May 21, 2021
State and Local Tax Weekly for May 14
Ernst & Young's State and Local Tax Weekly newsletter for May 14 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.
Kansas law establishes marketplace facilitator provisions, decouples from GILTI and IRC 163(j) business interest expense limitations
On May 3, 2021, the Kansas legislature voted to override Governor Laura Kelly's veto of SB 50 (the bill), which changes the state's sales and use tax and income tax codes. Key provisions of the bill include:
These provisions have various effective dates, as discussed in Tax Alert 2021-0934.
Ohio court dismisses challenge to city's tax provisions for remote workers
On April 27, 2021, the Franklin County Court of Common Pleas (court) found in The Buckeye Institute v. Kilgore1 that Section 29 of 2020 Ohio House Bill 197 (Section 29 of HB 197), which temporarily deems remote work performed by an employee working from home during the COVID-19 pandemic emergency to occur at the employee's principal place of work, did not violate the Ohio and US Constitutions.
The Buckeye Institute, which brought the case, has appealed the decision to Ohio's 10th District Court of Appeals. This decision comes amid other challenges to Section 29 of HB 197 and legislative efforts to modify its provisions.
There has also been legislative activity around Section 29 of HB 197. Two bills, 2021 Ohio House Bill 157 (HB 157) and 2021 Ohio Senate Bill 97 (SB 97), introduced earlier this year, would simply repeal Section 29 of HB 197 and immediately end the temporary withholding relief for employers. Concerns have been raised about the significant and immediate administrative burden that would be imposed on Ohio employers if Section 29 of HB 197 were repealed.
A substitute version of HB 157 (Sub HB 157) is being drafted. An Ohio Legislative Services comparative analysis2 indicates that Sub HB 157 would not immediately repeal3 Section 29 of HB 197, but would sunset the law after Dec. 31, 2021. Under this measure, Section 29 of HB 197 would be modified to do the following:
This legislation is subject to change as negotiations continue in the Ohio General Assembly with the participation of affected parties.
For more on this development, see Tax Alert 2021-0912.
California: A bill introduced earlier this year in the California legislature (SB 104) that would establish an elective pass-through entity (PTE) tax has been significantly amended. This new PTE-level tax, if adopted, is intended to enable California taxpayers who are owners of PTEs, such as partnerships and S corporations, to deduct, for federal income tax purposes, state and local taxes exceeding the $10,000 limitation imposed by IRC § 164(b)(6) (the "SALT deduction limitation"), consistent with IRS Notice 2020-75 (see Tax Alert 2021-0092). The legislatively stated goal of the PTE tax is to provide tax relief to small businesses facing unprecedented economic hurdles due to COVID-19. For additional information on this development, see Tax Alert 2021-1007.
Georgia: New law (HB 149) establishes an electable pass-through entity (PTE) level tax, applicable to tax years beginning on or after Jan. 1, 2022. The PTE election must be made annually on or before the due date for filing the applicable income tax return (including any extensions). Once made, the election is irrevocable. An electing PTE must pay an income tax equal to 5.75% of its net income, allocated and apportioned under Ga. Code §48-7-31. Partners and shareholders will not recognize their respective share of the portion of income on which tax was paid by the PTE. In computing net income subject to tax, the electing PTE is not allowed any deduction for taxes based on or measured by gross or net income (or any other variant thereof). Neither an electing PTE nor any of its partners or shareholders are entitled to any credit under reciprocity provision (Ga. Code § 48-7-28) with respect to tax paid by the PTE or any deduction for such income under Ga. Code §48-7-27(d). Electing PTEs, however, are otherwise eligible for credits. Ga. Laws 2021, Act 164 (HB 149), signed by the governor May 4, 2021.
