October 5, 2020
State and Local Tax Weekly for September 25
Ernst & Young's State and Local Tax Weekly newsletter for September 25 is now available. Prepared by Ernst & Young's State and Local Taxation group, this weekly update summarizes important news, cases, and other developments in U.S. state and local taxation.
State tax agency responses to the COVID-19 emergency
The Indirect Tax COVID-19 state response matrix provides updates on the latest state tax agency responses related to the COVID-19 emergency. The matrix is available on EY's Indirect Tax COVID-19 state response website, which is accessible directly through this link, or on ey.com where other important tax-related information pertaining to the COVID-19 emergency is available.
California law makes it easier for workers in certain industries to qualify for independent contractor status
On Sept. 4, 2020, Governor Newsom signed into law AB 2257 (Cal. Laws 2020, ch. 38) (AB 2257) which amends the presumption under AB 5 (Cal. Laws 2019, ch. 296) (AB 5) that a worker is an employee under the ABC test pursuant to the California Supreme Court holding in Dynamex Operations West, Inc. (Dynamex)1 by establishing exemptions for several specific industry services such as photography, music, freelance writing and translating services. Pursuant to the exemptions in AB 2257, covered workers in these categories may be classified as independent contractors under certain circumstances.
As we previously reported, effective Jan. 1, 2020, AB 5 codified the application of the ABC test under Dynamex and expanded and clarified its application. The ABC test essentially replaced the previous common law test. AB 5 significantly impacts most industries that customarily engage independent contractors, in particular the gig economy (e.g., rideshare and delivery drivers).
Under the ABC test, unless the occupation is specifically exempted by law, hiring entities must treat all workers as employees unless they can demonstrate that all the following conditions are satisfied:
If all the conditions above are met, the hiring entity may generally treat most of these workers as independent contractors. Note, however, that the California Employment Development Department continues to rely on the "Borello"2 test for certain occupations.
For additional information on this development, see Tax Alert 2020-2324.
Federal: The Treasury Department has released final and proposed regulations limiting the impact of the repeal of IRC §958(b)(4) in determining the controlled foreign corporation (CFC) status of a foreign corporation when applying certain provisions. Before repeal by the Tax Cuts and Jobs Act (P.L. 115-97), IRC §958(b)(4) prevented a US subsidiary from being treated as owning stock in a foreign-owned brother-sister subsidiary for purposes of determining whether the brother-sister foreign subsidiary was a CFC. For additional information on this development, see Tax Alert 2020-9048.
Federal: The US Department of Treasury and IRS have released final regulations (T.D. 9916) on the allowance for the additional first-year depreciation deduction under IRC § 168(k), as amended by the TCJA, for qualified property acquired and placed in service after Sept. 27, 2017. For more on this development, see Tax Alert 2020-9047.
Federal: The US Department of Treasury released final regulations (TD 9919) under IRC § 864(c)(8) on the treatment of a foreign partner's transfer of an interest in a partnership that is engaged in the conduct of a trade or business within the US. For more on this development, see Tax Alert 2020-9049.
Multistate: The latest state corporate and franchise tax quarterly newsletter provides a summary of the significant legislative, administrative and judicial actions that affected state and local income/franchise and other business taxes for the third quarter of 2020. These developments are compiled from the EY Indirect/State Tax Weekly and Indirect/State Tax Alerts. Highlights include: (1) a summary of legislative developments in California, Colorado, District of Columbia, Florida, Hawaii, Louisiana, Mississippi, Missouri, Nevada, New Jersey, Pennsylvania, South Carolina, and Utah; (2) a summary of judicial developments in Minnesota, Mississippi, New Jersey, Oregon, and Pennsylvania; (3) a summary of administrative developments in California, Colorado, Connecticut, District of Columbia, Florida, Georgia, Kentucky, Maine, Maryland, Massachusetts, Missouri, New Jersey, New York, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, and Virginia; (4) a discussion of state and local tax items to watch in California, Illinois, New York, and Vermont. See Tax Alert 2020-2364 for a copy of the newsletter.
