April 30, 2020

State and local taxes amid COVID-19

Naftali Dembitzer and Hugh Goodwin

This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No

reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in

the relevant jurisdiction.

www.dlapiper.com

• General filing extensions and payment deferrals

• Corporate income taxes

• The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides for a host of business tax changes

• NOL carrybacks and increased utilization; relaxed business interest expense limitation under Section 163(j)

• Impact of teleworkers on nexus and apportionment factors for corporate income taxes

• Sales and use taxes

• Impact of teleworkers on nexus for sales/use tax collection and on thresholds for Wayfair-type economic nexus

• Possible affect on state legislative activity/agenda, including marketplace facilitator laws

• Payroll taxes and personal income taxes

• Impact of teleworkers on local payroll taxes

• Impact of teleworkers on wage withholding for employees working in a different state

• Statutory residency for individuals for personal income tax

• Procedural rules

• Statute of limitations and tax controversies

• Bulk sales notices and tax clearance certificates

• Voluntary disclosure agreements

• Offers in compromise and payment plans

• Clawback of state tax incentives and credits

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Overview of state and local tax issues arising from COVID-19

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State tax filing extensions and payment deferrals

State and local taxes amid COVID-19

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Corporate income tax

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State and local filing extensions and payment deferrals

• To provide relief to taxpayers impacted by the coronavirus disease 2019 (COVID-19), states are

granting automatic extensions for filing corporate income tax returns and making payments

• States have taken different approaches when it comes to granting extensions, but generally

conform to the federal filing and payment deadlines laid out in IRS Notice 2020-18 by moving

their filing and payment deadlines for corporate income tax returns to July 15, 2020

• However, some states have selected filing deadlines as early as May 15, 2020 (eg, MS) and as

late as August 14, 2020 (eg, PA). Other filing deadlines include June 15, 2020 (eg, ID, NH), July

20, 2020 (eg, HI) and July 31, 2020 (eg, IA, MI)

• Each state’s law should be carefully reviewed prior to filing to ensure compliance

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Sales and use tax

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State and local filing extensions and payment deferrals

• Unlike corporate income tax filings, there are no federal guidelines to follow for state sales tax filing and payment

requirements so the method and type of state relief varies

• For those states providing sales and use tax relief, most are doing so by either offering relief to all filers OR only to

“small businesses” (ie, businesses under a certain tax liability or gross sales amount threshold) OR by request and on a

case-by-case basis. In addition, some states only offer deferrals for either payments or filing, but not both

• Deferral for all filers: A handful of generous states are providing sales and use tax filing and payment deferral to all

taxpayers. These jurisdictions include LA and DC

• Deferral for “small businesses”: CT and MA offer extensions for taxpayers with less than $150K in annual tax liability.

MA relief, however, does not extend to marketplace facilitators, motor vehicle vendors and marijuana retailers

• CA offers at least two forms of relief: small businesses with less than $5M in annual receipts can pay $50K of liability

ratably over a 12-month period, and taxpayers with a return showing less than $1M in tax are entitled to a 90-day filing

and payment deferral without penalty or interest (this provision applies to more than 99% of all sales tax filers)

• MS, ND and MT have requested that taxpayers unable to pay the full amount of the sales and use tax request a waiver

of penalties and interest

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• Payroll tax

• Most states have either remained silent or announced that payroll filings and payments will continue as normal

• Only a few states, such as CA and NM, have provided payroll tax deferral programs

• CA has allowed taxpayers to request a 60-day extension

• NM has automatically extended payroll tax deadlines for 90 days

• Considering the lack of guidance by states, taxpayers should expect to collect and remit payroll tax as scheduled

• Property tax

• Most states have also remained silent with regard to property tax relief updates

• For the handful of states that have announced property tax relief, most states have deferred property tax

payments (eg, MN, NJ, RI, SC, VT)

• Certain states (eg, ID, PA) have deferred property tax payments and have also extended the deadline for

seniors, persons with disabilities, and other qualified individuals to apply for property tax reduction/relief

programs.

• Other states, such as IA, do not defer the deadline for property tax payments, but defer the penalties and

interest associated with late payments.

