June 15, 2021
State and Local Tax Weekly for June 4
Ernst & Young's State and Local Tax Weekly newsletter for June 4 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.
Illinois legislature approves significant tax changes affecting bonus depreciation, dividends, GILTI and net loss deductions
On June 1, 2021, the Illinois Legislature approved the state's FY 2022 budget legislation, SB 2017, which includes provisions that would modify Illinois's income, franchise and sales/use tax laws and would extend the sunset date for certain credit and incentive provisions. Key provisions in the bill would:
Governor J.B. Pritzker, having proposed some of these changes in his budget address, is expected to sign the legislation in the coming weeks. For more on this development, see Tax Alert 2021-1154.
Idaho, Montana, Nebraska and Oklahoma reduce corporate and individual income tax rates
Multiple states have enacted income tax rate cuts. Oklahoma and Idaho are providing both corporate and individual income tax rate reductions. Nebraska has reduced its top corporate income tax rate, while Montana has reduced the rate of its individual income tax. The following is a summary of these changes.
On May 10, 2021, Idaho Governor Brad Little signed HB 380, which reduces the state's corporate and individual income tax rates and reduces the number of individual income tax brackets from seven to five. Effective retroactively to Jan. 1, 2021, the corporate income tax rate is reduced to 6.5% from 6.925% and the new individual income tax rates and brackets range from a low of 1% (reduced from 1.25%) on taxable income less than $1,000 up to 6.5% when taxable income is $5,000 and over (reduced from 6.925% when taxable income is $7,500 and over).
On May 6, 2021, Governor Greg Gianforte signed SB 159 and SB 399, both of which reduce the individual income tax rate1 while SB 399 also reduces the number of income tax brackets. SB 159 reduces the top individual income tax rate to 6.75% (from 6.9%) on taxable income in excess of $17,400. The intent of the legislation is for the rate reduction to apply to income tax years beginning after Dec. 31, 2021. However, SB 159 includes contingent termination provisions that apply to tax years 2022 and 2023 to alleviate the possibility of Montana losing federal funds available through the American Rescue Plan Act (P.L. 117-2) if the rate reduction in the bills are found to violate the federal law's restrictions on the use of federal funds. Because SB 399 was enacted and it modifies the individual income tax rate provisions, SB 159 terminates Dec. 31, 2023.
SB 399, effective for income tax years beginning after Dec. 31, 2023, reduces the top income tax rate on individuals to 6.5% and reduces the number of income tax brackets from seven to two. The revised rates and brackets will apply as follows
In addition, individual income taxpayers will now compute their Montana taxable income based on their federal taxable income, with various adjustments. These adjustments include a 30% deduction for net-long term capital gains, an addition for federal Qualified Business Income deducted under IRC §199A and for the portion of a shareholder's income under subchapter S that has been reduced by any federal taxes paid by the S corporation on income, among other adjustments. SB 399 also eliminates a number of tax credits for both individual and corporate income tax purposes.
On May 26, 2021, Nebraska Governor Pete Ricketts signed LB 432, provisions of which reduce Nebraska's top corporate income tax rate. Nebraska's current regime has two corporate income tax rates: 5.58% on state taxable income up to $100,000 and 7.81% on state taxable income over $100,000. LB 432 retains the 5.58% on state taxable income up to $100,000, but reduces the top rate as follows:
As stated in LB 432, it is the intent of the legislature to further reduce the top corporate income tax rate in 2024 and 2025. For more on this development, see Tax Alert 2021-1063.
A trio of bills — HB 2960, HB 2962 and HB 2963 — signed by Oklahoma Governor Kevin Stitt on May 21, 2021 reduces the income tax rates for corporations, individuals, and pass-through entities, respectively. Another bill, HB 2961, signed by the governor on May 24, 2021, reduces the rate of the bank privilege tax.
