The following are recent significant State Corporate Tax developments for the month of May that may be of interest to estate and business planners, organized by state.
- On May 14, H.B. 588 was signed into law, providing credits to owners, members, partners, or shareholders of an electing pass-through entity in an amount equal to its pro rata or distributive share. This Act is effective immediately and applies for tax years beginning on or after January 1, 2021 [H.B. 588 (5/14)].
- On April 27, an administrative law judge (ALJ) sustained a proposed assessment regarding the computation of a net operating loss carryover following a merger, holding that the acquiring corporation should compute “total income” by using Arkansas Corporate Income Tax Rule 1.26-51-427(3)(C), which provides that the amount of a net operating loss that may be claimed should be computed by multiplying the ratio of the acquired corporation’s assets to all assets by total income apportioned to Arkansas (rather than its total multistate income). The taxpayer’s methodology, which utilized “total multistate income” in its calculation, “would use the total income apportioned to Aekansas earned by all the assets of the succeeding corporation (including those not located within Arkansas), not just the apportioned income associated with the preceding company’s Arkansas assets”, which is contradictory to the state’s applicable rules. The ALJ found that the taxpayer failed to meet its burden of proof of proving entitlement to the total amount of its claimed NOL deduction [Docket No. 21-070, Ark. Dept. of Fin. & Admin. (4/27)].
- On April 29, S.B. 484 was signed into law, clarifying that nonresident income is allocated based on where the employee is located when performing the work associated with the income. Effective for tax years beginning on or after January 1, 2021, a nonresident individual who is paid any form of payment encompassing work performed both inside and outside of the state shall pay Arkansas income tax only for income allocable to work performed within the state. A nonresident individual is considered to be performing work in Arkansas when that individual is physically located in the state when performing the work.
Effective on the first day of the calendar month following the effective date of this act, the definition of “employer” is also extended to include a person doing business in or deriving income from sources outside of the state who has control over the payment of wages to an individual performing work inside of the state [S.B. 484 (4/29)].
- On May 7, H.B. 2879 was signed into law, allowing the Department of Revenue to issue draft rulings, procedures, notices, and administrative announcements that apply to tax laws and regulations, and stating that such administrative rulings become final and effective 30 days after they are issued for public comment and review unless withdrawn by the Department of Revenue. This legislation also amends the process of issuing private taxpayer rulings, stating that within 30 days of receiving a written request for a private taxpayer ruling, “the Department shall meet with the requestor to discuss the facts and circumstances pertaining to the request”, and should issue the ruling within 90 days after the meeting. Such meetings can be delayed or waived, and the Department may decline to issue a ruling by providing written advice explaining the reason for declining to issue a ruling [H.B. 2879 (5/7)].
- On April 15, the California Franchise Tax Board released a public service bulletin, noting that tax returns prepared for taxable years beginning during the 2020 calendar year are not required to be prepared using the rules reflected in the proposed revisions to California Code of Regulations, title 18, (CCR) §25136-2. The FTB notes that the draft language that circulated at the most recent Interested Parties Meeting indicated that the proposed revisions would apply to taxable years beginning on January 1, 2019, but the actual applicability date for the revisions has not yet been determined [Public Service Bulletin: Applicability Date of Proposed Revisions to California Code of Regulations, Title 18, Section 25136-2, Cal. FTB (4/15)].
- The California Franchise Tax Board recently released a notice of the Sixth Interested Parties Meeting on June 4 regarding possible additional amendments to the California Code of Regulations, title 18, section 25136-2 (Market-Based Rules Regulation). For this meeting, proposed amendments have been made to the draft language; comments may be submitted at the meeting or provided to the specified contacts by July 5. The meeting will be held telephonically. A form explaining the draft language amendments has also been provided, including the addition of definitions for Asset Management Services and Professional Services, the addition of rules and examples, and changes to applicability dates of amendments [Notice of Sixth Interested Parties Meeting; Explanation of Draft Language Amending California Code of Regulations, title 18, (CCR) section 25136-2, Cal. FTB (5/21)].
