February 9, 2021
State and Local Tax Weekly for January 29
Ernst & Young's State and Local Tax Weekly newsletter for January 29 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.
Colorado enacts legislation restoring certain CARES Act benefits
On Jan. 21, 2021, Colorado Governor Jared Polis signed HB 21-1002, which allows taxpayers that accelerated certain federal income tax deductions under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to subtract the corresponding state income tax benefit starting in 2021. HB 21-1002 is intended to offset previous decoupling1 from certain provisions of the CARES Act.
This new Colorado subtraction specifically concerns modifications to the following federal income tax deductions enacted under the CARES Act:
For income tax years beginning on or after Jan. 1, 2021, but before Jan. 1, 2022, the subtraction equals:
Additional provisions address modifications for corporate taxpayers that must apportion or allocate income to Colorado.
The subtraction is limited to the lesser of the taxpayer's Colorado taxable income or $300,000. Unused amounts can be carried forward to subsequent tax years until exhausted for tax years beginning on or after Jan. 1, 2022, but before Jan. 1, 2026; the amount subtracted for these years, however, is limited to the lesser of the taxpayer's Colorado taxable income or $150,000. Beginning in 2026, the subtraction may not exceed the taxpayer's Colorado taxable income. Further, the subtraction must be first applied to the earliest income tax year possible.
Taxpayers that apply the subtraction for QIP must calculate the gain or loss on the QIP's sale for purposes of the subtraction allowed under Colo. Rev. Stat. § 39-22-104(4)(b) (applicable to individuals, estates and trusts) or Colo. Rev. Stat. § 39-22-304(p) (applicable to corporations) using the basis reported on the taxpayer's federal income tax return at the time of the sale.
For additional information on this development, see Tax Alert 2021-0233.
Colorado: In response to a ruling request, the Colorado Department of Revenue (CO DOR) stated that a nonresident's income from restricted stock units are sourced to Colorado based on the number of workdays in Colorado during the period the employee was required to work for the employer before the vesting date. The CO DOR explained that the state's income tax law follows the federal income tax treatment of income arising from the receipt of a restricted stock unit, deferring it until it is vested and settled; further finding that while restricted stock units are different from stock options, they are sufficiently similar for purposes of sourcing such income to Colorado under the same apportionment principle (which is stated above). The CO DOR included an example in its response. Colo. Dept. of Rev., GIL 20-004 (Dec. 18, 2020).
Massachusetts: The Massachusetts Appeals Court (MAC) affirmed a ruling of the Massachusetts Appellate Tax Board (ATB) that a manufacturing corporation commercially domiciled in Massachusetts is required to source litigation awards, settlement payments and authorization royalties from patent litigation to the commonwealth for corporate excise tax purposes because it failed to overcome the presumption in the legal rights regulation of the Massachusetts Department of Revenue (see 830 Code Mass. Regs. § 63.38.1(9)(d)(3)(f)) that the receipts are attributable to Massachusetts. The MAC found no error in the ATB's reasoning and conclusion; rejecting the corporation's argument that the ATB applied the legal rights regulation in a manner that would render it invalid (i.e., enforcement of legal rights is not a type of income-producing activity under Mass. Gen. Law ch. 63, §38(f)) and that the ATB should have looked at the nature of the income-producing activity at issue in the patent infringement lawsuit. Instead, the MAC found that Mass. Gen. Law ch. 63, §38(f) does not contemplate an exclusive list of income-producing activities, noting that the statute specifies one type of income-producing activity — the licensing of intangible property — and grants the Massachusetts Commissioner of Revenue the authority to adopt implementing regulations. In regard to the royalty payments, the MCA rejected the corporation's argument that such payments should not have been considered as gross receipts from the enforcement of legal rights because it did not sue customers and it received the royalty payments pursuant to licensing agreements. Instead, the MAC found that the corporation "would not have received the royalty payments but for the enforcement of its legal rights." SynQor, Inc. v. Mass. Comr. of Rev., No. 19-P-1695 (Mass. App. Ct. Jan. 27, 2021) (unpublished).
Nebraska: The Nebraska Department of Revenue announced new guidance on Nebraska's tax treatment of global intangible low-taxed income under IRC § 951A (GILTI), the related GILTI deduction and the deduction for foreign-derived intangible income under IRC §250. Concurrently, during the opening weeks of 2021, members of the Nebraska legislature introduced legislation that, if enacted, would clarify that GILTI and repatriated income are eligible for the state's deduction for foreign dividends or deemed foreign dividends (foreign DRD) under in Neb. Rev. Stat. § 77-2716(5). For additional information on this development, see Tax Alert 2021-0190.
