August 10, 2020
State and Local Tax Weekly for July 31
Ernst & Young's State and Local Tax Weekly newsletter for July 31 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 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.
California FTB holds fifth interested parties meeting to discuss the next round of proposed amendments to its market-based sourcing rules
On July 21, 2020, the California Franchise Tax Board (FTB) held its fifth Interested Parties Meeting (5th IPM (and preceding IPMs referred to sequentially)), continuing ongoing discussions between the FTB and the public for the next round of proposed amendments to its market-based sourcing rules for California income tax purposes (to be codified at California Code of Regulations, title 18, (CCR) section 25136-2 (Regulation)).
In anticipation of the 5th IPM, the FTB released draft regulatory language and explanations of the proposed amendments to the Regulation. The proposed amendments to the Regulation include language that will affect asset managers, government contractors, research and development companies and taxpayers (including corporations, individuals and pass-through entities) in many other industry sectors.
In addition, for the first time, the FTB has proposed an applicable date for the Regulation. The changes made to the Regulation would apply for tax years beginning on or after Jan. 1, 2019. The FTB also proposed an option for taxpayers to elect to apply the new sourcing provisions in the Regulation to tax years beginning on or after Jan. 1, 2018. In addition, the FTB clarified the distinction between (1) an "effective date," which carries more statutory implications and (2) an "applicable date," which merely gives a date on which taxpayers may rely on the methods described in the Regulation.
See Tax Alert 2020-1926 for an overview of the topics discussed and comments made during the 5th IPM.
Maryland: The Maryland Comptroller of Treasury (MD Comptroller) issued guidance on the state's conformity to the federal Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act), specifically addressing changes to business interest expense deductions under IRC § 163(j), IRC § 461(l) excess business loss provisions, net operating loss provisions under IRC § 172 and the treatment of qualified business improvements under IRC § 168. Under Maryland's conformity law, the state generally conforms to the IRC, except when the state decouples from a provision or if the revenue impact of the federal IRC amendment for a tax year that begins in the calendar year in which the amendment is enacted is greater than $5 million. If the amendment is greater than $5 million, that change does not affect the determination of Maryland taxable income for that tax year. The MD Comptroller's Bureau of Revenue Estimates has determined that the above-mentioned changes would have an impact of greater than $5 million in each year affected by the law changes — 2018, 2019 and 2020. Under Maryland law, the state automatically decouples from these CARES Act provisions for 2020 (the calendar year the changes were enacted), but couples to these provisions for 2018 and 2019. Comptroller of Maryland, Tax Alert 07-24 Maryland Impact of the federal CARES Act on 1) Business Interest Expense Deduction, 2) Limitation of Excess Business Losses for Noncorporate Taxpayers, 3) Net Operating Losses, and 4) QIP Bonus Depreciation (July 24, 2020).
Massachusetts: The Massachusetts Department of Revenue (MA DOR) issued both proposed and emergency regulations setting forth "the sourcing rules that apply to income earned by a non-resident employee who telecommutes on behalf of an in-state business from a location outside the state due to the COVID-19 state of emergency in Massachusetts and explains the parallel treatment that will be accorded to resident employees with income tax liabilities in other states that have adopted similar sourcing rules." Under the rule, compensation received for services performed by a nonresident who, immediately prior to the Massachusetts COVID-19 state of emergency, was an employee performing such services in Massachusetts but is now performing such services outside the commonwealth due to the COVID-19 pandemic will continue to be treated as Massachusetts source income subject to personal income tax and personal income tax withholding. Persons who were performing such services outside the commonwealth prior to the pandemic but are now performing the services inside the commonwealth due to the pandemic will be eligible for a credit for income tax paid to the state where the employee was previously performing the services. The emergency regulation will be effective through the earlier of Dec. 31, 2020 or 90 days after the Governor gives notice that the state of emergency declared in Executive Order 591 is no longer in effect. A hearing on the proposed regulation is scheduled for Aug. 27, 2020. Mass. Dept. of Rev., 830 CMR 62.5A.3: Massachusetts Source Income of Non-Residents Telecommuting due to the COVID-19 Pandemic (July 21, 2020); Proposed 830 CMR 62.5A.3: Massachusetts Source Income of Non-Residents Telecommuting due to the COVID-19 Pandemic (July 21, 2020).
