September 10, 2020
State and Local Tax Weekly for September 4
Ernst & Young's State and Local Tax Weekly newsletter for September 4 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.
Ohio Appellate Court allows corporation to include all affiliated corporations in its city net profits tax consolidated return
In its opinion in Time Warner Cable, Inc. v. Cincinnati,1 the Ohio Court of Appeals, First Appellate District (court) held that the taxpayer could include in its consolidated municipal net profits return all affiliated corporations that were included in its consolidated federal income tax return. In so finding, the court affirmed a decision of the Ohio Board of Tax Appeals (BTA) reversing a determination of the Cincinnati Income Tax Board of Review.
At this time, it is unknown whether Cincinnati will appeal this decision. As the decision is from a court of appeals, an appeal to the Ohio Supreme Court is discretionary and not as of right, as would be the case with an appeal from the BTA.
This decision may have relatively limited application because all Ohio cities, for years after 2016, must allow an elective consolidated filing based on the taxpayer's membership in a federal affiliated group. Ohio cities have a three-year statute of limitations on refunds unless a waiver is in effect. There is, however, some variation with the statute of limitations provisions among the various Ohio city income tax ordinances. In some Ohio cities, the statute of limitations begins running from the date the taxes were due (i.e., unextended due date); in others, the statute of limitations begins running from the date of the extended due date. Thus, only some 2016 tax year Ohio city income tax returns (assuming a calendar-year taxpayer) that were filed in 2017 may still be open for a potential amended return refund claim. Taxpayers that filed nexus-only consolidated returns in any Ohio city may want to consider the application of this decision for open tax years.
For additional information on this development, see Tax Alert 2020-2145.
Federal: On Aug. 21, 2020, the US Treasury Department and the IRS released final regulations under the foreign dividend received deduction provisions enacted under the 2017 Tax Cuts and Jobs Act (P.L. 115-97) and codified at IRC § 245A (TD 9909). The final regulations provide anti-abuse rules for "extraordinary dispositions" and "extraordinary reductions." These regulations finalize proposed regulations and replace temporary regulations that were issued in June 2019. For additional information on this development, see Tax Alert 2020-2142.
Federal: On Aug. 21, 2020, the US Treasury Department and the IRS released proposed regulations under the foreign dividend received deduction and global intangible low-taxed income (GILTI) provisions enacted under the 2017 Tax Cuts and Jobs Act (P.L. 115-97) and codified at IRC §§ 245A and 951A. respectively (REG-124737-19). These proposed regulations are viewed as favorably to taxpayers and are intended to coordinate two independent sets of anti-abuse rules that apply to extraordinary dispositions and disqualified transfers (together, EDs). Both rules apply to certain transactions of a controlled foreign corporation (CFC) occurring during the so-called GILTI gap period. Absent the proposed regulations, gain recognized in an ED effectively could be subject to tax twice: Once, in the form of a taxable dividend distributed by a CFC (because the dividend is deemed to be attributable to the ED); and then again, either as increased subpart F income or GILTI inclusions from a CFC (because deductions attributable to basis acquired in the ED may not reduce subpart F income or tested income) or as increased gain from transactions in CFC stock (because those deductions generally still reduce earnings and profits). The proposed regulations, which would not be elective, would coordinate the two sets of anti-abuse rules so that one set generally would not apply to the extent that the other set resulted in taxable income. Taxpayers may apply the proposed regulations before they are finalized, including retroactively to past tax years of foreign corporations. For additional information on this development, see Tax Alert 2020-2157.
Federal: On Sept. 1, 2020, the US Treasury Department released final regulations (T.D. 9910; Final Regulations) on the base erosion anti-abuse tax (BEAT) enacted under the 2017 Tax Cuts and Jobs Act (P.L. 115-97) and codified at IRC §59A. As anticipated, the Final Regulations generally follow the proposed regulations issued in December 2019 with certain revisions. For additional information on this development, see Tax Alert 2020-9046.