- The California Legislature has proposed A.B. 71, relating to the taxation of global intangible low-taxed income. This Bill was passed by the Assembly Committee on Appropriations on May 20, was read for a second time and amended on May 24, and was ordered for a third reading on May 25 [A.B. 71 (5/21)].
- On April 29, A.B. 80 was signed into law, excluding any advance grant amount issued pursuant to specified provisions of the federal CARES Act or the Consolidated Appropriations Act, 2021 (CAA), and covered loan amounts forgiven pursuant to the CARES Act and the CAA. This legislation also adopts certain provisions of the CAA related to loan forgiveness, with modifications. A.B. 80 applies to taxable years beginning on or after January 1, 2019 [A.B. 80 (4/29)].
District of Columbia:
- On May 3, Act 24-0062 was signed, providing temporary support to D.C. residents and businesses during the COVID-19 public health emergency. Specifically, this act amends current Section 47-1803.03(a)(14) by adding subparagraph (H), which notes that “For tax years beginning after December 31, 0217, corporations, unincorporated businesses, or financial institutions shall be allowed an 80% deduction for apportioned District of Columbia net operating loss carryover to be deducted from the net income after apportionment.” This act takes effect following the approval of Mayor Bowser and a 30-day period of congressional review and expires after 225 days of its having taken effect [Act 24-0062 (D.C.B. B24-0140) (5/3)].
- On May 4, H.B. 149 was signed into law, allowing for certain elections to be made by Subchapter ‘S’ corporations and partnerships for the filing of tax returns and imposition of taxes. Among other amendments, electing Subchapter ‘S’ corporations shall pay an income tax equivalent to 5.75% of its net income, and shall not be allowed any deduction for taxes that are based on or measured by gross or net income or any other variant thereof. This act is applicable to all taxable years beginning on or after January 1, 2022 [H.B. 149 (5/4)].
- On May 10, H.B. 380 was signed into law, lowering the corporate income tax rate from 6.925% to 6.5% of Idaho taxable income for tax years commencing on and after January 1, 2001 [H.B. 380 §3(63-3025), Idaho Code (5/10)].
- The Indiana Department of Revenue recently released Information Bulletin #119, replacing a bulletin with the same dated February 2021, regarding Internal Revenue Code (IRC) provisions followed and not followed by the state. For references to Indiana law, the definition of IRC was updated to March 31, 2021 (previously, January 1, 2020). This bulletin provides the most significant modifications made to the IRC prior to March 31, 2021 and that are adopted retroactively by Indiana, since the Indiana General Assembly reconvenes prior to the date that legislation is commonly enacted. Provisions addressed in this bulletin include IRC §461(l) on loss limitations, depreciation of Qualified Improvement Property (QIP), and IRC §172 on net operating losses, among others [Information Bulletin #119, Ind. Dept. of Rev. (5/21)].
- On April 29, H.B. 1436 was signed into law, clarifying several provisions, including those regarding net operating loss (NOL) carryovers. Specifically, the legislation states that if an Indiana NOL carryover arising from a taxable year has been claimed as a deduction in a taxable year ending before July 1, 2021, the Indiana NOL available for use for taxable years ending after June 30, 2021 shall be computed after applying the deductions taken for Indiana NOLs in previous years “to the extent necessary to prevent duplicate use of a net operating loss” [§10(f)]. This section of the legislation is in effect until July 1, 2024 [H.B. 1436, (4/29)].
- Also on April 29, S.B. 383 was signed into law, addressing Indiana treatment of federal provisions regarding Partnership Audit and Administrative Adjustments, conforming to definitions applied under such federal law changes. This legislation also states that the Indiana Department of Revenue “may prescribe procedures:
- By which a pass-through entity remits tax;
- For persons or entities that are otherwise subject to withholding but that may have circumstances such that standard tax computation may result in excess withholding;
- For individuals and trusts that are residents for part of the taxable year and nonresidents for part of the taxable year; and
- By which an entity may request alternative withholding arrangements.” [S.B. 383, Digest (4/29)].
