State and local tax advisor: October 2020
Are you looking for the latest changes in state and local taxes? Find the October 2020 roundup of updates here.
The states covered in this issue of our monthly tax advisor include:
- New Jersey
- New York
- North Carolina
- South Carolina
Sales and use tax: Intercompany transfer of vehicles subject to tax
A California limited liability company (taxpayer) was not entitled to a refund of sales and use tax paid on the transfer of vehicles from its parent company because the taxpayer failed to establish that the parent company did not receive any consideration. Generally, intercorporate transactions are subject to the same rules that apply to all taxpayers unless a statutory or regulatory exception is applicable. In this matter, the California Department of Tax and Fee Administration (department) audited the taxpayer and found that it did not pay use tax on the transfer of vehicles from the parent company to the taxpayer. The department issued a Notice of Determination, and the taxpayer made payments satisfying the liability. Subsequently, the taxpayer filed a claim for refund and argued that it was not liable for any use tax because the parent company did not receive any consideration for the transferred vehicles. Further, the taxpayer asserted that there was no evidence that the transfer of assets created an intercompany debt, canceled an indebtedness, or was made in return for an additional ownership interest in the taxpayer. However, it was noted that the taxpayer failed to provide any contracts for the vehicle transfers from the parent company. Further, the taxpayer did not provide any evidence to establish that the parent company did not receive any consideration. Accordingly, the taxpayer was not entitled to a refund of tax paid on the transfer of vehicles.
CPC Transportation Company, LLC, California Office of Tax Appeals, No. 19064866, Aug. 12, 2020, released October 2020.
Unintended termination of California’s water’s-edge elections prevented; electronic withholding orders allowed
California has enacted legislation that:
- Prevents the unintended termination of water’s-edge elections for corporate tax purposes.
- Allows the Franchise Tax Board (FTB) to file or serve electronic withholding orders for income taxes.
For tax years beginning on or after Jan. 1, 2021, California eliminates the uncertainty arising from the unintended consequences of California’s “doing business” statute on a valid water’s-edge election. When a unitary foreign affiliate becomes a California taxpayer solely due to the “doing business” statute, California will treat that corporation as having made a water’s-edge election with other members of the unitary group. This prevents the unintended termination of an otherwise valid water’s-edge election.
The FTB previously issued notices indicating that it would not terminate an otherwise-valid water’s-edge election when a unitary foreign affiliate became a taxpayer solely by application of the amended “doing business” statute. FTB Notice 2016-02, issued Sept. 9, 2016, pertained to water’s-edge elections made before Sept. 9, 2016, for unitary foreign affiliates that became California taxpayers in a taxable year beginning on or before Dec. 31, 2016. FTB Notice 2017-04, issued Oct. 16, 2017, extended the guidance to water’s-edge elections made before Oct. 16, 2017, for unitary foreign affiliates that become California taxpayers in a taxable year beginning on or before Dec. 31, 2017. FTB Notice 2019-02, issued June 26, 2019, extended the guidance to water’s-edge elections made before June 26, 2019, for unitary foreign affiliates that became California taxpayers in a taxable year beginning on or before Dec. 31, 2020. The current legislation eliminates ambiguity and provides clear guidance going forward.
Electronic withholding orders
For notices filed or served on or after Jan. 1, 2021, the FTB may file or service the following by electronic transmission or other electronic technology:
- Continuous orders to withhold
- Earnings withholding orders for taxes
- Earnings withholding order
- Related notices or documents
A.B. 3372, Laws 2020, effective as noted; Bill Analysis, California Franchise Tax Board, September 2020.
Sales and use, miscellaneous taxes: Los Angeles offers tax penalty amnesty program
The City of Los Angeles, Calif., has announced a tax penalty amnesty program running from Oct. 1, 2020 to Dec. 17, 2020. The program provides a one-time opportunity for businesses to clear tax debt without paying the normally associated penalties. The program provides financial relief to distressed businesses negatively impacted by the current economic climate.
Taxes covered by the program
The program covers:
- business taxes
- communications users’ taxes
- transient occupancy taxes
- parking occupancy taxes
- electricity users’ taxes
- gas users’ taxes
- commercial tenants’ taxes
Relief from penalties
Both registered and unregistered businesses can apply for a waiver of penalties on outstanding taxes, including principal, interest, and fees, owed to the city. If they pay the outstanding principal, interest, and fees, they can avoid penalties in an amount up to the equivalent of 40% of their principal tax due.
