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.
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CARES Act Could Result in Taxation of More GILTI in New Jersey
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.
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Tax Commissioners: Please Drop Unnecessary or Dangerous Tax Administration Requirements
This week we wrote a letter to state tax administrators, sharing five key suggestions for relieving undue tax administration burdens in the wake of this difficult COVID-19 situation. As explained, “at a time when many people are working from home and should not or cannot go to post offices or banks, a business-as-usual attitude for tax administration would be inexcusable.” The five suggestions:
- Postpone deadlines for tax filing and payment. The federal government and many states have already taken this needed step. When many Americans, including business tax professionals and tax administrators and their staffs, are fearing for their own health and unable, prohibited or unadvised to leave their own house, this is not the time for pulling records and preparing tax filings.
- Waive requirements to file hard copy, notarized, and/or wet-signature documents. Waive requirements to mail documents by certified mail. Allow automated-clearing-house (ACH) electronic transfers of funds instead of requiring hard checks. In a time of social distancing and shelter-in-place orders, it is dangerous to require that business representatives go outside to banks or Post Offices, stand in line, and purchase services from one particular provider. While the US Postal Service (USPS) has valiantly endeavored to keep all post offices operating and mail delivery uninterrupted, new reports on the enormous financial difficulties of the USPS and the growing impact of the virus on the USPS’s public-facing workforce surely give all of us pause. Digital signatures and electronic document delivery, and electronic forms of payment, are widely adopted, affordable, secure, and instantaneous. It is time for tax authorities to dispense with – or suspend – the requirements of physical copies, wet signatures, notarization, physical checks and mailing. Furthermore, tax agencies and hearing tribunals should adopt temporary procedures to either automatically acknowledge receipt of electronic documents or waive stringent proof of delivery in situations in which missing a deadline would preclude a taxpayer from obtaining further review of agency action.
STAR Partnership and State Responses to GILTI
While the state treatment of global intangible low-taxed income (GILTI) was on the mind of many taxpayers, most state legislatures that enacted legislation in 2018 focused on the state treatment of foreign earnings deemed repatriated under IRC § 965, leaving the state treatment of GILTI unclear in many states. That said, of the states that enacted legislation addressing GILTI, very few have decided to tax a material portion of GILTI.
In states that did not address global intangible low-taxed income through legislation, a lack of clarity in the state laws created an opportunity for the STAR Partnership to seek favorable administrative guidance on the treatment of GILTI. The STAR Partnership pursued that opportunity in a number of states, as discussed in more detail below.
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2018 Recap: State Responses to the Repatriation Transition Tax in the Tax Cuts and Jobs Act
Since the Tax Cuts and Jobs Act (TCJA) passed in December 2017, over 100 bills were proposed by state legislatures responding to the federal legislation. Thus far in 2018, nearly half of states have passed legislation responding to the TCJA. With some exceptions, in this year’s legislative cycles the state legislatures were primarily focused on the treatment of foreign earnings deemed repatriated and included in federal income under IRC § 965 (965 Income).
The STAR Partnership has been very involved in helping the business community navigate the state legislative, executive and regulatory reaction to federal tax reform, and IRC § 965 in particular. The STAR Partnership’s message to states has been clear: decouple from IRC § 965 or provide a 100 percent deduction for 965 income. The STAR Partnership emphasized that excluding 965 Income from the state tax base is consistent with historic state tax policy of not taxing worldwide income and avoids significant apportionment complexity and constitutional issues.
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New Mexico Administrative Hearings Office Issues Timely Opinion Regarding State Taxation of Subpart F Income and Dividends from Foreign Affiliates
Earlier this month, the New Mexico Administrative Hearings Office issued an opinion that addressed the questions on the minds of many state tax professionals in the wake of federal tax reform: under what circumstances can a state constitutionally impose tax on a domestic company’s income from foreign subsidiaries, including Subpart F income, and when is factor representation required? These issues have recently received renewed attention in the state tax world due to the new federal laws providing additions to income for foreign earnings deemed repatriated under Internal Revenue Code (IRC) section 965 and for global intangible low-taxed income (GILTI). Since many state income taxes are based on federal taxable income, inclusion of these new categories of income at the federal level can potentially result in inclusion of this same income at the state level, triggering significant constitutional issues.
