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Ernst & Young's State and Local Tax Weekly newsletter for July 17 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.

EY's state guide to COVID-19 payroll and employment tax provisions, updated through July 8, 2020, is available here.

TOP STORIES

California "split roll" property tax measure qualifies for November 2020 ballot

California Proposition 15 (formerly Ballot Measure 19-0008A1) has qualified to appear on the statewide general election ballot on Nov. 3, 2020. If passed, Proposition 15 would amend Article XIIIA of the California constitution (Proposition 13) to require local county property tax assessors to value most commercial and industrial real property at fair market value on a regular cycle while maintaining the 2% annual base year value limitation for residential property. If approved, eliminating the restrictions on the valuation of real property used for commercial and industrial real estate located in California will likely result in increased property taxes for real estate that has not been subject to fair market valuation due to a change of ownership in recent years or new construction.

Adopted by California voters in 1978, Proposition 13 established an event-based system of real property assessment under which all real property in California is assigned a "base year" value that reflects fair market value at the time of purchase or new construction. Increases on this "base year value" are limited to no more than 2% annually, absent a subsequent change in ownership or new construction. This maximum annual increase typically falls below historical rates of appreciation for real property in California, so assessed values often lie significantly below market value, especially when property has been held for many years by the same owner.

Proposition 15 is commonly known as a "split roll" initiative because it proposes different assessment systems for different property classifications. If approved by California's voters, Proposition 15 will subject commercial and industrial real property to cyclical reassessments to market value while retaining Proposition 13 protections for other real property (primarily residential real property). Initial reassessments will be phased-in over a period of at least two years, beginning with the 2022-23 fiscal year. Affected owners will be obligated to pay taxes based on new assessed values only after the assessor has completed the reassessment. After the initial reassessment, Proposition 15 requires cyclical market value reassessments of affected commercial and industrial property to occur no less frequently than every three years.

For additional information on this development, see Tax Alert 2020-1757.

INCOME/FRANCHISE

Federal: On July 9, 2020, the US Department of the Treasury and the IRS released final regulations under IRC § 250 (Treasury Decision 9901) for calculating the deduction allowed to a domestic corporation for its foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI). The final regulations are scheduled for publication in the Federal Register on July 15, 2020. State taxpayers with FDII or GILTI income should be aware of the final regulations as they apply for states which follow either regime. For more information on this development, see Tax Alert 2020-1795.

Colorado: New law (HB 1420) decouples Colorado's income tax law from some of the most significant modifications to the federal tax law enacted by the Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136) (CARES Act) including: (1) modifying the federal income tax rules for net operating losses (NOLs) by restoring an NOL carryback and extending it to five years; (2) eliminating the 80% net income offset limitation for NOLs; (3) for individual taxpayers, eliminating the excess loss limitation rules under IRC §461(l); and (4) relaxing the limitations on the business interest expense deductions under IRC §163(j). In addition, the law further provides that for NOLs incurred after Dec. 31, 2017, the 80% limitation adopted under the Tax Cuts and Jobs Act (P.L. 115-97) applies without regard to the changes made by the CARES Act. Colo. Laws 2020, HB 1420, signed by the governor on July 11, 2020.

