By Georgia Lo
The following are recent significant State Corporate Tax developments for the month of June that may be of interest to estate and business planners, organized by state.
- On June 3, AB-71, regarding Global Intangible Low-Taxed Income and repatriation income, was moved to the inactive file.
- On June 23, H.B.21-1311 was signed into law, modifying several income tax provisions, including:
- Adding a cap per taxpayer beneficiary on deductions for contributions made to 529 plans;
- Modifying the computation of the corporate income tax receipts factor to make it more congruent with combined reporting rather than the unitary business principle;
- Preventing corporations from using tax shelters in foreign jurisdictions for the purpose of tax avoidance by requiring taxpayers to include in the combined group any member of an affiliated group of C corporations incorporated in a foreign jurisdiction for this purpose; and
- Subtracting the amount of any global intangible low-taxed income (GILTI) included in federal taxable income pursuant to IRC §951 with respect to a controlled foreign corporation that is included in a Colorado combined return [H.B.21-1311 (6/23/21)].
- On June 23, H.B. 1327 was signed into law, allowing pass-through entities to elect to pay their state income tax at the entity level so that the pass-through entity can claim an unlimited deduction at the federal level of states and local taxes paid, applicable for tax years commencing on or after January 1, 2022. The election is only allowed in an income tax year where there is a limitation on the deduction allowed to individuals under IRC §164. This legislation also allows an S corporation or partnership to annually elect to be subject to tax at the entity level, which should be made on the return filed.
An electing pass-through entity is subject to a tax of 4.55% of the sum of:
- Each electing pass-through entity owner’s pro rata or distributive share of the electing entity’s income attributable to the state, and
- Each resident electing pass-through entity owner’s pro rata or distributive share of the electing pass-through entity’s income not attributable to the state.
Electing pass-through entity owners are not subject to tax on the portion of their income that was included in an electing state pass-through entity tac return [H.B. 1327 (6/23/21)].
- On June 23, S.B. 1202 was signed into law, establishing a tax amnesty program for taxpayers owing any tax for any affected period. The program runs from November 1, 2021 through January 31, 2022. Taxpayers whose amnesty applications are granted will be entitled a 75% reduction in interest that would otherwise be owed on the tax that the taxpayer owes for the affected taxable period, and a waiver of all underlying penalties [S.B. 1202 (6/23/21)].
District of Columbia:
- On June 7, Act A24-0096 was signed, continuing to allow an 80% deduction for apportioned D.C. net operating loss (NOL) carryovers from new income after apportionment. This provision is applicable for tax years beginning after December 31, 2017, for corporations, unincorporated businesses, or financial institutions, and expires on September 5, 2021 [Act A24-0096 (D.C.B. 24-0257) (6/7/21)].
- The Indiana Department of Revenue has released guidance as a result of suspensions and alterations to several programs and procedures due to the COVID-19 pandemic. Regarding income tax, the Department notes that it would not use an employee’s relocation to working from home in the state as a basis for establishing Indiana nexus for exceeding the protections provided by P.L. 86-272 in the event that the relocation was the result of a federal, state, or local governmental work from home declaration or pursuant to the order of a physician. Such accommodations end upon the end of the applicable work from home declaration, and for workers subject to a physician’s order, will expire the later of June 30, 2021, or the expiration of an existing physician’s order in place prior to June 30, 2021. If a person remains in the state after the established dates, such presence can be used to determine whether the employer has Indiana nexus [DOR’s Back on Track Plan, In. Dept. of Rev. (6/21)].
- On June 16, S.F. 619 was signed into law, updating Iowa’s conformity to IRC sections 186(k) and 163(j) regarding bonus depreciation and business interest expense deductions, respectively. This conformity is applicable retroactively to January 1, 2021 for tax years beginning on or after that date, and for bonus depreciation, for qualified property placed in service on or after that date [S.F. 619 (6/16/21)].