Colorado: New and amended rules (Code of Colo. Regs. 39-22-103(5.3) and -303.6-1(1)(f)) clarify that Colorado's definition of "IRC" incorporates federal changes on a prospective basis only. Specifically, the rule provides that "[the IRC for Colorado tax law purposes] does not, for any taxable year, incorporate federal statutory changes that are enacted after the last day of that taxable year." Hence, federal changes enacted after the end of a taxable year do not impact a taxpayer's Colorado tax liability for that taxable year. The rule further provides that federal changes are incorporated into the IRC definition to the extent they are in effect in the tax year in which they were enacted and future tax years. This definition also applies to apportionment and allocation provisions. These rules take effect Sept. 30, 2020. Colo. Dept. of Rev., Code of Colo. Regs. 39-22-103(5.3) and -303.6-1(1)(f) (adopted Sept. 10, 2020)
Florida: New law (HB 7095) updates Florida's date of conformity to the IRC to Jan. 1, 2020 (from Jan. 1, 2019). This change took immediate effect and applies retroactively to Jan. 1, 2020. Fla. Laws 2020, ch. 2020-184 (HB 7095), signed by the governor on Sept. 18, 2020. In response to this law change, the Florida Department of Revenue (FL DOR) issued TIP No. 20C01-01 Florida Corporate Income Tax Adoption of 2020 Internal Revenue Code (Sept. 24, 2020), in which it explained that while the state will follow the computation of federal taxable income, state law requires the addition of amounts deducted as bonus depreciation under IRC §168(k). The FL DOR noted that HB 7095 does not address federal income tax law changes contained in the Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136).
Florida: The Florida Department of Revenue announced that the corporate income/franchise tax rate will remain 4.458% for tax years beginning on or after Jan. 1, 2020 but before Jan. 1, 2022. For tax years beginning on or after Jan. 1, 2022, the tax rate will revert back to 5.5% (the pre-2019 rate). Fla. Dept. of Rev., TIP No. 20C01-02 Florida Corporate Income Tax 2020 Tax Rate Remains 4.458% (Sept. 23, 2020).
New Jersey: In Preserve II,the Appellate Division of the New Jersey Superior Court (Appellate Court) affirmed the ruling of the New Jersey Tax Court that an out-of-state corporate limited partner (foreign co.) of two partnerships doing business in New Jersey has nexus with New Jersey for Corporation Business Tax (CBT) purposes because the foreign co. essentially took part in the partnerships' New Jersey business. In so holding, the Appellate Court rejected foreign co.'s argument that the tax court erred in in holding that it "had an 'automatic economic nexus' to this State upon its receipt of partnership income from New Jersey sources," finding the tax court judge "conducted an extensive analysis." The Appellate Court also rejected the foreign co.'s argument that the legislature did not intend N.J.S.A. 54:10A-2, which provides that "[e]very domestic or foreign corporation which is not … exempted shall pay an annual franchise tax … for the privilege of deriving receipts from sources within this State … ," to apply broadly to foreign limited partners, finding such "approach … irreconcilable with the language of N.J.S.A. 54:10A-2." Further, the Appellate Court found: (1) foreign co.'s status as a foreign limited partner did not exempt it from the tax; (2) legislative history and judicial precedent support the imposition of the CBT on all corporations that derive income from New Jersey; and (3) its interpretation of N.J.S.A. 54:10A-2 did not render N.J.S.A. 54:10A-15.7 (how to allocate a partner's share of receipts) and -15.11 (whether a partnership should remit payment on behalf of its foreign corporate partner's taxable business activities) illogical or absurd, noting that these statutes concern different topics. Preserve II, Inc. v. NJ Dir., Div. of Taxn., No. A-1331-17T3 (N.J. Super. Ct., Appel. Div., Sept. 9, 2020) (unpublished).
Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) has updated its corporate net income tax bulletin to clarify the gross receipts included in the calculation of the $500,000 gross receipts threshold for Pennsylvania nexus purposes and to provide guidance to pass-through entities (PTEs) with corporate partners. Under the original guidance, the PA DOR presumed nexus for out-of-state corporations that do not have a physical presence in the state but have $500,000 or more direct or indirect gross receipts from Pennsylvania sources (using the sales factor sourcing rules set forth in 72 P.S. §7401) from any combination of the following, gross receipts from the: (1) sale, rental, lease, or licensing of tangible personal property; (2) sales of services; and/or (3) sales or licensing of intangibles, including franchise agreements. Under the revised guidance, the PA DOR will presume nexus for out-of-state corporations that do not have a physical presence in the commonwealth but have $500,000 or more of gross receipts from Pennsylvania sources (using the sales factor sourcing rules in 72 P.S. §7401). Examples of gross receipts include: (1) the sale, rental, lease, or licensing of tangible personal property; (2) the sale of services; (3) the sale or licensing of intangibles, including franchise agreements; and (4) interest and other intangible income not included above. The updated bulletin also provides guidance to PTEs with corporate partners. A PTE with corporate partners that previously did not file a PA-65 Corp., depending on its activities and receipts, may be required to file a PA-65 Corp for tax year 2020 or later. A corporate entity in determining whether it has exceeded the $500,000 gross receipts threshold, will combine the receipts from all PTEs it holds. A PTE, however, in determining whether it is required to file Form PA-65 Corp., will make its own determination based on its Pennsylvania sourced gross receipts. Pa. Dept. of Rev., Corporation Tax Bulletin 2019-04 "Nexus for Corporate Net Income Tax Purposes" (updated Aug. 6, 2020).
SALES & USE
Arkansas: In response to a legal opinion request regarding the taxability of an online peer-to-peer car sharing platform, the Arkansas Department of Finance and Administration (Department) advised that the car rental facilitation company (CRFC), if it does not supply a vehicle, would be a marketplace facilitator if it meets the state's economic nexus threshold (e.g., exceed $100,000 in sales or 200 separate sales transactions). Upon meeting the threshold, the CRFC would be required to collect and remit sales and use tax and rental vehicle tax on sales that occur on its platform; tax is due on the total consideration for the vehicle rental. If a host (i.e., a person or entity that lists a vehicle on the marketplace) leases the vehicle through a marketplace facilitator, the marketplace facilitator would collect and remit the applicable taxes, even though ordinarily the lessor would collect and remit the tax. Additionally, for county and/or municipality tax, generally sales are sourced to where the customer takes receipt of the vehicle, except leases for more than one periodic payment (first payment is sourced where the customer takes receipts, and the rest of the payments are sourced to the vehicle's actual location). Lastly, the Department provided guidance on the taxability of various fees (e.g., airport related fees, vehicle license fees, ancillary product fees, late charges) contemplated by the CRFC as options for leases made through the marketplace. Ark. Dept. of Fin. and Admin., Rev. Legal Op. No. 20190925: Gross Receipts and Short-Term Rental Tax — Peer-to-Peer Vehicle Rental Platform (Aug. 20, 2020).
South Carolina: The South Carolina Department of Revenue issued for public comment a draft revenue ruling on the applicability of sales and use taxes to the cost of tariffs. A retailer's charge or increase in the sales price to reflect the partial or full cost of the tariff imposed by the federal government would be subject to sales and use tax unless another exemption applies. When a product is purchased from a foreign entity by the person who will use or consume the product, whether the cost of the tariff is includable in the sales or use tax base depends on who was responsible for the payment of the tariff — the purchaser or someone else. If the purchaser is the importer (and, therefore, liable for the tariff), the cost of the tariff is not included in the "gross proceeds of sales" or "sales price" of the transaction with the seller because the purchase of the item and the payment of the tariff are two separate transactions. When the tariff is the responsibility of someone other than the purchaser (e.g., the seller is the importer and a portion of the cost of the tariff is recovered from the purchaser), the charge is included in the "gross proceeds of sales" or "sales price" subject to sales and use tax, unless an exemption applies. Comments on the public draft are due Oct. 6, 2020. S.C. Dept. of Rev., SC Rev. Ruling #20-x (DRAFT — Sept. 21, 2020).
