April 5, 2021
State and Local Tax Weekly for March 26
Ernst & Young's State and Local Tax Weekly newsletter for March 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.
State tax agency responses to the COVID-19 emergency
The Indirect Tax COVID-19 state response matrix provides updates on the latest state tax agency responses related to the COVID-19 emergency. The matrix is available on EY's Indirect Tax COVID-19 state response website, which is accessible directly through this link, or on ey.com where other important tax-related information pertaining to the COVID-19 emergency is available.
Maine law updates state's date of conformity to IRC and makes various income tax changes
New law, L.D. 220, makes various changes to Maine's tax laws. Notably, it updates the state's date of conformity to the Internal Revenue Code of 1986, as amended (IRC) to Dec. 31, 2020 (from Dec. 31, 2019), applicable to tax years beginning on or after Jan. 1, 2018. Thus, Maine's tax code generally follows federal provisions enacted in 2020, including the exclusion from gross income of cancellation of indebtedness income from forgiven Paycheck Protection Program (PPP) loans and allowing deductions for business expenses paid with forgiven PPP loan proceeds.1
The new law, however, decouples the Maine tax code from the changes made by the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (CARES Act) to the business interest expense limitations under IRC §163(j) applicable to tax years beginning on or after Jan. 1, 2019 and before Jan. 1, 2021. A taxpayer is required to add to federal taxable income the amount of its federal business interest deduction for the tax year that exceeds the IRC §163(j) limitation and apply a rate of 30% of adjusted taxable income to determine the business interest expense limitation for Maine income tax purposes. For tax years beginning on or after Jan. 1, 2021, a corresponding subtraction equal to any prior year addition modification is allowed, but only to the extent Maine taxable income is not reduced below zero, no more than 25% of the amount is used as a modification in any tax year, and the amount has not been previously used as a modification of federal taxable income to determine Maine taxable income or to otherwise reduce Maine taxable income.
With respect to the federal tax law changes regarding the deductibility of excess business losses under IRC §461(l), a Maine individual taxpayer, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2021, is required to add to federal adjusted gross income an amount equal to the taxpayer's excess business loss for the tax year determined under IRC §461(l), reduced by any amount of the loss included in Maine taxable income for a prior tax year. The new law provides that notwithstanding the application dates in IRC §461(l)(1)(B), that section, which provides that any excess business loss of the taxpayer is not allowed for the tax year, applies to the calculation for the taxable year. A corresponding subtraction is allowed equal to the value of any prior year addition modification but only to the extent Maine taxable income is not reduced below zero, the amount had not been previously used as a modification, or otherwise used, to reduce Maine taxable income, and the taxpayer does not include the amount in computing any net operating loss carry-back or carry-over under IRC §172.
The new law requires Maine corporate taxpayers to add back to taxable income an amount equal to the taxpayer's deduction under IRC §250(a), which includes the deduction for foreign derived intangible income (FDII), effective for tax years beginning on or after Jan. 1, 2020. (Maine law already required the add back of the global intangible low-taxed income (GILTI) deduction under IRC §250(a)(1)(B).) The law also requires the Maine Department of Administrative and Financial Services to study the effect of decoupling from the GILTI deduction under IRC §250(a)(1)(B). The report is due to the Maine Legislature's joint standing committee on taxation no later than Jan. 15, 2022.
The new law provides that for tax years beginning in 2020, employees who are teleworking in Maine due to the COVID-19 pandemic state of emergency will be able to claim the credit for income tax paid to another taxing jurisdiction if certain criteria are met. Such criteria includes, the compensation is sourced to that jurisdiction, the employee was engaged in performing services from a location outside of Maine immediately prior to a COVID-19 state of emergency declared by either Maine or the state the employee was working, the employee began working in Maine due to COVID-19, the work was performed in Maine before Jan. 1, 2021 but during a state of emergency, and the employee does not qualify for an income tax credit in that other taxing jurisdiction for Maine income taxes paid as a result of the receipt of such compensation. Maine Pub. Laws 2021, ch. 1 (L.D. 220), signed by the governor on March 17, 2021.
Multistate: The latest state income tax quarterly, which provides a summary of the significant legislative, administrative and judicial actions that affected state and local income/franchise and other business taxes for the first quarter of 2021, is now available. Highlights in this issue include: (1) a summary of legislative developments in Alabama, Arkansas, Colorado, Connecticut, Georgia, Idaho, Kansas, Kentucky, Maine, New Jersey, South Dakota, Utah, Virginia, West Virginia and Wisconsin; (2) a summary of judicial developments in Idaho, Massachusetts and Wisconsin; (3) a summary of administrative developments in Colorado, Indiana, Iowa, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oklahoma, Oregon, Rhode Island, South Carolina, Tennessee and Texas; and (4) a discussion of items to watch in Kansas, New York, Texas and Virginia. The newsletter is available via Tax Alert 2021-0685.