- On May 14, the Indiana Tax Court denied a motion for partial summary judgement requested by the Indiana Department of State Revenue for a case regarding whether a pharmacy benefit management company receives its Indiana income from the retail sale of prescription drugs or the provision of services. After reviewing the facts, the Court found that the company receives its state income from the provision of services. The Court notes that the Department unsuccessfully used the company’s Form 10-K filed with the Securities and Exchange Commission, the company’s stance it took in other jurisdictions such as a Business and Occupation (B&O) tax case in Washington, and the company’s federal tax returns in trying to prove that the company admitted that it received its income from selling prescription drugs. Thus, the company appropriately apportioned its income in accordance with Indiana’s statutory provisions applicable for the provision of services rather than for sales of tangible personal property [Cause No. 19T-TA-00018, Ind. Tax Ct. (5/14)].
- The Iowa Department of Revenue released proposed guidance regarding treatment of Internal Revenue Code 163(j). Specifically, under this proposed legislation, for tax years beginning on or after January 1, 2020, the limit on the amount of business interest expense that a taxpayer can deduct in a taxable year under IRC 163(j) would not be applicable for Iowa purposes [§701-40.85(422)]. Iowa did not conform to this limitation for tax year 2018 but did conform for tax year 2019. Due to these differences in conformity depending on the year, some taxpayers may need to make adjustments to their federal business interest expense deduction to calculate the correct Iowa deduction amounts.
The DOR has also released guidance for partnerships and their partners that had business interest expense that was disallowed as a deduction for federal purposes under §163(j) in tax year 2018 but was allowed as a deduction for state purposes in 2018 because of nonconformity. Taxpayers who were allowed to deduct the full amount of interest expense in tax year 2018 may have to make adjustments to account for any federal 2018 carryforward amounts that were claimed in tax year 2019 [Proposed Regs. Sections 701 – 40.85(422), 50.39(422), 59.31(422) [ARC 5612C], Iowa Dept. of Rev. (5/5/21); Partnership Interest Expense Nonconformity Adjustment, Iowa Dept. of Rev. (5/3/21)].
- On May 3, the Kansas House and Senate voted to override a veto on S.B. 50, which provides modifications for the treatment of global intangible low-taxed income (GILTI), net operating loss (NOL) carryforwards, business interest expenses. Specifically, this legislation states that:
- For all taxable years commencing after December 31, 2020, 100% of GILTI under section 95A of the federal Internal Revenue Code (IRC) of 1986, and before any deductions allowed under section 250(a)(1)(B) of such code, should be subtracted from federal adjusted gross income;
- For NOLs incurred in taxable years prior to January 1, 2018, a NOL deduction shall be allowed in the same manner that it is allowed under the IRC, except that such NOL can only be carried forward to each other 10 taxable years following the taxable year of the NOL;
- For NOLs incurred in taxable years beginning after December 31, 2017, a NOL deduction shall be allowed in the same manner that it is allowed under the IRC, except that it may only be carried forward; and
- For all taxable years commencing after December 31, 2020, the amount deducted by reason of a carryforward of disallowed business interest pursuant to IRC section 163(j), as in effect on January 1, 2018, shall be added to federal adjusted gross income [S.B. 50, Governor veto overridden by House and Senate (5/3)].
- On May 17, S.B. 47 was signed into law, addressing, among other provisions, tax withholding for teleworking employees. Specifically, this new section states that from January 1, 2021 through December 31, 2022, for wages paid to employees who are temporarily teleworking in a state other than their primary work location due to the COVID-19 pandemic, employers shall have the option to continue to withhold income taxes based on the state of the employee’s primary work location and not based on the state where an employee may be teleworking or otherwise working [S.B. 47 (5/17)].
