Kansas Legislators adjourned their legislative sessions without passing key state tax legislation: S.B. 266 would have established legislative thresholds for its remote seller rules and would have enacted remittance requirements for marketplace facilitators, but the initiative failed. Without S.B. 266, Kansas also won’t apply a legislative threshold to the remote-seller collection rules.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This Week’s Question
Which state imposes an 18% interest rate on underpayments of taxes—the highest in the nation?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $20 UBER Eats gift card.

Answers will be posted on Monday. Be sure to check back then!

On May 14th, California Governor Gavin Newsom issued his proposed May revision to the state budget for fiscal year 2020-21. The budget proposal included two revenue-raising income tax measures, applicable for tax years 2020 through 2022: (1) limiting the amount of business tax credits a taxpayer can use to $5 million annually, and (2) suspending the net operating loss deduction. These tax proposals are estimated to raise $9.2 billion over the next three years.

On May 24th, the California Department of Finance released a proposed trailer bill, which, if enacted, would implement the Governor’s budget proposal to limit annual usage of business tax credits. The proposed bill provides that for taxpayers not required to be included in a combined report, the total of all allowable tax credits may not reduce tax by more than $5 million annually for each taxable year from 2020 through 2022. Similarly, for taxpayers required to be included in a combined report, the total of all allowable tax credits for all members of the combined report may not reduce the aggregate tax of all members by more than $5 million annually for the same period.

The proposed bill would limit usage of a number of business tax credits, including:

  • Research and Development Tax Credit (Cal. Rev. & Tax Code Section (Section) 23609)
  • Jobs Tax Credit (Section 23621)
  • GO-BIZ California Competes Credit (Section 23689)
  • State Low-Income Housing Tax Credit (Section 23610.5)
  • New Employment Credit (Section 23626)
  • Motion Picture Production Credit (Section 23685)
  • New Motion Picture Production Credit (Section 23695)
  • Expenditures for the Production of a Qualified Motion Picture (Section 23698)

Tax credits which would otherwise be allowable during a taxable year but are limited by the $5 million cap will remain a credit carryover. The carryover period is extended by the number of tax years the credit is not allowed due to the $5 million cap.

New York S. 8386, introduced and referred to the Budget and Revenue Committee on May 21, 2020, provides that employers “may designate” remote work by employees who have been required to telework during the Covid-19 pandemic state of emergency “as having been performed at the location such work was performed prior to the declaration of such state disaster emergency for all state and local tax purposes, including but not limited to, apportionment.” The Bill is broad in scope, not limited by tax type, taxing jurisdiction, an employee’s residency status, or an employee’s “normal work location.” However, the primary intent of the Bill is to “remove unnecessary confusion and complexity” for “people [who] are working in a different jurisdiction from where they worked before” due to the pandemic. Thus, among other impacts, the Bill would allow employers to withhold state or local tax from wages based on an employee’s work location immediately before Governor Cuomo issued the state of emergency declaration in New York Executive Order 202. If signed into law, the Bill would take effect immediately but only apply during Executive Order 202, which currently runs from March 7, 2020 through September 7, 2020.

If adopted, S. 8386 may impact New York State’s application of the “convenience of the employer test” that applies to employer withholding and personal income tax obligations. Under that test, the Department of Taxation and Finance deems an employee who is teleworking from an out-of-state location to be working from their assigned office in New York unless the teleworking arrangement is entered into out of necessity, whether a specialized condition of the teleworker’s employment or a mandatory work-from-home policy. To-date, the Department has not issued guidance on whether teleworking out-of-state during the Covid-19 pandemic meets the “necessity” exception. Because the Bill creates an employer election to retain an employee’s normal work location for tax purposes during the pandemic, it may also create an inference that Executive Order 202 triggered the necessity exception if ultimately signed into law.

Finally, S. 8386 only applies to employer-mandated remote work during the duration of Executive Order 202. Therefore, if the Bill is enacted, employers and employees should re-evaluate their state and local tax obligations as a result of any teleworking arrangement within its scope.

