As part of our open letter to state tax administrators urging relief of undue tax administration burdens in light of COVID-19, we urged the disregarding of remote work for tax purposes. The public health necessity for businesses to close central operations and direct employees to work from home should not be used as an “opportunity” to create nexus for affected businesses.
In late March, we wrote an open letter to state tax administrators requesting that they take steps to relieve undue tax administration burdens in the wake of the COVID-19 situation. We gave five suggestions, including postponing deadlines for tax filing and payment, waiving requirements to use hard-copy documents or checks, suspending accrual of interest on assessments during mandatory closures, directing revenue agencies to resolve outstanding controversies, and disregarding remote work for tax purposes.
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.
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.
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:
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.
From coast to coast, both state and local tax authorities are rapidly responding to the Coronavirus (COVID-19). And while many of the relief efforts are appropriately aimed at supporting individuals who have been impacted by COVID-19, recent pronouncements from local leaders demonstrate that cities are also eager to implement measures supporting small businesses within their communities.
Most states have historically not subjected foreign-source income to state income tax. Consequently, since the passage of TCJA, the vast majority of states have opted not to tax GILTI (with most states explicitly decoupling from GILTI or excluding at least 95% of GILTI from the state tax base) or repatriation income (only five states have failed to decouple or provide significant relief).
Unfortunately, the Nebraska Department of Revenue (DOR), despite for years consistently holding that foreign source (Subpart F) income is deductible as dividends received, ruled last year that GILTI and repatriation income are not deductible. The DOR ruling would start taxing foreign source income, a significant departure from Nebraska’s tax policies as established by the Legislature.
The Nebraska Legislature may decide the question, with today’s introduction of LB 1203. The bill would clarify the state’s policy that GILTI and repatriation income are deductible, as foreign dividends received or deemed to be received. The bill frames the policy as a clarification, and therefore applicable to tax filings prior to the bill’s effective date.
The STAR Partnership expects GILTI to be a continued important issue in the 2020 legislative cycle, and plans to continue to advocate for the exclusion of GILTI from the state tax bases either through legislation or administrative guidance.
As previously announced, the Illinois Department of Revenue has begun a new amnesty program, running October 1 through November 15, 2019. All taxes paid to the Illinois Department of Revenue for taxable periods ending after June 30, 2011, and prior to July 1, 2018, are eligible for amnesty with relief from penalties and interest. Unlike prior Illinois programs, taxpayers who do not participate in amnesty will not be subject to double interest or penalty charges on subsequent audit assessments for taxes that were eligible for amnesty. A link to the Illinois Department of Revenue forms for its amnesty program is attached here.
The Illinois Secretary of State also offers an amnesty program running from October 1 through November 15, 2019, for corporate franchise taxes related to periods ending after March 15, 2008, and on or before June 30, 2019. In light of the phase-out of the corporate franchise tax by January 1, 2024 (enacted by Public Act 101-9), participants in the amnesty program should proceed with extreme caution. For more information, the Secretary of State has published a Fact Sheet and form of Petition on its website: https://www.cyberdriveillinois.com/departments/business_services/home.html.
Taxpayers may have celebrated too soon when the New Jersey Division of Taxation announced that it was withdrawing TB-85 and the GDP-based apportionment regime for global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) in favor of a more fair apportionment regime. Read our first post on T8-85 here.
Yesterday, the Division issued a new Technical Bulletin (TB-92) on the state’s treatment of GILTI and FDII that is quite troubling. The guidance provides that GILTI and FDII should be included in the general business income apportionment factor and sourced as “other business receipts” to New Jersey. The guidance then provides that “to compute the New Jersey allocation factor on Schedule J, the net amount of GILTI and the net FDII income amounts are included in the numerator (if applicable) and the denominator. This is to help prevent distortion to the allocation factor and arrive at a reasonable and equitable determination of New Jersey tax.” (more…)
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