August 6, 2020 State and Local Tax Weekly for July 24 Ernst & Young's State and Local Tax Weekly newsletter for July 24 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 emergency 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. TOP STORIES New York State issues draft regulations on net operating losses The New York State (NYS) Department of Taxation and Finance (Tax Department) has posted for comment new draft corporate franchise tax regulations under Article 9-A of the New York Tax Law (to be codified at N.Y. Comp. Codes and Regs. tit. 20, Subparts 3-10.1 through 3-10.8), which would add rules on the NYS corporate income tax treatment of net operating losses (NOLs) and NOL deductions (NOLDs) for tax years beginning on or after Jan. 1, 2015 (hereafter, draft regulations). These draft regulations, if finalized, would repeal existing regulations related to NOLDs under N.Y. Comp. Codes and Regs. tit. 20, Subpart 3-8.1 through 3-8.9, but the repealed regulations would still apply to tax years beginning before Jan. 1, 2015. The Tax Department has requested comments on the draft regulations by Oct. 5, 2020, but said on its website that it may still consider comments submitted after the due date. The draft regulations contain examples explaining the new rules, including:
For additional information on this development, see Tax Alert 2020-1842. Delaware Chancery Court finds state's unclaimed property information requests too expansive, rejects enforcement of subpoena as abuse of court's process In Delaware Department of Finance v. AT&T, Inc.,1 the Delaware Court of Chancery (Court) threw out a subpoena issued to AT&T, Inc. (AT&T) by the Delaware Department of Finance (Department) on behalf of a third-party unclaimed property audit firm. While agreeing that the State Escheator was authorized to issue the subpoena, the Court held that enforcing such an expansive subpoena would be an abuse of the Court's process. In reaching its conclusion, the Court found that the subpoena was expansive in terms of both the time it covered (requesting checks and rebates going back to 1992) and its subject matter (seeking information about property the Department cannot escheat). In quashing the subpoena, the Court expressed concern regarding the subpoena's preparation. The Court found that the Department delegated its unclaimed property investigation to a third-party unclaimed property audit firm retained by the Department on a contingency-fee basis (hereafter, audit firm), and that the audit firm drafted requests and conducted the investigation without the Department's meaningful involvement. The Court further noted that this case fits into a larger controversy about unclaimed property, as several courts have criticized state escheat laws on the grounds that they are being used to raise revenue rather than their purported purpose of finding and safeguarding abandoned property for the owners' benefit.2 For more on this development, see Tax Alert 2020-1858. INCOME/FRANCHISE Kentucky: In its COVID-19 Relief FAQs, the Kentucky Department of Revenue in response to the question of whether the presence of an employee working in Kentucky due to COVID-19 related restriction will create nexus for Kentucky income tax purposes said that it "will continue reviewing Kentucky state income tax nexus determinations on a case-by-case basis." FAQs last accessed July 24, 2020. Kentucky: In its COVID-19 Relief FAQs posted to its website, the Kentucky Department of Revenue (KY DOR) responds to questions regarding the state's conformity to various changes made by the Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136) (CARES Act). In regard to CARES Act changes to net operating losses (NOLs), the KY DOR stated that Kentucky does not recognize the five-year NOL carryback or the suspension of the 80% limitation on utilization of NOLs provided for under the CARES Act for federal NOLs. Further, it stated that Kentucky does not conform to the increase to the percentage limitation of applicable taxable income for computing the net business interest expense limitation under IRC §163(j) or the relaxation of the IRC §461(l) excess loss limitation rules for noncorporate taxpayers. On the other hand, the KY DOR stated that Kentucky will follow the federal income tax treatment of a forgiven Paycheck Protection Program (PPP) loan under section 1106 of the CARES Act; thus, the amount excluded from gross income for federal income tax purposes also is excluded for Kentucky income tax purposes. Further, the KY DOR stated that Kentucky follows the provisions of IRC Notice 2020-32 addressing limitations on the deductibility of certain business expenses by PPP borrowers. Accordingly, certain otherwise deductible business expenses incurred by a business related to a forgiven PPP loan "are not deductible on a Kentucky return because the