In addition to the recently enacted federal tax legislation intended to provide relief to taxpayers who are struggling in the wake of COVID-19, states are also enacting legislation and policies to aid taxpayers through a variety of measures. States also are expecting to face challenges associated with balancing taxpayers’ needs for relief with the impact of the virus on government funding. This article highlights some of the state and local tax issues that may impact individuals and businesses related to COVID-19.
Recent State Tax Relief Efforts
Many states have announced measures designed to provide individuals and businesses with much-needed relief. Some of those measures include:
(1) Income/Excise Tax Filing and Payment Extensions
Numerous states and local jurisdictions have extended certain tax filing and payment deadlines, with most states conforming to the federal income tax filing and payment extension from April 15, 2020 to July 15, 2020.
Oregon, for instance, announced the following on March 25, 2020:
- Personal Income Tax, Transit Self-Employment Tax, and Fiduciary Taxpayers: The personal income tax return filing and payment due dates for 2019 are extended from April 15, 2020 to July 15, 2020. Any interest and penalties with respect to the extended tax filings and payments will not begin accruing until July 16, 2020.
- Corporate Income/Excise Taxpayers: The corporate/excise tax return filing and payment due dates are extended from May 15, 2020 until July 15, 2020. The deadlines for filing returns that are otherwise due after May 15, 2020 are not extended at this time. Any interest and penalties with respect to the extended tax filings and payments will not begin accruing until July 16, 2020.
- Corporate Activity Tax: Initial quarterly payments of Oregon’s new Corporate Activity Tax are still due by April 30, 2020, but the Department of Revenue will not assess underpayment penalties against taxpayers who make a good faith effort to estimate their first quarter payments.
(2) Sales and Use Tax Filing and Remittance Extensions
States have taken vastly different approaches to filing and payment extensions for sales and use taxes. For instance:
- Alabama has announced that it will provide sales tax payment relief for small businesses and food service businesses for tax periods from February through April 2020.
- California has pushed back the deadline for sales tax filings by 60 days for individuals and businesses unable to file on time based on compliance with public health requirements related to COVID-19. The California Department of Tax and Fee Administration also announced that businesses with less than $5 million in taxable annual sales may take advantage of a 12-month, interest-free, payment plan for up to $50,000 of sales and use tax liability.
- Minnesota has granted a 30-day extension for certain bars, restaurants, and other places of public accommodation to pay their February sales tax liabilities, extending the deadline from March 20, 2020 to April 2020.
- Washington has informed businesses that they can request the following types of relief:
- Monthly filers may request an extension prior to the filing due date or within 4 days after the due date;
- For quarterly filers, the Q1 sales tax due date is now June 30, 2020; and
- For annual filers, the annual 2019 return is now due June 15, 2020.
Note that sales taxes generally are “trust fund” taxes, meaning that the money belongs to the state once it has been collected. Ordinarily, states impose harsher penalties in cases where such taxes are collected but not remitted. It is a good idea to consult with a tax advisor before delaying remittance of these taxes to the state.
(3) Property Tax Appeal and Payment Deadlines
Some jurisdictions have extended property tax appeal or payment deadlines. For instance:
- The District of Columbia has extended the deadline to appeal property tax assessments for all property owners to April 30, 2020.
- Iowa has temporarily suspended collections of property taxes as well as penalties and interest.
- West Virginia has waived interest and penalties on property tax filings until May 1, 2020.
Unless a state has explicitly announced an extension, taxpayers should assume that all ordinary deadlines remain in effect.
Other Potential State Tax Issues Related to COVID-19
The steps being taken by states to prevent the spread of COVID-19 (e.g., working from home, curtailing travel and public gatherings, etc.) and provide taxpayer relief will inevitably impact state revenue generation and create other state and local tax consequences for individuals and businesses. With that in mind, it is important to consider the ways in which states could respond and the potential impact on business operations.
(1) Nexus and Apportionment
With potentially millions of employees working from home or other remote locations, businesses will need to consider how their state tax reporting obligations could change. For instance:
- Nexus: Businesses could see their nexus footprints expand. Ordinarily, a business is considered to be “doing business” in a state and is therefore subject to the state’s tax laws if the business has employees working in the state. Employees working in different states in light of COVID-19 could therefore inadvertently cause a business to be subject to tax in that state. Several states have issued guidance providing for relief from usual nexus provisions in response to COVID-19.For instance:
- New Jersey has issued a statement providing that “in the event that employees are working from home solely as a result of closures due to the coronavirus outbreak and/or the employer’s social distancing policy, no threshold will be considered to have been met.”
- Mississippi has also announced that it will not “use any changes in the employees’ temporary work locations due to the Pandemic” to impose nexus.
- Sourcing of Sales: In states that utilize the cost of performance method for sourcing sales from services for income tax purposes (in which sales are sourced to the state in which the income-producing activity was performed), businesses may need to source some or all service revenues to a different state if an employee providing the service is now working in that state.
Most states have shifted away from cost of performance approaches, but a handful of states continue to apply a cost-based approach to sourcing service revenues. In addition, several states that have adopted market-based sourcing have limited the application of such rules to C corporations (e.g., New York and New Jersey), and continue to apply the cost of performance method to pass-through entities.
- Income Tax Withholding: If an employee is working from home in a state other than the state where the employee previously worked, an employer may be obligated to withhold and remit income taxes based on the state where the employee is currently working, since withholding obligations often arise at low wage thresholds and, in some states, as soon an employee begins performing services in that state.
(2) State Tax Audits and Controversies
States seeking increased revenue as a result of COVID-19 may and probably will intensify and accelerate tax examinations, audits, and assessments. Temporarily, however, states have shown some flexibility with ongoing audits by postponing response deadlines, and some states have extended filing deadlines for tax appeals and refund claims.
(3) Revising Estimated Taxes
Some businesses may need to revisit their tax estimates and projections for their fiscal year. Specifically, businesses should consider whether to revise state estimated tax payments in light of any reductions in income, taking into account alternative state safe harbor estimated payment provisions as businesses begin putting together revised budgets.
(4) Incentive Programs
Incentive agreements with local tax jurisdictions may provide tax benefits for taxpayers who engage 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 within the jurisdiction. Considering the uncertain economic situation, businesses should review these types of agreements to make sure they are still able to comply with the agreed-upon capital investment and/or job creation thresholds. If a business is not able to meet its obligations under an incentive agreement, the business should consider whether there are provisions in the agreement that excuse nonperformance, such as a force majeure clause, an impossibility or impracticability defense, or a frustration of purpose defense. Whether such defenses can be invoked to excuse performance due to COVID-19 is a fact-intensive inquiry that must be determined on a case-by-case basis.
The state and local tax situation is fluid and evolving rapidly at this time. If you have questions about your obligations in any state or local taxing jurisdiction, please reach out to any member of our tax group.