State and local tax advisor: January 2021

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

• Colorado
• Illinois
• Indiana
• Maryland
• Michigan
• Nevada
• New Jersey
• Ohio
• Texas
• Wisconsin

Colorado

Corporate, personal income taxes: Governor issues declaration of vote on rate decrease ballot measure

Colorado Governor Jared Polis has issued a proclamation declaring the vote on Proposition 116, which was approved by voters to decrease the income tax rate from 4.63 to 4.55%. The measure takes effect from and after the date of the official declaration.

Executive Order D 2020 302, Colorado Gov. Jared Polis, Dec. 31, 2020.

Illinois

Corporate, personal income taxes: Governor calls for NOL changes, freeze on credits for construction jobs

Illinois Gov. J.B. Pritzker issued a press release calling for:

• Decoupling Illinois income tax law from changes to the federal treatment of net operating losses (NOLs)
• A freeze on corporate and personal income tax credits for the creation of construction jobs in the state.

NOL decoupling

The Coronavirus Aid, Relief and Economic Security (CARES) Act changed the federal treatment of NOLs by:

• Suspending the 80% NOL carryforward deduction limit under IRC Section 172 until 2021.
• Providing a five-year carryback period for NOLs from tax years beginning after 2017 and before 2021.

Illinois corporate income taxpayers can currently claim a NOL deduction based on amounts allowed under IRC Sec. 172. Illinois allows a 12-year carryforward period for the corporate income tax NOL deduction. It does not allow NOL carrybacks.

Taxpayers computing Illinois personal income tax liability start with federal adjusted gross income (AGI). Illinois does not require any adjustments to federal AGI for a taxpayer’s federal NOL deduction. Personal income taxpayers can currently carryback or carryforward NOLs for the same period allowed under IRC Sec. 172.

Construction jobs credit

Effective for tax years beginning on or after Jan. 1, 2021, Illinois taxpayers can claim income tax credits for new jobs from:

• High-impact business construction projects
• Enterprise zone construction projects
• River Edge Redevelopment Zone construction projects
• Economic Development for a Growing Economy (EDGE) construction projects

Press Release, Office of Illinois Gov. J.B. Pritzker, Jan. 21, 2021.

Sales and use tax: Guidance for out-of-state retailers issued

The Illinois Department of Revenue issued guidance for out-of-state retailers regarding the state sales and use taxes. Effective Jan. 1, 2021, the Leveling the Playing Field for Illinois Retail Act implemented a series of structural changes to the Illinois sales tax laws that changed the liabilities of many types of retailers.

Specifically, these changes include the following: (1) remote retailers, or retailers with no physical presence in Illinois, who meet certain economic or transactional thresholds are required to remit Illinois Retailers’ Occupation Tax (ROT) and applicable local ROT based on the Illinois location to which the tangible personal property is shipped or delivered or at which possession is taken by the purchaser (destination rate); (2) marketplace facilitators meeting certain economic or transactional thresholds are required to remit Illinois ROT and applicable local ROT on all sales made through the marketplace on behalf of marketplace sellers, including Illinois brick-and-mortar retailers, selling through the marketplace, based on the destination rate; (3) marketplace facilitators meeting certain economic or transactional thresholds making sales on their own behalf incur Illinois ROT and applicable local ROT in effect at the location of either the Illinois inventory from which an order is fulfilled or the Illinois location where their selling activities otherwise occur (origin rate). If their sales are filled from inventory located outside Illinois and their selling activities do not otherwise occur in Illinois, marketplace facilitators incur Illinois ROT and applicable local ROT based on the destination rate; (4) out-of-state retailers with a physical presence in Illinois will continue to handle their tax liability as they did prior to Jan. 1, 2021; and (5) Illinois retailers, including brick-and-mortar retailers, making sales from an Illinois location will continue to handle their liability as they did prior to Jan. 1, 2021.

Further, the guidance includes a list of common transactions that explain whether certain items are taxable or exempt, the applicable tax rates, definition, and legal references.

PIO-101, Illinois Department of Revenue, December 2020.

Note the Illinois Department of Revenue provides further guidance in 86 Ill. Adm. Code Sec. 131.101 through 86 Ill. Adm. Code Sec. 131.180 (effective Jan. 1, 2021).