expenses are now allocable to tax-exempt income." FAQs last accessed July 24, 2020. Louisiana: New law (SB 6) temporarily suspends the initial corporation franchise tax and the corporation franchise tax on the first $300,000 of taxable capital for small business corporations. The temporary suspension applies to tax periods beginning between July 1, 2020 and June 30, 2021. For purposes of this provision, a "small business corporation" is a business subject to the corporation franchise tax and that has taxable capital of $1 million or less. La. Laws 2020 (First Extra. Sess.), Act 15 (SB 6), signed by the governor on July 13, 2020. Maine: The Maine Revenue Services (MRS) issued guidance on nonconformity to certain federal law changes made by the Families First Coronavirus Response Act (P.L. 116-127) (FFCRA) and the Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136) (CARES Act), including specific guidance on nonconformity to select federal provisions the MRS deems "likely to be of interest to most Maine taxpayers and their advisers." The MRS noted that since the state currently conforms to the IRC as amended through Dec. 31, 2019, taxpayers that filed returns for 2018 or 2019 may have to file amended income tax returns. For both corporate and individual income tax purposes, MRS stated that Maine does not conform to the federal depreciation rule changes related to qualified improvement property or to the suspension of the 80% limitation on net operating losses under the CARES Act. In addition, the MRS stated that for corporate and individual income tax purposes the state does not conform to other federal income and expense changes, including the increase under the CARES Act of the percentage limitation for applicable taxable income for computing the net business interest expense limitation under IRC §163(j) or the relaxation of the IRC §461(l) excess loss limitation rules for noncorporate taxpayers, and the amount of covered Paycheck Protection Program loan forgiveness excluded from federal adjusted gross income under section 1106 of the CARES Act. Maine Tax Alert, Volume 30, Issue 15 (July 2020). Massachusetts: The Massachusetts Department of Revenue (MA DOR) issued a final technical information release addressing the impact of the federal Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136) (CARES Act) on Massachusetts corporate excise and personal income taxes. In regard to the treatment of covered Paycheck Protection Program (PPP) loan forgiveness excluded from federal income tax, the MA DOR stated that Massachusetts will follow the federal treatment for corporate excise tax but not for personal income tax purposes. Thus, amounts excluded for federal income tax purposes are excluded for corporate excise tax purposes but would be taxable for personal income tax purposes. The TIR also provides that Massachusetts does not conform to the changes made by the CARES Act to net operating losses although Massachusetts will conform to the changes made to the percentage limitation on business interest deductions under IRC § 163(j), "subject to the rules outlined in TIR 19-17," and to the changes to depreciable life of qualified improvement property (QIP). However, the TIR cautions that because the commonwealth has decoupled from the bonus depreciation rules in IRC § 168(k), the Massachusetts depreciation deduction for QIP must be calculated under IRC § 168 without regard to IRC § 168(k). For personal income tax purposes, Massachusetts generally follows the IRC as amended on Jan. 1, 2005, and as such MA DOR stated the commonwealth does not adopt the relaxation of the IRC §461(l) excess loss limitation rules for noncorporate taxpayers. Other issues for personal income tax purposes addressed by the TIR include tax refundable recovery rebate credits; unemployment compensation; changes related to retirement plans and charitable contributions; exclusion for certain employer payments of student loans; modification of limitation on losses for taxpayers other than corporations; changes to health savings accounts, flexible spending accounts, and Archer medical savings accounts. Mass. Dept. of Rev., TIR 20-9: Massachusetts Tax Implications of Selected Provisions of the Federal CARES Act (July 13, 2020). SALES & USE Arkansas: In response to a legal opinion request, the Arkansas Department of Finance and Administration determined that a direct primary care clinic's gross receipts from membership/per visit fees for medical services are not subject to Arkansas sales and use tax because the services are not specifically enumerated taxable services. The clinic, which provides such services as check-ups, primary care visits, blood and pregnancy tests, EKG's with interpretation, rapid strep tests, among other services, is a medical office, and not a health spa, health club or fitness club. Further, none of the services the clinic provides would be characterized as provided by a health spa, health club or fitness club. