November 17, 2020
State and Local Tax Weekly for November 6
Ernst & Young's State and Local Tax Weekly newsletter for November 6 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.
Various state and local tax-related ballot measures approved and rejected on November 3rd
On Nov. 3, 2020, voters across the US considered various state and local tax related ballot measures. Both California's Proposition 15 (which would have amended the state's constitution to allow the regular reassessment of commercial and industrial property but retained Proposition 13 for residential property) and a proposed Illinois constitutional amendment (which would have allowed a graduated personal income tax) appear to have failed. Voters in San Francisco, California, however, approved by wide margins four tax-related ballot measures, including measures to reform the city's business tax (which will increase most of the current gross-receipts-tax rates by approximately 40% and eliminate the payroll-expense tax beginning in 2021) and to implement a CEO-pay-ratio tax. (See Tax Alert 2020-2655.)
Tax rate increases were approved in Arizona (Proposition 208 imposes a 3.5% additional income tax rate on individuals with income exceeding $250,000 for single filers ($500,000 for joint filers)); Arkansas (Issue 1 makes permanent a 0.5% sales tax rate earmarked for transportation); Denver, Colorado (two measures each increased the city's local sales tax rate); Multnomah County (Portland), Oregon (funds a tuition-free preschool with an additional income tax on high wage earners); and Seattle, Washington (a measure replaces the current city car license fee and 0.1% local sales tax with an 0.15% sales tax). Tax rate increases were rejected in Alaska (Measure 1 would have increased taxes on certain oil production in the North Slope) and Metro (covering all or part of Clackamas, Multnomah (Portland) and Washington counties), Oregon (a measure would have imposed a new 0.75% payroll tax dedicated to transportation improvements, including pollution and climate change mitigation efforts).
In addition, Colorado voters approved a ballot measure (Proposition 116) that decreases the state's income tax rate.
The legalization and taxation of marijuana was approved in Arizona (Proposition 207), Montana (I-190), New Jersey (Constitutional Amendment) and South Dakota (Constitutional Amendment A). Voters in Colorado (Proposition EE) and Oregon (Measure 108) approved measures increasing cigarette and tobacco taxes.
Other approved ballot measures include a California measure to change employment classification rules for app-based transportation and delivery drivers, effectively overturning a state statute and court decision which treated such workers as employees (Proposition 22); a Florida measure that gradually increases the minimum wage to $15 by September 2026 (Amendment 2); a Maryland measure to allow sports betting in the state (Question 2); and a property tax measure in Colorado (Amendment B).
See Tax Alert 2020-2635 for more on these developments.
New Jersey enacts technical and substantive changes to 2018 Corporation Business Tax reform
On Nov. 4, 2020, New Jersey Governor Phil Murphy signed into law SB 3007/AB 4809 (the Bill), which makes technical corrections and substantive changes to legislation that reformed New Jersey's Corporation Business Tax Act (CBTA), which was first enacted on July 1, 2018 and then amended on Oct. 4. 2018.
The Bill resolves a tricky issue involving the computation of the dividends received exclusion (DRE). Before the Bill passed, the CBTA was unclear on how to compute the DRE for a member of a combined group. The New Jersey Division of Taxation (NJ DoT), however, interpreted the DRE law in existence before the Bill's enactment as requiring dividend income to be apportioned on a separate-company basis, using the apportionment formula of the member receiving the dividend, as opposed to the formula of the entire New Jersey combined group. Under this interpretation and as an example, a New Jersey combined group based in California could have had a combined apportionment to New Jersey of 5% but the member receiving the dividend might have had a zero-apportionment percentage. Accordingly, the dividend income would be apportioned at the 5% while the corresponding DRE was apportioned at the 0%. Effectively, in most cases, the taxpayer would have lost all benefit of the DRE.
In tax years ending on or after July 31, 2020, the revised Bill requires both the dividend income and the DRE to be apportioned using the combined group's apportionment percentage. The Bill, however, does not make a similar change for tax years ending on or after July 31, 2019 — the first combined reporting year. On Nov. 5, 2020, however, the NJ DoT released guidance through its DRE Exclusion Notice, extending this relief to tax years ending on or after July 31, 2019. The DRE Exclusion Notice, which also provides instructions on reporting the DRE change on Schedule R of a taxpayer's CBT tax return, reverses the NJ DoT's previous interpretation of the CBTA; that interpretation had required the DRE computation to be based on the individual recipient member's New Jersey apportionment rather than the combined-group's apportionment.
Other substantive changes in the Bill modify provisions regarding net operating loss (NOL) carryforwards, combined filing, real estate transfer taxes and bulk sales provisions, research and development credits, and penalty relief for tax underpayments resulting from the Bill's enactment.
Technical corrections in the Bill modify provisions for NOL carryforwards, DREs, and combined groups, and filing requirements.
