The states covered in this issue of our monthly tax advisor include:
California
Income tax: New hiring credits enacted, other credits extended and expanded
California has enacted tax credits for small businesses that hire new employees and for employers that hire individuals from the homeless population. In addition, California extended and expanded some existing personal income tax and corporate tax credits. A budget trailer bill made the tax credit changes. Provisions in the bill creating an elective pass-through entity tax were reported separately.
Small-business hiring credit
For the 2021 tax year, California provides a small-business hiring credit similar to that provided for the 2020 tax year. Qualified small-business employers may claim the credit against their personal income taxes or corporate taxes, or they may elect instead to apply the credit against qualified sales and use taxes. The credit provides some financial relief to small businesses for the economic disruptions resulting from the COVID-19 pandemic that have led to unprecedented job losses.
A qualified small-business employer is an employer that:
- Employed 100 or fewer employees as of Dec. 31, 2020.
- Has a 20% or more decrease in gross receipts over a specified time period.
The credit equals $1,000 for each net increase in qualified employees. The employees must be paid wages subject to withholding. The credit can’t exceed $150,000 for any employer. The total credits allocated to all taxpayers can’t exceed $70 million.
An employer must apply to the California Department of Tax and Fee Administration (CDTFA) from Nov. 1– 30, 2021, for a tentative credit reservation. The CDTFA will allocate tentative credit reservations on a first-come, first-served basis.
Employers may claim the credit only on timely filed original returns. Also, they must reduce any deduction otherwise allowed for qualified wages by the amount of the credit allowed.
If the credit allowed exceeds the amount of tax due, the excess may be carried over to reduce tax in the succeeding four years, if necessary, until the credit is exhausted.
Homeless hiring credit
For tax years 2022 through 2026, California provides a tax credit for employers that hire individuals from the homeless population. Employers may claim the credit against their personal income taxes or corporate taxes. The goal of the credit is to encourage employers to hire and retain individuals within this population who face systemic barriers of employment. The individual hired must:
- Be homeless on the date hired or during the 180-day period immediately before the hire.
- Receive supportive services from a homeless service provider.
The employer must:
- Pay wages subject to withholding.
- Pay eligible individuals at least 120% of the California minimum wage.
- Provide the Franchise Tax Board (FTB), upon request, a copy of the certification received for each eligible individual.
The amount of the credit is based on the number of hours worked and varied between $2,500 and $10,000 per eligible individual hired. The maximum credit allowed per employer per year is $30,000. The total credits allocated to all taxpayers can’t exceed $30 million per year, plus any unallocated credit amount from the preceding year.
An employer must apply to the FTB for a credit reservation within 30 days of hiring the eligible individual. The FTB will allocate credits, subject to the credit cap.
Employers may claim the credit only on timely filed original returns. Also, they must reduce any deduction otherwise allowed for qualified wages by the amount of the credit allowed.
If the credit allowed exceeds the amount of tax due, the excess may be carried over to reduce tax in the succeeding three years, if necessary, until the credit is exhausted.
Historic preservation credit
Taxpayers may claim the credit for rehabilitation of a certified historic structure through the 2026 tax year (previously, the 2025 tax year), as long as there is an appropriation for the credit in a budget-related bill.
Donated foods credit
Taxpayers may claim the credit for donating food to a food bank in California through the 2026 tax year (previously, the 2021 tax year).
California Competes Credit
The aggregate amount of credit that may be allocated under the California Competes Tax Credit program for the 2021–22 fiscal year is now $290 million (previously, $180 million). Ch. 8 (A.B. 150), Laws 2021, applicable as noted.
Delaware
Unclaimed property: New unclaimed property enforcement provisions enacted
Recently enacted Delaware legislation clarifies various aspects of the state’s procedures to operate its unclaimed property program, including promoting and determining holder compliance, processing owner claims, and preventing fraudulent claims.
