December 11, 2020
State and Local Tax Weekly for December 4
Ernst & Young's State and Local Tax Weekly newsletter for December 4 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.
Chicago budget includes rate increases
On Nov. 24, 2020, the Chicago City Council approved the city's 2021 budget (Ordinance O2020–5743), which includes various tax law changes. Effective Jan. 1, 2021, the following changes take effect:
Further, the new law provides for an increase in the property tax levy equal to the lesser of five percent or the most recently reported annual increase in the Consumer Price Index. The tax rate increase will be included in each year's budget starting with that for fiscal year 2021 and will continue to be included until certain pension funding requirements are met.
Massachusetts: The Massachusetts Appellate Tax Board (ATB) has upheld the imposition by the Massachusetts Department of Revenue (MA DOR) of corporate excise and nonresident composite taxes on the capital gain (Sale Gain) realized by a nonresident S corporation (S. corp.) from the sale of its interest in a Massachusetts limited liability company (LLC) that was treated as a partnership for federal and Massachusetts tax purposes. The ATB concluded that such imposition of Massachusetts tax did not result in the impermissible taxation of extraterritorial values. In so holding, the ATB applied an "investee apportionment" methodology and found that most of the Sale Gain was attributable to the increase in value of the LLC interest between the 2011 merger date of two entities (S. corp. and another entity that created the LLC) and the date of the sale of the LLC interest, and that this increased value, as well as the Sale Gain, "were inextricably connected to and in large measure derived from property and business activities in Massachusetts." The ATB also rejected the S corp.'s argument that "for Constitutional purposes, there is crucial distinction between a Massachusetts tax measured by its distributive share of income from its regular business activities and a tax measured by its Sale Gain income, which the [S corp.] argued was derived from the sale of a partnership interest." Citing the reasoning in its earlier ruling SAHI,1 the ATB found that the Sale Gain was directly related to the ownership, operation and management of the LLC and that the work and business effort related to these activities was performed largely in Massachusetts. Thus, through its ownership interest in the LLC, the S. corp.'s distributive share of income and the Sale Gain resulted from its connection to Massachusetts and its availment of Massachusetts' protections and benefits. As such, the S. corp. failed to show an adequate basis for the proposition that there was a constitutional distinction that "would render the [LLC's partnership distributive share income] taxable by Massachusetts and the [Sale Gain] beyond its reach." Lastly, the ATB found that given its findings and rulings, it was unnecessary to determine whether the S. corp. and the LLC were engaged in a unitary business to justify the imposition of Massachusetts tax. VAS Holdings & Investments LLC v. Mass. Comr. of Rev., Nos. C332269 and C332270 (Mass. App. Tax Bd. Oct. 23, 2020).
New Hampshire: Proposed rules (proposed Rev. 301.11 and .12; Rev. 304.04, .041, and .06 through .11; Rev. 308.01; Rev. 2401.05 and .07; Rev. 2403.03; and Rev. 2404.06 and .061) (collectively, the Proposed Rules) would implement New Hampshire's market-based sourcing provisions for purposes of apportioning the sales of services and intangibles under the Business Profits Tax and Business Enterprise Tax, effective Jan. 1, 2021, for tax periods ending on or after Dec. 31, 2021. The Proposed Rules, which would adopt aspects of the Multistate Tax Commission's market-based sourcing regulations, would source sales of services to New Hampshire if and to the extent the service is delivered to a location in New Hampshire (i.e., the location of the market for the services provided by the taxpayer, without regard to the location of the taxpayer's property or payroll). The sale, rental, lease, license, or other use of intangible property would be sourced to New Hampshire if and to the extent the property is used in the state. Further, the following types of income are sourced to New Hampshire: (1) interest income, if and to the extent the debtor or encumbered property is located in the state; (2) dividend income received by a business enterprise domiciled in New Hampshire; and (3) other income, if and to the extent the income is derived from sources in New Hampshire. The Proposed Rules also address how to source the delivery of a service by electronic transmission and delivery of a professional service by other than in-person means. In the case of sales other than sales of tangible personal property, reasonable approximation shall be used if the state(s) of assignment cannot be determined. Further, such sales would be excluded from the sales factor denominator if the taxpayer is not taxable in a state to which a sale is assigned or the state of assignment cannot be determined or reasonably approximated. Lastly, certain business organizations or combined groups must use one of the industry specific apportionment provisions (i.e., airlines, printing and publishing, television and radio broadcasting, financial institutions and transportation (other than airlines, communication and energy companies)) if more than 50% of its: (1) gross receipts for the tax period are from sources relating to the identified industry; and (2) total assets on the last day of the tax period are commonly related to the identified industry. A public hearing on these provisions is scheduled for 9:00 a.m. Dec. 14, 2020; comments are due by Dec. 24, 2020. N.H. Dept. of Rev. Admin., Notice 2020-95, proposed Rev. 301.11 and .12; Rev. 304.04, .041, and .06 through .11; Rev. 308.01; Rev. 2401.05 and .07; Rev. 2403.03; and Rev. 2404.06 and .061 (N.H. Rulemaking Register Nov. 19, 2020).
