August 31, 2020 State and Local Tax Weekly for August 21 Ernst & Young's State and Local Tax Weekly newsletter for August 21 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. EY's state guide to COVID-19 payroll and employment tax provisions, updated through Aug. 15, 2020, is available here. TOP STORIES Nebraska enacts new tax incentives program to replace the expiring NE Advantage Act On Aug. 17, 2020, Governor Pete Ricketts signed LB 1107, which modifies Nebraska's business incentives program. The Nebraska Advantage Act, one of the state's existing incentives programs, expires at the end of 2020. New law enacted under LB 1107 will replace the Nebraska Advantage Act with the ImagiNE Nebraska Act (Act). The Act grants tax incentives to qualifying taxpayers that attain certain levels of employment and investment at qualified locations. To receive incentives under the Act, a taxpayer must apply to the Nebraska Department of Economic Development (DED). The application must (1) request an agreement identifying the taxpayer's levels of employment and investment, (2) include specific information and acknowledgments, and (3) contain a $5,000 nonrefundable application fee. The Act is effective Jan. 1, 2021, with no applications accepted after Dec. 31, 2030. If approved, the DED and the taxpayer will enter into an agreement regarding qualified location(s). An agreement is valid for up to 15 years. Employment and investment levels must be reached by the end of the ramp-up period, which is the four years after the year of application. Credits can be used in the order they were first allowed; when credits are the same age, credits from an older tax incentive program, such as the Nebraska Advantage Act, must be applied first. Credits can be used beginning with the tax year the minimum employment and investment levels were reached. The performance period is the year the employment and investment levels were met plus the following six years, and the carryover period is the three years after the performance period. Under LB 1107, the levels of investment and employment that qualify for various incentives are:
Only wages paid to employees who are Nebraska residents are included in the computation to determine the number of equivalent employees. Under the Act, a qualifying taxpayer is eligible for wage credits, investment tax credits, sales tax refunds, personal property tax exemptions and real property tax refunds. For additional information on this development, see Tax Alert 2020-2106. San Francisco Board of Supervisors votes to place measures on November ballot On July 28, 2020, the Board of Supervisors (Board) of the City and County of San Francisco (City) voted to approve a compromise measure to amend the City's business tax regime. Additionally, the Board voted to approve a measure that would impose a compensation-ratio tax entitled the "Overpaid Executive Gross Receipts Tax" (also known as a "CEO tax" or "overpaid executive tax"). The measures will appear on the City's Nov. 3, 2020 ballot. The compromise measure replaces two prior proposals presented for consideration to the Board by Mayor London Breed and Board President Norman Yee (see Tax Alert 2020-1700). It requires a simple majority vote of the City's electorate to become law and does not affect Mayor Breed's direct-to-ballot proposal to amend the City's business tax regime (also described in Tax Alert 2020-1700). At this time, it appears both measures will appear on the November ballot. It is uncertain what will happen if both measures pass. The Overpaid Executive Gross Receipts Tax will require a super-majority vote of 66% of the City's electorate to become law. In addition, the Board's Rules Committee has unanimously approved Initiative Ordinance 200654 (Proposal) for inclusion on the Nov. 3, 2020 ballot. The Proposal seeks to amend the City's Business and Tax Regulations Code to increase real property transfer tax rates as follows:
If the ordinance passes, San Francisco will have the highest transfer tax rate in California and one of the highest transfer tax rates in the US. The City's Controller estimates the rate increases will result in an average annual increase in revenue for the City of $196 million per year. For additional information on these developments, see Tax Alert 2020-2107 and Tax Alert 2020-2117. INCOME/FRANCHISE Federal: Proposed bill (HR 8056, Remote Worker Relief Act of 2020) would provide for out-of-state businesses that have employees working remotely in a jurisdiction that the duties performed by employees in those jurisdictions would not be sufficient to create nexus or establish any minimum contacts or level of presence that would subject the business to registration, taxation or other related requirements for taxes that are based on net or gross receipts or income or for purposes of apportioning or sourcing such receipts or income. HR 8056 was introduced on Aug. 14, 2020. Mississippi: In calculating the