October 8, 2020
State and Local Tax Weekly for October 2
Ernst & Young's State and Local Tax Weekly newsletter for October 2 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.
New Jersey FY 2021 budget extends corporation business surtax through 2023, increases income tax rate imposed on millionaires, increases assessment on HMO net written premium
On Sept. 29, 2020, New Jersey Governor Phil Murphy as part of the Fiscal Year 2021 budget signed into law:
A. 4721, effective retroactive to Jan. 1, 2020, extends through Dec. 31, 2023 the 2.5% surtax currently imposed on CBT filers with allocated taxable net income in excess of $1 million. As originally enacted, the surtax rate was scheduled to decrease from 2.5% to 1.5% for privilege periods (i.e., tax years) beginning on or after Jan. 1, 2020 through Dec. 31, 2021, and expire for privilege periods beginning on or after Jan. 1, 2022.1 The law also directs the New Jersey Director of the Division of Taxation (NJ DOT) to waive penalties and interest incurred by a taxpayer due to the retroactive application of the increased surtax. (See Tax Alert 2020-2356.)
A. 10 increases to 10.75% (from 8.97%) the GIT rate imposed on individual, estate or certain trust income between $1 million and $5 million, effective retroactively to Jan. 1, 2020. (Prior to 2020, the 10.75% rate already applied to income over $5 million.) In response to this change, the NJ DOT said that effective immediately employers must withhold income tax at the rate of 21.3% from salaries, wages, and other remuneration in excess of $1 million but not in excess of $5 million, during the tax year. This higher withholding rate will allow affected taxpayers to "catch-up" on their withholding for the year. In addition, the DOT will not impose interest or penalties on insufficient estimated tax payments and/or withholding due before Sept. 29, 2020, provided that the underpayment is a result of the law change. (An updated withholding rate table is available here.) Lastly, A. 10 provides qualified taxpayers a rebate equal to the lesser of $500 or an amount equal to the amount of tax paid after credits for the tax year. (See Tax Alert 2020-2406.)
A. 4722, effective for Fiscal Year 2021, increases from 3% to 5% the annual assessment on net written premiums of HMOs. (Fiscal Year 2021 began Oct. 1, 2020.)
Federal: The US Department of Treasury and IRS have released a second set of final regulations (T.D. 9916) (2020 final regulations) on the allowance for the additional first-year depreciation deduction under IRC §168(k), as amended by the Tax Cuts and Jobs Act (P.L. 115-97), for qualified property acquired and placed in service after Sept. 27, 2017. For more on this development, see Tax Alert 2020-2330.
Federal: On Sept. 29, 2020, the US Department of Treasury released final regulations (T.D. 9922) and proposed regulations (REG-101657-20) on determining the foreign tax credit and allocating and apportioning deductions under the IRC. For more on this development, see Tax Alert 2020-9050.
Federal: On Sept. 21, 2020, the US Department of Treasury and the IRS released final regulations (T.D. 9919) under IRC § 864(c)(8) that provide guidance for determining the treatment of gain or loss recognized by a foreign person on the sale of an interest in a partnership that is engaged in the conduct of a trade or business within the United States. For more on this development, see Tax Alert 2020-2344.
California: A nonregistered out-of-state limited liability company (foreign LLC) whose sole connection to California is owning a membership interest in an LLC doing business in the state (in-state LLC) is not entitled to a refund of the annual $800 LLC tax because it is "doing business" in California based on the amount of its distributive share of the in-state LLC's California property. This share, the California Office of Tax Appeals (OTA) found, satisfies the property threshold of the state's bright-line nexus standard under Cal. Rev. and Tax Code (CRTC) §23101(b). For purposes of applying the property factor, the value of property owned is based on its original cost (fair market value is used if the original cost of the property cannot be ascertained). After making adjustments to account for potential assessed value increases, the OTA approximated the in-state LLC's original cost of its property to be $61.5 million and foreign LLC's distributive share of the property to be approximately $481,000. This amount "significantly exceeds" the applicable property threshold for the year at issue — $54,771. Additionally, the OTA rejected foreign LLC's argument that it was not "doing business" in California because under CRTC § 23101(a) and the California appeals court decision in Swart,2it was not "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit." The OTA found this argument to be incorrect for the following reasons: (1) for tax years beginning on or after Jan. 1, 2011, satisfying either one of two alternative tests under CRTC § 23101 (a) and (b) leads to a finding of nexus, and as discussed above, the property threshold under CRTC § 23101(b)(3) was exceeded; (2) Swart is distinguishable as that case dealt with a tax year before 2011, when the alternate "doing business" test did not apply; and (3) for purposes of applying the bright-line nexus tests, California law does not distinguish between active and passive ownership interests or general versus limited partnerships. In re: Appeal of Aroya Investment I, LLC, 2020 — OTA — 255P (Cal. Ofc. of Tax App. July 7, 2020)(Precedential).