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20180126 (May 13, 2020). Illinois: An Illinois Appellate Court (Court) held that a consumer electronics and appliance retailer's sales of appliances that it later installs is subject to the retail occupancy tax (ROT), because for these sales the retailer is a retailer and not a contractor. In so holding, the Court rejected the retailer's arguments that "the substance of the transaction test" does not apply because (1) when it installs certain built-in appliances it is a construction contractor (and as such not obligated to collect and remit tax), (2) the sale of the built-in appliances are incidental to the installation contract, and (3) the built-in appliances are incorporated into real estate. Considering the substance of the transaction, the Court determined that the sales of various built-in appliances have substantial value to purchasers even without installation services and that the installation services are incidental to the sale. Thus, the substance of the transaction test establishes that the retailer in this case is a retailer, not a construction contractor. The Court further determined that the lower court did not err in finding that the built-in appliances were not permanently affixed to and an integral part of the real estate, when customers were required to have an existing appliance that the retailer would replace. Such requirement, the Court reasoned, "fatally undermine[s] any characterization of either permanency or integrality." The Court noted that the retailer's citations to various unrelated "private letter rulings," "general information letters," and a "compliance alert" from the Illinois Department of Revenue in support of its case did not bind the Department and had no persuasive weight. Lastly, the Court rejected the retailer's argument that imposition of the tax violates the Illinois Constitution's Uniformity Clause. Best Buy Stores, LP v. Ill. Dept. of Rev., 2020 IL App (1st) 191680-U (Ill. App. Ct., 5th Div., June 30, 2020) (not to be cited as precedent). Louisiana: New law (HB 11) modifies the amount of compensation for persons required to collect and remit state sales and use tax, allowing 1.05% (from 0.935%) of the amount of tax due and accounted for and remitted to the state. The amount of compensation a dealer is allowed to deduct and retain shall not exceed $1,500 per month. This change takes effect Aug. 1, 2020. La. Laws 2020 (First Extraordinary Sess.), Act 27 (HB 11), signed by the governor on July 13, 2020. Michigan: The Michigan Department of Treasury (MI DOT) issued guidance explaining the applicability of the sales and use tax industrial processing exemption to personal protective equipment (PPE) and safety equipment used to prevent the spread of infectious disease, including COVID-19. According to the MI DOT "PPE or safety equipment purchased by a person eligible for the industrial processing exemption is exempt if used or consumed in an exempt industrial processing activity, as it is "equipment … used" or "property … consumed," in an industrial processing activity" (footnotes excluded). Specifically, PPE or safety equipment is eligible for the SUT exemption if it meets all of the following conditions: (1) it is purchased by the industrial processor or another person engaged in an industrial processing activity on behalf of an industrial processor, including purchases made directly by an employee of an industrial processor; (2) it is used for the safety of employees or other authorized personnel; and (3) it is used in an industrial processing activity. If it is used for both exempt and nonexempt activities, the exemption will be apportioned based on the percentage of exempt use to total use determined by a reasonable formula approved by the MI DOT. The Revenue Administrative Bulletin includes examples. Mich. Dept. of Treas., RAB 2020-9 Sales And Use Tax Industrial Processing Exemption Related To Infectious Disease Personal Protective Equipment And Safety Equipment (approved July 20, 2020). BUSINESS INCENTIVES Florida: New law (SB 664), beginning July 1, 2020, provides that the state cannot approve an economic development incentive application unless the application includes proof that the applying business is registered with and uses the E-Verify system operated by the U.S. Department of Homeland Security to verify the work authorization status of all newly hired employees. If an awardee is determined to be noncompliant, the awardee must repay all economic development incentive money to the Florida Department of Economic Opportunity within 30 days after the final determination. Fla. Laws 2020, ch. 2020-149 (SB 664), signed by the governor on June 30, 2020. Virginia: The Virginia