November 9, 2020
State and Local Tax Weekly for October 30
Ernst & Young's State and Local Tax Weekly newsletter for October 30 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.
EY's state guide to COVID-19 payroll and employment tax provisions, updated through Oct. 21, 2020, is available here.
Louisiana governor signs various tax bills in response to the impacts of COVID-19 pandemic and Hurricanes Laura and Delta
During the Second Extraordinary legislative session, the General Assembly approved and sent to Governor John Bel Edwards various tax related measures that address the impacts of the COVID-19 pandemic and hurricanes Laura and Delta on Louisiana taxpayers, workers and businesses. These measures include the following:
Act 41 (SB 67), in response to the impacts of the COVID-19 pandemic and hurricanes Laura and Delta on Louisiana taxpayers, workers and businesses, extends the job creation requirements for enterprise zone incentives and the filing period for quality jobs incentive rebates. The new law requires the Louisiana Department of Economic Development (LA DED) to provide an option to companies with active agreements for enterprise zone incentives to extend the time period for the creation of new jobs for an additional 12 months. Similarly, the LA DED is required to provide an option to companies with active agreements for quality jobs incentives rebates to extend the third annual rebate filing period for an additional 12 months. These optional extensions are only available to companies that have an executed enterprise zone incentives contract/executed quality jobs incentives rebate contract with a due date impacted by COVID-19 emergency proclamations or Hurricanes Laura or Delta and that provide written notification to the LA DED of their preference prior to the original certification due date but not later than Dec. 31, 2021. These provisions took effect upon the governor's signature. La. Laws 2020 (Second Extra. Sess.), Act No. 41 (SB 67), signed by the governor on Oct. 28, 2020.
Act 1 (SB 14) amends Louisiana's New Markets Jobs Act premium tax credit to expand eligibility to certain businesses impacted by Hurricane Laura, specifically those located in the Hurricane Laura recovery zone. Under the Act, a "recovery zone" is any parish for which the Federal Emergency Management Agency has made a determination that the parish is eligible for both individual and public assistance under the Hurricane Laura major disaster declaration. Generally, businesses have to be located in a low-income community as provided in IRC § 45D to qualify for the incentives, but beginning Aug. 1, 2020, that requirement is waived for businesses located in recovery zones. SB 14 took effect Oct. 16, 2020. La. Laws 2020 (Second Extra. Sess.), Act No. 1 (SB 14), signed by the governor on Oct. 16, 2020.
Act 26 (HB 89) modifies the definition of "federal income tax liability" for purposes of calculating Louisiana individual income tax liability to include the amount by which an individual's federal income tax due to the US was decreased as a result of claiming the federal itemized deduction for certain net disaster losses attributable to Hurricanes Laura or Delta. This requirement applies to tax periods beginning after Dec. 31, 2018 and before Jan. 1, 2021. La. Laws 2020 (Second Extra. Sess.), Act No. 26 (HB 89), signed by the governor on Oct. 28, 2020.
Act 16 (HB 26) establishes a sales tax holiday to provide relief for citizens recovering from the restrictions imposed by the COVID-19 pandemic and Hurricanes Laura and Delta. The sales and use tax holiday will apply to purchases made on Nov. 20 and 21, 2020. During this period, sales and use tax will not apply to the first $2,500 of the sales price or cost price of any consumer purchases of tangible personal property. For purposes of the sales tax holiday, "consumer purchases" mean items of tangible personal property other than vehicles subject to license and title; but does not include the purchase of meals furnished for on premises consumption. La. Laws 2020 (Second Extra. Sess.), Act No. 16 (HB 26), signed by the governor on Oct. 28, 2020.
