August 24, 2020
State and Local Tax Weekly for August 14
Ernst & Young's State and Local Tax Weekly newsletter for August 14 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.
Final regulations under IRC §163(j) related to the business interest expense limitations have state tax implications
On July 28, 2020, the US Treasury Department released final regulations (TD 9905) with guidance on applying the limitations on the deductibility of business interest expense (BIE) under IRC §163(j) (the Final Regulations), which was significantly modified by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) and then temporarily modified by the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act). The Final Regulations provide guidance on what constitutes interest for purposes of the limitation, how to calculate the limitation, which taxpayers and trades or businesses are subject to the limitation, and how the limitation applies in certain contexts (e.g., consolidated groups). For more on the Final Regulations, see Tax Alert 2020-1961.
Tax Alert 2020-2008 focuses on the general state corporate income tax effects of the Final Regulations. Nearly every state with an income tax relies upon the IRC in some manner and generally may follow the Final Regulations, except where modified by state tax law. As such, the Final Regulations will have important implications for state and local (collectively, state) income tax reporting purposes.
This tax alert highlights the significant provisions of the Final Regulations and broadly analyzes how these provisions could affect state corporate income taxes (i.e., state income taxes imposed on C corporations and other legal entities that are taxed as regular corporations for federal income tax purposes). It does not address the state income or other business tax consequences of the law on any other type of taxpayer, including individuals and pass-through entities (such as partnerships, limited liability companies or S corporations and their owners). Unless otherwise stated, it is not intended to provide a detailed analysis of the tax law implications in a particular state. Readers are cautioned that the impact of the Final Regulations on state corporate income taxpayers as described in this Tax Alert may not necessarily be the same impact that applies to other types of state taxpayers.
Minnesota Supreme Court holds that income from sale of partial interest in unitary business member is apportionable business income
In YAM Special Holdings, Inc.,1 the Minnesota Supreme Court held that the imposition of corporate income tax on an apportioned share of income from the sale of a partial interest in a member of a unitary business does not violate the Due Process Clauses of either the US or Minnesota Constitutions because the income is business income of a unitary business that had a sufficient connection to Minnesota.
The court's decision is another example in which the disposition of even a partial interest in a unitary business has been treated as apportionable business income by the taxing authority. The case is notable in that it addresses, and rejects, the argument that a member of the unitary business must have a physical presence in Minnesota for the income to be apportionable business income. Instead, it appears that a partial sale of the interest in the unitary business is apportionable to the state when the unitary business has been filing in Minnesota, thereby acknowledging nexus. For more on this development, see Tax Alert 2020-2118.
INCOME AND FRANCHISE
Hawaii: New law (SB 2920) updates Hawaii's date of conformity to the Internal Revenue Code to March 27, 2020 (from Dec. 31, 2018). Paycheck Protection Program (PPP) loan forgiveness under Section 1106(i) of the federal Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act) is operative. The law conforms to IRC §172 net operating loss provisions and IRC §461's general rule for taxable year of deduction as they existed as of Dec. 31, 2019; thus, decoupling from the changes made to these provisions by the CARES Act. These provisions are effective for tax years beginning after Dec. 31, 2019. Haw. Laws 2020, Act 13 (SB 2920), signed by the governor on Aug. 12, 2020.
Maryland: On remand from the Maryland Court of Special Appeals, the Maryland Tax Court (tax court) held an out-of-state unauthorized insurance company (company) that engages in re-insurance transactions is not subject to Maryland's corporate income tax on intercompany interest payments it received from its parent corporation (a retail holding company) because it qualified as an insurance company subject to a premium receipts tax instead of "all other state taxes." In so holding, the tax court found that Title 4 of the Insurance Article of the Annotated Code of Maryland (Insurance Article) exempts unauthorized insurance companies from "all other state taxes", including the corporate income tax. The tax court also rejected the Comptroller's contentions that the exemption applies only to insurance-related income and that the exempt language in Section 4-209(c) of the Insurance Article is meant to only apply to sales and use tax. Further, considering legislative history, the tax court found "no basis" that the company's income as an unauthorized insurer was subject to corporate income tax when the applicable law gave the Maryland Insurance Commissioner rather than the Maryland Comptroller of Public Accounts the power to enforce statutes applicable to unauthorized insurers, and the statute precludes the Comptroller from imposing Maryland income tax. Leadville Ins. Co. v. Md. Comp. of the Treas., No. 13-IN-OO-0035 (Md. Tax Ct. July 13, 2020).
