The following are recent significant State Corporate Tax developments for the month of April 2021 that may be of interest to estate and business planners, organized by state.
- On April 14, S.B. 1752 was signed into law, updating Arizona’s conformity to Internal Revenue Code (IRC) provisions regarding definitions of adjusted gross income and federal taxable income for corporations, the federal CARES Act, the 2021 federal Consolidated Appropriations Act, and the 2021 federal American Rescue Plan.
The American Rescue Plan includes a subtraction from federal adjusted gross income of up to $10,200 in unemployment income per person for the 2020 tax year, so taxpayers who claimed the subtraction on their federal return for tax year 2020 “should file their Arizona return starting with federal adjusted gross income from their federal return.” The Arizona Department of Revenue also notes that taxpayers that did not take the subtraction on their original federal return should wait to amend their Arizona return [S.B. 1752 (4/14)].
- On April 6, H.B. 1468 was signed into law, creating the Independent Tax Appeals Commission Act within the Department of Inspector General. This act establishes an independent tax tribunal to “resolve disputes between the Department of Finance and Administration and taxpayers before requiring the payments of the amount in issue” [H.B. 1468 (4/6)].
- On April 1, S.B. 525 was signed into law, reversing changes made under Act 819 of 2019, which transferred responsibility for franchise tax collection and administration to the Department of Finance and Administration on May 1, 2021. This Act transfers the administration and collection of franchise taxes back to the Secretary of State [S.B. 525 (4/1)].
- On April 13, the Connecticut Department of Revenue Services issued a Taxpayer Services Special Bulletin TSSB 2021-1 answering frequently asked questions regarding H.B. 6516, which addresses nexus provisions for resident and nonresident employees working remotely due to the COVID-19 pandemic. Among other subjects, this Bulletin clarifies how to determine whether a Connecticut resident was working remotely “due” to COVID-19 during taxable year 2020, and whether an employee that worked in a state that employs a “convenience of the employer” rule is subject to Connecticut income tax on income earned while an employee worked remotely [Taxpayer Services Special Bulletin TSSB 2021-1: Update to Commissioner’s Bulletin of March 4, 2021, Conn. Dept. of Rev. Serv. (4/13)].
- On April 15, House Bill 317 was signed into law, providing for the treatment of state and local tax deductions for affected business entities, in effect retroactively to January 1, 2021. Affected business entities include any partnership or S corporation that elects to be subject to tax pursuant to Section 63-3026B, Idaho Code. The bill also notes that each partnership or S corporation should report each members’ direct pro rata share of the tax imposed if it is an affected business entity and its indirect pro rata share of the tax imposed where such affected business entity is a direct or indirect member. Each individual who is a member and is subject to electing qualifying entities is entitled to a credit against such tax for the individual’s direct and indirect pro rata share of taxes paid to another state [H.B. 317 (4/13)].
- On April 13, an Administrative Law Judge denied an appeal by a petitioner to treat a member of its business group as an excluded 80/20 company, to calculate the payroll factor used to determine eligibility as an 80/20 company by including payroll costs reported by a single-member LLC owned by the business group as compensation paid to expatriate employees, and to consider such expatriate employees who were transferred to related foreign host companies as employees of the business group and the single-member LLC. The petitioner also argued that the reorganization of foreign operations under this business group and the single-member LLC had economic substance and could not be reversed by the economic substance doctrine as a matter of law. The Illinois Department of Revenue responded to this Summary Judgement Motion by arguing that, among other reasons, the business group had not met its burden in proving that it conducts 80% or more of its business activities outside of the United States, and thus the Department denied the petitioner’s Motion for Summary Judgement [Decision No. 16 TT 82 and 17 TT 16, Ill. Independent Tax Trib. (4/13)].
- On April 5, S.B. 162 was signed into law, affirming previous legislation that replaced the Kentucky Claims Commission with the Office of Claims and Appeals, consisting of three separate and distinct administrative boards: The Board of Tax Appeals, The Board of Claims, and The Crime Victims Compensation Board [§12 (2)]. Additionally, this legislation explains the overall structure of the administrative boards within the Office of Claims and Appeals, including the boards’ authorities and the details of their members’ appointments [S.B. 162 (4/5)].