New York: New York Governor Andrew Cuomo released two versions of his fiscal year (FY) 2022 budget proposal on Jan. 19, 2021, the first of which calls for an increase in personal income taxes for high income earners and the suspension of the phase-in of the middle-class income tax cut that began in 2018. The second version of his budget proposal, which would not include these income tax increases, assumes that Congress will grant the governor's request for $15 billion in additional federal aid to the state. At the time of the governor's release, the state anticipated receipt of only $6 billion in federal aid, which the governor states will be insufficient to avert increases in the state's personal income tax. For more on this development, see Tax Alert 2021-0188.
South Carolina: The South Carolina Department of Revenue (SC DOR) issued guidance on the state's tax treatment of the business interest expense deduction limitation under IRC §163(j) and the carryforward of such disallowed interest expense under IRC §§ 381(c)(20) and 382(d)(3). The SC DOR explained that the state has not adopted either provision. Accordingly, for tax years beginning after 2017, in calculating South Carolina taxable income, taxpayers can deduct 100% of their business interest expense without regard to IRC §163(j) but cannot deduct any interest expense carryforward from years beginning before 2018. The SC DOR noted that any interest expense that cannot be deducted in the year incurred may create a South Carolina net operating loss and any federal interest expense carryforward allowed for federal income tax purposes is treated as an addition to South Carolina taxable income. This guidance is effective for tax years beginning on or after Jan. 1, 2018. S.C. Dept. of Rev., SC Revenue Ruling #21-2 (Jan. 26, 2021).
Tennessee: An out-of-state manufacturer's receipts from the sales of its custom-built tangible personal property are included in the numerator of its Tennessee apportionment formula when the purchaser takes delivery of said property in, and has a location within, Tennessee. Such sales are excluded from the numerator of its Tennessee apportionment formula when (1) the sales are delivered to a purchaser in Tennessee and (2) the purchaser does not have a Tennessee location. In so advising, the Tennessee Department of Revenue (TN DOR) explained that receipts from sales of custom-built tangible personal property are sourced based on the purchaser's location. The TN DOR noted that the place where a purchaser registers the tangible personal property is not controlling for apportionment factor sourcing purposes. Tenn. Dept. of Rev., Rev. Ruling No. 20-09 (Oct. 14, 2020).
SALES & USE
Alabama: An authorized dealer's replenishment of customers' prepaid wireless plans on behalf of a wireless telecommunications provider (wireless provider) are sales of tangible personal property subject to state and local sales and use tax. In so holding, the Alabama Tax Tribunal (Tribunal) rejected the dealer's argument that it was merely facilitating customer payments to the wireless provider instead of making retail sales, finding that, unlike online travel companies making reservations for a commission and whose transactions were governed by an administrative rule that provided only persons who operate a hotel are persons who rent rooms, there is no administrative rule addressing the dealer's situation. Rather, under legislation enacted by the Alabama legislature from 1997 (subjecting sales of calling cards and authorization numbers to sales and use taxes) and 2014 (enacted while the appeal of this action was pending, and clarifying that prepaid wireless service that is or is not evidenced by a physical card is subject to sales and use tax), the dealer sold prepaid wireless services because customers could not continue using their monthly plans until they paid the dealer. Cellular Express, Inc. v. Ala. Dept. of Rev., No. S. 14-320-JP (Ala. Tax Trib. Jan. 21, 2021).
Michigan: In response to the Michigan Court of Appeals (MI COA) binding opinion in Emagine Entertainment,2 in which it affirmed a lower court ruling that the 75% test set forth in an administrative rule for determining whether eating utensils are deemed provided by the seller was invalid because it conflicted with statutory language, the Michigan Department of Treasury (MI DOT) issued guidance on how the provision of utensils impacts the taxability of prepared food for sales and use tax purposes. Since the previous 75% test no longer applies, for purposes of sales and use tax as applied to food, the MI DOT stated that eating utensils are "provided by the seller", and thus taxable, only when they "specifically accompany the food or [are] added to it." A seller that merely makes eating utensils available to customers is not considered to be "providing" eating utensils for purposes of the sales and use tax definition of "prepared food". The MI DOT noted that sellers must refund erroneously collected sales and use tax to customers before they are eligible for a refund of tax remitted to the MI DOT. Mich. Dept. of Treas., Sales and Use Tax Notice: Emagine Entertainment, Inc., et al. v. Dept. of Treas. (Jan. 20, 2021).
