April 28, 2021
State and Local Tax Weekly for April 16
Ernst & Young's State and Local Tax Weekly newsletter for April 16 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.
Maryland legislature approves bill that would move applicability date of digital advertising tax to 2022, exempt certain taxpayers from tax
The Maryland legislature approved and sent to Governor Larry Hogan SB 787, which would modify the state's new Digital Advertising Services Gross Revenues Tax.1 The applicability date of the new tax would be changed to tax years beginning after Dec. 31, 2021 (from Dec. 31, 2020). Thus, first quarterly estimated payments would be due April 15, 2022, based on first quarter 2022 revenues.
The new digital advertising services tax is imposed on the annual gross revenue derived from digital advertising in the state. The tax applies a graduated rate that increases in increments based on the taxpayer's global annual revenues.
SB 787 would exempt from this tax advertising on digital interfaces owned or operated by or on behalf of a broadcast entity and a news media entity. A "news media entity" would not include "an entity that is primarily an aggregator or republisher of third-party content."
SB 787 would also prohibit businesses subject to the tax from passing that cost to the customers who purchase the digital advertising services through a separate fee, surcharge or line item.
For additional information on this development, see Tax Alert 2021-0788.
West Virginia law enacts single sales factor apportionment and market-based sourcing, repeals throw-out rule, adopts mobile workforce provisions
On April 9, 2021, West Virginia Governor Justice signed HB 2026, modifying the state's corporate income apportionment and sourcing provisions. The law also modifies the mobile workforce provisions so that compensation of certain temporary nonresident employees is not subject to West Virginia personal income tax. This law comes as part of West Virginia's new initiative to make the state more attractive for remote workers.
Effective for tax years beginning on or after Jan. 1, 2022, West Virginia:
Effective Jan. 1, 2022, compensation paid to a nonresident individual is exempt from West Virginia personal income tax if all of the following apply:
An employer is not required to withhold tax on compensation paid to employees meeting these conditions. If, however, an employee exceeds the 30-day threshold during the calendar year, the employer will be required to withhold and remit tax for each day in the calendar year the employee performs employment duties in West Virginia.
For additional information on this development see Tax Alert 2021-0775.
Arizona: New law (SB 1752) updates the state's date of conformity to the IRC to March 11, 2021 (from Jan. 1, 2020), including provisions that became effective during 2020 with specific adoption of retroactive effective dates. Changes to the IRC enacted after March 11, 2021 are not adopted. This updated IRC conformity date applies for purposes of computing income tax for tax years beginning from and after Dec. 31, 2020. For purposes of computing income for a tax year beginning in 2020, the state conforms to the IRC in effect on Jan. 1, 2020, including provisions that became effective during 2019. SB 1752 makes clear that this conformity includes changes in the Families First Coronavirus Response Act (P.L. 116-127), the Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142), the Consolidated Appropriations Act, 2021 (P.L. 116-260) and the American Rescue Plan Act of 2021 (P.L. 117-2) that are retroactively effective during 2020. Ariz. Laws 2021, ch. 232 (SB 1752), signed by the governor April 14, 2021. See also, Ariz. Dept. of Rev., "2020 Conformity Notice" (April 16, 2021). Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136).
District of Columbia: The District of Columbia Office of Tax and Revenue (OTR) explained that District gross income does not include cancellation of indebtedness income from forgiven Paycheck Protection Program (PPP) loans. Further, in computing net income, corporations, financial institutions, unincorporated businesses and partnership can deduct business expenses paid using PPP loans, including PPP loans that are later forgiven. D.C. OTR, "Notice 2021-04 District Treatment of Paycheck Protection Program (PPP) Loans" (April 14, 2021).
Maryland: The Maryland Comptroller issued guidance on the state's conformity to federal tax changes in the Consolidated Appropriations Act, 2021 (CAA). The Maryland Bureau of Revenue Estimates has determined that no provision of the CAA meets Maryland's IRC automatic decoupling threshold.2 Thus, the state conforms to all provisions of the CAA, unless decoupling legislation is enacted. Notably, Maryland follows federal law, and will allow the deduction of business expenses paid for with Paycheck Protection Program loans. Md. Comp., Tax Alert 04-07-21 "Maryland Impact of the Consolidated Appropriation Act (CAA) of 2021" (April 7, 2021).