Sales and use tax: Guidance on marketplace facilitators for sales excluded from economic nexus threshold

Illinois provides additional information for “marketplace facilitators” on sales excluded from the retailers’ occupation tax remittance threshold determination. The information is effective Jan. 1, 2021.

Sales excluded from tax remittance threshold determination

As part of the tax remittance threshold determination, marketplace facilitators must exclude the following:

• Sales for resale
• Sales of tangible personal property that is required to be registered with an agency of Illinois, including motor vehicles, watercraft, aircraft, and trailers.

All sales other than these, even if they are exempt from tax, must be included in calculating the tax remittance thresholds.

A marketplace facilitator is considered to be habitually engaged in the selling of tangible personal property and as such, no sales made by a marketplace facilitator are considered to be occasional sales (unlike a remote retailer). Therefore, marketplace facilitators do not have occasional sales to exclude from their tax remittance threshold determination.

Informational Bulletin FY 2021-02-A, Illinois Department of Revenue, Jan. 4, 2021.

Indiana

Sales and use tax: Taxability of purchase of software discussed

The Indiana Department of Revenue (department) discussed the applicability of sales and use tax to a manufacturer’s (taxpayer’s) various purchases of software. Generally, purchases of tangible personal property including computer software are subject to sales tax. However, the purchase of services is exempt from sales tax. In this matter, the taxpayer filed tax refund claims for software purchases based on various exemptions. The department denied majority of the taxpayer’s claim, and the taxpayer protested.

It was noted that the taxpayer’s purchases of multistate point-of-use software were exempt from tax because those were initially accessed via electronic download outside of Indiana. Further, some of the taxpayer’s purchases qualified for the research and development tax exemption, while others did not. Moreover, the taxpayer’s purchases of software as a service “SaaS” made after July 1, 2018, were not taxable, nor were those purchases of SaaS made between December 2016, and June 30, 2018. However, the taxpayer’s purchase of SaaS made before December 2016 was taxable.

Memorandum of Decision No. 04-20191189R, Indiana Department of Revenue, Sept. 8, 2020.

Maryland

Multiple taxes: Due date extensions announced due to COVID-19 emergency

Due to the economic impact on individuals and businesses as a result of COVID-19, the Maryland Comptroller has announced extended due dates for certain business taxes.

Corporate and pass-through entity income taxes

Corporate and pass-through entity income tax returns and remittances with statutory due dates between Jan. 1, 2021, and April 14, 2021, are extended to April 15, 2021. Interest and penalty will be assessed on any unpaid tax from April 16, 2021, until the date the tax is paid. Additionally, corporate and pass-through entity estimated income tax declarations and payments due between Jan. 15, 2021, and April 14, 2021, are extended to April 15, 2021.

The extension for filing of returns and payment of income tax owed also extends the statute of limitations for filing a claim for refund of income tax for returns filed with a statutory due date between January 1, 2021, and April 14, 2021. Claims for refund for these returns must be filed no later than April 15, 2024.

Withholding taxes

Further, withholding returns and payments for periods beginning Jan. 1, 2021, through March 31, 2021, are extended to April 15, 2021. This affects withholding payments due for periods including January, February, and March of 2021, but does not include any payment due with the 2020 year-end withholding reconciliation due on or before Jan. 31, 2021. Any withholding payments originally due between Feb. 1, 2021, and April 14, 2021, may be submitted by April 15, 2021, without incurring interest or penalties. Taxpayers are advised that withholding returns and payments for all periods through Dec. 31, 2020, including the 2020 year-end reconciliation due in January, are due on their statutory due dates.

Individual and fiduciary taxes

For individuals and fiduciaries, the time to file estimated income tax declarations and payments due between Jan. 15, 2021, and April 14, 2021, is extended to April 15, 2021. The extension is automatic; no filing or request is required to take advantage of the extended deadline.

Sales and use taxes

The time to file sales and use tax returns that are due between Jan. 20, 2021, and April 14, 2021, is extended to April 15, 2021. This affects returns for sales taking place in December 2020, January 2021, and February 2021. Sales and use tax returns, and their accompanying payments, may be submitted by April 15, 2021, without incurring interest or penalties.

