State and local tax advisor: December 2020

The states covered in this issue of our monthly tax advisor include:

• Alabama
• California
• Illinois
• Massachusetts
• Michigan
• Nebraska
• New Jersey
• Oregon
• Rhode Island
• South Carolina
• Texas

Alabama

Corporate, personal income taxes: Emergency proclamation addresses tax and economic development issues

Alabama Governor Kay Ivey has signed an emergency proclamation to address tax issues that the legislature was not able to fully consider during its abbreviated 2020 regular session. The COVID-19 pandemic severely curtailed the legislative session. The proclamation does the following:

• Allows taxpayers to avoid paying state income taxes on certain benefits received under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act.
• Extends the sunset dates for the Alabama Jobs Act and Growing Alabama tax credits.

CARES Act benefits

Taxpayers may exclude any tax credits, advance refund amounts, or other direct benefits received under the CARES Act from:

• Alabama income taxation.
• All calculations in determining the federal income tax deduction for Alabama income tax purposes.

Also, taxpayers may exclude any income resulting from a loan forgiven pursuant to the CARES Act from:

• Alabama income taxation and financial institution excise taxation, to the same extent the amount is exempt from federal income tax under the CARES Act.
• All calculations in determining the federal income tax deduction for Alabama income tax purposes.

The Commissioner of Revenue must revise the tax return forms and instructions to effectuate this relief.

Income resulting from a loan forgiven pursuant to the CARES Act may only be considered for limited Alabama tax purposes. It can be considered in determining the deductibility of otherwise deductible expenses (such as payroll, utilities, mortgage interest, and rent) allowed to be paid with exempt funds. The expenses are deductible to the same extent they are deductible in calculating federal income tax.

Alabama Jobs Act and Growing Alabama tax credits

The Alabama Jobs Act tax credit program was set to expire on Dec. 31, 2020. The Growing Alabama tax credit program expired on Sept. 30, 2020. The sunset date for both tax credit programs has been extended until the legislature has an opportunity to enact legislation addressing the programs.

Proclamation, Gov. Kay Ivey, Dec. 11, 2020.

California

Multiple taxes: Immediate tax relief provided to small business owners

California business owners who need financial assistance can receive immediate tax relief from the California Department of Tax and Fee Administration (CDTFA) in the form of automatic filing extensions, interest-free payment plans, or a hiring tax credit of up to $100,000 to offset income or sales and use taxes.

Automatic filing extension

Taxpayers filing CDTFA returns for less than $1 million tax will automatically be granted a three-month extension on payments and returns originally due between Dec. 1, 2020, and April 30, 2021. For example, fourth-quarter 2020 returns and payments will be due in April 2021. Eligible taxpayers are not required to make a request to take advantage of this extension.

Interest-free payment plans

Qualified small businesses can apply for a 12-month, interest-free payment plan to defer payment of up to $50,000 for fourth quarter 2020 and the first quarter of 2021 in sales and use tax liability. The deferred tax would be paid in 12 equal monthly installments, with the first payment not due until April 2021. Any business with annual taxable sales of $5 million or less will be eligible for the new payment plans, including those taxpayers already in existing payment arrangements with the CDTFA.

All existing interest-free payment plans will remain in place. Businesses with sales greater than $5 million in sectors particularly impacted by operational restrictions due to the COVID-19 pandemic may also apply for an interest-free payment plan. CDTFA will extend these payment arrangements to all businesses demonstrating a significant drop in sales, regardless of annual sales volume.

Main Street Small Business Tax Credit

Beginning today and continuing through Jan. 15, 2021, CDTFA is accepting applications, through its online reservation system, for qualified small business owners to reserve up to a $100,000 hiring tax credit. The small business hiring tax credit provides a credit that a small business employer can use to offset their income taxes or their sales and use taxes when filing their tax returns.

The tentative credit reservation is allocated on a first-come, first-served basis. Within 30 days of receiving an application, CDTFA will notify each applicant via email whether a tentative credit reservation has been allocated to them and the amount.

News Release 20-15, California Department of Tax and Fee Administration, Dec. 1, 2020.

Illinois

Sales and use tax: Taxability of web-based services, computer software discussed

The Illinois Department of Revenue issued a general information letter discussing the sales and use taxability of web-based service. In this matter, the taxpayer sold internet electronic fitness guides and exercise programs and managed an internet-based interactive community of its followers. The taxpayer availed web-based services from two of its service providers that provided: (1) web-based email marketing services to design email newsletters, share those on social networks, integrate with services already used by the taxpayer and track results; (2) online meeting, desktop sharing, and videoconferencing software package that enables users to meet with other computer users, customers, clients, or colleagues via the internet in real-time.