How to apply
Businesses can apply for the program and pay all outstanding amounts online at: https://latax.lacity.org/oofweb/billpay/index.cfm. Or, they can complete a waiver application form and mail it with payment of all outstanding amounts to:
City of Los Angeles – Amnesty
Office of Finance
PO BOX 30716
Los Angeles, CA 90030-0716
The Office of Finance provides answers to frequently asked questions about the program on its website.
Tax Penalty Amnesty Program, City of Los Angeles Office of Finance, October 2020.
Corporate income tax: Taxpayer was doing business in state, subject to limited liability company tax
A limited liability company (taxpayer) was doing business in California and, thus, was required to pay LLC tax. Generally, a taxpayer is considered doing business in California if it satisfies certain bright-line nexus thresholds consisting of sales, property, or payroll amounts. In this matter, the taxpayer filed an amended 2016 California LLC return and sought a refund of the LLC tax on the basis that it was a limited partner of another LLC and was not doing business in California. However, the Franchise Tax Board denied the taxpayer’s request, asserting that nonregistered foreign LLCs that are members of an LLC doing business in California were considered to be doing business in California. It was noted that since the taxpayer’s pro rata share of the other LLC’s California property exceeded the applicable threshold, it qualified as doing business in California. Further, the taxpayer did not dispute that its property exceeded the bright-line threshold nexus amount. Accordingly, the taxpayer's refund request was denied.
Aroya Investments I, LLC, California Office of Tax Appeals, No. 19074982, July 7, 2020, released September 2020.
Income tax: Publication on CARES Act tax law changes revised
The Colorado Department of Revenue has revised a publication addressing how recent retroactive federal tax provisions under the Coronavirus Aid, Relief and Economic Security Act (CARES Act) interact with Colorado income taxation. The revised guidance addresses certain modifications to federal taxable income required pursuant to the enactment of H.B.1420, Laws 2020, including 2020 addback requirements for:
- Net operating loss deductions claimed on a taxpayer’s federal income tax return which exceed 80% of federal taxable income, determined without regard to the net operating loss deduction.
- Business interest deductions taken on the federal return to the extent they are in excess of the limits imposed under IRC Sec. 163(j), prior to the amendment of that section by Sec. 2306 of the CARES Act.
- Business losses to the extent they are in excess of the limits imposed under IRC Sec. 461(l), without regard to the amendment made by Sec. 2304 of the CARES Act, except for the technical correction made by Sec. 2304(b)(2)(B) of the CARES Act.
CARES Act Tax Law Changes & Colorado Impact, Colorado Department of Revenue, Sept. 23, 2020.
Income tax: Tax information on adoption of 2020 Internal Revenue Code published
The Florida Income Tax Code was amended to adopt the Internal Revenue Code (IRC) retroactively to Jan. 1, 2020. As a result, Florida will follow the computation of federal taxable income. However, state law requires the addition of amounts deducted as bonus depreciation under Sec. 168(k) of the IRC for assets placed in service before Jan. 1, 2027. Amounts required to be added to federal taxable income for bonus depreciation are provided back to a taxpayer through an annual subtraction over a seven-year period, equal to one-seventh of the amount of the addition, beginning with the taxable year of the addition. Moreover, Florida does not allow any adjustment to income for federal credits unless specifically stated in state law. A deduction is allowed for wages and salaries paid in Florida when a federal deduction is not allowed under Sec. 280C(a) of the IRC. However, for other federal credits, a Florida deduction is not included in state law, and is, as a result, not allowed. The new law does not address the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which became effective after the 2020 Florida legislative session ended.
Tax Information Publication, No. 20C01-01, Florida Department of Revenue, Sept. 24, 2020.
Multiple taxes: City of Chicago 2021 budget proposal includes various tax increases
City of Chicago Mayor Lori Lightfoot unveiled her 2021 budget that includes the following tax proposals:
- A property tax increase
- A consumer price index (CPI) increase to the property tax levy beginning with the 2021 levy and for each year thereafter
- A 3 cents-per-gallon increase in the motor fuel tax, to a total of 8 cents-per-gallon
- A 1.75% increase in the personal property lease tax applied to a nonpossessory computer lease of cloud software and cloud infrastructure. This would bring this tax in alignment with the tax imposed on all other lease, rental or use of rented, personal property, currently taxed at 9%
Press Release, City of Chicago Mayor Lori Lightfoot, Oct. 21, 2020; 2021 Budget Overview, City of Chicago Office of Budget and Management.
