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February 23, 2021

State and Local Tax Weekly for February 12

Ernst & Young's State and Local Tax Weekly newsletter for February 12 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.


Maryland legislature overrides governor's vetoes, enacts new tax on digital advertising and expands sales and use tax to digital goods

On Feb. 12, 2021, the Maryland legislature overrode Maryland Governor Larry Hogan's vetoes of HB 732, which imposes a new tax on digital advertising, and HB 932, which extends the state's existing sales and use tax to the sale of digital goods. Each of the bills were originally approved by the Legislature during its 2020 session.

Tax on digital advertising: Effective for tax year 2021, HB 732 imposes a new tax on the annual gross revenues derived from digital advertising in the state. The tax applies a graduated rate that increases in increments based on a person's globalannual revenues, as follows:

  • 2.5% of the assessable base for persons with global annual gross revenues of $100 million through $1 billion
  • 5% of the assessable base for persons with global annual gross revenues of more than $1 billion through $5 billion
  • 7.5% of the assessable base for persons with global annual gross revenues of more than $5 billion through $15 billion
  • 10% of the assessable base for persons with global annual gross revenues exceeding $15 billion

HB 732 defines "annual gross revenues" as income or revenue from all sources, before any expenses or taxes, computed according to generally accepted accounting principles.

Persons with annual gross revenues derived from digital advertising services within Maryland of at least $1 million must file a return with the Maryland Comptroller of Treasury on or before April 15 of the next year. Persons that reasonably expect their annual gross revenues from digital advertising services in the state to exceed that amount must file a declaration of estimated tax on or before April 15 of that year and pay quarterly estimated taxes. Persons subject to the tax must maintain records of the digital advertising services they provide in the state to substantiate the basis for their apportionment and calculation of the taxes owed on digital advertising gross revenues.

In anticipation of the veto override of HB 732, bills (SB 787 and HB 1200) introduced Feb. 5 and Feb. 8, 2021, respectively, would exempt from this new tax advertising on digital interfaces owned or operated by or on behalf of a broadcast entity and a news media entity.

Tax on digital goods: HB 932 applies Maryland's existing 6% sales and use tax to digital products, such as digital code, streaming, music, ring tones, e-books and audio books, movies, online newspapers and cable, satellite and pay-per-view television programming. Retail sales of digital code or digital projects are presumed to be made in the state in which the customer's tax address is located. Although the effective date listed in HB 932 is July 1, 2020, it will take effect March 15, 2021. Under the Maryland Constitution, an overridden bill is effective the later of its stated effective date or 30 days after the date of the Legislature's override of the governor's veto of the legislation.

For additional information on this development, see Tax Alert 2021-0343.

Alabama modifies its corporate income tax, exempts certain COVID-19-related payments from state tax, adopts an elective pass-through entity level tax

On Feb. 12, 2021, Governor Kay Ivey signed into law HB 170, which makes changes to Alabama's corporate income tax law, exempts certain COVID-19-related payments from state income and financial institution excise taxes and establishes a new elective entity-level state tax on a pass-through entity (e.g., a partnership, an LLC or an S corporation) (collectively, PTE). Refunds related to these changes will not be granted or paid for tax years ending before Jan. 1, 2020.

HB 170 makes the following corporate income tax changes:

  • Adopts a single sales factor apportionment formula and repeals the throwback rule, effective for tax years beginning on or after Jan. 1, 2021
  • Decouples from the federal global intangible low-taxed income (GILTI) provisions under IRC §951A and effectively disallows the IRC §250 deduction for GILTI, retroactively applicable to tax years beginning after Dec. 31, 2017
  • Decouples from the capital contribution provisions of IRC §118(b)(2), applicable to contributions by Alabama or any political subdivision made on or after Dec. 23, 2017
  • Modifies Alabama's tax treatment of the IRC §163(j) limitation on deductions for business interest expense, effective for tax years beginning on or after Jan. 1, 2021

HB 170 also provides that effective for tax years beginning on or after Jan. 1, 2021, a PTE can elect to be taxed at the entity level. The election, once made, is binding for that year and all subsequent tax years; an electing PTE can revoke its election by submitting a form to the Alabama Department of Revenue.

Lastly HB 170 exempts from Alabama income and financial institution excise taxes:

  • Income resulting from the forgiveness of Paycheck Protection Program loans
  • Small Business Administration subsidy payments
  • Emergency economic injury disaster loans (EIDL) grants and targeted EIDL advances
  • Grants to shuttered venues

Expenses paid with these funds (e.g., payroll, utilities, mortgage interest, rent) will be deductible for Alabama income tax purposes to the same extent they are deductible for federal income tax purposes.

