January 25, 2021
State and Local Tax Weekly for January 15
Ernst & Young's State and Local Tax Weekly newsletter for January 15 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 adopts sweeping amendments to its receipts sourcing rule for franchise tax
On Jan. 4, 2021, final/adopted revisions to the Texas Comptroller of Public Accounts' sourcing rule under 34 Tex. Admin. Code § 3.591 (Section 3.591) for franchise tax receipts, were filed with the Texas Secretary of State (final rule). The revisions made by the final rule are expansive. According to the Comptroller, they:
The final rule was adopted with changes to the proposed revision to Section 3.591, as published in the Nov. 13, 2020 issue of the Texas Register (proposed revision). The final rule was republished in the Jan. 15, 2021 issue of the Texas Register.1
The revisions made by the final rule generally are effective Jan. 1, 2008, except as otherwise noted in the net gain/loss provisions and certain changes stemming from legislation. The final rule also allows, in certain instances, the option of applying sourcing procedures under the former rule to earlier periods.
For more on this development, including a discussion of the modifications to the proposed revision made by the final rule, see Tax Alert 2021-0035.
Nevada tax amnesty program to run from February 1, 2021 through May 1, 2021
The Nevada Department of Taxation (Department) announced that the tax amnesty program established by SB 32 will begin on Feb. 1, 2021 and end on May 1, 2021. Individuals and businesses that participate in and comply with the terms of the amnesty program will have otherwise applicable penalties and interest waived upon the full payment of eligible unpaid taxes, fees or assessments. For the amnesty to apply, the base tax due must be paid in full during the amnesty period. Amnesty applies to unpaid taxes, fees or assessments due for periods ending on March 31, 2020 and on or before April 30, 2020 for quarterly filers and periods ending May 31, 2020 and on or before June 30, 2020 and/or outstanding tax debts. For unreported tax, taxpayers must file a return for each period in which tax was not reported.
Taxes eligible for amnesty include:
Amnesty does not apply to lodging tax, real property transfer tax and locally assessed property tax. For more on the Nevada amnesty program, see Tax Alert 2021-0057.
Federal: New final regulations (TD 9943, the 2021 Final Regulations), released Jan. 5, 2021, provide guidance on applying the limitations on the deductibility of business interest expense (BIE) under IRC § 163(j) (the Section 163(j) limitation) as significantly modified by the Tax Cuts and Jobs Act (TCJA) and further modified by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The 2021 Final Regulations retain the same basic structure as the proposed regulations released in July 2020 (2020 Proposed Regulations) and include certain definitions and rules for applying the Section 163(j) limitation to controlled foreign corporations and partnerships. While the 2021 Final Regulations adopt much of the 2020 Proposed Regulations, they also include significant revisions and clarifications from the earlier proposed rules. Additionally, the 2021 Final Regulations reserve on certain important provisions the IRS continues to study. For more on this development, see Tax Alert 2021-0059.
California: Proposed bill (SB 104) would establish an elective entity-level tax for pass-through entities (e.g., certain partnerships, limited liability companies or S corporations) (PTE). This new tax on PTEs, if adopted, is intended to enable California taxpayers who are owners of PTEs to deduct, for US federal income tax purposes, state and local taxes that exceed the $10,000 limitation imposed by IRC § 164 but are consistent with IRS Notice 2020-75. For more on this development, see Tax Alert 2021-0092.
California: Proposed bill (AB 71), as amended Jan. 12, 2021, would require an individual shareholder of a controlled foreign corporation to include global intangible low-taxed income (GILTI) in their gross income. For corporate income tax purposes, the bill would (1) increase the tax rate imposed on corporations and financial institutions with taxable income of more than $5 million to 9.6% (from 8.84%) and 11.6% (from 10.84%), respectively; and (2) require a taxpayer that elects to file a combined report using the water's-edge method to take into account 50% of GILTI income and 40% of repatriation income (under IRC § 965) of affiliated corporations (the bill, for calendar year 2022 only, would allow a taxpayer to revoke a water's edge election). These changes, if enacted, would be effective for tax years beginning on or after Jan. 1, 2022.
