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March 18, 2021

State and Local Tax Weekly for March 12

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


Digital products subject to Maryland sales and use tax include electronically delivered canned software and software as a service

The Maryland Comptroller of Treasury (MD Comptroller) issued guidance1 on the application of the recent statutory expansion of the state's sales and use tax to the sale or use of digital products in Maryland, which applies effective March 14, 2021. The MD Comptroller's guidance appears intended to clarify which digital goods and services will be taxed as digital products, what sales tax exclusions and exemptions may apply, how the collection of tax on sales of digital products will apply to marketplace facilitators and remote retailers and how to source sales of digital products and digital codes.

"Digital products" as defined in 2020 HB 932 (2020 Md. Laws c. 38, sec. 1 amending Md. Tax-Gen. sec. 11-101 by adding subsection (c-4)) includes digital code; streaming; music; ring tones; electronic and audio books; electronically transferred movies, music videos, news, entertainment programs, live events, video or electronic games; e-mailed audio and video greeting cards, prerecorded or live music or performances and speeches; and online newspapers and magazines. The guidance provides a non-exclusive list of digital products subject to sales and use tax if obtained or delivered electronically. In addition to the items mentioned previously, taxable digital products include:

  • Sales, subscriptions or licenses to use a software application or to access content online
  • Customer lists, mailing lists, medical records and similar products
  • Design files, models and templates
  • Access to a chat room, discussion, weblog or any other venue that permits users to communicate electronically in real time
  • Access to or use of virtual items, such in-app purchases for use in a video or online game

The MD Comptroller's guidance addresses the application of Maryland's sales and use tax to various transactions involving the sale of digital products. Most notable for businesses, the guidance states that canned or commercial off-the-shelf software that is delivered electronically, as well as sales of software as a service (SaaS), are taxable sales of digital products under the new law. On the other hand, the guidance states that custom software and computer programs for resale continue to be exempt from sales tax.

Specific guidance is also provided on the following:

  • Sales of digital products by advertising agencies when the transaction is for the production and electronic delivery of the product
  • Charges for viewing or attending continuing education classes, seminars or conferences that are electronically delivered
  • Sales of textbooks (delivered electronically or in tangible form)
  • Sales of various entertainment such as pre-recorded content, live music performances, streaming audio and video services, cable services and satellite television and radio services
  • Sales of newspapers, photography and video

Sales of non-taxable services performed electronically are not subject to sales and use tax unless the service results in a digital product. If the sale of a non-taxable service or non-taxable tangible personal property is bundled with the sale of a taxable digital product, the entire charge for the bundled transaction is subject to tax. Sales or use tax does not apply to charges for nontaxable personal, professional or insurance services that involve a sale of a digital product as an inconsequential element for which a separate charge is not made.

The guidance also clarifies that marketplace facilitators must collect and remit tax on sales of digital goods made through their marketplace. Before this clarification, the collection requirement was limited to transactions involving sales of tangible personal property.

According to the guidance, remote sellers must consider the amount or number of sales of digital products and digital code made to Maryland locations when determining whether they meet Maryland's economic nexus thresholds for sales and use tax (i.e., more than $100,000 in gross revenues or 200 or more separate transactions). Before this clarification, the collection requirement was limited to transactions involving tangible personal property or taxable services.

For additional information on this development, see Tax Alert 2021-0530.


Kansas: New law (SB 15) allows national banking associations, state banks, trust companies and savings and loan associations subject to the Kansas Financial Institutions Privilege Tax to deduct from net income the net interest income from qualified agricultural real estate and single family residence loans attributed to Kansas to the extent such interest is included in a corporation's Kansas taxable income. The law defines key terms, including "qualified agricultural real estate" and "single family residence". This deduction is effective for tax years beginning after Dec. 31, 2022. Kan. Laws 2021, SB 15, signed by the governor Feb. 25, 2021.

New Hampshire: The New Hampshire Department of Revenue Administration issued guidance on the taxability of certain state and federal COVID-19 financial relief programs under the Business Profits Tax (BPT) and Business Enterprise Tax (BET). The guidance says that all state and federal COVID-19 relief distributed to taxpayers required to file a BPT return should be included as income for BPT purposes. However, any state- and federal-level relief taking the form of a loan should not be included as income for BPT purposes unless that loan is forgiven or otherwise discharged. Thus, forgiven Paycheck Protection Program loans are included in a taxpayer's BPT liability. Deductible expenses for operating a business continue to be deductible even if paid with state- or federal-level relief. In addition, any state or federal relief "received by taxpayers required to file a BET return that is utilized to pay wages or other compensation to employees, interest, or dividends is included in the enterprise value tax base of the business and subject to the BET. N.H. Dept. of Rev. Admin., TIR 2021-001 (Jan. 20, 2021).

