TWIST - May 11, 2020

Welcome to TWIST for the week of May 11. This is Sarah McGahan from KPMG’s Washington National Tax state and local tax practice.

First up this week is a case from the Texas Supreme Court addressing how receipts from sales of F-16 fighter jets produced by a U.S. defense contractor that were delivered to foreign governments should be sourced for Texas franchise tax purposes.  The transactions at issue were governed by the Foreign Military Sales program and consisted, as required by federal law, of a contract between the taxpayer and the U.S. government and a contract between the U.S. government and the foreign government. The taxpayer argued that the “buyer” in the transaction at issue was the foreign country, and that delivery occurred at the location of the foreign buyer. The Comptroller, on the other hand, argued that the sale occurred when the jets were transferred to the U.S. Government in Texas for delivery to the foreign country. The court agreed with the taxpayer, holding that the pertinent buyers in this case were the foreign governments for whom the aircraft were manufactured and to whom they were ultimately delivered.  In the court’s view, the U.S. government’s involvement was simply “a condition of the sale” to the foreign government that was disregarded for franchise tax apportionment purposes.

A Virginia circuit court ruled that Virginia’s Business, Professional Occupational License (BPOL) tax imposed by Fairfax County was a tax on Internet access that was pre-empted by the Internet Tax Freedom Act. After determining that the BPOL was a tax, the court rejected the County’s argument that the Act did not prohibit a broad based gross receipts tax, such as the BPOL.

In New York, the Tax Appeals Tribunal overturned an Administrative Law Judge (ALJ) decision and in doing so held that a taxpayer engaged in generating electricity at a plant in New York was a “qualified New York manufacturer” whose capital tax base was capped at $350,000 for the 2010-2012 tax years at issue.  In large part, this case involved interpreting the Qualified New York Manufacturer law and the statute allowing an Investment Tax Credit for manufacturers, which did not apply to taxpayers engaged in generating electricity. In sum, the Tribunal agreed with the taxpayer that the Investment Tax Credit limitation applied only for purposes of determining eligibility for the credit and was not intended to limit it from being classified as a qualified New York manufacturer for purposes of the capital base cap.

The next development is a new Corporate Activity Tax or CAT rule recently published by the Oregon Department of Revenue. Under the CAT law, a unitary group is defined as a group of persons with more than 50 percent common ownership, either direct or indirect, that is engaged in a unitary business. The unitary group includes both domestic and non-U.S. members.  Under a new permanent rule, certain non-U.S. group member’s information may be excluded from the return under certain conditions, including but not limited to, when the Non-U.S. member has no commercial activity sourced to Oregon.

Finally, we have several COVID-19 related updates this week. The Oregon Department of Revenue announced that certain types of federal assistance to businesses under the CARES Act, such as Paycheck Protection Program loans, ware not considered commercial activity and will not be subject to the Corporate Activity Tax. In North Carolina, recently-signed Senate Bill 704 makes certain favorable changes to the state’s unemployment insurance laws and also adopts a new unemployment tax credit for employers. The amount of the credit is equal to the amount of contributions payable on the quarterly unemployment tax report filed by the employer on or before April 30, 2020. The Maryland Comptroller revised an earlier Tax Alert that addresses employer withholding requirements for teleworking employees during the COVID-19 emergency.  Similarly, the Philadelphia Department of Revenue issued revised wage tax policy guidance for non-resident employees and reiterated that non-resident employees who work for Philadelphia-based employers aren't subject to wage tax during the time they are required to work outside of Philadelphia, including working from home. Finally, the New Jersey Division of Taxation, in a FAQ, announced it will temporarily waive the sales and use tax nexus standard that is generally met if an out-of-state seller has an employee working in New Jersey. Please stay tuned to TWIST for future COVID-19 related updates and stay well.

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