Connecticut: The Connecticut Department of Revenue Services (CT DRS) issued guidance on the implications of the federal Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136) (CARES Act) for Connecticut tax purposes, including specific guidance on depreciation of qualified improvement property (QIP). The CT DRS advised that the amount of loan forgiven under the Paycheck Protection Program under Section 1106(i) of the CARES Act is not subject to Connecticut corporation business tax (CBT) or individual income tax. The CT DRS further explained that the CARES Act's five-year net operating loss (NOL) provisions do not impact Connecticut NOLs for CBT purposes because Connecticut follows its own, specific NOL rules. For individual income tax purposes, however, federal NOL carrybacks are applied consistent with the Connecticut Tax Court ruling in Adams v. Sullivan¹ and are subject to Conn. Gen. Stat. §12-727(b). In regard to the excess business loss limitation under IRC § 461(l), CT DRS stated that Connecticut law does not provide for specific modification related to this provision for purposes of calculating Connecticut adjusted gross income (AGI). Thus, the Connecticut individual income tax treatment of this limitation will depend on the extent the limitation increases or decreases federal AGI. Lastly, the CT DRS said that for purposes of the CBT "Connecticut conforms to the changes made to the depreciable life of QIP by the CARES Act, but does not conform to the ability to claim bonus depreciation on such assets." See CT DRS, OCG-10 "Office of the Commissioner Guidance Regarding the Connecticut Tax Implications of the CARES Act" (July 6, 2020) and CT DRS, OCG-11 "Regarding Depreciation of Qualified Improvement Property for Connecticut Tax Purposes" (July 6, 2020).

Mississippi: New law (HB 1748) amends the definition of "gross income" to exclude amounts received as loans, advances and/or grants under the Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136) (CARES Act); cancellation of indebtedness income provided for under the CARES Act; amounts received as payments under the federal Paycheck Protection Program (PPP) that are forgiven under Section 1106(i) of the CARES Act; and amounts received as grants under the 2020 COVID-19 MS Business Assistance Act. The law also clarifies that no deduction is allowed for otherwise deductible payments paid with PPP funds, but only to the extent those payments are not allowed as deductions for federal income tax purposes. To the extent such payments are allowed to be deducted for federal income tax purposes, such expenses will be deemed to have been incurred in connection with earning and distributing taxable income, notwithstanding that such payments resulted from forgiven loans. These changes took effect and are in force from and after Jan. 1, 2020. Miss. Laws 2020, HB 1748, signed by the governor on June 30, 2020.

New York: In reversing an administrative law judge's ruling, the New York Tax Appeals Tribunal (Tribunal) held that based on circumstances of this case, the retroactive application of 2010 Amendments to a law requiring a nonresident S corporation shareholder to treat the sale of stock subject to an IRC § 338(h)(10) election as the sale of assets and apportion proceeds to New York violated the shareholder's rights to due process under the US and New York Constitutions. In so holding, the Tribunal applied the Replan² balancing of the equities test, finding that: (1) the shareholder chose to forego including any increased New York tax liability based on the election in purchase agreement negotiations, and reasonably relied, to his detriment, on the final Tribunal decision in Baum³ — this weighed against the constitutionality of the retroactive application of the statute; (2) the one-year retroactive period from the time of the purchase agreement execution until the 2010 Amendments weighed in favor of the constitutionality of the retroactive application of the statute; and (3) the integrity of the finality of Tribunal decisions as a public policy weighed against the constitutionality of the 2010 Amendments' retroactive application over the legislature's public purpose of correcting a Tribunal mistake. In its analysis, the Tribunal distinguished Caprio and Luizza,⁴ in which it had found it unreasonable for the taxpayers in those cases to rely on their interpretation of the current status of the law, as opposed to the shareholder in this case who reasonably relied upon the Tribunal's final decision in Baum. In re Petition of Franklin C. Lewis, DTA No. 827791 (NY Tax App. Trib. May 21, 2020).

Philadelphia, PA: The Philadelphia Department of Revenue said the city does not conform to the federal treatment of net operating losses (NOLs), including those amendments to the federal NOL rules made by the Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136) (CARES Act), for purposes of the Business Income and Receipts Tax on net income (Method II filers). City of Philadelphia Dept. of Rev., "Federal CARES Act — NOLs guidance" (June 26, 2020).

