To call 2018 an “important” year in state and local tax (SALT) law falls short of describing its true impact. The Tax Cuts and Jobs Act (TCJA) reforms and the U.S. Supreme Court’s South Dakota v. Wayfair, Inc
., ruling dominated the tax-related considerations of state, county and municipal legislators and their court systems last year.
We see the implications of federal tax reform and the Wayfair
ruling on sales tax nexus standards continuing to spur the most significant changes in SALT laws and court decisions throughout this year as well. To help your business plan for another year of tax law changes, Grant Thornton offers 10 issues we believe will dominate SALT legislative actions in 2019.
10 SALT predictions
Based on our forecasts of the 10 issues we think will dominate SALT efforts in 2019, Grant Thornton offers 10 predictions for the year.
1. Sales tax nexus litigation
- Sales tax nexus litigation: While no direct challenge to Wayfair will make it to state courts in 2019, at least three state court decisions will reference Wayfair on pre-Wayfair nexus controversies.
- Marketplace facilitator legislation: States will continue to advance marketplace facilitator legislation imposing economic nexus thresholds, with at least seven states enacting legislation in 2019.
- Adoption of economic nexus standards by local jurisdictions: At least five self-administered local jurisdictions will adopt sales tax economic nexus provisions. However, in states that have locality-based sales taxation, despite pressure, no state will move to require state-level administration of these systems.
- Economic nexus provisions beyond sales tax: At least three additional states will adopt economic nexus provisions for corporate income/gross receipts taxes as a response to Wayfair.
- Decoupling from federal tax reform provisions: By the end of 2019, more states will have decoupled from the IRC Sec. 163(j) limitation than the GILTI inclusion.
- State-specific tax reform: at least three states will decide to engage in state-specific tax reform that goes well beyond addressing federal conformity and Wayfair.
- Partnership reporting and payment procedures: At least five additional states will adopt partnership reporting and payment procedures for adjustments following federal audits.
- Local headcount taxes: At least five jurisdictions (and at least one “major” municipality) will adopt a headcount tax designated to address a specific need.
- Corporate income tax extended filing deadlines: At least five states will recognize the need for corporate income tax filing date changes to avoid compliance nightmares by enacting legislation to move state corporate extended filing due dates to at least 30 days beyond the federal due date.
- Sports gambling taxes: In accordance with this rapidly growing “sin” tax trend, at least four states will adopt a tax on sports gambling.
In late 2018, we began to see state courts reference the Wayfair
decision in their opinions, noting that nexus standards are changing and there is a significant distinction between how the sales tax works in a pre-Wayfair
world. In one case of note, Alabama Department of Revenue v. Scholastic Book Clubs, Inc.
, the Alabama Court of Civil Appeals ruled that the business model used by a prominent classroom bookseller did not create a taxable sales and use tax nexus presence in Alabama. The Court noted that the decision handed down in Wayfair
has changed the applicable nexus standard, implying that the analysis made by the Court likely will not apply on a prospective basis.
2. Marketplace facilitator legislation
Since the Supreme Court handed down its decision in Wayfair
, many states have enacted economic nexus legislation or regulatory policies. Combined with the states that acted prior to Wayfair
, approximately 30 states have adopted or proposed sales tax economic nexus standards. Nearly half of these states have enacted marketplace facilitator or provider legislation. In the fall of 2018, the MTC formed a work group on Wayfair
implementation and marketplace facilitator issues, discussing definitions of marketplace facilitator, marketplace, and marketplace seller. One definition applies to those sellers
that list or advertise products, take orders, and collect payments for third-party sellers. There have been many questions raised as to how, functionally the marketplace facilitator and provider rules will play out, but we have seen little contest to these rules to date.
3. Adoption of economic nexus standards by local jurisdictions
There are a handful of states, including Alabama, Colorado and Louisiana, that give localities the constitutional authority to impose local-level taxability determinations and/or taxes, above and beyond that of the state. As of December 2018, all three of these states have enacted economic nexus legislation
. However, localities within these jurisdictions have been fairly quiet regarding the adoption of economic nexus provisions at the local level. Further, there have been efforts to “simplify” these complex taxing regimes, and one would think that in light of Wayfair
and its admonition to simplify sales taxes, there will be some pressure to do so. But will it be enough to overcome institutional resistance to change?
4. Economic nexus provisions beyond sales tax
, the U.S. Supreme Court approved an economic nexus standard for purposes of sales and use tax. While not explicitly stated by the Court, with the elimination of the physical presence rule from sales and use taxation, the application of Quill Corp. v. North Dakota
to income tax no longer appears possible. The Court’s decision to approve economic nexus thresholds in the sales tax context may validate economic nexus statutes and court decisions applicable to state income taxes. Prior to Wayfair
, states such as California
, New York
had enacted bright-line nexus standards for corporate income tax or gross receipts tax purposes.
