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State and local tax advisor: February 2022

February 24, 2022 Article 21 min read
Curtis Ruppal Mike Merkel Ron Cook Jeanette Tolar Julie Corrigan
Are you interested in the latest changes in state and local taxes? Find the February 2022 roundup here.
Close-up view of two business professionals hands using tablet devices.The states covered in this issue of our monthly tax advisor include:


Corporate, personal income taxes: Remote worker withholding guidance issued

Arizona has issued guidance on the withholding of Arizona income tax from the wages of remote workers.

Arizona resident working for out-of-state business, living in Arizona

Arizona income tax withholding is required from the start of employment for any resident employee physically working in Arizona, regardless of where the employer is based.

Arizona resident working outside of Arizona

An Arizona resident working outside of Arizona may request that the employer withhold Arizona income tax from wages for work done outside of Arizona. If the out-of-state employer agrees to withhold Arizona income tax from the out-of-state wages, the employee will complete Arizona Form A-4V and submit it to the employer.

Out-of-state employee working in Arizona

If an employee working in Arizona is not an Arizona resident, Arizona income tax withholding is required once the employee has been working in Arizona for 60 days. But, if both the employer and the nonresident employee agree, withholding can start at the beginning of employment instead of at 60 days.

Employee or Employer Out-of-State Withholding (Remote Worker), Arizona Department of Revenue, February 2022.


Corporate income tax: California issues guidance on application of P.L. 86-272

California has issued guidance on whether the protections of P.L. 86-272 apply to specific fact patterns that are common in the current economy. As the Franchise Tax Board notes, in the decades since P.L. 86-272 was enacted, the way in which interstate business is conducted has changed significantly. In each scenario below, a business makes sales to California customers, is commercially domiciled outside of California, and has no other activities in California other than those mentioned in the fact pattern. The issue in each scenario is whether there are business activities in California and whether those activities exceed the protection of P.L. 86-272 so that the business is subject to California income or franchise tax.

P.L. 86-272 prohibits a state from imposing a net income tax on the income of a person derived within the state from interstate commerce if the only business activities within the state conducted by or on behalf of the person consist of the solicitation of orders for sales of tangible personal property. The protections provided by P.L. 86-272 apply only to orders that are sent outside of the state for acceptance or rejection. If the orders are accepted, they must be filled by shipment or delivery from a point outside the state to maintain PL 86-272 immunity.

Telecommuting employee

An employee who telecommutes on a regular basis from within California performing business management and accounting tasks would cause a business to lose the protection of P.L. 86-272. These are business activities in California, and they don’t constitute solicitation, nor are they entirely ancillary to solicitation, of orders for sales of tangible personal property.

Post-sale assistance

If a business regularly provides post-sale assistance to California customers, via electronic chat or email, that customers initiate by clicking on an icon on the business’s website, the activity would disqualify the business from P.L. 86-272 immunity. There is business activity in California, and it’s not solicitation or ancillary to solicitation because it takes place after the sale.

Credit card applications

If a business solicits and receives online applications for its credit card via its website from California customers, that activity disqualifies the business from P.L. 86-272 immunity. The business activity in California exceeds solicitation, as offering to provide credit to customers is an activity outside of seeking to make orders of tangible personal property in California.

Job applications

If a business invites people in California to apply for non-sales jobs via its website, that activity that activity disqualifies the business from P.L. 86-272 immunity. The business activity in California is providing access to job applications and allowing upload of applications, cover letters, and resumes through computers or other electronic devices located in California. This activity exceeds solicitation as it involves human resource outreach to fill jobs that aren’t limited to sales.

Internet cookies

Placing internet cookies onto the computers or other electronic devices of California customers to gather customer search information that will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale, will disqualify a business from P.L. 86-272 immunity. This activity exceeds solicitation, as it’s not related to facilitating a sale of tangible personal property.

On the other hand, placing internet cookies onto the computers or other electronic devices of California customers to gather customer information that’s only used for purposes entirely ancillary to the solicitation of orders for tangible personal property, doesn’t disqualify the business from PL 86-272 immunity. This may include purposes such as remembering items that customers have placed in their shopping cart during a web session; storing personal information so that customers don’t need to reinput the information when they return to the seller’s website; and reminding customers what products they have considered during previous sessions.

Remote repairs or upgrades

Transmitting code or other electronic instructions to remotely fix or upgrade computers or other electronic devices previously purchased by California customers will disqualify a business from P.L. 86-272 immunity. The business activity in California exceeds solicitation, as providing repairs or upgrades to previously sold products aren’t activities related to sales of tangible personal property, but rather are post-sales activities.

