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November 23, 2020

State and Local Tax Weekly for November 13

Ernst & Young's State and Local Tax Weekly newsletter for November 13 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 where other important tax-related information pertaining to the COVID-19 emergency is available.


Total state and local business taxes: State-by-state estimates for FY19

The 18th annual state and local business tax study, produced by EY's Quantitative Economics and Statistics practice (QUEST), in conjunction with the Council On State Taxation (COST) and the State Tax Research Institute (STRI), indicates that businesses paid $833 billion in state and local taxes in FY19 (i.e., tax collections from July 2018 through June 2019 in most states), an increase of 5.7% from FY18.

The study analyzes all state and local business taxes paid in each of the 50 states and the District of Columbia. These taxes include business property taxes, sales and excise taxes paid by businesses on their input purchases and capital expenditures, gross receipts taxes, corporate income and franchise taxes, business and corporate license taxes, unemployment insurance taxes, individual income taxes paid by owners of non-corporate (pass-through) businesses and other state and local taxes that are the statutory liability of business taxpayers.

Key findings include:

  • State business taxes increased by 6.3% and local business tax grew by 5.2%. Growth in state and local tax revenue from business was concentrated in property taxes and sales taxes. In FY19, business tax revenue accounted for approximately 44.0% of all state and local tax revenue. These estimates reflect the last fiscal year completed before the COVID-19 pandemic.
  • Business property tax revenue increased 4.9% in FY19, a gain of $14.8 billion. Property taxes remain by far the largest state and local tax paid by businesses, accounting for 37.9% of the total state and local taxes they paid. Property taxes are also by far the largest local tax paid by businesses, representing 76.1% of all local taxes paid by businesses.
  • General sales taxes on business inputs and capital investment totaled $177.3 billion, or 21.3% of state and local business taxes. These sales taxes paid by business increased by 6.2% in FY19. Sales taxes on business inputs are the largest state tax paid by businesses, representing 31.3% of all state taxes paid by businesses.
  • Corporate income taxes increased for the second consecutive year after two consecutive years of decline, largely due to the expansion of state corporate income tax bases following the enactment of federal tax reform (the "Tax Cuts and Jobs Act" or TCJA) in December 2017. In FY19, state and local corporate income taxes, including certain statewide gross receipts taxes, totaled $77.1 billion, or 9.3% of all state and local business taxes (an increase of 17.0% from FY18). The increase in revenue represented the first full year of state conformity with the TCJA.
  • Individual income taxes on pass-through business income accounted for 6.5% of total state and local business tax revenue, totaling $53.8 billion, an increase of 4.5% from FY18. While the increase in individual income taxes was less significant than the prior fiscal year's increase, 39 states experienced an increase, with New York and California accounting for 28% of the $2.3 billion increase.
  • Severance taxes increased from $12.7 billion in FY18 to $15.0 billion in FY19, an increase of 18.0%. Almost 85% of the increase in severance taxes was concentrated in four states: New Mexico, North Dakota, Oklahoma and Texas.
  • Only unemployment insurance taxes experienced a decline during FY19, decreasing by 5.1%.


Hawaii: New rule (Haw. Admin. Rules § 18-235-3-01) designates how to distribute a credit for partnerships, S corporations, estates and trusts. Specifically, when Hawaii's income tax laws do not specify how a credit should be distributed or provide that the distribution or share of a credit be made as provided by rule, the distribution must be made based on the ratio upon which the partners, shareholders or beneficiaries divide the entity's general profits or losses. A partnership, however, can make a distribution under IRC Section 704. The rule takes effect Sept. 18, 2020. Haw. Dept. of Taxn., Haw. Admin. Rules § 18-235-3-01.

North Carolina: The North Carolina Department of Revenue (NC DOR), in response to a ruling request, addressed how to source certain sales of tangible personal property when the supply chain includes shipment to a consolidation warehouse. Receipts from sales of products shipped to a North Carolina consolidation warehouse (including by third-party manufacturers/suppliers), as well as receipts from sales of these products to unaffiliated wholesale or retail customers located in North Carolina, are included in both the sales factor numerator and denominator. Additionally, for products purchased and then shipped to a North Carolina consolidation warehouse, receipts from sales of these products to unaffiliated wholesale and retail customers located outside of North Carolina (or subsequent sale to unaffiliated wholesalers or retailers outside of North Carolina that deliver the property outside North Carolina), are only included in the sales factor denominator. When goods are delivered by common carrier or by other means of transportation, the place at which the goods are ultimately received after all transportation is completed is deemed to be the place at which the purchaser receives the goods. If an entity knows the tangible property's destination when it is picked up at the North Carolina consolidation warehouse, that property's sales receipts are sourced to the destined location. If, however, the property's destination is unknown, the receipts are sourced to the sales factor numerator. In this instance, receipts from the sale of the tangible property to affiliates are included in the sales factor denominator since they were earned in the regular course of business. N.C. Dept. of Rev., Private Letter Ruling No. CPLR 2020-01 (Sept. 30, 2020).

