State and local tax advisor: March 2021

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

• Alabama
• Arkansas
• California
• Colorado
• Illinois
• New Hampshire
• New Jersey
• Ohio
• Texas
• Virginia
• Wisconsin

Alabama

Apportionment changes, pass-through entity tax, CARES Act benefit exemptions, and more enacted

Alabama has enacted legislation that:

• Changes the standard apportionment formula to a single-sales factor formula and eliminates the throwback rule for purposes of computing the sales factor.
• Allows an electing pass-through entity to be taxed at entity level.
• Exempts various Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 and Consolidated Appropriations Act, 2021 tax benefits from Alabama income tax.
• Decouples from IRC Sec. 951A relating to global intangible low-taxed income (GILTI).
• Decouples from IRC Sec. 188(b)(2) relating to contributions made by a governmental entity or civic group.
• Modifies application of the IRC Sec. 163(j) business interest expense limitation.

Single-sales factor apportionment formula

For tax years beginning on or after Jan. 1, 2021, taxpayers must apportion business income to Alabama using a single-sales factor formula. This replaces Alabama’s three-factor double-weighted sales apportionment formula.

In addition, Alabama eliminates the throwback rule for purposes of computing the sales factor.

Elective pass-through entity-level tax

For tax years beginning on or after Jan. 1, 2021, Alabama also allows certain pass-through entities (S corporations and subchapter K entities) to elect to be taxed at the entity level. The owners, members, partners, or shareholders of an electing entity will not be liable for income tax on their distributive shares of the entity’s income.

An electing entity must pay a tax at the highest-applicable individual income tax rate and is subject to estimated payment requirements.

An entity must make the election by submitting the appropriate form to the Department of Revenue by the 15th day of the third month after the close of the tax year. The election is binding for that year and all subsequent years until revoked by the entity. The entity may revoke the election by submitting a form to the Department of Revenue by the 15th day of the third month after the close of the tax year for which it elects to no longer be taxed at the entity level.

CARES Act benefit exemptions

Effective for tax years ending after March 27, 2020, Alabama exempts the following from income tax:

• Tax credits or advance refund amounts received under the CARES Act or as part of other COVID-19-related relief measures.
• Principal or interest payments incurred by an employer on any qualified education loan that is excluded from the employee’s federal gross income under the CARES Act as amended by the Taxpayer Certainty and Disaster Relief Tax Act of 2020.
• Amounts received from a Qualified Emergency Federal Aid Grant.
• Amounts received from the state Coronavirus Relief Fund provided by Congress to the state.
• Qualifying disaster relief payments received by a taxpayer that would be excluded from federal income tax as a result of the COVID-19 national emergency proclamation.
• Cancellation of indebtedness income resulting from a forgiven Paycheck Protection Program (PPP) loan.
• Small Business Administration subsidy payments under the CARES Act.
• Amounts received as emergency Economic Injury Disaster Loan (EIDL) grants, grants to shuttered venues or targeted EIDL advances under the CARES Act or the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act.

Tax credits, advance refund amounts, forgiven PPP loan amounts, subsidy payments, emergency EIDL grants, grants to shuttered venues, or targeted EIDL advances exempted from tax are also excluded from the determination of the Alabama deduction for federal income tax.

Also, the payment of expenses with exempt PPP funds will not affect the deductibility of otherwise deductible expenses, such as payroll, utilities, mortgage interest, and rent. Nor will the receipt of Small Business Administration subsidy payments, emergency EIDL grants, grants to shuttered venues, or targeted EIDL advances affect the deductibility of otherwise deductible expenses.

GILTI

GILTI amounts included in federal taxable income under IRC Sec. 951A are deductible for Alabama purposes. The deduction is allowed only to the extent the amounts were not deductible in computing federal taxable income. The deduction applies retroactively for tax years beginning after Dec. 31, 2017. Taxpayers must add back to taxable income all expenses deducted on their return that are attributable to the subtracted amounts. The deduction provided by IRC Sec. 250 applies for Alabama purposes only to the extent the same income was included in Alabama-taxable income.

Contributions to capital of a corporation

Alabama also allows a deduction for any contribution to the capital of a corporation by Alabama or any of its political subdivisions, to the extent the amount is included in the corporation’s federal taxable income.