District of Columbia: Emergency law (Act 23-404) delays the deferred tax liability deduction, expands the reach of the unincorporated business franchise tax, and conforms to federal opportunity zone provisions. Provisions of the bill delay when a combined group whose net deferred tax liability was increased as a result of the enactment of the combined reporting provisions can deduct a portion of the net increase. Under the amended provisions, the deduction may be claimed by an eligible taxpayer for a seven-year period, beginning with the 15th year (formerly 10th year) of the combined filing. For taxpayers who took the deduction into account when making estimated 2020 payments (previously 2015 payments) and an underpayment results, the estimated tax interest resulting from such underpayment, upon application, will be waived. This change takes effect Oct. 1, 2020. Further, effective Jan. 1, 2021, taxable income for unincorporated business franchise tax purposes, includes gain from the sale or other disposition of any assets, including tangible assets, intangible assets, real property, and interests in real property in the District, even when the sale or other disposition results in terminating an unincorporated business. In regard to opportunity zones, the District conforms to federal opportunity zone provisions, allowing certain capital gains to be deducted from gross income. Specifically, if a taxpayer invests in a "qualified opportunity fund" (QOF) that meets specific criteria, the taxpayer can: (1) defer a capital gains tax payment for investing in a QOF, subject to certain conditions; (2) reduce capital gains tax liability through a 10% step-up in basis if invested in a QOF for five years prior to Dec. 31, 2026, and an additional 5% step-up in basis if invested in a QOF for seven years before Dec. 31, 2026; (3) abate capital gains on an investment of capital gains in a QOF for at least 10 years before Dec. 31, 2047. The new law includes information about program criteria and as well as eligible QOF requirements. DC Laws 2020, Act 23-404 (B23-0867), signed by the mayor on Aug. 19, 2020 (expires Nov. 16, 2020). A bill (B23-0760) that would make these changes permanent was approved by the Mayor on Aug. 31, 2020, and has been sent to Congress for the 60-day review period required by federal law.
Utah: New law (HB 6013) temporarily removes the 80% limitation on a Utah net loss carry (NOL) forward applicable to tax years 2018 through 2020. For tax years beginning on or after Jan. 1, 2021, the 80% NOL limitation is reinstated. This change is retroactively effective to tax years beginning on or after Jan. 1, 2018. Utah Laws 2020 (Sixth Special Sess.), HB 6013, signed by the governor on Aug. 31, 2020.
Utah: New law (SB 6005) modifies Utah's income tax provisions to generally follow the federal income tax treatment of, and exclude from tax, the income from a forgiven Paycheck Protection Program (PPP) loan under section 1106 of the Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136) (CARES Act). Specifically, the law modifies the Utah corporate franchise and income tax law definition of "unadjusted income" (the starting point for determining Utah taxable income and which is essentially the same as the federal taxable income of a Utah taxpayer but as if it had filed a federal return on a separate company basis) as set forth in Utah Code §59-7-101(32) to clarify that it does not include the income received from (i) a forgiven PPP loan to the extent that a deduction for the expenditures paid with the loan is disallowed, or (ii) a similar paycheck protection loan this is authorized by the federal government in response to COVID-19, is forgiven if the borrower meets the expenditure requirements, and is exempt from federal income tax to the extent a deduction for the expenditures paid with the loan is disallowed. Similar changes are made for Utah individual income tax purposes by amending the definition of "adjusted gross income" in Utah Code §59-10-103(1)(a) to provide that such PPP loan (or equivalent program) is exempt from state individual income tax. The new law also (1) provides an exemption from state corporate franchise or income tax or (2) a subtraction from adjusted gross income for individual income tax for a grant or a forgiven loan provided by the state, a county in the state, or a municipality in the state in response to COVID-19 using certain federal funds. This change is retroactively effective for a tax year beginning on or after Jan. 1, 2020. Utah Laws 2020 (Sixth Special Sess.), SB 6005, signed by the governor on Aug. 31, 2020.
