State tax law changes for the third quarter of 2021
TAX ALERT |
The following state tax law developments were enacted during the third quarter of 2021 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, Income Taxes, for the quarter ended Sept. 30, 2021. This information summarizes the listed developments and may not provide additional nuanced considerations when addressing for provision purposes. For questions about these quarterly updates, or other recent legislative and regulatory developments, please reach out to your tax adviser for more information.
MTC guidance on P.L. 86-272
On Aug. 4, 2021, the Multistate Tax Commission (MTC) adopted an updated version of its guidance on Public Law 86-272 (P.L. 86-272) and the associated limitations on a state’s ability to impose an income tax on sellers of tangible personal property (TPP), whose in-state activities are limited to solicitation of sales. The updated guidance is focused on interactions with customers conducted over the internet and has broad implications, potentially impacting any seller of TPP with a web presence. While the guidance is not considered authoritative in any state, the guidance on P.L. 86-272 from the MTC has historically been widely accepted and referenced by states and courts. Many states have already expressed that they will adopt at least a portion of the new guidance, and the expectation is that most states will adopt similar rules. For more information, please read our article, MTC adopts new PL 86-272 guidance: What you need to know.
In response to COVID-19, a number of states have addressed whether income or franchise tax nexus is created for a business by its employees temporarily teleworking in a state during the pandemic, in situations where the business has no other nexus-creating presence or activities within the state. Without official state guidance to the contrary, the presence of an employee working in a state is typically sufficient presence to create corporate income tax nexus in that state. Approximately 20 states provided some temporary nexus protection for income and franchise tax purposes related to employee teleworking as a result of the pandemic. As of the end of the third quarter, many of these nexus protection provisions have ended or are set to expire before year-end. Of note during the third quarter of 2021, California, New Jersey, Rhode Island and South Carolina released updated guidance concerning the end date of their COVID-19 nexus protection measures.
- On July 1, 2021, California’s Franchise Tax Board updated previously issued guidance to provide that the presence of an employee teleworking from the state would be sufficient to create income tax nexus. For more information on this California update, please refer to our article, California amends remote worker guidance.
- New Jersey issued guidance on Aug. 3, 2021, indicating that the temporary income tax nexus relief would end as of Sept. 30, 2021. The state has indicated that the income tax nexus guidelines previously published in TB-79R will resume applicability on Oct. 1, 2021.
- Rhode Island issued guidance in July 2021 which extended its COVID-19 related nexus protection measures to Sept. 15, 2021; the protections were previously set to expire on July 17.
- South Carolina released Information Letter 21-22 on Aug. 25, 2021, which extends its nexus relief related to employees teleworking in the state through Dec. 31, 2021.
On July 30, 2021, Delaware enacted House Bill 171 to codify the state’s historical approach to the treatment of net operating losses for corporate taxpayers. Delaware statute was amended to clarify that the net operating loss for a corporate taxpayer for Delaware purposes is limited to the amount claimed as a net operating loss on the taxpayer’s separate federal return or the consolidated federal return in which the taxpayer is included as an affiliate. This legislation appears to be a direct response to the December 2020 Delaware Superior Court decision, Verisign, Inc., which found that the state’s approach to limiting the net operating loss for a separate Delaware taxpayer to the net operating loss claimed on the federal tax return for the consolidated group of which the taxpayer was a subsidiary, violated the uniformity clause of Delaware’s constitution. In the analysis of the case, the Superior Court noted that the differential treatment for separate and consolidated federal taxpayers might be considered “reasonable” and within the guidelines of the uniformity clause; however, the court suggested that the state legislature would be the governing body with the authority to determine the reasonableness of the classification and apparent exception to the uniformity clause, rather than an administrative agency. The provisions of House Bill 171 are effective as of July 30, 2021.
On July 30, 2021, Florida issued Tax Information Publication 21C01-01 to provide additional guidance on Florida’s conformity to certain Internal Revenue Code provisions, as codified in House Bill 7059 (enacted in the second quarter of 2021). The guidance clarifies that Florida adopts the Code retroactively to Jan. 1, 2021, and will therefore conform to federal treatment for Paycheck Protection Program (PPP) loans for both non-taxability of loan forgiveness and deductibility of expenses. As noted in our 2021 second quarter update, Florida continues to decouple from certain provisions of the CARES Act, namely the 50% limitation on the business interest expense deduction under section 163(j).
On Aug. 13, 2021, Florida released a revised version of Tax Information Publication 21C01-01 to provide corrected, clarifying guidance on net operating loss utilization and carryforwards. For tax years beginning before Jan. 1, 2021, there is no limitation on the utilization of Florida net operating losses, regardless of the year of generation. For tax years beginning on or after Jan. 1, 2021, carryovers generated after Dec. 31, 2017 may only be used to offset 80% of Florida taxable income. Florida net operating losses generated before tax years beginning on or after Jan. 1, 2018, have a 20-year carryforward, and net operating losses generated in tax years after Dec. 31, 2017 have an indefinite carryforward.