Extended warranties

Selling, or offering to sell, extended warranty plans via a business’s website to California customers is a business activity in California. It involves the sale of intangible property and is not ancillary to the sale of tangible personal property. Thus, the activity disqualifies a business from P.L. 86-272 immunity.

Marketplace facilitator contracts

If a business contracts with a marketplace facilitator that facilitates the sale of business’s products on the facilitator’s online marketplace, and the facilitator maintains some of the business’s inventory in California, the activity will disqualify the business from P.L. 86-272 immunity. This activity exceeds solicitation of orders for sales of tangible personal property, as it amounts to consignment of stock of goods to another person, including an independent contractor, for purposes of sale.

Streaming services

Contracting with California customers to stream videos and music to electronic devices for a charge disqualifies a business from P.L. 86-272 immunity. Sales of digital video and music streaming are not sales of tangible personal property but rather are services and, thus, aren’t activities within the protection of P.L. 86-272.

Frequently asked questions

Providing post-sale assistance to California customers by posting a list of static Frequently Asked Questions (FAQs) with answers on a business’s website doesn’t disqualify the business from P.L. 86-272 immunity, because it doesn’t constitute a business activity within California. Viewing of static FAQs through the internet doesn’t provide the requisite interaction between the California customer and the business.

Tangible personal property

Offering only items of tangible personal property for sale on a business’s website won’t disqualify the business from P.L. 86-272 immunity, because the business engages exclusively in in-state activities that either constitute solicitation of orders for sales of tangible personal property or are entirely ancillary to such solicitation. The business activity is in California due to the interaction between the website and customers’ computers or other electronic devices located in California. But, because this business activity doesn’t exceed solicitation of orders for tangible personal property, the business remains protected by P.L. 86-272.

Technical Advice Memorandum 2022-01, California Franchise Tax Board, Feb. 14, 2022,

Multiple taxes: Temporary limits on NOLs and credits ended, other tax relief enacted

California has enacted tax relief legislation that:

  • Ends, one year early, the temporary limits on the ability of businesses to use net operating loss (NOL) deductions and tax credits to reduce their tax liability.
  • Conforms to federal law excluding Restaurant Revitalization Fund (RRF) and federal Shuttered Venue Operators (SVO) grants from tax.
  • Excludes assistance from other COVID-19 pandemic relief programs from tax.
  • Makes changes related to the elective pass-through entity (PTE) tax.

NOLs and tax credits

Ch. 8 (AB 85), Laws 2020, temporarily suspended the use of NOL deductions for taxpayers with income of more than $1 million and limited the amount of most business tax credits a taxpayer could claim for corporation franchise and income, personal income, and insurance premiums tax purposes to $5 million for 2020, 2021, and 2022. These limits are now removed for 2022.

RRF and SVO grants

California will follow federal law generally excluding the following amounts from gross income for tax purposes:

  • For tax years beginning on or after Jan. 1, 2019, amounts awarded as SVO grants.
  • For tax years beginning on or after Jan. 1, 2020, amounts awarded as RRF grants.

Other COVID-19 pandemic relief programs

For tax years 2021 through 2025, gross income also excludes any bill credit received by a customer from:

  • A community water system or wastewater treatment provider pursuant to the Water and Wastewater System Payment Program under the American Rescue Plan Act of 2021.
  • An electric utility pursuant to the California Arrearage Payment Program under the American Rescue Plan Act of 2021.

Elective PTE tax

Beginning with the 2021 tax year, California makes the following elective PTE tax changes:

  • Permits pass-through entities that have partnerships as one of their owners to make the election.
  • Allows the PTE tax credit, claimed by owners of entities that elect to pay the tax, to reduce the regular tax below the tentative minimum tax.
  • Allows disregarded limited liability companies owned by individuals to claim the credit.
  • Includes guaranteed payments in the amounts for which the credit may be claimed.

S.B. 113, Laws 2022, effective Feb. 9, 2022, and applicable as noted.


Sales and use tax: Destination sourcing exception for small businesses extended

The temporary exception that allows Colorado small businesses to continue to source their sales to their business’s location is extended until Oct. 1, 2022. The exception was set to be repealed Feb. 1, 2022.

Small business destination sourcing exception

Businesses are required to use destination sourcing. However, a small retailer with less than $100,000 of retail sales can continue to temporarily source their sales to the businesses’ location instead of the location where the customer receives the goods or services.