Tobacco taxes

The due date for tobacco tax returns and payments is extended to April 15, 2021. Manufacturers’ returns for activity from December 2020 and January, February, and March 2021 may be submitted by April 15, 2021, without incurring interest or penalties.

Further, the due date for cigarette and other tobacco products wholesalers’ returns and payments due between Jan. 21, 2021, and April 14, 2021, is extended to April 15, 2021. Returns and payments for products to which wholesalers took possession December 2020, and January, February, and March 2021, may be submitted by April 15, 2021, without incurring interest or penalties.

Finally, the due date for returns and payments for licensed retailers and tobacconists is extended to April 15, 2021. Returns and payments for liabilities incurred between July 21, 2020, and Oct. 21, 2020, may be submitted by April 15, 2021, without incurring interest or penalties.

Motor fuel taxes

The Comptroller is extending the due date for motor fuel tax returns and payments to April 15, 2021. Motor fuel tax returns and payments otherwise due between Jan. 1, 2021, and April 14, 2021, may be submitted no later than April 15, 2021, without incurring interest or penalties.

Admissions and amusement taxes

The due date for admissions and amusements tax returns due between Jan. 10, 2021, and April 14, 2021, is extended to April 15, 2021. Admissions and amusement returns and payments for gross receipts derived from events occurring in December 2020, and January, February, and March 2021 may be submitted by April 15, 2021, without incurring interest or penalties.

Alcoholic beverage taxes

The due date for alcohol tax returns and payments due between Jan. 1, 2021, and April 14, 2021, is extended to April 15, 2021. Alcohol tax returns (both those that include payments and those that do not include payments) may be submitted by April 15, 2021, without incurring interest or penalties. Additionally, for beer taxes, which must be prepaid, the Comptroller is extending the payment due date to April 15, 2021.

Tax Alert 01-06-21, Maryland Comptroller, Jan. 6, 2021.

Michigan

Personal income tax: Net operating loss guidance released for individuals and fiduciaries

Michigan has released a bulletin describing how to compute and use net operating loss (NOL) deductions for Michigan individual and fiduciary income tax purposes. The bulletin also discusses the impact of a federal NOL on Michigan tax credits. The bulletin addresses changes to the computation and use of NOLs as a result of the federal:

• Tax Cuts and Jobs Act (TCJA) of 2017
• Coronavirus Aid, Relief, And Economic Security (CARES) Act of 2020

The bulletin replaces Revenue Administrative Bulletin 2017-14.

Computation of Michigan NOL

The Michigan NOL follows the same general format and procedures as the federal NOL, but is computed independently of the federal NOL. The Michigan and federal NOLs are distinct because itemized deductions factor into the federal NOL but not the Michigan NOL. Additionally, the Michigan NOL includes only Michigan-sourced income, losses, and deductions. A Michigan NOL begins with adjusted gross income (AGI) as defined in the Internal Revenue Code (IRC) subject to Michigan adjustments. IRC Sec. 172(c) and the modifications in IRC Sec. 172(d) are then applied to Michigan-sourced income, losses, and deductions.

Use of Michigan NOL

Generally, NOLs incurred in 2017 or earlier years may be carried back for up to two years and carried forward for up to 20 years. The CARES Act generally allows NOLs from 2018, 2019, and 2020 to be carried back for up to five years. It also allows NOLs from tax years 2018 and 2019 to be carried forward to 2019 and 2020 to offset up to 100% of taxable income, while NOL carryforwards for subsequent years are limited to 80% of taxable income under the TCJA. After 2020, nonfarming NOL carrybacks are eliminated. NOLs incurred in 2018 or later may be carried over indefinitely until fully absorbed. To facilitate the different tax treatment of NOLs created after the enactment of the TCJA and the CARES Act, the Michigan Department of Treasury has designated NOLs created through 2017 as “Group 1 NOLs” and those created in 2018 or later as “Group 2 NOLs.” Group 2 NOLs are further designated as “Group 2 CARES” for 2018, 2019, and 2020 NOLs and “Group 2 TCJA” for NOLs incurred after 2020.

Michigan gives taxpayers the option to file a return based on the IRC in effect either for the tax year or as of Jan. 1, 2018. If a taxpayer opts to use the IRC in effect on Jan. 1, 2018, the CARES Act will not apply to the return, but the TCJA will apply.