Exam initiation and review of records
The legislation expands the state escheator’s authority to audit by clarifying that the state escheator has the authority to examine or investigate not only the holder, its agents, representatives, subsidiaries, and affiliates but also any party that’s in possession of records related to the examination. Further, the state escheator is permitted to examine or investigate the records of any persons or parties that hold information related to the audit of another party without providing any reason or justification to either party other than that the investigation/request is related to the unclaimed property audit.
VDA Outreach Program and Permanent Expedited Audit Program
The legislation allows companies more time to respond to a Secretary of State request to enter into a voluntary disclosure agreement (VDA), increasing the time to respond from 60 to 90 days. In addition to the opportunity to enter into a VDA, companies will now also have the option to request to enter into the new permanent expedited audit program.
The legislation creates new statutory grounds for expansive requests. Therefore, an expedited audit may not be optimal in every case. However, failure to elect the expedited audit course may subject a holder to significant penalty and interest exposures. If a company is subject to an existing Delaware audit that was authorized between Feb. 2, 2017, and before Aug. 1, 2021, the company may need to consider the expedited audit option. If a company hasn’t been audited by Delaware or undertaken a VDA with the Secretary of State, the company may need to consider proactive enrollment in a VDA to mitigate the chance of being selected for audit. If a company previously completed a VDA (before June 30, 2012) or withdrew from the VDA for a certain reason (e.g.,, bankruptcy or acquisition), it needs to consider options to mitigate selection for an audit.
Interest under new Delaware unclaimed property law
- Interest waived for holders that complete the VDA in good faith.
- State escheator can waive all but minimum required 20% interest for any holder who completes conventional audit.
- Interest set at 1% of past-due liability for any holder who completes expedited audit.
Due diligence
Due diligence requirements are modified by giving the state escheator the authority to send letters directly or to direct a holder to send them at any time.
Limitation of indemnification
The legislation excludes penalties imposed by another state from the indemnification afforded to holders who deliver property to Delaware that’s later claimed by another state.
Examination and VDA records
The legislation requires the holder’s written consent before records are obtained, and examination or voluntary disclosure can be used in a joint examination.
Ch. 59 (S.B. 104), Laws 2021, effective Aug. 1, 2021, and applicable retroactively to any claims, examinations, or litigation pending as of June 30, 2021.
Illinois
Corporate income tax: Foreign dividend reporting changes for corporate filers
The Illinois Department of Revenue issued an information bulletin providing guidance on foreign dividend reporting changes to corporate (Form IL-1120) filers with tax years ending on or after June 30, 2021 (taxpayers). Taxpayers are advised that a recent legislation, effective June 17, 2021, made significant corporate and personal income tax changes by decoupling Illinois from:
- The federal 100% foreign dividends received deduction.
- The deduction for global intangible low-taxed income (GILTI).
- The deduction for foreign dividends treated as domestic dividends.
The legislation also disallowed a subtraction modification for:
- The participation exemption deduction for foreign-source dividends.
- Gains from the sale or exchange of stock in a controlled foreign corporation (CFC).
Under Schedule M (Other Additions and Subtractions, for businesses), taxpayers must add back amounts deducted federally under:
- The 50% deduction from corporation’s GILTI.
- The deduction from the foreign-source portion of dividends received from a specified 10%-owned foreign corporation.
- The deduction for foreign dividends treated as domestic dividends.
The bulletin states that these amounts qualify for the foreign dividend subtraction modification on Schedule J (Foreign Dividends). Additionally, under Schedule J taxpayers may no longer include any amount attributable to dividends eligible for deduction for foreign-source dividends. The taxpayers are allowed a subtraction modification for dividends reported on federal Form 1120, Schedule C, Line 13, except for any amount attributable to gains from the sale or exchange of stock in a CFC. Further, taxpayers may include in their subtraction modification for GILTI the addition modification required on Schedule M for the amount deducted federally.
Informational Bulletin FY 2021-27, Illinois Department of Revenue, June 24, 2021.
Sales and use tax: Emergency amendments to rules adopted reflecting marketplace facilitator, remote seller changes
Illinois adopted emergency amendments to sales and use tax rules related to the Leveling the Playing Field for Illinois Retail Act (the Act). Specifically, the rules are amended to clarify the different types of retailers subject to the provisions of the Act.
