Tax News Update    Email this document    Print this document  

Ernst & Young's State and Local Tax Weekly newsletter for June 5 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.

COVID-19

State tax agency responses to the COVID-19 pandemic

The Indirect Tax COVID-19 state response matrix provides updates on the latest state tax agency responses related to the COVID-19 emergency. The matrix is available on EY's Indirect Tax COVID-19 state response website, which is accessible directly through this link, or on ey.com where other important tax-related information pertaining to the COVID-19 emergency is available.

Ernst & Young LLP's state guide to COVID-19 payroll and employment tax provisions is now available

To contain the outbreak of COVID-19 in the US, numerous states and local governments temporarily closed nonessential businesses and issued "stay-at-home" orders, creating an historic disruption to the US workforce. Most states and localities have responded to the emergency by expanding their paid leave mandates; waiving certain reporting requirements; expanding unemployment insurance benefits; providing extensions on the due date of payroll tax returns, tax payments or both; and/or temporarily halting certain garnishment orders. In our publication, COVID-19: state guide to payroll and employment tax provisions, we summarize many of these state and local payroll and employment tax developments sorted by state and topic for ease of navigation. This publication is current as of May 7, 2020 and updates will be periodically published in the weeks and months ahead.

TOP STORIES

Qualified Opportunity Zone funds and investors get more relief from deadlines

In Notice 2020-39, the IRS granted deadline relief for qualified Opportunity Zone (OZ) investors and Qualified Opportunity Funds (QOFs) in response to the COVID-19 pandemic. Extended deadlines apply to the 180-day investment window, the 30-month substantial improvement requirement and the 90% investment standard requirement, as well as the additional time for Qualified Opportunity Zone Businesses (QOZBs) to expend capital under the working capital safe harbor and for QOFs to reinvest certain proceeds under the Opportunity Zone regulations (TD-9889) (see Tax Alerts 2020-0056, 2020-0992).

In addition, the OZ FAQs were updated to take account of the final regulations and the guidance in Notice 2020-39.

180-day investment window: Under IRC §1400Z-2(a), OZ investors must invest capital gain in a QOF within a 180-day window to receive any OZ tax benefits. This 180-day window generally begins on the date of the sale or exchange resulting in the generation of capital gain.

Notice 2020-39 extends the investment window by providing that investors have until Dec. 31, 2020, to invest eligible gains into QOFs if the original 180-day window for investment would have ended any time from April 1, 2020 through Dec. 30, 2020. Although the extension is automatic, taxpayers are still required to file Forms 8949 and 8997 with a timely filed or amended federal income tax return (as extended in Notice 2020-23 (see Tax Alert 2020-0961)).

The guidance in Notice 2020-39 effectively extends the relief for the 180-day window originally granted in Notice 2020-23 (see Tax Alert 2020-1041).

30-month substantial improvement requirement: Under IRC § 1400Z-2(d)(2), property can be treated as qualified opportunity zone business property if it is substantially improved by a QOF or QOZB within a 30-month period upon acquisition.

Under Notice 2020-39 a taxpayer can disregard the period beginning on April 1, 2020 and ending on Dec. 31, 2020, in counting the 30-month period for purposes of the substantial improvement requirement.

90% investment standard: Under IRC § 1400Z-2(d)(1), a QOF must hold at least 90% of its assets in qualified opportunity zone property (QOZP), determined by averaging the percentage (1) on the last day of the first six-month period of the QOF's tax year and (2) on the last day of the QOF's tax year.

Notice 2020-39 provides for automatic relief so that if a QOF has a 90% investment standard test date falling between the period starting on April 1, 2020 and ending on Dec. 31, 2020 and the QOF fails to meet the 90% investment standard, such failure is deemed to be due to "reasonable cause" and does not disqualify the QOF, or investments into the QOF, under IRC § 1400Z-2. As a result, no penalties are owed, but the QOF must still complete and file Form 8996 with a timely filed federal income tax return (as extended in Notice 2020-23).

QOF reinvestment and working capital safe harbor: Under the IRC § 1400Z-2 regulations, if a QOF's plans to reinvest "proceeds from the return of capital or the sale or disposition of some or all of its qualified opportunity zone property" are delayed "due to a Federally declared disaster," then the QOF may benefit from an additional 12 months to reinvest so long as the QOF ultimately proceeds in accordance with its original reinvestment plan and has continuously held the proceeds in cash, cash equivalents, or debt instruments with a term of 18 months or less. In addition, if a QOZB is located in an OZ "within a Federally declared disaster," the final regulations grant the QOZB an additional 24 months to deploy its working capital in line with its business plan under the working capital safe harbor.

