TWIST - June 1, 2020

Welcome to TWIST for the week of June 1st. This is Sarah McGahan from KPMG’s Washington National Tax state and local tax practice.

We are covering two state Supreme Court cases today. First, the Idaho Supreme Court recently held that gain from a sale of a majority owned interest in an LLC did not constitute business income. Under Idaho law, income is business income if it meets either the transactional test or the functional test.  The State Tax Commission argued that the gain from the sale of the LLC was business income under the functional test. Idaho’s administrative rules provide two methods of meeting the functional test. The first requires a finding that the intangible interest served as operational, rather than passive investment function. The second is the unitary business test.   In addressing the first test, the Court held that the interest in the LLC was a passive investment because the sale was not “an integral, functional, or operative component to the taxpayer’s trade or business operations.” The Court next concluded that the taxpayer and the LLC were not unitary, although they were commonly controlled and the founder of the overall business had a presence within both of the entities.

The second case is from the Michigan Supreme Court. In addressing a City of Detroit sourcing dispute, the court held that the sales factor sourcing rule for services under the Uniform City Income Tax Ordinance attributes service receipts to the location where services are performed, rather than where the services are received by customers. Accordingly, legal services performed in Detroit for out-of-City clients were considered Detroit-sourced receipts.

In other news, the South Carolina Department of Revenue issued a ruling concluding that a taxpayer’s cloud-based software offering was subject to sales tax. Further, sales of computer training services made in conjunction with the sale of the software were includable in the sales price of the software and the entire amount was subject to tax. Training services sold on a standalone basis were not subject to sales tax because training is not a specifically enumerated taxable service in South Carolina.

Voters in the Portland, Oregon metro area recently approved a ballot measure that adopts a new tax to fund homeless services. Per the measure, a new one percent tax will be imposed on married individuals with income over $200,000- over $125,000 for single filers.  A new one percent business profits tax is imposed on businesses with gross receipts over $5 million. 

Finally, a number of states issued guidance on tax issues stemming from COVID-19. Illinois, Iowa, Nebraska, Rhode Island and South Carolina all addressed how employee withholding is impacted by employees working outside of their normal work locations and/or whether having an employee present in a state during the pandemic will create nexus for the employer. Nebraska issued a report addressing conformity to various aspects of the CARES Act. The Iowa Department of Revenue issued guidance on the taxability of forgiven Paycheck Protection Program or PPP loans. And, in Mississippi, legislation was signed into law providing that “funds received under the PPP shall not be subject to tax; however, eligible expenses for which PPP funds are received may not be itemized as tax deductions.”

Thank you for listening 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.