States and local jurisdictions continue to grapple with novel tax issues in response to the COVID-19 outbreak. On Friday, 27 March 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a USD 2 trillion federal stimulus package to provide fiscal relief in response to the COVID-19 outbreak. The CARES Act includes numerous tax relief provisions. States will need to consider whether, and how, they will conform to the federal provisions.
In the meantime, states continue to provide other relief to taxpayers, primarily by extending tax filing and payment deadlines. In the last week, additional states have provided individual and corporate income tax filing and payment extensions in response to the federal income tax deadline extensions and, some states are continuing to provide relief for certain non-income taxes. Furthermore, states are beginning to address the tax impact of employees working from home during the COVID-19 outbreak, including employers’ nexus and withholding considerations.
Meanwhile, litigation delays continue as additional state trial courts and tax tribunals postpone proceedings or move to conduct the proceedings remotely.
SALT Impact of the CARES Act
Among other things, the CARES Act: provides direct payments to taxpayers, temporarily modifies provisions of the Tax Cuts and Jobs Acts, expands unemployment insurance, provides loans and grants to businesses, and provides fiscal relief for state and local governments. The CARES Act also includes numerous tax relief provisions for businesses.
Federal Tax Relief for Businesses
The CARES Act includes several tax provisions affecting businesses, including the following provisions which could have particularly unique state tax considerations:
- The CARES Act modifies certain business interest expense and net operating loss limitations that were imposed by the Tax Cuts and Jobs Act, as discussed in more detail below.
- The CARES Act grants the Treasury Secretary authority to provide up to USD 500 billion in loans, loan guarantees, and “other investments” to support qualifying businesses, states, and municipalities. “Other investments” is open-ended and includes equity interests in qualifying businesses.
- Section 4003(h) of the CARES Act states that loans made or guaranteed by Treasury will be treated as debt for tax purposes and the stated interest on these loans will be treated as qualified stated interest.
- In addition, Section 4003(h) contains an explicit grant of authority to Treasury to issue guidance providing that any equity issued pursuant to Section 4003 does not result in an Internal Revenue Code (“IRC”) Section 382 ownership change.
One of the keys to evaluating how the income tax provisions in the CARES Act will impact taxpayers at the state and local level is a state’s conformity to the IRC. Most states use federal taxable income as computed under the IRC as the starting point for the taxpayer’s state corporate income tax calculation. However, state conformity to the IRC for this purpose is achieved in different ways, including: (1) conforming to the IRC as of a fixed date, which may or may not be the most recent version of the IRC (“static conformity”); (2) conforming to the IRC that is currently in effect (“rolling conformity”); or (3) conforming only to specific IRC sections (“selective conformity”), which may be either static or rolling. As a general matter, rolling conformity states will automatically incorporate some of the CARES Act provisions, whereas static conformity states will require legislation to explicitly conform to the new provisions in the CARES Act. As relevant herein:
- Net Operating Losses
Section 2303 of the CARES Act rolls back certain Tax Cuts and Jobs Act limitations on net operating losses (NOLs). The CARES Act suspends the 80% taxable income limitation and allows for five-year carrybacks of 2018, 2019, and 2020 NOLs. Rolling conformity states that have not expressly decoupled from IRC Section 172 will likely conform to the new carry-back provisions absent a legislative change. However, only a few states conform to the federal NOL provisions on a rolling basis. States that do not follow the federal NOL rules diverge in a number of ways, such as requiring the computation of a unique state NOL amount and providing a divergent range of carryback and carryforward periods.
- Interest Expense Limitation
Section 2306 of the CARES Act increases the business interest expense limitation from 30% to 50%, which is expected to help businesses generate liquidity. Rolling conformity states that have not expressly decoupled from IRC Section 163(j) will likely conform to the updated 50% limitation absent a legislative change.
- IRC Section 382 Treatment of Federal Equity Interests in Qualifying Businesses
IRC Section 382 limits the amount of losses that can be claimed when there is an ownership change in an acquired corporation. However, the CARES Act provides relief from IRC Section 382 limitations if the federal government acquires an equity interest in a qualifying business. It is important to note that IRC Section 382 relief in the CARES Act does not amend the Code section itself. Rather, it authorizes the U.S. Treasury to provide relief. As many states do not expressly confirm to U.S. Treasury Regulations or Administrative Pronouncements this will result in another interesting opportunity for divergence amongst the states when and if Treasury provides its relief.