Tennessee: New law (HB 776) for purposes of determining excise tax liability requires federal COVID-19 relief payments received between March 1, 2020 and Dec. 31, 2021 from the following programs be subtracted from net earnings and losses to the extent included in federal taxable income: (1) the Tennessee business relief program, (2) the Tennessee supplemental employer recovery grant program, (3) the coronavirus agricultural and forestry business fund, (4) the hospital staffing assistance program, (5) the emergency medical services ambulance assistance program, and (6) the Tennessee small and rural hospital readiness grants program. In addition, payments received between March 1, 2020 and Dec. 31, 2021 out of funds allocated to Tennessee from the child care and development block grant under the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136), as further extended under the Consolidated Appropriations Act, 2021 (P.L. 116-260), are deductible to the extent included in federal taxable income. Taxpayers should deduct relief payments on FAE 170, Schedule J, Line 25, on the return that covers the payment period. HB 776 took immediate effect. Tenn. Laws 2021, ch. 154 (HB 776), signed by the governor April 14, 2021; See also, Tenn. Dept. of Rev., Franchise and Excise Tax Notice #21-03 "Excise Tax Deduction for COVID-19 Relief Payments" (April 2021).
West Virginia: New law (SB 693), for personal income tax purposes, updates the state's IRC conformity date to federal changes made after Dec. 31, 2019 but prior to March 12, 2021 (previously, federal changes made after Dec. 31, 2019 but prior to Jan. 1, 2021). No amendments to the IRC made on or after March 12, 2021 will be given any effect. W.V. Laws 2021, SB 693, signed by the governor April 13, 2021.
SALES & USE
Alabama: New rule (Ala. Admin. Rule 810-6-1-.09) provides guidance on reporting and notice requirements for facilitators of the lease or rental of automotive vehicles. A facilitator is required to file an annual informational report with the Alabama Department of Revenue (AL DOR) and to provide annual notices to the third-party owner/lessors. The annual informational report, which must be filed electronically, is due January 31 of the calendar year succeeding the year for which the annual informational report is provided. The annual informational report for each third-party owner/lessor must include the third-party owner/lessor's name and billing address (and, if different, the last known mailing address), the third-party owner/lessor's vehicle registration information, and the total amount of the transactions that otherwise would be subject to lease or rental tax. Similarly, the annual transaction summary notice must be provided to the third-party owner/lessor by January 31 of the calendar year succeeding the year for which the annual transaction summary notice is provided. The transaction summary must include: (1) the third-party owner/lessor's name; (2) the date of each facilitated rental transaction; (3) the invoice, transaction or other number used by the facilitator to identify the transaction; (4) the name of the lessee associated with each transaction; (5) the total amount of the transactions that otherwise would be subject to lease or rental tax; and (6) a statement that a report will be submitted. In lieu of providing an annual informational report and the annual transaction summary notice, a facilitator may voluntarily register with the AL DOR and remit tax for each facilitated rental transaction. A penalty will be imposed for failure to timely file. The rule took effect April 12, 2021.
Arizona: New law (SB 1720) imposes the transaction privilege tax on peer-to-peer car sharing programs that accepts payment for a shared vehicle transaction in Arizona, and requires such peer-to-peer car sharing programs to register with the Arizona Department of Revenue (AZ DOR) for a license for the payment of state and local taxes due from shared vehicle owners on shared vehicle transactions it facilitates. Shared vehicle transactions are not subject to the rental vehicle surcharge and are not subject to the surcharges levied and collected by the Arizona Sports and Tourism Authority and stadium districts if the shared vehicle owner certifies to the AZ DOR that a shared vehicle is an individual-owned shared vehicle. A peer-to-peer car sharing program that relies in good faith on the shared vehicle owner's representation that the shared vehicle is an individual-owned shared vehicle, is not liable for any tax, penalty, fee or other sanction imposed on a shared vehicle owner. The law also defines key terms, provides for the sourcing of a shared vehicle transaction, requires taxes be paid and reported electronically, and provides for insurance and record retention requirements, car sharing program agreement disclosures and data retention requirements. The law takes effect 90 days after the adjournment of the 2021 legislative session. Ariz. Laws 2021, ch. 220 (SB 1720), signed by the governor April 9, 2021.
Maryland: The Maryland legislature has passed and sent to Governor Larry Hogan SB 787, which would amend the state's sales and use tax provisions on the taxation of digital codes and digital goods. The changes would clarify the digital codes and digital goods to which sales and use tax does and does not apply and would require marketplace facilitators to collect and remit sales and use tax on certain sales of digital codes and digital goods. For additional information on this development, see Tax Alert 2021-0805.
