December 23, 2020
State and Local Tax Weekly for December 21
Ernst & Young's State and Local Tax Weekly newsletter for December 21 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 Dec. 15, 2020, is available here.
Year-end 2020 COVID and omnibus legislation
The US House and Senate on Dec. 21, 2020 both approved the Consolidated Appropriations Act 2021 (Act), which would provide roughly $900b in coronavirus relief, including many tax and health components, as well as a $1.4t omnibus appropriations package to fund the government through September 2021. In addition, the Act also extends expiring tax and health care provisions.
The agreement on coronavirus relief was reached after two of the most controversial issues that had been holding up an agreement for months — state and local government funding and liability protection — were dropped from the negotiations, and a late issue over Federal Reserve lending authority was resolved. Policy disputes and the desire to keep the scope of the package targeted kept some items out of the final agreement, including a business credit for personal protective equipment and provisions which would have provided clarity on the state and local taxation of employees working in locations other than their normal place of work during 2020. Many of the tax provisions extend or modify parts of the Coronavirus Aid, Relief and Economic Security Act (P.L. 116-136) as further amended during 2020 such as the Payroll Protection Program loans and the employee retention credit instead of creating new COVID relief programs.
Among the most significant components of the "extenders" package are several provisions which permanently extend and other which align with the scheduled expiration of tax cuts under the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). For example, some key TCJA post-2025 scheduled tax increases relate to provisions for individuals as well some international tax provisions. Those expiring at the end of 2021 include those which align the TCJA amortization requirement for R&D expense and those which impose a more restrictive calculation of taxable income for the IRC Section 163(j) interest deductibility limitation.
A Washington Council Ernst & Young Alert summarizing key parts of the bill is available here.
Nebraska modifies guidance on the state's treatment of GILTI and FDII
The Nebraska Department of Revenue (NE DOR) issued revised guidance (General Information Letter (GIL) 24-20-1) (Nov. 19, 2020) (revised guidance), which supersedes GIL 24-19-3 (Dec. 10, 2019) (prior guidance), on the state's treatment of global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII), with the more significant edits being made to the sections on the foreign dividends received deduction on Nebraska tax returns and apportionment. Under prior guidance, the NE DOR said clarified that GILTI and FDII deductions are included in Nebraska taxable income because they are included in federal taxable income. The NE DOR also stated that GILTI is not eligible for the Nebraska deduction for dividends or deemed dividends under Neb. Rev. Stat. 77-2716(5) because the IRC and related Treasury Regulations establish that GILTI is not a foreign dividend. The revised guidance clarifies that GILTI is not a foreign dividend except for IRC Section 78 dividends attributable to GILTI under IRC §250(a)(1)(B)(ii). Thus, Nebraska law does not provide for an exclusion for GILTI income as a foreign/deemed foreign dividend, except for IRC Section 78 dividends attributable to GILTI.
In regard to apportionment, the revised guidance requires a corporate taxpayer taxable in Nebraska and one or more other states to include the entire amount of GILTI in its sales factor denominator (prior guidance only required inclusion of a share of GILTI income). Turning to the numerator, prior guidance directed a taxpayer in determining whether to include the GILTI amount in its sales factor numerator, to apply the situsing rules for certain investment income in Neb. Rev. Stat. 77-2734.14(3)(d) (dealing with interest, dividends, investment income and other net gains from transactions in intangible assets held in a treasury function). In addition, prior guidance presumed the inclusion of GILTI in a taxpayer's Nebraska sales factor numerator if its commercial domicile is in Nebraska, and excluded GILTI income from the Nebraska sales factor numerator for corporate taxpayers whose commercial domicile is in another state, unless it conducts relevant activities (i.e., investment, management, and recordkeeping) in Nebraska.
The revised guidance treats GILTI as an intangible value generated by US operations but realized by a controlled foreign corporation. The NE DOR said that since GILTI income "is not derived from intangible assets held in connection with a treasury function" the apportionment provisions in Neb. Rev. Stat. 77-2734.14(3)(a) through (j), which deal with sales of services, interest and dividends from intangible assets held in connection with a treasury function, interest and fees from loans, credit cards and other financial instruments, and licenses and rentals apply. Thus, Neb. Rev. Stat. 77-2734.14(3)(k), which requires that sales of nontangible personal property not specifically addressed in this subsection "be sourced so as to fairly represent the extent of the taxpayer's business activity in the state." The NE DOR acknowledged that "[t]here does not appear to be a uniform way to identify how much activity that results in GILTI is associated with Nebraska to 'fairly represent the extent of the taxpayer's business activity in this state,'" but said that all or a part of the amount of GILTI included in the denominator should be included in the numerator. The GILTI amount is included "to the extent that part or all of the intangible value that gives rise to GILTI is connected with and fairly attributable to developing or maintaining the intangible property in Nebraska." Neb. Dept. of Rev., GIL 24-20-1 (Nov. 19, 2020) (supersedes GIL 24-19-3 (Dec. 10, 2019)).
