September 27, 2021 State and Local Tax Weekly for September 17 Ernst & Young's State and Local Tax Weekly newsletter for September 17 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. TOP STORIES Tax provisions in House Ways and Means reconciliation bill could have state income tax implications On Sept. 13, 2021, the House Ways and Means Committee released the tax portion of its reconciliation bill (HW&M proposal) and a section-by-section summary of the tax proposals (see Tax Alerts 2021-9020 and 2021-9019). The HW&M proposal, if enacted, could affect corporate and individual income taxes imposed by state and local (collectively, state) governments. Generally, most state income tax systems use federal taxable income (corporate) or adjusted gross income (individual) as a starting point for state income tax computations, so changes to these federal income determinations can have state tax implications. By contrast, states do not automatically conform to federal tax rate changes, and most do not adopt minimum tax regimes that exist outside of the general rates under IRC §§ 11 and 1 (for corporations and individuals, respectively). The state income tax implications of the HW&M proposal generally would depend on how each state conforms to the IRC and to affected provisions, such as the regime for global intangible low-taxed income (GILTI) under IRC § 951A. States conform to the IRC in a variety of ways. Most either automatically incorporate the federal tax law as it changes (known as "rolling" conformity) or adopt the federal tax law as of a specific date (known as "fixed" conformity). There are also several "selective" conformity states, which adopt a hybrid of rolling and fixed conformity. Accordingly, if the HW&M proposal is enacted, rolling-conformity states generally would automatically adopt the IRC changes, while fixed-conformity states generally would only incorporate changes if and when they update their conformity date to a date on or after the effective date of the corresponding federal tax changes. Because the starting point for calculating "state taxable income" is typically subject to various modifications, taxpayers also must consider specific conformity to IRC provisions. For example, many states do not adopt the IRC § 59A base erosion and anti-abuse tax (BEAT) or the IRC § 245A corporate deduction for the foreign-source portion of certain dividends received, so changes to these provisions would not directly affect tax computations in those states. Provisions in the HW&M proposal that could impact state income taxes for businesses include:
Many of the proposed changes relate to international tax provisions, such as GILTI, FDII and subpart F income; these changes would amplify the complexity of state tax reporting given existing variations in state tax treatment of these items. In addition, the proposed changes impacting IRC § 163 could result in additional limitations on the deductibility of interest expense. Such provisions would add to the complexity of calculating the state income tax base, particularly if they invoke single-entity principles of a federal consolidated return, which states often do not follow in determining state taxable income. Moreover, states have historically challenged related-party transactions like interest expense deductions, and many states already limit these deductions. State governments may need to enact legislation or provide specific guidance to harmonize existing addback statutes for interest expense with these new federal limitations, similar to how many states responded to IRC § 163(j) under the "Tax Cuts and Jobs Act" of 2017. Businesses seeking to maintain or increase the state tax efficiency of their debt should consider the potential impact of these proposed federal limitations. Specific industries would also be impacted by the HW&M proposal. For example, the state income tax implications of proposed changes to the taxation of oil and gas extraction income will be of interest to companies in the energy sector, and the addition of "digital assets" to the IRC's constructive sale and wash sale rules would impact cryptocurrency users. For more on this development, see Tax Alert 2021-9022. Budget reconciliation bill contains many new and amended housing and energy tax credits On Sept. 10, 2021, the House Ways & Means Committee released the legislative text of tax proposals that would be part of the proposed Build Back Better Act (the bill). Subtitles F, G, H, and J: Budget Reconciliation Legislative Recommendations Relating to Infrastructure Financing, Green Energy, Social Safety Net, and Prescription Drug Pricing, include the following proposed credits related to housing and energy, which would extend and expand many current programs. Housing tax credits New markets tax credit: The bill would make the new markets tax credit (NMTC) permanent and create a new, permanent, annual $175 million NMTC allocation for low-income communities in tribal areas. Historic rehabilitation tax credit: The bill would increase the tax credit for the rehabilitation of historic structures; increase the credit for certain small projects; modify the substantial rehabilitation requirement; eliminate the rehabilitation credit basis adjustment; and repeal the temporary limitation on personal casualty losses. Low income