Effective for tax years beginning on or after Jan. 1, 2022:
Effective for tax years beginning on or after Jan. 1, 2022, the new individual income tax rates range from 0.25% up to 4.75% (from 0.50% up to 5%). See Tax Alert 2021-1120 for a break-down of the new individual income tax rates.
Federal: On May 28, 2021, the U.S. Treasury Department released its FY 2022 explanation of the Biden Administration's revenue proposals (the Green Book), offering new details on the various tax proposals included in the President's "Made in America" tax plan. Many of these Green Book provisions, if enacted, could directly or indirectly affect the corporate and individual income taxes imposed by state and local (collectively, state) governments because of state conformity to changes to the federal income tax laws. The more significant Green Book provisions with the potential to impact state income taxes include: (1) changing the calculation of GILTI, subpart F income and the corporate GILTI deduction under IRC § 250; (2) expanding IRC § 265 to disallow deductions allocable to certain foreign gross income; (3) repealing the corporate FDII deduction under IRC § 250; (4) replacing the BEAT with a newly proposed "SHIELD" (Stopping Harmful Inversions and Ending Low-tax Developments) that would restrict tax deductions for certain payments made to foreign parties, including related businesses; (5) limiting interest deductions for disproportionate borrowing in the US; (6) treating dispositions of "specified hybrid entities" as stock sales for certain purposes; (7) repealing deferral of gain from certain like-kind exchanges; and (8) permanently limiting excess business losses for noncorporate taxpayers. For more on this development, see Tax Alert 2021-9013.
Georgia: The Georgia Department of Revenue explained that in computing Georgia income tax, a taxpayer may subtract wage deductions that are disallowed for federal income tax purposes when a federal employee retention credit (ERC) is claimed based on the same wages. The subtraction goes on the "other subtraction line" of the applicable return's subtraction schedule. Ga. Dept. of Rev., "Income Tax Federal Tax Changes" webpage (last updated May 6, 2021).
Iowa: The Iowa Legislature recently adjourned its 2021 legislative session. Before adjourning, the Legislature passed SF 619, which would modify Iowa's income tax laws. Tax Alert 2021-1094 discusses the more significant income tax law changes contained in the legislation, including Iowa's conformity to federal bonus depreciation, the IRC § 163(j) limitations on business interest expense deductions, and the exclusion from gross income of the proceeds from forgiven Paycheck Protection Program loans for fiscal-year taxpayers. The Alert also addressed the removal of contingent income tax "triggers" allowing previously enacted tax changes to become effective in 2023, including changes to the definition of net income for corporations, individual income tax rates and the narrowing of the individual income tax exclusion for capital gains, among other tax law changes.
Maryland: New law (HB 495) modifies the automatic one-year decoupling provisions under Maryland's income tax law from certain amendments to the IRC. Under prior law, the state automatically decoupled from amendments to the IRC that impacted state revenue by $5 million or more during the fiscal year of passage. If the threshold is met, under prior law any such amendment to the IRC did not apply to state filings in the tax year in which the law was enacted. Applicable to tax years beginning after Dec. 31, 2020, an amendment to the IRC that affects the determination of federal adjusted gross income or federal taxable income, does not affect the determination of Maryland taxable income for any tax year that begins in the calendar year, or any tax year that precedes the calendar year, in which the amendment is enacted. The automatic decoupling described in the law does not apply if the Maryland Comptroller of the Treasury determines that the impact of the amendment on state income tax revenue is less than $5 million for the fiscal year that begins during the calendar year, or any fiscal year that precedes the calendar year, in which the amendment is enacted. Md. Laws 2021, ch. 763 (HB 495), enacted without the governor's signature May 30, 2021.
New Jersey: New law (S.3234) provides that the proceeds of forgiven Paycheck Protection Program (PPP) loans are not subject to the New Jersey's gross income tax (which is the state's personal income tax), and that corporate and individual income taxpayers can deduct ordinary and necessary business expenses paid for with proceeds of PPP loans even those that are forgiven. S.3234 took effect immediately and applies retroactively to tax years beginning on or after Jan. 1, 2020. N.J. Laws 2021, ch. 90 (S.3234), signed by the governor May 11, 2021.
