No one could have predicted the imprint that 2020 would leave on our lives due to the outbreak of the COVID-19 pandemic. The same goes for state and local tax (SALT) administration and policy, which was impacted by the pandemic in a variety of truly unpredictable ways. While most of us were eager to bid farewell to 2020 for obvious reasons, we are left with some lasting effects of the pandemic on the SALT landscape moving into 2021.
With COVID-19 vaccinations underway nationally and the Biden Administration in its opening days, it is possible to discern SALT policy trends with some degree of confidence. Accordingly, Grant Thornton has formulated 10 predictions covering the SALT issues that we believe will be of major focus in 2021.
Our 2021 predictions
1. Continued CARES Act responses
As discussed above, the federal government enacted the CARES Act on March 27, 2020, to provide substantial economic relief to both businesses and individuals in response to the pandemic. The three major corporate income tax provisions contained within the CARES Act were changes to the net operating loss (NOL) carryback rules, modifications to the business interest expense deduction limitation, and the reclassification of qualified improvement property (QIP) to be eligible for 100% bonus depreciation. Some states enacted legislation to address the major CARES Act provisions, but other state legislatures have not considered these provisions. Due to the shortened legislative sessions in some states caused by the pandemic, some states did not have sufficient opportunity to evaluate these issues. In fact, the Alabama governor expressly issued a proclamation addressing CARES Act conformity because the abbreviated 2020 regular legislative session prevented full consideration of the CARES Act.1 Some static conformity states that adopt the IRC as of a certain date enacted conformity legislation in 2020 but have not yet addressed the CARES Act provisions due to their conformity date. For example, static conformity states such as Florida,2 South Carolina,3 and Vermont4 enacted legislation during 2020 that advanced their IRC conformity dates to Dec. 31, 2019, or Jan. 1, 2020. These states presumably will consider the CARES Act during their 2021 legislative sessions as they advance their IRC conformity dates past March 27, 2020. The CARES Act provisions provide relief to taxpayers, but conformity with provisions tends to have an adverse effect on state revenue. Multiple states decided to decouple from some of the major CARES Act provisions in 2020. We predict that at least three additional states will decouple from the three key CARES Act corporate income tax provisions through legislation, regulation or administrative action.
2. New and unusual taxes
As the states continue to feel the financial pain induced by the pandemic, many will seek to identify new and politically acceptable sources of tax revenue. Rather than impose unpopular but seemingly simple income tax rate increases across the board, it is likely that state legislatures will look to alternative methods to raise revenue. Over the past several years, we have observed many states join in a slow and steady trend of adopting sin taxes. For example, many states have legalized the use of recreational marijuana and tax sales of the product as a means to generate substantial amounts of revenue.5 We have seen cities like Philadelphia and Seattle turn to soda tax for its ability to generate revenue while at the same time promoting a societal good. Further, in response to the U.S. Supreme Court’s 2018 decision declaring the Professional and Amateur Sports Protection Act unconstitutional,6 states have been legalizing sports betting activity and enacted corresponding taxes. During 2020, voters in Louisiana,7 Maryland,8 and South Dakota9 authorized sports wagering, while voters in Nebraska approved gaming operations at racetracks and a corresponding tax.10 Taking a different approach, New Jersey enacted legislation targeting high earners – another perceived “sin” – during 2020. Specifically, the new law signed Sept. 29 increased the state’s top Gross Income Tax rate from 8.97% to 10.75% for individuals earning between $1 million and $5 million in annual income retroactive to Jan. 1, 2020.11 Prior to the bill’s enactment, the 10.75% rate applied only to individuals earning over $5 million in income. During 2021, we predict that at least three states will enact legislation allowing for new “sin” taxes (i.e., legalization of marijuana and/or sports betting or adopting “millionaire” taxes). In addition, at least one state will enact a wealth tax of some form on high-earning residents.
