December 22, 2020
State and Local Tax Weekly for December 11
Ernst & Young's State and Local Tax Weekly newsletter for December 11 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.
Texas Comptroller proposes sweeping amendments to its franchise tax sourcing rule
On Nov. 2, 2020, the Texas Comptroller of Public Accounts (Comptroller) filed with the Office of the Secretary of State proposed revisions that would make substantial changes to its sourcing rule under 34 Tex. Admin. Code Section 3.591 (Section 3.591) for franchise tax receipts. The proposed revisions are expansive; according to the Comptroller, they (1) incorporate legislative changes enacted in 2013 and 2015; (2) update select definitions and define new terms; (3) supersede certain guidance; and (4) make significant changes to the sourcing rules for receipts from advertising services, capital assets and investments, computer hardware and digital property, internet hosting and other services.
Once finalized, the proposed revisions will generally be effective Jan. 1, 2008, except as otherwise noted in the net gain/loss provisions and certain changes stemming from legislation.
The proposed revisions may be adopted at any time, as the public comment period has now ended.
For more on this development, see Tax Alert 2020-2863.
Alabama: Any amount of cancellation-of-indebtedness income resulting under the federal Paycheck Protection Program (PPP) and subsequently forgiven under section 1106 of the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act), is excluded from the calculation of income tax and the financial institution excise tax to the extent such amount is exempted from federal income taxes. This amount also is excluded from all calculations in determining a taxpayer's federal income-tax deduction, but will be considered for Alabama tax purposes in determining the deductibility of otherwise deductible expenses (e.g., payroll, utilities, mortgage interest, rent) allowed to be paid with exempt funds to the extent such expenses are deductible in calculating federal income tax. Ala. Gov., Proclamation (Dec. 11, 2020).
District of Columbia: Permanent law (L23-0149) delays the deferred tax liability deduction, expands the reach of the unincorporated business franchise tax and conforms to federal opportunity zone provisions. Provisions of the law delay when a combined group whose net deferred tax liability was increased as a result of the enactment of the combined reporting provisions can deduct a portion of the net increase. Under the amended provisions, the deduction may be claimed by an eligible taxpayer for a seven-year period, beginning with the 15th year (formerly 10th year) of the combined filing. For taxpayers that took the deduction into account when making estimated 2020 payments (previously 2015 payments) and an underpayment results, the estimated tax interest resulting from such underpayment, upon application, will be waived. This change took effect Oct. 1, 2020. Further, effective Jan. 1, 2021, taxable income for unincorporated business franchise tax purposes, includes gain from the sale or other disposition of any assets, including tangible assets, intangible assets, real property and interests in real property in the District, even when the sale or other disposition results in terminating an unincorporated business. In regard to opportunity zones, the District conforms to the federal opportunity zone provisions, allowing certain capital gains to be deducted from gross income. Specifically, if a taxpayer invests in a "qualified opportunity fund" (QOF) that meets specific criteria, the taxpayer can: (1) defer a capital gains tax payment for investing in a QOF, subject to certain conditions; (2) reduce capital gains tax liability through a 10% step-up in basis if invested in a QOF for five years prior to Dec. 31, 2026, and an additional 5% step-up in basis if invested in a QOF for seven years before Dec. 31, 2026; (3) abate capital gains on an investment of capital gains in a QOF for at least 10 years before Dec. 31, 2047. The new law includes information about program criteria as well as eligible QOF requirements. DC Laws 2020, L 23-0149 (B23-0760), became law Dec. 3, 2020. A bill (Act 23-404) that had enacted these provisions for an emergency 90-day period expired Nov. 16, 2020.
Georgia: The Georgia Department of Revenue said that for 2020 it has adopted the increase to the IRC Section 179 deduction to $1,040,000 and the $2,590,000 phaseout, but has not adopted the IRC Section 179(d)(1)(B)(ii) deduction for certain real estate. Ga. Dept. of Rev., "Income Tax Federal Tax Changes" webpage (updated Dec. 9, 2020).