H.B. 1027, Laws 2022, effective and applicable on Feb. 1, 2022.


Corporate income tax: Rules on sourcing parent company’s, subsidiaries’ income from different services discussed

In a letter ruling, the Florida Department of Revenue (department) determined that a parent company and subsidiaries (taxpayers) must source their income from different types of services to the location where deliverables from those services were forwarded, sent, delivered, or provided on a market basis for corporate income tax purposes. In this matter, the taxpayers sold and provided different services and inquired about sourcing the income properly.

Applicable law

  • Sales factor is defined as a fraction, the numerator of which is the total sales of the taxpayer in this state during the taxable year or period and the denominator of which is the total sales of the taxpayer everywhere during the taxable year or period.
  • The numerator of the sales factor includes gross receipts attributed to Florida, which were derived by a taxpayer from transactions and activities in the regular course of its trade or business.
  • Apportionment factor provides a measure of a taxpayer’s business activity in the states in which it does business and serves as a means of attributing income to the states from which the income was derived.
  • Florida’s sales apportionment is based on where the sales transaction takes place rather than where contracts are approved, where data is processed or stored, where payment is made, or where the customer’s headquarters is located; thus, sales are attributed to Florida if the “income producing activity,” which gave rise to the receipt is performed wholly within Florida.
  • “Income producing activity” is defined as the transactions and activity directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profits.


Upon review, the department noted that:

  • The taxpayer’s income from the sale of services was to be sourced to Florida and included in the numerator of the sales factor when the services were rendered to Florida customers or deliverables from those services were forwarded, sent, delivered, or provided to a location in Florida for the customer.
  • The income from the sale of services to supplement sales to others who pay a fee for the taxpayer’s services should be included in the denominator of the sales factor.

Technical Assistance Advisement 21C1-005, Florida Department of Revenue, July 2, 2021, released January 2022.


Corporate, personal income taxes: Tax cuts enacted

Idaho Governor Brad Little has signed legislation enacting the income tax cuts that he proposed earlier this year. The changes apply beginning Jan. 1, 2022. The law provides for:

  • Income tax rebates that provide approximately a 12% rebate of income taxes.
  • A lower-top income tax rate for both individuals and businesses.

Rate reductions

The individual income tax rate on income:

  • Less than $1,000 is 1%.
  • $1,000 but under $3,000, is $10.00 plus 3% of the amount over $1,000.
  • $3,000 but under $5,000, is $72 plus 4.5% of the amount over $3,000.
  • $5,000 and over, is $160 plus 6% of the amount over $5,000.

The corporate income tax rate goes from 6.5 to 6%.

Ch. 1 (H.B. 436), Laws 2022, effective Feb. 4, 2022.


Sales and use tax: Sale of SaaS and cloud-based remote work tools not subject to tax

A software company (taxpayer) was not subject to Illinois sales and use tax on subscription fees it charged for the provision of Software as a Service (SaaS) and cloud-based remote work tools to customers because the taxpayer was acting as a serviceman. The taxpayer provided remote access to web-conferencing capabilities via a SaaS platform and, to that end, linked its servers to customers’ computers or mobile devices through the use of an applet, which it offered free of charge.

Generally, computer software provided through a cloud-based delivery system isn’t subject to tax. If a service provider offers to subscribers an API, applet, desktop agent, or a remote access agent to enable the subscriber to access the provider’s network and services, the subscriber is receiving computer software. Although there may not be a separate charge to the subscriber for the computer software, it’s nonetheless subject to tax, unless the transfer qualifies as a nontaxable license of computer software. Further, if an Illinois customer downloads computer software for free from an out-of-state retailer’s website or server that’s also located out of state, the retailer would incur no use tax liability. Finally, Illinois generally doesn’t tax subscriptions.

The Department of Revenue (department) noted that the taxpayer was acting as a serviceman when it provided its SaaS and cloud-based remote work tools. The Illinois customers download the applet for free from a server located out of state. Accordingly, the department concluded that the taxpayer would not incur use tax liability for providing the applet to the Illinois customers. Additionally, as Illinois doesn’t impose occupation or use taxes on subscriptions, the taxpayer wouldn’t be taxed on the subscription fees.

Private Letter Ruling, ST 21-0008-PLR, Illinois Department of Revenue, Nov. 23, 2021, released January 2022.


Personal income tax: Composite return filing guidance issued

Iowa has released composite income tax return filing guidance for pass-through entities and their nonresident members.

