October 16, 2020
State and Local Tax Weekly for October 9
Ernst & Young's State and Local Tax Weekly newsletter for October 9 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 Supreme Court ruling provides first judicial guidance on Commercial Activity Tax sourcing rule for gross receipts not otherwise sitused
In Defender Security Co. v. McClain,1 the Ohio Supreme Court (Court) ruled that a company's receipts from the sale of customer contracts to another business are properly sitused to the out-of-state physical locations where the business purchaser received the benefit of the purchased contracts. In so finding, the Court reversed the denial of the company's refund claim for Commercial Activity Tax (CAT) by the Ohio Department of Taxation (OH DoT). The Court remanded the case back to the OH DoT to issue the refunds.
The Court's decision is significant as it marks the first judicial guidance on how the receipts sourcing rule in Ohio Rev. Code § 5751.033(I) will be applied. The Court focused on the transaction at issue — the transfer of an intangible contract right by the taxpayer to the purchaser — which the OH DoT had conflated with the services performed by the purchaser pursuant to that contract. The Court's decision also highlights that the purchaser's physical location is paramount in sourcing such receipts.
The Court's decision may have broader application to the sourcing of receipts from other services, for example, where the OH DoT has applied a "look-through" approach in audits, the situs of receipts from the performance of services may be based on where the purchaser's customer is located instead of the location of the purchaser itself. Finally, the decision also may have implications on pass-through entity and individual income tax as the situs rules employed for those taxes are virtually identical to the CAT rules reviewed by the Court in this decision.
For additional information on this development, see Tax Alert 2020-2388.
New California law allows certain nonresident aliens to elect to file group returns instead of individual returns
On Sept. 18, 2020, Governor Gavin Newsom signed into law AB 2660 (2020 Cal. Stats., ch. 102) (AB 2660), allowing nonresident aliens who are not eligible for, or have not been issued, a Social Security number (SSN) or an Individual Taxpayer Identification Number (ITIN) to elect to file a group return instead of an individual return for taxable income received for services that take place in California. As a result, the nonresident alien can make the election without having to provide an SSN or ITIN.
For tax years beginning on or after Jan. 1, 2021 until Jan. 1, 2026, AB 2660 requires the California Franchise Tax Board (FTB) to allow nonresident aliens who receive California-source income the option of electing to file a group return in lieu of an individual return. The election also can be made by an entity authorized by the taxpayer to file on his or her behalf. The tax rate for each nonresident alien making the election will be the highest marginal individual income tax rate(s). If the electing nonresident alien would be subject to the mental health tax2 when filing individually, an additional 1% tax rate will apply. Further, a nonresident alien making the election to join in a group return will not be allowed any deductions or credits, except for taxes withheld under the California State Unemployment Insurance Code.
The nonresident alien taxpayer, or an entity authorized by the taxpayer to file on his or her behalf, is responsible for making the requisite payments of tax, interest and penalties. In addition, tax payments made by an entity authorized by nonresident alien taxpayers to file on their behalf would be excluded from the nonresident's income.
AB 2660 also allows the FTB to adjust the income of an electing nonresident alien taxpayer included in a group return to properly reflect income.
For additional information on this development, see Tax Alert 2020-2434.
Federal: The IRS issued final regulations (TD 9914) on eligible terminated S corporations and distributions of money from those corporations after the post-termination transition period. The final regulations implement provisions added by the Tax Cuts and Jobs Act (P.L. 115-97) and adopt with some modifications proposed regulations issued in 2019. For more on this development, see Tax Alert 2020-2358.
Federal: On Sept. 21, 2020, the Treasury Department and the IRS released final regulations (TD 9908) and proposed regulations (REG-110059-20) on the repeal of IRC § 958(b)(4) by the Tax Cuts and Jobs Act (P.L. 115-97). The regulations do not undo the repeal of IRC § 958(b)(4). Instead, the regulations modify certain provisions so they apply in a manner consistent with their application before the repeal of IRC § 958(b)(4). For more on this development, see Tax Alert 2020-2362.
