The states covered in this issue of our monthly tax advisor include:
Mobile Workforce State Income Tax Simplification Act introduced
U.S. Representatives recently introduced the Mobile Workforce State Income Tax Simplification Act of 2020. The act would limit the authority of states to tax wages and other remuneration from employment in other states. A substantially similar bill was introduced in the U.S. Senate in 2019 and passed the House of Representatives in 2017.
How is the states’ taxing authority limited?
The act states that wages and remuneration earned by an employee working in more than one state will only be subject to income tax in the state:
- of the employee’s residence; and
- where the employee is present and performing employment duties for over 30 days during the calendar year.
Who is considered an employee?
An “employee” has the same meaning given to it by the state where the employment duties are performed. However, the term “employee” will not include:
- professional athletes;
- professional entertainers;
- qualified productions employees; or
- certain public figures.
Can states require withholding?
If an employee is subject to income tax in the state, wages or other remuneration earned in the calendar year would be subject to state withholding and reporting requirements. In a state where the employee meets the 30 day threshold, the withholding and reporting requirements would apply on the employment commencement date in the state.
H.R. 5674, as introduced in the U.S. House of Representatives on January 24, 2020.
Proceeds from sale of intangible assets properly apportioned to state
A taxpayer, a wholly owned subsidiary of a pork business, was properly denied a refund of Arkansas corporate income tax because the proceeds from the sale of the taxpayer’s intangible assets met the functional test and therefore were properly apportioned to Arkansas. Under Arkansas law, an income is business income if the acquisition, management, and disposition of property constitute integral parts of a taxpayer’s regular trade or business operations. In this matter, a hearing officer (officer) determined that the taxpayer’s intangible assets associated with the pork business constituted an integral part of regular trade or business operations and served an operational rather than an investment function, and therefore the capital gain income was properly attributable to the intangible assets and satisfied the functional test. Subsequently, the taxpayer unsuccessfully argued that the hearing officer erred in determining that the income from the sale of the intangible assets satisfied the functional test. The Commissioner of Revenue rejected the taxpayer’s contention that the taxpayer could carve out the intangible assets from a single transaction into separate components to claim nonbusiness income status for a portion of the transaction. Specifically, the taxpayer did not provide any persuasive authority to support its decision to seek different tax status for the capital gains from its sale of the intangible assets of its pork business. Accordingly, the taxpayer’s protest was denied.
Revenue Ruling 19-162, Arkansas Department of Finance and Administration, January 23, 2020
Service provider must source income based on customer’s location
In a letter ruling, the Florida Department of Revenue (department) determined the sourcing of income from services rendered by technology-based corporation (taxpayer) for corporate income tax purposes. In this matter, the taxpayer charged a fee in exchange for access to its platform and asked the department about how it should source its user fees and fee revenues within and without the state for purposes of the state sales factor. The department clarified that when the activity producing the sales revenue occurred entirely or predominantly in the state, the receipts from the activity must be sourced to that state. Further, the department informed that whether the income-producing activity occurred in the state is determined based on a user’s billing address. Accordingly, the taxpayer was required to source its income from the services it provided to customers based on the customer’s location.
Technical Assistance Advisement, No. 20C1-001, Florida Department of Revenue, January 13, 2020, released February 2020
GILTI regulations adopted
Iowa has adopted corporate income tax regulations regarding the global intangible low tax income (GILTI).
Beginning in tax year 2019, Iowa requires taxpayers to include federal GILTI in the taxpayer’s Iowa net income. The inclusion occurs after subtracting allowable federal deductions. The rules provide for apportionment of GILTI. The existing rules did not apply to GILTI because GILTI represents a new category of income. Thus, the amendments provide a formula for apportioning GILTI in and outside of Iowa.
The net amount of GILTI is included in the numerator of the business activity formula. The amount is included to the extent it is from the taxpayer’s ownership of controlled foreign corporations (CFCs). The CFCs must be an integral part of business activity occurring regularly in Iowa.
