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July 7, 2020

State and Local Tax Weekly for June 19

Ernst & Young's State and Local Tax Weekly newsletter for June 19 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.


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 where other important tax-related information pertaining to the COVID-19 emergency is available.

Our state guide to COVID-19 payroll and employment tax provisions, originally published on May 7, 2020, has been updated through June 8, 2020. Sections updated are show in asterisks in the Table of Contents. 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 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.


Senate introduces modified Mobile Worker Relief bill to protect workers temporarily working in states due to COVID-19

On June 18, 2020, US Senator John Thune (R-SD), chairman of the Senate Finance Subcommittee on Taxation and IRS Oversight, issued a press release announcing that he and US Senator Sherrod Brown (D-OH) have introduced the Remote and Mobile Worker Relief Act (S. 3995).

The bill would expand on proposed provisions to reduce the financial and administrative burden of short-term business travel introduced last year under the Mobile Workforce State Income Tax Simplification Act (S.604), a measure that Senator Thune has been introducing since 2012, but has failed to pass in the House.

S. 3995 provides the same general protections as contained in S. 604, specifically, employees and employers would be relieved of nonresident income tax and withholding if employees are working in the nonresident state for less than 30 days in the calendar year.

Additionally, in response to the significant rise in telework due to the COVID-19 emergency, S. 3995 would, through Dec. 31, 2020, prohibit the imposition of state income tax and withholding for employees temporarily working in a state due to COVID-19 for less than 90 days. S. 3995 also provides nexus relief for purposes of the imposition of state business taxes due solely to employees temporarily working in the state because of the COVID-19 emergency.

For additional information on this development, see Tax Alert 2020-1619.


Alabama: The Alabama Department of Revenue said that it would not consider a temporary change is an employee's physical work location due to temporary telework requirements to impose nexus or alter apportionment of income of a business for state income tax purposes. This relief covers the period the temporary telework requirements are in place as a result of the COVID-19 pandemic. Ala. Dept. of Rev., "ADOR Operation Updates Due to COVID-19" section of its COVID-19 response webpage (May 12, 2020).

Alabama: The Alabama tax court held that expenses paid by a taxpayer (which was a member of a group of entities within a parent corporate structure) to another entity that provides employee services to the taxpayer, should not be included in the payroll factor in determining the taxpayer's Alabama business income tax liability because the services were performed by individuals who were not direct employees of the taxpayer. Thus, the taxpayer did not have compensation to employees which it could include in the Alabama payroll factor. Complete Payment Recovery Servs. Inc. v. Ala. Dept. of Rev., Dkt. Nos. BIT. 17-583-LP; BIT. 17-751-LP; BIT. 17-752-LP (Ala. Tax Ct. June 12, 2020).

District of Columbia: New law (Act 23-328) allows corporations, unincorporated businesses and financial institutions "an 80% deduction for apportioned District of Columbia [NOL] carryover to be deducted from the net income after apportionment." This change is effective retroactively to tax years beginning after Dec. 31, 2017. Because Act 23-328 is an emergency bill, it is only effective for a 90-day period, expiring on Sept. 6, 2020. D.C. Laws 2020, Act 23-328 (B23-0759), enacted June 8, 2020.

Michigan: The Michigan Department of Treasury (MI DOT) issued a notice addressing the state's corporate income tax treatment of the business interest expense (BIE) limitations under IRC § 163(j). MI DOT explained that Michigan tax law conforms to the current IRC and has not decoupled from the IRC §163(j) BIE limitation. Thus, Michigan conforms to the IRC § 163(j) BIE limitation for purposes of computing Michigan Corporate Income Tax liability. The MI DOT's notice explains adjustments that may have to be made by the members of a unitary business group or corporate income taxpayers that joined in filing a federal consolidated return. Mich. Dept. of Treas., "Notice: Corporate Income Tax Treatment of the IRC 163(j) Business Interest Limitation" (June 8, 2020).