New Hampshire: Adopted rules (Rev. 301.11 and .12; Rev. 304.04, .041, and .06 through .11; Rev. 308.01; Rev. 2401.05 and .07; Rev. 2403.03; and Rev. 2404.06 and .061) (collectively, Rules) implement New Hampshire's market-based sourcing provisions for purposes of apportioning sales of services and intangibles under the Business Profits Tax and Business Enterprise Tax, effective for tax periods ending on or after Dec. 31, 2021. The Rules source sales of services to New Hampshire if and to the extent the service is delivered to a location in New Hampshire (i.e., the location of the market for the services provided by the taxpayer, without regard to the location of the taxpayer's property or payroll). The sale, rental, lease, license, or other use of intangible property is sourced to New Hampshire if and to the extent the property is used in the state. Further, the following types of income are sourced to New Hampshire: (1) interest income, if and to the extent the debtor or encumbered property is located in the state; (2) dividend income if and to the extent the business organization's commercial domicile is in New Hampshire; and (3) other income, if and to the extent the income is derived from sources in New Hampshire. The Rules also address how to source the delivery of a service by electronic transmission and delivery of a professional service by other than in-person means. In the case of sales other than sales of tangible personal property, reasonable approximation will be used if the state(s) of assignment cannot be determined. Such sales are excluded from the sales factor denominator if the taxpayer is not taxable in a state to which a sale is assigned or the state of assignment cannot be determined or reasonably approximated. Lastly, certain business organizations or combined groups must use one of the industry specific apportionment provisions (i.e., airlines, printing and publishing, television and radio broadcasting, financial institutions and transportation (other than airlines, communication and energy companies)) if more than 50% of their: (1) gross receipts for the tax period are from sources relating to the identified industry; and (2) total assets on the last day of the tax period are commonly related to the identified industry. N.H. Dept. of Rev. Admin., Rev. 301.11 and .12; Rev. 304.04, .041, and .06 through .11; Rev. 308.01; Rev. 2401.05 and .07; Rev. 2403.03; and Rev. 2404.06 and .061 (adopted March 5, 2021).

Philadelphia, PA: The Philadelphia Department of Revenue (Department) issued guidance on the taxability of federal Economic Injury Disaster Loan (EIDL) grants, Targeted EIDL Advances, Small Business Administration (SBA) Loan Subsidy Payments and Shuttered Venue Operator Grants (collectively grants) authorized by the federal Coronavirus Aid, Relief, and Economic Security Act and the Consolidated Appropriations Act, 2021. For purposes of the tax on net income under its Business Income and Receipts Tax (BIRT), the Department stated that Philadelphia will follow the federal income tax treatment of these grants and, therefore, such amounts are excluded from taxable income. The Department also said that these grants are excluded from a taxpayer's receipts for purposes of the BIRT gross receipts tax and from gross receipts in computing the Net Profits Tax (NPT). Expenses paid with these grants are fully deductible for purposes of determining net income under both the BIRT and the NPT. Philadelphia Dept. of Rev., "Philadelphia's treatment of grants authorized by the CARES Act and Consolidated Appropriations Act, 2021 (CAA)" (Feb. 18, 2021).


Alabama: In a recent ruling the Alabama Tax Tribunal (AL Tribunal) concluded that a company is entitled to a refund of local Alabama use tax paid on out-of-state purchased materials that were delivered to the company's Bessemer, AL facility where the company performed some initial assembly or fabrication on the material and then removed it from the facility for use on out-of-state projects. These materials, the AL Tribunal concluded, were not purchased for storage, use or other consumption in Bessemer. Rather, they were purchased for use outside the state. The AL Tribunal explained that the Alabama Department of Revenue's temporary-storage rule "acknowledges that the use-tax liability 'attaches after the act of transportation ends and the property comes to rest in the state for use or consumption unless there is a contractual intent to the contrary.'"2 Here, the company's intent to use the materials outside the state was documented through its purchase orders and vendor invoices as well as the company's separation of materials at its facility until they were shipped to the specified job site. Physical Security, LLC v. City of Bessemer, Nos. CITY 17-100-JP and CITY 117-104-JP (Ala. Tax Trib. Feb. 24, 2021).

