October 30, 2020
State and Local Tax Weekly for October 23
Ernst & Young's State and Local Tax Weekly newsletter for October 23 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, Maine, Massachusetts, and New York provide additional guidance for individuals temporarily working from home due to the COVID-19 pandemic
On Oct. 21, 2020, the California Franchise Tax Board (FTB) updated its COVID-19 FAQs to provide guidance on determining residency status for 2020 California personal income tax returns due to actions taken related to the COVID-19 emergency and Governor Gavin Newsom's "stay at home" Executive Order N-33-20. Under California law, a person physically present in the state for at least nine months is presumed to be a resident of California for personal income tax purposes. Whether an individual is in or out of California for a temporary or transitory purpose is dependent on the individual's facts and circumstances, which include actions taken in response to the COVID-19 emergency. The FTB explained that Appeal of Stephen Bragg1 described 19 factors (e.g., physical presence, property interest, family abode) that may be relevant in determining whether an individual is in or out of California. In addition to these factors, the FTB said the follow may also be relevant: (1) when the individual entered California; (2) whether the individual remained in/stayed in California during/after the COVID-19 period; (3) whether the individual provided COVID-19 related services in California; and (4) whether the individual cared for an at-risk family or friend.
The FTB also provided income sourcing guidance to nonresident individuals who are temporarily relocated to California and filing and paying state income tax during the COVID-19 pandemic.
In its COVID-19 FAQs, the California Employment Development Department (EDD) states that it is providing limited relief from the obligation to pay state unemployment insurance (UI) tax, state disability insurance (DI) tax and the employment training tax (ETT). Specifically, wages of nonresident employees who typically perform services in another state for an employer located outside of California will not be subject to the state's UI, DI and ETT taxes if those employees are temporarily performing services within the state due to the COVID-19 emergency. If a worker remains in California performing services after the resident state or federal public health officials have ended stay-at-home orders and the worker could have resumed working at their normal work location outside California, the worker and the employer will be considered subject to the California UI, DI and ETT taxes. For more on this development, see Tax Alert 2020-2544.
The Maine Revenue Services (MRS) announced2 tax relief for employees who had previously been working in another state but in response to the COVID-19 pandemic are temporarily working remotely from Maine (i.e., telework). The MRS said for tax years beginning in 2020 it "will not consider the presence of one or more employees in [Maine], who commenced working remotely from Maine during the state of emergency and due to the COVID-19 pandemic, to establish, by itself, corporate income tax nexus." Similarly, for sales tax purposes, MRS said that for sales occurring in 2020 it will not "consider the presence of one or more employees in [Maine], who commenced working remotely from Maine during the state of emergency and due to the COVID-19 pandemic, to constitute substantial physical presence in [Maine] for sales and use tax registration and collection duty purposes."
The MRS also said individuals teleworking in Maine due to the pandemic where ordinarily they work out-of-state should have their income withheld and pay taxes as though they were still working outside of Maine. Lastly, the MRS will abate, upon request by the taxpayer, penalties for underpayment of estimated income tax if the underpayment is a result of the taxpayer suddenly working in Maine due to a state's COVID-19 state of emergency.
On Oct. 16, 2020, the Massachusetts Department of Revenue adopted final regulation 830 CMR 62.5A.3, which "sets forth general rules applicable to non-resident employees who are telecommuting on behalf of an in-state business from a location outside the [commonwealth] due to the COVID-19 pandemic … " Under the regulation, compensation received for services performed by a nonresident who, immediately prior to the Massachusetts COVID-19 state of emergency, was an employee performing such services in Massachusetts but is now performing such services outside the commonwealth due to the COVID-19 pandemic will continue to be treated as Massachusetts source income subject to personal income tax and personal income tax withholding. A nonresident employee will apportion Massachusetts source income based on days spent working in the commonwealth. Persons who were performing such services outside the commonwealth prior to the pandemic but are now performing the services inside the commonwealth due to the pandemic will be eligible for a credit for income tax paid to the state where the employee was previously performing the services. This regulation applies to sourcing of wage income attributable to employee services performed commencing March 10, 2020 through the earlier of Dec. 30, 2020, or 90 days after the Governor gives notice that the Massachusetts COVID-19 state of emergency is no longer in effect.
Following the adoption of the final regulation, the state of New Hampshire filed a complaint further challenging the constitutionality of this new regulation with the U.S. Supreme Court. Invoking the original jurisdiction of the Court under the U.S. Constitution and federal law, in its Bill of Complaint, New Hampshire asserts that it "has fundamental sovereign interests at stake. Indeed, Massachusetts' extraterritorial Tax Rule imposes an income tax on citizens of a state who are not, and historically have not been, subject to one, and who have selected New Hampshire (at least in part) for that reason." The complaint also asserts that the regulation violates the Court's rulings under the dormant Commerce Clause and the Due Process rights of New Hampshire citizens. New Hampshire v. Massachusetts, Dkt. No. 22O154 (filed Oct. 19, 2020).
