Diagnosing the SALT effects of COVID-19: Part 2

By Carolyn Puzella, J.D., LL.M.

Editor: Bridget McCann, CPA

The novel coronavirus pandemic that spread throughout the country this year is already having a deep and widespread — and sure to be long-lasting — impact on the state and local tax landscape. State governments were forced to respond to this unique crisis at alarming speeds and contend with loads of new questions, resulting in an assortment of both formal legislative and informal administrative guidance across states on unprecedented state tax matters, much of which has yet to be clarified or otherwise codified by legislation.

Part 1 of this column, on p. 594 of the September issue, looked at state conformity to certain federal relief provisions, income tax nexus and apportionment issues affecting businesses, and income tax issues for employers and employees. Part 2 reviews sales and use tax consequences, looks at local property tax matters, and discusses what is next for taxpayers and state and local governments as taxpayers continue to seek relief and as states look to replace lost revenue as well as consider new opportunities to support taxpayers and streamline outdated procedures.

Sales and use tax consequences

While garnering less overall attention than the state income tax issues stemming from both conformity to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and COVID-19 teleworking employees, the sales and use tax implications of newly remote employees as well as the all-out public movement to battle the spread of the coronavirus are particularly noteworthy. Fundamentally, the sales and use tax nexus implications of COVID-19 teleworking employees are not unlike those for income tax, and the questions will remain whether those employees trigger nexus for their employer based on their physical presence in a state outside their normal office location for however long they are instructed — or otherwise choose, as it pertains to their health — to remain there, as well as however long any specific relief from creating nexus might last.

Unlike for state income tax, though, no federal statutory protection exists like P.L. 86-272, the Interstate Income Act of 1959, relative to a nexus determination for sales and use tax; therefore, the overall threshold can be lower. Additionally, in light of stay-at-home orders and a consequential spike in online shopping, the Wayfair minimum economic nexus thresholds based on either a volume of sales receipts from and/or a certain number of transactions with customers in a state are now infinitely more significant for both well-established and new businesses selling any goods or services online (see South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)).

Apart from nexus, individuals and businesses that sell personal protective equipment (PPE) (e.g., face masks) or other COVID-19-elated goods to thwart the transmission of the coronavirus are particularly prone to obscure sales tax requirements because they are either unaware of state nexus rules and sales tax registration requirements or unfamiliar with the application of sales tax to the specific sales transactions in which they now engage, or both. What started out as relatively de minimis sales of those goods or services in early 2020 could lead to sufficient month-over-month revenue, triggering nexus in more than one state and corresponding sales tax registrations and return filing requirements.

These requirements — and possibly others — may exist even if COVID-19—related PPE, for example, is exempt from sales tax or the sale is otherwise exempt because the PPE is purchased and used by a medical professional, hospital, or other exempt organization. Furthermore, it certainly should not be assumed that sales of face masks or other COVID-19—related PPE and goods are always exempt from sales tax. In the absence of specific COVID-19 sales tax relief, existing state and local sales and use tax rules relative to the sale of those articles within each distinct customer base will guide any sales tax collection and exemption documentation obligations.

On the other hand, businesses or other groups that donate PPE or other COVID-19—related supplies to doctors and other organizations are likely to contend with use tax issues. Use tax is typically due on items withdrawn from inventory for either personal use or donation, if sales tax is not paid on their original purchase. While the specific application of use tax to donated items will depend on each state's rules, Indiana, for instance, provides direct relief now by waiving use tax on COVID-19 supplies donated by manufacturers and other organizations. A host of items are eligible for Indiana's waiver, including, but not limited to, medicine, medical supplies, disinfectants, certain food, clothing, and beds donated to fight the pandemic. Notably, companies and organizations must apply directly to the Indiana Department of Revenue to claim the COVID-19 waiver and, if the waiver is granted, will not be required to report donations on any return. Other states may or may not provide such direct relief.

