Menu
Tax Notes logo

2021 Q1 Legislative Overview — What a Ride!

Posted on May 3, 2021
Nikki E. Dobay
Nikki E. Dobay

Nikki E. Dobay is a partner with Eversheds Sutherland (US) LLP in Sacramento, California.

In this installment of SALT Policy Picks, Dobay reviews state tax bills enacted in the first quarter of 2021, including legislation on sales tax, COVID-19-related issues, and IRC conformity.

Copyright Nikki E. Dobay.
All rights reserved.

So far, the first quarter of 2021 has not been what most were expecting, when we started the year, on the state legislative front. First and foremost, the states’ fiscal situations are, generally speaking, so much better than predicted. Not only are most states doing significantly better than expected on the revenue side, but with the enactment of the American Rescue Plan Act (ARPA) (P.L. 117-2) (signed by President Biden March 11), even those states that had been on life support were given a shot of adrenaline to the chest (Pulp Fiction-style is how I imagine it). Specifically, Congress sent $350 billion of federal aid to the states with the ARPA. Now, the ARPA is not without its strings, and several states have filed lawsuits challenging the validity of the ARPA clawback provision, which provides that the states may not use federal stimulus funds to directly or indirectly decrease taxes.1 That said, initial comments from Treasury seem to indicate the legislative intent of the clawback provision may be a bit more benign than initially thought, and hopefully, more formal guidance from Treasury to that effect is forthcoming.

Nevertheless, state legislatures have forged ahead during the first three months of 2021. Thus, this installment of SALT Policy Picks will focus on some of the bills enacted in the first quarter.2

Maryland — The Elephant in the Room

As a Valentine’s Day gift to taxpayers, the Maryland legislature overrode the governor’s vetoes of two 2020 bills — adopting a first-of-its-kind digital advertising tax and expanding the sales tax base to cover digital goods. H.B. 732, which imposed the gross receipts tax on digital advertising, and H.B. 932, which subjects some digital products to the state’s sales and use tax, both received the final Senate vote to achieve the overrides on February 12. The digital advertising tax has been the main focus of attention, and the subject of multiple legal challenges. In addition, it lacks sourcing rules, which are required for compliance but seem impossible to conceive. Meanwhile, the sales tax expansion to digital products has largely flown under the radar until recently, when the Maryland comptroller issued some guidance that most agree takes an overbroad reading of H.B. 932 and is cause for serious concern.3

The Maryland legislature did on the last day of session passed S.B. 787,4 which is intended to ease the immediate impact of the digital advertising tax by moving the effective date from March 14 to January 1, 2022, as well as address some of the concerns regarding the department’s interpretation of the digital products bill.

Finally, the Maryland legislature also passed H.B. 8045 on the last day of the session. H.B. 804 establishes a whistleblower program within the Office of the Comptroller that would make whistleblowers eligible for a possible reward. The whistleblower program created in H.B. 804 is meant to mirror the IRS whistleblower program, whereby the taxing agency remains in control of all complaints, as opposed to allowing the state attorney general or private attorneys to pursue tax-related issues.

In Other News — The States Are Still Dealing With COVID

Another bill of note, albeit significantly less noteworthy, is Connecticut H.B. 6516, signed into law March 4. H.B. 6516 codifies two important pandemic/shelter-in-place state tax issues. First, a Connecticut resident who was required to pay income taxes to another state under the convenience of the employer rule will be entitled to a credit for taxes paid to another state in Connecticut. Second, an employee’s presence in the state during the pandemic would not create nexus for the employer that otherwise does not have nexus. Although several states have provided similar agency guidance regarding these issues during the pandemic, Connecticut is the first state to adopt legislation regarding these matters. Understanding Connecticut’s motivation to protect its residents, a better answer (in my mind) would be for the convenience of the employer test to be a thing of the past so that a state like Connecticut would not have to adopt legislation to protect its citizens from those states that believe they are entitled to tax the wages of some nonresidents. Hopefully, the Supreme Court will hear New Hampshire v. Massachusetts, and the Court will opine on the convenience of the employer test, which is long overdue.6

A handful of other states also addressed pandemic-related issues. While Arkansas, with H.B. 1345, allowed localities to collect property taxes early to avoid budgetary issues,7 New York’s S. 8138 allowed for property tax payments to be deferred to provide taxpayer flexibility.8 Kentucky enacted H.B. 84, which provides relief from some local taxes to specific disaster response entities and employees,9 and Virginia passed H.B. 2185, which provides an exemption from sales and use tax for personal protection equipment.10

Conformity as Usual — If That’s Still a Thing

Four states — Georgia,11 Idaho,12 Virginia,13 and West Virginia14 — enacted good old-fashioned IRC conformity bills. Meanwhile, a few other states made other specific conformity tweaks. Alabama enacted H.B. 170, which decoupled the state from global intangible low-taxed income. H.B. 170 also repealed the state’s throwback rule and moved the state to single-sales-factor apportionment — significant changes for Alabama taxpayers.15 Utah, with H.B. 39, clarified (retroactively) that a taxpayer is entitled to an IRC section 250 deduction when calculating the state inclusion of IRC 965 and GILTI.16

And three states adopted bills that would affect a taxpayer’s state-level net operating loss deduction. Not necessarily conformity, but each of these bills seems to have aspects of conformity. Interestingly, Colorado, with H.B. 21-1002, put the state back in line with the Coronavirus Aid, Relief, and Economic Security Act NOL carryback provisions.17 Colorado is one of only a few states that conform specifically to the federal NOL carryback/carryforward provisions. Idaho H. 170 conformed the state to IRC section 461(l) (the excess business loss provisions), providing a 20-year carryforward for those losses.18 And Utah’s S.B. 25 addressed technical issues related to the calculation of the 80 percent NOL cap.19

Good Administration Moves!