3. Tax treatment of telecommuting
During 2020, many states recognized the significant increase in the number of remote workers resulting from the pandemic and released guidance (often intended to be temporary) regarding the treatment of their wages for personal income tax, business tax nexus and corporate apportionment factor purposes.12 With respect to income tax withholding, many states released guidance indicating that employer state withholding obligations would not change during the time that employees are working remotely due to the pandemic, meaning that wages paid to nonresident employees normally working in one state before the pandemic are considered to be income earned in that state and subject to withholding. Additionally, approximately one-third of the states have issued guidance providing for the temporary suspension of corporate income tax and/or sales and use tax nexus thresholds where the pandemic has forced certain employees to work remotely in a state in which the employer would otherwise not have nexus. States have similarly released guidance providing that they would not consider temporary changes in an employee’s physical work location to alter the apportionment of income during the periods in which temporary telework requirements are in place.
Several states have provided a specific end date to their temporary tax withholding guidance and/or nexus and apportionment waivers, with many states beginning to extend the end dates out through the middle of 2021.13 Other states have specified that the guidance would remain in effect for the duration of their state of emergency declarations, some allowing for a grace period after the emergency declaration is lifted. However, most states have not provided any guidance addressing the tax treatment of remote workers, creating a lack of consistency and further confusion for employers that will continue to be faced with important tax decisions as remote work is expected to continue well into 2021. As workers continue to work from home in 2021, we predict that at least five states will extend their temporary guidance or release new guidance to address the issues related to income tax withholding, business tax nexus and/or income tax apportionment.
4. The PPP
In Section 1106(i) of the CARES Act, Congress specified that forgiven loans awarded as part of the Paycheck Protection Program (PPP) used for allowable expenses would be excluded from a recipient’s gross income for federal income tax purposes. With no specific provision addressing the deductibility of these allowable expenses, the IRS issued Notice 2020-32 on April 30, 2020, taking the position that expenses paid with forgiven PPP loans would not be deductible. To address the disparity between the IRS guidance and the designed intent of the original law, the House and Senate overwhelmingly approved the Coronavirus Appropriations Act, 2021 on Dec. 21, 2020, and President Donald Trump signed it into law on Dec. 27, 2020. Included is Section N – the COVID-related Tax Relief Act, which reverses the IRS guidance and allows taxpayers to fully deduct any expenses regardless of whether the forgiven PPP loan proceeds were utilized to pay for such expenses. Specifically, both the loan and the loan forgiveness will remain excluded from income. Further, taxpayers utilizing their forgiven PPP loan receipts to remain in business do not need to decrease any deduction or basis. Like other newly enacted federal provisions, each state will need to evaluate whether its current laws result in automatic conformity. Further, while taxpayers will certainly appreciate being allowed to deduct the expenses at a state level, deductibility will result in a cost incurred by the states. As the states look to balance their budgets during this time of economic uncertainty, one would expect that the cost of allowing the deduction will be scrutinized and addressed accordingly. While many states will align themselves with the Dec. 2020 federal law allowing deductibility of PPP-funded expenses, at least three states will choose to decouple from this provision in an effort to address state budget deficits.
5. PTE taxes
As discussed above, seven states have adopted entity-level taxes allowing PTEs to deduct taxes paid at the entity level in an attempt to circumvent the $10,000 SALT itemized deduction limit for individual taxpayers, with New Jersey14 and Maryland15 joining the list in 2020. After years of silence on the issue, the IRS released guidance confirming that PTEs may claim an entity-level deduction for state and local income tax paid under state laws that shift the tax burden from individual owners to the business entity.16 The IRS approval of these PTE tax regimes will likely encourage additional states to enact laws adopting similar tax regimes, especially those states imposing comparatively high personal income tax rates on residents that are disproportionately affected by the SALT deduction cap. However, some modification or even the full repeal of the SALT deduction limitation also remains a possibility under a Biden administration and with congressional support. Assuming that the SALT deduction cap is not adjusted this year, we predict that at least three additional states will enact pass-through entity tax regimes to the extent that the SALT deduction limitation remains in place.
