitations on the utilization of tax credits. The Governor's budget proposal now goes to the California legislature for negotiations. The California Constitution imposes a deadline of June 15, 2020 for the legislature to approve a budget bill for California's fiscal year beginning July 1, 2020. Based on California's Proposition 26, laws that increase tax must be approved by a two-thirds majority of both houses of the state legislature. Currently, California Democrats have a two-thirds majority in both the Assembly and Senate and thus the Governor's budget proposal, after revisions, would be expected to pass. For additional information on this development, see Tax Alert 2020-1347. Portland, Oregon voters approve ballot initiative imposing 1% tax on certain businesses and individuals to help fund homeless services On May 19, 2020, voters in the greater Portland, Oregon metro area1 approved Measure 26-210, imposing a new 1% tax on certain individuals and a 1% business profits tax on certain businesses. Revenue generated by the new taxes will help fund homeless services. Beginning with tax year 2021, the new taxes are imposed on businesses and individuals in Washington, Clackamas and Multnomah counties (i.e., the Metro area) as follows:
Metro Council will establish rules to enforce and implement these new taxes, including rules on filing dates, penalties and interest, forms and documentation, business profits tax determinations, individual income tax residency determinations, exemptions, refunds and deficiencies, overpayments, estimated tax payments, audit authority and other administrative provisions. Further, Metro Council intends to enter into an intergovernmental agreement with an Oregon tax agency (likely, the City of Portland) to collect the tax. For additional information on this development, see Tax Alert 2020-1355. Michigan: The Michigan Supreme Court (Court) reversed the appellate court and held that for purposes of the City Income Tax imposed by the City of Detroit (City), all legal services provided by an attorney physically located within the City's limits to a client outside the City's limits is "done or carried out within the city without regard to where those services are delivered". Hence, the income from performing this service is sourced to Detroit for purposes of the City Income Tax. In so holding, the Court considered the legislature's references to "services rendered" in its city income revenue factor statute, with the focus on the definition of "rendered", which is not defined by the statute. The taxpayer (a law firm located in the City) argued that "rendered" means "to transmit to another: DELIVER"; the City, however, asserted that "rendered" means "to do (a service) for another … encompassing all services done within the city." The Court agreed with the City, finding that when read in context, "the city's definition [of rendered] constitutes the more appropriate understanding." Accordingly, the revenue factor focuses upon where the services are done or carried out and not where they are delivered. The Court also determined that when the phrase "services rendered in the city" is read in context with the property and payroll factors as well as the state's Uniform City Income Tax Ordinance, apportionment of revenue under the revenue factor is determined based on the location where the business activity took place. Honigman Miller Schwartz and Cohn LLP v. City of Detroit, No. 157522 (Mich. S.Ct. May 18, 2020). Rhode Island: The Rhode Island Division of Taxation (RI DOT) announced that it will not seek to establish nexus for Rhode Island corporate income tax purposes solely because an employee is temporarily working from home during the COVID-19 state of emergency. It also will not seek to establish nexus because an employee temporarily working from home during the state of emergency is using property to allow the employee to work from home (e.g., computers, computer equipment or similar property). Further, the performance of any services by such employees within Rhode Island will not, in and of itself, cause their employers to lose the protection of P.L. 86-272. The RI DOT also stated that for the duration of Rhode Island's COVID-19 state of emergency, services performed by one or more employees who typically work in another state but who, solely due to the COVID-19 emergency, are now working remotely from Rhode Island, will not be considered by the RI DOT to increase the numerator of their employer's payroll factor for purposes of apportioning income. R.I. Dept. of Rev., Div. of Taxn., ADV 2020-24 (May 28, 2020). South Carolina: The South Carolina Department of Revenue (SC DOR) announced that it will not use changes in an employee's temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period solely as a basis for establishing nexus (including for P.L. 86-272 purposes) or for altering the apportionment of income. This relief is effective from March 13, 2020 through Sept. 30, 