New York City: The New York City Department of Finance (NYC DOF) determined that under the Relocation Employment Assistance Program's (REAP) Continued Eligibility Rule, an Acquired Entity (AE) is eligible for REAP credits beginning on its credit eligibility date until the date AE is integrated with a foreign limited liability partnership (FLLP), and the FLLP can claim the REAP credits beginning with the integration date and thereafter. The NYC DOF found that AE is eligible for the credit from the eligibility date to the integration date because it continued its business operations unchanged during this period, despite that FLLP's affiliate acquired AE's corporate parent. Further, FLLP met the Continued Eligibility Rule requirements following the integration date when AE was converted from a corporation into a single-member limited liability company (SMLLC), which was disregarded for federal and NYC tax purposes and transferred directly to FLLP. The NYC DOF found a "strong degree of continuity of the business operations of the [AE]" and, as a disregarded entity, the SMLLC's activities are treated as the activities of FLLP. Accordingly, the REAP credit will continue to be available to FLLP from the integration date, continuing for the period that the credit would have been available to AE provided FLLP continues the business that had been conducted by AE at the eligible premise. NYC Dept. of Fin., FLR No. 19-5001 (Sept. 14, 2020).

Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) issued guidance on the tax impact of pandemic telework during the COVID-19 pandemic. The PA DOR said it does not consider an employee working from home temporarily due to the COVID-19 pandemic as a change to the sourcing of the employee's compensation. Compensation of non-residents who were working in Pennsylvania before the pandemic remains Pennsylvania sourced income for all tax purposes, including PA-40 reporting, employer withholding and three-factor business income apportionment purposes for S Corporations, partnerships and individuals. Conversely, compensation of Pennsylvania residents who were working out-of-state before the pandemic remains the other state's sourced income. Such residents will still be able to claim a credit for tax paid to the other state on the compensation. For employers with non-resident employees temporarily working from home due to the COVID-19 pandemic in a state that does not have a reciprocity agreement with Pennsylvania, the PA DOR said the employee's compensation remains Pennsylvania sourced, and the employer is required to withhold on the compensation. In addition, the PA DOR echoing FAQs posted in April 2020, again said that it will not seek to impose Corporate Net Income Tax nexus solely on the basis of people temporarily working from home. This guidance is effective until the earliest of June 30, 2021, or 90 days after the end of Governor Tom Wolf's emergency disaster proclamation. Pa. DOR, "Telework During the COVID-19 Pandemic" (Nov. 9, 2020).

Tennessee: A foreign limited partnership (LP) whose only connection to Tennessee is ownership of, and receiving payment on, mortgages secured, in part, by property located in the state, is carrying on the "business of a financial institution" for Tennessee franchise and excise tax purposes but it is not "doing business in Tennessee" because its in-state business activities are limited to those identified in a statutory safe harbor.1 Specifically, under Tenn. Code Ann. § 67-4-2004(14)(C)(iii) a financial institution is not considered to be conducting the business of a financial institution in Tennessee when its Tennessee business activities are limited to the ownership of an interest in a loan, lease, note or other assets attributed to this state and the payment obligations were solicited and entered into by an independent third party not acting on its behalf. Here, the LP's Tennessee activities are limited to owning mortgages (some of which are secured by Tennessee property) and receiving payments on those mortgages (some of the borrowers of which could be from Tennessee), and the mortgages were brokered by an independent third party not acting on its behalf. Because LP's activities are limited to those protected by the safe harbor, it is not doing business in the state and, therefore, not subject to the state's franchise and excise tax. Tenn. Dept. of Rev., Letter Ruling #20-07 (Oct. 8, 2020).


Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) issued guidance on the tax impact of pandemic telework during the COVID-19 pandemic. The PA DOR, echoing its FAQs first posted in April 2020, again said that it will not seek to impose Sales and Use Tax nexus solely on the basis of people temporarily working from home. This guidance is effective until the earliest of June 30, 2021 or 90 days after the end of Governor Tom Wolf's emergency disaster proclamation. Pa. DOR, "Telework During the COVID-19 Pandemic" (Nov. 9, 2020).

