April 7, 2022
State and Local Tax Weekly for March 25
Ernst & Young's State and Local Tax Weekly newsletter for March 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.
California Franchise Tax Board issues ruling on assigning gross receipts from sales of services to business entities
In its Legal Ruling 2022-01, the California Franchise Tax Board (CA FTB) sets forth the "relevant considerations and proper analysis" that should be used to determine how to assign gross receipts from the sale of services to business entities under California Code of Regulations, title 18, section 25136-2 (Regulation 25136-2) for the purpose of the state's market-based sourcing rules (CA FTB Legal Ruling 2022-01). CA FTB Legal Ruling 2022-01 supersedes any prior CA FTB guidance to the extent there is a conflict and specifically revokes CA FTB Chief Counsel Rulings 2015-03 and 2017-01.
CA FTB Legal Ruling 2022-01 comes just as the CA FTB is entering the formal regulatory process on its second round of amendments to Regulation 25136-2 (see Tax Alert 2021-1167). While the proposed amendments to Regulation 25136-2 would apply to tax years beginning on or after Jan. 1, 2023, CA FTB Legal Ruling 2022-01 reflects the CA FTB's interpretation of the current version of Regulation 25136-2. With the revocation of its two prior Chief Counsel Rulings, the CA FTB's interpretation of the current version of Regulation 25136-2 with respect to the sale of services to business entities has changed.
In CA FTB Legal Ruling 2022-01, the CA FTB lists four questions to answer when applying Regulation 25136-2 to determine where to assign sales of services:
Once these questions are answered, the cascading rules in Regulation 25136-2 are applied to determine the location of where the benefit was received for purposes of the California market-based sourcing rules.
This framework is applied to three situations in CA FTB Legal Ruling 2022-01. Situation One involves an event planning company working remotely from its home office while planning an out-of-state event for a customer located in a third state. Situation Two involves a pharmacy benefits management company that administers drug benefit programs for employers, unions, government entities and health plans, with its primary activity being the processing and fulfillment of prescription drug claims. Situation Three involves a company providing consulting services to entities that want to manage their power consumption used in manufacturing, where a subcontractor based in another state is engaged to advise on certain aspects of a customer's manufacturing plant's power consumption.
For Situations 1 and 3, CA FTB Legal Ruling 2022-01 holds that the location where a service is performed does not determine where to assign the gross receipts from the sale of that service. Rather, the gross receipts are assigned to the location where the direct benefit of the service is received by the customer. For Situation 2, CA FTB Legal Ruling 2022-01 holds that the benefit of the service for the taxpayer's customer is received at the location of the taxpayer's customer's customer.
For more on this developments, see Tax Alert 2022-0531.
Arizona: New law (SB 1264) updates the state's date of conformity to the Internal Revenue Code (IRC) to Jan. 1, 2022 (from March 11, 2021). This updated IRC conformity date applies for purposes of computing income tax for tax years beginning from and after Dec. 31, 2021. For purposes of computing income for a tax year beginning in 2021, the state conforms to the IRC in effect on March 11, 2021, including the provisions in the Paycheck Protection Program Extension Act of 2021 (P.L. 117-6) and the Infrastructure Investment and Jobs Act (P.L. 117-58) that are retroactively effective during tax years beginning from and after Dec. 31, 2020 through Dec. 31, 2021. Ariz. Laws 2022, ch. 41 (2022 AZ SB 1264), signed by the governor on March 23, 2022.
Mississippi: New law (HB 1529) excludes the following from gross income: (1) amounts received as advances and/or grants under the federal Consolidated Appropriations Act of 2021 (P.L. 116-260) (CCA); (2) the American Rescue Plan Act (P.L. 117-2) (ARPA) and any and all cancelled indebtedness provided under the CCA; (3) amounts received as grants under the Shuttered Venue Operators Grant Program and the Restaurant Revitalization Fund authorized by the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act included in and amended by ARPA; and (4) amounts received as grants under the Mississippi Agriculture Stabilization Act. The law also allows the deduction for otherwise deductible expenses paid with amounts from the federal Paycheck Protection Program, the federal Economic Injury Disaster Loan Program, the 2020 COVID-19 Mississippi Business Assistance Act, the Rental Assistance Grant Program, the Shuttered Venue Operators Grant Program and the Restaurant Revitalization Fund, and the Mississippi Agriculture Stabilization Act. Miss. Laws 2022, HB 1529 is retroactively effective and in force from and after Jan. 1, 2020. Miss. Laws 2022, HB 1529, signed by the governor on March 17, 2022.