Payroll tax and property taxes

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State and local filing extensions and payment deferrals

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Corporate income tax

State and local taxes amid COVID-19

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State conformity to Internal Revenue Code

• State conformity/non-conformity to Internal Revenue Code

• Automatic/rolling conformity (22 states/DC)

• Fixed date conformity or static conformity (21 states)

• Selective conformity (4-5 states)

• States with gross receipts tax or no corporate income tax (5-6 states)

• WY and ID – no corporate income tax

• NV commerce tax, OH CAT, WA B&O and Texas margin tax

• Oregon commercial activity tax (new)

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• Federal net operating losses (NOLs)

• CARES Act amends current law to allow temporarily for the carryback of NOLs and increased NOL usage

• Allowing losses from 2018, 2019 and 2020 to be carried back for up to five years

• For existing NOL carryovers, losses carried to 2019 or 2020 will be able to offset 100% of taxable

income in those tax years

• State NOL rules

• State NOL rules may differ from the federal NOL rules

• State sourcing rule limits use of NOLs for state tax purposes (eg, NY)

• Apportioned income to a state in the source year (when loss arose) or the target year (when loss is to be

used) could limit the use of NOLs for state tax purposes as well

• Pre-apportionment

• Post-apportionment

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Federal and state NOL rules

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• Most states do not currently allow NOL carrybacks and may not be inclined to change tax policy

• States with selective conformity do not automatically conform to the NOL rules under the

CARES Act

• States with rolling conformity can decouple from NOL rules under CARES Act (eg, NY)

• Many states have special NOL rules, especially if taxable income for state corporate income tax

starts with federal taxable income before NOLs on Form 1120, Line 28

• Many states have limitations on the use of state NOLs when the corresponding federal NOL is

used to offset taxable income in a different tax year. That can still be an issue under CARES Act

• Some states have special rules for NOLs arising in earlier tax years and do not follow federal

rules (eg, NY pre-2015)

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State NOL issues after the CARES Act

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• Federal deduction for business interest expense

• IRC § 163(j) currently limits the deduction for business interest expense to the sum of (i) business

interest income and (ii) 30% of the business’ adjusted taxable income (ATI)

• The CARES Act increases the ATI threshold to 50% for taxable years beginning in 2019 and 2020

• The CARES Act also allows taxpayers to elect to use their 2019 ATI as their adjusted taxable income

threshold in 2020 (they are expected to have less adjusted taxable income in 2020)

• State responses to the CARES Act

• NY conforms to the IRC on a rolling basis, but recently decoupled from the expanded Section 163(j)

provision in the CARES Act

• One narrow exception: taxpayers can elect to use their 2019 ATI when calculating their 2020

business interest expense limitations (ie, subject to a 30% ATI threshold)

• Some states with fixed or “static” conformity have already updated their tax statutes to conform to the

CARES Act (eg, ID, IN, ME, VA, WV)

• States that do not follow Section 163(j) or conform to an earlier version of that statute are not likely to

adopt the CARES Act changes to Section 163(j) (eg, CA, CT, GA, IN, MS, WI)

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Business interest expense deduction limitation – §163(j)

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Corporate income tax – impact of teleworkers

State and local taxes amid COVID-19

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• Traditional nexus – doing business, leasing or owning property, and having employees or salespersons

in the state

• P.L. 86-272 – federal exception from state net income tax nexus, permitting limited presence of employees

in the state for solicitation of sales of tangible personal property only

• Teleworkers working from home due to governmental restrictions may cause an employer to be treated as

having an employee working in the state of residence or void any protection of P.L. 86-272

• Several states have enacted remedial rules to ignore temporary presence of employees working from

home. Thus, P.L. 86-272 protection is not lost and no nexus is created in the state

• These rules have been adopted in IN, NJ, MA, MS, MN, ND, PA and Washington, DC. MD has rejected any

change to its standard nexus guidelines

• Other states have not yet addressed this topic. Corporate taxpayers should review the laws in

jurisdictions where employees are working from home to assess potential nexus risk

Nexus for corporate income/franchise tax

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Impact of teleworkers – nexus

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• Method for apportioning business income among the states

• General apportionment factors for apportioning business income

• Payroll (employees based in a state)

• Property owned or leased in the state

• Sales/receipts

• Cost of performance (method for sourcing receipts)

• Customer location/market benefit (method for sourcing receipts)

• Double-weighted sales factor or single sales factor

• States can apply different apportionment factors to same taxpayer, resulting in more than 100%

total apportionment

• Alternative apportionment

• Tax commissioner may require (or taxpayer may request) alternative apportionment to a state.