Business interest expense limitation

If the business interest expense deduction of a taxpayer or any federal consolidated group of which a taxpayer is a member is not limited pursuant to IRC Sec. 163(j) for federal tax purposes, the taxpayer will not be subject to a limitation on the deduction for Alabama tax purposes other than the limitation for interest expense with a related member. If the business interest expense deduction of a taxpayer or any federal consolidated group of which a taxpayer is a member is limited on the federal return, the taxpayer must calculate the limitation for Alabama purposes on a separate-entity basis or, in the case of members of an Alabama-affiliated group filing an Alabama consolidated return, on the basis of the Alabama consolidated return group. The gross receipts test under IRC Sec. 163(j)(3) applies to each separate entity that is subject to Alabama income tax or, in the case of an Alabama-affiliated group filing an Alabama consolidated return, to the Alabama consolidated return group. These provisions are effective for tax years beginning on or after Jan. 1, 2021. Act 1 (H.B. 170), Laws 2021, effective Feb. 12, 2021, except as noted.

Arkansas

Corporate, personal income taxes: Pass-through entity-level tax enacted

Effective for tax years beginning on or after Jan. 1, 2022, Arkansas pass-through entities may elect to pay income taxes at the entity level.

Tax rate

The tax rate for electing entities is 5.9% of net taxable income. The rate of tax on capital gains is 50% of the rate imposed on taxable income.

Electing entities are allowed the same provisions for net operating losses as nonelecting entities. Further, an electing entity can choose to receive against its liability for the voluntary tax any credit that it would otherwise have received against its income tax liability.

Election

Members of at least 50% of the voting rights of a pass-through entity may make the election on an annual basis before the due date or extended due date of the entity's income tax return. A “member” includes:

• A shareholder of a Subchapter S corporation
• A partner in a general partnership, limited partnership, or limited liability partnership
• A member of a limited liability company

Payments

The pass-through entity tax is due before the 15th day of the fourth month of the taxable year. However, the tax is required be paid in quarterly estimated installments on the fourth, sixth, ninth, and 13th months of the taxable year. Failure at the end of the year to have paid 90% of the tax owed will result in imposition of the same penalty as applied to all other taxes for which the payment does not exceed 90% of what is owed by the time the tax is due.

Exclusions from tax

Income of a member that is subject to the pass-through entity tax is excluded from Arkansas income tax. Income subject to a similar tax in another state or the District of Columbia is also exempt from Arkansas income tax. Nonresident members of an entity subject to the pass-through entity tax are not required to file an Arkansas income tax return if all pass-through entities the member has an ownership interest in pay the pass-through entity tax.

Act 362 (H.B. 1209), Laws 2021, effective as noted.

California

Income tax: Report of 2020 federal laws enacted through December 2020 released

The California Franchise Tax Board (FTB) has released a report of 2020 federal income tax changes enacted prior to December 2020 and their impact for California tax purposes. The report analyzes changes made by the following federal laws:

• Families First Coronavirus Response Act (P.L. 116-127)
• Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136)
• Paycheck Protection Program and Health Care Enhancement Act (P.L. 116-139)
• Paycheck Protection Program Flexibility Act of 2020 (P.L. 116-142)

The FTB’s analysis of federal laws enacted in December 2020 will be available in April 2021.

California passed a law that provides an exclusion from gross income for amounts of covered loans that are forgiven under Section 1106 of the CARES Act. California also conforms to special rules under the CARES Act for the use of retirement funds. California does not conform to most of the other changes made by the above laws. Changes to which California does not conform include those in the CARES Act relating to net operating losses, the limitation on excess business losses for noncorporate taxpayers under IRC Sec. 461(l), and the limitation on business interest deductions under IRC Sec. 163(j). Summary of Federal Income Tax Changes, California Franchise Tax Board, January 14, 2021.

Colorado

Income tax: Revised guidance on capital gain subtraction issued

The Colorado Department of Revenue has updated its guidance regarding the corporate and personal income tax subtraction allowed for certain qualified capital gain income if it is included in federal taxable income. The guidance discusses the taxpayer qualifications, qualifying capital gains, acquisition date/holding period, and installment sales, among other topics. The revised document replaces FYI Income 15 on the capital gains subtraction. Income Tax Topics: Colorado Capital Gain Subtraction, Colorado Department of Revenue, February 2021.

Illinois

FAQs for marketplace facilitators, marketplace sellers, and remote retailers revised

Illinois revised its sales and use tax frequently asked questions (FAQs) for marketplace facilitators, marketplace sellers, and remote retailers.

What are the obligations of food ordering and delivery services?

Food ordering and delivery services, or similar sellers, such as DoorDash or GrubHub, are considered marketplace facilitators (and are therefore required to collect and remit state and local retailer’s occupation tax) if they both:

• List or advertise food or drink for sale by a marketplace seller (restaurant or other food establishment) in a marketplace.
• Either directly or indirectly, through agreements or arrangements with third parties, collect payment from the purchaser and transmit that payment to the marketplace seller (restaurant or other food establishment) regardless of whether the marketplace facilitator receives compensation or other consideration in exchange for its services.