Ohio: In Willacy v. Cleveland Bd. of Income Tax Rev., the Ohio Supreme Court (Court) held once again that the City of Cleveland can tax a former resident individual's income from stock options that were earned when the individual lived and worked in Cleveland but were exercised after the individual retired, relocated to and was a resident of Florida. The Court's holding deals with income from stock options exercised in 2016. In 2020, the Court issued an opinion on the same issue for the same taxpayer and with the same conclusion but for tax years 2014 and 2015. Willacy v. Cleveland Bd. of Income Tax Rev., Slip Opinion No. 2021-Ohio-1734, (Ohio S.Ct. May 25, 2021). For more on this development, see Tax Alert 2021-1091.
SALES & USE
District of Columbia: Adopted amendments to D.C. Mun. Regs. tit. 9, 9-402 (rule) provide additional guidance and clarity on the application of the casual and isolated sales tax exemption. The rule defines "casual and isolated sales" as those that "are limited to sales of a non-recurring nature that are made by a vendor who is not regularly engaged in the business of makes sales at retail." The casual and isolated sales tax exemption does not apply to the following: (1) sales by a vendor registered with the DC Office of Tax and Revenue for a sales and use tax account; (2) sales by a vendor that regularly engaged in the business of making retail sales regardless of whether the property being disposed was originally acquired for use or consumption by that vendor; (3) sales made on a marketplace; and (4) sales of the entire operating assets of a business or of a separate division, branch, or identifiable segment of a business when the sale is by a vendor that is regularly engaged in the business of making retail sales. The list includes examples of transactions that are and are not eligible for the exemption. These changes took effect upon publication in the D.C. Register (which occurred on May 14, 2021). D.C. Register, Vol. 68/20 (May 14, 2021).
Maryland: New law (SB 787) amends the state's sales and use tax provisions on the taxation of digital codes and digital goods. The changes clarify the digital codes and digital goods to which sales and use tax does and does not apply. In addition, the law: (1) modifies certain terms governing the application of sales and use tax to digital codes and digital products, (2) requires certain marketplace facilitators to collect tax on certain sales of digital codes and digital products, (3) exempts certain sales of digital code and digital products from tax, and (4) clarifies certain sales and use tax administrative provisions governing certain sales of digital codes and digital products. Md. Laws 2021, ch. 669 (SB 787), became law with the governor's signature May 30, 2021. For more on this development, see Tax Alert 2021-0805.
Nevada: New law (SB 25), effective May 14, 2021, eliminated the requirement that the Nevada Department of Taxation (NV DOT) base its determination of whether the sales and use tax exemption for food for human consumption applies on whether the food is intended for immediate consumption and not on the type of establishment where the food is sold. According to the bill, this requirement pre-dated the state's adoption of the Streamlined Sales and Use Tax Agreement (Agreement). Consistent with the Agreement, the NV DOT adopted a regulation, LCB File No. R056-18, which defines prepared food to include food sold with eating utensils provided by the seller. This determination is made based on the percentage of food sold by the seller that is prepared food. Nev. Laws 2021, ch. 15 (SB 25), signed by the governor May 14, 2021.
Oklahoma: New law (HB 1060) exempts from sales and use tax the transfer of tangible personal property between wholly owned subsidiaries of a parent company and between a parent company and its wholly owned subsidiary. This exemption takes effect Nov. 1, 2021. Okla. Laws 2021, ch. 374 (HB 1060), signed by the governor May 3, 2021.
Federal: The Biden Administration's FY2022 budget and Treasury Green Book describes a proposal to make the new markets tax credit (NMTC) permanent, with authority to allocate $5 billion annually after 2025, when the program was scheduled to end. For more on this development, see Tax Alert 2021-1108.
