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September 10, 2021

State and Local Tax Weekly for August 31

Ernst & Young's State and Local Tax Weekly newsletter for August 31 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.


Multistate Tax Commission approves updated statement on P.L. 86-272 to address its views on activities conducted over the internet

On Aug. 4, 2021, the Multistate Tax Commission (MTC) approved the fourth revision to its Statement of Information concerning practices of the MTC and supporting states under P.L. 86-272 (Statement).1 While many sections of the Statement were modified, the most significant change is new Section C, "Activities Conducted via the Internet," which was added to Article IV, "Specific Listing of Unprotected and Protected Activities" (hereafter, Art. IV, Section C).

Regarding internet activities, the Statement describes a general rule that, "when a business interacts with a customer via the business's website or app, the business engages in a business activity within the customer's state. However, … when a business presents static text or photos on its website, that presentation does not in itself constitute a business activity within those states where the business's customers are located."

The Statement includes "examples of activities conducted by a business that operates a website offering for sale only items of tangible personal property."2

Under the Statement, it is the MTC's view that protected activities of a business for purposes of P.L. 86-2723 include:

  • Providing post-sale assistance to in-state customers by posting a static list of frequently asked questions on the business's website (Ex. 1)
  • Placing on in-state customers' computers or other electronic devices "cookies" that gather customer information that is only used for purposes entirely ancillary to soliciting orders for tangible personal property (e.g., remembering items added to a customer's shopping cart during a web session, storing personal information provided by the customer, reminding customers of items they considered on prior visits to the website) (Ex. 6)
  • Offering only tangible personal property for sale on the business's website, with the website allowing customers to search for items, read product descriptions, purchase items and select delivery options (assumes that the business does not engage in any of the unprotected activities described later, or any other in-state activities not described in the example) (Ex. 11)

According to the Statement, unprotected activities of a business include:

  • Regularly providing post-sale assistance to in-state customers through an electronic chat or email that customers initiate by clicking on an icon on the business's website (Ex. 2)
  • Soliciting and receiving online applications for its branded credit card through the business's website (Ex. 3)
  • Placing on the business's website an invitation to viewers in the customer's state to apply for non-sales positions within the business (the example states that the website enables viewers to fill out and submit an online application and submit a resume and cover letter) (Ex. 4)
  • Placing on in-state customers' computers or other electronic devices "cookies" that gather customer search information for use in adjusting production schedules and inventory amounts, developing new products, or identifying new items to offer for sale (Ex. 5)
  • Remotely fixing or upgrading in-state customers' previously purchased products by transmitting code or other electronic instructions to those products over the internet (Ex. 7)
  • Offering and selling extended warranty plans through the business's website to in-state customers who purchase the business's products (Ex. 8)
  • Contracting with a marketplace facilitator to facilitate the sale of the business's products on the marketplace facilitator's online marketplace, where the marketplace facilitator maintains inventory, including that of the business, at fulfillment centers in a state in which the business's customers are located (Ex. 9)
  • Contracting with in-state customers to stream videos and music to electronic devices for a charge (Ex. 10)

Other notable changes to the Statement include the addition of teleworking under the list of unprotected activities, the revisions to the application of the Statement to foreign commerce and eliminating the application of the Joyce Rule4 in determining whether the activities of a company conducted in the state exceed the protections of P.L. 86-272.

For more on this development, see Tax Alert 2021-1608.

Maryland Comptroller proposes regulations for digital advertising tax

On Aug. 31, 2021, the Office of the Comptroller of Maryland (Maryland Comptroller) issued a proposed regulation (proposed Md. Reg. (Proposed Regulation) outlining how the state's new tax on gross revenues from digital advertising services (DAT) will operate. The DAT, which is currently scheduled to take effect on Jan. 1, 2022, will apply to persons with annual gross revenues derived from digital advertising services of at least $100 million globally and at least $1 million within Maryland.

For purposes of the DAT, "digital advertising services" are defined as "advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services." The Proposed Regulation would clarify issues delegated by the Legislature to the Maryland Comptroller in the original implementing DAT legislation (MD 2020 HB 732),5 including the sourcing and apportionment to Maryland of digital advertising services revenue.

