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October 26, 2021

State and Local Tax Weekly for October 15

Ernst & Young's State and Local Tax Weekly newsletter for October 15 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.


Texas adopts amendments to its franchise tax rule for credits for research and development activities

On Oct. 4, 2021, the Texas Comptroller of Public Accounts (TX Comptroller) filed with the Texas Secretary of State the final amendments to its franchise tax rule, 34 Tex. Admin. Code § 3.599 (Section 3.599), regarding the tax credit for research and development (R&D) activities. The final rule was published in the Texas Register on Oct. 15, 2021. The amendments will be effective retroactively for Texas franchise tax reports originally due on or after Jan. 1, 2014, according to the Preamble to Section 3.599 (Preamble). The TX Comptroller rejected a public comment suggesting that the amended rule only be applied prospectively.1

The TX Comptroller has also adopted amendments to the R&D exemption under its sales and use tax rule, 34 Tex. Admin. Code Section 3.340. It should be noted that Tax Alert 2021-1860 does not address the changes to the R&D exemption under the Texas sales tax law.

Based on public comments, the TX Comptroller changed the proposed text for both rules published in the Texas Register on April 16, 2021 (see Tax Alert 2021-0955).2

The adopted amendments to the franchise tax rule make significant changes to Section 3.599, including:

  • Incorporating, in general, the four-part test for the federal research credit articulated in IRC § 41(d)
  • Amending the definition of "qualified research expense" to mean the sum of all in-house research and contract research expenses
  • Clarifying that the applicable reference to the IRC for R&D credit purposes is the IRC in effect as of Dec. 31, 2011, and specifying that any federal regulation adopted after this date is only included in this term to the extent a taxpayer must apply that regulation in the 2011 tax year
  • Listing activities that do not constitute qualified research activities (such as "internal use software")
  • Clarifying that tangible personal property will not qualify as a research expense for purposes of the TX R&D credit if the taxpayer claimed a manufacturing or resale sales tax exemption when purchasing that property
  • Modifying credit eligibility requirements
  • Providing guidance to Texas franchise tax combined groups claiming the Texas R&D credit

Several important differences exist between the IRC § 41 rules and the analogous final Texas R&D tax credit rules. These differences could require separate federal and Texas R&D credit calculations, even when all research activities are performed in Texas. This disparity between the applicable federal and Texas R&D tax credit rules could increase the complexity and cost to taxpayers for compliance and recordkeeping. Because the TX Comptroller's final rule excludes a large category of software development activities from Texas R&D tax credit eligibility, taxpayers may wish to consider other states' R&D, location and/or employment credits and incentives regimes when deciding where to perform software development activities.

For more on this development, see Tax Alert 2021-1860.


District of Columbia: New emergency law (2021 DC emergency B24-373 (Emergency B24-373)) increases individual income tax rates for high wage earners and expands 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 remain the same for those making $250,000 or less. The increased rates apply to tax years beginning after Dec. 31, 2021 and are 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. Emergency B24-285 was approved by the Mayor on Aug. 23, 2021 and expires on Nov. 21, 2021. A bill (2021 DC B24-285 (B-24-285)) that would make these changes permanent was approved by the Mayor on Sept. 27, 2021, and has been sent to Congress for a mandatory 30-day review period (B24-285 currently has a projected law date of Dec. 2, 2021; this date could change depending on how frequently Congress is in session). See also, D.C. Off. Tax and Rev., "District of Columbia Tax Rate Changes Effective October 1, 2021" (Sept. 30, 2021) (the guidance also lists exclusions from individual income, corporate franchise and unincorporated business taxes).

Montana: The Montana Department of Revenue (MT DOR) posted remote work tax resources to its website for Montana residents working remotely in another state and nonresidents or part-year residents working remotely in Montana. Resources include a discussion of Montana source income and guidance for owners of partnerships, S corporations, limited liability companies and other pass-through entities on how to allocate or apportion such income.