Federal: The US Treasury Department and the IRS have released final regulations under IRC Section 451 dealing with the inclusion of income for a taxable year (T.D. 9941). These final regulations interpret IRC Section 451 as amended by the Tax Cuts and Jobs Act (P.L. 115-97). The final regulations are expected to be generally applicable for tax years beginning on or after the later of Jan. 1, 2021, or the date the final regulations are published in the Federal Register. The final regulations include two packages: Treas. Reg. § 1.451-3 under IRC Section 451(b) (Inclusion not later than for financial accounting purposes) and Treas. Reg. § 1.451-8 under IRC Section 451(c) (Advance payments for goods, services, and certain other items). Taxpayers may choose to apply the final regulations to tax years beginning before the effective date or may continue to rely on the proposed regulations (REG-104554-18) for tax years beginning after Dec. 31, 2017, and before the effective date of the final regulations. See Tax Alert 2020-9060 for more on this development.
Michigan: The Michigan Supreme Court (MSC) vacated the Michigan Court of Appeals (COA) judgment in Vectren Infrastructure Svcs. Corp. that a corporation was entitled to use an alternative apportionment formula because application of the Michigan Business Tax's statutory single sales factor apportionment formula would cause distortion and tax extraterritorial activity. The MSC remanded the case to the COA to address the proper method for calculating the business tax due under the statutory formula, determining that this issue is foundational and needs to be addressed before considering whether an alternative apportionment method is required. Vectren Infrastructure Svcs. Corp., successor-in-interest to Minn. Ltd., Inc. v. Mich. Dept. of Treas., No. 161422 (Mich. S.Ct. Nov. 25, 2020) vacating and remanding No. 345462 (Mich. Ct. of App. March 12, 2020).
New Jersey: The U.S. Supreme Court will not review the New Jersey appeals court's ruling in Xpedite Systems, Inc., upholding the New Jersey Division of Taxation's application of the "25-50-25" allocation method to source a corporation's receipts from providing fax blast services. Xpedite Systems, Inc. v. N.J. Dir., Div. of Taxn., No. A-0789-18T3 (N.J. Super. Ct., App. Div., Jan. 9, 2020), cert. denied, Dkt. No. 20-468 (U.S. S.Ct. Dec. 14, 2020).
New York: The New York Department of Taxation and Finance adopted an emergency regulation to increase the Article 9-A Metropolitan Transportation Business Tax Surcharge (MTA surcharge) rate to 30.0% (from 29.4%) for taxable years beginning on or after Jan. 1, 2021 and before Jan. 1, 2022. The 30.0% rate will remain in effect for succeeding tax years unless the Commissioner determines a new rate. N.Y. Dept. of Taxn. & Fin., 20 NYCRR 9-1.2(g) (emergency adoption Dec. 3, 2020); see also TSB-M-20(2)C (Dec. 15, 2020).
Texas: Proposed revisions to 34 Tex. Admin. Code § 3.586 would make changes to the franchise tax nexus rules. Under the proposed revision, gross receipts to determine economic nexus would mean all revenue reportable by a taxable entity on its federal return, without deduction for the costs of property sold, materials used, labor performed, or other costs incurred. Taxpayers would be able to rebut this presumption if registered for a Texas use tax permit. The earliest this proposed revision could be adopted is Jan. 3, 2021.
SALES & USE
Massachusetts: New law (H. 5164) accelerates the remittance of sales and use tax and room occupancy and local option meals excise tax. The payment of tax must be made in advance of the filing of the return not later than the 25th day of the last month of the filing period, provided, however, that such payment must include tax collected for any taxable sale made during the days in the filing period occurring on or before the 21th day of the last month of the filing period. This accelerated payment requirement applies to businesses that collected and remitted more than $150,000 in sales/use tax or more than $150,000 in room occupancy and meals excise tax in the prior calendar year. Tax collected during the remaining days of the filing period must be remitted at the time the return for that period is required to be filed. A penalty equal to 5% of the amount of the underpayment will be imposed, unless the underpayment is due to reasonable cause. In addition, the penalty will not be imposed if the payment made on or before the due date is not less than 70% of the total tax collected during the filing period. These provisions take effect April 1, 2021. Mass. Laws 2020, ch. 227 (H. 5164), signed by the governor on Dec. 11, 2020.
