February 1, 2021
State and Local Tax Weekly for January 22
Ernst & Young's State and Local Tax Weekly newsletter for January 22 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.
The New Jersey Economic Recovery Act of 2020 signed into law
On Jan. 7, 2021, Governor Murphy signed into law the New Jersey Economic Recovery Act of 2020 (P.L. 2020, ch. 156 (A 4)) (Act), which includes enacting state tax credits aimed at supporting job creation, innovation, historic property reinvestment, brownfield development, small business assistance, food deserts, among other provisions. A key piece of the Act is the new Emerge Program Act (Act, sections 68-81).
The Emerge Program Act (NJ Emerge) provides a nonrefundable income tax credit of $500 to $8,000 per net new job each year for seven years for taxpayers that:
In certain circumstances, projects involving large-scale job retention can also qualify.
While the NJ Emerge benefit is nonrefundable, the tax credit can be sold or surrendered to the NJ Division of Taxation for cash payment.
Additional tax credit programs in the Act include the following:
The Act also provides a tax credit for the manufacture of personal protective equipment (PPE). For privilege periods ending in 2020, 2021 and 2022, a taxpayer (upon application approval) is allowed a tax credit in the amount of $10,000 for each qualifying new hire involved in the manufacture of PPE in a qualified facility in which the taxpayer made a capital investment during the privilege period, with the total amount of credits under the program capped at $10 million in a fiscal year (Act, sections 106-107).
Lastly, the Act allows any business affected by the COVID-19 public health emergency to make an election to defer, adjust and terminate certain incentive agreements (Act, section 108); amends provisions for offshore wind energy credits (Act, section 109), film credits (Act, sections 110-111), angel investor tax credits (Act, sections 117-119) and economic redevelopment and growth grant credits (Act, sections 122-124); authorizes the Director of the New Jersey Division of Taxation to purchase certain unused tax credits (Act, section 89); and establishes the New Jersey Economic Development Authority a Working Group on Entrepreneur Zones to make recommendations for the creation of entrepreneur zones throughout New Jersey (Act, section 90).
Federal: The IRS has issued final regulations (T.D. 9946) providing guidance on the disallowance of a deduction for certain fines, penalties and other amounts paid to, or at the direction of, governmental entities (and other identified entities), for violating or potentially violating a law, under IRC §162(f), as amended by the Tax Cuts and Jobs Act (P.L. 115-97), and the related reporting requirements under IRC § 6050X. For more on this development, see Tax Alert 2021-0108.
Iowa: The Iowa Department of Revenue issued guidance on the income and franchise tax exemption for grants received under the Iowa Small Business Relief Program (program). Only grants labeled "Iowa small business relief grants" issued by the Iowa Economic Development Authority under the program qualify for the exemption. The grant must have been received by the taxpayer during a tax year ending on or after March 23, 2020. For calendar year taxpayers, grants received during 2020 will be eligible for exemption on the taxpayer's 2020 income tax return. For fiscal year taxpayers, the grant will be eligible for exemption on the 2019 or 2020 return, depending on the date of the taxpayer's fiscal year end. Iowa Dept. of Rev., "Iowa Small Business Relief Program - Income and Franchise Tax Exemption" (Jan. 2021).
New Jersey: On Jan. 13 and 14, 2021, the New Jersey Division of Taxation (NJ DOT) released several technical bulletins and a notice addressing various aspects of the enactment of new tax legislation under S3007/A4809 on Nov. 4, 2020 (S3007/A4809). S3007/A4809, which was intended as both a series of technical corrections to the state's Corporation Business Tax Act (CBT Act) and substantive compromises with New Jersey CBT taxpayers, resulted in significant changes to various aspects of the CBT entire net income base, tax attributes and filing methods. (See Tax Alert 2020-2648.) These NJ DOT technical bulletin releases include the following: (1) Revised Technical Bulletin 89 (TB 89(R)) which updates the NJ DOT's previously issued guidance on New Jersey's combined filing regime, (2) Technical Bulletin 98 which includes a list of federal forms and schedules that taxpayers must attach to their CBT returns for privilege periods ending on or after July 31, 2020, and (3) Technical Bulletin 99 which addresses transitional tax filing requirements for banking corporations. Further, in a notice issued on Jan. 13, 2021 and entitled "The World-Wide and Affiliated Group Elections for 2019/2020 CBT-100U Returns," NJ DOT reiterates the administrative-combined-filing election relief for taxpayers impacted by changes brought about by S3007/A4809 and affecting returns filed for those periods, as provided in TB-89(R) and as explained in Tax Alert 2021-0150.