For a detailed discussion of these changes, see Tax Alert 2020-2648.
Arkansas: A company that distributes fleets of fuel efficient, low-carbon vehicles is not entitled to a corporate income tax refund of tax paid on proceeds generated from the sale of excess environmental credits in 2015 because these sales arose in the regular course of the company's business and as such constitute apportionable business income. In so holding, the Arkansas Supreme Court (Court) applied the plain language of the "business income" statute contained in Arkansas' codification of the Uniform Division of Income for Tax Purposes Act (UDITPA),1 and found that under the transactional test2 selling the credits to five different vehicle manufacturers for almost $270 million was not a unique, nonrecurring event when the sale proceeds made up about 86% of the company's 2015 taxable income and the company sold these credits in at least three other tax years. In interpreting the term "business income", the Court noted that contrary to the company's and the Arkansas Department of Finance and Administration's (AR DFA's) arguments, it was "not tasked with interpreting 'the statute imposing the tax' as contemplated by [Ark. Code Ann. §] 26-18-313(a), … [or] 'the statute providing the tax exemption, deduction, or credit' as contemplated by [Ark. Code Ann. §] 26-18-313(b)."3 Hence, the Court "declined the parties' invitation to strictly construe the definition of 'business income' in limitation of the imposition of a tax, exemption or deduction." The Court further rejected the company's request to hold the AR DFA's regulatory interpretation of "business income" in Ark. Corp. Income Tax Reg. 2.26-51-701 void as applied. Lastly, in its ruling, the Court clarified that judicial review of AR DFA's statutory interpretation under the Tax Procedure Act is de novo. American Honda Motor Co., Inc. v. Walther, 2020 Ark. 349 (Ark. S.Ct. Oct. 29, 2020).
Indiana: An in-state company's income from sales of recreational vehicles to customers in 11 jurisdictions4 in 2015 is required to be thrown back to Indiana because the company's activities in those jurisdictions did not subject it to those jurisdictions' taxing authority. The Indiana Department of Revenue (IN DOR) explained that the company's agreement with third-party dealers to perform warranty-related repairs on its behalf within the other jurisdictions did not exceed "mere solicitation of sales" standard under P.L. 86-272 precluding income taxation and the company was not "doing business" in those jurisdictions under Indiana's doing business standard through its payments to the repair shops. Further, the IN DOR did not err in disallowing labor and supply research and expense credits because the company did not establish through reliable documentation retained from the outset of research that its employees and executive staff were actively engaged in qualifying research activities to the extent claimed. Ind. Dept. of Rev., Supp. Letter of Findings No. 02-20200290 (Oct. 28, 2020).
Louisiana: New law (SB 1) extends the carryforward period for excess tax credits against income and franchise taxes for ad valorem taxes paid to political subdivisions on inventory held by manufacturers, distributors and retailers, and on natural gas held, used or consumed in storage facilities to 10 years (from five years). This change takes effect Jan. 1, 2021. La. Laws 2020 (Second Extraordinary Sess.), Act 50 (SB 1), signed by the governor Nov. 5, 2020.
Vermont: The capital gain recognized from the sale of two Federal Communications Commission (FCC) telecommunications licenses by a telecommunications company (company) is nonbusiness income derived from an intangible asset and, as such, the gain is allocated to, and subject to corporate income tax in, Vermont, the company's commercial domicile. In reaching this conclusion, the Vermont Supreme Court (Court) determined that the licenses did not acquire a situs in New York through the grant of rights to broadcast there because such rights were created and protected by the FCC, not New York. Further, the Court found that for tax years 2012 and 2013, the company's commercial domicile was Vermont because it was the location of the company's principal office and where the business in managed and directed. Lastly, the Court declined to abate the underpayment penalty because the statute (32 Vt. Stat. Ann. § 3202(b)(3)) showed that the state legislature intended to create a penalty for failure to pay without fault and the company "assumed the risk" of penalty by not seeking formal guidance from the Vermont Department of Taxes. Vt. Natl. Telephone Co. v. Vt. Dept. of Taxes, 2020 VT 83 (Vt. S.Ct. Oct. 9, 2020).
Wisconsin: The Wisconsin Department of Revenue said that it will not consider an out-of-state business to have nexus with the state if its only activity within the state is its employees temporarily telecommuting from their Wisconsin homes instead of working at their employer's business location during the COVID-19 emergency. This nexus relief applies for the duration of the COVID-19 national emergency. Wis. Dept. of Rev., Tax Bulletin #211 (Nov. 2020).