California: New law (AB 3372) provides that if a non-US incorporated unitary corporation that is not itself subject to California corporate franchise or income tax in the year for which a valid water's-edge election is made, but subsequently becomes subject to the tax under the state's bright-line nexus standard (set forth in Cal. Rev. & Tax Code §23101(b)) in a tax year beginning on or after Jan. 1, 2021, the corporation will be deemed to have made the water's-edge election with the other members of the unitary combined reporting group. Cal. Laws 2020, ch. 297, (AB 3372), signed by the governor on Sept. 29, 2020.
Missouri: A multistate corporation and its affiliates (collectively, corporation) is not allowed under Missouri law to carry forward net operating losses (NOLs) of affiliates originating prior to 2007 (i.e., years in which the multistate corporation and its respective affiliates filed separate Missouri income tax returns) to their 2011–2013 amended consolidated Missouri income tax return when the corporation had applied the NOLs to their federal consolidated return prior to 2007 but had not applied them to any Missouri return. H&R Block, Inc. & Affiliates v. Mo. Dir. of Rev., Dkt. No. 17-1744 (Mo. Admin. Hearing Comm. Sept. 18, 2020).
New Jersey: The New Jersey Division of Taxation (NJ DOT) announced an automatic waiver of the late-filing penalty for filers of the 2019 New Jersey Corporation Business Tax Return.3If a return filer has properly extended its filing requirement to the Oct. 15, 2020 due date, the NJ DOT stated that it will automatically waive any late filing penalty that would be due if the return is filed by Nov. 16, 2020. Fiscal-year filers are also given an additional month to file. The NJ DOT updated its announcement on Oct. 1, 2020 to provide that it will treat elections that need to be made on a timely filed return (e.g., affiliated group, worldwide) as timely filed if the returns are submitted within the one-month abatement period. For additional information on this development, see Tax Alert 2020-2336.
South Carolina: New law (SB 545) updates the state's date of conformity to the IRC to Dec. 31, 2019 (from Dec. 31, 2018). In addition, for tax year 2020, the law conforms to the federal income tax treatment of, and excludes from tax, the income from a forgiven Payroll Protection Program (PPP) loan under section 1106 of Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136). These changes took effect upon the governor's approval. S.C. Laws 2020, Act 147 (SB 545), signed by the governor on Sept. 28, 2020.
SALES & USE
Colorado: The Colorado Department of Revenue adopted sales and use tax rules related to remote retailers, economic nexus, marketplace facilitators and the sourcing of retail sales. The following rules took effect Sept. 30, 2020: (1) Rule 39-26-102(1.3) — an auctioneer's duty to collect tax; (2) Rule 39-26-104-2 - sourcing retail sales; (3) Rule 39-26-102(3) - doing business in Colorado; and (4) Special Rule-44 - marketplaces owned, operated, or controlled by marketplace facilitators.