2020. S.C. Dept. of Rev., SC Information Letter #20-11 (May 15, 2020). Illinois: Amended and new regulations (amended 86 Ill. Admin. Code § 130.330 and new 86 Ill. Admin. Code § 130.1957) implement Illinois' expansion of the manufacturing machinery and equipment exemption to certain production related tangible personal property and its Retailers' Occupation Tax (ROT) exemption for certain data centers (see Tax Alert 2019-1205). For the manufacturing machinery and equipment exemption expansion, production related tangible personal property includes such items purchased on or after July 1, 2019 that are primarily used or consumed in a production related process by a manufacturer in a manufacturing facility in which a manufacturing process takes place or by a graphic arts producer in a graphic arts production. It also means all tangible personal property that is used or consumed in research and development regardless of use within or without a manufacturing or graphic arts production facility. The amended regulation provides illustrative examples of uses of tangible personal property by manufacturers that will and will not be considered production related. In regard data centers, beginning Jan. 1, 2020, qualified tangible personal property used in the construction and operation of such a data center is exempt from ROT, whether the tangible personal property is purchased by the owner, operator, or data center tenant, or by a contractor of these parties. The new data center regulation: (1) defines "qualified tangible personal property" and "data center"; (2) requires each owner, operator, or tenant of a data center to provide an exemption certificate before making a tax-exempt purchase of qualified tangible personal property; (3) permits data centers that would have qualified for an exemption certificate before Jan. 1, 2020 to apply for and obtain an exemption for subsequent purchases of certain computer equipment and enabling software; (4) sets forth documentation requirements; (5) describes tangible personal property that qualifies for the exemption when it is used in the rehabilitation, construction, and operation of a data center; and (6) explains when the exemption may be available to retailers and lessors (including when use tax may apply). The amended and new regulations took effect March 16, 2020. Ill. Dept. of Rev., amended 86 Ill. Admin. Code § 130.330 and new 86 Ill. Admin. Code § 130.1957 (44 Ill. Reg. 5392 March 27, 2020). Massachusetts: In response to a ruling request, the Massachusetts Department of Revenue advised that otherwise tax-exempt supermarket products offered for sale in the supermarket's restaurant areas will not be subject to sales tax when these items are purchased at cash registers located in the supermarket's restaurant areas. This treatment, however, is contingent on controls being put in place to separately track sales of meals and exempt items. It should be noted that the ruling applies to the facts and circumstances of the taxpayer's plan for differentiating between store and restaurant sales. Mass. Dept. of Rev., Letter Ruling 20-1: Sales at Cash Registers Located in the Restaurant Areas of a Supermarket (March 24, 2020). Rhode Island: The Rhode Island Division of Taxation announced that during Rhode Island's COVID-19 state of emergency, the presence of employees who normally work in another state but, solely due to the state of emergency, are working remotely from Rhode Island, will not by itself trigger nexus for sales and use tax purposes. Similarly, property temporarily located in Rhode Island during the state of emergency solely to allow one or more employees to temporarily work from home (e.g., computers, computer equipment or similar property) will not by itself trigger nexus for sales and use tax purposes. This policy is contingent on the fact that a remote retailer does not otherwise have a physical or economic presence in the state. R.I. Dept. of Rev., Div. of Taxn., ADV 2020-24 (May 28, 2020). South Carolina: The South Carolina Department of Revenue in response to a ruling request said that charges for peer-to-peer, short-term motor vehicle rentals through a marketplace facilitator are subject to the state's sales tax. The marketplace facilitator is a retailer and, thus, responsible for remitting the sales tax due. S.C. Dept. of Rev., SC Private Letter Ruling #20-2 (March 31. 