- On June 8, S.F. 608 was signed into law, requiring pass-through entities to file a composite return on behalf of all nonresident members and to report and pay the income or franchise tax imposed at the maximum state rate applicable to the member on the non-resident members’ distributive shared of the incomer from the pass-through entity. A nonresident member included on a composite return filed shall receive credit for the state’s income or franchise tax paid on the nonresident member’s behalf by the pass-through entity. Any amounts in excess of the nonresident member’s Iowa tax liability for the applicable tax period may be refunded to the nonresident member with interest. The same requirements to file a composite return and pay tax apply for a tiered pass-through entity, with respect to the distributive shares of the tiered pass-through entity’s income [S.F. 608 (6/8/21)].
- On June 14, S.B. 160 was signed into law, providing rules on reporting adjustments arising from an audit or other action by the IRS, or reported by the taxpayer on a timely filed amended federal income tax return, to federal taxable income. According to the legislation, a taxpayer shall report and pay any Louisiana income tax due by filing a federal adjustments report with the secretary for the reviewed year and, if applicable, paying the additional state income tax owed by the taxpayer no later than 180 days after the final determination date.
Partnerships may make an election to handle a state tax liability change at the partnership level rather than each partner filing an amended state return. Final federal adjustments shall be reported no later than 90 days after the final determination date, and the partnership should both file a completed federal adjustments report with the department as well as notify each of its direct partners of their distributive share of the final federal adjustments. In lieu of taxes owed by its direct and indirect partners, for the total distributive shares of the remaining final federal adjustments reported, the audited partnership should pay an amount at the highest corporate tax rate for corporate partners and at the highest individual income tax rate for individuals, trusts, and estates [S.B. 160 (6/14/21)].
- On June 16, S.B. 157 was signed into law, exempting employers from withholding taxes on wages paid to an employee if, during the calendar year, the number of days an employee spends performing employment duties for the employer and any entity related to the employer in the state does not exceed 25 days. If the number of days performing employment duties in the state exceeds 25, the employer shall withhold and remit tax to the state for every day in that calendar year, including the first 25 days during which the employee performed employment duties in the state. This law is applicable as of January 1, 2022. This law does not apply to professional athletes, professional entertainers, public figures, qualified production employees, or staff members of a professional athletic team [S.B. 157 (6/14/21)].
- On June 11, LD 1216 was signed into law, establishing a corporate income tax nexus with Maine for a corporation that:
- Is organized or commercially domiciled in the state, or
- Is organized or commercially domiciled outside the state if the corporation’s property, payroll, or sales in the state exceed any of the following thresholds for the taxable year:
- $250,000 for property;
- $250,000 for payroll;
- $500,000 for sales; or
- 25% of the corporation’s property, payroll, or sales.
A corporation that holds an interest directly or indirectly in a partnership has nexus with Maine if the partnership is organized or commercially domiciled in the state, or if the partnership’s property, payroll, or sales exceeds any of the “bright line” nexus thresholds listed [LD 1216 (HP 891) (6/11/21)].
- On June 10, the Maine Supreme Judicial Court (Court) affirmed a judgement of the State Tax Assessor denying a telephone company’s request for an income tax refund for the 2013 taxable year. The company argued that the trial court should have granted its petition for a refund because the Assessor’s application of Maine corporate income tax statutes resulted in an “unconstitutional indirect tax on extraterritorial income that was not subject to taxation in Maine.” The Court noted that Maine’s statutes express no requirement that the Tax Assessor look behind a taxpayer’s federal taxable income in other tax years to determine whether a carryforward or carryback should be permitted for the tax year in question,” and that in this case, the company’s argument that Maine is indirectly taxing nonunitary income is based on a U.S. Supreme Court opinion regarding a challenge to a statute affecting a deduction from income received within a tax year. The Court also determined that Maine’s taxation scheme does not violate the dormant Commerce Clause, and that by “applying the Supreme Court’s ‘internal consistency test,’ which requires [the Court] to assume that every state has adopted Maine’s taxation scheme,” the members of the unitary group would not be subjected to duplicate taxation of income derived from another state in neither 2012 nor in 2013. The Court concluded that the company sought “to create a new deduction in Maine that was not authorized by statute and is not required by the constitution,” and since Maine statutes “do not provide for a carryover of the 2012 net operating loss to Maine’s 2013 tax year, and because no such carryover is constitutionally required,” the Court affirms the decision of the State Tax Assessor [Case No. BCD-20-59, Me. (6/10/21)].