6. Permanent extensions of the state income tax filing season
During 2020, we saw taxpayers and tax practitioners continue to struggle to meet income tax compliance deadlines. State compliance has become increasingly difficult, in part due to the various state responses to both the TCJA and CARES Act, and the states’ numerous approaches to IRC conformity more generally. Taxpayers sometimes are required to make complex adjustments to their federal taxable income when computing their state income tax liability. The completion of state income tax returns is further complicated by the fact that some states vary their treatment of federal provisions between tax years. In 2020, income tax compliance was further complicated by the fact that the pandemic first became severe during the spring compliance season. Several states temporarily provided extra time to file state income tax returns as a result of the pandemic. The difficulty in completing state income tax returns is expected to continue for the foreseeable future. Taxpayers and tax practitioners would benefit by having a period of time after filing federal tax returns to accurately compute state income tax liability. We predict that at least three states will permanently extend their official due dates during 2021 to allow taxpayers to file at least 30 days beyond completion of their federal income tax returns.
7. Digital advertising taxes
In response to the continuing shift to a digital economy, we predict that states will seek to impose sales tax on digital goods and services. States seriously considered taxing digital advertising and downloads during 2020. In March 2020, the Maryland legislature passed bills that would impose a gross receipts tax on digital advertising17 and expand Maryland’s sales and use tax to digital downloads,18 but both bills were vetoed by the governor. However, there is a possibility that the legislature could override the governor’s veto in the 2021 legislative session.19 Many commentators have noted that digital service taxes, such as the one proposed by Maryland, are a poor policy choice, against the international trend, and face potential legal challenges, including but not limited to a violation of the permanent Internet Tax Freedom Act and a violation of the First Amendment. Although proposals to tax digital advertising also were considered during 2020 by the District of Columbia,20 New York,21 and Nebraska,22 none of these proposals were enacted. Despite the policy and legal concerns, the taxation of digital goods and services seems to be gaining momentum as states are seeking revenue to address budget shortfalls resulting from the pandemic. Legislation that would tax digital advertising recently was prefiled prior to New York’s 2021 legislative session.23 Other states similarly are expected to consider taxing digital goods and services. We predict that at least five states will introduce legislation attempting to adopt a special tax on digital goods and services, or expanding their sales tax bases to include digital goods and services, with at least two states successfully enacting this legislation.
8. Continued state responses to Wayfair
As discussed above, we saw continued state adoption of sales tax marketplace provisions in 2020 to complement sales tax economic nexus standards for remote sellers in response to the Wayfair decision.24 All but two states imposing a sales tax have adopted remote seller economic nexus and marketplace provisions, with Missouri and Florida being the only remaining holdouts. Both states have introduced legislation that would adopt remote seller and marketplace provisions, recognizing the significant additional revenue that would result from online sales made by out-of-state retailers.25 In the search for additional revenue to close budget deficits, other states are likely to regain the appetite to extend the application of Wayfair beyond sales and use taxes. We predict that the two remaining holdout states – Missouri and Florida – will follow the lead of others and finally enact remote seller and marketplace measures. In addition, we predict that at least two states will adopt an economic nexus standard for income tax via legislation, regulation or administrative action.