New Jersey: The New Jersey Division of Taxation (NJ DOT) issued revised guidance on the treatment of transactions involving convertible virtual currency (e.g., Bitcoin) for purposes of the New Jersey corporate business tax (NJ CBT) and New Jersey gross income tax (NJ GIT). The NJ DOT stated that for both NJ CBT and NJ GIT purposes, New Jersey conforms to the federal income tax treatment of convertible virtual currency.1 For federal income tax purposes, taxpayers must report transactions using virtual currency in U.S. dollars, with the fair market value (FMV) of the convertible virtual currency being determined in U.S. dollars as of the date of payment or receipt. For NJ CBT purposes, the NJ DOT stated that the protections of P.L. 86-272 do not apply to transactions involving virtual currency, which it states is treated as intangible property for purposes of the federal law. Thus, the NJ DOT said it will treat an out-of-state company selling virtual currency to in-state customers as doing business in the state for CBT purposes without regard to any pre-emption of the state's ability to impose the NJ CBT by the federal law. For NJ GIT purposes, the state follows the federal treatment of the gain or loss from the sale or exchange of property. Further, the FMV of convertible virtual currency paid as wages is subject to NJ GIT withholding, and payments made using such currency are subject to information reporting requirements to the same extent as any other payment made in property. N.J. Div. of Taxn., TAM-2015-1(R) "Convertible Virtual Currency" (March 21, 2022).
North Carolina: New law (HB 243) allows a North Carolina corporate and individual income tax deduction for the amount of qualified wages disallowed for federal income tax purposes because the employer claimed the federal employee retention tax credit against employment taxes in lieu of a federal income tax deduction. This deduction is allowed to the extent a similar credit is not allowed against North Carolina income tax liability for the expenses. In addition, HB 243 provides a corporate and individual income tax deduction for proceeds received from the following grant programs: the Business Recovery Grant Program, the ReTOOLNC grant program, and rent and utility assistance under Section 3.3. of N.C. S.L. 2020-4 and Section 1.2 of N.C. S.L. 2020-97. The deduction is allowed to the extent the proceeds were included in the taxpayer's federal taxable income. The deductions for qualified wages and grant proceeds are retroactively effective for tax years beginning on or after Jan. 1, 2020. In a notice describing the tax changes in HB 243, the North Carolina Department of Taxation said that it will not automatically recalculate a taxpayer's North Carolina taxable income and suggested that affected taxpayers consider filing amended returns. N.C. Laws 2022, ch. SL 2022-6 (2022 NC HB 243), signed by the governor on March 17, 2022. See also, N.C. Dept. of Rev., "Important Notice: Impact of Session Law 2022-06 on North Carolina Individual and Corporate Income Tax Returns" (March 18, 2022).
Ohio: On March 16, 2022, the Ohio Senate passed SB 246, which, if enacted, would create an elective entity-level tax on pass-through entities (each, a PTE) beginning in 2022. SB 246 would allow PTEs to elect annually to pay income tax at the entity level by filing the prescribed form with the Commissioner of the Ohio Department of Taxation (OH DOT) by the annual filing deadline for its tax return (i.e., the 15th day of the fourth month following the end of a PTE's qualifying tax year, which is April 15th for calendar-year filers). An electing PTE's tax year for Ohio income tax purposes is the same as its tax year for federal income tax purposes and may not necessarily be a calendar year. Under the proposal, any PTE tax election would be irrevocable for the tax year made. SB 246 is currently under consideration by the Ohio House. For additional information on this development, see Tax Alert 2022-0493.
Oregon: New law (SB 1525) updates the date of conformity to the IRC to for purposes of Oregon's various tax laws to Dec. 31, 2021 (from April 1, 2021). This change applies to transactions or activities occurring on or after Jan. 1, 2022. The effective and applicable dates and the exceptions, special rules and coordination with the IRC, relative to those dates, contained in federal law amending the IRC and enacted before Jan. 1, 2022, apply for Oregon individual income and corporate excise and income tax purposes to the extent such can be made applicable. Ore. Laws 2022, SB 1525, signed by the governor on March 24, 2022.
