September 20, 2021
State and Local Tax Weekly for September 10
Ernst & Young's State and Local Tax Weekly newsletter for September 10 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.
Illinois enacts elective pass-through entity tax
On Aug. 27, 2021, Illinois Governor J.B. Pritzker signed Public Act 102-0658 (the Act and formerly, Senate Bill 2531), establishing an elective income tax regime for pass-through entities (PTEs), including partnerships, S corporations and LLCs treated as either. Unlike many other states that have recently enacted these elective PTE tax regimes, Illinois already subjects the income of PTEs to the state's personal property replacement tax (Replacement Tax). This new PTE tax regime is an additional, elective entity-level income tax. Under the Act, eligible PTEs will pay an entity-level tax, with a proportionate share of the paid PTE tax credited to the PTE owners' Illinois income tax liability. Publicly traded partnerships are not eligible for this new PTE tax.
The PTE tax is intended to allow Illinois individual income taxpayers to deduct, for federal income tax purposes, Illinois taxes that are paid on PTE income and exceed the $10,000 annual limitation imposed by IRC § 164(b)(6) (the SALT deduction limitation), consistent with IRS Notice 2020-75 (see Tax Alert 2020-2690). This benefit is accomplished by treating PTE tax paid at the entity level as an "above the line" deduction by the trade or business rather than as an itemized deduction at the individual PTE owner level that would otherwise be subject to the SALT deduction limitation.
The Illinois elective PTE tax applies beginning with tax years ending on or after Dec. 31, 2021 and beginning before Jan. 1, 2026. Key features of the new PTE tax law are summarized in Tax Alert 2021-1616.
On Sept. 10, 2021, the Illinois Department of Revenue said that it will not assess penalty for late estimated payments due for tax years ending before Dec. 31, 2022, for PTEs that elect to pay the entity-level income tax. This penalty relief is not available to individual partners and shareholders of these entities; however, such partners and shareholders may claim a tax credit against their own tax liability for distributive shares of PTE level tax credit they receive and may adjust their estimated payments accordingly.
New York tax department issues guidance on new pass-through entity tax; 2021 election must be made by Oct. 15, 2021
The New York Department of Taxation and Finance issued guidance1 on the newly-enacted elective tax on pass-through entities (which applies to certain eligible partnerships, S corporations and limited liability companies (LLC) treated as either, referred to herein as a PTE). The new elective PTE tax is intended to permit eligible partners, members and shareholders of an electing PTE (an electing entity) to indirectly deduct for US federal income tax purposes their respective share of New York State taxes paid by the PTE in excess of the $10,000 limitation imposed on the deductibility of state and local taxes by IRC § 164(b)(6), consistent with IRS Notice 2020-75 (see Tax Alert 2020-2690).
The PTE tax election can be made annually, starting in tax years beginning on or after Jan. 1, 2021. Only an authorized person can make the election on behalf of an eligible PTE. An eligible partnership also includes a partnership with partners that are not eligible for a PTE tax credit, such as corporate partners.
According to the guidance, entities not eligible to make the PTE tax election include single member LLCs, sole proprietorships, trusts, non-profit corporations, and corporations that are not New York S corporations.
A PTE tax election, once made, is irrevocable. The election must be made online on an annual basis. Electing PTEs that are calendar-year taxpayers must use a calendar-year basis to elect, file and pay the PTE tax; fiscal year taxpayers must elect, file and pay PTE tax for the calendar year in which its fiscal year ends.
For tax year 2021, an authorized person has until Oct. 15, 2021, to file a PTE tax election through an eligible entity's Business Online Services account. (If the entity does not have a Business Online Services account, the authorized person will need to create one.) Fiscal year taxpayers whose 2021 tax year began before Jan. 1, 2021, are not eligible to make the 2021 PTE tax election.2
For tax years beginning on or after Jan. 1, 2022, the annual election can be made online on or after January 1 of each such year but no later than March 15 of that year.
See Tax Alert 2021-1675 for discussions on how to calculate PTE taxable income, PTE tax and PTE tax credits; how to claim PTE tax credits and the resident tax credit; making estimated tax payments; and annual return due dates and extensions.