- Enacted on May 30, 2021, effective July 1, and applicable to all taxable years beginning after December 31, 2020, H.B. 495 and S.B. 578 explain Maryland’s decoupling from amendments to the IRC for determining Maryland taxable income. Specifically, this legislation states that an amendment to the IRC that affects the determination of federal adjusted gross income or federal taxable income does not affect the determination of Maryland taxable income for:
- Any taxable year that begins in the calendar year in which the amendment is enacted, or
- Any taxable year that precedes the calendar year in which the amendment is enacted.
If the Maryland Comptroller determines that the impact of the amendment on State income tax revenue is less than $5,000,000 for the fiscal year that begins during the calendar year in which the amendment is enacted, or any fiscal year that precedes the calendar year in which the amendment is enacted, the decoupling provisions previously mentioned are not applicable [H.B. 495 and S.B. 578 (5/30/21)].
- On June 18, the Massachusetts Department of Revenue updated its Tax Filing Season Frequently Asked Questions page regarding employees working remotely due to the COVID-19 pandemic. The Department added notice that the telecommuting rules that were put into place to minimize disruption for employers and employees during the Massachusetts state of emergency will expire on September 13, 2021 [Tax Filing Season Frequently Asked Questions: Employees Working Remotely due to the COVID-19 Pandemic, Mass. Dept. of Rev. (6/18)].
- On June 15, the Missouri Department of Revenue adopted permanent rule 12 CSR 10-2.019 which, like its corresponding emergency rule 12 CSR 10-2.019 Determination of Withholding for Work Performed at Temporary Work Location, modifies the procedure for withholding and remitting Missouri income tax and allows certain employers to elect to withhold and remit tax on the basis of their employee’s primary work location when the employee was working from a temporary work location. The emergency ruling was published on February 16 and was scheduled to expire July 19, 2021 [Permanent 12 CSR 10-2.019 Determination of Withholding for Work Performed at Temporary Work Location, Mo. Dept. of Rev. (6/15/21)].
- The Nevada Department of Taxation recently issued a Modified Business Tax (MBT) Refund Notice in light of a recent Nevada Supreme Court decision that Senate Bill 551 (which repealed the biennial MBT rate adjustment) was unconstitutional and ordered the Department of Taxation to issue refunds of any overpayment of the MBT plus interest. The Department is developing a plan to reduce the MBT rate for quarters ending September 31, 2019 through March 31, 2021 for General Businesses, Financial Institutions, and Mining, and will announce shortly when the refunds will be issued.
The notice also states that Nevada law requires the Department to verify that a credit is valid before the amount can be refunded, so a taxpayer’s account must be in full compliance before any refund can be issued.
- On June 10, the New Jersey Division of Taxation announced that it is in the process of identifying companies that have been included as a part of combined group filing and indicated that they have nexus with the state, but that have not filed as a separate entity for periods prior to 2019. From June 15 through October 15, companies that have had nexus with the state prior to filing as part of a combined return “will have the opportunity to come forward and voluntarily comply with their Corporation Business Tax filing requirements.” Although such companies are not eligible for a standard Voluntary Disclosure Agreement, the Division will consider entering into a Closing Agreement based upon the following conditions:
- Companies must not have been incorporated, authorized to do business in, or registered for Corporation Business Tax in New Jersey prior to being included as part of a 2019 or 2020 combined return;
- The taxpayer must provide the New Jersey registration number of the Managerial Member, which begins with NU;
- The look-back period will be limited to the later of the periods ending after June 30, 2016, or the date that nexus was established with the state. Returns for prior periods are not required;
- The taxpayer must file all required returns and remit payment of the reported tax liability in full within 45 days of execution of the agreement;
- The Division will waive all penalties;
- The taxpayer will remit payment of interest within 30 days of assessment; and
- All returns will be subject to routine audits.
