July 21, 2020
State and Local Tax Weekly for July 10
Ernst & Young's State and Local Tax Weekly newsletter for July 10 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 ey.com where other important tax-related information pertaining to the COVID-19 emergency is available.
Iowa decouples from GILTI and IRC §163(j), retroactively conforms to PPP loan forgiveness, adopts partnership audit and adjustment rules
On June 29, 2020, Iowa Governor Kim Reynolds signed HF 2641, containing Iowa tax law changes, including decoupling Iowa's income tax law from the global intangible low-taxed income (GILTI) and IRC §163(j) business interest expense limitation (BIE) provisions under federal tax law, conforming to certain provisions of the CARES Act, adopting Iowa partnership audit and reporting of federal adjustment reporting rules, and other administrative changes.
Decoupling from GILTI and IRC Section 163(j) BIE limitation provisions: For 2018, Iowa conformed to the Internal Revenue Code of 1986, as amended (IRC), as it existed on Jan. 1, 2015. For tax years beginning on or after Jan. 1, 2019, Iowa conformed to the IRC as of March 24, 2018. Under prior legislation, Iowa became an IRC rolling conformity state for tax years beginning on or after Jan. 1, 2020. Accordingly, Iowa did not conform to certain provisions of the TCJA enacted in Dec. 2017, including provisions related to the inclusion in federal taxable income of GILTI from foreign subsidiaries under IRC §§ 951A and 250 and limitations on the deductibility of BIE contained in IRC § 163(j) for 2018 tax years. Iowa conformed to these provisions, however, for tax years beginning on or after Jan. 1, 2019.
Under HF 2641, Iowa tax law decouples from the GILTI provisions retroactive to tax years beginning on or after Jan. 1, 2019, and directs the Iowa Department of Revenue (Department) to rescind recently enacted administrative rules that would have included GILTI in Iowa taxable income (see Tax Alert 2019-2137).
Iowa tax law, under HF 2641, also decouples from IRC § 163(j)'s limitation on BIE deductions for tax years beginning on or after Jan. 1, 2020. Because Iowa's tax law conformed to IRC §163(j)'s limitation on BIE deductions for 2019 tax years, the Department issued guidance in June 2020 stating that Iowa does not conform to the increase in the deduction limitation from 30% to 50%, as enacted under the CARES Act. Iowa's tax statute1 states that its definition of the IRC shall not be construed to include any amendment to the IRC enacted after its existing conformity date (i.e., March 24, 2018, for tax years beginning on or after Jan. 1, 2019), including any amendment with retroactive applicability or effectiveness. (The CARES Act was enacted on March 27, 2020, and thus is not included within the current conformity period for that year.)
Small Business Administration Paycheck Protection Program (PPP): In recently updated FAQs, the Department stated that the proceeds of a PPP loan that is forgiven and excluded from federal gross income under Section 1106 of the CARES Act in a tax year beginning on or after Jan. 1, 2020, also qualifies for exclusion from income for Iowa tax purposes. Because Iowa conformed to the IRC as of March 24, 2018, before 2020, no exclusion existed for PPP loans forgiven in a tax year that began before Jan. 1, 2020. HF 2641 corrected this by stating that, notwithstanding any other provision of Iowa law to the contrary, Iowa will conform to the exclusion from gross income of a forgiven PPP loan under Section 1106 of the CARES Act for any tax year beginning on or after Jan. 1, 2019, and ending after March 27, 2020. Accordingly, taxpayers with fiscal years that began in 2019 that receive PPP loans during 2020 would have forgiven loans for that fiscal year excluded from Iowa tax.
Partnership audit and federal adjustment reporting provisions: HF 2641 creates a procedure to report changes to federal taxable income resulting from the new federal centralized partnership audit regime, which is substantially similar to the Multistate Tax Commission's model uniform statute and regulation. This procedure allows partnerships and certain partners to elect to pay additional Iowa tax, penalty and interest arising from a federal partnership adjustment on behalf of its owners, thereby relieving the owners of the administrative requirement to further report such federal adjustments to Iowa. These provisions are effective for federal partnership adjustments that have a final determination after July 1, 2020.