Idaho: New law (HB 251) requires the following adjustments be made in computing Idaho taxable income: (1) subtract any amount of forgiven Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loan advance funds included in taxable income; (2) subtract any amount of funds received or loans forgiven under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) (e.g., Rebound Idaho Small Business Grant); and (3) add any amounts excluded from taxable income for funds received under the emergency rental assistance program established by the Consolidated Appropriations Act, 2021 (P.L, 116-260). These changes apply retroactively to Jan. 1, 2021. Idaho Laws 2021, ch. 86 (HB 251), signed by the governor March 18, 2021.
New Mexico: The New Mexico Taxation and Revenue Department has adopted new, and amended and repealed existing, regulations related to the Corporate Income and Franchise Tax Act and the Uniform Division of Income for Tax Purposes Act (UDITPA). The new and revised regulations implement changes to the New Mexico tax code enacted in 2019, including the adoption of mandatory unitary combined reporting and market-based sourcing for sales of services, and tax base changes addressing certain provisions of the federal Tax Cuts and Jobs Act.
The following are new regulations:
The following regulations have been amended:
The following regulations have been repealed:
These regulatory rule adoptions, amendments and repeals are effective March 23, 2021.
A copy of the New Mexico corporate income and franchise tax regulation is available here. A copy of the New Mexico UDITPA regulations is available here.
Utah: New law (SB 25) clarifies the calculation of the 80% limitation on carrying forward a Utah net loss, effective for a tax year beginning on and after Jan. 1, 2021. Under the revised law, if the only Utah net loss a taxpayer carries forward is from a tax year that began before Jan. 1, 2018, the Utah State Tax Commission (commission): will instruct the taxpayer to calculate the 80% limitation by following federal corporate guidance on the federal 80% limitation (federal guidance) or, if the commission determines that adequate federal guidance is unavailable, may not apply the 80% limitation to the Utah net loss. If the taxpayer carries forward a Utah net loss from a tax year beginning before Jan. 1, 2018 and from a tax year beginning on or after Jan. 1, 2018, the commission: will instruct the taxpayer to calculate the 80% limitation by following the federal guidance. If, however, the commission determines that adequate federal guidance is unavailable, by calculating 80% of Utah taxable income before deducting any Utah net losses from Utah taxable income and applying the limitation such that the carried forward Utah net loss may not exceed 80% of Utah taxable income to Utah net losses incurred on or after Jan. 1, 2018, without regard to Utah net losses from a previous tax year that the taxpayer carries forward. Annually, by April 15 after the tax year ends, the commission must determine whether adequate federal guidance is available. Utah Laws 2021, SB 25, signed by the governor March 22, 2021.
Utah: New law (HB 39) provides that a corporate taxpayer's unadjusted income is determined before any deduction related to global intangible low-taxed income (GILTI), foreign derived intangible income (FDII) or deferred foreign income. The new law amends the definition of "unadjusted income" to mean "federal taxable income as determined on a separate return basis before intercompany eliminations as determined by the [IRC], before the [NOL] deduction and special deductions." (Changed from "special deductions for dividends received".) The law defines a "special deduction" to include a deduction under IRC §250 (GILTI and FDII) and IRC §965(c) (federal repatriation dividends). The law also states that a dividend for purposes of the 50% subtraction for a dividend considered to be received or received includes amounts included in federal taxable income under IRC §§ 965(a) and 951A. This law has retrospective operation for the last tax year of a taxpayer beginning on or before Dec. 31, 2017 and a tax year beginning on or after Jan. 1, 2018. Utah Laws 2021, HB 39, signed by the governor March 22, 2021.
SALES & USE
Kentucky: New law (HB 230) exempts from sales and use tax the sale or purchase of electricity used or consumed in the commercial mining of cryptocurrency. An application for the exemption must be made on or after July 1, 2021 and before June 30, 2025; the exemption applies to electricity sold or purchased on or after the application's effective date and before July 1, 2030. To qualify for the exemption, the person seeking an exemption must file an application for each Kentucky location commercial mining of cryptocurrency takes place. Approved applicants must annually report the amount of the tax exemption. The law also provides that an operator of a colocation facility primarily engaged in the commercial mining of cryptocurrency may apply for a utility gross receipts license tax exemption certificate. This exemption is effective from the date of confirmation of eligibility until June 30, 2030. Ky. Laws 2021, ch. 122 (HB 230), signed by the governor March 25, 2021.
North Carolina: The North Carolina Department of Revenue, in response to a ruling request, determined that a physician prescribed device worn on the body to support and correct snoring and obstructive sleep apnea qualifies as a prosthetic device. Thus, sales of the device are exempt from North Carolina sales and use tax. N.C. Dept. of Rev., SUPLR-2021—0008 (Feb. 3, 2021).