Texas: An out-of-state corporation that solicited business in Texas through its website; sold tangible personal property (e.g., HVAC equipment) to customers in Texas; and had an employee in the state who provided technical support and responded to customer questions via telephone or email, is engaged in business in Texas and, thus, subject to the state's franchise tax for franchise tax report years 2012 through 2018. The corporation argued that its Texas activities were not substantial enough to establish nexus, contending that it did not intend to establish a Texas business presence through the employee and that the employee's activities in the state did not improve its name recognition, market share, goodwill or customer relations in Texas. Disagreeing with the corporation, a hearing officer of the Texas Comptroller of Public Accounts found that the corporation's activities in Texas "demonstrate a substantial nexus between Texas and [the corporation's] business." Tex. Comp. of Pub. Accts., Hearing No. 2021–9034H (Sept. 8, 2021).


Arizona: The Arizona Department of Revenue (AZ DOR) issued guidance on new transaction privilege tax (TPT) collection and remittance requirements for peer-to-peer (P2P) car sharing platforms (i.e., a business that provides a platform for persons to rent vehicles for a fee), that apply beginning on Sept. 29, 2021. According to the AZ DOR, P2P car sharing platforms do not include rental car agents governed by A.R.S. §20-331, traditional car rental companies (i.e., a company that usually owns the vehicles it rents, governed by A.R.S. §§20-331 and 28-5810) and vehicle rentals that include a driver. While P2P platforms generally are intended for renting individually owned vehicles or by those not in the business of renting cars, traditional car rental companies are not prohibited from listing vehicles on the P2P platform. A traditional car rental company will report gross income received from the P2P platform on its TPT return, and it will deduct income derived from the P2P platform using deduction code 808. Individual owners not otherwise in the business of renting vehicles do not need a TPT license, but will need to certify to the AZ DOR that their vehicle is an individual-owned shared vehicle and that either (1) TPT or Arizona use tax was paid on the vehicle when it was purchased, or (2) an out-of-state sales or use tax was paid on the vehicle if it was purchased outside the state and subsequently brought into the state. The guidance lists information necessary for the certification application. P2P platforms must register for a TPT license and must remit all applicable state, county and city TPT taxes and any applicable surcharges. The AZ DOR's guidance explains how tax from shared vehicle transactions is sourced, deductions to consider in preparing the return and reporting Maricopa County and Pima County surcharges. The guidance includes examples. Ariz. Dept. of Rev., "Peer-to-Peer Car Rental" (last visited Oct. 15, 2021).

California: A federal court determined that it is barred by the federal Tax Injunction Act3 from adjudicating a constitutional challenge to California's assessment and collection of sales and use taxes from certain out-of-state merchants. The merchants, who source goods to be provided through an online retailer's platform (marketplace provider), were assessed for transactions occurring before the state adopted its marketplace facilitator provisions. Those provisions took effect in 2019 and require marketplace providers to assess and collect sales and use tax on sales made through their marketplace. The court gave the out-of-state merchants the opportunity to file an amended complaint within 20 days. If they do not, the court explained, the causes of action will be deemed dismissed with prejudice upon no further notice to the parties. Online Merchants Guild v. Maduros, No. 2:20-cv-01952-MCE-DB (Dist. Ct., E.D. Cal., Oct. 13, 2021).

Georgia: The Georgia Department of Revenue (GA DOR) issued a policy bulletin to provide guidance on the reporting requirements for high-technology companies claiming the computer equipment exemption under O.C.G.A. §48-8-3(68). High technology companies that have been issued a certificate of exemption must report to the GA DOR the amount of taxes exempted as well as a list of facilities for which the exempted computer equipment during the preceding calendar year was incorporated. The report is due by March 31 of each year following the year the high-technology company utilized a certificate of exemption. The GA DOR will not issue a certificate of exemption for a calendar year following the reporting year if the company failed to comply with the reporting requirements. Ga. Dept. of Rev., Policy Bulletin SUT-2021-03 (Oct. 14, 2021).

Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) issued a bulletin on the application of sales and use tax on remote help supply services. Pennsylvania law defines "help supply services" as "[p]roviding temporary or continuing help where the help supplied is on the payroll of the supplying person or entity, but is under the supervision of the individual or business to which help is furnished."4 Help supply services are subject to Pennsylvania sales and use tax if the delivery or use of the service occurs in Pennsylvania. Under a traditional arrangement, the location the help supply employees physically reports at and the location the help supply employee physically reports to are understood as the location where delivery or use occurs. While this may not be the case when the help supply employee works remotely, the PA DOR said: "the same principles determine whether the delivery or use of the help supply services occur in this Commonwealth under traditional or remote work arrangements." Thus, whether the employee reports in person or remotely is not determinative of taxability; rather where delivery or use occurs controls under both traditional and remote work arrangements. The PA DOR said that if the purchaser is located in Pennsylvania it will continue to presume that delivery occurred at a location in Pennsylvania, unless documentation shows otherwise. The bulletin includes illustrative examples. Pa. Dept. of Rev., Sales and Use Tax Bulletin 2021-03 "Remote Help Supply Services" (Sept. 16, 2021).

Tennessee: In response to a ruling request, the Tennessee Department of Revenue (TN DOR) concluded that Tennessee's sales and use tax does not apply to fees an entity charges brokers and carriers (collectively subscribers) to access freight transportation arrangement services the entity offers through its online cloud-based platform. One service offering allows brokers to post hauling opportunities on the platform and carriers to search broker postings; this offering does not provide a messaging system or other means of facilitating communications between the brokers and carriers. Such communication occurs outside of the entity's platform. The second service offering complies and synthesizes the aggregate data collected from subscribers to assist brokers and carriers in determining the fair market value of a route or hauling engagement. Neither service offering requires subscribers download software to remotely access the platform. The TN DOR determined that service offering one is a nontaxable online advertising platform and service offering two is a nontaxable data processing and information service. The services offerings are not taxable telecommunications services (with TN DOR concluding that the definition of "telecommunication services" does not include the type of online advertising platform or the data processing and information services the entity provides); nor do they constitute the use of computer software as subscribers do not purchase the services to gain access to the entity's software but rather to view and exchange information or to view processed rate data. Tenn. Dept. of Rev., Letter Ruling #21-08 (Aug. 26, 2021).

Tennessee: The Tennessee Department of Revenue is repealing its drop shipper rule (codified at Tenn. Comp. R. & Regs. 1320-05-01-.96 "Tangible Personal Property Sold by Dealers to Other Vendors Where Delivery Is Made for Use and Consumption"). The repeal is effective Jan. 10, 2022. Click here to view the rule filing.

Texas: An out-of-state corporation that solicited business in Texas through its website; sold tangible personal property (e.g., HVAC equipment) to customers in Texas; and had an employee in the state who provided technical support and responded to customer questions via telephone or email, is engaged in business in Texas and, thus, subject to the state's sales and use tax for the period from Dec. 1, 2011 through Sept. 30, 2017. Tex. Comp. of Pub. Accts., Hearing No. 2021–9034H (Sept. 8, 2021).


Texas: The Texas Comptroller of Public Accounts issued FAQs on the state's tax credit for certified rehabilitation of certified historic structures, which can be claimed against the state's franchise tax and insurance premium tax. The FAQs (1) describe the following terms: certified historic structure, certified rehabilitation and eligible costs; (2) address depreciation issues for nonprofit entities and institutions of higher education and universities; (3) list franchise tax and insurance premium tax credit forms to use when claiming the credit; and (4) respond to questions on buying/selling the historic structure credit (including whether there is a limit to the number of transactions for sale or assignment of a credit), receiving a share of a credit when the structure is owned by more than one person, determining the expiration date on the Form 05-901 Historic Structure Credit Certificate and carrying forward unused credit. Tex. Comp. of Pub. Accts., STAR Accession # 202109013L (Sept. 17, 2021).