2020). Federal: In proposed regulations (REG-124327-19), the IRS explains that the rehabilitation credits for historic buildings under IRC Section 47, as modified by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA), must be allocated ratably over five years, beginning in the tax year the building was placed into service. Comments on the proposed regulations may be submitted within 60 days of the May 22, 2020 publication in the Federal Register (July 21, 2020). For more on this development, see Tax Alert 2020-1402. California: The California Film Commission (CFC) has announced application deadlines for the next film and TV tax credit program - Program 3.0. For recurring or relocating TV projects, the application period is June 22-24, 2020 with credit allocation letters to be issued on July 20, 2020. For feature and independent films, the application period is July 13-15, with the credit allocation letters to be issued on Aug. 17, 2020. Each application period is followed by a five-day period during which all documentation must be submitted. The CFC stated in its announcement that applications for new television projects will not be accepted during the TV application period because the recurring TV category is oversubscribed. Lastly, the CFC noted that the application dates may change due to the COVID-19 pandemic and approval of the Program 3.0 regulations by the California Office of Administrative Law. Cal. Film Comn., Production Alert: California Film Commission Update (May 22, 2020). Nebraska: The Nebraska Department of Revenue (NE DOR) issued GIL 29-20-2 (GIL) to provide guidance on the treatment of alternative employment arrangements due to the COVID-19 pandemic (e.g., work from home (WFH), work reduced hours, being paid to stand ready-to-work) for purposes of calculating new employment levels under the Nebraska Advantage Act (Act). Under the Act, new employees are calculated based on the number of hours worked at the project. For employers that have arranged for some employees to WFH, the NE DOR stated that for the entire period the GIL is applicable it will not require employers to track the location of workers displaced by the COVID-19 pandemic and it will consider all employees who worked at the project prior to March 13, 2020 as continuing to work at that location (even though the employee is allowed to temporarily work at an alternative location). Employees hired after March 13, 2020, who WFH or an alternative site and begin work at the project location by the date this GIL expires, will be considered to have worked at the project since their date of hire. The NE DOR said that incentive companies should track employee hours as though these employees are working at the project while the GIL is applicable, regardless of where the employees are working. The hours of employees that have been placed on stand ready-to-work status will be treated similarly to those on vacation or sick leave. Thus, these hours will be considered leave time used and will count toward the calculation of the number of new employees. The GIL also addresses the calculation of the number of new employees, which includes hours paid at or above the required weekly wage, for employees that continue to work but at a reduced or subsidized rate of pay. Furloughed workers who are paid benefits, but not wages, are not included in the calculation of the number of new employees as they do not meet the required weekly wage. Employees working reduced hours will count toward the employee calculation if they receive the required weekly wage. The GIL applies to tracking hours and calculating the number of new employees for the period beginning March 13, 2020 and continuing until the later of Jan. 1, 2021 or 30 days after the end of the declared COVID-19 emergency. Neb. Dept. of Rev., GIL 29-20-2 (May 28, 2020). Oklahoma: New law (SB 1075) provides an exception to certain payroll requirements of the Oklahoma Quality Jobs Program Act for qualified establishments participating in the program. Specifically, any establishments that do not meet the quarterly payroll requirements during the time period beginning April 1, 2020 and ending June 30, 2021 will continue to receive incentive payments and are exempt from the limitations. Okla. Laws 2020, SB 1075, signed by the governor on May 21, 2020. Illinois: The Illinois Department of Revenue (IL DOR) issued FY 2020-29 explaining the Illinois income tax withholding requirements that apply when an employee who normally works in another state, temporarily works from home within Illinois due to the COVID-19 emergency. The guidance states that employee wages are subject to Illinois income tax and withholding if the nonresident employee performed their normal duties within the state for more than 30 working days. If an Illinois resident employee has performed work for more than 30 working days from their home in Illinois for an out-of-state employer, the employer may be required to register with the IL DOR and to withhold Illinois income tax from the wages of that employee. The IL DOR will waive penalties and interest for out-of-state employers who fail to withhold Illinois income taxes for Illinois employees if the sole reason for the Illinois withholding obligation is temporary work within the state due to the COVID-19 emergency. For more on this development, see Tax Alert 2020-1381. Pennsylvania: New law (HB 68) requires employers to provide employees with notification of the availability of unemployment insurance (UI) benefits at the time of separation from employment or