Federal: The Biden Administration's FY2022 budget and Treasury Green Book describes a proposal to restore the IRC § 45 production tax credit (PTC) and the IRC § 48 investment tax credit (ITC) to their original amounts beginning in 2022 and then phase them down over five years. The Administration's proposal would also allow a direct-pay option, under which taxpayers could receive cash in lieu of tax credits. The exact mechanism for receiving the direct payment is not described in the Green Book. New proposed credits include: a tax credit of 30% for electricity transmission investments, an allocated PTC for electricity generation from eligible existing nuclear power facilities that bid for the credits, and a stand-alone storage tax credit. For additional information on this development, see Tax Alert 2021-1127.
Federal: The Biden Administration's FY2022 budget and Treasury Green Book describes a proposal to authorize an additional $10 billion for new IRC § 48C tax credits for advanced energy manufacturing projects. The Green Book describes the proposal to expand the types of projects eligible for the credits and to revise the evaluation process for selecting the projects. The Green Book also describes a proposal for a direct-pay option, where taxpayers could elect a cash payment instead of the IRC § 48C credit. For additional information on this development, see Tax Alert 2021-1118.
Federal: The Biden Administration's FY2022 budget and Treasury Green Book describes a proposal to allow the credits for carbon dioxide sequestration to apply to facilities for which construction begins before Jan. 1, 2031. In addition, the credits for "hard-to-abate" industrial-carbon-oxide-capture sectors would increase. The Green Book also describes a proposal for a direct-pay option, under which taxpayers could elect a cash payment instead of the carbon sequestration credit. For additional information on this development, see Tax Alert 2021-1126.
Federal: The Biden Administration's FY2022 budget and Treasury Green Book describes a proposal for a new type of housing credit dollar amount (HCDA) called an Opportunity HCDA (OHDCA), which would expand the amount of low income housing tax credits (LIHTCs). The Administration also proposes creating the neighborhood homes investment credit (NHIC), which would support new construction and substantial rehabilitation for residential homeowners. For more on this development, see Tax Alert 2021-1128.
Federal: A modified version of Chairman Ron Wyden's (D-OR) Clean Energy for America Act that includes an expansion of the IRC § 48C 30% advanced energy manufacturing credit was the subject of a tie 14-14 vote in the Senate Finance Committee on May 26, 2021 with all Republicans opposed over issues including proposed repeal of fossil fuel incentives. Under the organizing agreement reached in February between Senate Democrats and Republicans, given the 50-50 split vote in the Senate, there is a mechanism for leaders to make a motion to discharge a measure subject to a tie in committee and bring it to the floor. For additional information on this development, see Tax Alert 2021-1084.
Indiana: New law (HB 1348), effective for assessment dates after Dec. 31, 2021, requires the land portion of the fixed property of a utility grade solar energy installation facility to be assessed at an amount not to exceed the solar land base rate for the region in which the property is located. This provision applies to a utility grade solar energy installation facility (1) that had the land portion of its fixed property assessed and valued on Jan. 1, 2021 for property taxes first due and payable in 2022, and (2) for assessment dates after Dec. 31, 2021, but only until the next planned reassessment of the property during the county's four year reassessment cycle. The Indiana Department of Local Government Finance is required to annually determine and release a solar land base rate for the north, central and south regions of the state. Ind. Laws 2021, P.L. 191 (HB 1348), signed by the governor April 29, 2021.
Iowa: In partially affirming an appellate court ruling, the Iowa Supreme Court (Court) held that customized overhead bins within a building where feed is manufactured constitute part of a continuous piece of machinery within that building and, as such, are exempt from property tax as "machinery used in manufacturing establishments". The Court, however, determined that large stand-alone corn silos that were connected to the feed manufacturing facility by an underground conveyor, are not exempt from property tax because they do not meet the ordinary definition of machinery. The Court found that that no processing or manufacturing occurs at the silos, rather they were used as storage buildings. The Court vacated the appellate court's decision and remanded the case back to the Property Assessment Appeal Board for determination of which bins in the feed manufacturing building qualify for the exemption. Stateline Coop. v. Iowa Prop. Asmt. App. Bd. And Emmet County Bd. of Review, No. 19-0674 (Iowa S.Ct. App. April 30, 2021).