On May 22, the Louisiana House Ways and Means Committee advanced S.B. 138, which would impose tax collection and remittance obligations on marketplace facilitators if they have either $100,000 of in-state sales or 200 separate transactions into the state. The proposal excepts telecommunication service providers from the definition of marketplace sellers and would allow telecom companies to opt out of handing over collection and remittance responsibilities to facilitators in order to keep collection of 911 and related fees simple. The legislature has until June 1, 2020 (its sine die) to pass the bill.

In addition, the Louisiana Sales and Use Tax Commission for Remote Sellers published an information bulletin announcing that remote sellers must begin registering with the Commission as of July 1, 2020. Remote sellers must submit an application with the Commission for approval to collect state and local sales and use tax within 30 days of meeting the economic nexus threshold. The bulletin indicates that all applications, tax returns, and remittances must be filed and paid electronically. The Commission will serve as the tax collecting entity for the benefit of state and local jurisdictions.

Thank you to everyone who participated in last week’s trivia question!

Last Week’s Question:
Which president once handled state tax cases, securing favorable rulings for taxpayers involving property taxes and local gross receipts taxes?

The Answer:
Abraham Lincoln represented taxpayers in various Illinois tax matters, including the Illinois Central Railroad Company in many of its property tax disputes. Most notably, Lincoln secured a favorable ruling from the Illinois Supreme Court, which upheld the legislature’s tax exemption to the Illinois Central Railroad Company for county property taxes. See Illinois Cent. R. Co. v. McLean Cty., 17 Ill. 291 (1855); see also State v. Illinois Cent. R. Co., 27 Ill. 64 (1861) (involving property tax valuation issue with Lincoln as counsel for railroad).

Lincoln later stated that he believed the county property tax case “was worth half a million dollars” to the railroad company. Abraham Lincoln, Speech at Carthage, Illinois (Oct. 22, 1858).

Keep an eye out for our next trivia question on Wednesday!

The New York State Tax Appeals Tribunal held that an electricity generation company was a qualified New York manufacturer for purposes of calculating New York State franchise tax on a corporation’s capital base, even though the company did not qualify for purposes of the entire net income base.

During the period at issue, a New York taxpayer’s franchise tax was generally determined by taking the highest amount calculated under one of four alternative bases, including the entire net income and capital bases. For purposes of the capital base, a taxpayer was a “qualified New York manufacturer” only if it was a manufacturer, defined as a taxpayer “principally engaged in the production of goods by manufacturing, processing, assembling,” or certain other activities. The Division contended that the taxpayer was not a manufacturer because electricity generation is not a qualifying activity. However, the Tribunal pointed out that the statutory definition of a manufacturer for calculating the entire net income base expressly excluded activities related to “the generation and distribution of electricity” from the qualifying activities. But the statutory definition for the capital base contained no such language. As a result, the Tribunal held that “the clear and unambiguous language of the capital base paragraph leads to the conclusion that petitioner is a manufacturer.”

The Division also argued that, even if the taxpayer is a manufacturer, it cannot be a “qualified” New York manufacturer because its electricity-generating property is excluded under N.Y. Tax Law § 210(12)(b)(i)(A) (an Investment Tax Credit provision). Following statutory analysis, the Tribunal concluded that the Investment Tax Credit electricity exclusion does not impact that aspect of the qualified New York manufacturer definition. Thus, the Tribunal concluded that the taxpayer was a qualified New York manufacturer for purposes of the capital base and was subject to the $350,000 cap on tax calculated on the capital base.

In re TransCanada Facility USA, Inc., Dkt. No. 827332 (N.Y.S. Tax Appeals Trib. May 1, 2020).

The California Court of Appeal recently held that a taxpayer must pay a tax assessment before seeking a declaration that the regulation giving rise to the tax assessment is invalid. California taxpayers cannot challenge unpaid tax assessments under Article XIII, section 32 of the California Constitution (“Section 32”). Therefore, a taxpayer seeking to challenge an assessment must generally pay the tax first and then pursue a refund claim, which is known as the “pay first, litigate later,” or “pay up or shut up” rule.