Louisiana: Royalty income an out-of-state television production company (company) received from third party licensing agreements attributable to Louisiana are not subject to corporate and franchise taxes for tax years 2011–2014 because the company did not have sufficient minimum contacts with the state to establish personal jurisdiction. In so holding, the Louisiana Court of Appeal (Court) found the following supportive of this conclusion: (1) the company had "zero contacts" with Louisiana aside from the licensing and distribution activities of unrelated third parties; (2) the company merely owns the intellectual property related to the production and its trademark and does not control where it is licensed and/or distributed; and (3) each licensing agreement specifically states that the company is not in a partnership, joint venture or agency with the unrelated third parties. Thus, the Court found the company's Louisiana contacts were random, fortuitous, and attenuated, and without its intentional or direct contact with the state, it could not reasonably anticipate being brought to court in Louisiana. Robinson v. Jeopardy Productions, Inc., No. 2019 CA 1095 (La. Ct. App., 1st Cir., Oct. 21, 2020).
Minnesota: New law (HF 1) conforms Minnesota's corporate franchise and individual income tax law to the federal business expensing rules under IRC § 179. Specifically, the law provides that the state Section 179 addition applies to property placed in service in tax years beginning before Jan. 1, 2020, except for qualifying depreciable property (QDP). For purposes of this provision, QDP means property for which a depreciation deduction is allowed under IRC § 167 and certain property received as part of an exchange that qualifies for gain or loss recognition deferral under IRC § 1031 as amended through Dec. 16, 2016, but not under IRC § 1031 as amended through Dec. 31, 2018. These changes apply to property placed in service in tax years beginning after Dec. 31, 2019, but for taxpayers with QDP acquired in an IRC §1031 like-kind exchange, the change applies retroactively for tax years 2017, 2018 and 2019. In addition, taxpayers in computing net income are not allowed to claim related subtractions for Section 179 expensing for QDP placed in service in tax years beginning after Dec. 31, 2017 due to the retroactive exception for QDP from the Section 179 addition requirement. A taxpayer that took this subtraction must recompute the tax in the year in which the qualifying property was placed in service and in each year it claimed the subtraction. This provision applies retroactively for tax years 2017, 2018 and 2019. Minn. Laws 2020 (5th Spec. Sess.), Sess. Law ch. 3 (HF 1), signed by the governor on Oct. 21, 2020. See also, Minn. Dept. of Rev., Tax Law Changes for Tax Years 2017 to 2020 (last updated Oct. 26, 2020).
Missouri: Proposed rules (12 CSR 10-2.076, -2.255, and -2.260) provide guidance on the state's allocation and apportionment provisions for corporate taxpayers, nonresident shareholders of S corporations and nonresident partners of partnerships, and apportionment provisions for broadcasters, effective beginning on or after Jan. 1, 2020. For corporate income tax purposes, the proposed rule (12 CSR 10-2.076) would replace all methods and tests previously used in Missouri to apportion and allocate corporate income, including the "source of income test" and the Multistate Tax Compact's three-factor apportionment formula. All income would be presumed to be apportionable unless it is clearly nonapportionable under the U.S. Constitution or Missouri law, and the proposed rule requires consistency in how a taxpayer classifies income as apportionable or nonapportionable each year (any deviation requires taxpayer disclosure). Additionally, the proposed rule describes when another state has jurisdiction to subject the taxpayer to net income tax and permits the Missouri Director of Revenue to require a taxpayer to provide evidence supporting an assertion that the taxpayer is subject to tax in another state. The proposed rule also defines what receipts are in the receipts factor and provides receipts factor guidance for certain circumstances (i.e., hedging transactions and cost plus fixed fee contracts, among others, as well as items specifically excluded). Further, the proposed rule addresses how to approximate the ultimate beneficiary when such information is not reasonably determinable, when the state or taxpayer can seek alternative apportionment, when a transaction is considered to be in the taxpayer's regular course of trade or business, and what constitutes a unitary business. The proposed rule for allocation and apportionment for nonresident shareholders of S corporations and nonresident partners of partnerships (12 CSR 10-2.255) interprets statutory provisions (Mo. Rev. Stat. §§ 143.421 and 143.471) for purposes of determining the adjusted gross income (AGI) from a shareholder's pro rata share of items of S corporation income, gain, or deduction and the AGI of a nonresident partner from the partnership's items of income, gain, loss or deduction. The proposed rule also defines Missouri allocated income and Missouri apportioned income and describes what constitutes S corporation income and partnership income derived from Missouri sources. Lastly, the proposed rule related to an apportionment method for broadcasters (12 CSR 10-2.260) implements an alternative apportionment method for sourcing receipts from broadcast advertising services and licenses of broadcasting intangibles. Comments must be received within 30 days after the rules are published in the Missouri Register. Mo. Dept. of Rev., proposed 12 CSR 10-2.076, -2.255, and -2.260 (Mo. Register, Vol. 45, No. 20, Oct. 15, 2020).
