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SALT Issues Arising From the COVID-19 Crisis

Posted on Mar. 30, 2020
Suzanne M. Palms
Suzanne M. Palms
Eric S. Tresh
Eric S. Tresh
Jeffrey A. Friedman
Jeffrey A. Friedman
Chris Lee
Chris Lee

Jeffrey A. Friedman and Eric S. Tresh are partners, and Suzanne M. Palms and Chris Lee are associates with Eversheds Sutherland (US) LLP.

In this installment of A Pinch of SALT, the authors discuss state and local tax issues that taxpayers should consider as the COVID-19 crisis develops.

 

 

Copyright 2020 Jeffrey A. Friedman, Eric S. Tresh, Suzanne M. Palms, and Chris Lee.
All rights reserved.

COVID-19 continues to affect almost all aspects of business. State and local taxes are not immune. This Pinch of SALT provides a summary of some of the near-term SALT issues businesses may want to consider as the crisis evolves. At the outset, we note that the economic impact of the crisis is likely to reverberate through the economy and state and local budgets for some time. Many states have already begun to predict substantial budget shortfalls. As we discuss here, most states have provisions that require balanced budgets. This will of course force states to make hard decisions among encouraging jobs and investment, increasing taxes, and cutting spending. The implications of these decisions will likely be felt by most businesses for the foreseeable future. With that in mind, taxpayers should consider the following issues.

State Tax Incentive Packages

Some state and local officials are looking to the business community for ideas on how to retain employees and encourage investment. Many states have proposed legislation in response to COVID-19. We expect many more states will introduce legislation and we are working with taxpayers to identify options that accomplish these employment retention and investment goals while considering fiscal conditions. For example, states may consider employee retention incentives that provide tax credits based on the percentage of employees retained by comparing employee count before the COVID-19 crisis to employee count on some future date. Or states may consider providing credit based on the rehiring of employees laid off during the crisis. States may consider increasing or broadening investment tax credits, especially for the industries most affected by COVID-19. There are many other potential incentive options and we are working with taxpayers to evaluate proposals.

However, many states have balanced budget requirements that may restrict their ability to enact tax incentives. The requirement generally refers to a state’s operating budget. The operating budget in most states is where tax collections are deposited and from which most legislative appropriations are made. States vary as to what their balanced budget requirements mean. For instance, some states have strict, explicit balanced budget requirements, which necessitates that expenditures in a fiscal year are within the cash available for that year. In other states, the requirement stems from constitutional limitations on state indebtedness. Constitutional provisions in a number of states permit unavoidable deficits to be resolved in the next fiscal year, but they do not define “unavoidable.” Therefore, state balanced budget requirements can be categorized as follows: (1) the proposed budget must be balanced; (2) the enacted budget must be balanced; (3) no deficit can be carried forward from one fiscal period into the next.1 While governors are given wide authority, they will have to take into account the fiscal impact of these arrangements on any balanced budget requirement the state might have.

Property Taxes

Valuation — Taxpayers should consider whether they may have reason to decrease the value of their assets for property tax purposes. Even if assets are not impaired for book purposes, taxpayers may be entitled to substantial reductions in value. Taxpayers should review their state’s property tax lien dates. While most states have a valuation date of January 1, there are some states with different lien dates, so action may be required in 2020. Other states may allow taxpayers to reduce value because of a near-term crisis. In almost all cases, taxpayers should consider the impacts of the current crisis based on a January 1, 2021, lien date.

Credits and Incentives

Incentive Agreements — Some taxpayers may have difficulty meeting near-term capital and employment commitments under negotiated incentive agreements. For example, as a result of reductions in force, furloughs, budget cuts, or government orders, taxpayers may be unable to timely meet new-hire or retention employment goals. Also, taxpayers may be unable to timely meet capital investment goals. Taxpayers should consider revising incentive agreements to avoid clawbacks by invoking force majeure and material adverse change clauses often associated with such agreements. Taxpayers may also have opportunities to request relief or renegotiate some deals.

Governor and Tax Commissioner Emergency Powers

State statutes often provide governors and state tax commissioners with authority to temporarily suspend tax return filing and payment requirements. Also, federal and state declarations of emergency generally provide governors and tax commissioners with additional authority to suspend tax statutes or extend filing and payment obligations. Often, the authority will apply to state as well as local tax obligations. With all states and the federal government declaring a state of emergency, this authority is now available to many governors and tax commissioners.