California: The California Franchise Tax Board announced adjustments to the bright-line "doing business in California" thresholds to reflect changes in the California Consumer Price Index as annually required by statute. The adjusted threshold values for taxable years beginning on and after Jan. 1, 2020 are: (1) taxpayer's in-state sales that exceed the lesser of $610,395 (increased from $601,967 in 2019) or 25% of the taxpayer's total sales; (2) taxpayer's real and tangible personal property in California exceeds the lesser of $61,040 (increased from $60,197 in 2019) or 25% of the taxpayer's total real and tangible personal property; and (3) taxpayer's in-state compensation exceeds the lesser of $61,040 (increased from $60,197 in 2019) or 25% of the total compensation paid by the taxpayer. Cal. FTB, TaxNews (Oct. 2020).
California: New law (AB 107) requires the Franchise Tax Board (FTB), in consultation with the Treasurer and Department of Finance, to develop for legislative consideration a comprehensive plan (including proposed statutory language and estimated program administration costs) for a California Economic Improvement Tax Voucher Program. Vouchers would be considered a prepayment of personal income or corporation taxes aimed at providing California with immediate resources. Vouchers could be taken as a credit against such taxes for future tax years beginning in the year after they are sold and could be carried over a minimum number of years. Vouchers would be fully transferable, and any capital gain from the vouchers would be excluded from state income taxes. The FTB has until March 1, 2021 to submit its plan to legislative committees that consider the state budget. AB 107 took effect immediately and will sunset on Jan. 1, 2022. Cal. Laws 2020, ch. 264 (AB 107), signed by the governor on Sept. 29, 2020.
Hawaii: The Hawaii Department of Taxation updated guidance addressing the application of P.L. 86-272 to Hawaii net income tax to incorporate an economic nexus standard that was enacted in 2019 (see 2019 Haw. Sess. Laws 221) and making other changes. The guidance discusses how P.L. 86-272 applies generally to protect only the solicitation of sales of tangible personal property from net income tax. Further, it addresses what activities are considered ancillary to solicitation, when shipping and delivery are protected, what are protected de minimis activities and when the activities of independent contractors are protected under the federal law. The guidance also includes a list of protected and unprotected activities in Hawaii. The updated guidance adds the following to the list of unprotected activities: (1) making sales that equal or exceed $100,000 during the current or preceding calendar year; (2) engaging in 200 or more business transactions with persons within Hawaii during the current or preceding calendar year; and (3) checking customers' inventories without a charge for quality control. The guidance also amends the list of protected activities. Changes include adding the normal distribution and use of business cards and clarifying when an in-home office is protected under P.L. 86-272. Haw. Dept. of Taxn., Tax Info. Release No. 2020-5 (Sept. 30, 2020) (supersedes Tax Info. Release No. 95-3).
Oregon: Individuals filing a joint income tax return were not entitled to Oregon's irrevocable pass-through entity (PTE) tax rate election for the 2015 tax year because they failed to make the election on their originally filed return. In so holding, the Oregon Tax Court (Court) found that the amended return filed in 2019 did not constitute an "original return" because it was not filed before the original 2015 filing deadline. The Court also rejected the individuals' argument that the state should permit them to correct their PTE election because they filed their amended return within "the three year statute of limitations," noting that the state law allowing the filing of amended returns and refunds within a specified period has no bearing on the irrevocable PTE election at issue or the requirement to claim the PTE election on an "original return." Mangat v. Ore. Dept. of Rev., No. TC-MD 200046N (Ore. Tax Ct., Mag. Div., Sept. 16, 2020).
Tennessee: The Tennessee Department of Revenue (TN DOR) in response to a letter ruling request regarding when predecessor taxpayers' net operating loss (NOL) carryforwards survive a merger transaction, determined that the statutory provision (Tenn. Code Ann. § 67-4-2006(c)(3)) permitting such survival applies only when a single taxpayer merges out of existence into a successor taxpayer with no income, expenses, assets, liabilities, equity or net worth. Therefore, in a fact scenario in which three federal S corporations (i.e., sequentially, S. corp. 1, S. corp. 2 and S. corp. 3) merge into a fourth shell corporation (Successor Corporation), the Successor Corporation could only succeed to and use the NOL carryforwards of S. corp. 1 after the merger. (Tennessee does not recognize federal S corporations and treats them as taxpayers under both its excise and franchise taxes just as if they were federal C corporations.) The TN DOR concluded that the NOL carryforwards of the other S corporations (i.e., those of S corp. 2 and S. corp. 3) would be lost. According to the TN DOR's ruling, once the Successor Corporation assumes all of S. corp. 1's income, assets, expenses, liabilities, equity or net worth after the first merger, the NOL carryforwards for S. corps. 2 and 3 would not meet the statutory requirements for taking the deduction (since Successor Corporation no longer meets the statutory requirement that it have no income, expenses, assets, equity or net worth after the merger with S corp. 1 is completed). Additionally, in a merger transaction in which S. corp. 1 and S corp. 3 have a Tennessee NOL carryforward while S. corp. 2 does not, and S. corps. 2 and 3 merge out of existence into S. corp. 1, S. corp. 3's NOL carryforwards would be lost because S. corp. 1 is not a shell corporation as it already had its own assets, liabilities and equity. Tenn. Dept. of Rev., Letter Ruling # 20-06 (Sept. 17, 2020).
