TWIST - September 14, 2020

Welcome to TWIST for the week of September 14th, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

The first development we are covering today is a case from New Jersey addressing whether a corporate limited partner had Corporation Business Tax nexus. In a recently-issued decision, the New Jersey Superior Court, Appellate Division affirmed a Tax Court holding that a foreign corporate limited partner had New Jersey nexus by virtue of owning limited partnership interests in two partnerships operating in the state. On appeal, the corporate limited partner taxpayer had argued that the tax court erred by holding that it had “automatic economic nexus” based on the receipt of partnership income from New Jersey sources. In the taxpayer’s view, the legislature did not intend the “deriving revenue from New Jersey sources” language in the Corporation Business Tax imposition statute to apply broadly to a foreign limited partner whose taxability was governed by separate statutory provisions addressing limited partnerships that were enacted at the same time.  The taxpayer argued that these partnership specific statutes would be rendered superfluous if a corporation automatically became subject to Corporation Business Tax by virtue of deriving receipts from New Jersey sources.   The appellate court rejected this argument and determined that the taxpayer had mischaracterized the tax court’s ruling with regard to automatic economic nexus. In the appellate court’s view, the tax court had performed an extensive analysis of whether the taxpayer had constitutional nexus with New Jersey and found that the taxpayer was not a mere passive investor in the partnership, but was part of an integrated enterprise engaged in building homes in New Jersey and was therefore subject to Corporation Business Tax.

In other news, legislation, Senate Bill 972, has been presented to California Governor Gavin Newsom that, if signed, would require the Franchise Tax Board to compile certain tax information on large taxpayers and provide that information on an annual basis to two tax committees in the California legislature. An earlier version of this bill would have required the Franchise Tax Board to publish this information on its website.

On the sales and use tax side, the District of Columbia, though the Office of the Attorney General, recently filed a consumer protection and sale tax enforcement action against an online grocery delivery platform. The platform allows customers to purchase groceries from local stores through an app or website and have the groceries delivered by personal shoppers. The complaint alleges that the platform did not collect the sales tax owed on the platform’s delivery and service fees. In addition, complaint alleges that a service fee charged to customers caused confusion because it appeared to be a tip for the personal shopper, but was instead retained by the platform to cover its operating costs. The platform’s alleged misrepresentations and omissions regarding the nature of the service fee are detailed in the complaint and form the basis of a claim that the platform violated the D.C. Consumer Protection and Procedures Act.

Finally, states continue to respond to COVID-19 and the CARES Act. The Michigan Department of Treasury recently announced that it will permit digital signatures on certain forms if the forms cannot be filed electronically. In other news, California Governor Newsom signed a bill providing that for taxable years beginning on or after January 1, 2020 loan amounts forgiven under the Paycheck Protection Program will not be included in gross income for individual and corporate income tax purposes.

On August 31, legislation was signed into law in in Utah retroactively allowing an unlimited net operating loss deduction for tax years beginning on or after January 1, 2018. The 80 percent limitation is reinstated for tax years beginning on or after January 1, 2021. The governor also signed a bill providing that for a tax year beginning on or after January 1, 2020, Utah exempts the amount of a forgiven Paycheck Protection Program loan from state corporate franchise and income tax. In the District of Columbia, the Office of Tax and Revenue announced that it will extend the period under which temporary presence of employees or property in the District will not create nexus for purposes of the corporate franchise tax or unincorporated business tax. Please stay tuned to TWIST for additional COVID-19 and CARES Act updates. Thank you for listening and stay well.

To read about the recent state and local tax relief guidance, click here and bookmark KPMG TaxNewsFlash-United States to stay current as more guidance is regularly released.