SALES & USE
New York: The New York State Department of Taxation and Finance advised that an online learning company's (company) receipts from the sale of its three tiers of subscription fees to access and view its online course library are not subject to state and local sales tax because the subscriptions are neither tangible personal property nor the provision of an enumerated taxable service. Sales of the basic subscription (i.e., unlimited access to the company's video library for one month) are not sales of tangible personal property and are not a taxable information service since the subscription's purpose is to impart knowledge by providing access to instructional course material. Likewise, sales of the company's premium-monthly subscription, which also includes the ability to download project files, are not subject to tax because the customer's electronically downloaded project files are not delivered in a tangible format. Further, providing project files is not an information service because the files supplement the video course and enhance the customer's learning experience. Lastly, sales of the premium-annual subscription (which in addition to the services mentioned above includes downloadable digital video courses for offline viewing) are not subject to tax since receipts from the sale of videos delivered to customers electronically over the internet and downloaded to a customer's computer or other device are receipts from the sale of nontaxable intangibles. N.Y.S. Dept. of Taxn. and Fin., TSB-A-20(18)S (June 16, 2020).
North Carolina: The North Carolina Department of Revenue (NC DOR) determined that the charges for managed services (i.e., network equipment support, monitoring of software updates, and emergency maintenance that includes security patch installation and hardware replacement) of an information technology company (company) are service contracts subject to general state and applicable local and transit sales and use tax. The NC DOR explained that a "service contract" is "[a] contract where the obligor under the contract agrees to maintain, monitor, inspect, repair, or provide another service included in the definition of repair, maintenance, and installation services to certain digital property, tangible personal property, or real property for a period of time or some other defined measure." Further, repair, maintenance, and installation services include keeping or attempting to keep property in working order to avoid breakdown and prevent deterioration or repairs; to calibrate, refinish, restore, or attempt to calibrate, refinish, or restore property to proper working order or good condition; to troubleshoot, identify, or attempt to identify the source of a problem to determine what is needed to restore property to proper working order or good condition; and to install, apply, connect, adjust, or set into position tangible personal property or certain digital property. The NC DOR noted that because the company sells the service contracts at retail, it is a retailer that must collect the tax due at the time of the sale on the sales price or the gross receipts derived. N.C. Dept. of Rev., SUPLR 2020–0014 (Oct. 16, 2020).
Colorado: On an issue of first impression, the Colorado Court of Appeals (Court) held that income a hotel generated from the operation of individually owned condominiums (condos) as rental units within the hotel is included in the hotel's actual (i.e., market) value under the income approach valuation method because the income is a revenue stream and not an intangible asset. In so holding, the Court vacated an order by the Board of Assessment Appeals (BAA), finding it abused its discretion by excluding the additional income from the hotel's actual value and improperly valuing the property for tax purposes. Specifically, the BAA did not follow the state's property tax assessment statutes when it assigned a special meaning to actual value for tax purposes to mean something different from "market value." Rather, the hotel's actual value must be measured by what a willing buyer would pay a willing seller under normal economic conditions. The Court also determined that the BAA erred in finding that condo net income is an intangible asset. The Court reasoned it is not an intangible for tax purposes because it is cash that is the direct product of the hotel's core income-producing business and it is not similar to intangibles such as patents, business goodwill, computer programs, literary rights, and stock options. Lastly, the BAA erred in excluding hotel resort fees as a revenue stream under the income approach to the hotel's valuation. Lodge Properties, Inc. v. Eagle Cnty. Bd. of Equal., 2020COA138 (Colo. Ct. App., Div. II, Sept. 17, 2020).
