State and local tax advisor: August 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:

• Colorado
• Iowa
• Maryland
• Massachusetts
• Michigan
• New Jersey
• New York
• North Carolina
• Ohio
• Oregon
• Pennsylvania
• Tennessee
• Washington

Colorado

Home rule, self-collected municipalities begin adopting economic nexus and marketplace facilitator collection laws after launch of online centralized filing portal

In June 2020, the Colorado Department of Revenue (CO DOR) launched the first version of the new Sales and Use Tax Simplification Program (SUTS). This online centralized filing portal enables a single point of remittance for (1) all state-collected sales and use taxes and (2) local sales and use taxes of home rule, self-collected municipalities that have agreed to participate in SUTS. As of Aug. 5, 2020, 20 Colorado home rule, self-collected municipalities are participating in SUTS, and 14 additional self-collected municipalities are in the process of executing agreements to participate as well.

Since the SUTS launch, some home rule, self-collected municipalities have also adopted the Colorado Municipal League (CML) Model Ordinance on Economic Nexus and Marketplace Facilitators (Model Ordinance), which enables the adopting municipalities to impose economic nexus and marketplace facilitator collection laws when sales into the state (not just the individual municipality) exceed $100,000 per year. In introducing the Model Ordinance, the CML noted that home rule, self-collected municipalities should only adopt it if they participate in SUTS because the CML believes that complying with facilitator collection laws would be unconstitutionally burdensome under South Dakota v. Wayfair, Inc., 138 S.Ct. 2080 (2018) unless the municipality participates in SUTS. Specifically, the CML states on its website: “The risk of a lawsuit under the United States Commerce Clause if you [i.e., self-collected municipalities not participating in SUTS] were to enforce economic nexus without the single point of remittance is high. Using the single point of remittance portal [i.e., SUTS] and uniform language [i.e., Model Ordinance] will assist in lessening that risk, although not removing it entirely.”

Corporate, personal income taxes: Tax rate reduction initiative qualifies for 2020 ballot

A proposed initiative to decrease the Colorado income tax rate has received enough signatures to appear on the state’s Nov. 3, 2020, ballot.

Tax rate reduction

If approved by voters, Initiative No. 306 would decrease the tax rate from 4.63 to 4.55% for the following:

• Personal income tax
• Corporate income tax
• Personal income tax withholding

The reduced rate, if approved, would be effective for tax years beginning on and after Jan. 1, 2020.

News Release, Colorado Secretary of State, August 17, 2020

Iowa

GILTI guidance updated

Iowa has updated its corporate income tax guidance regarding global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) to reflect recent legislative changes. The new law excludes GILTI from the Iowa corporate income tax base retroactive to tax years after 2018.

Taxpayers who filed 2019 returns that included GILTI prior to the law change may need to file amended returns to exclude GILTI from their Iowa income.

Impact of law change

GILTI under IRC Sec. 951A is now excluded from the Iowa corporate income tax base. Because GILTI is fully excluded from the corporate income tax base, corporations (including those subject to the franchise tax for Iowa purposes) are not permitted to take the 50% GILTI deduction under IRC Sec. 250(a)(1)(b). The law does not treat GILTI as a foreign dividend, or as subpart F income, and no portion of GILTI should be used in calculating a corporate taxpayer’s Iowa foreign dividends received deduction.

GILTI should not be included in a partnership’s or S corporation’s Iowa income, and no Iowa adjustment is required or allowed on an IA 1065 or IA 1120S return or Iowa K-1. Individual partners or shareholders must include all GILTI received from a pass-through as reported on their federal K-1 for Iowa purposes.

The corporate exclusion does not apply to individuals or fiduciaries. Individual and fiduciary income taxpayers must include all GILTI in their Iowa net income to the same extent it was included in their federal adjusted gross income. This includes amounts resulting from the taxpayer’s ownership in a partnership or S corporation and amounts reported on any federal 1041 K-1s received by the taxpayer.

