Top SALT predictions for 2022

March 1, 2022 9:00 AM

State and local taxation administration and policy continued to be shaped by the COVID-19 pandemic during the past year.

“The news headlines in 2021 were dominated by the pandemic, and the same can be said of state and local tax policy and litigation,” observed Jamie Yesnowitz, state and local tax national leader in the Washington national tax office of Top 10 Firm Grant Thornton. “It’s not surprising that many of the major SALT developments in the past year were a reaction by state and local governments to the continued effects of the pandemic.”

Nevertheless, Yesnowitz and his team’s outlook for the year ahead focuses on a post-pandemic world, with 10 topics that they believe will be of primary interest to policymakers, courts and taxpayers in 2022.

1. The remote workplace in 2022

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As a result of the appearance of new COVID variants, return-to-work arrangements were delayed throughout the year, with many employers rethinking their policies to accommodate a remote workforce. Many states issued temporary guidance addressing the income tax treatment of employees working from different states. “We think that this might be a good time for states to reevaluate their overall policies of taxing persons in-state for limited periods of time through state-specific mobile workforce legislation,” said Yesnowitz.

The first prediction is “hopeful, in that we will be viewing the pandemic in the rearview mirror at the end of the year,” he said.

Prediction: At least three states will enact legislation or promulgate regulations to address existing income tax withholding policies with respect to remote workers, and by the end of 2022, no states will continue to have temporary pandemic policies addressing corporate income tax nexus.

2. PTE taxes

Pass-through entity taxes were passed by 15 states in 2021, adding to the seven already in existence, in response to the $10,000 SALT deduction cap in the Tax Cuts and Jobs Act. These permitted a PTE to deduct its state and local taxes as a tax on the business at the federal level, followed by a deduction for the PTE tax on the distributive share of the owners’ income

“Depending on the structure of the PTE tax, owners generally claim a corresponding tax credit against their personal income tax liability or an exclusion on the portion of the owner’s pass-through income tax,” explained Yesnowitz. The IRS confirmed in late 2020 that these tax regimes would be respected for federal income tax purposes.

Prediction: At least five additional states will enact PTE tax regimes in 2022 to the extent that the SALT deduction limitation remains in place.

3. ARPA tax mandate litigation

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The American Rescue Plan Act contains a tax mandate, a.k.a. a “tax cut ban,” which requires states that accept federal funds through ARPA must not reduce their own taxes. It restricts states that receive aid from using the funds to “either directly or indirectly offset a reduction in the net tax revenue.”

This tax mandate has led to several constitutional challenges, resulting in three significant federal district court decisions during 2021 granting injunctions against enforcement, observed Yesnowitz.

Prediction: As several federal district courts begin to consider lawsuits challenging the constitutionality of the ARPA tax mandate, the Grant Thornton team predicts that at least two circuit courts will come to different conclusions, resulting in a split.

4. Income tax relief

Given states’ recovery from a fiscal perspective in 2021, in part because of federal funding, a number of states reduced rates or began phasing out corporate, personal or pass-through entity tax rates, Yesnowitz observed.

Prediction: As states continue to move from reliance on income taxes, Yesnowitz’s predicts that at least three states will enact income tax relief in the form of corporate and/or personal income tax cuts and/or phaseouts.

5. State adoption of MTC revised statement on P.L. 86-272

In August 2021, the Multistate Tax Commission adopted an updated statement on P.L. 86-272, the 1959 federal law that limits the state taxation of income from sales of tangible personal property if the taxpayer’s only business activities in the state are the solicitation of orders that are approved and shipped from outside the state. The revised statement includes a list of 11 different activities conducted by internet businesses and explains whether they are protected or unprotected for P.L. 86-272 purposes.

“The revised statement is somewhat controversial because it provides principles for applying the federal statute to modern business transactions in a manner that tends to narrow the protection of the law in many cases,” said Yesnowitz.

Prediction: At least three states will formally adopt the MTC’s revised statement of information providing that various activities conducted via the internet exceed P.L. 86-272 protection through regulation or administrative action.

