November 22, 2021
State and Local Tax Weekly for November 12
Ernst & Young's State and Local Tax Weekly newsletter for November 12 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.
Reinstatement and expansion of federal Superfund excise taxes could mean taxpayers in multiple economic sectors must pay tax on products they manufacture or import
On Nov. 15, 2021, President Biden signed into law H.R. 3684, the Infrastructure Investment and Jobs Act (P.L. 117-58) (IIJA). Effective July 1, 2022, the IIJA:
The reach of the expanded federal Superfund excise taxes enacted as part of the IIJA potentially includes industrial and consumer product manufacturers, businesses that historically have not been subject to the federal Superfund excise taxes in the past. Consequently, businesses in multiple economic sectors may now, for the first time, be obligated to report and pay federal Superfund excise taxes on products they manufacture or import.
Given the short time frame with the IIJA's effective date, businesses newly affected by the expansion of the federal Superfund excise taxes have a narrow window of time to develop a plan for integrating this cost into their pricing models and figuring out how to comply. Steps that affected businesses should consider taking immediately include:
Affected businesses also should continue to monitor the progress of H.R. 5376, the Build Back Better Act (BBB Act). As currently drafted, it would reinstate and increase the rate of federal Superfund excise taxes applicable to crude oil and petroleum products, in addition to the current federal oil spill liability tax. The expanded taxes on those items affected by the BBB Act would be effective July 1, 2022.
For more on this development, see Tax Alert 2021-2059.
Small businesses investing in certain energy technologies eligible for new federal grant program under Infrastructure Investment and Jobs Act
The Infrastructure Investment and Jobs Act (H.R. 3684) (P.L. 117-58) (IIJA), signed into law by President Biden on Nov. 15, 2021, establishes the Advanced Energy Manufacturing and Recycling Grant Program for small businesses investing in certain advanced energy technologies that will reduce greenhouse gas emissions (Advanced Energy Grant Program). This new grant program, described in Section 40209 of the IIJA, is modeled after the advanced energy manufacturing tax credit (codified at IRC § 48C), which was first authorized in the American Reinvestment and Recovery Act of 2009 (P.L. 111-5) (ARRA) and could be extended under the Build Back Better Act (H.R. 5376) currently pending before Congress.
If enacted, beginning in 2022, the Advanced Energy Grant Program will allocate $750 million over five years on a competitive basis to small businesses that undertake eligible projects in communities that have been impacted by closures of coal mines or coal-fired power plants.
To be eligible for this grant program, manufacturers must meet the following requirements:
The IIJA defines "Qualifying Advanced Energy Projects" as projects that: (1) re-equip, expand or establish a manufacturing or recycling facility to produce certain types of advanced energy property; or (2) re-equip a facility with equipment designed to substantially reduce greenhouse gas emissions.
To be eligible under the first type of qualifying project, the manufacturer must produce "advanced energy property," which includes:
The qualifications for the second type of eligible project are more broadly targeted at manufacturing and industrial facilities that are implementing energy efficiency and waste reduction technologies or any other technology that substantially reduces greenhouse gas emissions.
Both types of eligible projects must be in a census tract in which a coal mine closed after Jan. 1, 2000 or a coal-fired power plant closed after Jan. 1, 2010. Entities with a project in an adjacent census tract may also apply under this program.
Eligible entities must timely submit an application to the U.S. Department of Energy. Grant awards will be made on a competitive basis. Selected projects must be completed within three years of the award date.
For more on this development, see Tax Alert 2021-2101.