broadband credits' 50% limitation under Miss. Code § 57-87-5 the taxpayer — an affiliated group of telecommunication companies with each taxpayer filing separate franchise tax returns and each taxpayer included in the combined Mississippi corporate income tax return — may use against its franchise tax and income tax liabilities the aggregate of the taxpayer's separate franchise-tax liability and total income-tax liability of the affiliated group. In so holding, the Mississippi Supreme Court found that when reading together Miss. Code § 57-87-5 subsections (2) and (3) "it is clear that the Legislature intended for the taxpayers' tax liability to be the aggregate of the [franchise and income tax liabilities]." Further, as conceded by the Mississippi Department of Revenue, the taxpayer may allocate the credits to offset their franchise and/or income tax liabilities as "the taxpayer determines to be most beneficial." Mississippi Dept. of Rev. v. SBC Telecom, Inc., et al., No. 2019-CA-00917-SCT (Miss. S.Ct. Aug. 13, 2020). Nebraska: Before adjourning its 2020 legislative session, the Nebraska legislature failed to act on LB 1203, which would have addressed Nebraska's treatment of transition tax income under IRC § 965 and global intangible low-taxed income (GILTI) under IRC § 951A. As noted in Tax Alerts 2019-1639 and 2019-0062, the Nebraska Department of Revenue (Department) issued guidance on Nebraska's treatment of IRC § 965(a) repatriation income and GILTI under IRC § 951A. The guidance stated the Department's position that the IRC § 965(a) inclusion is not a dividend or deemed dividend deductible under Neb. Rev. Stat. §77-2716(5). Since issuing its guidance, the Department has been disallowing any dividend received deduction for IRC § 965(a) income. In January 2020, the Nebraska legislature introduced LB 1203, which would have amended Neb. Rev. Stat. § 77-2716(5) to provide that "deemed dividends" would include both IRC § 965(a) repatriation income and GILTI under IRC Section 951A, net of the deduction allowed by IRC § 250(a)(1)(B). Although LB 1203 had been designated priority legislation, when the legislature reconvened in July, it did not advance and was not passed. For more on this development, see Tax Alert 2020-2106. Pennsylvania: In reversing a decision by the Commonwealth's Board of Finance and Revenue (Board), the Pennsylvania Commonwealth Court (Court) upheld the longstanding interpretation of the Pennsylvania Department of Revenue (Department) of a corporate net income tax sourcing provision (72 P.S. § 7401(3)2.(a)(17) (Subparagraph 17)) applicable to pre-2014 tax years. The Court found that a multistate Pennsylvania corporation is entitled to a refund when it sourced sales of research, development, and management services for the 20111 tax year based on where customers received the benefits of its services, rather than where it incurred costs of performing those same services. On this issue of first impression, the Court found Subparagraph 17 to be ambiguous (particularly without definitions of "income-producing activity" and "costs of performance"), and deferred to the Department's decades-long interpretation despite a lack of regulation or formal policy regarding Subparagraph 17's construction. Under this interpretation, the Department treated each sales receipt as a separate income-producing activity, and then deemed each income-producing activity as having occurred at the location where the customer received the benefit of the service (i.e., benefits-received method). Further, an amendment to Subparagraph 17 that took effect in 2014 clarified, rather than altered, the benefits-received method that the Department was already applying and enforcing. The Court found this to be evidence that the legislature had acquiesced in the statutory interpretation and eliminated statutory ambiguity. Notably, the Court permitted the Department to intervene in this case between the corporation and the Pennsylvania Attorney General (AG), who took a position directly contrary to the Department's, finding the Department had a clear interest in the tax code issue presented and intervention would not cause prejudice. Synthes USA HQ, Inc. v. Pennsylvania, No. 108 F.R. 2016 (Pa. Cmwlth. Ct. July 24, 2020). SALES & USE Georgia: New law (SB 104) extends various sales and use tax exemptions related to nonprofit health centers and nonprofit hunger relief. The following exemptions from Georgia sales and use tax are permanently extended: (1) sales of tangible personal property to a certain nonprofit health center, as well as certain sales of tangible personal property and services to a nonprofit volunteer health clinic that serves indigent persons (both previously set to expire June 30, 2024); (2) sales of food and food ingredients to a qualified food bank (previously set to expire on June 30, 2021); (3) the use of food and food ingredients donated to a qualified nonprofit agency and used for hunger