February 22, 2022 State and Local Tax Weekly for February 11 Ernst & Young's State and Local Tax Weekly newsletter for February 11 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. TOP STORIES California governor signs bill restoring NOLs and R&D credits for 2022, modifies elective pass-through entity tax On Feb. 9, 2022, California Governor Newsom signed into law Cal. Laws 2022, ch. 3 (2022 CA SB 113) (SB 113), which includes business tax law changes that were part of the governor's 2022-23 budget proposal. The new law shortens the previously enacted suspension on the use of net operating losses (NOLs) and prior limits on the use of business tax credits, including the research and development (R&D) credit. Under Cal. Laws 2020, ch. 8 (2020 CA AB 85), which was enacted as a fiscal response to economic impact of the initial COVID-19 pandemic restrictions, the NOL suspension applied to California taxpayers with net business income of $1 million or more and the amount of business tax credits that could be used in a year was limited to $5 million for the tax years 2020, 2021 and 2022. SB 113 restores NOLs and removes the limitation on the use of business tax credits for the 2022 tax year.1 In addition to the R&D credit, other credits for which the limitations have been removed include the jobs tax credit, the California competes credit, motion picture production credits (including the motion picture production credits as applied to California sales and use tax), and insurance tax credits. SB 113 also modifies the state's elective pass-through entity (PTE) tax law by:
SB 113 conforms California's income tax treatment of payments from the federal Restaurant Revitalization Fund and grants from the federal Shuttered Venue Operators Grant program to the federal income tax treatment of these payments. Thus, these payments are excluded from gross income and taxpayers may deduct business expenses paid with these funds (except for taxpayers that are "ineligible entities").2 SB 113 appropriates $150 million in funding for remaining eligible waitlisted applicants for the California Small Business COVID-19 Relief Grant Program. For more on this development, see Tax Alert 2022-0235. Governors' budget proposals from throughout the US include tax relief measures and other tax changes With 2022 underway, governors across the country have delivered their state-of-the-state addresses and presented proposed budgets for the upcoming fiscal year (collectively, "proposals"). As in prior years, many of these proposals include state tax law changes. With states reporting revenues exceeding previous estimates due both to surprisingly robust tax receipts and the benefits of federal funding in response to the COVID-19 pandemic, the proposals' overarching theme thus far appears to be providing tax relief to both individuals and businesses. This relief includes cutting income tax rates, eliminating certain taxes and providing one-time rebates to taxpayers, as well as targeted tax credits and incentives to support business development. In addition to tax relief, governors of California, Indiana, Massachusetts and Pennsylvania have recommended tax changes that will be of keen interest to businesses. Tax Alert 2022-0245 provides a summary of many of these governors' proposals. INCOME/FRANCHISE Montana: An out-of-state S corporation that operated a multistate media and publishing business through various subsidiaries, including a Montana limited liability company taxed as a partnership for federal and state purposes (Montana subsidiary), is allowed to apportion its income based on three-factor apportionment set out in the Multistate Tax Compact (Compact). In so holding, the Montana Tax Appeals Board (MT TAB) rejected the Montana Department of Revenue's (MT DOR) argument that the Compact does not apply based on the MT DOR's position that the S corporation is not a taxpayer "subject to" an income tax. The MT TAB found that the S corporation and its owners fall within the Compact's definition of "taxpayer", which includes "any" person or corporation, and it "decline[d] to narrowly read Mont. Code Ann. § 15-30-3302(1) in such a way as to preclude S corporations from apportioning their income under the Compact." Additionally, the MT TAB determined that both the individual income tax and the composite tax (which the S Corporation paid to Montana on behalf of participating owners), fall within the definition of "income tax" under the Compact. The MT TAB reasoned that the "subject to" income tax requirement is met because the "income tax" is due regardless of whether the S corporation is responsible for paying the composite tax on behalf of its owners or its owners are ultimately responsible for paying tax individually. The MT TAB also rejected the MT DOR's argument that because the taxpayers in the case are pass-through entities, Mont. Admin. Rule (ARM) 42.9.107 requires the S corporation allocate income it received from the Montana subsidiary to Montana. The MT TAB found this argument "fails to consider that electing to apportion and allocate under the Compact is an alternative to apportioning and allocating under other Montana state law," noting that ARM 42.15.120 (as in effect during the audit period) provided that the reporting requirements in ARM 42.9.07 were in addition to, and not in lieu of, the rules referred to in the Compact. Further, the MT TAB determined that the S corporation operated a unitary business and, as such, was entitled to apportion its income from its subsidiaries and, that in this instance, ARM 42.9.107 is not applicable. Pioneer News Group, Inc. and Subsidiaries v. Montana Dept. of Rev., No. IT-2020-40 (Mont. Tax App. Bd. Jan. 20, 2022). Philadelphia, PA: The Philadelphia (Pennsylvania) Department of