Sales and use tax: Lessee use tax liability clarified
The Michigan Department of Treasury has agreed not to assess a lessee for use tax on the rental of tangible personal property. The two exceptions are as follows: when the lessee provides a claim of exemption to the lessor that the lessee was not eligible to claim; and when the lease was not executed in Michigan and the lessor relinquishes total control of the property when leasing the property from another state or country.
Revenue Administrative Bulletin 2020-16, Michigan Department of Treasury, Oct. 9, 2020.
Income tax: Corporate surtax extended, increased
New Jersey enacted legislation extending, and increasing, the existing corporate business surtax on taxpayer’s allocated taxable net income.
The surtax is now 2.5% if a corporation has allocated taxable net income over $1 million for 2018 through Dec. 31, 2023. The existing surtax rate was 1.5% in 2020 and 2021. The increase returns the surtax to the rate used in 2018 and 2019.
The increase applies retroactively to privilege periods beginning on or after Jan. 1, 2020. The law waives all penalties that a taxpayer may incur because of the retroactive imposition of the surtax rate.
However, if the federal corporate income tax rate is increased to a rate of at least 35% of taxable income, the surtax will be suspended following the conclusion of a taxpayer’s privilege period corresponding with the increase to the federal rate.
Ch. 2020-95 (A.B. 4721), Laws 2020, effective Sept. 29, 2020.
Income tax: Pass-through business alternative income tax information released
New Jersey has released information regarding the Pass-Through Business Alternative Income Tax Act, effective for tax years beginning on or after Jan. 1, 2020. The law allows pass-through entities to elect to pay tax due on the owner’s share of distributive proceeds. The owner(s) may then claim a refundable tax credit for the amount of tax paid by the pass-through entity on their share of distributive proceeds.
The pass-through entities covered under the law are:
- Federal S corporations that have made the New Jersey S corporation election
- Limited liability companies (LLCs)
The election must be made each year by all owners of the pass-through entity or by an officer or member who is designated under the law or the entity’s organizational documents with the authority to make the election for all members. The annual election will be made on or before the original due date of the entity’s return. The pass-through entity’s tax return is due on the 15th day of the third month after the close of the tax year. Estimated tax payments are due on April 15, June 15, and September 15 of the tax year and on or before January 15 of the succeeding tax year.
Since 2020 is the first year the alternative tax is available, taxpayers will not be penalized under the safe harbor provisions for the failure to file or make estimated payments this year.
The pass-through alternative income tax rate is:
- 5.675% on the first $250,000
- 6.52% on amounts between $250,000 and $1 million
- 9.12% on amounts between $1 and $5 million
- 10.9% on amounts over $5 million
Individuals, estates, and trusts receive a credit against their gross income tax equal to the member’s tax on the share of distributive proceeds paid by the pass-through entity. Nonresident members of a pass-through entity making the election can still participate on a Form NJ-1080-C composite return and take a credit for taxes paid.
Corporate members are allowed a credit against the corporation’s business tax equal to the corporate member’s tax on the share of distributive proceeds paid by the pass-through entity. The credit may not reduce the tax liability below the statutory minimum tax. Excess credits may be carried forward for 20 years.
New Jersey has also released:
- Pass-Through Business Alternative Income FAQ
- Pass-Through Business Alternative Income Tax (PTE) – Estimated Payments Only
Pass-Through Business Alternative Income Tax Act, New Jersey Division of Taxation, Sept. 29, 2020.
Income, miscellaneous taxes: New York City’s decoupling from certain CARES Act provisions discussed
New York City has issued a memorandum discussing the following:
- Decoupling of its business corporation tax, general corporation tax, unincorporated business tax, and banking corporation tax from certain federal tax changes contained in the CARES Act.
- Providing instructions to taxpayers for completing their tax year 2018 and 2019 business tax returns.