North Dakota: New law (SB 2152) creates a sales and use tax exemption for carbon dioxide used for secure geologic storage in the state. This exemption is available for transactions occurring after June 30, 2021. N.D. Laws 2021, SB 2152, signed by the governor March 22, 2021.
Arizona: New law (HB 2321) modifies the amount of the credit for qualified facilities. The amount of the combined credits that can be preapproved by the Arizona Commerce Authority (ACA) is increased from $70 million to $125 million. Further, the ACA must preapprove an applicant's credit. The amount of the preapproved credit is 10% of the lesser of (a) the amount the applicant has projected in total qualifying investment in the qualified facility; or (b) either (i) $200,000 for each net new full-time employment position that has job duties associated with the qualified facility if the total qualifying investment is less than $2 billion, or (ii) $300,000 for each net new full-time employment position that has job duties associated with the qualified facility if the total qualifying investment is $2 billion or more. The law also modifies the definitions of "qualified headquarters" and "qualified manufacturing". Ariz. Laws 2021, ch. 80 (HB 2321), signed by the governor March 23, 2021.
Mississippi: New law (HB 499) extends the date upon which the Mississippi Development Authority may not allocate any income and insurance premium tax credits for qualified equity investments through a qualified community development entity until July 1, 2024 (from July 1, 2021). Miss. Laws 2021, HB 499, signed by the governor March 17, 2021.
District of Columbia: New law (L23-0200) reestablishes the Tax Revision Commission (Commission), requiring it to submit recommendations once every 10 years to consider revisions to the District's tax code. The new law imposes a new requirement on the Commission to analyze specific changes to the District's tax system since the Commission's most recent recommendations in 2014. The report to the Mayor and District's Council is due within a year of the Commission's appointment, and it must include draft legislation, regulations, amendments to existing regulations or specific steps for implementing the recommendations. DC Laws 2020, L23-0200 (A23-0549; B23-0316), became law March 16, 2021.
PAYROLL & EMPLOYMENT TAX
Delaware: In its Technical Information Memorandum 2021-2, the Delaware Division of Revenue (DDR) provided guidance concerning the income tax requirements that apply to the wages of remote workers for employment outside the state due to the COVID-19 emergency. Prior to the COVID-19 emergency, the DDR applied the "convenience-of-the-employer rule," which asserts that if Delaware employees are working outside the state for their own convenience, and not for the necessity of the employer, those wages are sourced to Delaware for income tax purposes. Since March 22, 2020, the state has been under a COVID-19 emergency declaration that caused many Delaware employers to direct that employees work from home in locations both within and outside of Delaware. Normally, wages paid to Delaware employees for remote work outside the state is sourced to Delaware under the convenience-of-the-employer rule. Due to the breadth of the restrictions under the state's COVID-19 emergency declaration that applied effective March 22, 2020, including travel limitations and quarantine requirements, Delaware taxpayers may treat all days on which they actually worked from a home outside of Delaware as days worked outside of Delaware on Schedule W. On and after June 1, 2020, taxpayers may report days worked from home as days worked outside of Delaware on Schedule W if either: (1) their employer directed them to work from home and they were not permitted to work at the Delaware location, or (2) their employer strongly encouraged remote work but required they seek advance permission to return in person. Once employers give employees the discretion to return to work within their Delaware offices, those employees may no longer report days worked from home as days worked outside of Delaware on Schedule W if those employees elected, but were not required, to work remotely. For additional information on this development, see Tax Alert 2021-0613.
Rhode Island: The Rhode Island Division of Taxation has extended through May 18, 2021, emergency regulations that temporarily waive the requirement that employers withhold Rhode Island state income tax from the wages of employees temporarily working within the state solely due to the COVID-19 emergency. The emergency regulations took effect on March 9, 2020. R.I Div. Taxn., ADV 2021-11 "Withholding-tax guidance — emergency regulation extended" (March 26, 2021).
International — Costa Rica: Costa Rica's Ministries of Foreign Trade and Finance each published, in the Official Gazette, Decree No. 42813-MP-H-COMEX, which contains regulations that simplify the registration process for taxpayers that want to use the free trade zone regime or become a Customs Public Service Assistant. The decree is effective April 18, 2021. For more information on this development, see Tax Alert 2021-0611.
VALUE ADDED TAX
International — Cyprus: On March 2, 2021, the Cyprus Tax Tribunal issued its Decision in the long-anticipated banking case on the treatment under its value-added tax (VAT) of payment systems services. In its comprehensive Decision, the Cyprus Tax Tribunal held that payment systems services constitute a single supply, which fulfills the specific and essential characteristics of the transfer of money and is therefore VAT exempt. The conclusions of the Cyprus Tax Tribunal nullified the specific VAT assessment. Affected businesses should consider the implications of this judgment on their operations. For more on this development, see Tax Alert 2021-0635.
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 also, Maine Rev. Servc., Maine Tax Alert (Vol. 31, Issue 8 March 2021-#3).