In some states the party seeking alternative apportionment bears the burden to show why

required

Apportionment factors for corporate income/franchise tax

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Impact of teleworkers – apportionment

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• Apportionment factors – intended to show the benefits received by the corporation from the state such

that it is fair and constitutional to impose corporate income tax on the corporate taxpayer

• Corporate income (or loss) could shift using three-factor apportionment due to work from home

employees:

• Payroll – teleworkers shift the location of the corporation’s employees

• Property owned or leased – if the entire office is telecommuting, should property matter?

• Sales/receipts

• Cost of performance (sourcing method) – clearly impacted by teleworkers

• Customer location/market benefit (sourcing method) – can be impacted by teleworkers of a

customer if the benefit is received by the customer in the states where it has teleworkers

• Some states say no change to apportionment factors due to employee’s telecommuting (MA, MS and

ND). Otherwise, consider using alternative apportionment (if available) to show that the corporate

income tax should be apportioned to or away from the state

Apportionment factors for corporate income/franchise tax

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Impact of teleworkers – apportionment (cont’d)

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Sales and use tax

State and local taxes amid COVID-19

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Wayfair – economic nexusSouth Dakota limits reach of sales/use tax nexus statute

• Wayfair Supreme Court decision (June 2018) expands sales/use tax nexus for remote sellers

• Internet retailers vs. brick and mortar sellers

• SD’s law imposing sales tax on remote sellers was not retroactive:

• remote seller must make more than $100K in annual sales

• alternatively, remote seller must make 200 or more separate sales transactions annually

• Member, Streamlined Sales and Use Tax Agreement (SSUTA)

• Some states have enacted Wayfair-type nexus statutes that are different than the SD law

• CA (>$500K only); NY (>$500K and >100 separate sales); OK (>$100K)

• Some states have enacted Wayfair-type economic nexus for corporate taxes (eg, TX)

• Other states are conforming economic nexus for sales/use tax and corporate income tax

• Municipalities are not certain that they can adopt Wayfair-type nexus at the local level

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Nexus for sales and use tax collection and remittance

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Impact of teleworkers – nexus

• Nexus for sales/use tax collection

• Pre-Wayfair physical presence requirement could be satisfied by employee or representative

working in the state

• Wayfair case sanctioned an economic nexus standard (minimum requirements, $100K in

annual sales or 200 separate sales transactions), making physical presence unnecessary if

remote seller satisfies the state’s economic nexus parameters

• All states with sales taxes except FL and MO have adopted some form of “remote seller”

economic nexus legislation

• No federal P.L. 86-272 protection from sales tax collection nexus

• Query whether telecommuting employees working from home in jurisdictions where Wayfair

parameters are not satisfied, might create sales and use tax nexus

• Some states have provided helpful rules to avoid such sales/use tax nexus (eg, MA, PA)

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Marketplace facilitator legislation

Legislative activity/agenda

Online marketplace

platformMarketplace seller

Buyers

(commercial and

individual)

Marketplace

facilitator

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Marketplace facilitator rules• Sales and use tax (SUT) collection obligation imposed on non-sellers (ie, parties who operate the

marketplace platform). Key factors in incurring such SUT liability/obligations:

· Facilitating sales through advertising or marketing seller products to customers

· Must satisfy state sales threshold for period of time (preceding 12 months/# quarters/annually)

· Collecting funds from customers for subsequent remittance to sellers

• General problems for facilitators and sellers:

· Protection/indemnity for facilitator or seller if other party doesn’t handle properly/incorrect data

· Some facilitators are also direct sellers and track sales channels separately (TX proposal)

· Some marketplace sellers sell directly and through marketplace facilitators (how to compute)

· Potential double reporting of transactions by marketplace facilitator and marketplace sellers

• Unique problems for certain business models:

· Food delivery services

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Wayfair issues due to COVID-19

Marketplace facilitators

• Legislation thought to be overly broad (eg, food delivery service companies)

• States may be loath to extend sales tax extension benefits (eg, MA)

• Heightened enforcement likely given expected revenue shortfalls at the state and local level

• States that have not yet adopted marketplace facilitator rules may now have incentive to

move forward, thereby enabling the capture of additional sales tax revenue

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Payroll taxes and personal income tax

State and local taxes amid COVID-19

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Taxes imposed on employee salaries

• Philadelphia wage tax based on “requirement of employment” location for nonresidents

• Is employment “required” in the city when employees are working from home (WFH) due to COVID-19 concerns?

