October 23, 2020
State and Local Tax Weekly for October 16
Ernst & Young's State and Local Tax Weekly newsletter for October 16 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.
Alabama adopts new policy requiring annual renewal of most tax registrations beginning Nov. 1, 2020
The Alabama Department of Revenue (AL DoR) announced that, beginning Nov. 1, 2020, taxpayers will be required to renew most of their Alabama tax licenses on an annual basis.1 For calendar year 2021, Alabama-registered taxpayers must renew their licenses during the period between Nov. 1 and Dec. 31, 2020, or the licenses will be cancelled. A taxpayer that fails to renew its licenses, under Ala. Code § 40-23-6.1, may no longer use its sales-and-use-tax license to make tax-exempt purchases for resale or rental purposes. This is the first time Alabama has required license renewals.
The new annual registration requirement applies to the following Alabama taxes:
Taxpayers will be required to review and/or update the following information through the My Alabama Taxes website:
Businesses that changed their entity type will need to apply for a new license.
Federal: In final regulations under IRC § 1502 (TD 9927), Treasury and the IRS implement federal changes to IRC § 172 on the absorption by a US federal consolidated group of net operating loss (NOL) and consolidated net operating loss (CNOL) carryovers and carrybacks. The final regulations implement the recent statutory changes to IRC § 172 as they apply to consolidated groups by: (1) describing how to determine the 80% limitation on absorption of NOL and CNOL carryovers (80% limitation) by a "mixed" group (i.e., a consolidated group composed of nonlife insurance companies and other members); (2) addressing the calculation and allocation of farming losses generated by a consolidated group (which are eligible to be carried back two years); (3) implementing the 80% limitation to determine the absorption of NOLs that are carried from periods in which the attributable member was not part of the consolidated group and subject to limitation by the separate return limitation year (SRLY) rules; and (4) incorporating several changes to Treas. Reg. § 1.1504-47, which update older regulation rules for life-nonlife consolidated groups to reflect intervening changes to the IRC. The final regulations generally adopt, with few significant changes, the proposed regulations. (Temporary regulations addressing "split waiver" elections, which were published at the same time as the proposed regulations, will be addressed in a subsequent regulation package.) The final regulations apply to tax years beginning in 2021 but can be applied to prior tax years if they are applied consistently. For more on this development, see Tax Alert 2020-2491.
Maryland: The Maryland Comptroller of the Treasury (MD Comptroller) updated income tax guidance on the taxation of pass-through entities (PTE) to address a 2020 law change (2020 Md. Laws, Chap. 641, (SB 523)) that allows PTEs to elect to pay the tax imposed on resident members' distributive or pro rata shares of income (hereafter, "shares income") starting July 1, 2020.2 (PTEs were already required to pay income tax for nonresident members.) The elective tax on a resident's share of PTE income is equal to the sum of the top marginal state and lowest county income tax rates and applies to each member's share of the PTE's taxable income. The MD Comptroller explained that the elective tax on a resident's share of the PTE's income is considered an entity-level tax and, as such, any tax paid on a resident's share of such PTE income may not be treated as a tax paid by the resident member and any tax paid by the resident members individually cannot be deducted from the tax imposed on the PTE. Further, resident members can include their anticipated credit from the PTE in the estimated tax calculation. Resident/nonresident members may take a credit against the state tax imposed on the member individually for their proportionate share of the tax paid by the PTE, and any refund claims for tax paid on a resident's share of the PTE's income must be made by the resident member rather than the PTE. The guidance also describes the administrative procedures a PTE making this election should follow and the return filing requirements for PTEs and their resident/nonresident members. Md. Comp. of Treas., Admin. Release No. 6: Taxation of Pass-through Entities (revised Sept. 2020).
Massachusetts: The Massachusetts Court of Appeals (Court) reversed the Massachusetts Appellate Tax Board (Board), holding that a corporation and its affiliates (collectively, "corporation") could deduct from their combined Massachusetts corporate excise return the utility receipts tax (URT) paid to Indiana because the URT is not a "franchise tax for the privilege of doing business" within the meaning of the deduction disallowance statute.3 The Commissioner argued that the URT is a franchise tax for the privilege of doing business in Indiana as it is imposed (1) on the corporate enterprise as a whole rather than on discrete events, and (2) as a pre-condition for doing business in Indiana. The Court rejected these arguments, instead finding that the URT is imposed on the receipts received from retail sales (in this case, natural gas and electricity). Further, Indiana law identifies the URT as an income tax rather than as a franchise tax or a tax for the privilege of doing business in Indiana. Additionally, the URT is not imposed on all of a taxpayer's business revenues but only on enumerated revenues excluding certain receipts. Lastly, the Court noted that while the URT has some unique aspects, in substance it is fundamentally similar to deductible transaction taxes on retail sales. Bay State Gas Co. & Affiliates v. Mass. Comr. of Rev., No. 19-P-114 (Mass. App. Ct. Oct. 7, 2020).
