February 16, 2021
State and Local Tax Weekly for February 5
Ernst & Young's State and Local Tax Weekly newsletter for February 5 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.
New Jersey clarifies how state law change redefining "taxpayer" to include a combined group will impact Corporation Business Tax returns
The New Jersey Division of Taxation (NJ DOT) has released another in a series of technical bulletins on law changes enacted in November 20201 that made technical corrections and substantive changes to reform legislation enacted in 2018 under the Corporation Business Tax Act (CBTA).2 Technical Bulletin 100, The Combined Group as a Taxpayer under the Corporation Business Tax Act (TB-100) (Jan. 25, 2021), highlights the impact on Corporation Business Tax returns because of the change to the CBTA's definition of "taxpayer." The change, which adds a combined filing group (along with each constituent taxable member of the group) to the definition of taxpayer, took immediate effect and applies retroactively to privilege periods ending on and after July 31, 2019.
TB-100 also includes the NJ DOT's view on how the new definition of "taxpayer" will affect the application of P.L. 86-272, which limits the imposition of state taxes on net income of a taxpayer that has nexus with a state, if certain conditions are met. The NJ DOT stated that the inclusion of a combined group in the definition of a "taxpayer" means that the entire combined group will be deemed to have exceeded the protections of P.L. 86-272 if the activities of a single group member exceed those protections. In the NJ DOT's view, the activities of one or more members in furtherance of the combined group's unitary business must be used to determine whether the combined group itself exceeds the protections of P.L. 86-272. The NJ DOT's interpretation in TB-100 is consistent with the policy it has previously stated in TB-86(R) and TB-89(R).
The NJ DOT's broad interpretation of the application of this federal law to expand the test not only to the actual member but to the entire combined group may conflict with federal law, raising possible constitutional questions under the Supremacy Clause. Moreover, the NJ DOT's interpretation of P.L. 86-272 will likely limit (and perhaps entirely eliminate) any sales factor benefit an individual group member may derive from the so-called Joyce rule, which is explicitly codified into the CBTA in N.J.S.A. 54:10A-4.7. The NJ DOT's guidance in this part of TB-100 may go beyond, and be inconsistent with, the statute's language.
For additional information on this development, see Tax Alert 2021-0295.
Colorado: The Colorado Department of Revenue announced that final rules on the treatment of holding companies in combined group reports have been adopted. New Rule 39-22-303-1, clarifies that S.B.19-233, which addressed the Colorado Court of Appeals decisions in Oracle Corp. v. Department of Revenue and Agilent Technologies, Inc. v. Department of Revenue apply to tax periods beginning on and after Sept. 1, 2019. New Rule 39-22-303(11)(f) explains the manner in which the de minimis standard for filing a combined report in Colo. Rev. Stat. § 39-22-303(11)(f) will be uniformly applied to taxpayers. The rule defines "de minimis" to mean less than $100,000 of property and payroll, combined. Lastly, Rule 39-22-303(12)(c), which addressed corporation without property and payroll factors, has been repealed as it is not consistent with Colo. Rev. Stat. § 39-22-303(8), for tax years beginning on or after Sept. 1, 2019. The rules take effect March 2, 2021.
Iowa: The Iowa Department of Revenue (IA DOR) issued guidance on the state's nonconformity to the Federal Consolidated Appropriations Act of 2021 (CAA). Iowa follows the federal income tax treatment of not taxing forgiven Paycheck Protection Program (PPP) loan amounts for tax year 2019 (fiscal year filers), 2020 and beyond. Iowa partially follows the federal income tax treatment with respect to the deductibility of expenses paid with PPP loans. For tax years 2020 and beyond, the state follows the federal income tax treatment, allowing such expenses to be deducted, but does not allow the deduction for tax year 2019 (fiscal year filers). With respect to Economic Injury Disaster Loan (EIDL) Grants and Targeted EIDL Advances, Iowa conforms to the income exclusion, as well the deductibility of related expenses, for tax year 2020 and beyond. For tax year 2019 (fiscal year filers), such amounts are included in a taxpayer's Iowa income to the same extent they would have been included in federal income before the enactment of the CAA. The IA DOR also said that during the 2019 tax year, the state does not conform to the treatment of qualified disaster relief contributions, which allows corporations an additional charitable deduction and increased limitation for qualified disaster relief contributions. The state will, however, conform to this provision starting in 2020. IA Dept. of Rev., "Iowa Nonconformity: The Federal Consolidated Appropriations Act of 2021" (Jan. 19, 2021).