Under the Proposed Regulation, revenues from digital advertising services would be deemed "derived in the State" when any portion of those services are accessed through a device located within Maryland. The revenue would then be apportioned by applying a worldwide, device-based apportionment factor to the global digital advertising services revenue. That apportionment factor would be calculated as a fraction, the numerator of which would be the number of devices that accessed the digital advertising services from a location in Maryland and the denominator of which would be the number of devices that accessed the digital advertising services from any location. The apportionment factor would apply to digital advertising gross revenue received by the taxpayer to determine the gross revenue attributable to Maryland. In calculating the apportionment factor, devices with indeterminate locations would be excluded from both the numerator and denominator. The Proposed Regulation gives two examples to illustrate how the apportionment factor would be calculated and apply.

Identifying the location of "devices," which was of particular concern to several businesses that derive revenue from digital advertising services, would be done by taxpayers using "the totality of the data within their possession or control, including both technical information and the terms of the underlying contract for digital advertising services." This means each DAT taxpayer would be required to use the information within its possession or control that most reliably identifies a device's location, including:

  • Internet protocol (IP) data
  • Geolocation data
  • Device registration
  • Cookies
  • Any other comparable information

DAT taxpayers would use this information to determine, based on a totality of the facts and circumstances, whether a device is: 1) in Maryland; 2) not in Maryland, but in the United States; 3) not in the United States; or 4) Indeterminate.

For more on this development, see Tax Alert 2021-1609.


Federal: On Aug. 25, 2021, Senate Finance Committee Chairman Ron Wyden (D-OR) and Senators Sherrod Brown (D-OH) and Mark Warner (D-VA) released an updated and detailed international tax framework supplementing the one they previously released in April 2021. The updated framework focuses on changes to the 2017 TCJA's provisions on global intangible low-taxed income (GILTI), foreign-derived intangible income (FDII), and the base erosion and anti-abuse tax (BEAT). The new release includes legislative text of the framework which had not been included in the earlier April release. Nevertheless, the updated framework still leaves several policy options undetermined, including the GILTI tax rate and how the BEAT might be changed to incorporate aspects of the Stop Harmful Inversions and Ending Low-Tax Developments (SHIELD) proposal offered by the Biden Administration. For more on this development, see Tax Alert 2021-1563.

Delaware: New law (HB 171) limits the amount of net operating loss (NOL) carryforward calculated under the federal income tax law that can be deducted for Delaware income tax purposes to the amount of the deduction claimed on the taxpayer's federal income tax return for the tax year in which the taxpayer was included as a party. According to the Delaware General Assembly Revenue and Finance committee report on HB 171, this statutory change "codifies the long-standing practice of the [Delaware] Division of Revenue to limit [NOL] deductions to those deductions that were claimed on a federal return." This change took effect upon the date of the governor's signature. Del. Laws 2021, ch. 107 (HB 171), signed by the governor on July 30, 2021.

Iowa: The Iowa Department of Revenue issued guidance on the three-year net operating loss (NOL) carryback period allowed for individual income tax purposes for losses incurred in a presidentially declared disaster area by taxpayers engaged in a small business or a farming business (collectively "eligible taxpayers"). The COVID-19 federal disaster declaration issued on March 23, 2020 (and effective Jan. 20, 2020) for all Iowa counties, as of Aug. 26, 2021, is still ongoing. Thus, all Iowa NOLs incurred between Jan. 20, 2020 and the end of the disaster declaration by an eligible taxpayer must be carried back three years unless the taxpayer elects to waive the entire carryback period (alternatively, farmers may elect to use the five-year carryback period that is available to them). Iowa Dept. of Rev., "3-Year Carryback Period for Iowa NOLs Incurred by Individuals During the COVID-19 Pandemic" (Aug. 26, 2021).

South Carolina: The South Carolina Department of Revenue (SC DOR) extended the nexus and income tax withholding guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency to Dec. 31, 2021 (from Sept. 30, 2021). As previously announced, the SC DOR has stated that it will not use changes in an employee's temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period solely as a basis for establishing nexus (including for P.L. 86-272 purposes) or for altering the apportionment of income. S.C. Dept. of Rev., "SC Information Letter #21-22 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19" (Aug. 25, 2021).