The department provides a Michigan NOL Carryover Worksheet for taxpayers to track the absorption of Group 1 and Group 2 NOLs.

Excess business losses

Enacted as part of the TCJA, IRC Sec. 461(l) prohibits offsetting income with excess business losses generated in that same tax year. The disallowed excess business loss is treated as an NOL carried over to the following taxable year under IRC Sec. 172. The disallowed excess business loss that is sourced to Michigan is calculated on Form MI-461, Michigan Excess Business Loss. The CARES Act suspended the excess business loss limitation for 2018, 2019, and 2020. Thus, a taxpayer who had losses limited by the provision in 2018 or 2019 should file an amended return.

IRC Sec. 965 repatriation income

Taxpayers will generally include IRC Sec. 965(a) deferred income from foreign subsidiaries (repatriation income) in their taxable income either in 2017 or 2018. If an NOL is carried back to a year in which IRC Sec. 965(a) applied, by default, the taxpayer will be treated as having made an IRC Sec. 965(n) election. This excludes IRC Sec. 965 income from determining the NOL deduction for that year. This means that an NOL carryback will not reduce taxable income in the carryback year that is attributable to the mandatory repatriation income inclusion under IRC Sec. 965. Alternatively, a taxpayer may affirmatively elect to exclude IRC Sec. 965 income years from the carryback period.

Requirements to claim Michigan NOL

A Michigan individual or fiduciary claiming an NOL must file Form MI-1045, Michigan Net Operating Loss Schedule, with the loss-year return. To carry back NOLs after 2017, taxpayers also must complete Form 5603-CARES Act, Michigan Net Operating Loss Carryback Refund Request, for 2018, 2019, and 2020, or Form 5603, Michigan Farming Loss Carryback Request, for farming losses incurred in 2021 and subsequent years. To carry forward both Group 1 and Group 2 NOLs after 2020, taxpayers also must complete Form 5674, Michigan Operating Loss Deduction.

A taxpayer may elect to forego an NOL carryback. If a taxpayer wishes a federal NOL election to control the treatment of a Michigan NOL, the taxpayer must provide a copy of the federal election to the department with the taxpayer’s Michigan return. A taxpayer who wishes to make a separate Michigan election may check the box on Form MI-1045 to elect out of the NOL carryback. Once made, an election is irrevocable.

Impact of federal NOL on Michigan credits

For tax years beginning in 2012 and thereafter, a federal NOL deduction may not be used to determine eligibility for the homestead property tax credit or home heating credit. However, the federal NOL deduction, as limited by federal-modified taxable income, may be used for all tax years to compute eligibility for the farmland preservation tax credit.

Revenue Administrative Bulletin 2020-23, Michigan Department of Treasury, Dec. 17, 2020.

Personal income tax: Reminder issued on electronic filing and payment options

The Michigan Department of Treasury has reminded personal income tax filers that they have the option of e-filing their state tax returns and making payments electronically via the department’s e-payments system. In addition, the ability to claim a refund for the 2016 tax year expires April 18, 2021. The notice can be viewed on the department’s website.

Press Release, Michigan Department of Treasury, Dec. 21, 2020.

Corporate income tax: Small business alternative credit guidance issued

Michigan describes the small business alternative credit (SBAC) and its application for corporate income taxpayers. The SBAC provides a credit that results in an alternative effective tax rate of 1.8% of adjusted business income for qualifying taxpayers. The guidance discusses:

• Definitions and key terms
• Filing requirements for taxpayers claiming the credit
• Disqualifiers
• Credit reducers
• Special considerations

Filing requirements

The taxpayer’s SBAC is calculated on Form 4893 and carried over to the CIT Annual Return (Form 4891). Form 4894, CIT Schedule of Shareholders and Officers, must be filed with the return to qualify for the SBAC. For a unitary business group claiming the credit, each member that is a corporation must file a separate Form 4894.

Disqualifiers

Taxpayers are not eligible for the SBAC if gross receipts are over $20,000,000 or adjusted business income after loss adjustment is over $1,300,000. Taxpayers can also be disqualified if any shareholder or officer has compensation and directors’ fees over $180,000 or a shareholder has allocated income after loss adjustment over $180,000.