Similar state conformity issues arose in the aftermath of the 2008 financial crisis, when the federal government enacted the new IRC Section 382(n) to provide relief from IRC Section 382 limitations for certain corporations that received funds from the federal government. For example, when Hawaii (a static conformity state) updated its IRC conformity date in 2010 it expressly decoupled from IRC Section 382(n).
To the extent a state decides to decouple from this federal relief and treat a federal equity interest as an IRC Section 382 change in ownership, taxpayers will then be required to address numerous other state-level issues that can result from an IRC Section 382 change in ownership, such as whether the IRC Section 382 limitation must be apportioned and how to compute the limitation for a unitary or combined group.
State Tax Consequences of Employees Working from Home
The measures taken by businesses to ensure the health and safety of their employees could have unintended state tax consequences. For example, employers are encouraging and some state and local governments are ordering employees to work from home in order to help slow the spread of the virus and reduce the burden on local health networks. However, remote employees may create nexus for an out-of-state employer exposing them to taxation in a state where they would otherwise have insufficient contacts. And, in the withholding context, corporations that previously qualified for de minimis exceptions, or were below the statutory thresholds, may now find themselves above those thresholds.
A few states have provided temporary relief from these unintended consequences. On 30 March 2020, New Jersey’s Division of Taxation temporarily suspended its rule that work-from-home employees trigger corporate income tax nexus.
On 26 March 2020, Mississippi’s Department of Revenue issued guidance that it will not use any changes in employees’ temporary work locations due to COVID-19 to impose nexus or alter apportionment of income for any businesses while temporary telework requirements are in place. The Department also announced that it will not impose any new individual income tax withholding requirements for employers as a result of an employee’s temporary telework location.
Tax Filing/Payment Deadline Postponements
In the last week, additional states have announced individual and corporate income tax filing and payment deadline postponements in response to the federal deadline extension. At this time, 37 states and Washington, D.C. have conformed to the deadline extension, at least in part. However, a few states (such as Pennsylvania) have conformed only to the individual income tax deadline, and not the corporate income tax deadline extension.
Some of the most recent states to conform to the federal deadline extension include:
- Colorado (Colorado granted an extension to pay income taxes until 15 July 2020 and an automatic six-month extension to file income tax returns by 15 October 2020)
- Massachusetts (Massachusetts extended individual income tax deadline only; no corporate income tax guidance at this time)
- New York (the Department of Taxation and Finance issued guidance extending individual and corporation tax filing and payment deadlines from 15 April to 15 July , following an executive order from Governor Andrew Cuomo authorizing the extension)
- Ohio (extended individual income tax deadline)
- West Virginia
In addition to income tax deadline extensions, state and local jurisdictions are continuing to provide relief for certain non-income taxes, often focusing on businesses that were forced to close in response to the COVID-19 outbreak. For example, the Florida Department of Revenue announced sales and use tax relief for certain taxpayers that were “adversely affected” by the COVID-19 outbreak (the Department provides specific requirements for a taxpayer to qualify as “adversely affected”). The Department will waive all penalties and interest for qualifying taxpayers that collected taxes in February 2020, but were unable to meet the March 2020 due date, including for sales and use tax and certain fees and surcharges. As another example, the City of Chicago extended due dates for February and March tax payments until 30 April 2020 for the following City taxes: amusement tax, bottled water tax, checkout bag tax, ground transportation tax, hotel accommodations tax, parking tax, and restaurant tax.
COVID-19 continues to impact tax litigation deadlines and procedural requirements as state trial courts and tax appeals tribunals postpone deadlines or move to conduct proceedings remotely. Among recent developments, the New Jersey Tax Court deadlines for filing complaints and counterclaims have been extended to the later of 1 May 2020 or 30 days following a determination by the Governor that the State of Emergency declared under his executive order has ended. The Alabama Tax Tribunal announced that the Tribunal’s office is no longer open to visitors, but the Tribunal continues to operate during normal business hours. Many other state tax appeals tribunals have limited their operations by asking employees to work remotely and suspending all in-person administrative hearings until a later date. For example, the Massachusetts Appellate Tax Board closed effective 24 March 2020 until further notice, suspended all motion hearings until further notice, and continued many upcoming hearings for approximately three months. We expect additional closures and adjournments in the coming days and weeks.