Illinois: On Aug. 18, 2021, the Illinois Department of Revenue (IL DOR) suspended emergency rules related to the "Leveling the Playing Field for Illinois Retail Act" that had taken effect July 13, 2021. Among topics addressed, the emergency rules had provided guidance on the collection and remittance of the Metropolitan Pier and Exposition Authority Retailers' Occupation Tax (MPEA) and the Chicago Home Rule Municipal Soft Drink Tax by food delivery services that are considered marketplace facilitators. The suspended rules are codified at 86 Ill. Adm. Code §§ 131.105, 131.107, 131.110, 131.120, 131.125, 131.130, 131.135, 131.140, 131.145, 131.150, 131.155, 131.160, 131.170 and 131.175, and 131.Illustration A. Due to the suspension of the emergency rules, IL DOR Compliance Alerts 2021-01 "Tax collection obligations of remote retailers, marketplace sellers, and marketplace facilitators for Chicago Home Rule Municipal Soft Drink Retailers' Occupation Tax, Prepaid Wireless E911 Surcharge, Illinois Telecommunications Access Corporation Assessment, and Tire User Fee" and 2021-02 "Tax remittance obligations for MPEA Retailers' Occupation Tax on food and beverages under the new marketplace facilitator law" are no longer effective as of July 13, 2021. The IL DOR indicated that new information is coming soon. For more on this development, see the IL DOR's "Leveling the Playing Field for Illinois Retail Act" resource page.

Indiana: In response to a ruling request, the Indiana Department of Revenue (IN DOR) determined that a company's provision of web-based fleet management services via a Software as a Service (SaaS) model is not subject to the state's sales and use tax. The IN DOR explained that under Indiana law (IC 6-2.5-4-16.7(b)), prewritten computer software that is sold, rented, leased or licensed for consideration that is remotely accessed over the internet, private or public networks or wireless media is not considered an electronic transfer of computer software or a retail transaction. The IN DOR also found that the company's provision of a free mobile application to customers is not subject to sales and use tax. Lastly, the IN DOR noted that since none of the products within the transaction — fleet management services, remotely accessed software and free app — are subject to sales tax, the transaction is not a taxable bundled transaction and any tangible personal property provided for free as part of the service would not be subject to sales tax. Ind. Dept. of Rev., Revenue Ruling #2020-14ST (July 22, 2021).

South Carolina: The South Carolina Department of Revenue (SC DOR) extended the nexus guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency to Dec. 31, 2021 (from Sept. 30, 2021). As previously announced, the SC DOR has stated that it will not use changes in an employee's temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period solely as a basis for establishing sales and use tax nexus. S.C. Dept. of Rev., "SC Information Letter #21-22 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19" (Aug. 25, 2021).


New Jersey: New law (AB 5580) restores and revises New Jersey's Urban Enterprise Zone program. Any currently designated urban enterprise zone (UEZ) will remain a designated zone for 10 years; new enterprise zones (EZ) will not be designated after Aug. 17, 2021. Currently designated UEZ-impacted business districts will expire on the first day of the third year next following the effective date of AB 5580. Municipalities with a zone development plan that was approved more than five years ago will need to submit an updated preliminary zone development plan. (AB 5580 includes guidelines for formulating an updated plan and a timeframe for reviewing and approving/rejecting these plans). Newly approved plans will remain in force for five years. In order to extend the zone designation, a new updated preliminary zone development plan will need to be submitted for review and approval. AB 5580 includes a provision preventing existing qualified business from losing eligibility for certain UEZ sales and use tax exemptions, including when the business is in a municipality that loses its UEZ designation. After Aug. 17, 2021, no new applications for the EZ employee tax credit or the corporation business tax exemption will be accepted. The law makes various changes to the incentives and exemptions available under the UEZ program, including sales tax exemptions for a qualified business for which the UEZ Authority grants a UZ-2, UZ-4 or UZ-5 certification. Other changes to the UEZ program include the following: (1) modifies existing, and adds new, definitions of key terms; (2) changes the composition of the UEZ Authority, including the appointment of new public members; and (3) modifies zone boundaries, defining a zone as a continuous border within one qualifying municipality. AB 5580 took immediate effect. N.J. Laws 2021, ch. 197 (AB 5580), signed by the governor on Aug. 17, 2021.


Colorado: Proposed Initiative #27, if approved by voters during the Nov. 2, 2021 statewide election, would reduce property tax assessment rates for residential and non-residential property. The property tax assessment rate on residential property would be reduced to 6.5% (from 7.15%). The rate for all other property, except producing mines and lands or leaseholds producing oil and gas, would be reduced to 26.4% (from 29%). If approved, the reduced rates would apply starting in 2022.