California: The California Franchise Tax Board (FTB) created a webpage on the state's new pass-through entity (PTE) elective tax. Information on the webpage: (1) describes what are qualifying and non-qualifying PTEs and who are qualified taxpayers; (2) explains how to make the PTE election — the election is made when the tax return is filed, and for tax years 2022—2025, the PTE also must make an initial payment by June 15 (failure to timely make the initial payment will result in the PTE not being able to make the election for the tax year); (3) sets forth payment due dates; (4) provides a brief summary of the PTE elective tax calculation, the tax credit qualified taxpayers are eligible to claim, and how to claim the credit; and (5) lists what forms to file (as of Sept. 10, 2021, the forms were still being developed by the FTB).
Texas: In affirming a trial court ruling, a Texas appeals court held that the applicable franchise tax rate for a multistate business equipment and supply corporation for tax years 2008 and 2009 is the lower 0.5% franchise tax rate applicable to taxpayers primarily engaged in retail or wholesale trade rather than the 1.0% rate. The appeals court agreed with the trial court's finding that during the period at issue the corporation was primarily engaged in wholesale trade as it total revenue from its activities in wholesale trade were greater than the total revenue from its activities in trades other than the wholesale trade. The Comptroller argued that "under the ordinary meaning of 'selling' [as used in Division F of the Texas Tax Code], selling takes place only when there is a transfer of title to property for a price." The appeals court rejected this argument, and as a matter of first impression, concluded that the ordinary meaning of "selling," "sold," or "sale" does not require the transfer or passage of title, but does requires the transfer of the item being sold. In so holding, the appeals court rejected the Comptroller's argument that the corporation's "sales-type leases cannot fall within the scope of Division F because these leases do not involve any transfer of title." The appeals court also found that the trial court did not err in concluding that it was proper to classify the revenue from the corporation's sales-type leases under FAS 13 as revenue from sales falling within the scope of wholesale trade under Division F. Lastly, the appeals court rejected various Comptroller challenges to costs that the corporation included in its cost of goods sold deduction. Hegar v. Xerox Corp., No. 14-19-00358-CV (Tex. Ct. App., 14th Dist., Aug. 31, 2021).
SALES & USE
Colorado: In response to a ruling request, the Colorado Department of Revenue (CO DOR) determined that a company's online learning plan products are subject to state and state-administered local sales tax, but its internet advertising revenue from the pay-per-click model and the fulfilling of insertion orders are not subject to these taxes. In regard to the learning plan products, the CO DOR found this to be a mixed transaction that is more analogous to the sale of tangible personal property, noting that the user gains access to the study modules as finished products, which include streaming video lessons and written transcripts. Services provided with the learning plans exist to support the customer's use of the learning platform. The value of the learning platform is the access to the videos and accompanying transcripts. As for the internet advertising revenue, the CO DOR said advertising services are generally not subject to Colorado sales or use tax and that the exception to this general rule does not apply in this instance. Colo. Dept. of Rev., PLR 21-005 (July 21, 2021).
Illinois: New law (SB 2066) modifies the Retailers' Occupation Tax (ROT) to provide that a "marketplace facilitator" does not include any person licensed under the Auction License Act (ALA). This exemption, however, does not apply to any person who is an internet auction listing services (as defined by the ALA). In addition, beginning Jan. 1, 2020 through Dec. 31, 2020, the law exempts from ROT sales of tangible personal property made by a marketplace seller over a marketplace for which tax is due but for which use tax has been collected and remitted to the Illinois Department of Revenue by a marketplace facilitator. Marketplace sellers claiming this exemption must maintain books and records demonstrating that use tax on these sales has been collected and remitted by the marketplace facilitator. Marketplace sellers that remitted tax on such sales may file a claim for credit; a claim will not be allowed on such taxes if a credit or refund has been issued to the marketplace facilitator under the Use Tax Act (UTA) or for which the marketplace facilitator has filed a claim for credit or refund under the UTA. Further, on and after Jan. 1, 2021, a certified service provider (CSP) filing a return on behalf of a remote retailer, at the time of filing the return, is allowed a discount of 1.75% of the amount of tax due; remote retailers using a CSP are not eligible for the discount. SB 2066 took effect upon becoming law. Ill. Laws 2021, PA 102-0634 (SB 2066), signed by the governor Aug. 27, 2021.
Texas: The Texas Comptroller of Public Accounts has agreed not to implement 34 Tex. Admin. Code § 3.334(b)(5), which would source online sales to the buyers location instead of the seller's business location. Specifically, Rule 3.334(b)(5) provides that effective Oct. 1, 2021, orders not received by sales personnel (such as online orders), are received at locations that are not places of business of the seller. In July 2021, the City of Round Rock filed a lawsuit, seeking to overturn this provision, arguing that the rule is contrary to the Tax Code. Following an Aug. 30, 2021 hearing, the Comptroller and the city reached an agreement, enjoining the Comptroller from implementing or enforcing Rule 3.334(b)(5) until a final hearing on the merits or further order from The Travis County District Court. A hearing in the case has been set for the week of June 13, 2022.