Business tax form instructions effectuating New York City’s decoupling from CARES Act
New York City’s business corporation tax, general corporation tax, unincorporated business tax, and banking corporation tax are decoupled from CARES Act changes to the interest expense provisions under IRC Sec. 163(j)(10) for tax years beginning in 2019 and 2020. Additionally, for tax years beginning before Jan. 1, 2021, the general corporation tax, unincorporated business tax, and banking corporation tax are decoupled from CARES Act changes to the net operating loss provisions under IRC Sec. 172, and the unincorporated business tax is decoupled from CARES Act changes to the limitation on excess business losses of noncorporate taxpayers under IRC Sec. 461(l). Therefore, New York City provides instructions to taxpayers for completing their tax year 2018 and 2019 business tax returns:
- If a business corporation tax, general corporation tax, unincorporated business tax, and banking corporation tax taxpayer has already filed 2019 business tax returns with the City on which it reflected in entire net income the increase in the federal deduction allowed pursuant to IRC Sec. 163(j)(10), it must file an amended return using the instructions in this memorandum.
- If a general corporation tax, unincorporated business tax, or banking corporation tax taxpayer has already filed 2018 or 2019 business tax returns with the City on which it applied CARES Act amendments to IRC Sec. 172 when computing its NOL deduction, it must file an amended return using the instructions in this memorandum.
- If an unincorporated business tax taxpayer has already filed 2018 or 2019 business tax returns with the City on which it did not add back to federal gross income the amount of the increase in the federal deduction allowed pursuant to CARES Act amendments to IRC Sec. 461(l), it must file an amended return using the instructions in this memorandum.
New York City’s decoupling from CARES Act changes may result in increases to the City tax liability of some business taxpayers. The New York City Department of Finance has determined that the enactment of the CARES Act as well as the City’s decoupling legislation so late in tax year 2020 constitutes reasonable cause for taxpayers to have underpaid the portion of their City tax liabilities attributable to the City’s decoupling from CARES Act changes to IRC Sec. 163(j)(10), IRC Sec. 172, and IRC Sec. 461(l). Accordingly, if a taxpayer receives a bill that includes a penalty for failing to pay the correct amount of tax when due, and the underpayment is attributable to the City’s decoupling from CARES Act changes to IRC Sec. 163(j)(10), IRC Sec. 172, or IRC Sec. 461(l), the taxpayer may request an abatement of the penalty.
Finance Memorandum 20-6, New York City Department of Finance, Sept. 22, 2020.
Income tax: Guidance on 2020 IRC conformity legislation revised
North Carolina revised its guidance on the impact of 2020 IRC conformity legislation when computing state corporate and personal income tax liability. The guidance identifies and explains North Carolina’s treatment of certain federal tax changes made by:
- the Coronavirus Aid, Relief, and Economic Security (CARES) Act
- the Further Consolidated Appropriations Act (FCAA) of 2020
It also provides specific instructions for amending North Carolina income tax returns for the 2019 tax year.
Corporate income taxpayers
The differences between North Carolina and federal income tax law that impact corporate income taxpayers include:
- Business interest expense limitations
- Payment Protection Program (PPP) loan forgiveness and expenses
Individual income taxpayers
Federal changes that impact North Carolina personal income taxpayers include the treatment of:
- Mortgage insurance premiums
- Cancellation of qualified principal residence indebtedness
- Qualified tuition and related expenses
- Net operating loss (NOL) limitations and carrybacks
- Business interest expense limitations
- Excess business loss limitations
- PPP loan forgiveness and expenses
- Charitable contribution deductions and limitations
- Employer payments of student loans
The guidance clarifies that North Carolina does not allow IRC Sec. 168 bonus depreciation for qualified improvement property (QIP). Taxpayers computing North Carolina personal income tax liability must addback bonus depreciation. A taxpayer also should not include QIP bonus depreciation in the calculation of excess business loss.
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, Oct. 1, 2020.
Income tax: Sourcing of security monitoring contracts to Ohio overturned
The Ohio Supreme Court has held that gross receipts from the sale of security monitoring contracts do not have to be sourced to Ohio for purposes of the commercial activity tax (CAT), the location of the property being monitored. After signing security monitoring contracts, the taxpayer then resold them to a security company. The taxpayer was an Indianapolis-based authorized dealer for a national security monitoring company. Ohio taxed the receipts of those sales. The taxpayer requested a refund of commercial activity tax paid on the sale of the contracts. The Board of Tax Appeals (BTA) and lower court concluded the receipts were Ohio taxable receipts under the CAT.