Delaware: The Superior Court of Delaware (Court) held that the policy of Delaware Division of Revenue (Division) limiting the Delaware separate company net operating loss (NOL) a corporation may claim to the consolidated NOL deduction of the federal consolidated group of which it is a member while consistent with Delaware statutory law and nondiscriminatory under the Commerce Clause, nevertheless violates the Uniformity Clause of Delaware's state constitution by creating two classes of Delaware corporate taxpayers. In so holding, the Court explained that the Division's policy divides a single group of taxpayers — Delaware corporate taxpayers — into two groups on the basis of their federal filing status — consolidated filers and separate filers — and then applies a limitation on one group but not the other. The Court rejected the Division's argument that this classification regime is reasonable and, thus, meets the requirements of the Uniformity Clause, and instead found that the Division failed to cite authority that would suggest its administrative classification should be afforded the same deference the legislature is afforded when facing a Uniformity Clause challenge. Verisign, Inc. v. Del. Dir. of Rev., C.A. No. N19C-08-093 JRJ (Del. Super. Ct. Dec. 17, 2020).
Idaho: The U.S. Supreme Court (Court) has been asked to review the Idaho Supreme Court's ruling in Noell Industries in which it held that gain from an out-of-state corporation's sale of its interest in a limited liability company is not apportionable to Idaho because the gain constitutes nonbusiness income from a passive investment. Specifically, the question the state is asking the Court to rule on is whether the Court's ruling in Mobil Oil Corp.,3 that a unitary business relationship could not be determined from superficial aspects of corporations, applies to pass-through entities, specifically whether unity can be determined based on the superficial aspects of a pass-through entity's business. Noell Industries, Inc. v. Idaho State Tax Comn., No. 46941 (Idaho S.Ct. May 22, 2020), petition for cert. filed, Idaho State Tax Comn. v. Noell Industries, Dkt. No. 20-947 (U.S. S. Ct. filed Jan. 14, 2021).
Ohio: New law (HB 150) reduces the Financial Institutions Tax (FIT) by up to $1 million for "de novo" banks. A "de novo" bank is defined as any bank that has been operating for less than three years. A bank is not de novo if (1) it was formed, acquired or converted by an existing or former FIT taxpayer or (2) it resulted from a merger with that taxpayer. To qualify for the reduction, a de novo bank will have to have started its operations in the year in which HB 150 takes effect or in any future year. A bank will be considered to have started operations in the year it was issued a charter, certificate of authority or equivalent document authorizing its banking operations. Under HB 150, a de novo bank whose tax liability before the reduction equaled $1 million or less will not owe any FIT for that year, not even the minimum tax. A de novo bank whose tax liability before the reduction exceeded $1 million will owe the difference between its pre-reduction tax liability and $1 million. The reduction applies for the 2021 tax year, which is the measurement period for returns filed for tax year 2022. Ohio Laws 2020, HB 150, signed by the governor on Jan. 9, 2021. For more on this development, see Tax Alert 2021-0031.
Wisconsin: The Wisconsin Department of Revenue (WI DOR) issued guidance on the effect of the federal Consolidated Appropriations Act (Act) on 2020 Wisconsin tax returns. In regard to the expenses paid with forgivable Paycheck Protection Program (PPP) loan proceeds, which are now deductible for federal income tax purposes under the Act, the WI DOR said the state follows the federal law in effect prior to this amendment. Thus, expenses paid with forgivable PPP loan proceeds are not deductible for Wisconsin income/franchise tax purposes. Further, the WI DOR said taxpayers must include the following in Wisconsin gross income: (1) any subsequently forgiven PPP loan proceeds; (2) emergency grants of economic injury disaster loans (EIDL) and targeted EIDL advances; (3) subsidy for certain loan payments; and (4) grants for shuttered venue operations. Wis. Dept. of Rev., "Important Information About Effect of New Federal Law on 2020 Wisconsin Tax Returns" (Jan. 2021).
