June 23, 2021
State and Local Tax Weekly for June 11
Ernst & Young's State and Local Tax Weekly newsletter for June 11is 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.
Colorado legislature approves changes to combined reporting and other income tax rules, establishes electable pass-through entity level tax
The Colorado General Assembly has approved and sent to Governor Jared Polis HB 1311, which would change the state's combined reporting rules, including adopting a Finnigan approach to apportionment, implementing tax haven provisions and modifying the definition of affiliated group. HB 1311 also would make other modifications to the state's corporate and individual income tax provisions, including changing the computation of corporate net income, limiting the capital gains subtraction and modifying the Colorado tax treatment of captive insurance companies. Corporations will need to consider the changes to Colorado's combined reporting rules and computation of net income that will apply to tax years beginning on or after Jan. 1, 2022. Taxpayers that own captive insurance companies will need to evaluate whether those companies are "disqualified insurance companies" under the changes implemented by HB 1311, which would make them subject to corporate income tax and potentially includable in their combined reporting group. Further, some uncertainty may exist as to the validity of the General Assembly's adoption of the Finnigan approach since that action might qualify as a tax increase, which would require a referendum vote under Colorado law.
The General Assembly also approved HB 1327, which would allow certain pass-through entities (PTEs) (i.e., partnerships, S corporations and LLCs treated as partnerships or S corporations) to elect to pay state income taxes at the entity level. This proposed entity-level tax is intended to enable most Colorado taxpayers who are PTE owners to deduct, for federal income tax purposes, state and local taxes exceeding the annual $10,000 deduction limitation ($5,000 for married individuals filing separately) imposed by IRC § 164(b)(6), consistent with IRS Notice 2020-75. Colorado becomes the latest state to propose a "workaround" to the federal SALT deduction limitation for owners of PTEs by allowing an election to pay taxes at the entity level. States which have enacted PTE-level taxes are Alabama, Arkansas, Connecticut, Georgia, Idaho, Louisiana, Maryland, New Jersey, New York, Oklahoma, Rhode Island, South Carolina and Wisconsin. In addition to Colorado, other state legislatures considering enacting PTE-level taxes include Illinois (a bill enacting such a tax has been approved by the Legislature), Arizona, California, Massachusetts, Michigan, Minnesota, North Carolina and Oregon.
The changes to Colorado tax laws that would be affected by enactment of these bills are discussed in Tax Alerts 2021-1198 and 2021-1220, respectively.
California: On June 4, 2021, the California Franchise Tax Board (FTB) held a sixth Interested Parties Meeting (6th IPM), continuing discussions with the public on additional proposed amendments to its market-based sourcing rules for apportionment purposes under California's corporate franchise and income tax laws (to be codified at Cal. Code Regs., tit. 18, § 25136-2 (Regulation)). In anticipation of the 6th IPM, the FTB released draft regulatory language and explanations of the proposed amendments to the Regulation, including language that would affect asset managers, government contractors, research and development companies, and taxpayers (including corporations, individuals and pass-through entities) in many other industries. Affected taxpayers should consider submitting written comments by the July 5, 2021 deadline. For additional information on this development, see Tax Alert 2021-1167.
Indiana: The Indiana Tax Court concluded that a pharmacy benefit management company's Indiana income is from the provisions of services, and not retail sales of prescription drugs. Accordingly, the company properly sourced none of its revenue to Indiana under the cost of performance method — the method applicable to service providers for the years at issue 2011—2013 — because the greater proportion of its income producing activities were incurred outside of Indiana. Express Scripts Inc. v. Indiana Dept. of Rev., No. 19T-TA-00018 (Ind. Tax Ct. May 14, 2021).
