December 23, 2021
State and Local Tax Weekly for December 22
Ernst & Young's State and Local Tax Weekly newsletter for December 22 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.
Massachusetts appellate tax board finds revenue department cannot retroactively apply Wayfair
In U.S. Auto Parts Network, Inc.,1 the Massachusetts Appellate Tax Board (MA ATB) held that the Massachusetts Department of Revenue (MA DOR) cannot retroactively apply the U.S. Supreme Court (Court) ruling in South Dakota v. Wayfair, Inc. (Wayfair),2 which, in part, overruled the Court's prior ruling in Quill,3 to impose use tax collection and remittance responsibility on an out-of-state corporation whose only presence in Massachusetts was derived from "cookies", "apps" and "content delivery networks" (CDNs) servers in Massachusetts. Regulation 830 CMR 64H.1.7, which was adopted before the issuance of the Court's decision in Wayfair, included a presumption that out-of-state Internet vendors with a large volume of sales had one or more contacts with Massachusetts that constituted an in-state physical presence, including cookies, apps and CDNs. Under the MA DOR regulation, Internet vendors with one or more of these contacts were required to collect and remit tax if they had in excess of $500,000 of sales to Massachusetts customers.
Colorado: The Colorado Department of Revenue (CO DOR) issued general guidance on Colo. Rev. Stat. §39-22-202(8)(b), which starting in 2022, requires a taxpayer to include in its Colorado combined income tax return any member of an affiliated group of C corporations that is incorporated in a foreign (non-US) jurisdiction for purposes of tax avoidance. Under the statute, the CO DOR states that a C corporation is presumptively incorporated in foreign jurisdiction for the purposes of tax avoidance if it is incorporated in a listed jurisdiction. (The CO DOR guidance includes a table of the listed jurisdictions (e.g., Luxembourg, Cayman Islands, Bermuda, U.S. Virgin Islands.)) Further, according to the guidance, a C corporation is not incorporated in a foreign jurisdiction for tax avoidance purposes if it can prove that its incorporation in a listed jurisdiction has economic substance under IRC § 7701(o) (which does not include state or federal tax purposes). The guidance also discusses the rules that specifically apply in determining the net income of these C corporations incorporated in a foreign jurisdiction for the purpose of tax avoidance and required to be included in a combined report. Topics addressed include how to determine taxable income for certain foreign entities and alternative procedures and subtractions from federal taxable income for Subpart F income under IRC §951(a) and global intangible low-taxed income (GILTI) under IRC §951A(a) and the associated GILTI deduction under IRC §250(a)(1)(B). Colo. Dept. of Rev., Income Tax Topics: Section 303(8)(b) Entities (rev. Dec. 2021).
Colorado: The Colorado Department of Revenue (CO DOR) adopted three income tax special apportionment rules: (1) Special Rule 9A "Apportionment of income for electricity producers"; (2) Rule 39-22-303.6-1 "Apportionment and allocation definitions"; and (3) Rule 39-22-303.6-7 "Sales other than sales of tangible personal property in Colorado". In regard to apportionment of an electricity producer's income, the CO DOR established a rule prescribing adjustment of receipts from wholesale sales of electricity based on the income, gain or loss from certain hedging transactions. For taxpayers joining in the filing of a Colorado combined or consolidated (or both) return, the adjustment does not apply unless both the income from the wholesale sale and the gain or loss from the hedging transaction that hedged the wholesale sale are included in the taxpayer's combined, consolidated or combined and consolidated federal taxable income. Adopted Rule 39-22-303.6-1 defines terms used throughout the state's allocation and apportionment rules (Colo. Rules 39-22-303.6-1 to -17) that are consistent with the model statute and regulation of the Multistate Tax Commission (MTC) except when the MTC provisions are inconsistent with Colorado statutory law. In addition, adopted Rule 39-22-303.6-7 provides guidance for determining which gross receipts from sales of non-tangible personal property are included in the receipts factor. Rule 39-22-303.6-7 includes a general rule, general principles of application, rules of reasonable approximation, rules with respect to exclusion of receipts from the receipts factor and changes in the apportionment methodology. These rules were adopted Dec. 13, 2021. In addition, the CO DOR repealed 24 outdated Multistate Compact Tax regulations related to allocation and apportionment of income (Regulations IV — IV.18, nonconsecutive). The repealed regulations applied to tax years before 2009.