Missouri: New law (HB 1963) expands the definition of a corporation operating other forms of transportation to include "qualified air freight forwarders" for corporate income tax purposes. A qualified air freight forwarder means a taxpayer that meets all of the following requirements: (1) is primarily engaged in the facilitation of the transportation of property by air, (2) does not itself operate the aircraft, and (3) is in the same affiliated group as an airline. Under Section 29 of Article III of Missouri's Constitution, this change takes effect 90 days after the end of the legislative session at which it was adopted (which ended on May 30, 2020 and thus, is Aug. 28, 2020). Mo. Laws 2020, HB 1963, signed by the governor on July 14, 2020.
Oregon: The Oregon Department of Revenue on its COVID-19 Tax Relief Options webpage said that it will not treat the presence of teleworking employees in Oregon between March 8, 2020 and Nov. 1, 2020 as a relevant factor in determining nexus for purposes of the Oregon corporate excise and corporate income taxes. This relief applies to teleworking employees who are regularly based outside Oregon.
Oregon: A corporation whose principal business was the sale and purchase of wholesale electricity and natural gas is not a "public utility" and, therefore, the corporation is subject to Oregon's Uniform Division of Income for Tax Purposes Act (UDITPA) and its sales must be sources according to the UDITPA rules, not industry-specific rule for public utilities. In finding the corporation was not a public utility, the Oregon Tax Court (court) considered the statute's text, context and legislative history, concluding that the corporation did not own or operate property for public use. Moreover, the corporation was not compelled to sell electricity or natural gas to anyone (including members of the Oregon public), it could freely choose its customers, and no member of the Oregon public had a right to demand or receive purchases or delivery of electricity or natural gas from the corporation. The court distinguished a series of cases from before and after UDITPA was enacted in 1965, noting that neither of the parties presented cases (and the court could not verify any) that specifically addressed "public use" as a phrase used in the UDITPA definition. Thus, based on the dictionary definition and multiple cases, the Oregon legislature would have intended "public use" to apply to the activities of business entities that were obligated to sell, deliver, or furnish any of the listed commodities or services to anyone fitting within a defined segment of the public. Powerex Corp. v. Or. Dept. of Rev., TC 5339 (Or. Tax Ct., Reg. Div., July 15, 2020).
SALES & USE
Missouri: In reversing a decision of the Administrative Hearing Commission (AHC), the Missouri Supreme Court (Court) held that in determining whether equipment is exempt from sales and use tax as replacement equipment used directly in the manufacturing process the AHC should have considered whether each type of equipment was independently exempt under the "integrated plant doctrine". Thus, the AHC erred in making specific findings for some equipment and then grouping all the equipment together to find they were collectively integral to the manufacturing process. Ultimately, the Court found that certain equipment purchased for installation into a sawmill (such as circuit breakers, soft starters, overload relays, starters, connectors and disconnectors, and power and control wires) qualified for the exemption as it is a part of an integrated process necessary to the production of the sawmill's wood products. Equipment not part of the integrated process, including electric outlets, lights, and lamps not used in powering the plant and heat for the buildings generally, did not qualify for the exemption. The Court remanded the case to the AHC to apply the integrated plant doctrine to the other replacement equipment not mentioned by the AHC in its ruling, with instructions to apply the integrated plant doctrine individually to this equipment. Dreyer Elec. Co., LLC v. Mo. Dir. of Rev., No. SC98007 (Mo. S.Ct. June 16, 2020).