- On April 29, The Maine Supreme Judicial Court (Court) affirmed a judgement made by a trial court, which affirmed the State Tax Assessor’s denial of a telephone company’s request for an income tax refund for the 2013 taxable year on the basis that the Assessor’s application of the state’s corporate income tax statutes resulted in an unconstitutional indirect tax on extraterritorial income that was not subject to Maine taxation. The taxpayer “was not eligible for a net operating loss (NOL) carryforward on its 2013 federal tax return because it had already accounted for the loss in calculating its federal taxable income in 2012” that more than offset the group’s unitary net operating loss for that tax year, which resulted in the group’s federal tax return reflecting net taxable income rather than an NOL. The Court stated that no part of 2013 nonunitary income has been taxed, so there was no unconstitutional taxation of that nonunitary income. Thus, the taxpayer sought an unauthorized deduction in Maine that is not required by the Constitution. The Court therefore denied this refund claim [Case No. BCD-20-59, Me. (4/29/21)].
- On May 6, in an unpublished opinion, the Maryland Court of Special Appeals affirmed the judgement of the Maryland Comptroller’s use of the alternative apportionment method of a single sales factor formula applicable to manufacturing corporations when determining the taxes owed. The partners in question are all out-of-state limited or general partners in a limited partnership, and have all elected to be treated as corporations for federal income tax purposes. The Tax Court determined that the partners were required to use a single-sales factor apportionment method for tax purposes, and that corporations carrying on a trade or business either in or out of Maryland must allocate to Maryland “‘the part of the corporation’s Maryland modified income that is derived from or reasonably attributable to the part of its trade or business carried on in the state.’” Additionally, the Comptroller may change the apportionment formula if an apportionment formula doesn’t fairly represent the extent of a corporation’s activity in the state, and thus provided that this method was selected because it “would more clearly reflect income attributable to Maryland” [Docket File No. 88 (Case No. 03-C-18-012418), Md. Ct. Spec. App. (5/6)].
- On April 30, the Massachusetts Department of Revenue released Directive 21-1, providing 2020 personal income tax return preparation assistance to individuals who telecommuted in 2020 due to the COVID-19 pandemic. The Directive explains rules applicable to:
- Non-resident telecommuting employees: Employees filing a 2020 Massachusetts non-resident tax return who worked in Massachusetts prior to the Massachusetts COVID-19 state of emergency was declared, but began working remotely outside of the Commonwealth due to a “Pandemic-Related Circumstance”; and
- Resident telecommuting employees: Residents who worked in another state prior to the state of emergency but who began working in Massachusetts due to a Pandemic-Related Circumstance.
This directive does not apply to new jobs that commenced after March 10, 2020.
The directive also provides explicit information about the sourcing of wages for resident and non-resident teleworking employees, and states that resident telecommuting employees who worked outside of Massachusetts prior to the state of emergency but then telecommuted from Massachusetts due to a Pandemic-Related Circumstance will be eligible for a credit for taxes paid to that other state if the other state applies similar sourcing rules. A Massachusetts resident for the year 2020 is considered to be an individual who spent more than 183 days in, and maintained a permanent place of abode in, Massachusetts [Directive 2101: Personal Income Tax Guidance for Employees who Telecommuted in 2020 due to the COVID-19 State of Emergency, Mass. Dept. of Rev. (4/30)].
- On May 11, S.B. 376 was signed into law, revising the apportionment of income for the purposes of corporate income tax, and adopting a double-weighted sales factor apportionment model. Specifically, the apportionable income “shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus two times the receipts factor and the denominator of which is 4” [S.B. 376 (5/11)].
