December 22, 2021
State and Local Tax Weekly for December 10
Ernst & Young's State and Local Tax Weekly newsletter for December 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.
Arkansas governor signs bills cutting corporate and individual income tax rates
On Dec. 9, 2021, Governor Asa Hutchinson signed into law 2021 AR HB 1001 and 2021 AR SB 1 (2021 Ark. Acts (2nd Extra. Sess.) Act 1 and Act 2, respectively, and collectively, "new law"),1 provisions of which gradually reduce the rates of the state's corporate and individual income taxes, including the state's elective pass-through entity tax rate, and modify the individual income tax tables. The income tax rate reductions for the 2024 and 2025 tax years are contingent on funds not being transferred from the state's Catastrophic Reserve Fund (formerly the Long-Term Reserve Fund) during specific periods, as discussed below.
Legislation enacted in 2019 (2019 Ark. Acts 822) reduced the corporate income tax rate to 6.2% in 2021 (for corporations with net income exceeding $100,000) and to 5.9% in 2022 (for corporations with net income exceeding $25,000). The new law provides for additional rate cuts. Effective for tax years beginning on or after Jan. 1, 2023, the corporate income tax rate is reduced to 5.7%. The rate will be further reduced to 5.5% in 2024 and to 5.3% in 2025, if a transfer from the Catastrophic Reserve Fund is not made on or after July 1, 2022 but before Jan. 1, 2024 (the 2024 rate reduction) or during the 2024 calendar year (the 2025 rate reduction). If such transfer occurs during the 2022/2023 period, the 2024 rate reduction would not take effect and the tax rate in effect for 2023 would continue to apply. If such transfer occurs in 2024, the 2025 rate reduction would not take effect and the rate in effect for 2024 would continue to apply. A similar rate reduction is adopted for Arkansas' foreign corporation income tax.
The new law also provides that the current 5.9% top state income tax rate for individuals, trusts and estates will be reduced over a four-year period. The top rate will be reduced to 5.5% in 2022 and to 5.3% in 2023. The rate will be further reduced to 5.1% in 2024 and to 4.9% in 2025, if a transfer from the Catastrophic Reserve Fund is not made on or after July 1, 2022 but before Jan. 1, 2024 (the 2024 rate reduction) or during the 2024 calendar year (the 2025 rate reduction). If such transfer occurs during the 2022/2023 period, the 2024 rate reduction would not take effect and the rate in effect for 2023 would continue to apply. If such transfer occurs in 2024, the 2025 rate reduction would not take effect and the rate in effect for 2024 would continue to apply.
The new law also restructures and consolidates the lower- and middle- income tax tables into a single, standard income tax table. Thus, starting in 2022, there are two income tax tables — the standard income tax table and the upper income tax table.
The rate of the state's elective tax on pass-through entities (PTE tax), which is currently 5.9%, is modified to reflect the rate reductions made to the individual income tax. The rate of the PTE tax equals the top marginal income-tax rate.
Maryland Comptroller adopts final regulations for digital advertising tax
On Nov. 24, 2021, the Office of the Comptroller of Maryland (MD Comp.) adopted final regulations outlining how the state's new tax on gross revenues from digital advertising services (DAT) will operate (Md. Reg. 03.12.01.01 - 03.12.01.06) (Final Regulations). The DAT is currently scheduled to take effect on Jan. 1, 2022 and will apply to persons with annual gross revenues of at least $100 million globally and at least $1 million of revenue derived from digital advertising services within Maryland.
The DAT statute defines "digital advertising services" as "advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services."2 The Final Regulations clarify issues that the Legislature delegated to the MD Comp. in the original implementing DAT legislation (MD 2020 HB 732),3 including the sourcing and apportionment to Maryland of digital advertising services revenue.