Indiana: New law (SB 383) allows a person to claim an income tax credit equal to the amount of tax imposed on that income by a foreign country if the income is included in the person's Indiana adjusted gross income (AGI) due solely to an acceleration of the income inclusion for federal income tax purposes. To claim the credit, the person will have to show: (1) the foreign country in which the income is subject to tax, (2) the amount of income included in Indiana AGI derived from the foreign country, (3) the amount of tax that will be imposed on the income by that foreign country (including any withholding or composite tax), and (4) any other information required by the Indiana Department of Revenue (IN DOR). Further, the IN DOR may impose limitations and conditions on claiming this credit, including reporting requirements and extensions of statutes of limitations. This change is retroactively effective to Jan. 1, 2017. The law also provides that if a partner is required to include an item of income, a deduction, or another tax attribute in its Indiana AGI, such item is considered to be includible in the partner's federal AGI or federal taxable income, regardless of whether such item is actually required to be reported by the partner for federal income tax purposes. Items for which a valid election is made under IC 6-3-4.5-6, IC 6-3-4.5-8, or IC 6-3-4.5-9 (the state's federal partnership audit and administrative adjustment rules) are not included in the partner's AGI or taxable income; such item, however, is included in the partner's AGI or taxable income if a valid election was not made and the partnership is required to remit tax on such item. Ind. Laws 2021, P.L. 159 (SB 383), signed by the governor April 29, 2021.
Montana: New law (SB 376) changes 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), applicable to tax years beginning after June 30, 2021. Mt. Laws 2021, SB 376, signed by the governor May 11, 2021. For more on this development, see Tax Alert 2021-0859.
Texas: On May 8, 2021, Governor Greg Abbott signed HB 1195, which exempts forgiven Paycheck Protection Program (PPP) loans from being included in total revenue for purposes of the Texas franchise tax. Other federal COVID-19-related loans and grants excluded from taxable total revenue include emergency economic injury disaster loans (EIDL) and targeted EIDL advances, small business loan payments, grants for shuttered venue operators, microloan program recovery assistance and restaurant revitalization grants. These amounts are excluded only if the loan or grant is excluded from federal taxable income. Business expenses paid with such loan or grant proceeds can be deducted as cost of goods sold (COGS) or compensation in determining taxable margin, to the extent the expense is otherwise includable as a COGS or compensation. These changes took immediate effect and apply only to franchise tax reports originally due on or after Jan. 1, 2021. For additional information on this development, see Tax Alert 2021-0945.
SALES & USE
Georgia: New law (SB 6) extends certain existing, and creates new, sales and use tax exemptions. The sales and use tax exemption for sales of tangible personal property used for and in the construction of a competitive project of regional significance is extended through June 30, 2023 (from June 30, 2021). The exemption applies to purchases made during the entire time of construction of the competitive project of regional significance. The sales and use tax exemption for maintenance and replacement parts for machinery or equipment, stationary or in transit, used to mix, agitate, and transport freshly mixed concrete in a plastic and unhardened state is reinstated for the period starting July 1, 2021 and ending on June 30, 2026. The law exempts sales of tickets, fees, or charges for admission to fine arts performance or exhibition conducted within a facility owned or operated by a tax-exempt entity or a museum of cultural significance. This exemption is repealed on Dec. 31, 2022. Further, the law modifies the exemption for the sale or lease of computer equipment incorporated into a facility in Georgia to any high-technology company to clarify that the term "computer equipment" does not include wireline or wireless telecommunication systems. A high-technology company issued a certificate of exemption must make an annual report to the commissioner listing the facilities for which all computer equipment exemption under this provision during the prior calendar year was incorporated, as well as the amount of taxes exempted during the prior year. This exemption is repealed on June 30, 2023. Ga. Laws 2021, Act 166 (SB 6), signed by the governor May 4, 2021.
