March 8, 2021
State and Local Tax Weekly for February 26
Ernst & Young's State and Local Tax Weekly newsletter for February 26 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.
Wisconsin Governor signs legislation updating state's IRC conformity and providing tax relief
On Feb. 18, 2021, Wisconsin Governor Evers signed 2021 Wisconsin Act 1 (AB 2), which updates the Internal Revenue Code (IRC) conformity for the state's income tax law. Wisconsin's state income tax law is tied to the IRC as it exists as of a specified date, a so-called static conformity state. In addition, the law decouples from various federal provisions. The latest conformity language, which is in new statutory subsection Wis. Stat. 71.22(4)(m), generally conforms Wisconsin's income tax law to the IRC as amended on Dec. 31, 2020, effective for tax years beginning after Dec. 31, 2020.1 Therefore, Wisconsin's income tax law does not conform to IRC amendments that were enacted after Dec. 31, 2020, unless otherwise specified.2
Wisconsin decouples from the following IRC amendments that were enacted before Dec. 31, 2020:3
For tax years beginning after Dec. 31, 2020, Wisconsin's income tax law conforms to the following federal provisions:
For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2021, Wisconsin's income tax law generally conforms to the IRC as amended to Dec. 31, 2017.5 This conformity includes the following IRC amendments:6
Lastly, Wisconsin income tax will not apply to income received from the state through the coronavirus relief fund if that income is used for any of the enumerated purposes, including grants to small businesses, lodging industry grants, tourism grants program and ethanol industry assistance, among other purposes. Income from the foregoing programs is included in federal taxable income. The legislation provides for a subtraction adjustment on the appropriate line of the Wisconsin state tax return using the description "Wisconsin COVID-19 Program Funds." Expenses paid for with proceeds from these programs and deducted for federal income tax purposes do not have to be added back to compute Wisconsin taxable income.
Taxpayers that have already filed their 2020 Wisconsin state income tax returns should consider amending those returns if they have included the foregoing items in computing their Wisconsin taxable income.
For more on this development, see Tax Alert 2021-0411.
California: New law (SB 88) repeals a law enacted in 2020 that required the Franchise Tax Board to develop for legislative consideration a comprehensive plan (including proposed statutory language and estimated program administration costs) for a California Economic Improvement Tax Voucher Program. Vouchers would have been considered a prepayment of personal income or corporation taxes aimed at providing California with immediate resources and would have been allowed to be taken as a credit against such taxes for future tax years. Cal. Laws 2021, ch. 8 (SB 88), signed by the governor Feb. 23, 2021.
Idaho: The U.S. Supreme Court (Court) will not review the Idaho Supreme Court's ruling in Noell Industries in which it held that gain from an out-of-state corporation's sale of its interest in a limited liability company is not apportionable to Idaho because the gain constitutes nonbusiness income from a passive investment. Noell Industries, Inc. v. Idaho State Tax Comn., No. 46941 (Idaho S.Ct. May 22, 2020), petition for cert. denied, Idaho State Tax Comn. v. Noell Industries, Dkt. No. 20-947 (U.S. S. Ct. Feb. 22, 2021).
New Mexico: The New Mexico Taxation and Revenue Department (NM TRD) issued guidance on the taxability of COVID relief payments, loans and grants for New Mexico taxpayers. In regard to Paycheck Protection Program (PPP) loans, the NM TRD said both personal and corporate income tax treatment conforms to the federal rules. According to the NM TRD, since proceeds from PPP loans are not included in federal taxable income, they are not taxable income for New Mexico income tax purposes either, even when forgiven. Grants received through Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136 (CARES Act), however, "are likely taxable as income for most recipients." The NM TRD explained that "each grant has its own rules and may have exclusions from tax in some cases." The NM TRD noted that PPP loans and most grants received through CARES Act funding are not gross receipts subject to the state's gross receipts tax. N.M. Taxn. & Rev. Dept., Bulletin B-100.37 Taxability of COVID Relief Payments (Feb. 2021).