Amounts received from the state Coronavirus Relief Fund is not recognized as income for Alabama income and financial institution excise tax purposes.

Additional COVID-19-related amounts excluded from state income tax include:

  • Federal tax credits or advance refund payments
  • Qualified Emergency Federal Aid Grants
  • Qualified disaster relief payments received as a result of the Presidential Proclamation on Declaring a National Emergency Concerning the Novel Coronavirus Disease (COVID-19) Outbreak
  • Principal or interest payments incurred by an employer on any qualified education loan that is excluded from the employee's federal gross income under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (P.L. 116-136) (CARES Act), as amended by the Taxpayer Certainty and Disaster Relief Tax Act of 2020.

For more on these developments, see Tax Alert 2021-0360.


Federal: On Jan. 19, 2021, the IRS published final carried interest regulations under IRC §1061, as well as related partnership and holding period provisions (the Final Regulations). The Final Regulations generally follow the approach taken by proposed regulations published on Aug. 14, 2020,with several notable exceptions. For additional information on this development, see Tax Alert 2021-0291.

Indiana: The Indiana Department of Revenue (IN DOR) issued guidance on recent federal income tax changes in the Coronavirus Aid, Relief, and Economic Security Act of 2020 (P.L. 116-136) (CARES Act) and the Consolidated Appropriations Act (P.L. 116-260) the state does and does not follow due to the state tax law's current IRC conformity date of Jan. 1, 2020. Changes Indiana's tax law follows include: (1) the exclusion of Paycheck Protection Program (PPP) loan forgiveness from adjusted gross income; (2) the deductibility of expenses paid with PPP loan proceeds; and (3) the federal income tax treatment of qualified emergency financial aid grants, US Treasury Program Management Authority Loans, emergency economic injury disaster loans (EIDL) grants and targeted EIDL advances. Federal tax law changes not followed by Indiana's state income tax law include those regarding the business interest expense deduction limitation under IRC §163(j) (note: Indiana decoupled from IRC §163(j) in 2018 and allows a full deduction for any interest paid as existed prior to enactment of the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA)); depreciation of qualified improvement property; net operating losses; the suspension of the excess loss limitation rules under IRC §461(l); business meal deductions; among other changes. With respect to certain federal tax law extenders enacted in 2020, IN DOR stated that the Indiana income tax law recognizes the 2020 federal income tax treatment of such items unless there is an Indiana-specific provision requiring different treatment. The state, however, will not recognize the tax treatment of such items in tax years 2021 and later. Also, while Indiana conforms to federal regulations in effect on Jan. 1, 2020, IN DOR states that Indiana does not conform to federal regulations adopted since Jan. 1, 2020 including many of the regulations adopted in response to the TCJA. The guidance includes information on how to report differences where Indiana has decoupled from federal treatment. Ind. Dept. of Rev., Information Bulletin #119 (Feb. 2021).

Louisiana: The Louisiana Department of Revenue issued guidance on the implications of various federal COVID-19 relief measures for Louisiana state income tax purposes. For example, Paycheck Protection Program loan forgiveness is not subject to Louisiana state income tax; however, federal pandemic unemployment compensation benefits, frontline worker rebates, and main street recovery program funds are subject to Louisiana state income tax. La. Dept. of Rev., Press Release "Some federal COVID-19 relief benefits are subject to state income tax" (Feb. 11, 2021).

New Jersey: The New Jersey Division of Taxation (NJ DOT) issued guidance on the income reporting and accounting methods for a non-US corporation included as a member of New Jersey combined return where a non-US corporate member of the combined group only uses the International Financial Reporting Standards (IFRS) for financial and tax purposes. Under New Jersey law, the income of a non-US corporation must be determined based on accounting principles generally accepted in the US or in a manner that reasonably approximates income under the New Jersey Corporation Business Tax. The NJ DOT said it "recognizes that IFRS qualifies as one of the 'generally accepted accounting principles' for purposes of the net deferred tax liability deduction computation (as outlined in TB-96)", and that it will "accept IFRS as an acceptable accounting method that 'reasonably approximates income' if that is the only method of accounting the specific entity uses." The NJ DOT noted that it is in process of drafting regulations on this issue. N.J. Div. Taxn., TB-101 "Income Reporting and Accounting Methods of Non-U.S. Corporations Members of a Combined Group" (Feb. 8, 2021).

