November 24, 2020
State and Local Tax Weekly for November 20
Ernst & Young's State and Local Tax Weekly newsletter for November 20 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 Nov. 18, 2020, is available here.
IRS plans to issue proposed regulations on deductibility of certain state and local tax payments by partnerships and S corporations
The IRS has announced (Notice 2020-75) (Notice) that it will issue proposed regulations (Proposed Regulations) clarifying that a partnership or S corporation may deduct "Specified Income Tax Payments" in computing their non-separately stated income or loss. The IRS said the forthcoming Proposed Regulations are needed to provide certainty to individual partners and S corporation shareholders in calculating their SALT deduction limitations.
The Notice defines Specified Income Tax Payments as any amount that a partnership or S corporation pays to a state, a political subdivision of a state, or the District of Columbia (Domestic Jurisdiction) to satisfy an income tax liability imposed on the partnership or S corporation. Specified Income Tax Payments expressly do not include taxes imposed by US territories or their political subdivisions. The definition includes only income taxes described in IRC § 164(b)(2) for which (1) a partnership may claim a deduction under IRC § 703(a)(2)(B) and (2) an S corporation may claim a deduction under IRC § 1363(b)(2). Therefore, a Specified Income Tax Payment includes any amount that a partnership or S corporation pays to a Domestic Jurisdiction under its ability to impose an income tax. This applies whether or not (1) the income tax liability results from an election the entity made; or (2) the partners or shareholders received a deduction or other tax benefit based on their share of what the partnership or S corporation paid to satisfy its liability.
The Proposed Regulations will permit a partnership or S corporation that makes a Specified Income Tax Payment during a tax year to claim a deduction for the payment in computing its taxable income for the tax year in which the payment is made.
Any Specified Income Tax Payment that a partnership or S corporation makes during a tax year will not constitute a deductible item that partners or S corporation shareholders may take into account separately under either IRC § 702 or IRC § 1366 in determining their federal income tax liability for the year. Rather, any Specified Income Tax Payment must be reflected in the partner's or S corporation shareholder's distributive or pro-rata share of non-separately stated income or loss reported on Schedule K-1.
Finally, any Specified Income Tax Payment that a partnership or S corporation makes may not be taken into account in applying the SALT deduction limit to any individual partner or S corporation shareholder.
According to the Notice, the forthcoming Proposed Regulations will apply to payments made on or after Nov. 9, 2020, although taxpayers will be permitted to apply the rules described in the Notice to payments made in a partnership or S corporation tax year ending after Dec. 31, 2017 and before Nov. 9, 2020. The IRS further stated that taxpayers may rely on the Notice until the Proposed Regulations are issued. For additional information on this development, see Tax Alert 2020-2690.
Federal: The IRS has issued procedural guidance (Revenue Procedure 2020-50) for taxpayers to implement the 2020 final bonus depreciation regulations, the 2019 final bonus depreciation regulations, or both the 2019 final and proposed bonus depreciation regulations, for property acquired and placed in service by the taxpayer after Sept. 27, 2017. Revenue Procedure 2020-50 also contains guidance for making certain late elections or revoking certain elections made under IRC §168(k), as described later. Revenue Procedure 2020-50 modifies Revenue Procedures 2019-43 and 2020-25 and is effective Nov. 6, 2020. For additional information on this development, see Tax Alert 2020-2719.
South Carolina: The South Carolina Department of Revenue (SC DOR) issued guidance on the state's conformity to the federal income tax exemption of loans forgiven under the Paycheck Protection Program (PPP) (Section 1106 of the Coronavirus Aid, Relief, and Economic Security Act). For South Carolina income tax purposes, a PPP loan is not taxable and the forgiveness of the PPP loan is not taxable for tax year 2020. Further, the SC DOR said it will follow the IRS's position in Notice 2020-32 and will not allow businesses to deduct expenses that are normally deductible to the extent the expenses were reimbursed by a PPP loan that was then forgiven (i.e., the SC DOR will disallow related payroll and occupancy costs to the forgiven portion of the PPP loan forgiveness). S.C. Dept. of Rev., SC Information Letter #20-28 (Nov. 2, 2020).