Tennessee: New law (SB 2397) provides that for purposes of computing net earnings or net loss, IRC § 174 (research and experimental expenditures (R&E)) shall be applied as it existed and was applied immediately before the enactment of the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). This change effectively decouples Tennessee's excise (net income) tax laws from the change made by the TCJA, which, starting in 2022, requires R&E expenditures to be amortized over five years for domestic R&E and 15 years for foreign R&E. Thus, for Tennessee excise tax purposes, corporate taxpayers are allowed to continue to fully deduct all R&E expenditures as incurred. This change is effective for tax years beginning on or after Jan. 1, 2022. Tenn. Laws 2022, SB 2397, signed by the governor on March 24, 2022.
Utah: New law (HB 268) provides that starting in tax years beginning on or after Jan. 1, 2022, a taxpayer may make an irrevocable election to treat all of its income from sales of intangible property as business income. This election must be made on or before the deadline for filing the income tax return under an extension. HB 268 also modifies the definition of business income. As revised, "business income" means "income that: (i) is apportionable under the United States Constitution and is not allocated under the laws of this state, including income arising from: (A) a transaction or activity in the regular course of the taxpayer's trade or business; and (B) tangible and intangible property, if the acquisition, management, employment, development, or disposition of the property is or was related to the operation of the taxpayer's trade or business; or (ii) would be allocable to this state under the United States Constitution, but is apportioned rather than allocated in accordance with the laws of this state." Utah Laws 2022, HB 268, signed by the governor on March 23, 2022.
Utah: New law (SB 48) provides that when a nonrefundable corporate or individual income tax credit (in Part 6 of the Utah Corporate Franchise and Income Tax code section, or Part 10 of the Nonrefundable Tax Credit Act, respectively) expires or is repealed, the taxpayer is allowed to carry forward unused credit for the period of time described in the tax credit for the tax year in which the taxpayer first claimed it. Utah Laws 2022, SB 48, signed by the governor on March 23, 2022.
Utah: New law (HB 444) allows a pass-through entity (PTE) that is not a disregarded entity to elect to pay a tax (PTE tax) that equals the percentage listed in Utah Code § 59-10-104(2) (i.e., the then current Utah individual income tax rate) and voluntary taxable income. The law defines "voluntary taxable income" as the sum of the PTE's income that is (1) attributed to a final PTE taxpayer2 who is a resident individual and (2) business income and nonbusiness income derived from or connected with Utah sources and attributed to a final PTE entity taxpayer that is a nonresident individual. A PTE must notify final PTE taxpayers that it made the election, and PTEs that pay the PTE tax must provide each PTE taxpayer a statement that includes the amount of tax paid on the income attributed to the PTE taxpayer. PTE tax paid on or before the last day of the tax year is an irrevocable election to be subject to tax for the tax year. Resident or nonresident individuals must add to their adjusted gross income the amount of tax paid on income attributed to the individual in accordance with Utah's PTE tax and the amount of tax paid on (1) income attributed to the individual and taxable in Utah, (2) to another state, and (3) that the Utah state tax commission determines is substantially similar to Utah's PTE tax. A "taxed pass-through entity taxpayer"3 can claim a nonrefundable credit for imposed PTE tax. The credit equals the amount of PTE tax paid by the PTE on the income attributed to the "taxed pass-through entity taxpayer". Unused credit can be carried forward for the next five taxable years; unused credit cannot be carried back. The election can be made for a tax year that begins on or after Jan. 1, 2022 but begins on or before Dec. 31, 2025. Utah Laws 2022, HB 444, signed by the governor on March 23, 2022.
