January 15, 2021
State and Local Tax Weekly for January 8
Ernst & Young's State and Local Tax Weekly newsletter for January 8 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.
Consolidated Appropriations Act, 2021 modifies and extends key employment-related tax credits and creates new tax credit for employers in 2020 qualified disaster zones
On Dec. 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (P.L. 116-260) (Act), which includes a $1.4 trillion omnibus appropriations package to fund the government through fiscal year 2021, approximately $900 billion in coronavirus relief and a variety of important tax provisions. Tax Alert 2021-0019 focuses on the Act's changes to several federal tax credit provisions, including:
Consolidated Appropriations Act, 2021, extends certain energy credits
The Consolidated Appropriations Act, 2021 (P.L. 116-260) (Act), signed by President Trump on Dec. 27, 2020, extends several energy credits, including those for renewable energy sources such as wind, solar and offshore wind facilities. Tax Alert 2021-0028 addresses the following energy credits extended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which was enacted as part of the Act:
Federal: The IRS published final regulations under IRC § 162(m) (TD 9932), incorporating statutory amendments made by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) and making certain other changes to existing rules. The final rules generally follow the proposed rules, but there are a few key changes: (1) additional transition relief for a publicly held corporation's distributive share of the deduction for compensation paid by a partnership on or before Dec. 18, 2020; (2) a simplified approach for calculating grandfathered amounts of deferred compensation subject to pre-TCJA rules, making it unnecessary to track losses on amounts deferred as of Nov. 2, 2017; (3) a different approach to clawbacks, such that the right to recover compensation after it is paid does not affect its grandfathered status; (4) clarification that extending the exercise period for a grandfathered stock option or stock appreciation right is not a material modification and does not cause a loss of grandfathered status. The final regulations also include other, less significant new rules and clarifications. For more on this development, see Tax Alert 2020-2923.
Louisiana: A Texas holding company's gain from the sale of its 100% interest in a limited liability company disregarded for federal income tax purposes and doing business in Louisiana to an unrelated third party was properly included in the denominator of the sales factor ratio of its apportionment percentage. On appeal, the Louisiana Court of Appeal (Court) had to determine whether gain from a sale not made in the regular course of business, such as the gain at issue, should be excluded from the Revenue Ratio as set forth in La. Rev. Stat. 47:287.95(F). Based on statutory construction, the Court concluded that the Legislature did not intend to exclude sales not made in the regular course of business from "other gross apportional income" in the Revenue Ratio denominator. The Court also rejected the argument of the Louisiana Department of Revenue (Department) that the gain is altogether excluded from the Revenue Ratio under Louisiana Administrative Code 61:I.1134(D), which only includes net sales made in the regular course of business and other gross apportionable income in the revenue ratio; stating that "tax regulations cannot extend the taxing jurisdiction of the statute, as taxes are imposed by the legislature, not the Department." Lastly, the Court found it was not the intent of the Legislature to include the "sales not made in the regular course of business" language in La. Rev. Stat. 47:287.95 given that it had previously repealed similar language in La. Rev. Stat. 47:287.95 and did not reintroduce the language in subsequent amendments. Davis-Lynch Holding Co., Inc. v. Robinson, 2019 CA 1574 (La. Ct. App., 1st Cir., Dec. 30, 2020).
Michigan: The Michigan Department of Treasury updated its individual and fiduciary income tax guidance on net operating losses (NOL) to reflect changes to the computation of Michigan NOLs as a result of federal tax law changes made under the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) and the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act). In calculating the Michigan NOL, the guidance describes how to: (1) determine NOLs under IRC § 172 and IRC § 461(l); (2) apply Michigan allocation and apportionment provisions to NOLs; and (3) carryback and carryforward NOL deductions, incorporating the modifications made under the TCJA and the CARES Act. The guidance also explains differences between Michigan and federal NOLs, requirements for claiming a Michigan NOL for a loss year, what NOL deduction (if any) can be used to establish eligibility for certain Michigan tax credits, the election to not carryback NOLs, how IRC § 965 impacts certain carrybacks under the amendments made under the CARES Act and how the statute of limitations impacts refunds based on NOLs. Mich. Dept. of Treas., Rev. Admin. Bull. No. 2020-23 (Dec. 17, 2020) (replaces Rev. Admin. Bull. No. 2017-14).
