May 12, 2021
State and Local Tax Weekly for April 30
Ernst & Young's State and Local Tax Weekly newsletter for April 30 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.
California conforms to federal income tax treatment of PPP loans and EIDL advance grants
On April 29, 2021, Governor Gavin Newsom signed a bill (AB 80) conforming the state corporate and individual income tax treatment of Paycheck Protection Program (PPP) loans and Economic Injury Disaster Loan (EIDL) advance grants under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Consolidated Appropriations Act, 2021 (CAA) to federal tax law (with some modifications). According to the governor's press release, AB 80 "will give small businesses hit hardest by [the COVID-19] pandemic a $6.2 billion tax cut over the next six years … "
Under AB 80, taxpayers may exclude forgiven PPP loans or EIDL advance grants from their gross income when computing California corporate and individual income tax for tax years beginning on or after Jan. 1, 2019. Taxpayers may also deduct business expenses paid with the proceeds of forgiven PPP loans (except taxpayers that are "ineligible entities") or EIDL advance grants.
An "ineligible entity" is defined as a publicly traded company (as described in Section 342 of Division N of the CAA) or a taxpayer that did not experience at least a 25% reduction in gross receipts from the applicable quarter in 2019.
For more on this development, see Tax Alert 2021-0903.
Ohio Supreme Court ruling that a waste hauler could claim sales/use tax exemption for 'highway transportation for hire'
The Ohio Supreme Court's ruled in N.A.T. Transp. Inc. v. McClain1 that a waste hauler could claim the "highway transportation for hire" sales/use tax exemption for the purchase of two trucks used to transport waste to disposal sites designated by the customer. The court concluded that waste remains the customer's personal property when the customer specifies where to dispose of the waste, thereby qualifying the trucks as "highway transportation for hire."
In 2002, the court denied this exemption to a taxpayer in Rumpke,2 which addressed whether a residential waste hauler could claim the exemption, concluding that the taxpayer did not transport tangible personal property belonging to others because the customers relinquished control over their waste upon pickup by the taxpayer. In the present case, the court held that the waste hauler could claim the exemption for the two trucks used to haul commercial, industrial and institutional customers' waste to landfills. The court based its ruling on the finding that the waste remained the personal property of the customer because the customer told the taxpayer where to dispose of the waste. In so holding, the court distinguished the facts in this case from those in Rumpke, finding that that the waste hauler in Rumpke not only owned the trucks and hauled the waste but also owned the landfills to which it was taken and, as such, was not transporting personal property belonging to others.
Taxpayers engaged in hauling waste should consider both Rumpke and this new decision in N.A.T. Transp. Inc. in considering whether their operations could qualify for the sales and use tax exemption. For some similarly situated waste haulers, refunds of sales tax may be available. The statute of limitations for refunds is four years from the payment of the tax.
For more on this development, see Tax Alert 2021-0865.
Montana: As part of a corporate income tax "modernization program," the Montana legislature on April 22, 2021, passed SB 376, which would change the Corporate Income Tax apportionment formula from an equally weighted three-factor formula to a double-weighted sales factor formula (i.e., property factor, plus the payroll factor, plus two times the sales factor and a denominator of four). Governor Greg Gianforte is expected to sign SB 376. Adoption of the double-weighted sales factor apportionment formula would apply to tax years beginning after June 30, 2021. For more on this development, see Tax Alert 2021-0859.
Oregon: The Oregon Department of Revenue (OR DOR) explained that taxpayers claiming the employee retention credit (ERC), are required to reduce their wage expense deduction on their federal income tax return by the amount of the ERC for the year. The OR DOR said that Oregon allows a subtraction equal to the amount of wage expense reduction on the taxpayer's federal income tax return. Taxpayers should subtract the entire amount of the wage expenses reduction in the tax year the ERC was first claimed. Ore. Dept. of Rev., COVID-19 Tax Relief FAQs (updated April 22, 2021).