Colorado: Proposed Initiative 2021–2022 #31 qualified for the Nov. 2022 general election ballot. The initiative, if approved by Colorado voters, would reduce the state's corporate income rate to 4.4% (from 4.55%), effective for tax years beginning on or after Jan. 1, 2022.
District of Columbia: The District of Columbia Office of Tax and Revenue adopted amendments to D.C. Mun. Regs. 9-117 "Tax on Unincorporated Business" to clarify the proper treatment of a gain or loss from the sale or other disposition of property that results in the termination of an unincorporated business. The revision deletes former sections 117.13 and 117.14 of the regulations which had provided that gain or loss from the sale or disposition of property is recognized and reported by the business owners when the sale or disposition resulted in the termination of an unincorporated business but by the unincorporated business entity when it did not result is such termination, respectively. The amendment to the regulation was done to bring the regulation into conformity with changes made to D.C. Code § 47-1808.02 by legislation enacted in 2020 (DC Laws 2020, L 23-0149). The legislative change to the law provides that effective Jan. 1, 2021, taxable income for unincorporated business franchise tax purposes includes gain from the sale or other disposition of any assets, including tangible assets, intangible assets, real property and interests in real property in the District, even when the sale or other disposition results in terminating an unincorporated business. D.C. Off. of Tax and Rev., amended D.C. Mun. Regs. 9-117 (D.C. Register, Vol. 68/50 Dec. 10, 2021).
Georgia: The Georgia Department of Revenue (GA DOR) adopted new Rule 560-7-3.-03 "Election to Pay Tax at the Pass-Through Entity Level" and amendments to Rules 560-7-3.06 "Taxation of Corporations", 560-7-3-.08 "Partnerships" and 560-7-5-.02 "Accounting Periods and Basis of Net Income". New Rule 560-7-3.-03 "Election to Pay Tax at the Pass-Through Entity Level" provides for the implementation and administration of the new election for Georgia taxpayers to pay tax at the pass-through entity level (PTE tax) as enacted under Ga. Laws 2021 HB 149. The PTE tax rule defines terms and addresses the following topics: (1) entities eligible to make the PTE tax election; (2) how to make the election (note: the election, once made, is irrevocable for the year); (3) estimated tax payments; (4) computing income and the PTE tax; (5) tax attributes; (6) rules for electing PTEs with certain pension plans; (7) the owner subtraction for income that was taxed at the PTE level; (8) rules for audits; (9) rules for investment PTEs and exempt owners; (10) rules for withholding; and (11) S corporation specific issues. This rule applies to tax years beginning on or after Jan. 1, 2022. Rules 560-7-3.06 "Taxation of Corporations" and 560-7-3-.08 "Partnerships" were amended to add provisions regarding the elective PTE tax and to bring the rules into conformity with existing Georgia tax law. The amendments apply to tax years beginning on or after Jan. 1, 2022. Rule 560-7-5-.02 "Accounting Periods and Basis of Net Income" was amended to provide that the tax year/method of accounting of a person is the same as the person's tax year/accounting method used for federal income tax purposes and to repeal outdated provisions. Additional information on recently adopted or proposed Georgia income tax regulations is available here.
Idaho: The Idaho Tax Commission (Commission) notified pass-through entities (PTEs) that want to deduct the state and local tax (SALT) payment from their 2021 income on their federal return must submit the payment to the Commission by Dec. 31, 2021. If an entity later decides not to elect to pay tax at the entity level, payments will be applied per the payor's instructions or the unused amount will be refunded. To make a payment, the PTE can either pay online using the Commission's quick pay option — use "business income tax" as the account type and "estimated payment" as the payment type — or use Idaho Form 41ES. The Commission has also created a "More SALT guidance" webpage on the PTE tax. It is worth noting, that an electing PTE must make the election on its original, timely-filed return. The election, once made, is irrevocable for the tax year.