Oregon: In Comcast Corp. the Oregon Tax Court (OTC) ruled on various tax issues of a corporation and its subsidiaries that are in the business of providing broadcast and cable television, internet and telecommunications services (hereafter, corporation), including those concerning nonbusiness income, interstate broadcaster apportionment formula, net operating loss (NOL) carryforwards, and the deduction or addback of taxes paid to other states. The OTC concluded that the gains and dividends the corporation received in connection with certain stock sales are nonbusiness income not subject to apportionment because the stock did not serve an operational function in its business. In regard to how to determine the Audience/Subscriber Ratio for purposes of the interstate broadcaster apportionment formula, the OTC noted that the statutes and rules do not address the possibility of a single entity operating both an over-the-air network and a cable service, which this corporation provides. However, the corporation's methodology of using Nielsen data to determine the audience for its over-the-air broadcasting activity and adding subscriber data from broadcasting by cable and satellite, is consistent with the text, context and legislative history of the broadcaster apportionment statutes. Applying the framework set out in the ruling in State v. Gaines1, the statute's2 use of the word "and" in reference to the denominator confirms that the legislature intended "or" for the numerator to have an inclusive meaning, such that the corporation would not be required to count only audience or subscribers. Additionally, as to whether the corporation had preserved its right to contest the adjustments made by the Oregon Department of Revenue (OR DOR) to the corporation's NOL carryforwards, the OTC found that the OR DOR provided no authority to deviate from the general rule that the party seeking to recalculate the reported net loss for the year of origination may take into account any item that should have been treated differently in preparing the return. Lastly, the OTC tentatively concluded that the corporation is not required to increase its taxable income by the amount of Texas margins tax paid, because that tax as applied to the corporation was not a tax measured by "net income" based on its limitations on deductions. Comcast Corp. and Subs. v. Ore. Dept. of Rev., TC 5265 (Control); TC 5346 (Ore. Tax Ct. Nov. 25, 2020) (unpublished).
Oregon: An adopted amendment to a corporate excise tax rule (OAR 150-317-0510) changes the common ownership and control necessary to establish a unitary relationship between any two corporations from "more than 80%" to "more than 50%". This change took effect Jan. 1, 2021. Ore. Dept. of Rev., amended OAR 150-317-0510 (adopted Dec. 23, 2020).
Rhode Island: A limited liability company that did not file any returns for the tax years 2008 through 2015 and was not treated as a corporation for federal income tax purposes is required by R.I. Gen. Laws § 7-16-67(c)(2) to pay a fee equal to the annual minimum corporate tax imposed by R.I. Gen. Laws § 44-11-2(e), which for the tax years at issue was $500 per year, plus a $100 per-year late filing penalty. R.I. Div. of Taxn., Admin. Hearing No. 2020-08 (Dec. 12, 2020).
Tennessee: A homebuilder's capitalized "soft costs" for labor, interest, permits, services and other non-tangible items that are included on its balance sheet as components of its inventory and/or works in progress are used as part of the value of the homebuilder's real and tangible personal property. Consequently, these soft costs are included in the minimum measure of the Tennessee franchise tax. The Tennessee Department of Revenue (TN DOR) explained that Tennessee law requires property be valued in accordance with generally accepted accounting principles (GAAP), at cost less accumulated depreciation, and that GAAP contemplates the capitalization of soft costs to inventory. Further, because associated costs of the process of assembling and constructing homes, including soft costs, enhance the value of real property, soft costs are expenditures and charges incurred to bring the home to its existing condition and, as such, should be included in the cost of the home. The TN DOR rejected the argument that the reference in Tenn. Code Ann. § 67-4-2108(a)(1) to "real or tangible personal property" allows a taxpayer to split inventory into tangible and soft components and exclude the soft components from the franchise tax minimum measure as such cost would not constitute real or tangible personal property. The TN DOR noted that this alternative interpretation would be inconsistent with GAAP. Lastly, citing Crown Enterprises,3 the TN DOR found that the soft costs at issue were similar to the "miscellaneous overhead" that the Tennessee Supreme Court previously found should be included in the franchise tax minimum measure. Tenn. Dept. of Rev., Rev. Ruling #20-12 (Nov. 18, 2020).