Vermont: New law (HB 954) updates the state's date of conformity to the IRC to Dec. 31, 2019 (from Dec. 31, 2018). This change is effective retroactively to Jan. 1, 2020 and applies to tax years beginning on and after Jan. 1, 2019. Vt. Laws 2020, Act 175 (HB 954), signed by the governor on Oct. 8, 2020.
SALES & USE
Multistate: The latest EY Sales and Use Tax Quarterly Update provides a summary of the major legislative, administrative and judicial sales and use tax developments. Highlights of this edition, which is available in Tax Alert 2020-2398, include a review of the most recent developments involving nexus, tax base and exemptions, technology and compliance and controversy.
Arkansas: In response to a legal ruling, the Arkansas Department of Finance and Administration (AR DoFA) advised that advertising space on grocery store checkout dividers is subject to Arkansas sales tax. Under Arkansas law, a taxable sale includes the lease or rental of tangible personal property. Grocery store checkout dividers, as well as the space on the dividers, are taxable tangible personal property, the sale or lease of which is subject to tax unless an exemption applies. Although there is an advertising services exemption, it does not apply in this case because the company failed to demonstrate that it is "a 'full service' advertising agency offering comprehensive, professional advertising services to its customers for purposes of creating and implementing an advertising scheme." Further, the advertising space on the dividers do not qualify for the advertising space exemption for newspapers, publications and billboards. It is not a newspaper since it is not "a means of publication in sheet form containing reports of current events and articles of general interest to the public." It is not affixed to land and, as such, cannot be considered a billboard. Finally, the checkout divider is not a public transit bus (which is one of the exempt advertising spaces). Ark. Dept. of Fin. and Admin., Legal Op. No. 20200522 (July 16, 2020).
New Mexico: The New Mexico Taxation and Revenue Department (NM TRD) issued a bulletin on the application of the state's gross receipts tax on sales of food delivered to a customer's location using a variety of delivery methods. (The bulletin does not address the sale of prepared food.) Under New Mexico law, food sold at a retail food store may be deducted from gross receipts, unless the product is not exempt or not deductible under state law. When a food store uses a third-party delivery service to deliver groceries directly to customers who ordered and paid for groceries from the store online, the receipts from selling the groceries are eligible for the deduction and the receipts from performing delivery services are taxable (such receipts may be paid for by the retail food store or the end customer). When the store selling groceries offers delivery by the store for an additional service charge and charges the customer when the groceries are delivered and the order reviewed, receipts from the sale of groceries and the separate delivery charge are both taxable and the store is not eligible for the deduction. Under this scenario, the food is not sold at the retail store; rather, the sale and transfer of ownership takes place at the customer's delivery location. When the store selling groceries offers delivery by the store for an additional service charge and the customer orders the groceries online and the store accepts the customer's payment and then packs the groceries for delivery to the customer, the receipts from selling groceries are eligible for the deduction and the receipts from selling the delivery service are taxable. When a delivery service sells groceries and delivers it to its customer's home, the delivery service does not qualify for the deduction (unless it is a retail food store). The food store, however, is eligible for the deduction on groceries purchased by the delivery service for resale to its customers. The NM TRD noted that starting July 1, 2021 destination sourcing rules will take effect. This change could result in "several different tax rates being reported by a seller and passed on to a buyer based on the delivery location." N.M. Dept. of Taxn. and Rev., Bulletin 200.34 "Delivered Groceries" (Sept. 1, 2020).