SALES & USE
California: Proposed amendments to Cal. Code Regs., tit. 18, § 1706 would amend California's sales and use tax drop shipment regulation to: (1) clarify that certain marketplace sales are not drop shipment transactions, (2) clarify when drop shippers can calculate the retail selling price of their drop shipments based on the property's selling price to the true retailer plus a markup, and (3) provide additional guidance on how to overcome the presumption of being a drop shipper. Under the proposed amendments, a marketplace facilitator would not be the "true retailer" when it is the retailer for a retail sale of tangible personal property to a California customer by a marketplace seller. Further, a supplier would not be a drop shipper when the supplier delivers property directly to a consumer based on a marketplace seller's instructions through a contract purchasing the property from the supplier. Additionally, for reporting periods commencing on or after July 1, 2021, in calculating the retail selling price of drop shipments, a drop shipper that does not know the retail selling price the true retailer charged to the California consumer would be able to calculate the retail selling price of its drop shipment based on its selling price of the property to the true retailer plus a markup (i.e., either 10% or, if the drop-shipper can document, a lower percentage that accurately reflects the retail selling price charged by the true retailer). The proposed amendments also address how to proceed if a markup percentage lower than 10% is developed in a drop shipper audit. Lastly, the proposed amendments provide that in order for a person to overcome the drop shipper presumption, the person would be required to accept a timely resale certificate that meets certain requirements, or establish that the customer was either a California retailer at the time of the sale or was a marketplace seller that purchased the property through a marketplace facilitator that was the retailer in that transaction. The proposed rules update the explanatory examples. An interested parties meeting (teleconference only) is scheduled for Sept. 15, 2020 (1:00 p.m. PDT), and written comments are due by Sept. 29, 2020. Cal. Dept. of Tax and Fee Admin., proposed Cal. Code Regs,. tit. 18, § 1706 (discussion paper issued Aug. 25, 2020).
Oregon: A car rental company is subject to vehicle use tax on cars it purchased for the purpose of temporarily renting them to customers because the purchases were made "at retail" and were not for resale. In so holding, the Oregon Tax Court (Court) explained that for purposes of the vehicle use tax, which was enacted in 2017, the legislature did not define "at retail" or "retail", and that the plain meaning of a purchase "at retail" is ambiguous since it could refer either to a purchase of a small number of vehicles or to a purchase of any number of vehicles if the purchaser buys them for the purpose of consumption rather than resale. The Court found that "retail" and "wholesale" have established legal meanings that consider whether a transaction is a sale to an "ultimate consumer" or a sale "for resale" or "for further distribution or processing." Using the context of several other excise tax laws, the Court concluded that the legislature intended "at retail" to refer to a sale other than a sale for resale. In addition, the Court rejected the company's argument that it is not the "ultimate consumer" of the vehicles it purchased, noting that the legislature did not use the word "ultimate" which "appears only in the dictionary definitions." Further, the Court found "no need to determine the 'ultimate' user or consumer of the vehicles", instead finding it "sufficient" that the company uses the vehicles and does not buy them for resale in the ordinary course of its business. Ean Holdings, LLC v. Ore. Dept. of Rev., TC 5337 (Ore. Tax Ct., Reg. Div., Aug. 12, 2020).
District of Columbia: Emergency law (Act 23-404) makes various changes to the Qualified High Technology Company (QHTC) credit provisions and clarifies DC Low-Income Housing Tax credit provisions. Modifications to the QHTC provisions include QHTC eligibility requirements, increasing the required number of qualified employees in the District to at least 10 or more (from two or more). The amount of the QHTC credit for retraining costs for qualified disadvantaged employees is reduced to $10,000 (from $20,000) for certain qualified disadvantaged employees; the associated carryforward and refundability provisions for this credit are repealed.