Mississippi: The franchise tax assessment by the Mississippi Department of Revenue (Department) of a national cable company did not reflect the true value of the company's capital employed in Mississippi because it erroneously included the value of the company's non-unitary subsidiaries in its capital base. In so holding, the Mississippi Supreme Court (Court) agreed with the Mississippi Board of Tax Appeals that the company overcame the presumption of correctness of the Department's franchise tax assessment. The Court reasoned that by including the value of the company's non-unitary subsidiaries in its capital, the Department included passive, non-unitary investments that had no connection to the company's business in Mississippi in its tax base. The Court further agreed with the company that Miss. Code Ann. §27-13-11 allows the company to use an alternative apportionment formula when application of the statutorily prescribed apportionment method does not accurately reflect capital in the state. Here, the company's alternative factor-representation method computation, which included the apportionment factors of the company's subsidiaries, demonstrates that the Department's tax assessment is distortive and did not fairly represent the true value of the company's capital in Mississippi. The Department's assessment disregarded the receipts and property of the company's subsidiaries from the apportionment formula; this exclusion "created an inherent mismatch between the value and the factors used to compute [the company's] Mississippi franchise-tax liability … result[ing] in a distortion in favor of the state by overattributing income to the state." Miss. Dept. of Rev. v. Comcast of Georgia/Virginia, Inc. (N/K/A Comcast Cable Communications, LLC), No. 2019-CA-01134-SCT (Miss. S.Ct. Aug. 13, 2020).
Tennessee: The Tennessee Department of Revenue (TN DOR) in its Franchise & Excise Tax FAQs addressed whether the federal Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act) impacts the excise tax return — specifically addressing IRC §§ 168 and 163(j), Paycheck Protection Program (PPP) loan forgiveness, and NOLs. The CARES Act modified IRC § 168, reducing the modified accelerated cost recovery system (MACRS) recovery period for "qualified improvement property" (QIP) from 39 years to 15 years. This change, for federal income tax purposes, makes the property eligible for bonus depreciation. The TN DOR said that while the excise tax law conforms to federal MACRS, including the depreciation of QIP over a 15-year period, it does not allow bonus depreciation. In regard to IRC §163(j), for excise tax purposes, Tennessee conforms to this provision, including the changes made by the CARES Act, for tax periods beginning after Dec. 31, 2017 and before Jan. 1, 2020. For tax years beginning on of after Jan. 1, 2020, Tennessee decouples from IRC §163(j). The TN DOR also said that for excise tax purposes the state conforms to the CARES Act's exclusion from gross income for cancellation of indebtedness income from the forgiveness of a PPP loan. Lastly, TN DOR stated that Tennessee does not conform to federal net operating loss (NOL) carryforward and carryback provisions, including changes made by the CARES Act. Rather, for Tennessee excise tax purposes, NOLs may be carried forward for up to 15-years; NOLs cannot be carried back. Tenn. Dept. of Rev., Franchise & Excise Tax FAQs "Does the CARES Act of 2020 impact the excise tax return?" (July 29, 2020).