South Carolina: The South Carolina Department of Revenue (SC DOR) announced that businesses with multiple South Carolina locations that file on a monthly basis and have a retail sales tax account can now file a consolidated sales tax return. The consolidated sales tax return covers information normally submitted on the SCDOR Form ST-3, Sales and Use Tax Return, and Form ST-389, Schedule for Local Taxes. Businesses must apply and be approved by the SC DOR to use this option. Businesses receiving the SC DOR's approval will file their Consolidated Sales Tax Returns on the SC DOR's online tax portal, MyDORWAY. S.C. Dept. of Rev., Release: SCDOR Consolidated Sales Tax Return Now Available for Businesses (Oct. 1, 2020).
Vermont: New law (HB 954) provides that the universal service charge imposed on retail sales of prepaid wireless telecommunications services is subject to sales and use tax to be collected by marketplace facilitators, in addition to being collected by the sellers. This change takes effect July 1, 2021. The law also modifies the state's economic nexus provisions for remote retailers and its marketplace facilitator provisions, changing the time period for meeting the threshold from "any 12-month period preceding the monthly period with respect to which that person's liability for tax … is determined" to "the 12-month period … " Additionally, the law repeals the requirement that noncollecting vendors file a copy of the notification they are required to send to Vermont purchasers with the Vermont Department of Taxes. Vt. Laws 2020, Act 175 (HB 954), signed by the governor on Oct. 8, 2020.
California: The California Film Commission has announced application deadlines for the next film and TV tax credit program - Program 3.0. For relocating TV series, the application period is March 8-10, 2021, with the phase II from March 11-15, 2021. For recurring TV series, the application period is March 15-17, 2021, with phase II from March 18-22, 2021. The approval date for these applications is April 19, 2021. Applications for new TV series will not be accepted during this application period. For feature and independent films, the application period is Jan. 25-27, 2021, with phase II Jan. 28 — Feb. 1, 2021. The approval date for these applications is March 1, 2021. Additional information on the program is available here.
Hawaii: New law (SB 2820), effective for tax years beginning after Dec. 31, 2019, repeals the individual and corporate net income tax credit for a solar energy system that is five megawatts in total output capacity or larger and requires a power purchase agreement approved by the public utilities commission (PUC). If, however, such a solar energy system is installed and placed in service pursuant to a power purchase agreement approved, or pending approval, by the PUC before Dec. 31, 2019, the taxpayer will continue to receive a tax credit equal to the lesser of 35% of the actual cost or $500,000 per solar energy system that has a total output capacity of at least 1,000 kilowatts per system of direct current. In addition, a tax credit equal to the lesser of 35% of the actual cost or the cap amount set forth in Haw. Rev. Stat. § 235.12.5 (b), may be claimed for each solar energy system integrated with a pumped hydroelectric energy storage system, if the applicable project approval filings have been made to the PUC by Dec. 31, 2021. 2020 Haw. Sess. Laws 61 (SB 2820), signed by the governor on Sept. 15, 2020.
California: New law (AB 107) extends to March 31, 2021 the two-year deadline by which a county board is required to render a final determination on certain qualified applications for a property tax assessment reduction. A qualified application is an application for reduction in assessment that was timely filed with the country board and has a two-year deadline occurring during the period beginning on March 4, 2020 and before March 31, 2021. Under California property tax law, if the county board fails to hear evidence and fails to make a final determination on the application for reduction in assessment of property within two years of the timely filing of the application, the applicant's opinion of value as reflected on the application for reduction in assessment shall be the value upon which taxes are to be levied for the tax year or tax years covered by the application.3 In addition, AB 107 clarifies that county boards and multijurisdictional assessment appeals boards can conduct hearings using remote means to protect public health and safety. Remotely conducted hearings include the use of video, audio, and telephonic means for remote appearances; the electronic exchange and authentication of documentary evidence; e-filing and e-service; the use of remote interpreting; and the use of remote reporting and electronic recording to make the official record of an action or proceeding. AB 107 took effect immediately. Cal. Laws 2020, ch. 264 (AB 107), signed by the governor on Sept. 29, 2020. See also, Cal. State Bd. of Equal., Letter to Assessors No. 2020/048 (Sept. 21, 2020).
