September 8, 2020 State and Local Tax Weekly for August 28 Ernst & Young's State and Local Tax Weekly newsletter for August 28 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 Immediate action recommended for companies receiving letters from Delaware on voluntary disclosure agreements for unclaimed property On Aug. 21, 2020, the Delaware Secretary of State (SOS) announced that its office was mailing approximately 200 letters to businesses and organizations identified as holders of unclaimed property (collectively, holders) that it has determined are likely to be out of compliance with reporting dormant, abandoned or unclaimed property under Delaware's Escheats Law. According to the letter, a holder that responds within 60 days of the letter's mailing can enter into Delaware's voluntary disclosure agreement (VDA) program. Under this program, a holder would perform a self-review of its books and records in exchange for the state's waiver of interest and penalties on late-filed unclaimed property. As explained in the letters, holders that do not timely enroll in the VDA program will be referred to the Delaware State Escheator and Delaware Department of Finance for audit to be conducted by a third-party auditor. Once audited, holders can no longer participate in the VDA program. Since third-party unclaimed property auditors contract with multiple states, a Delaware audit could also lead to a multistate audit of a holder's unclaimed property. For additional information on this development, see Tax Alert 2020-2140. California court rules assessor may not include certain capitalized costs in personal property tax assessments California's First District Court of Appeal (court) recently ruled a county property tax assessor may not include certain expenses capitalized for accounting purposes when determining fair market value for property tax assessments. In Church v. San Mateo County Assessment Appeals Bd.,1 the court concluded "fair market value and net book value are separate concepts with separate purposes, and … the assessor may not rely on [the taxpayer's] capitalization of expenses for accounting purposes to establish that those expenses increase the value of the equipment and are subject to assessment." As the opinion in this case makes clear, the value on a taxpayer's balance sheet for financial reporting purposes can differ from the value to be considered for property tax assessment purposes. Based on this ruling, when valuing equipment purchased by a taxpayer in a finished state, the assessor should exclude the following costs when determining fair market value:
To the extent a taxpayer's balance sheet asset values reflect excludable costs like those described above, taxpayers should carefully consider the costs reported to California assessors on annual business personal property returns and under cyclical audits. For additional information on this development, see Tax Alert 2020-2123. INCOME/FRANCHISE New York: A worldwide entertainment company and its consolidated subsidiaries (collectively, corporation) are required to include royalties received from alien affiliates in its entire net income under the former related member royalty expense add back and income exclusion provisions (N.Y. Tax Law former §§ 208(9)(o)(2) and (3)), because the alien affiliates were not subject to the add back provision the corporation was not entitled to the royalty income exclusion. In so holding, the New York State Tax Appeals Tribunal (Tribunal) found that contrary to the corporation's contention, related member royalty payments are not required to be added back if the related member-royalty payer is not a New York taxpayer. Thus, under N.Y. Tax Law former § 208(9)(o)(3), in order for the related member-royalty payee to claim the income exclusion, the related member-royalty payer must be a New York taxpayer. Since the alien affiliate is not a New York taxpayer, the corporation does not qualify for income exclusion. The Tribunal noted that the legislature did not intend for a taxpayer to gain the benefit of the income exclusion without the corresponding cost of the add back to a related member. Further, since the related members share the same economic interest, the Tribunal found that N.Y. Tax Law former § 208(9)(o)(3) as applied did not discriminate against the corporation in violation of the dormant Commerce Clause when the statute provided no advantage for New York taxpayers and such related member transactions did not burden interstate commerce. Lastly, the Tribunal found that the payments from the alien affiliates for the use, or license to use, copyright interests in certain programming are expressly included in the statutory definition of royalty payments. Matter of the Walt Disney Co. and Consol. Subs., DTA No. 828304 (NYS Tax App. Trib. Aug. 6, 2020). North Carolina: The Corporate Income Tax Division of the North Carolina Department of Revenue (Division) published Frequently Asked Questions regarding the state's Transfer Pricing Resolution Initiative (FAQs). The FAQs address the following issues: (1) whether a taxpayer which is currently under audit or in a request for review can participate in the initiative, (2) appeal rights, (3) whether a taxpayer has to participate in the initiative for all open years, (4) the impact of the initiative on non-filing affiliates in intercompany transactions, and (5) the Division's use of third party consultants as part of the initiative, among other topics. N.C. Dept. of Rev., "FAQs — Transfer Pricing Resolution Initiative" (Aug. 24, 2020). South Carolina: The South Carolina Department of Revenue (SC DOR) extended the nexus and income tax withholding guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency from Sept. 30, 2020 to Dec. 31, 2020. As previously announced, the SC DOR has stated that it will not use changes in an employee's temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period solely as a basis for establishing nexus (including for P.L. 86-272 purposes) or for altering the apportionment of income. S.C. Dept. of Rev., SC Information Letter #20-24 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19 (Aug. 26, 2020). SALES & USE Arkansas: In response to a revenue legal opinion request, the Arkansas Department of Finance and Administration (Department) advised that the sale of an extended warranty is subject to Arkansas sales tax when it is purchased in-state and is exempt from sales tax when it is purchased out-of-state. The Department stated that this general rule also includes the sale of a future performance of a taxable service. For sales and use tax purposes, according to the Department's response, Arkansas applies destination sourcing according to a hierarchy of rules. Under this hierarchy: (1) sales are sourced to the business location if a purchaser receives a product or service at the seller's business location; (2) if not 1, then the sale is sourced to the location where the receipt by the purchaser occurs, including the location indicated by instructions for delivery to the purchaser known to the seller; or (3) if neither 1 or 2, the sale is sourced to the location indicated by an address for the purchaser that is available from the seller's business records that are maintained in the ordinary course of the seller's business when use of the address does not constitute bad faith. Therefore, according to this ruling, extended warranty purchases made by customers while out of state (such as online or over the phone) are not subject to Arkansas sales and use tax, based on the location where the customer received the extended warranty. Ark. Dept. of Fin. and Admin., Op. No. 20200601 (Aug. 11, 2020). Iowa: Adopted amendment to Iowa Admin. Code 230.15(4) adds new paragraph "c" to clarify when a person is not eligible for a manufacturing exemption from sales tax based on being "primarily engaged" in one of five enumerated activities — construction contracting, repairing tangible personal property or real property, providing health care, farming, and transporting for hire. Legislation (HF 779) enacted in 2019 expanded the sales tax exemption for manufacturers by adding the word "primarily" to the definition of "manufacturer." The rule amendment implements, in whole or part, this law change. New paragraph "c" provides that a person is "primarily engaged" in an activity if it generates more than 50% of its gross revenue from its operating business from, or spending more than 50% of its time engaging in, any combination of those five activities during the 12-month period after the date the person engages in one of the listed activities. The rule provides examples of how the "primarily engaged" provision will be applied. The rule took effect Aug. 19, 2020. Iowa Dept. of Rev., Iowa Admin. Code 230.15(4)c (adopted June 22, 2020). Mississippi: New law (HB 1729) extends to July 1, 2025 (from July 1, 2020) the sunset date of the sales tax exemptions available to telecommunications enterprises for specified costs of equipment used in the deployment of broadband technologies. Sales of equipment to telecommunications enterprises before July 1, 2025 that is installed in Tier One areas and used to deploy broadband technologies is exempt from one-half of the sales/use tax imposed on the transaction. A full exemption is available if the equipment is installed in a Tier 2 or Tier 3 area. These provisions took effect July 1, 2020. Miss. Laws 2020, HB 1729, signed by the governor on July 7, 2020. Nebraska: A corporation that builds, maintains, repairs, and removes mobile telecommunication towers and equipment, and at all relevant times has been an "Option 2" contractor, must (1) pay sales or use tax on the building materials it purchased, and (2) remit sales tax when it bills customers for the same building materials once those materials are annexed to real property during the course of the corporation's "furnishing, installing, or connecting" of mobile telecommunications services. In so holding, the Nebraska Supreme Court (Court) found that the corporation is not entitled to a credit or deduction for sales tax paid when no conflict existed between a statute allowing the corporation to pay sales tax as a consumer2 and another statute requiring it to remit tax on the gross receipts it earned in furnishing, installing, or connecting mobile telecommunications services using those previously taxed goods.3 Further, while there is an exemption for gross income of certain Option 2 and 3 contractors, the exemption applies for services performed on the customer's side of the utility demarcation point. Since the corporation did not assert that any of its services were performed on the customer's side of the demarcation point, the exemption did not apply. The Court also found the corporation is not subject to double taxation when in the first instance — the purchase of building goods — the corporation, as the consumer, is the entity being taxed, and in the second instance — sales tax on its gross receipts — the corporation's customers are the entities being taxed, with the corporation obligated to remit the tax to the state. Lastly, the Court determined that several items (i.e., generators, fuel, electrical equipment, concrete pads) were used in conjunction with "furnishing, installing or connecting" of mobile telecommunications services and, as such, are subject to tax, and it rejected the corporation's equal protection challenge. Diversified Telecom Svcs., Inc. v. Nebraska, 306 Neb. 834 (Neb. S.Ct. Aug. 14, 2020). South Carolina: The South Carolina Department of Revenue (SC DOR) extended the nexus guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency from Sept. 30, 2020 to Dec. 31, 2020. As previously announced, the SC DOR will not use changes