In addition, HF 2641 establishes that Iowa audits and assessments of, and appeals by, pass-through entities such as partnerships and S corporations will be conducted and determined solely at the entity level through a state partnership representative. HF 2641 also outlines a procedure for reporting those Iowa audit adjustments, similar to the procedure for reporting federal audit adjustments, including the election to pay additional Iowa tax, penalty and interest arising from the Iowa audit adjustment on behalf of its owners. These provisions are effective for tax years beginning on or after Jan. 1, 2020.
For additional information, including a discussion of penalty and other administrative provisions, see Tax Alert 2020-1723.
Significant Oregon Corporate Activity Tax legislative and rule changes
On June 30, 2020 Oregon Governor Kate Brown (D) signed HB 4202, which makes significant technical corrections to the Oregon Corporate Activity Tax (CAT). In addition, at the end of June, the Oregon Department of Revenue (OR DOR) adopted the first of 17 permanent rules related to the CAT.
Key legislative changes in HB 4202 to the CAT law include the following:
On June 28,2020, the OR DOR adopted the first of 17 permanent rules related to the CAT. The rules cover a variety of topics, including the cost subtraction rule and the unitary group rule. A complete listing of these rules can be found on the OR DOR's website accessible through this link. However, given the significant statutory changes to the cost subtraction and unitary group provisions enacted the day after the rules were adopted, taxpayers should carefully examine these rules in comparison to the changes made by the newly enacted legislation. Many of the provisions in these two rules directly conflict with the legislative changes made by HB 4202 (discussed above). The OR DOR indicated that it will start the process to update these two rules to reflect these legislative changes.
For additional information on this development, see Tax Alert 2020-1742.
Georgia: New law (HB 846) does the following:
These changes apply to all tax years beginning on or after Jan. 1, 2019. Ga. Laws 2020, HB 846, signed by the governor on June 30, 2020).
On its webpage "Income Tax Federal Tax Changes" (updated July 8, 2020), the Georgia Department of Revenue (GA DOR) discussed HB 846, noting that for tax years beginning on or after Jan. 1, 2018 and before Jan. 1, 2019, Georgia does not adopt any of the 2019 or 2020 federal changes including those in the CARES Act. Further, Georgia did not adopt changes to the federal NOL provisions or modifications to the IRC §461(l) excess loss limitation rules for noncorporate taxpayers made by the CARES Act.
In regard to NOLs, the following applies:
As for the relaxation of the excess loss limitation rules IRC §461(l) by the CARES Act, the GA DOR said the adjustment is required in the same manner as required prior to enactment of the CARES Act.
The GA DOR further noted that the state has adopted the increase to the IRC §179 deduction to $1,020,000 and the $2,550,000 phaseout but has not adopted the IRC §179(d)(1)(B)(ii) deduction for certain real estate.
Idaho: Gain from an out-of-state corporation's 2010 sale of its interest in a limited liability company (LLC) is not apportionable to Idaho because the gain constitutes nonbusiness income from a passive investment. In so holding, the Idaho Supreme Court (Court) performed a fact-specific analysis under the transactional test and the functional test, finding that between 2003 and 2010, the corporation's sole business was holding its investment in the LLC, and this type of gain is not "business income" under either test. Under the transactional test, the corporation's primary function was holding its interests in the LLC and another business entity as a parent or holding company, and the one-time sale over a seven-year span does not constitute a "regular" trade or business. Under the functional test's operational or passive investment test, the corporation held a passive investment in the LLC when its investment function was limited to mere financial betterment of the corporation in general, and the sale of its interest in the LLC was not "an integral, functional, or operative component to [its] trade or business." Further, under the functional test's unitary business test, the Court found that: (1) the corporation was a parent holding company with no shared control or operations over the LLC; (2) they had no shared centralized management, oversight, or headquarters; (3) they had a high level of separation between them; and (4) the presence of the corporation's founder in both companies as a member of their boards of directors and "high-level executive" did not support a unitary business finding. Noell Industries, Inc. v. Idaho State Tax Comn., No. 46941 (Idaho S.Ct. May 22, 2020).
Illinois: The Illinois Department of Revenue adopted amendments to regulation 86 Ill. Admin. Code §100.2430 clarifying the interaction of the 30% business interest expense limitation rules under IRC § 163(j) and Illinois's related-party interest expense "addback" rules, focusing on the impact on 80/20 companies. In short, the amended regulation applies the federal business interest expense limitation first before determining the Illinois interest expense addback. The amended rule took effect June 10, 2020.