In Matter of General Electric Company & Subsidiaries, a New Mexico Hearing Officer determined that the inclusion of dividends and Subpart F income from foreign subsidiaries in General Electric’s state tax base did not violate the Foreign Commerce Clause, even though dividends from domestic affiliates were excluded from the state tax base, because General Electric filed on a consolidated group basis with its domestic affiliates.
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Overview of Minnesota’s Response to Federal Tax Reform
Minnesota has several bills pending that would address the Minnesota state tax implications of various provisions of the federal tax reform legislation (commonly referred to as the Tax Cuts and Jobs Act).
HF 2942
HF 2942 was introduced in the House on February 22, 2018. This bill would provide conformity to the Internal Revenue Code (IRC) as of December 31, 2017, including for corporate taxpayers. The bill makes clear that, with respect to the computation of Minnesota net income, the conformity to the Internal Revenue Code as amended through December 31, 2017, would be effective retroactively such that the federal provisions providing for the deemed repatriation of foreign earnings could have implications in Minnesota.
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Illinois Confirms Treatment of Deemed Repatriated Foreign Earnings Provisions
On Wednesday, the Illinois Department of Revenue (Department) issued additional guidance concerning its treatment of the new deemed repatriated foreign earnings provisions found in Internal Revenue Code Section 965, enacted in the federal tax reform bill (known as the Tax Cuts and Jobs Act, or “TCJA”). The Department confirmed key aspects of Illinois’ treatment of the repatriation provisions, including:
- Both the income inclusion and deduction provided for in the deemed repatriated foreign earnings provisions will be taken into account in determining a taxpayer’s tax base, so that the inclusion in Illinois will be net. The Department’s guidance references the new federal IRC 965 Transition Tax Statement, which a taxpayer must file with its 2017 federal return when reporting deemed repatriated foreign earnings; that statement includes both income under IRC 965(a) and the corresponding participation deduction under IRC 965(c).
- Additionally, the Department’s guidance also confirms that the net amount included as deemed repatriated foreign earnings will be treated as a foreign dividend eligible for Illinois’ dividend-received deduction, which can be a 70 percent, 80 percent or 100 percent deduction depending on a taxpayer’s percentage share of ownership of the foreign subsidiary subject to the repatriation provisions. See 35 ILCS 5/203(b)(2)(O). (For tax periods beginning on or after January 1, 2018, 80 percent is reduced to 65 percent and 70 percent is reduced to 50 percent because this provision incorporates the federal dividend-received deduction rates found in IRC 243, which was amended as such by the TCJA.)
More States Respond to Federal Tax Reform
It’s been nearly three months since the federal tax reform bill (commonly referred to as the Tax Cuts and Jobs Act, or “TCJA”) was enacted and states continue to respond to the various provisions of the TCJA. Recently, there have been notable legislative efforts in New York, Idaho, Iowa and Minnesota.
New York
Starting with the release of the Governor’s Budget Bill in January 2018, the 30-day amendments to that Bill on February 15, and the amendments to the Assembly Bill and Senate Bill this month, there has been much action this legislative session concerning the potential response to federal tax reform. The proposed response in the two latest bills—the Assembly Bill (AB 9509) and the Senate Bill (SB 7509)—is discussed below.
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Southeast States Respond to Federal Tax Reform and NJ Senate Leader Talks Tax Surcharge to Limit Corporate “Windfall”
Virginia and Georgia are two of the latest states to pass laws responding to the federal tax reform passed in December 2017, known as the Tax Cuts and Jobs Act (TCJA). Both states updated their codes to conform to the current Internal Revenue Code (IRC) with some notable exceptions.
Virginia
On February 22, 2018, and February 23, 2018, the Virginia General Assembly enacted Chapter 14 (SB 230) and Chapter 15 (HB 154) of the 2018 Session Virginia Acts of Assembly, respectively. Before this legislation was enacted, the Virginia Code conformed to the IRC in effect as of December 31, 2016. While the new legislation conforms the Virginia Code to the IRC effective as of February 9, 2018, there are some very notable exceptions. The legislation explicitly provides that the Virginia Code does not conform to most provisions of the TCJA with an exception for “any… provision of the [TCJA] that affects the computation of federal adjusted gross income of individuals or federal taxable income of corporations for taxable years beginning after December 31, 2016 and before January 1, 2018…” Thus, despite Virginia’s update of its IRC conformity date, Virginia largely decouples from the TCJA.
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