housing tax credit: The bill would increase the 9% housing credit and the small state minimum by 50%, phased in over five years, and temporarily reduce the tax-exempt bond financing requirement. Among other proposed changes, the bill would also provide a 50% basis boost for buildings with limits on rent and at least 20% of their occupied units designated for extremely low-income tenants. Neighborhood homes credit: The bill would establish a new neighborhood homes credit to encourage the rehabilitation of deteriorated homes in distressed neighborhoods. Energy tax incentives Production tax credit (PTC) for electricity produced from certain renewable resources: The bill would extend the PTC for landfill gas (municipal solid waste), trash (municipal solid waste), qualified hydropower, marine and hydrokinetic renewable energy facilities and geothermal facilities through the end of 2031. The credit would phase down to 80% of the applicable rate in 2032, and 60% of the applicable rate in 2033. For wind facilities, the PTC would increase to the full applicable credit rate through the end of 2031, phasing down to 80% in 2032 and 60% in 2033. For solar facilities, the PTC would be revived and extended through 2031, phasing down to 80% of the applicable credit rate in 2032 and 60% of the applicable credit rate in 2033. An enhanced credit would be available if certain wage and workforce requirements were met. Investment tax credit (ITC): In most cases, the bill would extend the ITC for property for which construction begins by the end of 2032. The base credit rate would be 6% of the basis of qualified energy property or a bonus credit rate of 30% of the basis of qualified energy property for facilities placed in service after Dec. 31, 2021. The base credit rate would phase down to 5.2% for facilities that commence construction in 2032 and 4.4% for facilities that commence construction in 2033. The bonus credit rate (tied to wage and workforce requirements) would phase down to 26% in 2032 and 22% in 2033. The bill would also expand the ITC to include energy storage technology and linear generators. Both PTCs and ITCs would be eligible for enhanced credits if certain domestic content requirements were met. The bill also would:
Emissions tax credits In regard to the emissions tax credits, the bill would:
For more on this development, see Tax Alert 2021-1677. INCOME/FRANCHISE Florida: The Florida Department of Revenue announced that effective for tax years beginning on or after Jan. 1, 2021 but before Jan. 1, 2022, the state's corporate income/franchise tax rate is reduced to 3.535% (from 4.458%, which was in effect Jan. 1, 2019 through Dec. 31, 2020). The tax rate returns to 5.5% for tax years beginning on or after Jan. 1, 2022. Consequently, taxpayers making 2022 estimated tax payments based on 100% tax due in the prior year will need to recompute the prior year tax due using the 5.5% rate. Fla. Dept. of Rev., TIP No: 21C01-02 (Sept. 14, 2021). Minnesota: The Minnesota Department of Revenue (MN DOR) posted on its website FAQs on the state's new electable pass-through entity tax (PTE tax). Effective for tax years beginning after Dec. 31, 2020, qualifying entities (i.e., partnerships, S corporations and limited liability companies1) may elect to file and pay the PTE tax. The election, once made, is irrevocable for the tax year, and: (1) is made by filing Schedule PTE, Pass-Through Entity Tax, by the due date (or extended due date) of the qualifying entity's income tax return; (2) may only be made by qualifying owners who collectively hold more than a 50% ownership interest in the qualifying entity; and (3) is binding on all qualifying owners. The PTE tax imposed on a qualifying entity equals the sum of the tax liability of each qualifying owner. The qualifying owner's tax liability is the amount of the owner's income multiplied by the highest Minnesota income tax rate for individuals, which is currently 9.85%. For nonresidents, the PTE tax election may satisfy their Minnesota filing requirement if all of the following are met: (1) the taxpayer is a full-year Minnesota nonresident who is a partner, member, or shareholder in an electing PTE; and (2) the taxpayer's only Minnesota source income is from an entity/entities that is/are filing and paying composite tax or PTE tax on the taxpayer's behalf. If, however, nonresident owners receive a share of gross profit or income from an installment sale reported to them by a partnership or S corporation, the PTE tax cannot be used to satisfy their filing requirement. The FAQs also provide guidance on making estimated PTE tax payments and calculating estimated tax installments. Minn. Dept. of Rev., Law Change FAQs for Tax Year 2021: Pass-Through Entity Tax (Sept. 2021). Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) did not violate the Pennsylvania Constitution's Uniformity Clause when, following the 2017 Pennsylvania Supreme Court's ruling in Nextel Communications2 eliminating the net loss carryover3 (NLC) flat dollar cap, it applied the 2014 NLC provision as written, rather than retroactively applying Nextel and recalculating the tax liability of all taxpayers that used the flat dollar cap in accordance with the remaining percentage cap. In so holding, the Pennsylvania Commonwealth Court also found the corporation is not entitled to a refund under the Due Process, Equal Protection or the Remedies Clause of the Pennsylvania Constitution. Alcatel-Lucent USA Inc. v. Commonwealth, No. 803 F.R. 2017 (Pa. Commth. Ct. Sept. 13, 2021). SALES & USE District of Columbia: Approved bill (B24-0276) would extend the imposition of the District of Columbia's sales and use tax to sales at gift shops, souvenir ships, kiosks, convenience stores, food shops, cafeterias, restaurants, and similar establishments in federal buildings, including memorials and museums, that (1) make sales to general public (if operated by the federal government, an agent of the federal government or a contractor); and (2) other than the general public, if operated by an agent of the federal government or as a contractor. Sales tax would also apply to sales of goods and services by a government-sponsored enterprise or corporation, institution or organization established by federal law (e.g., Smithsonian Institution, Federal National Mortgage Association) if it is otherwise exempt from such taxation, to the extent these sales would be subject to tax if the entity were organized as a nonprofit corporation. B24-0276 was approved by the Mayor Sept. 13, 2021. The bill will now be sent to Congress for approval. Mississippi: Amended regulation (Tit. 35 .IV.11.03 Aircraft) subjects sales of aircraft made or facilitated by a person regularly engaged in the sale or facilitation of aircraft (e.g., a broker) to a 3% sales tax. The purchaser is liable for the tax if the facilitator fails to collect it. The amended regulation exempts the following from sales tax: (1) gross income from the stripping and painting of commercial aircraft engaged in foreign or interstate transportation business; (2) sales of parts used in the repair and servicing of aircraft not registered in Mississippi engaged exclusively in the business of foreign or interstate transportation to business engaged in aircraft repair and maintenance; (3) gross proceeds from the sale of rotary-wing aircraft if exported from Mississippi with 48 hours and registered and first used in another state; and (4) gross proceeds of sales of aircraft used predominately to transport passengers or property to or from offshore oil or natural gas exploration or production platforms or vessels, and engines, accessories and spare parts for such aircraft. The amened regulation takes effect Oct. 1, 2021. Utah: The Utah Tax Commission revised its general sales and use tax guidance for marketplace sellers and marketplace facilitators. The guidance (1) includes definitions of key terms (i.e., products, marketplace, marketplace seller, marketplace facilitator); (2) describes tax requirements for sellers (noting that sellers cannot opt-out of having a marketplace facilitator collect tax on its sales) and facilitators (must begin collecting Utah sales tax by the first day of the calendar quarter that is at least 60 days after the day on which it meets or exceeds the nexus threshold); (3) explains when a marketplace facilitator is not liable for failing to collect taxes; (4) provides information on finding the applicable tax rates and sourcing requirements; and (5) addresses exemption certificates and refund claims. Utah Tax Comm., Sales and Use Tax Publication 71 "Information for marketplace sellers and marketplace facilitators" (revised Sept. 2021). Washington: The Washington Department of Revenue issued guidance on the plastic bag ban and charges on other reusable bags (the WA DOR noted that it considers this charge a retail sale, subject to retail sales tax). Effective Oct. 1, 2021,4 Washington bans single use plastic and non-recycled bags and imposes a charge on the use of certain paper and plastic bags. The guidance defines key terms and addresses the following topics: (1) the type of carryout bags that are banned; (2) charges on compliant paper and film plastic bags; (3) exemptions from the charge; (4) charges to be collected in a locality that already imposes a carryout bag charge; (5) whether a business has to report this bag charge as income; and (6) remittance of the bag charge. Wash. Dept. of Rev., Special Notice "Plastic bag ban and charges on other reusable bags" (Sept. 1. 2021). BUSINESS INCENTIVES Colorado: The Colorado Department of Revenue adopted the following amended enterprise zone rules: (1) Rule 39-30-104 "Enterprise Zone Investment Tax Credit"; (2) Rule 39-30-105.6 "Credit for Rehabilitation of vacant buildings"; and (3) Rule 39-35-104 "Aircraft Manufacturer New Employee Income Tax Credit". Rule 39-30-104 has been amended to clarify that the credit cannot be claimed for property that the taxpayer did not actually claim a depreciation expense for federal income tax purposes, limits the amount of credit a taxpayer can claim to $750,000 (credits carried forward from tax years before Jan. 1, 2014 are not subject to this limit), clarifies that a taxpayer cannot claim the enterprise zone investment tax credit on the same qualified investment property that the old Investment Tax Credit under C.R.S. 39-22-507.5 has been claimed, provides that the credit is allowed only with respect to qualified property used solely and exclusively in an enterprise zone for at least one year, and requires pre-certification in order to claim the credit. Rule 39-30-105.6 is amended