August 24, 2021
State and Local Tax Weekly for August 13
Ernst & Young's State and Local Tax Weekly newsletter for August 13 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.
Pennsylvania ends COVID-19 temporary business tax nexus and income tax withholding guidance for teleworkers
The Pennsylvania Department of Revenue (PA DOR) announced that its temporary provisions governing the determination of nexus for Corporate Net Income Tax (CNIT), sales and use tax (SUT) and state income tax withholding for teleworkers during the COVID-19 emergency expires effective July 1, 2021. Further, PA DOR provided the following guidance in summary:
Wage sourcing and withholding. Under the PA DOR's guidance, if nonresident employees were working in Pennsylvania before the pandemic, their compensation remained Pennsylvania-sourced income for all tax purposes, including PA-40 reporting, employer withholding and three-factor business income apportionment purposes for S corporations, partnerships and individuals. Conversely, for Pennsylvania residents who were working out-of-state before the pandemic, their compensation remained sourced to the other state and they were still able to claim a Pennsylvania resident credit for tax paid to the other state on the compensation.
Further, if a nonresident employee was temporarily working from home due to the COVID-19 emergency in a state that doesn't have a reciprocity agreement with Pennsylvania, the PA DOR advised that the employee's compensation remained Pennsylvania sourced, and the employer was required to withhold Pennsylvania personal income tax on the compensation.
CNIT/SUT. PA DOR stated it would not seek to impose CNIT or SUT nexus on an out-of-state business solely on the basis of temporary telework within Pennsylvania due to the COVID-19 emergency restrictions.
Federal: On Aug. 12, 2021, the US Department of Treasury and IRS released Revenue Procedure 2021-34, which provides procedural guidance on final regulations under IRC § 451 (the final regulations, which were published in the Jan. 6, 2021 Internal Revenue Bulletin) relating to accounting method changes. The revenue procedure is generally effective for IRS Forms 3115 filed on or after Aug. 12, 2021. Revenue Procedure 2021-34 modifies the list of automatic method changes contained in Revenue Procedure 2019-43 by adding new automatic method changes and modifying some existing automatic method changes. For more on this development, see Tax Alert 2021-9015.
Colorado: The Colorado Department of Revenue (CO DOR) issued revised guidance on the interaction of recent federal income tax law changes made by the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act, P.L. 116-136) and the Consolidated Appropriations Act, 2021, with Colorado income tax, including relevant state modifications enacted in 2020 and 2021. For Colorado corporate and individual income tax purposes, the CO DOR guidance addresses the treatment of Colorado net operating losses, the business interest expense limitation under IRC §163(j), excess loss limitations under IRC § 461(l) (individual income tax only), qualified improvement property (includes examples), Colo. Laws 2021 HB 1002 subtraction, residential real estate, Paycheck Protection Program loans, and emergency economic injury disaster loans grants. Colo. Dept. of Rev., "CARES Act Tax Law Changes & Colorado Impact" (revised Aug. 2021).
District of Columbia: Approved budget bill (B24-285 and emergency B24-373) would increase individual income tax rates for high wage earners and expand the number of individual income tax brackets from five to seven. The current rates range from 4% (imposed on income not over $10,000) up to 8.95% imposed on income over $1 million. The tax rates would remain the same for those making $250,000 or less. The increased rates would be imposed as follows: (1) 9.25% on income over $250,000 but not over $500,000; (2) 9.75% on income over $500,000 but not over $1 million; and (3) 10.75% on income over $1 million. The new rates would apply to tax years beginning after Dec. 31, 2021. B24-285 was approved by the DC Council on Aug. 10, 2021 and will next be sent to the Mayor for her consideration. Once the bill is approved by the Mayor, it will be sent to Congress for a mandatory 30-day review period. Emergency B24-373 also was approved by the DC Council on Aug. 10, 2021. Once approved by the Mayor, the emergency bill will be effective for a 90-day period.