Tennessee: New law (HB 131) for sales and use tax purposes provides that "tangible personal property" does not include mains, pipes, pipelines or tanks after they become attached to a building, other structure, or installed underground for conducting steam, heat, water, wastewater, oil, electricity, gas or any property, substance, or product capable of transportation or conveyance, excluding propane tanks for residential use and above-ground storage tanks that can be moved without disassembly and are not affixed to the land. "Tangible personal property" also does not include surface, underground, or elevated railroads, or railroad structures, substructures, and superstructures, tracks and the metal thereon, branches, switches, and other improvement structures permitted or authorized to be made in, upon or under public or private property. For sales and use tax purposes, the above described items are deemed to be realty. These changes take effect July 1, 2021. Tenn. Laws 2021, ch. 86 (HB 131), signed by the governor April 7, 2021.
Tennessee: New law (SB 874) exempts from sales and use tax online access to continuing education courses that meet regulatory requirements for licensed individuals and that are offered by an exempt organization (under IRC §§ 501(c)(3) or (c)(6)). The exemption takes effect July 1, 2021. Tenn. Laws 2021, ch. 139 (SB 874), signed by the governor April 13, 2021.
Federal: The IRS released proposed regulations (REG-121095-19) that would allow certain non-US persons and non-US-owned partnerships, including private equity, real estate, and other alternative and private capital funds, to reduce or eliminate withholding imposed under IRC §§ 1445, 1446(a) and 1446(f) on eligible gains deferred and invested in a qualified opportunity fund (QOF) provided certain requirements are met. These persons or partnerships must timely obtain from the IRS an "eligibility certificate" and meet certain specified requirements to include their "security-required gains" in their QOF gain deferral election. The proposed regulations also clarify the requirements for Qualified Opportunity Zone Businesses (QOZBs) receiving up to an additional 24 months under the working capital safe harbor because of a federally declared disaster. For more on this development, see Tax Alert 2021-0719.
Arkansas: New law (HB 1706) establishes the Logging and Wood Fiber Transportation Job Creation Incentive Act which provides an income tax credit for new, or the expansion of existing, wood energy products and forest maintenance projects. The credit equals 30% of the cost of wood energy products equipment purchased for use in Arkansas after the date specified in an incentive agreement by a certified taxpayer. Taxpayers allowed the credit that do not have an Arkansas public retirement system as a proprietor, partner member, shareholder, or interest holder, can claim each year a credit equal to the lesser of $5 million or the amount of income tax due. Unused credit can be carried forward indefinitely; credits can be sold or transferred. If at the time the incentive agreement is executed, the taxpayer would apportion any portion of the tax credit to an Arkansas public retirement system as a proprietor, partner, member, or shareholder of the taxpayer, the public retirement system will have possession and control of all tax credits, including any tax credit allowed under this provision. The credit is available for a project: (1) for which construction was commenced by the date specified in the incentives agreement, but no earlier than Jan. 1, 2020; (2) that uses low-valued wood (e.g., sawmill residuals, unwanted treetops, damage/diseased trees) to produce high-efficiency, high-energy wood energy products; (3) the taxpayer has a total investment in excess of $50 million; (4) that is undertaken by a taxpayer who has entered into an incentive agreement with the state in which the taxpayer commits to creating at least 100 net new full-time permanent employees with an average annual wage of at least $60,000; (5) that will provide a positive cost-benefit analysis to the state; (6) that is certified as having a closing date before Dec. 31, 2023, for all facilities by which the taxpayer verifies that necessary capital acquisition and borrowing for the facilities has occurred to ensure funds will be available; and (7) the taxpayer and state agree that the facility is to be classified as a qualified wood energy products and forest maintenance project. Provisions of HB 1706 are effective for tax years beginning on or after Jan. 1, 2021. Ark. Laws 2021, Act 594 (HB 1706), signed by the governor April 6, 2021.
Maryland: New law (SB 19) modifies the biotechnology investment tax credit program. For purposes of the credit, the definition of "qualified investor" is modified to provide that a "qualified investor" does not include a founder or current employee of a qualified Maryland biotechnology company, if the company has been in active business for more than five years. The law also prohibits the Maryland Department of Commerce (MD DoC) from issuing biotechnology investment tax credit certificates after June 30, 2028. The amount of the tax credit allowed is reduced to 33% (from 50%) of the investment in a qualified Maryland biotechnology company, not to exceed $250,000. If the company is located in Allegany, Dorchester, Garrett, or Somerset counties, the amount of the credit is reduced to 50% (from 75%) of the investment, not to exceed $500,000. The law also lists additional information that must be included in the MD DoC's report on the credit and requires the MD DoC to study how it can award biotechnology investment tax credits on a more competitive basis. These changes take effect June 1, 2021 and apply to initial tax credit certificates issued after June 30, 2021. Md. Laws 2021, ch. 112 (SB 19), signed by the governor April 13, 2021.
