July 29, 2021
State and Local Tax Weekly for July 23
Ernst & Young's State and Local Tax Weekly newsletter for July 23 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.
Governor signs bill establishing elective pass-through entity tax in California
On July 16, 2021, Governor Gavin Newson signed 2021 California Assembly Bill 150 (2021 Cal. Stat. Ch. 82) (AB 150), establishing a new elective pass-through entity-level tax (PTE tax). The legislation enables California taxpayers who own pass-through entities (e.g., S corporations, partnerships and LLCs treated as either) (each a PTE and collectively PTEs) to receive a credit for their share of the PTE-level state and local taxes deducted at the PTE level allowing the individual owners to exceed the federal $10,000 state and local tax deduction limitation imposed by IRC § 164(b)(6) (the SALT deduction limitation), consistent with IRS Notice 2020-75.
AB 150 incorporates much of the language of a bill introduced earlier this year in the California legislature (SB 104) but makes some subtle, but significant, changes to SB 104's PTE tax scheme. As enacted, for tax years beginning on or after Jan. 1, 2021 and before Jan. 1, 2026, AB 150 allows a qualifying PTE doing business in California to annually elect to pay a 9.3% tax according to, or measured by, the PTE's net income for the tax year for which the election is made.1 As a result of the elective PTE tax paid, a "qualified taxpayer" will be allowed a credit equal to the "qualified amount"2 against the "net tax."3 Under SB 104, a qualified taxpayer would have only been allowed a credit equal to 94.9% of the "qualified amount."
A qualified entity can elect to pay the PTE tax annually on its original, timely filed return. Once made, the election is irrevocable. For tax years beginning on or after Jan. 1, 2021 and before Jan. 1, 2022, the elective PTE tax is due and payable on or before the filing due date of the original return without regard to extension. For each tax year beginning on or after Jan. 1, 2022 and before Jan. 1, 2026, the PTE must pay by June 15 of the tax year of the election the greater of 50% of the elective tax paid in the prior year or $1,000. The PTE must pay the remaining amount on or before the filing due date of the original return without regard to extension. The elective PTE tax is in addition to any other required personal or corporate income tax. A taxpayer can carry forward the amount of credit exceeding the "net tax" due to the following tax year, and the succeeding four years, until exhausted. AB 150 is more lenient in this regard compared to a similar provision in SB 104 that would have limited the carryforward period to only three years.
Section 15 of AB 150 specifically states that the PTE tax is effective only until Dec. 1, 2026, unless repealed sooner, and any earlier repeal of the SALT deduction limitation by Congress would cause California's PTE tax to be repealed as of December 1 of that same tax year.
For additional information on this development, see Tax Alert 2021-1407.
Arizona: New law (HB 2838) establishes an elective pass-through entity level tax. Effective for tax years beginning from and after Dec. 31, 2021, the partners or shareholders of a business that is treated as a partnership or S corporation for federal income tax purposes (hereafter, PTE) may consent to be taxed at the entity level (PTE tax). Tax is imposed at a rate of 4.5% of the entire portion of the entity's taxable income attributable to its resident partners or shareholders and the portion of its taxable income derived from Arizona sources attributable to its nonresident partners or shareholders for that tax year. If an election is made, all of the following apply: (1) the taxable income of the PTE is computed under this chapter [Chapter 10 (dealing with individual income taxation) of the Arizona Revised Statutes] or that applicable to partnerships [i.e., Chapter 14 of the Arizona Revised Statutes]; (2) if the PTE does not pay the amount owed to the Arizona Department of Taxation (AZ DOT) as a result of the PTE election, the AZ DOT may collect the amount from the partners or shareholders based on the proportionate share of the PTE's income attributable to each partner or shareholder for Arizona tax purposes; and (3) the PTE must pay estimated tax. This election does not apply to (1) partners or shareholders that are not individuals, estates or trusts or (2) to partners or shareholders that are individuals, estates or trusts that opt out or waive the right to opt into the PTE election. The portion of taxable income attributable to such partners or shareholders is not included in the PTE level tax. In determining Arizona gross income, an individual taxpayer is required to add back the amount deducted by the PTE under the IRC for the amount paid to Arizona and for taxes that the AZ DOT determines are substantially similar to Arizona's PTE tax. The statute governing Arizona's credit for income tax paid to other states is modified to provide a resident taxpayer with a credit for its share of the taxes of other states that the AZ DOT determines are substantially similar to Arizona's PTE tax. This credit cannot exceed the amount that would have been allowed if the income were taxed at the individual level, not the entity level. A credit is also allowed against the entity-level income tax for a taxpayer who is a partner or shareholder of a PTE that elects to pay the PTE tax. The amount of the credit is the portion of the tax paid by the PTE that is attributable to the partner's or shareholder's share of income taxable in Arizona. If the amount of credit exceeds the taxes otherwise due, or if there are no taxes due, the amount of unused credit can be carried forward for up to five consecutive tax years. The election to be taxed at the entity level must be made by the due date, or extended due date, of the PTE's return. Az. Laws 2021, ch. 425 (2021 AZ HB 2838), signed by the governor on July 9, 2021.