Florida: The Florida Department of Revenue (FL DOR) issued revised guidance on the recent update of the state's date of conformity to the Internal Revenue Code (IRC) to Jan. 1, 2021. As a result of this update, Florida's corporate income tax law generally will follow the computation of federal taxable income, including changes made by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Consolidated Appropriations Act, 2021, with some exceptions. For instance, the FL DOR guidance indicates that Florida's corporate income tax law is following the federal corporate income tax treatment of Paycheck Protection Program (PPP) loans, Economic Injury Disaster Loans (EIDL) and Small Business Administration (SBA) loans. On the other hand, the guidance points out that Florida's law decouples from CARES Act changes to the business interest expense limitation, qualified improvement property placed in service on or after Jan. 1, 2018, certain net operating loss (NOL) provisions, business meal expenses and bonus depreciation, among other provisions. The revision corrects the FL DOR description of the treatment of NOLs. Fla. Dept. of Rev., TIP No. 21C01-01 (revised Aug. 13, 2021).
Hawaii: In response to a ruling request, the Hawaii Department of Taxation (HI DOT) determined that income a nonresident individual earned from the performance of personal services from a vacation home in Hawaii is subject to Hawaii income tax. Although the individual was in Hawaii for more than 200 days due to stay at home orders issued in response to the COVID-19 pandemic, the HI DOT determined that the individual was neither domiciled in, or a "resident" of, the state. Despite this finding, the HI DOT said the individual's income earned while telecommuting from Hawaii nevertheless is subject to tax. Under Hawaii law, a nonresident is subject to Hawaii net income tax on income from sources within the state (HAR § 18-235-1.2(a)), and income from the performance of purely personal services is sourced to where the service is performed (HAR § 18-235-4.03). The HI DOT noted that the state has not adopted the convenience of the employer test (which would apportion the telecommuter's income entirely to the state in which the taxpayer's employer is located) and that the individual may allocate Hawaii source income using any reasonable method. Haw. Dept. of Taxn., Letter Ruling No. 2021-01 (July 26, 2021).
Virginia: New law (HB 7001) removes the $10,000 penalty for failure to timely file the corporate income tax unitary combined reporting information report by July 1, 2021 or making a material omission or misstatement in connection with such report. The Tax Commissioner has until Dec. 1, 2021, to submit a report based on the information provided in the combined reporting information reports to certain members of the Virginia General Assembly. Va. Laws 2021 (First Special Sess.), ch. 1 (HB 7001), signed by the governor Aug. 10, 2021.
SALES & USE
Arizona: The Arizona Department of Revenue (AZ DOR) issued guidance to automotive dealers regarding sourcing motor vehicle leases for a term of 24-months or more (i.e., a long-term lease). The AZ DOR explained that in terms of long-term motor vehicle leases there are conflicts between state and city statutory provisions. For state purposes, leases are sourced to the lessor's Arizona business location; if there is no Arizona business location, leases are sourced to the lessee's shipping address. City statutes, however, require long-term motor vehicle leases to be sourced to the location of the original motor vehicle dealership. The AZ DOR said this "is interpreted to mean that ongoing lease payments are sourced to the original motor vehicle dealership even if the lease contract is later sold, transferred, or otherwise assigned to a third-party leasing company." Since state and city provisions conflict, TPR 20-2 1 requires that state sourcing provisions apply. Thus, long-term motor vehicle leases that are transferred to a third-party leasing company are sourced using state provisions. Leased motor vehicles permanently moved to, and used exclusively, at a location outside of Arizona, are not subject to Arizona state, county, or city tax. The AZ DOR said new leases should be sourced following this guidance and TPR 20-2; existing leases should be changed when they expire and are renewed. Ariz. Dept. of Rev., "Notice for Arizona Automotive Dealers" (Aug. 9, 2021).
Colorado: In response to a ruling request, the Colorado Department of Revenue (CO DOR) said state and state-administered local sales tax does not apply to a company's sales of basic cable television service packages, premium channels, sports packages, pay-per-view events and video on demand content. The CO DOR applied the true object test to the transactions at issue and determined that they are mixed transactions and when taken as a whole are more analogous to a service. Since the transactions at issue are not specifically listed as a "taxable service", such sales are not subject to tax. Colo. Dept. of Rev., PLR 21-001 (May 21, 2021).