Missouri: New law (HB 1963) extends the sunset date for a state and local sales and use tax exemption for aviation jet fuel to Dec. 31, 2033 (from Dec. 31, 2023). The exemption applies to all sales of aviation jet fuel in a given calendar year to common carriers engaged in the interstate air transportation of passengers and cargo, and the storage, use and consumption of such aviation jet fuel by such common carriers, provided the common carrier has previously met the $1.5 million state sales and use tax cap in the calendar year. Mo. Laws 2020, HB 1963, signed by the governor on July 14, 2020.
Ohio: An online market research platform provider's charges for "panel" or "survey respondents" services is subject to Ohio sales tax as "electronic information services" since the customer's end-product is the panel's/survey respondents' survey results or data. The services are not personal or professional services, as they do not fall into specific statutory categories and the selection of a pool of survey respondents based on demographic criteria do not otherwise involve any cognitive thought or intellectual act. In general, the sales are sourced to the location where the customer receives the service in Ohio. According to the Ohio Department of Taxation, if the service is concurrently available for the customer's use in more than one jurisdiction, the provider and its customer can use any reasonable, consistent and uniform apportionment method supported by the provider and its books and records at the time of the sale. Ohio Dept. of Taxn., Op. No. 20-0002 Sales Tax - Re: Electronic Information Services (July 1, 2020).
South Carolina: Sales of electricity by a business to its customers at its vehicle charging stations are subject to South Carolina sales tax. The taxable retail sale includes all charges (i.e., charging fees, session fees, idling fees, etc.) with respect to the retail sale of electricity. Sales of electricity by utilities to the business for resale to customers at vehicle charging stations are wholesale sales not subject to state sales tax. S.C. Dept. of Rev., SC Private Letter Ruling #20-5 (July 7, 2020).
Tennessee: New law (SB 2207) imposes sales and use tax on peer-to-peer car sharing programs by including them within the definition of "marketplace facilitator." The law makes clear that the 3% surcharge or tax on rental car companies does not apply to entities or shared vehicle owners engaged in peer-to-peer car sharing or any gross proceeds from peer-to-peer car sharing. Peer-to-peer car sharing is defined to be the authorized use of a vehicle by an individual other than the vehicle's owner through a peer-to-peer car sharing program, which is a business platform that connects motor vehicle owners with drivers to enable the sharing of motor vehicles for financial consideration. This provision takes effect Oct. 1, 2020. Tenn. Laws 2020, Pub. Ch. 796 (SB 2207), signed by the governor on July 15, 2020.
California: The California Film Commission (CFC) has announced application deadlines for the next film and TV tax credit program - Program 3.0. For relocating TV series, the application period is Sept. 28-30, 2020, with the phase II Oct. 1- Oct. 5, 2020. For recurring TV series, the application period is Oct. 5-7, 2020, with phase II Oct. 8-Oct. 12, 2020. The approval date for these applications is Nov. 16, 2020. Applications for new TV series will not be accepted during this application period. For feature and independent films, the application period is Jan. 25-27, 2021, with phase II Jan. 28 — Feb. 1, 2021. The approval date for these applications is March 1, 2021. Additional information on the program is available here.
Colorado: New law (SB 21) disallows tax expenditures in legislation from continuing for an indefinite period of time and requires a tax preference performance statement to be included as part of the statutory legislative declaration for any bill creating a new tax expenditure or extending an expiring tax expenditure. The tax preference performance statement must designate one or more of the following categories as the intended purpose of the tax expenditure: (1) to induce certain behavior by taxpayers; (2) to improve industry competitiveness; (3) to create or retain jobs; (4) to reduce structural inefficiencies in the tax structure; or (5) to provide tax relief for certain businesses or individuals. The tax preference performance statement also must provide detailed information on the new or extended tax expenditure, including clear, relevant, and ascertainable metrics and data that permit the state to measure how effective the tax expenditure is in fulfilling its purpose. These requirements apply beginning Jan. 1, 2021. Colo. Laws 2020, Ch. 185 (SB 21), signed by the governor on June 30, 2020.