In Georgia, S.B. 185, which passed before the Q1 cutoff but is still awaiting the governor’s signature, will eliminate deference provided to the department on subregulatory, or informal, guidance.20 The bill does not change the level of deference provided to formally promulgated regulations that are required to comply with the state’s Administrative Procedure Act.

Wisconsin enacted A.B. 2, which extends the revenue agent report (RAR) reporting deadline from 90 to 180 days.21 And, Arkansas, with H.B. 1031, will now require e-filing for all returns that are filed by a tax practitioner when the practitioner e-files at the federal level.22

It Is Definitely Not Over

Again, the bills discussed above are only some of those that passed both chambers and were signed into law before March 31. And as of the end of the first quarter, most states are still in session.23 There is, however, still long way to go until sine die for most state legislatures. This seems doubly true during a year in which pandemic procedures and protocols seem to have many bills hung up for now.

Considering what has happened so far this legislative season, here are the items I will be continuing to watch closely:

  • Obviously, digital advertising/data/personal information taxes — while most states that have introduced proposals earlier this year are standing by and watching what happens in Maryland, Connecticut seems to be forging ahead.

  • The remaining three states working towards marketplace facilitator legislation. As of the time this article was drafted, Florida and Kansas had passed bills; however, the Kansas bill had been vetoed by the Governor. And, Missouri’s bill had yet to make it across the finish line. Seems like 2021 could be the year that the states complete their marketplace facilitator collection legislation game board, but there may still be some drama along the way.

  • Sales tax base expansion to digital products and combined reporting/worldwide reporting bills are always worth keeping an eye on. Right now, it seems like Nevada is the state to watch on the digital products front, and even though most of the combined/worldwide bills seem to be dead — one never knows until sine die!

  • Conformity bills — in addition to the general conformity bills that are still moving along, some states may reconsider their general conformity methods, as we see the federal government potentially gearing up for more changes to the IRC to fund Biden’s infrastructure plan.24

  • Public disclosure of taxpayer information — although the Oregon corporate disclosure bills appear to have lost steam, this is not an issue I expect to fade away completely. Assuming these bills are not resurrected this session, taxpayers will likely face the issue during the interim or next year.

Although these proposals have yet to completely solidify, they nonetheless keep those of us in the policy world up at night.

FOOTNOTES

1 See P.L. 117-2 section 602(c)(2)(A).

2 While I have not identified every state tax bill enacted before March 31, 2021, I have tried to identify those bills that large corporate taxpayers should likely have on their radar.

4 See S.B. 787 (passed Apr. 12, awaiting signature).

5 See H.B. 804 (passed Apr. 12, awaiting signature).

7 See H.B. 1345 (signed by the governor Mar. 9).

8 See S. 8138 (signed by the governor Jan. 30).

9 See H.B. 84 (signed by the governor Mar. 18).

10 See H.B. 2185 (singed by the governor Mar. 11).

11 See H.B. 265, updates conformity to the IRC for tax years beginning on or after Jan. 1, 2021 (signed by the governor Feb. 24).

12 See H.B. 58, updates conformity to the IRC as of Jan. 1, 2021 (signed by the governor Feb. 18).

13 See S.B. 1146, updates conformity to the IRC to Dec. 31, 2020 (signed by the governor Mar. 15).

14 See H.B. 2359, updates conformity to the IRC in effect after Dec. 31, 2019, but before Jan. 1, 2021 (signed by the governor Feb. 24).

15 See H.B. 170 (signed by the governor Feb. 12).

16 See H.B. 39 (signed by the governor Mar. 22).

17 See HB21-2002 (signed by the governor Jan. 21).

18 See H. 170 (signed by the governor Mar. 17).

19 See S.B. 25 (signed by the governor Mar. 22).

20 See S.B. 185 (sent to the governor Apr. 7).

21 See A.B. 2 (signed by the governor Feb. 18). A.B. 2 also provides for specific conformity to specific IRC provisions.

22 See H.B. 1031 (signed by the governor Feb. 24).

23 Those states not in session include Georgia (adjourned Mar. 31), Kentucky (adjourned Mar. 30), Maine (adjourned Mar. 30), Mississippi (adjourned Apr. 1), New Mexico (adjourned Mar. 20; special session held Mar. 31), South Dakota (adjourned Mar. 29), and Utah (adjourned Mar. 5). Virginia also adjourned on Feb. 8 but held a special session Feb. 10 through Mar. 1, and a veto session was held Apr. 7.

24 See White House, “Fact Sheet: The American Jobs Plan” (Mar. 31, 2021).

END FOOTNOTES

Copy RID