State and Local Tax (“SALT”) Year-End Tax Updates
Due to both revamped economic nexus laws in the wake of the 2018 Wayfair decision and state responses to the upheaval caused by the COVID-19 pandemic, 2020 was a busy year for State and Local Tax professionals. Now, two years removed from Wayfair, states are increasingly enacting and updating their economic nexus statutes, and many state legislatures have been forced to update tax policy as part of their efforts to provide emergency relief to taxpayers affected by the pandemic.
In the following sections, we will discuss some notable effects of the COVID-19 pandemic on state and local taxes and highlight some updates to state law.
EFFECT OF COVID-19 ON BUSINESSES’ STATE AND LOCAL TAXES
Many employees have been forced to telecommute as a direct result of the COVID-19 pandemic. Work-from-home orders and the realities of life under lockdown have resulted in a sudden relocation of many U.S. employees, often, across state lines. Generally, the presence of a remote employee in a state where a company’s employees do not usually work would be sufficient to create nexus in that state for an employer – thereby potentially exposing the employer to additional taxation by the new state.
A few states have answered this by providing guidance stating they would not seek to impose nexus due to employees working in-state temporarily, as a matter of safety and public health for the duration of this emergency. The states’ leniency in this regard is limited, however, as some states are starting to issue guidance including expiration dates for this treatment. The most common dates are the end of 2020 or 90 days after the state’s state of emergency is lifted. Another consideration concerns a change in an employee’s status, from temporary remote to full-time remote. This would cause businesses to have additional state income tax filing requirements, potentially affecting the employer’s payroll apportionment factor, as well as sales, withholding and unemployment tax requirements.
EFFECT OF COVID-19 ON STATE AND LOCAL INDIVIDUAL INCOME TAX
Notable tax concerns faced by individual taxpayers relocating to a different state due to the COVID-19 pandemic include individual withholding requirements, as well as the potential residency implications of living for a prolonged period in a new state.
Generally, individuals are subject to tax withholding based on the states in which they work.
As a result of the pandemic, many states have chosen to accommodate individual taxpayers, allowing income to be sourced to the individual’s normal work location rather than the state from which they are telecommuting (their resident state). However, not all states have taken this position, potentially raising double income tax implications for individual taxpayers.
For example, Georgia released guidance stating that if an employee is temporarily working in the state, wages earned during that time period will not be considered Georgia income, and employers will not be required to withhold Georgia income tax. Unfortunately, states rarely conform, and some states have taken the opposite position. Iowa, for example, has released guidance stating that an individual temporarily working in Iowa will be subject to Iowa individual income taxes, and that employers of such employees will have to withhold taxes on wages and payments made to those employees.
Taxpayers moving to another state during the pandemic should also consider the impact of state residency rules. A relocated individual working and living in a new state could still be considered a resident taxpayer of their original state and simultaneously meet statutory residency rules in their new state. Generally, in order to change residency status, taxpayers must change their domicile. Taxpayers looking to pursue a domicile change should be aware that a number of factors are taken into account in the determination. A temporary relocation during the pandemic is not likely to change a taxpayer’s domicile unless significant changes are made. However, the relocation during the pandemic may trigger statutory residency, where some states will treat taxpayers who exceed 183 days and have a place of abode as a resident for tax purposes. It is possible that a taxpayer could be treated as a resident of two states; one based upon domicile and the other based upon statutory residency. In most cases, the resident credit will protect the taxpayer from double taxation, but depending on the states, double taxation can apply to types of intangible income.
Each taxpayer’s circumstances should be individually reviewed and commented on by a tax professional, as the details around domicile and residency are important in order to draw a conclusion.
SALES TAX NEXUS CONSIDERATIONS AND INCREASED SCRUTINY
It has been two years since the United States Supreme Court ruled in the Wayfair case pertaining to sales tax economic nexus, and the implications are still unrolling for affected taxpayers. Taxpayers who have not addressed sales tax economic nexus should make sure that they speak to their tax advisors in order to understand their exposure. Taxpayers who addressed the implications of the decision in prior years should make sure that any state changes over the last two years do not require modifications to that initial analysis. State taxes are always changing, and any analysis should be updated frequently in order to confirm that changes in law do not alter the conclusions.
On June 21, 2018, in South Dakota v. Wayfair, Inc., the United States Supreme Court, in a 5-4 decision, ruled in favor of South Dakota and its economic nexus provisions for sales tax collection. In so doing, the Court overturned its prior decision in Quill (Quill Corp. v. North Dakota). Quill required that a retailer have a physical presence in a state, in order to be required to collect sales tax for sales into that state. The South Dakota statute requires remote retailers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax.
