State treatment of Paycheck Protection Program loan forgiveness, although not immediately apparent when federal forgiveness became a reality, has been clarified by most states, according to the 2021 Survey of State Tax Departments by Bloomberg Tax & Accounting.
“That’s one of the most relevant of the survey’s findings this year,” said Lauren Colandreo, state tax analyst at Bloomberg Tax. “Twenty-nine states will follow federal treatment of PPP loan forgiveness.”
“This is important because it means both small businesses and large corporations that took out loans will not have additional income attributable to them,” she said. “The federal government is treating forgiveness as nontaxable income and the states are following suit.”
Every year Bloomberg Tax surveys senior state tax department officials in the District of Columbia, New York City, and the 45 states that impose a corporate income tax. They also ask about issues regarding sales and use tax in the 47 jurisdictions that impose those taxes.
Corporate income tax
“Like last year, we saw states asserting nexus over a business that had one to six employees that are working remotely from a location in their state,” said Colandreo. “Although a number of these waived their nexus requirement because of COVID-19, many states are now reviving these nexus waivers even though employees are still working remotely.”
“The unique circumstance created by COVID-19 over the past year means that employers will want to pay careful attention to the location from which their employees are working remotely, since nearly every state responded that doing so would create nexus,” noted Colandreo.
Specifically, the survey found that having a minimal number of telecommuting employees who conduct nonsolicitation activities is enough to create nexus in 37 states. A similar number also responded that a single telecommuting employee would create nexus if they are performing back-office functions (34 states) or participating in product development functions (35 states). Mississippi was the only state that said a telecommuting employee would not create nexus under any of these circumstances. Oklahoma, Tennessee and West Virginia also said “No” to some of these questions, but not all of them.
Eleven states, three fewer than in 2020, reported that they use a factor presence threshold to determine if an out-of-state corporation has nexus. Only two states, Alabama and Tennessee, said that they fully conform to the Multistate Tax Commission’s model statute, while Connecticut responded that they partially conform to the model statute. The remaining eight states either said that their threshold does not conform to the Multistate Tax Commission’s model statute or did not respond.
Sourcing receipts from sales other than sales of tangible personal property was an area that evidenced sweeping uniformity in the corporate income tax area, according to Colandreo.
“In that area, most states are now using a market-based sourcing formula, with the source being receipt. Specifically, 31 states, four more than in 2020, said that they use market-based sourcing,” she said. “Only seven stated that they use a cost-of-performance approach. Sixteen states said they apply different sourcing methods to different categories of receipts.”
Because nexus determinations are fact-specific and subject to interpretation, the states’ answers should not be relied upon as definitive policy statements, she cautioned: “Even where a state responds that the performance of a particular activity by itself would not trigger nexus, it is not always clear whether nexus might arise if any additional activity was performed in the state.”
It pays to be vigilant to changing circumstances, according to Colandreo. “In some cases, a corporation that started off doing business in only one state grows quickly and fails to recognize it may have triggered nexus in a number of states,” she said. “In other cases, a company might change an earlier position after deciding that a former tax manager either incorrectly concluded that the company was not subject to tax or pursued an overly aggressive nexus policy.”
States respond to the feds
As in previous years, the survey asked whether states conform to a variety of code sections affected by the Tax Cuts and Jobs Act of 2017. Of the IRC sections addressed, states most often said they conform to the changes made to Code Section 163(j), which limits the business interest expense deduction, and the repeal of Section 199, which eliminates the domestic production activities deduction.
A new category of questions this year was added regarding the states’ adoption of tax-related provisions in the CARES Act.
“Unlike the majority of states’ adherence to the changes made to Code Section 163(j) by the TCJA, the states were split on whether they conform to the temporarily modified limitations on the interest expense deduction made by the CARES Act changes. Twenty-one states said they conform, while 16 states said they do not,” said Colandreo.
State sales tax
“On the state sales tax side, we saw unprecedented uniformity, with nearly every state moving to an economic nexus standard,” said Colandreo. “Florida has adopted an economic standard, and Missouri, the last holdout, has just passed its own economic nexus standard.”
The Missouri legislation incorporated many of the suggestions of the Streamlined Sales Tax Project, according to Scott Peterson, former director of the SST Project Governing Board and currently vice president of U.S. tax policy & government relations at Avalara.
“The Streamlined Sales Tax Project devoted considerable effort to find ways to ease that burden. Many of those efforts were included in the legislation that Governor Parsons signed. Those efforts include a process to exactly identify jurisdiction boundaries and then associate tax rates with those boundaries along with a matrix of what is and isn’t taxable,” Peterson said.
“Historically, the burden of finding those answers fell on the business trying to collect the state and local taxes,” he said. “It is the state and local governments that control the decisions that create that information, and it follows that they should be responsible to provide the information to impacted businesses.”
“This legislation also includes use of the SST’s Certified Service Provider program,” he said. “This is an additional step in shifting the compliance burden off of businesses by providing access to sales tax automation solutions.”
Just as it did with corporate income tax nexus, COVID-19 shed light on whether a telecommuting employee performing non-sales-related activities would create nexus for an out-of-state retailer. “Twenty-two states, the same as in 2020, told us that one employee who performs back office administrative business functions would create sales tax nexus if that employee telecommutes from a home located in the state,” said Colandreo. “And states were nearly unanimous in responding that reimbursing an in-state salesperson for the costs of maintaining a home office would create nexus.”
One reason the survey is so important is that state policies and rules are constantly changing, Colandreo observed: “It can be difficult to keep up with all these issues across many states. As our business landscape has changed in the last year due to COVID-19, having these answers is even more important.”