Generally, a provider of software as a service is acting as a serviceman. If the provider does not transfer any tangible personal property (TPP) to the customer, then the transaction generally would not be subject to retailers’ occupation tax, use tax, service occupation tax, or service use tax. However, if the provider transfers to the customer an API, applet, desktop agent, or a remote access agent to enable the customer to access the provider’s network and services, the subscriber is receiving computer software that is subject to tax. Here, the taxpayer inquired about the taxability of the above-mentioned services. It was noted that the web services received by the taxpayer qualified as taxable software.

General Information Letter ST 20-0032-GIL, Illinois Department of Revenue, Nov. 9, 2020.

Massachusetts

Corporate, personal income taxes: Effective date for COVID-19 telecommuting rules revised

Massachusetts revised the effective date for guidance and rules on employees working remotely during the COVID-19 pandemic. The guidance covers the impact of employee work-from-home arrangements on:

• Corporate Excise Tax Nexus
• The payroll factor of the employer’s Massachusetts apportionment formula
• Pass-through entity withholding and filing requirements
• Sales And Use Tax Nexus
• Massachusetts Paid Family and Medical Leave (PFML) contributions

Emergency and proposed regulations issued with the guidance set forth sourcing rules that apply to wage income of telecommuting employees.

The revised guidance and regulations replace existing guidance and regulations.

Effective date

The guidance and regulations will remain in effect until 90 days after Massachusetts lifts the COVID-19 state of emergency.

Public hearing

The Massachusetts Department of Revenue will hold a public hearing on the proposed rules on Jan. 20, 2021. Individuals who want to testify should notify the department by Jan. 19, 2021.

Technical Information Release 20-10, Massachusetts Department of Revenue, Dec. 8, 2020; Emergency 830 CMR 62.5A.3, Massachusetts Department of Revenue, effective Dec. 8, 2020 and as noted; Proposed 830 CMR 62.5A.3 and Notice of Public Hearing, Massachusetts Department of Revenue, Dec. 8, 2020.

Corporate income tax: Nonresident S corporation’s gain by selling its interest in state-based corporation properly subject to tax

A nonresident S corporation that sold its entire 50% interest in a Massachusetts limited liability company (LLC) and realized a sale gain was properly subject to corporate income tax assessment on the sales gains. Under Massachusetts law, a foreign corporation “doing business” in the commonwealth is subject to tax on its net income derived from business conducted in the commonwealth. Generally, “doing business” means and includes each and every act, power, right, privilege, or immunity exercised or enjoyed in the commonwealth, as an incident to or by virtue of the powers and privileges acquired by the nature of such organizations.

In this matter, although the taxpayer acknowledged taxable nexus with Massachusetts, the taxpayer disagreed as to whether application of relevant Massachusetts law results in impermissible taxation of the sale gain at issue. The taxpayer asserted that the sale of its interest at issue did not involve the requisite “minimum connection” to Massachusetts or availment of the protections and benefits of Massachusetts law as required by the Due Process and Commerce Clauses of the United States Constitution. However, the Massachusetts tax board (board) asserted that a tax measure is presumed valid and is entitled to the benefit of any constitutional doubt, and the burden of proving its invalidity falls on those who challenge the measure.

It was noted that the business activities that gave rise to the sale gain at issue involved availment of the protection, opportunities, and benefits given by Massachusetts, which inured to the benefit of the taxpayer. Accordingly, the protection, opportunities, and benefits afforded by Massachusetts, for Constitutional purposes, supplied the requisite connection between Massachusetts and business activities that resulted in the sales gain at issue.

Moreover, it was noted that the taxpayer failed to demonstrate an adequate basis for the proposition that there was a distinction grounded in Constitutional concerns between the LLC’s partnership distributive share income and the sale gain that would render the former taxable by Massachusetts and the latter beyond its reach. Lastly, the taxpayer and LLC possessed the necessary unity to justify imposition of the Massachusetts tax at issue in the appeals.

Accordingly, the assessments at issue were proper under applicable Massachusetts statutes and regulatory authority and a majority of the sale gain was attributable to the business activities in the state through its ownership interest in the state company. Accordingly, the tax assessments at issue did not result in the taxation of extraterritorial values in violation of the United States Constitution and the assessments at issue were sustained.

