State and local taxes impact almost every taxpayer, and developments in any one jurisdiction can be frequent and sometimes confusing. In this newsletter edition, we will briefly summarize certain SALT developments in several states which may be important to you.
Single Sales Factor: Earlier this year, Governor Ivey signed Act 2021-1 into law, which provides in part that "All business income shall be apportioned to this state by multiplying the income by the sales factor". This Act removes both the property factor and the payroll factor from the formula used to apportion business income to Alabama. The "sales factor" is defined as a fraction, the numerator of which is the total sales of the taxpayer in Alabama during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period. This change to use a single sales factor is effective for tax years beginning on or after January 1, 2021. The Alabama Department of Revenue updated its frequently asked questions to address this new single sales factor. More information can be found here and here.
Amended Returns Advised For Taxpayers: The Office of Tax and Revenue (OTR) previously issued Tax Notice 2021-06 (more information can be found here) which addressed the treatment for District tax purposes of the federal unemployment compensation exclusion. In that Tax Notice, the OTR stated that taxpayers should not file an amended District return at this time since the OTR is waiting for more guidance from the Internal Revenue Service on how these recalculations will be reported to taxpayers and state taxing agencies. On May 26, 2021, the OTR issued Tax Notice 2021-07 stating that the OTR is now advising taxpayers who filed an original 2020 District tax return without reporting the unemployment exclusion, to file an amended return with the OTR. Tax Notice 2021-07 then discusses the filing of amended returns with the OTR and encourages taxpayers to file those amended returns electronically. More information can be found here.
Indexed Tax Amounts Increased: Florida Department of Revenue (Department) has issued Tax Information Publications (TIP) addressing indexed amounts which have been increased. For instance, the Department issued TIP No. 21BO7-O1, dated May 20, 2021, addressing the adjusted tax rates for production of gas and sulfur effective July 1, 2021 through June 30, 2022 (more information can be found here); TIP No. 21BO6-O1 issued May 21, 2021, addressing the increase in the index pricing used by distribution companies to calculate the gross receipts tax on the sale or transportation of natural or manufactured gas to retail consumers effective July 1, 2021 through June 30, 2022 (more information can be found here); and TIP No. 21AO1-O7, dated June 9, 2021, addressing the change in tax rate used by contractors who manufacture and use asphalt during fiscal year July 1, 2021 through June 30, 2022 (more information can be found here).
Legislation Addressing Chevron Deference: Chevron deference is a principle of judicial review in which a federal court yields to an agency's interpretation of a statute or regulation. This principle was developed by the United States Supreme Court in 1984 in the case of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. However, with respect to tax laws in the State of Georgia, Governor Kemp signed Senate Bill 185 a few months ago which provides in essence that all questions of law decided by a court or by the Georgia Tax Tribunal pursuant Georgia law, including interpretations of constitutional, statutory and regulatory provisions, shall be made without any deference to any determination or interpretation, whether written or unwritten, that may have been made on the matter by the Georgia Department of Revenue (Department), except such requirement shall have no effect on the judicial standard of deference accorded to rules propagated pursuant to the Georgia Administrative Procedure Act. Similar language in this legislation addresses refund claims and related tax matters in Georgia. More information can be found here.
Film Tax Credit/Non-qualifying Vendors: The Department recently issued Informational Bulletin CRED-2013-2-13, revised June 2, 2021, dealing with the Georgia film tax credit (more information as to this credit can be found here). In this revised Informational Bulletin, the Department gives examples of vendors that do not qualify as a Georgia vendor under applicable regulations for purposes of the film tax credit. For instance, one example provides that Company A has an inventory of costumes that it rents and sells to production companies; that a production company places an order for a type of costume that Company A does not regularly hold in its Georgia inventory; that Company A rents/buys the costumes from a company that is not a Georgia vendor in order to fulfill the order from the production company; and, as a result, Company A would not be considered a Georgia vendor for this costume because more than a de minimis amount of this type of costume is not regularly held in their inventory and therefore the amount paid to Company A by the production company for the costume would not qualify as a production expenditure for purposes of the film tax credit. More information can be found here.