• In Philadelphia, withholding still applies (nonresidents will have to seek refunds)

• Other jurisdictions: Pittsburgh, Newark

Employee payroll used as an apportionment mechanism

• San Francisco Gross Receipts Tax (GRT)

• Apportionment based on city payroll as a function of total payroll. City payroll is total amount paid for

compensation in the city

• Opportunity to reduce San Francisco GRT from WFH requirement for San Francisco businesses

– must document!

Situations where WFH requirements could create organizational nexus

• San Francisco gross receipts tax, nexus created by “the rendering of services within San Francisco by employees

. . . for all or any part of any seven days during the year.”

• Non-San Francisco business with a WFH San Francisco employee

Local payroll taxes

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Impact of teleworkers – local payroll taxes

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• Wage withholding typically imposed based on location where employee performs services

• However, non-residents can also be subject to wage withholding in state where employer business

is located under the convenience of employer test. These states include CT, DE, NE, NY and PA

• Some states have de minimis exception for limited number of days that an employee works in the

state (eg, NY/CT = <14 days; AZ = <60 days)

• Some states impose wage withholding for dollar thresholds of allocable wages (PA=$35 or NJ/MS)

• Some states have reciprocity agreements to avoid withholding on the other state’s residents (eg,

NJ-PA)

Wage withholding

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Impact of teleworkers – wage withholding

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• COVID-19 changes

• NJ/MS continue to apply withholding based on employer’s work location; ignore telecommuting

changes

• MD/MN: telecommuting can change required tax withholding based on where employee performs

work

• PA: non-resident working for PA employer and telecommutes from outside PA – subject to PA

withholding

• Conversely, a PA resident telecommuting for non-PA employer can still be subject to PA

withholding

• MA: MA source income of a non-resident telecommuting outside MA remains subject to MA

withholding; resident credit is available for MA-resident telecommuting in MA for out-of-state

employer

Wage withholding

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Impact of teleworkers – wage withholding (cont’d)

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• Resident vs. non-resident

• Definition of “resident”

• Domiciliary – changing or forming a domestic/foreign domicile

• Statutory resident – physical presence for more than 183 days and maintenance of a permanent abode or

satisfying other statutory tests

• Day count and travel only days

• Hospitalization vs. medical treatment

• Non-resident

• Allocate taxable wages based on number of working days in-state compared to total work days everywhere

• Beware of convenience of the employer test for non-residents (eg, CT, DE, NE, NY, PA)

• Any COVID-19 temporary relief?

• Does home shoring due to COVID-19 count as work in another state for the convenience of the employer?

• Compare IRS Rev. Proc. 2020-20 providing for a 60-consecutive-day special exemption for foreigners

who intended to leave the US and cannot travel abroad and would be in the US more than 183 days

under the substantial presence test under IRC Section § 7701(b)

Residency for personal income tax

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Impact of teleworkers – personal income tax

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Procedural rules

State and local taxes amid COVID-19

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• NY – due to forced closures, Governor Cuomo has extended all state statutes of limitation for courts until

May 16, 2020

• New York State Tax Appeals Tribunal doesn’t agree and requires timely filings without any extensions

• In contrast, New York City Division of Tax Appeals says that its filing deadlines have all been extended

• MS – 60-day deadline to appeal agency action cannot be deferred, and tax agency believes that taxpayers

can make a timely filing. This does not consider difficulty of taxpayers to make a timely filing

• NJ – Chief Justice of New Jersey Supreme Court has ordered that deadlines for filing tax protests are

extended to a minimum of 30 days after COVID-19 restrictions are lifted

• PA – Board of Appeals has extended filing dates a minimum of 30 days after its offices re-open

• Pennsylvania Department of Revenue will limit collection activities of outstanding tax debts; continue to

work to resolve outstanding matters; allow taxpayers to more easily enter into payment plans; and limit

new audit activity

• MN – extension until May 30, 2020 to file defense or objection to real and personal property taxes to

pursue claim that such property was unfairly or unequally assessed compared to other property

Statute of limitations and tax controversies

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Procedural rules

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• Bulk sales notices and tax clearance certificates

• States have not started to provide updates or deferrals for obtaining bulk sales notices or tax clearance

certificates. Further, most (if not all) states have closed their tax department offices and call centers to

help slow the spread of COVID-19

• Note: applications are still able to be submitted, but there is no one to review and respond to requests

• This can cause issues in transactional matters for both buyers and sellers:

• Buyers unable to satisfy a state’s bulk sales laws may inherit more tax liability in the asset acquisition

• Sellers’ ability to close deals may be impacted if they are unable to obtain a tax clearance certificate

• Example: if a purchase agreement is predicated on obtaining a tax clearance certificate to limit

successor liability in a particular state, seller may not be able satisfy those provisions prior to closing

• Voluntary disclosure applications

• Difficulty making a VDA submission when state tax departments are closed due to COVID-19

Closing matters: what do we do now?