Department of Taxation issued guidelines for claiming the Virginia Research and Development (R&D) Expenses Tax Credit, effective for tax years beginning on or after Jan. 1, 2020. The credit, which is available for conducting qualified R&D in Virginia, is refundable and can be claimed against the individual and corporate income taxes. It is allowed in the same calendar year in which qualified R&D expenses are reported on the federal income tax return according to the taxpayer's accounting method. The guidelines provide a general overview of the credit and describes the requirements to qualify for the credit, the primary and simplified methods of computing the credit and the application and filing requirements for the credit (including information for fiscal year filers with examples, information related to pass-through entities, and documentation and record keeping information). Beginning with applications due in 2020, the filing deadline is September 1. The guidelines include illustrative examples. The R&D expenses tax credit guidelines are separate from the Major R&D Expenses Tax Credit Guidelines. Va. Dept. of Taxn., Pub. Doc. Ruling No. 20-120 Research and Development Expenses Tax Credit Guidelines (July 7, 2020). CONTROVERSY California: The California Court of Appeal (Court) affirmed that San Francisco's Proposition C initiative, "Additional Business Taxes to Fund Homeless Services," was validly enacted through the people's initiative power because a majority (61%) of San Francisco voters who cast ballots in Nov. 2018 approved it. In reaching this conclusion, the Court cited two California Supreme Court cases3 and found that supermajority vote requirements added to the California Constitution by Proposition 13 in 1978 (Art. XIII A, § 4) and Proposition 218 in 1996 (Art. XIII C, § 2) did not apply to the people's power to enact initiatives by majority vote. City and Cnty. of San Francisco v. All Persons Interested in re: Prop. C, No. A158645 (Cal. Ct. App., 1st App. Dist., Div. 4, June 30, 2020). Maryland: A 2014 budget reconciliation law's limitation of interest paid on refunds stemming from the U.S. Supreme Court's decision in Wynne4 to the prime rate of interest charged by banks (3%) instead of the minimum 13% rate Maryland law required for other refunds at the time does not violate the dormant Commerce Clause. In so holding, the Court of Appeals of Maryland (Court) found that the interest at issue (i.e., the remedy for a previous constitutional violation) satisfied McKesson5and that the taxpayers did not establish that the limitation was discriminatory in effect, without showing how it disadvantaged interstate commerce or engaged in economic protectionism. Specifically, distinguishing a tax from the interest paid on a tax refund, the Court found the interest paid on tax refunds was too attenuated from interstate commerce to substantially affect or interfere with decision making that directs the flow of capital or the location of transactions. Further, noting the large budgetary hit Maryland would take in issuing Wynne-related refunds, the Court found that pegging the interest rate for such refunds to one commonly used by banks ensured fair compensation for affected taxpayers while maintaining Maryland's fiscal integrity. Wynne v. Comp. of Md., No. 12 (Md. Ct. App. June 5, 2020). Ohio: The Tax Appeals division of Ohio Department of Taxation (OH DOT) to facilitate the process of reviewing final determinations of the Tax Commissioner is posting issued final determinations on the OH DOT's website. The final determinations can be found here, under the "Laws, Rules and Rulings" section. PAYROLL & EMPLOYMENT TAX Colorado: New law (SB 20-207) provides that the employer state unemployment insurance taxable wage base will increase incrementally to $30,600 by calendar year 2026. For additional information on this development, see Tax Alert 2020-1831. Kentucky: In its COVID-19 Relief FAQs, the Kentucky Department of Revenue (KY DOR) explained that the requirements for Kentucky income tax withholding for residents and nonresidents remain unchanged by restrictions related to the COVID-19 emergency. Thus, employers employing Kentucky residents and/or nonresidents who work in a state with a reciprocal agreement with Kentucky, will not have to change their current withholding practices during the period these employees are working from home. KY DOR also cautioned that its guidance does not apply for license, occupational, or other excise taxes imposed by cities, counties, and other local jurisdictions in Kentucky since it is not responsible for the administration of such taxes. For additional information on this development, see Tax Alert 2020-1826. Louisiana: Under HB 70 signed into law by Louisiana Governor John Bel Edwards, eligible Louisiana resident employees may apply for a hazard pay