However, even during a time of emergency these powers are generally discretionary and require governors and state tax commissioners to affirmatively suspend or extend tax obligations. Many states have already taken action, and we expect many more will follow. For example, the North Carolina Department of Revenue announced that it will provide a waiver of penalties for any returns or payments due in March so long as the taxpayer files and pays by April 15. The South Carolina DOR said that tax returns and payments due from April 1 through June 1 will now be due on June 1 and that penalties and interest will not be charged if payment is made by June 1. This includes individual income tax, corporate income tax, sales and use tax, admissions tax, withholding tax, and other taxes administered by the DOR. California Gov. Gavin Newsom (D) issued an order delaying the deadline for state tax return filings by 60 days for businesses and individuals. The tax commissioners and governors of several other states have taken similar action.

Income Tax/Withholding

Local Tax Obligations Related to Working from Home — In some cities with especially high local taxes, taxpayers may be able to avoid local wage taxes because they are being forced to work from home. Taxpayers should consider the effect of these local taxes on their employees.

Nexus and Apportionment — Employees working from home may generate nexus exposure for employers. One employee working from home in a state has the potential to trigger nexus for income tax and sales tax purposes. Working-from-home arrangements may also affect sales, property, and payroll apportionment factor calculations.

Withholding — Because of the limits on business travel and mandatory telecommuting policies, U.S. employers should evaluate how these disruptions affect their state and local employment tax obligations. In the nonresident withholding context, payroll departments should revisit their employees’ business traveler policies and multistate withholding allocations.

For example, employees who have severely and unexpectedly restricted their business travel may not cross a state’s or locality’s withholding threshold during the applicable period and may not obligate their employer to withhold tax in that jurisdiction. As a result, payroll departments may have to adjust their nonresident withholding certifications or allocations to avoid overwithholding from employee wages.

Moreover, employer-mandated telecommuting may affect state or local withholding reporting and remittance. Jurisdictions generally require employers to withhold tax based on where an employee performs services, that is, the location where the employee earns wages subject to tax, or in some cases where the employee resides. Prolonged telecommuting as a result of COVID-19 concerns may change the jurisdictions where an employer is required to withhold, at least on an incremental level. Numerous exceptions exist to general-source taxation rule, most notably reciprocity agreements among states and so-called convenience-of-the-employer rules. Accordingly, employers should evaluate the applicable withholding tax laws in the locations where their employees will telecommute from in relation to their usual work locations.

Multistate employers should evaluate the localization rules for state unemployment insurance taxes considering COVID-19 preparedness, keeping in mind that those rules may materially differ from the withholding rules. Other state employment tax obligations, like paid family leave or disability contributions, should also be reviewed given the recent changes to employee work locations.

Finally, work location changes may affect direct business activity taxes, like the payroll factor for some state’s corporation income tax (which frequently tracks the localization rules for state unemployment insurance taxes) and liability under payroll-based excise taxes.

In General

State courts, legislatures, and administrative agencies have either fully or partially closed to the public or are otherwise operating in a reduced capacity. As a result, it is likely that we will continue to see tax return due dates postponed and court filing deadlines or time requirements modified or suspended. For example, New York Gov. Andrew Cuomo (D) issued an executive order suspending the statute of limitations for many courts. We expect many governors and tax commissioners will take similar actions to suspend the running of statutes of limitations or to extend appeal deadlines. However, taxpayers that have pending appeal deadlines should be careful to determine whether such actions of the governor or tax commissioner apply to their specific matter and to the specific forum where their dispute resides. Also, taxpayers currently under audit or appeal should consider granting state requests to extend statutes of limitations if there is concern over timely meeting appeal deadlines.

Take-Away

COVID-19 is likely to affect taxpayers for 2020 and beyond. Businesses may generate unexpected net operating losses in 2020 or have significant unforeseen expenses. However, since enactment of the Tax Cuts and Jobs Act, nearly all states will not permit a carryback of net operating losses and instead will allow taxpayers to use 2020 losses only against future income. Further state tax considerations will likely arise as the COVID-19 crisis unfolds.

FOOTNOTES

1 See National Conference of State Legislatures, “NCSL Fiscal Brief: State Balanced Budget Provisions” (Oct. 2010).

END FOOTNOTES

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