TWIST - March 15, 2021

Summary of state tax developments in Alabama, Massachusetts, Virginia, and a Multistate update.

Weekly TWIST Podcast Overview

This Week's Developments

Welcome to TWIST for the week of March 15, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

The first development today is an Alabama Court of Civil Appeals decision in which an LLC challenged the constitutionality of the state’s mandatory composite income tax return requirement because it applied only to passthrough entities with nonresident members. The court rejected the taxpayer’s argument, noting that the composite return acted as a withholding mechanism and ultimately the final amount paid by residents and nonresidents for their distributive shares of a pass-through entity's taxable income was equal, despite the distinction in the manner of collection.

Next up, we are covering some pending legislation this week. There are certain states—Mississippi, Oklahoma, and West Virginia- with pending legislation that, if enacted, would phase-out major taxes for certain taxpayers and, in some cases, raise other taxes to offset the revenue loss.   Furthermore, the Virginia budget bill, which has been agreed to by both the House and Senate, would require corporate taxpayers to file reports disclosing what their tax liability would have been if unitary combined reporting had been effective for the 2019 tax year.  These reports would be due by June 1, 2021 and a $10,000 penalty would be applied for failing to file or filing a report that contained omissions or misstatements.  Finally, a regulation was recently finalized in Massachusetts providing that if a nonresident was an employee engaged in performing services in Massachusetts immediately prior to the Massachusetts COVID-19 state of emergency, and the nonresident is subsequently performing  those services from a location outside Massachusetts due to a Pandemic-Related Circumstance, all such compensation will continue to be treated as Massachusetts source income subject to Massachusetts personal income tax and withholding. On the flip side, an employer of a Massachusetts resident is not obligated to withhold Massachusetts income tax to the extent the employer remains required to withhold income tax in another state. This regulation has not been well received by New Hampshire. The Granite State has filed a Bill of Complaint with the U.S. Supreme Court arguing that Massachusetts’ rule impedes New Hampshire’s sovereign right to control its own tax and economic policies and violates the Due Process and Commerce Clauses.  Should the court decide to hear this case, it could have implications in other states, such as New York, that apply so-called convenience of the employer rules whereby New York nonresidents working from home during COVID-19 continue to be subject to New York tax on their wages. 

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Featured Speaker

Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US