March 26, 2021
State and Local Tax Weekly for March 19
Ernst & Young's State and Local Tax Weekly newsletter for March 19 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.
Many states follow extensions of federal individual income filing and payment deadlines
A number of states will follow the extensions of the federal individual income tax return filing and payment deadlines. Under the federal extension, individuals have until May 17, 2021 (extended from April 15, 2021) to file their federal individual income tax return and to pay their 2020 income tax liabilities, without penalties or interest. The federal relief does not apply to estimated tax payments due on April 15, 2021.
The following states align their return filing and payment deadlines with these recently extended federal filing and payment dates: Arkansas (extension includes 2020 returns of S Corporations, fiduciaries and estates, partnership and composite returns), California, Colorado, Connecticut, Delaware, District of Columbia (extension applies to all income tax returns, including District Forms D-20 (corporate), D-30 (unincorporated business), D-40 (individual), D-41 (fiduciary), and D-65 (partnership) tax filers, and includes combined return filers), Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Virginia, West Virginia, and Wisconsin.
Alabama and North Carolina have extended their individual income tax return filing deadlines to May 17, 2021 and will not impose penalties on late filed payments, provided such payments are received by May 17, 2021. In their announcements, both states' taxing authorities stated that do not have the authority to waive interest.
Like the federal extension, the extension of these states' return filing deadlines do not apply to, and do not extend the date for making, estimated tax payments, or to the filing of either corporate or fiduciary income tax returns, unless otherwise noted.
The Louisiana Department of Revenue (LA DOR) and Oklahoma Tax Commission (OTC) have not addressed the IRS extension for individual income taxpayers, however, both the LA DOR and OTC are providing extensions to taxpayers impacted by the February 2021 winter storms. The LA DOR has extended the 2020 individual income tax filing and payment deadlines to June 15, 2021, while the OTC extended the 2020 individual income tax payment deadline to June 15, 2021, without penalties or interest. In addition, due to recent state law changes that require modification to the state's income tax return, Maryland has extended its filing and payment deadline to July 15, 2021.
The Hawaii Department of Taxation said that it will not extend its return filing deadline, which remains April 20, 2021. It also said, however, that taxpayers will automatically be granted a six-month extension if the taxpayer is due a refund or the taxpayer pays the proper estimated tax amount owed by April 20, 2021.
Neither Arizona nor Iowa have indicated whether they will follow the federal return filing and payment extension deadlines for individuals.
In addition, some states provide separate, longer extensions for certain taxpayers who were impacted by the February 2021 winter storms and other natural disasters. The above list does not capture this information, unless otherwise noted.
Arkansas: New law (HB 1209) creates an elective pass-through entity tax (PTE tax) imposed on the net taxable income of an "affected business entity" at a tax rate of 5.9%, effective for tax years beginning on or after Jan. 1, 2022. An "affected business entity" is a business entity1 whose members that hold more than 50% of the voting rights in the entity elect on an annual basis to be subject to the PTE tax. The Arkansas gross income of a person that is a member2 of an "affected business entity" does not include the member's share of income subject to the PTE tax. Such member also may exclude from Arkansas gross income the member's pro rata share of income subject to a substantially similar tax paid to another state or the District of Columbia. If the member of an affected business entity is a company, the amount excluded is applied after all other applicable exclusions under the income tax and is not subject to any limits otherwise imposed by law. The exclusion does not apply to withholding taxes. The new law explains how to calculate the PTE tax, the liability for the PTE tax, required annual payments, the imposition of penalties and interest and reporting pro rata interests of members of a business entity. 2021 Ark. Acts 362 (HB 1209), signed by the governor March 15, 2021.
Colorado: The Colorado Department of Revenue said that proceeds from forgiven Paycheck Protection Program (PPP) loans that are excluded from federal taxable income are also excluded from Colorado taxable income. As for the deduction of business expenses paid with forgiven PPP loan proceeds, which was retroactively allowed for federal income tax purposes by the Consolidated Appropriations Act, 2021 (P.L. 116-260), such expenses can be deducted for tax years beginning on and after Dec. 27, 2020 (the date P.L. 116-260 was enacted). Under 1 C.C.R. 201-2, Rule 39-22-103(5.3), Colorado incorporates changes to the Internal Revenue Code only on a prospective basis. Colo. Dept. of Rev., COVID-19 Updates: Colorado Impact of Federal Legislation — CARES Act Paycheck Protection Program (PPP) Loans (March 2021).
