January 31, 2022
State and Local Tax Weekly for January 21
Ernst & Young's State and Local Tax Weekly newsletter for January 21 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.
Governor Murphy signs New Jersey Business Alternative Income Tax revisions into law
On Jan. 18, 2022, Governor Murphy signed into law New Jersey Senate Bill 4068 /Assembly Bill 6110(P.L. 2021, c. 419) (S. 4068), which revises significant aspects of New Jersey’s elective pass-through entity (PTE) tax, known as the Business Alternative Income Tax (BAIT).1 S. 4068 revises New Jersey’s existing law by:
S. 4068 went into effect on Jan. 1, 2022, but the language in the bill itself does not specify whether the effective date pertains to tax years beginning or ending on or after that date or applies simply to all periods containing that date.
On Jan. 20, 2022, the NJ DOT published updated BAIT forms and instructions including:
The NJ DOT noted that its BAIT FAQs will be updated soon to reflect the legislative changes brought about by enactment of S. 4068.
For more on this development, see Tax Alert 2022-0128.
Connecticut: In response to a ruling request, the Connecticut Department of Revenue Services said that the combined unitary group’s net operating losses (NOLs) that were allocated to two taxable group members will survive the merger of those members into a third taxable group member and that the NOLs can be utilized by the third group member or any other taxable member that was included in the combined group in the year of the loss.6 Conn. Dept. of Rev. Serv., Ruling 2022-1 “Corporation Business Tax Combined Unitary Group Net Operating Losses” (Jan. 18, 2022).
Kentucky: The Kentucky Department of Revenue has submitted for final review amendments to 103 Ky. Admin. Reg. 16:270 (the regulation), regarding the apportionment of receipts of financial organizations that were previously subject to the Kentucky Bank Franchise Tax. Provisions of 2019 KY Acts ch. 196 (2019 KY HB 458) cause the commonwealth’s Bank Franchise Tax to sunset after 2020 but also caused its corporate income tax to be applied to the income of banks, savings and loans institutions, and companies defined as financial organizations beginning in 2021. The regulation, as currently drafted, would adopt sourcing rules similar to those under the former Bank Franchise Tax by incorporating the definitions and sourcing provisions in Ky. Rev. Stat. §§ 136.500, 136.535 and 136.530 into the corporate income tax law. The definitions in Ky. Rev. Stat. § 136.500 would mostly be incorporated into Section 1 of the regulation. In a notable change, however, the regulation would expand the definition of a financial organization to include any entity that is more than 50% owned, directly or indirectly, by a bank or a savings and loan holding company. The sourcing rules in Ky. Rev. Stat. § 136.530, and related definitions in Ky.Rev. Stat. §§ 136.500 and 136.535, would be largely incorporated into Section 6 of the regulation. For more on this development, see Tax Alert 2022-0110.
Massachusetts: The Massachusetts Department of Revenue (MA DOR) issued guidance explaining the impact of select federal income tax changes under the Federal Consolidated Appropriations Act, 2021 (CAA) and the American Rescue Plan Act of 2021 (ARPA) on Massachusetts corporate excise tax (CET) and personal income tax (PIT). Some of the CAA and ARPA changes addressed for Massachusetts tax purposes include: (1) tax implications of Paycheck Protection Program loan forgiveness, Economic Injury Disaster Loan Advances, Small Business Administration debt relief subsidies, Shuttered Venue Operator Grants and Restaurant Revitalization Grants – for CET and PIT purposes, the amounts are not taxed and expenses paid with such amounts are deductible to the extent deductible for federal income tax purposes; (2) Massachusetts does not conform to the Employee Retention Credit (ERC) and where the taxpayer cannot deduct wages paid for federal income tax purposes as a result of claiming the ERC, such wages cannot be deducted for either CET or PIT purposes; (3) for both CET and PIT purposes, Massachusetts conforms to the temporary allowance of a full deduction for the costs of business meals and the expansion of disallowance of deduction for certain compensation paid by publicly traded corporations; and (4) qualified disaster relief charitable contributions – adopted for CET, but not for PIT, purposes. Other federal income tax law changes addressed by the guidance for Massachusetts tax purposes include changes to retirement plans, the reduction in the medical expense deduction floor, the depreciation of certain residential rental property over a 30-year period, the extension of the limitation on non-corporate taxpayers’ deduction of business losses, among other provisions. Mass. Dept. of Rev., TIR 22-2: Massachusetts Tax Implications of Selected Provisions of the Federal Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 2021 (Jan. 12, 2022).