Vas Holding and Investment LLC v. Massachusetts Commissioner of Revenue, Massachusetts Appellate Tax Board, No. C332269 & C332270, Oct. 23, 2020.

Michigan

Sales and use tax: Form for qualified data center exemption introduced

For purposes of the Michigan sales and use tax exemption for the purchase of data center equipment, taxpayers are required to use Form 5726 (Report for Qualified Data Center Exemption) for reporting the purchase price of such equipment. The form must be filed no later than January 31 of the year following the close of the calendar year being reported. Form 5726 is not a method by which to claim the exemption, does not constitute a return, and should not include any remittance of tax. If no equipment was purchased, the form need not be filed for that calendar year.

Notice, Michigan Department of Treasury, Dec. 14, 2020.

Corporate income, sales and use taxes: Penalty and interest waiver announced

The Michigan Department of Treasury is automatically waiving penalty and interest on the late reporting or payment of sales, use, and withholding tax for any nonaccelerated return or payment due on Dec. 20, 2020. The waiver lasts for 31 days; consequently, eligible taxpayers must report and pay the tax due by Jan. 20, 2021. The penalty and interest waiver applies only to those businesses impacted by the section of the Dec. 7, 2020 Health and Human Services (MDHHS) order prohibiting gatherings.

Notice, Michigan Department of Treasury, Dec. 8, 2020.

Nebraska

Corporate, personal income taxes: GILTI and FDII guidance updated

Nebraska updated its guidance on the corporate and personal income tax treatment of:

• IRC Sec. 951A global intangible low-taxed income (GILTI)
• IRC Sec. 250 foreign-derived intangible income (FDII)

Federal treatment

IRC Sec. 951A requires U.S. shareholders of a controlled foreign corporation (CFC) to include GILTI in the taxpayer’s gross income. IRC Sec. 250 allows a domestic corporation with GILTI and FDII to deduct part of that income on its federal return. The deduction reduces the rate of U.S. tax on GILTI and FDII.

Nebraska treatment

Taxpayers computing Nebraska income tax liability start with:

• Federal taxable income for corporate taxpayers.
• Federal adjusted gross income for individual taxpayers.

So, the starting point for computing Nebraska income tax liability includes IRC Sec. 951A GILTI. The federal taxable income starting point for corporate taxpayers also includes the IRC Sec. 250 FDII and GILTI deduction.

Nebraska allows a corporate and personal income tax deduction for a dividends from foreign corporations. It does not treat GILTI as deductible foreign dividends, except for IRC Sec. 78 dividends from GILTI under IRC Sec. 250(a)(1)(B)(ii).

Apportionment

Corporate taxpayers doing business in and outside Nebraska must use an apportionment formula consisting of a sales factor to compute income tax liability. A taxpayer’s sales factor must include income from intangibles.

Nebraska treats GILTI as intangible value generated by U.S. operations but realized by a CFC. This activity can include:

• Research and development of patents and trademarks
• Generating brand recognition tied to marketing and selling products in the United States

The denominator of the Nebraska sales factor must include the entire amount of GILTI. The numerator of the sales factor must include all or part of GILTI if the intangible value that gives rise to that income is connected with and fairly attributable to developing or maintaining the intangible property in Nebraska.

GIL 24-20-1, Nebraska Department of Revenue, Nov. 19, 2020.

New Jersey

Corporate income tax: U.S. Supreme Court declines to review state reapportionment decision

The U.S. Supreme Court has denied a petition for certiorari filed by a corporation business taxpayer asking if New Jersey violated the Due Process Clause and Commerce Clause when it gave deference to its taxing authority’s decision to reapportion revenue.

Reapportionment

New Jersey reapportioned the taxpayer’s revenue using a different method to reasonably reflect the portion of the taxpayer’s services performed in New Jersey. New Jersey has a statute allowing it to order reapportionment of revenue when the taxpayer’s method of apportionment does not properly reflect the revenue that is reasonably attributable to New Jersey.

When reviewing those decisions, New Jersey applies a presumption of correctness to its Division of Taxation’s decisions. The taxpayer argued this led to a system in which New Jersey can take different departure approaches to different taxpayers in violation of the Due Process Clause and Commerce Clause.

Xpedite Systems, Inc., v. Director, Division of Taxation, U.S. Supreme Court, Dkt. 20-468, petition for certiorari denied Dec. 14, 2020.