California: Out-of-state limited liability companies (LLCs) that were passive investors in entities that conducted business in California were doing business in the state because their respective distributive shares of real and tangible property of the LLCs located in California exceeded the bright-line property threshold under Cal. Rev. and Tax Code §23101(b). Thus, the LLCs are not entitled to a refund of the annual $800 LLC tax paid for the tax years at issue. In the Matter of LA Hotel Investments #3, LLC and LA Hotel Investments #2, LLC, OTA Case Nos. 18083638, 19014240 (Cal. Off. Tax App. May 13, 2021) (pending precedential).
Maine: New law (LD 221) updates the state's date of conformity to the IRC to April 30, 2021 (from Dec. 31, 2020). This change applies to tax years beginning on or after Jan. 1, 2021 and to any prior tax years as specifically provided by the IRC. Maine Laws 2021, ch. 398 (2021 ME LD 221), enacted on July 1, 2021.
Maine: The Maine Revenue Services (MRS) announced that its temporary nexus relief related to COVID-19 has ended. For tax years beginning in 2020 and for the period from January through June 2021, the MRS "will not consider the presence of one or more employees in [Maine], who commenced working remotely from Maine during the state of emergency and due to the COVID-19 pandemic, to establish, by itself, corporate income tax nexus." With the end of this relief, MRS will now consider the in-state presence of one or more employees, including those working remotely in Maine, in determining whether an out-of-state corporation has nexus with Maine, regardless of when the person commenced working in the state. MRS, "Coronavirus (COVID-19) FAQ" (last updated July 21, 2021).
Oregon: New law (HB 2457) updates Oregon's date of conformity to the IRC to April 1, 2021 (from Dec. 31, 2018). This change applies to transactions or activities occurring on or after Jan. 1, 2021. The effective and applicable dates and the exceptions, special rules and coordination with the IRC, relative to those dates, contained in federal law amending the IRC and enacted before Jan. 1, 2021, apply for Oregon individual income and corporate excise and income tax purposes to the extent such can be made applicable. Ore. Laws 2021, ch.456 (2021 Ore. HB 2457), signed by the governor on July 14, 2021.
Rhode Island: New law (HB 1622 Sub. A) for purposes of determining Rhode Island net income and gross income under the corporate income, bank excise and individual income taxes requires the add back of the amount of the proceeds from forgiven Paycheck Protection Program (PPP) loans in excess of $250,000. Thus, up to $250,000 in forgiven PPP loans is excluded from Rhode Island net income and gross income. This change is effective for tax years beginning on or after Jan. 1, 2020. The new law also requires the Rhode Island Division of Taxation to waive interest and penalty on the taxable portion of a PPP loan that is forgiven during the 2020 tax year, provided that the taxpayer pays the amount due by March 31, 2022. R.I. Laws 2021, ch. 162 (2021 RI HB 6122 Sub. A), signed by the governor July 6, 2021. See also, R.I. Div. of Taxn., "Summary of Legislative Changes" (July 26, 2021).
SALES & USE
Arizona: In response to a ruling request, the Arizona Department of Revenue (AZ DOR) determined that an information and analytics company's gross income derived from providing a temporary or non-perpetual right to use digital information and data, over which the customer has exclusive use and control, is subject to Arizona's transaction privilege tax under the personal property rental classification. The AZ DOR found that the company is engaged in the business of renting tangible personal property and that under the "common understanding test", the customer's receipt of data is not a byproduct, or a mere incident, of providing a nontaxable service. Rather, receipt of data is the primary object of the transaction and without the data, "it is unlikely the [company's] customers would sign a contract or pay the fees they do for the [d]ata." Ariz. Dept. of Rev., Private Taxpayer Ruling LR 21-003 (May 27, 2021).