in an employee's temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period solely as a basis for establishing nexus. In the extension notice, the SC DOR makes clear that this guidance applies to sales tax. S.C. Dept. of Rev., SC Information Letter #20-24 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19 (Aug. 26, 2020). BUSINESS INCENTIVES Mississippi: New law (HB 1729) extends the sunset date for the credit for the costs of equipment used in the deployment of broadband technologies and the historic rehabilitation tax credit. The law extends to July 1, 2025 (from July 1, 2020) the sunset date of income and franchise tax credits available to telecommunications enterprises for specified costs of equipment used in the deployment of broadband technologies. A credit is not allowed if the equipment used in such deployment was paid for, or the cost was reimbursed, by funds made available under the federal Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act). These provisions took effect July 1, 2020. The law also amends the historic rebate tax credit, removing a provision that allowed a taxpayer to make an election to receive a 75% rebate on the amount of the credit in excess of $250,000 in lieu of the 10-year carryforward. Instead, a taxpayer can elect to receive a rebate on 75% of the total amount of the credit in lieu of the 10-year carryforward. In addition, the aggregate amount of the credits that may be awarded is increased to $180 million (from $120 million). Any taxpayer issued a certificate evidencing the eligibility to claim the credit prior to July 1, 2020 but who could not claim the credit due to the aggregate cap, will be given priority for tax credits awarded after July 1, 2020. Lastly, the historic rehabilitation credit will apply to a taxpayer that has been issued a eligibility certificate before Dec. 31, 2030 (formerly, Dec. 31, 2020). Changes to the historic rehabilitation tax credit took effect Jan. 1, 2020. Miss. Laws 2020, HB 1729, signed by the governor on July 7, 2020. PROPERTY TAX South Carolina: The South Carolina Constitution and the enabling statute do not prohibit counties from including private dormitories in a multicounty industrial and business park because the dormitories are commercial establishments, not legal residences. In so holding, the South Carolina Court of Appeals found that the dormitories are commercial enterprises under the ordinary definition of "business," reasoning that they engage in continuous commercial activity by leasing and providing specific dormitory-related services, are not owner-occupied, and are zoned commercially. SC Public Interest Foundation v. City of Columbia, Richland Cnty., and Fairfield Cnty., Op. No. 5740 (S.C. Ct. App. July 8, 2020). CONTROVERSY Mississippi: New law (HB 861) allows the Mississippi revenue commissioner (commissioner) to reduce the amount due by a taxpayer, if during the 60 days after the date the Mississippi Board of Tax Appeals mailed an order, the taxpayer provides additional documentation or information. The commissioner has 30 days from the date the taxpayer mails or provides in writing the additional documentation or information to issue a determination. During this period the 60-day appeal period is tolled; it will begin to run again at the time of the written notice of the commissioner's determination. This provision took effect July 1, 2020. Miss. Laws 2020, HB 861, signed by the governor on July 7, 2020. Missouri: New law (SB 676) establishes provisions for reporting federal partnership audit adjustments, incorporating much of the model rules provided by the Multistate Tax Commission. Generally, a taxpayer in a partnership must report and pay any Missouri tax due related to final federal adjustments by filing a federal adjustments report with the Missouri Department of Revenue (Department) for the reviewed year and, if applicable, pay the additional Missouri tax owed within 180 days after the final determination date. Similarly, partnerships and partners must report final federal adjustments arising from a partnership-level audit or an administrative adjustment request and make payments as required by law. The state partnership representative for the reviewed year will have the sole authority to act on the partnership's behalf, binding the partnership's direct and indirect partners. Additionally, the partnership payment election is irrevocable, unless the Missouri revenue director/designee determines otherwise in his or her discretion. These reporting and payment provisions, including the payment election, apply to direct and indirect partners of an audited partnership that are tiered partners and all of the partners of such tiered partners that are subject to Missouri income tax. SB 676 also addresses: (1) refund or credit claims arising from a federal adjustment, (2) making estimated payments of the tax expected from a pending IRS audit before the final adjustments report due date to limit interest accrual, and (3) limitations periods and when such periods can be extended. These provisions apply to any adjustments to a taxpayer's federal taxable income or federal adjusted gross income with a final determination date occurring on or after Jan. 1, 2021. Mo. Laws 2020, SB 676, signed by the governor on July 14, 2020. New York: New law (SB 8832) allows the use of electronic signatures on tax documents (i.e., return, report or any other tax related document or other matter administered by the Commissioner of the New York Department of Taxation and Finance) that can be electronically filed. This change took immediate effect. N.Y. Laws 2020, ch. 167 (SB 8832), signed by the governor on Aug. 24, 2020. PAYROLL & EMPLOYMENT TAX Iowa: State regulatory provisions require Iowa employers to provide employees with notification of the availability of unemployment insurance benefits at the time of separation