Notice 2020-39 confirms that, as a result of the declaration of a federally declared disaster in all OZs, the final regulations' provision allowing a 24-month extension for the working capital safe harbor for QOZBs applies to all QOZBs that otherwise qualify. Additionally, the 12-month extension for QOFs to reinvest certain proceeds applies to all QOFs that otherwise qualify so long as the original reinvestment period included Jan. 20, 2020 (the date of the disaster identified in the federal declarations).

For additional information on this development, see Tax Alert 2020-1498.

INCOME/FRANCHISE

Iowa: The Iowa Department of Revenue (IA DOR) issued guidance on the state's non-conformity to federal changes made by the Coronavirus Aid, Relief, and Economic Security Act of 2020 (P.L. 116-136) (CARES Act) to the extent they apply to any tax year beginning before Jan. 1, 2020. Section 1106 of the CARES Act provides for the exclusion from gross income proceeds of forgiven loans under the federal Paycheck Protection Program (PPP). Iowa does not conform to this exclusion for a tax year beginning before Jan. 1, 2020.The CARES Act suspends the excess business loss limitation under IRC § 461(l) for tax years 2018 through 2020. The IA DOR indicated that Iowa does not conform to this limitation for tax year 2018, but for 2019, it will apply for Iowa purposes even though it does not apply for federal purposes. The CARES Act modified the IRC § 163(j) business interest expense deduction limitation by increasing the percentage of a taxpayer's adjusted taxable income used in calculating the deduction limitation from 30% to 50%, effective for tax years 2019 and 2020. IA DOR stated that Iowa does not conform to the modification as it applies to tax year 2019; thus, the 30% limitation applies for that year. In addition, Iowa does not conform to the modifications to the depreciation of qualified improvement property (QIP) under the CARES Act. The IA DOR said that additional guidance on the state's nonconformity, including a detailed description of the provisions and how to report differences on the Iowa tax return, is forthcoming. Iowa generally conforms to the provisions of the CARES Act to the extent they affect Iowa income taxes for tax years beginning on or after Jan. 1, 2020. IA Dept. of Rev., "Iowa Nonconformity: CARES Act of 2020" (June 2, 2020).

Kentucky: New law (HB 351) modifies the state deduction for IRC § 179, the state adjustment for IRC § 110 and limited liability entity tax (LLET) provisions. Kentucky law provides that for property placed in service on or after Jan. 1, 2020 only the IRC § 179 expense deduction in effect on Dec. 31, 2003 is allowed, but the phase-out provision of IRC § 179, which limits the qualifying investment in property, does not apply. Another provision of HB 351 eliminates the requirement that tax payments made by lessees to lessors under IRC § 110 be included in a lessor's gross income and excluded from the gross income of lessees. Lastly, the LLET provisions are modified to clarify that an affiliated group (rather than a combined group) must file a single return for LLET purposes. Unless otherwise noted, these changes apply retroactively to tax years beginning on or after Jan. 1, 2019. Ky. Laws 2020, Acts ch. 91 (HB 351), enacted over the governor's veto April 15, 2020.

New York: The New York State Department of Taxation and Finance (Tax Department) has posted for comment draft corporate franchise tax regulations (Draft Regulations) under Article 9-A of the New York Tax Law (draft N.Y. Comp. Codes and Regs. tit. 20, Subparts 10-1 through 10-5). The Draft Regulations address tax computation rules and definitions for qualified New York manufacturers, corporate partners, New York S corporations, real estate investment trusts (REITs), regulated investment companies (RICs) and domestic international sales corporations (DISCs). These are the first draft regulations the Tax Department has issued on qualified New York manufacturers and incorporate concepts announced in previously issued Technical Service Bulletins (TSB-Ms).¹ The remaining sections of the Draft Regulations are based on previously released draft regulations and amendments. Comments on the Draft Regulations are due by Aug. 7, 2020, though the Tax Department said it may still consider comments submitted after the due date. For more information on this development, see Tax Alert 2020-1476.