Under Md. Reg. 03.12.01.02, revenues from digital advertising services are "derived in the State" when a device located within Maryland accesses any portion of those services. The revenue is then apportioned by applying a worldwide, device-based apportionment factor to the global digital advertising services revenue. That apportionment factor is calculated as a fraction, the numerator of which is the number of devices that accessed the digital advertising services from a location in Maryland and the denominator of which is the number of devices that accessed the digital advertising services from any location. The apportionment factor applies to digital advertising gross revenue received by the taxpayer to determine the gross revenue attributable to Maryland. In calculating the apportionment factor, devices with indeterminate locations are excluded from both the numerator and denominator. Examples provided in the regulation illustrate how to calculate and apply the apportionment factor.
Identifying the location of "devices," which was of particular concern to several businesses that derive revenue from digital advertising services, is done by taxpayers using "the totality of the data within their possession or control, including both technical information and nontechnical information included in the contract for digital advertising services." This means each DAT taxpayer must use the information within its possession or control that most reliably identifies a device's location, including:
DAT taxpayers will use this information to determine, based on a totality of the facts and circumstances, whether a device is: (1) in Maryland; (2) not in Maryland, but in the United States; (3) not in the United States; or (4) indeterminate.
The Final Regulations took effect on Dec. 13, 2021.
For more on this development, see Tax Alert 2021-2253.
Georgia: New law (HB 7EX), effective for tax years beginning on or after Jan. 1, 2021, updates Georgia's date of conformity to the Internal Revenue Code of 1986, as amended (IRC) to the IRC as amended on March 11, 2021. The new law causes Georgia's income tax law to decouple from all provisions in the American Rescue Plan Act of 2021 (P.L. 117-2) that change or affect in any manner IRC § 461(l) by treating such changes as if they were not in effect. Ga. Laws 2021 (1st Spec. Sess.), Act 5EX (HB 7EX), signed by the governor on Dec. 8, 2021. See also, Ga. Dept. of Rev., "Income Tax Federal Tax Changes" webpage (last updated Dec. 13, 2021).
Ohio: In Buckeye Inst. v. Kilgore,4 the 10th District of the Ohio Court of Appeals (appeals court) affirmed the trial court's dismissal of a complaint filed by The Buckeye Institute asserting that Section 29 of 2020 Ohio House Bill 197 (HB 197) violated the Ohio and U.S. Constitutions. The appeals court held that Section 29 of H.B. 197 did not violate the limit the due process clause places on a municipality's jurisdiction to tax. HB 197 deems remote work performed by an employee working from home during the COVID-19 pandemic to occur at an employee's principal place of business for the purpose of determining employer withholding of Ohio local income taxes. This holding comes amid other challenges to Section 29 of HB 197 and other similar Ohio laws as well as legislative efforts to modify these provisions. For additional information on this development, see Tax Alert 2021-2227.
South Carolina: The South Carolina Department of Revenue (SC DOR) issued a revenue ruling on the state's new annual election allowing pass-through entities (PTEs) to pay tax at the entity level. The election, which can be made starting in tax years 2021, allows certain PTEs to report "active trade or business income" directly on their tax return and pay a 3% entity level income tax on such income. The guidance provides: (1) an overview of the rate reduction on active trade or business income to an owner; (2) an overview of the statutory provisions establishing the PTE tax; and (3) responses to frequently asked questions (FAQs). The FAQs address: (1) entity election questions; (2) entity administrative and compliance questions (including questions on Schedule K-1, estimated tax payment due dates and payment procedures, and nonresident withholding); (3) entity level tax on active trade or business income general entity computation questions (including tax rate, state tax deduction, active trade or business loss treatment, and use of tax credits at the entity level); (4) owner compliance and reporting questions (including owner tax reporting, use of tax credits, South Carolina basis impact, owner election for non-electing entities and treatment of losses when a qualified owner has an interest in both electing and non-electing entities). The ruling includes illustrative examples. S.C. Dept. of Rev., SC Revenue Ruling #21-15 Active Trade or Business Income — Annual Election by Pass-Through Entity to Pay Tax at Entity Level (Income Tax) (Dec. 2, 2021).
