April 22, 2021
State and Local Tax Weekly for April 9
Ernst & Young's State and Local Tax Weekly newsletter for April 9 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.
Virginia requires unitary business groups to file corporate income tax informational report based on group's combined net income
A provision of Virginia's 2021 budget bill, Section 3-5.23 of 2021 Va. HB 1800 (HB 1800), requires corporations that are members of a unitary business to file a corporate income tax informational report (based on 2019 tax year computations) using the unitary combined net income of its unitary group of which the corporations are a part. On April 7, 2021, the General Assembly approved Governor Ralph Northam proposed amendment, to delay the due date for filing the informational report from to July 1, 2021.
Section 3-5.23(A)(2) of HB 1800 defines a "unitary business" as a "a single economic enterprise made up either of separate parts of a single business entity or of a commonly controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts." According to the statute, a "unitary business" includes certain partnership interests but does not include entities subject to Virginia's insurance premiums tax or bank franchise tax.
The informational report is based on the combined group's 2019 tax year computations, and must include, at a minimum, the difference in tax owed as a result of filing a unitary combined report compared to the tax owed under current filing requirements. According to a Virginia Department of Taxation (DOT) news release the report will need to include information regarding the unitary group's income, apportionment computation, tax credits, and tax liability calculation. This information must be provided as if the unitary group was filing a unitary combined report under both the Joyce and Finnigan methods, as well as under the current filing requirements for all group members that have nexus with Virginia. The income and apportionment factors for foreign corporations that have at least 80% of property, payroll and sales outside the US or otherwise includable foreign corporations with income that is subject to the provisions of a federal income tax treaty, are excluded from the unitary combined group.
The measure imposes a $10,000 penalty for late filing or making a "material omission or misstatement" in connection with the report.
The Virginia Tax Commissioner will be required to submit a report based on the information it receives under the reporting requirement to the Chairs of the Virginia General Assembly's Senate Finance and Appropriations, House Appropriations and House Finance Committees.
For additional information on this development, see Tax Alert 2021-0699.
Federal: The Treasury Department released President Biden's "Made in America Tax Plan." According to the report, the plan's goal "is to make American companies and workers more competitive by eliminating incentives to offshore investment, substantially reducing profit shifting, countering tax competition on corporate rates, and providing tax preferences for clean energy production. Importantly, this tax plan would generate new funding to pay for a sustained increase in investments in infrastructure, research, and support for manufacturing, fully paying for the investments in the American Jobs Plan over a 15-year period and continuing to generate revenue on a permanent basis." For more on this development, see Tax Alert 2021-0722.
Massachusetts: New law (HB 90) excludes the cancellation of indebtedness income (CODI) from forgiven Paycheck Protection Program (PPP) loans from personal income tax. This change brings the Commonwealth's personal income tax in line with federal income tax treatment of PPP forgiven loans. (CODI from forgiven PPP loans was already exempt from the Commonwealth's corporate excise tax due to the rolling conformity of that tax's law to the federal income tax laws.) The new law also excludes the following federal COVID-19 related amounts from personal income tax: (1) advances received as an Economic Injury Disaster Loan, (2) Small Business Administration payments, and (3) funding received as an Economic Injury Disaster Loan. This change applies for the tax year beginning Jan. 1, 2020. Affected taxpayers that already filed their 2020 Massachusetts personal income tax returns should consider filing an amended return to exclude these amounts. Mass. Laws 2021, ch. 9 (HB 90), signed by the governor April 1, 2021.
Mississippi: New law (HB 1356) modifies depreciation provisions to provide that in the case of new or used aircraft, equipment, engines, or other parts and tools used for aviation, the bonus depreciation allowance conforms with the bonus depreciation rates applicable for federal income tax purposes. A reasonable allowance under this provision is no less than 100%. This change takes effect from and after July 1, 2021. Miss. Laws 2021, HB 1356, signed by the governor April 6, 2021.
New Mexico: New law (SB 218) modifies the state's adoption of the Multistate Tax Compact, eliminating the taxpayer election to apportion and allocate income under the state specified apportionment factor instead of the Compact's three factor (i.e., property, payroll and sales) formula. The change applies to tax years beginning on or after Jan. 1, 2021. N.M. Laws 2021, ch. 69 (SB 218), signed by the governor April 6, 2021.