Lastly, alcoholic beverage distilleries and other manufacturers that shifted operations to manufacture and sell alcohol-based hand sanitizer could face the same sales tax nexus and product taxability concerns as those selling PPE, in addition to customary state alcohol excise tax obligations. Certain states are making relief from alcohol excise taxes clear, however, by providing either a deduction from the tax base or a direct exemption for alcohol purchases. Illinois, for instance, instructed licensed distilleries and craft distilleries producing alcohol for use in hand sanitizer due to the COVID-19 pandemic to report gallons of alcohol purchased for this purpose as an expense deduction on their monthly excise tax return with a "COVID-19 Alcohol" notation. Not surprisingly, this deduction is only allowed during a "specified time period (as yet undetermined)." Likewise, Wisconsin provided manufacturers certain exemptions from liquor excise taxes for the purchase of specified alcohols to make hand sanitizer during the COVID-19 emergency and eased other restrictions for the industry. Indeed, in conformity with the CARES Act's distilled spirits provisions, Wisconsin extended certain authorizations through Dec. 31, 2020.

Despite these COVID-19-related indirect tax risks and the unknown nature of a longer-term public health emergency, it is not too late to gather up the necessary documentation to support nexus or taxability positions or, in fact, to claim a refund of any overpaid tax if appropriate. It is imperative to understand each state and local jurisdiction's sales tax nexus and product taxability guidance, as well as its specific application to one's own business over its life.

Local property tax matters

Property tax considerations arising from the coronavirus pandemic should also not be overlooked. As the pandemic's economic effects linger and financial pressures continue to weigh on homeowners, lessors, and other property owners into late 2020 and beyond, local taxing authorities are implementing — or seriously considering — property tax relief. Such relief includes, in part, extending payment deadlines and/or waiving penalties for late payments. Cook County in Illinois, for example, was not charging its typical 1.5% interest penalty for second installments of 2019 property tax paid by Oct. 1, 2020. Madison, Wis., waived penalties for tax installments due after April 1 until October, as well. Similarly, Lake County in Illinois allowed property owners to spread property tax payments over four installments by extending 50% of each of the usual two installments for two months, with the last installment of the four due in November.

It is important to note, however, that counties may exclude from deadline relief those property tax payments made through escrow or other third-party arrangements or may require taxpayers to submit certain forms before they can obtain any penalty relief. In some cases, too, counties may require property owners to meet a series of conditions before relief is granted, including, for instance, a job layoff or termination, a reduction in income, an inability to collect a certain percentage of rent, or an emergency shutdown of a nonessential business on owned property. Therefore, it is essential that affected taxpayers understand specific local relief efforts and check local resources often for available assistance, as well as how to properly obtain relief.

Conceivably more significant in the long term, upcoming local real estate assessments could be materially impacted by the fiscal crisis caused by COVID-19. Some local assessors stated they expect to reduce assessed 2020 property values because of the profound financial effects of the coronavirus, thereby possibly reducing property tax bills later next year. Other localities, however, are not keen to follow suit. As an example of state relief, New Jersey provided taxpayers extra time to file property tax appeals to fight 2019 real estate assessments for taxes going back to April, as well as extended the deadline by which county boards of taxation must rule until the end of September.

Even after the immediate health threat of COVID-19 passes, property valuations and property tax matters are sure to remain top of mind, particularly in state and local jurisdictions hit hard by the economic effects of the virus or that otherwise typically turn to the property tax base to raise needed revenue.

What's next?

Undeniably, the coronavirus pandemic has caused unprecedented strain and economic disruption on individuals and organizations of all sizes across all industries. As its profound stress and fiscal impact persist for the foreseeable future, there is no question that taxpayers will continue to seek relief, and state and local governments will look for ways to replace hundreds of millions of dollars in lost tax revenue.