Nebraska: In a case regarding whether a company and a subsidiary were engaged in the qualified business of manufacturing and/or processing for purposes of the Nebraska Advantage Act (NAA), the Nebraska Supreme Court (Court) found that the company was engaged in processing aggregate but not manufacturing aggregate. In so holding, the Court noted that whether aggregate production is considered "manufacturing" for NAA purposes was an issue of first impression and found that "manufacturing" and "processing" have distinct meanings within the NAA context. While "manufacturing" is defined by the statute,4 "processing"5 means to subject to a particular method, system, or technique of preparation, handling or other treatment designed to prepare tangible personal property for market, manufacture or other commercial use which does not result in the transformation of property into a substantially different character. Here, the aggregate was not manufactured because it was not reduced or transformed into a different state but it was processed as it was subjected to particular treatment to prepare it for the market. The Court also rejected the subsidiary's overpayment claims under the sales and use tax manufacturing machinery and equipment exemption since the machinery and equipment was not used in manufacturing and the subsidiary failed to prove a physical change to the aggregate. The Court further rejected the subsidiary's argument that all of the equipment at the aggregate production locations is eligible for the exemption because it is used to transport, convey, handle or store the aggregate products used at the concrete production locations, noting that aggregate's later use in manufacturing concrete did not establish that the aggregate production locations are engaged in manufacturing. Ash Grove Cement Co. v. Neb. Dept. of Rev., 306 Neb. 947 (Neb. S.Ct. Aug. 28, 2020).
Tennessee: The Tennessee Department of Revenue posted frequently asked questions regarding the application of sales and use tax to pre-recorded videos. The sale of a pre-recorded video accessed by subscribers or consumers in Tennessee (i.e., by residential or primary business street address) is subject to sales tax as the sale of access to a specified digital product. Such pre-recorded videos are subject to tax regardless of whether they are live-streamed, offered on demand or as a replay. Specified digital products can be sold with rights that permit the product's subscriber or consumer to access it any time or only at a specific date and time. Lastly, even if an online course's instructor is not available during an online course but is available to participants to ask questions by email during or following the course (i.e., a nontaxable component), the transaction is still subject to sales tax because access to a specified digital product through the pre-recorded video is the true object of the transaction. Tenn. Dept. of Rev., Frequently Asked Questions on pre-recorded videos (Sept. 16, 2020).
Texas: The Texas Comptroller of Public Accounts (Comptroller) clarified guidance on the taxability under Texas' sales and use tax and oil well service tax of equipment at a well site to manage flowback and transition an oil or gas well to production after a frac job. Charges for "flowback services" are taxed as a rental of equipment and sales or use tax is due on the total equipment rental charge. The tax includes charges for transportation, installation, removal, and accompanying personnel, regardless of whether charges for equipment and personnel are billed as a lump sum, separated amounts, or on separate invoices. Flowback services are not included as nontaxable services subject to the 2.42% oil well service tax unless the flowback is provided by the frac service provider; and it is not on the list of nontaxable services under Tex. Admin. Code tit. 34, Rule 3.324(b)(2)(A)-(S). Further, any flowback personnel (including supervisors) that accompany the equipment are not equipment "operators" for sales and use tax purposes, since after installation the equipment needs only minor adjustments by flowback personnel to meet customer needs and such personnel do not actively guide or drive the equipment while it's in use. General resale principles apply to flowback equipment purchases. Lastly, the manufacturing exemption is not available to companies providing flowback equipment or to customers renting it, because the flowback process occurs before the well is completed and put into production. (The Comptroller noted that some equipment (e.g., separators) could qualify for this exemption when used outside the flowback process.) This clarification applies to all periods open within the statute of limitations. Tex. Comp. of Pub. Accts., No. 202009002L (Sept. 21, 2020) (supersedes Nos. 200208347L (Aug. 12, 2002), 200811221L (Nov, 20, 2008), 200804075H (2008), and 9705464H (1997) as they relate to equipment provided to control flowback and to the application of manufacturing exemptions for that equipment).
California: Vetoed bill (SB 972) would have required the California Franchise Tax Board (FTB) to compile a list of all taxpayers subject to the Corporation Franchise Tax with gross receipts of $5 billion or more for the tax year reported on a return in the previous calendar year and provide the list to certain committees in the California State Legislature. The list would include the name and tax liability of each taxpayer, the return's tax year, that tax year's total gross receipts and the amounts and types of credits claimed. In his veto message, Governor Newsom said the "bill is unnecessary, as current law already authorizes the FTB, upon request, to disclose taxpayer data to legislative committees." SB 972, vetoed Sept. 29, 2020.