SALES & USE
Multistate: The EY Sales and Use Tax Quarterly Update provides a summary of major legislative, administrative and judicial sales and use tax developments. Highlights of this edition include a review of the most recent developments involving nexus, tax base and exemptions technology, and compliance and controversy. A copy of the update is available through Tax Alert 2021-0039.
California: An out-of-state laboratory (lab) had a duty to collect use tax from its California customers and remit that tax to the state because it was engaged in business in California through the in-state presence of leased equipment and employees and had been issued a valid California use tax registration certificate. In so holding, the California Office of Tax Appeals (OTA) found that any of these three reasons established nexus under the applicable provisions (Cal. Rev. & Tax. Code § 6203; Cal. Code Regs., tit. 18, § 1684). The lab was engaged in business in California because it leased equipment to its California customers to enable them to use the lab's test kits. The lab's staff, who installed and maintained the equipment and trained clients' technicians on how to use it, were directly related to the lab's ability to establish, maintain and grow a California customer base. Further, the California Department of Tax and Fee Administration's issuance of a valid use tax registration certificate to the lab was a separate and independent basis for finding that the lab had a duty to collect and remit California use tax, regardless of whether the lab was engaged in business in California. In re: Appeal of Theratest Labs., Inc., No. 19044588, 2020-OTA-353 (Cal. Ofc. of Tax App. Sept. 29, 2020) (nonprecedential).
Louisiana: The Louisiana Attorney General in response to an opinion request clarified that under the Louisiana Enterprise Zone Act all sales and use taxes are subject to rebate unless a political subdivision has dedicated such taxes to the repayment of bonded indebtedness or to schools. La. Atty. Gen., Op. No. 20-0071 (Dec. 9, 2020).
Michigan: A telecommunications company (company) is not entitled to a use tax exemption for cable boxes and similar equipment provided to certain subscribers when such equipment was not used only for an exempt purpose. MCL 205.94q provides a use tax exemption for "tangible personal property located on the premises of the subscriber and to central office equipment or wireless equipment, directly used or consumed in transmitting, receiving, or switching, or in the monitoring of switching of a 2-way interactive communication." The statute further provides that the exemption applies only to the extent that the property is used for the aforementioned exempt purposes, and it includes an irrebuttable presumption that 90% of total use is for exempt purposes. An administrative law judge (ALJ) for the Michigan Tax Tribunal found the irrebuttable presumption, by virtue of the plain language of the statute, is limited to such tangible personal property and central office equipment or wireless equipment, directly used or consumed in transmitting, receiving, or switching, or in the monitoring of switching of a 2-way interactive communication" — i.e., property or equipment used for the exempt purpose. In so finding, the ALJ rejected the company's argument that the Legislature intended to apply the exemption's irrebuttable presumption to all of its equipment based on the use of some of its equipment for exempt purposes. Instead, the ALJ found a "reasonable" interpretation is to apply the irrebuttable presumption to each piece of tangible personal property or equipment such that the total use of each piece would be 90% for exempt purposes if that piece or box is being used or consumed for both exempt and non-exempt uses. Mich. Bell Telephone Co. v. Mich. Dept. of Treas., No. 19-002613 (Mich. Tax Trib. Nov. 18, 2020).
New York: An administrative law judge (ALJ) for the New York State Division of Tax Appeals found that the New York Division of Taxation erred in finding that a marketing analytics firm's sales of advertiser and media company services were subject to sales and use tax. Rather, the ALJ found that these are nontaxable information services. The ALJ also determined that the firm's sales of white paper services and advertising agency products are taxable information services and prewritten computer software, respectively. In regard to advertiser services, the ALJ explained that these services principally consist of giving of advice and guidance, which is generally treated as a nontaxable consulting service (as opposed to quantitative information provided through taxable information services), and information provided through a web platform was just one component of a larger service of helping the customer use analytic marketing. Similarly, the media company service was not a taxable information service based on the primary and secondary functions of the contracts (i.e., to give customers guidance and advice related to analytic marketing and to help media companies prove the value of their media platforms to potential clients). The ALJ, however, found that a contract with a broadcasting company to provide a "model rebuild" and access to the firm's software platform was a taxable information service when the contract did not require the performance of a professional service. The firm's white paper service is also a taxable information service because it included widely available public information (i.e., academic literature) and did not include data collection and modeling services. Lastly, the ALJ found that advertising agency contracts were taxable sales of tangible personal property when the firm transferred "actual exclusive possession" of software to customers through secure accounts to use as they saw fit. In re: Marketshare Partners, LLC, DTA No. 828562 (N.Y. Div. of Tax App. Dec. 3, 2020).