SALES & USE
Colorado: A cable company's sales of movies, shows, pay-per-view events and video on demand content (transactions) that it provides through fiber optic and coaxial cable are not subject to state and state-administered local sales tax because the transactions as a whole are more analogous to a service than tangible personal property. In applying the true object test to the transactions, the Colorado Department of Revenue found the transactions involved the sale of tangible personal property (i.e., by providing cable subscribers with movies, television shows and pay-per-view content), but the provision of such content through fiber optic and coaxial cable included a service component. Because the mixed transactions are more analogous to a service and the service is not specifically subject to tax, the transactions likewise "are not explicitly taxed and are, therefore, excluded." Colo. Dept. of Rev., PLR 20-009 (Dec. 4, 2020).
Illinois: New regulations (86 Ill. Admin. Code §§ 131.101-131.180) implement the Leveling the Playing Field for Illinois Retail Act, which imposed state and local Retailers' Occupation Tax (ROT) on Illinois retailers, remote retailers and marketplace facilitators. Among the provisions covered by the new regulations are: (1) descriptions of the six different types of retailers with ROT obligations on and after Jan. 1, 2021, including how each retailer classification must source applicable sales (86 Ill. Admin. Code § 131.107); (2) general guidance for remote retailers, how to determine a seller's status as a remote retailer, how to determine if sales thresholds are met, obligations, procedures, and hold harmless provisions (86 Ill. Admin. Code §§ 131.110, .115, .120, .125); (3) general guidance for marketplace facilitators, how to determine an obligation to remit tax, factors used to determine if sales thresholds are met, obligations, procedures and hold harmless provisions (86 Ill. Admin. Code §§ 131.130, .135, .140, .145); (4) guidance for marketplace sellers (86 Ill. Admin. Code § 131.150); (5) sourcing (86 Ill. Admin. Code § 131.155); (6) Certified Service Providers and Certified Automated Systems obligations, procedures and hold harmless provisions (86 Ill. Admin. Code §§ 131.160, .165); (7) responsibilities of the Illinois Department of Revenue (86 Ill. Admin. Code § 131.170); (8) the annual requirement for local taxing jurisdictions, beginning Feb. 1, 2022, to certify their boundaries (86 Ill. Admin. Code § 131.175); and (9) definition of key terms (86 Ill. Admin. Code § 131.105). These regulations took effect Jan. 1, 2021. The Illinois Department of Revenue has created the Resource Page for the "Leveling the Playing Field for Illinois Retail Act" - Sales Taxes, which includes links to resources, registration and tax information, and publications.
New York: Proposed bill (S103/A734) would impose a sales tax on digital advertising. The bill would define "digital advertising service" as "advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services which markets or promotes a particular good, service, or political candidate or message." This bill would take effect 30 days after becoming law and would be repealed five years after the effective date. S103/A734 was introduced on Jan. 6, 2021.
Rhode Island: The sale of proprietary software and an online dashboard giving access to real-time advertising data by a marketing analytics services provider (service provider) is subject to sales and use tax as sales of vendor-hosted prewritten computer software. In so finding, the Rhode Island Division of Taxation (RI DOT) rejected the service provider's arguments that (1) the real object of its customers' purchases of the software was to obtain nontaxable data processing and information services, (2) the software is incidental to the real object, and (3) the software and services it provides are separate and distinct products. Instead RI DOT found that the software and the services the service provider provides "are clearly intertwined and inseparable." The RI DOT noted that even if the software was considered to be a telecommunications service it nevertheless is taxable as a sale at retail. R.I. Div. of Taxn., Ruling Request No. 2020-03 (Dec. 29, 2020).