Colorado: In response to a ruling request, the Colorado Department of Revenue (CO DOR) said state and state-administered local sales tax applies to a company's sale of paid subscription program to Colorado customers. The CO DOR found the fee for the paid subscription program is a bundled transaction as the subscriber receives services, tangible personal property and other benefits such as discounts. Under Colorado law, the entire price of a bundled transaction is subject to tax; thus, the fee for the subscription program is subject to state and state-administered local sales tax. In regard to a free, one-month trial period, the CO DOR said state and state-administered local sales and use tax does not apply. The CO DOR stated it views these free trial periods as a discount. Since the company is not reimbursed for the discount, the sales tax due is calculated on the discounted price for the first subscription period. Colo. Dept. of Rev., PLR 21-002 (July 5, 2021).
Hawaii: The Hawaii Department of Taxation (HI DOT) issued guidance on the general excise tax treatment of software. The HI DOT considers the sales of prewritten or canned software, including the sale of a license to use such software, taxable sales of tangible personal property. On the other hand, the HI DOT deems custom software to be the provision of a service. Sales of taxable tangible personal property and services are subject to a 4% tax rate; a 0.5% tax rate applies if the taxpayer is a wholesaler (i.e., a person who sells such property to a licensed seller for purposes of resale) of tangible personal property or services. If the software is sold or licensed through a marketplace facilitator, the marketplace facilitator is deemed the retail seller subject to a 4% tax rate. The marketplace seller on whose behalf the sale or licensing of software is made, is deemed to have made a sale at wholesale. Haw. Dept. of Taxn., Tax Information Release No. 2021-06 (Aug. 10, 2021).
Federal: On Aug. 5, 2021, the US Department of Treasury released corrections (86 FR 42716 and 86 FR 42715) (the August 2021 corrections) to the final qualified Opportunity Zone (OZ) regulations (TD 9889). The August 2021 corrections primarily address the working capital safe harbor for Qualified Opportunity Zone Businesses (QOZBs). The August 2021 corrections are effective on Aug. 5, 2021 and apply on or after Jan. 13, 2020.For additional information on this development, see Tax Alert 2021-1519.
California: New law (SB 144) amends the state's film and television tax credit program by increasing the amount of credit available, establishing a new credit for certified studio construction projects, among other changes. The law provides an additional $90 million in tax credits for fiscal year 2021-22 and 2022-23, for a total of $330 million per fiscal year. Of the additional $90 million, $75 million is allotted to recurring TV series and $15 million is allotted to relocating TV series. Further, the law requires the California Film Commission (CFC) to limit the amount of credits any recurring television series receives in a subsequent season to no more than the amount reserved in its prior fiscal year Credit Allocation Letter(s) (if no amounts were reserved in the prior fiscal year, the most immediate prior fiscal year in which a Credit Allocation Letter(s) were received). If there are insufficient tax credits available to fund all recurring TV series, the CFC may redirect funds from other programs or future fiscal years. Effective for tax years beginning on or after Jan. 1, 2022 and before Jan. 1, 2032, the law provides a new credit for certified studio construction projects. The amount of this credit will equal 20% or 25% (whichever is the applicable credit percentage described for the project) of qualified expenditures paid or incurred during the tax year by a qualified motion picture produced in California at a certified studio construction project. A certified studio construction project is the construction or renovation of one or more sound stages in California with a cost of at least $25 million over not more than five continuous calendar years. The project must be built and maintained in accordance with certain labor requirements and it must commence after July 21, 2021. Productions that receive a film infrastructure credit cannot receive a California competes grant or credits from the Film and TV tax credit 3.0 program in the same year. The law also requires those receiving the Film Infrastructure Credit to submit a diversity workplan, which must be approved by the CFC. An applicant production that the CFC has determined met or made a good faith effort to meet the diversity goals in its workplan, will have its credit percentage increased by up to four percentage points. Starting in 2022, the CFC is required to submit an annual report providing aggregate diversity information for production allocated tax credits, among other information. Cal. Laws 2021, ch. 114 (SB 144), signed by the governor on July 21, 2021). See also, Cal. Film Commission, Senate Bill 144 Frequently Asked Questions (Aug. 2021).
