March 4, 2022 State and Local Tax Weekly for February 25 Ernst & Young's State and Local Tax Weekly newsletter for February 25 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 bill would establish new unclaimed property voluntary compliance program Legislation (2022 CA AB 2280) introduced in the California Assembly on Feb. 16, 2022, would allow the California State Controller's Office (CA SCO) to establish a voluntary compliance program (VCP) for certain unclaimed property holders (Holders), allowing them to report past-due unclaimed property without having to pay interest. As currently proposed, the CA SCO, which administers the state's unclaimed property reporting law, would be authorized to waive interest for Holders that complete all VCP requirements.1 To be eligible to participate in the VCP, the Holder would have to:
The CA SCO would have the right to reinstate interest if the above conditions are not met. The VCP would not be available to all Holders. In addition to the typical conditions that preclude a Holder from participating in a voluntary disclosure agreement with most states (e.g., an ongoing or impending state audit or being the subject of civil or criminal prosecution related to unclaimed property compliance), a Holder would not be eligible to participate in the California VCP if it received an interest assessment from the CA SCO within the past five years that was waived or remains unpaid. In other words, any interest assessment imposed on a Holder by the CA SCO in the five years prior to applying to the VCP would negate the Holder's ability to enroll in the program. The proposal to enact a VCP should be welcome news for Holders who wish to come into compliance with California unclaimed property laws but have been dissuaded by the statutory 12% interest imposed on past-due property. In addition to imposing interest on audit assessments (including audits conducted by state-hired third-party audit firms), California, unlike other states, routinely issues interest assessments to Holders who discover past due unreported unclaimed property when filing their annual compliance reports. In addition to the introduction of the VCP, 2022 CA AB 2280 would amend provisions of California's unclaimed property law relating to third-party assistance in recovering unclaimed property. As presently proposed, the bill would invalidate an agreement with a third party to locate and recover unclaimed property if it requires the owner to pay the third party a fee before the claim is approved and the owner is paid. For additional information on this development, see Tax Alert 2022-0334. INCOME/FRANCHISE Iowa: Proposed bill (2022 IA HF 2087) would provide a "workaround" to the federal $10,000 state tax deduction cap similar to those enacted in other states by allowing pass-through entities to pay tax at the entity level for tax years ending on or after Dec. 31, 2022, but before tax years beginning on and after Jan. 1, 2026 (the date the cap on the federal state tax deduction is currently scheduled to expire). For more on this development, see Tax Alert 2022-0321. Ohio: New law (2022 OH HB 51) amends Ohio Rev. Code § 5701.11(A) to incorporate changes to the Internal Revenue Code taking effect after March 31, 2021 and before Feb. 17, 2022. The incorporated changes include those made by the federal Infrastructure Investment and Jobs Act (IIJA) enacted in Nov. 2021. These changes affect the tax base of taxpayers subject to Ohio individual income tax by adjusting federal adjusted gross income, which is the starting point for determining a taxpayer's Ohio taxable income. 2022 OH HB 51 articulates a clear legislative intent that the change to the Ohio conformity date is an emergency measure and is intended to "enable [Ohio] taxpayers to avoid making miscellaneous adjustments on their 2021 tax returns that increase costs of compliance" and therefore, "shall go into immediate effect." Ohio Laws 2022, HB 51, signed by the governor on Feb. 17, 2022. For more on this development, see Tax Alert 2022-0317. Virginia: New law (2022 VA HB 971) updates Virginia's date of conformity to the Internal Revenue Code (IRC) to Dec. 31, 2021 (from Dec. 31, 2020), but decouples Virginia's tax laws from certain provisions in the federal Consolidated Appropriations Act (P.L. 116-260) (CAA) and the federal American Rescue Plan Act (P.L. 117-2) (ARPA). For tax years beginning before Jan. 1, 2021, Virginia tax law decouples from the federal allowance of the deduction of business expenses paid with forgiven Paycheck Protection Program (PPP) loans, Economic Injury Disaster Loan (EIDL) funds, and Restaurant Revitalization grants. For tax years 2021 and thereafter, Virginia tax law will follow the federal treatment of expenses paid with funding from these federal programs. In addition, 2022 VA HB 971 retroactively extends to tax year 2019 the Virginia specific deduction for up to $100,000 in business expenses paid with forgiven PPP loan proceeds and the subtraction of up to $100,000 for Rebuild Virginia grant receipts. Under prior law, these Virginia specific modifications applied to tax year 2020. 