- On May 26, L.B. 432 was signed into law, changing the corporate income tax rate at certain taxable income levels. Specifically, the legislation states that:
- For taxable years beginning or deemed to begin on or after January 1, 2013, and before January 1, 2022, the tax rate is 5.58% for the first $100,000 of taxable income, and 7.81% on taxable income in excess of $100,000;
- For taxable years beginning or deemed to begin on or after January 1, 2022, and before January 1, 2023, the tax rate remains at 5.58% for the first $100,000, but is reduced to 7.5% on all taxable income in excess of $100,000; and
- For taxable years beginning or deemed to begin on or after January 1, 2023, the tax rate remains at 5.58% for the first $100,000, but is reduced to 7.25% on all taxable income in excess of $100,000.
The legislation also notes that the Legislature’s intent, after the operative date of this section, is to continue to lower the tax rate for taxable income in excess of $100,000, to 7% for taxable years beginning or deemed to begin on or after January 1, 2024 and before January 1, 2025, and to 6.84% for taxable years beginning or deemed to begin on or after January 1, 2025 [L.B. 432 (5/26)].
- On May 11, the New Jersey Division of Taxation released TB-87(R), providing guidance for Corporation Business Tax (CBT) filers on the federal IRC §163(j) limitation. The Division of Taxation notes that the law changes codified in P.L. 2020, Chapter 118 were in-line with how the Division had been treating IRC §163(j) and does not change the way it is reported on New Jersey returns. New Jersey also conforms to the modifications of IRC §163(j) as part of the federal CARES Act “to the extent they are consistent with the New Jersey Corporation Business Tax Act”, and as such, the state conforms to the adjusted taxable income deduction limit for the applicable periods [TB-87(R) Guidance for Corporation Business Tax filers on the IRC §163(j) Limitation, N.J. Div. of Tax. (5/11)].
- On May 17, the New Jersey Division of Taxation released a notice regarding short period returns in the context of combined reporting. This notice describes when a combined group is not required to file a short period return, including if:
- A member (other than the managerial member) change from one combined group to another;
- A member (other than the managerial member) departs a combined group to file on a separate entity basis; or
- A member (other than the managerial member) dissolves, withdraws, surrenders, or otherwise ceases to have a taxable status in the state before the end of the group’s tax year.
Generally, as long as the managerial member remains a part of the combined group for the tax year, the accounting period of the managerial member remains the same, and the managerial member is not required to file a short period return for federal purposes, the combined group does not need to file a short period combined return.
Circumstances that may require the filing of short period returns include:
- When a managerial member dissolves, merges, consolidates, withdraws, surrenders, or otherwise ceases to have a taxable status in the state before the end of its tax year;
- The first privilege period during which a combined group gains taxable status in the state;
- When the group’s managerial member changes its federal year;
- When a newly organized corporation that becomes the managerial member and whose first accounting period established for federal income tax purposes is less than 12 months; or
- When a managerial member joins or separates from a New Jersey combined group or changes from one combined group to another [Notice: Short Period returns in the Context of Combined Reporting (N.J.A.C. 18:7-12.1 through N.J.A.C. 18:7-12.3) N.J. Div. of Tax. (5/17)].
- On April 28, the New York State Department of Taxation and Finance released updates to proposed draft amendments to New York Article 9-A State Business Corporation Franchise Tax Regulations Parts 1 through 3 regarding nexus, income and capital, net operating loss conversion subtractions, and net operating losses.
- Regarding nexus, updates include adding to the list of activities deemed insufficient to subject a foreign corporation to tax activities typically engaged in banking corporations based on activities included in the bank tax regulations, and clarifying that if all members of a unitary group are exempt from taxation because of P.L. 86-272, then the unitary group is not required to fill out a combined report.
- Regarding income and capital, updates include:
- Clarifying the valuation of subsidiaries for purposes of attribution and the capital base computation, as well as of when a loan is secured by real property and how the $8 billion asset test is computed for purposes of the bank modifications; and
- Incorporating previously released guidance on the attribution of expenses, as well as recent legislative changes regarding the treatment of repatriated income and global intangible low-taxed income.