SALES & USE

Alaska: The Alaska Remote Seller Sales Tax Commission (Commission) passed its streamlined Uniform Code applicable to remote sellers and marketplace facilitators (Alaska Municipal Uniform Code). Th Alaska Municipal Uniform Code accommodates individual rates and exemptions of multiple jurisdictions within Alaska, "with single-level, statewide administration." The Commission provides tax authority-approved software that includes rates and exemptions attached to geographic information system (GIS)-mapped delivery, and software that provides a single access point for filing returns and remittance, including batch returns. Remote sellers or marketplace facilitators that meet the criteria threshold set in the Alaska Municipal Uniform Code are encouraged to register immediately through the registration, returns and remittance portal. Additionally, a tax look-up map is available and is being updated as Alaska municipality members adopt the Alaska Municipal Uniform Code. Click here for a list of jurisdictions that have adopted the Alaska Municipal Uniform Code. Remote sellers have 30 days from the listed effective date to begin collecting and remitting tax in the municipal member jurisdictions. Alaska Remote Seller Sales Tax Comn., Info. Portal (last visited July 17, 2020); Alaska Remote Seller Sales Tax Comn., Notice to Register for Remote/Marketplace Facilitator Sales into Alaska (last visited July 17, 2020).

Arkansas: In response to a legal opinion request, the Arkansas Department of Finance and Administration (Department) determined that a food delivery business is a marketplace facilitator that must collect and remit sales tax on the gross receipts from sales of food ordered through its website, but is not required to collect and remit tax on the 20% commissions earned from the restaurants listed on its website. Once the business exceeds 200 transactions or $100,000 in taxable sales, it will be required to collect and remit sales tax on the gross receipts from its website purchases. These purchases are sourced to the purchaser's location of receipts. Lastly, the Department determined that the 20% commission restaurants pay to the business for the exclusivity of being listed on its website is not an enumerated service subject to sales tax. Ark. Dept. of Fin. and Admin., Op. 20200301 (May 15, 2020).

New York: A graphic arts packaging company's receipts from sales of comprehensive layouts (comps), designs and/or prototypes delivered in tangible form to customers in New York, including the integral components of design costs and other expenses, are subject to state and local sales taxes unless the sales of tangible personal property are otherwise exempt. The design services are subject to tax regardless of whether such charges are separately stated. Tax must be collected based on the state and local rates in effect at the place where the company delivers the tangible personal property to its customer. No tax is required to be collected on tangible personal property delivered outside of New York or delivered in electronic format regardless of whether delivery is in-state or out-of-state. Lastly, if the entity delivers comps to a customer electronically and later delivers a tangible copy of it for a separately stated charge, such separately stated charge (not the charge for the entire comp) is subject to tax, unless another exemption applies. N.Y. Dept. of Taxn. and Fin., TSB-A-20(8)S (May 26, 2020).

North Carolina: New law (HB 1080) amends North Carolina's sales and use tax laws related to marketplace facilitators and digital property and requires certain retailers to remit local meals tax on prepared food and beverages. The law broadens the scope of the marketplace facilitator provisions under N.C. Gen. Stat. §105-164.4J by expressly replacing the economic and transaction thresholds (i.e., more than $100,000 in gross sales, or 200 or more separate transactions) with an "engaged in business in this State" standard. As currently defined under N.C. Gen. Stat. §105-164.3(65), "engaged in business" includes such activities as making a remote sale (which contains similar economic and transaction thresholds described above) or "maintaining, occupying, or using permanently or temporarily, directly or indirectly, or through a subsidiary or agent, … any office, place of distribution, sales or sample room, warehouse or storage place, or other place of business in the state." This change took effect July 1, 2020 and applies to sales occurring on or after this date. Effective June 30, 2020, the law treats the sale at retail or the use, storage, or consumption (collectively, sale or use) in North Carolina of digital code the same as the sale or use in North Carolina of certain digital property for which the digital code relates. Lastly, applicable to sales occurring on or after July 1, 2020, a retailer required to remit state and local sales and use tax to the North Carolina Department of Revenue also is required to remit the local meals tax on prepared food and beverages to the taxing county. This requirement will apply only in the localities that levy a meals tax, which are: Dare County (Cape Hatteras area of North Carolina), Wake County (Raleigh area), Mecklenburg County (Charlotte area), Cumberland County (Fayetteville area) and the Town of Hillsborough. N.C. Laws 2020, Sess. Laws 2020-58 (HB 1080), signed by the governor on June 30, 2020.

