COVID-19: State and Local Tax Implications.

As we all are aware, COVID-19 has affected individuals and businesses on a global scale.  Here in the United States, it is clearly not “business as usual,” and the federal and state governments are taking actions to bring some relief, both economic and non-economic, to those impacted.  From a state and local tax perspective, state governments, taxing authorities, and taxpayers are all dealing directly with the effects of COVID-19, in terms of impacts to both revenue generation, business operations, and the administration of and compliance with state tax laws.

This article highlights several of the state and local tax issues that may impact taxpayers due to COVID-19.  If you are looking for a detailed, up-to-date resource containing announcements from each state as it pertains to specific tax filing/payment extensions as well as other tax-related information (including some counties and cities providing local tax relief), I recommend the AICPA’s “State Tax Filing Guidance for Coronavirus Pandemic.”  This information is changing daily.

Tax Filing and Payment Extensions

Of course, this is the compliance issue of most concern for taxpayers right now.  Some states have made specific announcements or have indicated that they will follow the IRS as noted in the AICPA’s guide.  Below are some issues to consider:

• Income Taxes – Taxpayers need to pay close attention to (i) whether any extension includes filings, payments, or both, (ii) the date or date range to which any extension applies, and (iii) to what types of filings/payments and to which taxpayers an extension may apply.

For example, Iowa announced that it is extending until July 31, 2020, certain individual, fiduciary, corporate, and partnership income tax filings and payments with a due date after March 19, 2020, and before July 31, 2020.  However, this relief does not apply to estimated payments.

Utah’s statute sets the due date for individual income tax returns as “the day on which a federal individual income tax return is due under the Internal Revenue Code.”[1]  However, for partnerships and corporations, returns are due “on or before the 15^th day of the fourth month following [the close of the taxpayer’s] taxable year.”[2]  Therefore, a Utah Tax Commission News Release stated, “If the IRS changes the due date [for individuals] due to the outbreak, Utah’s due date will also be extended,” but that, “The due dates of Utah corporate and pass-through entities is set by state statute and will not be effected by IRS changes in the due dates for those returns without action by the [state] legislature.”  Also, in a separate Utah New Release, the state made clear that it has not extended the deadline for payment of state taxes.

• Sales/Use & Payroll Withholding Taxes – While it remains to be seen whether there will be widespread extensions for these taxes, a few states have already announced some sales/use tax and/or payroll tax relief. For example, Alabama announced sales tax payment relief until June 1, 2020, for small retail businesses (those whose average monthly retail sales were no more than $62,500 for the prior calendar year) and for taxpayers engaged in NAICS Sector 72 business activities, which includes accommodation and food service businesses.  This relief applies to sales tax liabilities for the February-April 2020 tax periods.

California’s Economic Development Department has announced on its website that employers statewide directly affected by COVID-19 may request a 60-day extension to file state payroll reports and to pay state payroll taxes without penalty or interest.  Those requests must be received within 60 days from the original due date of the payment or return.

One note of caution:  States consider sales and payroll withholding taxes to be “trust fund” taxes, since they are just collected by the taxpayer at the source on behalf of the state.  Once that money is collected, it belongs to the state.  As such, states typically impose harsher penalties in cases where these taxes are collected and not remitted, which may include personal liability and criminal prosecution.  Please reach out to your tax advisor before taking any action to delay payment of these taxes.  

Payroll Tax Withholding

Do you have an employee that is now working at home in a state other than the one where he or she reported to previously?  This is likely the case for businesses that are located close to other states, including in cities such as New York, Philadelphia, Cincinnati and Chicago.  For these employers, there may be obligations to withhold and remit income taxes based on where the employee is currently working, as some states take the position that this requirement arises as soon as the employee is performing services for the employer in the state.

