State and local tax advisor: June 2020

For COVID-19-related state and local tax information, please see our alert here.

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

• Arkansas
• Colorado
• District of Colombia
• Idaho
• Illinois
• Iowa
• Louisiana
• Michigan
• New York
• Rhode Island

Arkansas

Marketplace seller was not required to obtain tax license

A marketplace seller (taxpayer) was not required to obtain an Arkansas sales tax license because the marketplace facilitator collected the tax on each of the taxpayer’s sales. Generally, a marketplace seller is a person who has an agreement with a marketplace facilitator under which the marketplace facilitator facilitates sales for the person. In this matter, the taxpayer transacted entirely as a marketplace. Since the marketplace facilitator collected the tax on each of the taxpayer’s sales, the taxpayer did have not sales to report in any given month. Accordingly, the taxpayer was not required to obtain a gross receipts tax permit or file the sales tax returns that are typically required of taxpayers who sell tangible personal property.

Revenue Legal Counsel Opinion No. 20200416, Arkansas Department of Finance and Administration, May 15, 2020

Colorado

Sourcing of partnership guaranteed payments discussed

In a general information letter, the Colorado Department of Revenue (department) discussed sourcing of partnership guaranteed payments for personal income tax purposes. In this matter, the taxpayer inquired about the method of determining the sourcing of guaranteed payments made by a partnership to nonresident partners for services performed and the impact of a partnership’s election to apportion and allocate nonresident partners’ distributive shares on the sourcing method.

It was noted that:

• The source of a guaranteed payment for services is determined in accordance with the rules for sourcing wage income.
• A guaranteed payment to a nonresident partner for services is not part of the partner’s distributive share because the sourcing of distributive shares of partnership income does not apply to guaranteed payments for services rendered.
• A partnership election does not impact the method for determining the source of guaranteed payments for services.

GIL-20-001, Colorado Department of Revenue, February 28, 2020, released May 2020

District of Columbia

CARES Act loans excluded from tax

The District of Columbia has adopted a bill stating that small business loans awarded and forgiven under the Coronavirus Aid, Relief, and Economic Security (CARES) Act are excluded from the franchise tax.

Act 23-323 (D.C.B. 23-734), Laws 2020, approved May 21, 2020, effective after a 60-day congressional review period, expires 225 days after taking effect

Idaho

Sale of LLC interest not taxable

The Idaho Supreme Court found that a corporate taxpayer’s sale of an ownership interest in a limited liability company (LLC) was not “business income” apportionable to Idaho. The decision upheld a district court decision.

Corporate structure

The taxpayer was incorporated in Virginia. For many years it manufactured and sold gear. In 2003, the owner of the corporation formed the LLC and transferred the net assets of the corporation to the LLC in exchange for a majority membership interest. The LLC was based in Virginia and operated across many states, including Idaho. The LLC established a physical presence in Idaho in 2004 when it purchased and developed real property, commenced sales of its products, and hired employees in Idaho. In 2007, the LLC opened a factory in Idaho. By 2010, the LLC held approximately $20 million worth of real and personal property in Idaho.

In 2010, the corporation sold its interest in the LLC for a net gain of $120 million. The corporation reported the gain from the sale on its 2010 Idaho tax return, but it did not apportion any of the gain to Idaho. The corporation reported and paid taxes on the gain from the sale to Virginia. Idaho concluded the gain was “business income,” taxable in Idaho.

Was the gain “business” or “nonbusiness income?”

Idaho was trying to apportion the income from the corporation’s sale of the LLC to Idaho. Idaho contended the sale qualified as business income because the LLC constituted a necessary part of the corporation’s operations.

Idaho uses two separate definitions for business income, the:

• Transactional test
• Functional test

Transactional test. Under the transactional test, income from transactions and activity in the regular course of the taxpayer’s trade or business is business income. The transactions need to be ones that frequently occur in the trade or business. On its returns, the corporation listed its business activity as investment. The corporation was considered an “investment” company. The corporation did not regularly engage in the trade or business of buying and selling subsidiary companies. The gain did not meet the definition of business income under that transactional test.