New York: A company's sale of coupon clearing products to advertisers that issue discount coupons and the retailers that accept them, are not subject to sales and use tax because the primary function of the product is the nontaxable service of processing the coupons and obtaining payment from the advertisers that issued the coupons. The New York Department of Taxation and Finance advised the company that its products sold to advertisers (e.g., coupon processing to determine how much the advertiser owes to coupon-redeeming retailers, data harvested from such processing, benchmark data derived from anonymized advertiser customers, fraud prevention services, and prewritten software for promotion planning analyses and budget planning) should be considered as a single unit since the products are sold as a standardized, integrated product with components that cannot be purchased separately. The primary function of the product sold to the advertisers is a coupon processing service, which is not a taxable service. Further, the company's provision of prewritten software with limited functionality to its retail customers is an incidental part of the service the company is selling and, therefore "does not render that service taxable." N.Y. Dept. of Taxn. and Fin., TSB-A-20(28)S (June 9, 2020).
West Virginia: The purchases by an energy corporation (corporation) of crew quarters and related equipment, portable toilets, sewage systems, related water systems and septic cleaning charges were used directly in its natural resource production and, therefore, qualified for the direct use exemption from the state's sales and use tax. In so holding, the West Virginia Supreme Court of Appeals (WVSC) held that the plain language of the definition of "directly used or consumed"1 in natural resources production means "used or consumed in those activities or operations which constitute an integral and essential part of the activities, as contrasted with and distinguished from those activities or operations which are simply incidental, convenient or remote to the activities." The WVSC rejected the argument of the West Virginia State Tax Commissioner's Office (Commissioner) that the crew quarters and related equipment were for the personal comfort of personnel and instead found that they were necessary to allow certain workers to remain on-site for the operation and monitoring of the drilling operations. The WVSC also rejected the Commission's argument that use of the direct use exemption's catch-all provision (which provides an exemption for "[o]therwise using as an integral and essential part of … manufacturing production or production of natural resources") is dependent upon the other 13 specific categories of expenses that qualify for the exemption, noting that if this were true there would be "little need" for the more encompassing language in the catch-all provision. Further, based on the facts and the commonly accepted meaning of "essential," the WVSC found that the sewage systems, related water systems and septic cleaning charges were an integral and essential part of the corporation's production activity and, therefore, were directly used in the production activity. Rentals of trash trailers and waste receptacles, however, do not qualify for the exemption. The WVSC found that they do not meet the definition of "directly used or consumed" in the drilling process because the waste at issue did not result from the production of natural resources. Antero Resources Corp. v. Steager, No. 18-1106 (W.Va. S.Ct. of App. Nov. 17, 2020).
Federal: In Notice 2020-88, the IRS announced Round 3 of credit allocations for qualified investment in coal projects that have reduced carbon dioxide emissions under the IRC Section 48A Phase III Program, with more than $2 billion available. The last round of credit allocations was in 2015. For additional information on this development, see Tax Alert 2020-2885.
Georgia: Adopted regulation (Ga. Comp. R & Regs. §560-7-8-.66) provides guidance on the implementation and administration of the personal protective equipment (PPE) manufacturer jobs tax credit. A PPE manufacturer that qualifies for the jobs tax credit under O.C.G.A. §48-7-40 or 48-7-40.1 and claims the jobs tax credit as provided in Ga. Comp. R. & Regs. §560-7-8-.36 is allowed an additional $1,250 PPE manufacturer jobs tax credit (PPE credit) for qualifying jobs that are engaged in manufacturing PPE in Georgia during the tax year. The PPE credit may be used to offset 100% of the PPE manufacturer's Georgia income tax liability derived from operations within the state. The PPE manufacturer is eligible for the PPE credit at individual business establishments. If more than one business activity is conducted at the establishment, only the jobs engaged in manufacturing PPE are eligible for the additional PPE credit. Whether a job is considered engaged in the qualifying activity of manufacturing PPE will be determined on a monthly basis; any job included in the jobs tax credit calculation where 50% or more of the time is spent on manufacturing PPE in Georgia is eligible to be included in the monthly calculation of average number of jobs engaged in manufacturing PPE. The conditions and limitations that apply to the jobs tax credit also apply to the PPE credits. The regulation includes guidance on claiming the credit. Unused PPE credit can be carried forward 10 years. If the PPE manufacturer is a pass-through entity (PTE) that does not have an income tax liability, the PPE credit will pass to the PTE's individual members, shareholders or partners based on their year ending profit/loss percentage. The PPE credit cannot be claimed for jobs created on or after Jan. 1, 2025. The regulation applies to tax years beginning on or after Jan. 1, 2020. Ga. Dept. of Rev., Ga. Comp. R. & Regs. §560-7-8-.66 (adopted effective Dec. 24, 2020).