to define the term "building" to include the entire physically contiguous structure, clarify that the building is not deemed to be unoccupied at any time when the building is actively used in the operation of a trade or business, requires pre-certification in order to claim the credit, among other approved changes. Amendments to Rule 39-35-104 clarify (1) the method of calculating total aircraft manufacturing employees for the total year, (2) the qualifications for employees who perform duties both at and away from the aircraft manufacturing facility, and (3) the calculation of the credit for aircraft manufacturers that acquire an existing facility. Minor amendments were made to Rule 39-30-103.5 "Credit for Enterprise Zone contributions"; Rule 39-30-105 "Enterprise Zone New Business Facility Employee Credit" was repealed due to the repeal of the statutory bases for the rule. The amendments, which were adopted on Aug. 18, 2021 and will be published in the Sept. 25, 2021 Colorado register, take effect Oct. 15, 2021. COMPLIANCE & REPORTING Illinois: The Illinois Department of Revenue (IL DOR) reminds taxpayers that changes to the Illinois Income Tax Act enacted in 2021 may increase current year tax liabilities, requiring certain taxpayers to begin making estimated tax payments or increase estimated tax payments for the remainder of the tax year in order to limit the late-payment penalty for underpayment of estimated tax due. Guidance issued by the IL DOR describes (1) the estimated payment requirements for corporations and individuals, and (2) what taxpayers can do to limit the late-payment penalty. Ill. Dept. of Rev., Informational Bulletin FY 2022-01 (Sept. 2021). PAYROLL & EMPLOYMENT TAX Federal: In a memo from the Chief Counsel office (PTMA-2021-07), the IRS determined that a failure to deposit any portion of the federal employment taxes deferred by Section 2302 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) by the applicable installment due date will result in a penalty under IRC § 6656 that runs from the original due date and applies to the entire deferred amount. For additional information on this development, see Tax Alert 2021-1624. MISCELLANEOUS TAX New Hampshire: New law (SB 103) provides that no out-of-state business or out-of-state employee that is present in New Hampshire or conducts operations in the state to perform disaster-related or emergency-related work during a disaster response period, shall be deemed to have established sufficient presence in the state to require such business or employee to: (1) register with the state or any political subdivision, (2) be subject to any state taxes other than transaction taxes and fees (e.g., sales and use, fuel, fees/charges on rental vehicles or machinery), (3) submit any tax filing to the state, or (4) be subject to business licensing or occupational licensing provided that said business or employee is properly registered, licensed or otherwise authorized under the laws of another state to perform disaster-related work. Businesses and employees that remain in the state after the disaster response period ends will be subject to all other laws that provide standards to establish presence in the state and have to comply with any provision of the general statues applicable to the business/employee, such as licensing and registration requirements. The law also defines key terms and includes a notification requirement for certain out-of-state business performing disaster or emergency related services in the state. These provisions take effect Oct. 9, 2021. N.H. Laws 2021, ch. 201 (SB 103), signed by the governor on Aug. 10, 2021. Virginia: The Virginia Department of Taxation (VA DOT) issued guidelines for the disposable plastic bag tax. Legislation enacted in 2020 (ch. 1022 (HB 534) and ch. 1023 (SB 11)) allows cities and counties to adopt the bag tax on disposable plastic bags provided to customers in grocery, convenience and drug stores within the locality. The VA DOT will administer the tax. The guidelines describe (1) the types of disposable plastic bags subject to the tax, (2) collection of the tax, (3) the applicable dealer discount, (4) administration of the tax, (5) return filing deadlines (including examples), and (6) adoption of the tax. The VA DOT noted that for purposes of the Business, Professional and Occupational License (BPOL) tax, any bag tax collected from customers and remitted to the VA DOT is excluded from the dealer's gross receipts in the same manners as the retail sales and use tax. Va. Dept. of Taxn., Guidelines for the Virginia Disposable Plastic Bag Tax (Sept. 1, 2021). UPCOMING WEBCASTS 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 Partnerships, S corporations and limited liability companies qualify to make the PTE tax election if no partner, member, or shareholder is a partnership, limited liability company, or corporation, other than a disregarded entity. Single member limited liability companies are not eligible to make the PTE tax election. 2 Nextel Communications of Mid-Atlantic, Inc. v. Commonwealth, 171 A.3d 682 (PA 2017). 3 PA Tax Reform Code §401(3)4.(c)(1)(A)(V). 4 The implementation of the ban was delayed to Oct. 1, 2021 (from Jan. 1, 2021) by a proclamation issued by the governor. | ||||
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