Alabama: The Alabama Tax Tribunal (tribunal) determined that the taxpayers' constitutional challenge to the state's factor presence nexus statute is an "as applied" challenge, not a facial challenge; thus, the challenge is within the tribunal's jurisdiction to hear and decide. The taxpayers challenging the statute are out-of-state intangible holding companies that do not have any property or employees or business activity in Alabama and their parent company. The parent company files Alabama corporate income tax returns; on the returns, parent added back royalties it paid to the holding companies. The holding companies did not file returns, concluding that they did not have substantial nexus with the state. The Alabama Department of Revenue (AL DOR) asserted that the holding companies had nexus with the state based on the sourcing schedules the holding companies supplied, which showed that Alabama sales of products bearing their intellectual property exceed the $500,000 sales threshold of Alabama's nexus statute. The holding companies are arguing that the factor presence nexus standard, as applied to them, violates the Due Process and Commerce Clauses of the U.S. Constitution because they did not purposefully avail themselves of Alabama's market (i.e., they did not license intellectual property to licensees in Alabama). The AL DOR asserted that the taxpayers' challenge constituted a facial challenge, which exceeded the scope of the tribunal's authority. The tribunal found that a ruling favorable to the taxpayers would not invalidate the state's factor presence nexus statute. Moreover, such a ruling would not address the statute's nexus assertion when one of the other thresholds — property, payroll or apportionment ratio — is met, nor would it address any other aspect of the statute's definition of sales. Because the constitutional challenge concerns specific facts — those of the taxpayers — it is an "as applied" challenge that falls within the tribunal's jurisdiction. Reynolds Brands, Inc., Lorillard Licensing Co., LLC and R.J. Reynolds Tobacco Company v. Alabama Dept. of Rev., Dkt. Nos. BIT. 19-1160-JP, BIT. 19-1161-JP and BIT. 20-419-JP (Ala. Tax Trib. Oct. 22, 2021).
California: The California Superior Court for the County of Los Angeles (court) rejected a company's challenge to the constitutionality of the enactment of the "Clean Energy Jobs Act" (California "Proposition 39" approved by voters on Nov. 6, 2012 (Prop. 39)), which among other provisions mandated the use of a single sales factor (SSF) apportionment factor for California corporate franchise tax purposes (and, in effect, eliminated a taxpayer's ability to elect to use either a SSF or a three-factor formula that existed under prior law). The company argued that the three components of Prop. 39 — (1) creating a fund to support clean energy jobs, (2) mandating the use of a SSF and (3) providing a tax break for certain cable television providers — violated California's Constitution's single subject rule as they are not unified under a common subject, object or purpose. The court found the "[company's] Complaint fails to state facts sufficient to constitute a cause of action in that Proposition 39 does not violate the 'single subject rule' set forth in Cal. Const., art. II, § 8(d)." One Technologies LLC v. Cal. Franchise Tax Bd., Case No. 21STCV21844 (Cal. Super. Ct, Los Angeles County, Nov. 10, 2021).
Illinois: In response to a ruling request, the Illinois Department of Revenue (IL DOR) said that for income apportionment purposes under 35 ILCS 5/304 and 86 Ill. Adm. Code 100.3370, it treats bitcoin as "intangible personal property" and does not consider it to be a "patent, copyright, trademark, or similar item of intangible property". Ill. Dept. of Rev., General Information Letter IT-21-0004 (Aug. 31, 2021).
SALES & USE
Arkansas: An online company that maintains an online marketplace where governmental agencies (e.g., towns, school districts) list and sell surplus items is acting as a marketplace facilitator by facilitating sales on behalf of governmental bodies. Accordingly, once the company meets the nexus threshold (i.e., Arkansas sales of more than $100,000 or 200 separate sales transaction in the state), it must collect and remit sales tax on these sales. Transactions for which the company is not acting as the marketplace facilitator (i.e., it does not directly or indirectly collect payment from the purchaser and transmit the payment to the marketplace seller) are not counted for purposes of calculating the threshold. Ark. Dept. of Fin. and Admin., Op. No. 20190703 (Nov. 4, 2021).
California: An in-state retailer that made sales through an online marketplace is liable for sale tax on the online sales to California customers for the audit period from July 1, 2009 to June 30, 2012. In so holding, the California Office of Tax Appeals (CA OTA) found no statutory provision that would exempt the retailer from paying tax on its internet-based sales to in-state customers, and it rejected the retailers' assertion that it was the online marketplace's responsibility to collect and remit sales tax. The CA OTA found that since the retailer made the sales at issue it is responsible for payment of tax, regardless of the online marketplace's participation in the transactions. (It should be noted that the audit period at issue is prior to the enactment of the state's marketplace facilitator provisions, which took effect Oct. 1, 2019.) Matter of Appeal of Sarafian Video, Inc., OTA Case No. 19075022 (Cal. Off. Tax App. Sept. 7, 2021) (Nonprecedential).