In its FAQs concerning filing requirements, residency and telecommuting for New York state personal income tax purposes, the New York Department of Taxation and Finance (NYSDOTF) said that the rules set forth in its 2006 guidance on telework (TSB-M-06(5)I) continue to apply when employees are working remotely from outside the state due to the COVID-19 emergency.
New York is one of several states that imposes what is called the "convenience of the employer" test in determining if an employee working from a home office outside of the state is liable for nonresident income tax. Under this test, nonresident income tax applies if the employee is working outside of the state for the employee's own convenience rather than the necessity of the employer and the employee spends at least one day in New York in the calendar year. Conversely, if the telework is performed outside of New York out of the necessity of the employer, New York state nonresident income tax does not apply.
The NYSDOTF provided further guidance on this topic in TSB-M-06(5)I that, for years beginning on or after Jan. 1, 2006, any normal work day spent at the taxpayer's home office will be treated as a day working outside New York if the taxpayer's home office is a "bona fide employer office." For additional information on this development, see Tax Alert 2020-2543.
District of Columbia: New temporary law (A23-334) allows corporations, unincorporated businesses and financial institutions "an 80% deduction for apportioned District of Columbia [net operating loss] carryover to be deducted from the net income after apportionment." This change is effective retroactively to tax years beginning after Dec. 31, 2017. The law also excludes the following from the computation of District gross income, the amount of: (1) small business loans awarded and subsequently forgiven under section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136); (2) public health emergency small business grants awarded under section 2316 of the Small and Certified Business Enterprise Development and Assistance Act of 2005 (enrolled version of B23-758); and (3) public health emergency grants under the Advisory Neighborhood Commissions Act of 1975 (D.C. Code § 1-309.13(m)(1)). Because A23-334 is a temporary law, it will expire May 21, 2021. D.C. Laws 2020, L23-130 (A23-334, B23-758), became law Oct. 9, 2020.
New Jersey: The New Jersey Division of Taxation (NJ DOT) issued frequently asked questions (FAQs) regarding the new Pass-Through Business Alternative Income Tax (PTBAIT), which a pass-through entity (PTE) may elect to pay starting in tax years beginning on or after Jan. 1, 2020. PTEs making this election will pay the PTBAIT at the entity level on the sum of each of its members' share of distributive proceeds; members may claim a corresponding tax credit for their distributive share of the PTBAIT paid by the PTE. An election to pay the PTBAIT must be made by the PTE each year. Such an election should be made electronically on or before the original due date of the PTE's return and it cannot be made retroactively but it can be revoked on or before the original due date of the PTE's return. The election can be made by partnerships, federal S corporations that have made the New Jersey S corporation election, and limited liability companies. An electing PTE must have at least one member whose share of distributive proceeds is subject to the New Jersey Gross Income Tax (GIT). Making the PTBAIT election does not eliminate a PTE's obligation to file any other tax return or pay any other tax, including the requirement to remit tax on behalf of nonresident partners. For purposes of the PTBAIT, a PTE must source its income using the GIT sourcing rules. The FAQs also provides guidance on how to calculate the PTBAIT on the sum of each member's share of distributive proceeds, and addresses issues specific to corporate members (e.g., what's included in the corporation's entire net income; what to do if the corporate member is member of a New Jersey combined group under the state's corporation business tax (CBT); a corporate member's entitlement to a CBT credit for its share of PTBAIT paid by the PTE). N.J. Div. of Taxn., Pass-Through Business Alternative Income Tax Act — FAQ (last updated Oct 8, 2020).
New York City: In response to a ruling request regarding the application of the New York City unincorporated business tax (UBT) to two entities (i.e., Investments and Management) following the sale of all membership interest in Investments, the New York City Department of Finance (NYCDOF) determined that UBT did not apply to either entity. First, NYCDOF held that Investments, which was a limited liability company and became a disregarded entity after its members sold their membership interests to a single acquirer under IRC § 741, will not recognize the gain on the member interest sale because the gain is not attributable to Investments itself. Moreover, the gain on the sale also is not includable in Investments' unincorporated business income. Secondly, NYCDOF ruled that Management is not subject to the UBT on the gain realized from the sale of its membership interest in Investments even though the transferor partner in the sale of Investments (i.e., Management) would recognize the gain or loss from the sale of its interest in investments. NYCDOF concluded, however, that because Investments was solely engaged in an activity that did not constitute an unincorporated business subject to the tax, Management would not be deemed to be engaged in an unincorporated business solely by holding and disposing of its interest in Investments. N.Y.C. Dept. of Fin., FLR 20-5002 (July 10, 2020).