The guidance provides detailed examples covering how to determine:

• Gross receipts and adjusted business income after loss adjustment disqualifiers
• Allocated income
• Compensation

Credit reducers

The SBAC is reduced on a percentage basis if a shareholder’s or officer’s compensation and directors’ fees or a shareholder’s allocated income exceeds $160,000. The examples discuss both the gross receipts reducer and allocated income and compensation reducers.

Special considerations

Finally, the guidance provides examples and discussion of:

• Identifying shareholders, active shareholders, and officers
• Unitary business group considerations
• Loss adjustment use in computing adjusted business income
• Short years

Revenue Administrative Bulletin 2020-26, Michigan Department of Treasury, Dec. 22, 2020.

Corporate, personal income taxes: Historic preservation tax credit authorized

Michigan’s historic preservation tax credit against the personal income tax and corporate income tax has been reinstated. It allows for a credit of up to 25% of qualified expenditures on the rehabilitation of historic buildings, structures, and sites. No taxpayer can claim a credit of more than $2 million for a single property, and the total preapproved credits can’t exceed $5 million in a calendar year.

Application and commencement

A “qualified taxpayer” means the owner of the historic resource to be rehabilitated or one who holds a long-term lease agreement and that has qualified expenditures meeting either of the following:

• For the rehabilitation of a residential historic resource, qualified expenditures of at least $1,000
• For rehabilitation of nonresidential historic resources, qualified expenditures equal to or greater than 10% of the state-equalized valuation of the property.

To receive the credit, a person must submit an application and a rehabilitation plan to the State Historic Preservation Office (SHPO). An applicant with a preapproval letter must start rehabilitation within one year and complete the plan within eight years.

Revocation

If a certificate of rehabilitation is revoked or a historic resource was sold less than five years after the certificate was issued, a percentage of the credit would be added back to the qualified taxpayer’s liability. The percentage is based on how long after the issuance of the certificate the revocation occurred:

• If less than one year, 100%.
• If at least one year but less than two years, 80%.
• If at least two years but less than three years, 60%.
• If at least three years but less than four years, 40%.
• If at least four but less than five years, 20%.
• If five years or more, no addback would be required.

A qualified taxpayer may into a written agreement with SHPO that allows for the transfer or sale of the historic resource.

Carryforward of credits

If the credit for a tax year exceeds the qualified taxpayer’s tax liability for the tax year, the excess could be carried forward for 10 years or until used up, whichever occurs first.

S.B. 54, Laws 2020, effective Dec. 30, 2020.

Corporate income, sales, and use taxes: Additional penalty and interest waiver announced

The Michigan Department of Treasury is automatically waiving penalty and interest on the late reporting or payment of sales, use, and withholding tax for any nonaccelerated return or payment due on Jan. 20, 2021. The waiver lasts for 33 days; consequently, eligible taxpayers must report and pay the tax due by Feb. 22, 2021. The penalty and interest waiver applies only to those businesses impacted by the section of the Dec. 7, 2020 Health and Human Services (MDHHS) order prohibiting gatherings.

The waiver applies to the 2020 fourth-quarter return and to returns and payments due on Jan. 20, 2021, as a result of the prior 31-day penalty and interest waiver. The 2020 sales, use, and withholding tax annual return (Form 5081) remains due on Feb. 28 2021.

Notice, Michigan Department of Treasury, Jan. 14, 2021.

Nevada

Multiple taxes: Guidance issued for upcoming tax amnesty program

Nevada has a tax amnesty program for businesses and individuals that will begin Feb. 1, 2021, and end May 1, 2021.

Amnesty program details

The amnesty program allows penalty and interest from Nevada state taxes to be waived if the outstanding taxes:

• Were due and payable on or before June 30, 2020.
• Is paid in full for the period.
• The tax is paid during the amnesty period.

Taxes due and payable on or before June 30, 2020, would include:

• All monthly tax returns due on or before May 31, 2020.
• All quarterly tax returns due on or before April 30, 2020.
• All annual tax returns due on or before Dec. 31, 2019.