Vermont: The Vermont Department of Taxes has adopted Regulation 1.5833 "Allocation and Apportionment of Vermont Net Income by Corporations". The extensive regulation covers the following topics: (1) computations of Vermont apportionment percentage; (2) property factor; (3) payroll factor; (4) sales and receipts factor; (5) non-apportionable income; (6) discretionary adjustments of Vermont apportionment percentage; and (7) special rules for the property factor, trucking companies, television and radio broadcasting, and financial institutions subject to net income tax. In regard to the sales and receipts factor, the regulation addresses a number of issues including: general principals of application (e.g., year to year consistency, rules of reasonable approximation, changes in methodology); sales of tangible personal property in Vermont; compensation for services (in-person, services delivered to the customer, services delivered on behalf of the customer and services delivered electronically through the customer); professional services; rent, lease or license of tangible personal property and real property; license or lease of intangible property; sales of intangible property; and special rules for software transactions and sales or licenses of digital goods or services. The regulation includes illustrative examples. The regulation took effect Dec. 1, 2021.
SALES & USE
Connecticut: The Connecticut Department of Revenue Services (CT DRS) issued guidance on the application of the state's sales and use tax to peer-to-peer car sharing, which is defined as "the authorized use of a shared vehicle for a consideration by a person other than the shared vehicle owner through a car sharing platform." Peer-to-peer car sharing will constitute the sale of tangible personal property subject to sales and use tax (1) if peer-to-peer car sharing falls within the scope of Conn. Gen. Stat. § 12-407(a)(2)(J), which provides that sale and selling include the leasing or rental of tangible personal property of any kind, and (2) if the person leasing the "shared vehicles" is a "retailer". The CT DRS found that "peer-to-peer car sharing" constitutes a lease as it involves a person receiving authorization from a shared vehicle owner to use a shared vehicle and the authorization is contingent on a person paying consideration for the use of the vehicle. Whether the transaction is a taxable sale, however, depends on if the person leasing the shared vehicles is a retailer. When the person is a retailer, the sale is taxable; but if the person is making the shared vehicle available for lease on a casual or isolated basis, the CT DRS said the person would not be required to collect tax on the sale. The CT DRS also determined that a peer-to-peer car sharing company that operates a car sharing platform will be required to collect and remit tax on sales made on the platform if the company meets the requirements of a marketplace facilitator. Lastly, the CT DRS determined that peer-to-peer car sharing does not constitute the sale of a taxable service for sales and use tax purposes because it is not on the list of enumerated services. Conn. Dept. of Rev. Servs., "RE: 2021 Conn. Pub. Acts 106, § 65 — "Peer-to-peer car sharing" (Dec. 1, 2021).
Michigan: The Michigan Department of Treasury (MI DOT) issued a revenue information bulletin (RAB) updating the general procedures sellers and purchasers should follow when claiming a sales or use tax refund. This update, the MI DOT said, is limited to its interpretation of the phrase "by other means" as used in the sales and use tax acts; it does not address specific exemptions or additional requirements that may apply under those exemptions. The MI DOT explained in the RAB that a seller may prove that a transaction is not subject to tax "by other means" under certain circumstances. The phrase "by other means" is included in the sales and use tax acts, but neither act "expound[s] on the meaning or application of this phrase." The MI DOT "interprets this phase as 'curative' such that it is intended to provide a post-transaction way to establish an exemption when the taxpayer has not complied with the other methods to document particular sales or use tax exemptions." The MI DOT said the phrase is not intended to be applied as a method to supplant or be used in lieu of the general requirements for claiming an exemption described in the RAB. The MI DOT further noted that the "limited scope of the 'by other means' language … does not circumvent the general requirements for claiming an exemption even where another statutory scheme appears to be based on wholesale (resale) transactions." Additional topics addressed by the RAB include: (1) claiming an exemption; (2) acceptable formats that will constitute a valid "certificate of exemption"; (3) blanket certificates of exemption; (4) use of purchase orders; (5) seller liability; and (6) recordkeeping requirements. Mich. Dept. of Treas., Rev. Admin. Bulletin 2021-18 "Sales and Use Tax Exemption Claim Procedures and Formants" (Nov. 22, 2021) (replaces Rev. Admin. Bulletin 2016-14).