Montana: New law (SB 184) imposes an alternative 0% tax rate on the net long-term gain that is attributable to the sale or exchange of capital stock of a corporation. For a taxpayer to qualify for the 0% rate, as of the date on which the sale or exchange of capital stock is made by the taxpayer, the corporation must have: (1) at least 60 consecutive months of new business activity in the state, with the first activity occurring on or after Jan. 1, 2021; (2) more than 50% of its corporate officers residing in the state for the previous 36 months; (3) at least 30% of its employees residing in the state for the prior 12 months, and (3) at least 25 full-time employees residing in the state for the prior 36 months. Further, the corporation may not be organized primarily for the purpose of land or real estate investment and no more than 50% of the capital gain from the sale of the stock can be attributable to gains on real property. This change took immediate effect and applies retroactively to income tax years beginning after Dec. 31, 2020. Mont. Laws 2021, ch. 458 (SB 184), signed by the governor May 11, 2021.
New Hampshire: New law (SB 3) excludes the proceeds from forgiven Paycheck Protection Program (PPP) loans from the base of New Hampshire's business profits tax. Further, the law allows a deduction for business expenses paid with forgiven PPP loans, each consistent with the federal income tax laws. These provisions took effect upon passage and apply to tax years ending after March 3, 2020. N.H. Laws 2021, ch. 74 (SB 3), signed by the governor June 10, 2021.
Oregon: New law (SB 136) adopts apportionment provisions for Oregon corporation excise (income) tax purposes specific to interstate broadcasters. Under the new rules, in the case of broadcasting sales, a taxpayer's market for sales are in Oregon if the taxpayer's audience or subscribers are in the state. The sales factor numerator based on audience or subscribers includes sales determined using third-party ratings information where available; a taxpayer with broadcasting sales must make information from its books, papers, records or memoranda available to the Oregon Department of Revenue to determine the taxpayer's audience or subscribers. The sales factor denominator must include the total gross receipts derived by the taxpayer from transactions in the regular course of the taxpayer's trade or business, including receipts from real or tangible personal property. If the information available to the taxpayer is insufficient to determine audience or subscribers, the ratio of population in Oregon to the population of the United States will be used to apportion income. In the case of broadcasting sales receipts derived from licensing to subscription services or advertising on subscription services, when the information available to the taxpayer to determine audience or subscribers is insufficient, the taxpayer will use 0.6% multiplied by its receipts from licensing to subscription services and from advertising on subscription services in the numerator of the sales factor. The law also provides affected taxpayers with the option of electing to apply their apportionment ratio for broadcasting sales to their total gross receipts. The bill takes effect on the 91st day following the legislature's adjournment sine die and the new apportionment provisions apply retroactively to tax years beginning on or after Jan. 1, 2020. Ore. Laws 2021, ch. 74 (SB 136), signed by the governor on May 21, 2021.
South Carolina: Legislation (2021 S.C. Acts No. 61, SB 627) signed into law on May 17, 2021, allows certain pass-through entities (e.g., partnerships, S corporations and LLCs treated as either for federal income tax purposes (each, a PTE and each defined as a "qualified entity" under the new law)) to elect to pay an entity-level tax in South Carolina and which allow their "qualified owners" to exclude income subject to such tax from the determination of each owner's respective South Carolina tax liability. Starting in 2021, a "qualified entity" may elect annually to have its active trade or business income taxed at the entity level at a 3% flat income tax rate (i.e., the tax rate set forth in S.C. Code § 12-6-545(B)(2)). The election must be made by the due date for filing the applicable income tax return (including extensions). To be a "qualified entity," the PTE must be owned by (1) a "qualified owner" (i.e., a partner or shareholder of a qualified entity that is an individual, estate, trust or any other entity except those taxed or exempted from South Carolina's corporate income tax) or (2) a partnership that is owned directly or through other partnerships by qualified owners. Active trade or business income from an electing qualified entity is excluded from a qualified owner's South Carolina taxable income if the electing qualified entity properly filed an income tax return and paid the tax due. A qualified owner's active trade or business losses that are derived from other PTEs and reported directly may not reduce tax at a rate higher than the rate in S.C. Code § 12-6-545(B)(2) (currently 3%). For more on this development, see Tax Alert 2021-1150.
