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August 17, 2021

State and Local Tax Weekly for August 6

Ernst & Young's State and Local Tax Weekly newsletter for August 6 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.


IRS provides guidance on employee retention credits for the second half of 2021

In Notice 2021-49 (Notice), the IRS explains how its previous guidance applies to employee retention credits (ERCs) as they were modified and extended to the end of 2021 by the American Rescue Plan Act of 2021 (ARPA). The Notice also gives additional guidance in response to practitioner questions on ERCs.

Background - Section 9651 of ARPA added new Section 3134 to the Internal Revenue Code (IRC), creating an enhanced ERC that was fundamentally an extension of the ERC that was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and later modified and extended by the Consolidated Appropriations Act, 2021 (CAA) (see Tax Alert 2021-0539). The ERC, as modified by ARPA, applies through the end of 2021 and provides a credit against payroll taxes based on qualified wages paid by an eligible employer.

In addition to extending the ERC for two additional quarters, ARPA contained two substantive enhancements to the credit:

  • In addition to the original paths to ERC eligibility (e.g., a full or partial suspension of operations due to certain COVID-19-related governmental orders or a significant decline in gross receipts), ARPA added a third path for a recovery startup business (RSB). An RSB is an employer that does not qualify under either of the first two eligibility gateways and commenced a trade or business after Feb. 15, 2020, for which the average annual gross receipts over a three-year lookback period (prorated for periods less than three years) do not exceed $1 million. While eligible employers generally are limited to a credit of $7,000 per employee per quarter in 2021, an RSB is limited to a total credit of $50,000 per quarter for all employees.
  • Qualified wages for a "severely financially distressed" employer that experienced a greater-than-90% decline in gross receipts, whether a large or small employer, including any wages paid during the calendar quarter. For other employers, the distinction between large employers averaging more than 500 full-time employees during 2019 (2020 if the employer did not exist in 2019) and small employers under this threshold continues to apply.1

In March of 2021, the IRS released Notice 2021-20 with guidance on qualified wages paid in 2020, incorporating most of the FAQs from the IRS website and addressing the retroactive ERC amendments made by Section 206 of the Disaster Relief Act (Tax Alert 2021-0513). The IRS then released Notice 2021-23, incorporating the changes made by Section 207 of the Disaster Relief Act that applied to qualified wages paid in the first two quarters of 2021 (Tax Alert 2021-0724).

In addition to clarifying miscellaneous issues affecting the ERC in both 2020 and 2021, Notice 2021-49 amplifies the guidance in the two previous notices so they apply to the second two quarters of 2021 for similar provisions. The Notice also clarifies provisions of IRC § 3134 created by ARPA.

Notice 2021-49 - In Notice 2021-49, the IRC § 3134 provisions are clarified as follows:

  • With regard to RSBs, the determination of whether a taxable employer began carrying on a trade or business after Feb. 15, 2020, is made in the same manner as under IRC § 162, meaning the business has begun to function as a going concern and performed the activities for which it was organized. In addition, tax-exempt entities may qualify as RSBs based on their operations and gross receipts. Although ARPA did not include a definition for qualified wages of an RSB, the Notice treats all wages paid by an RSB that is a small employer as qualified wages. (Treasury and IRS indicate that they do not anticipate any RSBs being large employers.)
  • A "severely financially distressed" employer is not a separate category of eligible employer — once it has been established as such, however, the Notice provides a special rule for identifying qualified wages. The credit is available only for qualified wages the employer paid in the same quarter it claims the credit.
  • The ERC does not apply to qualified wages taken into account as payroll costs in connection with a shuttered-venue-operators grant or a restaurant-revitalization grant for the second half of 2021.

Notice 2021-49 clarifies additional ERC issues - In response to practitioner questions, the IRS clarified the following issues:

  • Eligible employers are not required to include full-time equivalents in the count of full-time employees for purposes of determining whether an eligible employer is a large or a small employer. Wages paid to an employee who is not full-time, however, may be treated as qualified wages if all other requirements to treat the amounts as qualified wages are satisfied.
  • Cash tips treated as either IRC § 3121(a) wages or IRC § 3231(e)(3) compensation are treated as qualified wages if all other requirements to treat the amounts as qualified wages are satisfied. Eligible employers can receive both the ERC and the IRC § 45B credit for the same wages. Although the Notice does not comment on this issue, it is unclear how a tip might be paid to an employee who is "not providing services."
  • To comply with the rule disallowing an employer's federal income tax deduction for qualified wages, taxpayers that claim ERCs on amended Forms 941 after filing their federal income tax return for the period should file an amended federal income tax return or administrative adjustment request if the appropriate disallowance was not taken on the original return.
  • Employers are not required to use the alternative quarter election consistently from quarter to quarter. In 2021, this election allows employers to compare their gross receipts for the prior quarter, rather than the current quarter, to the corresponding calendar quarter in 2019. For example, an employer could elect to be a Q2 2021 eligible employer if its Q2 2021 gross receipts are less than 80% of its Q2 2019 gross receipts and could then make an alternative quarter election in Q3 2021, again relying on the gross receipts decline in Q2 2021.
  • The availability of ERCs for wages paid to owner-employees and their spouses depends on whether they have other family members who are treated as owners under the IRC § 267(c) attribution rules.