Reform Guidance - GILTI & FDII, Iowa Department of Revenue, July 17, 2020

Maryland

Treatment of federal CARES Act provisions explained

Maryland explained the income tax impact of various federal CARES Act provisions.

Business interest expense deduction

The CARES Act amended IRC Sec. 163 to increase the percentage of adjusted taxable income that can be included in the business interest expense deduction from 30 to 50% for most business types for taxable years beginning in 2019 and 2020. In addition, for any taxable year beginning in 2020, a taxpayer may elect to substitute its 2019 taxable income in the calculation of its business interest expense deduction, unless 2019 was a short taxable year.

If taxpayers amend their federal 2018 or 2019 return to increase the business interest expense deduction, they may also amend their Maryland return accordingly. No decoupling modification for business interest expense is required for amended returns for tax years 2018 or 2019.

However, Maryland is decoupled from IRC Sec. 163 as amended by the CARES Act, as it applies to tax years beginning in 2020. A decoupling modification is required in order to add back to federal taxable income any amount included in the federal business interest expense deduction that exceeds 30% of federal taxable income.

Limitation of excess business losses for noncorporate taxpayers

The CARES Act amended IRC Sec. 461(l) to eliminate the excess business loss limitation on individuals, trusts, and estates and allow them to use business losses to offset the full amount of their nonbusiness income for tax years 2018 through 2020.

Maryland conforms to this amendment, as it applies to tax years 2018 and 2019. If taxpayers amend their 2018 or 2019 federal returns to use business losses to offset the full amount of their nonbusiness income, they may also amend their Maryland return for those years.

However, Maryland is decoupled from IRC Sec. 461(l) as amended by the CARES Act, as it applies to tax year 2020. A decoupling modification is required to add back to federal taxable income any deduction of business loss that exceeds $250,000, or $500,000 for joint filers.

Net operating losses

The CARES Act amended the net operating loss (NOL) provisions enacted under the TCJA to allow a five-year carryback for NOLs and suspend the 80% carryforward limitation for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2021.

Maryland conforms to this provision as it applies to tax years 2018 and 2019. NOLs incurred in tax years 2018 and 2019 may be carried back for up to five years.

However, Maryland is decoupled from IRC Sec. 172 as amended by the CARES Act, as it applies to tax year 2020. Taxpayers may not amend prior year returns to carry back current year federal NOLs incurred in tax year 2020. Further, any NOLs carried forward from prior years are limited to 80% of Maryland taxable income for 2020.

A decoupling modification is required (1) for each year to which a 2020 NOL is carried back at the federal level, and (2) to add back to tax year 2020 any NOL carryforward that exceeds 80% of taxable income for the tax year. The modification is determined using Maryland Form 500DM and instructions, with pro forma federal returns being completed in order to determine the modification.

Qualified improvement property and bonus depreciation

The CARES Act made a technical correction to the TCJA, allowing qualified improvement property (QIP) placed in service after Dec. 31, 2017, to be classified as 15-year property and eligible for federal 100% bonus depreciation.

Maryland conforms to the provision that classifies QIP as 15-year property for all tax years beginning after Dec. 31, 2017. However, because Maryland has decoupled from federal bonus depreciation, nonmanufacturers may not take bonus depreciation on QIP at the Maryland level, even though the property qualifies for federal bonus depreciation.

Income Tax Alert, Maryland Comptroller, July 24, 2020

Massachusetts

Emergency withholding rules for COVID-19 telecommuters adopted

Massachusetts adopted emergency sourcing rules for personal income tax withholding from employees who telecommute during the COVID-19 pandemic. It also issued proposed rules for public comment that are identical to the emergency rules.

Nonresidents

Employers must source compensation to Massachusetts, and withhold income tax, for personal services performed by a nonresident:

• Who, immediately before the Massachusetts COVID-19 emergency, was an employee engaged in performing those services in the state.
• Who is performing those services from a location outside the state due to pandemic-related circumstances.