relief or disaster relief (exemption added in italics) (previously set to expire on June 30, 2021); and (4) the use of food and food ingredients donated following a natural disaster and used for disaster relief purposes (previously set to expire on June 30, 2020). In addition, the law provides a new exemption for certain sales to nonprofit organ procurement organizations and extends until July 1, 2026 (previously July 1, 2021) an exemption for the sale or use of noncommercial written materials or mailings by certain Georgia nonprofit organizations. SB 104 took effect Aug. 5, 2020. Ga. Laws 2020, Act 585 (SB 104), signed by the governor on Aug. 5, 2020. Louisiana: Related companies that operates casino-hotels (collectively "company") owe rooms taxes collected by the Louisiana Department of Revenue2 on all discounted and complimentary hotel rooms it provided to patrons at its hotel and certain third-party hotels based on the average seasonal rates from the preceding year of hotels in the New Orleans Central Business District and the French Quarter. In so holding, the Louisiana Court of Appeal (Court) found that the statute (La. Rev. Stat. §27:243(C)(1)(i)(2)(e) (Sub.(e)) was unambiguous, such that "room taxes" referenced all taxes levied by the state and city on the furnishing of sleeping rooms, not just city taxes. Further, Sub.(e) does not limit its application to lodging physically connected to the official gaming establishment or exclude third-party hotels from its provisions.3 The Court also rejected the company's argument that Sub.(e) violates the Louisiana Constitution either as a new tax or an increase of an existing tax that was enacted without the required two-thirds majority of members of each house of the legislature. The Court found the principal object of the law providing for such taxation on the company was to ease the company's financial burden after it filed for bankruptcy protection; thus, Sub.(e) was not a revenue-raising or money-appropriating measure, but rather was an exercise of Louisiana's police power regarding benefits not shared by other members of society. Jazz Casino Co., LLC v. Bridges, 2019 CA 1530 through 1534 (La. Ct. App., First Cir., July 29, 2020) (consolidated). Michigan: The Michigan Department of Treasury (Department) issued guidelines on the taxability of the retail sale of vehicles by leasing companies and persons other than state-licensed vehicle dealers, as these businesses may be required to obtain a sales tax license, file sales tax returns, and remit tax to the Department on such sales. A sellers not licensed as an automobile dealer (e.g., a leasing company, a bank or financial institution, a business selling a leased vehicle to an employee, a business selling vehicles rented on a daily basis, among other businesses) are presumed to be in the business of making retail sales when they sell or offer for sale three or more used vehicles in the previous 12 months. The guidance describes how to determine the tax due on vehicle sales, including retail sales of vehicles for registration inside or outside Michigan, and explains retail sales where an in-transit permit is used to transport the vehicle to a reciprocal state or a nonreciprocal/exempt state. Purchasers taking the vehicle to another country (including US territories) are subject to the Michigan sales tax on the selling price at the time of the retail sale. The bulletin provides various examples. Mich. Dept. of Treas., Rev. Admin. Bull. 2020-11 (Aug. 7, 2020) (replaces Rev. Admin. Bull. 1990-15). BUSINESS INCENTIVES New Hampshire: New law (HB 1558) extends the Economic Revitalization Zone Tax Credits (ERZTC) through Jan. 1, 2028 (previously, July 1, 2020). The law also (1) requires the Commissioner of Business and Economic Affairs to certify each application for the ERZTC (under prior law the Commissioner and taxpayer entered into a written ERZTC agreement); (2) makes the credit available after the commercial or industrial base has been expanded and new jobs have been created in the state, rather than before such expansion or creation; and (3) amends the credit calculation, requiring all credit recipients to calculate the credit based on the sum of a combination of capital expenditures and salary calculations related to new jobs created, rather than claiming the lesser of either the above amount or the maximum amount of the credit as provided by agreement. The extension took effect June 30, 2020, and the rest of these provisions took effect July 1, 2020. N.H. Laws 2020, ch. 38 (HB 1558), signed by the governor on July 29, 2020. PROPERTY TAX Arizona: In considering the valuation of a natural gas pipeline company's property, the Arizona Court of Appeals (Court) found the tax court erred in the use of a company-specific risk premium to determine the capitalization rate, affirmed reducing the company's income to account for income tax, and found the tax court did not err in reducing