Massachusetts: The Massachusetts Department of Revenue issued guidance to personal income taxpayers, including members of a pass-through entity, on the application of the commonwealth's credit for taxes paid to another jurisdiction with respect to deemed repatriated income that was paid to the other jurisdiction in a different year than it is due in Massachusetts. For Massachusetts personal income tax purposes, deemed repatriated income is taken into account in the tax year ended Dec. 31, 2019; for federal income tax purposes, and in many states, deemed repatriated income was required to be reported on a taxpayer's 2017 and 2018 returns, unless the taxpayer elected to pay the amount due in installments.4 Taxpayers that paid tax on deemed repatriated income in another jurisdiction in 2017 or 2018 and are required to report such income to Massachusetts in 2019, are eligible for the credit for tax paid to another jurisdiction. The credit is claimed in the year reported to Massachusetts (2019) and not the year paid to the other jurisdictions (2017/2018). If the installment plan is elected and tax is paid to another jurisdiction in a later year, the credit is available in Massachusetts in the tax year in which the tax is paid to the other jurisdiction. Lastly, the guidance explains how to determine the amount of the credit and includes examples. Mass. Dept. of Rev., Directive 20-2: Application of the Massachusetts Personal Income Tax Credit for Taxes Paid to Another Jurisdiction on Deemed Repatriated Income (Oct. 9. 2020).
New Jersey: The U.S. Supreme Court (Court) has been asked to review the New Jersey appeals court's ruling in Xpedite Systems, Inc., upholding the New Jersey Division of Taxation's application of the "25-50-25" allocation method to source a corporation's receipts from providing fax blast services. The question presented to the Court is "Whether granting unfettered deference to a State tax commissioner's decision to reapportion the revenues of an interstate business violates the Due Process Clause and Commerce Clause." Xpedite Systems, Inc. v. N.J. Dir., Div. of Taxn., No. A-0789-18T3 (N.J. Super. Ct., App. Div., Jan. 9, 2020), petition for cert. filed, Dkt. No. 20-468 (U.S. S.Ct. filed Oct. 5, 2020).
SALES & USE
Iowa: Adopted amendments to Iowa Admin. Code (IAC) 701-213.24(423) (and rescission of IAC 701-18.32(422,423)) clarify that Iowa does not exempt from sales and use tax the sale, transfer, or exchange of tangible personal property or taxable services among affiliated corporations. Specifically, the Iowa Department of Revenue (IA DOR) deleted language providing that the sales price of transactions between affiliated corporations may not be subject to tax where it can be shown that the affiliated corporations are operating as a unit within the meaning of state law. In the "Purposes and Summary" section of the rule, the IA DOR explained that its current statutory definition of "person", which conforms to the Streamlined Sales and Use Tax Agreement, does not include the "acting as a unit" language, concluding that it should not have subsequently adopted the "acting as a unit" language in IAC 701-213.24(423) as that language "no longer ha[s] meaning" without being included in the statutory definition of "person". The IA DOR noted that this change will "improve accuracy and clarity" of its rules. These changes take effect Nov. 11, 2020. Iowa Dept. of Rev., amended IAC 701-213.24(423) and rescinded and reserved IAC 701-18.32(422,423) (ARC 5201C, adopted Sept. 15, 2020; published Oct. 7, 2020).
Missouri: An in-state retailer's online sales that are processed and shipped from its out-of-state office and warehouse, are subject to Missouri's state and local vendor's use tax, and not Missouri state and local sales tax. The Missouri Department of Revenue noted that use tax must be collected based upon each online customer's location in Missouri. Mo. Dept. of Rev., Private Letter Ruling No. LR 8116 (Sept. 25, 2020).
South Carolina: The South Carolina Department of Revenue issued a final 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 is included in "gross proceeds of sales" or "sales price" and as such is 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. S.C. Dept. of Rev., SC Rev. Ruling #20-4 (Oct. 10, 2020).