New York: A New Jersey-domiciled couple are subject to New York personal income tax as statutory residents for tax years 2012 and 2013 because they (1) maintained a permanent place of abode in the state through ownership of a New York vacation home and (2) were present in the state for more than 183 days when the husband primarily worked out of his New York City office. The New York State Tax Appeals Tribunal (TAT) found the vacation home was a permanent place of abode since its physical characteristics (e.g., year round climate control, attached apartment with a separate entrance and key) made it suitable for year-round habitation, the couple owned the home, and they occasionally exercised their residential interest by staying there on vacation. Distinguishing Gaied,7 the TAT rejected the couple's argument focusing on the meaning of "residence," noting that the question was whether they had a "residential interest," with "interest" indicating a legal share in something. Additionally, the TAT agreed with amicus curiae that Gaied abrogates the holding in previous cases to the extent they state that mere maintenance of a dwelling, without more, is enough to deem a dwelling to be a permanent place of abode. Matter of Obus and Coulson, DTA No. 827736 (N.Y. Tax App. Trib. Jan. 25, 2021).
Texas: The Texas Comptroller of Public Accounts (Comptroller) issued guidance on treatment of Paycheck Protection Program (PPP) loan amounts that are forgiven and excluded from federal taxable income under the state's franchise tax law. According to the Comptroller's guidance, Texas conforms to the Internal Revenue Code (IRC) in effect for tax years beginning on Jan. 1, 2007 and therefore, does not include changes made to the IRC thereafter. Accordingly, the Comptroller concluded that Texas's franchise tax law does not conform to the federal income tax exclusion for forgiven Paycheck Protection Program (PPP) loan amounts. The Comptroller further explained that receipts from forgiven PPP loan amounts are sourced to the legal domicile of the bank that made the loan (which the Comptroller stated, in most cases, is not likely to result in a Texas receipt) and "that qualifying expenses can be deduced as Cost of Goods Sold or Compensation, regardless of whether the forgiven loan amounts are exempt from being included in income." The Comptroller noted, however, that legislation being considered by the Texas Legislature (HB 1195) if enacted would exempt the forgiven PPP loan amounts from being includable in revenue for purposes of the Texas franchise tax. Tex. Comp. of Pub. Accts., Tax Policy News - Paycheck Protection Program Loans Forgiveness and Franchise Tax (Feb. 2021).
West Virginia: New law (HB 2359) for corporate net income tax purposes updates West Virginia's date of conformity to the Internal Revenue Code of 1986, as amended (IRC) to the IRC in effect on Dec. 31, 2020. No amendment to IRC made on or after Jan. 1, 2021, will be given any effect. This change is effective retroactive to the extent allowable under federal income tax law. W.V. Laws 2021, HB 2359, signed by the governor on Feb. 24, 2021.
West Virginia: New law (HB 2358) for individual income tax purposes updates West Virginia's date of conformity to the Internal Revenue Code of 1986, as amended (IRC) to the IRC in effect on Dec. 31, 2020. No amendment to IRC made on or after Jan. 1, 2021, will be given any effect. This change is effective retroactive to the extent allowable under federal income tax law. W.V. Laws 2021, HB 2358, signed by the governor on Feb. 24, 2021.
SALES & USE
Minnesota: A multistate home improvement retail store (retailer) is not entitled to offset its sales tax liability by the amount of sales tax attributable to uncollectible debts that resulted from customer purchases made on retailer-branded private label credit cards offered by a third-party bank. The Minnesota Supreme Court found the retailer is not eligible for the offset under Minnesota's bad debt statute (Minn. Stat. §297A.81) because it was not a guarantor and did not essentially act as guarantor of the account holders' debts through its revenue sharing agreement with the third-party bank. Rather, the unpaid debts from customer transactions made on the credit cards were owed to the third-party bank. Menard, Inc. v. Minn. Comm. of Rev., A20-0241 (Minn. S.Ct. Feb. 24, 2021).
New York: A corporation's acquisition of the assets of a limited liability company (LLC) included the purchase of tangible personal property (e.g., leasehold improvements, computer equipment and software, furniture and fixtures, telephone equipment) subject to New York sales tax, but a portion of these purchases qualify for an exclusion or exemption from sales tax. In so holding, the New York Division of Tax Appeals (NY DTA) reviewed the Purchase Agreement and found that it did not support the corporation's assertion that the Purchase Agreement is the legal document that controls the form of its acquisition of the LLC (i.e., a transfer of the intangible equity interests of a LLC from the seller). Rather, the limited documents, in the record, memorializing the acquisition "clearly show that the [corporation] received title to [the LLC's] assets as part of the acquisition." This finding is also supported by the method in which the corporation reported the LLC's assets on its books and records (i.e., one general ledger that commingled the LLC's assets with those of the corporation and its other subsidiaries). The NY DTA also found that the corporation sustained its burden of proof that the transfer of customer software is exempt from sales tax and the transfer of leasehold improvements (i.e., customization of leased office space to meet its business needs) are excluded from sales tax. In the Matter of TheStreet.com, Inc. (a/k/a The Street, Inc.), DTA No. 828467 (N.Y. Div. of Tax App. Feb. 4, 2021).