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Bulk sales notices and tax clearance certificates

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• Many jurisdictions offer voluntary disclosure agreements concerning outstanding income tax, sales tax and

employment taxes.

• Executive orders and legislative action seek to benefit taxpayers with cash flow issues

• What about relief from adverse consequences for a default under VDAs?

• VDAs are contractual arrangements, usually not statutory (often provided at the discretion and on terms

created by the state revenue agency) and sometimes require ancillary filings with the VDA application

• Potential breach of contract if taxpayer is unable to make VDA payments or file all requisite forms if no

relief is offered

• Policy Argument: Taxpayer is in the same situation as other taxpayers granted relief due to COVID-19

and should not be penalized, especially when taxpayer came forward voluntarily to enter into the VDA

• Can states void the VDA if payments are missed and seek to recover taxes, penalties and interest from

excluded years? They would point to the provisions in the VDA, but contract relief doctrines may apply

VDAs are generally contractual arrangements

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Voluntary disclosure agreements

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Federal

• Due to COVID-19, IRS offers relief to taxpayers in various stages of Offer in Compromise (OIC) process:

• Taxpayers have until July 15, 2020 to provide additional information to support a pending OIC

• The IRS will also not close any pending OIC request before that date without the taxpayer’s consent

• Taxpayers can suspend payments on accepted OICs until that date, but interest will accrue until amount paid

• The IRS will not place a taxpayer in default of an OIC for being delinquent in filing a 2018 tax return, but

taxpayers should file both any delinquent 2018 return and their 2019 return on or before July 15, 2020

State

• It is unclear whether states will offer similar relief to taxpayers for payment plan requests. IN has taken steps to

ease the burden on taxpayers in that state’s Offer in Compromise program, which include:

• Relaxing certain record submission requirements for new case creation

• Extending the time frame for submissions on all pending hardship cases until July 31, 2020

• Extending processing deadlines for new cases and supporting all requests to adjust payment plan terms

• Several member states of the Multistate Tax Commission have indicated that they would permit payment plans

for VDAs filed with the state if a taxpayer was facing hardship due to the COVID-19 pandemic

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Offers in compromise and payment plans

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• Many states offer tax programs to incentivize new and expanding businesses and provide tax benefits

• States typically require minimum capital expenditures and also increased or maintaining jobs and wage

levels

• Companies with existing incentive agreements may face hardship to comply due to COVID-19, which

could allow states to clawback benefits when businesses fail to satisfy the required levels

• Most states have not issued guidance on whether the COVID-19 pandemic may relieve certain

incentive recipients of their obligation to repay benefits for failing to maintain employment and

investment levels

• Nebraska was the first state to issue guidance providing that if a company received incentives

under the Nebraska Advantage Act, the company will be relieved from any recapture provisions if

the company can show that its failure to satisfy employment and investment requirements was a

direct result of the national emergency declaration due to COVID-19

• Companies should review their tax incentive agreements to determine if the agreements contain

any force majeure or market conditions provisions which may allow the company to be excused from

satisfying any of its obligations due to the COVID-19 pandemic

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Clawback of state tax incentives and credits

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• States may consider replacing income taxes with gross receipts taxes (no need to decouple from

federal, tax revenue not dependent upon profitability); follow the lead of other states (WA, OH, TX,

NV, OR)

• Sales tax base will continue to expand to include services and more types of taxable items (SaaS)

• Heightened sales tax enforcement against remote sellers and marketplace facilitators

• Less leniency and accommodations in tax audits

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What’s next beyond COVID-19?

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Thank youAny questions?

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This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational

purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without

first seeking legal advice from counsel in the relevant jurisdiction.

Naftali Z. Dembitzer

Partner, Tax

naftali.dembitzer@us.dlapiper.com

New York

T: +1 212 335 4759

Hugh Wesley Goodwin

Partner, Tax

hugh.goodwin@us.dlapiper.com

Silicon Valley

T: +1 650 833 2262