New Jersey: Governor Phil Murphy (D) announced that New Jersey will "follow the federal government's lead in allowing Paycheck Protection Program (PPP) loans to be tax exempt at the state level and enable recipients to deduct business expenses that were paid with the tax-exempt loan proceeds, thereby enhancing the tax benefits of the loans." Governor Murphy said that for the 2020 tax season, related expenses paid for with PPP loans will be deductible for both Gross Income Tax (GIT) and Corporation Business Tax (CBT) purposes and forgiven loans will be excluded from being subject to either tax. N.J. Gov., Press Release "Governor Murphy, Treasurer Muoio Announce Plan to Follow Federal Government's Lead to Enhance the Benefits of Paycheck Protection Program Loans" (Feb. 9, 2021).

Rhode Island: An out-of-state corporation that provides healthcare technology services through a web-based platform to network retail pharmacies and call centers should source its services revenue from Rhode Island customers in proportion to the percentage of retail pharmacy and call center cases where the recipient of the services receives the benefit in Rhode Island. The Rhode Island Division of Taxation reasoned that the creation of a case is directly linked to a patient's visit to a retail pharmacy to receive one or more services, thus the location of the retail pharmacy cases can be used to determine where the services were delivered. Similarly, a call center's location could be used to determine where the services were delivered under the applicable sourcing provisions, 280-RICR-20-25-9.8(K)(4)(b). If the corporation cannot source the services revenue based on cases, it can reasonably approximate the amount of services revenue based on where the corporation paid its fees to network retail pharmacies and call centers. R.I. Div. of Taxn., Ruling Request No. 2021-01 (Feb. 4, 2021).


Hawaii: The Hawaii Department of Taxation (HI DOT) announced that it will begin enforcing new temporary administrate rules (HI Admin. Rules §§18-251-1-01 to -02) on peer-to-peer car-sharing marketplaces on March 1, 2021. The temporary rules define "rental motor vehicle lessors" to include peer-to-peer car-sharing marketplaces. As a rental motor vehicle lessor, peer-to-peer car-sharing marketplaces must report and pay Hawaii's rental motor vehicle surcharge tax on any rental car transactions carried out on the provided marketplace. Even though the temporary rules took effect Feb. 9, 2021, the HI DOT extended the enforcement date to March 1, 2021 to give affected taxpayers sufficient time to prepare to file and pay taxes on these transactions. Peer-to-peer car-sharing marketplaces must register for a license prior to March 1, 2021; first Rental Motor Vehicle Surcharge Tax returns are due April 20, 2021. The temporary rules sunset Aug. 9, 2022. HI Dept. of Taxn., Announcement No. 2021-04 (Feb. 10, 2021).

Illinois: The Illinois Department of Revenue (IL DOR) adopted regulations 1 establishing new collection requirements for online marketplace facilitators and remote sellers. These new regulations, which took effect Jan. 1, 2021, address collection and reporting obligations imposed by the "Leveling the Playing Field for Illinois Retail Act".2 The regulations significantly alter the structure of the Illinois sales tax regime as it applies to remote retailers and marketplace facilitators. Nominally, the regulations were promulgated to impose the requirements of the state and local retailers' occupation tax on out-of-state sellers, similar to those imposed on sellers that were physically present in Illinois. Nevertheless, the regulations allow sellers that maintain a physical presence in the state, but fulfill their orders from outside of the state, to continue to collect tax at the state use tax rate of 6.25%, without collecting any additional local tax. Remote retailers or marketplace facilitators that do not have a physical presence in the state must administer and collect the 6.25% sales and use tax, as well as all local taxes, accounting for the hundreds of local tax rates imposed throughout the state. At this time, the major sales tax systems used by marketplace facilitators and remote retailers, as well as the IL DOR's own systems, are not equipped to handle the changes required under the regulations. Although legal challenges are expected, failure to comply with the regulations at this time may result in significant under-collection of Illinois local taxes and the imposition of understatement penalties. For more on this development, see Tax Alert 2021-0376.

Maine: The Maine Revenue Services (MRS) announced that, continuing through 2021, it will not consider the presence of one or more employees in the state, who commenced working remotely from Maine during the state of emergency and due to the COVID-19 emergency, to constitute substantial physical presence for Maine sales and use tax registration and collection duty purposes. MRS had previously announced this nexus relief would be available through 2020. Maine Rev. Serv., Maine Tax Alert, Vol. 31, Issue 3 (Feb. 2021).


