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State and local tax advisor: April 2021

Authors: Curtis Ruppal, Mike Merkel, Ron Cook, Jeanette Tolar, Julie Corrigan

April 27, 2021 / 36 min read

Are you looking for the latest changes in state and local taxes? Find the April 2021 roundup here. 

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

Alabama

Corporate, personal income taxes: Estimated tax payment guidance released for electing pass-through entities

If a pass-through entity (PTE) anticipates making the election to pay Alabama income tax at the entity level for tax year 2021, it may need to make estimated tax payments. The Department of Revenue released temporary guidance to help PTEs comply with recent tax law changes. The guidance helps electing PTEs determine whether, when, and how they should make estimated tax payments.

The Alabama Electing Pass-Through Entity Tax Act

Beginning with the 2021 tax year, Alabama S corporations and Subchapter K entities can elect to pay state income tax at the entity level. Entities making this election must notify the Department of Revenue by the 15th day of the third month following the close of the tax year for which they elect to be taxed at the entity level. The Department will issue additional guidance regarding the election process, returns, and related matters prior to the 2021 filing season.

Are estimated payments required?

A PTE must make estimated tax payments if it:

What are the due dates?

The due dates for estimated tax payments for calendar year filers for the 2021 tax year are:

The due dates for fiscal year filers are the 15th day of the fourth, sixth, ninth, and 12th months of the fiscal year.

What are the required payment amounts?

The required estimated quarterly payment is 25% of the “required annual payment.” The required annual payment generally means the lesser of:

This safe-harbor rule will apply to electing PTEs making estimated tax payments for the 2021 tax year using the following calculations for the required annual payment:

The Department may, on a case-by-case basis, address special situations and circumstances resulting from the first year of implementing the estimated tax payment requirement.

How can electing PTEs make the payments?

Electing PTEs may make the payments by:

What if a PTE does not make the election?

If a PTE makes estimated tax payments and does not ultimately elect to be taxed at the entity level for the tax year, it may request a refund. To request a refund, it should use form PTE-C, Nonresident Composite Payment Return, and list the amount of estimate payments made on line 5b.

News Release, Alabama Department of Revenue, April 2, 2021.

Arizona

Corporate, personal income taxes: IRC conformity updated

Arizona has updated its conformity to the Internal Revenue Code (IRC) for income tax purposes. For tax years beginning after 2020, Arizona now conforms to the IRC as amended and in effect on March 11, 2021. This includes provisions that became effective during 2020 with the specific adoption of all retroactive effective dates.

Prior tax years

Previously, for tax years beginning after 2019, Arizona conformed to the IRC as amended and in effect on Jan. 1, 2020. Now, the Jan. 1, 2020 conformity date applies only for tax years beginning during 2020.

Arizona has also adopted provisions of the following acts that have retroactive effect for tax years beginning before 2021:

S.B. 1752, Laws 2021, effective 91 days after adjournment of the 2021 Legislature.

Arkansas

Enacts pass-through-entity-level tax

Effective for tax years beginning on or after Jan. 1, 2022, Arkansas pass-through entities may elect to pay income taxes at the entity level.

Tax rate

The tax rate for electing entities is 5.9% of net taxable income. The rate of tax on capital gains is 50% of the rate imposed on taxable income.

Electing entities are allowed the same provisions for net operating losses as nonelecting entities. Further, an electing entity can choose to receive against its liability for the voluntary tax any credit that it would otherwise have received against its income tax liability.

Election

Members of at least 50% of the voting rights of a pass-through entity may make the election on an annual basis before the due date or extended due date of the entity’s income tax return. A member includes:

Payments

The pass-through entity tax is due before the 15th day of the fourth month of the taxable year. However, the tax is required be paid in quarterly estimated installments on the fourth, sixth, ninth, and 13th months of the taxable year. Failure at the end of the year to have paid 90% of the tax owed will result in imposition of the same penalty as applied to all other taxes for which the payment does not exceed 90% of what is owed by the time the tax is due.

Exclusions from tax

Income of a member that is subject to the pass-through entity tax is excluded from Arkansas income tax. Income subject to a similar tax in another state or the District of Columbia is also exempt from Arkansas income tax. Nonresident members of an entity subject to the pass-through entity tax are not required to file an Arkansas income tax return if all pass-through entities the member has an ownership interest in pay the pass-through entity tax.