certain property values for economic obsolescence. In regard to the capitalization rate, the Court found the company did not show that the company-specific risk premium was "appropriate under the circumstances", noting that the company did not suffer more depreciation or more key-customer dependence than other pipeline companies, and the company's specific risks were duplicate risks already accounted for. The Court also affirmed the tax court's calculation of the company's income for use in the income methods (i.e., reduction of revenue to account for income taxes), finding competent evidence supporting the tax court's decision. Further, in reducing the property's value considering economic obsolescence, the Court found that: (1) massive cost overruns and dramatic downturns in the economy (2008–2009) resulted in obsolescence; (2) economic obsolescence was calculated by averaging two estimates (comparing recent rates of return with historical rates of return, then comparing to guideline pipeline companies); and (3) the asserted causes of the obsolescence affected the company's value. Lastly, the tax court erred in denying the state's motion for summary judgment to replace revised valuations with error-corrected property valuations. The Court remanded the case with instructions. Transwestern Pipeline Co. v. Ariz. Dept. of Rev., No. 1 CA-TX 19-0006 (Ariz. Ct. App., Div. 1, Aug. 6, 2020) (not for official publication). PAYROLL & EMPLOYMENT TAX Federal: Proposed bill (HR 8056, entitled the "Remote Worker Relief Act of 2020") would provide that any employee working remotely in connection with the COVID-19 emergency would be deemed to be performing services at their primary work location, and, alternatively, if the employer maintains a system that tracks employee work locations, the employer may, at its option, source the wages to the location where the remote work is performed. HR 8056 was introduced on Aug. 14, 2020. Colorado: A nonprofit organization announced that it collected enough signatures to place a paid family and medical leave program initiative on the Nov. 3, 2020 ballot. For more on this development, including information on the paid family and medical leave program, see Tax Alert 2020-2076. Delaware: An emergency order issued by the Delaware Secretary of Labor provides that employers will not be charged for COVID-19 UI benefits retroactively effective March 16, 2020 through the end of the state's COVID-19 emergency order (most recently extended for the fifth time on Aug. 5, 2020, with no expiration date). For additional information on this development, see Tax Alert 2020-2084. Georgia: The Georgia Department of Labor recently issued emergency rules to remove the requirement that employers file partial unemployment insurance (UI) benefit claims on behalf of part-time employees laid off due to the COVID-19 emergency. Employers continue to be required to file these claims for full-time employees. Under the partial-benefit claim process, the employer, not the employee, files for UI benefits. The revised rules are in effect for 120 days from the July 17, 2020 effective date. For additional information on this development, see Tax Alert 2020-2105. Kansas: In the 2020 special session of the Kansas legislature, state law makers passed HB 2016 providing that contributory employers will not be charged for unemployment insurance (UI) benefits attributable directly to the COVID-19 emergency. The bill does not give an expiration date for the waiver of COVID-19 UI benefit charges nor does it extend the provision to reimbursing employers (governmental employers and charities). For additional information on this development, see Tax Alert 2020-2087. Ohio: Earlier this year, legislation was enacted under Section 29 of HB 197 that, effective March 9, 2020, and for 30 days following the conclusion of the state's emergency declaration, temporarily changes the Ohio municipal income tax rules by stipulating that any day in which an employee performs personal services at a telework location, including the employee's home, is deemed to be a day performing personal services at the employee's principal place of work. The law faces a legal challenge and a bill, SB 352, if enacted would repeal it. For additional information on this development, see Tax Alert 2020-2098. MISCELLANEOUS TAX Arkansas: Flavor cartridges used in soft drink machines to customize the flavor of otherwise completed soft drinks are not subject to Arkansas's soft drink tax because they are not a taxable "syrup," "simple syrup," or "soft drink." The Arkansas Department of Finance and Administration (Department) found that the cartridges are not a syrup or simple syrup used to make a complete soft drink since the soft drinks exist independently of the additional flavor. Further, Soft Drink Tax Reg. 1993-8(A)(17) states that soft drink "does not include products used solely for coloring or flavoring other beverages." Ark. Dept. of Fin. and