California — City of Los Angeles: The Office of Finance (LA Finance) for the City of Los Angeles, California (City) is conducting a tax amnesty program (LA Amnesty Program) that will run from Oct. 1, 2020 through Dec. 17, 2020 (Amnesty Period). During the Amnesty Period, unlicensed businesses can come into compliance with the City's various business taxes, including the business license tax, commercial tenant occupancy tax, communications users tax, parking occupancy tax and transient occupancy tax, among others. In exchange for complying with the terms of the LA Amnesty Program, otherwise applicable penalties will be waived. For additional information on this development, see Tax Alert 2020-2389.
PAYROLL & EMPLOYMENT TAX
New York: The New York Department of Financial Services announced that the 2021 paid family leave (PFL) payroll deduction rate will increase to 0.511% of an employee's gross wages for each pay period, up from 0.270% for 2020. The maximum 2021 annual contribution will be $385.34, up from $196.72 for 2020. Employees earning less than the current statewide average weekly wage of $1,450.17 will contribute less than the annual cap of $385.34, consistent with their actual wages. For additional information on this development, see Tax Alert 2020-2426.
New York - New York City: Mayor Bill De Blasio recently signed into law a bill (Intro 2032-A) that amends the city's paid sick leave requirements to align with New York state's recently enacted paid sick leave law. New York City has had a paid sick leave law in place since April 2014. As we previously reported, New York state fiscal year 2021 budget legislation establishes a statewide paid sick leave law that requires employers to: (1) allow employees to begin accruing sick leave effective September 30, 2020, and (2) begin providing accrued sick leave to employees effective Jan. 1, 2021. For more on this development, see Tax Alert 2020-2411.
South Carolina: New law (HB 4431) standardizes South Carolina's local business license tax, providing how it is calculated, a uniform business license schedule, when local business licenses must be renewed, how it must be paid and controversy procedures. Generally, the business license tax must be computed based on the business's gross income for the calendar year before the due date, its 12-month fiscal year before the due date, or on a 12-month projected income based on the monthly average for a business in operation for less than one year. New businesses will compute the local business license tax based on the estimated probable gross income for the balance of the license year; business license for construction contract projects, at the option of the taxpayer, may be issued on a per project basis. In general, "gross income" is defined as "the gross receipts or gross revenue of a business, received or accrued, for one calendar or fiscal year collected or to be collected from business done within the taxing jurisdiction." Separate definitions of "gross income" are provided for agents, insurance companies, manufacturers and telecommunications providers. "Gross income" for purposes of the business license tax may not include taxes collected for a governmental entity, escrow funds, or funds that are the property of a third party. Each taxing jurisdiction is required to accept a standard business license application provided by the Director of the South Carolina Revenue and Fiscal Affairs Office. By December 31 of every odd year, a jurisdiction imposing a business license tax will adopt the latest Standardized Business License Class Schedule recommended by the Municipal Association of South Carolina. Further, any special ordinances and formal/informal agreements entered into between taxing jurisdictions and taxpayers regarding rate classes, an annual flat fee, or the calculation of the business license tax that pre-date the enactment HB 4431 are considered valid upon approval of the taxpayer. These provisions do not impair certain similar potential future agreements. Taxpayers that fail to timely pay the business license tax may be served a notice of assessment of tax due. The law includes procedures for appealing the assessment. Lastly, HB 4431 permits a taxing jurisdiction to hire a third party to help it collect property or business license taxes and permits such third parties to work on a contingency fee basis in efforts to collect delinquent business license taxes, when certain requirements are met. Unless otherwise noted, these provisions take effect Jan. 1, 2022. S.C. Laws 2020, Act 176 (HB 4431), signed by the governor on Sept. 30, 2020.
International — Turkey: On Sept. 23, 2020, through Presidential Decree No. 2955, changes were made to various decisions that came into force during 2020 regarding the application of Additional Customs Duties. Specifically, certain increased rates will now remain in effect through Dec. 31, 2020. For additional information on this development, see Tax Alert 2020-2399.
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 Defender Security Co. v. McClain, Slip Opinion No. 2020-Ohio-4594 (Ohio S.Ct. Sept. 29, 2020).
2 The mental health tax is a 1% tax imposed on personal income over $1 million per year that goes to California's county mental health service systems. California Mental Health Services Act (as of Jan. 27, 2020), Sec. 12 (the California personal income tax provisions of which are codified at Cal. Rev. & Tax Code §17043).
3 Cal. Rev. & Tax Code §1604(c).