February 7, 2022
State and Local Tax Weekly for January 28
Ernst & Young's State and Local Tax Weekly newsletter for January 28 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.
California governor proposes to restore NOLs and R&D credits for 2022
On Jan. 25, 2022, California Governor Newsom and legislative leaders announced they reached an agreement that would support businesses impacted by the ongoing COVID-19 pandemic. The agreed to framework calls for the shortening, by one tax year, of a prior suspension of net operating losses (NOLs) for tax years tax years 2020 through 2022 and prior limits on the use of business tax credits, including the research and development (R&D) credit, for the same period. Other agreed-to actions include relief for restaurants and shuttered venues that received federal relief grants and additional funds for the Small Business Covid-19 Relief Grant Program.
The Governor's announcement describes these agreements as “[e]arly budget actions,” although a timeline for these actions was not specified.
Governor's budget proposal
On Jan. 10, 2022, Governor Newsom released his 2022-23 budget proposal. A key tax law change would restore, one year earlier than under current law, NOLs and business tax credits that were suspended or limited beginning in 2020 to combat the pandemic's anticipated effects on the state budget. For tax years 2020, 2021 and 2022, 2020 CA AB 85 (Cal. Laws 2020, ch. 8) suspended the use of NOLs for California taxpayers with net business income of $1 million or more and limited the use of business tax credits to $5 million in any one year. (See Tax Alert 2020-1691.) The Governor's 2022-23 budget proposal recommends restoring the NOLs and business tax credits in the 2022 tax year. After the governor's January 25 announcement, the Legislature amended AB 87 and SB 113 to include these proposed changes.
Other tax law changes in the Governor's 2022-23 budget proposal would:
Changes to the Governor's budget proposals based on the latest economic forecasts will be released in May 2022. The Legislature is required under the California Constitution to pass the budget bill by midnight on June 15, 2022.
Massachusetts: The Massachusetts Appellate Tax Board (MA ATB) determined that a corporation whose engineers created, modified, improved and oversaw the development and production of standardized software products that were provided to its customers through the software as a service model was engaged in manufacturing in Massachusetts and that such manufacturing activity was substantial. In so holding, the MA ATB explained that the sale of standardized computer software occurs without regard to how it is delivered. Because the corporation both developed and sold standardized computer software and since its manufacturing activities were “substantial”, the corporation should be characterized as a manufacturing corporation for tax years 2010-2012 under Mass. G.L. c. 63 §§ 38 and 42B, and for 2017 and 2018 under Mass. G.L. c. 58 § 2 and c. 63 §42B. Accordingly, the corporation, as a manufacturing corporation, is required to apportion its income using the single sales factor method, can claim the investment tax credit as it was substantially engaged in manufacturing in Massachusetts, and is entitled to a tax refund. Akamai Technologies, Inc. v. Massachusetts Comm. of Rev. and Board of Assessors of The City of Cambridge, Intervenor, Dkt. Nos. C332360, C334907 and C336909 (Mass. App. Tax Bd. Dec. 10, 2021).
New Jersey: The New Jersey Division of Taxation (NJ DOT) issued guidance in response to the ruling in Shechtel3 by the Appellate Division of the New Jersey Superior Court that an individual could reduce his taxable distributive share of a partnership's income in 2010 by partnership losses incurred in 2009 because the New Jersey Gross Income Tax (GIT) Act did not bar him from applying his losses as required by the "at risk" limitation rules set forth in IRC §465. The NJ DOT said this decision applies to partners in partnerships and sole proprietors, but it does not apply to S corporation shareholders. The NJ DOT explained that N.J.S.A 54A:5-12 provides specific language limiting shareholders’ losses. In addition, a taxpayer may not use a loss following the “at-risk” rules if they have previously used the loss for NJ GIT purposes. According to the NJ DOT guidance, refund claims must be filed within three years from the original due date of the returns or two years from the date the tax was paid, whichever is later. Lastly, the NJ DOT said it is considering issuing a proposed regulation on this issue. N.J. Div. of Taxn., “Guidance pursuant to the Superior Court of New Jersey Appellate Division decision, September 3, 2020, in Andrew J. Shechtel v. Director, Division of Taxation, 32 N.J. Tax 180 (App. Div. 2020)” (last updated Jan. 19, 2022).