West Virginia: The West Virginia State Tax Department (WV Tax Dept.) issued general information guidance to clarify the state and municipal sales and use tax requirements for entities selling streaming services. The WV Tax Dept. explained that all sales of services in West Virginia are subject to sales and use tax unless an exemption applies. Since there is no exemption for streaming services, such services are subject to state sales and use tax. Municipal sales or use tax not greater than 1% also applies in municipalities that impose a municipal sales and use tax. A "streaming service provider" generally supplies entertainment (e.g., movies, music, video games) or other content and delivers the content electronically over the internet, satellite or cable connection to the subscriber's computer, television, mobile device or other device able to access such content. Remote streaming service providers should see TSD-406A on the state's economic nexus provision for additional guidance. The W.V. Tax Dept. noted that this guidance does not cover sales of digital products, which is a discreate identifiable item such as the purchase or rental of a movie at a specified price for download. W.V. Dept. of Taxn., TSD-445 "Sales and Use Tax for Streaming Services" (Aug. 2021).
Federal: On Sept. 1, 2021, the Treasury Department announced that it awarded $5 billion in New Markets Tax Credit allocation to successful Community Development Entities (CDEs) from the 2020 application round. The $5 billion was awarded to 100 CDEs headquartered in 34 states and the District of Columbia. For additional information on this development, see Tax Alert 2021-1598.
Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) issued revised guidance on the application and sale of restricted tax credits. The guidance applies to the following credits: the Research and Development Tax Credit, FILM Production Tax Credit, Neighborhood Assistance Program (NAP), Resource Enhancement and Protection Tax Credit (REAP), Keystone Innovation Zone Tax Credit (KIZ), Keystone Special Development Zone Tax Credit (KSDZ), Historic Preservation Tax Incentive, Coal Refuse Energy and Reclamation Tax Credit, Innovate in Pennsylvania Tax Credit, Mixed Use Development Tax Credit, Entertainment Economic Enhancement Program, Video Game Production Tax Credit, Waterfront Development Tax Credit, Manufacturing and Investment Tax Credit, Pennsylvania Resource Manufacturing (PRM) Tax Credit, and Local Resource Manufacturing (LRM) Tax Credit. Many of the tax credits are applied first against the tax liability for the period in which the credit is approved. Unpaid tax liability must be satisfied before any portion of the credit can be carried forward, sold or passed through. Prior year credits are applied on a first-in-first-out basis until all tax liabilities are satisfied, and restricted credits will be applied before any cash payments. The guidance also provides information about the application of restricted credits to corporate accounts; requirements that must be met by sellers before approval (including that assignment of a restricted credit will not be approved if the seller has any unpaid state taxes); waiting periods before sale for the KSDZ, NAP, REAP, PRM and LRM tax credits; special requirements for KIZ tax credit sales; pass-through requirements; requirements for purchased credits (including that the buyer of a restricted credit must use the credit in the year in which the purchase or assignment is made); credit buyer tax liability offset limits; additional buyer and seller tax return reporting requirements; frequently asked questions; and a quick reference table of the credits. Pa. Dept. of Rev., "Restricted Tax Credit Bulletin 2021-09" (Sept. 2021) (replaces Restricted Tax Bulletin 2018-01).
New Jersey: New law (AB 2374) requires the New Jersey Economic Development Authority (EDA) to establish a program for public/private financing of certain renewable energy, water and storm resiliency projects — property assessed clean energy (PACE) projects — through the use of voluntary special assessments by municipalities for participating property owners, including commercial properties (C-PACE). The Legislature included in AB 2374 its finding that PACE financing (under which repayment is made via a special assessment on the real property that has been improved, including new construction on previously unimproved real property) "is an innovative way for property owners to finance or refinance renewable energy, energy and water efficiency, and other eligible improvements which, in turn, saves a significant sum in utility costs or insurance premiums, creates jobs, stimulates local economies, reduces greenhouse gas emissions, and improves the safety and quality of building stock." The law defines a "C-PACE project" to mean the acquisition, construction, installation, modification or, in the discretion of the authority, entry into a capital lease of an energy efficiency improvement or renewable energy system including energy storage, microgrid, water conservation improvement, stormwater management system, electric vehicle charging infrastructure, flood resistant construction improvement, or hurricane resistant construction improvement, in each case affixed to a property, including new construction upon previously unimproved real property, within a participating municipality. At the discretion of the authority, a C-PACE project also means a microgrid or district heating and cooling system in which a property owner within the municipality participates for the duration of the C-PACE assessment or a power purchase agreement with respect to a renewable energy system affixed to a property. In establishing the C-PACE program, the EDA must post to its website uniform assessment documents, a model opt-in ordinance, program guidelines, and the application process of a local C-PACE program ordinance. AB 2374 took immediate effect. N.J. Laws 2021, ch. 201 (AB 2374), signed by the governor on Aug. 24, 2021.