South Dakota: A U.S. District Court (Court) held that gross receipts a general contractor who was not a member of an Indian Tribe derived from construction services performed on-reservation are preempted from contractor's excise tax under two different federal laws. The contractor's excise tax is impliedly preempted by the Indian Gaming Regulatory Act because under the Bracker2 balancing test, the state's interests in imposing the tax (i.e., reimbursement for state government services, raising revenue for its general fund, and uniform application of South Dakota tax law and exemptions) do not outweigh tribal and federal interests in promoting tribal self-sufficiency and self-governance. Additionally, the Indian Trader Statutes expressly preempt the contractor's excise tax, which is imposed on the general contractor's gross receipts from "all labor and materials" including the general contractor's services and materials/goods used in the service, based on a finding that "trade" as used in the statute includes on-reservation sales of construction materials and services. Moreover, even if the Indian Trader Statutes do not expressly preempt the contractor's excise tax, the Court found that under Bracker the state tax demonstrates a general revenue-raising interest that is outweighed by federal and tribal interests. Flandreau Santee Sioux Tribe v. Terwilliger, No. 4:17-CV-04055-KES (D. S.D. Oct. 21, 2020).

Tennessee: The Tennessee Department of Revenue (TN DOR) in response to a manufacturer's ruling request provided guidance on the application of Tennessee's sales and use tax to installation charges for household appliances when the charge is stated as a separate line item on the invoice and the installation is performed by a third party. The TN DOR explained that the contractor will not owe use tax on appliances it installs that become part of the real property if, as in this case, the manufacturer had charged the end users sales tax on the sale of the appliance. (Note, the contractor is liable for sales/use tax on property bought and/or used during installation.) In regard to the appliances, the TN DOR said appliances that remain tangible personal property upon installation (i.e., washers, dryers, various free-standing appliances) are subject to Tennessee sales tax, but appliances that become affixed to realty upon installation (i.e., dishwashers, built-in appliances, and electric and gas cooktops) are not. In making this determination, the TN DOR considered the expressed intent of the parties and objective factors such as the mode of attachment, whether removal would damage the real property to which the appliance is installed, and whether the appliance's removal would destroy its essential character as personal property. Non-invasive installations of items that remain tangible personal property showed the intent that the items are removable at will, and removal of such items would be unlikely to damage the real property on which it is installed or destroy its essential character as personal property. In contrast, dishwashers and built-in appliances become affixed to realty upon installation, are unlikely to be removed and relocated after installation, and generally remain in place for their useful life after installation even though removal would not likely cause serious real property damage or destroy their essential character as personal property. Tenn. Dept. of Rev., Rev. Ruing No. 20-11 (Nov. 2, 2020).


New York: A real estate developer that used two related subsidiaries to carry out real estate development projects failed to establish that it was entitled to have the qualified empire zone enterprise (QEZE) tax credits passed through to it from one of the subsidiaries (FC Yonkers) for tax year 2009 because an employee worked for the other subsidiary (FCRC) rather than FC Yonkers. In so holding, a New York Supreme Court, Appellate Division affirmed the New York State Tax Appeals Tribunal finding that since FC Yonkers was certified as the QEZE, it had to meet the requirements of the QEZE program in order to qualify for and pass through the credits to the developer. In this case, FC Yonkers did not meet the QEZE program's employment requirements because the employee was employed by the FCRC and not FC Yonkers; thus, the developer is not entitled to the QEZE real property tax credit for tax year 2009. Matter of Forest City Realty Trust, Inc. v. Tax Appeals Tribunal of the State of New York, No. 528420 (N.Y. S.Ct., App. Div., 3rd Jud. Dept., Nov. 5, 2020).