Oregon: The Oregon Department of Revenue on its COVID-19 Tax Relief Options has extended the period for which it will not treat the presence of teleworking employees in Oregon as a relevant factor in determining nexus for purposes of the Oregon corporate excise and corporate income taxes, effective for periods between March 8, 2020 and Dec. 31, 2020 (formerly Nov. 1, 2020). This relief applies to teleworking employees who are regularly based outside Oregon. Ore. Dept. of Rev., COVID-19 Tax Relief Options webpage "Corporations" (Nov. 2020).
South Carolina: The South Carolina Department of Revenue (SC DOR) extended the nexus and income tax withholding guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency from Dec. 31, 2020 to June 30, 2021. As previously announced, the SC DOR has stated that it will not use changes in an employee's temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period solely as a basis for establishing nexus (including for P.L. 86-272 purposes) or for altering the apportionment of income. S.C. Dept. of Rev., SC Information Letter #20-29 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19 (Nov. 30, 2020).
SALES & USE
Colorado: Adopted amendments to Rule 39-26-102(15) clarify the definition of tangible personal property (TPP) for Colorado sales and use tax purposes. Under the amended rule, TPP does not include computer software that does not meet the criteria enumerated in C.R.S. § 39-26-102(15)(c) (i.e., the computer software is prepackaged for repeated sale or license; it is governed by a tear-open nonnegotiable license agreement; and it is delivered to the customer in a tangible medium).2 As amended, new subsection Rule 39-26-102(15)(4) provides that the method of delivery does not impact the taxability of a sale of TPP. Methods used to deliver TPP under current technology include compact disc, electronic download, and internet streaming. Examples of taxable transactions, with tax due on the purchase price, include when a purchaser buys a movie (1) on a VHS tape or a compact disc, (2) through the internet and then downloaded to the purchaser's computer, or (3) accessed through an internet browser but does not save a copy of the movie to the purchaser's computer. Sales tax is also due on a monthly subscription fee that allows the purchaser to select and stream movies and television shows. New subsection Rule 39-26-102(15)(5) requires taxpayers to apply the true object test to determined whether a purchase price that includes TPP and services (and/or other types of property) is subject tax. Sales tax will be due on the purchase price when the true object of the purchase is TPP. The rules take effect 20 days after publication in the Colorado Register. Colo. Dept. of Rev., "Digital Goods Rule Adopted" (Dec. 2, 2020).
Illinois: The Illinois Department of Revenue (IL DOR) issued guidance on changes to the application of the Retailers' Occupation Tax (ROT) on sales by auctioneers to Illinois purchasers that take effect Jan. 1, 2021. The IL DOR said auctioneers meeting either of the remittance thresholds (i.e., cumulative gross receipts of $100,000 or more or at least 200 separate transactions, for the sale of tangible personal property (TPP) to Illinois purchasers) will be considered a marketplace facilitator and will be subject to the state and local ROT "on all sales made on their marketplace." Auctioneers making sales on behalf of an undisclosed marketplace sellers incur ROT at the destination rate. For sales made on behalf of undisclosed marketplace sellers, for tax remittance purposes, the auctioneer is considered the seller and is required to file its own return, separate from the return for sales made on behalf of marketplace sellers. In this instance, the auctioneer will pay tax to the IL DOR on that sale applying the following provisions: (1) if the item sold is not located in Illinois or the selling does not otherwise occur in Illinois, the auctioneer will incur ROT at the rate in effect at the destination rate; or (2) if the item sold is located in Illinois, of if the selling otherwise occurs in Illinois for that sale, the auctioneer will incur ROT at the rate in effect at the origin rate. If an out-of-state auctioneer does not meet either threshold but otherwise has a nexus with Illinois, it will be required to collect and remit Illinois use tax on its sales to Illinois purchasers. Ill. Dept. of Rev., Informational Bulletin FY 2021-5 "Changes to the taxation of sales by auctioneers to Illinois purchasers" (Nov. 2020). In addition, the IL DOR has established a resource page for remote retailers and marketplace facilitators that will include administrative rules, "leveling the playing field retailer flowchart," ROT guidance for remote retailers, certified service providers/certified automated system information, Illinois tax matrix, tax rate database, FAQs, and filing, payment and registration resources for marketplace facilitators and remote retailers.
South Carolina: The South Carolina Department of Revenue (SC DOR) extended the nexus and income tax withholding guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency from Dec. 31, 2020 to June 30, 2021. As previously announced, the SC DOR has stated that it will not use changes in an employee's temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period solely as a basis for establishing nexus. S.C. Dept. of Rev., SC Information Letter #20-29 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19 (Nov. 30, 2020).