Louisiana: New law (SB 24) amends the Angel Investor Tax Credit Program to provide an enhanced credit for investments in federal Opportunity Zones for applications received on or after July 1, 2020. The enhanced credit is 35% of the investment amount with the credit divided into equal parts over two years. The cap for this enhanced credit is $3.6 million a year; unused credit amounts from a calendar year will carry forward to later calendar years and may be granted in any year without regard to the $3.6 million annual cap. Lastly, to the extent that federal Opportunity Zone laws and regulations require that business revenues be derived from within the Opportunity Zone, otherwise eligible businesses will be exempt from the credit's requirement that 50% or more of sales will come from out of state. Lastly, the law extends the sunset date of the credit to July 1, 2025 (previously July 1, 2021). SB 24 took effect July 13, 2020. La. Laws 2020 (1st Extra. Sess.), Act 22 (SB 24), signed by the governor on July 13, 2020.
Louisiana: New law (SB 4) extends the research and development credit by providing that no credit for research expenditures incurred, Small Business Technology Transfer Program funds received, or Small Business Innovation Research Grant funds received after Dec. 31, 2025 (from Dec. 31, 2021). La. Laws 2020 (1st Extra. Sess.), Act 13 (SB 4), signed by the governor July 13, 2020.
California: The California Court of Appeal (Court) reversed the trial court and found a biotechnology company purchased all of its machinery and equipment (M&E) in a finished state, assembling the M&E into a production line did not make the M&E "self-constructed property," and the company's capitalization of expenses for accounting purposes should not be included in the M&E's fair market value for property tax purposes. The Court concluded that each piece of equipment is a distinct marketable product that should be appraised separately based on its fair market value, rather than its collective value as part of a product or manufacturing line. The Court noted that the trial court's error stemmed from its incorrect finding that the criteria for capitalization of expenses under Financial Accounting Standards Board (FASB) 34 and an assessors' handbook rule (Rule 6(b)) are the same, since the two rules serve considerably different purposes (i.e., financial reporting versus determining property value). Thus, the company's capitalization of interest in its accounting records is not substantial evidence that the interest should be imputed to assess the M&E's fair market value. The Court remanded the case to the trial court to address the proper standard for valuing the company's laboratory and manufacturing fixtures, which was not addressed in earlier proceedings. Church v. San Mateo Cnty. Asmt. App. Bd. and Genentech, Inc., No. A155034 (Cal. Ct. App., 1st App. Dist., Div. 4, June 26, 2020) (certified for publication July 16, 2020).
Pennsylvania: New law (SB 352) establishes the Tax Exemption and Mixed-Use Incentive Program Act, permitting local taxing authorities to provide a real property tax exemption on the assessed valuation of improvements to blighted properties and on new construction in a designated deteriorated industrial, commercial, business, and residential area, with certain allowances for mixed-use housing and development. The exemption ordinance or resolution must describe each deteriorated area, the cost of improvements per unit to be exempted, and the schedule or taxes exempted. The amount exempted must follow a 10-year schedule exempting 100% of the eligible assessment for the first three years, and then annually reducing the exempted amount by varying percentages until the exemption is terminated after the tenth year. SB 352 provides parameters for how the boundaries of deteriorated areas will be set; how more than one local taxing jurisdiction can adopt contingent tax-exemption schedules when they are involved in establishing a single deteriorated area; how to apply for the exemption; eligibility standards; when a local taxing authority is entitled to a return of its proportional share of taxes exempted; and when the local taxing authority can rescind the blighted areas designation based on the exemption accomplishing its revitalization goal. The exemption does not terminate upon property sale or exchange. Lastly, purchases or sales of exempt property cannot be structured to exclude or exempt the transaction from a realty transfer tax due to a taxing authority that would not otherwise be excluded or exempt, with certain exceptions. SB 352 takes effect in 60 days. Pa. Laws 2020, Act 61 (SB 352), signed by the governor on July 14, 2020.