- Regarding capital losses, updates include clarifying the rules for capital losses sustained in a non-captive REIT filing year if an entity ceases to qualify as a REIT.
- Regarding net operating losses, the updates remove rules and examples pertaining to REIMCs, and revise examples to show the interaction of separate return limitation year (SRLY) and IRC §382 limitations [Draft Proposed Amended New York State Article 9-A Business Corporation Franchise Tax Regulations, Parts 1, 2, and 3, N.Y. Dept. of Tax. & Fin. (4/28)].
The Department also released a draft providing updates to proposed rules for special entities to New York Article 9-A State Business Corporation Franchise Tax Regulations, new part 10, posted in May of 2020. The changes include:
- An inclusion of a definition of “goods” for purposes of a qualified New York manufacturer;
- Clarification of the business apportionment factor (BAF) computation for corporate partners computing tax under the aggregate method;
- The addition of an example of tax computation for corporate partners using the entity method;
- Clarification of sourcing of global intangible low-taxed income (GILTI) for New York S corporations; and
- Moving the definitions of real estate investment trust (REIT), non-captive REIT, regulated investment company (RIC), and non-captive RIC to Subpart 1-1, Definitions.
The Department is reviewing the need for special rules for real estate mortgage investment conduits (REMICs), and if special rules are needed for such entities, they will be included in an update. Comments on the proposals are due to the Department by August 2, 2021 [Draft Proposed Amended New York State Article 9-A Business Corporation Franchise Tax Regulations, new Part 10, N.Y. Dept. of Tax. & Fin. (4/28)].
- On May 17, the New York Tax Appeals Tribunal affirmed a 2019 ruling from the New York Division of Tax Appeals regarding the treatment of S corporations owned by individual taxpayers who had not made the New York S corporation elections for such entities, and whether an eligible S corporation’s investment income under Tax Law §660(i) includes the gain from a deemed sale of assets made following an election pursuant to IRC (26 USC) §338(h)(10). The Tribunal held that the corporations were required to file as an S corporation due to the mandatory New York S corporation election under Tax Law §660, and were required to include the gain from the sale of assets as income from a New York source [DTA Nos. 828035, 828036, 828037 and 828038, N.Y. Tax App. Trib. (5/17/21)].
- On April 27, the Court of Common Pleas of Franklin County, Ohio, Civil Division granted a motion to dismiss a challenge to Ohio’s General assembly to legislatively limit, coordinate, and regulate municipal taxing authorities in their respective treatment of employees working remotely under the exigent circumstance of the COVID-19 pandemic. The Court found that “the General Assembly enjoys the authority to establish municipal income allocation rules among Ohio taxing authorities in order to efficiently and uniformly coordinate intrastate taxation of Ohio residents,” and as such, the General Assembly has been allowed to “regulate municipal taxation where necessary to police taxation among municipalities.” For the above reasons, the motion to dismiss was granted and the Plaintiff’s complaint was dismissed with prejudice [Case No. 20CV004301 (Civil Division), Court of Common Pleas, Franklin County, Ohio (4/27)].
- On May 21, the following bills were signed into law:
- H.B. 2960, lowering income tax rates from 6% to 4% for domestic and certain foreign corporations and for taxable year beginning after December 31, 2021
- H.B. 2962, lowering individual income tax rates for single individuals and married individuals filing separately, and for married individuals filing jointly and surviving spouses “to the extent and in the manner that a surviving spouse is permitted to file a joint return under the provisions of the Internal Revenue Code and heads of households as defined in the Internal Revenue Code” [H.B. 2962 (5/21)]; and
- H.B. 2963, lowering the tax rate for electing pass-through entities from 6% to 4% for tax years beginning on or after January 1, 2022 [H.B. 2963 (5/21)].