North Carolina: New law (HB 1080) makes the following corporate income tax changes:
The law also decouples from certain CARES Act provisions for individual income tax purposes, including provisions related to NOLs, IRC §163(j), relaxation of the IRC §461(l) excess loss limitation rules for noncorporate taxpayers, PPP loan forgiveness, certain qualified charitable contributions, among other provisions. These changes took effect upon the bill becoming law. N.C. Laws 2020, Sess. Laws 2020-58 (HB 1080), signed by the governor on June 30, 2020.
SALES & USE
Multistate: The EY Sales and Use Tax Quarterly Update provides a summary of the major legislative, administrative, and judicial sales and use tax developments. Highlights of this edition include a review of the most recent developments involving nexus, tax base and exemptions, technology, and compliance and controversy. For a copy of the newsletter, see Tax Alert 2020-1756.
District of Columbia: The budget proposal for FY2021 (B23-760) introduced by the District of Columbia City Council (Council) would expand the DC sales tax base to include sales of advertising services — including digital advertising services — and sales of personal information. Both types of transactions would be subject to tax at a reduced rate of 3%. The proposal to expand the tax base to include digital advertising services is similar to recent legislative proposals introduced in Maryland, New York and Nebraska (note, however, that the Maryland and New York proposals would have enacted a new, separate tax rather than expand the existing sales tax base as offered in the Nebraska proposal). The measure also would repeal most tax benefits associated with the Qualified High Technology Companies tax credit program. The bill for the budget proposal, which is subject to a 30-day review period by Congress, would then be sent to Mayor Muriel Bowser for her consideration. The Mayor has publicly urged the Council to not include any tax increases in the FY2021 budget. B23-760 was introduced on July 6, 2020.
Iowa: An airline that regularly rents multiple hotel rooms in Iowa on a long-term basis for its employees qualifies for Iowa's hotel and motel tax exemption because the airline is the same person that rents the rooms it needs each month for its employees and it rents the rooms for a period of more than 31 consecutive days. In support of this conclusion, the Iowa Department of Revenue (Department) found that the airline rents the lodging when: (1) it obtains the use, possession, or control of the rooms; (2) it contacts the hotel each month regarding the number of rooms it needs for that month; and (3) it is both billed for and pays for the rooms (as opposed to the airline's employees being billed). The Department noted that the same employees do not need to occupy the hotel rooms for the entire period since the airline is the "person" renting the hotel room. In re PSA Airlines, Inc., No. 2019-300-2-0791 (Iowa Dept. of Rev. declaratory order May 12, 2020).
Rhode Island: New law (SB 2650, Sub. A) modifies the definition of "sale", specifically a "sale" related to digital products, to mean "[t]he sale to, or storage, use, or other consumption by, an end-user of specified digital products … , including the right to use the specified digital products on a permanent or less than permanent basis and regardless of whether the purchaser is required to make continued payments for such right." Further, the law provides that "sale" includes any license, lease, or rental of prewritten computer software delivered electronically or by load and leave, vendor-hosted prewritten computer software, and specified digital products. With respect to the term "specified digital products," the law provides that an "end user" includes any person other than a person who receives by contract a product transferred electronically for further broadcast, rebroadcast, transmission, retransmission, licensing, relicensing, distribution, redistribution, or exhibition of the product, in whole or part, to another person. A person that purchases products transferred electronically or the code for specified digital products for the purpose of giving the product or code away, is not considered to have engaged in the distribution or redistribution of such product or code and instead is treated as the end user. These changes took effect upon passage. R.I. Laws 2020, SB 2650, signed by the governor on June 24, 2020.