COMPLIANCE & REPORTING
Nevada: The Nevada Commerce Tax return is due 45 days following the end of Nevada's fiscal year, which ended on June 30, 2020. This year, the return is due Aug. 14, 2020. The Commerce Tax is based on a taxpayer's Nevada gross receipts over $4 million, earned from July 1, 2019 through June 30, 2020. Businesses with less than $4 million of Nevada gross receipts are not required to file a return. For additional information on this development, see Tax Alert 2020-1956.
Louisiana: New law (HB 736) permits any person who has won a legal challenge for the payment of a statutory imposition that is declared invalid to present the claim to the tax commission within three years of the final judgment date, along with a copy of the court's judgment, for repayment. The tax commission must order repayment of the statutory impositions by the tax collector of the amounts that were declared legally invalid, together with interest and court costs, within 30 days of the tax commission's order. In lieu of a refund, the tax collector also may provide a credit for up to the amount of the statutory imposition to offset ad valorem tax liability or statutory impositions owed by the taxpayer. Unused credits will carryover until fully utilized. These provisions apply to all claims of statutory impositions declared invalid by a court on or after Jan. 1, 2020. La. Laws 2020, Act 297 (HB 736), signed by the governor on June 12, 2020.
Nevada: New law (SB 3) directs the Nevada Department of Taxation (Department) to conduct a tax amnesty program, relieving eligible taxpayers of penalties and interest upon the full payment of certain unpaid taxes, fees, or assessments that are due and payable before July 20, 2020. The program can last up to 90 calendar days and must occur beginning on or after July 20, 2020 and end no later than June 30, 2021. The Department must give notice of the program on its website, including applicable dates and how to request relief. The program is not open to a taxpayer that: (1) has entered into a compromise or settlement agreement with the Department regarding the unpaid tax, fee or assessment; (2) has entered into a compromise with the Nevada Tax Commission regarding the unpaid tax, fee or assessment; and (3) is being audited by the Department and has not been issued a final notice of deficiency determination. Nev. Laws 2020 (Special Sess.), ch. 4 (SB 3), signed by the governor on July 20, 2020.
PAYROLL & EMPLOYMENT TAX
Colorado: As expected, Colorado Governor Jared Polis recently signed SB 20-205 into law, which requires employers of 16 or more employees to provide paid sick leave to all employees effective Jan. 1, 2021. The requirement is delayed by one year for employers of 15 or less employees such that these employers must provide paid sick leave effective Jan. 1, 2022. For more on this development, see Tax Alert 2020-1854.
Idaho: The Idaho State Tax Commission released inflation-adjusted 2020 state income tax withholding percentage method and wage-bracket tables to its website. Businesses are instructed to implement these revised tables as soon as possible. The Tax Commission instructs that employers should not adjust the withholding for the months prior to receiving the revised tables. For additional information on this development, see Tax Alert 2020-1849.
Massachusetts: In TIR-20-10 Revised Guidance on the Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic, the Massachusetts Department of Revenue announced that it has updated its guidance concerning income tax withholding, the assertion of nexus and the requirement for participation in the Massachusetts Paid Family and Medical Leave (PFML) program when employees are temporarily working in the state due to the COVID-19 emergency. Under the Massachusetts PFML program, businesses are required to collect and remit PFML contributions on behalf of individuals who perform services in Massachusetts. An individual who previously performed services outside of Massachusetts and was not subject to PFML will not become subject to PFML solely because the individual is temporarily working from home in Massachusetts due to the COVID-19 emergency. Likewise, an individual who previously performed services in Massachusetts but is temporarily working from home outside of Massachusetts solely due to the COVID-19 emergency continues to be subject to the PFML rules. For additional information on this development, see Tax Alert 2020-1865.
New Hampshire: The New Hampshire Department of Employment Security announced that as a result of the state's decreased unemployment insurance (UI) trust fund balance due to COVID-19 UI benefits, employers will see an increase in their state unemployment insurance (SUI) tax rates for the second- and third-quarters of 2020. For additional information on this development, see Tax Alert 2020-1878.