On Sept. 14, 2021, Florida released Tax Information Publication 21C01-02 to inform taxpayers that the corporate income tax rate is reduced to 3.535% from 4.458%, effective for tax years beginning on or after Jan. 1, 2021. For tax years beginning on or after Jan. 1, 2022, the rate will return to 5.5%. This rate decrease communication is related to the previously enacted provisions that provide for adjustment of the applicable tax rate through the end of the state’s 2020-2021 fiscal year based on differences in forecasted and collected revenues.
On July 2, 2021, Hawaii issued Tax Information Release (TIR) No. 2021-05 to provide guidance on the deductibility of expenses paid with PPP loans. The guidance in TIR 2021-05 clarifies that if a taxpayer is entitled to PPP loan forgives and has a reasonable expectation that the loan will be forgiven, expenses paid with PPP loan funds are not deductible for Hawaii purposes. While previously issued TIR No. 2021-03 had indicated that Hawaii would conform to federal treatment for both non-taxability of PPP loan forgiveness and deductibility of expenses, TIR No. 2021-05 revokes and replaces the guidance previously issued in TIR 2021-03. The updated guidance made no change to the state’s treatment of PPP loan forgiveness, and these amounts continue to be excludable from Hawaii taxable income.
On July 16, 2021, Iowa revised guidance previously published on its website under Iowa Nonconformity: The Federal Consolidated Appropriations Act of 2021 to update the portion of the guidance related to forgiveness of PPP loans and the deductibility of associated expenses. The updated guidance clarifies that Iowa conforms to the federal exclusion from income for PPP loan forgiveness and the deductibility of associated expenses for any tax year ending after March 27, 2020. This updated guidance relates to law changes enacted through House File 2641 in June 2020, and Senate File 619 in June 2021.
On June 16, 2021, Louisiana’s legislature passed House Bill 292, which would eliminate the deduction for federal income tax on Louisiana corporate returns and reduce the corporate tax rate. The legislation is contingent on a public vote for an amendment to the state’s constitution that will take place on Oct. 9, 2021. If the constitutional amendment is approved, Louisiana’s current rate structure with five brackets and a top marginal rate of 8% will be reduced to three brackets with a top marginal rate of 7.5%. Both the repeal of the federal income tax deduction and the change to the corporate rate will be effective on Jan. 1, 2022, contingent on voter approval to the constitutional amendment in October 2021.
On July 1, 2021, Maine enacted Legislative Document 221, updating its conformity date to the Code to April 30, 2021 from its previous conformity date of Dec. 31, 2020. The change applies to tax years beginning on or after Jan. 1, 2021.
On July 1, 2021, Minnesota enacted House File 9 to update the state’s conformity to certain recently enacted federal provisions. The general conformity date to the Code for Minnesota is Dec. 18, 2018; however, House File 9 extends conformity to several provisions enacted after this general conformity date, most notably the federal provisions related to PPP loan forgiveness and expense deductibility. With the enactment of House File 9, PPP loan forgiveness is now nontaxable and associated PPP loan expenditures continue to be deductible for Minnesota purposes. For information, please read our article, Minnesota tax bill exempts PPP loans; adopts SALT deduction workaround.
On July 14, 2021, Oregon enacted House Bill 2457, updating its conformity date to the Code to April 1, 2021 from its previous conformity date of Dec. 31, 2018. The change applies to tax years beginning on or after Jan. 1, 2021.
On July 6, 2021, Rhode Island enacted House Bill 6122 to address the state’s treatment of PPP loan forgiveness. The bill provides that loan forgiveness for PPP loans is non-taxable in Rhode Island up to $250,000; the amount exceeding this threshold will be subject to tax for Rhode Island purposes. On Sept. 1, 2021, Rhode Island issued ADV 2021-34, which indicates that taxpayers who have not yet filed their returns for the 2020 tax year should file a return excluding the PPP loan forgiveness that exceeds $250,000 from Rhode Island taxable income. Further, the guidance states that the Division of Taxation will issue additional guidance in fall 2021 to address how the portion of PPP loan forgiveness taxable for Rhode Island purposes should be reported and the associated tax remitted to the state. The guidance in ADV 2021-34 is not intended to change the ultimate taxability of the PPP loan forgiveness over $250,000 for Rhode Island purposes, only how that amount and the associated tax are reported to the state.
Texas has issued Letter ruling 202106005L, which provides clarifying guidance on the treatment of PPP loan forgiveness and associated expenses for Texas Franchise Tax purposes, previously codified in Texas statute with the passage of House Bill 1195 on May 8, 2021. The guidance indicates that PPP loan forgiveness is not required to be included in Texas revenue, and associated PPP loan expenditures can be included as deductible expenses in the computation of cost of goods sold or compensation. The provisions of House Bill 1195 apply to Franchise Tax reports due on or after Jan. 1, 2021.