Texas: A Texas appeals court (court) reversed the trial court and held that an out-of-state corporation is required to apportion its revenue from the provision of subscription-based satellite radio services to Texas based on the percentage of its subscribers in Texas, and not based on the locations where it produced and distributed its programming for broadcast. At issue in this case is whether a Texas subscription receipt is a receipt from a "service performed in this state" under Tex. Tax Code §171.103(a)(2). The court agreed with the Texas Comptroller's interpretation of "where the service is performed" to mean where the "receipt-producing, end-product" act is done. Applying this standard to facts in this case, the court concluded that the service for which the corporation's subscribers contracted was the receipt of the radio programming through a satellite-enabled radio, which is presumed to be where the subscriber resides. The court also rejected the corporation's request to adjust its cost of goods sold (COGS) deduction to include the revenue share and hardware subsidies, finding that the radio subscribers, similar to the movie-viewing audience in American Multi-Cinema,² only received a right to access and listen to the programs' creative content. The court reasoned the content was not transmitted in a manner that would allow a subscriber to access that information again at a later time — in other words "property with a physical or demonstrable — that is, tangible — presence" was not transferred by the corporation to its subscribers. Hegar v. Sirius XM Radio, Inc., No. 03-18-00573-CV (Tex. App. Ct., 3rd Dist., May 1, 2020).

SALES & USE

Idaho: New law (HB 521), effective July 1, 2020, exempts from sales and use tax the purchase or use of eligible server equipment and new data center facilities by qualifying business entities and contractors installing eligible server equipment or building new data center facilities for such entities. A "qualifying business entity" is a business entity that certifies to the Idaho State Tax Commission (Commission) that it will make capital investments in one or more data centers after July 1, 2020 of at least $250 million in aggregate within the first five years after construction begins and that it will create and maintain at least 30 new jobs at the data center within two calendar years after operations begin. Initially a qualifying business entity is entitled to a provisional sales and use tax exemption that will become final if the investment and job creation requirements are timely met; thereafter, the exemption applies to all additional purchases of eligible server equipment and purchases associated with constructing new data center facilities. If a qualifying business entity fails to timely meet the investment and job requirements, it will have to pay the sales and use tax that would have been due if the provisional exemption had not been granted. The sales and use tax exemption is not available for property subject to business incentives under the Idaho Reimbursement Incentive Act and, for property tax purposes, taxable market value of new construction does not include property that qualified for the data center sales tax exemption. The Commission will make rules to implement these provisions. Idaho Laws 2020, Sess. Law ch. 335 (HB 521), signed by the governor on March 30, 2020.

Kentucky: New law (HB 351) modifies the definition of marketplace provider and expands certain manufacturing-related sales and use tax exemptions, effective Aug. 1, 2020. The law amends the definition of "marketplace provider" by deleting the following as an activity that could satisfy one of the requirements that must be met to fall within the definition of marketplace provider: a person that directly or indirectly charges, collects, or otherwise receives selling fees, listing fees, referral fees, closing fees, fees for inserting or making available tangible personal property, digital property, or services on a marketplace, or receives other consideration from the facilitation of a retail sale of tangible personal property, digital property, or services (collectively "goods and services"), regardless of ownership or control of such taxable goods and services. In addition, the law expands the definition of machinery for new and expanded industry, and the exemptions for supplies and industrial tools and for labor or services to install, repair, or maintain tangible personal property, to include certain manufacturers of distilled spirts, wine, or malt beverages. Ky. Laws 2020, Acts ch. 91 (HB 351), enacted over the governor's veto April 15, 2020.

BUSINESS INCENTIVES

Kentucky: New law (HB 351) creates the renewable chemical production program, which provides a tax credit that can be taken against corporate or individual income tax or limited liability entity tax (LLET). To be eligible for the credit, a business must: (1) be physically located in Kentucky; (2) operate for profit; (3) organize, expand or locate in Kentucky on or after July 1, 2020; (4) create new jobs and retain them for at least four years or invest a substantial amount of new capital in Kentucky and maintain the investment for at least four years; (5) certify certain information to the Department of Agriculture (department); (6) not provide professional or health care services, medical treatments or engage in retail operations; and (7) not relocate operations from, or reduces operations in, another area of the state while seeking this credit. The law describes other requirements of the credit program, including the application process and agreements that must be entered into with the department. Further, the credit is nonrefundable and nontransferable, unused credit amounts can be carried forward for up to three years, and credits that have been claimed must be repaid if the taxpayer fails to fulfill any requirements of the program or terms of the agreement. The credit is available for tax years beginning on or after Jan. 1, 2021, and sunsets on Dec. 31, 2024. Ky. Laws 2020, Acts ch. 91 (HB 351), enacted over the governor's veto April 15, 2020.