Iowa: Ingredient bins and exterior grain bins that are part of a co-op's feed manufacturing facility are exempt from property tax as "machinery used in manufacturing establishments" because the bins' primary purpose is to serve directly in the manufacturing process and their storage feature is temporary and incidental. In contrast, load-out bins are not exempt from tax as they are not used directly in the manufacturing process and are not "machinery" since they only contain finished product "ready to be put on the market so as to be sold to the consuming public for the purpose for which it was intended." In so holding, the Iowa Court of Appeals (COA) concluded that while "machinery" is undefined by statute it is broadly interpreted under Iowa Code § 427A.1(1)(e) under a case-by-case analysis. Additionally, the COA rejected the argument of the Emmet County Board of Review (ECBR) that the assessor properly followed the Iowa Real Property Appraisal Manual in assessing the property, finding that the assessor is required to use it as an assessment tool but the manual is not legally controlling for an item's exempt status. Lastly, in regard to the exemption valuation, the COA found sufficient evidence to value the structures and the claimed exemptions, concluding that the district court and the Iowa Property Assessment Appeal Board acted unreasonably, arbitrarily, or capriciously in declining to value the claimed exemptions, which prejudiced the co-op's substantial rights. Stateline Coop. v. Iowa Prop. Asmt. App. Bd., No. 19-0674 (Iowa Ct. App. Nov. 4, 2020).
Pennsylvania: Buildings encumbered by commercial leases that were purchased by a state university are effectively under control of the Pennsylvania government and are immune from local real estate taxes when the local taxing unit failed to show it had legislative authority to levy property taxes on the university's properties. In so holding, the Pennsylvania Commonwealth Court (PCC) reversed the portion of the trial court's ruling that the university was subject to tax on parts of the buildings with commercial leases, but affirmed its finding that the land underlying the buildings and each building's vacant space is immune from local property tax. Distinguishing SEPTA2 as being governed by a different enabling statute as well as on its facts, the PCC found that the university could not transfer its real property without General Assembly approval (whereas SEPTA could sell or lease the property at is discretion), and the university purchased the buildings to turn them into university facilities while inheriting commercial leases without intent to continue them on a long term basis (by contrast SEPTA acquired its building intending to use part of it as an ongoing commercial real estate business). Ind. Univ. of Pa. v. Jefferson Cnty. Bd. of Asmt. App. v. Punxsutawney Area School Dist., No. 775 C.D. 2019 (Pa. Cwlth. Ct. Dec. 3, 2020).
Massachusetts: New law (H. 5164) establishes provisions for reporting federal partnership audit adjustments. Generally, within 90 days after the final determination date of a final federal adjustment an audited partnership must: (1) notify the commissioner of the final determination date with respect to a partnership-level audit, (2) file a federal adjustments report with the commissioner, and (3) notify each of its direct partners of their distributive share of the final federal adjustment. The federal adjustment report must include certain information including an explanation of how the final federal adjustment needs to be modified for state tax purposes to account for differences in federal and state tax law. If the audited partnership received an approved modification it must notify the commissioner of such within 90 days after the date of the approval. An audited partnership that originally reported or paid tax on behalf of some or all of its partners through a composite return or pass-through entity withholding, must amend its return or report to account for the distributive share of the final federal adjustment attributable to those partners and pay additional tax, penalties and interest due. This must be done no later than 90 days after the final determination date. Within 180 days of a final determination date, a partner of an audited partnership must report and pay individual income or corporate excise tax due (along with applicable interest and penalties) with respect to adjustments resulting from a partnership-level audit. If the individual income or corporate excise taxes due from an audited partnership's partners are not otherwise accounted for, the audited partnership may make an irrevocable election to pay such taxes no later than 90 days after the final determination date, with payment of the tax due within 180 days after that date. This provision does not apply if a corporate partner participated in a combined report; rather, the corporate partner will account for its taxes owed. The law provides guidance on tax payments with respect to the distributive share attributable to the audited partnership's direct, indirect and tiered partners. Further, the partnership representative has the sole authority to act on behalf of the audited partnership, binding the partnership's direct and indirect partners. Failure to comply with these provisions could result in the imposition of various penalties or being jointly and severally liable for additional amounts due. These provisions took immediate effect. Mass. Laws 2020, ch. 227 (H. 5164), signed by the governor on Dec. 11, 2020.