California: A marine construction and dredging company is not entitled to the Vessel Use Exemption from property tax under the California Constitution3 for tax years 2013 and 2014 because its vessels were not "engaged in the transportation of freight" when they carried sludge and other dredged material from harbors to disposal sites. In so holding, the California Court of Appeal (COA) found the company was engaged in a dredging project, not in the transportation of goods for hire, and carrying dredge materials from the harbor to disposal sites was a byproduct of, and incidental to, the vessels' dredging work. The COA reasoned that the legislature's use of "freight" suggests it intended for the exemption to apply to vessels that are hired to carry goods from a consignor to a consignee, and noted that although courts have expanded the scope of the exemption, the legislature has not expanded it over the years to include vessels that carry any tangible item or person for hire. Thus, the exemption's purpose (i.e., protecting the shipping industry by encouraging commercial shipping and helping California retain its fair share of the merchant shipping industry) is unchanged. Lastly, in rejecting the company's argument that "freight" should be more broadly interpreted for exemption purposes, the COA distinguished Star & Crescent Boat,4 finding that the dredged waste was not "goods," and the incidental moving of the dredged material to disposal sites did not trigger federal transportation taxes. Manson Construction Co. v. Contra Costa Cnty., No. A159144 (Cal. Ct. App., 1st App. Dist., Div. 3, Nov. 2, 2020).


Georgia: The Georgia Department of Revenue (GA DOR) issued a policy bulletin clarifying its current regulation on accepting electronic signatures, remote notaries and electronic filings (Bulletin). Under its current regulation (Ga. Comp. R. & Reg. § 560-3-2-.27) (Regulation), the GA DOR accepts e-signatures on business account registrations and tax returns filed electronically. The Regulation sets forth the standards for the acceptance of e-signatures with which taxpayers and authorized third-party representatives must comply. The GA DOR said it will accept electronic or remote notarization in lieu of physical in-person notarization on any of its forms that require a notary authorization, provided that the remote notarization complies with Governor Kemp's Executive Order 04.09.21 "Temporarily Allowing Remote Notarization and Attestation of Documents during the COVID-19 Public Health State of Emergency." While the governor's executive order is temporary, the GA DOR said it will accept remote notarization on a permanent basis if it meets the requirements listed in the Bulletin. The GA DOR also said it will accept e-signatures that comply with the requirements of the Bulletin on all of its documents and forms that require signatures and that are not already covered by the Regulation. Such documents include Powers of Attorney, requests for tax returns, statutes of limitations waivers for assessments and collections, waivers of statutory notices of deficiency and consents to assessments, consents to audit changes and other agreements between the GA DOR and taxpayers. In addition to the GA DOR's current automatic acceptance of e-signatures by third-party representatives accepted by the IRS, the GA DOR stated in the Bulletin that it also will accept an e-signed and e-filed document from a taxpayer's third-party representative if certain conditions are met. The provisions of the Bulletin do not apply to documents and forms to be filed with the Motor Vehicle Division. Ga. Dept. of Rev., Policy Bulletin ADMIN-2020-02 (Nov. 10, 2020).

Ohio: In City of Athens v. McClain, the Ohio Supreme Court held that the Ohio General Assembly was authorized to enact the centralized system for filing and administering municipal net-profits taxes, but the 0.5% fee retained by the Ohio Department of Taxation for administering those taxes was unconstitutional. For more on this development, see Tax Alert 2020-2667.


Multistate: Letting employees know about their right to unemployment insurance and how to claim benefits if eligible, has long been a requirement for employers in most states. Our survey of state workforce agency websites shows that except for Arizona, Connecticut, Hawaii, New Hampshire, Ohio and South Carolina, all states require that employers post a notice in the workplace about the availability of unemployment insurance benefits to eligible workers. For more on this development, see Tax Alert 2020-2671.

Colorado: Voters in Colorado approved Proposition 118 which creates a statewide paid family and medical leave program that will be administered by the Colorado Department of Labor and Employment. Beginning in 2023, employers are required to remit a contribution of 0.9% of each employee's wages up to the Social Security wage limit. Employers of 10 or more employees will be allowed to deduct up to 50% of the contributions from employee wages while employees of smaller employers will pay 100% of the contributions. The contribution rate is scheduled to increase to 1.2% as of Jan. 1, 2025. For additional information on this development, see Tax Alert 2020-2661.

Kentucky: The Kentucky Department of Revenue released the draft 2021 income tax withholding tables and computer formula to its website. A draft 2021 Form K-4, Kentucky's Withholding Certificate, has also been released. The final versions are expected to be published in December 2020. The Kentucky 2021 standard deduction amount increases to $2,690, up from $2,650 for 2020. Effective with tax years beginning on and after Jan. 1, 2018, Kentucky enacted a flat 5% income tax (HB 366), replacing the graduated personal and corporate income tax tables. Due to this change, all Kentucky taxpayers are taxed at 5% with an allowance for the standard deduction. For additional information on this development, see Tax Alert 2020-2680.