It is important to note that some states have reciprocity agreements, mainly in the Mid-Atlantic and Midwest regions, that typically permit the employer to withhold taxes for the employee’s state of residence rather than the state in which services are performed.  However, be aware that in certain cases, the agreements extend only to state taxes; for example, New Jersey and Pennsylvania have reciprocity, but it does not cover tax imposed by Philadelphia.

Nexus and Apportionment

In conjunction with the issues noted above related to payroll tax withholding, businesses need to consider the possibility that having an employee working from home in another state will create nexus for state income and sales/use taxes.  Generally, having an employee working in a state creates a physical presence in that state for the business, and it may necessitate additional income tax and sales/use tax compliance obligations.  Also, with millions of Americans staying home and practicing social distancing, online/remote sellers are likely to see an increase in their sales.  Those online/remote sellers need to pay special attention to state sales tax economic nexus rules that have been enacted over the last couple of years since the Wayfair decision on June 21, 2018.  For more information about each state’s economic nexus thresholds and effective date, please see our sales tax compliance map.

In addition, those remote employees may impact how the taxpayer computes its payroll factor and/or its sales factor.  In particular, in states that utilize the income-producing activity/costs of performance method for sourcing sales from services, taxpayers may need to source some or all service revenues to a different state, since the employee providing that service may now be working in that other state.

Estimated Payment Reforecasting

Unfortunately for many businesses, there will be real negative economic impact that will go straight to the bottom line.  As businesses begin the process of reforecasting and building revised budgets, attention should be given to estimated payments. For example, if your business budgeted to make safe-harbor estimated payment (i.e., 100 percent or 110 percent of last year’s tax liability), consider whether you should revise those state estimated payments lower in light of any anticipated reduction in income, taking into account alternative state safe-harbor estimated payment provisions.  Some states provide a lower safe-harbor percentage based on the current year’s tax liability.

Incentive Agreements

Does your business have an incentive agreement in place with a local jurisdiction?  These agreements typically provide significant tax benefits in exchange for a business engaging in a new or expanded project that results in the investment of a certain amount of capital and/or the creation of a certain number of jobs in the local jurisdiction.

In light of the uncertain economic environment at this time, businesses need to review those agreements and make sure that they are still able to comply with the required capital investment/job creation thresholds.  Otherwise, the business may not be able to receive a tax benefit, or worse, there could be a claw-back of prior benefits received.  For those businesses that may not be able to meet their obligations under the agreement, consider whether there are provisions that could excuse nonperformance, such as force majeure provisions.

State Tax Legislation

State legislative sessions were in full-swing until COVID-19 caused the shutdown/suspension of state legislative activity – some through a specific date (which could get extended) and some indefinitely.  While the overall impact of this is unclear right now, in the short-term there will be legislation that taxpayers were anticipating this year that may be delayed until after tax filings/payments are due or that, due to economic and other conditions, may be tabled permanently.

For example, each year Georgia passes legislation that updates the state tax code’s conformity with the Internal Revenue Code (i.e., changes to the Internal Revenue Code during 2019 become incorporated into the state tax code where applicable).  This year that legislation, HB 949, was introduced on Feb. 19, 2020.  Since then, additional tax reform measures were added to the bill, including the introduction of a flat 5.375 percent tax rate for individuals, tripling the credit for the adoption of a foster child during the first five years of the adoption from $2,000 to $6,000, and adding a new income tax credit for certain working families.  The bill passed the House but is now sitting in the Senate while the legislature is adjourned indefinitely.

As we all work together to navigate this difficult time, Aprio and our SALT team are here to answer any questions and assist you with your business needs.  States are announcing relief daily, so it is important to continually monitor any changes that may impact your business, and Aprio’s SALT team is doing just that.  Stay up-to-date with all of the options available to you by subscribing to Aprio’s new COVID-19 Advisor content hub.  Our advisors are informed and ready to help, so please reach out to your Aprio advisor or you can contact us here.

[1] Utah Code Ann. § 59-10-514(1)(a).

[2] Utah Code Ann. §§ 59-10-514(1)(c) and 59-7-505(2).