Pandemic-related circumstances include:

• A government order issued in response to the COVID-19 pandemic.
• A remote work policy adopted by an employer to comply with federal or state government guidance or public health recommendations on the COVID-19 pandemic.
• Employee compliance with quarantine or isolation directives on a diagnosis or suspected diagnosis of COVID-19 or the advice of a physician on COVID-19 exposure.
• Any other remote COVID-19 work arrangement during the period that the rules are in effect.

Residents

Massachusetts will provide a credit for income taxes paid to another state to a resident:

• Who, immediately before the Massachusetts COVID-19 emergency, was an employee engaged in performing services from a location outside the state.
• Who began performing those services in Massachusetts due to pandemic-related circumstances.

It also will not require withholding from the employer if the employer must withhold income tax for the employee in the other state.

Effective date

The regulation is effective through the earlier of:

• Dec. 31, 2020
• 90 days after Massachusetts Gov. Charlie Baker gives notice that the state of emergency declaration is no longer in effect

Public hearing

The Massachusetts Department of Revenue intends to hold a public hearing on the proposed rules on Aug. 27, 2020. Individuals who want to testify should notify the department by Aug. 26, 2020.

Emergency 830 CMR 62.5A.3, Massachusetts Department of Revenue, effective July 21, 2020 and as noted; Proposed 830 CMR 62.5A.3 and Notice of Public Hearing, Massachusetts Department of Revenue, July 21, 2020

COVID-19 guidance on remote employees revised

Massachusetts reissued and revised guidance on the tax implications of employees working remotely during the COVID-19 pandemic. The guidance clarifies and replaces rules explaining the impact of employee work-from-home requirements on:

• Corporate excise tax nexus and the Massachusetts apportionment formula
• Pass-through entity withholding and filing requirements
• Personal income and withholding tax obligations
• Sales and use tax nexus
• Massachusetts Paid Family and Medical Leave (PFML) contributions

It mirrors emergency and proposed regulations on personal income and withholding tax requirements for employees telecommuting due to COVID-19 pandemic-related circumstances. The rules are effective until the earlier of:

• Dec. 31, 2020
• 90 days after Massachusetts lifts the state of emergency

Corporate excise tax nexus

The presence of one or more employees working remotely from Massachusetts solely due to COVID-19 pandemic-related circumstances will not create nexus. The presence of employees also will not cause the loss of constitutional protections under P.L. 86-272. This includes the presence of business property reasonably needed by employees for use while working remotely.

Pandemic-related circumstances include:

• A government order issued in response to the COVID-19 pandemic.
• A remote work policy adopted by an employer to comply with federal or state government guidance or public health recommendations on the COVID-19 pandemic.
• Employee compliance with quarantine or isolation directives on a diagnosis or suspected diagnosis of COVID-19 or the advice of a physician on COVID-19 exposure.

Massachusetts will apply the same nexus rules to determine withholding and filing obligations for:

• S corporations
• Partnerships
• Limited liability companies (LLCs)
• Other pass-through entities

Apportionment formula

The Massachusetts apportionment formula includes a payroll factor and property factor. Compensation for services performed by employees in Massachusetts during the emergency will not increase the numerator of the employer’s payroll factor. The presence in Massachusetts of business property reasonably needed by employees for use while working remotely will not increase the numerator of the employer’s property factor.

Massachusetts will apply the same apportionment rules to pass-through entities.

Sales and use tax nexus

The presence of employees working remotely from Massachusetts due solely to pandemic-related circumstances will not trigger nexus itself for sales and use tax collection purposes.

Technical Information Release 20-10, Massachusetts Department of Revenue, July 21, 2020

Michigan

Sales and use tax: Indiana-based company did not relinquish control on implants; properly subject to Michigan use tax

An Indiana-based company’s (taxpayer’s) supply of manufactured and marketed orthopedic implants (such as prosthetic joints) was properly subject to Michigan use tax as the taxpayer did not totally relinquish control of the property when it shipped it into Michigan. Generally, the use tax is imposed on the privilege of using, storing, or consuming tangible personal property in Michigan. Under Michigan law, “use” means the exercise of a right or power over tangible personal property incident to the ownership of that property including transfer of the property in a transaction where possession is given. When a taxpayer places requirements on the property when it’s in Michigan, the taxpayer has not ceded all control over the property and in order for use tax to be inapplicable, the owner must have relinquished “total control” over the property outside of the state.