South Carolina: The South Carolina Department of Revenue released the 2021 income tax withholding computer formula and wage-bracket tables to its website. Form SC W-4, South Carolina Employee's Withholding Allowance Certificate, has also been updated for 2021. Beginning for calendar year 2021, employees are required to submit, at the time of hire, both the state Form SC W-4 and the federal Form W-4. (Email notice, 10-23-2020.) For additional information on this development, see Tax Alert 2020-2679.


Rhode Island: The Rhode Island Department of Revenue and Division of Taxation has issued FAQs on employer reporting under the state individual mandate for health insurance. For the 2020 tax year, employers must furnish Form 1095-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, to individuals by March 2, 2021, and file the form with the state by March 31, 2021. For additional information on this development, see Tax Alert 2020-2678.


Federal: The latest edition of EY's Trade Watch, which outlines key legislative and administrative developments for customs and trade around the world, is now available. It can be accessed via Tax Alert 2020-2670.

Federal: United States (US) President Donald Trump announced on Oct. 30, 2020 that the US would suspend the duty-free treatment of certain goods from Thailand (Thai-origin goods) afforded under the Generalized System of Preferences (GSP), effective Dec. 30, 2020, citing Thailand's lack of assurance to provide the US with equitable and reasonable access to its markets, a primary condition of program eligibility. The US Trade Representative (USTR) issued a subsequent announcement detailing the enforcement action against Thailand and other country review procedures under GSP. The announcement reaffirmed the removal of certain Thai origin goods, and provided additional details noting that the suspension action specifically targeted Thai goods with an annual import value of US$817 million currently granted as duty free under GSP. In the same announcement, the USTR provided an update on several other outstanding GSP eligibility reviews, including Georgia, Indonesia, Laos and Uzbekistan. Finally, the USTR opened two new eligibility reviews on Eritrea and Zimbabwe. On Nov. 4, 2020, the US Department of Commerce announced an affirmative preliminary determination in the countervailing duty investigation of passenger vehicle and light truck tires from Vietnam. For additional information on this development, see Tax Alert 2020-2665.

International — European Union: On Nov. 9, 2020, the European Union (EU) announced countermeasures to be imposed against the United States (US) pursuant to a decision issued by a World Trade Organization (WTO) arbitrator in October 2020. The countermeasures, published in the Official Journal of the EU, consist of a 15% punitive tariff on civil aircrafts and a 25% punitive tariff on an array of other US origin goods, such as spirits, food products and machinery, and were made effective Nov. 10, 2020. For additional information on this development, see Tax Alert 2020-2674.


International — Brazil: On Nov. 4, 2020, the Brazilian Supreme Court (STF) held that the state value-added tax does not apply to the licensing of, or right to use, software. The STF found, however, that the municipal service tax applies to the licensing of, or right to use, software because they are services. For additional information on this development, see Tax Alert 2020-2653.

International — United Kingdom: The United Kingdom (UK) is implementing fundamental changes to the value-added tax (VAT) accounting and reporting requirements for online sellers, businesses with a direct-to-consumer channel and online marketplaces. These changes will be implemented from Jan. 1, 2021. Similar VAT changes in the European Union (EU) become effective from July 1, 2021. For additional information on this development, see Tax Alert 2020-2663.


Multistate: On Wednesday, Dec. 9, 2020 from 1:00-2:30 (EST) Ernst & Young LLP (EY) will host the fourth domestic tax quarterly webcast. During this webcast, panelists from EY's Indirect Tax practice will focus on state and local tax policy issues related to the 2020 general election and continued state responses to the coronavirus (COVID-19) pandemic. We will also highlight the most important developments affecting state income, sales and use, and property taxes as well as federal and state business credits and incentives. Topics to be addressed include: (1) post-election overview: how the results will shape state and local tax changes in 2021, including an analysis of: state house changes, the outcome of key state and local tax ballot measures, highlighting San Francisco's business tax reform and new CEO pay ratio tax and the impact of the elections on federal COVID-19 pandemic aid for states; (2) the latest on state tax agency responses to the COVID-19 pandemic; (3) state and local tax considerations of making a "work from home" option permanent, including the impact on the ability to meet certain credit and incentive requirements; and (4) forecasts of the 2020 state and local tax trends that are likely to carry over into 2021. Register.

Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor.


1 Tenn. Code Ann. § 67-4-2004(14)(C)(iii).

2 White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980).

3 Cal. Const. art. XIII, § 3, subd. (l).

4 Star & Crescent Boat Co. v. County of San Diego (1958) 163 Cal.App.2d 534.