Maryland: New law (SB 397) exempts certain sales of qualified data center personal property from sales and use tax, and permits localities to reduce or eliminate property tax on such property. A "qualified data center" is a data center located in Maryland in which an individual or corporation, within three years after submitting an application for the sales and use tax exemption, has: (1) invested at least $2 million in qualified data center personal property and created at least five qualified positions for a data center located within a Tier I area; or (2) invested at least $5 million in qualified data center personal property and created at least five qualified positions for a data center located in any other area of Maryland. Exemption eligibility certificates must be renewed each year and generally can be renewed for up to 10 consecutive years (up to 20 years if the individual or corporation invests at least $250 million in qualified data center personal property). The law addresses record retention requirements and specifies when exemption certificates can be revoked or sales and use tax can be recaptured. Lastly, a county or municipality may reduce or eliminate the percentage of the assessment of any qualified data center personal property used in a qualified data center that is subject to the county or municipal corporation property tax. SB 397 takes effect July 1, 2020. Md. Laws 2020, ch. 640 (SB 397), enacted without the governor's signature on May 8, 2020.

PROPERTY TAX

Washington: New law (SB 5628) exempts from property tax all heavy equipment rental property owned by a heavy equipment rental property dealer (dealer) for taxes levied for collection in 2022 and later. "Heavy equipment rental property" means any equipment that is rented by a heavy equipment rental property dealer that: (1) is mobile; (2) is customarily used for construction, earthmoving, or industrial applications; and (3) is rented without an operator. The law includes examples of what is and is not included as heavy equipment rental property. The exemption will not apply to heavy equipment rental property that in the immediately preceding tax year was rented or leased by the dealer to an affiliate. To claim the credit, a taxpayer must file an exemption claim and a statement of personal property with the county assessor. Wash. Laws 2020, ch. 301 (SB 5628), signed by the governor on April 2, 2020.

CONTROVERSY

Kentucky: New law (HB 351) conforms Kentucky law to federal adjustments to taxable income and the federal centralized partnership audit regime based upon the Multistate Tax Commission's model statute. The new Kentucky law requires taxpayers, including partnerships, to report final federal adjustments to the Kentucky Department of Revenue (Department) within a specified amount of time and details the information that must be included and the time in which payments of additional tax due must be made. It provides information about how the state partnership representative is designated and establishes that the state partnership representative for the reviewed year has the sole, binding authority to act on the partnership's behalf. The law also includes reporting and payment requirements for partnerships and partners (including tiered partners), makes available an election (generally irrevocable) for the partnership to calculate and pay the amount due in lieu of taxes owed by the partners, and establishes when the partnership election does not apply. Under certain circumstances, an audited partnership or tiered partner can enter into an alternative reporting and payment method agreement with the Department. Additionally, the law sets the deadlines for the state to assess additional tax, interest, and penalties resulting from any final federal adjustments. Lastly, a federal adjustments report permits the taxpayer to report additional tax due, report a claim for refund or credit of tax, and make other adjustments, including any net operating losses, resulting from adjustments to the taxpayer's federal taxable income. HB 351 took effect upon becoming law. Ky. Laws 2020, Acts ch. 91 (HB 351), enacted over the governor's veto April 15, 2020.

PAYROLL & EMPLOYMENT TAX

Florida: The Florida Department of Economic Opportunity ("EO Department") confirmed on its employer COVID-19 webpage that contributory employer unemployment insurance (UI) accounts will not be charged for UI benefits paid as a direct result of COVID-19. As a result, contributory employers will not see these benefits affect the computation of their 2021 state UI tax rates. Employers participating in the EO Department's short-time compensation (workshare) program will also not be charged with COVID-19-related UI benefits. For additional information on this development, see Tax Alert 2020-1475.

Chicago, IL: On May 20, 2020, the Chicago City Council approved an ordinance that protects employees from employer retaliation for obeying the Mayor's order in connection with the COVID-19 emergency and makes corrections to city's paid leave and minimum requirements by expanding the types of workers covered by those requirements. For additional information on this development, see Tax Alert 2020-1473.