Usufruct/Property Tax Litigation Update: Georgia recognizes a property interest, having an origin in the English common law, known as a usufruct. A usufruct, as opposed to a leasehold interest, is an interest in real property pursuant to which the holder is limited to specific uses for the property. Generally, but not always, the term of a usufruct interest is no more than five years. A common example of a usufruct is an apartment lease. The Mercedes stadium, used by the Atlanta Falcons, had been classified by the Fulton Assessor's Office as a usufruct and hence not taxable for ad valorem tax purposes. In Love v. Fulton County Board of Tax Assessors, property owners contended that the Board of Assessors had erred in classifying the interest of the Atlanta Falcons as a usufruct, as opposed to a leasehold. The Georgia Supreme Court on June 1, 2021 sided with the Board in recognizing that the limitations put on the use of the facility were sufficient to justify classifying the property interest as a usufruct. More information can be found here.
Centralized Sales Tax Collection Passed By Legislature: The Louisiana Legislature just passed House Bill No. 199 (HB 199) which makes various changes to the State's sales and use tax laws, including the establishment of The State and Local Streamlined Sales and Use Tax Commission (Commission). The Commission, the initial members of which will include the Secretary of the Department (Department) of Revenue together with other appointed members, shall (among other responsibilities) provide for the streamlined electronic filing, electronic remittance, and the collection of sales and use taxes levied within Louisiana ensuring prompt remittance of the respective tax returns and monies received electronically by the Commission to the single collector for each taxing authority and to the Department of Revenue for distribution. The Commission ultimately will become the authority in Louisiana for functions currently performed by the Louisiana Sales and Use Tax Commission for Remote Sellers and the Louisiana Uniform Local Sales Tax Board. As stated in HB 199, these proposed amendments to Louisiana law must be submitted to voters of the State at the statewide election to be held on November 8, 2022, so as to constitutionally approve such amendments. Governor Edwards is expected to sign HB 199. More information can be found here.
Income Tax Amendments Passed By Legislature: Additionally, the Louisiana Legislature passed various legislation revising and reforming the State's income tax laws; contingent, however, on a statewide vote on October 9, 2021, as required by Senate Bill 159 (now Act No. 134, more information can be found here), to approve changes to Louisiana's Constitution to accommodate these changes. For instance, House Bill No. 278 reduces the income tax rates for individuals, changes the definition of net income by deleting the deductibility of federal income taxes and other adjustments, effective on January 1, 2022 if so approved by voters (more information can be found here); House Bill No. 292 reduces the tax rate for corporate income taxes, and eliminates the deduction for federal income taxes with other adjustments, effective January 1, 2022 upon such statewide approval (more information can be found here); and Senate Bill 161 which provides for reduced corporate franchise tax rate for small business corporations effective January 1, 2023, again contingent upon statewide approval (more information can be found here). Governor Edwards is expected to sign these legislative initiatives.
Transferability of Credits/Pass-through Entity Elections: The Department issued Information Bulletin No. 21-012 on May 12, 2021, addressing the timing for the transfer of certain credits and the timing for pass-through entities electing to pay tax at the entity level. With respect to the transferability of credits, the Department stated that to utilize a transferred credit on a tax return, Louisiana law requires that the effective date of the transfer of the tax credit, or the execution of a binding agreement to transfer the tax credit, occur on or before the due date of the return without regard to any extension granted. As a result, the Department concluded in this Bulletin that there is no extension of time for either the effective date of the transfer of a tax credit or the execution of a binding agreement to transfer the tax credit; and as such, the deadline remains May 17, 2021. With respect to the election for pass-through entity taxation, the Department stated in this Bulletin that Louisiana law requires that taxpayers file the election by April 15, 2021; and that, while an extension of time to file the 2020 income and 2021 franchise tax returns are available, no extension is granted for the pass-through entity election. However, the Department further stated in the Bulletin that a late filed election may be considered timely by Department if there exists reasonable cause for the failure to make a timely election, and that an applicant must provide adequate facts and circumstances to support a finding of reasonable cause. More information can be found here.
Digital Advertising Tax: As previously reported, Senate Bill 787 as passed in the Maryland General Assembly makes various amendments to the previously enacted tax on digital advertising, including a change in the effective date to all taxable years beginning after December 31, 2021. Because of the passage of Senate Bill 787, and the impact of that legislation upon the tax on digital advertising, the Comptroller of Maryland has revised and republished Business Tax Tip #29 Sales of Digital Products and Digital Codes, with such republication being on June 3, 2021. As stated in that Business Tax Tip #29, such publication contains a non-exhaustive list of digital codes and digital products the sale of which is subject to the sales and use tax if obtained or delivered by electronic means. That publication goes on to state that questions on such Tax Tip #29 can be addressed to the Comptroller’s Office at email@example.com; and, further, that such Tax Tip will be periodically updated by that Office to provide guidance to taxpayers. More information can be found here.