New composite return requirements

For tax years beginning after 2021, pass-through entities with nonresident members are required to file Iowa composite returns and pay Iowa income or franchise tax on behalf of nonresident members. The composite return tax will be computed by multiplying each nonresident member’s Iowa-source income from the pass-through entity by the top Iowa tax rate applicable to that nonresident member.

For calendar-year filers, the tax year 2022 composite return tax payment will be due on May 1, 2023.


Beginning in tax year 2022, pass-through entities are no longer required to additionally withhold and remit Iowa income tax on a nonresident member’s Iowa-source income from the pass-through entity, because that nonresident member’s Iowa-source income is now subject to the mandatory composite return requirement. A pass-through entity may still be required to withhold and remit Iowa income tax, using a valid Iowa-withholding permit, on income paid to a nonresident who is not a member of the entity.

Nonresident members

A nonresident member may be excluded from the composite return only if the nonresident member and pass-through entity complete and sign the 2022 Nonresident Member Composite Agreement. The agreement is only valid for tax year 2022. The nonresident member will be responsible for filing their own Iowa returns and making their own Iowa tax payments.

Nonresident members will receive a refundable credit for the Iowa income or franchise tax paid on the nonresident member’s behalf by the pass-through entity on the composite return.

Iowa Composite Returns for Tax Year 2022 and Later, Iowa Department of Revenue, Feb. 4, 2022.


Personal income tax: Refund of pass-through entity's estimated tax overpayment properly granted

A limited liability company (taxpayer) that operated long-term care medical facilities and provided ancillary healthcare services was entitled to a personal income tax refund without interest. In this matter, the taxpayer made quarterly estimated tax payments for its nonresident members and claimed a refund when it filed a tax return showing losses. However, the comptroller of taxation denied the refund.

Upon review, the tax court granted the refund without interest, holding that the taxpayer properly followed the state Schedule K-1 instructions and complied with the applicable tax laws, which the Circuit Court affirmed. Subsequently, the comptroller filed an appeal and the Court of Special Appeals of Maryland noted that:

  • The taxpayer’s estimated tax payments were deposits and not taxes paid.
  • The taxpayer was not prohibited from claiming the refund on behalf of its members.
  • The voluntary payment rule was inapplicable.

Therefore, the court of special appeals affirmed the trial court’s decision.

Comptroller of Maryland v. FC-GEN Operations Investments, Court of Special Appeals of Maryland, No. 0946, Feb. 3, 2022.


Corporate income tax: Taxpayer entitled to manufacturing corporation status

A software-based solutions provider (taxpayer) was entitled to be classified as a Massachusetts manufacturing corporation and the abatement of corporate excise tax because sales of its content delivery network (CDN) business units constituted sales of standardized software. Under the applicable law, the development and sale of standardized computer software is considered a manufacturing activity, without regard to the manner of delivery of the software to the customer. A business corporation that both develops and sells standardized computer software is characterized as a manufacturer if its manufacturing activities are “substantial.”

The Commissioner of Revenue, soon after granting the taxpayer manufacturing corporation status, retroactively revoked the classification on the ground that the software offerings should be regarded as services because the taxpayer was exclusively a cloud-based internet services provider and its research of new software was exclusively for its own internal purposes. The taxpayer argued that it was a vendor of standardized computer software provided remotely, and that its business model was Software as a Service (SaaS), not infrastructure as a service. It didn’t offer customers access to its computer hardware to run their own applications or store content. There was also no intended or actual transfer of software copies or the related technology to the customers.

Upon review, the Appellate Tax Board (board) focused on the substance of the transactions and found that the CDN sales constituted sales of standardized software meant for remote access and use. Accordingly, the board determined that the taxpayer was engaged in substantial manufacturing activities and therefore should be classified as a manufacturing corporation entitling it to use a single sales factor apportionment formula for excise tax purposes.

Akamai Technologies, Inc. v. Commissioner of Revenue, Appellate Tax Board (Massachusetts), No. C332360, C334907, C336909, Dec. 10, 2021.

New York

Corporate, personal income taxes: Pass-through entity tax return and extension application available

New York announced that the pass-through entity tax (PTET) return and extension application are available for tax year 2021 in the Department of Taxation and Finance’s Online Services. An eligible entity that opted in for tax year 2021 is required to file an annual PTET return or request an extension online on or before March 15, 2022. Tax professionals having authorization to perform services on behalf of their clients can file clients’ PTET returns and extensions using their Tax Professional Online Services accounts.

Notice, New York Department of Taxation and Finance, Feb. 9, 2022.

