Top 10 SALT stories of 2020


In a year wracked by the outbreak of COVID-19, the most important state and local tax (SALT) issues of 2020 were necessary responses to the economic downturn that COVID-19 caused. Continuing our long-standing tradition of summing up the year in SALT, our Grant Thornton SALT team in the Washington National Tax Office evaluated and ranked the 10 most important SALT stories of 2020 in order of perceived importance. Below, we briefly outline the issues that are described more thoroughly in our full story.




1. CARES Act and state reactions


The CARES Act, passed in late March, provided more than $2 trillion in economic relief in response to COVID-19. The major provisions included changes to net operating loss carryback rules, modifications to the business interest expense deduction limitation and the reclassification of qualified improvement property eligible for 100% bonus depreciation. Many states took a variety of approaches to address these changes in their state tax codes, and those by Colorado and Iowa deserve special mention. Colorado adopted the federal Internal Revenue Code (IRC) on a prospective basis, but with a definition of IRC that does not adopt statutory changes enacted after the last day of the year. Iowa amended corporate tax provisions and decoupling from certain TCJA and CARES Act provisions.




2. The remote workplace


The spread of COVID-19 nationwide led to a significant portion of the workforce to relocate away from offices to work-from-home situations. Many of these moves meant people were working in different states than before, and these location shifts created significant state and local tax issues for both employers and employees. Several states indicated employer state withholding obligations would not change for remote workers, so income earned in the office’s state would still be considered income earned in that state by remote workers residing in another state. New York, after some months of uncertainty, clarified that a nonresident with a primary office in New York but telecommuting would be considered still working in New York unless the employer established a bona fide office at the remote work location.




3. Impact of the pandemic on state budgets


State and local governments are estimated to have furloughed or laid off up to 1.2 million employees, tied to the need to implement budget reductions. At least 17 states turned to the use of reserves to offset revenue losses and also benefited from federal legislation providing $150 billion to state and local governments. Financial conditions could grow increasingly worse, pressuring state and local governments to turn to more aggressive enforcement of tax statutes to collect revenue.




4. Shifting income tax deadlines


With the onset of the COVID-19 lockdowns in March and April coinciding with many tax filing deadlines, states nationwide scrambled to pass legislation providing taxpayer relief through deadline extensions. The IRS moved its April 15 deadline to July 15, with most states following by granting similar extensions. In New Jersey, accounting for the financial impact of the tax revenue delays, the state became the first to extend its fiscal year beyond 12 months.




5. IRS approves workaround to TCJA’s SALT deduction cap


The Tax Cuts and Jobs Act limited itemized deductions for state and local taxes to $10,000 for individuals and most married couples in 2018, and many states have tried to respond to this limitation since. In response, seven states have enacted pass-through entity tax regimes, which shifts the imposition of tax from an owner to the entity, with New Jersey and Maryland doing so this year. Six of the states allow this regime to be elective, while Connecticut mandates the tax. In November, the IRS formally accepted the ability to use state pass-through entity tax regimes to work around the $10,000 limit, likely encouraging more states to act similarly in 2021.




6. State ballot initiatives


The Nov. 3 general election saw major ballot initiatives in California and Illinois. In California, voters considered several ballot initiatives:

  • Voters rejected Proposition 15, proposing a “split roll” property tax system assessing commercial and industrial properties at fair market value, while leaving residential property assessed at purchase price.
  • Voters approved Proposition 19, allowing homeowners 55 and older, or disabled, to transfer their property tax basis between counties.
  • Voters approved Proposition 22, allowing app-based rideshare and delivery drivers to be classified as independent contractors.

Voters in Illinois rejected the Illinois Fair Tax, which would have allowed the state to enact a graduated income tax, currently forbidden under the Illinois Constitution.




7. California NOL/credit suspensions


In June, California enacted legislation temporarily suspending the use of net operating losses for most taxpayers, and limiting the use of most business credits to $5 million for tax years beginning in 2020, 2021 and 2022. The law suspends use of NOL deductions, but provides a small business exemption for corporations that have less than $1 million of income subject to tax in a year. The legislation is projected to raise $9.2 billion in three years to help close a budget shortfall.




8. Wal-Mart and clarification of marketplace facilitator provisions


Since the South Dakota v. Wayfair, Inc. decision two years ago, nearly all states have imposed an online marketplace sales tax. Some states have attempted to impose sales tax obligations for periods prior to the enactment of these laws, resulting in legal challenges. In a challenge to this policy, he Louisiana Supreme Court ruled in Normand v. USA, LLC that an online marketplace was not a “dealer” required to collect and remit sales tax on third-party sales. The ruling may be a deterrent to other states adopting similar legislation pursuing tax collection for periods preceding Wayfair.




9. Addressing Wayfair and indirect tax issues


State and local tax laws enacted in the wake of the Wayfair decision, allowing collection of sales taxes from remote sellers and marketplace facilitators, helped those jurisdictions offset some of the effects of COVID-19. Online sales jumped in March and April, accelerating a shift to e-commerce shopping and spending. Comparing Texas and Florida, which do not levy personal income taxes, Texas’ embrace of remote seller provisions saw its overall revenues drop by only 6.5% in June, compared to last year. Florida, which has not enacted remote seller laws, saw its sales tax revenue decrease 19% in the same time frame.






10. Meeting credits and incentives program requirements


On a limited scale, state and local governments were developing incentives to aid struggling businesses during the COVID-19 downturn. Arkansas allocated $55 million to its Ready for Business grant program which provided funding for personal protective equipment, no-contact thermometers, no-contact point-of-sale equipment and other safety items. New York’s Forward Loan Fund and Wisconsin’s We’re All In grant program provided similar help to its businesses.


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