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

TOP STORIES

Wisconsin appeals court allows dividends received deduction for distribution received from foreign limited partnership treated as a corporation for federal income tax purposes

On Feb. 25, 2021, the Wisconsin Court of Appeals (court) affirmed an order of the circuit court that the Wisconsin Tax Appeals Commission (WTAC) correctly held that a corporation could claim a Wisconsin dividends received deduction (DRD) for certain distributions that it received from a foreign limited partnership (LP) in which it held an interest and which, critically, was treated as a corporation for federal income tax purposes.¹

The court affirmed the WTAC's analysis, which began with examining the question of whether LP was a corporation for purposes of the Wisconsin DRD. The WTAC had concluded that LP's classification for federal income tax purposes was paramount in determining whether it qualified as a "corporation" under Wisconsin law. By electing to be treated as a corporation for US federal income tax purposes, LP was also treated as a corporation for Wisconsin tax law purposes. As such, the court affirmed that the recipient corporation's interest in LP was deemed to be treated as common stock of a corporation, thereby making LP's distributions dividends for which the recipient corporation could claim a Wisconsin DRD.

The court focused its analysis on the "contrary to guidance issue" upon which the WTAC had based its decision. Wis. Stat. 73.16(2)(a) provides that, "in the course of any determination, or in the course of any proceeding appealing any determination, the [Wisconsin D]epartment [of Revenue (WI DOR)] shall not take a position that is contrary to any rule promulgated by the [WI DOR] that was in effect during the period related to the determination or that is contrary to any guidance published by the [WI DOR] prior to that period and not subsequently retracted, altered, or amended by the [WI DOR] or the [Wisconsin] legislature or by a final and conclusive decision of the [WTAC] or [the Wisconsin] courts." The WTAC had pointed to previously published WI DOR guidance, namely its Publication 119, which states that an LLC electing to be treated as a corporation for federal income tax purposes is treated as such for Wisconsin purposes, including the LLC interest being treated as common stock. The WTAC concluded there was no basis to treat the LP interest differently; as such, the WI DOR had to adhere to its own guidance in effect during the audit period as required under Wis. Stat. 73.16(2)(a). The court agreed with the WTAC and concluded that the WI DOR could not advance its current position on the DRD because that interpretation is contrary to the pertinent language of its own guidance. In addition, the court concluded that the WI DOR failed to develop its argument that it could contradict its own guidance.

For additional information on this development, see Tax Alert 2021-0469.

INCOME/FRANCHISE

Arkansas: New law (HB 1361) conforms to the federal tax treatment of certain loans, payments, and expenses related to COVID-19 relief programs. The law excludes from Arkansas gross income (1) the proceeds from forgiven Paycheck Protection Program (PPP) loans, (2) Economic Injury Disaster Loan (EIDL) grants and EIDL advances, (3) grants for shuttered venue operators, and (4) payments received under the Coronavirus Food Assistance Program (CFAP). In addition, taxpayers may deduct allowable expenses paid with PPP loan proceeds, EIDL grants and CFAP funds. The law further provides that these excluded amounts are includable for purposes of calculating net operating loss carryovers. These changes are effective for tax years beginning on or after Jan. 1, 2019. Ark. Laws 2021, Act 248 (HB 1361), signed by the governor on March 2, 2021.

Connecticut: New law (HB 6516) prohibits the Connecticut Department of Revenue Services from considering the activities of an employee who worked remotely from the state during the 2020 tax year solely due to the COVID-19 emergency in determining whether an employer has nexus with the state for purposes of any Connecticut tax, including corporation business and pass-through entity taxes. This relief only applies to 2020. Conn. Laws 2021, HB 6516, signed by the governor March 4, 2021. See also, Conn. Dept. of Rev. Serv., News "Connecticut State Senate Passes H.B. No. 6516 and Immediately Transmits the Legislation to Governor Lamont" (March 5, 2021).