COMPLIANCE & REPORTING
Alabama: The Alabama Department of Revenue (AL DOR) issued proposed Ala. Admin. Code 810-3-36-.01 (proposed rule) to provide guidance on filing a pass-through entity (PTE) tax return and paying the tax due for PTEs electing to be taxed at the entity level (i.e., electing PTE). The proposed rule would require a PTE to electronically submit via My Alabama Taxes (MAT) Form PTE-E "Pass-Through Entity Election Form" on or before the 15th day of the third month following the close of the tax year for which the PTE elects to be taxed as an electing PTE. If the electronic election form is not timely filed through MAT, the election to become an electing PTE would be denied for that year. The election, once made, would be binging for subsequent years until a request to revoke the election is made. An electing PTE would have to file Alabama Form EPT "Electing Pass-Through Entity Payment Return" in addition to a complete Form 20S "S-Corporation Information Tax Return" or Form 65 "Alabama Partnership/Limited Liability Company Return of Income" for the tax year for which the election is made and thereafter until the election is revoked. In computing the PTE tax liability, the PTE (1) would apply the maximum individual income tax rate; (2) would not be able to use a net operating loss (carryforward) to offset income or gain; and (3) would not be allowed to eliminate or exempt any owner, member, partner, or shareholder's pro rata distributive share of Alabama taxable income. PTE tax returns would be due on the 15th day of the third month following the close of the PTE's tax year; PTEs would be granted an automatic six-month extension of time to file the electing PTE return. The filing extension would not extend the time to pay the tax due. Owners, members, partners, or shareholders (collectively "owner") of an electing PTE would have to file an Alabama return to report its pro rata or distributive share of income from the entity. Owners would be allowed a credit in an amount equal to its pro rata or distributive share of Alabama income tax paid by the electing PTE. Lastly, the following rules would apply to PTEs transitioning to an electing PTE: (1) estimated payments must be 25% of the required annual payment; and (2) once the election is made, the initial return's preceding tax year's computation is computed using the total of either Form 20S or Form 65's Schedule K (income (loss) and deductions) column C (apportioned amount), multiplied by 5%. If an electing S corporation reported a loss on Schedule K for the first tax year, these transition rules would not apply. A public hearing on the proposed rule is scheduled for 1:30 pm on Tuesday, Oct. 5, 2021.
Rhode Island: The Rhode Island Division of Taxation (RI DOT) issued guidance on the tax treatment of forgiven loans under the federal Paycheck Protection Program (PPP). Up to $250,000 in forgiven PPP loans is excluded from Rhode Island net income and gross income for corporate income, bank excise and individual income tax purposes. Thus, the increment of PPP loan forgiveness above $250,000 must be included in income. For taxpayers with PPP loan forgiveness in excess of $250,000 that have not yet filed their 2020 tax year return, the RI DOT said to "go ahead and file the return — but do not include, on that return, the increment of loan forgiveness that is taxable for Rhode Island purposes." The RI DOT said that it will be providing additional guidance in the fall. This guidance will address (1) how to account for the increment of PPP loan forgiveness that is taxable, and (2) how to ensure that the incremental amount will not subject the taxpayer to interest and penalties. Under ch. 162 (2021 RI HB 6122 Sub. A), the RI DOT is required 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. The RI DOT noted that it is still developing forms and instructions for computing and making the payment. RI Div. of Taxn., ADV 2021-34 "Guidance on tax treatment of PPP loan forgiveness amounts" (Sept. 1, 2021).