SALES & USE
Georgia: A qualifying high technology company that provides cellular phone service (company) is entitled to a sales and use tax refund on its purchases of telecommunications equipment for tax years 2012–2016 because the company qualifies for the high-technology exemption as the equipment meets the definition of "computer equipment" and it is not otherwise excluded from the exemption as it is not "telephone central office equipment or other voice data transport technology." In so holding, the Georgia Tax Tribunal (Tribunal) found that each piece of equipment at issue (e.g., routers, system modules/radios, hardware, plug-ins, power distribution units, antennae) is "computer equipment" under the statute's plain meaning (i.e., individual computer or organized assembly of hardware or software), when each asset type is at minimum an integral part of the corporation's LTE network (which itself is an assembly of hardware and software) and most of the assets themselves are computers. Additionally, the equipment is not excluded from the exemption under the plain meaning of "telephone central office equipment" (i.e., equipment used by local exchange carriers to provide wireline service, housed in a central office) because the company does not maintain a telephone central office. Further, the equipment cannot be considered "other voice data transport technology" (which the Tribunal found to be an ambiguous term and constructed it to mean technology, other than that housed in a central office, that is utilized to provide wireline service by a local exchange carrier), as it uses an entirely new network that relies on new technology that is completely unrelated to services provided by wireline local exchange carriers. In so holding, the Tribunal rejected the Georgia Department of Revenue's argument that the mere capability to transmit voice makes the equipment at issue "other voice data transport technology", noting that this is "an implausible construction of the statute that eviscerates the exemption entirely." T-Mobile South, LLC v. Curry, Nos. 1732418 and 1800700 (consol.) (Ga. Tax Trib. Aug. 6, 2020).
Mississippi: New law (HB 865) authorizes the revenue commissioner to deny a sales tax permit or revoke a sales tax permit of an entity if any of the entity's partners, members, principal officers, or directors (collectively, "member") have failed to satisfy all of the finally determined tax liabilities owed by that member. For such denial or revocation to be authorized, the member must own 10% or more of the entity and is or will be exercising responsibility for fiscal management. Alternatively, the revenue commissioner may accept an increased or additional bond from the entity, in lieu of denying or revoking the entity's permit, to cover the additional risk. HB 865 took effect July 1, 2020. Miss. Laws 2020, HB 865, signed by the governor on July 7, 2020.
Georgia: New law (HB 1037) amends various credit requirements of the Georgia Entertainment Industry Investment Act and adds oversight provisions, such as requiring audits of each tax credit either by the Georgia Department of Revenue (DOR) or a certified eligible auditor before final certification. Among the modifications, the law reclassifies certain sound recordings as "production expenditures" rather than "qualified production activities," and excludes from "qualified production activities" any project that is not intended for multimarket commercial distribution. It also excludes from "production expenditures" various expenditures for work or services not conducted or rendered in Georgia, or goods not purchased, rented, or leased in Georgia from a Georgia vendor. To receive the additional tax credit of 10% of the base investment, the Georgia Department of Economic Development must electronically certify to the DOR when the taxpayer met eligibility requirements, including requirements related to commercial distribution. Unused credit amounts can be carried forward for three years from the close of the taxable year in which the credit was issued its final certification, but they cannot be carried back. Further, a production company is prohibited from claiming, assigning, selling, transferring or using the credit until final certification is issued; credits that receive valid final certifications cannot be recaptured from a transferee. HB 1037 also phases in oversight requirements starting with credits exceeding $2.5 million and later including all credits, restricting credit transfers until the taxpayer meets application requirements and receives a final certification. Qualified interactive entertainment production companies are not subject to some of these new credit requirements. Provisions of HB 1037 take effect Jan. 1, 2021. Ga. Laws 2020, Act 559 (HB 1037), signed by the governor on Aug. 4, 2020.