- The Maine Revenue Services recently released a Tax Alert updating its conformity to most federal tax law changes enacted on or before December 31, 2020, including federal treatment of the Paycheck Protection Program (PPP) loan forgiveness. The Maine legislature has not yet made a decision regarding conformity with federal tax laws after December 31, 2020 and does not conform to certain tax law changes enacted in 2020, including:
- “The deferred effective date for the limitation on noncorporate excess business losses allowed to reduce federal adjusted gross income;
- The increase in the allowable business interest deduction from 30% to 50% of federal adjusted taxable income; and
- For tax year 2019 fiscal year filers, the additional corporate charitable contribution deduction allowed to reduce federal taxable income.
- Additionally, for tax years beginning on or after January 1, 2020, Maine tax law does not conform to the federal deduction for foreign-derived intangible income (“FDII”), which was enacted in 2017 by the Tax Cuts and Jobs Act (“TCJA”).”
This legislation also includes provisions allowing Maine residents who began teleworking in Maine due to the COVID-19 pandemic and was performing the same services outside of the state immediately prior to the declaration of the COVID-19 state of emergency or a similar declaration by the jurisdiction where the employee was performing the services, to claim tax credit for income tax paid to other jurisdictions, with certain exceptions [Tax Alert, Vol. 31, Iss. 10. Me Rev. Serv. (4/21)].
- On March 31, the Massachusetts Department of Revenue released a Technical Information Release TIR 21-4, which explains Massachusetts treatment of certain provisions in the Fiscal Year 2021 Budget (the FY21 Budget) relating to partnerships that are the subject of a federal audit, including a rule that treats the partnership itself as a taxpayer and requires the partnership to pay any assessment resulting from a federal audit.
The Massachusetts DOR explains that the “FY21 Budget includes a new provision, codified at G.L. c. 62C, §30B, that will enable the Department to receive notice of, and address the state tax consequence of, a partnership-level federal audit” for the purpose to creating a “mechanism whereby partnerships and their partners must inform the Department of the federal audit, properly report tax changes or obligations that derive from the audit, and account for any resulting state tax liability.”
Additionally, new G.L. c. 62C, §30B:
- Requires audited partnerships to amend their Massachusetts nonresident composite returns or withholding reports;
- Allows audited partnerships to make an election to pay state tax on behalf of their partners; and
- Requires partners in an audited partnership to directly pay state tax in certain instances.
The statute is effective as of January 1, 2021, and the Department will be releasing further guidance regarding the administration of G.L. c. 62C, §30B [Technical Information Release (TIR) 21-4: Tax Provisions in the Fiscal Year 2021 Budget, Mass. Dept. of Rev. (3/31)]
- The Michigan Department of Treasury Tax Policy Division recently released an update summarizing a Court of Claims ruling regarding Corporate Income Tax rules for a holding company. The Court determined that the holding company had sufficient nexus with Michigan to subject it to the Corporate Income Tax, but that the assessment had to be cancelled. The issue in question regarded the holding company’s liability for tax gain from the sale of its stock in a Canadian company. The Court ruled in favor of the company on the apportionment issue, noting that the closing of the sales transaction occurred in Canada, and that since the company “was ‘subject to tax’ in Canada, even though it was not actually taxed there, and since, according to the court, the only business activity (the transfer of stock) occurred there, the court found the apportionment to Michigan was zero.” [Michigan Department of Treasury Update: Court Finds Holding Company Created Nexus, But No Apportionment To Michigan, Mich. Dept. of Treas. (3/21)].