South Carolina: The South Carolina Department of Revenue (SC DOR) extended the nexus and income tax withholding guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency to March 31, 2022 (from Dec. 31, 2021). As previously announced, the SC DOR has stated that it will not use changes in an employee's temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period solely as a basis for establishing nexus (including for P.L. 86-272 purposes) or for altering the apportionment of income. S.C. Dept. of Rev., "SC Information Letter #21-31 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19" (Dec. 21, 2021).
SALES & USE
Massachusetts: New law (Mass. Laws 2021 c. 102, sec. 34 (MA 2021 HB 4269)) amends the administrative provisions of the Massachusetts taxation statutes (Mass. G.L. c. 62C, §16B) requiring certain vendors and operators to remit advance payments of sales and use tax, local sales tax on meals and room occupancy excise. As amended, certain vendors, including marketplace facilitators and operators (including intermediaries), are required to remit a payment of these taxes by the 25th day of each month. The payment must include (1) the tax collected for any taxable sale made during the days in the filing period occurring on or before the 21st day of the last month of the filing period or (2) not less than 80% of the tax collected on gross receipts from taxable sales during the immediately preceding filing period. Tax due for the remaining filing period must be remitted when the return for the applicable tax period is required to be filed. The advance payment requirement does not apply to vendors or operators whose cumulative Massachusetts sales and use tax, or room occupancy excise, liability in the prior calendar year was $150,000 or less or to a materialman who files a return under Mass. G.L. c. 62C, §16(h). Mass. Laws 2021 ch. 102, sec. 34 (MA 2021 HB 4269), signed by the governor on Dec. 13, 2021.
New Jersey: The New Jersey Division of Taxation (NJ DOT) issued a notice on limitations on Urban Enterprise Zone (UEZ) sales and use tax exemption certificates UZ-5 and UZ-4 that begin Jan. 1, 2022. According to the notice, a business can use the UZ-5 exemption certificate to make tax-free purchases of tangible personal property and services (except for motor vehicles, telecommunications and utilities) for the UEZ business location, but only the first $100,000 of annual taxable purchases are exempt. Once the $100,000 annual purchase limit is met, the business must stop using the UZ-5 exemption certificate and pay tax on the purchases for the remainder of the year. If a supplier does not charge required sales tax on a purchase, the business must remit use tax on the purchase. Similarly, a qualified business can give the UZ-4 exemption certification to building contractors to make tax free purchases of construction materials, supplies and services used exclusively to improve, alter or repair a qualified business UEZ location. Only the first $100,000 in annual taxable purchases of such items by all contractors hired to work on the property are exempt. Once the threshold is met, the business can no longer give the UZ-4 exemption certificate to contractors or subcontractors for the remainder of the year. This limitation does not apply if the purchase of the items are made by a contractor that is erecting a new structure or is substantially improving, altering or repairing the property of a qualified business (i.e., total costs equal or exceed 50% of the market value of the structure). The NJ DOT said it will audit UEZ businesses to ensure proper use of the UZ-4 and UZ-5 exemption certificates, and it recommended that an affected business keep detailed records of its tax-exempt purchases. Businesses will also have to file an annual report that lists all purchases in which the UZ-5 and UZ-4 exemption certificates were used. N.J. Div. of Taxn., Notice: New Limitations on Urban Enterprise Zone (UEZ) Exemption Certificates (Dec. 10, 2021).
South Carolina: The South Carolina Department of Revenue (SC DOR) extended the nexus guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency to March 31, 2022 (from Dec. 31, 2021). As previously announced, the SC DOR has stated that it will not use changes in an employee's temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period solely as a basis for establishing sales and use tax nexus. S.C. Dept. of Rev., "SC Information Letter #21-31 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19" (Dec. 21, 2021).