Florida: New law (SB 566) requires peer-to-peer car-sharing programs to collect and remit Florida sales tax on motor vehicles rented through its program. Tax is imposed at a rate of 6% of the gross proceeds derived from the lease or rental of a motor vehicle. If the vehicle is leased or rented by a motor vehicle rental company or through a peer-to-peer car sharing program for a period of less than 12 months, the entire amount of the rental is taxable if the motor vehicle is rented in Florida and dropped off in another state. The rental is exempt from tax if the vehicle is rented in another state and dropped off in Florida. In addition, a rental car surcharge of $1 per day (or any part of a day) is imposed on each peer-to-peer car-sharing program agreement involving a Florida registered shared vehicle that is designed to carry fewer than nine passengers for financial consideration. These provisions take effect Jan. 1, 2022. Fla. Laws 2021, ch. 2021-175 (2021 FL SB 566), signed by the governor June 29, 2021.
Illinois: The Illinois Department of Revenue (IL DOR) issued a compliance alert notifying retailers filing IL Form ST-1 returns for tax periods after Jan. 1, 2021, with sales amounts reported only on lines 6a and 7a (the lines for reporting sales subject to Illinois Use Tax) that they may not be properly assessing, collecting and remitting Illinois tax on some of their sales. The IL DOR said that some of these sales may be subject to the Illinois Retailers' Occupation Tax (ROT) at the origin or destination rate, based on the specifics of the sale. The IL DOR explains in the compliance alert the type of tax that must be collected by (1) an in-state retailer (state and local ROT at the origin rate); (2) an out-of-state retailer with a physical presence in Illinois (depends on where the selling activity takes place); (3) a remote retailer meeting the economic nexus threshold (state and local ROT at the destination rate); and (4) a marketplace facilitator (depends on if the sale is made on the behalf of a marketplace seller or on behalf of itself (which further depends on where the sales are fulfilled or where the selling activities occur)). Amended returns should be filed to correct any errors. Ill. Dept. of Rev., Compliance Alert "Compliance and Reporting Issues for Form ST-1, Sales and Use Tax Return" (June 2021).
Illinois: New law (SB 61) requires an insurer who determines an insured's or third-party claimant's private passenger vehicle is a total loss covered under the terms of a personal automobile policy issued or renewed after July 1, 2022, to pay any state or local use or occupation tax and title and transfer fees. If the insurer replaces the insured vehicle, it must pay any state or local use or occupation tax as well as title and transfer fees on the replacement vehicle. If, however, a cash settlement is paid for the vehicle, the insurer must reimburse the insured or third-party claimant for these taxes and fees if the replacement vehicle is purchased or leased within 30 days after the insured or third-party claimant received the payment. These provisions take effect July 1, 2022. Ill. Laws 2021, Pub. Act 102-69 (2021 IL SB 61), enacted on July 9, 2021.
Louisiana: New law (HB 50) provides a state and local sales and use tax exclusion for leases or rentals by a short-term equipment rental dealer for the purposes of re-lease or re-rental. A "short-term rental" means the rental of tangible personal property for less than 365 days, for an undefined period or under an open-ended agreement. A short-term equipment rental dealer is a person or entity whose principal business is the short-term rental of tangible personal property classified under North American Industry Classification System Code Number 53241 (construction, mining, and forestry machinery and equipment rental and leasing) and 532310 (general rental centers). The exclusion applies beginning Oct. 1, 2021. La. Laws 2021, Act 7 (2021 LA HB 50), signed by the governor on June 1, 2021.
New Jersey: The recently enacted budget bill (SB 2022) directs the New Jersey Division of Taxation (NJ DOT) to examine the state's tax laws as they relate to the digital economy. Specifically, the examination will "quantify how various taxes have expanded or reduced the economic activity, and [New Jersey] revenue, that those laws were intended to capture when first enacted, and particular forms of economic activity that are untaxed or undertaxed that have grown more significant in the modern economy." The NJ DOT has until March 31, 2022 to submit the report, along with recommendations for changes to the state's tax law that would "address gaps in the current law", to the State Treasurer and the Joint Budget Oversight Committee. N.J. Laws 2021, P.L. 2021, ch. 133 (2021 NJ SB 2022), signed by the governor on June 29, 2021.
Federal: In Revenue Ruling 2021-13, the IRS ruled that (1) an acid gas removal (AGR) unit at a methanol plant constitutes carbon capture equipment; and (2) the person to whom the IRC § 45Q credit is attributable must own at least one component of the carbon capture equipment. The IRS also ruled that, for purposes of IRC § 45Q(a), the original placed-in-service date of a single process train of carbon capture equipment that includes new and existing equipment is the date the single process train is ready and available to capture, process and prepare carbon oxide for transport. For more on this development, see Tax Alert 2021-1402.