Revenue (PDOR) posted responses to frequently asked questions regarding the expiration of the city's temporary nexus waiver on June 30, 2021. The PDOR explained that for Business Income and Receipts Tax (BIRT) purposes if an out-of-city business has Philadelphia resident employees working in the city after the expiration of the nexus waiver, the activities of the resident employees will create nexus for the business in 2021. The PDOR said the determination of what constitutes a "remote workforce" in Philadelphia is based on facts and circumstances, and that it will consider the company's remote work arrangement policies and the nature and regularity of business activity in the city. In terms of P.L. 86-272 protection, the PDOR said that it applies to the net income portion of the BIRT and not to the gross receipts portion of the BIRT. The PDOR also explained that a taxpayer will be presumed to have nexus for purposes of the city's net profits tax if it meets the BIRT's economic nexus standard. Philadelphia Dept. of Rev., "Frequently Asked Questions Regarding the Expiration of Philadelphia's Temporary Nexus Waiver" (Feb. 10, 2022). South Dakota: New law (HB 1010) updates the South Dakota bank franchise tax date of conformity to the Internal Revenue Code to Jan. 1, 2022 (from Jan. 1, 2021). This change takes effect July 1, 2022. S.D. Laws 2022, HB 1010, signed by the governor on Feb. 10, 2022. Utah: New law (SB 59) reduces the rates of the corporate franchise and income tax and the individual income tax to 4.85% (from 4.95%). The law also expands eligibility for the nonrefundable tax credit for social security benefits and establishes a nonrefundable earned income tax credit. These changes are retroactively effective for tax years beginning on or after Jan. 1, 2022. Utah Laws 2022, SB 59, signed by the governor on Feb. 11, 2022. SALES & USE Minnesota: The Minnesota Department of Revenue said that COVID-19 at-home test kits are subject to sales and use tax unless an exemption applies. An exemption applies to COVID-19 test administered under the supervision of a health care professional and billed through health care insurance. COVID-19 at-home test kits that provide results are taxable, but at-home kits that require the test to be sent to a lab to perform an analysis are not taxable. COVID-19 test kits purchased by schools (public and private) are exempt from tax. Minn. Dept. of Rev., "COVID-19 At-Home Test Kits" (Feb. 4, 2022). Ohio: The Ohio Department of Taxation adopted Ohio Admin. Code Rule 5703-9-63 to provide guidance on the sales and use tax exemption for purchases of tangible personal property for direct use or consumption in the production of crude oil and natural gas for sale. The rule defines "production" as "operations and tangible personal property directly used to: expose and evaluate an underground reservoir that may contain hydrocarbon resources; prepare the wellbore for production; and lift and control all substances yielded by the reservoir to the surface of the earth." The rule also applies to persons engaged directly in rendering services in the exploration for and production of crude oil and natural gas for others. In determining whether an item qualifies for the exemption, how the item is used or consumed will be reviewed. The rule includes a non-exhaustive list of items and examples of different scenarios applicable to an exemption analysis (e.g., tangible personal property used in providing services related to the production of crude oil and natural gas for sale, equipment used in the production of crude oil and natural gas for sale, repair and installation services, lease or rental of tangible personal property without an operator). The rule took effect Feb. 10, 2022. BUSINESS INCENTIVES California: The California Film Commission (CA FC) has announced application deadlines for the next film and TV tax credit program - Program 3.0. For recurring and relocating 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. Another application period will run from June 13 to15, 2022, with phase II running from June 16 to 20, 2022. The approval date for these applications is July 18, 2022. The CA FC said that an eligible relocating TV series will qualify if it meets the following definition: "A television series without regard to episode length or initial media exhibition, with a minimum production budget of [$1 million] per episode, that filmed at least 75% of principal photography days in its most recent season outside of California or has filmed all seasons outside of California and for which the taxpayer certifies that the credit is the primary reason for relocating to California." For the June application period, the definition is modified to also provide that an eligible relocating TV series may not have filmed more than 25% of principal photography days for any episode in California. The CA FC said it will determine in May 2022 whether credit applications for new TV series will be accepted during the June application period. For independent and non-independent feature films, the next application period runs from July 18 to20, 2022, with phase II running from July 21 to 25, 2022. The approval date for these applications is Aug. 22, 2022. Minnesota: The Minnesota Department of Revenue (MN DOR) said a mining company subject to the Occupation Tax (under Minn. Stat. §298.01) can claim the credit for increasing research activities under Minn. Stat. §290.068 (research credit) against the Occupation Tax. The research credit can be claimed against tax computed under Minn. Stat. chapter 290 (the corporate franchise tax) when the credit's requirements are met. The MN DOR position is that since the Occupation Tax imposed expressly provides that it is determined in the same manner as