Illinois: On Jan. 8, 2021, Illinois Governor JB Pritzker citing the "budget crisis caused by the ongoing COVID-19 pandemic," announced that he was freezing the implementation of additional tax credits for wages paid to workers for construction associated with relocation or expansion under the state's Enterprise Zone, River's Edge Redevelopment Zone, Economic Development for a Growing Economy, or High Impact Business tax credit programs that were set to take effect Jan. 1, 2021. (The changes were enacted in 2019, as part of PA 101-9.) The governor said the that "[t]hese new credits will not be implemented while the state is working to overcome its current fiscal challenges." Ill. Gov., Press Release "Pritzker Administration Targets $520 Million Corporate Tax Loopholes in Advance of Lame Duck Session" (Jan. 8, 2021).
Virginia: The Virginia Department of Taxation updated its recyclable materials processing equipment tax credit guidance to reflect the enactment of 2020 legislation (Va. Acts 2020, ch. 789/SB 590) that expanded credit eligibility and extended the credit's repeal to before Jan. 1, 2025. For tax years beginning on or after Jan. 1, 2020, taxpayers can claim the credit for the purchase of machinery and equipment used predominantly (italics indicate emphasis retained from guidance) in or on the premises of facilities that are predominantly engaged in advanced recycling. "Advanced recycling" is defined as the operation of a single-stream or multi-stream recycling plant that converts waste materials into new materials for resale by processing them and breaking them down into their raw constituents. It includes the operation of a materials recovery facility or materials reclamation facility that receives, separates and prepares recyclable materials for sale to end-user manufacturers. The guidance includes information on how to claim the credit, the annual credit cap and carryover credits. The revised guidance applies to tax years beginning on or after Jan. 1, 2020. Va. Dept. of Taxn., Recyclable Materials Processing Equipment Tax Credit Guidelines (updated Dec. 16, 2020).
New York: New law (A8091) amends the residential-commercial urban exemption program under the New York Real Property Tax Law to add exemption requirements, impose an annual certification requirement from property owners attesting compliance and provide grounds for exemption revocation and penalty. The amendments require that at least 75% of the floor area of a mixed-use property consist of the pre-existing building or structure and the portion of the building used for commercial purposes currently must be used as such or must be in good faith contemplated (documentation required). Land that was vacant before the residential or commercial construction work is ineligible for the exemption. Additionally, the definition of "mixed-use property" is amended to require at least 50% of a building or structure's square footage be devoted to residential purposes or use, and at least 15% of its square footage be devoted to commercial purposes or use. Further, the definition of "commercial purpose or use" is amended to mean the buying, selling or otherwise providing of goods or services directly to the public, including hotel services, retail stores, office space, restaurants, bars, gyms, theaters, and cafes (additions in italics). The exemption will be revoked upon the property owner's failure to annually certify exemption compliance and compliance with applicable local laws. Lastly, the new law enumerates grounds for exemption revocation that require repayment of any previously granted benefits and imposes a penalty for material misstatements that provided the basis for granting the exemption. AB 8091 took effect Jan. 1, 2021 and applies to properties for which the initial application for exemption are received on or after that date. N.Y. Laws 2020, ch. 357 (A8091), signed by the governor on Dec. 23, 2020.
Oregon: New rule (Ore. Admin. Code 150-314-0733) addresses how to treat certain partnership adjustments stemming from federal partnership audits, including partnership-level payment elections and how to determine a tiered partner's share of adjustments. In regard to the election, an audited partnership can elect to pay at the partnership level after a federal centralized partnership audit adjustment. The election is irrevocable after the due date of the election, but it can be rescinded before the due date for providing notice of the election if certain conditions are met. As for tiered partners, the rule excludes the following from a tiered partner's share of adjustment: (1) the share of adjustments allocable to indirect partners exempt from personal income tax as an association, trust or unincorporated organization under ORS 316.277(2) or corporate excise tax under ORS 217.080, other than amounts that are unrelated business taxable income; and (2) an indirect corporate partner's share of adjustments that are statutorily excluded from a tiered partner's share of adjustments, which is the share of the adjustments that the audited partnership can reasonably determine is required to be included in the apportionable income of the indirect corporate partner. (The rule describes how such adjustments are "reasonably determined".) The rule took effect Jan. 1, 2021. Ore. Sec. of State, REV 42-2020, Ore. Admin. Code 150-314-0733 (approved Dec. 23, 2020).