SALES & USE TAX
Arkansas: New law (HB 1596) expands Arkansas' sales and use tax exemption for sales for resale to include goods, wares, merchandise and property sold for use in printing if the goods, wares, merchandise, or property become a recognizable, integral part of a printed product. Further, the law adds a definition of "articles of commerce" to mean: (A) an item to be placed on the market for retail sale; (B) a printed item that is produced for a specific customer in response to a special order, or (C) an item that becomes a recognizable, integral part of an above described item. These changes take effect on the first day of the calendar quarter following the effective date of the new law (which is Oct. 1, 2021). Ark. Laws 2021, Act 880 (HB 1596), signed by the governor on April 25, 2021.
Arkansas: New law (HB 1054) allows Arkansas' isolated sale exemption to apply to sales of tangible personal property, specified digital products or digital codes at a special event. This change takes effect on the first day of the calendar quarter following the effective date of the new law (which is Oct. 1, 2021). Ark. Laws 2021, Act 972 (HB 1054), signed by the governor on April 27, 2021.
Arkansas: New law (SB 26) extends Arkansas' reduced sales and use tax rate for utilities used by manufacturers to sales of coal for use in manufacturing. To qualify for the exemption, the coal must be purchased by a manufacturer for use directly in the actual manufacturing process. This change takes effect on the first day of the calendar quarter following the effective date of the new law (which is Oct. 1, 2021). Ark. Laws 2021, Act 915 (SB 26), signed by the governor on April 26, 2021.
Idaho: New law (HB 171) revises provisions related to Idaho sales tax exemption certificates and resale certificates to provide that the purchaser bears the burden of establishing the facts giving rise to the exemption. Further, the purchaser providing such certificates to a seller also bears all responsibility and liability for any subsequent audit of the transaction. Under the new rules, the seller will be held harmless. These changes take effect July 1, 2021. Idaho Laws 2021, ch. 282 (HB 171), signed by the governor on April 22, 2021.
Nebraska: New law (LB 595) exempts the sale, lease, or rental of and the storage, use, or other consumption in Nebraska of all catalysts, chemicals, and materials used in the process of manufacturing ethyl alcohol and the production of coproducts from gross receipts for Nebraska sales and use tax purposes. This exemption takes effect Oct. 1, 2021. Neb. Laws 2021, LB 595, signed by the governor on May 25, 2021.
South Dakota: The South Dakota Department of Revenue (SD DOR) issued updated guidance on the sales tax treatment of sales made on a marketplace. The SD DOR bulletin describes when a marketplace provider must collect and remit sales tax to South Dakota and the sales tax treatment of the revenues from services provided by marketplace providers. For example, if a seller is charged a monthly fee to use the marketplace platform as well as a commission for each sale made on the platform, only the monthly fee is treated as a taxable service. Among the FAQs in the SD DOR bulletin is one that states that meal delivery platforms have created a physical presence in South Dakota through the physical presence of individuals delivering meals to customers and, as such, meal delivery platforms must be licensed and pay sales tax regardless of the volume of sales or number of transactions made through such platforms. Further, marketplace providers must file all sales tax returns even if there are no sales to report. S.D. Dept. of Rev., Sales and Use Tax Bulletin: Marketplace (May 2021).
West Virginia: New law (SB 661) allows a retailer to advertise or hold out or state to the public or to any purchaser, consumer or user, that it will assume or absorb West Virginia sales or use tax or that any part required to be added to the purchase price will be refunded. The retailer must separately state the selling price of the property sold and the full amount of the tax imposed on the sale of such property. For each sale for which the retailer assumes or absorbs any part of the tax, the retailer must remit the full amount of tax with the sales and use tax return for the period covering the completed sale or transaction. These provisions take effect July 1, 2021. W.V. Laws 2021, ch. 254 (SB 661), signed by the governor on April 26, 2021.
West Virginia: New law (SB 34) creates a West Virginia sales and use tax exemption for the proceeds from the rental of equipment among certain business entities. Effective July 1, 2021, the exemption applies to leases of heavy equipment or machinery among corporations, partnerships, or limited liability companies when the entities are members of the same control group or are related taxpayers as defined in IRC §267. W.V. Laws 2021, ch. 246 (SB 34), signed by the governor April 28, 2021.