Tennessee: In response to a revenue ruling request, the Tennessee Department of Revenue advised a company that its sales of on-hold messaging (OHM) services, VideoCast programming (VCP) services, and overhead music (OM) services are subject to sales and use tax as the licensing of specified digital products. The company is required to pay use tax on certain equipment it provides to Tennessee customers at no charge as the company is using the equipment to transfer specified digital products. In addition, separately stated optional weather feeds, news feeds, and stock ticker feeds sold with the company's VCP services are exempt information services, while certain separately stated additional services (i.e., Spanish language programming, radio ad audio conversion, voice prompts, professional writing, etc.) sold as part of the "sales price" of the customized OHM services are subject to tax since such offerings would not be of any value to the customer without being able to obtain the customized recorded messages. Further, VCP services and pre-programmed advertising-free music with optional promotional messages licensed for use as an OM service are taxable, with certain additional services included in the taxable sales price when they would otherwise not be taxable. Tenn. Dept. of Rev., Rev. Ruling No. 20-03 (May 4, 2020).
Georgia: New law (HB 846), effective for tax years beginning on and after Jan. 1, 2020, provides a personal protective equipment (PPE) manufacturer that is qualified to claim a job tax credit under Ga. Code §§ 48-7-40 or 48-7-40.1 an additional $1,250 job tax credit for qualifying jobs to the extent they are engaged in the qualifying activity of manufacturing PPE in Georgia during the tax year. If more than one business activity is conducted at the individual establishment of the business, then only those jobs engaged in the qualifying activity of manufacturing PPE are eligible for the additional job tax credit. The additional job credit is claimed separately from the job credit claimed under Ga. Code §§ 48-7-40 or 48-7-40.1. Unused credit can be carried forward 10 years. No credit can be claimed for any jobs created on or after Jan. 1, 2025. In addition, for tax years beginning in 2020 and 2021, HB 846 allows a business enterprise that in tax year 2019 claimed one of the following tax credits to use the number of new full-time employee jobs that the taxpayers claimed in that year or calculate the number of full-time employee jobs as specified in the specific code section: (1) tax credits for certain business enterprises in less developed counties; or (2) establishing or relocating headquarters tax credit. Ga. Laws 2020, HB 846, signed by the governor on June 30, 2020.
North Carolina: New law (HB 1080) extends the authority of the Economic Investment Committee to make new awards under the Job Development Investment Grant Program to Jan. 1, 2030 (from Jan. 1, 2021). N.C. Laws 2020, Sess. Laws 2020-58 (HB 1080), signed by the governor on June 30, 2020.
Michigan: In considering the valuation of a big-box store on remand from the Michigan Court of Appeals (COA), the Michigan Tax Tribunal (Tribunal) found that the cost-less-depreciation approach was the best technique to determine the true cash value (TCV) of the property for the 2012-2014 tax years at issue based on the testimony and evidence presented, but cautioned that this approach may not be the most appropriate technique to find the TCV for every big-box store. In reaching this conclusion, the Tribunal stated that the COA on remand had not requested a review of the "dark store theory," and the Tribunal could not "debunk or affirm" it. The Tribunal noted that finding the highest and best use (HBU) for a property looks forward to what use the purchaser puts to the property, not the former use by the seller. Accordingly, whether a property is occupied or not when it is sold is not determinative of its HBU. Additionally, after taking more evidence regarding the market effect of deed restrictions as directed by the COA, the Tribunal found that in this case the deed restrictions had a neutral effect on sales price due to "carve-outs" for buyers potentially subject to any deed restriction, and the addition of the deed restriction after a buyer is located. Therefore, based on the findings of fact and conclusions of law, the property was over assessed. The Tribunal rejected the sales comparison approach to valuation, finding that the appraiser's comparable sales were too small, they were not subject to normal market pressures and/or did not sell for the property's HBU, and the sales were not reliably adjusted to reflect their value upon sale for the property's HBU. Menard Inc. v. City of Escanaba, No. 14-001918 (Mich. Tax Trib. May 28, 2020).
North Carolina: New law (HB 1080) provides that if a taxpayer, as a trustee, collects taxes on behalf of North Carolina but fails to remit all the taxes held in trust when due, the period in which the state can propose an assessment is the later of 10 years after the due date of the return or 10 years after the taxpayer filed the return. This provision took effect June 30, 2020 and applies to assessments not barred by the statute of limitations prior to that date. The law also amends the definition of "overdue tax date" to mean any part of a tax debt that remains unpaid 60 days (formerly 90 days) or more after it becomes collectible. This provision does not include a tax debt for which an installment agreement was entered into within 60 days (formerly 90 days) after the tax debt became collectible. N.C. Laws 2020, Sess. Laws 2020-58 (HB 1080), signed by the governor on June 30, 2020.