For more on this development, see Tax Alert 2021-1489.


California: The California Franchise Tax Board (FTB) issued a Chief Counsel Ruling, providing guidance on the state's franchise and income tax treatment of the transfer of unwanted appreciated property by an insurance company to a general corporation where the parties made an IRC § 338(h)(10) election. Specifically, (1) whether either the seller (a general corporation) or target (an insurance company) recognizes gain on the unwanted assets, and (2) is the seller's basis of the unwanted assets carry-over or fair market value? The FTB concluded that the seller will be treated as receiving a distribution of all of target's earnings and profits; the distribution will be treated as a dividend for which the insurance company dividend received deduction is available under Cal. Rev. and Tax Code § 24410. Other than this treatment, the transaction will be treated as a liquidation under IRC § 332. Consequently, under IRC § 337(a) target does not recognize income on the distribution of these assets and consistent with IRC §334(b)(1) the seller has a carry-over basis in the unwanted assets. Cal. FTB, Chief Counsel Ruling 2021-01 (July 14, 2021).

Nebraska: The Nebraska Department of Revenue updated its revenue ruling on the treatment of limited liability companies (LLCs) and their resident individual members. The treatment of LLC income derived from sources outside the state is different for resident members and resident partners. Notably, members, but not partners, are allowed an adjustment decreasing federal adjusted gross income for the portion of the member's share of LLC income apportioned to other states using the sales factor formula. Because of this adjustment, members are not allowed a credit for taxes paid to another state on LLC income. Partners, however, are allowed such a credit. Neb. Dept. of Rev., Revenue Ruling 25-21-1 (updated Aug. 5, 2021) (supersedes Revenue Ruling 25-94-1, June 13, 1994).

New Jersey: The New Jersey Division of Taxation (NJ DOT) announced that its COVID-19 temporary Corporation Business Tax (CBT) nexus relief no longer applies on and after Oct. 1, 2021. Under this relief, the NJ DOT temporarily waived the CBT nexus standard which is generally met if an out-of-state corporation has an employee working in New Jersey. Thus, as long as the out-of-state corporation did not otherwise meet any of the factors giving rise to nexus, other than employees working from home in New Jersey solely due to COVID-19, the NJ DOT did not consider the out-of-state corporation to have nexus for purposes of the CBT. On and after Oct. 1, 2021, the pre-pandemic CBT standard applies (see TB-79R). Thus, an employee working from home creates CBT nexus because working at a location within New Jersey is considered a physical presence within the state. N.J. Div. of Taxn., "Teleworking — End of COVID-19 Temporary Suspension Period for Nexus and Withholding Purposes" (updated Aug. 3, 2021). For more on this development, see Tax Alert 2021-1495.

South Carolina: New law (SB 677) allows a partnership or limited liability company taxed as a partnership (collectively "partnership") to pass through to its partners and members historic rehabilitation tax credits, housing tax credits, and textile mill rehabilitation, renovation and redevelopment tax credits (collectively "credit") it has earned, including any unused credit amount carried forward. Such credits may be allocated among any of the partnership's partners or members on an annual basis, including an allocation of the entire credit to any partner or member who was a partner or member at any time in the year in which the credit or unused credit was allocated. The allocation is allowed without regarding to any IRC provision (or associated regulation) that may be interpreted as contrary to the allocation (e.g., treatment of the allocation as a disguised sale). This provision took effect May 17, 2021 and applies to a qualified project in service after Jan. 1, 2020 but before Dec. 31, 2030, if the project is issued an eligibility statement after May 14, 2020. S.C. Laws 2021, Act. No. 63 (SB 677), signed by the governor on May 17, 2021.

Tennessee: In response to a ruling request, the Tennessee Department of Revenue (TN DOR) determined that if a partnership elects, for generally accepted accounting principles (GAAP) for financial statement purposes, to "push down" the step-up in the purchaser's basis in partnership property the taxpayer (a single member limited liability company that is treated as a disregarded entity for federal income tax purposes and that is indirectly wholly owned by the partnership) must include the step-up in basis of its assets in calculating its franchise tax net worth. If the partnership makes an IRC §754 election that results in a step-up in basis of the taxpayer's assets for federal income tax purposes, the taxpayer in calculating its excise tax net earnings, would exclude the IRC §743(b) tax basis adjustments and associated amortization and depreciation deductions. Tenn. Dept. of Rev., Letter Ruling #21-06 (June 10, 2021).