Texas: On April 16, 2021, the Texas Comptroller of Public Accounts (TX Comptroller) released proposed amendments to its franchise tax rule, 34 Tex. Admin. Code § 3.599 (Section 3.599), regarding the tax credit for research and development (R&D) activities. The proposed franchise tax amendments would make significant changes to Section 3.599, including:
The proposed amendments, if adopted, would be retroactively effective for Texas franchise tax reports originally due on or after Jan. 1, 2014.
For more on this development, see Tax Alert 2021-0955.
SALES & USE
Multistate: During an April 28, 2021 meeting, the Multistate Tax Commission announced that its Uniformity Committee's standing subcommittee would start collecting information on, and analyzing issues related to, the state taxation of digital goods. This project could result in a white paper on this issue.
New Mexico: New law (HB 98) makes various changes to the state's gross receipts and compensating taxes. The definition of "lease" or "leasing" is clarified to mean "an arrangement whereby, for a consideration, the owner of property grants another person the exclusive right to possess and use the property for a definite term." The law also defines the term "licensing" or "license" to mean "an arrangement whereby, for a consideration, the owner of property grants another person a revocable, non-exclusive right to use the property." The law modifies compensating "use" tax provisions, imposing the tax on tangible property/services that was acquired in a transaction for which the seller's receipts were not subject to the gross receipts tax. Similarly, tax applies only to the value of a license or franchise used in New Mexico where the license or franchise was acquired in a transaction the receipts from which were not subject to the gross receipts tax. (Under prior law, tax would have applied to tangible property/services/use of a license or franchise acquired inside or outside the state as a result of a transaction with an out-of-state person that would have been subject to the gross receipts tax had the property/services/license or franchise been acquired from a person that had nexus with New Mexico.) For purposes of these provisions, receipts are not subject to the gross receipts tax if the person responsible for the gross receipts tax does not have nexus with New Mexico or the receipts are exempt or allowed to be deducted. The law also allows in certain transactions the provision of alternative evidence instead of a nontaxable transaction certificate, modifies the deduction provisions for gross receipts from sales of aerospace services to certain organizations, expands the deduction of gross receipts for certain medical and health care services to include an association or health care practitioners, provides that the gross receipts tax deduction for receipts from sales of food for home consumption is available for food sold "by" a retail food store (changed from "at" a food store), and expands the credit for compensating tax on property bought outside the state to include services purchased outside the state (the credit cannot exceed the compensating tax due on the property or services). These changes take effect July 1, 2021. N.M. Laws 2021, ch. 65 (HB 98), signed by the governor April 5, 2021.
New Mexico: New law (HB 278) expands the gross receipts tax deduction for manufacturers to include manufacturing service providers. A deduction from gross receipts will be allowed for receipts from selling or leasing qualified equipment if the sale is made to, or the lease is entered into with, a manufacturer or manufacturing service provider who delivers a nontaxable transaction certificate to the seller. The manufacturer or manufacturing service provider delivering a nontaxable transaction certificate for the qualified equipment shall not claim an investment credit for the same equipment. The bill makes clear that "manufacturing" and "manufacturing service" do not include construction services, farming, electric power generation, processing of natural resources (including hydrocarbons), or the processing/preparation of meals for immediate consumption. These changes take effect Jan. 1, 2022. N.M. Laws 2021, ch. 66 (HB 278), signed by the governor April 5, 2021.
Tennessee: New law (HB 85), effective immediately, deletes certain streamlined sales and use tax provisions for which implementation has been delayed in prior sessions, including changes to the single article limitation on local option sales taxes, use of a single sales and use tax return for multiple dealer locations instead of a consolidated filing, use of a foreign resales certification for items that are resold and drop shipped to a Tennessee consumer, among other provisions. Effective July 1, 2021, the law amends provisions related to bundled transactions and makes clear that sourcing provisions applicable to post-paid calling services do not apply to prepaid wireless calling services. Tenn. Laws 2021, HB 85, signed by the governor April 30, 2021.