Washington: New law (HB 2965) provides $25 million in emergency funds for the state's COVID-19 unemployment account to be used for relieving employer accounts of charges related to COVID-19 unemployment insurance (UI) benefits (termed "offsets"). Under guidance issued by the Washington Employment Security Department, employers that make state unemployment insurance (SUI) contributions can apply to have some of their COVID-19 UI benefits offset from the state's COVID-19 unemployment account rather than having the benefits impact their experience rating (potentially resulting in a higher SUI tax rate in 2021). For more on this development, see Tax Alert 2020-1853.
Nevada: New law (SB 3), beginning in calendar year 2021, requires persons that extract minerals in Nevada to temporarily accelerate paying part of the tax on the net proceeds of minerals and on royalties, based on estimated net proceeds and royalties for the calendar year and reduced by the amount of the taxpayer's applicable credits. Such taxpayers have the option to file with the Nevada Department of Taxation (Department) a quarterly report that includes estimates for the year and the actual quarterly amounts of production, gross yields, and net proceeds as of March 31, June 30, Sept. 30, and Dec. 31, and pay any additional amount due. Further, effective July 1, 2021, the Department will include in its net proceeds certificates the amount of estimated tax paid in the previous calendar year, any additional payments made, and the balance of tax due. Taxpayers that pay less than 90% of the amount certified as the net proceeds of any minerals extracted and royalties paid during the previous calendar year must pay an underpayment penalty of 10% unless certain requirements are met. Taxpayers will receive a credit for overpayments toward the payment due for the next calendar year. These changes expire June 30, 2023. Nev. Laws 2020 (Special Sess.), ch. 4 (SB 3), signed by the governor on July 20, 2020.
VALUE ADDED TAX
International — Brazil: The bill 3,887/20 proposed by the Brazilian government on July 21, 2020 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). The CBS is intended to work as a federal value-added tax (VAT). If enacted, the CBS would be effective the first day of the sixth month following enactment of the law, and the PIS and COFINS would cease to exist. For more on this development, see Tax Alert 2020-1959.
International — Ireland: The July 2020 Jobs Stimulus Plan announced by the Irish Government contains a suite of tax, loan and expenditure measures designed to directly support business at all levels of the economy that are negatively impacted by the COVID-19 emergency. One of the key measures is the temporary reduction in the standard rate of value-added tax (VAT) from 23% to 21%, effective Sept. 1. 2020 to Feb.28,2021.For additional information on this development, see Tax Alert 2020-1953.
International — Kenya: The High Court of Kenya, on July 16, 2020, issued a conservatory order suspending Value Added Tax (VAT) on insurance agency and insurance brokerage services as introduced by the Tax Laws (Amendment) Act, 2020 on April 25, 2020, pending the hearing and determination of the petition. Prior to April 25, 2020, these services were exempt from VAT under Paragraph 10 of Part II of the First Schedule to the Value Added Tax, 2013. For more on this development, see Tax Alert 2020-1899.
International — Costa Rica: Costa Rica's Minister of Finance delayed VAT collection on cross-border digital services by Costa Rican public or private entities that issue credit or debit cards (withholding agents) to Oct. 1, 2020.The delay only covers the withholding agents. It does not include VAT collection by suppliers or intermediaries of cross-border digital services that voluntarily register as VAT taxpayers. The suppliers and intermediaries will be able to voluntarily register as VAT taxpayers and collect VAT beginning Aug. 1, 2020. For more on this development, see Tax Alert 2020-1876.
International — Oman: On July 21, 2020, the Majlis Al Shura approved the Value-Added Tax (VAT) law and has now referred it on to the Majlis Al Dawla. It is anticipated that following the Eid holidays, the Majlis Al Dawla will review the VAT law and the final proposed VAT law may be submitted for completing the next steps for issuance of a Royal Decree to enact the VAT law. It is anticipated that the VAT law should be effective and applicable from early 2021. For more on this development, see Tax Alert 2020-1918.
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.