Wisconsin: The Wisconsin Department of Revenue (WI DOR) updated its publication on the application of the state's sales and use tax on digital goods. Topics covered by the publication include: (1) a description of digital goods; (2) imposition of sales and use tax on digital goods; (4) when a sale of a digital good occurs; (5) sourcing sales and purchases of digital goods; (6) descriptions of digital audio works, digital audiovisual works, digital books and additional digital goods; (7) sales and use tax treatment of digital codes; (8) nontaxable digital goods; (9) bundled transactions; and (10) exemptions for digital goods. The WI DOR noted that updates to the additional digital goods section (1) clarify that "other news or information products" are products that disseminate news or information and (2) revise the example to clarify that charges for access to an online database or website allowing the user to search the database and view/download the information is a taxable sale of a news or information product. In addition, the nontaxable digital goods section is revised to clarify that a sale may not be taxable even though a digital good is transferred to the customer (e.g., a webinar transferred incidental to the sale of educational service). Wis. Dept. of Rev., Publication 240 "Digital Goods" (Nov. 2021).
Federal: In its Revenue Ruling 2021-20 and Revenue Procedure 2021-43, the IRS addresses the 4% minimum credit rate (4% floor) for taxpayers using the low-income housing tax credit. The guidance clarifies when the 4% floor applies to projects that receive housing credit allocations or tax-exempt bonds both before and after the floor's effective date of Dec. 31, 2020. For more on this development, see Tax Alert 2021-2201.
COMPLIANCE & REPORTING
New York: The New York Department of Taxation and Finance (NY DOTF) announced that the pass-through entity tax (PTET) estimated payment application is now available. For tax year 2021, an electing PTE is not required to make estimated PTE tax payments. The electing PTE, however, may make optional online estimated tax payments before Dec. 31, 2021. The NY DOTF explained that to make an estimated PTET payment online, electing PTEs will need to: (1) log in to its Business Online Services account, (2) select the services menu on the account summary homepage, and (3) select PTET web file from the Corporation tax or Partnership tax expanded menu and then click-on PTET estimated payment. PTET payments must be paid using the NY DOTF's online Web File application and pay by ACH debit. PTET taxpayers cannot pay by check or other methods. The NY DOTF noted that an electing PTE that has debit blocks on its bank account — even if other tax payments have already been authorized — must instruct its bank to specifically authorize the transaction. Additional information on NY's PTET is available here. N.Y. Dept. of Taxn. and Fin., "Pass-Through Entity Tax (PTET) Estimated Payment application is available" (updated as of Dec. 3, 2021).
New Jersey: Reminder, the combined reporting initiative of the New Jersey Division of Taxation (NJ DOT) for the state's Corporate Business Tax (CBT) will end on Jan. 3, 2022. During this initiative, the NJ DOT is offering a unique closing agreement to any corporation that: (1) joined in a New Jersey combined return; (2) indicated it has New Jersey nexus; and (3) did not file separate company returns in prior years, even if it may have been obligated to do so. Under this initiative, NJ DOT offers the following terms to all corporations that apply for a closing agreement between June 15, 2021 and Jan. 3, 2022: a limited look-back to the privilege periods ending after June 30, 2016 or the date nexus was established with New Jersey, whichever is later, and waiver of all penalties. Corporations requesting a closing agreement cannot have been (1) incorporated in New Jersey, (2) authorized to do business in New Jersey or (3) registered for CBT purposes before being included as part of a 2019 or 2020 combined return. In addition, all submitted returns will be subject to routine audits. Corporations that do not take advantage of this initiative will be subject to all applicable penalties and interest for the look-back period going back beyond the privilege periods ending after June 30, 2016. For additional information on this initiative, including a list of what taxpayers must do as part of the closing agreement, see Tax Alert 2021-1810.