Mississippi: In response to a ruling request, the Mississippi Attorney General (AG) opined that a production or processing facility located at the same physical address as a licensed free port warehouse or storage facility may qualify for the personal property in transit tax exemption (Miss. Code § 27-31-53(d)) when the local county or municipal governing authority determines the production or processing facility is completely separate from the warehouse or storage facility. In so advising, the AG stated that Mississippi law unambiguously permits an exemption of personal property stored in a warehouse or storage facility if it is maintained separately from the processing or production facility and does not specifically require that the warehouse or storage facility be at a physical address other than that of the processing or production facility. The AG noted that the Forrest County Board of Supervisors (Board) is not required to grant a free port warehouse exemption for a five-year term effective Jan. 1, 2016, two years before the legislative amendment authorizing an exemption for incoming raw materials and work-in-progress (which is at issue here) took effect. The AG advised that a new application for a free port warehouse license that includes the production or processing facility that was not previously considered by the Board be submitted. Miss. Atty. Gen., Opinion Re: Tax Exemption Pursuant to Miss. Code Ann. § 27-31-53 (May 13, 2020) (released September 2020).
Minnesota: The Minnesota Court of Appeals (Court) reversed the ruling of an administrative law judge and held that a county waived its claim to work-product protection of continuing legal education (CLE) materials covering strategies used by county attorneys to defend property tax appeals brought by big box retailers because the county presented the material to third parties without taking appropriate measures to maintain its confidentiality and the common-interest doctrine did not apply. Specifically, the Court found that the materials were unprotected because: (1) the county allowed individuals who did not share the common interest of defending tax appeals to access the presentation; and (2) the presentation lacked adequate safeguards to ensure it would not be disclosed to adverse parties. Matter of Walmart Inc. v. Anoka County, No. A19-1926 (Minn. Ct. App. Sept. 14, 2020) (unpublished).
PAYROLL & EMPLOYMENT TAX
Multistate: Considering that the added $600 per week of federal unemployment insurance (UI) benefits (the Federal Pandemic Unemployment Compensation or FPUC) authorized under the CARES Act lasted only through July 31, 2020, the Trump Administration authorized the Federal Emergency Management Agency (FEMA) to spend up $44 billion from the Disaster Relief Fund to continue funding UI benefits for lost wages due to the COVID-19 emergency. Under the Lost Wages Assistance program, qualified individuals can receive an added federally funded benefit of up to $300 per week and an optional $100-per-week benefit paid by the state or territory. For additional information on this development, see Tax Alert 2020-2281.
Multistate: The August-September 2020 issue of EY Payroll Perspectives, a newsletter of the Employment Tax Advisory Services team is now available through Tax Alert 2020-2310.
California: Tax Alert 2020-2292 provides an update on San Francisco gross-receipts tax. On Sept. 9, 2020, the California Supreme Court declined to review the California Court of Appeal's decision in City and Cnty. of San Francisco v. All Persons Interested in re: Prop. C , which upheld the validity of a gross-receipts tax to fund homelessness services. In other news, the San Francisco Director of Elections has assigned labels to two propositions that will appear on the November 2020 ballot related to the San Francisco's gross-receipts tax on businesses operating in the city. The "Business Tax Overhaul" proposal, which seeks to reform the city's current business tax regime, will appear on the ballot as Proposition F. This proposition will require a 50% +1 affirmative vote for approval and would be effective in calendar tax years starting in 2021. The "Business Tax Based on Comparison of Top Executive's Pay to Employee's Pay," will appear on the ballot as Proposition L and if enacted, would impose an additional progressively increasing tax rate on gross receipts for city taxpayers based upon a ratio of the amount paid to the taxpayer's highest paid employee compared to the median amount paid to its employees. Like Proposition F, Proposition L will require a 50% +1 affirmative vote for approval and would be effective in calendar tax years starting in 2022.
Tuesday, October 20.State and local tax developments in the real estate industry (1:00 p.m. ET).Topics to be discussed include state responses to the COVID-19 pandemic; state income tax conformity to the CARES Act; remote workforce issues, including wage withholding, business tax and individual income tax; and recent state and local tax legislation and proposals. 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 Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (2018).
2 See S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations, 48 Cal.3d 341(1989).