Pennsylvania: New law (HB 732) establishes a local resource manufacturing credit equal to $0.47 per unit of dry natural gas that is purchased and used in the manufacturing of petrochemicals or fertilizers at a project facility by a qualified taxpayer. To be a "qualified taxpayer," a company must satisfy all of the following: (1) purchase and use dry natural gas produced in Pennsylvania to manufacture petrochemicals or fertilizers at a Pennsylvania project facility that has been placed in service on or after the credit's effective date; (2) make a capital investment of at least $400 million to construct the Pennsylvania project facility and place it into service; (3) create a minimum aggregate total of 800 new jobs and permanent jobs; (4) make good faith efforts to recruit and employ workers from the local labor market for employment during the project facility's construction; and (5) show that the new jobs created are paid at least the applicable prevailing minimum wage and benefit rates. The credit is available against personal or corporate net income tax, bank and trust company shares tax, title insurance companies shares tax, insurance premiums tax, gross receipts tax, and mutual thrift institutions tax. It can be applied against up to 20% of the qualified taxpayer's qualified tax liabilities incurred in the tax year for which the credit was approved. The credit is nonrefundable, cannot be carried back or carried forward, and can be sold or assigned once, subject to certain requirements. Pass-through entities with an unused tax credit can elect, in writing, to transfer all or part of the credit to shareholders, members, or partners in proportion to the share of the entity's distributive income to which they are entitled, subject to certain usage restrictions. In addition, the new law includes due dates, other eligibility provisions, and defines key terms. The credit applies to the purchase of natural gas produced in Pennsylvania for the period beginning Jan. 1, 2024 and ending Dec. 31, 2049. These provisions expire on Dec. 31, 2050. Pa. Laws 2020, Act 66 (HB 732), signed by the governor on July 23, 2020.
Florida: Withdrawing its previous opinion regarding a county appraiser's assessment of a resort's real property and substituting a new one, a Florida District Court of Appeal (Court) deleted statements that the Rushmore method used in assessing a resort property violates Florida's Constitution because it does not remove the nontaxable, intangible business value from an assessment. The opinion, however, maintained 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 regard to the use of the Rushmore method, the Court determined that the manner in which it was applied in this case (i.e., the appraiser did not make any deduction to the resort's income stream to account for the intangible business value that contributed to that income) impermissibly included the resort's intangible business assets in its assessment. As for 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. Ultimately, the Court reversed and remanded the case with instructions, however, the new opinion deletes a statement that on remand the appraiser should not reassess the property using the Rushmore method. Singh v. Walt Disney Parks and Resorts US, Inc., No. 5D18-2927 (Fla. Dist. Ct. App., 5th Dist., Aug. 7, 2020).
Wisconsin: The Wisconsin Court of Appeals (Court) in reversing the trial court found that a hotel's 2016 tax assessment properly included income generated from parking hotel guests' vehicles in a third party's off-site parking ramp because the hotel's parking income is inextricably intertwined with its business value. In so holding, the Court disagreed with the trial court's determination that the 2016 assessment should not have included the parking income because that business value would not be transferred upon the sale of the hotel since the hotel does not own the parking ramp. Rather, the Couth said the proper issue for consideration is whether the income derived from hotel guests requiring parking services would continue upon a theoretical sale of the hotel; ownership of the parking ramp is not relevant to this analysis. The hotel did not provide significant contrary evidence that parking income would not continue if the hotel was sold. Consequently, the Court found the hotel's "parking income is inextricably intertwined with its business value" and, as such, should be included in the assessment. Milwaukee Block 10 Properties, LLC v. City of Milwaukee, No. 2019AP1424 (Wis. Ct. App., Dist. I, June 16, 2020) (not to be published).
PAYROLL & EMPLOYMENT TAX
Federal: Proposed bill (HR 7968) would prevent states from imposing state personal income tax on employees who are teleworking outside the state. Specifically, the bill would clarify that workers are required to pay income tax only in the state where they are physically present when the income is earned. HR 7968 was introduced on Aug. 7, 2020.
Nevada: According to a media relations office representative of the Nevada Department of Employment, Training and Rehabilitation, employers will soon see their unemployment insurance (UI) relieved of COVID-19 benefit charges. For additional information on this development, see Tax Alert 2020-1997.