SALES & USE
District of Columbia: The District of Columbia Office of Tax and Revenue (DC OTR) issued a notice stating that purchases of at-home COVID-19 tests are exempt from the District’s sales and use tax and that “[r]etail businesses should no longer add a sales tax to at-home COVID tests purchasers.” D.C. Off. Tax and Rev., OTR Tax Notice 2022-02 “Sales Tax Exemption for At-Home COVID-19 Tests” (Jan. 24, 2022).
Tennessee: In response to a ruling request, the Tennessee Department of Revenue (TN DOR) said that a plant where raw materials are mined (Plant A) could qualify for the state’s sales and use tax industrial machinery exemption. The TN DOR had issued a sales and use tax industrial machinery exemption to a separate plant where the taxpayer processed and manufactured the raw materials into a finished product (Plant B). The taxpayer asked if Plant A also qualified for the exemption. The TN DOR explained that under Tennessee case law, “courts have long held that equipment, machinery, and materials used to mine/extract materials may qualify as industrial machinery.” To obtain the exemption, the taxpayer must: (1) ensure that Plant A is a registered location for sales and use tax purposes; and (2) complete and submit the Application for Industrial Machinery, Energy Fuels and Water Sales and Use Tax Exemption to the TN DOR. The TN DOR noted that taxpayers with multiple locations in the state must separately register each location for sales and use tax, and each location must separately apply for the exemption, even if the multiple locations are part of the same manufacturing process. Tenn. Dept. of Rev., Revenue Ruling #21-12 (Dec. 20, 2021).
Texas: A Texas Court of Appeals (Tex. Ct. App.) reversed a trial court decision and held that a cash register tape manufacturer’s purchases of electricity used to print third-party advertising on the reverse side of register tapes is exempt from sales tax because this printing activity qualifies as manufacturing under Tex.Tax Code§151.318. In so holding, the Tex. Ct. App. found that “Section 151.318(t) unambiguously provides that the imprinting of tangible personal property for sale is manufacturing,“ and it agreed with the manufacturer “that the statute does not make a distinction about the type of content that may be printed on the tangible personal property.” The Tex. Ct. App. also found that the manufacturer established that “its equipment was ‘necessary and essential’ to the actual manufacture of the registration tapes it sold” to its customers, and that more than 50% of the electrical consumption at the plant at issue was used for the manufacturing of the register tapes. Accordingly, the manufacturer is entitled to a refund of sales tax paid on electricity purchased for use at the plant during the tax periods at issue. RTU, Inc. v. Hegar, No. 07-20-00301-CV (Tex. Ct. App., 7th Dist., Jan.3, 2022).
Michigan: New law (HB 5506) provides that a new industrial facilities exemption certificate cannot be approved after Dec. 30, 2021 for any personal property that qualified as eligible manufacturing personal property. The new law took immediate effect. Mich.Laws 2021, PA 157 (2021 MI HB 5506), signed by the governor on Dec. 27, 2021.
Michigan: New law (HB 5502) provides that starting in 2023 the exemption granted under the General Property Tax Act for qualified new personal property will remain in effect until the personal property is no longer qualified new personal property. A person claiming the exemption will rescind the claim of exemption by February 20 (a change from December 31) of the year in which the property is no longer eligible for the exemption. If a person fails to timely file a rescission for property later determined to be ineligible for the exemption, they will be subject to repayment of any additional tax and interest. Mich. Laws 2021, PA 153 (2021 MI HB 5502), signed by the governor on Dec.27, 2021.