Minnesota: New law (HF 1) permits a county auditor to waive a tax payment requirement in certain circumstances and classifies certain short-term rental properties for property tax purposes. Effective Oct. 22, 2020, a county auditor can waive the requirement that all property taxes due and payable be fully paid and discharged before removing a structure from any tract of land, if the auditor determines that such removal is in the public interest and will not impair the collection of property taxes. Additionally, effective for property tax assessments in 2021 and thereafter, the definition of Class 4b property is amended to provide that residential real estate with less than four units includes property rented as a short-term rental property for more than 14 days in the preceding year. "Short-term rental property" is defined as "nonhomestead residential real estate rented for periods of less than 30 consecutive days." Minn. Laws 2020 (5th Spec. Sess.), Sess. Law ch. 3 (HF 1), signed by the governor on Oct. 21, 2020.
Texas: The U.S. Supreme Court (Court) has been asked to review the Texas Supreme Court (TXSC) ruling in PRSI Trading, LLC, in which the TXSC held that a refinery and its connected storage facilities for imported crude oil and refined petroleum products qualified for the federal foreign trade zone (FTZ) ad valorem tax exemption under the federal Foreign-Trade Zones Act of 1934.1 U.S. Customs and Border Protection (CBP) deactivated the FTZ in August 2013 following five years of administrative appeals addressing whether the refinery operator was a new or continuing operator following a series of mergers. The TXSC rejected the county's argument that since CBP ultimately deactivated the FTZ because the refinery did not qualify as a continuing operator, the refinery was not entitled to the FTZ ad valorem exemption and, therefore, owed tax dating back to 2011. The TXSC reasoned that CBP did not expressly or implicitly deactivate the FTZ while determining whether the refinery was an authorized operator until it formally deactivated the zone in August 2013. The question presented to the Court is "[w]hether the [TXSC] erred in failing to follow the findings of CBP in its Headquarters Ruling Letters in holding that the foreign trade subzone in question was 'activated.'" PRSI Trading, LLC v. Harris County, No. 18-0664 (Tex. S.Ct. Feb. 28, 2020), petition for cert. filed, Harris County, TX v. PRSI Trading, LLC, Dkt. No. 20-563 (U.S. S.Ct. Oct. 29, 2020).
North Carolina: The North Carolina Department of Revenue (NC DOR) announced that it will implement increased statutory penalties for failure to file informational returns related to gasoline, diesel, fuel blends and alternative fuel beginning with the November 2020 motor fuel tax returns, due by Dec. 22, 2020. Legislation enacted in 2018 increased the allowable penalties, effective June 12, 2018, as follow: (1) $50 per day for failure to file a required informational return, up to a maximum penalty of $1,000; and (2) $200 penalty for failure to file an informational return in the state-prescribed format. (Prior law imposed a $50 penalty for failure to file an informational return.) Changes to the penalty amount affect the GAS-1204 Motor Fuels Terminal Operator and the GAS-1301 Motor Fuels Transporter returns. To request a waiver of an informational return penalty, taxpayers must submit new Form NC-5501 Request for Waiver of an Informational Return Penalty. N.C. Dept. of Rev., Important Notice: Regarding Filing Penalties on Informational Returns for Motor Fuels and Alternative Fuels (Oct. 9, 2020).
PAYROLL & EMPLOYMENT TAX
Missouri: The Missouri Department of Revenue (MO DOR) explained in its withholding tax frequently asked questions (FAQs) list that income tax and withholding apply to wages earned within the state by employees who are working remotely within the state pursuant to the normal rules that apply. The MO DOR gives no exception for teleworkers who are temporarily working in the state due to COIVD-19. For additional information on this development, see Tax Alert 2020-2561.