Act 362 (H.B. 1209), Laws 2021, effective as noted.

Florida

Sales and use tax: Florida enacts economic nexus

Florida has enacted economic nexus for sales and use tax purposes. Out-of-state retailers and marketplace providers with no physical presence in Florida are required to collect Florida’s sales and use tax on sales of taxable items delivered to purchasers in Florida if the out-of-state retailer or marketplace provider makes a substantial number of sales into Florida. A “substantial number of remote sales” is defined as any number of taxable remote sales in the previous calendar year in which the sum of the sales prices exceeded $100,000. The legislation is entitled the “Park Randall ‘Randy’ Miller Act.”

Taxation of marketplace sales

A marketplace provider that has a physical presence in Florida or who is making or facilitating a substantial number of remote sales through a marketplace is a sales and use tax dealer.

A marketplace provider that is a sales and use tax dealer or a person who is required to collect and remit sales tax on remote sales is required to collect discretionary sales surtax when the taxable item of tangible personal property is delivered within a county imposing a surtax.

In addition, a marketplace provider that is a dealer must certify to its marketplace sellers that it will collect and remit sales and use tax on taxable retail sales made through the marketplace. Such certification may be included in the agreement between the marketplace provider and the marketplace seller.

A marketplace seller may not collect and remit sales and use tax on a taxable retail sale when the sale is made through the marketplace and the marketplace provider certifies that it will collect and remit the tax. A marketplace seller must exclude such sales made through the marketplace from the marketplace seller’s tax return.

Moreover, a marketplace seller who has a physical presence in Florida must register and collect and remit sales and use tax on all taxable retail sales made outside the marketplace. A marketplace seller who does not have a physical presence in Florida but who makes a substantial number of remote sales must register, collect, and remit sales and use tax on all taxable retail sales made outside the marketplace. For the purpose of determining whether a marketplace seller made a substantial number of remote sales, the marketplace seller can consider only those sales made outside a marketplace.

Applicable definitions

A “marketplace” is any physical place or electronic medium through which tangible personal property is offered for sale.

A “marketplace provider” is a person who:

The term “marketplace provider” does not include a person who is:

A “delivery network company” is defined as a person who maintains a website or mobile application used to facilitate:

A “marketplace seller” is a person who has an agreement with a marketplace provider that is a sales and use tax dealer and who makes retail sales of tangible personal property through a marketplace owned, operated, or controlled by the marketplace provider.

The term “retail sale” is amended to include:

A “remote sale” is defined as a retail sale of tangible personal property ordered by mail, telephone, internet, or other means of communication from a person who receives the order outside Florida and transports the property or causes the property to be transported from any jurisdiction, including the state of Florida, to a location in Florida. For these purposes, tangible personal property delivered to a location within Florida is presumed to be used, consumed, distributed, or stored to be used or consumed in Florida.

Audit of marketplace provider’s books and records

A marketplace provider must allow the department to examine and audit its books and records. If the department audits a marketplace provider, the department may not propose a tax assessment on the marketplace seller for the same retail sales unless the marketplace seller provides incorrect or incomplete information to the marketplace provider. However, the relief provided to a marketplace seller does not apply if:

The marketplace provider is relieved of liability for the tax on the retail sale, and the marketplace seller or customer is liable for the sales and use tax if the marketplace provider demonstrates to the department’s satisfaction that:

This provision does not apply to a retail sale for which the marketplace provider is the seller if:

Marketplace seller may contract to collect and remit taxes for marketplace

Effective April 1, 2022, a marketplace provider and a qualifying marketplace seller may contractually agree to have the marketplace seller collect and remit the taxes for sales on the marketplace. This applies to marketplace sellers with annual U.S. gross sales of more than $1 billion, including the gross sales of any related entities. In the case of franchised entities that meet the $1 billion threshold, including the combined sales of all franchisees of a single franchisor.

Also effective April 1, 2022, a marketplace provider must, at the time of sale, collect and remit the following fees on applicable sales:

Electronic filing required

Out-of-state retailers and marketplace providers are required to file returns and remit tax electronically.

