TWIST - April 13, 2020

Welcome to TWIST for the week of April 13.  This is Sarah McGahan from KPMG’s Washington National Tax state and local tax practice.

The first development we are covering today is actually three developments- the Texas Supreme Court recently issued opinions in three cases generally addressing whether taxpayers were entitled to deduct certain costs as COGS in determining Texas Franchise tax liability.  In the first decision, the court held that, for the tax years at issue, a movie theater was not entitled to deduct its exhibition costs as COGS.  The second case involved whether a taxpayer was entitled to subtract certain amounts paid to subcontractors in determining total revenues and whether the taxpayer’s COGS methodology was appropriate. In this case, the court ruled for the taxpayer on the issue of whether the payments qualified for the flow-through funds exclusion, but held that the taxpayer’s method of computing COGS, which started with the federal calculation under IRC section 263A and adjusted for amounts expressly disallowed under Texas law, was “flawed.” In the third case, the Court affirmed an appeals court holding that a taxpayer in the business of renting and leasing construction equipment could not deduct the costs associated with delivery and pick-up of its equipment as COGS.

Another case we are covering today is from the New York Supreme Court, Appellate division. In this case, the court affirmed a Tax Appeals Tribunal decision holding that a taxpayer was not entitled to a refund of sales taxes paid on electricity used to power and deliver telecommunications services. Notably, the court rejected the taxpayer’s arguments that the electricity was purchased for resale to customers.

In other sales and use tax news, legislation recently signed in Utah revises the definition of taxable admissions to exclude certain lessons and excludes persons facilitating sales for restaurants from the definition of a marketplace provider.

This past week, many states and localities continued to issue guidance on extensions of time to file and pay upcoming state and local taxes.  In addition, a few states are starting to speak out on other tax issues resulting from COVID-19.  Two states- Pennsylvania and Indiana- issued guidance generally advising taxpayers that having employees working from home during the COVID-19 crisis will not create nexus for the employers. Illinois and Washington State addressed the tax implications of selling alcohol to make hand sanitizer. States are also beginning to recalibrate their revenue forecasts to account for the impact of the COVID pandemic on the state fiscal situation. Thank you for reading and stay well.

To read about recent state and local tax guidance in response to COVID-19, please click here and bookmark KPMG TaxNewsFlash-United States to stay current as more guidance is regularly released.