SALES & USE
Iowa: The Iowa Department of Revenue (IA DOR) issued a declaratory ruling responding to a question from a utility company (utility) regarding how to determine sales tax for inflow-outflow billing for an eligible distributed generation facility (customer). Specifically, the utility asked IA DOR whether (1) its outflow and inflow charges should be treated as two separate transactions for sales tax purposes, or (2) whether its outflow charges should be considered a "trade-in" and, if a trade-in (a) should the prior month's credits in the "bill credit bank" for the customer offset the current month energy inflow before calculating sales tax for the current month, or (b) should the trade-in be calculated on the current month's activity only, treating each month separately. The IA DOR considered the three possible sales tax scenarios, finding that the outflow would be considered a "trade-in" under Iowa Code § 423.3(59) and that the portion of the sales price credited to the customer is exempt from sales tax. The IA DOR found that while the credit for a trade-in is part of the sales price subject to tax, the amount of credit received from the trade-in is exempt from sales tax if the trade-in transaction meets certain statutory requirements. Here, the trade-in is exempt since the customer only trades electricity toward the sale price of other electricity that the customer will receive from the utility, the utility sells electricity in the normal course of business, and the utility intends to sell the customer's traded electricity at retail or for resale. The IA DOR noted that both sales tax scenarios under option (2) are in compliance with the Iowa Code and the IA DOR's administrative rules. In addition, the IA DOR rejected the utility's scenario that would have treated the outflow and inflow charges as two separate transactions, and it said that the utility is not required to issue an exemption certificate to each customer. In re: MidAmerican Energy Co., No. 2020-300-2-0299 (Iowa Dept. of Rev. July 10, 2020).
Ohio: New law (HB 242) temporarily prohibits charter counties and municipal corporations from imposing a fee, tax, assessment, or other charge on the sales, use or consumption of an auxiliary container or on the basis of receipts received from the sale of such containers. An auxiliary container is a bag, can, cup, food or beverage service item, container, keg, bottle, or other packaging that is designed to be either single use or reusable, made out of a specified material, and is designed for consuming, transporting, or protecting merchandise, food, or beverages from a restaurant, grocery store, or other type of retail, manufacturing, or distribution establishment. This temporary prohibition is in place for 12-months after the bill's Jan. 15, 2021 effective date. Ohio Laws 2020, HB 242, signed by the governor on Oct. 13, 2020.
Georgia: The Georgia Department of Revenue (GA DOR) updated its COVID-19 FAQs to provide guidance on the state's film tax credit. The GA DOR said costs incurred during the COVID-19 shutdown will qualify for the state's film tax credit as provided below, but only (1) if the costs are due to the COVID-19 shutdown; (2) to the extent they are not reimbursed by insurance, the federal government, or otherwise; and (3) if the production continues filming in Georgia. Qualifying costs include: (1) the cost for storage of sets and stage holding costs; (2) reasonable transportation costs from and back to Georgia are allowed for cast and crew; and (3) "at the production site" rules would apply, to the extent not otherwise disqualified, to work from home or another location (both would have to be in Georgia) when this activity would normally be performed at the Georgia production site. Costs that do not qualify for the credit include: (1) hotel costs, per-diems, allowances, airfare during the shutdown for cast and crew that are not performing ongoing production activities; (2) compassion/suspension payments and other costs (these costs are not directly used in a qualified production activity); and (3) rent or other reimbursements to employees/crew for use on non-commercial space. The GA DOR further said that if cast and crew are required to quarantine in Georgia after travel to the state, this compensation and their accommodations would not be qualified direct production expenditures because currently Georgia does not have a mandate to quarantine. If such a mandate is imposed, the GA DOR will revisit this issue. Lastly, the GA DOR provided a list of post-COVID 19 costs (i.e., costs incurred once the production company returns to Georgia) that will qualify for the film tax credit. Ga. Dept. of Rev., COVID-19 FAQs (updated Oct. 2020).
Michigan: New laws (SB 493 and SB 494) extend the availability of property tax abatements under the Commercial Rehabilitation Act and the Commercial Redevelopment Act until Dec. 31, 2025 (from Dec. 31, 2020). The bills took immediate effect. Mich. Laws 2020, Act No. 217 (SB 493) and Act No. 218 (SB 494), both signed by the governor on Oct. 15, 2020.
South Carolina: New law (HB 3596) provides that when land classified as agricultural real property for property tax purposes is applied to a non-agricultural use, rollback taxes are limited to three years (previously five years). In such a case, the real property owner's actions taken that are inconsistent with agricultural use would be evidence of non-agricultural use. HB 3596 takes effect Jan. 1, 2021 and applies to agricultural real property changed to another use after 2020. S.C. Laws 2020, Act 173 (HB 3596), signed by the governor on Sept. 29, 2020.