Repealed QHTC provisions include:
The QHTC personal property exemption is repealed applicable beginning July 1, 2020; all other provisions related to the QHTC apply as of the effective date of Act 23-404 (which is Aug. 19, 2020).
Lastly, Act 23-404 temporarily suspends the tax on capital gain (generally imposed at 3%) from the sale or exchange of a QHTC investment from Jan. 1, 2020 through Dec. 31, 2024.
Act 23-404 also clarifies various aspects of the DC Low-Income Housing Tax Credit, which can be claimed against income and franchise taxes or certain insurances taxes. An owner of a qualified project may receive the credit in an amount equal to 25% of the value of the federal low-income housing tax credit claimed under IRC § 42 received with respect to the qualified project. The credit can be claimed equally for 10 years and unused amounts can be carried forward, but it is not refundable. In addition, Act 23-404: (1) modifies transfer, sale, assignment, or allocation provisions; (2) clarifies that the number of such transactions is unlimited but the maximum credit allowable still applies; and (3) provides that credits earned or purchased by, or transferred or assigned to, a pass-through entity can be allocated to that entity's partners, members, or shareholders, without regard to their ownership interests in the qualified project. These changes take effect Oct. 1, 2020. DC Laws 2020, Act 23-404 (B23-0867), signed by the mayor on Aug. 19, 2020 (expires Nov. 16, 2020). A bill (B23-0760) that would make these changes permanent was approved by the Mayor on Aug. 31, 2020, and has been sent to Congress for the federally required 60-day review period.
District of Columbia: Emergency law (Act 23-404) exempts computer software from personal property tax unless: (1) the software is incorporated as a permanent component of a computer, machine, piece of equipment, or device, or of real property, and it is not commonly available separately; or (2) the software's cost is included as part of the cost of a computer, machine, piece of equipment, or device, or of the cost of real property on the taxpayer's books or records. This change applies starting July 1, 2021. DC Laws 2020, Act 23-404 (B23-0867), signed by the mayor on Aug. 19, 2020 (expires Nov. 16, 2020). A bill (B23-0760) that would make these changes permanent was approved by the Mayor on Aug. 31, 2020, and has been sent to Congress for the federally required 60-day review period.
Ohio: A big box retailer undervalued its property for the tax years at issue (2016 and 2017) by concluding, without sufficient support, that the property must be valued as if it were vacant rather than at a market rate. In so holding, the Ohio Board of Tax Appeals (BTA) found the assessor's valuation incorporating market data provided the best estimation of the property's value. Although the BTA found that both parties performed credible property analyses, it determined that the assessor better supported the market conclusions reached by, for example, considering the surrounding dense commercial area and including data about the property's market, such as rental and occupancy rates. Further, the BTA rejected the retailer's argument that a "fee simple unencumbered" appraisal must assume a property is vacant and available to be occupied at the time of the sale, noting that an appraiser may value a property as if it is vacant on the valuation date but is not required to do so. The BTA also found that an appraiser may consider the present use of a property among the relevant factors without having to adopt a "value in use" for the property. In this instance, the assessor's appraisal was not a "value in use" since the assessor provided adequate market data to support her conclusions. Lowe's Home Centers, LLC v. Wood Cnty. Bd. of Revision, Nos. 2017–1429 and 2018–1580 (Ohio Bd. of Tax App. Aug. 18, 2020).
Kentucky: Governor Andy Beshear through Executive Order 2020-708 has abolished the Kentucky Claims Commission, effective immediately upon the filing of this Order, and establishes the Office of Claims and Appeals within the Public Protection Cabinet. Within the Office of Claims and Appeals is the reinstated Board of Tax Appeals (Board), which had been disbanded by the state's prior governor. The Board is vested with the exclusive jurisdiction to hear and determine appeals from final rulings, orders, and determinations of any state or county government agency affecting revenue and taxation, including appeals currently pending before the Kentucky Claims Commission. Administrative hearings before the Board will be de novo and conducted in accordance with the Administrative Hearings provisions under KRS Ch. 13B. Board rulings may be appealed to the Franklin Circuit Court or to the circuit court in the county the aggrieved party resides or conducts business. Ky. Gov., Executive Order 2020-708 Relating to the Reorganization of the Public Protection Cabinet (Aug. 31, 2020).