Although Cal Gov. Code § 11350 (“Section 11350”) authorizes declaratory relief actions challenging the validity of regulations, the court held that Section 11350 did not supersede the “pay up or shut up” rule for three reasons:

  1. The plain language of Section 11350 did not exempt declaratory relief actions from Section 32’s prepayment requirement, and a state constitutional provision could not be “impliedly partially repealed” by statute;
  2.  The purpose underlying Section 11350 did not justify exempting declaratory relief otherwise subject to Section 32’s prepayment requirement because the refund procedures provided administrative and judicial forums for testing the validity of tax regulations; and,
  3. California Supreme Court precedent provides that Section 11350 is to be “strictly construed in tax cases and may not be used to prevent the state from collecting taxes or, by parity of reasoning, to compel the state to refund taxes.”

The taxpayer was an officer and shareholder in a corporation that allegedly continued to do business after its corporate status was suspended while failing to pay sales tax. The California Board of Equalization assessed the taxpayer for unpaid taxes and penalties pursuant to a regulation and policy of holding a suspended corporation’s officers and shareholders liable for its unpaid taxes. The taxpayer sought to challenge this policy and regulation as a “responsible officer” of a different closely-held corporation that could be subject to the policy and regulation in the future, and as a general California citizen interested in “having all branches of government act within the bounds of their constitutional authority.”

The court held that the taxpayer could not avoid the “pay up or shut up” rule by challenging an unpaid assessment via his declaratory relief claim under these alternative standing theories. This is because the net effect of the declaratory relief claim would be to absolve the taxpayer of liability for the disputed unpaid tax. Thus, resolving such claims would effectively prevent or enjoin the state from collecting the disputed tax, triggering the prepayment requirement of the state constitution.

California Department of Tax and Fee Administration et al., v. Superior Court, No. BC684614 (Cal. Ct. App. May 7, 2020)

On May 18, 2020, the California Assembly Revenue and Taxation Committee unanimously passed Assembly Bill 2660 (AB 2660) out of committee. AB 2660 would allow employers to file income taxes on behalf of their foreign workers, specifically providing for the optional filing of a group return by the employer for electing foreign workers who receive taxable income for services that are performed in California.

Existing law requires employers who pay wages to nonresident employees for services performed in California to deduct and withhold from those wages specified taxes and to make returns, reports, statements, and other documents related to the wages paid and withheld. The stated purpose of AB 2660 is to ease compliance standards for employers and foreign workers in circumstances where filing requirements may be difficult to meet when foreign workers have trouble obtaining taxpayer identification numbers.

The tax rates applicable to each nonresident electing to file in the group return would consist of the highest marginal rate provided by the Personal Income Tax Law plus an additional 1% for foreign workers with income in excess of $1 million. In most cases, deductions or credits will not be allowed; however, amounts withheld during any calendar year are permitted to be a credit against the tax for the taxable year. AB 2660 would become effective January 1, 2021 and remain in place until January 1, 2026.

The biggest proponent of AB 2660 is the California Lawyers Association Taxation Section, which sees the bill as a way to ease tax compliance for both employees and employers. Proponents believe this voluntary option is “commonsense”, easing tax burdens for employers and employees alike by eliminating a foreign employee’s current requirement to file tax returns individually, and making compliance for employers easier by eliminating the requirement for employers to provide an employee’s social security number or other identifying number on its withholding statement that is not available. The fiscal effect of the bill is estimated to generate $12 million in fiscal year (FY) 20-21, $27 million in FY 21-22, and $34 million in FY 22-23.

Some opponents believe this is just an attempt by California to shift the foreign worker’s filing obligation to the employer. Additionally, other employers are concerned about how the state reporting may affect federal reporting and about issues related to enforcement if it becomes law.

This is the first bill of its kind in the United States. AB 2660 passed by a vote of 11-0 before the Assembly’s Revenue and Taxation Committee, and now moves to the Assembly Appropriations Committee. It will need to receive a passing vote by the Assembly by June 19 to move to the Senate for debate this year.