New York City: The Appellate Division of the New York Supreme Court (court) affirmed a holding of the New York City Tax Appeals Tribunal that a consulting firm's receipts from providing expert knowledge, analysis and views to clients are flat payments for a subscription service that is the product of the efforts of the firm's employees and consultants performed within and without New York City. In so holding, the court rejected the corporation's arguments that the inclusion by the New York City Department of Finance (NYC Department) of compensation paid to employees who did not perform core consulting services — including salespeople, consultant managers, and IT staff — was reversible error, and that its tax liability should be based solely upon the location of and amounts paid to its consultants and research managers who provided the consulting services it provided to clients. Instead, the court found the NYC Department properly focused on the nature of the corporation's business and the personnel who contributed to the performance of the service, including salespeople, consultant manager, and IT. The court reasoned that the IT staff maintains the database used by research managers to develop surveys, consulting managers help locate and recruit industry experts who clients have access to, and salespeople solicit new service subscribers and manage client accounts. In the Matter of Gerson Lehrman Group, Inc. v. New York City Tax Appeals Tribunal, 2021 NY Slip Op 02102 (NY App. Div., First Div., April 6, 2021).
South Carolina: The South Carolina Department of Revenue (SC DOR) extended the nexus and income tax withholding guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency to Sept. 30, 2021 (from June 30, 2021). As previously announced, the SC DOR has stated that it will not use changes in an employee's temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period solely as a basis for establishing nexus (including for P.L. 86-272 purposes) or for altering the apportionment of income. S.C. Dept. of Rev., SC Information Letter #21-8 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19 (April 7, 2021).
SALES & USE
South Carolina: The South Carolina Department of Revenue (SC DOR) extended the nexus guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency to Sept. 30, 2021 (from June 30, 2021). As previously announced, the SC DOR has stated that it will not use changes in an employee's temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period solely as a basis for establishing sales and use tax nexus. S.C. Dept. of Rev., SC Information Letter #21-8 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19 (April 7, 2021).
Virginia: New law (SB 1398), effective Sept. 1, 2021, requires accommodations providers and accommodations intermediaries to collect and remit retail sales and use tax and transient occupancy taxes. Under the new law, when an accommodation is facilitated by an intermediary, the intermediary will be deemed the dealer making a retail sale of an accommodation, and will be required to collect and remit tax, computed on the room charge (i.e., the full retail price charged to the customer by the intermediary for the use of the accommodations, including any accommodations fee, before taxes). If the accommodation is at a hotel, the intermediary will remit the taxes on the accommodations fee to the Virginia Department of Taxation (VA DOT) and will remit any remaining taxes to the hotel, which will remit the tax to the VA DOT. If the charge is at a short-term rental, or at any other accommodation, the intermediary will remit taxes on the room charge to the VA DOT. When the accommodation is not facilitated by an intermediary, the accommodations provider will be required to collect and remit tax, computed on the total charge for the accommodations. An intermediary will not be liable for sales tax remitted to an accommodations provider who fails to remit the tax to the VA DOT. Va. Laws 2021, ch. 383 (SB 1398), signed by the governor March 25, 2021.
West Virginia: New law (SB 305) provides a sales and use tax exemption for purchases of certain services and tangible personal property sold for the repair, remodeling, and maintenance of aircraft. Specifically, the exemption applies to "[s]ales of aircraft repair, remodeling, and maintenance services, or to an engine or other component part of an aircraft; sales of tangible personal property that is permanently affixed or permanently attached as a component part of an aircraft, as part of the repair, remodeling, or maintenance service; and sales of machinery, tools, or equipment directly used or consumed exclusively in the repair, remodeling, or maintenance of aircraft, aircraft engines, or aircraft component parts for an aircraft, or used exclusively in combination with the purposes specified in this subsection and the purposes specified in [W.V. Code Section 11-15-9(a)(33)]." To claim the exemption, the taxpayer must first pay tax to the vendor and then apply to the West Virginia Tax Commissioner for a refund or credit. Alternatively, a taxpayer can seek permission from the West Virginia Tax Commissioner to use an exemption certificate. The exemption applies to sales made on and after Sept. 1, 2021. W.V. Laws 2021, SB 305, signed by the governor April 2, 2021.
