TWIST - April 27, 2020

Summary of state tax developments in Arkansas, South Carolina, Texas, Multistate responses to COVID-19, and a Multistate update on Public Law 86-272

Weekly TWIST Podcast Overview

This Week's Developments

Welcome to TWIST for the week of April 27. This is Sarah McGahan from KPMG’s Washington National Tax state and local tax practice.

The first development we are covering today is a case out of South Carolina holding that a bank was not entitled to an NOL deduction in computing South Carolina bank tax liability.  In reaching this conclusion, the South Carolina Administrative Law Court concluded that the state’s bank tax is not an income tax, but a franchise tax imposed on net income. The court also determined that the taxpayer failed to establish that conformity to the IRC was a basis for allowing a bank taxpayer an NOL deduction.

On the sales and use tax side, an Arkansas Administrative Law Judge or ALJ recently addressed the scope of the state’s manufacturing exemption. Under Arkansas law, a sales and use tax exemption applies to purchases of machinery and equipment used directly in manufacturing “articles of commerce.”  The term “articles of commerce” is not defined by statute, but an Arkansas regulation defines the term to exclude “custom items” not readily marketable to the general public.  Because the taxpayer at issue manufactured certain items to the specifications of customers, the ALJ concluded it was not entitled to the manufacturing exemption. In a Texas private letter ruling, the Comptroller addressed whether a service fee charged to customers who purchased lottery tickets over a taxpayer’s app was taxable data processing. The Comptroller concluded that because the taxpayer’s services included scanning images of the lottery tickets, adding a watermarked barcode to the images, and storing the images, the service fee was subject to sales tax as data processing.

In multistate news, the Multistate Tax Commission is moving forward with revisions to its Statement of information on Public Law 86-272. The revisions – if adopted by a state - would provide guidance on “how the statute applies to modern business activities,” including selling goods over the Internet.

Finally, it’s been another week, and state taxing authorities continue to respond to COVID-19. Almost every state has issued guidance of some sort on extensions of time to file returns and pay certain taxes, and this guidance continues to be refined and expanded. This past week, Massachusetts and North Dakota issued guidance generally providing that having employees temporarily telecommuting due to COVID-19 will not, standing alone, create nexus for the employer. Wisconsin and Montana each addressed certain aspects of the recently-enacted federal CARES Act. The Nebraska Department of Revenue issued a General Information Letter addressing the effect of COVID-19 on taxpayers that have earned tax incentives under the Nebraska Advantage Act. In short, an Advantage Act project holder can avoid recapture by establishing that COVID-19 was the cause of its failure to maintain employment and investment and that the failure was the direct result of forces beyond its control. Thank you for listening and stay well.

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Featured Speaker

Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US