New Hampshire: New law (SB 101) increases the minimum gross business income required for filing a business profits tax return to $92,000 (from $50,000). Starting in 2023, the New Hampshire tax commissioner will biennially adjust the threshold amount, rounding to the nearest $1,000 based on the two-year percentage change in the Consumer Price Index for All Urban Consumers, Northeast Region. SB 101 took effect July 1, 2021. N.H. Laws 2021, ch. 199 (SB 101), signed by the governor on Aug. 10, 2021.

New Jersey: The New Jersey Division of Taxation updated its guidance on the federal income tax returns and forms required to be included with the filing of a New Jersey Corporation Business Tax Return to require the inclusion of Federal Schedule UTP (Form 1120, Uncertain Tax Position Statement) if it is filed for federal income tax purposes. N.J. Div. of Taxn., TB-98(R) (revised Aug. 20, 2021).


Virginia: The Virginia Department of Taxation (VA DOT) issued guidelines for reporting federal income tax adjustments, including partnership adjustments. The guidelines define terms and address the following: (1) general reporting requirements for the reporting of federal tax adjustments; (2) federal adjustments from IRS-initiated action; (3) federal adjustments from taxpayer-initiated action; (4) requirements for reporting certain partnership-level federal tax adjustments — federal centralized partnership audit regime; (5) Virginia partnership reporting requirements; (6) 90-day rule for partnerships to report and notify; (7) nonresident withholding tax; (8) composite return; (9) one-year rule for partners to report and pay; and (10) failure of partnership to comply with federal adjustments reporting filing requirements. The guidelines also include detailed guidance for when the partnership, as an alternative to having partners report and pay tax on their distributive share of adjustments, elects to pay tax on behalf of the partners. Issues addressed include those related to allocation and apportionment of income, various types of partners (e.g., tiered, resident, nonresident, corporate, tax exempt), assessment and collection of elective payment, revoking the election and the treatment of tax preferences on partners' taxes, among other topics. The VA DOT noted that the guidelines represent its interpretation of the laws and "do not constitute formal rulemaking" and as such do not have the force and effect of law or regulation. Va. Dept. of Taxn., "Guidelines for Reporting Federal Tax Adjustments" (Aug. 13, 2021).


Nebraska: The Nebraska Department of Revenue updated its frequently asked questions (FAQs) to reflect that in accordance with Executive Order No. 21-09, which rescinded the state's pandemic emergency order, it is withdrawing its temporary income tax withholding relief for teleworkers effective July 30, 2021. Thus, beginning on July 30, 2021, employers must properly ascertain the work location of their employees for Nebraska income tax withholding purposes and meet the state's normal withholding tax requirements. For more on this development, see Tax Alert 2021-1564.

South Carolina: The South Carolina Department of Revenue announced that the nexus and income tax withholding guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency is extended to Dec. 31, 2021 (from Sept. 30, 2021). S.C. Dept. of Rev., "SC Information Letter #21-22 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19" (Aug. 25, 2021).


Wednesday, September 29, 2021. US Indirect Tax Controversy: Current audit trends and outlook, including ways to manage your state tax posture. (1:00 p.m.-2:00 p.m. (ET)).While the COVID-19 pandemic has not reduced state and local tax revenues as much as anticipated, uncertainty about the trajectory of the economy remains, especially as new COVID-19 variants continue to emerge. Join our EY team of state controversy tax professionals for a webcast focused on recent audit trends in select states, including California, New York and Texas, and possible avenues to resolve uncertain tax positions. 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 For purposes of the MTC Statement, a "Supporting State" is "a State that adopts or otherwise expressly indicates support for this Statement by legislation, regulation or other administrative action. Other states may adopt or otherwise indicate support for individual sections of this Statement."

2 For purposes of these examples, the business has no other connection with the customer's state, and orders are approved (or rejected) and the property shipped from outside the customer's state.

3 The federal limitations imposed under P.L. 86-272 on the ability of the states to impose net income taxes on businesses engaged in certain sales solicitation activities are codified at 15 U.S.C. Sections 381 to 384.

4 The Joyce rule adopts the principle established in Appeal of Joyce, Inc., Cal. St. Bd. of Equal. (Nov. 23, 1966).

5 For more on MD 2020 HB 732, see Tax Alert 2021-0343.