Administrative relief for taxpayers

Taxpayers specifically seeking administrative support are likely to see it — at least in the short term — in a variety of ways that have already been instituted across states in response to the pandemic, such as case-by-case waivers or broad reasonable-cause relief from penalties and interest; delayed tax collection activity; relaxed audit processes; extensions to refund claim periods, business licenses, and sales tax "E" number expiration dates; as well as loosened restrictions on electronic signatures and document notarizations. Further, states already providing certain relief from nexus and personal income tax obligations triggered by COVID-19 teleworking employees could extend it, and other states may fall in line. As a practical matter, existing state relief — formal or informal — may in fact already be tied to the durations of state COVID-19 public health emergency declarations, which are sure to extend for some time.

However, the taxpayer relief and other COVID-19—related state tax guidance implemented across jurisdictions is neither uniform nor all-encompassing, making awareness and compliance complex and burdensome for multistate taxpayers. To assist taxpayers in this regard, the AICPA is maintaining a comprehensive state-by-state chart summarizing an extensive amount of COVID-19—related state and local legislative and administrative information as well as other emerging guidance for the public (available at www.aicpa.org). In addition, the AICPA publishes carefully outlined recommendations for all state and local administrators crafting policies in response to the coronavirus pandemic, with an eye toward emphasizing uniformity and simplicity for taxpayers as well as identifying opportunities for streamlining outdated policies and procedures in the longer term for governments (available at www.aicpa.org). Some example AICPA recommendations for administrators are: holding that COVID-19 teleworking employees do not create nexus, permitting employers to adhere to employees' original work location for payroll withholding, and accepting electronic signatures.

Local credit and incentive opportunities

Taxpayers seeking continued relief may also greatly benefit from ongoing discrete state and local credits and incentive programs offered through economic development agencies. In addition to existing programs, in March, many states and localities initiated new small business financial relief in the form of grants, loans, and private and not-for-profit donation assistance — or some combination of such support — for those hit particularly hard by nonessential business closures and stay-at-home orders. For example, Illinois, Michigan, New Jersey, New York (including New York City), and Washington state provided a mix of resources ranging from grants to cover payroll costs and rent, to zero- or low-interest working capital loans.

Unique programs tailored to the restaurant and hospitality industry also took shape. Examples include Ohio's liquor buyback program and the National Restaurant Association's nationwide restaurant employee relief fund.

While many of these early programs are likely to have exhausted their initial funding and stopped accepting applications, certain of these programs may be continuing in a phase 2—type format, and other new programs are being added. For instance, in June, Chicago introduced a $5 million cash-assistance program to support certain Chicago residents excluded from COVID-19 federal stimulus payments. Also, in late June, Illinois earmarked $60 million for a Business Interruption Grant program to aid small businesses affected by COVID-19 with working capital expenses, one-third of which will go to businesses located in disproportionately impacted areas. Local counties, too, may have one-off or limited breaks for locally important businesses. Suffolk County in New York, for example, is providing a targeted exemption for up to a year from sales tax for purchases of equipment by certain manufacturers making PPE, diagnostic tests, and medicine tied to the coronavirus pandemic.

Replacing lost tax revenue

As the COVID-19 health emergency subsides, state and local governments will look to replace millions in lost tax revenue, fill budget gaps, and restore depleted coffers. In the short term, state tax administrators are likely to consider quick and easy methods of obtaining much-needed cash, most of which should afford taxpayers excellent opportunities to favorably resolve outstanding state and local tax liabilities.

To begin with, often-used state and local tax amnesty programs could emerge, under which taxpayers voluntarily come forward to pay outstanding state or local tax liabilities in exchange for full abatement of penalties and interest. These traditional programs are easy to implement — taxing jurisdictions benefit from added revenue without the costs associated with audit and enforcement, and taxpayers eliminate underreporting errors and avoid the risk of high penalties for noncompliance. In addition, taxpayers are in a great position to negotiate and settle open audit issues as well as negotiate waivers of associated penalties if agreed-upon liabilities are otherwise quickly paid and paid in full. Also, taxpayers ought to have the chance to either pay back taxes in installments or enter long-term payment programs in exchange for agreeing to pay outstanding tax debts.