Tennessee: A taxpayer that is classified a foreign corporation for federal income tax purposes (hereafter, foreign co.) and does not have effectively connected income with a US trade or business is not subject to the state's franchise tax even though it is doing business in the state because it qualifies for the statutory exception1 that treats it as not having substantial nexus with the state. The Tennessee Department of Revenue (TN DOR) explained that the nexus exception applies despite the fact that foreign co. is doing business in the state through its storage of raw materials and finished goods, payments to a manufacturer to process the raw materials into finished goods and shipping finished goods to customers both within and without Tennessee. Additionally, Tennessee's 1999 franchise tax statute revisions to remove language that clearly imposed franchise tax on corporations regardless of place of incorporation, and to impose franchise tax on "all persons doing business in Tennessee, or exercising the corporate franchise [change in italics]," was intended to broaden the franchise tax so that it applied to Tennessee-chartered and Tennessee-organized limited liability entities, rather than capture foreign corporations. Lastly, the TN DOR noted that because foreign co. is not a Tennessee-chartered corporation it is not exercising a corporate franchise in Tennessee by storing inventory in the state. Tenn. Dept. of Rev., Rev. Ruling No. 20-08 (Oct. 9, 2020).
SALES & USE
Arizona: The Arizona Department of Revenue reminds taxpayers that effective Jan. 1, 2021, the economic nexus threshold for remote sellers under the state's transaction privilege tax (Arizona's version of a sales or use tax) will be reduced from $150,000 in gross sales to $100,000 in gross sales. This new threshold may be met "at any time in 2021". Click here for more on Arizona's economic nexus provisions. Ariz. Dept. of Rev., Transaction Privilege Tax Updates "Upcoming Threshold Changes" (Nov. 2020).
Michigan: A group of related entities that operate movie theaters in Michigan are not entitled to a refund of sales tax paid on tax exempt prepackaged candy sold at the theaters' concession stands because the tax was paid by the entities' customers. In so holding, the Michigan Court of Appeals (Court) affirmed the decision of the Michigan Tax Tribunal (Tribunal) that prepackaged candy is exempt from the Michigan General Sales Tax Act under MCL §205.54g(1)(a), which exempts from sales tax all food "except prepared food intended for immediate consumption"2 and that the prepackaged candy did not become "prepared food" under MCL §205.54g by the mere availability of napkins at the movie theater. The Court also affirmed the Tribunal's determination that Rule 86(5), which includes a 75% test for determining whether eating utensils are deemed provided by the seller, is invalid as it conflicts with the plain meaning of the statute. The Court determined that the 75% test is not found in the statute "either explicitly or by implication." Rather, "the statute contemplates that the eating utensils must specifically accompany the food or be added to it" and "merely making the utensils available in other parts of an establishment is insufficient and does not fit within the ordinary definition of 'with'." The Court also rejected the entities' argument that the Tribunal erred in concluding that a refund was not required on the erroneously paid sales tax related to the prepackaged candy sales, noting that the record supported a finding that the entities' customers paid sales tax on the transactions. Emagine Entertainment, Inc. et al. v. Mich. Dept. of Treas., Nos. 350376 and 350881 (Mich. Ct. App. Nov. 19, 2020).
New York: An out-of-state corporation's receipts from its digital advertising campaign management platform are subject to New York state and local sales and use tax because the platform permits its customers to access taxable prewritten software to create, deliver, and manage their own digital advertisements. The New York Department of Taxation and Finance reasoned that the products are prewritten software (and not "services" as provided in the sales agreement), and that sales of these products will be treated as sales of tangible personal property when the products are not customized to a specific customer's specifications, and they give customers the ability to create, deliver, and track their own advertisements. Additionally, consulting and advertisement placement services the corporation provides are not listed among New York's taxable services. Thus, a taxpayer will not be required to collect sales tax on receipts from these services if the charge for the services are separately stated and reasonable in relation to the overall receipt. Since, however, the corporation invoices its customers for one non-itemized price for each advertising campaign (i.e., it does not separately bill for use of taxable software tools and other non-taxable services), sales tax is due on the total sales price charged. N.Y. Dept. of Taxn. and Fin., TSB-A-20(22)S (June 30, 2020).