Federal: In Notice 2021-23, the IRS released guidance on the employee retention credit (ERC) for the first two quarters of 2021. The new guidance amplifies Notice 2021-20 (see Tax Alert 2021-0513) by incorporating the changes made by Section 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of the Consolidated Appropriations Act, 2021 (P.L. 116-260)), which apply on a prospective basis for qualified wages paid in the first two quarters of 2021. For more on this development, see Tax Alert 2021-0724.
Kentucky: New law (SB 162) modifies various Kentucky tax credit and incentive provisions. The law provides various incentives to bolster in-state production of vital medications and personal protective equipment. The law sunsets tax credit eligibility under the Kentucky Industrial Revitalization Act Tax Credit program (specifically, those credits approved under KRS 154.26-010 to 154.26-100) by providing that an eligible company that has not received preliminary approval for the credits by June 30, 2021 will not receive final approval by the Kentucky Cabinet for Economic Development to become an approved company and receive such tax credits. The amount of the skills training investment credit is increased to up to $2,000 per trainee (from $500 per employee), not to exceed $200,000 (from $100,000) for each approved company per fiscal year (instead of per biennium under prior law). The law modifies various credit provisions (including expanding qualifying activities, adjusting certain credit caps, modifying definitions and modifying approval provisions) related to the Angel Investment Act, the Kentucky Investment Fund Act, the Kentucky Business Investment Program, the Kentucky Reinvestment Act, the Kentucky Research and Development Infrastructure Fund. Lastly, the Kentucky rural innovation fund and the Kentucky commercialization fund will cease June 30, 2021; unused funds will be transferred to the Kentucky enterprise fund. Ky. Laws 2021, ch. 185 (SB 162), signed by the governor April 5, 2021.
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 Section 44-48.3-7(a). The suspension, which began on March 9, 2020, now runs through May 7, 2021 (formerly April 9, 2021). R.I. Gov., Executive Order 21-33 (April 8, 2021).
COMPLIANCE & REPORTING
Alabama: The Alabama Department of Revenue (AL DOR) issued guidance to pass-through entities (PTEs) electing to pay Alabama income tax at the entity level. This election can be made starting with the 2021 tax year. Any PTE making the election must notify the AL DOR no later than the 15th day of the third month following the close of the tax year for which the PTE elects to be taxed as such. For PTEs making this election for the 2021 tax year, estimated payments will be required if the PTE's estimated Alabama tax liability is expected to be $500 or more. The guidance includes estimated tax due dates for calendar and fiscal year taxpayers and explains how to calculate the amount of estimated quarterly tax payments due for 2021. If a PTE makes estimated payments but ultimately decides not to elect to be taxed at the entity level, the PTE can file a refund claim for the amount of estimated payments made. Ala. Dept. of Rev., "ALDOR Issues Estimated Payment Guidance for Electing Pass-Through Entities" (April 2, 2021).
Arizona: New law (SB 1297) automatically extends the 2020 individual income tax return filing and tax payment deadlines to May 17, 2021 (from April 15, 2021). The Arizona Department of Revenue in its Individual Income Tax FAQs stated that these extensions apply to individual income tax returns, Form 140PTC and Form 140ET. The extension does not apply to estimated tax payments. Ariz. Laws 2021, ch. 177 (SB 1297), signed by the governor April 5, 2021.
Arizona: New law (SB 1350), effective for tax years beginning from and after Dec. 31, 2020, gives a taxpayer that has been granted an extension to file its federal income tax return seven months after the initial due date of its Arizona corporate income tax return or exempt organization return to file these returns. This change does not apply to small business corporation returns. Ariz. Laws 2021, ch. 178 (SB 1350), signed by the governor March 30, 2021.
Arkansas: New law (SB 525) reverses a law change enacted in 2019 (Ark. Laws 2019, Act 819) that transferred the administration and collection of the franchise tax from the Arkansas Secretary of State to the Arkansas Department of Finance and Administration. Upon enactment of the new law, the administration and collection of the franchise tax immediately transferred back to the Arkansas Secretary of State. Ark. Laws 2021, Act 523 (SB 525), signed by the governor April 1, 2021.