Business taxpayers operating under existing local incentive agreements that are based on certain business growth benchmarks (e.g., employee headcount) may, too, have a fresh opportunity to formally or informally renegotiate those benchmarks — or the timing within which they need to be met — since states and localities should be eager to retain business in their communities that contribute to future tax revenue and overall vibrancy.

In the long term, these quick and easy methods of immediate cash infusion, while helpful, certainly will not correct the enormous financial fallout taxing jurisdictions are experiencing from the coronavirus pandemic. State and local tax revenue forecasts are dire, and, therefore, as legislatures resume full operations and state tax administrators re-shift focus inward and renew revenue-generating efforts, taxpayers are likely to see much less favorable activity on the horizon — activity that could restrict business growth altogether. Initially, beyond general nonconformity to recent taxpayer- and business-friendly provisions of the CARES Act, states may in fact implement rules that depart from those provisions, including, for example, rules that not only decouple from the new five-year carryback of net operating losses (NOLs) but also suspend the use of NOLs altogether for a period of time. California, for instance, disallowed NOL deductions for certain business and individual taxpayers for tax years 2020, 2021, and 2022, in July. In addition, state and local jurisdictions might implement new taxes, such as hotly debated gross receipts taxes, which are not dependent on net revenue; excise taxes on marijuana or gambling; employee head taxes; or digital services taxes, like the one recently vetoed by the governor in Maryland.

States could also ramp up efforts to retrieve unclaimed property, since it is politically easier to tap this source of revenue than to raise taxes. Or, as an alternative to new taxes, states and certain localities may revisit expanding their income tax and sales tax bases by establishing new modifications that further decouple the state's income tax code from taxpayer-friendly federal income tax provisions, or adding services — and particularly computer-related services, like software as a service — to those categories subject to sales tax.

Taxing jurisdictions may also use notices and audits to enforce compliance and uncover state and local tax liabilities. Online retailers and other remote businesses are particularly vulnerable to exposure as a result of complex and divergent state and local tax rules, especially small businesses whose operations grew quickly across the country during the pandemic. What is more, to the extent current COVID-19 relief expires, taxpayers will be on the hook to know the rules and comply.

Notably, steadfast enforcement of nexus and economic nexus standards are likely to take center stage, possibly including extensions of Wayfair thresholds to income tax nexus, as Pennsylvania and Massachusetts have already done. Notice resolution and audits may very well be handled and performed by aggressive tax personnel and auditors under pressure to produce results. To aid in all this, state revenue departments are expected to further innovate and take advantage of data analytics to find noncompliant taxpayers — taxpayers ranging from those not registered for sales tax or payroll tax, to those not reporting income earned across multiple taxing jurisdictions.

While outright income tax increases are not politically appealing on the heels of a major global public health emergency, recession woes could prompt states that do not already have a graduated personal income tax rate structure to put one in place. Indeed, Illinois already has such a proposal slated for the ballot in November of this year. Ultimately, while it is unclear what technique each state or local jurisdiction will use, each is likely to explore more than one means of replacing billions of dollars lost during the coronavirus pandemic.

Conclusions and recommendations

Like the novelty of the coronavirus itself, the extraordinary government, business, and individual response to the sudden public health emergency — in the spirit of both assistance and containment — leads to many new direct and indirect state and local tax concerns, only some of which we know today, and most of which come with limited and inconsistent initial guidance. It is not enough for taxpayers to assume states and localities will respond in a certain way or equally in the same way. Rather, it is critical for taxpayers to understand the full reach of the coronavirus pandemic's effects on state and local tax matters, along with each state and local jurisdiction's evolving formal and informal guidance, in order to be truly compliant, to be informed of risks associated with noncompliance, and to properly obtain available relief and support.

At this time, primarily, business taxpayers will need to navigate state conformity to the new income tax rules and Paycheck Protection Program loan forgiveness provisions under the CARES Act, based on each state's conformity to the Code, prior conformity to the law known as the Tax Cuts and Jobs Act, P.L. 115-97, direct state law as to specific modifications, and adoption of non-Code provisions. Simply put, some states will conform in full, in part, or not at all, and one will need to rely on a number of different resources to make that determination.