Department may establish rules

The Florida Department of Revenue may establish, by rule, procedures for collecting use tax from unregistered persons who but for their remote purchases would not be required to remit sales or use tax directly to the department. The procedures may provide for:

Application and tax relief

The act first applies to remote sales made or facilitated on or after July 1, 2021, by a person who made or facilitated a substantial number of remote sales in calendar year 2020. Further, a marketplace seller should only consider those sales made outside of a marketplace to determine whether it made a substantial number of remote sales in calendar year 2020.

Relief of liability for tax, penalty, and interest is granted to the following upon registration with the department by Oct. 1, 2021:

This tax relief does not apply to a person who:

Additionally, the department may not use data received from registered marketplace providers or persons making remote sales to identify use tax liabilities if the person with the use tax liability:

Ch. 2 (S.B. 50), Laws 2021, effective July 1, 2021, unless otherwise indicated.

Illinois

Income tax: Changes to estimated payment requirements discussed

The Illinois Department of Revenue issued a bulletin discussing changes to individual income tax estimated payment requirements. Since the filing and payment deadlines for 2020 income tax returns (IL-1040) were extended from April 15, 2021, to May 17, 2021, a significant number of taxpayers will not be able to accurately calculate and pay their 2021 Illinois estimated income tax. Therefore, the department is providing an additional option upon which taxpayers can base their 2021 estimated tax payments. Taxpayers are required to estimate their tax liability for the year and make four equal installments.

Additionally, taxpayers will not be assessed a late estimated payment penalty if the amount of the timely paid installments equals (1) 90% of actual liability for 2021 or (2) 100% of actual liabilities for 2019 or 2020.

Who are required to file estimated tax?

Individuals are required to make estimated payments if their Illinois individual income tax liability exceeds $1,000 for the year; after subtracting:

How to estimate payments based up 100% of 2019 liability if taxpayers failed to file 2020 return

For individual income tax, taxpayers may use Form IL-1040-ES, Estimated Income Tax, and base the estimated tax on the amount of tax owed on 2019 IL-1040, Illinois Income Tax Return. Taxpayers are advised to review 2021 Form IL-1040-ES. Informational Bulletin FY 2021-17, Illinois Department of Revenue, March 2021.

Kentucky

Corporate, personal income taxes: Withholding for corporate partners and composite returns eliminated

Kentucky enacted legislation that eliminates:

Ch. 156 (H.B. 249), Laws 2021, effective March 29, 2021, and applicable to tax years beginning on or after Jan. 1, 2022.

Michigan

Corporate, personal income taxes: Tax treatment of Paycheck Protection Program loans outlined

The Department of Treasury issued a notice outlining Michigan’s conformity to the federal income tax of treatment Paycheck Protection Program (PPP) loans. The notice also provides guidance on the various income tax issues raised by the federal program.

Tax base

The Michigan tax base for both individuals and corporations using the Internal Revenue Code (IRC) in effect for the tax year fully conforms to the federal income tax treatment of PPP loans. Although the federal provision creating the PPP loan program is not codified with the IRC, it is a provision of the laws of the United States relating to federal incomes taxes. It is generally the intent that income subject to the Michigan income tax be computed in like manner as under the IRC. Thus, forgiven PPP loans excluded from the computation of federal income tax are similarly excluded from the computation of the Michigan tax base. Likewise, business expenses paid for by PPP loans that are deductible at the federal level remain deductible in computing the Michigan tax base.

Nexus

In determining whether a corporate taxpayer has substantial income tax nexus with the state, “gross receipts” do not include PPP loan amounts required to be repaid. However, “gross receipts” do include forgiven PPP loan amounts.

Apportionment

When apportioning business income for individual income tax purposes, a forgiven PPP loan amount is a “gross receipt” included in the sales factor calculation. It is included in the denominator of the sales factor for all taxpayers and included in the numerator for taxpayers with a commercial domicile in Michigan.

When apportioning business income for corporate income tax purposes, PPP loans, including the forgiven amount of any such loan, are not included in either the numerator or the denominator of the sales factor computation. This is because when computing the sales factor under the corporate income tax law, “sales” is generally limited to amounts received by the taxpayer as consideration received for the transfer of property that can be characterized as stock in trade; the performance of certain services; or the rental, lease, licensing, and use of tangible and intangible property.

Credits

When determining eligibility for various individual income tax credits, “total household resources” (THR) will include PPP expenses deductible at the federal level, because THR is based on federal adjusted gross income (AGI). But, because forgiven PPP loan amounts are exempt from the computation of federal AGI, taxpayers must add the forgiven amounts to THR. Any portion of a PPP loan that is not forgiven is treated like other loans and excluded from THR.