Oklahoma: New law (SB 915) allows a deduction from Oklahoma taxable income or Oklahoma adjusted gross income for the tax years 2022 through 2026 equal to the amount of qualified equity investment in an eligible Oklahoma venture capital entity made by an accredited investor. The maximum amount of the qualified investment made by such investor is capped at $25 million for any taxable year of the investor. The deduction cannot reduce Oklahoma taxable income or adjusted gross income below zero; the law specifically provides that there "shall not be any carryover with respect to [this] deduction." The law addresses record and documentation requirements; provides when a qualified equity investment made by an accredited investor for purposes of the deduction shall not be returned by the eligible Oklahoma venture capital company to the accredited investor; and defines key terms such as "eligible Oklahoma business venture", "eligible Oklahoma venture capital company" and "qualified equity investment". These provisions take effect Nov. 1, 2021. Okla. Laws 2021, ch. 581 (SB 915), signed by the governor on May 28, 2021.
Pennsylvania: The Pennsylvania Supreme Court in a per curiam order affirmed the Commonwealth Court's opinion in Dechaert LLP v. Pa. Dept. of Comm. and Economic Dev., 442 M.D. 2020 (June 23, 2020). In Dechaert, the Commonwealth Court held that the plain statutory language of the Keystone Opportunity Zone, Keystone Opportunity Expansion Zone and Keystone Opportunity Improvement Act (KOZ Act)1 permits an entity to relocate from a zone in which the KOZ tax benefits have expired into an "active zone." In so holding, the Commonwealth Court found that the KOZ Act does not restrict or penalize a qualified business from such relocations, and that the Pennsylvania Department of Community and Economic Development exceeded its authority in prohibiting such a move based on the KOZ Act's silence on the issue. Dechert LLP v. Pa. Dept. of Comm. and Economic Dev., No. 18 EAP 2020 (Pa. S.Ct. May 18, 2021).
Georgia: New law (HB 451) modifies the Georgia freeport exemption for property tax purposes to give taxpayers an option in determining the fair market value (FMV) applicable to inventory for which a level 1 freeport exemption is sought for certain tax years. Under the new law, taxpayers that claimed the exemption in the 2020 tax year for finished goods inventory (as described in Ga. Code §48-5-48.2(c)(2)), have the option to determine FMV of eligible finished goods inventory for which such exemption is applicable and sought for the 2021 tax year based on either the FMV of applicable inventory as of Jan. 1, 2020 or as of Jan. 1, 2021. This provision took immediate effect. Ga. Laws 2021, Act 162 (HB 451), signed by the governor on May 4, 2021.
Montana: New law (HB 394) makes permanent the Montana exemption from property tax for certain air and water pollution control and carbon capture equipment. To qualify for the exemption, the equipment must be placed in service after Jan. 1, 2014 for the purposes of environmental benefit or to comply with state or federal pollution control regulations. If the air or water pollution control and carbon capture equipment enhances the performance of existing air and water pollution control and carbon capture equipment, only the market value of the enhancement is subject to the exemption. As originally enacted, the exemption was in place for a 10-year period. Mont. Laws 2021, ch. 266 (HB 394), signed by the governor on April 22, 2021.
PAYROLL & EMPLOYMENT TAX
All states: EY issued an alert examining the impact the COVID-19 emergency has had on state unemployment insurance (SUI) costs. The alert also addresses the actions certain jurisdictions have taken to lessen the financial impact on employers while also maintaining adequate funds for the ongoing payment of unemployment insurance (UI) benefits. See Tax Alert 2021-1149.
Illinois: New law (H.B. 158), effective April 27, 2021, extends coverage under Illinois' Employee Sick Leave Act (ESLA) to include stepchildren and expands the circumstances under which employees must be allowed to take sick leave. Additionally, the Illinois Department of Labor and the city of Chicago have issued guidance for employers relating to the requirements governing time off for obtaining COVID-19 vaccines. For additional information on this development, see Tax Alert 2021-1027.
Michigan: According to a Michigan.gov COVID-19 news release, the charging of COVID-19 unemployment insurance (UI) benefits to the nonchargeable benefits component account ended as of March 31, 2021. Accordingly, effective April 1, 2021, the state will resume charging COVID-19 UI benefits to employers' UI accounts, which could result in an increase in the UI tax rates for some Michigan employers. For additional information on this development, see Tax Alert 2021-1059.