Iowa: The Iowa Department of Revenue explained that Iowa's tax law does not include a specific adjustment for income tax expense deductions disallowed for federal income tax purposes for the portion of wages for which an employer received an employee retention credit (ERC) for the tax year. Thus, because there is no federal-level deduction, no deduction is allowed for these amounts for Iowa income tax purposes, even though Iowa does not have an ERC (or an equivalent credit). Iowa Dept. of Rev., "Iowa Nonconformity: Coronavirus Aid, Relief, & Economic Security (CARES) Act of 2020" (updated March 12, 2021).
Kentucky: New law (HB 278) effective immediately, allows the deduction of expenses paid with proceeds of forgiven Paycheck Protection Program (PPP) loans. The provision applies to deductions attributed to the proceeds of forgiven PPP loans for tax years ending on or after March 27, 2020, but before January 1, 2022. Ky. Laws 2021, HB 278, signed by the governor March 15, 2021. For more on this development, see Tax Alert 2021-0571.
New Jersey: The New Jersey Division of Taxation (NJ DOT) issued a technical bulletin providing "general guidance on the federal Internal Revenue Code sections or rules as they relate to, or differ from, the New Jersey Corporation Business Tax Act" (CBTA). The guidance focuses on comparative provisions of the federal consolidated return rules and the rules relating to the filing of New Jersey combined returns. The NJ DOT said that the principles set forth in Treasury regulations promulgated under IRC §1502 (i.e., the federal consolidated return regulations) apply to the extent consistent with the CBTA and "the unitary business principles to a combined group filing a New Jersey combined return as though the combined group filed a consolidated return." Federal limitations on net operation losses (NOL) and NOL carryovers apply, but federal provisions related to NOL carrybacks, tax rates, payments and due dates do not. The CBTA has its own (1) definitions for various terms including the definitions for "combined group", "affiliated group" (for purposes of the New Jersey affiliated group election), "member", "common ownership" (NJ DOT pointed out that New Jersey has a more than 50% ownership threshold versus the 80% ownership threshold required for being a member of a federal consolidated group) and "commonly owned", among other defined terms common to both federal and New Jersey tax laws; (2) included and excluded entity provisions which differ from the entity inclusions and exclusions applicable under the federal consolidated return rules; (3) additions, deductions, exclusions and other modifications to entire net income; and (4) rules for the treatment of tax credits by and among members of a New Jersey combined group. NJ DOT further stated that New Jersey will generally follow the federal consolidated return rules for New Jersey CBTA combined group reporting purposes with respect to the treatment of intercompany transactions, depreciation and certain expensing provisions and income from the discharge of indebtedness but that it does not conform to certain federal income tax provisions such as bonus deprecation.
The NJ DOT further explained that the federal consolidated return rules related to the dividends received deductions (DRD) do not apply for New Jersey purposes (as such rules were not incorporated into N.J.S.A. 54:10A-4(k)(5)). Instead, for New Jersey combined reporting purposes dividends paid by one member to another member of the combined group are eliminated from the income of the recipient. In terms of NOLs and DRDs, the NJ DOT said the NOL-DRD ordering rules that are part of the CBTA still apply, but the federal limitations governing the interaction of federal NOLs/NOL carryovers and the federal DRD do not apply because federal DRDs are special deductions under the Internal Revenue Code (IRC) that do not apply for New Jersey CBTA purposes. According to the NJ DOT, the only special deductions that apply are federal rules related to IRC §250 (i.e., the deductions allowed for global intangible-low taxed income (GILTI) and foreign derived intangible income (FDII)). Thus, if the members of a New Jersey combined group that has GILTI and FDII are eligible for the IRC §250 deduction, the federal consolidated return rules and rules governing the interaction of NOLs and the IRC §250 deductions apply. NJ DOT further noted that it is drafting regulations addressing these topics and that it may update this guidance to include additional topics or address specific issues. N.J. Div. of Taxn., TB-103 "Initial Guidance on New Jersey's Conformity to IRC §1502 for Combined Returns" (March 16, 2021).
New Jersey: The New Jersey Division of Taxation (NJ DOT) updated its COVID-19 Related Tax Information webpage, stating that grants and tax credits provided by the New Jersey Economic Development Authority (NJEDA) and grants issued by New Jersey counties are not subject to the state's Gross Income Tax Act (New Jersey's personal income tax law) or the Corporation Business Tax Act. (Updated March 2021).
Oklahoma: The Oklahoma Tax Commission updated its corporate income tax FAQs to advise that for purposes of the state's income tax laws, it will follow the federal income tax treatment of proceeds from forgiven Paycheck Protection Program (PPP) loans and the deductibility of certain business expenses paid for with proceeds from such forgiven PPP loans. Thus, for Oklahoma income tax purposes, the proceeds from forgiven PPP loans will not be subject to Oklahoma income tax and any business expenses paid with PPP loan proceeds can be deducted for Oklahoma income tax purposes. Okla. Tax Comm., FAQ Corporate Income Tax (updated March 2021).