SALES & USE
New Jersey: The New Jersey Division of Taxation (NJ DOT) issued guidance on the tax treatment of transactions involving convertible virtual currency (e.g., Bitcoin). For New Jersey sales tax purposes, the sale of convertible virtual currency is treated as the sale of intangible property. Thus, the purchase of convertible virtual currency for investment purposes is not subject to New Jersey sales tax. If, however, such currency is used as payment for taxable goods or services, New Jersey sales and use tax applies to such purchase. Sellers and retailers accepting convertible virtual currency as payment for taxable goods and services must determine the convertible virtual currency's fair market value in U.S. dollars as of the date of payment in order to determine the amount of sales tax charged on the underlying transaction. In addition to complying with general recordkeeping and registration requirements, sellers and retailers accepting convertible virtual currency as payment for taxable goods and services also must comply with additional recordkeeping and reporting requirements, including recording in its books and records (1) the value of the convertible virtual currency accepted at the time of each transaction (converted to U.S. dollars) and (2) the amount of sales tax collected at the time of each transaction (converted to U.S. dollars). N.J. Div. of Taxn., TAM-2015-1(R) "Convertible Virtual Currency" (March 21, 2022).
Utah: New law (HB 268) establishes a sales and use tax exemption for sales of a note, leaf, foil or film if it: (1) is used as a currency; (2) does not constitute legal tender of a state, federal or foreign nation; and (3) has a gold, silver or platinum metallic content of 50% or more, exclusive of any transparent polymer holder, coating or encasement. An exemption also is created for amounts paid or charged for admission to an indoor skydiving, rock climbing or surfing facility if a trained instructor is present with the participant (in person or by video) for the duration of the activity and actively instructs the participant. These changes take effect July 1, 2022. Utah Laws 2022, HB 268, signed by the governor on March 23, 2022.
Virginia: The Virginia Department of Taxation announced that the retail sales and use tax exemption for qualifying business purchases of personal protective equipment related to COVID-19 expires on March 24, 2022. The exemption was effective for qualifying purchases made during the period from March 11, 2021 through March 23, 2022. Va. Dept. of Taxn., Tax Bulletin 22-5 (March 23, 2022).
Virginia: New law (HB 1239) creates a new class of tangible personal property for local personal property tax purposes. The new class of tangible personal property includes most automobiles, passenger trucks, motor vehicles with specially designed equipment for use by the handicapped, motorcycles, mopeds, all-terrain vehicles, off-road motorcycles, campers and other recreational vehicles. Under the new law, localities can assign a different tax rate for this class of property from the rate applicable to the general class of tangible personal property. Previously, this class of property was subject to the general rate. The new classification applies to tax years beginning on or after Jan. 1, 2022 but before Jan. 1, 2025. Va. Laws 2022, ch. 30 (2022 VA HB 1239), signed by the governor on March 22, 2022. See also, identical Senate Bill (2022 VA SB 771), which has been presented to the governor for his approval. See also, Va. Dept. of Taxn., Tax Bulletin 22-4 (March 23, 2022).
PAYROLL & EMPLOYMENT TAX
Federal: U.S. Senate Majority Whip Dick Durbin (D-IL) and U.S. Representative Danny K. Davis (D-IL) announced that they and other U.S. senators and representatives have introduced legislation that would extend the period that states are not charged for interest on their federal unemployment insurance loans. The announcements explain that the purpose of the legislation is to help Illinois (and the other jurisdictions with loan balances) to recover from the COVID-19 emergency without assessing employers for interest charges or diverting state funds that could be used for economic recovery. For more information on this development, see Tax Alert 2022-0476.
California: A provision of a recently enacted law (2022 Cal. Stat. ch. 4 (2022 CA SB 114) reinstates California's COVID-19 supplemental paid sick leave requirement for the period from Jan. 1, 2022 through Sept. 30, 2022 for employees to care for themselves or a family member for reasons related to COVID-19. For purposes of the new law, a family member includes a child, parent, spouse, registered domestic partner, grandparent, grandchild or sibling. Under prior law, which expired Sept. 30, 2021, employers were required to provide up to 80 hours of COVID-19 supplemental paid sick leave to employees unable to work due to certain reasons related to COVID-19, including that the employee or provider was advised by a health care provider to self-quarantine due to concerns related to COVID-19. For more information on this development, see Tax Alert 2022-0459.
Missouri: In response to the recent trend of employees transitioning from working at the office to remotely working from their homes, the Missouri Department of Revenue (MO DOR) has published a new web page to assist employers and employees with questions they may have about the tax impact of alternative remote work assignments. Previously, the MO DOR announced that there are no exceptions to the income tax rules for employees who are/were temporarily working from home due to the COVID-19 emergency. For more information on this development, see Tax Alert 2022-0455.