COMPLIANCE & REPORTING
San Francisco, CA: Due to governmentally imposed COVID-19 restrictions, the San Francisco Board of Supervisors has changed the due dates of certain business taxes and license fees. The 2021-22 San Francisco Business Registration Renewal due date has been extended from May 31, 2021 to June 30, 2021, for taxpayers with more than $25 million of taxable gross receipts calculated on the 2020 Annual Business Tax Return due April 30, 2021. For taxpayers with less than $25 million of taxable gross receipts, the due date has been extended to Nov. 1, 2021. The deadline for 2020-21 and 2021-22 license fees has been extended to Nov. 1, 2021. For more on this development, see Tax Alert 2021-1057.
Hawaii: The Hawaii Department of Taxation (HI DOT) issued guidance on its adoption of tax bases capital reporting for large partnerships beginning in 2020. The IRS through the instructions for the 2020 Form 1065, U.S. Return of Partnership Income, require partnerships to use the "transactional approach for the tax basis method" for purposes of reporting tax capital accounts to partners on Schedule K-1 (Form 1065). The HI DOT said that it will also require a partner's capital account be determined using the transactional approach method for all partnership returns filed for tax years beginning after Dec. 31, 2019. Haw. Dept. of Taxn., Tax Information Release No. 2021-04 (May 13, 2021).
New Hampshire: New law (HB 324) provides that the New Hampshire Department of Revenue Administration "may prescribe a time not to exceed 30 days after notice of the original assessment or any reissued assessment" to pay the amount of assessed tax due without imposition of interest. This provision took effect upon passage. N.H. Laws 2021, ch. 24 (HB 324), signed by the governor May 6, 2021.
PAYROLL & EMPLOYMENT TAX
All states: In all jurisdictions, except Alaska and the Virgin Islands (effective Jan. 1, 2021), an employer's state unemployment insurance (SUI) tax rate can rise based on the unemployment insurance (UI) benefits paid to its laid-off workers. That is why the jobless rate can be a strong indicator of the future trajectory of SUI tax rates. For additional information on this development, see Tax Alert 2021-1117.
California: New law (SB 95) reinstates and expands the state's COVID-19 supplemental paid sick leave (SPSL) requirements that, under AB 1867, expired on Dec. 31, 2020. Unlike AB 1867 that supplemented the federal Families First Coronavirus Response Act (P.L. 116-127), and therefore applied only to employers with 500 or more employees, SB 95 covers all employers, both public and private, with 26 or more employees. SB 95 also expands on the qualified reasons for leave and the methods for determining SPSL leave compensation. For additional information on this development, see Tax Alert 2021-1017.
Colorado: The Colorado Department of Labor and Employment announced that it has reissued 2021 employer state unemployment insurance (SUI) tax rate notices. The original 2021 SUI tax rate notices, issued in Nov. 2020, did not reflect the removal of COVID-19 unemployment insurance benefit claims and contained formatting errors. For many employers, the 2021 revised rate notice will reflect a different UI tax rate than shown on the Nov. 2020 rate notice. For more on this development, see Tax Alert 2021-1090.
Delaware: Recently enacted legislation (HB 65) freezes the 2021 state unemployment insurance (SUI) tax rate schedule at the same rate as was in effect for 2020. As a result, the 2021 SUI tax rates continue to range from 0.3% to 8.2%. New non-construction employers pay at 1.8%, construction employers at 2.3%. For additional information on this development, see Tax Alert 2021-1010.
Kansas: New law (SB 47), among other things, provides that for the period from Jan. 1, 2021 through Dec. 31, 2022, for wages paid to employees temporarily teleworking in a state other than their primary work location, employers have the option to withhold income taxes based on the state of each employee's primary work location instead of the state in which the employee is teleworking. The law also states that if any provisions of K.S.A. 79-3296 (and amendments), are in conflict, this provision shall control. For additional information on this development, see Tax Alert 2021-1103.