In this matter, the taxpayer retained ownership of the instruments and required its customers to reimburse the taxpayer for any loss or damage of the instruments. The taxpayer argued that it did not “use” the property because it did not exercise a right or power over the instruments, since it relinquished control of them to a common carrier. It was noted that, although the taxpayer transferred possession of its personal property to Michigan hospitals, it did not relinquish total control of the property because it imposed at least one requirement on the hospitals regarding the property. Since the taxpayer did not totally relinquish control of the property when it shipped it into Michigan, the property was subject to use tax.

Zimmer US Inc. v. Michigan Department of Treasury, Michigan Court of Appeals, No. 349358, July 23, 2020

Personal protective equipment qualifies for industrial processing exemption

Personal protective equipment (PPE) or safety equipment purchased by a person eligible for the industrial processing exemption is exempt from Michigan sales and use tax if used or consumed in an exempt industrial processing activity.

Industrial processing exemption

PPE or safety equipment is eligible for exemption if it meets the following criteria:

• Is purchased by the industrial processor or another person engaged in an industrial processing activity on behalf of an industrial processor, including purchases made directly by an employee of an industrial processor.
• Is used for the safety of employees or other authorized personnel.
• Is used in an industrial processing activity.

If PPE or safety equipment is used for both an exempt and nonexempt activity, the exemption must be apportioned based on the percentage of exempt use to total use determined by a reasonable formula approved by the Department of Treasury.

Revenue Administrative Bulletin 2020-9, Michigan Department of Treasury, July 20, 2020

New Jersey

GILTI guidance for S corporations updated

New Jersey has updated its global intangible low-taxed income (GILTI) guidance for S corporation taxpayers to reflect guidance issued by the Internal Revenue Service.

IRS regulations

In accordance with both the final federal regulations and IRS Notice 2019-46, taxpayers (including partners in a partnership and shareholders of an S corporation), should report GILTI for New Jersey income tax purposes when the income is actually distributed from earnings and profits as dividend income.

New Jersey impact

Under the revised federal regulations, GILTI no longer meets the “S Corporation Income” definition under New Jersey law (N.J.S.A. 54A: 5-10). Thus, GILTI does not have to be included in the income of New Jersey S corporation shareholders.

Taxpayers may amend their returns if this change affects their situation. Taxpayers are responsible for keeping track of differences in their federal and New Jersey basis, so that the proper New Jersey gain or loss from the disposition of foreign stock is reported.

Federal Tax Cuts and Jobs Act (TCJA) - Questions and Answers, New Jersey Division of Taxation, July 27, 2020

New York

New York State issues draft regulations on net operating losses

The New York State (NYS) Department of Taxation and Finance (Tax Department) has posted for comment new draft corporate franchise tax regulations under Article 9-A of the New York Tax Law (to be codified at N.Y. Comp. Codes and Regs. tit. 20, Subparts 3-10.1 through 3-10.8), which would add rules on the NYS corporate income tax treatment of net operating losses (NOLs) and NOL deductions (NOLDs) for tax years beginning on or after Jan. 1, 2015 (hereafter, draft regulations). These draft regulations, if finalized, would repeal existing regulations related to NOLDs under N.Y. Comp. Codes and Regs. tit. 20, Subpart 3-8.1 through 3-8.9, but the repealed regulations would still apply to tax years beginning before Jan. 1, 2015.