Oregon: The Oregon Department of Revenue revised its COVID-19 Tax Relief Options and has extended the period for which it will not treat the presence of teleworking employees in Oregon as a relevant factor in determining nexus of their employers for purposes of the Oregon corporate excise/income taxes or personal income tax. This relief is effective for periods between March 8, 2020 and the later of: (1) the expiration date of Oregon Executive Order 20-67; (2) the date of expiry of an emergency declaration, a stay at home or similar government order related to COVID-19 and issued by the state government for the employee's assigned work location; or (3) Dec. 31, 2021. This relief applies to teleworking employees who are regularly based outside Oregon. Ore. Dept. of Rev., COVID-19 Tax Relief Options webpage "Corporations" (March 2021).
Virginia: New law (HB 1935 and SB 1146) updates Virginia's date of conformity to the Internal Revenue Code (IRC) to Dec. 31, 2020 (from Dec. 31, 2019), but decouples Virginia's tax laws from certain provisions in the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act) and the Consolidated Appropriations Act, 2021 (P.L. 116-260) (CAA). Specifically, Virginia tax law now decouples from the CARES Act changes to net operating loss limitations and carryback, excess business losses by individuals under IRC § 461(l) and the relaxation of the business interest expense limitations under IRC §163(j). Virginia tax law, however, follows the federal treatment of Paycheck Protection Program (PPP) loan forgiveness and certain funding under the Economic Injury Disaster Loan (EIDL) program and, as such, Virginia will not tax these amounts. Business expenses paid with forgiven PPP loan proceeds can be deducted up to $100,000; a deduction for business expense paid with EIDL funding proceeds, however, is not allowed. In computing Virginia taxable income, a subtraction of up to $100,000 is allowed for grant funds received by corporate and individual income taxpayers under the Rebuild Virginia program, effective for tax year 2020. Va. Acts 2021, ch. 117 (HB 1935) and ch. 118 (SB 1146), both signed by the governor on March 15, 2021; see also Va. Dept. of Taxn., Bulletin No. 21-4 Important Information Regarding 2020 Virginia Income Tax Returns - Virginia's Conformity to the Internal Revenue Code advanced to December 31, 2020 (March 15, 2021).
SALES & USE
North Carolina: In response to a ruling request, the North Carolina Department of Revenue (NC DOR) said a company's charges for access to its web-based services provided through a Software as a Service model (i.e., a software application running on a cloud-based infrastructure) are not subject to North Carolina sales and use tax. The NC DOR explained that the state currently does not tax revenue from access to cloud-based software accessed electronically through the internet. N.C. Dept. of Rev., SUPLR 2021–0005 (Feb. 2, 2021).
Texas: Under Texas law (Tex. Tax Law §151.0595(b)), a remote seller has the option to use a single local use tax rate as an alternative to the combined rate of all applicable local use taxes, effective Oct. 1, 2019. Under the law (id., §151.0595(c)), a remote seller electing to use a single rate must notify the Texas Comptroller of Public Accounts (TX Comptroller) of its decision before using the single local use tax rate. Any such election will apply to all sales of taxable items made by the remote seller unless the seller revokes the election. The single rate in effect for the calendar year equals the estimated average rate of local sales and use taxes imposed in Texas during the prior state fiscal year. In a recent edition of its Tax Policy News, the TX Comptroller announced that it has determined that the single local use tax rate for remote sellers is 1.75%, effective Jan. 1, 2021 to Dec. 31, 2021. Tex. Comp. of Pub. Accts., Tax Policy News, Certification of the Single Local Use Tax Rate for Remote Sellers - 2021 STAR No. 202102003L (Feb. 25, 2021).
Virginia: New law (HB 1916 and SB 1112), effective for tax years beginning on and after Jan. 1, 2021, allows the Virginia research and development expense tax credit and the major research and development expenses tax credit to be claimed against the commonwealth's bank franchise tax. Under prior law, both credits could only be claimed against either Virginia corporate or individual income taxes. These credits sunset for tax years starting in 2025. Va. Acts 2021, ch. 47 (HB 1916) and ch. 48 (SB 1112), both bills were signed by the governor on March 11, 2021.