Federal: In Notice 2021-65, the IRS explained the actions that employers who received advanced payments or reduced employment tax deposits in anticipation of 2021 fourth-quarter employee retention credits (ERCs) must take to avoid failure-to-pay penalties under IRC § 6651. The ERC was repealed by the Infrastructure Investment and Jobs Act (H.R. 3684) (P.L. 117-58) (IIJA) enacted on Nov. 15, 2021 and retroactively for wages paid on or after Oct. 1, 2021 (i.e., the fourth quarter of calendar year 2021). This guidance does not apply to recovery startup businesses (RSBs)4 because they may still claim 2021 fourth quarter ERCs. For additional information on this development, see Tax Alert 2021-2226.
Federal: The Senate Finance Committee's substitute text of the Build Back Better Act reconciliation bill (H.R. 5375) (BBBA bill), released on Dec. 11, 2021, includes workforce-related credits that may benefit certain employers. Specifically, the BBBA bill, if enacted, would (1) temporarily enhance the existing general business credit for employer-provided childcare under IRC § 45F, (2) create a refundable payroll tax credit for employers of local news journalists, and (3) create a new general business credit for corporations that have an active trade or business in US possessions (e.g., American Samoa, the Northern Mariana Islands, Puerto Rico, Guam, the U.S. Virgin Islands) and meet certain sourcing and income qualifications. For more on this development, see Tax Alert 2021-2256.
North Carolina: The North Carolina Department of Revenue announced that it began accepting applications for the state's Business Recovery Grant Program on Dec. 16, 2021. Under this grant program, a payment will be issued to eligible North Carolina businesses that have experienced an economic loss of at least 20% during the COVID-19 pandemic. The grant application period closes on Jan. 31, 2022. Additional information on the grant program, including eligibility requirements, the application process and frequently asked questions, can be found here.
PAYROLL & EMPLOYMENT TAX
Multistate: For federal income tax withholding and payroll and employment tax reporting purposes, the due date for filing the 2021 Forms W-2 with the Social Security Administration (SSA) and furnishing copies to employees is Jan. 31, 2022. Businesses that must file 250 or more Forms W 2 must submit them electronically to the SSA. The IRS has issued proposed regulations that, if finalized, would lower the electronic filing threshold to for businesses that must file 100 or more forms effective for tax year 2022. EY has included a chart in its Tax Alert 2021-2283 which shows the state filing due dates as well as each state's threshold for filing state copies of Forms W-2 electronically. As demonstrated by the chart, some of the states automatically conform to the applicable federal threshold for filing Forms W-2 electronically and thus, if the IRS finalizes its regulations to lower the threshold to 100 or more forms, that same electronic filing threshold will apply in such states.
Multistate: State unemployment insurance (SUI) trust funds are largely financed by employer contributions (in addition, in Alaska, New Jersey and Pennsylvania employees also make contributions). States are required to maintain an SUI taxable wage base of no less than the limit set under the Federal Unemployment Tax Act (FUTA). The 2022 FUTA wage limit of $7,000 has remained unchanged since 1983, despite increases in the federal minimum wage and annual cost-of-living adjustments over the last 36 years. For additional information on this development, see Tax Alert 2021-2255.
Multistate: Though the federal minimum wage remains $7.25 per hour, state minimum wage rates will increase in a number of states on Jan. 1, 2022. Increases in a state's minimum wage rate can occur either because of voter approval, law changes or because of annual inflation adjustments. Employers should be aware of differences in localities that independently set a minimum wage for employees working within their city or county limits (for example, several cities in California (e.g., Los Angeles, San Francisco, Santa Monica) impose their own minimum wage of "living wage" requirements). The chart in Tax Alert 2021-2292 shows the minimum wage rates that apply in 2022 as reported by the respective agencies as of Dec. 21, 2021.
Colorado: The Colorado Department of Labor & Employment announced that issuance of the 2022 state unemployment insurance (SUI) tax rate notices will be delayed until early to mid-December 2021 due to the volume of work to determine correct charging of COVID-19 UI benefit claims. SUI tax rate notices are usually issued by late November. For additional information on this development, see Tax Alert 2021-2242.