Rhode Island: In its ADV 2021-11 Withholding-tax guidance-emergency regulation extended, the Rhode Island Division of Taxation announced that it has extended through July 17, 2021 (which had previously been extended through May 18, 2021), emergency regulations that temporarily waive the requirement that employers withhold Rhode Island state income tax from the wages of employees temporarily working within the state solely due to the COVID-19 pandemic. The emergency regulations took effect on March 9, 2020. For additional information on this development, see Tax Alert 2021-1095.
New York: The U.S. Supreme Court has been asked by a trade association to determine whether "New York's Opioid Stewardship Act's surcharge is a 'tax' within the meaning of the federal Tax Injunction Act [28 U.S.C. § 1341], despite having features that other circuits repeatedly have held indicative of a punitive fee." Healthcare Distribution Alliance, Association for Accessible Medicines, and Specgx LLC v. James, petition for cert. filed, Dkt. No. 20-1611 (U.S. S.Ct. filed May 17, 2021).
Tennessee: New law (SB 852) provides that vacation lodging services is not a short-term rental unit marketplace for purposes of being responsible for collecting a remitting Tennessee's tourist accommodation taxes and hotel occupancy taxes. The law defines "short-term rental unit marketplace" as "a person or entity, excluding a vacation lodging service, that provides a platform for compensation, through which a third party offers to rent a short-term rental unit to an occupant." The law further defines a "vacation lodging service" as "a person or entity that is engaged in the business of providing the services of management, marketing, booking, and rental of short-term rental units." These provisions took immediate effect. Tenn. Laws 2021, ch. 264 (SB 852), signed by the governor on April 30, 2021.
Tennessee: New law (HB 856) for purposes of the Tennessee hotel occupancy tax updates the definition of "hotel" to mean "any structure or space, or any portion thereof, that is occupied or intended or designed for occupancy by transients for dwelling, lodging, or sleeping purposes, and includes privately, publicly, or government-owned hotels, inns, tourist camps, tourist courts, tourist cabins, motels, short-term rental units, primitive and recreational vehicle campsites and campgrounds, or any place in which rooms, lodgings, or accommodations are furnished to transients for consideration." (New text in italics.) This provision takes effect July 1, 2021. Tenn. Laws 2021, ch. 334 (HB 856), signed by the governor on May 4, 2021.
VALUE ADDED TAX
International — Portugal: On April 27, 2021, the Portuguese Tax Authorities published Administrative Ordinance nº. 30235, to clarify the rights and obligations, for Value Added Tax (VAT) purposes, of nonresident taxable persons performing taxable operations located within the Portuguese territory. It is important to emphasize that the instructions identified within the aforementioned Ordinance took effect as of April 27, 2021. However, the guidelines under previous ordinances, supporting the current administrative instructions now published must also be complied with. For additional information on this development, see Tax Alert 2021-1078.
Wednesday, June 30, 2021. President Biden's executive order on supply chains (1:00 p.m. EDT). In response to President Biden's recent executive order, various US federal governmental agencies have submitted recommendations on how to strengthen the US supply chain to assure continuous production of critical goods. Join our EY team of global trade, supply chain and policy professionals for a 60-minute webcast focused on the agencies' findings and their effects on multinational corporations' supply chains. Topics include the following: supply chain resiliency, specific industry implications, and how to prepare for potential government action. Register.
Tuesday, July 20, 2021. US corporate income tax compliance: Tax year 2020 filing update and multi-year readiness (3:30 p.m. EDT). The corporate tax landscape is more dynamic than ever heading into the tax year 2020 corporate filing season. Please join EY panelists for a webcast where they will provide insights on preparing for 2020 US federal and state filings and multi-year considerations in this age of "continuous" compliance. The panel discussion will include topics such as key federal and state tax compliance developments arising from multiple tax policies and regulations, including interdependencies among federal, state and international compliance and filings, among other topics. 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 Act of Oct. 6, 1998, P.L. 705, as amended, 73 P.S. §§820.101-820.1308.