SALES & USE
Arizona: The Arizona Department of Revenue (AZ DOR) in response to a ruling request, said that when state sourcing provisions (Ariz. Rev. Stat. § 42-5040) conflict with local sourcing provisions (Model City Tax Code, or MCTC), the state sourcing provisions apply since they involve a matter of statewide concern. The AZ DOR explained that legislation enacted in 2013 (HB 2111) aimed to simplify sourcing for retail sales and leases and rentals of tangible personal property "for both state and local taxes," noting, however, that conflicts between state and local sourcing still exist and no context exists to warrant variance from state provisions. When a subject of taxation is outside the state statute's scope, local sourcing provisions may continue to vary from state provisions and in this case, the ruling stated that taxpayers should rely on the an applicable MCTC provision. Lastly, for inconsistencies between state and local provisions, municipalities cannot penalize a taxpayer for complying with then-existing MCTC sourcing provisions applicable to retail sale, lease, or rental transactions in any tax period falling before this ruling was issued. Ariz. Dept. of Rev., Ariz. Transaction Privilege Tax Ruling TPR 20-2 (Oct. 6, 2020).
Indiana: An insurance company is entitled to a refund of sales and use tax paid on purchases of several computer software-related agreements for vendor-specific services only (i.e., exempt service agreements; a maintenance agreement) that did not lead to the provision of any form of tangible personal property. The company, however, may or may not be entitled to a refund of sales tax paid on agreements to purchase remotely accessed computer software or software as a service, depending on when the agreement was executed. In December 2016, the Indiana Department of Revenue's (IN DOR) issued a revised Sales Tax Information Bulletin 8, which exempted from tax remote access of prewritten computer software when certain conditions are met. Thus, agreements executed before December 2016 are governed by the IN DOR's Sales Tax Information Bulletin 8 issued in May 2002 or November 2011, both of which subject the transactions at issue to Indiana sales and use tax. Ind. Dept. of Rev., Supp. Memo. of Decision Nos. 04-20200186R, 04-20200187R, 04-202000188R, and 04-20200189R (Oct. 28, 2020).
Louisiana: New law (SB 52) modifies income and corporate franchise tax credits for certain ad valorem taxes paid on inventory, on offshore vessels, and by telephone companies for public service properties by allowing taxpayers to make an election to treat ad valorem taxes for the 2020 tax year that are eligible for one of these credits but are paid after Dec. 31, 2020, as paid on Dec. 31, 2020, provided that the payments are made on or before April 15, 2021. Taxpayers making this election cannot also claim that these taxes were paid in 2021 for purposes of claiming the credit for the 2021 tax year. This law change took effect upon the signature of the governor. La. Laws 2020 (Second Extraordinary Sess.), Act 56 (SB 52), signed by the governor Nov. 5, 2020.
Louisiana: New law (SB 62) amends the tax credit for local inventory tax paid to only allow a full refund of excess credit amounts of ad valorem taxes paid on inventory for tax year 2020. To qualify for the full refund, the total amount of ad valorem tax paid by the taxpayer to all political subdivisions must be $1 million or less, and the taxpayer must have employed a minimum of 100 full-time employees at each location in the state for whom income tax withholding was remitted to the Louisiana Department of Revenue for at least one month within each of the first three quarters of calendar year 2020. This law change took effect upon the signature of the governor. La. Laws 2020 (Second Extraordinary Sess.), Act 59 (SB 62), signed by the governor Nov. 5, 2020.
PAYROLL & EMPLOYMENT TAX
Wisconsin: The Wisconsin Department of Revenue provided guidance concerning the income tax and business tax nexus requirements that apply when employees are temporarily working in the state due to the COVID-19 emergency. The rules governing the employer's requirement to withhold Wisconsin state income tax from wages have not changed except that the withholding requirement does not apply to an out-of-state business if its only activity within the state is due to its employees working temporarily from their Wisconsin homes during the COVID-19 emergency. The guidance includes examples. Wis. Dept. of Rev., Tax Bulletin #211 (Nov. 2020). For additional information on this development, see Tax Alert 2020-2624.
VALUE ADDED TAX
International — Kenya: On Oct. 23, 2020, the Kenyan Tax Appeals Tribunal (TAT) ruled that excise duty on financial services was not applicable prior to July 2013. The TAT also ruled that loan appraisal and loan commitment charges fall within the definition of interest and are not subject to excise duty and that Value Added Tax is applicable on the sale of commercial property. For additional information on this development, see Tax Alert 2020-2634.
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 Codified at Ark. Code Ann. § 26-51-701(a).
2 Because the transactional test was satisfied, the Court did not consider the functional test.
3 The company argued that the definition of business income should be strictly construed against taxation as required by Ark. Code Ann. § 26-18-313(a), while the AR DFA argued that because the company is claiming a tax exemption for nonbusiness income, the appropriate standard to apply is that set forth in Ark. Code Ann. § 26-18-313(b), which provides that the statute providing the tax exemption, deduction or credit shall be strictly construed in limitation of exemption, deduction, or credit.
4 The 11 jurisdictions are: Alaska, Connecticut, Delaware, Florida, Nevada, Oklahoma, South Dakota, Virginia, West Virginia, Wyoming, and Canada.