Massachusetts: The Massachusetts Department of Family and Medical Leave has announced the contribution rates for Paid Family and Medical Leave (PFML) effective Jan. 1, 2022. The PFML contribution rate is set each year and applies up to the Social Security wage limit, or $142,800 for 2021 and $147,000 for 2022. For additional information on this development, see Tax Alert 2021-2211.
South Carolina: The South Carolina Department of Revenue announced that the nexus and income tax withholding guidance it previously issued concerning temporary work in the state due to the COVID-19 emergency is extended to March 31, 2022 (from Dec. 31, 2021). S.C. Dept. of Rev., "SC Information Letter #21-31 Extended Tax Relief - Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19" (Dec. 21, 2021).
Cincinnati, OH: The U.S. Supreme Court has been asked to review the Ohio Supreme Court's ruling that the City of Cincinnati's excise tax on outdoor advertising signs (billboard tax), which falls predominately on two billboard operators, is a discriminatory tax that violates the First Amendment's right to free speech and a free press. The question presented to the Court is: "[w]hether a municipal excise tax on the business privilege of charging for the use of billboard space abridges the freedom of speech, or of the press." Lamar Advantage GP Co., L.L.C. v. Cincinnati, Slip Op. No. 2021-Ohio-3155 (Ohio S.Ct. Sept. 16, 2021), pet. for cert. filed, Cincinnati v. Lamar Advantage GP Co., LLC, Dkt. No. 21-900 (U.S. S.Ct. Dec. 14, 2021). (It should be noted that the U.S. Supreme Court is considering a similar cert. petition regarding the constitutionality of the City of Baltimore's excise tax on outdoor advertising.)5
Multinational: The latest edition of Trade Watch is available through Tax Alert 2021-2252. Trade Watch is a regular communication from EY Global Trade that outlines key legislative and administrative developments for customs and trade around the world.
VALUE ADDED TAX
International — French: The French law currently provides that an importing company established or not in the European Union (EU) customs territory and moreover liable for import Value Added Tax (VAT) may, with the authorization of the customs authorities (provided that the said company is already registered for VAT purposes in France at that time), pay the tax due on import and deduct it simultaneously on its VAT return. For additional information on this development, see Tax Alert 2021-2241. International — Italy: Italy's Decree Law No. 146/2021 Conversion Law postpones from Jan. 1, 2022 to July 1, 2022 the entry into force of the amendments to the communication process for transactions with non-Italian businesses, referred to as "Esterometro," which provides that in place of filing the requisite form, the transmission of data relating to cross-border transactions via the Interchange System with the format of an electronic invoice is sufficient. For additional information on this development, see Tax Alert 2021-2276.
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 U.S. Auto Parts Network, Inc. v. Massachusetts Comm. of Rev., Dkt. No. C339523 (Mass. App. Tax Bd. Dec. 7, 2021).
2 South Dakota v. Wayfair, Inc., 585 U.S. ___, 138 S. Ct. 2080 (2018).
3 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
4 A "recovery startup business" is an employer that: (1) is not otherwise an eligible employer (i.e., an employer whose trade or business's operation was fully or partially suspended due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19 or that experienced a decline in gross receipts (as defined in IRS Notices 2021-20 and 2021-23)); (2) began carrying on a trade or business after Feb. 15, 2020; and (3) with average annual gross receipts for the three tax years preceding the quarter in which it claims the ERC of no more than $1 million (with rules under IRC §448(c)(3) for their calculation if the entity has not been in existence for three years and by reference to the entity's predecessor). See IRC §3134(c)(5) (defining "recovery startup business" for purposes of the ERC.)
5 Clear Channel Outdoor, Inc. v. Baltimore City Dept. of Finance, No. 9 (Md. Ct. App. March 15, 2021), pet. for cert. filed, Dkt. No. 21-219 (U.S. S.Ct. filed Aug. 12, 2021).