9. Property tax values and the pandemic
As a result of the pandemic decreasing commercial property values in many major cities, overall property tax revenues could be significantly disrupted. With many employees now working from residential locations, the future need for commercial property space in major metropolitan areas remains uncertain. The prolonged closure of offices, and the potential for less demand to maintain office in core business districts in the future could lead to significantly reduced commercial property values. Conversely, residential property values appear to be increasing in many markets as the sale price of a median single-family home in the third quarter of 2020 increased by approximately 12% from the year before.26 From a property tax perspective, these valuation changes could result in significant disruption of property tax revenues over the coming years. According to the Urban Institute, state and local governments collected a combined $526 billion in revenue from property taxes, or 17% of general revenue, in 2017.27 Property tax revenue as a percentage of state and local general revenue was higher than general sales tax revenue, individual income tax revenue, and corporate income tax revenue in 2017. With property tax representing such a significant proportion of revenue, the impact of changes to property tax values will be consequential. In an effort to stabilize this revenue source, we predict that at least three jurisdictions will increase their general rates or adjust valuation formulas during 2021.
10. New Hampshire v. Massachusetts
In an attempt to address the long-term fiscal impact of a remote workforce, Massachusetts in 2020 finalized an emergency regulation providing that compensation received by a nonresident who previously worked in the state, but is now working outside the state due to the pandemic, will continue to be treated as Massachusetts source income subject to tax.28 The regulation was extended through 90 days after the end of the Massachusetts governor’s state of emergency declaration.29 In response, New Hampshire brought an action in the U.S. Supreme Court, arguing that the Massachusetts regulation unconstitutionally imposes income tax on New Hampshire residents lacking a connection with the state during the pandemic, in violation of the Due Process and Commerce Clauses.30 The complaint also alleged that Massachusetts infringed on New Hampshire’s sovereignty and discretion over its policy not to levy a personal income tax. Numerous states, including Connecticut, New Jersey, Rhode Island and Vermont, are considering intervening in the litigation, based on the significant number of residents now working remotely in their states. Indeed, the litigation has received widespread attention from both state taxing authorities and SALT practitioners, with numerous states and interested parties filing amicus briefs in support of New Hampshire’s compliant and urging the Court to hear the case.
So the obvious question to ask is, will the Court take it? To be sure, the case presents important questions regarding the proper sourcing of income earned by non-residents working in their resident state during the pandemic and beyond. Further, New Hampshire is arguing that since the lawsuit implicates two states, under the Court’s original jurisdiction, the Court must grant a hearing (though there are competing views regarding whether the Court is actually required to hear such cases).31 However, the Court only agrees to hear oral arguments in approximately 1% of the cases it reviews each term.32 Despite the important multistate income sourcing implications involved in the case, and the desire among SALT practitioners to see state tax litigation addressing cutting-edge topics at the Supreme Court, we predict that the Court will decline to grant review in New Hampshire v. Massachusetts.
1 Proclamation, Office of Alabama Governor, Dec. 11, 2020.
2 Ch. 2020-184 (H.B. 7095), Laws 2020.
3 Act 47 (S.B. 545), Laws 2020.
4 H.B. 954, Laws 2020.
5 Jamie Yesnowitz and Emily Fiore, The History and Purpose Behind Sin Taxes, BLOOMBERG BNA DAILY TAX REPORT: STATE, Oct. 17, 2017. During 2020, Arizona, Montana, New Jersey and South Dakota voters all approved legalization of marijuana sales.
6 Murphy v. NCAA, 138 S. Ct. 1461 (2018). The PASPA was a federal law that prohibited the expansion of sports betting beyond Nevada, Delaware, Montana and Oregon, which all had some type of sports betting or commercial casino gambling at the time of the law’s enactment in 1992. 28 U.S.C. §§ 3701-3704.
7 Louisiana Secretary of State, 2020 General Election, Official Results.
8 Question 2, Maryland State Board of Elections, Unofficial 2020 Election Results (as of Dec. 1, 2020).
9 Authorizing the legislature to allow sports wagering in the City of Deadwood. South Dakota Secretary of State, 2020 General Election, Unofficial Results (as of Dec. 1, 2020).
10 Initiative Measures 430 and 431, Nebraska Secretary of State, Unofficial Results: General Election – Nov. 3, 2020 (updated Nov. 23, 2020).