Texas: The Texas Comptroller of Public Accounts clarified when remote sellers, marketplace providers and marketplace sellers are engaged in business in Texas for sales and use tax purposes. In addition to the economic nexus threshold for remote sellers and remote marketplace providers (i.e., total Texas revenue greater than $500,000 in the preceding 12 calendar months), taxpayers are engaged in business in Texas when they: (1) have a temporary or permanent location there operated directly or through an agent; (2) have an employee or representative in Texas to sell, deliver, or take orders for taxable items; (3) perform services using company employees, authorized service agents or subcontractors in Texas; (4) promote a flea market, arts and crafts show, trade day, festival or another event selling taxable items/services in Texas; (5) lease equipment or other tangible personal property to others in Texas; (6) own or use tangible personal property (including computer software) in Texas; (7) deliver items using owned, leased or company-owned vehicles in Texas; (8) allow a franchisee or licensee to operate under the taxpayer's trade name and the franchisee or licensee is required to collect sales and use tax in Texas; (9) formed, organized or incorporated the business in Texas and the entity's internal affairs are governed by Texas law; (10) solicit sales of taxable items in Texas by mail or online or through catalogs, periodicals, advertising flyers or other advertising or by radio, television, telephone or other communications systems; (11) have at least a 50% ownership interest in, or are owned at least 50% by, another entity that maintains physical locations in Texas of certain types of businesses; or (12) otherwise conduct business in Texas. Lastly, out-of-state businesses that come to Texas solely to help with disaster recovery are excluded from sales and use tax registration requirements and are not required to collect or remit Texas taxes if they meet certain requirements. Tex. Comp. of Pub. Accts., No. 202012001L (Dec. 10, 2020).
Nebraska: On Jan. 1, 2021, the ImagiNE Nebraska Act became effective. The Nebraska Advantage Act, one of the state's existing incentives programs, expired at the end of 2020, and the ImagiNE Nebraska Act (Act) takes its place. The Act provides various tax incentives under various application levels, each with its own job growth, investment, location, business activity, wage requirements and incentive earning potential, as summarized in Tax Alert 2021-0040.
Oregon: New rule (Or. Admin. R. No. 150-315-0005) clarifies tax credit transfer uniformity provisions, specifically providing that the credit can only be transferred by the entity or individual that received the original tax credit certification. For transferable credits that must be claimed in one tax year (excluding carry forward provisions), a transferor taxpayer can transfer part of the credit to another taxpayer and claim the remaining credit amount on the transferor's return (i.e., the entire credit is not required to be transferred). For credits that are claimed over multiple years (excluding carry forward provisions), a transferor taxpayer can transfer the full amount of the credit for each tax year to one or more transferees, but the transferor cannot claim any part of that tax year's credit. Explanatory examples are included. The new rule took effect Jan. 1, 2021. Ore. Dept. of Rev., REV 31-2020, Or. Admin. R. No. 150-315-0005 (filed Dec. 23, 2020).
Michigan: New law (SB 1203) for tax year 2021, requires that personal property that on tax-day has been moved to an alternative location due to COVID-19 be assessed in its ordinary location rather than the alternative location. Mich. Laws 2020, SB 1203, signed by the governor on Dec. 30, 2020.
COMPLIANCE & REPORTING
Maryland: The Maryland Comptroller announced the extension of filing and payment deadlines originally falling between Jan. 1, 2021 and April 14, 2021. The following deadlines are extended to April 15, 2021: (1) individual and fiduciary estimated income tax declarations and payments due between Jan. 15, 2021 and April 14, 2021; (2) sales, admissions and amusement tax returns and payments that are originally due between Jan. 1, 2021 and April 14, 2021; (3) business income return and payment deadlines, including quarterly payments, falling between Jan. 1, 2021 and April 14, 2021; (4) withholding returns payments for periods beginning Jan. 1, 2021 through March 31, 2021; and (5) alcohol, tobacco, motor fuel taxes and tire recycling fees, with returns and payments originally due between Jan. 1, 2021 and April 14, 2021. Md. Comp., Tax Alert 01-06-21 (Jan. 6, 2021).