St. Louis, MO: The St. Louis Collector of Revenue stated in recent guidance that employees who are working remotely in connection with the COVID-19 emergency should be treated as working in their original place of work for purposes of the city's earnings tax. Accordingly, St. Louis employers should continue to withhold the earnings tax for these employees in the same manner as they did prior to the temporary relocation of their employees. For additional information on this development, see Tax Alert 2020-2044.
Wyoming: New law (SF 1002; SF 89) provides that employers will receive two credits against their employer workers' compensation (WC) premiums. The credits are available starting July 1, 2020 and may be applied to WC premiums through June 30, 2021. For more on this development, see Tax Alert 2020-2054.
Iowa: New law (HF 760) modifies the hotel and motel tax exemption for extended rentals of lodging and adds a new exemption for certain guests staying with hospital patients. Effective July 1, 2020, the sales price from the extended rental of lodging when the lodging is rented by the same person is exempt from tax for the period beginning after 90 consecutive days of rental by such person. (Previously, the exemption applied if the lodging was rented by the same person for a period of more than 31 consecutive days.) The rental can be a room, apartment, or sleeping quarter in a hotel, motel, inn, public lodging house, or rooming house or in any place where sleeping accommodations are furnished to transient guest. Also effective July 1, 2020, a new exemption from hotel and motel tax is provided to friends and family of a hospital patient staying at a nonprofit lodging provider. Iowa Laws 2020, HF 760, signed by the governor on June 24, 2020; See also Iowa Dept. of Rev., "Summary of Taxation of Hotels Rooms — State Excise Tax, Local Hotel/Motel Lodging Tax, and Sales Tax Information" (updated Aug. 7, 2020).
Vermont: New law (H. 550) repeals and replaces Vermont's unclaimed property laws, substantially adopting the Uniform Law Commission's 2016 model Revised Uniform Unclaimed Property Act. Issues addressed in the new law include: (1) presumption of abandonment for various property types, such as bonds, debts of business associations, amounts owed on life insurance contracts or annuity contracts, tax-deferred retirement accounts, other tax-deferred accounts, stored-value cards, and securities, among others; (2) rules for taking custody of property presumed abandoned; (3) requirements related to reports by holders (i.e., content, filing requirements, records retention, etc.); (4) requirements regarding notice to the apparent owner of property presumed abandoned; (5) requirements for an administrator taking custody of and selling property; (6) making claims to recover property from the administrator; (7) information about verified reports of property and examination of records; (8) liability determinations and remedies; (9) enforcement provisions; (10) agreements to locate property of an apparent owner held by an administrator; (11) confidentiality and information security; and (12) other miscellaneous provisions. H. 550 takes effect Jan. 1, 2021. Vt. Laws 2020, Act 93 (H. 550), signed by the governor on April 28, 2020.
VALUE ADDED TAX
International — Columbia: On Aug. 3, 2020, the Colombian Government issued Decree 1089, which includes regulations on the credit against income tax liability for the VAT paid on the acquisition, importation, formation or construction of Real Productive Fixed Assets ("AFRP" per its Spanish acronym). For more on this development, see Tax Alert 2020-2038.
Wednesday, September 2. Domestic tax quarterly webcast series: a focus on state tax matters (1 pm ET). Topics include: the impact of COVID-19 on state and local tax revenues now and in the future; the latest on state tax responses to the TCJA and CARES Act, the recent adoption of federal TCJA-related regulations; state and local tax considerations related to the "work from home" arrangements; and the November 2020 US election season from a state and local tax perspective. Register.
Wednesday, September 9. The evolving world of site selection | Corporate location in today's rapidly changing environment (12 pm ET). This webcast explores current trends in site selection domestically and abroad, how these trends are expected to change, and issues economic developers should consider. The following topics will be discussed: current market trends and which industries may be best poised for expansion and relocation, effects of COVID-19 on the timing and process of site selection, US vs. international site selection trends and how they differ, and how economic developers and community leaders can adapt to new site selection trends. Register.
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 YAM Special Holdings, Inc. v. Minn. Commissioner. of Revenue, A20-0021 (Minn. S.Ct. Aug. 12, 2020).