Missouri: Final rules (12 CSR 10-2.076, -2.255, and -2.260) provide guidance on Missouri's allocation and apportionment provisions for corporate taxpayers, nonresident shareholders of S corporations and nonresident partners of partnerships, and apportionment provisions for broadcasters, applicable beginning on or after Jan. 1, 2020. For corporate income tax purposes, the final rule (12 CSR 10-2.076) replaces all methods and tests previously used in Missouri to apportion and allocate corporate income, including the "source of income test" and the Multistate Tax Compact's three-factor apportionment formula. All income is presumed apportionable unless it is clearly nonapportionable under the U.S. Constitution or Missouri law; the final rule requires consistency in how a taxpayer classifies income as apportionable or nonapportionable each year (any deviation requires taxpayer disclosure). Additionally, the final rule describes when another state has jurisdiction to subject the taxpayer to net income tax and permits the Missouri Director of Revenue to require a taxpayer to provide evidence supporting an assertion that the taxpayer is subject to tax in another state. The final rule also defines what receipts are includible in the receipts factor and provides receipts factor guidance for certain circumstances (i.e., hedging transactions and cost-plus fixed fee contracts, among others, as well as items specifically excluded). Further, the final rule addresses how to approximate the ultimate beneficiary when such information is not reasonably determinable, when the state or taxpayer can seek alternative apportionment, when a transaction is considered to be in the taxpayer's regular course of its trade or business, and what constitutes a unitary business. The final rule for allocation and apportionment for nonresident shareholders of S corporations and nonresident partners of partnerships (12 CSR 10-2.255) interprets statutory provisions (Mo. Rev. Stat. §§ 143.421 and 143.471) for purposes of determining the adjusted gross income (AGI) from a shareholder's pro rata share of items of S corporation income, gain, or deduction and the AGI of a nonresident partner from the partnership's items of income, gain, loss or deduction. The final rule also defines Missouri allocated income and Missouri apportioned income and describes what constitutes S corporation income and partnership income derived from Missouri sources. Lastly, the final rule provides a special apportionment method for broadcasters (12 CSR 10-2.260) by sourcing receipts from broadcast advertising services and licenses of broadcasting intangibles based upon market shares. The final rules generally were adopted as proposed, with a modification to the definition of "broadcaster". The final rules take effect March 31, 2021. Mo. Dept. of Rev., 12 CSR 10-2.076, -2.255, and -2.260 (Mo. Register, Vol. 46, No. 3, Feb. 1, 2021).
Minnesota: On Jan. 26, 2021, Minnesota Governor Tim Walz announced his proposed COVID-19 Recovery Budget (proposal) for the next two years. The proposal would increase the corporate franchise tax rate from the current flat rate of 9.8% to 11.25% beginning in tax year 2021. The proposal also would tax foreign income when it is repatriated to the US. This treatment would effectively reverse legislation enacted in 2019, which decoupled Minnesota law from federal changes to deferred foreign income enacted under the Tax Cuts and Jobs Act and allowed corporations (and individuals) to subtract foreign income included on their federal return (see Tax Alert 2019-1107). Under the proposal, taxpayers repatriating IRC § 965 income would include those amounts in Minnesota income subject to the state's dividend-received deduction. The current-year inclusion for global intangible low-taxed income also would be subject to the dividend-received deduction. The proposal also would modify individual income tax brackets, decreasing taxes from some while increasing tax for others, including a new bracket for high wage earners. Lastly, the proposal would impose an additional tax of 1.5% on capital gains and dividend income for individuals, trusts and estates with over $500,000 up to $1 million of income and 4% on those with income over $1 million. For additional information on this development, see Tax Alert 2021-0227.
South Dakota: New law (SB 40) for bank franchise tax purposes updates the state's date of conformity to the Internal Revenue Code to Jan. 1, 2021 (from Jan. 1, 2020). This change takes effect July 1, 2021. S.D. Laws 2021, SB 40, signed by the governor Feb. 1, 2021.
Texas: Final revisions to 34 Tex. Admin. Code § 3.586 make changes to the franchise tax nexus rules. Under the final revision, gross receipts to determine economic nexus means all revenue reportable by a taxable entity on its federal return, without deduction for the cost of property sold, materials used, labor performed, or other costs incurred. A taxpayer can rebut the presumption if it was registered for a use tax permit. Tex. Comp. of Pub. Accts., 34 TAC §3.586 (Tex. Reg. Feb. 5, 2021).