Rhode Island: In response to recent IRS guidance on the deductibility of payments by partnerships and S corporations for certain state and local income taxes (Notice 2020-75), the Rhode Island Division of Taxation said it will not assess underestimated payment interest for pass-through entities that make the election to be subject to Rhode Island tax at the entity level (PTE election) for the first time in the 2020 tax year and did not make estimated payments during that year. This relief does not apply to entities that made the election in 2019 and 2020 and did not make sufficient estimated payments in 2020. The recent IRS guidance did not affect those taxpayers and they will be subject to the underestimated payment interest. R.I. Div. of Taxn., Elective entity-level tax on pass-through entities (Jan. 6, 2021).
PAYROLL & EMPLOYMENT TAX
California: The California Employment Development Department issued the wage-bracket and percentage method withholding tables for calendar year 2021 to its website. The supplemental withholding rates continue at 6.6% and 10.23% for stock options and bonus payments. For additional information on this development, see Tax Alert 2021-0078.
Colorado: In its frequently asked questions about the Colorado personal income tax, the Colorado Department of Revenue states that the new Colorado income tax rate is 4.55% beginning in the 2020 tax year. Accordingly, taxpayers can recover any 2020 excess income tax withholding due them when filing their 2020 Colorado personal income tax return. Effective Jan. 1, 2021, employers should compute Colorado income tax withholding at 4.55%. For more on this development, see Tax Alert 2021-0086.
Connecticut: The Connecticut Paid Leave Authority (CT PL Authority) is reminding employers with one or more employees that they must now register with the CT PL Authority to comply with the state's statute governing paid family and medical leave insurance (CT FMLI). Payroll deductions for CT FMLI contributions are required to start with the first paycheck on or after Jan. 1, 2021, and all covered employers are required to deduct 0.5% of taxable wages. Businesses that fail to deduct CT FMLI contributions from their employees' wages are liable for the requisite contribution amounts and may be subject to interest and penalties. For additional information on this development, see Tax Alert 2021-0041.
Connecticut: The Connecticut Department of Revenue Services released its 2021 Connecticut Circular CT Employer's Tax Guide containing the 2021 income tax withholding calculation rules and wage-bracket withholding tables. The 2021 withholding calculation rules and 2021 withholding tables are unchanged from 2020. For additional information on this development, see Tax Alert 2021-0106.
New Mexico: The New Mexico Department of Taxation & Revenue announced that the top individual income tax rate for 2021 will be 5.9% for individuals with taxable income above $210,000 for single filers and $315,000 for married couples filing joint. The previous top income tax rate was 4.9%, which remains in effect for taxpayers with taxable income below the new 5.9% thresholds. For additional information on this development, see Tax Alert 2021-0058.
Wyoming: Wyoming Governor Mark Gordon issued an executive order that allows contributory employers to avoid having their unemployment insurance (UI) accounts charged for COVID-19 UI benefits. The UI benefit charge relief is retroactive to March 19, 2020 (when the first statewide COVID-19 order was issued) and applies through Dec. 31, 2020. According to the governor, the order may be extended into 2021 if conditions warrant and the state's UI trust fund stays solvent and can withstand additional UI benefits that are not charged against employer accounts. For more on this development, see Tax Alert 2021-0072.
Indiana: Proposed bill (HB 1312) would impose a surcharge tax on social media providers starting in 2022. The surcharge tax would be imposed on social media providers with (1) a public social media platform, (2) more than 1 million active Indiana account holders, (3) annual gross revenue from social media advertising services in Indiana of at least $1 million, and (4) derive an economic benefit from data Indiana residents share with the provider. The surcharge would equal (1) the annual gross revenue derived from social media advertising services in Indiana for the calendar year multiplied by 7% plus (2) the total number of active Indiana account holders in the calendar year multiplied by $1. HB 1312 was introduced on Jan. 14, 2021.