Maryland: The Maryland Comptroller of Treasury (MD Comptroller) said that due to the recent enactment of the Maryland Recovery for the Economy, Livelihoods, Industries, Entrepreneurs, and Families (RELIEF) Act and the Maryland legislature's veto override of 2020 HB 932 (2020 Md. Laws c. 38) (which expands the state's sales and use tax to include revenues from the sale of digital products), he finds reasonable cause to extend the due date of sales and use tax returns for sales occurring in March, April and May 2021 to July 15, 2021. The MD Comptroller also stated he will waive interest and penalty for late payment of sales and use tax for these sales if the tax is paid by July 15, 2021. Md. Compt. of Pub. Accts., Tax Alert "Extension of Time to File and Waiver of Interest and Penalty for Certain Filers" (March 11, 2021).

New Mexico: New law (SB 1), effective March 1, 2021 through June 30, 2021, allows a food or beverage establishment3 to deduct receipts from the sale of prepared food or non-packaged beverages that are served or picked up at the establishment by or delivered to customers for immediate consumption from gross receipts. This deduction applies only to gross receipts remaining after all other allowable deductions available under the Gross Receipts and Compensating Tax Act have been taken. The taxpayer must separately state these receipts. Any amount passed on to a customer in lieu of a gross receipts tax on receipts that a food or beverage establishment may deduct under these provisions are not considered gross receipts. N.M. Laws 2021, ch. 4 (SB 1), signed by the governor on March 3, 2021.

Tennessee: The Tennessee Department of Revenue (TN DOR) in response to a ruling request said sales and use tax does not apply to fees and dues charged for individual memberships in a professional membership organization. The TN DOR explained that professional memberships are not listed, on a stand-alone basis, as a taxable service or amusement. Access to nontaxable services and some taxable items such as a guide, e-learning, and pre-recorded on demand webinars, does not result in the membership fees becoming taxable. Tenn. Dept. of Rev., Letter Ruling #21-02 (Feb. 9, 2021).

Texas: The Texas Comptroller of Public Accounts issued guidance on the state's sales and use tax exemption available to taxpayers that manufacturer, fabricate or process tangible personal property for sale. This exemption generally applies to tangible personal property that (1) is an ingredient or component of an item manufactured for sale or (2) that makes a chemical or physical change in the product being manufactured and is necessary and essential to the manufacturing process. The exemption also applies to taxable services performed on a manufactured product to increase its marketability. The guidance includes examples of exempt items and services and non-exempt items. In addition, the guidance addresses: (1) who does and does not qualify for the exemption; (2) the treatment of machinery and equipment used for manufacturing support; (3) exemptions for specific industries (i.e., printers and newspaper publishers, production companies, semiconductor and pharmaceutical biotechnology manufactures); (4) how to claim the exemption; and (5) divergent use, calculating divergent use and formulas for determining divergent use. Tex. Comp. of Pub. Accts., STAR # 202103001L (March 8, 2021).

Virginia: New law (HB 2185 and SB 1403) provides a Virginia sales tax exemption for purchases of personal protective equipment (PPE) purchased by a qualifying business (i.e., a business that has a COVID-19 safety protocol in place). An exemption will not be allowed if the PPE purchased by a qualifying business is for "other than business use".4 If the Virginia Department of Taxation (VA DOT) receives information that the qualifying business used the PPE for a "other than business use", it will notify the business. The business then will be required to remit tax due on the purchase plus penalties (equal to 10% of the tax due) and interest. Additionally, if the VA DOT determines the business is not following its COVID-19 safety protocols, it will revoke the business's qualification for the exemption. The VA DOT has been tasked with issuing guidelines clarifying what equipment and training are tax exempt. Va. Acts 2021, ch. 55 (HB 2185) and ch. 56 (SB 1403), both signed by the governor on March 11, 2021.