- On April 26, the Minnesota Department of Revenue issued Revenue Notice #21-01, revoking and replacing Revenue Notice #17-04, which provided that unrelated business income taxpayers are not subject to the limitations and modifications on net operating losses in Minnesota Statutes, §290.0133, subdivision 5 and 290.095. In 2019, the Minnesota Legislature enacted 2019 Minn. Laws, 1st Special Session chapter 6, article 1, section 35, which aligned Unrelated Business Income Tax (UBIT) with corporate treatment of net operating loss deductions, doing so by amending Minnesota Statutes, §290.05.
The Legislature notes that “as a result of these changes, Revenue Notice #17-04 is in direct conflict with Minnesota Statutes, section 290.05, subdivision 3(d). Revenue Notice #17-04 therefore is revoked and replaced with Revenue Notice #21-01 [Revenue Notice No. 21-01, Minn. Dept. of Rev. (4/26)].
- On March 31, H.B. 53 was signed into law, which addresses state treatment of federal partnership audit and adjustment process changes under the 2015 Bipartisan Budget Act. This Act adopts the Multistate Tax Commission proposed model statute for reporting adjustments to federal taxable income and partnership audit adjustments, and provides payment, rulemaking authority, and limitation information for federal adjustments [H.B. 53 (3/31)].
- On April 5, the New Jersey Division of Taxation adopted new rules regarding the Corporation Business Tax Act, proposed on November 2, 2020. These new rules specifically address:
- The computation of tax on dividends included in entire net income for privilege periods beginning on and after January 1, 2017, but beginning before January 1, 2019;
- The computation of Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) for corporation business tax purposes, and the limitations for claiming deduction for GILTI and FDII under IRC §250 for federal and New Jersey tax purposes; and
- The exclusion of previously taxed subsidiary dividends received by a taxpayer from entire net income in a tax year [Readoption of Specially Adopted Amendment with Amendments: N.J.A.C. 18:7-5.18; Readoption of Specially Adopted New Rules with Amendments: N.J.A.C. 18:7-3.25, 5.19, and 5.20, N.J. Div. of Tax. (4/5)].
- On April 22, the New Jersey Tax Court ruled on the New Jersey Division of Taxation’s motion for reconsideration, regarding whether the New Jersey Alternative Minimum Assessment (AMA) is preempted by federal law P.L. 86-272. The Court noted that the state’s AMA provisions allowed taxpayers covered by P.L. 86-272 to avoid the AMA if they waived their federal protections under P.L. 86-272 and instead consented to corporation business tax (CBT) imposition. Under the Supremacy Clause, the AMA is an obstacle to the execution of P.L. 86-272 and thus is preempted by federal law. The Court determined that the Division of Taxation’s motion for reconsideration of partial summary judgement entered by the Court in favor of the taxpayer and denial of the Director’s motion for partial summary judgement is denied.
- On April 6, S.B. 410 was signed into law, amending sections of the Tax Administration Act and Tax Withholding Act to address federal partnership audit or adjustment requests resulting in under- or over-payment of certain state taxes. This legislation provides instructions on when to file adjustment reports and tax returns for partnerships, payments, and apportionment of adjustments. Additionally, effective January 1, 2022, a new section of the Withholding Tax Act is amended to allow a pass-through entity to file a composite income tax return on behalf of electing nonresident members [S.B. 410 (4/6)].
- S.B. 218 was also signed on April 6, eliminating a taxpayer election to apportion and allocate income pursuant to the model version of the Uniform Division of Income for Tax Purposes Act and requiring taxpayers to apportion and allocate income pursuant to New Mexico’s Uniform Division of Income for Tax Purposes Act, and enacting the “Multistate Tax Compact” into law, with all jurisdictions legally joining therein. These provisions apply to taxable years beginning on or after January 1, 2021 [S.B. 218 (4/6)].
- On April 19, New York’s 2021-2022 Budget Act was signed into law, addressing various corporate and personal income tax provisions including:
- On April 15, the New York Division of Taxation denied a petition for the redetermination of a deficiency or the refund of corporation franchise tax under Article 9-A of the Tax Law from January 1, 2009 through December 31, 2012. The issue at hand was whether the petitioner may exclude royalties received from foreign affiliates in the computation of its entire net income (ENI). The Division determined that New York State taxpayers may not exclude such royalties when computing the taxpayer’s Article 9-A corporation franchise tax combined return ENI if the foreign affiliates are not New York State taxpayers [Determination DTA No. 828259, N.Y. Div. of Tax App., ALJ Div. (4/15)].