Minnesota: The Minnesota Department of Revenue (MN DOR) said it is applying Wayfair2 economic nexus thresholds to Minnesota's cigarette and tobacco excise tax provisions. Under this standard, an out-of-state tobacco product retailer that does not have a physical presence in Minnesota is subject to the Ensure-Payment Provision3 and has nexus with the state if, during the previous 12-month period, its tobacco sales to Minnesota destinations equal or exceed 200 transactions or exceed $100,000. Out-of-state tobacco product retailers must register with the MN DOR before making any delivery sales of tobacco products to Minnesota customers, regardless of whether their delivery sales meet either of the Wayfair thresholds. Out-of-state tobacco product retailers must begin collecting and remitting the excise tax on the first day of the calendar month no later than 60 days after meeting either of the Wayfair thresholds in a 12-month period, and must continue doing so until at least the last day of the 12th calendar month after the calendar month in which the retailer began collecting and remitting the tax. Retailers no longer meeting either of the Wayfair thresholds after this period can stop collecting and remitting the tax provided they notify the MN DOR. The MN DOR's guidance includes illustrative examples. Minn. Dept. of Rev., Rev. Notice #20-03: Tobacco Products Tax — Out-of-State Retailers — Collection Responsibility (Oct. 12, 2020).
Tennessee: The Tennessee Department of Revenue (TN DOR) issued a notice, informing short-term rental unit marketplaces that effective Jan. 1, 2021, they must register with the TN DOR and collect and remit local occupancy taxes on short-term rental units rented through a marketplace. Tax is remitted in the same manner the short-term rental unit marketplace remits sales tax. A "short-term rental" is a unit in a residential dwelling rented (in full or in part) for less than 30 continuous days; it includes cabins, houses, condominiums, or apartments, but does not include hotels or bed and breakfasts. Tenn. Dept. of Rev., Important Notice: Short-Term Rental Unit Marketplace (Oct. 31, 2020); Notice #20-20 "Short-Term Rental Unit Marketplace" (Oct. 2020).
Tennessee: The Tennessee Department of Revenue announced that the rate of the statewide 911 surcharge is increasing to $1.50 (from $1.16), effective Jan. 1, 2021. Retailers of monthly communication services (e.g., wireline, prepaid wireless, and non-pre-paid wireless telecommunications services) should begin collecting the new rate on sales of these services made on or after Jan. 1, 2021. Tenn. Dept. of Rev., Notice #20-18 "911 Surcharge Rate Change" (Oct. 2020).
Texas: A Texas Court of Appeals (Court) ruled an insurance brokerage corporation is not entitled to a refund of insurance premium tax paid on premiums covering risks to cotton temporarily stored in Texas warehouses because imposition of the tax does not violate either the Commerce Clause or the Import-Export Clause of the U.S. Constitution and the insurance is taxable "surplus lines insurance" rather than marine cotton insurance ("export property" not subject to tax). In so holding, the Court found that the insurance taxes were not subject to the Commerce Clause challenges because Congress specifically left the regulation and taxation of insurance companies to the states through the federal McCarran-Ferguson Act. Applying the three-prong Michelin Tire Corp.4 test, the Court also found the tax imposed did not violate the U.S. Constitution's Import-Export Clause because: (1) it generally applies equally to all surplus lines insurance policies and does not usurp the federal government's authority to regulate foreign relations; (2) it did not deprive the federal government of import revenues; and (3) it did not disrupt harmony by allowing coastal states to tax goods coming through their ports. In regard to the third prong of the Michelin Tire Corp. test, the Court explained that this prong is "equivalent to the analysis required to determine whether a state tax violates the Commerce Clause." Hence, the Court looked to the Complete Auto5 and Japan Line6 tests, and found that: (1) the taxed activity had substantial nexus with Texas; (2) it was fairly apportioned; (3) it was non-discriminatory; (4) it was fairly related to the Texas services provided (i.e., satisfying the first through fourth prongs of the Complete Auto test); (5) the tax as applied did not create a substantial risk of multiple taxation; and (6) it did not prevent the federal government from speaking "with one voice when regulating commercial relations with foreign governments. (i.e., prongs five and six of the Japan Line test). Lastly, the lower court did not err in finding that the insurance policies at issue were surplus lines insurance (subject to tax) rather than marine cotton insurance ("export property" not subject to tax) because nothing in 28 Tex. Admin. Code Ann. § 5.5002(2)(B) established otherwise. Rekerdres & Sons Ins. Agency, Inc. v. Hegar, No. 07-19-00209-CV (Tex. Ct. App., 7th Dist., Sept. 24, 2020).