New York: In response to a ruling request, the New York Department of Taxation and Finance (NYS DOTF) determined that a mixed-use building will be used primarily for manufacturing activities when 50,000 of its total 80,000 square feet will be dedicated to such activities. Therefore, the "cap" on the tangible property credit component of the brownfield redevelopment tax credit under the Brownfield Cleanup Program (BCP) will be the lesser of $45 million or six times the sum of site preparation costs and groundwater remediation costs. Neither the applicable BCP statute or regulations define "used primarily for manufacturing activities." The NYS DOTF, however, interpreted "primarily" to mean "50% or more," based on the word's usual connotation as well as its tax regulations not directly applicable to the BCP — in this instance, regulations applicable to sales tax. N.Y. Dept. of Taxn. and Fin., TSB-A-20(4)I (June 16, 2020).
Pennsylvania: A taxing authority in assessing real property containing billboards may not consider the value of the billboard itself but may consider any increase in the value of the property attributable to the billboard's presence on the property, such as billboard-related income received by a landowner through a lease or easement agreement. In so holding, the Pennsylvania Supreme Court (Court) found that the capitalized value of lease payments for billboards (as opposed to an income stream from advertisers to a billboard company) are not part of the billboard's actual value to a billboard owner or prospective buyer, so considering these payments in assessing the underlying property does not incorporate part of the billboard's actual value into the land assessment. Additionally, the Court found that the billboard exclusion only requires that the sign and its supporting structures may not be assessed as real property; it does not prohibit all consideration of a billboard's existence when valuing the property on which it is situated. In re: Consol. Appeals of Chester-Upland School Dist., Nos. 55 MAP 2019, 56 MAP 2019, and 57 MAP 2019 (Pa. S.Ct., Middle Dist., Oct. 1, 2020) (consolidated).
COMPLIANCE & REPORTING
New Jersey: On Oct. 15, 2020, Governor Phil Murphy issued an executive order extending the due date for filing the 2019 New Jersey Corporation Business Tax (CBT) calendar year return from Oct. 15, 2020 to Nov. 16, 2020. The executive order also provides that the New Jersey Division of Taxation (NJ DOT) will not impose late filing penalties on 2019 CBT returns filed after Oct. 15, 2020 but on or before Nov. 16, 2020. (As previously reported, on Sept. 25, 2020, the NJ DOT announced an automatic waiver of the late-filing penalty for filers of the 2019 New Jersey CBT Return if the return is filed by Nov. 16, 2020. See Tax Alert 2020-2336.) N.J Gov., Executive Order No. 189 (Oct. 15, 2020).
PAYROLL & EMPLOYMENT TAX
Multistate: The U.S. Bureau of Labor Statistics reports that the national rate of unemployment fell to 7.9% in September 2020, down from the August 2020 rate of 8.4%. Total nonfarm payroll rose by only 661,000 in September, less than the 1.4 million in August. The September 2020 national unemployment rate is 4.4% higher than in September 2019.The national rate of unemployment was 4.4% for March 2020, 14.7% for April 2020, 13.3% for May 2020, 11.1% for June 2020 and 10.2% for July 2020. For additional information on this development, see Tax Alert 2020-2475.
California: New law (AB 1867 (2020 Cal. Stat., ch. 45)) expands COVID-19 supplemental paid sick leave (SPSL) to cover California employees of employers with 500 or more employees nationwide and all first responders and healthcare workers. According to California Governor Gavin Newsom, combined with federal paid leave available to employees of fewer than 500 employees under the federal Families First Coronavirus Response Act and his previous executive order covering food sector employees, this legislation "fills in gaps in our federal and state paid sick days policy and gives our extraordinary employees a little more peace of mind as they take time to care for themselves and protect those around them from COVID-19." For additional information on this development, see Tax Alert 2020-2461.
Connecticut: New law (HB 7006) provides a nexus exception for certain out-of-state businesses and out-of-state employees when they are in Connecticut to perform disaster-related or emergency-related work during a disaster-response period. "Disaster-related or emergency-related work" means repairing, renovating, installing, constructing, or rendering services to critical infrastructure in Connecticut that has been damaged, impaired or destroyed by a state disaster or emergency (declared by the Governor or the US President with respect to Connecticut). Additionally, "disaster-response period" means the period beginning 10 calendar days before the issuance date of the proclamation or declaration of a state disaster or emergency and ending 60 calendar days after the governor has proclaimed, or the President has declared, the end of such disaster or emergency. The out-of-state businesses and out-of-state employees will not: (1) be required to register with the state or any political subdivision; (2) be required to be licensed by the state (but they must be properly registered, licensed, or otherwise authorized in another state to perform such work); (3) be subject to any Connecticut property tax, tax on income from performing disaster-related or emergency-related work during a disaster response period, or use tax on tangible personal property temporarily in the state to help the employee to perform such work; or (4) submit any state tax filing. Note, the provisions exempting out-of-state employees from property, income, and use tax, and not requiring them to submit tax returns will apply only to an out-of-state employee who is a resident of a state with substantially similar provisions that except similarly situated Connecticut residents from such taxes, or that does not impose personal income tax. These provisions took effect from passage. Conn. Laws 2020 (Sept. Special Session), Pub. Act No. 20-5 (HB 7006), signed by the governor on Oct. 2, 2020.