Florida: The Florida Department of Revenue (FL DOR) announced that starting on March 20, 2021 and ending March 26, 2021, qualified target industry businesses subject to the Florida corporate income tax may file an online application for an allocation of Florida research and development tax credit for expenses incurred during 2020. As part of the application, taxpayers must attach a copy of the certification letter issued by the Florida Department of Economic Opportunity (FL DEO). Certification letters are valid for up to a three-year period; thus, certificates issued by the FL DEO in 2019, 2020 and 2021 may be attached. Partnerships, limited liability companies taxed as partnerships and disregarded single member limited liability companies are not eligible to apply for the credit. Additional information on the credit and application process is available on the FL DOR's website here.

Rhode Island: Governor Daniel J. McKee 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 April 9, 2021 (formerly March 11, 2021). R.I. Gov., Executive Order 21-23 (March 10, 2021).


Arizona: New law (HB 2316) describes when the Arizona Department of Revenue (AZ DOR) will be required to adjust the base value used to determine the full cash value (FCV) of pipeline property in order to reflect changed circumstances. These circumstances include a final ruling by an Arizona court that the FCV of an in-state pipeline using the prescribed method in Ariz. Stat. §42-14204 is more than the market value of the pipeline property using standard appraisal methods and techniques. In such instances, the final FCV of the system plan in service determined by the court for the most recent tax year involved in any such appeal, is the base value for the subsequent tax year and the AZ DOR will be required to adjust all valuations for future years. Other circumstances include an agreement between a pipeline company and the AZ DOR entered into either (1) as a result of a pending tax appeal and they stipulate to adjust the FCV of the system plant in service as of a specific valuation date, or (2) to correct an error in the calculation of the FCV of the system plant in service for a pipeline that operates in this state. This change applies retroactively to tax years beginning from and after Dec. 31, 2015. Ariz. Laws 2021, ch. 26 (HB 2316), signed by the governor Feb. 18, 2021.


Maryland: The Maryland Comptroller of Treasury (MD Comptroller) said that due the recent enactment of the Maryland Recovery for the Economy, Livelihoods, Industries, Entrepreneurs, and Families (RELIEF) Act and federal COVID-19 related legislation, the state will need to make changes to previously published 2020 income tax forms. Consequently, the MD Comptroller is extending the filing deadlines for all individual, corporate, pass-through entity, and fiduciary income tax returns that otherwise would have been due on a date between Jan. 1, 2021 and July 15, 2021, inclusive, to July 15, 2021. The MD Comptroller also said he will waive interest and penalty for late payment of income tax for tax year 2020 that otherwise would have been due on a date between said date if the tax is paid by July 15, 2021. This filing and penalty relief applies to first and second quarter estimated tax payments, which typically are due April 15 and June 15, respectively. Md. Compt. of Pub. Accts., Tax Alert "Extension of Time to File and Waiver of Interest and Penalty for Certain Filers" (March 11, 2021).

New Jersey: The New Jersey Division of Taxation (NJ DOT) announced the automatic filing extension for certain 2020 Corporate Business Tax (CBT) returns. Taxpayers with CBT returns (i.e., Forms CBT-100, BCT-100U, BFC-1, and CBT-100S) with an original due date falling anytime between Nov. 15, 2020 and April 15, 2021 are granted an automatic extension to file their tax returns by May 15, 2021. Because May 15, 2021 falls on a Saturday, the return will be due on the following business day, which is Monday, May 17, 2021. (Note, the NJ DOT previously issued an automatic extension to April 15, 2021 for taxpayers with returns that had an original due date between Nov. 15, 2020 and March 15, 2021; this notice expands and extends that extension.) Late filing penalties will not be charged if the return is filed by the extended due date. This extension does not extend the time to make a payment. N.J. Div. of Taxn., "Notice: Automatic Extension for 2020 CBT Returns for Certain Filers" (last updated March 12, 2021).


Alabama: The Alabama Court of Civil Appeals (AL court), in affirming a circuit court's ruling, upheld the constitutionality of Ala. Code §40-18-24.2, which requires a pass-through entity to file a composite income tax return with the Alabama Department of Revenue on behalf of its nonresident members and pay income tax on the nonresidents' distributive share of income of the pass-through entity. In so holding, the AL court found "in light of the language of the entire statute and statutory scheme … the statute does not operate with discriminatory effect." The AL court further found that "the burden on interstate commerce by the operation of [the statute], if any, is only incidental." Black Eagle Minerals, LLC v. Ala. Dept. of Rev., No. 2200050(Ala. Ct. App. March 5, 2021).

Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) revised its sales and use tax bulletin addressing the review of large and complex refund requests. The bulletin states that if a large refund request results in the issuance of an audit, the taxpayer can either continue pursing the refund through the appeal process or withdraw the refund petition and allow the overpayment to be addressed in the audit. Generally, the audit encompasses the open period (i.e., three years plus the current year), but it can be extended to additional periods if the taxpayer agrees to waive the statute of limitations on assessments. The PA DOR noted the taxpayer's due process rights for that period are preserved through the field audit process. Any refunds not granted in the audit for the audit period can be raised by the taxpayer by the later of six months of the mailing date of the notice of assessment or within three years of actual payment of the tax. Pa. Dept. of Rev., Sales & Use Tax Bulletin 2017-01 "Review of Large and Complex Refund Requests" (revised March 5, 2021).


Michigan: Legislation (HB 6136) that would have held the 2021 state unemployment insurance (SUI) taxable wage base at $9,000 failed to pass before the end of the 2019 — 2020 legislative session. Consequently, the employer Michigan SUI taxable wage base will increase to $9,500 for 2021 unless the state legislature reintroduces and enacts similar legislation during the 2021 — 2022 legislative session. The increase to the 2021 Michigan SUI taxable wage base, up from $9,000 in 2020, was confirmed by the Michigan Unemployment Insurance Agency (UIA). For more on this development, see Tax Alert 2021-0465.

Virgin Islands: The U.S. Department of Labor (USDOL) released an updated federal unemployment tax (FUTA) credit reduction estimate for calendar year 2021. The estimate shows a potential 2021 FUTA credit reduction for Virgin Islands employers, should the territory still have a balance remaining from its federal unemployment insurance (UI) loan balance on Nov. 10, 2021. The Virgin Islands is the only state/territory that has the potential of a FUTA credit reduction for 2021. Thus far, almost 20 other states run the risk of a FUTA credit reduction for 2022 if their loans are not repaid by Nov. 10, 2022. For more on this development, see Tax Alert 2021-0460.


Federal/International: The latest edition of EY's TradeWatch, which outlines key legislative and administrative developments for customs and trade around the world, is now available.

Federal/International: The United States (US) Trade Representative (USTR) issued joint statements with the United Kingdom (UK) on March 4, 2021 and the European Union (EU) on March 5, 2021 announcing a four-month suspension of the US punitive tariffs imposed on certain UK- and EU-origin goods in relation to the ongoing dispute on large civil aircraft subsidies. The suspension effective date for the EU has not yet been established, with the USTR indicating the suspension will become effective once internal procedures are completed. The suspension for the UK is effective as of March 4, 2021 and will temporarily relieve punitive tariffs of 15% to 25% levied under Section 301 of the Trade Act of 1974 (Section 301) on certain UK- and EU-origin products. For more on this development, see Tax Alert 2021-0515.

Federal: A United States (US) Court of International Trade (CIT) decision issued on March 1, 2021 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 by the Court of Appeals for the Federal Circuit in its decision 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. Leaders from Ernst & Young LLP's Sales and Use Tax Practice will host a webcast at 1:00 P.M. EDT on March 30, 2021 entitled "The many faces of the marketplace facilitator: How sales and use tax rules aimed at marketplaces have affected multiple industries". Since the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc. nearly three years ago, state and local 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 to discover that the new laws are broad enough to include their operations. The panelists on this webcast 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 Md. Comp. of Treas., Business Tax Tip #29 "Sales of Digital Products and Digital Code" (March 9, 2021).

2 Ala. Admin. Code r. 810- 6-5-.23(2), citing State v. Toolen, 277 Ala. 120, 167 So. 2d 546 (1964).

3 For purposes of New Mexico's new law, a "food or beverage establishment" is defined as a craft distiller, dispenser, mobile food service establishment, restaurant, small brewer, or winegrower. See N.M. SB 1, Sec. 3 (adding section (C)(3) to existing law). "Restaurant", however, does not include a fast food restaurant. See id. (adding section (C)(5) to existing law).

4 Under the new Virginia law, the term "other than business use", with respect to a purchased item or service, means that the business (1) uses the purchased item or service more than 50 % of the time for nonbusiness purposes, or (2) transfers a purchased item to a person other than the business or transfers the use of a purchased service to a person other than the business. See e.g., Va. Acts 2021, ch. 55, Sec. 1 (adding Va. Code Sec. 58.1-609.14(A) (defining "other than business use.")

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