New Mexico: New law (HB 98) amends the rural job tax credit to clarify that the purposes of the credit are to encourage businesses to start new businesses or expand existing businesses in rural areas of the state. The law also expands the information an eligible employer seeking the rural job tax credit must certify, including (1) whether the application is for the first, second, third or fourth qualifying period (depending on if the taxpayer is in a tier one or tier two area); (2) the number of employees the employer employed at the job location on the day before, and the last day of, the qualifying period; (3) whether the eligible employer is receiving (or is eligible to receive) state development training program assistance; and (4) whether the eligible employer has ceased business operations at any of its New Mexico business locations. The law also provides that employers seeking the credit shall apply with the New Mexico Taxation and Revenue Department (NM TRD) once per calendar year; the application must be filed by December 31 of the following year. The application must contain all qualifying periods that closed during the calendar year for which the application is made. The NM TRD will deny the application for any qualifying period that did not close in the calendar year as well applications not timely filed. The law amends the definitions of "eligible employee" and "qualifying job" and adds a definition for "new job". These changes take effect Jan. 1, 2022. N.M. Laws 2021, ch. 65 (HB 98), signed by the governor April 5, 2021.
Tennessee: New law (HB 141) establishes a process for taxpayers to apply for a sales and use tax exemption and franchise and excise tax credits for a qualified production. A "qualified production" means any of the following activities in Tennessee: (1) the production of a film, pilot episode, series, esports event or other episodic content; (2) the creation of computer-generated imagery, video games, or interactive digital media; or (3) stand-alone audio or visual post-production scoring and editing. If a taxpayer's application is approved by the commissioners of revenue and of economic and community development, the taxpayer's sale, use, storage, or consumption of tangible personal property, computer software, or services that are necessary to and primarily used for a qualified production will be exempt from sales and use tax. The commissioner of revenue will issue a sales and use tax exemption certificate to approved applicants; the exemption certificate expires two years from its effective date and can be renewed. In addition, if approved, a taxpayer is allowed a credit for qualified payroll expenses against its combined franchise and excise tax liability. The credit is 40% of qualified payroll expenses (increased to 50% if paid to individuals whose primary residence is in a tier 2, 3, or 4 enhancement county). The total amount of credit taken on any franchise and excise tax return, including any credit carry forward, cannot exceed 50% of the combined franchise and excise tax liability shown on the return before any credit is taken. Unused credit can be carried forward for up to 15 years. In order to fully utilize the credit, an applicant may file a combined return with one or more affiliates or affiliated group members, if such filing is approved by the revenue department. These changes take effect July 1, 2021. Tenn. Laws 2021, ch. 70 (HB 141), signed by the governor March 29, 2021.
Colorado: New law (SB21-130) allows counties, municipalities and special districts to exempt up to 100% of business personal property from the levy and collection of property taxation for the 2021 property tax year. This exemption was enacted to help Colorado businesses impacted by the COVID-19 restrictions and to attract new businesses to the local jurisdiction's providing this exemption. Colo. Laws 2021, ch. 75 (SB21-130), signed by the governor April 29, 2021.
Indiana: New law (SB 336) increases the acquisition cost threshold for the business personal property tax exemption to $80,000 (from $40,000), effective Jan. 1, 2022. Ind. Laws 2021, P.L. 153 (SB 336), signed by the governor April 29, 2021.
Georgia: New law (SB 185) requires that all questions of law decided by a court or the Georgia Tax Tribunal be decided without deference to Georgia Department of Revenue, written or unwritten, determinations or interpretations of constitutional, statutory and regulatory provisions. This requirement, however, has no effect on the judicial standard of deference accorded to rules promulgated under the Georgia Administrative Procedure Act. This change took effect upon becoming law. Ga. Laws 2021, Act 41 (SB 185), signed by the governor April 29, 2021.
Montana: On March 31, 2021, Montana Governor Greg Gianforte signed House Bill 53 (HB 53), which addresses the methods and timing of how some partnerships must report federal tax adjustments to the Montana Department of Revenue (Department). HB 53 was enacted in response to changes in the federal partnership audit and adjustment rules under the federal Bipartisan Budget Act of 2015 (P.L. 114-74). Montana considered similar legislation in 2017, but it was not enacted. HB 53 generally aligns with many of the provisions in the Multistate Tax Commission's "Model Uniform Statute for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit Adjustments." For more on this development, see Tax Alert 2021-0854.