Kentucky: In recently enacted legislation (SB 162), the Kentucky General Assembly confirmed Executive Order 2020-708 (Aug. 31, 2020) which abolished the Kentucky Claims Commission, reorganized the Public Protection Cabinet and established the Office of Claims and Appeals and various other boards, including the Board of Tax Appeals, the Board of Claims and the Crime Victims Compensation Board. The new law codifies provisions related to the Board of Tax Appeals and updates statutory references to the Kentucky Claims Commission to the Kentucky Office of Claims and Appeals and the appropriate board. Ky. Laws 2021, ch. 185 (SB 162), signed by the governor April 5, 2021. For more on Executive Order 2020-708, see Tax Alert 2020-2355.
Montana: New law (HB 53) establishes provisions for reporting federal partnership audit adjustments, adopting the model rules developed and issued by the Multistate Tax Commission. Generally, within 90 days after the final determination date of a final federal adjustment, an audited partnership must file a federal adjustments report with the Montana Department of Revenue (MT Department) and notify each of its direct partners of their distributive share of the final federal adjustment. Direct partners will have 180 days to file an amended return and pay additional tax, penalty and interest due. An audited partnership that originally reported or paid Montana income tax on behalf of some or all of its partners through a composite return, must file an amended information return and pay additional tax, penalty and interest due. This must be done no later than 90 days after the final determination date. Within 180 days of a final determination date, a partner of an audited partnership must report and pay tax due (along with applicable interest and penalties) with respect to adjustments resulting from a partnership-level audit. Alternatively, an audited partnership can make an irrevocable election to pay tax , penalty and interest due. If the election is made, the partnership will have 180 days after the final determination date to pay the additional Montana tax owed. These reporting and payment provisions, including the payment election, apply to direct and indirect partners of an audited partnership that are tiered partners and all of the partners of such tiered partners that are subject to Montana income tax. An audited partnership or tiered partner may enter into an agreement with the MT Department to use an alternative reporting and payment method, if it demonstrates that the requested alternative method will reasonably provide for the reporting and payment of tax, penalty and interest due. These provisions apply to tax adjustments made after March 31, 2021. Mont. Laws 2021, ch. 108 (HB 53), signed by the governor on March 31, 2021.
PAYROLL & EMPLOYMENT TAX
South Carolina: The South Carolina Department of Revenue announced that the nexus and income tax withholding guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency is extended to Sept. 30, 2021 (from June 30, 2021). S.C. Dept. of Rev., SC Information Letter #21-8 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19 (April 7, 2021).
Minnesota: The Minnesota Department of Revenue said that health care providers, hospitals, and surgical centers providing COVID-19 testing or COVID-19 at-home test kits are subject to MinnesotaCare tax on any payment received for providing the testing or kits, unless otherwise exempt. Payments for such services or kits from individuals, patients or third-party payers (e.g., insurance companies) must be reported as gross receipts on the MinnesotaCare tax return. Exempt payments reported in gross receipts should be included on the appropriate exemption lines. Minn. Dept. of Rev., "Taxation of COVID-19 Testing and Test Kits" (March 31, 2021).
Wyoming: New law (HB 133) establishes provisions for regulating and taxing online sports wagering by the Wyoming Gaming Commission (WY Commission). The law authorizes the WY Commission to impose a $100,000 fee for an initial sports wagering operator permit which is valid for five years. Thereafter, the WY Commission can impose an additional $50,000 fee to renew a sports wagering operator permit for each subsequent five-year period. A sports wagering vendor must possess a permit issued by the WY Commission to conduct business in the state. The WY Commission can impose a $10,000 fee for the initial permit, which is valid for five years and, thereafter, a $5,000 renewal fee likewise valid for each subsequent five-year period. Persons who knowingly accept online sports wagers or otherwise operate a business of sports wagering without a valid permit will be subject to a $25,000 penalty for the first offense, increased to $50,000 for a second and any subsequent offense. These provisions take effect Sept. 1, 2021. Wyo. Laws 2021, ch. 100 (HB 133), signed by the governor April 5, 2021.
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.