California: New law (AB 2013) provides property tax relief for new construction of property substantially damaged or destroyed by a state-declared disaster by permitting the base year value of the damaged or destroyed property to be applied to comparable replacement property reconstructed on the damaged or destroyed property's site within five years after the disaster. Property is substantially damaged or destroyed if the improvements sustain physical damage of more than 50% of their full cash value immediately before the disaster. Reconstructed property will be considered comparable to the original property if it is similar in size, utility and function to the property it replaces. If the reconstructed property's full cash value does not exceed 120% of the full cash value of the property substantially damaged or destroyed, the property's adjusted base year value will apply to the reconstructed property as its base year value. The law includes separate base year value calculations for when the full cash value of the reconstructed property exceeds 120% of the full cash value of the damaged or destroyed property or is valued less than the adjusted base year value of the damaged or destroyed property before the disaster. The relief applies to property that was substantially damaged or destroyed by misfortune or calamity on or after Jan. 1, 2017 and has since been reconstructed. Taxpayers claiming this relief are not eligible to transfer the base year value of the property to a comparable replacement property within the same county under Cal. Rev. and Tax Code § 69. Cal. Laws 2020, ch. 124 (AB 2013), signed by the governor on Sept. 24, 2020.
COMPLIANCE & REPORTING
Maine: The Maine Revenue Services (MRS) in response to COVID-19 related federal corporate tax law changes is automatically extending the filing deadline for Maine corporate taxpayers to Nov. 16, 2020 (from Oct. 15, 2020). This automatic extension applies to any 2019 Maine Form 1120ME (Corporate Income Tax Return) or 2019 Maine Form 1120B-ME (Franchise Tax Return) that was otherwise due on the Oct. 15, 2020 extension date. Late filing penalties will be abated for returns filed by Nov. 16, but other associated penalties (e.g., underpayment penalty) and interest will continue to accrue. The MRS noted that the deadlines for forms not listed in this announcement or subsequent years for the listed forms are not affected. ME Rev. Serv., Maine Tax Alert (Vol. 30, Issue 8, Oct. 2020).
Kentucky: Governor Andy Beshear has abolished the Kentucky Claims Commission, effective on Sept. 1, 2020, and established the Office of Claims and Appeals within the Public Protection Cabinet (Executive Order 2020-708 (Order)). The newly established Office of Claims and Appeals consists of the reestablished Board of Tax Appeals (BTA), which had been abolished after creation by his predecessor of the Kentucky Claims Commission. The BTA has exclusive jurisdiction to hear 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. Any party aggrieved by a decision of the BTA (with the exception of an appeal from a county board of assessment appeals) may appeal to the Franklin County Circuit Court or the circuit court where the taxpayer resides or conducts its business. A state or county agency may petition the circuit court to require the taxpayer to post a bond or other security for the payment of any circuit court judgment if the agency believes its ability to obtain payment from the taxpayer is in jeopardy or if it believes that the appeal is for the purpose of delaying payment. The Public Protection Cabinet has issued proposed rules on BTA practice and procedure and has invited the public to submit comments and participate in a public hearing. The public hearing is scheduled to begin at 10 a.m. EST on Nov. 24, 2020. For additional information on this development, see Tax Alert 2020-2355.
PAYROLL & EMPLOYMENT TAX
Indiana: The Indiana Department of Revenue announced that the counties of Pulaski and Wayne have changed their local withholding income tax rates effective Oct. 1, 2020. The changes are as follows: Pulaski — the rate decreased from .0338 to .0285. Wayne — the rate decreased from .015 to .0125. For additional information on this development, see Tax Alert 2020-2342.
Nevada: New law (SB 4, 2020 Nev. Stat., ch. 8) requires that hospitality employees exposed to or contracting COVID-19 be provided with paid sick leave. This paid leave cannot be counted against the paid sick leave that the employee has accrued under NRS 608.0197 (2019 SB 312). The paid leave may, however, be deducted from paid leave provided under the federal Families First Coronavirus Response Act (P.L 116-127). For additional information on this development, see Tax Alert 2020-2361.
New York: The New York Department of Taxation and Finance released proposed regulations that include revised wage bracket and percentage method income tax withholding tables for New York State and Yonkers, effective with wages paid on or after Jan. 1, 2021. For more on this development, see Tax Alert 2020-2354.