Montana: Montana's corporate income tax law requires members of a unitary business to file returns on a worldwide combined basis unless a water's-edge election is made to exclude foreign affiliates from the combined group. A Montana water's-edge group pays tax at an elevated tax rate of 7% instead of the regular rate of 6.75%. While many states require a water's-edge election to be made by the due date or extended due date of the return for the year for which it is intended to be effective, Montana is unique in that a water's-edge election must be made within 90 days of the beginning of the first year in which it is first intended to become effective. Accordingly, a corporation wishing to make a new water's-edge election, or renew an existing election, for the 2021 tax year must file a Montana Form WE-ELECT by March 31, 2021. For more on this development, see Tax Alert 2021-0009.
Federal: By a vote of 81-13, the U.S. Senate on Jan. 1, 2021 voted to override President Trump's veto of HR 6395, the conference report for the fiscal 2021 National Defense Authorization Act (NDAA), with a two-thirds supermajority needed to override. The NDAA bill includes language establishing a regime requiring smaller businesses to disclose their beneficial owners to the Treasury Department's Financial Crimes Enforcement Network (FinCEN), as well as an overhaul of anti-money laundering laws for financial institutions. For more on this development, see Tax Alert 2021-0005.
PAYROLL & EMPLOYMENT TAX
All states: Our survey of state revenue department websites shows that effective with the 2020 tax year (filed in 2021) all states except Alabama, Arizona, Idaho, Louisiana, Maine, Minnesota, South Carolina and Utah specifically provide that nonemployee compensation is reported on Form 1099-NEC, Nonemployee Compensation, rather than Form 1099-MISC, Miscellaneous Information. Businesses will need to keep in mind that Form 1099-NEC is not included in the IRS combined federal/state reporting program. Accordingly, if the state requires the filing of Forms 1099-NEC, businesses will need to directly file them with the state department of revenue. For additional information on this development, see Tax Alert 2021-0023.
All states: To assist in reviewing the state income tax withholding rates for 2021, Tax Alert 2021-0012 includes a chart of the most recent income tax withholding tables published by states and US territories and the supplemental withholding rate if allowed.
California: The 2021 California state unemployment insurance, state disability insurance and Employment Training Tax rates and limits, as provided by the California Employment Development Department are available in Tax Alert 2020-2929.
Indiana: The Indiana Department of Revenue released Departmental Notice #1, How to Compute Withholding for State and County Income Tax, effective Jan. 1, 2021. The notice shows that the counties of Martin, Owen, Randolph, Shelby, Switzerland and Union changed their local withholding income tax rates effective Jan. 1, 2021. The counties of Pulaski and Wayne changed their local withholding rates effective Oct. 1, 2020. For additional information on this development, see Tax Alert 2020-2928.
New York: The New York Department of Taxation and Finance (NY DOTF) released the 2021 income tax withholding tables for New York State and Yonkers. Proposed regulations, which included revised wage bracket and percentage method income tax withholding tables for New York State and Yonkers effective with wages paid on or after Jan. 1, 2021, were previously released. The NY DOTF has also released an updated Publication NYS-50, Employer's Guide to Unemployment Insurance, Wage Reporting, and Withholding Tax. For more on this development, see Tax Alert 2020-2920.
Washington: The Washington Department of Labor & Industries announced that the average workers' compensation insurance premiums will not increase for 2021. This is the first time in 20 years that workers' compensation rates have dropped or stayed steady for four consecutive years. For additional information on this development, see Tax Alert 2020-2937.
Federal: On Dec. 30, 2020, the United States Trade Representative (USTR) announced additional modifications to the punitive tariffs previously imposed on certain products originating from the United Kingdom and the European Union under Section 301 of the Trade Act of 1974. The latest modifications, which include punitive tariffs on new items of French and German origin, will go into effect on Jan. 12, 2021. For more on this development, see Tax Alert 2021-0014.
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 State v. Gaines, 346 Or 160, 171-72 (2009).
2 ORS 314.684(4) provides: "Gross receipts from broadcasting of an interstate broadcaster which engages in income-producing activity in this state shall be included in the numerator of the sales factor in the ratio that the interstate broadcaster's audience or subscribers located in this state bears to its total audience and subscribers located both within and without this state." (Emphasis retained from the opinion.)
3 Crown Enterprises, Inc. v. Woods, 557 S.W.2d 491 (Tenn. 1977).