New York: The New York Department of Taxation and Finance in FAQs posted on its "New York State tax implications of the federal CARES Act" webpage said that New York State follows for both personal income and corporation tax purposes the federal income tax treatment of Payroll Protection Program (PPP) loans that are forgiven as well the deductibility of expenses associated with PPP loans. Thus, the proceeds of a forgiven PPP loan that is excluded from federal taxable income and expenses associated with PPP loans that may be deducted in computing federal taxable income are also excluded from New York taxable income. The FAQs also address the New York tax treatment of other changes brought about by the CARES Act including net operating losses (concluding that New York State does not follow these federal tax law changes for individual or corporation tax purposes) and depreciation of qualified improvement property (QIP) (New York State does not follow these changes for individual income tax purposes but generally follows them for corporation tax purposes, with special instructions if the federal special depreciation deduction allowed under IRC § 168(k) for QIP was claimed). N.Y. Dept. of Taxn. And Fin., New York State tax implications of the federal CARES Act webpage (last updated Jan. 25, 2021).
SALES & USE
Chicago, IL: The Department of Finance (DOF) of the City of Chicago (City) announced that it will apply a Wayfair nexus standard for the City's amusement tax as applied to amusements delivered electronically (e.g., video streaming, audio streaming, on-line games) and its personal property lease transaction tax as applied to nonpossessory computer leases. According to the DOF, the City will consider whether an out-of-state entity meets the thresholds that apply for state use tax purposes (at least $100,000 in gross receipts from, or 200 or more separate transaction for, the sale of tangible personal property to Illinois purchasers). The state threshold "will not necessarily be treated as determinative" if the City's safe harbor applies. Under the safe harbor, the obligation to collect and remit these taxes will not apply to an out-of-state entity that receives under $100,000 in revenue from City customers during the most recent consecutive four calendar quarters. The safe harbor applies only to entities that have no other significant contacts with the City (e.g., physical presence, employees or agents performing activities in the City on the entity's behalf, agreements with other businesses in the City, advertising directed at customers in the City). The safe harbor applies on a prospective basis, starting July 1, 2021; refunds or credits will not be granted for taxes paid or remitted before July 1. Once an entity no longer qualifies for the safe harbor, it will need to register with the DOF within 60 days, begin collecting tax within 90 days and continue to collect the tax for at least 12 months. Chicago Dept. of Fin., "Information Bulletin — Nexus and Safe Harbor" (Jan. 21, 2021).
Iowa: The Iowa Department of Revenue (IA DOR) issued guidance explaining the sales and use tax exemption for computers and computer peripherals used in processing or the storage of data or information by an insurance company, financial institution or commercial enterprise. The guidance includes non-exhaustive lists of taxable and exempt devices. Exempt items include desktop computers or towers, laptops, keyboard, mouse, monitors, hard drives, multi-functional devices, printers, scanners, toughbooks, smartphones, tablets, docking stations, port replicators, USB hubs, discriminators, flash drives, thin clients, zero clients, wireless access points, routers, modems, hotspots, smart TVs, servers, DVRs and webcams. Taxable items include adapters, firewall hardware, digital displays or billboards, hardware maintenance agreements, computerized phone systems, cell phones not including smartphones, time clocks, postage meters, cables, switches or switching equipment, surveillance or security cameras, uninterruptible power supplies, power strips or surge protectors, computer cases, fluke meters, testing equipment, replacement parts, pill counters or sorters and satellite or cable television equipment. The IA DOR noted that whether a device is taxable may require a fact-intensive analysis. Iowa Dept. of Rev., Sales Tax Treatment of Computers and Computer Peripherals (Jan. 15, 2021).
Kentucky: The Kentucky Department of Revenue (KY DOR) in a tax publication explained that the commonwealth's sales and use tax does not apply to Software as a Service (SaaS) that is not delivered into Kentucky. When the software is accessed exclusively through (1) the "cloud" or (2) online through the selling entity's server, access is not subject to Kentucky's sales and use tax. The KY DOR further explained that software accessed through a server and not downloaded to the customer, is not a taxable retail sale of tangible personal property. Ky. Dept. of Rev., Kentucky Sales Tax Facts (Dec. 2020).
Kentucky: The Kentucky Department of Revenue (KY DOR) in a tax publication stated that sales and use tax exemptions for traditional manufacturers do not extend to businesses performing services supporting financial transactions, such as block chain or bitcoin production, because these do not constitute the production of tangible personal property for sale. The KY DOR explained that in block chain production, computer equipment creates and adds a new block to the block chain network by repeated attempts "to manufacture" a specific string of computer commands that can execute a prescribed complex math solution. However, nothing indicates that there is a sale of the blocks of data that become a permanent part of a public digital ledger. Ky. Dept. of Rev., Kentucky Sales Tax Facts (Dec. 2020).
Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) issued a sales tax bulletin addressing the application of the state's sales and use tax to sales of non-medical masks and other face coverings. The PA DOR stated that "[a]s of October 30, 2020, in response to the ubiquitous use of non-medical masks and face coverings, [it] recognizes that both cloth and disposable non-medical masks and face coverings are exempt from sales and use tax as everyday wear or clothing." The bulletin is retroactively effective to Oct. 30, 2020. Pa. Dept. of Rev., Sales and Use Tax Bulletin 2021-01, Sales and use tax exemption for non-medical masks and face coverings (Jan. 20, 2021).
Virginia: The Virginia Tax Commissioner in response to a ruling request explained that hotel rooms occupied for 90 continuous days or more are exempt from sales tax. When a transient has occupied a room for 90 days or more, the dealer that furnished the room or other accommodations can refund any sales tax actually collected and then deduct from gross sales on their return the amount of charges for which they refunded the tax. For blocks of rooms rented under rental contracts, the exemption applies to the least number of rooms rented on a given day during a continuous 90-day period; each day is the start of a new 90-day period for purposes of this calculation. (An explanatory example is provided.) Additionally, meals that are included in a stay as part of a package are taxable and must be separately stated from room or accommodations charges in order to maintain the room exemption. If the charges are lumped into a single charge, the entire transaction will be subject to tax. Va. Dept. of Taxn., Ruling of the Tax Comr. No. 20-177 (Oct. 6, 2020).
Federal: In Notice 2021-10, the IRS further extended the deadlines for Qualified Opportunity Zone investors and Qualified Opportunity Funds (QOFs) after relief granted in Notice 2020-39 (see Tax Alert 2020-1498). These extended deadlines apply to the 180-day investment window, 30-month substantial improvement requirement and 90% investment standard requirement. They also apply to the additional time for a Qualified Opportunity Zone Business (QOZB) to expend capital under the working capital safe harbor and for QOFs to reinvest certain proceeds under the Opportunity Zone regulations (TD-9889). For additional information on this development, see Tax Alert 2021-0143.
Michigan: New law (SB 54) provides a historic rehabilitation tax credit against individual and corporate income tax equal to 25% of qualified expenditures that are eligible under the federal rehabilitation credit or that would qualify for the federal rehabilitation credit except that they were for a historic resource that is not eligible for that credit. The credit is available for qualified taxpayers with a certificate of completed rehabilitation issued after Dec. 31, 2020 and before Jan. 1, 2031. The credit must be claimed within five years after the certificate of completed rehabilitation is issued. Up to $5 million is available as credits per calendar year, with taxpayers limited to no more than $2 million in a single tax year for the same historic resource. The credit is nonrefundable; unused credit can be carried forward for up to 10 tax years. Further, the credit (or a portion thereof) can be irrevocably assigned and generally, a qualified taxpayer can enter into a written agreement with the state that allows the transfer or sale of the historic resource, provided certain requirements are met. SB 54 took immediate effect. Mich. Laws 2020, P.A. 343 (SB 54) signed by the governor on Dec. 30, 2020.
California: The California State Board Equalization's (SBE) provided initial responses to questions identified by the County-Assessed Properties Division and the California Assessors' Association as questions necessary to answer for the proper implementation and administration of the provisions of voter-approved Proposition 19 (Prop. 19), which limits property tax increases on transfers of certain primary residences. In analyzing Prop. 19's effect on the previous base year value transfer provisions and the existing parent-child exclusion, the SBE noted significant unanswered questions from Prop. 19's text and stated that its initial interpretational answers may be subject to change. Notably, Sec. 2.1 makes the previous parent-child exclusion inoperative on and after April 1, 2021 but did not specifically do so for the previous base year transfer provisions. Questions addressed regarding base year value transfer provisions include when the sale of a primary residence and the purchase of a replacement primary residence must be completed and when the value of the original and replacement primary residences are determined for calculating the transferrable taxable value, among others. The SBE urged the legislature to answer questions about Prop. 19's implementation and administration in follow-up legislation detailing "procedures and definitions." Cal. State Bd. of Equal., Legal Dept., Memorandum: Prop. 19 — Initial Interpretational Questions and Answers (Jan. 8, 2021).