New York: The U.S. Court of Appeals for the Second Circuit (Court) reversed a federal District Court's invalidation of New York State's Opioid Stewardship Act (OSA), including the opioid stewardship payment imposed on opioid manufacturers and certain distributors, finding the District Court lacked jurisdiction over the payment since it is a state tax under the Tax Injunction Act (28 U.S.C. § 1341). The opioid stewardship payment's primary purpose, the Court determined, is to raise revenue rather than to punish or regulate opioid manufacturers or distributors. It should be noted that due to legislative changes to the OSA and enactment of a new opioid tax,6 New York did not challenge the District Court's invalidation of the pass-through prohibition. Assn. for Accessible Medicines v. James, Nos. 19-183-cv(L), 19-199-cv(CON), 19-201-cv(CON) (2d Cir. Sept. 14, 2020) (consolidated).
International — European Commission: On Sept. 25, 2020, the European Commission (the Commission) published a new version of its Guidance Document on Customs Valuation (the Guidance). While not legally binding, the Guidance is considered to be an important interpretation of the European Union (EU) customs legislation and it is applied by most EU customs authorities. The most important changes relate to the removal of the domestic sale principle from the guidance document and the incorporation of new examples. The removal of the domestic sale principle has as a consequence that a sale between two EU residing parties can be regarded as a sale for export and thus the transaction could be used as the basis to determine the customs value of imported goods in the EU if it is the last sale. In many supply chains this results in the situation that a later sale in the supply chain, which usually represents a higher value, is elected as the relevant sale for export. This may lead to an increase of import duties payable. For additional information on this development, see Tax Alert 2020-2340.
International - OECD: On Sept. 24, 2020, the Organisation for Economic Co-operation and Development (OECD) released the compilation of the outcomes of the third phase of peer reviews (the Compilation) of the minimum standard on Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting) of the Base Erosion and Profit Shifting (BEPS) project. As Action 13 is a minimum standard, all members of the Inclusive Framework on BEPS have committed to implement it and to be reviewed and monitored by their peers. For additional information on this development, see Tax Alert 2020-2341.
VALUE ADDED TAX
International — European Commission: The European Commission (Commission) has published Explanatory Notes on the new value-added tax (VAT) e-commerce rules (Explanatory Notes). The Explanatory Notes contain extensive explanations and clarifications on these new rules including practical examples on how to apply the rules for suppliers or electronic interfaces (e.g., marketplaces and platforms) involved in e-commerce transactions. The Explanatory Notes are meant to help online businesses and in particular small and medium-sized enterprises (SMEs) to understand their VAT obligations arising from cross-border supplies to consumers in the European Union (EU). For more on this development, see Tax Alert 2020-2368.
International — Norway: The Norwegian Tax Authority is currently working on a project called "Modernization of the VAT system." The project is focused on digitalization and therefore, is likely to implement significant changes in the value-added tax reporting process and requirements in the near future. An EY Alert summarizes the expected developments under the new plan. For additional information on this development, see Tax Alert 2020-2366.
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 Coronavirus Aid, Relieve and Economic Security Act (P.L. 116-136) (CARES Act); remote workforce issues, including wage withholding, business tax and individual income tax; and recent state and local tax legislation and proposals affecting the real estate industry. 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 See N.J.S.A. 54:10A-5 (2019) (prior to its amendment by A. 4721).
2 Swart Enterprises, Inc. v. Franchise Tax Bd. (2017) 7 Cal.App.5th 497.
3 N.J. Div. of Tax., 30-Day Penalty Relief for Corporations for 2019 (last updated Oct 1, 2020) (last accessed Oct. 8, 2020).
4 Neb. Rev. Stat. § 77-2701.46.
5 According to the definition of "processing" previously endorsed by the Court in Nucor Steel v. Leuenberger, 233 Neb. 863 (1989) (quoting Webster's Third New International Dictionary, Unabridged 1808 (1981)) as modified by precedent from the U.S. Supreme Court in East Texas Lines v. Frozen Food Exp., 351 U.S. 49 (1956) and Anheuser-Busch Assn v. United States, 207 U.S. 556 (1908). (See Ash Grove Cement Co. v. Neb. Dept. of Rev., 306 Neb. 947, 975 (Neb. S.Ct. Aug. 28, 2020).
6 New York amended the OSA causing its provisions to expire in Dec. 2018, and it enacted a new payment method, which did not include a pass-through prohibition. The new method took effect July 1, 2019. See Tax Alert 2019-1235.