The Tax Department has requested comments on the draft regulations by Oct. 5, 2020, but said on its website that it may still consider comments submitted after the due date. The draft regulations contain examples explaining the new rules, including:

• Adding back New York investment capital losses (Example 1)
• How the NOLD reduces tax on the business income base to the greater of the capital base tax or the fixed-dollar minimum tax (Example 2)
• How separate filers (Example 4) or combined groups compute and/or carry back NOLs (Examples 5 and 6)
• Scenarios involving real estate mortgage investment conduits (REMICs) and excess inclusion income (Examples 9-11)

North Carolina

Market-based sourcing

The North Carolina Department of Revenue (NC DOR) issued a summary of the state’s market-based sourcing provisions, which apply to tax years beginning on or after Jan. 1, 2020. According to the NC DOR, these provisions generally require receipts from services to be sourced to North Carolina if and to the extent the service is delivered to an in-state location. (Previously, such receipts were sourced based on the cost-of-performance method.) The state's market-based sourcing administrative rules provide for reasonable approximation when a taxpayer cannot determine the state to which a sale should be sourced and, when reasonable approximation cannot be determined, provide for the removal of such receipts from the factor calculation.

The NC DOR summary addresses generally applicable rules and special/industry- specific rules. Topics covered include guidance relating to receipts derived from: (1) in-person services, other than professional services (directly/indirectly provided by the taxpayer); (2) professional services; (3) non-in-person and nonprofessional services delivered to the customer, on behalf of the customer, or delivered electronically through the customer; (4) license or lease of intangible property; (5) sale of intangible property; (6) interest income received by a nonbank; (7) special rules for sourcing software transferred through a tangible medium and all other cases of software; (8) industry-specific rules for wholesale content distributors, and banks; and (9) other special apportionment provisions.

Corporate, personal income taxes: Impact of decoupling from certain federal tax provisions discussed

For corporate and personal income tax purposes, North Carolina Department of Revenue (department) issued an important notice identifying and explaining the decoupling of North Carolina law from certain federal tax provisions in Consolidated Appropriations Act of 2020 (FCAA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), collectively referred as “federal tax provisions.” As of May 1, 2020, individuals and corporations must apply federal tax provisions when calculating their state income tax liability to the extent North Carolina follows the federal tax provisions and does not decouple from the changes.

Taxpayers that are impacted by the decoupling provisions may refer the notice as it provides specific instructions for completing, or amending, 2019 corporate or personal income tax return. The department will release a notice discussing the impact of decoupling on the 2020 corporate or personal income tax returns in early January 2021.

Important Notice: North Carolina’s Reference to the Internal Revenue Code Updated - Impact on North Carolina Corporate and Individual Income Tax Returns, North Carolina Department of Revenue, July 20, 2020.

Ohio

Sales and use tax: Sourcing by marketplace facilitators explained

For the sourcing of sales for Ohio sales tax purposes, marketplace facilitators source sales they facilitate (excluding sales of motor vehicles, titled watercraft, and titled outboard motors) to the location where the consumer receives the property or service. When the marketplace facilitator makes direct sales that are received in Ohio, the sales are sourced to the location where the order is received.

Sales and Use Tax Information Release ST 2009-03, Ohio Department of Taxation, July 24, 2020

Oregon

Corporate income tax: COVID-19 guidance updated with nexus information

For Oregon corporate excise (income) tax purposes, the presence of teleworking employees in Oregon between March 8, 2020, and Nov. 1, 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.

COVID-19 Tax Relief Options, Oregon Department of Revenue, July 28, 2020

Pennsylvania

Departments use of benefits-received apportionment method upheld

A corporate income taxpayer, who determined its percentage of out-of-state sales of services using the wrong method, was entitled to a refund after applying the appropriate method and providing evidence to support its claim. Further, the Department of Revenue’s use of the benefits-received method to apportion sales of service was correct. The taxpayer originally calculated and paid its 2011 corporate net income taxes using the costs-of-performance method to determine the sales factor.

History of the case

After the taxpayer determined that filing using the benefits-received method would result in lower taxes, it requested a refund. The Department of Revenue denied the refund request because the taxpayer failed to present sufficient evidence demonstrating where its sales occurred. The taxpayer then appealed to the Board of Finance and Revenue, which upheld the decision of the Department. The Department acknowledged that the taxpayer eventually did provide the evidence needed to support its refund claim.