Federal: The IRS has posted two new employee retention credit (ERC) FAQs on its website addressing the interaction of the ERC and Paycheck Protection Program (PPP) loans in the context of mergers and acquisitions. The FAQs provide taxpayer-favorable answers to questions that have been plaguing employers for months, clarifying the conditions under which the ERC would remain available following the acquisition of a target company that previously received a PPP loan. For additional information on this development, see Tax Alert 2020-2725.
Federal: In Ampersand Chowchilla Biomass, LLC,3 the Court of Federal Claims (court) found that two open-loop biomass facilities were not entitled to certain energy grants under the American Recovery and Reinvestment Act of 2009 because the facilities were placed into service before the time specified by the statute. In so finding, the court said the facilities were placed into service when they "were ready and available to perform their specifically assigned function." For additional information on this development, see Tax Alert 2020-2732.
Pennsylvania: New law (SB 30) establishes the Pennsylvania housing tax credit to encourage development of qualified low-income housing projects in the state. The Pennsylvania housing tax credit, which will be administered using the same guidelines, procedures, and priorities that the Pennsylvania Housing Finance Agency (PHFA) uses to administer the federal housing tax credit under IRC § 42 (when possible), permits a taxpayer to claim the state credit in an amount up to 50% of the taxpayer's "qualified tax liability" for a single tax year. The PHFA will determine credit amounts conditionally reserved to a taxpayer based on the merits of the qualified low-income housing project. Once the taxpayer meets credit requirements, the PHFA will issue credit certificates in an amount up to 20% of the conditional reservation for each tax year in the credit period. The credit must first be applied against the taxpayer's qualified tax liability for the current tax year as of the date the credit was issued, and unused amounts can be carried forward up to five tax years but cannot be carried back or refunded. Additionally, the credit can be sold or assigned in whole or in part, subject to state approval. Pass-through entities with unused credits can elect in writing to transfer all or part of the credit to shareholders, members, or partners, subject to certain limitations and requirements. The state will develop recapture procedures similar to those provided in IRC § 42. These provisions took immediate effect. Pa. Laws 2020, Act 107 (SB 30), signed by the governor on Nov. 3, 2020.
COMPLIANCE & REPORTING
Virginia: The Virginia Department of Taxation (VA DOT) issued guidance on Virginia specific reporting requirements for payment settlement entities and third-party settlement organizations submitting federal Form 1099-K to the IRS reporting certain information related to payment card transactions and third-party transactions. Under Virginia law enacted in 2020 (2020 Va. Acts, ch. 248 and ch. 63), a payment settlement entity is required to submit to the VA DOT either a duplicate of each Form 1099-K it submitted to the IRS or a duplicate of each IRS Form 1099-K it submitted to the IRS related to a participating payee with a Virginia address or which is a Virginia taxpayer. In addition, a third-party settlement organization is required to submit to the VA DOT and to any participating payee all information required to be reported for federal income tax purposes on IRS Form 1099-K using the thresholds imposed for purposes of IRS Form 1099-MISC. Thus, for Virginia tax purposes, such an organization must submit to the VA DOT the IRS Form 1099-K information to the extent it makes any payments of $600 or more in a taxable year to another person who is not an employee in pursuit of the organization's trade or business. This requirement applies to reportable payments transactions made on or after Jan. 1, 2020. The guidance sets forth reporting methods and deadlines. Va. Dept of Taxn., Tax Bulletin 20-10 Important Information Regarding Reporting Requirements for Payment Settlement Entities - Reporting Requirements for Form 1099-K Filers with Virginia Participating Payees (Oct. 30, 2020).