Georgia: New law (HB 265) updates the state's date of conformity to the Internal Revenue Code to Jan. 1, 2021 (from March 27, 2020). This change applies to tax years beginning on or after Jan. 1, 2020. In regard to Paycheck Protection (PPP) loan amounts, the Georgia Department of Revenue said the state has adopted the federal income tax treatment of amounts related to PPP loan forgiveness (concluding that such amounts are not taxable for Georgia income tax purposes) and the deductibility of expenses paid with PPP loan proceeds. Ga. Laws 2021, Act 3 (HB 265), signed by the governor Feb. 24, 2021; Ga. Dept. of Rev., "Income Tax Federal Tax Changes" webpage (last updated Feb. 25, 2021).

Massachusetts: The Massachusetts Department of Revenue (MA DOR) adopted a final regulation (830 CMR 62.5A.3) setting forth the sourcing rules that apply to income earned by a non-resident employee who telecommutes on behalf of an in-state business from a location outside the state due to the COVID-19 pandemic and explains the parallel treatment that will be accorded to resident employees with income tax liabilities in other states that have adopted similar sourcing rules. Under the rule, compensation received for services performed by a nonresident who, immediately prior to the declaration of the Massachusetts COVID-19 state of emergency, was an employee performing such services in Massachusetts but is now performing such services outside the commonwealth due to the COVID-19 pandemic will continue to be treated as Massachusetts source income subject to the commonwealth's personal income tax and personal income tax withholding. Residents who were performing such services outside the commonwealth prior to the pandemic but are now performing the services inside the commonwealth due to the pandemic will be eligible for a credit for income tax paid to the state where the employee was previously performing the services. The rule applies to sourcing wage income attributable to employee services performed March 10, 2020 through 90 days after the governor ends the COVID-19 state of emergency. Mass. Dept. of Rev., 830 CMR 62.5A.3: Massachusetts Source Income of Non-Residents Telecommuting due to the COVID-19 Pandemic (final rule adopted March 5, 2021).

New Jersey: The New Jersey Division of Taxation (NJ DOT) issued guidance on the impact changes to the state's Corporation Business Tax Act in recent years have on mergers and acquisitions (M&A) in the context of the utilization of prior net operating loss conversion carryovers (PNOLs) and new post-allocation net operating losses and post-allocation net operating loss carryovers (NOLs) among members of the combined reporting group. According to the NJ DOT guidance, for mergers entered into for privilege periods ending on and after July 31, 2019 and entered into before Nov. 4, 2020, PNOLs and NOLs survive the merger or acquisition between member of a group that already join in filing a New Jersey combined return. If the M&A involves entities that had not previously joined in filing a New Jersey combined return, the survival of the PNOLs and NOLs post-merger/acquisition depends on the facts and circumstances and whether the corporations (or separate combined groups) subsequently join in filing a New Jersey combined return together. For M&A transactions occurring on or after Nov. 4, 2020, PNOLs and NOLs survive the merger or acquisition if the parties involved are, or will be, members of the same New Jersey combined group return within the first group privilege period following the date of the merger. As explained by the NJ DOT, if there is merger or acquisition in Year 1 between two corporations/combined groups that had not previously filed together, in order for the PNOLs and NOLs to survive, the corporations/combined groups must join in filing a New Jersey combined group return together no later than for the Year 2 privilege period. If approval of a merger or acquisition is delayed by federal or other state regulatory authorities, the corporation must notify the NJ DOT of its plan to join in a New Jersey combined group filing upon approval of the merger or acquisition by such regulatory authority(ies). Once the merger or acquisition is approved, the corporation must notify the NJ DOT of such approval within 180 days; the NJ DOT will then issue a stamped certificate attesting that the PNOLs and NOLs are not extinguished. The NJ DOT said it is creating a procedure taxpayer will be able to use to satisfy the notification requirements and to receive the certificate. N.J. Div. of Taxn., TB-102 "Net Operating Losses (NOLs) and Post Allocation Net Operating Losses (PNOLs) with Certain Mergers & Acquisitions" (March 2, 2021).