Wisconsin: Adopted amendments to Wis. Admin. Code Tax §2.955 provides that a tax-option (S) corporation, partnership, or limited liability company (collectively, "entity") that makes an election to be taxed at the entity level, may claim an income or franchise tax credit for any net minimum tax, income tax, or franchise tax paid by the entity to another state upon income of the entity and upon income of the entity paid on behalf of the entity's resident shareholders, partners, and members on a combined or composite return filed with the other state. A credit for tax paid to another state is not allowed for minimum tax, income tax, or franchise tax paid to another state by a Wisconsin resident individual on income derived from an entity electing to be taxed on income at the entity level. In addition, the credit cannot be claimed by an entity electing to be taxed on income at the entity level if the entity's shareholder, partner, or member pays the tax to the other state on their proportionate share of entity income. The amended regulation, which took effect Aug. 1, 2021, includes guidance on how to claim the credit. Wis. Dept. of Rev., Amended Wis. Admin. Code Tax §2.955 (Wis. Register July 26, 2021).


Alabama: The Alabama Department of Revenue (AL DOR) issued guidance on the state's simplified sellers use tax (SSUT) and marketplace facilitator provisions. Marketplace facilitators that meet the $250,000 sales threshold are required to register for the SSUT under Ala. Code §40-23-193 or report such sales to the AL DOR and notify customers. The 8% SSUT should be collected and remitted on all retail sales of products sold in Alabama through the marketplace facilitator's platform. Collection and remittance of the SSUT relieves marketplace facilitators, marketplace sellers and purchasers from additional state or local sales and use tax on transactions made through the marketplace. Marketplace sellers, however, are not relieved of their obligation to remit sales and use tax on sales made through its own electronic platform or at in-state retail locations. The AL DOR said that qualified marketplace facilitators are required to apply and register for a SSUT account; noting that applications should be submitted by Oct. 1, 2021. Additional information on the SSUT is available here. Ala. Dept. of Rev., "Alabama Simplified Sellers Use Tax and Marketplace Facilitators Guidance" (July 26, 2021).

Florida: A medical center is not entitled to a refund of tax on rental or license fee assessed by the Florida Department of Revenue on rent payments the medical center made to its landlord for several floors within the landlord's hospital. In so holding, a Florida Court of Appeals (court) found no reason to set aside the FL DOR's final order which concluded that the medical center is not exempt from the tax because the medical center's patients are not "tenants". The court reasoned that there was nothing in the context of Fla. Rule 12A1.039(3) showing that the medical center's lease of its care area within the hospital for subsequent patient use qualifies as a "registered" dealer" licensing inpatient rooms to tenants. The medical center's rent payments also did not qualify as a tax-exempt sale for resale under Fla. Rule 12A1.039(1). Bayfront HMA Medical Center, LLC v. Florida Dept. of Rev., No. 1D20-1445 (Fla. Ct. App., First Dist., July 28, 2021).

Missouri: New law (HB 271) prohibits the state or any political subdivision from imposing any new tax, license, or fee in addition to any tax, license, or fee already authorized on or before Aug. 28, 2021 upon the provision of satellite or streaming video service. Mo. Laws 2021, HB 271, signed by the governor on June 15, 2021.

Missouri: In response to a ruling request, the Missouri Department of Revenue (MO DOR) said an in-state company that utilizes marketplace facilitators to market and sell its products must report all sales conducted on all marketplace facilitators' platforms on the company's vendor's use tax return and remit collected taxes directly to Missouri. The MO DOR explained that the marketplace facilitator operates as an agent of the company; thus, the company is a person engaged in making sales of tangible person property by agent and, as such, qualifies as the vendor in the transaction. As a vendor, the company is required to collect, report and remit vendor use tax on these marketplace sales. The MO DOR noted that delegation of this responsibility would result in the company's returns being incomplete. Beginning in January 2023, marketplace facilitators meeting a cumulative gross receipts threshold will be required to collect and remit tax on behalf of marketplace sellers. Mo. Dept. of Rev., Letter Ruling — LR 8151 (July 15, 2021).

New Jersey: The New Jersey Division of Taxation (NJ DOT) announced that its COVID-19 temporary guidelines for establishing sales tax nexus in connection with teleworkers will expire on and after Oct. 1, 2021. In connection with COVID-19, the NJ DOT temporarily waived the sales tax nexus standard which is generally met if an out-of-state seller has an employee working within New Jersey. Accordingly, provided an out-of-state seller did not maintain any physical presence in New Jersey, other than employees working from home in New Jersey due to COVID-19, and was below the economic activity thresholds (i.e., gross revenue exceeding $100,000 or 200 or more separate transactions) the NJ DOT did not consider the out-of-state seller to have nexus for sales tax purposes. Starting Oct. 1, 2021, the pre-pandemic sales tax nexus standard applies whereby an employee working from home creates sales tax nexus for an employer because working at a location in New Jersey is considered a physical presence within New Jersey. N.J. Div. of Taxn., "Teleworking — End of COVID-19 Temporary Suspension Period for Nexus and Withholding Purposes" (updated Aug. 3, 2021). For more on this development, see Tax Alert 2021-1495.