Functional Test. Under the functional test, income from the acquisition, management, or disposition of tangible and intangible property when the acquisition, management, or disposition are integral or necessary parts of the taxpayer’s trade or business operations is business income. Idaho provides two methods for meeting the functional test:

• Finding that an intangible interest serves an operational function as “an integral, functional, or operative component to the taxpayer’s trade or business operations”
• By meeting the unitary-business test

The taxpayer was a holding company. The sale of the LLC was a passive investment because the sale was not an integral, functional, or operative part of the taxpayer’s business. The sale did not further the taxpayer business, which was holding interest, but instead discontinued the business. The functional test is not met where the holding of property is limited to solely an investment function.

Also, there was no unitary-business. The corporation was a parent holding company with no shared control or operation over the LLC. There was no centralized management, oversight, or headquarters with the corporation. The only transactions between the companies consisted of the 2003 transfer of assets, regular income from the LLC for the held interests, and the 2010 sale of those interests. The main connection between the two companies was the same founder, but his presence at both did not alone suggest the level of oversight that unitary principles require.

Noell Industries, Inc. v. Idaho State Tax Commission, Idaho Supreme Court, No. 46941, May 22, 2020

Illinois

COVID-19 withholding guidance released

Illinois released personal income tax withholding guidance for employers due to the COVID-19 outbreak. The guidance applies to out-of-state employers who employ Illinois residents working from home during the pandemic.

Does Illinois require withholding from out-of-state employers?

Illinois will require out-of-state employers to withhold income tax from employees:

• Who perform services in Illinois.
• Who perform those services in Illinois for more than 30 days.

Most of those employers must also register for withholding.

The withholding requirements do not apply to out-of-state employers from states that have a reciprocal collection agreement with Illinois.

Will Illinois impose penalties and interest?

Illinois will waive penalties and interest for out-of-state employers who fail to withhold if employees are working at home in the state solely due to the pandemic.

Will employees owe income tax?

Employees who do not have Illinois income tax withheld may owe income tax. Estimated tax requirements may also apply.

Informational Bulletin FY 2020-29, Illinois Department of Revenue, May 19, 2020

City of Chicago extends due dates again for various taxes

The City of Chicago tax payment due dates for the periods July 2019 through September 2020 have been extended again for the following taxes:

• Amusement tax
• Bottled water tax
• Checkout bag tax
• Ground transportation tax
• Hotel accommodations tax
• Parking tax
• Restaurant tax

New due dates

Tax payment due dates for the following tax payment periods have been extended as follows:

• Period of July 2019 through February 2020 — new due date of July 15, 2020
• Period of March and April 2020 — new due date of August 17, 2020
• Period of May and June 2020 — new due date of Sept. 15, 2020
• Period of July and August 2020 — new due date of Oct. 15, 2020
• Period of September 2020 — new due date of Nov. 16, 2020

In addition, the filing deadline for 2020 annual tax returns has been extended from Aug. 17, 2020 to Oct. 15, 2020.

News Release, Chicago Department of Finance, June 1, 2020

Iowa

CARES Act conformity discussed

Iowa has provided guidance to income taxpayers regarding conformity with the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020. Iowa has not conformed with any of the federal tax changes in the CARES Act to the extent they apply to any tax year beginning before Jan. 1, 2020. Specifically, Iowa does not conform with:

• Paycheck Protection Program (PPP)
• Modification of Limitation on Losses for Taxpayers Other than Corporations (Excess Business Losses) (IRC Sec. 461(l))
• Modification of Limitation on Business Interest (IRC Sec. 163(j))
• Depreciation of Qualified Improvement Property (QIP) (IRC Sec. 168(e)(6))

Iowa does generally conform with tax provisions of the CARES Act to the extent they affect Iowa income taxes for tax years beginning on or after Jan. 1, 2020.

Iowa Nonconformity: Coronavirus Aid, Relief, and Economic Security Act of 2020, Iowa Department of Revenue, June 1, 2020

COVID-19 FAQs updated with nexus information

Iowa has released telecommuting and nexus guidance for income taxpayers.