PAYROLL & EMPLOYMENT TAX
Iowa: The Iowa Department of Revenue announced that as a result of its emergency order 2020-4 providing flexibility for certain businesses disrupted by the COVID-19 emergency, it is extending the due date for the payment of individual income tax withholding tax. For more on this development, see Tax Alert 2020-2166.
District of Columbia: Emergency law (Act 23-404) imposes a tax and a local transportation surcharge on motor vehicle fuels sold or otherwise disposed of by an importer or by a user, or used for commercial purposes. Effective Oct. 1, 2020, the tax rate is $0.235 per gallon, and the surcharge is $0.053 per gallon. The surcharge will increase to $0.103 per gallon, effective Oct. 1, 2021; the surcharge will be increased annually by a cost-of-living adjustment starting Oct. 1, 2022. Effective Sept. 30, 2020, the previous motor fuels tax of 8% of the average wholesale prices of gallons of regular unleaded gasoline for the applicable base period is repealed. DC Laws 2020, Act 23-404 (B23-0867), signed by the mayor on Aug. 19, 2020 (expires Nov. 16, 2020). A bill (B23-0760) that would make these changes permanent was approved by the Mayor on Aug. 31, 2020, and has been sent to Congress for the federally required 60-day review period.
Virginia: The cities of Norfolk and Chesapeake are prohibited by the federal Internet Tax Freedom Act (ITFA) from imposing their respective Business Professional and Occupational License (BPOL) taxes on a communications company's gross receipts derived from internet access services provided to customers. In so holding, both the Norfolk and Chesapeake circuit courts, for different reasons, found the respective city's BPOL to be a tax as defined by the ITFA (not a fee imposed for a specific privilege) and the BPOL is a "tax on internet access" as defined by the ITFA. Neither court addressed whether their respective city's BPOL would fall under ITFA's grandfathering provision, thereby allowing either respective city to impose tax prior to July 1, 2020. Cox Comm. Hampton Roads, LLC v. City of Norfolk, No. CL19-4764 (Norfolk, Va. Cir. Ct., 4th Jud. Cir., Aug. 3, 2020); Cox Comm. Hampton Roads LLC v. King, CL19-3711 (Chesapeake, Va. Cir. Ct., 1st Jud. Cir., Aug. 14, 2020).
International — Kenya: In accordance with Section 47 of the East Africa Community (EAC) Customs Management Act, 2004 which grants authority to any taxpayer to warehouse dutiable goods in a government or bonded warehouse and regulation 64 of the EAC Customs Management regulation, 2010 which lists goods which are excluded, Kenya's Commissioner of Customs and Border Control issued a Gazette Notice No. 3350 providing an additional list of goods that may not be warehoused. Initially, the effective date of the notice was Aug. 12, 2020. However, following consultations with taxpayers, the Commissioner has considered an extension of the effective date to October 2020. For additional information on this development, see Tax Alert 2020-2153.
VALUE ADDED TAX
International — Cyprus: The Cyprus House of Representatives voted on and approved several important amendments to the Value Added Tax (VAT) Law on July 31, 2020. The amending bill was enacted as part of a package of measures to improve tax collection and to tackle VAT fraud. This Alert summarizes the key changes. Affected businesses should seek immediate guidance to ensure compliance and implementation of potential benefits. For additional information on this development, see Tax Alert 2020-2143.
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 Time Warner Cable, Inc. v. Cincinnati, 2020-Ohio-4207, Appeal No. C-190375 (Ohio Ct. App., First App. Dist., Aug. 26, 2020).