- On May 24, H.B. 2961 was signed into law, lowering the bank privilege tax from 6% to 4% for taxable years beginning on or after December 31, 2021 [H.B. 2961, (5/24)].
- On April 27, the Oregon Department of Revenue filed proposed permanent rule changes regarding Corporate Activity Tax. Specifically, the Department has proposed OAR 150-317-1020, which modifies reference to OAR 150-317-1025 for changes made to Oregon laws in 2020, clarifying that entities that are members of more than one unitary group must file with only one group by filing a return with the unitary group reporting the greatest amount of commercial activity after exclusions, and clarifying that intercompany transactions are only excluded if the members are filing as a unitary group. The Department requests that the public make comments “on whether other options should be considered for achieving the rule’s substantive goals while reducing negative impact of the rule on business” by May 25 at 5:00 PM [Proposed Permanent OAR section 150-317-1020, Or. Dept. of Rev. (4/27)].
- On May 21, S.B. 136 was signed into law, addressing apportionment methods for receipts related to subscription services. Specifically, this legislation notes that “the numerator of the sales factor based on audience or subscribers shall include sales determined using third-party ratings information where available” and that “a taxpayer with sales from broadcasting shall make actual information from the taxpayer’s books, papers, records, or memoranda available to the Department of Revenue to determine the taxpayer’s audience or subscribers.” The denominator should include total gross receipts derived by the taxpayer from transactions in the regular course of the taxpayer’s trade or business including receipts from real or tangible personal property. This Act becomes effective on the 91st day after the date on which the 2021 regular session of the Oregon Legislative Assembly adjourns sine die [S.B. 136 (5/21)].
- The Rhode Island Division of Taxation recently released Regulation 280-RICR-20-55-14, providing guidance on withholding for employees working remotely due to COVID-19. Specifically, the regulation states that:
- For non-resident individuals employed by a Rhode Island employer but temporarily working outside of the state due to the COVID-19 state of emergency, the state will continue to treat the income of such employees as Rhode Island-source income;
- For resident individuals employed by an employer outside of the state but temporarily working remotely in Rhode Island due to the COVID-19 state of emergency, the state will not require an employer to withhold Rhode Island income taxes from the wages of such employees.
This regulation has been extended and is now effective until July 17, 2021. [Regulation 280-RICR-20-55-14 “Withholding for Employees Working Remotely During the COVID-19 State of Emergency,” R.I. Div. of Tax. (5/21)].
- On May 17, S.B. 627 was signed into law, creating an election to tax certain partnerships and “S” corporations at the entity level. A qualified owner shall exclude active trade or business income from an electing qualified entity provided that the qualified entity properly filed an income tax return and paid appropriate taxes pursuant to Subsection (G)(3) of Section 12-6-545 of the 1976 Code that included the active trade or business income or loss. This act is effective immediately and applies to tax years beginning after 2020 [S.B. 627 (5/17)].
- On May 18, H.B. 4017 was signed into law, updating South Carolina’s conformity to the Internal Revenue Code (IRC) through December 31, 2020, along with any IRC sections that expired on December 31, 2020 but have otherwise been extended by congressional enactment during 2021 for federal income tax purposes. This Act also conforms to loan forgiveness and exclusions from gross income, or extensions under or of the paycheck protection program of the federal CARES Act, and allows the deduction of any expenses associated with the foreign paycheck protection program loss as a South Carolina deduction for income tax purposes. This legislation states that South Carolina does not conform to a number of the federal CARES Act provisions, including IRC §172(a) regarding income limitations allowed for the use of net operating losses for certain tax years, IRC §461(l) regarding the modification of limitations on losses allowed for noncorporate taxpayers for certain tax years, and several others [H.B. 4017 (5/18)].