Ohio: New law (HB 150) excludes mortgage lenders from the Ohio Commercial Activity Tax (OH CAT). Under existing law, the definition of "gross receipts" under the OH CAT law excludes certain gross receipts of mortgage brokers (which are distinct from mortgage lenders) and thus excluded from the OH CAT. The exclusion for a mortgage broker's gross receipts applies to the funds the broker uses to finance a table-funded loan or warehouse lending loan, other than money the broker receives as fees or other consideration for the transaction. HB 150 allows mortgage lenders to exclude, from their OH CAT base, gross receipts from the sale or transfer of mortgage loans and mortgage-backed securities. The exclusion equals the receipts representing the principal balance of mortgage loans. This exclusion is effective July 1, 2021. Ohio Laws 2020, HB 150, signed by the governor on Jan. 9, 2021. For additional information on this development, see Tax Alert 2021-0031.
Federal: On Jan. 6, 2021, the United States Trade Representative (USTR) released the findings in its investigations initiated under Section 301 of the Trade Act of 1974 (Section 301) of the Digital Services Tax (DST) regimes adopted by India, Italy and Turkey. The USTR determined each nation's DST to be discriminatory against US companies, inconsistent with prevailing principles of international taxation and burdensome or restrictive to United States commerce.4 While the USTR is authorized to take action under Section 301 as a result of the findings, it noted in the announcement that no specific actions in connection with the findings would be taken at this time. The following day, the USTR announced the suspension of punitive tariffs on certain French origin goods in relation to the Section 301 investigation of France's DST that were set to take effect on Jan. 6, 2021. For more on this development, see Tax Alert 2021-0080.
VALUE ADDED TAX
International — Dutch: On Dec. 17, 2020, the Dutch State Secretary of Finance issued a new Decree providing guidance on various topics concerning fixed establishments for Dutch Value Added Tax (VAT) purposes, including: (1) the VAT treatment of transactions between a head office and its fixed establishment where either one of them is part of a Dutch VAT group; (2) the introduction of a "purchase fixed establishment"; (3) details on how a service provider may identify which establishment of its customer to which it provides its services (which is also relevant for VAT recovery purposes in the financial sector); (4) determining the entitlement to recover Dutch VAT on costs incurred by a Dutch fixed establishment or head office where these costs partially relate to foreign establishments of a taxpayer; (5) other topics, including the force of attraction rules (i.e., when does the reverse charge mechanism apply) and the virtual warehousing rules for foreign taxpayers that have a fixed establishment in the Netherlands. The new Decree replaces the Decree that was released in 2002 and updates Dutch policy to include various developments in case law and European Union legislation since 2002. For more on this development, see Tax Alert 2021-0093.
Tuesday, January 26. Update on federal tax credits and business relief following enactment of Consolidated Appropriations Act, 2021 (3:30 pm ET). The Consolidated Appropriations Act, 2021, enacted Dec. 27, 2020, renewed, extended and modified numerous tax credits and enacted new business relief measures. Join our team of Ernst & Young LLP professionals to hear important developments on these tax credit and relief opportunities. We will explore the following topics: (1) employee retention credit (ERC): extension and modification of the ERC, which was enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act; (2) hiring: extension of the Work Opportunity Tax Credit (WOTC), Federal Empowerment Zone Credit and Indian Employment Credit; (3) relief measures for sectors impacted by the Coronavirus: transit grants; shuttered-venue grants; (4) disaster relief: creation of a new disaster zone credit for certain major (non-Coronavirus) disasters in 2020; (5) paid leave: extension of the Section 45S credit for employer-provided paid family and medical leave; extension of the paid-leave credits under the Families First Coronavirus Response Act; (6) sustainability: extension of energy credits and energy-efficiency deduction for buildings; (7) economic development: New Markets Tax Credit and Opportunity Zones. Register.
Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor.
1 The final rule is effective Jan. 24, 2021.
2 Nev. Laws 2020 (Special Sess.), ch. 4 (SB 3), signed by the governor on July 20, 2020.
3 Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425 (1980).
4 See USTR press release "USTR Releases Findings in DST Investigations" (Jan. 6, 2021).