Oregon

Corporate income tax: COVID-19 nexus guidance revised

For Oregon corporate excise (income) tax purposes, the presence of teleworking employees in Oregon between March 8, 2020 and Dec. 31, 2020, won’t be treated as a relevant factor when making a nexus determination if the employee(s) in question are regularly based outside Oregon. Previously, the period of time covered by the exemption ended Nov. 1, 2020.

COVID-19 Tax Relief Options, Oregon Department of Revenue, Nov. 23, 2020.

Rhode Island

Corporate, personal income taxes: Emergency regulations on withholding for teleworkers during COVID-19 pandemic extended

The Rhode Island Department of Revenue has extended the expiration date for income tax emergency regulations governing employees who are temporarily working remotely due to the coronavirus pandemic.

Withholding for nonresidents who normally work in Rhode Island

The regulations provide that the state will continue to treat as Rhode Island-source income the income of employees who are nonresident individuals temporarily working outside of Rhode Island solely due to the COVID-19 state of emergency.

Withholding for Rhode Island residents who normally work out-of-state

Further, Rhode Island will not require employers located outside of the state to withhold Rhode Island income taxes from the wages of employees who are resident individuals, but who are temporarily working within Rhode Island solely due to the COVID-19 state of emergency.

Duration

The emergency rules, previously set to expire Nov. 18, 2020, have been extended to Jan. 18, 2021.

280-RICR-20-55-14, Rhode Island Department of Revenue, effective May 23, 2020.

South Carolina

Multiple taxes: Nexus relief for COVID-19 telecommuting extended again

South Carolina has extended through June 30, 2021, relief that it previously announced regarding the establishment of income and sales tax nexus solely because an employee is temporarily working in a different work location due to COVID-19.

Under the relief provisions, which previously applied through Dec. 31, 2020, South Carolina will not use changes solely in an employee’s temporary work location due to the remote work requirements arising from, or during, the COVID-19 relief period as a basis for establishing nexus or altering apportionment of income. The extension also covers related guidance that was issued on employer withholding requirements.

Information Letter 20-29, South Carolina Department of Revenue, Nov. 30, 2020.

Texas

Sales and use tax: Tax treatment of online orders discussed

Texas issued a publication discussing sales and use tax treatment of online orders. The publication, among other issues, clarifies:

• Online buyers must pay sales and use tax on taxable items delivered or brought into Texas.
• When a Texas purchaser buys a taxable item online from a seller that does not charge Texas sales tax, the purchaser owes use tax; use tax is complementary to sales tax.
• The use tax due is based on the location where the taxpayer first receive, store or use the item; the taxpayers can verify the tax rate for a specific address using Sales Tax Rate Locator.
• Purchases made online from remote sellers with no physical presence in Texas are taxable; many remote sellers must collect, report, and remit the appropriate use tax on taxable items delivered to customers in Texas.
• A Texas-based seller must have a Texas sales tax permit — unless the underlying sales qualify as occasional sales.
• Texas sellers must collect sales tax on taxable items, including shipping and delivery charges, sold online in Texas.
• Texas sellers do not need to collect Texas sales tax on items shipped and delivered to out-of-state locations; to document these sales, taxpayers’ records must include proof of delivery, such as a bill of lading, a shipping invoice, or a postal receipt.
• When a purchaser buys items intended to be resold in the regular course of business, they can give the supplier a properly completed Texas Resale Certificate instead of paying Texas sales tax; purchasers can buy these items tax free since they will be collecting sales tax from their customers.

Letter No. 202011004L, Texas Comptroller of Public Accounts, November 2020.

Sales and use tax: Assessment upheld for taxpayer’s failure to timely submit exemption certificates

An automotive repair service provider’s (taxpayer’s) gross receipts were properly subject to Texas sales and use tax because the taxpayer failed to timely submit resale and exemption certificates. Generally, a taxpayer must provide resale and exemption certificates within 60 days of the issuance of a written notice in this regard by the Texas Comptroller of Public Accounts. In this case, the taxpayer was required to produce the resale and exemption certificates on or before Sept. 19, 2017, but provided these certificates on May 20, 2018, beyond the 60-day statutory period. Accordingly, the assessment was upheld.

Decision, Hearing No. 115,453, Texas Comptroller of Public Accounts, Oct. 28, 2020,

Note: While this decision is specifically related to a Texas automotive repair service provider, the timely collection of resale exemption certificates is not limited to this situation and is a common issue that applies to other Texas taxpayers, as well as taxpayers in other states that impose a sales/use tax.