TWIST - March 29, 2021

Welcome to TWIST for the week of March 29th, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

In indirect tax news, a New Mexico Administrative Hearings Officer recently held that demilitarization and munitions disposal services performed in New Mexico were subject to gross receipts tax. Under New Mexico law, sales of a service to an out-of-state buyer may be deducted from gross receipts, unless the buyer of the service makes initial use of the product of the service in New Mexico or takes delivery of the product of the service in New Mexico. The taxpayer argued that the buyer of the demilitarization services- a government agency- was out-of-state and therefore the receipts were deducted from the gross receipts tax base. However, because the resulting product of the services performed were demilitarized range sites in New Mexico, the Hearing Officer concluded the initial use or delivery location of the service was in state.

In Wyoming, the State Board of Equalization concluded that a taxpayer was not providing taxable alteration or improvement services to tangible personal property. The Department of Revenue had assessed the taxpayer for sales tax on certain vehicle related services on the basis that the taxpayer was improving or altering vehicles when it jump-started cars, changed flat tires, or unlocked vehicles for locked out customers. The Board, reversing the assessment, concluded that the Department interpreted “alteration” and “improvement” too broadly and did not prove by a preponderance of the evidence that the services were taxable.

In legislative news, a bill was recently signed into law in Maine that updates the state’s conformity to the Internal Revenue Code. Specifically, for tax years beginning on or after January 1, 2018, the “Code” means the United States Internal Revenue Code of 1986 and amendments to that Code as of December 31, 2020. Previously, Maine conformed to the Code as of December 31, 2019, so had not adopted any of the tax changes included in the federal COVID-19 relief bills.  In addition to updating the conformity date, the legislation decouples from certain federal provisions for corporate taxpayers.

Finally, the recently enacted American Rescue Plan Act, which allocates significant revenues to support states and local governments, contains a prohibition on using these funds to reduce taxes. Not surprisingly, state officials are concerned about how this prohibition may affect future state tax cuts and incentive legislation. In response to requests for interpretive guidance, Treasury Secretary Yellen stated that Congress may place reasonable conditions on how states use federal funding, but that “nothing in the Act prevents states from enacting a broad variety of tax cuts.”  Per the Secretary, if states lower certain taxes, but do not use funds under the Act to offset those cuts, then the limitation in the Act would not be implicated. Additional guidance is anticipated to be forthcoming.