Nebraska: The Nebraska Department of Revenue (NE DOR) notified taxpayers that the provisions of its general information letter (GIL 29-20-2 "Treatment of Alternative Employment Arrangements Due to the COVID-19 National Emergency for Purposes of Calculating Employment Levels under the Nebraska Advantage Act") (GIL) will expire on July 30, 2021. Under the Nebraska Advantage Act, new employees are calculated based on the number of hours worked at the project. For employers that have arranged for some employees to work from home (WFH), the NE DOR stated that for the entire period the GIL is applicable it will not require employers to track the location of workers displaced by the COVID-19 pandemic and it will consider all employees who worked at the project prior to March 13, 2020 as continuing to work at that location (even though any such employee may be allowed to temporarily work at an alternative location). Employees hired after March 13, 2020, who WFH or an alternative site and begin work at the project location by the date the GIL expires, will be considered to have worked at the project since their date of hire. The NE DOR said that incentive companies should track employee hours as though these employees are working at the project while the GIL is applicable, regardless of where the employees are working. The hours of employees that have been placed on stand ready-to-work status will be treated similarly to those on vacation or sick leave. Thus, these hours will be considered leave time used and will count toward the calculation of the number of new employees. The GIL also addresses the calculation of the number of new employees, which includes hours paid at or above the required weekly wage, for employees that continue to work but at a reduced or subsidized rate of pay. Furloughed workers who are paid benefits, but not wages, are not included in the calculation of the number of new employees as they do not meet the required weekly wage. Employees working reduced hours will count toward the employee calculation if they receive the required weekly wage. The GIL applies to tracking hours and calculating the number of new employees for the period beginning March 13, 2020 through July 30, 2021. Thereafter, employees must work at the project, or as a teleworker under Neb. Rev. Stat. §77-5714(3), to count toward the calculation of new employees, and taxpayers should resume tracking employees' work locations. Neb. Dept. of Rev., "Notice of the Expiration of GIL 29-20-2" (July 20, 2021).
Arizona: New law (HB 2879) allows the Arizona Department of Revenue (AZ DOR) to issue draft rulings, procedures, notices and administrative announcements (each a draft document), either generally or on a specific set of facts and that otherwise do not change the substance and meaning of a statute or rule. Except for private letter rulings, the AZ DOR will allow for public comment on these draft documents. A draft document issued for public comment as provided under the new law will become final and effective 30 days after it is issued for public comment and review unless the AZ DOR withdraws it. Az. Laws 2021, ch. 342 (2021 AZ HB 2879), signed by the governor on May 7, 2021.
PAYROLL & EMPLOYMENT TAX
Florida: New law (Fla. Laws 2021, ch. 2021-25 (2021 FL HB 1463)) reduces the time employers have to respond to a state notice that a former employee filed an unemployment insurance (UI) benefit claim (referred to by the state as reemployment assistance or RA). Effective May 7, 2021, the employer must respond within 14 days of the mailing date on the state's notice, down from 20 days. Under Florida state UI law, failure by a contributing employer or its agent to timely or adequately respond to a notice of UI claim or request for information may result in the prohibition of employer relief of UI benefit charges when UI benefits have erroneously been paid. For additional information on this development, see Tax Alert 2021-1390.
Idaho: In May 2021, Idaho Governor Brad Little signed into law 2021 ID H.B. 380 (HB 380) which, effective retroactive to Jan. 1, 2021, lowers the top personal income tax rate from 6.925% to 6.5%, reduces the income tax brackets from seven to five and provides Idaho income taxpayers with a one-time nontaxable sales/income tax rebate. To accommodate the personal income tax adjustments under HB 380, the Idaho State Tax Commission issued revised 2021 income tax withholding tables which employers are instructed to implement as soon as possible. Employers are not required to make retroactive adjustments to Idaho income tax withheld prior to their implementation of the revised income tax withholding tables. For additional information on this development, see Tax Alert 2021-1396.
Kansas: By overriding Governor Laura Kelly's veto, the Kansas House and Senate enacted 2021 KS SB 50 (SB 50), which, effective retroactive to Jan. 1, 2021, increases the Kansas standard deduction amounts to $3,500 for single filers, $6,000 for single head-of-household filers and $8,000 for married filers filing jointly, up from $3,000, $5,500 and $7,500, respectively. To implement this provision of SB 50, the Kansas Department of Revenue announced on July 13, 2021 that it issued revised 2021 withholding tax tables which reflect the higher standard deductions. Employers are required to implement the revised income tax withholding tables immediately. Employers are not required to make retroactive adjustments to Kansas income tax withheld prior to their implementation of the revised income tax withholding tables. For additional information on this development, see Tax Alert 2021-1403.