from employment or reduction in hours. The Iowa Workforce Development Department provides a standard notice for employers to use to meet this requirement.For additional information on this development, see Tax Alert 2020-2126. Michigan: Michigan employers should expect to see an increase in the state unemployment insurance taxable wage base from the $9,000 that has been in effect for the past several years to the $9,500 currently only required to be used by delinquent employers. Reportedly, Michigan's unemployment insurance trust fund balance fell below $2.5 billion on June 30, 2020, the balance required for the $9,000 wage base to be in effect. For more on this development, see Tax Alert 2020-2141. South Carolina: The South Carolina Department of Revenue announced that the nexus and income tax withholding guidance it previously issued concerning temporary work in the state for COVID-19 is extended from Sept. 30, 2020 to Dec. 31, 2020. S.C. Dept. of Rev., SC Information Letter #20-24 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19 (Aug. 26, 2020). For additional information on this development, see Tax Alert 2020-2133. MISCELLANEOUS TAX Georgia: The Georgia Department of Revenue (Department) issued guidance on the state's new transportation services tax on for-hire ground transportation (see, Ga. Laws 2020 Act 606 (HB 105)). The new law imposes a $0.50 excise tax on any for-hire ground transport trip and $0.25 tax on any shared for-hire ground transportation trip to be collected and remitted by the for-hire ground transportation service provider and not the vehicle driver. A "for-hire ground transportation service provider" includes a limousine carrier, ride share network service, taxi service, or transportation referral service. According to the Department, tax does not apply to the following (1) no-show or cancellations fees, (2) fees charged by a service provider for waiting for the customer, and (3) rides that either originate or terminate in Georgia but terminate or originate in another state. The guidance also addresses who the tax applies to, describes ground transportation services, how and when to report and register for the tax, vendor's compensation, penalties for failure to file a return or pay tax due, among other issues. Lastly, although the law provided for the tax to apply to sales of transportation on or after the law's April 1, 2020 effective date, the Department said that ground transportation service providers must begin collecting the tax on Aug. 5, 2020 (the date HB 105 was enacted). Ga. Dept. of Rev., FET-2020-01 Transportation Services Tax (Aug. 7, 2020). New Jersey: New law (AB 4389) requires certain entities authorized to issue health or dental benefits plans in New Jersey to pay an annual 2.5% tax on their net written premiums. Entity does not include a dental service corporation or a multiple employer welfare arrangement registered under New Jersey's Self-Funded Multiple Employer Welfare Arrangement Regulation Act (codified at N.J.S.A. §17B: 27C-1 et seq.). The money from the assessment will be used only for the purposes of increasing the affordability in the individual market and providing greater access to health insurance to the uninsured, with a focus on households with an income below 400% of the federal poverty level. The assessment will no longer have to be collected if it is certified the Director of the Division of Budget and Accounting in the New Jersey Department of the Treasury to the Director of the New Jersey Division of Taxation and the New Jersey Commissioner of Banking and Insurance that money from the assessment is appropriated for a purpose other than to further the purposes of increasing affordability in the individual market and providing greater access to health insurance to the uninsured and the other objectives of AB 4389. These provisions take effect Jan. 1, 2021. N.J. Laws 2020, ch. 61 (AB 4389), signed by the governor on July 31, 2020. Washington: The Washington Department of Revenue issued guidance on when amounts received as a reimbursement for cooperative advertising expenses (i.e., sharing of advertising costs between businesses with common business interests) is included in gross income for business and occupation (B&O) tax purposes. Such receipts are excluded from gross income when the receipts are "advances" or "reimbursements" that a business receives solely as an agent for a third party. Generally, reimbursements a business receives for cooperative advertising expenses are gross income subject to the services and other activities classification of the B&O tax, but WAC 458-20-111 (Rule 111) excludes from gross income advances or reimbursements that a business receives solely as an agent for a third party because the receipts are income attributable to the business activities of the principal rather than the agent. A business (B1) will be able to deduct from its taxable gross income amounts received as cooperative advertising reimbursements from a different business (B2) if all of the following Rule 111 requirements are met: (1) B1 must pay the obligations to B2 to another party; (2) B1 cannot render or have liability for providing the services; and (3) B1 must act as an agent of B2 and cannot have any liability, except as agent. The guidance includes illustrative examples. Wash. Dept. of Rev., Excise Tax Advisory 3220.2020 Taxability of Cooperative Advertising Receipts (July 23, 2020). 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 Church v. San Mateo County Assessment Appeals Bd., 52 Cal.App.5th 310, A155034 (Cal. Ct. App., 1st App. Dist., Div. 4, June 26, 2020) (certified for publication July 16, 2020) (Genentech, Inc. was captioned as the "Real Party in Interest and Appellant.") 2 Neb. Rev. Stat. § 77-2701.10(2). 3 Neb. Rev. Stat. § 77-2701.16(2)(e). | ||||
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