6. Supreme Court review of SALT cases

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The Supreme Court may look at four cases involving the constitutionality of certain federal, state or local tax laws.

“In two of the cases, state high courts determined whether local taxes imposed on billboard advertising violate the free speech and free press protection of the First Amendment,” Yesnowitz noted. “The two remaining cases involved more traditional constitutional issues.”

In Ferrellgas Partners LP v. Division of Taxation, a New Jersey court held that a statute imposing an unapportioned partnership filing fee that does not reflect the amount of business conducted in the state does not violate the Commerce Clause. In New York v. Yellen, the Second Circuit held that the TCJA’s SALT deduction cap is not unconstitutional.

Prediction: The U.S. Supreme Court will grant review of at least one of these pending SALT cases.

7. Post-Wayfair litigation

Justices of the U.S. Supreme Court pose during their formal group photograph in the East Conference Room of the Supreme Court in Washington, D.C. Seated from left: Associate Justice Stephen Breyer, Associate Justice Clarence Thomas, Chief Justice John Roberts, Associate Justice Ruth Bader Ginsburg and Associate Justice Samuel Alito Jr. Standing behind from left: Associate Justice Neil Gorsuch, Associate Justice Sonia Sotomayor, Associate Justice Elena Kagan and Associate Justice Brett Kavanaugh.

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“In Wayfair, the Supreme Court upheld South Dakota’s sales tax economic nexus law in part because the state was a member of the Streamlined Sales Tax Agreement,” Yesowitz said.

In a constitutional challenge to the state tax complexity in Louisiana, a small family business, Halston Bead, has sued the state.

“Among other things, the Halston Bead litigation raises the question of whether states with decentralized sales tax systems like Louisiana will pass muster under Wayfair if they are not SSTA members and there is lack of uniformity in administration between the state sales tax and self-administered local taxes,” said Yesnowitz.

Prediction: At least three further challenges by online sellers will be introduced in court against states that do not have centralized or SSTA-compliant sales tax systems.

8. Sales tax and the digital economy

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In 2021, Maryland became the first state to enact a gross receipts tax on proceeds derived from digital advertising services. This is being challenged in both state and federal court in lawsuits by business associations and media companies, alleging violations of the Internet Tax Freedom Act and the Commerce and Due Process Clauses of the U.S. Constitution.

“Given the current legal and practical issues associated with implementing digital advertising taxes, states may have a greater appetite to tax the digital economy by expanding their sales tax bases to include digital goods and services, as many have done already,” said Yesnowitz.

Prediction: First, at least three states will enact legislation to expand their sales tax bases to include digital goods and/or services; and second, no state will adopt legislation that is substantially similar to the Maryland digital advertising tax currently being disputed in the courts.

9. Tweaks to state marketplace laws

In the move to capitalize on Wayfair, states enacted both remote seller economic nexus and marketplace facilitator laws.

“All states that adopted adopted remote seller provisions also enacted a corresponding marketplace provision with similar sales and transaction thresholds,” remarked Yesnowitz. “However, the rapid adoption of such legislation resulted in a wide range of definitions and collection responsibilities that vary widely from state to state, causing compliance difficulties for marketplace facilitators.”

Prediction: Recognizing the difficulties in navigating inconsistent marketplace rules, the Grant Thornton team predicts that at least two states will provide further clarity to their existing marketplace facilitator/provider provisions through legislation, regulation or administrative action.

10. Cryptocurrency guidance

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With cryptocurrencies increasingly popular both as currency and as an investment, the IRS and some states (New York New Jersey and Illinois) have issued guidance treating virtual currency as property rather than currency, with the rules regarding property transactions applicable to transactions using virtual currency. On the other hand, Wisconsin issued guidance explaining that virtual currency is intangible property treated for tax purposes similar to other types of intangible property.

Prediction: Due to the increased importance of this topic and the relative lack of state guidance, Yesnowitz and his team predict that at least two states will provide guidance in 2022 on the tax treatment of virtual currency.