Massachusetts: The Massachusetts Department of Revenue (MA DOR) extended the period in which its work from home guidance will apply. Under the guidance, the MA DOR will not assert nexus for corporate excise solely because employees are temporarily working remotely in the commonwealth due to the COVID-19 emergency, including the presence of business property reasonably needed from such persons' use while working remotely. Further, such presence, itself, will not cause a corporation to lose the protections of P.L. 86-272. The MA DOR also said that services performed by these temporary remote workers/the presence of such business property will not be considered to increase the numerator of the employer's payroll or property factors, respectively, for apportionment purposes. As revised, this nexus and apportionment relief will remain in effect until 90 days after the state of emergency in Massachusetts is lifted. Mass. Dept. of Rev., TIR 20-15: Revised Guidance on the Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic (revised Dec. 8, 2020).
Philadelphia, PA: The City of Philadelphia Department of Revenue (CP DOR) extended its temporary waiver of the legal nexus threshold under the Business Income & Receipts Tax (BIRT) Regulations, which considers the presence of employees working temporarily from home within Philadelphia as sufficient to establish nexus for out-of-Philadelphia businesses. This waiver applies if and when an employee works from home solely as a result of the COVID-19 pandemic." This waiver is in effect until the earlier of June 30, 2021, or 90 days after the Proclamation of Disaster Emergency in Pennsylvania is lifted. Further, the CP DOR said for purposes of sourcing BIRT and net profits tax (NPT) it will deem services performed by COVID-19 related work from home employees to be performed within the city and employees ordinarily working outside the city will be deemed to perform services in the location of their ordinary workplace. Philadelphia Dept. of Rev., "Business Income & Receipts Tax (BIRT), Net Profits Tax (NPT) nexus and apportionment policies due to the COVID-19 pandemic " (revised Dec. 7, 2020).
Tennessee: The Tennessee Department of Revenue updated its FAQs, stating that the marketplace facilitator legislation enacted for sales and use tax purposes does not affect the nexus requirement for business tax or franchise and excise tax. Rather, the marketplace facilitator filing and threshold requirements, which took effect Oct. 1, 2020, only apply for sales and use tax purposes. Tenn. Dept. of Rev., FAQs "Sales Tax Collection by Marketplace Facilitators" (posted Dec. 1, 2020).
Tennessee: The Tennessee Department of Revenue (TN DOR) updated its FAQs stating that payments received under the Tennessee Business Relief Program (BRP) or the Supplemental Employer Recovery Grant Program (SERGP) are subject to the state's franchise and excise tax but are not subject to the state's business tax. The TN DOR explained that since Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) funds were used to establish the BRP and SERGP, the receipt of payment from such programs by a business is subject to federal taxation. Because the starting point for determining Tennessee franchise and excise tax is federal taxable income, the payments are subject to this tax. Tenn. Dept. of Rev., FAQs Franchise & Excise Tax FAQs (posted Dec. 1, 2020).
SALES & USE
Louisiana: An out-of-state corporation owes use tax on tangible personal property (in this case tools) used for servicing oil wells it imported into Louisiana for lease, rental, and/or service transactions because the transactions do not qualify for the sale for lease exclusion when the tools were used in service transactions. The use tax, the Louisiana Board of Tax Appeals (BTA) noted, applies to all tools that were not exclusively provided as bare rentals (i.e., those without an operator) and the corporation would have to show such exclusive use (which it failed to do). The BTA also rejected the corporation's argument that imposing the use tax would be an improper duplication of tax, finding the corporation did not pay sales tax on the tools and the only tax paid on the tools — the lease or rental tax — was paid by its customers. Additionally, the corporation could not claim a credit for tax paid to another state on the tools because it failed to show that it paid sales tax (or a similar tax) on the tools in Mississippi (the state in which the corporation purchased most of the tools), and that those taxes were legally owed. Eastern Fishing & Rental Tool, Co., Inc. v. Robinson, No. 10210C (La. Bd. of Tax App. Oct. 8, 2020).