reduction in hours. The Pennsylvania Department of Labor & Industry, Office of Unemployment Compensation, provides a standard notice (Form UC-1609) for employers to use to meet this requirement. To be eligible for federal grants under the Families First Coronavirus Response Act (P.L. 116-127) (FFCRA), state workforce agencies must have a provision in place requiring that employers notify employees at the time of layoff or reduced work of the availability of UI benefits. Pa. Laws 2020, Act 9 (HB 68), signed by the governor March 27, 2020. For more on this development, see Tax Alert 2020-1325. Rhode Island: In ADV 2020-22, the Rhode Island Department of Revenue, Division of Taxation (RI DOT) issued guidance providing relief from income tax withholding for employees who are temporarily working from home outside of the state where their employer is located due to the COVID-19 emergency. Under the emergency regulations, 280-RICR-20-55-14, the income of employees who are nonresidents temporarily working outside of Rhode Island solely due to the COVID-19 emergency will continue to be treated as Rhode Island-source income for Rhode Island withholding tax purposes. Further, employers located outside of Rhode Island will not be required to withhold Rhode Island income taxes from the wages of employees who are Rhode Island residents temporarily working within Rhode Island solely due to the COVID-19 emergency. The guidance is explained in detail in the RI DOT's emergency regulations. For additional information on this development, see Tax Alert 2020-1391. South Carolina: The South Carolina Department of Revenue (SC DOR) issued guidance to provide temporary relief from income tax withholding instructions for employees working from home temporarily within and outside of the state due to the COVID-19 pandemic. From the period March 13, 2020 through Sept. 30, 2020 (the COVID-19 relief period), the SC DOR will not use the temporary change of an employee's work location due to the COVID-19 emergency to impose the income tax withholding requirement. This relief does not apply to workers whose status changed from temporary to permanent assignment during this period. During the COVID-19 relief period, a South Carolina employer's income tax withholding requirement is not affected by the current shift of employees working on the employer's premises in South Carolina to teleworking from outside of South Carolina. Accordingly, the wages of nonresident employees temporarily working remotely in another state instead of their South Carolina business location continue to be subject to South Carolina withholding. Further, during the COVID-19 relief period, an out-of-state employer is not subject to South Carolina's income tax withholding requirement solely due to the shift of employees working on the employer's premises outside of South Carolina to teleworking from South Carolina. Accordingly, the wages of a South Carolina resident employee temporarily working remotely from South Carolina instead of their normal out-of-state business location are not subject to South Carolina withholding if the employer is withholding income taxes on behalf of the other state. S.C. Dept. of Rev., SC Information Letter #20-11 (May 15, 2020). For additional information on this development, see Tax Alert 2020-1380. Federal: On May 19, 2020, in Announcement 2020-6 (Announcement), the US Treasury Department (Treasury) and the Internal Revenue Service (IRS) announced that, once the Protocol Replacing the North American Free Trade Agreement with the Agreement between the United States of America, the United Mexican States, and Canada (USMCA) enters into force, they will interpret references in US income tax treaties to the North American Free Trade Agreement (NAFTA) as references to the USMCA. For additional information on this development, see Tax Alert 2020-1356. 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. International: Following the announcement on May 11, 2020 that Saudi Arabia would increase the standard rate of value-added tax (VAT) from 5% to 15%, the General Authority for Zakat and Tax has announced transitional rules governing supplies taking place around or spanning the rate change. In addition, the VAT rate applicable to goods imported after July 1, 2020 has been clarified. For additional information on this development, see Tax Alert 2020-1360 and Tax Alert 2020-1420. 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 IRC Section 163(j), the application of IRC 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. 1 According to the Metro website, "Metro serves more than 1.5 million people in Clackamas, Multnomah and Washington counties. The agency's boundary encompasses Portland, Oregon and 23 other cities — from the Columbia River in the north to the bend of the Willamette River near Wilsonville, and from the foothills of the Coast Range near Forest Grove to the banks of the Sandy River at Troutdale." Document ID: 2020-1495 |