Record keeping

Taxpayers do not need to include any specific loan documentation with the filing of their Michigan returns. But, all taxpayers must keep accurate and complete records necessary for an accurate determination of their tax liability. Borrowers of PPP loans should retain sufficient documentation of their participation in the PPP loan program. This should generally include proof of the taxpayer’s application and subsequent receipt of the PPP loan; the amount of the loan subsequently forgiven; and the business expenses paid through loan proceeds.

Notice: Treatment of Paycheck Protection Program (PPP) Loans Under the Michigan Income Tax Act, Michigan Department of Treasury, April 19, 2021.

Corporate income tax: Holding company had nexus, but no apportionment of income to Michigan

In Apex Laboratories Int’l v. Dep’t of Treasury, a Delaware holding company had sufficient nexus with Michigan to be subject to the corporate income tax. But, it’s apportionment factor was zero, according to the Michigan Court of Claims. Therefore, the holding company was not liable for tax on the gain from the sale of its stock in a Canadian company.

The holding company argued that it had no nexus with Michigan because it had no employees, physical assets, or activities in Michigan. But, it had a physical presence in Michigan through its officers. The officers acted from Detroit on the its behalf. Thus, it had nexus with Michigan for income tax purposes.

However, the sales transaction closed in Canada. The holding company was “subject to tax” in Canada, even though it was not actually taxed there. Also, the only business activity — the transfer of stock — occurred in Canada. Thus, none of the holding company’s income was apportionable to Michigan.

Treasury Update, Michigan Department of Treasury, March 2021.

New Jersey

Income tax: Combined filing conformity to IRC Sec. 1502 discussed

New Jersey has released guidance for corporation business tax filers filing a combined return regarding conformity to IRC Sec. 1502 and the associated regulations. New Jersey acknowledges that combined returns are not the same as consolidated but they are similar. Thus, a taxpayer’s entire net income as reported on a federal consolidated return must match the taxpayer’s entire net income on line 28 on Schedule A of the CBT-100, CBT-100U, or BFC-1, before the respective New Jersey modifications.

General principle

In general, the principles set forth in the Treasury regulations promulgated under IRC Sec. 1502, including the principles relating to deferrals, eliminations, intercompany offsets, etc., apply to the extent they are consistent with New Jersey law and the unitary business principles to a combined group filing a New Jersey combined return as though the combined group filed a consolidated return. Additionally, the limitations governing federal net operating losses (NOLs) and net operating loss carryovers apply. However, federal carrybacks do not apply because New Jersey NOLs can only be carried forward for 20 privilege periods.

The guidance provides specific guidance regarding:

Technical Bulletin TB-103, New Jersey Division of Taxation, March 16, 2021.

New Mexico

Corporate income tax: Guidance issued on 2020 change to sales factor

The New Mexico Taxation and Revenue Department has issued corporate income tax guidance on new method of determining the sales factor that went into effect on Jan. 1, 2020.

Sales and gross receipts

“Sales” means all gross receipts from transactions and activities in the regular course of business. “Gross receipts” means all income from transactions and activities in the regular course of business, including income from licensing intangible personal property.

Sales of tangible personal property

Sales of tangible personal property are New Mexico sales if either of the following is true:

Sales other than sales of tangible personal property

Sales other than sales of tangible personal property are New Mexico sales if any of the following are true:

Gross receipts for the performance of personal services are attributable to New Mexico to the extent such services are performed within the state:

Bulletin B-300.21, New Mexico Taxation and Revenue Department, March 1, 2021.

New York

Multiple taxes: Enacted budget increases tax rates, extends incentives, makes other changes

Enacted as part of New York’s 2021-22 budget package, S.B. 2509 contains a variety of personal income, corporate franchise, sales and use, property, and other tax changes, including those detailed below.

Ch. 59 (S.B. 2509), Laws 2021, effective April 19, 2021, applicable as noted.

Ohio

Corporate, personal income taxes: IRC conformity and pass-through withholding rate updated

Ohio has enacted legislation:

IRC conformity

The updated conformity date incorporates changes to the IRC made after March 27, 2020, the previous incorporation date. Among the changes to federal law incorporated by the update are changes made by the Consolidated Appropriations Act 2021 (CAA) and the American Rescue Plan Act of 2021.