2022 VA HB 971 took immediate effect. Va. Acts 2022, ch. 3 (2022 VA HB 971), signed by the governor on Feb. 23, 2022; see also Va. Dept. of Taxn., Tax Bulletin 22-1 "Important Information Regarding 2021 Virginia Income Tax Returns" (Feb. 23, 2022). West Virginia: New law (2022 WV SB 451) updates West Virginia's IRC conformity date for corporate net income tax purposes to federal changes made after Dec. 31, 2020 but prior to Jan. 1, 2022. (Prior to enactment of the new law, the IRC conformity date applied to federal changes made after Dec. 31, 2019 but prior to Jan. 1, 2021). No amendment to IRC made on or after Jan. 1, 2022, will be given any effect. This change is effective retroactive to the extent allowable under federal income tax law. W.Va. Laws 2022, SB 451, signed by the governor on Feb. 21, 2022. West Virginia: New law (2022 WV SB 450) for personal income tax purposes, updates the state's IRC conformity date to federal changes made after March 12, 2021 but prior to Jan. 1, 2022. (Prior to enactment of the new law, federal changes the IRC conformity date applied to federal changes made after Dec. 31, 2019 but prior to March 12, 2021.) No amendments to the IRC made on or after Jan. 1, 2022 will be given any effect. W.Va. Laws 2022, SB 450, signed by the governor on Feb. 21, 2022. SALES & USE Colorado: The Colorado Department of Revenue amended Rule 39-26-717 "Medical Material, Equipment, and Drugs" to remove the requirement that a prosthetic device be dispensed pursuant to a prescription order to qualify for the applicable sales and use tax exemption. As revised, a "prosthetic device" means "a replacement, corrective, or supportive device, including repair and replacement parts for such device, worn on or in the body to: (i) artificially replace a missing portion of the body; (ii) prevent or correct physical deformity or malfunction; or (iii) support a weak or deformed portion of the body." The amended rule was adopted on Feb. 3, 2022 and takes effect on March 17, 2022. New York: New law (2022 NY SB 7838) modifies recently enacted amendments to New York's taxation of, and fees applied to, peer-to-peer car sharing programs (P2P car sharing program). 2022 NY SB 7838 repeals the fees that were originally imposed on P2P car sharing programs under Article 29-D of the tax law (added by N.Y. Laws 2021, ch. 795 (2021 NY SB 6715)). In place of the fees, 2022 NY SB 7838 imposes a state-wide P2P tax, a metropolitan commuter transportation district (MCTD) tax, a regional transportation (RT) tax and a use tax on shared vehicle drivers. The state-wide P2P tax, MCTD tax and RT tax taxes are equal to 3% of the gross receipts paid by the shared vehicle driver for use of the shared vehicle when the transfer or possession of the vehicle to the driver occurs: (1) in New York (the state-wide P2P tax); (2) in the metropolitan commuter transportation district (for MCTD tax); and (3) anywhere in the state outside of MCTD as established by N.Y. Pub. Auth. Law §1262 (for the RT tax). Except to the extent that the transfer of a shared vehicle has already (or will be) subject to the state-wide P2P, the MCTD tax or the RT tax and except as otherwise exempted, a use tax is imposed on every shared vehicle driver for the use within New York of the shared vehicle by the shared vehicle driver. The use tax equals 3% of the gross receipts paid or contracted to be paid for the shared vehicle. The P2P car sharing program administrator is required to collect the tax from the shared vehicle driver. To prevent evasion of the P2P taxes, it is presumed that every transfer of possession of a shared vehicle to a shared vehicle driver anywhere in New York is subject to tax. The person liable for the tax can overcome the presumption by proving the contrary. The law sets forth procedures for filing returns and paying the P2P taxes as well as record retention requirements. The special tax on passenger car rentals and the special supplemental taxes on passenger car rentals within and outside of MCTD do not apply to P2P car sharing programs. N.Y. Laws 2022, ch. 129 (2022 NY SB 7838), signed by the governor on Feb. 24, 2022. Texas: In reversing a district court ruling, a Texas Court of Appeals (Tex. Ct. App.) held that loan packaging