Provided the marketplace facilitator meets either of the Wayfair economic nexus tax remittance thresholds, state and local retailers’ occupation taxes are incurred at the rate in effect at the:

• Location where the order is delivered when the food or drink order is delivered to a customer address (destination rate).
• Location of the restaurant or other food establishment when the order is picked up by the customer at the restaurant or other food establishment (origin rate).

Note: Chicago home rule municipal soft drink retailers’ occupation tax is required to be remitted by the food ordering and delivery service if the sale is made on behalf of a restaurant or other food establishment in Chicago. A restaurant or other food establishment incurs state and local retailers’ occupation tax whenever an order is placed directly with it. Tax is incurred at the rate in effect at the location of the restaurant or other food establishment, regardless of the method of delivery. In addition, the restaurant or other food establishment, not the marketplace facilitator, is required to remit the Metropolitan Pier and Exposition Authority (MPEA) food and beverage tax.

How to determine tax owed for out-of-state retailer selling through marketplace with inventory in Illinois?

Tax liability depends on how the inventory located in Illinois is used. If the inventory is used strictly to fulfill orders made over the marketplace, the inventory does not create physical presence nexus. As a result, you are a remote retailer.

• If you meet either of the economic tax remittance thresholds, you incur state and local retailers’ occupation tax on your own sales at the rate in effect at the Illinois location to which the tangible personal property is shipped or delivered or at which possession is taken by the purchaser (destination rate).
• If you do not meet either of the tax remittance thresholds, you have no sales tax liability. However, you may voluntarily collect and remit use tax.

If the inventory is used to fulfill your own sales, or if it is used to fulfill both your own sales and the marketplace sales, then the Illinois inventory creates physical presence nexus. As a result, you are not a remote retailer. When your sale is fulfilled from inventory located.

• In Illinois, you will incur state and local retailers’ occupation taxes at the rate in effect at the location of the inventory (origin rate).
• Out of state, you incur use tax.

Questions on Form ST-1, sales and use tax

The following questions and answers are provided regarding Form ST-1.

How do I report my own sales on Form ST-1 when I also make sales through a marketplace? Your non-marketplace sales are reported on your Form ST-1. Sales made through a marketplace that is collecting and remitting taxes for you are not reported on your Form ST-1. Do not include and then deduct any marketplace sales on Form ST-1.

Should I include and then deduct my marketplace sales on my Form ST-1? No, you should not include any marketplace sales in Total Receipts and then deduct them on Schedule A. Just leave these sales off Form ST-1.

I am a marketplace facilitator that makes my own sales in addition to marketplace sales. How do I report my own sales and the marketplace sales on Form ST-1? You will need to register for two sales and use tax accounts: one for your own sales and one for all sales made on behalf of marketplace sellers through your marketplace. Your own sales are reported on one Form ST-1 and all marketplace sales are reported on a different Form ST-1. On the Form ST-1 reporting your own sales, do not include and then deduct any marketplace sales. Frequently Asked Questions (FAQs) for Marketplace Facilitators, Marketplace Sellers, and Remote Retailers, Illinois Department of Revenue, February 17, 2021.

Multiple taxes: Governor proposes NOL, bonus depreciation, and other tax changes

Illinois Gov. J.B. Pritzker delivered his annual State of the State and budget address that includes proposals to:

• Limit the net operating loss deduction for corporate income taxpayers to $100,000 over the next 3 years.
• Reduce the foreign dividends received deduction for corporate income taxpayers.
• Require an income tax addback for 100% bonus depreciation under IRC Sec. 168(k).
• Eliminate the repeal of the corporate franchise tax.
• Cancel the credit for Enterprise Zone, River Edge Redevelopment Zone, HIB, and EDGE construction projects.
• Accelerate the expiration of sales tax exemptions for biodiesel fuel.
• Cap the retailer’s sales tax discount at $1,000 per month.
• Remove production-related tangible personal property from the manufacturing machinery and equipment (MME) sales tax exemption.

State of the State and Budget Address Office Illinois Gov. J.B. Pritzker, Feb. 17, 2021.

New Hampshire

Corporate income tax: Market-based sourcing rules adopted

New Hampshire has adopted business profits tax (BPT) and business enterprise tax (BET) regulations to adopt the market-based sourcing method of apportioning sales of services and intangibles. New Hampshire adopted market-based sourcing effective Jan. 1, 2021, for tax periods ending on or after Dec. 31, 2021.