California — City of Los Angeles: Reminder - The Office of Finance (LA Finance) for the City of Los Angeles, California (City) is conducting a tax amnesty program (LA Amnesty Program) that will run through Dec. 17, 2020 (Amnesty Period). During the Amnesty Period, unlicensed businesses can come into compliance with the City's various business taxes, including the business license tax, commercial tenant occupancy tax, communications users tax, parking occupancy tax and transient occupancy tax, among others. In exchange for complying with the terms of the LA Amnesty Program, otherwise applicable penalties will be waived. For additional information on this development, see Tax Alert 2020-2389.
District of Columbia: The District of Columbia Office of Tax and Revenue issued a notice stating that, during the declared public health emergency, it will allow taxpayers and tax professionals to use digital signatures on all forms, including those that cannot be filed electronically. DC OTR, Tax Notice 2020-08 (Nov. 17, 2020).
PAYROLL & EMPLOYMENT TAX
Federal: The US Bureau of Labor Statistics reports that the national rate of unemployment fell to 6.9% in October 2020, down from the September 2020 rate of 7.9%. Total nonfarm payroll rose by only 638,000 in October, down from 661,000 in September and 1.4 million in August. Further, as of Nov. 13, 2020, 22 jurisdictions have applied for and are approved to receive federal unemployment insurance (UI) loans and 21 jurisdictions have outstanding federal UI loan balances for loans paid to them in 2020, for a total combined 2020 loan amount of $40,688,726,896.33. For additional information on this development, see Tax Alert 2020-2721.
Colorado: With 100% of Colorado counties reporting in, voters have approved by a margin of 58% to 42% a retroactive reduction in the state's flat income tax rate for individuals and corporations from 4.63% to 4.55%, effective with taxable years commencing on or after Jan. 1, 2020. Proposition 116 also reduces the state's withholding tax rate to 4.55%. For additional information on this development, see Tax Alert 2020-2730.
Pennsylvania: New law (HB 716) establishes a joint task force within the Department of Labor and Industry that will study employee misclassification as independent contractors and make recommendations to reduce employee misclassification in the commonwealth. Pa. Laws 2020, Act 28 (HB 716), signed by the governor Oct. 29, 2020.
International: The World Trade Organization (WTO), on Oct. 13, 2020, authorized the European Union (EU) to impose countermeasures on United States (US)-origin products due to illegal US subsidies granted to the US aircraft industry. 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 annually. Following the WTO's authorization, the EU was initially reluctant to impose countermeasures on US products as it was waiting for the outcome of the negotiations with the US before moving forward with countermeasures. However, on Nov. 9, 2020, the EU decided to impose countermeasures on the US by increasing tariffs on US exports into the EU worth US$4 billion. For more on this development, see Tax Alert 2020-2706.
Multistate: On December 3, 2020, from 3:30-5:00 pm (EST), Ernst & Young LLP (EY) will host the employment tax year in review webcast. The COVID-19 national emergency has created a historic flurry of federal, state and local responses with significant impacts on employers. Changes to federal employment tax returns and a sudden rise in telework are just some of the pandemic-related challenges facing employment tax professionals as they undertake year-end tasks. Topics included in this year's webcast: 2021 federal employment tax rates and limits; federal IRS Form W-2 reporting considerations for 2020; employer and employee deferral of Social Security tax; tax credits available under the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act; employer and employee deferral of Social Security tax; 2020 state ballot results affecting payroll; teleworker payroll tax considerations; IRS Form W-2 reporting for multistate employment; and 2020 payroll year-end checklist. Register.
Multistate: On Wednesday, Dec. 9, 2020 from 1:00-2:30 (EST) Ernst & Young LLP (EY) will host the fourth domestic tax quarterly webcast of the year. 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. They will also address the most important developments affecting state income, sales and use, and property taxes as well as federal and state business credits and incentives that occurred during 2020. 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(49)(B).
2 MCL §205.54g(4) defines "prepared food" as including food sold with eating utensils provided by the seller such as napkins and straws.
3 Ampersand Chowchilla Biomass, LLC v. United States, No. 14-841C (U.S. Fed. Cl. Nov. 9, 2020).