services purchased by a law firm are subject to the state's sales tax as data processing services and not tax exempt legal services. In so holding, the Tex. Ct. App. rejected the law firm's argument that Tex. Tax Code §151.0035(a)(1) and 34 Tex. Admin. Code §3.330(a)(1) (TX Rule 3.330), when read in conjunction, establish a two-part test for determining whether a service is taxable data processing, such that data-processing services consist of (1) enumerated activities classified as data processing that (2) are performed "for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information." The Tex. Ct. App. found that TX Rule 3.330 does not create a two-part test for data processing; rather, "the first sentence defines data processing as a class of activities while the second defines some, but not all, activities included in that class." The Tex. Ct. App. noted that "[n]othing limits data processing only to the enumerated activities. Nor does it create a distinct 'purpose' prong that must be satisfied in every case." Turning to the purchased services, the Tex. Ct. App. determined that the law firm paid vendors to collect and manipulate data and return it according to the firm's instructions and that based on the contracts and surrounding legal context the vendors do not provide a service that requires the use of legal skill or knowledge. Ultimately, the Tex. Ct. App. concluded that the "essence of the transactions" is the provision of taxable data-processing services. Hegar v. Black, Mann, and Graham, L.L.P., No. 03-20-00391-CV (Tex. Ct. App., 3rd Dist., Feb. 25, 2022). BUSINESS INCENTIVES Colorado: The Colorado Department of Revenue adopted new Rule 39-30-105.1 "Enterprise Zone Business Facility Employee Credits" to clarify the calculation of enterprise zone business facility employee credits. The new rule provides for (1) the method of calculating business facility employees, including when the business facility is in operation for less than the entire tax year and when the tax year is less than 12 months; (2) calculating the number of eligible employees for current and prior tax years; (3) calculating the credit for the business facility's first year of operation and determining the credit in subsequent tax years, including when a taxpayer acquires a business facility that was operated by another party before the acquisition and continues operating the facility in a substantially similar revenue-producing enterprise; and (4) specific additional credits (i.e., credits for business facilities in enhanced rural enterprise zones and business facilities that add value to agricultural commodities through manufacturing or processing and credits for employee health insurance). When the duties of a business facility employee are not performed in connection with the operation of the facility or are performed outside of the enterprise zone, the employee is included in the calculation to the extent the duties were performed in connection with operation of the facility and within the enterprise zone. Such employee, however, will be fully included in the business facility's calculation of the number of employees if the employee customarily performs duties within the zone and in connection with the facility for at least 20 hours per week throughout the tax year, regardless of whether the employee performs duties unconnected with the facility or outside of the enterprise zone. The rule describes when an employee's duties are performed in connection with the operation of the business facility, including specific provisions for an employee who is a licensed commercial driver whose primary duties consist of operating a commercial motor vehicle. The amended rule was adopted on Feb. 3, 2022 and takes effect on March 30, 2022. PROPERTY TAX Colorado: The Colorado Supreme Court (CO S.Ct.) reversed the Colorado Court of Appeals and held that net income generated from fees paid by condominium owners to a third-party company that manages the rental of their condominiums, which are individually and separately owned but located within the resort property, is not included in the resort's actual (i.e., market) value under the income approach valuation method because the income was not generated by the resort. In so holding, the CO S.Ct. said the resort and the condominiums are legally separate and distinct parcels of real property and, as such, these properties must be separately appraised and valued and the rental income generated by the condominiums cannot be assigned to the resort. The CO S.Ct. next considered whether the rental management income of the third-party management company, which also is a subsidiary of the resort owner, was generated by the