Tennessee: In response to a ruling request, the Tennessee Department of Revenue (TN DOR) stated that an online forum operator which through an internet website or mobile application connects food and beverage sellers with potential customers is a "delivery network company." As such it is not required to collect and remit Tennessee sales and use tax for sales of taxable products made on its forum when it does not have common ownership or control of the sellers with whom it contracts and the deliveries it facilitates are within 50 miles of the seller. The TN DOR further explained that to "facilitate" delivery service, the delivery network company is only required to make a delivery service easier; it is not required to actually perform the delivery service. If a marketplace facilitator is not considered a delivery network company, it can submit an application to the TN DOR requesting a waiver of the requirement to collect or remit sales and use tax for sales made through its online forum. As part of the application, the marketplace facilitator would have to (1) state that substantially all of the marketplace sellers on its marketplace are registered in Tennessee for sales and use tax purposes, and (2) attach a list of their names, addresses and Tennessee sales tax registration numbers or explain why any marketplace sellers' Tennessee sales tax registration number is not on the list. Tenn. Dept. of Rev., Rev. Ruling No. 20-13 (Dec. 7, 2020).
Federal: The US Department of Treasury issued final regulations (TD 9944) on the credit under IRC §45Q for carbon oxide sequestration which reduce the recapture period to three years while retaining the basic approach of the proposed regulations. The final regulations address (1) secure geological storage; (2) contracting with third parties for the disposal, injection or utilization of qualified carbon oxides and allowing third parties to claim the IRC § 45Q credits; (3) the definition of the recapture period for carbon oxides that are not properly captured; and (4) clarification on "utilization" of captured carbon. The final regulations are effective upon publication in the Federal Register. For more on this development, see Tax Alert 2021-0198.
Minnesota: The Minnesota Department of Revenue announced that it will follow most of the guidance issued by the IRS on Sept. 10, 2020 related to the examination process for eligible Large Business and International taxpayers that claim the federal Credit for Increasing Research Activities, except for a requirement for auditors to receive approval before requesting information not listed in Part V of the federal guidance. It also will allow the use of generally accepted accounting principles expenditures for calculating the Minnesota R&D credit. Additional R&D Credit Documentation guidance provides information about changes taxpayers must make to federal calculations when computing the Minnesota credit. For example, subtracting all U.S. ASC 730 Financial Statement R&D In-house Research performed outside Minnesota from the Computation of Adjusted ASC 730 Financial Statement R&D under the IRS Directive Appendix C, Line 9 and including only wages attributed to qualified research conducted within Minnesota for the Adjusted ASC 730 Financial Statement R&D Wage Detail under the IRS Directive Appendix D. Further, the state may request documentation for each tax period for which the taxpayer used the federal directives for Minnesota purposes, such as a copy of the completed and signed Certification Statement filed with the IRS and all U.S. ASC 730 Financial Statement R&D In-House Research performed outside of Minnesota. Minn. Dept. of Rev., Updated IRS Guidance for Credit for Increasing Research Activities (Jan. 26, 2021).
COMPLIANCE & REPORTING
California — Multiple Cities including San Francisco and Los Angeles: The business tax filing deadlines for both the cities of San Francisco and Los Angeles are approaching fast. Tax Alert 2021-0199 discusses the filing deadlines for these cities. Further, California taxpayers should not assume that San Francisco and Los Angeles are the only municipalities in the state that impose local business license taxes and fees. Nearly every California municipality does so, with the levies varying widely from locality to locality both in tax bases and amounts. For example, the City of Santa Monica also imposes a gross receipts tax, but the returns and payments are due by August 31. For businesses active in California, especially in the larger municipalities, it is a best practice to assume that some type of business license tax applies. Information about these special and unique city taxes can usually be obtained from the relevant municipality's webpage.