Massachusetts: The Massachusetts Department of Revenue (MA DOR) extended the period in which its work from home guidance will apply. Under the guidance, the MA DOR said that it will not assert nexus for sales and use tax purposes solely because employees that previously worked in another state are working in the commonwealth due to the COVID-19 emergency. As revised, this relief will remain in effect until 90 days after the state of emergency in Massachusetts is lifted. Mass. Dept. of Rev., TIR 20-15: Revised Guidance on the Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic (revised Dec. 8, 2020).
Michigan: Gift certificates and gift cards (collectively, gift certificates), which are often sold as tangible personal property as a plastic card or paper certificate, are not subject to sales and use tax. Rather, gift certificates generally are treated as intangible property that represents a monetary value which can be used to purchase goods or services from the businesses listed. As such, a charitable organization (or other seller) that sells or auctions gift certificates to raise money for the organization would not be liable for sales tax in these transactions. Additionally, a seller that sells taxable property purchased with a gift certificates must remit sales tax based on the monetary value exchanged. When gift certificates do not have a specified monetary value (such as hotels or accommodation providers offering accommodations for specific times) and they are used to purchase a room or accommodation, the provider is liable for use tax based on the room or accommodation's value at the time of the rental (i.e., the amount that represents the "purchase price"). Mich. Dept. of Treas., Update (Nov. 2020).
Alabama: Governor Kay Ivey through a Proclamation extended the Alabama Jobs Act and the Growing Alabama tax credit programs, both of which would have sunset in 2020. Now, the credits will sunset the earlier of (1) the enactment of a bill to extend the Alabama Job's Act tax credits/ Growing Alabama tax credit, or (2) the last day of the first regular session of the Legislature following the issuance of this proclamation. Ala. Gov., Proclamation (Dec. 11, 2020).
District of Columbia: Permanent law (L23-0149) makes various changes to the Qualified High Technology Company (QHTC) credit provisions and clarifies the DC Low-Income Housing Tax credit provisions. Modifications to the QHTC provisions include QHTC eligibility requirements, increasing the required number of qualified employees in the District to at least 10 or more (from two or more). The amount of the QHTC credit for retraining costs for qualified disadvantaged employees is reduced to $10,000 (from $20,000) for certain qualified disadvantaged employees; the associated carryforward and refundability provisions for this credit are repealed.
Other repealed QHTC provisions include:
The QHTC personal property exemption is repealed applicable beginning July 1, 2021; all other provisions related to the QHTC apply as of Jan. 1, 2020.
Lastly, L23-0149 temporarily suspends the tax on capital gain (generally imposed at 3%) from the sale or exchange of a QHTC investment from Jan. 1, 2020 through Dec. 31, 2024.
L23-0149 also clarifies various aspects of the DC Low-Income Housing Tax Credit, which can be claimed against income and franchise taxes or certain insurance taxes. An owner of a qualified project may receive the credit in an amount equal to 25% of the value of the federal low-income housing tax credit claimed under IRC Section 42 received with respect to the qualified project. The credit can be claimed equally for 10 years and unused amounts can be carried forward, but it is not refundable. In addition, L23-0149: (1) modifies transfer, sale, assignment, or allocation provisions; (2) clarifies that the number of such transactions is unlimited but the maximum credit allowable still applies; and (3) provides that credits earned or purchased by, or transferred or assigned to, a pass-through entity can be allocated to that entity's partners, members, or shareholders, without regard to their ownership interests in the qualified project. These changes took effect Oct. 1, 2020. DC Laws 2020, L 23-0149 (B23-0760), became law Dec. 3, 2020. A bill (Act 23-404) that had enacted these provisions for an emergency 90-day period expired Nov. 16, 2020.
District of Columbia: Permanent law (L23-0149) exempts computer software from personal property tax unless: (1) the software is incorporated as a permanent component of a computer, machine, piece of equipment, or device, or of real property, and it is not commonly available separately; or (2) the software's cost is included as part of the cost of a computer, machine, piece of equipment, or device, or of the cost of real property on the taxpayer's books or records. This change applies starting July 1, 2021. DC Laws 2020, L 23-0149 (B23-0760), became law Dec. 3, 2020. A bill (Act 23-404) that had enacted these provisions for an emergency 90-day period expired Nov. 16, 2020.