California: New law (SB 539) implements Proposition 19 (approved by voters on Nov. 3, 2020), which changes how family-property transfers are taxed by limiting property-tax savings only to inherited properties used as primary homes or farms (effective beginning on or after Feb. 16, 2021) and allows homeowners who are over 55, disabled or victims of wildfire/disaster to transfer their primary residence's taxable value to a replacement residence (effective beginning on or after April 1, 2021). In regard to the limitation on the parent-child/grandparent-grandchild change in ownership exclusion, SB 539 provides that the exclusion applies when the transferred real property is the principal residence of the eligible transferor and requires the real property to become the principal residence of the transferee within one year of the transfer. A claim for the exclusion must be filed with the assessor. SB 539 also directs the California State Board of Equalization to adopt emergency regulations implementing these provisions. As for the taxable value transfer provision, SB 539 requires a transfer claim be filed within three years of the date the replacement property was purchased or new construction on the replacement dwelling was completed. In addition, a person is not allowed to transfer the taxable value of a primary residence more than three times, except for victims of wildfire or natural disasters. Documents filed under either provision are not public and, therefore, are not subject to public inspection. Cal. Laws 2021, ch. 427 (2021 CA SB 539), signed by the governor on Sept. 30, 2021.


Iowa: The Iowa Department of Revenue (IA DOR) issued updated guidance on corporate income tax changes for 2021, to include a 2021 law change (2021 IA SF 619) that allows bonus depreciation under IRC §168(k) for Iowa corporate and individual income tax purposes for property placed in service in tax years beginning on or after Jan. 1, 2021. The IA DOR explained that taxpayers claiming the additional first-year depreciation for federal income tax purposes in tax year 2021 or later will not have to make a depreciation adjustment on their Iowa return for those assets. Taxpayers, however, may still need to make Iowa specific deprecation adjustments for property placed in service in prior years when the state did not conform to federal bonus depreciation and other federal expensing and depreciation provisions. The guidance also discusses Iowa's corporate income tax rate (and rate brackets) for 2021, the elimination of (1) the deduction for federal taxes paid and (2) Iowa's corporate alternative minimum tax. This change applies to corporate and individual income taxes and franchise taxes, including those imposed on, or collected by, pass-through entities. Iowa Dept. of Rev., "Iowa Corporate Income Tax Changes for 2021" (Oct. 4, 2021).


Alabama: The Alabama Department of Revenue (AL DOR) adopted new rule (Ala. Admin Code, Rule 810-14-1-.23) on the procedures for the use and acceptance of electronic signatures under the Uniform Electronic Transactions Act (UETA). Under the UETA, any document submitted to the AL DOR that requires a signature may be signed electronically subject to the following requirements and limitations: (1) the document must comply with the UETA's requirements and (2) the person creating and submitting the electronically signed documents is solely responsible for ensuring that the method used complies with all the requirements of the UETA. All electronic signatures are subject to AL DOR verification. When verifying an electronic signature, the AL DOR will consider whether the electronic signature was affixed to the document with a method that uniquely identifies the signer or creator of the record, prevents others from using the same identifier and provides a mechanism for determining whether the date contained in the record changed after the document was signed or created. The AL DOR further provides that the rule does not supersede any existing rule issued by the AL DOR or statute relating to the electronic filing or signing of documents. The AL DOR, by rule, may (1) provide more specific requirements for electronic filing or signing of a document (or class of documents) or (2) exclude a document (or class of documents) from submission with an electronic signature. AL DOR officials or employees may electronically sign documents it distributes or issues. The new rule took effect Oct. 15, 2021.