- The Pennsylvania Department of Revenue recently extended their Voluntary Compliance Program for businesses that have stores or inventory inside of the state but are not registered to collect and pay Pennsylvania taxes. This program now runs through June 8, 2021, and taxpayers who choose to participate in the program will not be liable for taxes owed before January 1, 2019. The Department notes that the program offers a limited lookback period and penalty relief when the business becomes compliant, and that such penalty relief extends to any non-compliance for past due tax returns that were not filed and taxes that were not paid.
Interested taxpayers should complete an online Physical Presence Business Activity Questionnaire (BAQ) to determine if they have nexus in Pennsylvania. The Department will complete a review of the business once the BAQ is received and contact the business to discuss how to become compliant. The Department also notes that when the business is registered, “all penalties from non-compliance will be abated” under the condition that the business continues to maintain tax compliance with the department [Voluntary Compliance Program For Retailers With Inventory in Pennsylvania, Penn. Dept. of Rev. (5/21)].
- On May 17, the U.S. Supreme Court denied a taxpayer’s petition to review a Vermont Supreme Court decision regarding the gains from a company’s purchase of two licenses from the Federal Communications Commission (FCC) that gave the company rights to broadcast in designated parts of New York State. The Vermont Supreme Court determined that the gain was subject to taxation in Vermont, holding that the licenses had no situs in New York unde the 1937 Whitney decision of federal due process principles governing state taxation. The petition was denied on the basis that the licenses never became “localized” at an actual location in New York and thus the company’s ownership of those licenses was never protected by New York law [Docket No. 20-1159, US (cert denied 5/17)].
- On May 7, the Virginia Department of Taxation released a Reference Guide for corporations that are part of a unitary business who are generally required to file an informational report (i.e., a pro forma return) for their unitary combined group. This report should be submitted to the Department of Taxation on or before July 1, 2021. The guide provides information on how to file the form, including instructions regarding:
- Dividing Virginia taxable income into business apportionable income and nonbusiness apportionable income;
- The appointment of a Designated Corporation to file the unitary combined report;
- Separate Report Worksheets; and
- Joyce and Finnigan Approaches to Apportionment
Additionally, if the report is filed after the July 1 due date, or the report is timely filed but the corporation made a material omission or misstatement, then the corporation is subject to a $10,000 penalty that applies to each corporation separately. Penalty waiver requests must be submitted in writing to the Department along with a description of how the reporting requirement would have caused an undue hardship to the corporation or unitary combined group requesting the waiver [Notice, Vir. Dept. of Tax. (5/7)].
- On May 13, the Virginia Circuit Court granted the Virginia Department of Taxation’s motion for summary judgement from a determination regarding what portion of a taxpayer’s royalty payments paid to its Illinois affiliate were actually taxed by another state and therefore excepted from Virginia’s related-party intangible expense addback statute. The Court determined that the exception applies only to the extent that the royalty payments were actually taxed by another state, and that the taxpayer failed to meet its burden to show that the royalty payments at issue were apportioned to and taxed in other states in order to correctly calculate the exception. The Court also held that the state’s “subject-to-tax exception” applies only to the extent that the royalty payments were actually taxed by another state on a post-apportionment basis, and as long as royalties are actually taxed regardless of the entity that paid the tax [Case No. CL 12-1774, Va. Cir. Ct., City of Richmond (5/13)].
- The Washington Department of Revenue has released guidance on recently passed legislation ESSB 5096 which created a 7% tax on the sale or exchange of long-term capital assets (including stocks, bonds, or other investments) if the profits exceed $250,000 annually. While the tax applies to individuals only, individuals can be liable to the tax as a result of their ownership interest in an entity that sells or exchanges long-term capital assets. The legislation takes effect on January 1, 2022 and the first payments are due on or before April 17, 2023.
The guidance also provides information on certain assets that are exempt from Washington capital gains tax, certain deductions that apply, and instructions on how to report and pay the tax, and the Department explains that the guidance will be updated as the new tax is implemented [Capital Gains Tax, Wash. Dept. of Rev. (5/21)].