condominiums or by the resort. In finding the income was generated by the condominiums, the CO S.Ct. determined that: (1) the condominiums' owners' payment to the management company for its rental management services does not change the fact that the income at issue was derived from the rental of the condominiums; (2) the management company's rental management income is from management services, paid out of rental income generated by the condominiums, and not from an interest in (or use of) the resort's real property; and (3) the rental management agreements are not contracts for the use of the resort's real property and amenities. Lodge Properties, Inc. and Board of Assessment Appeals v. Eagle Cnty. Bd. of Assessment Appeals, No. 2022 CO 9 (Colo. S.Ct. Feb. 22, 2022). COMPLIANCE & REPORTING Iowa: The Iowa Department of Revenue issued guidance for Iowa pass-through entities (PTEs) that must file composite tax returns and pay Iowa income or franchise tax on behalf of nonresident members with Iowa-source income from the PTE. For tax years 2022 and later, PTEs must file composite tax returns on behalf of their nonresident members and pay Iowa income or franchise tax on those members' Iowa-source income from the PTE. The former PTE withholding tax on Iowa-sourced distributive share income is eliminated. PTEs, however, must still withhold and remit Iowa income tax, using a valid withholding permit, on income paid to a nonresident who is not an investor in the PTE. For more on this development, see Tax Alert 2022-0321. Maryland: The Office of the Comptroller of Maryland announced that it will automatically extend the deadline for making the first and second quarter 2022 individual income tax estimated tax payments to July 15, 2022. This extension of time to make the estimated tax payment only applies to individuals; it does not apply to pass-through entities or corporations. Md. Comp., News Release "Comptroller Franchot Extends Filing and Payment Deadline for Quarterly Estimated Tax Filers to July 15" (Feb. 23, 2022). PAYROLL & EMPLOYMENT TAX Nebraska: The 2022 Nebraska combined state unemployment insurance (SUI) tax rates continue to range from 0.0% to 5.4%, with rates within the table remaining the same or decreasing by as much as 0.03%. New non-construction employers continue to pay at 1.25% and new construction employers at 5.4%. For calendar year 2022, Nebraska's average combined SUI tax rate is 0.49%, a reduction of 0.01% compared to the average 2021 combined rate of 0.50%. For more on this development, see Tax Alert 2022-0319. Washington: New law (2022 WA HB 1732 and 2022 WA HB 1733) modifies the Washington long-term care insurance program by delaying collection of employee premiums from Jan. 1, 2022 to July 1, 2023 and the receipt of benefits from Jan. 1, 2025 toJuly 1, 2026. For additional information on this development, see Tax Alert 2022-2023. West Virginia: On Feb. 17, 2022, Workforce West Virginia announced that the 2022 state unemployment insurance (SUI) taxable wage base will decrease from $12,000 to $9,000. Under current law, the wage base is lowered from $12,000 to $9,000 if the state's unemployment trust fund is at least $220 million on February 15 of any year. As of February 15, 2022, the amount in the unemployment fund exceeded $220 million, therefore triggering the decrease in the wage base for 2022. For additional information on this development, see Tax Alert 2022-0299. UNCLAIMED PROPERTY Wisconsin: The Wisconsin Department of Revenue (WI DOR) announced that an unclaimed property voluntary disclosure program (VDP) will run from Feb. 1, 2022 through Feb. 28, 2023. Under the VDP, the WI DOR said it will accept property from the previous five years without assessing penalties. Once a VDP application is approved, the holder will have 120 days to complete the due diligence process and submit the holder report and payment. Holders that meet all of the following are eligible to participate in the VDP: (1) have unclaimed property to report from any of the five most recent reporting periods; (2) have not been audited for unclaimed property since July 1, 2016 or received an upcoming audit notice; and (3) do not have a balance due on their unclaimed property holder account. Additional information on the VDP, including agreement and filing requirements, is available on the WI DOR unclaimed property voluntary disclosure webpage. 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 2022 CA AB 2280 includes proposed amendments to Cal. Code of Civil Proc. § 1577. 2 Specifically, Cal. Code of Civil Proc. § 1530(b), (c) and (e). 3 Cal. Code of Civil Proc. § 1532. | ||||
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