The adopted rules:

• Define “what delivered to a location in this state” means.
• Make clear that the cost of performance-based sourcing rules apply to periods ending before Dec. 31, 2021.
• Update New Hampshire’s special industry-specific apportionment rules to cross-reference the new market-based sourcing.
• Readopt and amend other rules to cross-reference the new market-based sourcing rules.

Rev 301.11, 301.12, 304.04, 304.041, 304.06, 304.07, 304.08, 304.09, 304.10, 304.11, 308.01, 2401.05, 2401.07, 2403.03, 2404.06, 2404.061, New Hampshire Department of Revenue Administration, adopted March 5, 2021.

New Jersey

Corporate income tax: Gain from taxpayer’s drugs sales was taxable nonoperational income

For New Jersey corporate income tax purposes, a neuroscience-based technology company’s gain from sales of two of its lines of drug were not subject to the business liquidation doctrine. Generally, where the sales have constituted liquidations or partial liquidations of a business, and the sale proceeds haven’t been reinvested in the business, the courts (other than in California) uniformly have held that the sale proceeds were nonbusiness income.

In this matter, the Division of Taxation (division) audited the taxpayer and issued an assessment, finding that the gain from sales of the two drug lines were taxable operational income. However, the taxpayer protested and the Tax Court upheld the assessment.

Subsequently, the taxpayer appealed contending that the Tax Court erred in determining that the business liquidation doctrine was not applicable. Upon review, it was noted that:

• A gain realized from the sale of assets is nonoperational income if the sale constitutes a liquidation or partial liquidation of a business and if the sale proceeds are distributed to shareholders and not reinvested in the business.
• The taxpayer’s sale of certain rights did not constitute a complete or partial liquidation of the taxpayer’s oncology business.
• The taxpayer’s sale proceeds were reinvested in the business and not distributed to shareholders.
• The majority of the taxpayer’s transaction proceeds were used to reimburse reinvestment expenditures and to repay loans.

Accordingly, the taxpayer’s appeal was denied.

Elan Pharmaceuticals, Inc. v. New Jersey Division of Taxation, New Jersey Superior Court, Appellate Division, No. A-4962-18T2, Jan. 26, 2021.

Ohio

Personal income tax: Protest denied as taxpayers were domiciled in Ohio

Taxpayers were properly subject to an Ohio personal income tax assessment because they were Ohio residents during the tax year at issue. In this matter, the taxpayers claimed the nonresident status, which the Department of Revenue (department) denied. Subsequently, the department issued an income tax assessment against the taxpayers. The taxpayers argued that they were not domiciled in Ohio during the relevant tax years. It was noted that domicile incorporates both residence and intent.

While the taxpayers may have had a residence outside of Ohio during the relevant tax years, they intended to maintain their Ohio domicile. Further, the taxpayers failed to show an intent to permanently reside in Utah, Texas, or Indiana because they did not take the affirmative steps that would demonstrate an intent to permanently reside outside of Ohio, neither did the taxpayers establish a new domicile, and, therefore, maintained their Ohio domicile. Accordingly, the taxpayers’ protest was denied.

Miller v. Commissioner of Ohio, Ohio Board of Tax Appeals, No. 2020-239, Feb. 16, 2021.

Texas

Corporate income tax: Franchise tax deadline extended

Texas has extended the due date for 2021 franchise tax reports from May 15 to June 15. The Comptroller announced the extension in response to the recent winter storm and power outages in the state. This aligns with action taken by the Internal Revenue Service (IRS). The IRS extended the April 15 federal income tax filing and payment deadline to June 15 for all Texas residents and businesses. The extension is automatic, and taxpayers do not need to file any additional forms.

Taxpayers who need an extension beyond June 15 have these options:

• Taxpayers who are mandatory electronic funds transfer (EFT) payers have until June 15 to request an extension of time to file to August 15. They must pay 90% of the tax due for the current year, or 100% of the tax reported as due for the prior year, when they file the extension request. If they need a second extension, they have until August 15 to request an extension of time to file to November 15. They must pay the remainder of a tax due with the second extension request.
• Non-EFT taxpayers have until June 15 to request an extension to file until November 15. They must pay 90% of the tax due for the current year, or 100% of the tax reported as due for the prior year, when they file the extension request. They must pay the remainder of a tax due by November 15.

News Release, Texas Comptroller of Public Accounts, Feb. 25, 2021.