Minnesota: The Minnesota Department of Revenue (MN DOR) updated its guidance for the Minnesota income tax credit for increasing research and development (R&D credit) and specifically applicable to C corporations joining in the filing of a combined return in Minnesota. The MN DOR explained that the current Schedule RD allows a credit carryover to be used only by an earning group member. The MN DOR has determined that the credit carryover must be applied to other members, similar to how it is applied in the year it is generated. Thus, for combined groups the R&D credit carryforward will be used first by the earning member and then by other group members. The MN DOR said this change is effective for tax years beginning after Dec. 31, 2012 and, for refund purposes, it may be applied within the applicable statute of limitations. The MN DOR also stated that it will be updating its 2018 and 2019 forms and instructions to reflect this change. Minn. Dept. of Rev., "Credit for Increasing Research Activities" (updated June 17, 2020).

Tennessee: The Tennessee Court of Appeals (court) held that two wholly owned single-member limited liability companies (SMLLCs) which were treated as disregarded entities for federal income tax purposes from their parent limited liability company treated as a partnership for federal income tax purposes (parent LLC) are statutorily barred from filing consolidated Tennessee franchise and excise (F&E) tax returns with the parent LLC. In so holding, the court upheld the constitutionality of a requirement that federally disregarded SMLLCs file separate returns when their parent is not treated as a corporation for federal income tax purposes, finding the statute had a rational basis of ensuring F&E tax is paid when the tax may otherwise go unreported or be under-reported. The court said the statute's preferential treatment of subsidiary LLCs whose single-member parent is an S corporation does not violate the Equal Protection Clause because the parent in this case could have elected classification as a corporation for federal income tax purposes, which under the Tennessee statute would have permitted the parent to join in filing a Tennessee consolidated return with the SMLLCs. The court also held that settlement proceeds parent earned from a 2011 settlement of a legal malpractice claim related to improperly filed patents were properly subject to F&E tax as "business earnings". This, the court said, is because under the functional test, the settlement proceeds arose from the parent LLC's management, use, or acquisition of its US patents (all of which are controlled exclusively from an office in Tennessee) and those patents are an integral part of the parent LLC's business. The court also upheld the commissioner's apportionment of the full amount of the settlement proceeds to Tennessee. Finally, the court held that negligence penalties for the excise tax due from each entity were properly assessed for the excise tax attributable to consolidated reporting but were not properly assessed in regard to the malpractice settlement proceeds. EmeraChem Power, LLC et al. v. Gerregano, No. E2019–00292-COA-R3-CV (Tenn. Ct. App. June 1, 2020).


Arkansas: In response to a request for legal opinion, the Arkansas Department of Finance and Administration (Department) advised the requestor to pay sales tax for software license renewal charged by a company for its online/go-to-meeting solutions tool. The tool, the Department explained, provides audio, video, and recording capabilities over the internet and as such provides an online telecommunications service for its users. Accordingly, the company's service is a taxable telecommunications service. The Department further found the true object of the "software license renewal" transaction is the purchase of the telecommunications service, so the exemption from sales tax for separately stating the licensing of software downloaded through a modem or by other electronic means on an invoice or billing statement would not apply. Ark. Dept. of Fin. and Admin., Op. No. 20191230: Telecommunications Software License Renewals (June 11, 2020).

South Carolina: In a private letter ruling, the South Carolina Department of Revenue (SC DOR) held that a company's charges for online software subscription services are subject to sales and use tax as charges for access and use of software through an Application Service Provider. Revenues from certain related training services are also subject to tax. According to SC DOR, the charges are considered to be sales of communications, which are included in the definition of tangible personal property, and the tax is imposed on "the gross proceeds accruing or proceeding from the charges for the ways or means for the transmission of the voice or messages … ." The SC DOR further determined that the company's charges for training made in conjunction with, or as part of the sale of, online software subscription services are subject to sales and use tax, since they are includable in "gross proceeds of sales" or "sales price." The training could occur at the customer's location, the company's location outside of South Carolina, or through a live videoconference call. Charges for training not made in conjunction with or as part of the sale of the company's online software subscription service are not includable in "gross proceeds of sales" or "sales price" and, therefore, are not subject to tax. S.C. Dept. of Rev., SC Priv. Letter Ruling #20-4 (May 18, 2020).