Tax types eligible for amnesty

The following tax types are eligible for the amnesty program:

• Sales and use
• Modified business
• Cigarette
• Other tobacco product
• Liquor tax
• Bank branch excise
• Insurance premium
• Tire
• Live entertainment (nongaming)
• Short-term lessor (passenger car governmental service fee)
• Exhibition facilities fees
• Commerce
• Transportation connection
• Wholesale marijuana
• Retail marijuana
• Centrally assessed property
• Net proceeds of minerals

The tax types not included in the program are:

• Lodging
• Real property transfer
• Locally assessed property

Ineligible businesses or individuals

The amnesty program doesn’t apply to businesses or individuals who:

• Have already entered into a compromise or settlement agreement with the Department of Taxation or Nevada Tax Commission regarding the unpaid tax.
• Are currently under audit but have not yet received a final deficiency determination before May 1, 2021.

A business or individual who has filed for bankruptcy within the last five years should call the Department for amnesty qualifications.

Amnesty payments

Amnesty payments can be made by credit or debit card online at nevadatax.nv.gov.

Payments can also be made by writing “Amnesty” at the top of a tax return and mailing it with a check to: Department of Taxation, 1550 College Parkway, Suite 115, Carson City, NV 89706.

Press Release - Penalty and Interest Waiver for Delinquent Taxes in Nevada, Nevada Department of Taxation, Jan. 6, 2021.

New Jersey

Corporate income tax: Worldwide and affiliated group elections guidance issued

New Jersey is providing a one-time exception to prospectively allow a change to corporation business taxpayer’s combined group’s filing methods.

Current law

Currently, the water’s-edge group filing method is the mandatory default filing method for New Jersey-combined returns. However, the managerial member of the combined group may elect to make a worldwide election or affiliated group election.

Exception

The exception is being granted because of recent law changes that may impact a taxpayer’s choices. Thus, the filing method elections selected on the 2019 CBT-100U will not be binding for subsequent years. Instead, any election the combined group makes on their 2020 CBT-100U return will be considered the start of the binding period.

No retroactive changes will be permitted for the use of the mandatory default method or the affiliated or worldwide elections made for the 2019 privilege period with respect to any return previously filed for 2019. No amended returns changing the election or use of the mandatory default method will be permitted for the 2019 privilege period.

Notice: The World-Wide and Affiliated Group Elections for 2019/2020 CBT-100U Returns, Division of Taxation, Jan. 13, 2021.

Ohio

Sales and use tax: Bank’s purchase of software did not qualify for exemption

A bank’s (taxpayer’s) purchases of banking software and services did not qualify for an exemption from Ohio sales and use taxes because, as per the statute, software and services are not personal and professional services exempt from tax as custom software. In this matter, the taxpayer operated banks and used banking software for its online banking system. The taxpayer paid tax on the purchase of software and service and subsequently claimed a refund stating that: (1) the software and services were exempt from tax as personal and professional services; and (2) the services were exempt accounting services. It was noted that: (1) the banking software and service at issue were not personal or professional services exempt from tax as custom software because the banking software purchased by the taxpayer already existed and was not specifically designed or developed for the sole and specific use of the taxpayer; and (2) the banking software and services did not qualify as professional accounting services exempt from tax because the vendor of the services did not provide any advice on tax matter, assets management, budgetary matters or any other type of studying, altering, analyzing, or adjusting of the taxpayer’s data or financial material. Rather, the vendor simply provided the taxpayer banking software and software that created the taxpayer’s general ledger, updating and displaying information upon input or request of data, which did not qualify as accounting service. Accordingly, the Board of Tax Appeals affirmed the Tax Commissioner’s denial of the refund claim.

Cincinnati Federal Savings and Loan v. Tax Commissioner of Ohio, Ohio Board of Tax Appeals, No. 2018-2247, December 22, 2020.

Texas

Sales and use tax: Single local use tax rate for remote sellers announced

The Texas single local use tax rate for remote sellers is set at 1.75%. The rate is in effect beginning Jan. 1, 2021, through Dec. 31, 2021.

Single local use tax rate for remote sellers

The single local use tax rate provides an optional way of computing the amount of local use tax that remote sellers would be required to collect on taxable items. A remote seller can either collect the local use taxes using either:

• The combined rate of all applicable local use taxes.
• If the remote seller chooses, the single local use tax rate.

The single use tax rate is the estimated average of local sales and use taxes imposed in Texas during the preceding state fiscal year. The rate is unchanged from the initial rate put in effect Oct. 1, 2019.