New Mexico: New law (SB 410) requires that within 180 days after the final determination date resulting from a federal audit a taxpayer file a federal adjustment report and pay state tax due. The new law also adopts rules for reporting federal partnership audits and adjustments. 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 New Mexico Taxation and Revenue Department (NM TRD) 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. Within 180 days of a final determination date, a partner of an audited partnership must file a federal adjustments 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 file a federal adjustments report and pay tax, penalty and interest due. These reporting and payment provisions apply to direct and indirect partners of an audited partnership that are tiered partners. An audited partnership or tiered partner may enter into an agreement with the NM TDR 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 federal adjustments with a final determination date occurring on and after Jan. 1, 2021. The law also allows a pass-through entity to file a composite income tax return on behalf of electing nonresident members; reporting and paying tax at the highest marginal income tax rate on the members' pro rata or distributive shares of income of the pass-through entity from New Mexico sources. This provision takes effect Jan. 1, 2022. N.M. Laws 2021, ch. 83 (SB 410), signed by the governor April 6, 2021.
New York City: The New York City Department of Finance (NYC DOF) issued guidance on its Voluntary Disclosure and Compliance Program (VDP). The guidance explains eligibility requirements, how initial contact is made and sets forth the steps necessary to utilize the VDP. Eligible taxpayers include those who (1) are not currently under NYC DOF audit, (2) were not previously contacted by the NYC DOF regarding the specific tax liability, and (3) are not parties to a criminal investigation by either New York State (NYS) or any NYS political subdivision. In addition, the liability cannot be related to a tax avoidance transaction that is a federal or NYS reportable transaction. Taxpayers may qualify for penalty waiver and/or a limited lookback period — either a six-year lookback period (trust fund taxes or intentional tax evasion) or a three-year lookback period (most other circumstances). Taxpayers will need to document the reason for not filing. A VDP agreement may be voided by the NYC DOF if the taxpayer makes a material misrepresentation or omits facts in the voluntary disclosure request. In regard to contacting the NYC DOF, the taxpayer may come forward directly or through a representative, with initial contact being made in writing to the voluntary disclosure coordinator or electronically through the e-Service webpage of the NYC DOF. Taxpayers can remain anonymous. The guidance lists the information taxpayers will need to include in the VDP request. For city taxes administered by the New York State Department of Taxation and Finance, taxpayers would need to apply for the state VDP. Taxpayers delinquent for both city and state taxes may participate in the Unified Program, which allows a taxpayer to make one request to participate in both the NYC and NYS VDP (the Unified Program is made through NYS). N.Y.C. Dept. of Fin., Statement of Audit Procedure "Procedure for Voluntary Disclosure and Compliance Program" PP-2021-1 (Jan. 22, 2021).
PAYROLL & EMPLOYMENT TAX
Massachusetts: Recently enacted Massachusetts legislation (HB 90, 2021 Mass. Acts ch. 9) (MA HB 90) freezes the state unemployment insurance (SUI) tax rate schedule for 2021 — 2022 at the same rate schedule as was used for 2020 (Schedule E), with SUI taxes ranging from 0.94% to 14.3%. MA HB 90 also imposes a federal interest assessment on employers, which ranges from 0.1% to 0.76% based on the employer's SUI reserve ratio. For more on this development, see Tax Alert 2021-0876.
Massachusetts: The Massachusetts Department of Unemployment Assistance announced that in an effort to assist employers, the deadline for submitting the first-quarter 2021 state unemployment insurance contribution is extended to June 1, 2021. However, the first-quarter 2021 employment/wage report due date is unchanged from April 30, 2021. For more on this development, see Tax Alert 2021-0883.