Texas: The Office of the Texas Comptroller of Public Accounts (Comptroller) adopted changes to 34 Tex. Admin. Code § 3.334 which amend local sales and use tax rules. In light of the U.S. Supreme Court's ruling in South Dakota v. Wayfair, Inc.,1 the rule has been amended to provide that remote sellers required to collect state use tax should collect local use tax based on the destination location, and to implement the requirement that a Texas seller collect local use tax when it ships or delivers a taxable item into a jurisdiction where the local use tax exceeds the local sales tax in the jurisdiction the sale was consummated. The amended rule also implements legislation enacted in 2019 that establishes local sales and use tax collection responsibilities for marketplace providers (HB 1525) and establishes a single local use tax rate that remote sellers may elect to use (HB 2153). Amendments to the rule also add new subsection (b) to provide guidance on how to determine the place of business of the seller. The rule's preamble states that "[i]n new subsection (b), the [C]omptroller no longer includes administrative offices supporting a traveling salesperson, and distribution centers, manufacturing plants, storage yards, warehouses, or similar facilities operated by a seller at which salespersons are assigned to work in the determination of 'place of business of the seller.'" The Comptroller noted that "the mere fact that a salesperson is assigned to work from, or work at, a distribution center, manufacturing plant, storage yard, warehouse, or similar facility operated by a seller does not mean that a seller receives orders at these locations." In addition, the amended rule: (1) defines new terms (e.g., "marketplace provider", "order placed in person") and amends existing terms (e.g., "itinerant vendor", "temporary place of business of the seller"); (2) includes local sales tax provisions regarding consummation of sales and how to determine the local taxing jurisdictions to which sales tax is due; (3) provides rules for local use tax, including general rules as well as general rules applied to specific situations, with examples; (4) sets forth tax rates, including the 2% local tax cap; (5) addresses jurisdictional boundaries (city, county, special purpose districts and transit authority, extraterritorial), combined areas, and city tax imposed through strategic partnership agreements; (6) explains sellers' and purchasers' responsibilities for collecting or accruing local taxes; (7) includes provisions on direct payment permit, special rules for certain taxable goods and services, special exemptions applicable to individual jurisdictions, restrictions on local sales tax rebates and other economic incentives, prior contract exemptions, and statutes of limitation. In general, the amended rule took effect May 31, 2020, except that the Comptroller is delaying until Oct. 1, 2021 the implementation of clauses (b)(4) and (b)(5), regarding orders received by sales personnel when they are not at a place of business of the seller and orders not received by sales personnel (i.e., orders received by mail, phone, shopping websites, shopping software application), in order to give interested parties an opportunity to seek a legislative change. Tex. Comp. of Pub. Accts., Amended 34 Tex. Admin. Code § 3.334 (45 TexReg 3499, May 22, 2020).


Maryland: New law (HB 980) extends and modifies the energy storage tax credit. The credit is available to the owner of a residential or commercial property who purchases and installs an energy storage system of such property, or an individual or a corporation that owns or pays for the installation of an energy storage system that supplies energy for use on the residential or commercial property on which the system is installed. The amount of the credit which may be claimed against the state income tax is the total installed costs of the system installed on the property, but may not exceed the lesser of (1) $5,000 (residential) or $150,000 (commercial), or (2) 30% of the total installed costs of the system. The credit may not exceed state income tax for the tax year, and unused credit may not be carried forward. The credit may not be claimed for energy storage systems installed before Jan. 1, 2018 or after Dec. 31, 2022. These changes take effect July 1, 2020 and apply to tax years beginning after Dec. 31, 2019. Md. Laws 2020, ch. 636 (HB 980) became law without the governor's signature on May 8, 2020.