Maryland: New law (SB 787) modifies the state's new Digital Advertising Services Gross Revenues Tax.2 The applicability date of the new tax is changed to tax years beginning after Dec. 31, 2021 (from Dec. 31, 2020). Thus, first quarterly estimated payments are 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, and it applies a graduated rate that increases in increments based on the taxpayer's globalannual revenues. SB 787 exempts from this tax advertising on digital interfaces owned or operated by or on behalf of a broadcast entity and a news media entity. SB 787 also prohibits businesses subject to the digital advertising services tax from passing that cost to the customers who purchase the digital advertising services through a separate fee, surcharge or line item. Md. Laws 2021, ch. 669 (SB 787), became law with the governor's signature May 30, 2021. For more on this development, see Tax Alert 2021-0788.
VALUE ADDED TAX
International - United Arab Emirates: The United Arab Emirates (UAE) has published Cabinet Decision No. (49) of 2021, which amends Cabinet Decision No. (40) of 2017 on Administrative Penalties for Violations of Tax Law in the UAE. The amendments will be effective from June 28, 2021. The amendments generally reduce the value added tax (VAT) penalties for non-compliance. The most significant change is that taxpayers will now be given time to settle underpaid taxes before late payment penalties are imposed. The variable penalties for correcting filing errors through a voluntary disclosure before the Federal Tax Authority notifies the taxpayer of an audit have also been reduced. However, the variable penalties when a voluntary disclosure is not filed before an audit notification, have increased. Taxpayers may also benefit from a waiver of 70% of unpaid penalties if they meet certain conditions. The amendments create an incentive for businesses to review their historic filing positions and to voluntarily disclose any errors before they are notified of an audit. Businesses should also review any outstanding penalties to determine if they can benefit from relief. For additional information on this development, see Tax Alert 2021-1124.
International - United Kingdom: The Government of the United Kingdom (UK) has issued a Policy Paper regarding the value-added tax (VAT) e-commerce package rules being introduced by the European Union (EU) from July 1, 2021. The UK Government states that implementation of the EU's e-commerce package is in accordance with the UK's obligations under the Northern Ireland Protocol, following the end of the Brexit transition period. For additional information on this development, see Tax Alert 2021-1006.
Thursday, June 17. Telework and other employer challenges in 2021 and beyond (3:30 p.m. EDT). COVID-19 impacts continue to challenge employers, particularly around the demand for telework arrangements after state and local mandatory work-from-home orders have expired. Another challenge is the lasting impact COVID-19 unemployment insurance claims will have on current and future unemployment insurance costs as many states grapple with how they will finance trust-fund shortages. To help you navigate these topics, our panelists will bring together their insights and experience to discuss the following topics: COVID-19 unemployment benefit claims and the impact on employers' current and future state unemployment insurance costs; the employer's role in managing unemployment insurance fraud; identifying work and resident location for teleworkers and why it matters; multistate payroll tax implications for hybrid teleworkers; teleworker payroll tax calculations — case studies; teleworker tax legislation and legal challenges; and employer considerations in evaluating and managing telework arrangements. Register.
Wednesday, June 23. The indirect tax technology journey: Now. Next. Beyond. (1:00-2:00 p.m. EDT). Join our EY team of tax technology professionals for the first in a series of six webcasts focused on the evolving technology landscape. During these 60-minute webcasts, we will share our insights into how market-leading organizations are using technology to adapt to new legislation and market trends, and to effectively transform tax operations. Because technology is a vital component for every business looking to build a resilient, future-ready tax function, these webcasts will be relevant across all sectors and to businesses of every size. During our first webcast in the series, we will focus on the following topics: (1) current business issues impacting technology decisions, (2) trending indirect tax technology developments, and (3) key focus areas for becoming "future-ready". 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 See Mont. Code §15-30-2103.
2 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.