West Virginia: The West Virginia State Tax Department (WV Tax Dept.) issued revised guidance on the state's voluntary disclosure program (VDP), under which eligible taxpayers can come forward and comply with the state's tax laws in exchange for a waiver of penalties or prosecution and a limited lookback period. Individuals and entities conducting business in West Virginia but have not registered with the WV Tax Dept. may be eligible to participate in the VDP. The guidance lists the requirements that must be met to qualify for the VDP, the information that must be included in a voluntary disclosure agreement (VDA) request, and what the WV Tax Dept. may agree to as part of the VDA. W.V. Tax Dept., TSD-412 "Voluntary Disclosure Agreement" (revised Sept. 2021).
PAYROLL & EMPLOYMENT TAX
Kentucky: On March 23, 2021, Kentucky Governor Andy Beshear signed into law HB 210, which effective June 29, 2021, provides that employers with existing paid or unpaid leave policies for the birth of a child must extend those same leave benefits for adoptions. For additional information on this development, see Tax Alert 2021-1589.
New Jersey: The New Jersey Department of Labor and Workforce Development announced that fiscal year 2022 (July 1, 2021 to June 30, 2022) state unemployment insurance (SUI) tax rates range from 0.5% to 5.8% on Rate Schedule C, up from a range of 0.4% to 5.4% on Rate Schedule B for fiscal year 2021 (July 1, 2020 to June 30, 2021). The new employer rate remains at 2.8% for FY 2022. For additional information on this development, see Tax Alert 2021-1582.
North Carolina: The North Carolina Department of Revenue issued a notice concerning the following changes that will apply to the filing of the 2021 annual reconciliation return and information statements: (1) penalties for failure to file Forms NC-3 and W-2 electronically, (2) filing of Forms 1099-MISC and 1099-NEC, and (3) two account numbers allowed for filing Forms W-2 and 1099. For additional information on this development, see Tax Alert 2021-1611.
Ohio: On Aug. 5, 2021, two taxpayers, on behalf of the State of Ohio, filed an action with the Ohio Supreme Court (Court) against the Tax Commissioner and Treasurer of the State (defendants). The taxpayers allege that they were taxed twice due to defendants' "systemic failure" to correctly credit their individual income tax accounts with Form W-2 information from their employers. The taxpayers request that the Court direct the defendants to jointly adopt policies and procedures to make accurate transcripts available to taxpayers listing state withholding taxes paid by employers. For more on this development, see Tax Alert 2021-1628.
Virginia: Under recently enacted budget legislation (HB 7001), calendar year 2022 state unemployment insurance (SUI) tax rates must be computed without regard to regular unemployment insurance (UI) benefits charged for the period of April 1, 2020 through June 30, 2021. In addition, employer 2022 SUI tax rates (and the pool charge portion of the tax rate) may be lower than, but cannot exceed, the SUI tax rate assigned to individual employers for calendar year 2021. For additional information on this development, see Tax Alert 2021-1596.
VALUE ADDED TAX
International — Thailand: On Aug. 24, 2021, the Thai Cabinet approved the extension of the reduced Value Added Tax (VAT) rate of 7% for another two years to sustain the economic stability of the country. The 7% VAT rate will, therefore, continue to be applied for sales of goods, provisions of services and imports of goods from Oct. 1, 2021 until Sept. 30, 2023. For more on this development, see Tax Alert 2021-1585.
International — Thailand: Effective Sept. 1, 2021, nonresident providers of electronic services supplied to non-VAT registrant consumers in Thailand (B2C supplies) must register for value-added tax (VAT) if their annual turnover is above THB1.8 million (approximately €47,000 or US$55,500). Affected e-service providers must register for VAT, file VAT returns, and pay VAT. The first tax filing and due date for remittances is Oct. 25, 2021. Examples of electronic services covered by the new rules include online games, mobile application services, and online advertising services For additional information on this development, see Tax Alert 2021-1613.
Wednesday, Sept. 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.
Thursday, Sept 30, 2021. Build Back Better legislative developments: advanced manufacturing, sustainability and workforce incentives. (1:00-2:15 p.m. (ET)). The US legislative environment is fluid, making it critical for businesses to keep informed about proposed legislation and its potential impact. Recent proposals by the House Ways and Means Committee associated with the President's $3.5 trillion Build Back Better plan include multiple new and expanded incentives. Depending upon your business and sector, these incentives can be substantial, as many proposals include proposed funding of $1 billion or more. Join our EY team of subject matter professionals for a discussion around the latest legislative developments, including proposed advanced manufacturing, sustainability, and workforce incentives. 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 N.Y. Dept. of Taxn. and Fin., TSB-M-21(1)C, (1)I (Aug. 25, 2021) (PTE Tax TSB).
2 See example under "Election — When to make the election" on the NY DOTF PTE tax webpage.