Tennessee: A funeral home that at the time of the sale of a pre-need funeral service contract collects sales tax from customers on all taxable merchandise purchased as part of the service is not required to collect additional sales tax from the customer or their next of kin if the price of the merchandise increases by the time the pre-need contract becomes an at-need contract. The Tennessee Department of Revenue (TN DOR) explained that under Tennessee law, tax is due at the moment of sale, which, in this case, is at the time the parties entered into the pre-need contract. The TN DOR noted that because the funeral home purchases the merchandise as an exempt sale for resale, it is essentially providing the merchandise at or below cost under the terms of the pre-need contract. Thus, even if the funeral home does not purchase the guaranteed merchandise until several years later, and the cost/sales price of the merchandise has increased, the merchandise is still being sold for the previously agreed upon price and, as such, no additional tax is due. Tenn. Dept. of Rev., Letter Ruling # 20-10 (Nov. 2, 2020).
Colorado: The Colorado Department of Revenue in a letter ruling provided guidance on when the enterprise zone investment tax credit (EZ credit) can be claimed for qualified investments and addressed how the credit is maintained or lost. The EZ credit is allowed for the tax year in which the qualified property is placed in service, and the qualified property must be used solely and exclusively within the enterprise zone during the 12-month period after the date the property was first placed in service. If the qualified property is used outside the enterprise zone during that time the credit will not be allowed with respect to such property. Additionally, a corporation's sale to Passive Investors of 77.5% equity interests in two limited liability companies (Project LLCs) formed to facilitate two renewable energy projects (Projects) does not, by itself, disqualify the corporation from claiming the EZ credits for the Projects. Because the corporation will retain partial ownership of, and will exercise control over, the Projects post-sale, the corporation "will be sufficiently equipped to either ensure use of the Projects solely and exclusively within the enterprise zone for at least one year or, if used outside the enterprise zone, to file original or amended returns to forfeit any credit claimed." Colo. Dept. of Rev., PLR 20-003 (May 6, 2020) (issued Nov. 2020).
South Carolina: An administrative law judge (ALJ) for the South Carolina Administrative Law Court held that S.C. Code § 12-14-60(G) imposes a $5 million lifetime limitation (and not a $5 million per taxable year limitation) on the capital investment tax credit for entities subject to South Carolina's license tax.3 Consequently, the ALJ upheld the denial by the South Carolina Department of Revenue (SC DOR) of a utility's capital investment tax credit, finding the utility exceeded that $5 million limitation in the 2010–2014 tax years. In reaching this conclusion, the ALJ resolved ambiguity in the credit limitation statute in the SC DOR's favor and noted that such a finding was reasonable considering the statute as a whole. S.C. Code § 12-14-60(G) limits "[t]he credit allowed by this section," and the ALJ found that limiting the credit "allowed" reflected an intent to limit the credit itself (as opposed to a limit upon "[t]he amount of the credit allowed by this section", which presumes a right to the credit). Additionally, the ALJ found that the SC DOR was not bound by its previous Form TC-11, which, before revision in 2014, required taxpayers to apply the credit limitation on an annual basis, and that the SC DOR's change to its Form did not amount to an invalid rule-making procedure. The ALJ also rejected the utility's arguments that: (1) the SC DOR's dismissal of its old form was in direct conflict with its obligations under the Taxpayers' Bill of Rights; (2) the SC DOR should be estopped from changing its interpretation of the credit limitation, because in making the decision to invest in the state, the utility relied, in part, on the SC DOR's prior interpretation; and (3) the SC DOR would be unjustly enriched by retroactively applying its new interpretation of the credit limitation. Duke Energy Corp. v. S.C. Dept. of Rev., No. 19-ALJ-17-0153-CC (S.C. Admin. Law Ct. Oct. 27, 2020).
Oklahoma: The Oklahoma Court of Civil Appeals (OK CCA) reversed a ruling of the Oklahoma Tax Commission and held a 2016 law change to Okla. Stat. tit. 68, § 227 that shortened a three-year statute of limitations for filing a refund claim to two years could not be enforced retroactively under Oklahoma's Constitution. Therefore, a limited liability company (LLC) is entitled to refunds of sales tax overpayments made when the statute allowed a taxpayer to file a refund claim within three-years from the date of the erroneous payment. In so holding, the OK CCA found that Okla. Const., Art. 5, § 54 prohibits repeals of statutes from affecting any accrued right and the statute at issue grants to the LLC a right to a refund of its erroneously paid tax (accrued upon payment), provided the claim is timely filed. At the Beach, LLC v. Okla. Tax Comn., 2020 OK CIV APP 61 (Okla. Ct. of Civ. App., Div. 1, Oct. 23, 2020) (mandate issued Nov. 19, 2020).