Certification of the Single Local Use Tax Rate for Remote Sellers - 2021, Texas Comptroller of Public Accounts, Dec. 15, 2020.

Corporate income tax: Apportionment rule changes adopted

Texas has adopted amendments to its rule on the sourcing of revenue for franchise tax purposes. The Comptroller indicated that the amendments implement recent statutory changes and update the rule to reflect current guidance and improve readability. The most significant amendments affect the sourcing of gross receipts from services. Some of them are discussed below.

General services

Except as otherwise provided, gross receipts from services are sourced to where the service is performed. Generally, under the amended rule, a service is performed at the location of the receipts-producing, end-product act(s). If there is a receipts-producing, end-product act(s), then the location of all other acts will not be considered, even if they are essential to the performance of the receipts-producing act(s). If there is not a receipts-producing, end-product act(s), then the locations of all essential acts may be considered.

According to the Comptroller, the Council on State Taxation (COST) argued that these amendments resulted in market-based sourcing that was not supported by any legislative change, and that any changes should be applied prospectively. The Comptroller agreed with COST that the rule should seek to fairly apportion multistate business to Texas consistent with the statutes. But, the Comptroller disagreed that the amended rule was a retroactive application of market-based sourcing to service receipts. Rather, the Comptroller said that the rule recognizes that sometimes a service is performed where the taxpayer’s market is located and sometimes it is not. That is the Comptroller’s current interpretation of the sourcing statutes, and the Comptroller hopes that the rule will assist taxpayers and auditors in telling the difference.

Advertising

The amendments consolidate the sourcing rules for advertising to provide a uniform sourcing rule across media types. Gross receipts from the dissemination of advertising are sourced to the locations of the advertising audience. The locations of the advertising audience should be determined in good faith using the most reasonable method under the circumstances. The method should be consistently applied from year to year and supported by records retained by the service provider. Locations that may be reasonable include:

• The physical locations of the advertising
• Advertising audience locations recorded in the books and records of the service provider
• Locations listed in published rating statistics

If the locations of nationwide advertising audiences cannot otherwise be reasonably determined, then 8.7% of the gross receipts are sourced to Texas.

However, for reports originally due prior to Jan. 1, 2021, advertising receipts attributable to a radio or television station transmitter in Texas may be sourced to Texas.

Capital assets and investments

The amendments revise the treatment of the sale of investments and capital assets. To be consistent with the Texas Supreme Court decision in Hallmark Marketing Co. v. Hegar, 488 S.W.3d 795 (Tex. 2016), net losses are no longer included in gross receipts. In addition, for reports originally due on or after Jan. 1, 2021, net gains and losses will be determined on a sale-by-sale basis. The Comptroller has concluded that the only reasonable interpretation of the statute is that “net gain” refers to the net amount resulting from proceeds of an asset sale reduced by the adjusted basis in the asset. Because the statute only permits the inclusion of net gains, the net loss from the sale of one asset cannot be used to offset the net gain from another asset.

Computer hardware and digital property

Under the amended rule, the sale or lease of software installed on computer hardware is part of the sale or lease of the computer hardware. The sale or lease of digital property on fixed physical media (such as compact discs) is the sale or lease of tangible personal property. This treatment is consistent with the treatment of other intellectual property that is sold in nondigital fixed physical media (such as books). The sale of digital property transferred by means other than fixed physical media is the sale of intangible property, which is sourced to the location of the payor. This is consistent with former provisions in the rule regarding computing software. Receipts from the delivery of digital property as a service are sourced as receipts from providing services. Receipts from the delivery of digital property as part of an internet-hosting service are sourced as receipts from providing internet-hosting services. And receipts from the use of digital property are sourced as receipts from the use of an intangible asset.

Financial derivatives

A new provision in the rule provides guidance for sourcing receipts from the settlement of financial derivatives contracts, including hedges, options, swaps, futures, and forward contracts, and other risk management transactions. These types of investments are intangibles and the receipts are sourced to the location of the payor.

Internet-hosting services

Under the rule, receipts from internet-hosting services are sourced to the location of the customer, consistent with the statute. The rule defines “Internet hosting service” consistent with the statute, and also provides examples of internet-hosting services. In addition, the rule lists factors for distinguishing the purchase of access to computer services over the internet from the purchase or lease of digital property over the internet.