Maryland: New law (HB 862) makes the historic revitalization tax credit for commercial rehabilitation transferable and refundable under certain circumstances. The amount of credit allowed but not used for commercial rehabilitation may be transferred in whole or in part to any individual or business entity. In the tax year of such transfer, the transferee may apply the tax credit against total tax otherwise payable by the transferee in that tax year. If there is excess credit, the transferee can either claim a refund for the excess amount or transfer it to any individual or business entity. These changes take effect July 1, 2020 and apply to tax years beginning after Dec. 31, 2019. Md. Laws 2020, ch. 633 (HB 862) became law without the governor's signature on May 8, 2020.


Illinois: An Illinois university and a childcare center were not entitled to a property tax exemption for two on-campus daycare centers run by the childcare center because the daycare centers, while reasonably necessary to fulfill the university's educational objectives, were "used with a view to profit." In reversing the circuit court and affirming the Illinois Department Revenue's decision, the Appellate Court of Illinois (Court) construed the exemption narrowly and strictly in favor of taxation and found that "used with a view to profit" refers to any entity profiting from the use of the property (as opposed to only the property's owner). Nothing in the statute indicates that the property owner must be the entity that profits for the exemption to be inapplicable. Further, in addressing an issue of first impression, the Court found that the daycare centers are primarily used for purposes that are reasonably necessary to accomplish and fulfill the university's educational or efficient administration objectives. On-campus childcare was created specifically to alleviate difficulty in hiring professional employees with young children, since there was no other on-campus childcare facilities in the area and having the childcare access enabled the university to better serve its students through its attraction and retention of quality professors and other staff members. The Univ. of Chicago and Bright Horizons Children's Center, LLC v. Ill. Dept. of Rev., 2020 IL App (1st) 191195 (Ill. Appel. Ct., 1st Jud. Dist., 6th Div., May 15, 2020).

South Carolina: In reversing the federal district court, a US Court of Appeals held the South Carolina Real Property Valuation Reform Act impermissibly discriminated against railroads in violation of the Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act) by providing an assessed value cap for commercial and industrial property, but not railroads. CSX Transp., Inc. v. S.C. Dept. of Rev., Nos. 19-1089 and 19-1154 (4th Cir. May 20, 2020).


Missouri: The Missouri Department of Labor & Industrial Relations (Department) announced that due to the reopening of state businesses, effective July 5, 2020, the Department will once again begin charging employers with unemployment insurance (UI) benefits. As we reported, the Department has been waiving UI benefit charges that are the result of job impairments due to the COVID-19 pandemic. Also beginning the week of July 5, 2020, claimants will be required to resume fulfilling work-search requirements to continue to be eligible for UI benefits. The Department also will stop waiving the one-week waiting period for UI claims filed on or after July 5, 2020. For additional information on this development, see Tax Alert 2020-1579.

New York: New law (SB 7506B, Part J) establishes a statewide paid sick leave law that, effective Sept. 30, 2020, requires employers to allow employees to begin accruing sick leave and to begin providing accrued sick leave to employees beginning Jan. 1, 2021. According to Governor Cuomo's news release, employers with 100 or more employees will be required to provide at least seven days of job-protected paid sick leave each year (businesses with five to 99 employees will be required to provide at least five days of paid leave). For additional information on this development, see Tax Alert 2020-1578.

Vermont: The Vermont Department of Taxes issued guidance concerning the income tax and income tax withholding requirements that apply to wages paid for services provided temporarily in the state due to the COVID-19 pandemic. For additional information on this development, see Tax Alert 2020-1577.

Seattle, WA: The city council of Seattle passed an ordinance on June 12, 2020, that modifies the existing municipal code for paid sick leave and safe time by extending its coverage to gig workers. (Ord 126091.) Due to the COVID-19 emergency, the ordinance requires that covered hiring entities, food delivery network companies and transportation network companies provide gig workers with paid sick and safe time to care for their personal and family members' health conditions or safety needs. For additional information on this development, see Tax Alert 2020-1586.


Louisiana: New law (HB 653) amends unclaimed property reporting and advertising thresholds. HB 653 lowers the threshold above which property generally must be reported abandoned to $10 (previously $50). It also increases to a value of $100 (previously $50) the threshold above which administrators generally must advertise the name and address or location of an owner of property. HB 653 takes effect Aug. 1, 2020. La. Laws 2020, Act 156 (HB 653), signed by the governor on June 9, 2020.