California: The California Film Commission (CFC) has announced application deadlines for the next film and TV tax credit program - Program 3.0. For recurring and relocating TV series, the application period is Sept. 20-22, 2021, with phase II from Sept. 23-27, 2021. The approval date for these applications is Oct. 25, 2021. Applications for new TV series will not be accepted during this application period. For independent and non-independent feature films, the application period is Jan. 24-26, 2022, with phase II Jan. 27 — Jan. 31, 2022. The approval date for these applications is Feb. 28, 2022. Additional information on the program is available on the CFC's website.
Connecticut: New law (SB 3) expands the state's stranded tax credit program, which allows a business to exchange accumulated (i.e., stranded) research and development (R&D) credits for undertaking certain in-state capital projects, by allowing the exchange of stranded R&D credits for human capital investments. For purposes of this provision, "human capital investment" includes amounts paid or incurred by a corporation on (1) in-state job training for in-state employment; (2) in-state work education programs (e.g., public high school and in-state work education-diversified occupations programs); (3) in-state worker training and education provided by in-state institutions of higher education; (4) donations or capital contributions to in-state institutions of higher education for improvements or advancements of technology; (5) planning, site preparation, construction, renovation or acquisition of facilities in Connecticut for the purpose of establishing a child care center that will be primarily used by the children of in-state employees; (6) subsidies to employees who are employed in Connecticut for child care to be provided in the state; and (7) contributions made to the Individual Development Account Reserve Fund. This change took effect July 1, 2021 and applies to income years beginning Jan. 1, 2021. The law also requires the Connecticut Department of Economic and Community Development (CT DECD) to prioritize economic development financial assistance applications for businesses that have demonstrated a willingness to make jobs available to certain individuals, and requires the CT DECD commissioner to study the state's opportunity zone financial incentives. Conn. Laws 2021, Pub. Act 21-188 (2021 Conn. SB 3), signed by the governor on July 13, 2021.
COMPLIANCE & REPORTING
Oregon: New law (SB 164) requires for purposes of computing the 2021 tax year Corporate Activity Tax (CAT) that taxpayers using a federal year other than a calendar year must register with the Oregon Department of Revenue (OR DOR) and file a short year tax return. The short year return is applicable to a period starting Jan. 1, 2021 and ending on the last day of the taxpayer's federal tax year that ends in calendar year 2021. Taxpayers subject to this registration and filing requirement will prorate, for the number of days the short year return applies, the CAT $750,000 threshold and the $1 million rate threshold as well as the subtractions allowed under ORS 317A.119. In addition, the law defines "tax year" as a taxpayer's annual accounting period used for federal income tax purposes under IRC § 441, and it aligns CAT payment and filing deadlines with the taxpayer's tax year (changed from calendar year). Thus, annual returns are due by the 15th day of the fourth month following the end of the tax year (changed from April 15 of the following year), and estimated tax payments for the previous quarter are payable to the OR DOR on or before the 4th, 7th, and 10th months of the tax year and the first month immediately following the end of the tax year (changed from the last day of January, April, July and October of each year for the previous calendar quarter). The new law also provides that if all members of a unitary group use the same annual accounting period for federal income tax purposes, that same accounting period will be used for the group's annual CAT accounting period. If the unitary group includes members with different accounting periods and two or more members of the group file a federal consolidated return, the unitary group's tax year is the same as the federal consolidated group's annual accounting period. In other instances, the unitary group will use the accounting period of the group's designated reporting entity, unless otherwise allowed by the OR DOR. Lastly, the law requires the unitary group for purposes of the CAT to designate a single reporting entity. SB 164 generally applies to tax years beginning on or after Jan. 1, 2021. Ore. Laws 2021, ch. 572 (SB 164), signed by the governor July 19, 2021. See also, Ore. Dept. of Rev., "2021 Legislative Changes Made in Senate Bill 164" (Aug. 2021).
PAYROLL & EMPLOYMENT TAX
Ohio: The Ohio Department of Taxation has released revised income tax withholding tables that apply to wages paid on and after Sept. 1, 2021 and through Dec. 31, 2021. The updated withholding tax tables and percentage method reflect legislation under 2021 Ohio H.B. 110, which, retroactive to Jan. 1, 2021, reduces Ohio's individual income tax rates by 3%, eliminates the top income tax bracket for Ohio adjusted gross income (AGI) over $217,000, reduces the tax rate for Ohio AGI over $110,650 to 3.99%, and eliminates individual income tax for anyone with $25,000 or less in Ohio AGI. For additional information on this development, see Tax Alert 2021-1503.