Corporate income tax: Federal exclusion for forgiven PPP Loan amounts doesn’t apply to franchise tax

Federal law excluding forgiven Paycheck Protection Program (PPP) loan amounts from gross income for tax purposes does not apply to the Texas franchise tax. Because of Texas’ Jan. 1, 2007, federal conformity date, Texas must enact legislation to exclude PPP loan forgiveness from total revenue.

Rep. Charlie Geren has filed H.B. 1195, which would exempt forgiven PPP loans from revenue for purposes of the franchise tax. The Comptroller’s Office will monitor H.B. 1195 and provide an update if the legislation passes. If it does not pass, the receipts from a forgiven PPP loan must be sourced to the legal domicile of the bank that made the loan. In most cases, this is not likely to result in a Texas receipt.

Regardless of whether forgiven PPP loan amounts are exempt from tax, qualifying expenses can be deducted as cost of goods sold or compensation.

Tax Policy News, Texas Comptroller of Public Accounts, February 2021.

Virginia

Corporate, personal income taxes: IRC conformity updated

Virginia enacted legislation advancing the IRC conformity date under the corporate and personal income taxes from Dec. 31, 2019, to Dec. 31, 2020. Accordingly, Virginia generally conforms to the federal CARES Act and Consolidated Appropriations Act, 2021 (CAA). However, the legislation decouples Virginia from a number of significant provisions.

Business interest deduction, NOLs, and excess business losses

The legislation specifically decouples from the CARES Act provisions temporarily changing the limitations applicable to excess business losses, the net operating loss deduction, and the business interest deduction.

Medical expense deduction

The legislation decouples from the CAA provision permanently reducing the medical expense deduction threshold.

Paycheck Protection Program loans

The legislation conforms to the federal exemption for PPP loan forgiveness, but it partially decouples from the CAA provision allowing taxpayers to claim a federal deduction for business expenses funded by forgiven PPP loan proceeds. Instead, for taxable year 2020, the law permits a deduction of up to $100,000 for business expenses funded by forgiven PPP loan proceeds.

Economic Injury Disaster Loan program

The legislation conforms to the federal exemption for certain funding received under the EIDL program. However, the legislation fully decouples from the CAA provision allowing taxpayers to claim a federal deduction for business expenses funded by forgiven EIDL funding proceeds.

Rebuild Virginia program

The legislation also provides an individual and corporate income tax subtraction for taxable year 2020 for up to $100,000 of all grant funds received by a taxpayer under the Rebuild Virginia program.

Existing conformity exceptions for taxable year 2020

Virginia continues to decouple from the following federal tax law provisions:

• Bonus depreciation allowed for certain assets.
• Five-year carryback of certain NOLs generated in taxable years 2008 and 2009.
• Exclusions related to cancellation of debt income.
• Deductions related to application of the applicable high-yield debt obligation rules.
• Suspension of the federal overall limitation on itemized deductions.

The Virginia Department of Taxation issued Tax Bulletin 21-4 explaining the conformity adjustments that may be required because of the legislation.

Ch. 117 (H.B. 1935) and Ch. 118 (S.B. 1146), Laws 2021, effective March 15, 2021, applicable as noted.

Wisconsin

Income tax: IRC conformity updated

Wisconsin has generally adopted the Internal Revenue Code as amended to Dec. 31, 2020, with numerous exceptions, for taxable years beginning after 2020.

For taxable years beginning after 2017 and before 2021, the general conformity date remains at Dec. 31, 2017, but a number of federal provisions enacted after that date are specifically adopted.

PPP loans

Among other changes resulting from the new law, Wisconsin now conforms to the federal treatment of forgiven Paycheck Protection Program (PPP) loans and expenses paid for with the forgiven loan amounts.

Other provisions

Additional changes made by the law include extending certain reporting deadlines from 90 days to 180 days (such as the reporting of IRS adjustments) and allowing taxpayers to use earned income from the prior taxable year when determining their 2020 earned income tax credit, if their 2020 earned income is lower.

The law text is available here. Act 1 (A.B. 2), Laws 2021, effective on the day after publication, applicable as noted.

Sales and use tax: Economic nexus requirements changed

Wisconsin Governor Tony Evers signed tax legislation on Feb. 18, 2021. The new law affects a number of sections of Wisconsin’s tax code, including sales and use tax provisions. Wisconsin previously required remote retailers to register and collect Wisconsin sales or use tax if, in the previous or current year, their annual gross sales into Wisconsin exceed $100,000; or annual number of separate sales transactions into Wisconsin is 200 or more. The new law eliminates the 200 or more separate transactions sales threshold for remote sellers in the previous or current calendar year.

The law text is available here. Act 1 (A.B. 2), Laws 2021, effective on the day after publication, applicable as noted.