Food delivery services considered marketplace facilitators
The current rules are amended to provide that the Metropolitan Pier and Exposition Authority Retailers' Occupation Tax (MPEA) and the Chicago Home Rule Municipal Soft Drink Tax (Soft Drink Tax) are required to be collected and remitted by food delivery services that are considered marketplace facilitators meeting a tax remittance threshold.
Also, the amendment reverses provisions of Compliance Alert 2021-01 issued by the Department of Revenue (the department) with regard to collection of these taxes. In connection with this change, provisions are added to emphasize that food delivery services that are considered marketplace facilitators under the Act must provide food service establishments with a certification that the food delivery service assumes the rights and duties of a retailer under the retailers’ occupation tax and all applicable local taxes administered by the department for sales made by the food service establishment on the marketplace, and that it will remit all such taxes for such sales. The rules specify additional requirements for this certification and clarify that food services establishments that have received this certification are generally relieved of liability for tax on such sales.
Tax-exempt sales by remote retailers
Remote retailers exclusively making tax-exempt sales (i.e., 100% of their sales are nontaxable) are not subject to the provisions of the Act.
Occasional sales
For remote retailers, occasional sales are excluded from consideration when calculating tax remittance thresholds. However, for marketplace facilitators, occasional sales must be included when calculating tax remittance thresholds.
Origin sourcing
Throughout the rules, provisions are amended to specify that retailers incurring retailers’ occupation tax based on origin sourcing must consult the provisions of 86 Ill. Adm. Code 270.115 (c) and (d) to determine the location at which selling activities occur, and therefore, which local taxes will be incurred.
Books and records for marketplace facilitators
Books and records requirements for marketplace facilitators are clarified, including the manner in which sales made by marketplace sellers that possess active exemption identification numbers (E numbers) must be documented. 86 Ill. Adm. Code Secs. 131.105, 131.107, 131.110, 131.120, 131.125, 131.130, 131.135, 131.140, 131.145, 131.150, 131.155, 131.160, 131.170, 131.175, 131. ILLUSTRATION A, Illinois Department of Revenue, effective July 13, 2021.
Indiana
Sales and use tax: Refund denied as taxpayer was not a registered retail merchant
A taxpayer’s claim for a refund of Indiana sales and use tax was properly denied because the taxpayer failed to establish that she was registered as a retail merchant. Generally, transactions involving tangible personal property are exempt from tax if the person acquiring the property acquires it for resale, rental, or leasing in the ordinary course of the person's business without changing the form of the property.
In this matter, the Department of Revenue (the department) denied the taxpayer’s claim for a refund because the taxpayer was not registered as a retail merchant with the department. The taxpayer argued that she was qualified for the resale exemption because she resold the items that she purchased in Indiana. However, it was noted that the taxpayer failed to establish that she was a registered retail merchant engaged in reselling tangible personal property in Indiana. Accordingly, the taxpayer was not entitled to a refund. Memorandum of Decision No. 04-20200312, Indiana Department of Revenue, April 30, 2021, released July 2021.
Kansas
Corporate income tax: Corporate filing deadline discussed
The Kansas Department of Revenue (the department) has issued a notice informing corporate income taxpayers that beginning the 2020 tax year, tax returns are due one month after the filing deadline established for federal corporate income tax returns, including any applicable extensions granted by the Internal Revenue Service. The department will recognize the federal extended due date, so taxpayers will not be required to request an extension. Further, the department will not impose a late filing penalty on taxpayers who file by the extended due date.
Notice 21-07, Kansas Department of Revenue, July 1, 2021.
Missouri
Sales and use tax: Seller must report all marketplace facilitator sales on Vendor Use Tax Return, remit all tax
A taxpayer must report all sales conducted on all marketplace facilitator platforms on its Missouri Vendor’s Use Tax Return and remit all taxes collected directly to Missouri.