Philadelphia, PA: The City of Philadelphia announced that effective July 1, 2021, the Earnings Tax rate for nonresidents is 3.4481%, down from 3.5019%, and the rate for residents is 3.8398%, a decrease from the previous rate of 3.8712%. For additional information on this development, see Tax Alert 2021-1385.
Rhode Island: New law (HB 1622 Sub. A), effective Jan. 1, 2022, imposes an additional real estate conveyance tax (RECT). Currently, the RECT equals $2.30 for each $500.00 (or fractional part thereof) paid for the purchase of real estate located in Rhode Island or the interest in an acquired real estate company (i.e., an entity which owns Rhode Island real estate and satisfies certain other property ownership conditions). HB 1622 imposes an additional $2.30 tax for each $500.00 (or fractional part thereof) paid in excess of $800,000 for the purchase of real property or an interest in an acquired real estate company. The Rhode Island Division of Taxation issued guidance on this change, providing examples of when the additional RECT applies. R.I. Laws 2021, ch. 162 (2021 RI HB 6122 Sub. A), signed by the governor July 6, 2021. See also, R.I. Div. of Taxn., "Summary of Legislative Changes" (July 26, 2021).
International — Ecuador:A new policy requires the Ecuadorian Ministryof Energy and Nonrenewable Natural Resourcesto modify the model used for oil and gas contracts and renegotiate current contracts. In addition, the Ecuadorian Government is reducing customs tariffs on 667 items beginning Aug. 1, 2021.For additional information on this development, see Tax Alert 2021-1392.
VALUE ADDED TAX
International — Georgia: As part of recent Value Added Tax (VAT) reform in Georgia, effective from July 1, 2021, foreign suppliers of digital services to non-entrepreneurial natural persons (consumers) in the territory of Georgia are required to assess and pay VAT to the state budget of Georgia. There is no minimum revenue threshold. For additional information on this development, see Tax Alert 2021-1387.
Thursday, August 5, 2021. The indirect tax technology journey: Now. Next. Beyond. (1:00 PM EDT). Join our EY team of tax technology professionals for the second 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. During this second webcast in the series, we will focus on the impact of digital transformation on the tax department. 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 AB 150, Section 15 (Small Business Relief Act), which adds Part 10.4 to the California Revenue & Taxation Code (CRTC) and will consist of new CRTC §§ 19900 — 19906. Section 7 of AB 150 adds CRTC § 17052.10, which provides "qualified taxpayers" (i.e., taxpayers subject to the California personal income tax law but specifically excluding partnerships) with the credit for their respective share of the PTE tax paid by the PTE.
2 See AB 150, Section 7, adding CRTC § 17052(b)(2), which defines the "qualified amount" as "an amount equal to 9.3[%] of the qualified taxpayer's pro rata share or distributive share, as applicable, of qualified net income subject to the [PTE tax] election made by an electing qualified entity under Part 10.4 [i.e., the PTE tax law] … "
3 "Net tax" is defined by CRTC § 17039 to refer to the personal income tax imposed on residents, nonresidents and part-year residents, less certain exemption credits and adjustments for interest on installment obligations.
4 See the definition of "taxpayer" in CRTC § 17004. New CRTC § 17052.10(b)(3)(B) added by AB 150, Section 7, specifically excludes from the definition of "qualified taxpayer" partnerships and any business entity that is disregarded for federal tax purposes.
5 A PTE owner may be a partner, shareholder or member of the PTE. PTE owners eligible for the credit include residents, nonresidents or part-year residents of California.
6 CRTC § 19900(a)(2) as added by AB 150, Section 15. CRTC § 19902(b) specifically excludes from the definition of "electing qualified entity" publicly traded partnerships and any entity permitted or required to be included in a combined reporting group. CRTC §§ 19900(a)(1), 19902(b) and 17052.10(b)(1) set forth the requirements for a PTE to qualify for and make a PTE tax election.
7 See CRTC § 17052.10(b)(3)(B).
8 CRTC § 19900(c)(1) ("The qualified entity may include in its qualified net income the pro rata share or distributive share of the income of any of its [owners] upon their consent. A[n owner] that does not consent does not prevent the qualified entity from making an election to pay the elective tax.")