the corporate franchise tax, the research credit can be claimed against the Occupation Tax when the credit's requirements are met. Minn. Dept. of Rev., Revenue Notice #22-01: Mining Companies — Occupation Tax — Credit for Increasing Research Activities (Jan. 31, 2022). PAYROLL & EMPLOYMENT TAX Indiana: The Indiana Department of Revenue has updated Department Notice #1 to show the county income tax rates that apply effective Jan. 1, 2022, reflecting income tax increases in the following counties: (1) Cass County: 0.0295 (increased from 0.027); (2) Madison County: 0.0225 (increased from 0.0175); (3) Randolph County: 0.03 (increased from 0.025). Employers are instructed to withhold county tax based on the employee's Indiana county of residence as of January 1 of the tax year. If employees reside outside of the state of Indiana on January 1, but their principal place of work or business is within an Indiana county as of January 1, the employer should withhold for the Indiana county of the employee's principal place of work or business. For more on this development, see Tax Alert 2022-0233. Massachusetts: The Massachusetts Department of Revenue announced in TIR-22-2 that because the commonwealth's personal income tax law generally conforms to the federal Internal Revenue Code (IRC) as of Jan. 1, 2005, several fringe benefits temporarily excluded from federal income tax due to COVID-19 are not exempt for Massachusetts personal income tax and withholding purposes. Consequently, certain provisions of the federal Coronavirus Aid, Relief, and Economic Security Act, (CARES Act), the COVID-Related Tax Relief Act of 2020 (CTRA), the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA), and the American Rescue Plan Act of 2021 (ARPA) providing relief may not apply for Massachusetts personal income tax and withholding purposes. For more on this development, see Tax Alert 2022-0228. MISCELLANEOUS TAX Maine: The Maine Revenue Service (MRS) adopted Rule 210 to provide an overview of the excise tax imposed on telecommunications businesses. An excise tax is imposed on all qualified telecommunications equipment located in Maine; the tax rate equals the mill rate of the municipality in which the equipment is located. The MRS is responsible for assessing tax on such equipment owned or leased by a telecommunications business. If the equipment is not owned or leased by a telecommunications company, the assessment will be made by the assessor of the municipality in which the equipment is located. Equipment subject to this excise tax is exempt from municipal property tax. The rule defines key terms (e.g., "certified ratio", "distribution facilities", "just value", "qualified telecommunications equipment", "mill rate"), and explains (1) how the MRS will determine the just value (i.e., market value) of the property owned or leased by a telecommunications business subject to the excise tax; (2) how tax and interest will be applied; (3) the filing and payment requirements; and (4) the process for appealing an assessment. Maine Rev. Serv., Rule 210 (effective Feb. 13, 2022). UNCLAIMED PROPERTY California: Effective Jan. 1, 2022 and under a new law adopted in 2021, California business tax filers must disclose their compliance with the state's unclaimed property reporting requirements on their 2021 California business tax returns.3 Additionally, the new law allows the California Franchise Tax Board (FTB) to share information collected from business tax returns with the California State Controller's Office (Controller) which is responsible for the administration of California's unclaimed property laws. This information includes whether a taxpayer previously filed an unclaimed property report and, if so, the date the most recent report was filed and the amount that was remitted to the state. Specifically, the questions on the 2021 FTB Form 100, "California Corporation Franchise or Income Tax Return," 2021 FTB Form 565, "Partnership Return of Income," and on the 2021 FTB Form 568, "Limited Liability Company Return of Income", are: Has this business entity previously filed an unclaimed property Holder Remit Report with the State Controller's Office? [Yes/No]; If "Yes," when was the last report filed? [mm/dd/yyyy]; Amount last remitted? Under the new law, the Controller can only disclose unclaimed property information from business tax returns to (1) locate the unclaimed property's owner, or (2) determine compliance with the state's unclaimed property reporting requirements. For more on this development, see Tax Alert 2022-0244. VALUE ADDED TAX International — Ghana: The Commissioner-General (CG) of the Ghana Revenue Authority (GRA), the officer responsible for the administration of the tax laws, has issued administrative guidelines on the application and administration of the Value Added Tax (VAT) (Amendment) Act, 2021, Act 1072, which was enacted pursuant to the tax measures introduced by the Government in the 2022 Budget Statement and Economic Policy to raise revenue to support the financial sector reforms and for other matters. For more on this development, see Tax Alert 2022-0212. UPCOMING WEBCASTS 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 SB 113 restores NOL and credit utilization by amending the relevant language in Cal. Rev. and Taxn. Code §§ 23036.3 and 24416.23 from "beginning on or after January 1, 2020, and before January 1, 2023" to "beginning on or after January 1, 2020, and before January 1, 2022." 2 An "ineligible entity" is defined as a publicly traded company or a taxpayer that did not experience at least a 25% reduction in gross receipts from the applicable quarter in 2019. 3 Cal. Laws 2021, ch. 92 (2021 AB 466), enacted July 16, 2021. | ||||
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