South Carolina: A regulated public utility (utility) is entitled to a partial property tax exemption for its owned or leased real property that is used to generate (i.e., manufacture) electricity for the 2018 tax year, but property that is not used for such purposes does not qualify for the exemption. In so holding, an administrative law judge (ALJ) for the South Carolina Administrative Law Court relied on the plain meaning of "manufacturing property" under S.C. Code § 12-37-220(B)(52)(a) and legal precedent, finding the utility was both factually and legally engaged in manufacturing. The ALJ reasoned that South Carolina has a long history of treating companies that generate electricity as manufacturers (even as applied to different tax types) and that the plants or stations where the electricity is produced are manufactories. In considering the property tax scheme, the ALJ found the legislature never expressly indicated by statute that manufacturing and utility properties must be treated differently under the exemption and further decided to treat manufacturing property and utility property similarly even though they were classified separately within South Carolina's property tax system. Thus, the legislature did not intend to overrule existing precedent to exclude a utility from the exemption. Duke Energy Carolinas, LLC v. S.C. Dept. of Rev., No. 19-ALJ-17-0417-CC (S.C. Admin. Law Ct. Dec. 21, 2020); Duke Energy Progress, LLC v. S.C. Dept. of Rev., No. 19-ALJ-17-0418-CC (S.C. Admin. Law Ct. Dec. 21, 2020).
PAYROLL & EMPLOYMENT TAX
Arizona: The Arizona Department of Revenue (AZ DOR) released the 2021 Form A-4, Employee's Arizona Withholding Election, to its website reflecting the same withholding tax rates that applied in 2020. The form confirms that employers are not required to withhold the new high-income tax surcharge provided for under voter-approved Proposition 208. According to an AZ DOR tax policy representative, these individuals would be required to pay the surcharge, which took effect Jan. 1, 2021, with their 2021 state individual income tax returns, due in 2022. For more on this development, see Tax Alert 2021-0146.
Missouri: The Missouri Department of Revenue issued proposed regulations under 12 CSR 10-2.109, which allows employers that did not have an adequate time and attendance system in 2020 the option to declare that they withheld income tax from employees' wages as if they were earned for work performed at the employee's primary work location within the state, without regard to the employee's temporary work location during the COVID-19 relief period. For more on this development, see Tax Alert 2021-0124.
New York: Nine local jurisdictions2 could not impose local hotel and motel tax on online facilitation and service fees charged by online travel companies (OTCs) because the enabling hotel tax statutes generally did not authorize such taxes. In affirming the lower court, the New York Supreme Court, Appellate Division noted that while the enabling statutes authorized the imposition of a hotel tax on the per diem hotel room rental rate they did not include language "which could be found to authorize a hotel tax upon the separate online 'facilitation' or 'service' fees" charged by the OTCs. County of Nassau, et al., v. Expedia, Inc., et al., D&O Nos. 2017—05276, 2017—05285, and 2017—06486 (N.Y. S.Ct., App. Div., 2d Jud. Dept., Dec. 23, 2020).
Texas: In affirming the lower court, the Texas Court of Appeals (COA) found an insurer that sells "stop-loss" policies to businesses that directly fund their employee healthcare benefits is not subject to premium tax on these policies because they are not "an insurance policy or contract covering risks on individuals or groups." Rather, the stop-loss insurance covers the employer's risk by capping the employer's costs in paying for its employees' medical care. The COA also determined the stop-loss policies are not subject to maintenance tax because they are not "collected from writing" health insurance, noting that the insurer "sells the policies to employers who do not ask an insurer to write health insurance." Lastly, the COA found that the trial court had rendered a final judgment in which the requested refund amount was unequivocally specified; thus, the insurer was entitled to its sufficiently documented refund of $3 million. Hegar v. Health Care Service Corp., No. 03-19-00864-CV (Tex. Ct. App., 3d Dist., Dec. 11, 2020).
Florida: The Florida Department of Financial Services posted an alert on its website reminding holders of unclaimed property that annual reports and remittances for property that reached its dormancy period in 2020 are due by April 30, 2021. Late reports (including for prior years) are subject to penalties. Fla. Dept. of Fin. Svcs., Unclaimed Property Reporting Info. (Jan. 2021).
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 definition of "targeted industry" is subject to periodic change by the New Jersey Economic Development Authority and initially includes advanced transportation and logistics, advanced manufacturing, aviation, autonomous vehicle and zero-emission vehicle research or development, clean energy, life sciences, hemp processing, information and high technology, finance and insurance, professional services, film and digital media and non-retail food and beverage businesses, including food innovation and other innovative industries that disrupt current technologies or business models.
2 Nassau, Orange, Rensselaer, Saratoga, Steuben, Oswego, Westchester, and Chautauqua Counties, and the City of Saratoga Springs.