Federal: On Oct. 13, 2020, a World Trade Organization (WTO) arbitrator authorized the European Union (EU) to impose countermeasures on nearly US $4 billion of US-origin goods in its decision on subsidies provided by the United States (US) to domestic civil aircraft manufacturers. Following the announcement, the European Commissioner for Trade announced that the EU would "vigorously pursue" negotiations to end US tariffs on EU exports, but, if unsuccessful, the EU would be prepared to enact similar tariffs on US goods. The United States Trade Representative (USTR) responded, stating that the US firmly disagrees with the finding and specifically noting that the WTO arbitrator did not authorize retaliation beyond certain subsidies which were repealed earlier this year. Therefore, any action taken by the EU will be viewed as unlawful and will generate a response by the US. USTR Robert Lighthizer also acknowledged consideration of a recent proposal for resolution of the dispute and maintained that the US is intent on concluding an agreement that restores fair competition. For more on this development, see Tax Alert 2020-2500.
VALUE ADDED TAX
International — European Union: The European Commission requests feedback on a proposed directive to transform EU's VAT Committee into a "Comitology Committee". European Union (EU) value-added tax (VAT) rules have been harmonized under a VAT Directive. Therefore, it is important that these rules are implemented in every EU Member State in a fully consistent manner (e.g., by means of implementing acts). Currently, the European Commission (the Commission) has no implementing powers in respect of the VAT Directive. The only existing tool for the Commission to promote a consistent implementation of VAT rules is an advisory committee set up by the VAT Directive (Article 398) — the "VAT Committee," which agrees on non-binding guidance. The VAT Committee is made up of representatives of the Member States and of the Commission and has no competence in the procedure of adoption of the implementing measures. As the Member States are not legally obliged to implement the guidelines of the VAT Committee, the common interpretation of EU VAT law, set forth in these guidelines, is often not put into practice. For additional information on this development, see Tax Alert 2020-2455.
International — Oman: On Oct. 12, 2020, His Majesty Sultan Haitham Bin Tariq issued Royal Decree No. 121/2020 to introduce Value Added Tax (VAT) in Oman at the rate of 5%. The law will come into force in April 2021. The Gulf Cooperation Council VAT Framework Agreement stipulates that businesses with taxable turnover in excess of US $100,000 must register for VAT, and businesses with taxable turnover between US $50,000 and US $100,000 have the option of registering for VAT. Oman will adopt a phased introduction with an initial focus on larger businesses. Businesses that have not yet begun their VAT implementation projects will need to start preparing if they are to be compliant when VAT is implemented. Being a transactional tax, the introduction of VAT is expected to have a wide impact across businesses.
For additional information on this development, see Tax Alert 2020-2492.
International — United Kingdom: On Oct. 8, 2020, the United Kingdom (UK) Government released a comprehensive update on its Border Operating Model that will be effective from Jan. 1, 2021. This was supplemented in the same week by additional guidance on specific types of goods movements, in particular, products subject to excise duty. All businesses moving goods between the European Union (EU) and Great Britain (GB) (and also from the EU to Northern Ireland (NI) via GB) from Jan. 1, 2021 will need to review the relevant sections of the Border Operating Model guidance to understand the impact to their trade flows and Brexit preparations. For additional information on this development, see Tax Alert 2020-2463.
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 Ala. Dept. of Rev., NOTICE Annual Renewal of Alabama Tax Licenses (Oct. 1, 2020).
2 The MD Comptroller noted that the Maryland Attorney General determined that "notwithstanding an apparent drafting error", SB 523 "should be construed, consistent with the bill's purpose, as requiring a [PTE] to pay income tax for its nonresident members but also giving it the option to pay income tax for its resident members."
3 Mass. G.L. c. 63, § 30(4)(iii) disallows a deduction for taxes on or measured by income, franchise tax measured by net income, franchise tax for the privilege of doing business and capital stock taxes.
4 For Massachusetts purposes, the three installments would be paid in 2020, and the five remaining installments would be paid in tax years 2021 through 2025.