North Carolina: In response to a private letter ruling request, the North Carolina Department of Revenue (Department) found that a medical manufacturer and distributor's sales of three kinds of regenerative stimulators approved by the US Food and Drug Administration to stimulate bone growth are exempt from sales and use tax as prosthetic devices since the devices are worn externally on the human body to correct a physical deformity or malfunction. The Department noted that the Streamlined Sales Tax Health Care Item List provides that member states, of which North Carolina is a member, should classify externally worn bone growth stimulators as prosthetic devices. N.C. Dept. of Rev., Private Letter Ruling Request, SUPLR 2020–0010 (April 9, 2020).

Tennessee: New law (SB 2932) modifies economic nexus thresholds for remote sellers and marketplace facilitators, reducing the amount of sales into the state threshold from $500,000 to $100,000 during the previous 12-month period. Taxpayers meeting the threshold are required to collect and remit the tax by the first day of the third calendar month following the month in which the threshold was met, but tax is not required to be collected for sales made before Oct. 1, 2020. Tenn. Laws 2020, ch. 759 (SB 2932), signed by the governor on June 30, 2020. See also, Tenn. Dept. of Rev., Notice #20-14 "New Filing Threshold for Out-of-State Dealers" (July 2020), Notice #20-15 "Marketplace Facilitators" (July 2020), and FAQs.

BUSINESS INCENTIVES

Colorado: New law (HB 1003) extends to Jan. 1, 2026 (from Jan. 1, 2021) the Rural Jump-Start Zone Program (Program), and modifies certain Program requirements. The amendments permit an "economic development organization" to participate in the Program by working with new businesses with which the economic development organization's mission and activities align and then helping the new business to apply for Program acceptance from the state. (Currently, only state institutions of higher education are eligible to hold that role.) Additionally, amendments to the definition of "new business" require that at the time a new business submits its application for Program participation, it must not directly compete with the core function of a business that is operating in the Rural Jump-Start Zone in which the new business will be located and in a distressed county contiguous to that particular Zone. HB 1003 takes effect Sept. 14, 2020. Colo. Laws 2020, ch. 234 (HB 1003), signed by the governor on July 6, 2020.

Colorado: New law (HB 1177) reduces the amount of the income tax credit available to a taxpayer that makes a monetary or in-kind contribution to implement the economic development plan for the enterprise zone to 25% (previously 50%) of the total value of the contribution as certified by the person or agency designated by the Colorado economic development commission as the enterprise zone administrator. The law also moves certain incorrectly placed cross references in the state law code sections permitting an investment tax credit in enterprise zones and a credit for new enterprise zone business employees and it deletes obsolete provisions. The bill states that it is effective 90 days after the final adjournment of the general assembly, which based on the date the general assembly adjourned is Sept. 14, 2020. (The general assembly's 2020 Session Laws webpage, however, lists the bill's effective date as June 23, 2020.) Colo. Laws 2020, ch. 118 (HB 1177), signed by the governor on June 23, 2020.

Pennsylvania: In a matter of first impression, the Pennsylvania Commonwealth Court (court) held that the plain statutory language of the Keystone Opportunity Zone, Keystone Opportunity Expansion Zone and Keystone Opportunity Improvement Act (KOZ Act) permits a corporation to relocate from a zone in which the KOZ tax benefits have expired into an "active zone." In so holding, the court found that the KOZ Act does not restrict or penalize a qualified business from such relocations, and that the Pennsylvania Department of Community and Economic Development exceeded its authority in prohibiting such a move based on the KOZ Act's silence on the issue. Dechert LLP v. Pa. Dept. of Comm. and Economic Dev., No. 442 M.D. 2019 (Pa. Cmwlth. Ct. June 23, 2020).