SALES & USE
Missouri: An entity that provides nationwide telecommunications, video and internet services is entitled to a refund of use tax paid on telecommunications replacement equipment. In so holding, the Missouri Administrative Hearing Commission (MO AHC) found that the equipment at issue (e.g., surge-gap taps, splitter/combiner modules, various router equipment, optical transport linecards, optical transport pluggable transmitter/receivers, optical transport commons, switches, and software) qualified for the manufacturing exemption. To qualify for the exemption under RSMo § 144.030.2(4), each item (1) must be purchased as replacement equipment, (2) must be used directly in the manufacturing or fabricating of a product (i.e., telephone calls), and (3) the product is intended to ultimately be sold for final use or consumption. At issue in this case was whether the disputed items are used directly in the manufacturing of telecommunication services. To determine this, the MO AHC applied the “integrated plant doctrine” and found the evidence established that the disputed items satisfy all three prongs on this doctrine as they: (1) are necessary for production of telecommunications services to the entity’s customers; (2) interact with each other and cause changes in the voice signal to ensure telephone calls reach the recipients and, as such, are both physically and causally close to the finished product; and (3) operate harmoniously with other exempt machinery to make an integrated and synchronized system used to manufacture telephone calls. Charter Communications Entertainment I, LLC v. Missouri Dept. of Rev., No. 14-1199 RS (Mo.Admin. Hearing Comm. Jan. 18, 2022).
Texas: The Texas Comptroller of Public Accounts (TX CPA) adopted amendments to Tex. Admin. Code tit. 34, §3.302 regarding accounting methods, credit sales, bad debt deductions, repossessions, interest on sales tax, and trade-ins (the regulation). Amendments to the regulation define key terms, including “affiliate”, “assignee”, “bad debt”, “credit sale”, “private label credit agreement”, “private label credit provider”, and “trade-in”. According to the preamble of the regulation, the bad debt provisions have been reorganized and amended to incorporate longstanding agency guidance. New bad debt provisions add guidance on (1) how payments should be applied to determine the amount of bad debt, (2) clarify that payments on an account are applied to charges occurring first in time and are prorated between taxable and nontaxable charges, (3) explain requirements that the claimant must account for all payments and recoveries of a debt, (4) clarify that a bad debt refund must be made within four years from the date the account was claimed as a bad debt for federal income tax purposes, (5) provide guidance on how a person can seek a credit or refund for bad debts and repossessions, (6) make clear that the TX CPA requires an express assignment of the right to a refund of tax paid on a bad debt from the retailer or private label credit provider that transferred the bad debt accounts to the claimant, among other changes. Tex. Comp. of Pub. Acct., amended Tex. Admin. Code tit. 34, § 3.302 (46 TexReg 9410 Dec. 31, 2021).
West Virginia: New law (SB 1001) provides a sales and use tax exemption for qualified labor intensive heavy industrial manufacturing project certificate holders and construction contractors. The exemption applies to purchases of building materials, tangible personal property and services by a construction contractor (or subcontractor) or by an eligible certificate holder, used in the construction of qualified labor intensive heavy industrial manufacturing project facility (project facility) and any property, structure or facility location on or within the property boundaries of a project facility, or the outside property boundaries of a project facility but owned 50% or more by eligible certificate holders. This exemption applies to building materials and tangible personal property incorporated into certified project buildings and structures during construction, and to services used in construction of certified project buildings and structures. The exemption also applies to structures and facilities located outside the qualified property that are not used in manufacturing and may be ancillary, incidental, convenient or remote to the manufacturing activity. Purchases of services, materials and tangible personal property for repairs, maintenance and refurbishment of qualified property are also exempt from sales and use tax. The law took effect Jan. 11, 2022. W.Va. Acts 2022 (First Spec. Sess.), SB 1001 (enrolled version), signed by the governor on Jan. 12, 2022.
Federal: In Notice 2022-05 (Notice), the IRS further extended the deadlines for complying with the requirements under IRC § 42 for low-income housing tax credits. The Notice also extends other compliance deadlines, including those for qualified residential rental projects. Due to the continuing effects of the COVID-19 pandemic, the IRS said it was amplifying its Notice 2020-23, Notice 2020-53, Notice 2021-12, Notice 2021-17, Revenue Procedure 2004-39, Revenue Procedure 2014-49 and Revenue Procedure 2014-50 to give taxpayers more temporary relief. For more on this development, see Tax Alert 2022-0060.