Further, taxpayers with tax years ending after March 27, 2020, and before March 31, 2021, can irrevocably elect to apply the IRC in effect to their taxable year.

CAT exclusions

The law exempts the Second Draw Paycheck Protection Program (PPP) loan amounts forgiven under the CAA from the CAT. A similar exemption already exists for First Draw PPP loan amounts forgiven under the CARES Act.

There is also now an exemption from the CAT for Bureau of Workers’ Compensation (BWC) dividends paid to employers in 2020 and 2021.

Unemployment benefits

Ohio may now temporarily abate any interest or penalties for the underpayment of state and school district income taxes due on unemployment benefits received in 2020. Also, individuals will now be able to elect to have state income tax withheld from their unemployment benefits.

Pass-through entity withholding tax

Finally, the withholding rate that pass-through entities use when remitting taxes on nonresident investor income is reduced from 5 to 3% for individual investor and from 8.5 to 3% for nonindividual investors after 2022.

S.B. 18. Laws 2021, effective March 31, 2021.

Utah

Corporate income tax: Utah addresses taxation of Sec. 965 Income, GILTI, and FDII

Utah has enacted legislation addressing the state taxation of:

The legislation is operative retroactively for:

Dividends received deduction

Taxpayers may utilize the state’s 50% dividends received deduction for amounts included in federal taxable income under:

Unadjusted income and special deductions

“Unadjusted income” means federal taxable income determined on a separate return basis before intercompany eliminations, and before:

“Special deductions” includes deductions under:

H.B. 39, Laws 2021, effective as noted above.

Virginia

Corporate income tax: Informational combined reporting requirement announced

The Virginia Department of Taxation announced that corporations subject to Virginia income tax may need to file a one-time report by July 1, 2021, showing the difference between the amount of tax the corporation would pay if it filed as part of a unitary combined group and the amount of tax based on the current filing requirements. Taxpayers should use their 2019 corporation income tax calculations to complete the report. The Virginia General Assembly created the requirement so that the department can put together a report detailing the revenue impacts of combined corporate income tax reporting.

There is no tax due with the report. However, taxpayers may be subject to a $10,000 penalty if they do not file the report, or if they make a material misstatement or omission.

Required information

A designated member of the unitary group will need to file the report using taxable year 2019 information. The report will need to include information about the unitary group’s income, apportionment computation, tax credits, and tax liability calculation. The designated member will need to provide this information as if filing a unitary combined report under both the Joyce and Finnigan methods, as well as the same tax information under the current filing requirements for all the members of the group that have nexus with Virginia.

Members outside United States

The calculations should not include any information from members incorporated outside the United States whose average property, payroll, and sales factors outside the United States equals 80% or more. Members whose income is not subject to federal taxation because of the provisions of a federal tax treaty should exclude that income from the report, along with any associated apportionment factors or expenses.

Insurance companies and banks

Corporations required to file the Virginia insurance premiums license tax or Virginia bank franchise tax are not considered part of the unitary combined group for purposes of this report. Corporations that would be liable for those two taxes if they were located in Virginia should also not be considered part of a unitary group.

Notice, Virginia Department of Taxation, April 8, 2021.

West Virginia

Corporate income tax: Apportionment formula changes, market-based sourcing enacted

West Virginia enacted corporate income tax legislation that:

Sales of services

Taxpayers must source or assign income from the sales of services to West Virginia if the services are delivered to a location in the state.

Rented, leased, or licensed intangible property

A taxpayer must source income from rented, leased, or licensed intangible property to West Virginia if:

Sales of intangible property

Taxpayers must source income from the sales of intangible property to West Virginia if the property is used in the state. A sale of a contract right, government license, or similar intangible is used in West Virginia, if the holder can use the intangible property in all or part of the state. If receipts from intangible property sales are contingent on the productivity, use, or disposition of the intangible property, a taxpayer must use the sourcing rules that apply to rented, leased, or licensed intangible property.

A taxpayer must exclude all other receipts from a sale of intangible property from the sales factor.

Effective date

The apportionment and market-based sourcing rules are effective for tax years beginning on or after Jan. 1, 2022.

H.B. 2026, Laws 2021, effective June 28, 2021 and 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.

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