Puerto Rico: The Puerto Rico Department of State (PRDOS) has established an amnesty period from Jan. 19, 2021 to Feb. 17, 2021, to file corporate annual reports for tax years before 2020, including 2019 reports, and pay limited liability company (LLC) annual fees for tax years before 2020. If corporate annual reports are filed or LLC annual fees paid during the amnesty period, penalties and additional fees will not be imposed. For entities that have a payment plan, the amnesty will apply to the remaining balance. Amounts already paid will cover the costs of the annual reports for corporations and the annual fees for LLCs. For additional information on this development, see Tax Alert 2021-0196.
PAYROLL & EMPLOYMENT TAX
Multistate: State unemployment insurance (UI) benefit payouts in connection with the COVID-19 emergency have been substantial, placing an unprecedented strain on the state UI trust funds. As experienced during the financial collapse of 2008–2009, several states requested and received federal UI loans to meet the unprecedented demand for UI benefits. Under the Coronavirus Aid, Relief, and Economic Security Act, federal UI loans taken in 2020 are interest free if repaid by the end of 2020 and interest begins to accrue in 2021. However, the recently enacted Consolidated Appropriations Act, 2021, extends the period that interest will not accrue to March 14, 2021. Under federal law, if all or a portion of a federal UI loan received in 2020 by a state is still outstanding after two years, employers in those states are required to make payments toward the outstanding federal UI loan balance in the form of a Federal Unemployment Tax Act (FUTA) credit reduction that increases the FUTA taxes employers pay. For the states that began borrowing in 2020, and still have an outstanding loan balance as of Nov. 10, 2022, a FUTA credit reduction of 0.3% would go into effect in 2022. As of Jan. 23, 2021, 22 jurisdictions have applied for, and been approved to receive, federal UI loans. For more on this development, see Tax Alert 2021-0202.
Missouri: The Missouri Department of Revenue has released Form 5841, Affidavit for Withholding Based on Primary Work Location. Form 5841 was published to facilitate proposed regulations under 12 CSR 10-2.109 that allow 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 2021-0183.
Rhode Island: The Rhode Island Division of Taxation has extended through March 19, 2021 the emergency regulations that temporarily waive the requirement that employers withhold Rhode Island state income tax from the wages of employees temporarily working within the state solely due to the COVID-19 emergency. For more on this development, see Tax Alert 2021-0173.
Connecticut: Proposed bill (HB 5645), if enacted, would impose a tax on social media provider companies on the apportioned annual gross revenue derived from social media advertising services in the state. HB 5645 was introduced on Jan. 27, 2021.
Connecticut: Proposed bill (HB 6187), if enacted, would impose a 10% tax on annual gross revenues derived from digital advertising services in Connecticut for any business with annual world-wide gross revenues exceeding $10 billion. HB 6187 was introduced on Jan. 29, 2021.
Oregon: Proposed bill (HB 2392) would impose a tax on the privilege of engaging in the business of selling taxable personal information at retail in Oregon. The tax would be computed at a rate of 5% of the gross receipts a person generates from such sales. The term "taxable personal information" would mean "personal information accumulated from the Internet." If enacted, this tax would apply to sales of taxable personal information that occur on or after Jan. 1, 2022. HB 2392 was introduced on Jan. 19, 2021.
Washington: Proposed bill (HB 1303) would impose a 1.8% tax on the gross income of every person in Washington engaging in the business of making sales of personal data or exchanging personal data for consideration. If enacted, this provision would take effect Jan. 1, 2022. HB 1303 was introduced Jan. 19, 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 Colorado income tax law generally conforms to changes to the Internal Revenue Code (IRC) as they occur (known as a "rolling conformity" tax law). In response to the CARES Act, HB 20-1420 was enacted in July 2020, requiring taxpayers to add back the difference between interest deducted for federal income tax purposes under the CARES Act amendments to IRC § 163(j) and interest that would have been deducted under IRC § 163(j) as it existed before the enactment of those amendments. HB 20-1420 also limited the Colorado NOL deduction to 80% of taxable income notwithstanding that a provision of the CARES Act amended the IRC provision to which Colorado automatically conformed which allowed federal NOLS to offset 100% of taxable income. The Colorado Department of Revenue by regulation instructed that Colorado's tax law incorporates changes to the IRC on a prospective basis only. The regulations prohibit Colorado taxpayers from applying the retroactive change provided by the CARES Act to the treatment of Qualified improvement property (QIP) as eligible for 100% bonus depreciation.
2 Emagine Entertainment, Inc. et al. v. Mich. Dept. of Treas., Nos. 350376 and 350881 (Mich. Ct. App. Nov. 19, 2020).