Tennessee: The Tennessee Department of Revenue (TN DOR) updated its Franchise & Excise Tax FAQs to explain the Tennessee excise (income from business entities) tax treatment of the proceeds from Paycheck Protection Program (PPP) loans and state COVID-19 related grants (last updated Feb. 1, 2021). The TN DOR said that for Tennessee excise tax purposes PPP loan forgiveness is excluded from gross income and eligible expenses paid with PPP loan proceeds can be deducted. Payments received under the Tennessee Business Relief Program and the Supplemental Employer Recovery Grant Program (both of which used funds received from the federal government under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) and, as such are subject to federal income taxation) are subject to Tennessee's franchise and excise taxes but not the business tax (based on gross receipts).

SALES & USE

Alabama: New law (HJR 5) extends until amended or revoked the sales and use tax exemption for gross receipts from the sale of parts, components and systems that become a part of a fixed or rotary wing military aircraft or certified transport category aircraft that undergoes conversion, reconfiguration or general maintenance, if the address of the aircraft for FAA registration is outside the state. The exemption does not apply to local sales tax unless previously exempted by local law or approved by a local governing board. Without this action, the exemption would have expired on May 30, 2022. Ala. Laws 2021, Act 28 (HJR 5), approved March 3, 2021.

Arkansas: New law (HB 1033) modifies the definition of marketplace facilitator by removing extraneous reference to digital magazines. The law also clarifies that the sale of a car wash operator's sale of a car wash through an automatic car wash, car wash tunnel or self-service bay are exempt from sales and use tax and defines "self-service bay". These changes are effective on the first day of the calendar quarter following the effective date of the act. Ark. Laws 2021, Act 144 (HB 1033), signed by the governor on Feb. 24, 2021.

Connecticut: New law (HB 6516) prohibits the Connecticut Department of Revenue Services from considering the activities of an employee who worked remotely from Connecticut during the tax year solely due to the COVID-19 emergency in determining whether an employer has nexus with the state for purposes of imposition of Connecticut's sales and use tax. This provision applies to the tax year commencing Jan. 1, 2020. Conn. Laws 2021, HB 6516, signed by the governor March 4, 2021. See also, Conn. Dept. of Rev. Serv., News "Connecticut State Senate Passes H.B. No. 6516 and Immediately Transmits the Legislation to Governor Lamont" (March 5, 2021).

BUSINESS INCENTIVES

Connecticut: New law (HB 6514) authorizes the Connecticut Department of Economic and Community Development (CT DECD) to enter into an agreement to provide incentives to qualified data centers locating, and making a minimum investment, in Connecticut. The incentives include sales and use tax and property tax exemptions for eligible qualified data center costs for expenditures made on or after July 1, 2021 for the development, acquisition, construction, rehabilitation, renovation, repair or operation of a facility to be used as a qualified data center. Examples of eligible qualified data center costs include the cost of land, buildings, site improvements, engineering and design services, and data center equipment acquisition. A data center agreement shall: (1) be for a period of 20-years (30 years if it meets certain investment and/or location criteria); (2) include a 5-year qualifying period; (3) include a payment of an annual fee by the qualified data center (to be determined annually by the CT DECD commissioner, capped at $50,000); (4) include a detailed description of the project; (5) provide for the period to which the agreement applies; and (6) include a claw back provision for the assessment and payment of exempt tax if the CT DECD commissioner determines the qualified data center is not meeting the terms of the agreement. The law also requires developers and owners to enter into a host municipality fee agreement with the municipality in which the qualified data center facility is located before the facility construction, rehabilitation, renovation or repair can begin. Lastly, qualified data centers meeting certain investment and/or location criteria would be exempt from any financial transactions tax or fee the state may impose on trades of stock, bonds, derivatives and other financial products. (The state currently does not impose a financial transaction tax.) These provisions take effect July 1, 2021. Conn. Laws 2021, Pub. Act 21-1 (HB 6514), signed by the governor March 4, 2021.

COMPLIANCE & REPORTING

Arkansas: Reminder: Effective March 15, 2021, all Arkansas franchise taxes will be paid to the Arkansas Secretary of State. Akr. Dept. of Fin. and Admin., Notice: Franchise Tax (March 2021).