Indiana: New law (SB 383) creates two sales tax exemptions and expands the list of taxes remote sellers are required to collect and remit. The law provides a sales tax exemption for transactions involving tangible personal property that is classified as a utility scale battery energy storage systems if: (1) it is acquired by a public utility that furnishes or sells electrical energy or a power subsidiary that furnishes or sells electrical energy to a public utility, and (2) the person acquiring the property uses it to store electrical energy in-front of the customer's meter. This exemption applies to transactions occurring on or after May 1, 2021. The law also provides a sales tax exemption for public safety equipment and materials "if the equipment or material is predominately used by the purchaser to protect the general public and workers during the purchaser's performance of public works construction or maintenance." Exempt items include concrete or metal barriers, temporary pavement markings, rumble strips, cones, among other listed items; non-exempt items include hard hats, safety vests and glasses, pest control, or other personal protective equipment. The exemption takes effect July 1, 2021. In addition, effective July, 1, 2021, remote retailers required to collect and remit sales tax under the state's economic and transactional nexus provisions (more than $100,000 in sales, or 200 or more separate transactions) are also required to collect the following: waste tire management fee, fireworks public safety fee, and prepaid wireless service charge. Ind. Laws 2021, P.L. 159 (SB 383), signed by the governor April 29, 2021.
Washington: The Washington Department of Revenue issued guidance on the taxability and sourcing of credit bureau services, regardless of how transferred (e.g., electronically or tangible media). Sales of credit bureau services are retail sales subject to the retail sales tax and the gross proceeds from these sales are subject to the retailing business and occupation tax (B&O). Credit bureau services transferred electronically generally fall within the definition of a "digital good" or a "digital automated service", both of which are retail sales. If a credit bureau service falls within one of the retail sales tax exemption, the sale of the services is still subject to the retailing B&O tax. The guidance addresses application of sales/use/B&O tax when sales tax is not collected by the seller on a retail sale, when the service is delivered by tangible media, and the gross proceeds are from wholesale sales of services. Sales are sourced under the destination-based sourcing hierarchy. The guidance goes through the hierarchy and provides examples. Lastly, the guidance notes that services provided by a credit rating agency is not credit bureau services. Wash. Dept. of Rev., ETA 3107.2021 "Taxability of Credit Bureau Services" (May 3, 2021).
Georgia: New law (SB 6) establishes new, and amends certain existing, tax credits and provides for the economic analyses of certain tax credits and benefits. The law provides an additional tax credit to medical equipment and supplies manufacturers or pharmaceutical and medicine manufacturers that are qualified to claim a job tax credit. For qualifying jobs created on or after July 1, 2021, such taxpayers will be allowed an additional $1,250 per job tax credit against income tax for those qualifying jobs to the extent they are engage in the qualifying activities of manufacturing medical equipment or supplies or manufacturing pharmaceuticals or medicine in Georgia during the tax year. Such taxpayers are eligible for the additional per job tax credit at an individual establishment of the business. If more than one business activity is conducted at an establishment, then only the jobs engaged in the qualifying activities of manufacturing medical equipment or supplies or manufacturing pharmaceuticals or medicine in Georgia are eligible for the additional credit. The law provides for limitations and conditions on claiming the credit, when the credit will be disallowed, and use of excess credits. A taxpayer is not eligible for this credit for any job for which the taxpayer claimed a jobs credit under Ga. Code §§48-7-40, -40.1, or -40.1A prior to July 1, 2021. This provision takes effect July 1, 2021 and applies to tax years beginning on or after Jan. 1, 2021. Taxpayers will not be allowed to claim the job tax credit for manufacturing personal protective equipment for any job for which the taxpayer claimed the tax credit for medical equipment and supplies manufacturers or pharmaceutical and medicine manufacturers.
In addition, the law: (1) provides a tax credit for high-impact aerospace defense projects; (2) extends credits for Class III railroads and reporting; and (3) increases the amount of credit for rehabilitation of historic structures that can be claimed in the aggregate for calendar year 2022, and provides that no credit will be issued on or after Jan. 1, 2023.
Lastly, the law allows the chairperson of the House Ways and Means Committee and the Senate Finance Committee to each request up to five economic analyses of: (1) an exemption, exclusion, or deduction from the tax base; (2) a tax credit; (3) a tax deferral; (4) a rebate of tax paid; or (5) a preferential tax rate. The economic analysis should include a good faith estimate as a result of a law or proposed law the net change in state revenue, state expenditures (e.g., costs of administering the bill), economic activity, and if applicable, public benefit. Ga. Laws 2021, Act 166 (SB 6), signed by the governor May 4, 2021.