PAYROLL & EMPLOYMENT TAX
Colorado: The Colorado Department of Revenue announced that starting in 2022, employees can use the new Form DR 0004, Colorado Employee Withholding Certificate. If employees request that their Colorado state income tax withholding be adjusted, their employer must give them Form DR 0004. Currently, employees use the federal Form W-4 for both federal and Colorado income tax withholding purposes. The new Form DR 0004 does not replace the federal Form W-4; rather, it gives Colorado employees the ability in specific situations to direct employers to fine-tune the amount of Colorado income tax withheld. For additional information on this development, see Tax Alert 2021-2199.
Illinois: In response to a ruling request, the Illinois Department of Revenue (IL DOR) determined that a person operating an electric vehicle charging station that sells electricity is a delivering supplier. As a delivering supplier, the person must register with the IL DOR and collect and remit the electricity excise tax. The amount of tax due is based on kilowatt-hours used or consumed by the customer. Ill. Dept. of Rev., ST-21-0040 (Sept. 17, 2021).
Washington: The Washington Department of Revenue (WA DOR) issued a special notice on the state's carbon cap and trade programs. The WA DOR explained that starting in 2023 there will be two new programs aimed at reducing carbon dioxide and other greenhouse gas emissions — (1) reducing greenhouse gas emissions by reducing the carbon intensity of transportation fuels (WA Laws 2021, HB 1091) and (2) reducing greenhouse gas emissions through the Washington Climate Commitment Act (WA Laws 2021, SB 5126). The WA DOR explained that income earned from selling, transferring, trading or retirement of carbon credits, carbon offsets and allowances is taxable under the Service and Other Activities tax classification of the Washington Business and Occupation (B&O) Tax. In addition, amounts earned from the generation, purchase, sale, transfer or retirement of transportation fuel carbon credits are exempt from B&O tax and may be deducted. Wash. Dept. of Rev., Special Notice "Carbon cap and trade programs" (Nov. 30, 2021).
International — Costa Rica: In accordance with the Central American Uniform Customs Code IV and regulations and Law No. 9977, "Promotion of tourist marinas and coastal development," Costa Rica's General Directorate of Customs issued Resolution RES-407-2021, creating two new categories for the temporary importation of vessels. Under the resolution, the new categories are the temporary importation of vessels for tourist purposes and the temporary importation of chartering vessels. For additional information on this development, see Tax Alert 2021-2173.
VALUE ADDED TAX
International — United Kingdom: As a result of Brexit, from Jan. 1, 2021, European Union (EU) businesses which are not VAT registered or established in the United Kingdom (UK) will need to submit value-added tax (VAT) refund claims in the same way as non-EU businesses to reclaim UK VAT incurred for business purposes in the UK (with the exception of VAT incurred on goods in Northern Ireland). The deadline for such claims for the period from Jan. 1, 2021 to June 30, 2021 is Dec. 31, 2021. This is particularly significant for EU businesses as it is the first time a claim of this nature will have been submitted in the UK. As the deadline is fast approaching, affected businesses will need to collate the relevant information and documents required to submit the claim as soon as possible. For more on this development, see Tax Alert 2021-2200.
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 2021 Ark. Acts (2nd Extraordinary Sess.), Act 1 (HB 1001) and Act 2 (SB 1), each signed by the governor on Dec. 9, 2021.
2 Md. Tax-Gen. Ann. § 7.5-101(e).
3 For more on MD 2020 HB 732, see Tax Alert 2021-0343.The DAT law is generally codified at Md. Tax-Gen. Ann. §§7.5-101 to -301.
4 Buckeye Inst. v. Kilgore, 10th Dist. Franklin No. 21AP-193, 2021-Ohio-4196 (Nov. 31, 2021).