Alabama: New law (HB 192) expands and extends the credit under the Alabama Jobs Act and reinstates and expands the Growing Alabama Act. The Alabama Jobs Act is expanded to allow an incentivized company engaged in pharmaceutical, biomedical, medical technology or medical supplies manufacturing, or related research and development, to claim an annual jobs credit against utility taxes. The credit equals 4% of wages paid to eligible employees during the prior year. A transferred investment credit under the Alabama Jobs Act can be used to offset the transferee's state license tax liability for project agreements entered into after Jan. 1, 2021 (unused credit may be carried forward for five years). The annual cap on credits available under the Alabama Jobs Act increases to $325 million in 2021 and $350 million in 2022. HB 192 also reestablishes the Growing Alabama Act, which provides a tax credit for cash contributions to certain local economic development organizations. The Growing Alabama Act now allows credits to be claimed against the state portion of the financial institution excise tax and the insurance premiums tax. HB 192 caps the amount of funding available under the Growing Alabama Act to $20 million per calendar year. Credits under both the Alabama Jobs Act and the Growing Alabama Act will be denied for applications that are not approved on or before July 31, 2023. Ala. Laws 2021, HB 192, signed by the governor Feb. 12, 2021.

Rhode Island: Governor Gina Raimondo extended the suspension of the period "within which a business must submit its certification for tax credit under the Qualified Jobs Incentive Act contained in R.I. Gen. Laws § 44-48.3-7(a)." The suspension, which began on March 9, 2020, now runs through March 11, 2021. RI Gov., Executive Order 21-12 (Feb. 10, 2021).


New Jersey: A state statute requiring certain partnerships to pay a $150 per-partner fee (capped at $250,000) when filing information returns does not violate the Dormant Commerce Clause because the fee defrays the cost of the state's processing and review of partnership and partner returns, which is a "purely intrastate activity." In so holding, the New Jersey Superior Court, Appellate Division found that the limited partnership challenging the statute did not establish that the fee discriminates against, or imposes an excessive burden on, interstate commerce, and did not show that the fee was not fairly related to the state's processing and review of partnership and partner returns. Ferrellgas Partners, LP v. N.J. Dir., Div. of Taxn., No. A-3904-18T1 (N.J. Super. Ct., Appel. Div., Jan. 13, 2021) (unpublished).


Arizona: The Arizona 2021 state unemployment insurance (SUI) tax rates range from 0.08% to 20.6%, significantly up from 0.05% to 12.85% for 2020. The 2021 new employer rate continues at 2.0%. The SUI taxable wage base continues at $7,000 for 2021. For more on this development, see Tax Alert 2021-0316.

Maine: The Maine Revenue Services (MRS) confirmed that the statutory residence requirements for income tax purposes remain unchanged, even during the COVID-19 emergency. A statutory resident is an individual who maintained a permanent place of abode in Maine for the entire tax year and spent more than 183 days of the year in the state (unless the individual is in the U.S. Armed Forces). A place of abode is not considered permanent if it is only maintained during a temporary stay in Maine for the accomplishment of a particular purpose. An individual who is domiciled outside of Maine but maintains a second home in Maine at which they stay during part of the year would not meet this exception, even during COVID-19. Maine Rev. Serv., Maine Tax Alert, Vol. 31, Issue 3 (Feb. 2021). For more on this development, see Tax Alert 2021-0372.

Montana: The Montana Department of Revenue (MT DOR) issued a reminder that employees are subject to Montana state income tax on wages paid to them if they resided in the state for any portion of 2020 and provided teleworker services from their Montana homes. This requirement applies to temporary work assignments within the state due to COVID-19 and even if the employee normally provides services to an employer based in another state. Absent guidance from the MT DOR to the contrary, this guidance also applies in 2021. For additional information on this development, see Tax Alert 2021-0359.

New York: Governor Andrew Cuomo signed into law S1197, which provides that unemployment insurance benefits paid in connection with the COVID-19 emergency will not be charged to employer accounts for experience rating purposes. The noncharging provision also applies to reimbursing employers (nonprofit and governmental employers) to the extent allowed under federal law. The law is effective March 12, 2020 and is repealed after Dec. 31, 2021. For additional information on this development, see Tax Alert 2021-0289.


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.


1 See 86 Ill. Admin. Code Sections 131.101-131.180 .

2 Ill. Pub. Act. 101-0031, Art. 5 as amended by Ill. Pub. Act 101-0604, Art. 15, sec. 15-20 (codified at 35 ILCS 185/5-1 to 185/5-97).