SALES & USE
Illinois: The Illinois Department of Revenue issued guidance explaining what qualifies for a retroactively extended exemption from the Use Tax Act, the Service Use Tax Act, the Service Occupation Tax Act, and the Retailers' Occupation Tax Act for aircraft repair and refurbishment. Exempt items include materials, parts, equipment, components, and furnishings incorporated into or upon an aircraft as part of an aircraft's modification, refurbishment, completion, replacement, repair or maintenance (but not such items used for aircraft engines or power plants, regardless of whether these are installed in an aircraft) and certain consumable supplies for these purposes (e.g., adhesive, tape, sandpaper, general purpose lubricants, cleaning solution, latex gloves and protective films). The guidance explains the criteria a person performing the repair or refurbishment of aircraft must meet to qualify for the exemption. Further, the exemption does not include aircraft operated by certain commercial air carriers, and it applies continuously from its Jan. 1, 2010 enactment date through its extended termination date of Dec. 31, 2024. Taxpayers cannot claim a credit or refund for taxes paid as a result of the disallowance of the exemption on or after Jan. 1, 2015, before its reenactment effective Feb. 5, 2020. Ill. Dept. of Rev., Info. Bulletin FY 2021-15: Sales and Use Tax Exemption for Aircraft Repair and Refurbishment Extended (Jan. 2021).
Louisiana: An entity's sales of daily catering services to the students and staff of a non-profit school in Orleans Parish are exempt from sales and use tax under a uniformly applicable state statute, which overrode a New Orleans ordinance subjecting such transactions to tax. In so holding, the Louisiana Board of Tax Appeals found that New Orleans' taxing powers under its Home Rule Charter are subordinate to specific tax clauses in the Louisiana Constitution, and must yield when they are inconsistent with these constitutional provisions. Healthy Course, LLC v. City of New Orleans, No. L00807 (La. Bd. of Tax App., Local Div., Jan. 13, 2021).
Massachusetts: Governor Charlie Baker (R), as part of his FY2022 budget proposal (HB 1) (Proposal), has again put forward a sales tax "modernization" initiative that includes a "real-time" sales tax remittance requirement. This requirement, if enacted, would impact both retailers and financial services companies that process credit card transactions. The Proposal would augment a recently enacted law requiring accelerated remittance of sales and use taxes, room occupancy excise taxes and local option meals excise taxes (i.e., optional local taxes on restaurant meals). For more on this development, see Tax Alert 2021-0319.
New Mexico: The New Mexico Taxation and Revenue Department (NM TRD) issued guidance describing the imposition of gross receipts tax upon, and the registration and filing requirements for, marketplace providers and marketplace sellers. The NM TRD explained that under the state's nexus standard, an individual or business that lacks a physical presence in the state is engaging in business in the state if it has at least $100,000 of taxable gross receipts in the prior calendar year from sales, leases and licenses of tangible personal property, sales of licenses and sales of services or licenses for use of real property, sourced to New Mexico. "Gross receipts" only include gross receipts that are not otherwise exempt or deductible. In determining whether the threshold has been met, a marketplace provider's gross receipts include (1) all receipts collected for sales, leases and licenses facilitated for marketplace sellers that are sourced to the state, including if the payment received from the buyer is paid or transferred to the marketplace seller; and (2) fees charged by the marketplace provider to the marketplace seller. The guidance also describes who are marketplace providers and who are marketplace sellers and explains their filing requirements, exemptions and deductions that may apply to marketplace sellers (e.g., isolated and occasional sales), and supporting documentation. The NM TRD noted that the state currently uses origin-based sourcing, but effective July 1, 2021, it moves to destination-based sourcing. N.M. Taxn. Rev. Dept., FYI-206 "Gross Receipts Tax and Marketplace Sales" (Jan. 2021).