Wisconsin: New law (2021 Wisconsin Act 1 (AB 2)) modifies Wisconsin's Wayfair nexus standard for remote sellers. Under prior law, nexus was created if the remote seller met either of the following thresholds in the current or previous calendar year: 1) more than $100,000 in sales to Wisconsin customers or 2) 200 or more separate transactions with Wisconsin customers. AB 2 eliminates the second, 200-or-more-transactions threshold. The new law took effect Feb. 19, 2021. Wis. Laws 2021, Act 1 (AB 2), signed by the governor Feb. 18, 2021.
California: New law (SB 87) appropriates $2.075 billion to fund the California Small Business COVID-19 Relief Grant Program (program). The program provides grants up to $25,000 to qualified small businesses and nonprofit organizations with up to $2.5 million in annual gross revenue and eligible nonprofit cultural institutions. The law specifies the eligibility criteria for small businesses and nonprofits, lists entities that are not eligible for the grant program, the criteria for grant priority and eligible uses for grant funds, among other provisions. For tax years 2020—2029, specified grant allocations are excluded from gross income, including grants funded by the program. Grant amounts may be recaptured if the California Office of Small Business Advocate determines the grantee failed to meet the criteria for a qualified small business. Cal. Laws 2021, ch. 7 (SB 87), signed by the governor on Feb. 23, 2021.
New Jersey: New law (AB 1135) requires tax-exempt hospitals to pay community service contributions, establishes the "Nonprofit Hospital Community Service Contribution Study Commission" and reinstates a property tax exemption for nonprofit hospitals with on-site for-profit medical providers. N.J. Laws 2021, AB 1135, enacted Feb. 22, 2021. For additional information on this development, see Tax Alert 2021-0463.
South Dakota: New law (SB 41) revises certain requirements for contesting certificates of assessment. A taxpayer that has been issued a certificate of assessment, may in writing request a hearing before the secretary if the taxpayer believes the assessment is based upon a mistake of fact or error of law (italics indicates new). The written request must be received by the secretary within 60 days from the date the certificate of assessment was mailed to the taxpayer by certified mail. If the taxpayer's written request for a hearing is not received within that 60-day period, no court has jurisdiction over a suit to contest the certificate of assessment. If the written request is sent through US mail, the date of the US postmark will be considered the date received by the secretary. S.D. Laws 2021, S.B. 41, signed by the governor Feb. 18, 2021.
Wisconsin: New law (2021 Wisconsin Act 1 (AB 2)) extends from 90 to 180 days the deadline for reporting to the Wisconsin Department of Revenue any changes or corrections made to returns filed with the IRS. The new statute also applies the 180-day reporting deadline for any partnership adjustments as defined under IRC §§ 6241 and 6225 after a final determination by the IRS under the federal partnership audit program. The new law took effect Feb. 19, 2021. Wis. Laws 2021, Act 1 (AB 2), signed by the governor Feb. 18, 2021.
Wisconsin: New law (2021 Wisconsin Act 2 (AB 3)) modifies Wisconsin's tax-option (S) corporation provisions. For tax years beginning on or after Jan. 1, 2018, tax-option (S) corporations are allowed to elect to be taxed at the entity level; partnerships can make such an election for tax years beginning on or after Jan. 1, 2019. Under AB 3, tax-option (S) corporations that make the entity-level tax election under Wis. Stat. 71.365(4m)(a) are entitled, or subject, to the following: (1) the Wisconsin 30% or 60% long-term capital gain exclusion under Wis. Stats. 71.05(6)(b)9 or 9m; (2) a $500 limitation on capital loss deductions; and (3) an exemption from underpayment interest if the tax-option (S) corporation had zero income or franchise tax liability in the prior year, regardless of the amount of its Wisconsin net income in the current tax year. This law first applies to tax years beginning after Dec. 31, 2019. Wis. Laws 2021, Act 2 (AB 3), enacted Feb. 18, 2021.