- On March 31, S.B. 18 was signed into law, updating its conformity to corporate and individual income tax law changes under the Internal Revenue Code as of March 27, 2020. These changes are effective immediately and applicable for tax years 2020 and prior, and taxpayers whose taxable year ends after such date but before the effective date may elect to apply the IRC provisions as they existed for that taxable year. This legislation also addresses the withholding tax on qualifying pass-through entities that have at least one qualifying investor who is an individual. This tax is imposed on the sum of the adjusted qualifying investors who are individuals at a rate equal to the tax rate imposed on taxable business income under division (A)(4)(a) of section 5747.02 of the Revised Code [S.B. 18 (3/31)].
- On April 14, in an unpublished opinion, the Oregon Tax Court Magistrate Division ruled on an order for cross motions for summary judgement regarding hedging receipts in a taxpayer’s sales factor for corporate income tax purposes. The Tax Court found that the Plaintiff’s derivative commodity instruments are intangible assets, and that including gross hedging receipts in the sales factor would result in distortion. Regarding whether the Plaintiff’s hedging receipts derived from its primary business activity, the Tax Court determined that “given the fact-dependent nature of the inquiry,” the request for “summary judgement is not appropriate at this time.” The Tax Court granted in part and denied in part the Oregon Department of Revenue’s motion for summary judgment, indicating that the motion will be granted “if all the documents on file ‘show that there is no genuine issue as to any material fact and that the moving party is entitled to prevail as a matter of law’” [Case No. TC-MD 190031N, Or. Tax Ct. (4/14)].
- On April 7, the South Carolina Department of Revenue released SC Information Letter #21-8, which further extends temporary relief regarding a business’s establishment of nexus for income and sales solely because an employee is temporarily working in a different location due to COVID-19. The relief has been extended through September 30, 2021 (previously, SC Information Letter #20-11 extended the relief through June 30, 2021) [Information Letter 21-8, S.C. Dept. of Rev.].
- On April 22, H.B. 38 was signed into law, providing that a taxpayer my rely on guidance published by the commissioner of revenue concerning the taxability of a privilege., If the commissioner changes the guidance, the taxpayer who relied on the prior guidance is not liable for any additional tax, penalty, or interest that was accrued before the guidance was changed and was thus unpaid because of the taxpayer’s reliance on the earlier guidance. Additionally, the law notes that if a taxpayer is audited by or requests specific advice from the department and receives erroneous audit findings, the taxpayer is not liable for any assessment of additional tax, interest, or penalty attributable to the erroneous finding to the extent that:
- The taxpayer reasonably relied on the finding or advice,
- The additional assessment did not result from the taxpayer failing to provide adequate information,
- The department provided the finding or advice in writing, or
- The department’s records establish that the taxpayer received erroneous verbal advice [H.B. 38 (4/22)].
- On April 6, the Texas Comptroller of Public Accounts released Memo 202104008L, responding to Frequently Asked Questions about Cost of Goods Sold, including answers to various inquiries on calculations, exclusions, allowable entities, deductions, and consideration to federal bonus depreciation amounts [Memo 202104008L, Tex. Comptroller (4/6)].
- On April 7, the Texas Comptroller of Public Accounts released Memo 202104014L, responding to Frequently Asked Questions about professional employer organizations, including answers to what constitutes a professional employer organization, what is included in compensation for client companies of professional employer organizations, whether there are any exclusions from total revenue, and other questions [Memo 202104014L, Tex. Comptroller (4/7)].