Nexus

While Iowa’s state of emergency in response to COVID-19 remains in effect, Iowa will not consider the will not consider the presence of one or more employees working remotely from within Iowa solely due to the COVID-19 pandemic, by itself, sufficient business activity within the state to establish Iowa corporate income tax nexus. Iowa will not consider presence by nonsales employees due to the pandemic sufficient, by itself, to cause a corporation to lose the protections of Public Law 86-272.

Withholding

Iowa individual income tax and withholding requirements have not been modified by the COVID-19 pandemic. Compensation for personal services rendered in Iowa is subject to Iowa income tax, unless that income is exempted by a specific provision of Iowa law. Iowa individual residents are subject to tax on their entire income, wherever earned, so an Iowa resident’s income tax return filing requirements should not be affected by temporary telecommuting in Iowa or another state. Nonresidents of Iowa who normally work in Iowa but are temporarily telecommuting in another state, or who normally work outside of Iowa but are temporarily telecommuting in Iowa, may need to adjust their income apportionment or their Iowa income tax return filing requirement. However, Iowa has a reciprocal agreement with the state of Illinois.

COVID-19 Frequently Asked Questions, Iowa Department of Revenue, May 2020

Louisiana

Remote seller registration to become effective

Remote seller registration requirements are effective July 1, 2020. Remote sellers must apply to the Louisiana Sales and Use Tax Commission for Remote Sellers for approval to collect within 30 calendar days after meeting economic nexus thresholds. State and local tax collection must start once approved, no later than 60 days after meeting one of the economic nexus thresholds.

Economic nexus thresholds

A seller has economic nexus with Louisiana if it has:

• Sales into the state in excess of $100,000
• 200 or more separate transactions

Direct marketers

Direct marketers could voluntarily collect and remit until the Commission enforced collection. Thus, in the near future, direct marketers will receive information regarding registration. Direct marketers that do not meet economic nexus thresholds may continue to collect and remit.

Pending legislative change

Pending legislation would require marketplace facilitators to collect and remit sales tax. The Louisiana Department of Revenue advises marketplace facilitators to be aware of this pending legislation and the potential amendment that would change the applicability date to July 1, 2020.

Revenue Information Bulletin No. 20-002, Louisiana Department of Revenue, May 7, 2020

Michigan

Michigan provides guidance on treatment of IRC Sec. 163(j) business interest limitation

Michigan has released guidance on how the IRC Sec. 163(j) business interest limitation impacts Michigan corporate income tax. Michigan conforms to the federal limitation when computing corporate income tax liability. A corporate taxpayer’s starting point for computing its state tax base is federal taxable income. The starting point incorporates any business interest expense deducted at the federal level. Thus, a taxpayer that files a separate federal return does not have to make any adjustments for IRC Sec. 163(j) on its Michigan return. But, a taxpayer that files a federal consolidated return will have additional calculations when it files its Michigan return separately or as part of a unitary business group (UBG).

Pro forma federal returns

Michigan requires each UBG member included on a federal consolidated return to separately compute a pro forma federal return. Michigan also requires a corporation that is part of a federal consolidated return but files separately for Michigan purposes to compute a pro forma federal return. Michigan will generally follow the IRC and supporting regulations when computing pro forma business interest expense.

Small business exemption and excepted trades or businesses

If a pro forma corporation’s federal consolidated group was exempt from the limitation for federal purposes, the corporation is exempt from the limitation for Michigan tax purposes. This includes corporations in consolidated groups that either met the small business exemption or engaged in an excepted trade or business. Conversely, if a pro forma corporation was subject to the limitation on its federal consolidated return, it is subject to the limitation for Michigan tax purposes.

Eliminations for UBGs

To the extent included in the corporate income tax base, a UBG member must eliminate the pro forma business interest expense attributable to transactions with other members of the UBG. In addition, a UBG member that lent to another member must eliminate its interest income to the extent included in that member’s pro forma federal taxable income.

Carryforward of disallowed business interest expense

A pro forma corporation must track in its books and records, and report in an attachment to its return, any Michigan carryforward of disallowed business interest expense. The Michigan carryforward may differ from the federal carryforward amounts. A UBG member cannot use the carryforward or disallowed business interest expense of another UBG member.