Michigan: The Michigan Treasury Department issued an update to its recent announcement that the deadline for monthly or quarterly withholding returns and taxes due on May 20, 2020 is extended to June 22, 2020 by adding that business taxpayers that have deferred paying their withholding taxes due to the COVID-19 pandemic can now participate in an installment payment option to satisfy their outstanding tax balance. For additional information on this development, see Tax Alert 2020-1489.

Michigan: The Michigan Treasury Department (Department) announced that it has further extended the deadline for monthly or quarterly withholding returns and tax payments. Any monthly or quarterly payment or return due on May 20, 2020 may be submitted to the Department without penalty or interest by June 20, 2020. This includes the withholding returns and taxes previously extended to May 20, 2020 (monthly or quarterly withholding return and taxes due on March 20, 2020 and April 20, 2020). For additional information on this development, see Tax Alert 2020-1351.

Missouri: The Missouri Department of Labor & Industrial Relations, Division of Employment Security (Department), announced that employers participating in the federal Paycheck Protection Program (PPP) may, to protect their unemployment insurance (UI) accounts and the Missouri UI trust fund, report PPP wage payments made to employees electronically through a new portal or through their UInteract account. For additional information on this development, see Tax Alert 2020-1408.

Nebraska: The Nebraska Department of Revenue (NE DOR) expanded its COVID-19 FAQs to address the income tax withholding requirements that apply when employees are temporarily working from home or from an alternate state. The NE DOR indicates that it will not require employers to change an employee's state as it was established prior to the COVID-19 emergency for Nebraska income tax withholding purposes provided the employees are telecommuting temporarily from a work location within or outside Nebraska due to the COVID-19 emergency. This special relief is available March 13, 2020 through Jan. 1, 2021, unless extended. For additional information on this development, see Tax Alert 2020-1379.

MISCELLANEOUS TAX

Kentucky: New law (HB 351) imposes a vapor products tax, permits a coal tax refund in certain situations, and imposes a tire fee. Beginning Aug. 1, 2020, an excise tax is imposed on every distributor for the privilege of selling tobacco products in Kentucky, at a rate of $1.50 per closed vapor cartridge. For open vaping systems, the rate is 15% of the actual price for which the distributor sells the open vaping systems. A licensed retail distributor of tobacco products is subject to the excise tax at $1.50 per cartridge on purchases of untax-paid closed vapor cartridges and is subject to tax at 15% of the total purchase price of untax-paid open vaping systems as invoiced by the retail distributor's supplier. A coal tax refund is available to taxpayers engaged in severing or processing coal in Kentucky equal to the coal tax paid if the coal is transported directly to a market outside North America. The refund process is available beginning on or after Aug. 1, 2020 but before July 1, 2022 and limited during any calendar year to the export of a combined total of 10 million tons of coal subject to the coal tax and exported through US coal export terminals to markets outside of North America. Lastly, HB 351 imposes a $2 fee paid by retailers on each new motor vehicle, trailer, or semitrailer tire sold in Kentucky, effective July 1, 2020 through June 30, 2024. The fee is subject to Kentucky sales tax and can be passed on to the new tire purchaser. Ky. Laws 2020, Acts ch. 91 (HB 351), enacted over the governor's veto April 15, 2020.

Washington: New law (SB 5628) imposes a 1.25% heavy equipment rental tax on each rental of heavy equipment rental property to a consumer by a heavy equipment rental property dealer, applicable to rental contracts or agreements entered into on or after Jan. 1, 2022. The tax applies to all such rentals where the rental location and the customer pickup/delivery location are in Washington State, and does not apply to rentals where either the rental location or delivery location is out of state. Wash. Laws 2020, ch. 301 (SB 5628), signed by the governor on April 2, 2020.

VALUE ADDED TAX

International: On June 1, 2020, the new 19% VAT on digital services rendered by foreign digital service providers went into effect in Chile. Foreign digital service providers that provide services to individuals in Chile must register for VAT purposes and report the relevant VAT. For additional information on this development, see Tax Alert 2020-1453.

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.

———————————————
ENDNOTES

¹ The Tax Department's previous guidance on qualified New York manufacturers includes: TSB-M-19(5)C, 6(I) (Oct.18, 2019), TSB-M-16(2)C (May 24, 2016), TSB-M-15(3.1)C, (3.1)(I) (July 24, 2015) and TSB-M-15(3)C, (3)I (Feb. 26, 2015).

² Hegar v. Am. Multi-Cinema, Inc., No. 17-0464 (Tex. S.Ct. April 3, 2020).