California: The California Franchise Tax Board (CA FTB) announced in its January 2021 Tax News that certain business taxpayers must file the new IRS Form 1099-NEC with the CA FTB. The new requirement applies to (1) taxpayers that paid $600 or more during tax year 2020 to a California full-year or part-year resident or (2) transactions that occurred in California.² Additionally, the payments must have been made: (1) to someone who was not the taxpayer's employee; (2) for services or cash purchases of fish for resale in the course of the taxpayer's trade or business (including government agencies and nonprofit organizations); or (3) to an individual, partnership, estate or, in some cases, a corporation. Due to the requirement's late implementation, the CA FTB stated that taxpayers will be granted a reasonable-cause exception for all late filings for reporting required payments made during tax year 2020.³ For additional information on this development, see Tax Alert 2021-0492.

Massachusetts: The Massachusetts Department of Revenue (MA DOR) posted FAQs on reporting income from Paycheck Protection Program (PPP) loan forgiveness and Coronavirus Relief Fund grants. MA DOR stated that PPP loan forgiveness income is not subject to the corporate excise tax but is taxable for Massachusetts personal income tax purposes (including unincorporated businesses reporting income on Schedule C, partners in a partnership and S corporation shareholders). The FAQs explain how to report this income. Income from COVID-19 related grants are taxable under Massachusetts law. Such grants include those awarded by the Massachusetts Growth Capital Corporation, the commonwealth or municipalities. For Massachusetts individual income tax purposes, debt relief subsidies paid by the federal Small Business Administration and federal Economic Injury Disaster Loan grants are includable in taxable gross income. Business expenses paid with PPP loan proceeds or COVID-19 related grants that are deducted on federal income tax returns can also be deducted on Massachusetts returns. Mass. Dept. of Rev., Tax Filing Season Frequently Asked Questions (March 5, 2021).

PAYROLL & EMPLOYMENT TAX

Connecticut: New law (HB 6516) prohibits the Connecticut Department of Revenue Services from considering the activities of an employee who worked remotely from the state during the 2020 tax year solely due to the COVID-19 emergency in determining whether an employer has nexus with the state for purposes of any Connecticut tax, including the imposition of withholding tax. The new law also allows Connecticut residents to claim a personal income tax credit for income tax paid to another state if the state applies a "convenience of the employer rule" against nonresidents who regularly work in the state and the state taxed the Connecticut resident's income while the resident was working remotely from Connecticut for the tax year, including when "obligated by necessity to work remotely from [Connecticut]" due to COVID-19-related restrictions. In addition, the law allows a Connecticut resident to claim a credit for income tax paid to another state if that state requires nonresident employees to pay nonresident income tax on income earned while the nonresident employee was working remotely from Connecticut due to the COVID-19 pandemic. This credit applies if, immediately before March 11, 2020, the employee was working in the other state. Conn. Laws 2021, HB 6516, signed by the governor March 4, 2021. See also, Conn. Dept. of Rev. Serv., News "Connecticut State Senate Passes H.B. No. 6516 and Immediately Transmits the Legislation to Governor Lamont" (March 5, 2021). For more on this development, see Tax Alert 2021-0533.

Pennsylvania: The Pennsylvania calendar year 2021 employer state unemployment insurance (SUI) experience tax rates continue to range from 1.2905% to 9.9333%. The new employer rate remains at 3.6890% for non-construction employers and 10.2238% for construction employers. Pennsylvania employers with a negative reserve ratio of greater than 20% as of the computation date may elect to have their negative balance reduced to negative 20% of the average annual taxable payroll. This election must be made between January 1 and April 30 of the rate year. The employer is assigned the maximum experience-based SUI rate for the current and next two years from the date of election. Care should be taken in making this election as it is irrevocable after 10 days. For more on this development, see Tax Alert 2021-0458.

Oregon: The Oregon 2021 state unemployment insurance tax rates range from 1.2% to 5.4% on Rate Schedule IV, up from 0.7% to 5.4% on Rate Schedule II for 2020 and 0.9% to 5.4% on Rate Schedule III for 2019. A For more on this development, see Tax Alert 2021-0450.