California: The California Department of Industrial Relations reminds employers that the COVID-19 Supplemental Paid Sick Leave (SPSL) requirement ended on Sept. 30, 2021. Under the rule, California employers with 26 or more employees were required to provide their employees with up to 80 hours of SPSL for COVID-19 related reasons. Employees who were on SPSL as of Sept. 30, 2021 continue to be eligible if their entitlement extends past Sept. 30, 2021. California employers should be aware that employees continue to be eligible for regular paid sick leave of one hour for every 30 hours worked up to a cap of 48 hours. They may also be eligible for benefits through the state paid family and medical leave program. For additional information on these developments, see Tax Alert 2021-1857.

New York: To address the federal interest charges due on the state's current federal unemployment insurance (UI) loan balance, 2021 NY SB 3969 would repeal New York statute that allows for employer state unemployment insurance (SUI) assessments to repay the interest paid by the state on its current federal unemployment insurance loan balance. For more on this development, see Tax Alert 2021-1846.

Vermont: The Vermont Department of Labor has updated procedures for the relief from inclusion of COVID-19 unemployment insurance (UI) claims on the employer's state unemployment insurance (SUI) experience and future SUI tax rates. For more on this development, see Tax Alert 2021-1848.


International — Kenya: The Kenya Revenue Authority (KRA) has rolled out the Electronic Tax Invoice requirements effective Aug. 1, 2021. All Value Added Tax (VAT)-registered persons were required to comply with the requirements of the Value Added Tax (Electronic Tax Invoice) Regulations, 2020 regarding implementation of the electronic tax invoice within a period of 12 months from Aug. 1, 2021. To facilitate compliance, KRA has issued guidelines and published a list of approved Electronic Tax Register (ETR) suppliers and their manufacturers. For more on this development, see Tax Alert 2021-1868.

International — Uganda: On the Jan. 22, 2020, Uganda's Minister of Finance Planning and Economic Development, by the powers conferred upon him under section 5(2) of the Value Added Tax Act, issued a notice cited as the Value Added Tax (Designation of Tax Withholding Agents) Notice, 2020. The Notice followed an amendment of the VAT Act in 2019 providing for VAT withholding at a rate of 6% of the taxable value under section 5(2a). The Uganda Revenue Authority (URA) recently announced the 1,025 designated agents who must comply with the law to avoid penalties. Tax Alert 2021-1895 highlights the implications of this notice and obligations placed on appointed agents.

UPCOMING WEBCASTS Wednesday, Nov. 3, 2021. The indirect tax technology journey. Now. Next. Beyond (1:00-2:00 pm ET). Join our EY team of tax technology professionals for the third in a series of six webcasts focused on the evolving technology landscape. During these 60-minute webcasts, EY panelists will share insights into how market-leading organizations are using technology to adapt to new legislation and market trends, and to effectively transform tax operations. Because technology is a vital component for every business looking to build a resilient, future-ready tax function, these webcasts will be relevant across all sectors and to businesses of every size. This third webcast in the series will focus on the following: (1) how artificial intelligence (AI) is transforming the tax function through automation of key tax processes; (2) the use of AI to aggregate, analyze, prepare and review unprecedented volumes of information; and (3) blockchain technology's ability to provide secure, auditable records of transactions and assets. Register.

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 In the Preamble the TX Comptroller said it disagreed with a public comment that the changes to Section 3.599 "are retroactive changes in law," finding them to be "expositions of existing [TX] Comptroller policy" regarding the R&D credit. The TX Comptroller further noted that it "does not view the amendments to this section any differently than the amendments to the Treasury Regulation that are applicable to the 2011 federal income tax year."

2 As noted in the Preamble, the TX Comptroller rejected a number of other public comments, including suggestions that it not redefine "qualified research" and that it eliminate Section 3.599(b)(8)(A)(iii), which excludes from being an in-house research expense a taxable item for which the taxable entity claimed a sales or use tax exemption and the exemption is for use other than in qualified research.

3 28 U.S.C. §1341. The Tax Injunction Act bars a federal court from enjoining, suspending or restraining the assessment, levy or collection of any state law when there is a "plain, speed, and efficient remedy" available in state courts.

4 72 P.S. §7201(cc).