The taxpayer’s transactions led to three types of revenue sources:
- Payments made by Ohio customers to the taxpayer for the cost and installation of alarm-services equipment
- Payments made by Ohio customers to the taxpayer under the alarm-services contracts that are not accepted by the security company
- Payments made by the security company to the taxpayer under the master agreement as consideration for the security company’s purchase of Ohio alarm-services contracts from the taxpayer
Only the third category, was at issue.
The CAT statute provides a catch-all situs for receipts “not otherwise sitused,” and it states that those receipts are sitused to Ohio “in the proportion that the purchaser’s benefit in this state with respect to what was purchased bears to the purchaser’s benefit everywhere with respect to what was purchased.” In determining that ratio, the statute provides that “[t]he physical location where the purchaser ultimately uses or receives the benefit of what was purchased shall be paramount in determining the proportion of the benefit in this state to the benefit everywhere.”
The main consideration when determining the proportion of the benefit attributed to Ohio is the physical location where a purchaser uses or receives the benefit of what they purchased. The taxpayer argued that the security company purchased intangible contract rights. The security company’s physical locations outside Ohio were the places where it actually used and received the benefit of those contractual rights. The court agreed with the taxpayer and concluded that the tax commissioner, the BTA, and the court of appeals all failed to properly distinguish between the benefit Ohio consumers received from the security company and the benefit the security company received by purchasing consumer contracts from the taxpayer.
Defender Security Co. v. McClain, Tax Commr., Ohio Supreme Court, Slip Opinion No. 2020-Ohio-4594, Sept. 29, 2020.
Pennsylvania corporate nexus guidance revised
Pennsylvania has revised its corporate nexus guidance to clarify:
- Which gross receipts are included in the $500,000 threshold
- Pass-through entity reporting
The bulletin lists examples of gross receipts that are included in the $500,000 threshold. The three items in the original version are gross receipts from:
- The sale, rental, lease, or licensing of tangible personal property
- The sale of services
- The sale or licensing of intangibles, including franchise agreements
The list was updated to add “gross receipts from interest and other intangibles not included above.”
Pass-through entity reporting
Further, the bulletin clarifies that the state’s approach may require pass-through entities with corporate partners that previously did not file the PA-65 Corp. to file one for tax year 2020 and later periods. The receipts from all pass-through entities held by a corporate entity will be combined in determining whether the corporate entity has exceeded the $500,000 rebuttable presumption of nexus. However, for purposes of a pass-through entity determining whether the Form PA-65 Corp. is required, each entity will need to make its own determination based on its gross receipts sourced to Pennsylvania.
Corporation Tax Bulletin 2019-04, Pennsylvania Department of Revenue, Aug. 6, 2020.
South Carolina updates IRC conformity
South Carolina has updated its IRC conformity date from Dec. 31, 2018, to Dec. 31, 2019.
If there are IRC sections adopted by South Carolina that expired on Dec. 31, 2019, and are extended, but not amended, by congressional enactment during 2020, then those sections are also extended for South Carolina income tax purposes.
However, South Carolina specifically does not adopt the provisions of Sec. 204(a) (temporary increase in limitation on qualified contributions) of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (Division Q of P.L. 116-94) as it pertains to individuals.
For tax year 2020, to the extent that loans under the PPP are forgiven and excluded from gross income for federal income tax purposes, the loans are also excluded for South Carolina income tax purposes. Further, to the extent that the federal government allows the deduction of expenses associated with the forgiven PPP loans, those expenses will be allowed as a deduction for South Carolina income tax purposes.
S.B. 545, Laws 2020, effective Sept. 28, 2020.
Vermont updates IRC conformity, enacts other changes
Vermont changed its IRC conformity date from Dec. 31, 2018, to Dec. 31, 2019, for taxable years beginning on or after Jan. 1, 2019.
The provision on income tax refunds is amended to allow claims to be filed up to six months from the date a tax liability is paid or offset.
The deadline for filing an amended return is extended from 60 to 180 days after a federal amended filing or other relevant change.
Eligible uses of Vermont 529 plan distributions are expanded. If account holders use 529 plan dollars for a licensed apprenticeship program or a withdrawal related to the death or disability of a beneficiary, they will not be subject to recapture of any Vermont Higher Education Investment Plan tax credits they previously received.
In addition, the tax department is authorized to impose penalties for fraudulent refund requests, even if the refund is not issued.
H.B. 954, Laws 2020, effective Oct. 8, 2020, or as noted.
The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC, is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.
©2020 CCH Incorporated and its affiliates. All rights reserved.