North Carolina

Franchise tax: Limitation on debt deduction for out-of-state affiliates was unconstitutional

A Virginia corporation doing business in North Carolina was entitled to a franchise tax deduction for debt owed by affiliate corporations that weren’t doing business in the state because the statutory provision denying the deduction discriminates against interstate commerce in violation of the dormant Commerce Clause of the U.S. Constitution. The corporation borrowed money from and lent money to affiliated corporations. Some of the affiliates were doing business in North Carolina and subject to franchise tax, while others were not. The corporation asserted that North Carolina’s method of calculating the capital stock base for franchise tax, specifically denying the deduction for affiliate receivables owed by out-of-state corporations, was unconstitutional as applied to the taxpayer. By allowing a deduction only if the debtor is doing business in North Carolina and pays the franchise tax, the statutory limitation results in differential treatment based on the location of the debtor’s business, burdens interstate business, and benefits intrastate business.

Philip Morris USA Inc. v. Department of Revenue, North Carolina Office of Administrative Hearings, Dec. 30, 2021.


Personal income tax: Law imposing municipal income tax on nonresident’s income earned outside city constitutional

A personal income taxpayer’s appeal against an Ohio law that allowed the city of Cincinnati to tax nonresidents on income earned outside of its borders while working from home for a city-based business was denied as the law at issue wasn’t unconstitutional.

In this matter, the taxpayer asserted that the law at issue erroneously extended municipal taxation beyond the territorial jurisdiction of Ohio. Moreover, the taxpayer argued that in personam jurisdiction for taxation purposes should not apply to nonresident of the city.

The appeals court, upon review, noted that the General Assembly was authorized to enact the section under the Ohio Constitution. Moreover, under the applicable law, municipality can tax beyond its physical borders if state law permits. Since the taxpayer was a state citizen, he received all the process that he was due under the law. Accordingly, the taxpayer’s due process clause challenge was properly denied.

Schaad v. Alder et al, Court of Appeals of Ohio, First District, No. C-210349, Feb. 7, 2022,


Corporate, personal income taxes: Guidance on expiration of Philadelphia’s temporary nexus waiver issued

For corporate and personal income tax purposes, the Philadelphia Department of Revenue (department) issued frequently asked questions (FAQs) regarding the expiration of the city’s temporary nexus waiver.

During the pandemic, the department temporarily waived the legal nexus threshold that considers the presence of employees working temporarily from home within Philadelphia as establishing a sufficient nexus for businesses located outside Philadelphia. This waiver applied when an employee worked from home solely as a result of the COVID-19 pandemic. This temporary policy ended on June 30, 2021.

The FAQs, among other issues, discussed:

  • Businesses located outside the city that continue to have any city resident employees working from home after June 30, 2021, will have nexus in 2021 based on the activities of those remote workers.
  • Determination of what constitutes a “remote workforce” in the city is based on facts and circumstances of each case.
  • Nexus for the net profits tax and the business income and receipts tax (BIRT) exists for a business regardless of the level of its gross receipts.
  • Taxpayers with nexus in the city are still subject to the gross receipts portion of the BIRT, even if their city activities are protected under P.L. 86-272.

Release, Philadelphia Department of Revenue, Feb. 7, 2022.


Personal income tax: Treatment of credit for tax paid to other state determined for certain pass-through entity owners

Virginia issued a personal income tax ruling addressing whether its credit for taxes paid to another state is available to Virginia taxpayers who are owners of pass-through entities making an election to be taxed at the entity level in Maryland. According to the ruling, a tax imposed at the entity level isn’t attributable to individual owners, unless they are S corporation shareholders. Therefore, Virginia residents who are shareholders of an S corporation electing to be taxed at the entity level under Maryland’s SALT cap workaround must determine on a case-by-case basis if the tax payment would otherwise qualify for the credit in the hands of the individual shareholder; if it would, then the Virginia resident is entitled to claim the credit as if it had been paid by the individual directly. However, Virginia resident taxpayers holding interests in other types of entities making the Maryland election will not be eligible for the credit.

Ruling of Commissioner, P.D. 21-156, Virginia Department of Taxation, Dec. 29, 2021.

Plante Moran note: There are many considerations whether electing into a state’s pass-through entity election is favorable. One such important consideration is whether the pass-through entity owners obtain in their resident state a credit for taxes paid to another state under that state’s pass-through entity tax regime. Per the above, not all states provide for such a credit, which may result in additional tax by electing into a state’s pass-through entity election.

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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