Texas: The U.S. Supreme Court (Court) will not 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. PRSI Trading, LLC v. Harris County , No. 18-0664 (Tex. S.Ct. Feb. 28, 2020), cert. denied, Harris County, TX v. PRSI Trading, LLC , Dkt. No. 20-563 (U.S. S.Ct. Dec. 7, 2020).
COMPLIANCE AND REPORTING
Arkansas: Effective Jan. 1, 2021, the administration and collection of all Arkansas franchise tax will be transferred from the Arkansas Secretary of State (AR SOS) to the Arkansas Department of Finance and Administration (AR DOFA). The first franchise tax reports due to the AR DOFA for all corporations is May 1, 2021. The AR SOS's Business and Commercial Services offices will close at noon on Dec. 30, 2020 to complete the transfer of the franchise tax to the AR DOFA. The AR SOS said that companies wanting to dissolve before year-end, will need to do so prior to this time. Ark. Sec. of St., Notice "Franchise Taxes move from SOS to DFA beginning January 1st" (Nov. 9, 2020).
Pennsylvania: Applicable to tax years beginning on or after Jan. 1, 2021, the Pennsylvania Department of Revenue (PA DOR) is repealing its statement of policy in 61 Pa. Code § 9.11, which provided guidelines for withholding tax requirements imposed on partnerships, associations and Pennsylvania S corporations with nonresident partners, members or shareholders. The PA DOR said it is "currently revising its Personal Income Tax systems. This statement of policy no longer reflects current tax processes and systems that will be incorporated into the new system." The repeal applies to tax years beginning on or after Jan. 1, 2021. Pa. Dept. of Rev., Pa. Bull. Vol. 50, No. 49 at 6905 (Dec. 5, 2020).
PAYROLL & EMPLOYMENT TAX
All state: State unemployment insurance (SUI) trust funds are largely financed by employer contributions (except in Alaska, New Jersey and Pennsylvania, where employees also make contributions). States are required to maintain a SUI wage base of no less than the limit set under the Federal Unemployment Tax Act (FUTA). The 2021 FUTA wage limit of $7,000 has remained unchanged since 1983, despite increases in the federal minimum wage and annual cost-of-living adjustments over the last 36 years. Some states are conservative in their approach to maintaining adequate SUI trust fund reserves. Consequently, the SUI wage base is flexible in those states, meaning it is indexed to the average wage or varies based on the trust fund balance. According to the U.S. Department of Labor, 24 states and the Virgin Islands had a flexible wage base in 2020. For additional information on this development, see Tax Alert 2020-2848.
All state: Six jurisdictions (i.e., California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island) operate state disability insurance (SDI) programs. Another nine jurisdictions (i.e., California, Connecticut, the District of Columbia, Massachusetts, New Jersey, New York, Oregon, Rhode Island and Washington) are now operating, or will soon be operating, paid family and medical leave (PFML) insurance programs. Depending on the jurisdiction, the employee may pay all contributions to the SDI and/or PFML program through wage withholding, or the employer and the employee may share the cost of the insurance coverage. Most states allow employers to use a private insurance company or self-insured plan in lieu of paying into the state insurance fund(s). For additional information on this development, see Tax Alert 2020-2831.
Kansas: In its frequently asked questions (FAQs ) about income tax withholding, the Kansas Department of Revenue (KS DOR) stated that in consideration of the impact of the COVID-19 emergency on employer operations, it will waive employer under withholding and individual estimated tax payment penalties for all employees required to work remotely. These penalty waivers apply for the period in 2020 that Governor Laura Kelly's disaster emergency order remained in effect. The following FAQs explain the KS DOR's income tax withholding requirements under various scenarios which reflect no departure from the rules that applied before the COVID-19 emergency. For more on this development, see Tax Alert 2020-2827.