Pass-Through Entity’s Taxable Income: In addition to addressing the tax on digital advertising, Senate Bill 787 also sought to define a pass-through entity’s taxable income. That definition of taxable income is found Section 2 of Senate Bill 787, and essentially states that such term “means the portion of a pass-through entity’s income under the federal Internal Revenue Code, calculated without regard to any deduction for taxes based on net income that are imposed by any state or political subdivision of a state, that is derived from or reasonably attributable to the trade or business of the pass-through entity in …” Maryland (more information can be found here). Further, and under Section 4 of Senate Bill 787, Section 2 is applicable to all tax years beginning after December 31, 2019 - - in essence, years beginning in 2020. Since Senate Bill 787 only recently became effective, the Maryland Comptroller reportedly has been delayed in updating and finalizing the 2020 pass-through entity tax forms and instructions. Informally, the Comptroller’s Office has advised that the forms will be updated and finalized soon and provided to the various tax preparation software companies, who will then need to implement the forms into their software programs and distribute these updates to taxpayers and accounting firms. Nevertheless, and based on the timing of these updates, it is anticipated that many taxpayers will not be able to file the flow-through entity return by the July 15, 2021 deadline, and will need to utilize an extension of that deadline for filing purposes.
Sales Tax Holidays: The Mississippi Department of Revenue (Department) has recently issued Official Guides addressing sales tax holidays currently scheduled to take place between July 30, 2021 and July 31, 2021, and August 27, 2021 and August 29, 2021. Generally, in the first holiday the sales tax is not due on the sale of articles of clothing, footwear or school supplies if the sales price of a single item is less than $100; and the sales tax is not due during the second holiday on the sale of firearms, ammunition, and certain hunting supplies. Both Official Guides set forth the terms and details of the items that can acquired free of tax. More information can be found here and here.
Nonsettling Manufacturer Fee Rate Increase: The Department issued Notice 72-21-09, dated June 1, 2021, announcing a nonsettling manufacturer fee rate increase on returns filed for the July 2021 filing period forward. According to that Notice, the fee rate will be increased by 3%, and will result in an increase of 10¢ per impacted cigarette carton. More information can be found here.
Legislation Authorizing Entity-Level Tax Election: On May 17, 2021, Governor McMaster signed legislation authorizing a "qualified entity" to elect annually to have its income taxed on its active trade or business income at the rate provided under South Carolina Code Section 12-6-545(B), which is currently 3%; provided that such a election must be made no later than the due date for filing the applicable income tax return, including any extensions. The phrase "qualified entity" means a partnership or S corporation including a limited liability company taxed as a partnership or S corporation, where all of its owners are "qualified owners" or partnerships, and, where those partnerships are owned directly or through other partnerships by qualified owners. The phrase "qualified owner" means a partner or shareholder of the qualified entity that is an individual, estate, trust, or other entity, with certain exceptions specified in this new legislation. Qualified entities may make such election for tax years beginning after 2020. For tax years beginning after 2021, an electing qualified entity shall submit estimated tax payments pursuant to South Carolina law. However, if the electing entity fails to pay the amount owed to the South Carolina Department of Revenue (Department) with respect to income as a result of the election, the Department may collect the amount from the electing entity or its direct or indirect owners based upon their proportionate share of the income, or both. Other provisions and conditions apply to this election. More information can be found here.