Marketplace facilitators
The taxpayer utilizes marketplace facilitators to market and sell its products. The taxpayer currently engages a marketplace facilitator that collects sales tax on behalf of the taxpayer and remits the tax to the taxpayer. The taxpayer then reports and remits the tax amounts to Missouri, along with reporting and remitting vendors use tax for any direct online sales into Missouri. The taxpayer entered into a contract with a new marketplace facilitator. This new marketplace facilitator sells the taxpayer’s product to the end consumer, then collects and remits the sales tax for products sold on its platform under its own sales tax license in every state. Both the taxpayer and the new marketplace facilitator have substantial physical presence in Missouri.
In order to bind the taxpayer to the sales facilitated by the new marketplace facilitator, the new marketplace facilitator must operate as an agent of the taxpayer. Therefore, the taxpayer is a person engaged in making sales of tangible personal property by agent (the new marketplace facilitator). This, in turn, qualifies the taxpayer as the vendor in this transaction. As a vendor, the taxpayer is required to collect vendors use tax from its purchasers. Every vendor is required to regularly file returns reporting its gross receipts for the purpose of vendors use tax. Also, returns are required to be accompanied by a remittance of the amount of the tax required to be collected by the vendor during the period covered by the return. Therefore, the taxpayer is required to provide full payment with its return.
With regard to the new marketplace facilitator, the taxpayer must report all sales conducted on all marketplace facilitator platforms on its Vendor's Use Tax Return and remit the taxes collected directly to the state as it is currently doing with its other marketplace facilitator. The Department of Revenue (the department) noted that it’s permissible for the taxpayer to delegate its responsibility to collect tax from the customer to its marketplace facilitator. However, the taxpayer’s returns must be accompanied by a remittance of the full amount of the tax required to be collected by the vendor during the period covered by the return. The taxpayer may not partially delegate this responsibility because such partial delegation would cause its own returns to be incomplete.
Expiration of letter ruling
The department noted that beginning Jan. 1, 2023, recently enacted legislation (S.B. 153) changes the laws regarding sales tax and marketplace facilitators. After that date, this letter ruling will no longer be binding.
Letter Ruling No. LR 8151, Missouri Department of Revenue, July 15, 2021.
New Jersey
Sales and use tax: End of COVID-19 teleworking temporary suspension period for nexus announced
New Jersey announced that the waiver of sales tax nexus for employees working in New Jersey as a result of the COVID-19 pandemic no longer applies beginning Oct. 1, 2021. On and after Oct. 1, 2021, the pre-pandemic sales tax nexus standard applies whereby an employee working from home will create sales tax nexus for an employer because working at a location in New Jersey is considered physical presence in New Jersey.
Temporary waiver of nexus standard
As a result of the COVID-19 pandemic, some employees were required to work from their New Jersey home. The Division of Taxation (the division) temporarily waived the sales tax nexus standard, which is generally met if an out-of-state seller has an employee working in New Jersey. Thus, as long as the out-of-state seller did not maintain any physical presence other than employees working from home in New Jersey solely due to the pandemic, and was below the economic activity nexus thresholds, the division didn’t consider the out-of-state seller to have nexus for sales tax purposes during this waiver time period. This temporary waiver no longer applies beginning Oct. 1, 2021.
Teleworking—End of COVID-19 Temporary Suspension Period for Nexus and Withholding Purposes, New Jersey Division of Taxation, Aug. 3, 2021.
Oregon
Corporate, personal income taxes: Voluntary pass-through entity tax enacted
Oregon has enacted an elective entity-level income tax on qualified pass-through entities. The tax is effective for tax years 2022 and 2023. The tax is repealed if IRC Sec. 164(b)(6), the limitation on the deduction for state and local taxes (SALT), is repealed.
Pass-through entity
A pass-through entity is a:
- Partnership.
- S corporation.
- Limited liability company electing to be treated as a partnership or S corporation.
All members of the pass-through entity must be:
- Individuals subject to the personal income tax.
- Entities that are pass-through entities owned entirely by individuals subject to the personal income tax.
Rate of tax
A pass-through entity will pay tax at the rate of:
- 9% on the first $250,000 of income.
- 9.9% on income over $250,000.