Florida: An out-of-state distributor of tobacco products that had no physical presence in Florida is not entitled to a reimbursement of "tax on tobacco products other than cigarettes or cigars" (FL OTP) paid from April 2013 through March 2016 because imposition of the FL OTP tax did not violate the Commerce Clause of the US Constitution. In so holding, a Florida appellate court found that the FL OTP tax is a regulatory measure and not subject to the sales and use tax physical presence test under the Florida Supreme Court's ruling in Fla. Dept. of Rev. v. Share International, Inc., 676 So. 2d 1362 (Fla. 1996). The appellate court noted that any argument that the FL OTP tax violates the Commerce Clause under a regulatory measure standard3 was not asserted and, thus, was waived. Global Hookah Distributions, Inc. v. Florida Dept. of Business and Professional Regulation, No. 1D20-822 (Fla. First Dist. Ct. App. April 12, 2021).
New Mexico: New law (SB 317) increases the health insurance premium surtax from 1% to 3.75%, effective Jan. 1, 2022. The law also provides for the reduction in the surtax rate (but not less than 1%) if the annual fee on health insurance providers under the Federal Patient Protection and Affordable Care Act (P.L. 111-148) is imposed. N.M. Laws 2021, ch. 136 (SB 317), signed by the governor April 8, 2021.
North Dakota: New law (HB 1412) exempts a coal conversion facility from 85% of the coal conversion facilities privilege tax. Instead, such facilities must pay the lignite research tax in an amount equal to 85% of the amount of the coal conversion facilities privilege tax multiplied by 5%. An electrical generating plant is exempt from the generation tax and instead must pay a lignite research tax equal to the generation tax multiplied by 5%. These changes are effective for tax production beginning after June 30, 2021 and are effective through June 30, 2026. N.D. Laws 2021, HB 1412, signed by the governor April 22, 2021.
Colorado: New law (SB21-121) amends the Revised Uniform Unclaimed Property Act (RUUPA), adding a definition of "a financial organization loyalty card" and exempting such cards from the RUUPA's definition of property. The law also specifies activities by which the owner of a demand, savings, or time deposit with a financial organization (including a deposit that is automatically renewable and funds paid toward the purchase of a share, a mutual investment certificate, or any other interest in a financial organization) may rebut the presumption of abandonment and permits delivery of that property to be delayed in order to avoid penalties or forfeiture. For purposes of this provision, property includes interest and dividends. The bill took effect immediately. Colo. Laws 2021, SB21-121, signed by the governor April 15, 2021.
VALUE ADDED TAX
International — Portugal: The Portuguese Tax Administration (PTA) has clarified that taxable persons who are not resident in the national territory but who are registered for value added tax (VAT), are required to exclusively use software programs previously certified by the PTA for issuing invoices and other relevant tax documents. For additional information on this development, see Tax Alert 2021-0866.
Thursday, June 3. Domestic tax quarterly webcast series: a focus on state tax matters (1:00 pm ET). For our second quarterly webcast in 2021, our panelists will discuss important state tax policy developments and federal tax developments that could affect state and local taxes. Topics will include: (1) state transfer pricing issues and advance pricing agreements; (2) IRC conformity carousel: a discussion of scheduled Tax Cuts and Jobs Act base expanders, Coronavirus Aid, Relief, and Economic Security Act modifications, and other notable and emerging issues; (3) federal, state and local tax credits and incentives related to sustainability initiatives; and (4) state and local tax judicial, legislative and administrative developments from the past quarter. 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 N.A.T. Transp. Inc. v. McClain, Slip Opinion No. 2021-Ohio-1374 (Ohio S.Ct. April 22, 2021).
2 Rumpke Container Serv., Inc. v. Zaino, 94 Ohio St.3d 304, 2002- Ohio 792, 762 N.E.2d 995 (2002).
3 The standard for determining whether a regulatory statute violates the Commerce Clause is whether the challenged statute regulates evenhandedly with only incidental effects on interstate commerce, or discriminates against interstate commerce either on its face or in practical effect and whether the statute serves a legitimate local purpose and, if so, is there an alternative means that could promote this local purpose without discriminating against interstate commerce. See Global Hookah Distributions, Inc. v. Florida Dept. of Business and Professional Regulation, No. 1D20-822 (Fla. First Dist. Ct. App. April 12, 2021), pg. 7 (citing Department of Banking and Finance, State of Florida v. Credicorp, Inc., 684 So. 2d 746, 751 (quoting Hughes v. Oklahoma, 441 U.S. 322, 336 (1979)).