Warranty Agreements/Withdrawals of Repair Part Ruling: On June 8, 2021, the Department issued SC Private Letter Ruling #21-1 addressing the application of the South Carolina sales and use tax to warranty agreements and withdrawals of repair parts from inventory by a manufacturer under a warranty. Under the facts in this Ruling, a manufacturer of certain medical equipment provides its customers with a new product limited warranty, and in addition offers its customers an optional extended warranty. The optional extended warranty extends the effective date of the new product limited warranty, and a customer can enter into a contract to purchase the optional extended warranty in conjunction with the purchase of the equipment or, alternatively, can purchase the optional extended warranty at any time prior to the expiration of the new product limited warranty. In this Ruling, the Department determined that the sale of an optional extended warranty in conjunction with or as part of the retail sale of the medical equipment is includable in the gross proceeds of sales or sales price of the medical equipment, and therefore is subject to sales tax unless the transaction is otherwise exempt; however, the sale of the optional extended warranty not in conjunction with or part of the retail sale of the medial equipment is not includable in the gross proceeds of sales or sales price of the medical equipment, and, therefore, not subject to the sales tax. The Department then reviews the application of the sales and use tax to the withdrawal from inventory under both a new product limited warranty as well as an optional extended warranty. The Department also addresses the situation in which the customer uses a direct pay certificate in making the original purchase of the equipment. As a caveat, the Ruling notes that Private Letter Rulings are binding on the Department only with respect to the person to whom the Ruling was issued and only until superseded or modified. More information can be found here.
Various Tax Legislation Enacted: In addition to those new laws referenced in our May edition (which can be found here), Governor Lee has signed into law additional tax and related legislation passed by the Tennessee Legislature during the 2021 Session. Some of those additional tax related legislative enactments include 2021 Public Chapter 217 which, effective April 22, 2021, tolls the statute of limitation for collection of taxes upon the imposition of a bankruptcy stay or other similar events, and permits such statute to commence running 30 days after the stay is lifted or the proceeding prohibiting the collection ends (more information can be found here); Public Chapter 522 which, effective May 25, 2021, authorizes a county trustee to proceed against a taxpayer who is delinquent in the payment of tangible personal property taxes by retaining an agent to collect such taxes, subject to the conditions set forth in this new law, the effectiveness of which is repealed on July 1, 2024 (more information can be found here); and Public Chapter 559 which, effective for tax years beginning on or after January 1, 2021, adds one month to the current six-month extension of time in which taxpayers can file a franchise and excise tax return (more information can be found here).
Marketplace Facilitator Ruling: Additionally, the Tennessee Department of Revenue (Department) issued Letter Ruling #21-05, dated April 28, 2021 and posted June 1, 2021, finding that the activities of a certain "Taxpayer" did not create "marketplace facilitator" responsibilities since the necessary requirements to be such a facilitator were not satisfied. The Taxpayer in this Ruling is affiliated with other companies that manufacture and distribute certain products to a network of independent dealers located across the country. The Taxpayer created an online platform which enabled the participating dealers to create an inventory listing and make business-to-business sales to certain customers of products purchased from these other companies affiliated with Taxpayer. The Taxpayer required the participating dealers to enter into a contract with the Taxpayer and potentially remit an initial fee for use of the platform. However, the Taxpayer did not collect payments from customers of the participating dealers; nor did the platform perform any functions facilitating payment for the orders, although the platform did provide inventory listings and confirmation of preliminary order approvals or rejections. The Department concluded that the Taxpayer's platform is a "marketplace" since it is an internet website where taxable tangible personal property is offered for sale; however the Taxpayer is not a "marketplace facilitator" since the Taxpayer is not involved in collecting or remitting payments even though the Taxpayer is involved in confirming preliminary order approvals or rejections. As a result, the Department determined that the Taxpayer under these facts is not a marketplace facilitator; and, thus, is not required to collect and remit Tennessee sales and use tax on sales made to Tennessee consumers who use this online platform. More information can be found here.
Sales Tax Holiday Notice: Further, the Department has issued several Notices regarding various tax and related matters, one of which being Notice #21-10 addressing the sales tax holiday for food, food ingredients and prepared food, with such holiday beginning on Friday, July 30, 2021 and ending on Thursday, August 5, 2021. More information can be found here.
Sales Tax Exemption For Firearm Safety Equipment: On June 14, 2021, Governor Abbott signed into law Senate Bill No. 313 providing a sales tax exemption for certain “firearm safety equipment.” According to this new legislation, which is effective September 1, 2021, that phrase means a “gun lock box, a gun safe, a barrel lock, a trigger lock, a firearm safety training manual or electronic publication, or another item designed to ensure the safe handling or storage of a firearm.” Under this new law, the sale, storage, use or other consumption of firearm safety equipment is exempt from the sales tax. More information can be found here.