Indiana: New law (SB 383) establishes provisions for reporting federal partnership audit adjustments and clarifies when a taxpayer filing a combined return must report a federal income tax change. Generally, once a report of partnership adjustment is considered final, a partnership, within the applicable deadline, must give its direct partners and the Indiana Department of Revenue (IN DOR) a partner level adjustments report attributable to each partner and remit any composite tax or withholding tax due. If a partner is a tiered partner, the tiered partner must file an amended return for the tax year and any other affected year reporting its share of the adjustments, give its owners or beneficiaries and the IN DOR amended statements reflected the adjustments attributable to the owner or beneficiary, and remit any tax due (including any composite or withholding tax due). Upon receiving a partner level adjustments report or tiered partner statement, the taxpayer receiving such report or statement must file an amended return and remit any tax due by the applicable deadline. A partnership that has issued such a report (or a tiered partner that is a partnership that received a partner level adjustment report or statement) may make an irrevocable election to pay any tax due arising from a report of the final partnership adjustments. If a partnership has made an election to report and remit any tax due at the partnership level for the tax year, the partnership is considered to have made a timely election with regard to any adjustments in the report of partnership adjustments for that tax year. The law includes provisions that are effective for any audit completed or amended return filed after June 30, 2021, and provisions that are effective with regard to any federal partnership audit conducted under IRC §§ Section 6221 through 6241 with regard to partnerships whose taxable year: (1) begins after Dec. 31, 2017; (2) ends after Aug. 12, 2018; or (3) begins after Nov. 2, 2015 and before Jan. 1, 2018, and for which a valid election under Treasury Regulation 301.9100-22 is in effect. Further, final federal adjustments received before July 1, 2021 will be deemed to have been received by the partnership on July 1, 2021, with a final determination date of July 1, 2021.
The law also clarifies that when a taxpayer reporting a federal income tax alteration or modification files a combined return, the date on which the alteration or modification is made is considered to be the last day on which the alternation or modification occurs for any entity filing as part of the combined return. Further, the law provides that a modification or alternation occurs on the date on which a "modification or alteration in an amount of tax, adjusted gross income, taxable income, credit, or other tax attribute is otherwise made that is a final determination." (New text in bold.) These changes take effect July 1, 2021. Ind. Laws 2021, P.L. 159 (SB 383), signed by the governor April 29, 2021.
PAYROLL & EMPLOYMENT TAX
Arkansas: New law (SB 484), effective April 30, 2021, reverses the effect of a 2020 Department of Finance and Administration (DFA) legal opinion asserting that despite an employee's physical location within the state of Washington, her work for an Arkansas business met the definition of "carrying on an occupation within the state" thereby subjecting her wages to Arkansas state income tax. S.B. 484 also confirms that an out-of-state employer is required to withhold Arkansas income tax from the wages of Arkansas-based employees under the same requirements that apply to Arkansas employers. For more on this development, see Tax Alert 2021-0905.
Colorado: The Colorado Department of Labor and Employment issued a press release reminding employers that under Health Families and Workplace Act that took effect on July 15, 2020, all Colorado employees have the right to paid leave for the time it takes to receive the COVID-19 vaccine and for any side effects that prevent them from working. For additional information on this development, see Tax Alert 2021-0974.
Kentucky: New law (HB 413) reduces 2021 Kentucky employer state unemployment insurance tax rates by freezing the rate schedule to Schedule A, the lowest rate schedule provided for by law and the same rate schedule that applied in 2021. For more on this development, see Tax Alert 2021-0920.
New Mexico: On April 8, 2021, New Mexico Governor Lujan Grisham signed into law the Healthy Workplaces Act (HB 20) which effective July 1, 2022, requires that most employers provide up to 64 hours of paid sick leave per year to their New Mexico employees. For more on this development, see Tax Alert 2021-0900.