PROPERTY TAX

Florida: A Florida District Court of Appeal (Court) found that while the trial court did not err in rejecting a county appraiser's use of the Rushmore method to determine a resort's ancillary income figure used in assessing the resort's real property, it did err in conducting its own reassessment. In so holding, the Court held the application of the Rushmore method violates the Florida Constitution because it does not remove the nontaxable, intangible business value from an assessment. In regard to the reassessment, the Court found that although the trial court used testimony and evidence presented in the case to reassess the resort property under an income capitalization approach it was nevertheless invalid without competent substantial evidence to support the resort's assessment of the value of the restaurant, retail, and spa spaces, which the trial court had adopted. Therefore, the trial court should have remanded the case to the appraiser for reassessment, and on remand, the appraiser should not use the Rushmore method in its reassessment. Ultimately, the Court reversed and remanded the case with instructions. Singh v. Walt Disney Parks & Resorts US, Inc., No. 5D18-2927 (Fla. Dist. Ct. App., Fifth Dist., June 19, 2020).

COMPLIANCE & REPORTING

Oregon: Taxpayers must make their second payment for Oregon 's new Corporate Activity Tax (CAT) by July 31, 2020. Taxpayers that have "substantial nexus" with Oregon must pay taxes on their Oregon commercial activity. Commercial activity generally means a person's or unitary group's total amount realized from transactions and activity in the regular course of its trade or business in Oregon, without deducting expenses incurred. Commercial activity is sourced to Oregon under market-based sourcing rules. For additional information on this development, see Tax Alert 2020-1834.

CONTROVERSY

Washington: The Washington Department of Revenue (Department) temporarily expanded eligibility criteria for its Voluntary Disclosure Agreement (VDA) Program, effective July 15, 2020 through Nov. 30, 2020. There are exceptions for sales and use taxes related to remote sellers as well as collected but not submitted sales tax. Under the temporarily expanded program, the following businesses are eligible for the VDA Program: (1) businesses that closed their tax registration before Jan. 1, 2020, including those that have previously filed tax returns; (2) businesses placed on Active Non-Reporting status before Jan. 1, 2020; (3) businesses whose most recent enforcement contact was before July 1, 2019, except that those the Department has contacted at any time regarding Wayfair, marketplace fairness, or remote seller relief do not qualify for such relief; and (4) businesses that have not been named as an affiliate of another business through an enforcement contact. VDA Program requests under the expanded program must be submitted through the Department's online application by Nov. 30, 2020, with disclosure of the business' name within 15 days of application and no later than Nov. 30, 2020. Full payment of amounts due must be paid within 30 days of the assessment issue date. The expanded VDA Program does not apply to collected but not submitted sales tax — an unlimited look back period and 29% late payment of a return penalty applies to such taxes. Wash. Dept. of Rev., Voluntary disclosure program temporarily expanded (last visited July 6, 2020).

PAYROLL & EMPLOYMENT TAX

Multistate: As of July 1, 2020, 13 jurisdictions (i.e., California, Colorado, Delaware, Hawaii, Illinois, Kentucky, Massachusetts, Minnesota, New York, Ohio, Texas, the Virgin Islands and West Virginia) have applied for and been approved to receive federal unemployment insurance (UI) Title XII advances (UI loans). Connecticut had previously received approval for a UI loan but has since been removed from the list. As of July 1, 2020, California, Illinois, Kentucky, Massachusetts, New York, Ohio, and Texas currently have outstanding federal UI loan balances. The Virgin Islands continues to carry a federal loan balance on a loan that has existed since 2009. For additional information on this development, see Tax Alert 2020-1724.

California: Recently enacted fiscal year 2021 budget legislation (AB 103) provides that, through Dec. 31, 2020, contributory employer unemployment insurance (UI) accounts will not be charged for UI benefits paid as a direct result of the COVID-19 emergency.For more on this development, see Tax Alert 2020-1715.