New Jersey: New law (A.862) provides that when a taxpayer is successful in an appeal from an assessment on real property, the municipality in certain circumstances may refund excess property taxes paid on nonresident real property as a tax credit. In the case of nonresidential real property, a municipality may refund the amount owed to the taxpayer in substantially equal payments within three years of the final judgement or, when the amount at issue exceeds $100,000, it can refund the amount as a credit against the balance of property taxes that become due and payable on such property immediately following the county Board of Taxation’s decision or Tax Court judgement. If the excess amount has not been fully refunded to the taxpayers after three years, the remaining excess amount will be immediately refunded to the taxpayer. A refund, however, must be paid within 60 days if (1) the dollar amount of the refund relating to nonresidential real property does not exceed $100,000, or (2) the real property is residential. These provisions took immediate effect. N.J. Laws 2021, P.L. 2021, ch. 432 (A.862), signed by the governor on Jan. 18, 2022.
PAYROLL & EMPLOYMENT TAX
South Carolina: The South Carolina Department of Revenue announced in SC Information Letter #21-31 that it is extending to March 31, 2022 the temporary relief from the assertion of nexus and income tax withholding for employees working from home temporarily within and outside of the state due to the COVID-19 emergency. For more on this development, see Tax Alert 2022-0142.
Wisconsin: The Wisconsin Department of Revenue announced that the temporary nexus and income tax relief for COVID-19 explained in Tax Bulletin #211 expires effective Jan. 1, 2022. For more on this development, see Tax Alert 2022-0134.
Washington: The U.S. Supreme Court is being asked to review the Washington Supreme Court ruling upholding the constitutionality of the additional 1.2% Washington business and occupation (B&O) tax rate imposed on specified financial institutions under Wash. 2019 Laws, ch. 420 (2019 Wash. Sub. HB 2167). Specifically, the additional tax is imposed on a financial institution that is a member of a consolidated financial institution group that reported on its consolidated financial statement for the prior calendar year annual net income of at least $1 billion (income threshold), not including net income attributable to noncontrolling interests. The question presented to the Court is: “Does a law that is triggered by a proxy for participating in interstate commerce and that burdens out of-state entities almost exclusively violate the dormant Commerce Clause.” Washington Bankers Association et al v. Washington, No. 98760-2 (Wash. S.Ct. Sept. 30, 2021), petition for cert. filed, Dkt. No. 21-1066 (filed U.S. S.Ct. Jan. 28, 2022).
Wednesday, Feb.23, 2022. Domestic tax quarterly webcast series: a focus on state tax matters. (1:00–2:30 p.m. EST; 10:00–11:30 a.m. PST). For our first quarterly webcast in 2022, we welcome Joe Crosby, CEO of MultiState, a full-service state and local government relations company, who will join us to discuss important state and local tax policy considerations that are emerging in 2022. Topics will include: state and local tax legislative proposals and trends, the upcoming federal midterm and state elections, the continuing impact of the COVID-19 pandemic on state and local tax revenues, and the effects of current economic trends and federal tax developments on state and local taxes and policy developments. EY state and local tax professionals from around the country will join in these discussions, bringing unique insights from each region. They’ll also highlight key state and local judicial, legislative and administrative developments from the past quarter and hot audit issues taxpayers and their advisors should consider as they prepare for a busy tax season. To register for this event, go to State tax matters.
Wednesday, March 2, 2022. The indirect tax technology journey. (1:00–2:00 p.m. EST; 10:00–11:00 a.m. PST). Join our EY team of tax technology professionals for the fourth in a series of webcasts focused on the evolving technology landscape. During these 60-minute webcasts, we 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 fourth webcast in the series will focus on: leading practices for developing and implementing a tax technology road map, the role of Tax in large global transformations, leading practices for selecting the right technology, and successful implementation and maintenance of indirect tax technology. To register for this event, go to Indirect tax technology.
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 The budget proposal recommends enacting this change to assist businesses with their 2021 tax liabilities before the March 15, 2022 tax filing and payment deadline for certain business entity filers.
2 The budget proposal recommends enacting this change to assist businesses with their 2021 tax liabilities before the March 15, 2022 tax filing and payment deadline for certain business entity filers.
3 Shechtel v. N.J. Dir., Div. of Taxn., No. A-0252-18T1 (N.J. Super. Ct., App. Div., Sept. 3, 2020) (unpublished).