Rules 701—54.2(422), 59.28, Iowa Department of Revenue, effective April 1, 2020
Standard apportionment formula was unconstitutional as applied
Michigan's standard apportionment formula was unconstitutional as applied to a taxpayer's business activity. Thus, the taxpayer qualified to use an alternate method to calculate its Michigan business tax liability. The taxpayer met its burden of proving that the standard formula did not fairly represents its business activity in the state. Applying the standard formula led to a grossly distorted result. This ran afoul of the Due Process and Commerce Clauses.
Sale of business
The case involved the sale of an out-of-state business. The business provided services in many states throughout the Midwest. While engaged in a severe oil spill cleanup project in Michigan, the business sold all of its stock to the taxpayer. It treated the sale as a sale of its assets.
On its short period return for the year of sale, it included the sale in its tax base and in its sales factor denominator (i.e., sales everywhere). Upon audit, the Department of Treasury excluded the sale from the sales factor denominator. This increased the sales factor from about 15% to about 70%. But, historically, the business’s sales in Michigan averaged around 7% of its total sales. The majority of the activities making up the business’s fair market value at the time of the sale occurred outside of Michigan. Thus, imposing a tax on 70% of the gain from the sale was not commensurate with the protection, opportunities, and benefits Michigan conferred on the business. The fact that the sale occurred in a short year when the business had an unusually large percentage of activity in Michigan compounded the problem.Thus, the Court of Appeals remanded the case for the parties to determine an alternate method of apportionment.
Vectren Infrastructure Services Corp. v. Department of Treasury, Michigan Court of Appeals, No. 345462, March 12, 2020
Corporate income tax net deferred tax liability deduction guidance issued
New Jersey has issued a technical bulletin explaining the eligibility requirements for the net deferred tax liability deduction available to corporation business taxpayers adversely affected by the shift to combined reporting.
The deduction is available to publicly-traded companies and their affiliates (subsidiaries) whose deferred tax positions are negatively affected by the switch to combined reporting. The deduction is allowed in an amount necessary to offset the increase in the net deferred tax liability, decrease in the net deferred tax asset, or aggregate change from a net deferred tax asset to a net deferred tax liability. Taxpayers can use one-tenth of the deduction per year over a ten-year period beginning after 2022.
Technical Bulletin TB-96, New Jersey Division of Taxation, February 24, 2020
Benefits enacted for state qualified opportunity fund investments
Wisconsin has enacted a capital gain exclusion or basis adjustment for investments in a Wisconsin qualified opportunity fund, applicable to taxable years beginning after 2019. "Wisconsin qualified opportunity fund" means a qualified opportunity fund holding at least 90% of its assets in Wisconsin qualified opportunity zone property.
Capital gain exclusion
Individuals can subtract:
- 10% of the deferred gains from investment in a Wisconsin qualified opportunity fund if held for at least five years (this is in addition to the federal 10% exclusion); and
- 15% of the deferred gains from investment in a Wisconsin qualified opportunity fund if held for at least seven years (this is in addition to the federal 15% exclusion).
An individual can claim the 30% long-term capital gain exclusion in addition to this state subtraction. However, this subtraction does not apply to capital gains excluded or deferred under the qualified Wisconsin business program. In addition, an individual partner, member, or shareholder may not claim this Wisconsin subtraction if the partnership or S corporation elects to pay tax at the entity level.
For corporations, other than S corporations, the basis increase allowed under federal law for investment in a Wisconsin qualified opportunity fund is increased by:
- 10% of the deferred gains from investment in a Wisconsin qualified opportunity fund if held for at least five years (this is in addition to the federal 10% basis increase); and
- 15% of the deferred gains from investment in a Wisconsin qualified opportunity fund if held for at least seven years (this is in addition to the federal 15% basis increase).
If a Wisconsin qualified opportunity fund is liable for a penalty under IRC Sec. 1400Z−2(f), the fund is also liable for a Wisconsin penalty equal to 33% of the federal penalty.
Act 136 (A.B. 532), Laws 2020, applicable as noted; Fact Sheet 1121, Wisconsin Department of Revenue, March 2020
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