New York: A corporation's usage agreement in conjunction with a laser machine provided to dermatologists to treat skin conditions is not subject to sales and use tax because such an agreement is not a lease for sales tax purposes. Applying various case law, an administrative law judge (ALJ) for the New York Division of Tax Appeals rejected the New York Division of Taxation (NY DOT) argument that the revenues derived from the usage agreements were taxable because they involve a transfer of possession of tangible personal property for consideration in the form of per treatment charges. Instead, the ALJ concluded that the usage agreements do not constitute a lease for sales tax purposes, reasoning that the usage agreements are not identified as leases, contain no lease language, are not structured as leases (i.e., stating the laser is "consigned" to the dermatologist), and the corporation's charges under the usage agreements are for "treatment codes" and not explicitly for laser rental. While moot, the ALJ noted that similar to the ruling in SSOV,3 the primary function of the sales under the usage agreements were to manage the non-medical aspects of providing medical treatments using the laser, which are not subject to tax. Additionally, the ALJ rejected the corporation's arguments that (1) the usage agreement was not a lease of the laser it did not transfer "exclusive possession" to the dermatologists, and (2) the laser treatments should be treated as the sale of a nontaxable intangible or exempt drugs and medicines. Matter of Strata Skin Sciences, Inc., DTA No. 828704 (N.Y. Div. Tax App. Jan. 21, 2021).
South Carolina: A home improvement big box retailer that acted both as a retailer and a contractor when installing real property improvements for customers, engaged in retail sales when, through installation contracts, it sold the installation contract materials at retail prices to customers as the final users and consumers of such materials. As such, the retailer should have remitted sales tax based on the retail selling price at the time of sale. In reaching these conclusions, an administrative law judge (ALJ) for the South Carolina Administrative Law Court found that even though the retailer acted as a retailer at the time customers purchased the items for installation contracts and later acted as a contractor in overseeing the installation of the materials, the transactions remain retail sales. "The fact that [the retailer] acts in both capacities at distinct times during the installation contract transaction does not … affect the nature of the underlying transaction … ." The ALJ rejected the retailer's interpretation of the Dual Business Regulation of the South Carolina Department of Revenue (SC DOR) (S.C. Code Regs. 117-324) that it would allow it to pay use tax on the wholesale cost of materials unlike any other contractor, finding that such interpretation would lead to absurd results and is contrary to the plain meaning of the regulation and statutory scheme. Additionally, the ALJ rejected the SC DOR's argument that the taxable transaction is the "deemed sale" of the materials by the retailer to itself upon withdrawal, use, or consumption during the performance of installation contracts, finding this argument moot since the retail sale occurs upon the customer's purchase of materials. Lastly, the ALJ upheld the SC DOR's assessment of interest on the outstanding tax liability but declined to assess negligence penalties based on the complexity of the issues presented. Lowe's Home Center, LLC v. S.C. Dept. of Rev., No. 14-ALJ-17-0552-CC (S.C. Admin. Law Ct. Dec. 11, 2020).
Nevada: A new regulation promulgated by the Nevada Tax Commission (LCB File No. R001-20) adopts property tax assessment requirements for certain types of aircraft by county assessors. The regulation generally only applies to aircraft assessed by a county assessor, and addresses the following issues: (1) how to determine if an aircraft has a taxable situs in Nevada; (2) exclusions from taxable situs for certain service members and certain foreign air carriers; (3) whether an aircraft qualifies for the business inventory exemption from property tax, with documentation requirements; (4) written statement requirements for aircraft with information that allows the county assessor to determine value; (5) how to allocate an aircraft's taxable value among two or more applicable jurisdictions; (6) the requirement that aircraft be assessed for a full fiscal year, without prorated taxes if removed from the county before the fiscal year's end; (7) the exclusion from the partial abatement of property taxes for certain increases in assessed value that result in a greater portion of an aircraft's taxable value to be allocated to Nevada; and (8) defines various terms. Nev. Tax Comn., LCB File No. R001-20 (filed Jan. 21, 2021).
California: San Francisco's Proposition C voter initiative entitled the "Universal Childcare for San Francisco Families Initiative," which imposes an additional tax on certain commercial rents to fund early childcare and education, did not require a supermajority vote for passage and, therefore, succeeded with 51% of the votes cast in the June 2018 election. In affirming the lower court, the California Court of Appeal (Court) adopted the reasoning of the ruling in All Persons,4 noting that it has been "fully agree[d] with and endorse[d] by … Fresno Building Healthy Communities,"5 and rejected the taxpayers' argument that Proposition 13 (Cal. Const. Art. XIII A, § 4), Proposition 218 (Cal. Const. Art. XIII C, § 2), and the San Francisco City Charter require a supermajority vote for passage. The Court also rejected the argument that an elected official's participation in the initiative process (i.e., by submitting the written "Notice of Intent to Circulate Petitions" for the proposition, turning in signed initiative petition pages, signing ballot arguments in the proposition's favor) caused Propositions 13 and 218 to apply to voter initiatives. Howard Jarvis Taxpayers Assn. et al. v. City and Cnty. of San Francisco, No. A157983 (Ca. Ct. App., 1st App. Dist., Div. 5, Jan. 27, 2021).