rebate of $250 for essential services provided during the COVID-19 emergency. Independent contractors, self-employed individuals and gig workers may also be eligible for the rebate if all the eligibility requirements are met. For more on this development, see Tax Alert 2020-1880. Ohio: In Executive Order 2020-26D, Ohio Governor Mike DeWine has directed that for the period the state receives full reimbursement from the U.S. Department of Labor, as provided under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act), no participating employers will be charged for unemployment insurance (UI) benefits that are paid under Ohio's SharedWork program (also known as workshare or short-term compensation). For more on this development, see Tax Alert 2020-1829. Pennsylvania: The Pennsylvania Department of Community and Economic Development has announced a COVID-19 hazard pay grant program to help employers provide hazard pay to employees in life-sustaining occupations during the COVID-19 emergency. Hazard pay means additional wages paid to employees for performing hazardous duty or work involving physical hardship in connection with the COVID-19 emergency. For additional information on this development, see Tax Alert 2020-1881. Rhode Island: Governor Gina Raimondo's issued Executive Order 20-52, extending to Aug. 2, 2020 a provision under Executive Order 20-19 that provides COVID-19 unemployment insurance (UI) benefits won't be charged to employer UI accounts. For more on this development, see Tax Alert 2020-1830. Wisconsin: The Wisconsin Department of Workforce Development has announced that both contributory and reimbursing employers must use Form UCB-18823-E to request relief from charges of unemployment insurance (UI) benefits paid in connection with Executive Order 72 pertaining to the COVID-19 emergency. According to the instructions, Form UCB-18823-D must be submitted within 30 days after the initial claim is filed. However, for initial claims filed between May 17, 2020 and June 30, 2020, the deadline for submission is Aug. 15, 2020. For additional information on this development, see Tax Alert 2020-1787. MISCELLANEOUS TAX Washington: The Washington Department of Revenue is filing an appeal with the Washington Supreme Court, challenging the King County Superior Court's ruling that the additional 1.2% Washington business and occupation tax rate imposed on specified financial institutions under Ch. 420, Wash. 2019 Laws (Ch. 420) violates the Commerce Clause of the U.S. Constitution because it discriminates against interstate commerce. Washington Bankers Assn et ano. v. Washington et al, Cause No. 19-2-29262-8 SEA (Wash. Super. Ct., King Cnty., May 15, 2020), notice of appeal to the Wash. Sup. Ct. (July 13, 2020). VALUE ADDED TAX International — Brazil: On July 21, 2020, the Brazilian Government proposed a bill that would replace the PIS and COFINS (Social Security Contributions on Sales) with a new tax, the Contribution on Goods and Services (CBS for its Portuguese acronym). Taxpayers need to evaluate the potential impact of this bill to their businesses. This bill is intended to be the first phase of a comprehensive tax reform. Although the bill would simplify the Brazilian tax system, it also would create issues that taxpayers will need to consider. For more on this development, see Tax Alert 2020-1860. International — Russia: On July 21, 2020, the Russian State Duma (Russia's highest legislative body) approved in the first and second readings a draft bill limiting applicability of the value-added tax (VAT) exemption upon a transfer of rights to software and databases. The proposed legislative changes would affect, inter alia, foreign companies licensing rights to software or databases to Russian companies that currently benefit from VAT exemption. For more on this development, see Tax Alert 2020-1866. 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 No. 2019-0985-JTL (Del. Chancery Ct. July 10, 2020). 2 Marathon Petroleum Corp. v. Sec'y of Fin., 876 F.3d 481 (3d Cir. 2017) (quoting Plains All Am. Pipeline L.P. v. Cook, 876 F.3d 534, 536 (3d Cir. 2017); Taylor v. Yee, 780 F.3d 928 (9th Cir. 2015) cert. den. 136 S. Ct. 929, 930 (2016) (J. Alito concurring) ("The convoluted history of this case makes it a poor vehicle for reviewing the important question it presents, and therefore I concur in the denial of review. But the constitutionality of current state escheat laws is a question that may merit review in a future case.") 3 Kennedy Wholesale, Inc. v. State Bd. of Equal. (1991) 53 Cal.3d 245 [Proposition 13] and Cal. Cannabis Coalition v. City of Upland (2017) 3 Cal.5th 924 [Proposition 218]. 4 Comptroller v. Wynne, 431 Md. 147 (2013), aff'd, 575 U.S. 542 (2015). 5 McKesson Corp. v. Div. of Alc. Bev., 496 U.S. 18 (1990). | ||||
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