Philadelphia, PA: Because of the COVID-19 emergency, Pennsylvania Governor Tom Wolf and Philadelphia Mayor Jim Kenney issued Executive Orders requiring that, effective March 16, 2020, nonresident office employees work remotely from their homes. Since July 3, 2020, the Philadelphia guidance has provided that nonresident office employees continue their remote work from home where feasible, referred to as the "limited green phase." To assist employers in determining their wage tax obligations during this limited green phase, the City of Philadelphia Department of Revenue (DOR) updated its frequently asked questions (FAQs) to include various employer policy scenarios and their implications. These FAQs augment previous guidance issued by the DOR. For additional information on this development, see Tax Alert 2021-0957.
Texas: The Texas Workforce Commission (TWC) announced that issuance of the 2021 state unemployment insurance tax rate notices are further delayed until late June or July 2021. The TWC had originally planned to issue rate notices in February 2021, a delay from the normal timeframe of December 2020. For additional information on this development, see Tax Alert 2021-0911.
Georgia: New law (HB 317) modifies the excise tax on rooms, lodgings, and accommodations to provide that an "innkeeper" includes marketplace facilitators (i.e., a marketplace innkeeper). Further, the $5 nightly excise tax is levied on the rental or lease of any room, lodging, or accommodation; however, extended stay rentals and lodging or accommodations that do not provide physical shelter are exempt from this nightly excise tax. A marketplace innkeeper is responsible for collecting and remitting all these taxes on transactions it facilitates. Franchisors that meet certain conditions are not considered a marketplace innkeeper with respect to any innkeeper that is its franchisee. These changes take effect July 1, 2021. Ga. Laws 2021, Act 21 (HB 317), signed by the governor April 21, 2021.
Washington: On May 12, 2021, Washington Governor Jay Inslee signed a bill (SB 5315) that provides for the registration and taxation of certain out-of-state captive insurance companies. Prior to SB 5315, Washington lacked the statutory framework to allow for the registration or taxation of captive insurance companies in the state. For additional information on this development, see Tax Alert 2021-1000.
Washington: New law (SB 5096) beginning Jan. 1, 2022, imposes a 7% excise tax on the voluntary sale or exchange of long-term capital assets owned by the taxpayer, whether the taxpayer was the legal beneficial owner of such assets at the time of sale or exchange. The tax is imposed on sales of stocks, bonds, and other capital assets where the profit is in excess of $250,000 annually. Assets exempt from the tax include real estate, livestock related to farming or ranching, certain property used in a trade or business, timber and timberlands, retirement accounts, among other assets. The law defines key terms and includes provisions on allocating gains and losses; deductions for charitable donation and the sale of substantially all of a qualified family-owned small business; filing returns; and penalties for failure to timely file or pay. A credit is allowed against business and occupation taxes due on a sale or exchange that is also subject to the new excise tax on capital gains. It should be noted that the constitutionality of this new tax is being challenge. Wash. Laws 2021, ch. 196 (SB 5096), signed by the governor May 4, 2021.
VALUE ADDED TAX
International — Portugal: Following publication of special regimes in Annex I of Portugal's Value-Added Tax (VAT) Law 47/2020 of Aug. 24, 2020 (due to enter into force on July 1, 2021), Tax Circular 30233 was published on April 19, 2021 outlining further information on the One-Stop Shop scheme. For additional information on this development, see Tax Alert 2021-0870.
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 The Buckeye Institute v. Kilgore, No. 20-CV-4301 (Ohio Franklin Cty. Ct. Com. Pleas April 27, 2021).
2 Ohio Leg. Service Comm., Substitute Bill Comparative Synopsis, Sub. H.B. 157, 134th General Assembly (undated).
3 2021 Ohio House Bill 264 (HB 264) was also recently introduced. HB 264 would sunset Section 29 of HB 197 as of the later of 30 days after the rescission of the Governor's emergency declaration or Dec. 31, 2022. It does not appear that this legislation would be able to garner enough votes for passage but may have served as an impetus for the modifications in Sub HB 157.