Missouri: In response to a ruling request made by an out-of-state remote seller, the Missouri Department of Revenue (MO DOR) addressed the application of the state's sales and use tax to sales made by fulfillment centers and web platforms. The MO DOR said the remote seller's sales made to Missouri customers through an online retailer's fulfillment program are subject to Missouri state and local sales tax when the remote seller's sales are fulfilled from inventory held at the facilitator's Missouri fulfillment warehouse. The remote seller is also required to collect and remit Missouri vendor's use tax on sales to Missouri customers made through a facilitator's subscription-based website host that allows anyone to set up an online store to sell the remote seller's products. The MO DOR noted that starting in Jan. 1, 2023, the state's new marketplace facilitator sales tax provisions will change and the provisions of this letter ruling may no longer be binding. Mo. Dept. of Rev., Letter Ruling LR 8161 (Sept. 23, 2021).
Texas: The Texas Comptroller of Public Accounts (Tex. Comp.) issued guidance on the taxability of various services involved in social media management. Taxable services include: (1) creating a report from customer data such as an informational report on the location of a customer's followers; (2) designing, developing and hosting a website (activity that can be classified as taxable data processing services) as well as maintaining and modifying website content; (3) creating finished graphic artwork in any format such as logos, images, marketing material designs and website graphics (tax is due on the total charge); and (4) photographs when given to a customer as a physical print, digital image or electronic image (tax is due on all expenses directly related to the production and sale of photographs billed to the customer). Nontaxable services include: (1) writing a blog post or other original content (as well as proofing and editing such content) and posting or responding to comments on social media; and (2) placing an advertisement on a web page (e.g., classified ads, banner ads, text links, skyscraper ads and vertical banners). If both taxable and nontaxable services are provided, tax will only need to be collected on taxable charges if the charges for taxable and nontaxable services are separately stated and the nontaxable services are distinct and identifiable. Tex. Comp. of Pub. Accts., STAR No. 202110017L (Oct. 29, 2021).
Federal: The Infrastructure Investment and Jobs Act (HR 3684) (P.L. 117-58) (IIJA), signed into law by President Biden on Nov. 15, 2021, repeals employee retention credits (ERCs) as of Sept. 30, 2021. The repeal of ERCs will effectively cut the extension under the American Rescue Plan Act of 2021 (ARPA) in half by retroactively eliminating ERCs for the fourth quarter of 2021. Thus, wages paid after Sept. 30, 2021, are not eligible for the ERC. For more information on this development, see Tax Alert 2021-2075.
California: The California Film Commission (CFC) has announced application deadlines for the next film and TV tax credit program - Program 3.0. For independent and non-independent feature films, the application period runs from Jan. 24 to 26, 2022, with phase II running from Jan. 27 to 31, 2022. The approval date for these applications is Feb. 28, 2022. For recurring television series, the application period runs from March 7 to 9, 2022, with phase II running from March 10 to 14, 2022. The approval date for these applications is April 11, 2022. The CFC is evaluating whether to accept applications for new TV projects and/or relocating TV series. Additional information on the program is available on the CFC's website at here.
COMPLIANCE & REPORTING
Louisiana: The Louisiana Department of Revenue (LA DOR) explained that starting with the December 2021 sales tax period, consolidated sales tax filers will be required to file returns and remit sales tax electronically and complete a new schedule when filing returns. Consolidated filers also will be required to report sales on a parish-by-parish basis. The LA DOR said "[c]onsolidated filers should immediately review and update their location address in Louisiana Taxpayer Access Point ["LaTAP"]." In addition to the electronic filing requirement, consolidated filers also will be required to complete and submit Schedule B with the consolidated sales tax return. New Schedule B requires an itemization of all business locations reporting sales and use tax on the consolidated return. La. Dept. of Rev., Revenue Information Bulletin No. 21-028 (Nov. 5, 2021).
PAYROLL & EMPLOYMENT TAX
Colorado: In Executive Order D2021-121, Colorado Governor Jared Polis rescinded the emergency declaration in Executive Order D2020-268 which extended the requirement under the Healthy Families and Workplaces Act (HFWA) that employers provide temporary COVID-19 paid sick leave to their employees through the emergency declaration period. Although the temporary COVID-19 supplemental paid sick leave requirement expired July 10, 2021, Colorado employers continue to be subject to the regular paid sick leave requirements under the HFWA which took effect Jan. 1, 2021 (Jan. 1, 2022 for employers with 15 or fewer employees). Under these requirements, Colorado employers must provide at least one hour of paid leave for every 30 hours worked, up to 48 hours per year. Employees exempt from the overtime pay requirement accrue leave as though they work 40 hours per week, regardless of the actual hours worked. For additional information on this development, see Tax Alert 2021-2050.