Penalty waivers

If a taxpayer has a tax deficiency due to not calculating business interest expense correctly in accordance with department guidance, the department may waive penalties. If that is the only reason for the deficiency, the department will consider it reasonable cause to justify a waiver of penalties upon the taxpayer’s request.

Notice: Corporate Income Tax Treatment of the IRC 163(j) Business Interest Limitation, Michigan Department of Treasury, June 8, 202

New York

Filing impact of state not following IRC changes explained

New York has issued income tax filing guidance for individuals, partnerships, estates, and trusts related to the fact that federal amendments made to the IRC after March 1, 2020, do not apply to the state or New York City personal income taxes.

Any retroactive changes made to the IRC after March 1, 2020, should not be taken into account when filing 2019 New York personal income tax returns. For example, the federal CARES Act made retroactive changes to the IRC on March 27, 2020. Although the changes may impact a taxpayer’s 2019 federal income tax return, they should not be reflected on the 2019 New York personal income tax return.

Filing 2019 returns

For taxpayers filing their 2019 return using software, software developers that produce e-file approved commercial software for New York personal income tax have been advised not to update the 2019 federal income tax computation for New York income tax purposes to account for any changes made to the IRC after March 1, 2020. Accordingly, the software should correctly compute the federal amounts to be used on the New York personal income tax return.

Taxpayers filing their 2019 New York return without software must compute any federal amounts using federal forms the IRS made available prior to March 1, 2020.

The guidance also explains how amended returns should be handled.

Important Notice N-20-7, New York Department of Taxation and Finance, June 10, 2020

New York City

City decoupled from certain CARES Act provisions

A New York law has decoupled the New York City business corporation tax, general corporation tax, banking corporation tax, and unincorporated business tax from certain federal income tax changes contained in the CARES Act.

Business interest expense limitation. For all four taxes, an addition modification is required for the amount of the increase in the federal interest deduction allowed under IRC Sec. 163(j)(10). This relates to the federal CARES Act amendment increasing the cap of the business interest expense limitation and allowing an election to use 2019 adjusted taxable income for 2020. The modification is required for taxable years beginning in 2019 and 2020.

Net operating loss deduction. For the general corporation tax, banking corporation tax, and unincorporated business tax, the law provides that for taxable years beginning before 2021, any amendment to IRC Sec. 172 made after March 1, 2020, does not apply.

Excess business loss limitation. For the unincorporated business tax, for taxable years beginning before 2021, an addition modification is required for the amount of increase in the federal deduction allowed under any amendment to IRC Sec. 461(l) made after March 1, 2020. This relates to the federal suspension of the excess business loss limitation.

Ch. 121 (S.B. 8411), Laws 2020, effective June 17, 2020, applicable as noted

Rhode Island

Guidance issued on nexus and apportionment during COVID-19 pandemic

The Rhode Island Division of Taxation has issued information on corporate income tax nexus and apportionment issues during the COVID-19 pandemic.

Nexus

For the duration of the state’s COVID-19 state of emergency, corporate income tax nexus will not be established solely because an employee is temporarily working remotely in Rhode Island. Further, property that is temporarily located in Rhode Island during the state of emergency for telework purposes, such as computer equipment, will not trigger nexus for Rhode Island corporate income tax purposes.

In addition, the performance of any services by such employees within Rhode Island will not cause their employer to lose the protection of Public Law 86-272. This policy is predicated on the condition that there are no other activities being conducted within Rhode Island on behalf such out-of-state corporate employers, either before or during Rhode Island’s COVID-19 state of emergency, that would establish nexus.

Apportionment

During the state of emergency, services performed by employees who previously worked in another state, but who are now working remotely from Rhode Island, will not be considered to increase the numerator of their employer’s payroll factor for purposes of apportioning income. This policy is predicated on the condition that the presence of such employees in Rhode Island will be temporary and that they will return to a regular workstation located outside of the state after the coronavirus state of emergency has ended.

ADV 2020-24, Rhode Island Division of Taxation, May 28, 2020