Admin., Op. No. 20200526 (Aug. 4, 2020). Georgia: New law (HB 105) imposes a $0.50 excise tax on any for-hire ground transport trip and $0.25 tax on any shared for-hire ground transport trip to be collected and remitted by the for-hire ground transport service provider and not the vehicle driver. The tax will be annually adjusted for inflation or deflation. HB 105 requires each for-hire ground transport service provider to submit quarterly reports containing trip information and it defines key terms including, "for-hire ground transport trip", "shared for-hire ground transportation trip", "for-hire ground transport service provider," "transit," "transit projects," and "transit provider." The transactions subject to this tax are exempt from sales and use tax. These provisions became effective April 1, 2020 and apply to sales of transportation on or after that date. Ga. Laws 2020, Act 606 (HB 105), signed by the governor on Aug. 5, 2020. Ohio: The Ohio Court of Appeals (Court) partially reversed the trial court, finding that Cincinnati's excise tax on billboards is constitutional under the First Amendment's free speech protections, but restricting communications between advertising hosts and their customers regarding tax is unconstitutional. The Court found the billboard tax (1) is content neutral as it applies to billboards regardless of the message displayed and does not threaten to suppress the expression of certain viewpoints and (2) it does not single out a small group for taxation. The ordinance's prohibition of an advertising host from issuing a statement to an advertiser reflecting the tax, as well as prohibiting the host from indicating that an advertiser will absorb the tax's cost, however, is unconstitutional. The Court reasoned that Cincinnati had a substantial interest in making sure that the billboard tax operated as an excise tax rather than as a sales tax, but it was broader than necessary to achieve the city's interest when a simple disclaimer to customers would communicate that the billboard tax is the operators' payment responsibility. Lamar Advantage GP Co., LLC v. City of Cincinnati, Ohio, No. C-180675 (Ohio App. Ct., First Appel. Dist., June 18, 2020). Washington: Two non-profit medical centers (medical centers) are not entitled to a refund of business and occupation (B&O) tax for taxes paid on compensation received from non-Washington state Medicaid or Children's Health Insurance Programs because under the series-qualifier rule of statutory construction, the statute limits the B&O tax deduction to compensation from Washington programs. In affirming the decisions of the lower courts, the Washington Supreme Court (Court) also rejected the medical centers' argument that the Court's reading of the statute raises dormant Commerce Clause concerns, finding the medical centers failed to provide evidence of impermissible protectionism. Thus, the limited deduction is constitutional under the government function exemption of the dormant Commerce Clause (i.e., the exemption is constitutional because it benefits the exercise of a government function while treating all other private entities the same). Peacehealth St. Joseph Medical Center v. Wash. Dept. of Rev., No. 97557-4 (Wash. S.Ct. Aug. 6, 2020). VALUE ADDED TAX International — Peru: On Aug. 12, 2020, Peru issued Supreme Decree 226-2020-EF, simplifying the procedure for foreign tourists to claim a value-added tax (VAT) refund. Tourists who have visited Peru and have purchased goods subject to VAT in "authorized establishments" may file a request for a VAT refund with the Peruvian tax authority at the control point in the international terminals. For additional information on this development, see Tax Alert 2020-2099. International — Rwanda: On July 20, 2020 and pursuant to provisions of Article 2 of the Value Added Tax (VAT) Laws of Rwanda, the Rwandan Minister of Trade and Industry issued an announcement listing specific requirements that should be met by industries and manufacturers when filing an application for a VAT exemption on imported machinery, capital goods and raw materials. This exemption is not applicable to importers who intend to resell the imported machinery, capital goods and raw materials. For additional information on this development, see Tax Alert 2020-2097. UPCOMING WEBCASTS 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 versus 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 Other tax years at issue were stayed pending the case outcome. 2 The state-collected room taxes at issue included the state sales tax, the Louisiana Stadium and Exhibition District tax and the New Orleans Exhibit Hall Authority tax. 3 The state acknowledged that the company is entitled to a credit for the amount of room taxes it paid to the third-party hotels based on the contracts it executed for room blocks, as the transactions were sales for resale. | ||||
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