- On February 18, the Vermont National Telephone Company petitioned for a writ of certiorari in a case concerning a nonbusiness gain earned on the sale of two licenses issued by the Federal Communications Commission (FCC). Such licenses granted rights to broadcast exclusively in New York, but the Vermont Supreme Court held that “they were not ‘localized’ in New York and thus had no ‘situs.’” The petitioner questioned whether the Vermont Supreme Court erred in holding that a federal license that can only be used in one state lacks a situs in that state under previous interpretation (the 1937 Whitney case) of the federal due process principles governing state taxation. On April 7, the Vermont Department of Taxes filed a brief in opposition to the petitioner [Docket No. 20-1159, US (petition for cert filed 2/28)].
- On April 7, H.B. 1800 was passed in the House and Senate, amending and reenacting Chapter 1289 of the 2020 Acts of Assembly as amended by Chapter 56 of the 2020 Acts of Assembly, Special Session I which appropriated funds for the 2020-222 Biennium, and detailing the distribution of funds for certain employees and for certain duties. This Act notes that corporations that are members of a unitary business must file a report for the unitary combined group containing the unitary combined net income of such group, based on taxable year 2019 computations, and filed in a manner prescribed by the Tax Commissioner. [H.B. 1800, (4/7)].
- Chapter 552 of H.B. 1800 provides further guidance on intangible holding company addbacks, clarifying that, for taxable years beginning on and after January 1, 2004:
i. The exception “for income subject to a tax based on or measured by net income or capital imposed by Virginia, another state, or a foreign government shall be limited to and apply only to the portion of such income received by the related member that owns the tangible property, which portion is attributed to a state or foreign government in which such related member has sufficient nexus to be itself subject to such taxes”; and
ii. The exception “for a related member deriving at least one-third of its gross revenues from licensing to unrelated parties shall be limited and apply to the portion of such income received by the related member that owns the intangible property and derived from licensing agreements for which the rates and terms are comparable to the rates and terms of agreements that such related member has entered into with unrelated entities” [Chapter 552 (H.B. 1800, Budget Bill), (4/7)].
- On April 8, the Virginia Department of Taxation released a notice referencing new reporting requirements for corporations as detailed in H.B. 1800. 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 filed as part of a unitary combined group and the amount that they currently file. Corporations that are members of an in-state unitary business are not required to file a unitary combined report, and there is no tax due with the report. This notice answers other additional questions regarding the new reporting requirements. Businesses will be able to file reports using Virginia’s Web Upload Application beginning on May 1. The Virginia Department of Taxation has also included a sample Unitary Report Template with technical instructions, and more detailed instructions are available in the Unitary Combined Report Guide [Notice, Vir. Dept. of Tax. (4/8)].
- A pending bill, E.S.S.B. 5096, passed in the House and the Senate on April 25, would impose an excise tax on the sale or exchange of certain capital assets if signed by Governor Jay Inslee.
- On April 5, the Administrative Review and Hearings Division (Division) of the Washington Department of Revenue ruled on a petition regarding the classification of income, apportionment of income, and gross proceeds of sales for state business and occupation (B&O) tax purposes. With regard to the apportionment of income, the Division ruled that an out-of-state distribution center that provides services to affiliated entities “including the receipt, repackaging, storage, and shipment of tangible personal property, must apportion its income based on the nature of the specific services it offers” along a “‘distribution continuum,’” which requires separate analyses of each specific service provided by the distribution center to its affiliated customers to determine whether such customers received the benefit of the distribution center’s services in the state [Det. No. 18-0302, 40 WTD 064 (2021), Wash. Dept. of Rev., Admin. Rev. & Hrgs. Div. (4/5)].
- On April 19, H.B. 2026 was signed into law, incorporating various personal and corporate net income tax updates, including:
- Mobile employee exclusions from state source income for certain employees performing duties outside of the state;
- Removing exclusion requirements for the allocation of certain sales of tangible personal property made before January 1, 2022;
- Adopting market-based sourcing for the allocation of sales other than sales of tangible personal property made on or after January 1, 2022; and
- Changing the allocation of multi-state income from a four factor formula to a single sales factor [H.B. 2026 (4/19)].