Maryland: New law (SB 160) renames the Cybersecurity Investment Incentive Tax Credit the Innovation Investment Incentive Tax Credit and changes the references to "qualified Maryland cybersecurity company" to "qualified Maryland technology company". For purposes of the credit, the definition of "qualified investor" is modified to provide that a "qualified investor" in a qualified Maryland technology company does not include a founder or current employee of a qualified Maryland technology company, if the company has been in active business for more than five years. A qualified Maryland technology company does not include a technology company that is or has been certified as a qualified Maryland biotechnology company. A "technology company" is defined as a for profit company engaged in the research, development, or commercialization of innovative and proprietary technology. Each year the Maryland Department of Commerce will establish a list of technology sectors that will be eligible for these credits. The credit provisions apply to tax years beginning before Jan. 1, 2025 (formerly Jan. 1, 2023). These changes take effect June 1, 2021 and apply to initial tax credit certificates issued after June 30, 2021. Md. Laws 2021, ch. 113 (SB 160), signed by the governor April 13, 2021.
Maryland: New law (SB 196) modifies the Maryland research and development (R&D) tax credit. As revised, an individual or corporation may claim an R&D credit against state income tax in an amount equal to 10% of the amount by which the Maryland qualified R&D expenses paid or incurred by the individual or corporation during the tax year exceeds the Maryland base amount for the individual or corporation. The amount of credit approved by the Maryland Department of Commerce may not exceed $12 million in the calendar year, with $3.5 million in credit reserved for small business applicants. The amount of credit awarded to any single applicant may not exceed $250,000. The credit is available in tax years beginning before Jan. 1, 2026 (formerly Jan. 1, 2021). These changes take effect July 1, 2021 and apply to Maryland R&D credits certified after Feb. 15, 2021. Md. Laws 2021, ch. 114 (SB 196), signed by the governor April 13, 2021.
COMPLIANCE & REPORTING
Arkansas: New law (SB 420) extends by a month the extended deadline for filing an Arkansas income tax return. The Legislature found that having the additional extended deadline for filing an Arkansas income tax return occur on the same date as the federal return imposed a compliance burden on taxpayers and tax professionals. As revised, persons who receive a federal extension will be granted an extension of time until one month after the due date of the federal income tax return to file the corresponding Arkansas state income tax return. Taxpayers need to include a copy of the request for the federal extension or the document granting the extension. This change is effective for tax years beginning on or after Jan. 1, 2021. Ark. Laws 2021, Act 629 (SB 420), signed by the governor April 12, 2021.
Puerto Rico: In Administrative Order 2021-02, the Puerto Rico Department of State extended the due date from April 15, 2021 to May 17, 2021 for filing the 2020 corporate annual reports, paying limited liability company (LLC) annual fees and requesting an extension of time to file the annual reports. Entities that request an extension to file the corporate annual reports will have until July 19, 2021, to file the reports. LLCs, however, must still pay the LLC annual fee of $150 on or before May 17, 2021. For additional information on this development, see Tax Alert 2021-0747.
Nevada: Reminder, Nevada's tax amnesty program will end on May 1, 2021. Individuals and businesses that participate in and comply with the terms of the amnesty program will have otherwise applicable penalties and interest waived upon the full payment of eligible unpaid taxes, fees or assessments. For the amnesty to apply, the base tax due must be paid in full during the amnesty period. For unreported tax, taxpayers must file a return for each period in which tax was not reported. Taxes eligible for amnesty include: commerce tax, modified business tax, sales and use tax, bank branch excise tax, insurance premium tax, centrally assessed property tax, liquor tax, tire tax, live entertainment tax (non-gaming), short term lessor (passenger car) fee, exhibition facilities fees, transportation connection tax, net proceeds of mineral tax, cigarette and other tobacco products taxes, and cannabis tax. Amnesty does not apply to lodging tax, real property transfer tax and locally assessed property tax. For more on the Nevada amnesty program, see Tax Alert 2021-0057.