Arguments of the parties

Before the court, the Pennsylvania Attorney General argued that the Department’s interpretation of the tax code was in error. The Attorney General argued that the costs-of-performance method was the correct method to use when apportioning sales of services and that the taxpayer was not entitled to a refund. The Department filed as an intervenor in the case in order to argue in support of its longstanding interpretation of the tax code. The Department and the taxpayer both argued that the benefits-received method of calculating the sales factor was the correct interpretation of Pennsylvania law in 2011.

The Department had long interpreted the law to mean that the place where the income-producing activity occurred was the place where the customer received the benefit of the service. Accordingly, if a customer was outside Pennsylvania, the taxpayer’s income-producing activity regarding that customer occurred outside Pennsylvania. The Attorney General reasoned that the Department’s interpretation was not entitled to deference because it was never adopted as a legislative regulation. Further, the application of the benefits-received method of calculating the sales factor failed to effectuate the legislature’s intent. The Attorney General noted that the legislature enacted an amendment to the code in 2014 that expressly sources service receipts to Pennsylvania “if the service is delivered to a location in” Pennsylvania. The Attorney General argued there would have been no need for the legislature to amend the code if it already provided for application of the benefits-received method as the Department claimed.

Benefits-received apportionment upheld

The court determined the statute was ambiguous because it failed to define the terms “income-producing activity” and “costs of performance.” When a statute is ambiguous, courts generally defer to the expertise of the agency charged with interpretation and enforcement responsibilities. The court found it was undisputed that the Department has consistently interpreted the code as applying the benefits-received method for many years. The legislature acquiesced in that interpretation. In fact, the legislature’s amendment of the code in 2014 clarified, rather than altered, the application of the benefits-received method the Department was already applying and enforcing. The Department’s interpretation was not contrary to the legislature’s intent. Thus, the court upheld the Department’s application of the benefits-received method of calculating the sales factor and remanded the matter for issuance of a tax refund.

Synthes USA HQ, Inc. v. Commonwealth of Pennsylvania, Pennsylvania Commonwealth Court, No. 108 F.R. 2016, July 24, 2020

Tennessee

Effect of CARES Act provisions discussed

The federal CARES Act amended IRC Sec. 168 to reduce the MACRS recovery period of qualified improvement property from 39 to 15 years, thereby making such property eligible for federal bonus depreciation. Although Tennessee excise tax law conforms to the federal MACRS provisions, including the depreciation of qualified improvement property over 15 years, bonus depreciation is never allowed for excise tax purposes.

Business interest expense limitation: The TCJA limited deductions for net business interest under IRC Sec. 163(j) for tax years beginning after 2017, and the CARES Act retroactively loosened the limitation. Tennessee excise tax law conforms to the federal provisions, including the CARES Act, for tax periods beginning after 2017 and before 2020. For tax years beginning on or after Jan. 1, 2020, Tennessee decoupled from the TCJA’s amendment of IRC Sec. 163(j), so that the deduction for business interest expense will not be limited.

PPP loan forgiveness: The CARES Act also provided for an exclusion from gross income for forgiveness of a Paycheck Protection Program (PPP) loan. Tennessee excise tax law conforms to this provision, since the starting point for determining income subject to excise tax is federal taxable income.

NOLs: In addition, the CARES Act made revisions concerning federal NOL carryforwards and carrybacks. Tennessee does not follow federal law on NOLs. For Tennessee excise tax purposes, NOLs can be carried forward until fully used, but no more than 15 years. They are never carried back.

Impact of the CARES Act, Tennessee Department of Revenue, July 29, 2020

Washington

Sales and use tax: COVID-19 tax relief extended

Washington Governor Jay Inslee has extended Proclamation 20-20 to provide further excise tax relief due to COVID-19. Therefore, the department will waive interest on tax payments from Feb. 29, 2020 through the end of the emergency or Sept. 1, 2020, whichever occurs first. Furthermore, the department will delay the issuance of tax warrants, notices of withhold and deliver, and revocations until September 1.

Proclamation 20-20.6, Office of the Governor, August 3, 2020