Idaho: To encourage workers to return to work as businesses reopen following the COVID-19 shutdown, Idaho Governor Brad Little ordered the creation of the Idaho Return to Work program that provides bonuses of up to $1,500 for employees currently receiving unemployment insurance (UI) benefits due to the COVID-19 emergency and who return to work. For more on this development, see Tax Alert 2020-1714.

Missouri: The Missouri Department of Labor & Industrial Relations announced that unemployment insurance (UI) benefits paid to workers under an approved shared-work plan will not be charged against employers' accounts through Dec. 26, 2020. Missouri has had a shared-work program for more than 30 years and employers are typically charged with the UI benefits paid to employees under the program. However, the federal Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136) (CARES Act) provides that states are allowed to waive UI benefit charges to employer accounts through December 2020. For more on this development, see Tax Alert 2020-1709.

New Mexico: New law (HB 6) enacted on June 29, 2020 waives interest and penalties for failure to pay several New Mexico state taxes during the COVID-19 pandemic, including income, corporate, gross receipts and employer withholding taxes. Under the law, failure to make withholding tax payments due March 25, 2020 through July 25, 2020 will not result in the imposition of interest and penalties if paid by April 25, 2021. N.M. Laws 2020 (First Special Sess.), ch. 4 (HB 6), signed by the governor on June 29, 2020. For additional information on this development, see Tax Alert 2020-1716.

GLOBAL TRADE

Federal — French DST Retaliation: On July 10, 2020, the United States (US) Trade Representative (USTR) announced that the US would take action against France's Digital Services Tax (DST) in the form of an additional 25% ad valorem duty on specified French-origin goods. The tariffs are scheduled to take effect on Jan. 6, 2021, 180 days after the determination of action. The list covers 21 tariff subheadings, with an estimated trade value for calendar year 2019 of approximately US$1.3 billion. Targeted items include cosmetics and handbags. The announcement comes after the US withdrew from negotiations regarding DSTs at the Organisation of Economic Co-operation and Development (OECD) level in June 2020. For additional information on this development, see Tax Alert 2020-1784.

International — European Commission: The European Commission published, on June 12, 2020, Commission Delegated Regulation (EU) 2020/760, regarding new rules for import tariff quotas subject to import licenses which will apply as of Jan. 1, 2021. Under the new rules operators may, in principle, only apply for tariff quotas where they are not linked with other operators applying for the same tariff quota order number. This prevents the current practice whereby several linked operators separately apply for import tariff quotas. As a result, companies may, as of Jan. 1, 2021, benefit from a full or partial suspension of import duties for only a limited quantity of products. Tax Alert 2020-1813 summarizes the new rules and how these might impact existing trade practices of companies importing agricultural products.

International - European Union: On July 9, 2020, the European Court of Justice (ECJ) published its decision in the court case named "'Curtis Balkan' EOOD." The ECJ ruled that royalties paid by the buyer to its parent company for the supply of the know-how required for the manufacture of the finished products in the European Union (EU), might be added to the customs value of imported semi-finished products if certain conditions are fulfilled. For additional information on this development, see Tax Alert 2020-1801.

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.

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ENDNOTES

¹ Adams v. Sullivan, 2014 WL 4413427 (Conn. Super. Ct. July 24, 2014).

² Matter of Replan Dev. v. Dept. of Hous. Preserv. & Dev. of City of N.Y., 70 NY2d 451 (1987), appeal dismissed, 485 U.S. 950 (1988).

³ Matter of Baum (N.Y. Tax App. Trib. (Feb. 12, 2009)).

⁴ Caprio v. N.Y. State Dept. of Taxn. & Fin., 24 NY3d 744 (2015); rearg. denied 26 NY3d 955 (2015); Matter of Luizza, (N.Y, Tax App. Trib. (March 29, 2016)).