COMPLIANCE & REPORTING
New Jersey: The New Jersey Division of Taxation (NJ DOT) issued guidance explaining that a 2020 law change (P.L. 2020, c. 118), moving the original due date of the Corporation Business Tax (CBT) return to 30 days after the due date of the federal return, may impact the original due dates for some taxpayers. NJ DOT stated that taxpayers with returns that have an original due date falling anytime between Nov. 15, 2020 and March 15, 2020 will be granted an automatic extension to file their tax returns by April 15, 2021. Late filing penalties will not be imposed if the taxpayer files the return by the April 15, 2021 extended due date. This extension only applies to the time to file a return; it does not extend the time to make required payments. The NJ DOT also noted that affected taxpayers that apply for an extension of time to file have six months from the original due date to file their tax returns. The guidance includes explanatory examples. N.J. Div. of Taxn., Notice: Automatic Extension for 2020 CBT Returns for Certain Fiscal Tax Year Filers (last updated Dec. 1, 2020).
PAYROLL & EMPLOYMENT TAX
All states: 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 an 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. For additional information on this development, see Tax Alert 2020-2848.
Delaware: The Delaware Division of Revenue announced that effective Jan. 1, 2021, employers are required to electronically file and pay certain withholding tax returns and taxes in addition to certain other business taxes. The list of business taxes required to be filed and paid electronically can be found in Technical information memorandum 2020-2. For more on this development, see Tax Alert 2020-2887.
Wilmington, DE: In the wake of the COVID-19 emergency, the City of Wilmington updated the interpretation of its earned income and head tax regulations for teleworkers following a comment and review period that spanned the period from June 10, 2020 to Oct. 13, 2020. The revised guidance summarized in Tax Alert 2020-2871 is retroactive to Jan. 1, 2020 and will remain in effect until changed through the regulatory process.
Arizona: The Arizona Department of Revenue in response to a ruling request explained how luxury taxes are imposed on ready-to-drink (RTD) alcoholic beverages. Non-alcoholic ingredients that are not otherwise subject to luxury tax are taxable when they are added to a RTD beverage that includes one of four liquor types — spirituous liquor, vinous liquor, malt liquor, and cider — at the rate applicable to the RTD's base liquor. Additionally, RTDs that contain more than one type of liquor are subject to luxury tax at the highest rate of liquor incorporated into the RTD. If, however, an RTD's alcohol by volume falls below 0.5%, it would not be considered a liquor and would not be subject to Arizona luxury tax. The ruling applies to RTD beverages of a manufacturer or producer that either sells at wholesale or is required to be licensed as a craft distillery, farm winery or microbrewery. Ariz. Dept. of Rev., Ariz. Luxury Tax Ruling PLR 20-3 (Oct. 27, 2020).
Missouri: Unlimited use phone cards sold by a retailer are subject to the prepaid wireless emergency telephone service charge because the phone cards fall within the definition of "prepaid wireless telecommunications services." Missouri law defines "prepaid wireless telecommunications services" as "a wireless telecommunications service that allows a caller to dial 911 to access the 911 system and which service shall be paid for in advance and is sold in predetermined units or dollars of which the number declines with use in a known amount." The Missouri Department of Revenue (MO DOR) found that even though the cards allow for "unlimited" usage, such usage is only allowed for a specified time range, with the amount of time to use the data on the cards reducing each day. This daily reduction in value, the MO DOR determined, constitutes a "unit" for purposes of the statutory definition of "prepaid wireless telecommunications services." Mo. Dept. of Rev., LR 8118 (Oct. 29, 2020).
VALUE ADDED TAX
International — Uganda: On Nov. 30, 2020, the Ugandan Tax Appeals Tribunal (TAT) issued a ruling in TAT Application No. 36 of 2019 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 W. Va. Code § 11-15-2(b)(4).
2 Southeastern Pa. Transp. Auth. (SEPTA) v. Bd. of Revision of Taxes, 833 A.2d 710 (Pa. 2003) (Pennsylvania Supreme Court held SEPTA, which was established by the Metropolitan Transportation Authority Act of 1963, was not immune from taxation on property it leased to commercial tenants).