Virginia: New law (HB 2006 and SB 1201) expands the definition for Virginia property tax law purposes of "certified pollution control equipment and facilities" property to include "energy storage systems", whether or not such property has been certified to the Virginia Department of Taxation by a state certifying authority. Under the new law, "energy storage systems" is defined as "equipment, facilities, or devices that are capable of absorbing energy, storing it for a period of time, and redelivering that energy after it has been stored." Under Virginia law (Va. Code §58.1-3660(A)), certified pollution control equipment is exempt from state and local property tax. The exemption for energy storage systems, however, only applies to projects greater than five megawatts and less than 150 megawatts, as measured in alternating current (AC) storage capacity. The exemption equals 80% of the assessed value in the first five years of service after commencement of commercial operation, and it will decrease to 70% of the assessed value in the second five years in service and to 60% of the assessed value for all remaining years in service. The exemption for energy storage systems greater than five megawatts, as measured in AC storage capacity, will not apply to any such project unless an application is filed with the locality for the project before July 1, 2030, regardless of whether a locality assesses a revenue share on such project. In localities that adopt an energy revenue share ordinance, the exemption for energy storage systems greater than five megawatts is 100% of the assessed value. In localities that do not adopt such an ordinance it is the same as that for projects greater than five megawatts and less than 150 megawatts if an application is filed with the locality before July 1, 2030. Both bills take effect July 1, 2021. Va. Acts 2021, ch. 49 (HB 2006) and ch. 50 (SB 1201), both bills were signed by the governor on March 11, 2021.
District of Columbia: New law (L23-0180) expands the District of Columbia's false claims liability to tax issues and increases the reward for those who report such claims. Specifically, false claims liability applies in tax matters when the District income, sales or revenue of the person against whom the action is being brought equals or exceeds $1 million for any tax year subject to a false claims action and the damages sought total $350,000 or more. The District's Attorney General must consult with the District's Chief Financial Officer (DC CFO) on qui tam actions related to taxation. Additionally, such actions cannot be brought based on allegations or transactions that relate to tax and are subject to an existing DC CFO investigation, audit, examination, ruling, agreement, or administrative or enforcement activity. In these types of proceedings, the DC CFO cannot be required to produce tax or other information from which tax information can be inferred if such production would violate federal law. Lastly, the reward for those who report tax fraud increases to 30% (previously 10%). These provisions took effect March 16, 2021. 2020 D.C. Laws, L23-0180 (Act 23-564; B23-0035), became law March 16, 2021.
Rhode Island: The Rhode Island Division of Taxation announced that effective immediately it is allowing electronic signatures in place of handwritten signatures for the following forms: Form T-71 "Insurance Companies Tax Return Gross Premiums"; Form T-71A "Surplus Line Broker Return of Gross Premiums"; Form T-72 "Public Service Corporation Gross Earnings Tax Return"; Form T-74 "Banking Institution Excise Tax Return"; and Form T-86 "Bank Deposits Tax". This is in addition to electronic signatures allowed for Forms RI-71.3 Election "Election to Have Withholding Based on Gain" and Form RI-71.3 Remittance "Remittance of Withholding on Sale of Real Estate by Nonresident". R.I. Div. of Taxn., ADV 2021-09 "Division allows electronic signatures in more cases" (March 17, 2021).
West Virginia: New law (SB 270) requires a marketplace facilitator that has a contract with a hotel or hotel operation to offer the use or occupancy of a hotel room, to collect municipal and county hotel occupancy tax on hotel rooms booked through its marketplace on behalf of the hotel or hotel operator. This requirement applies to marketplace facilitators that in the current or immediately preceding calendar year make or facilitate West Virginia sales for itself (or on behalf of one or more hotel or hotel operators) of at least $100,000 in gross revenue or in 200 or more separate transactions. A marketplace facilitator meeting these requirements is also deemed to be an agent of any hotel or hotel operator making retail sales through the marketplace facilitator's physical or electronic marketplace. SB 270 takes effect June 7, 2021 and applies to sales made on or after Jan. 1, 2022. W.Va. Acts 2021, SB 270, signed by the governor March 18, 2021.
VALUE ADDED TAX
International — Bulgaria: Bulgaria, which is a Member State of the European Union (EU), has introduced changes to its Value Added Tax (VAT) law relating to United Kingdom (UK) businesses that are registered for VAT in the country, following the UK's departure from the EU (Brexit). These rules also apply to businesses resident in other non-EU countries with which the EU has not concluded an agreement for mutual assistance similar in scope to Directive 2010/24 and Regulation 904/2010. For more on this development, see Tax Alert 2021-0578.
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 For purposes of this provision, a "business entity" includes " … a general partnership, a limited partnership, a limited liability company, or for federal income tax purposes, an Subchapter S corporation that: is engaged in a business for profit … and is required to file a[n Arkansas tax] return … " 2021 Ark. Acts 362, sec. 2 (adding Ark. Code Ann. §26-65-102(2)).
2 A "member" includes a shareholder of an S corporation, a partner in a partnership (general, limited, or limited liability), a member of a limited liability company. 2021 Ark. Acts 362, sec. 2 (adding Ark. Code Ann. §26-65-102(3)).