In the two years since the Wayfair decision, almost every state has enacted sales tax economic nexus laws. While the most common thresholds mirror those of South Dakota, many states have unique thresholds for sales and transactions for nexus creation. The only two states with a sales tax that have yet to pass an economic nexus rule are Florida and Missouri.
As expected, as a result of the Wayfair decision, many taxpayers have been required to register, collect and remit sales tax in a large number of additional states. Not as obvious, the ability to correctly collect the tax has been a large hurdle for taxpayers. The additional cost of research into the taxability of products and services and investment in software enabling taxpayers to correctly invoice their customers is a by-product of the decision that was not widely anticipated by interstate retailers.
The ruling also brought many historical sales tax exposures to the front of taxpayers’ minds. It is important to understand that the Wayfair decision didn’t negate prior nexus-creating activity in earlier years, so a taxpayer that registers to collect sales tax in compliance with the Wayfair rules, but had prior nexus due to prior physical presence that had gone unaddressed, will still have exposure for those prior years. The only way to properly address previous year sales tax exposure is to file all delinquent returns or enter into a voluntary disclosure agreement with the state.
Taxpayers who were slow to respond to the Wayfair decision had a small window of time for non-compliance; however, now, two years later, the potential exposure is much larger. The longer these rules go unaddressed, the larger the exposure grows. If a taxpayer never files a return, the statute of limitations never begins, so a state has the ability to audit a company from the first day the taxpayer had nexus.
These issues become an immediate concern for taxpayers because of the COVID-19 pandemic. States are likely to become more aggressive in identifying taxpayers who should be filing sales taxes , in order to help make up for lost revenue during the crisis. Once contacted by a state about delinquent filings, taxpayers are generally no longer allowed to pursue voluntary disclosure agreements and are, therefore, subject to penalties on uncollected sales taxes and a longer look-back period.
STATE AND LOCAL TAX UPDATES
Following is a summary of recent tax law changes in selected states, for 2019, 2020 and 2021:
On June 29, 2020, California Governor, Gavin Newsom, passed Assembly Bill No. 85 into law. The law established that for tax years 2020 through 2022, taxpayers will not be allowed to utilize Net Operating Loss deductions generated in prior tax years and will only be allowed to utilize up to $5 million in general business Credits. Additionally, on September 9, 2020, Governor Newsom also signed SB 1447, which provides a credit against personal and corporate income taxes for each taxable year beginning on or after January 1, 2020, and before January 1, 2021, for qualified small business employers that increase their net employment.
Beginning on January 1, 2020, Florida decreased the state sales tax rate imposed on commercial real property rentals from 5.75% to 5.50%.
Beginning on October 1, 2020, remote sellers and marketplace facilitators are required to collect and remit Tennessee sales tax if their annual sales into Tennessee exceed $100,000. Tennessee has reduced its economic nexus threshold from $500,000 to $100,000 as part of an effort to increase revenue generated from its sales and use tax.
On December 20, 2019, the Texas Comptroller of Public Accounts adopted an economic nexus provision. In addition to the date physical presence was first established in Texas and the date the taxpayer first obtained a Texas use tax permit, taxpayers will now also be subject to Texas franchise tax as of the first date on which the taxpayer had Texas gross receipts in excess of $500,000.
On May 16, 2019, Oregon Governor Kate Brown signed legislation establishing the Oregon Corporate Activity Tax (“CAT”), effective beginning tax year 2020. The Oregon CAT, imposed in addition to the state’s existing businesses excise and income tax, is imposed on businesses for the privilege of doing business in Oregon. Taxpayers with taxable Oregon commercial activity in excess of $1 million are obligated to remit the CAT at a rate of $250 plus 0.57% of their taxable Oregon commercial activity exceeding the $1 million threshold.
New York State and New York City
On April 3, 2020, New York State Governor Andrew Cuomo signed into law a provision that decouples the state from specific provisions of the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, including the CARES Act amendment to IRC § 163(j) increasing the amount taxpayers can deduct as an interest expense for the 2019 and 2020 tax years.
On September 22, 2020, the New York City (NYC) Department of Finance issued a Finance Memorandum addressing the ramifications of its decoupling from certain provisions of the CARES Act. Currently, New York City has decoupled from the business interest deduction and net operating loss carryback rules detailed in the Act.