Loan servicing

Gross receipts from servicing loans secured by real property continue to be sourced to the location of the real property. Under new guidance, gross receipts from servicing other loans that are not secured by real property are sourced pursuant to the rule for services generally (i.e., the location of the receipts-producing, end-product act(s)).

Loans and securities

A subsection of the rule relating to loans and securities now specifically applies only to loans and securities treated as inventory of the seller. Also, a new provision states that loans and securities held for investment or risk management purposes are not inventory.

Single-member limited liability company (SMLLC) interest

The amended rule also provides guidance on the sale of a membership interest in an SMLLC. The sale of an SMLLC by its sole owner is the sale of a membership interest in the SMLLC. The membership interest is an intangible asset, and receipts from the sale of a SMLLC are sourced to the location of payor.

Telecommunications

A subsection of the rule relating to telephone companies has been revised to refer more generically to telecommunications. This more accurately reflects that it applies to all taxable entities providing telecommunication services.

Television broadcasting

A new provision in the rule provides guidance for sourcing receipts from televising broadcasting. The provision closely tracks the statutory language. 

34 TAC §3.591, Texas Comptroller of Public Accounts, effective Jan. 24, 2021.

Sales and use tax: Tax treatment of remote sellers, marketplace providers and marketplace sellers discussed

Texas issued a publication discussing that remote sellers, marketplace providers and marketplace sellers engaged in business in the state must apply for a sales and use tax permit and collect tax on their sale of tangible personal property and taxable services. The publication provides the qualifying criteria for remote sellers, marketplace providers and marketplace sellers to be consider engaged in business in Texas.

Further, remote sellers and remote marketplace providers with total Texas revenue greater than $500,000 in the preceding 12 calendar months have sales and use tax responsibility in the state. Additionally, an out-of-state business coming to Texas for helping with disaster recovery is not considered engaged in business in the state and is not required to register with the Secretary of State or to collect or remit Texas taxes if it meets statutory requirements.

Letter No. 202012001L, Texas Comptroller of Public Accounts, December 2020.

Wisconsin

Corporate, personal income taxes: Lack of conformity to new federal provisions discussed

Wisconsin has addressed a number of significant provisions of the federal Consolidated Appropriations Act, 2021 (P.L. 116-260) that have not been adopted into state law and will therefore affect the filing of 2020 Wisconsin income and franchise tax returns.

Paycheck Protection Program expenses

The new federal Act provides that expenses paid with forgivable Paycheck Protection Program (PPP) loan proceeds are deductible for federal tax purposes. However, Wisconsin follows federal law prior to the amendments made by the new Act. Therefore, expenses paid with the forgivable PPP funds are not deductible for Wisconsin purposes.

Subsequent PPP loans

Under the new federal Act, subsequent PPP loan proceeds that are forgiven are excluded from gross income for federal purposes. However, taxpayers are required to include in Wisconsin gross income any subsequent PPP loan proceeds forgiven.

Earned income tax credit

Under the federal law, if a taxpayer’s earned income for 2020 is less than the earned income for 2019, the taxpayer may elect to use 2019 earned income to compute the 2020 federal-earned income tax credit. However, taxpayers are required to use their 2020 income to compute the Wisconsin-earned income tax credit. Accordingly, if taxpayers elect to use 2019 earned income to compute their 2020 federal-earned income tax credit, they must recompute the federal-earned income tax credit using their 2020 earned income amount for Wisconsin purposes.

Emergency EIDL grants and targeted EIDL advances

The new federal Act provides that emergency grants of economic injury disaster loans (EIDL) and targeted EIDL advances are excluded from gross income for federal purposes, but taxpayers must include the grants or advances in Wisconsin gross income.

Subsidy for certain loan payments

Under the new federal Act, the subsidy for certain loan payments is excluded from gross income for federal purposes. However, taxpayers are required to include the subsidy in Wisconsin gross income.

Grants for shuttered venue operations

The new federal Act provides that grants for shuttered venue operations are excluded from gross income for federal purposes, but taxpayers are required to include the grants in Wisconsin gross income.

News for Tax Professionals, Wisconsin Department of Revenue, Jan. 15, 2021.