California: On Nov. 11, 2021, the Executive Committee of the Multistate Tax Commission (MTC) approved California's request to become a sovereignty member of the MTC. Both the California Franchise Tax Board and the California Department of Tax and Fee Administration will participate.
Virginia: The Virginia Department of Taxation (VA DOT) announced that the Virginia Disposable Plastic Bag Tax has been adopted by the following localities effective Jan. 1, 2022: the cities of Alexandria, Fredericksburg and Roanoke and the counties of Arlington and Fairfax. The VA DOT will administer the bag tax. Additional information on Virginia's bag tax is available here. Va. Dept. of Taxn., Bulletin No. 21-9 (Nov. 9, 2021).
Wisconsin: New law (2021 WI AB 325 (2021 Wis. Act 87) (WI Act 87)) amends Wisconsin's unclaimed property law by adopting, with modifications, the Revised Uniform Unclaimed Property Act. Changes to the state's unclaimed property law made by the WI Act 87 include: (1) changing the state administrator of unclaimed property from the Wisconsin Secretary of Revenue to the Wisconsin Department of Revenue; (2) adding new types of property not addressed under prior law; (3) modifying existing defined terms such as "domicile", "business association", "financial institution", "insurance company", "owner" and "person"; and (4) adding new definitions for certain items such as "virtual currency", "game-related digital content", "gift cards", "loyalty cards", "mineral", "mineral proceeds", "money order", "municipal bond", "property", "security" and "store-valued card", among other new terms. WI Act 87 includes time periods for presuming abandonment of property, tax-deferred retirement accounts, other tax-deferred accounts, custodial accounts for a minor, contents of a safe deposit box, securities and related property. WI Act 87 also lists activities that constitute an indication of an apparent owner's interest in property, describes when a person has knowledge of the death of an insured or annuitant, provides guidance on when property presumed abandoned is subject to reporting and custody of Wisconsin, sets forth reporting and notification requirements, allows for voluntary disclosure by a property holder to come into compliance with the reporting requirements and addresses a variety of other issues. WI Act 87 took effect on Nov. 7, 2021. 2021 Wis. Act 87 (2021 WI AB 325) signed by the governor on Nov. 5, 2021.
Thursday, Dec. 2, 2021. Domestic tax quarterly webcast series: A focus on state tax matters (1:00 pm EST). For our fourth quarterly webcast in 2021, panelists from Ernst & Young LLP's Quantitative Economics & Statistics and Indirect Tax practices will highlight the results of the latest EY study prepared for the Council On State Taxation (COST) on state business tax burdens, provide a state fiscal update and discuss tax policy issues that will be top of mind in 2022. Panelists will discuss state and local tax policy developments from 2021 and look ahead to those anticipated in 2022. In looking back at 2021, panelists will highlight the most important developments that affected state income, sales and use and payroll taxes, as well as those that affected federal and state business credits and incentives. As panelists look ahead to the upcoming year, they will highlight trends likely to carry over from 2021 into the new year, identify emerging developments that deserve every tax practitioner's attention and note the potential disruptions on the horizon. Register.
Tuesday, Dec. 7, 2021. Webcast: 2021 employment tax year in review (3:30 pm EST). In meeting their 2021 year-end employment reporting requirements, employers will need to address the unique challenges created by temporary federal and state COVID-19 provisions while also following other necessary procedures for closing the tax year. In this information-packed webcast, EY's employment tax and benefits professionals will discuss the following common areas of year-end employment tax concern: (1) 2022 federal and state rates and limits; (2) temporary COVID-19 federal employment tax provisions, including the scope and limitations of the federal employee retention tax credit; (3) taxation of domestic partner and paid family and medical leave insurance benefits; (4) IRS Forms W-2/1099-NEC reporting changes; (5) state developments including teleworker income tax relief; (6) state unemployment insurance and the federal unemployment insurance credit reduction; (7) year-end reconciliation and required employee notices; and (8) preparing the year-end payroll checklist. 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.