Vermont: The Vermont Department of Labor announced that its fiscal year 2022 (July 1, 2021 — June 30, 2022) state unemployment insurance (SUI) tax rates are determined on Rate Schedule III, with rates ranging from 0.8% to 6.5%, up from fiscal year 2021 where Rate Schedule I applied, with rates ranging from 0.4% to 5.4%. The increase is due to the impact of COVID-19 unemployment insurance (UI) benefits on the state's UI trust fund, and despite legislation that required that calendar year 2020 UI benefits not be used in computing employer SUI tax rates. For additional information on this development, see Tax Alert 2021-1479.
Maryland: The U.S. Supreme Court has been asked to review the constitutionality of the City of Baltimore's excise tax on outdoor advertising. The Maryland Court of Appeals held that the tax was not an unconstitutional tax on the exercise of free speech, finding that the Ordinance imposing the tax does not single out the press as it is imposed on all operators of off-site billboards in the City who sell advertising on those billboards. The appeals court also found the Ordinance does not elicit heightened scrutiny under the First Amendment of the US Constitution by targeting a small group of speakers, reasoning that the tax applies to all off-site billboards and does not distinguish among billboards based on any other factor or its subject matter. The question presented to the U.S. Supreme Court is "[w]hether a tax singling out off-premises billboards is subject to heightened scrutiny under the First Amendment." Clear Channel Outdoor, Inc. v. Baltimore City Dept. of Finance, No 9 (Md. Ct. App. March 15, 2021), pet. for cert. filed, Dkt. No. 21-219 (U.S. S.Ct. filed Aug. 12, 2021).
Oregon: New law (SB 164), for purposes of the Corporate Activity Tax (CAT), amends the definition of "commercial activity" to expand the exclusions for: (1) vehicle dealer trades to exclude any new vehicle exchanged between franchised motor vehicle dealerships; and (2) retail and wholesale grocery sales to exclude the compensation a consignee receives for grocery sales. The law expands the definition of "excluded person" to include foreign or alien insurance companies that are subject to the retaliatory tax. SB 164 generally applies to tax years beginning on or after Jan. 1, 2021. Ore. Laws 2021, ch. 572 (SB 164), signed by the governor July 19, 2021. See also, Ore. Dept. of Rev., "2021 Legislative Changes Made in Senate Bill 164" (Aug. 2021).
VALUE ADDED TAX
International — Thailand: Initially proposed four years ago, Thailand's new Value Added Tax (VAT) rule for nonresident providers of electronic or digital services (so-called "e-services" under Thai law) to non-VAT registrants in Thailand was passed into law in February 2021 and will apply from Sept. 1, 2021. The rule is broadly similar in concept (taxing supplies of digital services by nonresidents) to the rules introduced in Singapore (Goods and Services Tax or GST), Malaysia (Services Tax) and Indonesia (VAT) in 2020. However, it is important to note that the rules and how they are being applied in practice is different in each jurisdiction. Its principal objective is to generate additional tax revenue and to create a level playing field for Thai-based providers of e-services. For additional information on this development, see Tax Alert 2021-1481.
Thursday, September 9.Domestic tax quarterly webcast series: A focus on state tax matters (1:00 p.m. EDT (New York); 10:00 a.m. PDT (Los Angeles)). For our third quarterly webcast in 2021, Helen Hecht, Uniformity Counsel for the Multistate Tax Commission (MTC), will join us to discuss the MTC's recently launched partnership tax project, as well as other ongoing uniformity projects. Other featured topics include: (1) state tax considerations for employers and employees if employees continue to work from home on an interim or permanent basis after temporary state nexus relief and other similar measures end; (2) state proposals to impose new income taxes or expand existing sales and use taxes to digital advertising and digital services; and (3) other important state tax policy developments from the past quarter. Register for this webcast here.
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 AZ DOR, TPR 20-2 (Oct. 6, 2020) (when state sourcing provisions conflict with local sourcing provisions, the state sourcing provisions apply since they involve a matter of statewide concern).