Oregon: The Oregon Department of Revenue (OR DOR) has issued guidance to assist employers in understanding the income tax withholding requirements that apply when employees are working remotely within the state. Importantly, the OR DOR said there are no exceptions to the rules contained in Oregon Administrative Rule 150-316-0255 in consideration of the COVID-19 emergency. For more on this development, see Tax Alert 2022-0461.
Connecticut: New law (HB 5501) suspends the 25 cents per gallon Connecticut motor vehicle fuels tax on gasoline/gasohol for the period from April 1, 2022 to June 30, 2022. During this period, the Connecticut tax does not apply to fuels or gasohol sold or used by a distributor in the state. The suspension does not apply to tax due on propane, natural gas or diesel fuel sold or used by a distributor in Connecticut. The law requires each retail dealer to reduce the per-gallon price of fuels or gasohol sold by such retail dealer in an amount equal to the reduction in such tax. A violation of this provision will be deemed an unfair or deceptive trade practice. Conn. Laws 2022, Special Act No. 22-2 (2022 CT HB 5501), enacted on March 24, 2022; see also, Conn. Dept. of Rev. Servs., Taxpayer Service Special Bulletin 2022-3 (March 25, 2022).
Maryland: New law (SB 1010) suspends certain motor fuels taxes that would otherwise apply, effective for the period from March 18, 2022 through April 16, 2022. Qualifying fuel includes gasoline other than aviation gasoline, each gallon of special fuel other than clean-burning fuel or turbine fuel and each gallon equivalent of clean-burning fuel except electricity. Qualifying retailers may receive a refund of advance of motor fuel tax previously paid to suppliers on purchases of qualifying fuel. Md. Laws 2022, ch. 2 (2022 MD SB 1010), signed by the governor on March 18, 2022; see also Md. Comp., "News Release: Comptroller Franchot Announces 30-Day Gas Tax Holiday" (March 18, 2022).
VALUE ADDED TAX
International — Turkey: The Turkish General Directorate of Customs issued a letter on March 4, 2022 to clarify the treatment of warehousing service fees, including the Value Added Tax (VAT) and the calculation of the Special Consumption Tax (SCT) base. The March 2022 Letter refers to the Turkish Revenue Administration's (TRA) letter of Jan. 6, 2022 which states that the SCT should be calculated on the amount after including the Turkiye Radyo Televizyon Banderol fee imposed on the VAT base. The recent letter clarifies that the warehousing service fee, before the import of goods mentioned in List numbered (IV) attached to the SCT Law should also be included in the SCT base during the importation, whether such fee is exempt from VAT or not. The Letter also refers to the TRA's letter dated March 1, 2022 which states that the aforementioned opinion should be applied for all situations where a tax base during an importation is to be calculated under the procedures mentioned in VAT Law No. 3065.For additional information on this development, see Tax Alert 2022-0457.
Wednesday, April 13, 2022. Indirect tax considerations of digital assets, Web 3.0 and the metaverse (1:00-2:15 p.m. EDT New York; 10:00-11:15 a.m. PDT Los Angeles). Join our EY team of tax professionals for the first in a series of discussions focused on the evolving digital landscape of blockchain technology, digital assets, Web 3.0 applications and how those items may converge in a metaverse ecosystem. During this 75-minute webcast, we will discuss this evolving landscape through a state and local and indirect tax lens. Other mattes to be discussed will include the "what" and the "why" — what the digital revolution is and why it is important to understand how it could change the way your company engages with other businesses and consumers. Specifically, we will provide an overview of the new digital landscape to identify and analyze some of the pertinent considerations from the perspective of state sales tax, state income tax and national value-added taxes, as well as certain potential information reporting requirements. Register.
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.
2 Under the new Utah law, a "final pass-through entity taxpayer" is a PTE taxpayer who is a resident or nonresident individual.
3 Under the new Utah law, a "taxed pass-through entity taxpayer" is defined as a resident or nonresident individual who has income attributed to the individual by a PTE, receives such income after the PTE pays the PTE tax, and adds the amount of tax paid on such income to adjusted gross income as provided by the new law.