On March 18, 2020, Maryland legislature sent a massive new tax on digital advertising services to Governor Hogan for consideration. The tax imposes a rate of up to 10% on annual gross revenue in the state derived from digital advertising services. This tax is on a sliding scale based on companies’ global revenues and would take effect with tax year 2021. There are many legal problems with the legislation, including the violations of the Internet Tax Freedom Act, the Commerce Clause and the First Amendment. Other states have considered and are considering similar proposals. It is imperative that companies know how broadly this new tax will apply.

Click below to watch our recent webinar on this new tax. We discuss the legal challenges that can be made and how to protect your company from the unlawful reach of such laws.

Illinois has announced the following tax-related relief measures related to COVID-19. Taxpayers who file quarterly estimated returns should note that unlike the federal government, Illinois has not extended the April 15, 2020 due date for first quarter estimated tax payments.

I. Extension of Filing and Payment Deadlines for Illinois Income Tax Returns

The 2019 income tax filing and payment deadlines for all taxpayers who file and pay their Illinois income taxes on April 15, 2020, have been automatically extended until July 15, 2020. This relief applies to all individual returns, trusts and corporations. The relief is automatic; taxpayers do not need to file any additional forms or call the Illinois Department of Revenue (IDOR) to qualify. For additional details, click here for the guidance issued by IDOR on March 25, 2020.

Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020.

Even though the deadline has been extended, IDOR has encouraged taxpayers expecting a refund to file as soon as they can. Taxpayers who have already filed a return can check the status of their return by using the Where’s My Refund? link located at mytax.illinois.gov

Note: This extension does NOT impact the first and second installments of estimated payments of 2020 taxes that are due on April 15 and June 15. Although the federal government has extended the date for the payment of first quarter estimated tax payments to June 15, 2020, Illinois has not followed this practice. Illinois taxpayers are still required to estimate their tax liability for 2020 and make four equal installment payments to IDOR, starting on April 15, 2020.

II. Sales Tax Deferral for Bars and Restaurants

To help alleviate some of the unprecedented challenges facing bars and restaurants due to COVID-19, Governor Pritzker has directed IDOR to defer sales tax payments for eating and drinking establishments that incurred less than $75,000 in sales tax liabilities last year. Qualifying businesses are still required to timely file their sales tax returns, but will not be charged penalties or interest on their late payments due in March, April or May 2020. The IDOR estimates this will give relief to nearly 80% of the bars and restaurants in Illinois.

Taxpayers taking advantage of this relief will be required to pay their sales tax liabilities due in March, April and May in four installments, starting on May 20 and extending through August 20. For more information, please view IDOR’s informational bulletin available at tax.illinois.gov.

III. Small Business Loans

The US Small Business Administration has approved the state’s eligibility for disaster assistance loans for small businesses facing financial hardship in all 102 Illinois counties due to COVID-19. Eligible businesses can apply for up to $2 million in low-interest loans here.

The federal stimulus bill (the CARES Act), HR 748, which was signed into law by President Trump on March 27, includes certain corporate income tax provisions designed to provide relief to corporate taxpayers. One such provision–the net operating loss (NOL) provision that allows taxpayers to carryback NOLs to prior years–could have unintended consequences at the state level. For some taxpayers, the carryback of NOLs to 2018 and 2019 could reduce the deductions allowed pursuant to IRC § 250 applicable to global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII) generated in those years. While this will obviously have federal income tax consequences it will also have consequences in states that tax GILTI and allow the deductions in IRC § 250. This blog post focuses on the consequences of the NOL rules to the New Jersey Corporation Business Tax (CBT), but the issue could arise in other states, including, for example, Nebraska and Iowa.

The state issue is based on the mechanics of the federal GILTI and FDII deductions computed pursuant to IRC § 250. IRC § 250(a)(1) provides a 50% deduction for GILTI and a 37.5% deduction for FDII. However, IRC § 250(a)(2) then provides that, if the amount of a taxpayer’s GILTI and FDII, net of the related IRC § 250 deductions, exceeds the taxable income of the taxpayer determined without regard to the IRC § 250 deductions, then the amount of the IRC § 250 GILTI and FDII deductions will be reduced.  In determining “taxable income” for such purposes, a taxpayer has to include its NOLs, so if a taxpayer carries back NOLs and uses them to reduce its taxable income in 2018 and 2019, the amount of the taxpayer’s GILTI and FDII deductions could also be reduced.

New Jersey is notorious for being one of the states to tax GILTI. New Jersey includes GILTI computed under IRC § 951A in the tax base, but then allows the IRC § 250 GILTI deduction; as a result, for many taxpayers, New Jersey ultimately taxes 50% of GILTI. While New Jersey does not follow the federal NOL rules, it does specifically link its GILTI deductions to IRC § 250. Accordingly, the carryback of NOLs at the federal level could result in a reduction of the GILTI deduction that the taxpayer can take for New Jersey CBT purposes. As a result, New Jersey could end up taxing far more than 50% of a taxpayer’s GILTI. The carryback of NOLs at the federal level could also reduce the amount of the FDII deduction that can be claimed in New Jersey.