Beyond the CARES Act, business taxpayers may need to contend with new state and local income tax compliance obligations and shifting tax liabilities under existing income tax rules stemming from the physical location of COVID-19 teleworking employees, who expose their employers to state and local nexus and income tax apportionment and revenue sourcing nuances, as well as payroll withholding obligations. These same COVID-19 teleworking employees may also expose themselves to new personal income tax obligations and liabilities based on where they traveled and worked remotely.

In addition to income tax, business taxpayers who shifted operations or otherwise grew in scale from moving to the manufacture and/or sale of PPE or expanding remote sales may also need to manage new sales and use tax collection and reporting responsibilities, relying on existing state and local sales and use tax rules, which are complex and burdensome. Lastly, given the sheer scope of COVID-19's disruption, taxpayers should not forget about more obscure state and local tax issues and opportunities that are coming to light, like a possible rise in unemployment insurance tax and changes to property tax deadlines and assessments, as well as ongoing and new local credits and incentive programs.

To assist taxpayers right now, some states are issuing specific COVID-19—related relief from certain initial state tax concerns, including from the various business and personal income tax effects of COVID-19 teleworking employees, from the imposition of sales and use tax to purchase and sales transactions that supported the public health emergency, as well as from other various administrative requirements. Other states, however, either are not providing relief in their guidance or are silent on the matter. And, even if any relief exists, it is not presently consistent among state and local jurisdictions and is likely either tied to the "temporary" nature of the coronavirus — or any number of other COVID-19—related criteria — or contains certain exclusions or procedures that need to be closely followed to benefit from it.

In the absence of specific relief or to the extent any initial relief expires, the analysis of any new direct or indirect state and local tax issue stemming from the effects of the pandemic will fall squarely within existing state and local rules as well as any targeted permanent statutes and regulations ultimately adopted. Such an analysis is sure to be fraught with difficulties and highly dependent on each taxpayer's unique set of facts as they stood before and throughout the pandemic.

In the coming months, amid continued widespread economic uncertainty and barring a second wave of a public health emergency, state and local governments are likely to consider implementing new taxes, expanding tax bases, and exploiting a variety of enhanced compliance measures for purposes of replacing tax revenue lost during the pandemic. This is true, even while taxpayers may see opportunities in the short term to collaborate with tax administrators to favorably resolve outstanding state and local tax liabilities through possible new amnesty programs, audit negotiations, or flexible payment arrangements.

At some point, longer-term telecommuting arrangements or strategic companywide permanent shifts to remote work could result in not only double tax concerns for employees but also unique and broad multistate tax troubles for employers. Certainly, the adoption of additional broad federal economic relief, any changes to already available programs, or the resurgence of a health emergency warranting a return to stay-at-home orders would only lead to even more state and local tax questions and concerns. Given the fluidity of all this, best practices dictate documentation — and, in some cases, time- or date-stamped documentation reflecting, for instance, superseded information on which one relied for key interim tax decisions.

Not unlike other historic events, the vast and deep social and economic effect of the coronavirus pandemic will shape direct and indirect state and local tax law and policies well into the future, both adding to the complexity of state and local tax regimes but hopefully, too, creating opportunities for simplicity and uniformity between jurisdictions where it is needed most. Taxpayers who successfully navigate the state and local tax impacts of the coronavirus pandemic will necessarily appreciate the pandemic's effect on a broad range of tax types and taxpayers as well as the nuances among state and local jurisdictions now and for months and years to come.



Carolyn Puzella, J.D., LL.M., is director, Indirect/State and Local Tax at FGMK LLC in Chicago.Bridget McCann, CPA, is managing director of State Tax at Grant Thornton LLP in the Philadelphia area. Ms. McCann is the chair of the AICPA State & Local Tax Technical Resource Panel. For more information about this column, contact thetaxadviser@aicpa.org.

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