The Division notes that “failure to take advantage of this initiative will result in the look-back period going beyond return periods ending after June 30, 2016 and all applicable penalties and interest being assessed” [Corporation Business Tax – Combined Reporting Initiative (6/10/21)].
- The Pennsylvania Department of Revenue recently announced that it is extending its Voluntary Compliance Program for businesses that have inventory or stores property within the state but are not registered to collect and pay Pennsylvania taxes. Participating taxpayers will not be liable for taxes owed prior to January 1, 2019, and “will be given penalty relief for any non-compliance for past due tax returns that were not filed and taxes that were not paid.” Interested businesses should complete the Department’s “Physical Presence Business Activity Questionnaire” (BAQ) to participate, and will then be contacted regarding how the business can become compliant [Alert: Voluntary Compliance for Retailers with Inventory in Pennsylvania, Penn. Dept. of Rev. (6/21)].
- The Pennsylvania Department of Revenue also recently announced that its temporary guidance regarding telework and related tax implications of the COVID-19 pandemic are extended to June 30, 2021 (the End Date), and as of this End Date, existing law will govern and the temporary guidance will no longer be applicable. Regarding:
- Corporate Net Income Tax (CNIT): A non-filing out of state corporation that continues to have a Pennsylvania resident working at home in 2021 after the End Date has nexus for 2021 and for future years based on the activities of that employee unless the telework activity is protected by P.L. 86-272 (i.e., solicitation of sales of tangible personal property with orders approved and shipped from inventory outside of the state).
- Personal Income Tax and Employer Withholding: A Pennsylvania resident required to telework full-time from home in Pennsylvania rather than the employer’s out of state location should treat their compensation as Pennsylvania source income. A non-resident employee who is required to telework full-time from home in another state should treat their compensation as non-Pennsylvania source income even if their employer is located in the state. In this situation, the employer is not required to withhold on the employee’s compensation [Telework Guidance, Penn. Dept. of Rev. (6/21)].
- On June 10, the Rhode Island Division of Taxation released updated advisory guidance extending emergency regulation that provides withholding tax guidance for employers that have employees temporarily working remotely due to the COVID-19 pandemic. This emergency regulation is extended to July 17th, 2021. Under the guidance, the income of employees who are nonresidents temporarily working outside of Rhode Island solely due to the pandemic will continue to be treated as Rhode Island-source income for the state’ withholding tax purposes. Rhode Island will also not require employers located outside of Rhode Island to withhold Rhode Island income taxes from the wages of employees who are Rhode Island residents temporarily working within Rhode Island solely due to the pandemic [Adv. 2021-21, R.I. Div. of Tax. (6/10/21)].
- On June 7, the Texas Comptroller of Public Accounts released a notice of a public hearing on proposed regulations regarding Research and Development Activities Credits. The Comptroller received requests by interested parties to hold a public hearing, and will be holding this hearing to take public comments on June 28 [Notice of Public Hearing on Proposed §3.340 – Qualified Research and §3.599 – Margin: Research and Development Activities Credits, Tex. Comptroller (6/7/21)].
- On June 2, the West Virginia Department of Revenue released proposed amended rules which include:
- Amending the apportionment formula from the four-factor formula to a single sales factor formula;
- Changing West Virginia from the “throw out” rule to the “no throw” rule, where sales on which a corporation does not pay tax in any state are subtracted from the numerator but will remain in the denominator of the sales factor; and
- Changes the state’s cost of performance rule to market-based sourcing for services and intangible property, where sales of services go into the sales factor numerator based on whether the service is delivered to a customer in the state [Proposed Amended Regulations Sections 110-24-1 et al., W.V. Dept. of Rev. (6/2/21)].