Vermont: New law (S. 54) imposes a cannabis excise tax equal to 14% of the sales price of each retail sale in Vermont of cannabis and cannabis products, including food and beverages, (collectively, cannabis). The new excise tax is separate from and in addition to the state's general sales and use tax, it is not part of the sales price to which the general sales and use tax applies and it must be itemized on the purchaser's receipt. Retail sales of bundled transactions that include cannabis are subject to the cannabis excise tax on the entire sales price, unless the portion not subject to tax can be identified from the retailer's or integrated licensee's books and records kept in the regular course of business. The law exempts from sales and use tax cannabis sold by any dispensary when such products are sold only to registered qualifying patients directly or through their registered caregivers. Additionally, cannabis is excluded from the definition of "food and food ingredients" for sales and use tax purposes and from the definition of "taxable meal" for purposes of the meals and rooms tax. These provisions take effect March 1, 2022. Lastly, effective for taxable years beginning on or after Jan. 1, 2022, the law provides a state income tax deduction for any federal deduction or credit that a taxpayer would have been allowed for the cultivation, testing, processing or sale of cannabis, but for federal tax provisions prohibiting deductions or credits for amounts related to the illegal sale of drugs. Vt. Laws 2020, Act 164 (S. 54), allowed to become law without the governor's signature on Oct. 7, 2020.
VALUE ADDED TAX
International — Kenya: Kenya's Cabinet Secretary for National Treasury and Planning published the Value Added Tax (VAT) (Electronic Tax Invoice) Regulations, 2020 (the Regulations), through Legal Notice No. 189 dated Sept. 10, 2020 and published on Sept. 25, 2020. The primary objective of the Regulations is to provide a framework for the use of electronic tax registers by persons registered under Section 34 of the VAT Act, 2013 (the Act). These regulations detail the use of a register, availability of a register, obligations of the user of a register, specifications of a register, transmission of invoice data and security, among others. For additional information on this development, see Tax Alert 2020-2570.
International — Kenya: Kenya's Cabinet Secretary for the National Treasury and Planning published the Value Added Tax (Digital marketplace supply) Regulations 2020 on Sept. 10, 2020. These Regulations aim at ensuring that Value Added Tax (VAT) is charged on taxable services supplied in Kenya through the digital marketplace by Business to Customer transactions. The Regulations provide for a transition clause of six months from the date of publication. For more on this development, see Tax Alert 2020-2553.
International — Portugal: On Oct. 20, 2020, the Portuguese Government published Order no. 404/2020-XXII (Order), postponing the obligation for taxable entities registered solely for Value Added Tax (VAT) purposes in Portugal to use a certified invoicing system for the issuance of invoices and relevant tax documents to July 1, 2021. Before this Order, this obligation was to enter into force as of Jan. 1, 2021 (per Order No. 349/2019-XXI). For additional information on this development, see Tax Alert 2020-2581.
International — United Kingdom: The United Kingdom (UK) Government has issued guidance providing information regarding when a business that is registered for value added tax (VAT) in the UK can or must, account for VAT on its tax return for movements of goods between Great Britain (i.e., England, Wales and Scotland) and Northern Ireland. This guidance, which relates to the end of Brexit transition period, applies from Jan. 1, 2021. For additional information on this development, see Tax Alert 2020-2582.
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 19 U.S.C. §§ 81a-81u.
2 South Dakota v. Wayfair, Inc., et al., 138 S.Ct. 2080 (2018).
3 The Ensure-Payment Provision under Minn. Stat. §325F.781 requires out-of-state tobacco product retailers to collect and remit all state excise taxes that apply to tobacco products which currently includes collecting and remitting the consumer use tax under Minnesota's cigarette and tobacco tax provisions.
4 Michelin Tire Corp. v. Wages, 423 U.S. 276 (1976).
5 Complete Auto Transit v. Brady, 430 U.S. 274 (1977).
6 Japan Line, Ltd. v. Cnty. of Los Angeles, 441 U.S. 434 (1979).