California: New law (AB 726), for purposes of the Capital Investment Incentive Program (CIIP), expands the list of businesses that may operate a "qualified manufacturing facility" to include those manufacturing fuels, electrical parts, or components used in the field of clean transportation or the production of alternative fuel vehicles or electric vehicles. In counties and cities that have established a CIIP, businesses operating a qualified manufacturing facility may receive a capital investment incentive. Cal. Laws 2021, ch. 121 (HB 726), signed by the governor July 23, 2021.


South Carolina: The South Carolina Department of Revenue issued a guide on the state's IRC conformity from 2018–2020, updated through the 2021 General Assembly session. The guide includes state conformity statutes, a listing of IRC sections not adopted, filing consequences and policy documents. S.C. Dept. of Rev., "South Carolina's Guide To IRC Conformity From 2018–2020" (June 2021 edition).


New Hampshire: New law (2021 N.H. HB 2) allows for the creation of the Granite State Paid Family Leave Plan for the purpose of providing family medical leave insurance (FMLI) wage-replacement benefits under certain circumstances. All New Hampshire employers may voluntarily opt into the program; however, employers with more than 50 employees that elect to participate are required to make premium contributions available to employees through payroll deduction. Employers of 50 or fewer employees may elect to offer payroll deduction and all employers may make FMLI available at no cost to employees or may partially subsidize the employees' cost. For more on this development, see Tax Alert 2021-1466.

New Jersey: The New Jersey Division of Taxation (NJ DOT) announced that its COVID-19 temporary guidelines for income tax withholding liability in connection with teleworkers will expire on and after Oct. 1, 2021. Under the normal rules, New Jersey requires that income be sourced to the state based on where the service or employment is performed using a day's method of allocation. However, during the temporary period of the COVID-19 pandemic, the NJ DOT stated that wage income would continue to be sourced based on the employer's jurisdiction. (The NJ DOT noted that because of the reciprocal agreement between New Jersey and Pennsylvania, New Jersey nonresident income tax is not required on wages for services performed within New Jersey by Pennsylvania residents.) When asked if the NJ DOT would advise New Jersey employers to not change the current work-state set-up for employees in their payroll systems who, due to COVID-19, were telecommuting or temporarily relocated at an out-of-state employer location, the NJ DOT responded that it would not require employers to make that change for this temporary situation; however, employers were urged to consider their unique circumstances and make that decision. Starting Oct. 1, 2021, employers should resume sourcing income based on where the teleworker's service or employment is performed and withhold New Jersey income tax from wages sourced to New Jersey. N.J. Div. of Taxn., "Teleworking — End of COVID-19 Temporary Suspension Period for Nexus and Withholding Purposes" (updated Aug. 3, 2021). For more on this development, see Tax Alert 2021-1495.

Oregon: On July 27, 2021, Oregon Governor Kate Brown signed into law HB 3398, which delays the requirement for employers to begin making contributions to the state's paid family and medical leave insurance (PFMLI) from Jan. 1, 2022 to Jan. 1, 2023 and the date that employees may begin collecting PFMLI benefits from Jan. 1, 2023 to Sept. 1, 2023. According to the fiscal notes for HB 3398, the delay in the program's implementation will allow the Oregon Employment Department to develop rules, policies and processes; hire necessary staff and set up facilities; plan outreach events to raise awareness about the program; and build a technology system that will fully support the PFMLI program. For additional information on this development, see Tax Alert 2021-1461.


International — Georgia: As part of recent Value Added Tax (VAT) reform in Georgia, foreign suppliers of digital services to non-entrepreneurial natural persons (consumers) in the territory of Georgia will be required to assess and pay VAT to the state budget of Georgia. For more on this development, see Tax Alert 2021-1459.

International — Poland: On July 26, 2021, the Polish Government announced draft legislation implementing broad tax reform. The changes affect several areas of taxation including Value Added Tax. The potential impact of these changes should be assessed by businesses in order to prepare for change and undertake the necessary actions. For more on this development, see Tax Alert 2021-1462.

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 For large employers, qualified wages continue to be wages paid to an employee who is not providing services due to the circumstances that caused the employer to be eligible for the credit. For small employers, qualified wages include wages paid — without regard to whether the employee was providing services — during the suspension period or the calendar quarter for which the gross receipts test was met.