PAYROLL & EMPLOYMENT TAX
Iowa: On July 2, 2020, Governor Kim Reynolds announced in a press release that she is allocating $490 million of the $1.25 billion of federal funds the state received under the CARES Act toward the state's unemployment insurance (UI) trust fund. This transfer of funds will help to continue to pay UI benefits while also helping to avert an increase in employer UI tax rates in 2021 due to the rise in claims in connection with the COVID-19 emergency. For additional information on this development, see Tax Alert 2020-1754.
Illinois: Recently enacted legislation (HB 2455) provides that Illinois employer accounts will not be charged with unemployment insurance (UI) benefits paid to workers that are directly or indirectly attributable to the COVID-19 emergency. The noncharge provision applies 100% to contributory employers and 50% to reimbursing employers and is effective retroactively to March 15, 2020, through Dec. 31, 2020. The employer must be able to show that the workers' UI benefits are directly or indirectly attributable to the COVID-19 emergency. For additional information on this development, see Tax Alert 2020-1735.
Philadelphia, PA: The City of Philadelphia announced that effective July 1, 2020, the Wage Tax rate for nonresidents is 3.5019%, an increase from the previous rate of 3.4481%. The rate for residents remains unchanged at 3.8712%. For additional information on this development, see Tax Alert 2020-1701.
Seattle, WA: On July 6, 2020, the Seattle City Council approved an ordinance for a "JumpStart" payroll expense tax imposed on businesses operating in Seattle (with some exceptions). The tax will be used to provide services to Seattle's low-income population. The payroll expense tax takes effect on Jan. 1, 2021, with a sunset date of Dec. 31, 2040. The tax rates may be adjusted beginning Jan. 1, 2022, and on January 1 of every year thereafter. For more on this development, see Tax Alert 2020-1736.
Ohio: Newly-enacted and an uncodified provision of Ohio law (Ohio amended Substitute House Bill 481 (HB 481)) provides that the forgiven amount of a Paycheck Protection Program (PPP) loan excluded from gross income for federal income tax purposes under Section 1106(i) of the CARES Act is not subject to the Ohio Commercial Activity Tax (CAT). For additional information on this development, see Tax Alert 2020-1728.
VALUE ADDED TAX
International — Cyprus: The Cypriot Council of Ministers, using the powers provided under Articles 18 and 18A of the Value-Added Tax (VAT) Legislation, has issued a new decree regarding the application of the reduced VAT rate of 5% on hotel accommodation, restaurant and catering and transportation services, amending the Fifth and Twelfth Schedules of the Cypriot VAT legislation. For additional information on this development, see Tax Alert 2020-1750.
International — Indonesia: The Indonesian Director General of Tax (DGT) issued, on June 25, 2020, implementing regulations (DGT Regulations) that provide additional details related to the regulations issued by the Minister of Finance (MOF) (MOF Regulations) on May 5, 2020 with respect to Value-Added Tax (VAT) collection on digital transactions. The DGT Regulations are effective from July 1, 2020 and include: (i) thresholds for appointment of VAT collectors; and (ii) registration, collection, payment and reporting procedures. For additional information on this development, see Tax Alert 2020-1740.
International — United Kingdom: On July 8, 2020, the United Kingdom (UK) Chancellor, Rishi Sunak, delivered his "Summer economic update" in the House of Commons. Aimed at boosting the tourism/hospitality sector following the COVID-19 emergency, the Chancellor announced a targeted reduction on the Value-Added Tax (VAT) rate applied to most tourism and hospitality related activities — from 20% to 5%. This includes supplies of food and non-alcoholic drinks from restaurants, pubs, bars, cafés and similar premises and supplies of accommodation and admission to attractions. The reduction will apply from July 15, 2020 to Jan. 12, 2021. For additional information on this development, see Tax Alert 2020-1751.
Multistate: On July 28, 2020 from 4:00-5:00 (ET), Ernst & Young LLP (EY) will host a webcast on teleworker tax implications during the COVID-19 emergency 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 Iowa Code Section 422.32(2)(h)(1).