PAYROLL & EMPLOYMENT TAX
New York: Recently enacted legislation (SB S2588A, ch. 77) requires that New York employers provide up to four hours of paid leave to employees for time spent to obtain a COVID-19 vaccine. If a COVID-19 vaccine requires two injections, the employee is entitled to two periods of paid leave of up to four hours each (which could be up to eight hours in total). The new law is effective March 12, 2021 through Dec. 31, 2022. The New York Department of Labor released a fact sheet on the new law. For additional information on this development, see Tax Alert 2021-0776.
Ohio: The Ohio Department of Job and Family Services announced that it extended to all four quarters of 2020 the waiver of interest and penalty charges for late filing and payment of state unemployment insurance tax returns. For additional information on this development, see Tax Alert 2021-0757.
Ohio: In NASCAR Holdings, Inc.,3 the Ohio Board of Tax Appeals (OH BTA) held that an out-of-state company's broadcast revenue attributed to Ohio viewers is sourced to Ohio for Commercial Activity Tax (CAT) purposes, not to the company's state of domicile. In so holding, the OH BTA first analyzed which sourcing statute applied. The Ohio Department of Taxation (OH DOT) had applied Ohio Rev. Code 5751.033(I), which sources receipts from services and receipts not otherwise sourced elsewhere in the statute based on the purchaser's benefit received in Ohio. The company argued that the OH DOT should have applied Ohio Rev. Code 5751.033(F), which sources receipts from the right to use trademarks, trade names, patents, copyrights and similar intellectual property in Ohio. The OH BTA agreed with the company that Ohio Rev. Code 5751.033(F) was the correct statute to apply and modified the assessment. Having determined that Ohio Rev. Code 5751.033(F) applies, the OH BTA noted that the company's broadcasting revenue had to be sourced based on the purchaser's use, or right to use, the intellectual property in Ohio. The OH BTA then turned to the company's arguments against the OH DOT's sourcing methodology. The company argued that sourcing based on Nielsen ratings or Ohio population overstated Ohio usage as that data did not consider areas beyond the US. The OH BTA declined to reject the OH DOT's sourcing methodology on the ground that the company had more detailed viewership information in its possession but did not provide it during the audit. The OH BTA also rejected the company's assertion that the Ohio Supreme Court's recent decision in Defender Security Co.4 should be considered, reasoning that the sourcing rules under Ohio Rev. Code 5751.033(I), and not Ohio Rev. Code 5751.033(F), applied in that decision. For more information on this development, see Tax Alert 2021-0756.
VALUE ADDED TAX
International: Outlining value-added tax (VAT) systems in 137 jurisdictions, the 2021 edition of EY's annual reference book, Worldwide VAT, GST and Sales Tax Guide, is now available in an interactive map format (as well as to download as a pdf) on ey.com.
Thursday, May 6. Unclaimed property enforcement amidst regulatory compliance challenges (1 pm ET). The topic of unclaimed property still mystifies some organizations, particularly the enforcement and application, which differ greatly from other indirect regulatory obligations. Why is it important? Why does my organization need to annually comply? Ernst & Young LLP would like to level set on the basics of unclaimed property and why an organization would benefit from sound accounting policies and tracking in order to mitigate risk and decrease costs. Additionally, the panel will discuss the regulatory and audit landscapes as they continue to change, often contradicting one another as holders strive to adapt and comply. State statutes are in flux, as more and more states are adopting, or considering adopting, the Revised Uniform Unclaimed Property Act (RUUPA) of 2016. Please join members of Ernst & Young LLP's Unclaimed Property and Escheat Services practice as they address the current landscape. 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. Laws 2020, ch. 37 (HB 732) (codified generally at Md. Code Tax-Gen. §§ 7.5-101 to -301), enacted over governor's veto on Feb. 12, 2021.
2 Under Maryland law, the state automatically decouples from amendments to the IRC impacting state revenue by $5 million or more during the fiscal year of passage. If the threshold is met, the amendment to the IRC will not apply to state filings in the tax year in which the law was enacted.
3 NASCAR Holdings, Inc. v. McClain, BTA Case No. 2015-263 (April 5, 2021).
4 Defender Security Co. v. McClain, Slip Opinion No. 2020-Ohio-4594 (The Ohio Supreme Court, applying Ohio Rev. Code 5751.033(I), held that a company's receipts from the sale of customer contracts are sourced to the out-of-state physical locations where the purchaser received the benefit of the purchased contracts (see Tax Alert 2020-2388)).