Credit
If a pass-through entity elects to pay the pass-through tax, a taxpayer that’s a member of the pass-through entity will be allowed a credit against the income tax. The credit will equal the member’s pro rata share of the tax paid for the tax year.
Ch. 589 (S.B. 727), Laws 2021, effective on the 91st day following adjournment sine die.
Corporate income tax: Fiscal year filing required for corporate activity tax
The Oregon corporate activity tax (CAT) is amended to:
- Require taxpayers using a federal tax year other than the calendar year to register and file a short year tax return.
- Exclude from commercial activity receipts from the transfer of new vehicles between franchised motor vehicle dealerships.
- Exempt insurance companies that are subject to the retaliatory tax.
The changes are applicable to tax years beginning on or after Jan. 1, 2021.
Short year returns
The 2021 short year tax return must be filed no later than April 15, 2022. A taxpayer required to file a short year return must prorate the commercial activity threshold of $750,000, the tax rate threshold of $1 million, and the CAT subtraction.
S.B. 164, Laws 2021, effective 91 days following adjournment sine die.
Texas
Practice and procedure: Refund arising from costs of goods sold deductions denied as taxpayer’s products were services
A communication company’s (the taxpayer’s) claim for Texas franchise tax refund was properly denied as the taxpayer’s products during the tax years at issue were services and the taxpayer erroneously claimed costs of goods sold (COGS) deductions.
Under Texas law, franchise tax is imposed on each taxable entity that does business in this state or that is chartered or organized in this state. The taxable margin of a taxable entity is determined by calculating 70% of total revenue from the entity’s total business or by subtracting, at the election of the taxpayer, either its COGS or compensation. Generally, the COGS deduction includes all direct costs of acquiring or producing goods that are sold. While “goods” are defined as real or tangible personal property sold in the regular course of business, “service” is not defined in the franchise tax statutes for franchise tax purposes. However, the sales of telecommunication products such as internet access, landline telephone service, and online video streaming services are considered the provision of services, not sales of tangible personal property.
In this matter, the taxpayer requested a refund hearing, contending that it was entitled to COGS deductions and alternatively argued the violation of the Equal Protection Clause of the U.S. Constitution. Upon review, it was noted that the telecommunication products that the taxpayer sold in the periods at issue were services and the taxpayer failed to demonstrate that its expenses during the periods at issue were qualifying COGS. Additionally, the taxpayer’s contention concerning the U.S. constitution was denied due to want of jurisdiction.
Hearing No. 202105012H, Texas Comptroller of Public Accounts, May 17, 2021, released June 2021.
Virginia
Corporate income tax: Penalty for failure to comply with informational combined reporting requirement removed
Virginia eliminated the provision imposing a $10,000 penalty on corporations for failure to file the informational combined report that was due July 1, 2021, or for making a material omission or misstatement.
Ch. 1 (H.B. 7001), Second Special Session, Laws 2021, effective Aug. 10, 2021.
Washington
Business and occupation tax: Taxpayer’s property in facilitators distribution centers established nexus with state
An out-of-state retailer (the taxpayer) providing sales through a third-party online marketplace facilitator has substantial nexus with Washington and was subject to business and occupation (B&O) tax. Under Washington law, substantial nexus exists if a taxpayer has a physical presence in the state. In this matter, the Department of Revenue (the department) found that the taxpayer’s products were stored in distribution centers of the marketplace facilitator in Washington and determined that the taxpayer had substantial nexus with the state.
The taxpayer argued that it didn’t have a physical presence in the state because it didn’t maintain any inventory nor had any employees within Washington. Further, the taxpayer argued that it didn’t meet the standard of ownership of the property held in Washington because the facilitator bore the risk of loss for the property. However, it was noted that under the agreement with the facilitator, the title to the property remained with the taxpayer until delivered to the purchaser. Further, the contractual obligation of bearing the risk of loss was not a standard or incident of ownership. Therefore, the property in distribution centers established the taxpayer’s physical presence in the state and it was responsible to collect tax from customers. Accordingly, the taxpayer’s petition was denied.
Determination No. 19-0003, Washington Department of Revenue, June 25, 2021.
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