West Virginia: New law (SB 1001) establishes the West Virginia Industrial Advancement Act to provide tax credits to promote the development of new, and the expansion, growth and revitalization of, labor and capital intensive heavy industry in West Virginia. The amount of the credit is equal to 50% of the qualified manufacturing investment for any eligible certificate holder at the time of certification and thereafter, for subsequent qualified manufacturing investment made in West Virginia in excess of the amount of the certification. The credit can be claimed against the state’s corporation net income tax (or similar tax) and the personal income tax, but it cannot reduce any such tax below zero. Unused credit can be carried forward until exhausted. Credit earned by one member of a combined group but not fully used by that member may be used by another member of the group. The law includes specific provisions for unused credit of a flow-through entity. Eligible certificate holders must apply for the credit; failure to timely file the credit application will result in the forfeiture of 5% of the annual credit allowed. In certain circumstances, unused credit may be forfeited or redetermined, if, during the tax year the property for which the credit has been allowed is disposed of or ceases to be used in the taxpayer’s industrial facility before the end of its useful life. Property will not be treated as disposed of by reason of any transfer or sale to a successor business or a mere change in the form of conducting the business if the property continues to be used in manufacturing in a West Virginia industrial facility. The law includes record retention and property identification requirements for those claiming the credit. The credit is effective for tax years beginning on and after Jan. 1, 2022. W.Va. Acts 2022 (First Spec. Sess.), SB 1001, signed by the governor on Jan. 12, 2022.
Connecticut: Reminder - The tax amnesty program currently being conducted by the Connecticut Department of Revenue Services (CT DRS) ends Jan.31, 2022. Amnesty applies to tax periods ending on or before Dec. 31, 2020. The CT DRS will waive penalties and 75% of the interest otherwise due and not pursue criminal prosecution for taxpayers that participate and comply with all the conditions of the amnesty program. The amnesty program applies to most taxes administered by the CT DRS, including the following: corporation business tax, sales and use tax, income tax (individual, estate and trust), pass-through entity tax, withholding tax and motor vehicle fuels tax. For more on the program, see Tax Alert 2021-2047.
COMPLIANCE & REPORTING
Maryland: The Office of the Comptroller of Maryland announced that it has automatically extended the 2021 individual income tax filing and payment deadline for returns due between Jan. 24, 2022 and April 18, 2022 to July 15, 2022. If a taxpayer needs an additional extension (e.g., to Oct. 17, 2022 (the full six-month extension from the originally filing deadline)), such request must be made by July 15, 2022. The extension only applies to individual income taxpayers. It does not apply to the deadline for making estimated tax payments nor does it change the filing and payment deadlines for corporate, pass-through entity and fiduciary income taxpayers. Md. Comp., Tax Alert “New Extended Deadline for Certain Maryland Tax Year 2021 Individual Income Tax Filings and Payments” (Jan. 19, 2022).
PAYROLL & EMPLOYMENT TAX
St. Louis, Missouri: In response to the COVID-19 emergency, the St. Louis Collector of Revenue announced in 2020 that employees who are working remotely in response to the COVID-19 emergency should be treated as working in their original place of work for purposes of the city's earnings tax. Accordingly, the Collector of Revenue instructed St. Louis employers to continue to withhold the earnings tax in the same manner as before employees were temporary relocated due to the COVID-19 emergency. Further, the Collector of Revenue reminded St. Louis employers that this special guidance (which was last updated on Oct. 7, 2021), continues to apply. For more on this development, see Tax Alert 2022-0098.
VALUE ADDED TAX
International – Italy: In Resolution No. 1 published on Jan. 3, 2022, the Italian Revenue Agency (ITA) has clarified that the net cash settlement payments made upon the execution of derivative contracts are exempt from Value Added Tax (VAT) under the Italian VAT Law, implementing Article 135.1b-f of the European Union (EU) VAT Directive. The Resolution supersedes the former ITA's official interpretation, provided in Resolution 77 of July 16, 1998, which stated that the net cash settlement payments were to be considered out of the VAT scope. The new ITA interpretation may have a significant impact on Italian taxpayers that apply the pro rata calculation to recover input VAT. For more on this development, see Tax Alert 2022-0107.
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 PTEs include partnerships, S corporations and LLCs treated as either.
2 As in other states, the distinction the New Jersey legislature made between electing S corporations and electing partnerships by not allowing the BAIT for resident S corporation shareholders to be determined on 100% of their distributive share of the S corporation’s income may have been due to a perception that to do so would violate the “single class of stock” requirement for valid S corporation elections for federal income tax purposes.
3 This provision appears to have been inserted to address concerns that BAIT tax overpayments by S corporations could not be recovered by shareholders or by the S corporation.
4 This provision relieves partnerships with New Jersey nonresident partners from having to make duplicate payments under the nonresident partner withholding law and the BAIT law.
5 Permitting consolidated filings by related PTEs is an unexpected development but may be advantageous to select taxpayers with tiered PTEs when details are released by NJ DOT.
6 See Conn. Gen. Stat. § 12-217(a)(4)(A).