5. Decoupling from federal tax reform provisions
Since the enactment of the TCJA in December 2017, states have looked at how specific tax reform provisions will affect corporation income tax bases. Two of the more prominent changes brought by the TCJA relate to a new limitation on the interest deduction, and a new tax on certain international operations. Under IRC Sec. 163(j)
, the TCJA provides for a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income for tax years beginning after Dec. 31, 2017, but the disallowed amount can be carried forward indefinitely. The majority of states currently conform to this provision, but states including Connecticut
have enacted legislation to specifically decouple from IRC Sec. 163(j). Also, the TCJA subjects U.S. shareholders of controlled foreign corporations (CFCs) to a tax on GILTI (essentially the excess of a U.S. shareholder’s aggregated net “tested income” from CFCs over a routine return on certain qualified tangible assets) through IRC Sec. 951A. Specifically, the tax is imposed on foreign intangible income to the extent it exceeds a 10% rate of return on invested foreign assets. IRC Sec. 250 provides a deduction equal to 50% of the GILTI inclusion and a portion of foreign-derived intangible income (FDII). Currently, approximately 13 states decouple from the IRC Sec. 163 deduction limitation, while approximately 13 states decouple from the GILTI inclusion amount under IRC Sec. 951A
. States have already taken different approaches to their treatment of GILTI, and we expect state legislatures this year to weigh whether to conform to aspects of the TCJA that will in many cases, substantially increase corporations’ state tax bases, or to decouple from these provisions and provide businesses a significant break.
6. State-specific tax reform
In response to federal tax reform and Wayfair
, state legislatures were unusually responsive in 2018 in addressing tax issues. Not only did states address the immediate issues of conformity to the TCJA and how to adopt economic nexus provisions, states such as Connecticut
and New Jersey
were able to adopt major state-specific tax reform addressing combined reporting, apportionment and pass-through entity taxes. In 2019, the continuing impact of federal tax reform and Wayfair
, along with political shifts in gubernatorial seats and state legislative bodies, will result in states continuing to actively pursue novel tax structures.
7. Partnership reporting and payment procedures
The Bipartisan Budget Act of 2015
included new partnership audit and assessment procedures that dramatically increase the payment and reporting responsibilities for partnerships for tax years beginning after Dec. 31, 2017. The new procedures are designed to shift the burden for actually assessing tax after a partnership-level adjustment from the IRS to the partnership and partners. A federal partnership audit that produces an adjustment may change corresponding state tax liability, and often proves to be problematic for several reasons. For example, the identity of the partners in the partnership may change between the tax year in which the adjustment occurs, and the tax year in which liability is finally fixed. In addition, while states have not had much opportunity to react to the new federal rules, a lack of uniformity in this area could make things extremely unwieldy for multistate partnerships and their partners. Several states, including Arizona
, have already adopted the new federal partnership audit provisions. The adoption of the federal approach by other states has been endorsed by a number of business and governmental groups, and would advance uniformity and ease the administrative burden for partnerships that operate in multiple states, as well as their partners.
8. Local headcount taxes
Local governments recently have been considering the imposition of special “headcount” taxes on large businesses that have contributed to the growth of their local economies through jobs and investment. This growth has made it more expensive for these localities to provide necessary infrastructure and in some cases has made local housing markets unaffordable for many. For example, voters in Mountain View, California, a locality in the heart of Silicon Valley, recently approved
an annual per-employee tax on businesses, based on the average number of employees over a prior four-quarter period. In May 2018, Seattle, another city with large technology companies, enacted a progressive tax on businesses on a per employee basis, but the tax was repealed several weeks later
in response to the outcry of affected businesses. This tax was intended to raise revenue to address the city’s homelessness and affordable housing issues. The reaction from the companies impacted by these types of new taxes could determine how widespread such taxes will become, as there seems to be growing pressure on localities to enact taxes on large employers to raise revenue.
9. Corporate income tax extended filing deadlines
For calendar-year corporations, the extended federal corporation income tax return filing deadline has moved from Sept. 15 to Oct. 15. Many states that historically have required extended state corporation income tax returns to be filed on Oct. 15 (or soon thereafter) have not changed their due dates in response to the federal changes. As a result, many taxpayers have found it difficult to timely and accurately file state corporation income tax returns in many jurisdictions. The ability to timely and accurately file has become even more challenging following the many changes enacted by the TCJA. In response to these challenges, the Council on State Taxation (COST), with support from the American Institute of Certified Public Accountants (AICPA), contacted tax authorities in states with Oct. 15 and Nov. 1 extended corporation income tax due dates to request a blanket 30-day extension for corporate 2017 tax year filings. Some states responded to this request, but only provided temporary relief for 2017, or in some cases permitted taxpayers to formally request the extension if needed. Unless permanent changes are enacted by states, the extended filing deadline issue will present considerable difficulties this year and into the future, as the complexity of complying with the TCJA becomes more apparent.
10. Sports gambling taxes
In May 2018, the U.S. Supreme Court decided Murphy v. NCAA
, declaring the Professional and Amateur Sports Protection Act
(PASPA) unconstitutional. The PASPA was a federal law that prohibited the expansion of sports betting beyond Nevada and four other states which had, as of the enactment of PASPA in 1992, some type of sports betting or commercial casino gambling. As a result of this development, Delaware
was the first state to allow for the activity, followed closely by New Jersey
, Rhode Island
and West Virginia
, with several others likely to follow.
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