Federal: The Senate Finance Committee held a hearing June 17, 2020 with U.S. Trade Representative (USTR) Robert Lighthizer during which he was again asked, as he was in a morning House Ways & Means hearing, about press reports that the United States suspended its involvement in the OECD BEPS 2.0 project negotiations, along with trade questions regarding China, a potential UK trade agreement, and the World Trade Organization. For additional information on this development, see Tax Alert 2020-1598.

International — United Kingdom: The United Kingdom (UK) Government has announced the transition period for leaving the European Union (Brexit) will not be extended and controls for importing goods will now apply from July 2021. As well as giving businesses more time to prepare, HM Revenue & Customs has unveiled a new package of measures to accelerate growth of the UK's customs intermediary sector. As well as injecting £50 million (total now over £84m) to support businesses with recruitment, training and supplying IT equipment to handle customs declarations, the UK Government announced that it intends to remove barriers for intermediaries taking on extra clients by adapting the rules around financial liability. For additional information on this development, see Tax Alert 2020-1600.


International — European Union: On May 28, 2020, the Court of Justice of the European Union (CJEU) ruled that if a business is granted a (volume) discount that relates to multiple (prior) transactions, that discount should be allocated to all transactions it relates to. Even if the business granting the retroactive discount does not issue an invoice (or other document), this rule still applies. For additional information on this development, see Tax Alert 2020-1590.

International — Costa Rica: Foreign digital services providers and foreign suppliers of intangible goods may voluntarily register with Costa Rican tax authorities as taxpayers subject to value-added tax (VAT). Digital services provided by foreign services providers for use in Costa Rica will be subject to VAT. For additional information on this development, see Tax Alert 2020-1612.


Federal/Multistate: On Thursday, July 9, 2020 from 11:00-noon (ET), Ernst & Young LLP will host a webcast on how organizations can prepare for the future of payroll. Panelists will discuss payroll trends companies need to be aware of and what's on the horizon for global payroll. Looking through the lens of payroll strategy, this webcast will discuss significant trends identified during the 2019 payroll survey and analyze how these insights can help companies better prepare for the future of payroll. Click here to register for this webcast.

Federal/Multistate: On Tuesday, July 21, 2020 from 1:00-2:15 (ET), Ernst & Young LLP (EY) will host a webcast on US corporate income tax compliance. EY professionals will discuss how companies can continue to navigate the complexity and challenges of the CARES Act and TCJA compliance, while preparing for tax year 2019 (TY19) and tax year 2020 (TY20). Click here to register for this webcast.

Multistate: On July 28, 2020 from 4:00-5:00 (ET), Ernst & Young LLP (EY) will host a webcast on teleworker tax implications for COVID-19 and beyond. In their response to the COVID-19 pandemic, states and localities issued stay-at-home orders and guidelines for social distancing that dramatically increased the number of employees working from home. As businesses begin to reopen, they are considering other benefits of teleworking and analysts predict that the COVID-19 emergency has sparked a new upward trend in telework arrangements that will survive long after the governmental responses to the immediate crisis subside. A shift in an employee's work location from the office to their home can have broad tax implications for businesses and employees that are important to consider when evaluating and implementing telework arrangements. To help employers identify the tax implications of telework arrangements, in this webcast, EY will bring together professionals from its employment and business tax subservice lines to discuss: state and local income tax withholding for residents and nonresidents; determining the applicable state for unemployment insurance and similar taxes; nexus implications for corporate income, sales and use and other business taxes; state and local tax relief made available to employers and employees in response to the COVID-19 emergency and their limitations; determining if travel expenses of home office workers are excluded from taxable wages; and steps in evaluating the feasibility of telework arrangements from a federal, state and local tax perspective, among other topics. Register here.

Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor.


1 South Dakota v. Wayfair, Inc., 585 US ___ (2018).