Utah: The Utah State Tax Commission (USTC) issued guidance explaining how it assesses penalties and interest on most tax types (except motor vehicle laws and motor vehicle business regulation, most property taxes and privilege tax), including how the interest and penalties are calculated and how payments are applied. The guidance covers the taxes to which the interest and penalty provisions apply, various interest provisions (including rates, how interest applies to overpayments and underpayments, the order in which delinquent tax payments are applied and how interest is calculated), various penalties provisions (including late filing and late payment penalties, extension penalty, underpayment penalties, employer withholding reconciliation penalties, other penalties and fines and preparer penalties) and waivers. Lastly, the USTC can waive, reduce, or compromise any penalties or interest based on reasonable cause. Utah State Tax Comn., Pub. 58: Utah Interest and Penalties (revised Oct. 2020).
PAYROLL & EMPLOYMENT TAX
North Dakota: The North Dakota Job Service (NDJS) recently reported that its state unemployment insurance (SUI) tax system erroneously calculated interest due from employers that timely filed their 2020 third quarter SUI tax return and payment after Oct. 31, 2020 but by Nov. 2, 2020. Employers that filed their 2020 third quarter SUI returns on Nov. 1, 2020 or Nov. 2, 2020 should disregard any notice of interest due because of late filing and payment. For more on this development, see Tax Alert 2020-2785.
Rhode Island: On Nov. 23, 2020, the Rhode Island Department of Revenue, Division of Taxation (RI DOT) announced that it is extending through Jan. 18, 2021 emergency regulation, 280-RICR-20-55-14, which provides relief from income tax withholding for employees who are temporarily working from home outside of the state where their employer is located due to the COVID-19 emergency. Under the emergency regulations the income of employees who are nonresidents temporarily working outside of Rhode Island solely due to the COVID-19 emergency will continue to be treated as Rhode Island-source income for Rhode Island withholding tax purposes. Further, employers located outside of Rhode Island will not be required to withhold Rhode Island income taxes from the wages of employees who are Rhode Island residents temporarily working within Rhode Island solely due to the COVID-19 emergency. R.I. Dept. of Rev., Email "Rhode Island Division of Taxation — withholding-tax guidance for employers" (Nov. 23, 2020).
South Carolina: The South Carolina Department of Revenue announced that the nexus and income tax withholding guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency is extended from Sept. 30, 2020 to Dec. 31, 2020. S.C. Dept. of Rev., SC Information Letter #20-29 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19 (Nov. 30, 2020).
Vermont: The Vermont Department of Taxes issued updated guidance concerning the income tax rules that apply to employees who work remotely or who are temporarily relocated to the state due to the COVID-19 emergency. The revised guidelines make it clear that Vermont nonresident income tax does not apply unless the employee is performing services within the state. For more on this development, see Tax Alert 2020-2794.
International — Egypt: Egypt published Customs Law No. 207 of 2020 on Nov. 11, 2020. While the new law aims to simplify and standardize procedures by merging and updating Egypt's customs laws, it also introduces various changes to the current legal regime with stricter penalties to ensure compliance. In addition, the new law aims to support Egypt's digital transformation and provides for the electronic submission and exchange of documents. Businesses engaged in import/export operations in Egypt (including brokers and special zone entities) should consider the amendments, clarifications and enhancements of the new law to: (1) review their operations and supply chains in line with the new requirements to better achieve customs compliance, audit readiness and penalty avoidance; and (2) facilitate the achievement of any newly introduced or revised benefits brought about through the new provisions. Tax Alert 2020-2798 summarizes some of the key aspects highlighted within the law.
VALUE ADDED TAX
International — Kenya: The Kenyan Tax Appeals Tribunal recently held that the claim of input Value Added Tax must be supported by proof of purchases made by the taxpayer. This was following an assessment by the Kenya Revenue Authority accusing the taxpayer of fraud. Additionally, the associated purchases were treated as not deductible for corporate income tax. For more on this development, see Tax Alert 2020-2778.
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 SAHI USA, Inc. v. Mass. Comr. of Rev., Mass. ATB Findings of Fact and Reports, 2006-794, 812. (quoting General Mills Inc. v. Mass. Comr. of Rev., 440 Mass. 154, 175 (2003), cert. denied, 541 U.S. 973 (2004).
2 C.R.S. § 39-26-102(15)(c)(I)(C) provides that "[c]omputer software is not delivered to the customer in a tangible medium if it is provided through an application service provider, delivered by electronic computer software delivery, or transferred by load and leave computer software delivery."
3 S.C. Code Ann. § 12-20-100. Additionally, S.C. Code § 12-14-60(G) does not address the treatment of taxpayers not subject to the license tax.