PAYROLL & EMPLOYMENT TAX
New York: The New York Department of Taxation and Finance announced that the Employer Compensation Expense Tax rate increases as of Jan. 1, 2021 and thereafter to 5%, up from 3% for 2020 and 1.5% for 2019. Eligible employers may enroll to participate in the 2021 Employer Compensation Expense Program from Oct. 1, 2020 through Dec. 1, 2020. Calendar year 2021 will be the third year for the program. For additional information on this development, see Tax Alert 2020-2525.
Dallas, TX: The city of Dallas announced that the effective date of its paid sick leave ordinance continues to be delayed indefinitely due to an injunction requested by Texas state Attorney General Ken Paxton along with several businesses and ordered by U.S. District Judge Sean D. Jordan. As a result, the Dallas paid sick leave ordinance will not be enforced at this time. For more on this development, see Tax Alert 2020-2530.
California: New law (SB 1441) extends the Local Prepaid Mobile Telephony Services Collection Act (Act) through Jan. 1, 2026 (from Jan. 1, 2021). The Act requires local prepaid charges imposed by a city, county, or city and county on mobile telephony services be collected from the prepaid consumer by the seller at the time of the retail sale. The bill also incorporates various administrative provisions that were previously part of the Prepaid Mobile Telephony Services Surcharge Collections Act (Cal. Stat. 2014, ch. 885 codified at Cal. Rev. & Tax. Code §§42001–42024 and which had previously been declared pre-empted and unconstitutional and enjoined from enforcement by a federal court on Nov. 16, 2018)3, such as vendor compensation, separately stating local charges on the receipt, refunds of excess fees collection, bad debt, specifying where a retail transaction occurs and when local charges apply to bundled transactions, among other provisions. Cal. Laws 2020, ch. 179 (SB 1441), signed by the governor on Sept. 25, 2020.
Louisiana: The Louisiana Department of Revenue (LA DOR) requests that any Louisiana-registered business that solicits a nonresident business to perform disaster or emergency-related work related to Hurricane Delta provide written notice to the LA DOR of such solicitations. A nonresident business's performance of disaster or emergency-related work during Hurricane Delta's disaster period (Oct. 6, 2020 through Jan. 3, 2021) is excluded from Louisiana income tax, however, nonresident businesses and nonresident employees are still subject to other tax types, including sales tax and corporation franchise tax. The written notice must include: (1) the nonresident business's name, address, and federal tax identification number; (2) the date of the request to perform disaster or emergency-related work; (3) the date and declaration number of the declared state disaster or emergency; and (4) a general description of the disaster or emergency-related work requested. The written notice also must include representative contact information (name, phone number, and email address), be signed by an authorized officer, owner, or other official of the resident business, be submitted on official letterhead of the resident business, and be transmitted as an email attachment to the LA DOR. La. Dept. of Rev., Rev. Info. Bulletin No. 20-022 (Oct. 8, 2020).
International — European Union: On Oct. 13, 2020, the World Trade Organization (WTO) authorized the European Union (EU) to impose countermeasures on United States (US)-origin products due to illegal US subsidies granted to the US aircraft manufacturer, Boeing. The WTO determined that the level of countermeasures "commensurate with the degree and nature of the adverse effects determined to exist" amounts to nearly US$4 billion per year. The EU is currently reluctant to impose countermeasures on US products and has decided to wait for the outcome of the negotiations with the US before moving forward with countermeasures. For additional information on this development, see Tax Alert 2020-2516.
VALUE ADDED TAX
International — Italy: By Resolution Letter No. 63 (Oct. 5, 2020), the Italian Revenue Agency (IRA) addressed the value-added tax (VAT) treatment of fees for claims handling services supplied by reinsurers acting as a delegated party on the behalf of ceding insurers. According to the IRA, claims handling services provided by the delegated reinsurer within the framework of a reinsurance agreement are subject to VAT, because they cannot be considered: exempt reinsurance services; services related to those performed by insurance brokers or insurance agents; or services ancillary to insurance or reinsurance services. For more on this development, see Tax Alert 2020-2520.
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 Cal. State Bd. of Equal., Appeal of Stephen Bragg, 2003-SBE-002 (May 28, 2003).
2 Maine Rev. Services, Maine Tax Alert "Maine Revenue Services Announces Tax Relief Updates for COVID-19 Emergency Period" (Vol. 30, Issue 19, Oct. 2020 - #2).
3 See Cal. Pub. Utilities Comm., The Prepaid Mobile Telephony Services Surcharge Collection Act - Assembly Bill 1717 (available on the internet at https://www.cpuc.ca.gov/General.aspx?id=2973 (last accessed Oct. 30, 2020)).