As mentioned above, this issue also arises in other states that tax GILTI and tie to the federal IRC § 250 deduction.

Over the past several weeks, state and local governments have issued a slew of “stay-in-place” or “shelter-in-place” orders mandating the closure of all “nonessential businesses” and requiring all persons to self-isolate. For most companies, this means that most, if not all, of their employees are required to work remotely. While telework has become a great way for businesses to protect their employees from the Coronavirus (COVID-19), it may also be exposing the businesses to taxation in states where they may not otherwise have sufficient nexus. This is because employees may be working remotely from states where a business does not otherwise have a presence. Under the traditional nexus rules, the employees’ work in these states would likely be sufficient to create nexus such that the states can tax the business. This seems unfair given that the federal, state and local governments are strongly encouraging individuals not to travel and to work remotely.

Although state taxing authorities have implemented certain tax relief measures in response to COVID-19, very few states have addressed this nexus issue and indicated that its tax relief guidance includes measures aimed at limiting the expansion of nexus. The New Jersey Division of Taxation (“Division”) has been one of the few state taxing authorities to limit the expansion of nexus for corporate income tax purposes and will, hopefully, set a precedent that other states will follow. On March 30, the Division issued the following statement regarding telecommuting and corporate nexus:

“As a result of COVID-19 causing people to work from home as a matter of public health, safety, and welfare, the Division will temporarily waive the impact of the legal threshold within N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.9(a) which treats the presence of employees working from their homes in New Jersey as sufficient nexus for out-of-state corporations. In the event that employees are working from home solely as a result of closures due to the coronavirus outbreak and/or the employer’s social distancing policy, no threshold will be considered to have been met.”

The Mississippi Department of Revenue (“Department”) has similarly indicated that it will not use changes in an employees’ temporary work location due to COVID-19 to impose nexus or to alter any income apportionment while temporary telework requirements are in place. The Department further provided that it will not change withholding requirements for a business based on an employee’s temporary telework location due to COVID-19.

The COVID-19 pandemic is a novel experience requiring novel responses from all US taxing authorities, including states. One effective way for states to provide taxpayer relief during periods of mandated shelter would be to disregard employees’ temporary telework location changes. We applaud the responses of the New Jersey and Mississippi taxing authorities and we hope that others follow suit, both with respect to nexus and with respect to other relevant issues, such as wage withholding issues.

On March 11, 2021, US President Joe Biden signed the American Rescue Plan Act of 2021 (ARPA), the COVID-19 relief bill that includes $350 billion in relief to states and localities. To prevent states from using federal relief funds to finance tax cuts, Congress included a clawback provision requiring that any relief funds used to […]

The post Federal COVID-19 Relief Bill Brings State Tax Policy to a Grinding Halt appeared first on INSIDE SALT.

The recently enacted American Rescue Plan Act of 2021 (ARPA) includes an ambiguous claw-back provision that has brought the world of state and local tax policymaking to a grinding halt. Because ARPA’s adoption occurred during the final weeks of many states’ legislative sessions, rapid issuance of guidance from the US Department of the Treasury is […]

The post McDermott Provides Treasury Department with Concrete Suggestions for Guidance on the American Rescue Plan Act’s Claw-Back Provision appeared first on INSIDE SALT.

As we’ve blogged about in the past, the recently enacted American Rescue Plan Act of 2021 (ARPA) includes an ambiguous claw-back provision. If broadly interpreted, it could result in states losing relief funding provided under the APRA if there is any state legislative or administrative change that results in the reduction of state revenue. This […]

The post The US Department of the Treasury Says State IRC Conformity Bills Do Not Trigger Federal Relief Claw-Back Provision appeared first on INSIDE SALT.

Yesterday afternoon the Kansas legislature overrode Governor Laura Kelly’s veto of Senate Bill (SB) 50, effectively enacting the provisions of the bill into law. Among those are provisions decoupling from certain Tax Cuts and Jobs Act (TCJA) provisions that taxpayers have been advocating for since 2018. Under the new law, for tax years beginning after […]

The post Kansas Decouples from GILTI and 163j appeared first on INSIDE SALT.

Earlier this week, the US Department of the Treasury (Treasury) issued formal guidance regarding the administration of the American Rescue Plan Act of 2021 (ARPA) claw-back provision. The guidance (Interim Final Rule) provides that the claw-back provision is triggered when there is a reduction in net tax revenue caused by changes in law, regulation or […]

The post US Treasury Issues Guidance on the ARPA Claw-Back Provision appeared first on INSIDE SALT.

Last week, the Lancaster County District Court granted the state’s motion to dismiss in COST v. Nebraska Department of Revenue. COST brought this declaratory judgment action to invalidate GIL 24-19-1, in which the department determined that earnings deemed repatriated under IRC § 965 are not eligible for the state’s dividends-received deduction and are thus subject […]

The post Nebraska District Court Holds That GIL 24-19-1 is Not Afforded Deference appeared first on INSIDE SALT.