California: The City of San Diego's utility surcharge to move electric and communications facilities underground (Undergrounding Surcharge) is compensation validly given in exchange for franchise rights (rather than a tax) and, therefore, was not required to be approved by voters under Proposition 218, the Right to Vote on Taxes Act. In so holding, a California Court of Appeal (COA) applied the reasoning in Jacks2 to the Undergrounding Surcharge's text, legislative history, application, and purpose, finding that the compensation San Diego receives from the Undergrounding Surcharge is reasonably related to the value of the franchise rights. Additionally, the Undergrounding Surcharge was not imposed unilaterally under San Diego's taxing powers, and the fact that San Diego Gas & Electric Company acts as San Diego's collection agent from ratepayers does not change that the surcharge was not a franchise fee. Mahon, Jr., et al. v. City of San Diego, No. D074877 (Cal. Ct. App., 4th Appel. Dist., Div. 1, Nov. 20, 2020).
District of Columbia: Permanent law (L23-0149) imposes a tax and a local transportation surcharge on motor vehicle fuels sold or otherwise disposed of by an importer or by a user, or used for commercial purposes. Effective Oct. 1, 2020, the tax rate is $0.235 per gallon, and the surcharge is $0.053 per gallon. The surcharge will increase to $0.103 per gallon, effective Oct. 1, 2021; the surcharge will be increased annually by a cost-of-living adjustment starting Oct. 1, 2022. Effective Sept. 30, 2020, the previous motor fuels tax of 8% of the average wholesale prices of gallons of regular unleaded gasoline for the applicable base period is repealed. DC Laws 2020, L 23-0149 (B23-0760), became law Dec. 3, 2020. A bill (Act 23-404) that had enacted these provisions for an emergency 90-day period expired Nov. 16, 2020.
Virginia: The Virginia Department of Taxation (VA DOT) issued guidance on tobacco products tax changes,3 including the imposition of tax on heated tobacco products and the application of economic nexus thresholds to out-of-state distributors. Heated tobacco products will be taxed at the rate of 2.25 cents per stick for sales or purchases occurring on or after Jan. 1, 2021 and will not be subject to cigarette stamping requirements. Under economic nexus provisions, beginning Jan. 1, 2021 a distributor must register in Virginia if, in the previous or current calendar year, it: (1) receives more than $100,000 in gross revenue from sales of tobacco products in Virginia, or (2) engages in 200 or more separate tobacco products sales transactions in Virginia. Sales made by all commonly controlled persons, including all wholesale and retail sales, are aggregated in determining whether the sales thresholds are met. Distributors must register with the VA DOT within 30 days of establishing economic nexus, and distributors with economic nexus as of Jan. 1, 2021 must register and begin collecting the tax for transactions occurring on or after Jan. 1, 2021. Va. Dept. of Taxn., Tax Bulletin 20-11 (Dec. 1, 2020).
VALUE ADDED TAX
International — Kenya: Kenya has issued a second Tax Laws (Amendment) (No.2) Bill, 2020 (the Bill) which proposes various changes to the Income Tax Act and the Value Added Tax Act. The Bill has been issued pursuant to a public notice which was issued by the Cabinet Secretary in charge of the National Treasury on Dec. 4, 2020 highlighting the expected cessation of some of the tax relief measures extended by the Government at the onset of the COVID-19 pandemic. The key changes proposed by the Bill are the reinstatement of: (1) the resident corporate income tax rate to 30% from the current 25%; and (2) the highest individual income tax band to 30% from the current 25%. Tax Alert 2020-2835 summarizes the key tax proposals included in the Bill.
International — Uganda: On Nov. 30, 2020, the Ugandan Tax Appeals Tribunal (TAT) issued a ruling in TAT Application No. 36 of 2019 Samsung Electronics East Africa Limited versus Uganda Revenue Authority to the effect that a branch of a company is not distinct from its head office and there is no Value Added Tax due on a supply of services by a branch to its head office. For additional information on this development, see Tax Alert 2020-2850.
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 Jacks v. City of Santa Barbara (2017) 3 Cal.5th 248.
3 See Va. Laws 2020, Special Session I, Ch. 56, HB 5005.