PAYROLL & EMPLOYMENT TAX
Multistate: To contain the outbreak of COVID-19 in the US, many state and local governments temporarily closed nonessential businesses and issued "stay-at-home" orders, creating an historic disruption to the US workforce. Most states and local governments have responded to the emergency by expanding their paid leave mandates; waiving certain reporting requirements and expanding unemployment insurance benefits; among other relief. In EY's publication, COVID-19: state guide to payroll and employment tax provisions, which has been updated through Feb. 22, 2021, many of these state and local payroll and employment tax developments are summarized and categorized by state and topic for ease in navigation.
Illinois: The 2021 Illinois state unemployment insurance (SUI) experience-rated tax rates will range from 0.675% to 6.875%, an increase of 0.5% from the range of 0.625% to 6.825% for 2020. The SUI taxable wage base also increases to $12,960 for 2021, up from $12,740 for 2020. New employers pay at 3.175% for 2021, up from 3.125% for 2020. For more on this development, see Tax Alert 2021-0416.
New Jersey: The Superior Court of New Jersey Appellate Division vacated a case pleading that the Jersey City payroll tax is unconstitutional. The case was remanded to the lower court because New Jersey employers could be subject to both the Jersey City and Newark payroll tax for the same employees, violating the Commerce Clause of the US Constitution that protects taxpayers from double taxation on the same base. The court stated that these New Jersey payroll taxes could operate constitutionally if both provided a procedure and remedy for an aggrieved taxpayer to demonstrate it was being taxed twice for the same employee. A resolution to the constitutional issue is expected within 45 days of its referral back to the lower court. For more on this development, see Tax Alert 2021-0406.
COMPLIANCE & REPORTING
Oregon: Temporary rule (OAR 150-317-1020) requires an entity that is a common owner of more than one unitary group to file annually as a member of the unitary group that realizes the greatest amount of Oregon corporate activity tax (CAT), after certain exclusions and without deduction for any cost inputs or labor costs attributable to the subtraction in ORS 317A.119. This temporary rule is effective March 1, 2021 through Aug. 27, 2021. Ore. Dept. of Rev., OAR 150-317-1020 (approved Feb. 22, 2021).
Virginia: The Virginia Department of Taxation in an advisory opinion said that loan proceeds from federal Paycheck Protection Program loans are not gross receipts for purposes of computing the state's Business, Professional, and Occupation License (BPOL) taxes imposed by some Virginia counties and cities, regardless of whether any part of such loans are forgivable. Va. Dept. of Taxn., PD 21-12 Exemption : Loan Proceeds - Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), Paycheck Protection Program (Feb. 9, 2021)
Tuesday, March 30. The many faces of the marketplace facilitator: How sales and use tax rules aimed at marketplaces have affected multiple industries (1 pm ET). Since the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc. nearly three years ago, sales and use tax developments have been dominated by the imposition of new requirements on marketplace facilitators. While "traditional" marketplace providers struggle to comply with these requirements, businesses in "non-traditional" retail industries are often surprised that the new laws are broad enough to include their operations. This webcast will feature leaders from Ernst & Young LLP's Sales and Use Tax Practice, who will discuss how these laws, designed to capture sales made by smaller marketplace sellers, have also created multiple new compliance obligations for larger businesses that are not primarily engaged in retail activities. During the webcast, the following topics will be discussed: (1) the latest state and local developments related to remote sellers and marketplace facilitators; (2) how to identify who is responsible for collecting and remitting the tax; (3) establishing new policies, systems and processes to manage marketplace requirements; and (4) leading practices for dealing with state revenue agencies. 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 Wisconsin Tax Bulletin No. 212 (Feb. 2021).
2 See Wis. Stat. 71.22(4)(m)3.
3 AB 2 repealed references to specified sections of the federal tax law (see, e.g., Wis. Stat. 71.22(4)(c) to (4)(i)). The historic coupling and decoupling referenced in those provisions have been moved to new Wis. Stat. 71.22(4)(m)2 and (m)3. This Tax Alert will focus on the more recent statutory coupling and decoupling to the IRC now codified in Wis. Stat. 71.22(4)(m)2 and (m)3.
4 Wis. Stat. 71.22(4)(m)4.
5 Id. 71.22(4)(L)1.
6 Id. 71.22(4)(L)3.
7 Matter of Gaied v. New York State Tax Appeals Trib. 22 NY3d 592 (2014).