11 A. 10, Sec. 1, adding N.J. REV. STAT. § 54A:2-1(a)(7), (b)(7).
12 For further discussion, see GT SALT Alert: “COVID-19 impact on remote work and state tax policy.”
13 For example, South Carolina extended its temporary guidance regarding income tax withholding and nexus relief to apply through June 30, 2021. S.C. Information Letter #20-29, South Carolina Department of Revenue, Nov. 30, 2020. Pennsylvania recently updated its teleworking guidance to extend withholding tax and nexus relief through the earlier of June 30, 2021 or 90 days after the governor’s state of emergency proclamation is lifted. Telework During the COVID-19 Pandemic, Pennsylvania Department of Revenue, Nov. 9, 2020.
14 P.L. 2019, c.320, Laws 2020.
15 Ch. 641 (S.B. 523), Laws 2020.
16 Notice 2020-75, Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes, U.S. Department of Treasury & Internal Revenue Service, Nov. 9, 2020.
17 H.B. 732, vetoed by governor, May 7, 2020. This legislation would have instituted the nation’s first digital services tax on digital advertisers and would have primarily targeted large technology companies. For additional information, see GT SALT Alert: “Multiple Maryland tax bills enacted.”
18 H.B. 932, vetoed by governor, May 7, 2020. This legislation included a provision that would have expanded Maryland’s sales and use tax to digital downloads, including digital products and digital codes delivered to purchasers with a physical location in Maryland.
19 Pamela Wood, Coalition pushes to block digital advertising tax in Maryland, BALTIMORE SUN, Nov. 10, 2020.
20 The taxation of digital advertising was included in a proposed version of the Fiscal Year 2021 Budget Support Act of 2020, D.C.B. 23-760, but it was removed prior to enactment. For further information, see Aaron Davis, D.C. Council Removes Ad Tax, Tweaks Gas Tax in Final Budget Vote, TAX NOTES TODAY STATE, July 29, 2020.
21 S. 8056, introduced March 13, 2020 (died in committee).
22 L.B. 989, introduced Jan. 14, 2020 (died in committee).
23 S. 302, referred to the New York Senate Budget and Revenue Committee on Jan. 6, 2021. For further discussion, see Carolina Vargas, New York Lawmakers Propose to Tax Digital Ads, Carbon-Based Fuels, TAX NOTES TODAY STATE, Jan. 4, 2021.
24 Georgia, Louisiana, Mississippi and Tennessee all adopted marketplace provisions in 2020.
25 Proposed Florida legislation would require remote sellers and marketplace facilitators to collect sales tax if they exceed $100,000 in sales into Florida or make at least 200 separate transactions into the state. H.B. 15. Similarly, proposed Missouri bills would establish an economic nexus threshold for remote sellers and marketplace facilitators having at least $100,000 in sales into the state. H.B. 244, S.B. 97, S.B. 153.
26 Existing-Home Sales Jump 4.3% to 6.85 Million in October, National Association of Realtors, Nov. 19, 2020.
27 Urban Institute, State and Local Finance Initiative, Property Tax (Jan. 10, 2021).
28 MASS. REGS. CODE tit. 830, § 62.5A.3, effective Oct. 16, 2020.
29 Technical Information Release 20-15, Revised Guidance on the Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic, Massachusetts Department of Revenue, Dec. 8, 2020.
30 New Hampshire v. Massachusetts, U.S. Supreme Court, No. 22O154, filed Oct. 19, 2020.
31 For example, Justices Alito and Thomas are of the view that the Court lacks the discretion to turn away cases of original jurisdiction arising between two states, and likely would therefore grant certiorari on this basis. See Arizona v. California, 140 S. Ct. 684 (2020).
32 While the Court receives approximately 7,000 to 8,000 petitions for writ of certiorari each term, the Court grants and hears oral arguments in about 80 of those cases. A Reporter’s Guide to Applications Pending Before the Supreme Court of the United States, U.S. Supreme Court, June 2017.
Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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