Washington: New law (SB 5061) reduces the Washington 2021 state unemployment (SUI) tax rates for experience-rated employers effective Dec. 18, 2020. Employer SUI tax rates for 2021 now range from 0.2% to 6.0%, down from an original range of between 0.23% and 6.0%, and up from a range of between 0.10% and 5.7% for 2020. For additional information on this development, see Tax Alert 2021-0464.

MISCELLANEOUS TAX

California: The real property transfer tax of the City and County of San Francisco (city), which is imposed at graduated tax rates based on the consideration or value of the realty sold, does not violate the Equal Protection Clause of the U.S. Constitution. In upholding the tax, a California Court of Appeal (court) agreed with the lower court that the city's decision to treat the sale or transfer of a higher valued property differently from the sale of a lower valued property was rational and based on factors other than ability to pay (e.g., higher cost to the city to audit, and to fairly allocate the costs of servicing, higher valued property). Further, unlike the graduated gross receipts tax invalidated in Stewart Dry Goods,⁴ the city taxes all property transfers of the same consideration or value equally. Ashford Hospitality et al. v. City and County of San Francisco, No. A159181 (Cal. Ct. App., 1st App. Dist., March 1, 2021).

Minnesota: The Minnesota Department of Revenue said the wholesale distribution of COVID-19 vaccines to entities in Minnesota is not subject to the MinnesotaCare Wholesale Drug Distribution Tax while the federal public health emergency under Section 319 of the Public Health Service Act and the Minnesota COVID-19 Peacetime Emergency under Executive Order 20-01 remain in effect. Minn. Dept. of Rev., "Taxation of COVID-19 Vaccine Distribution in 2020" (Feb. 23, 2021).

GLOBAL TRADE

Federal: A US Court of International Trade decision questions the applicability of the first sale principle to transactions involving non-market economies, including China and Vietnam. In instances where merchandise is subject to multiple sales for export to the US prior to importation, the first sale concept allows the US importer to declare the price paid on an earlier sale for custom purposes, provided certain criteria are met. The criteria, set forth in Nissho Iwai America Corp.,⁵ requires that the sale from the manufacturer to a middleman be a bona fide sale for export, the goods be clearly destined for the US and that the "manufacturer and middleman deal with each other at arm's length, in the absence of non-market influence that affect the legitimacy of the sale price." For more on this development, see Tax Alert 2021-0499.

UPCOMING WEBCASTS

Tuesday, March 30, 2021. The many faces of the marketplace facilitator: How sales and use tax rules aimed.at marketplaces have affected multiple industries (1:00 p.m. EDT). Since the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc. nearly three years ago, a dominant feature of state and local sales and use tax developments has been the imposition of new registration, collection and reporting requirements for 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. Topics to be discussed include: (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 taxes; (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.

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ENDNOTES

¹ Wisconsin Dept. of Rev. v. Deere and Co., Appeal No. 2020AP726 (Wis. Ct. App. Feb. 25, 2021) (unpublished). For more on the circuit court and WTAC's rulings, see Tax Alerts 2020-0819 and 2019-1535.

² See CA FTB, Information Returns — Payer ("Filing requirements - You need to file an information return with [the CA FTB] if either of the following are true: The recipient is a California resident or part-year resident [or] the source of a 1099 transaction [sic] was in California.").

³ Id. ("Filing requirements - … We have determined: A failure to timely file a[n IRS] Form-1099 NEC directly with [the CA FTB] is deemed to meet the reasonable cause exception in the statute [and] [t]his determination will apply for the 2020 tax year[.]").

⁴ Stewart Dry Goods Co. v Lewis, 294 U.S. 550 (1935). The rate of the gross receipts tax at issue in Stewart Dry Goods increased as the total gross receipts from the retail sales of merchandise increased; in other words, the similar transactions were taxed differently depending on the amount of receipts obtained from prior transactions.

⁵ Nissho Iwai America Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992).