PAYROLL & EMPLOYMENT TAX
Arizona: The Arizona Department of Revenue announced that due to technical issues with its AZTaxes.gov website, a 60-day waiver from the electronic filing mandate is provided for the filing of withholding tax returns. During the 60-day waiver period, employers may file their annual and quarterly withholding returns by paper. In addition, the Feb. 1, 2021 due date for 2020 Forms A1-R, Arizona Withholding Reconciliation Return, W-2, 1099, and A1-APR, Arizona Annual Payment Withholding Tax Return, is extended by 30 days to March 1, 2021. For additional information on this development, see Tax Alert 2021-0270.
Hawaii: The Hawaii Department of Labor & Industrial Relations announced that the state unemployment insurance (SUI) tax rates for 2021 will increase significantly to range from 2.4% to 6.6% on Rate Schedule H, up from 0.0% to 5.6% on Rate Schedule C for 2020. Rate Schedule H is the highest SUI rate schedule allowed under state law. Rate Schedule C had been in effect for several years prior to 2021. For additional information on this development, see Tax Alert 2021-0251.
Kansas: On Jan. 27, 2021, Kansas Governor Laura Kelly announced that in consideration of the COVID-19 emergency, an executive order has been issued that effectively relieves certain employers of the liability for state income tax withholding shortages in 2020. On the same day, the governor also announced that due to the enactment of SB 14, which she approved on Jan. 25, 2021, special COVID-19 unemployment insurance relief provisions are extended and/or revoked. (See Tax Alert 2021-0230.)
Philadelphia, PA: As a result of the COVID-19 emergency, the Philadelphia Department of Revenue (Department) anticipates an increased volume in requests for 2020 wage tax refunds. To make the refund process easier for Philadelphia taxpayers, the Department announced it is making available an employer-requested refund option. Under this option, and for tax year 2020 only, Philadelphia employers can submit a wage tax refund request on behalf of a group of their nonresident employees. For additional information on this development, see Tax Alert 2021-0239.
Arkansas: A furniture and electronics retailer's rent-to-own leases with weekly or semimonthly terms are subject to the short-term rental tax because they are both for "a period of less than 30 days" based on the plain statutory language (Ark. Code Ann. § 26-63-301) and rental agreement language. In so holding, the Arkansas Supreme Court (Court) agreed with the Arkansas Department of Finance Administration that for weekly and semimonthly rentals, the initial rental period or lease term and each renewal are separate periods under the "short-term rental" definition and a customer's renewal of the lease does not change the rental or lease period length. The Court rejected the retailer's argument that the transactions were not leases or rentals for purposes of the tax, and further rejected the argument that these transactions, in which customers almost always renewed their leases beyond the initial term, were nontaxable long-term agreements for the customer to acquire the merchandise with a customer option to terminate the lease and relinquish possession. Rent-A-Center East, Inc. v. Walther, 2021 Ark. 10 (Ark. S.Ct. Jan. 28, 2021).
Wednesday, February 24. Domestic tax quarterly webcast series: a focus on state tax matters (1:30 pm ET). For our first quarterly webcast in 2021, we welcome Douglas L. Lindholm, President & Executive Director of the Council On State Taxation (COST), who will join us to discuss important state tax policy developments, as well as federal tax developments that could affect state and local taxes. Topics to be addressed include: (1) state and local tax proposals and trends that are emerging in the upcoming 2021 state legislative sessions; (2) the continuing impact of the COVID-19 pandemic on state and local tax revenues and how current economic trends are affecting state tax policy; (3) state tax considerations of working from home, particularly for nonresident income taxation, payroll and employment tax matters; (4) US federal and state judicial and legislative developments affecting remote workers and their impact on employer business taxes; and (5) state and local judicial, legislative and administrative developments from the past quarter affecting taxation. 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.
2 Prior NJ DOT guidance on the Nov. 2020 law change is discussed in Tax Alert 2021-0150.
3 Matter of SSOV '81 Ltd. d/b/a People Resources (Tax App. Trib. Jan. 19, 1995).
4 City and County of San Francisco v. All Persons Interested in the Matter of Prop. C (2020) 51 Cal.App.5th 703.
5 City of Fresno v. Fresno Building Healthy Communities (2020) 58 Cal.App.5th 884.