SALT: A look back and a look ahead
Two major issues dominated the conversation around state and local tax in 2019, according to Jamie Yesnowitz and the team at Grant Thornton’s SALT National Tax Office: the 2017 Tax Cuts and Jobs Act and the Supreme Court decision in South Dakota v. Wayfair Inc. in June 2018. They’ll both continue to have a major influence in 2020.
“In fact, the top two spots, and four of the top seven spots [for 2019] deal with the states’ response to Wayfair,” said Yesnowitz, a GT principal and SALT practice and National Tax Office leader. This year’s list ranked the top SALT stories of the previous year in order of importance:
1. Rapid post-Wayfair implementation of sales tax nexus. “Wayfair has spurred all but two states to adopt laws establishing sales tax economic nexus provisions for remote sellers, and those two states, Florida and Missouri, have pending legislation for this,” Yesnowitz commented. “But not all state sales tax nexus laws are alike. Remote sellers face plenty of challenges attempting to comply with these laws, where cost and transaction thresholds can vary depending on the state.”
2. The extension of Wayfair to income tax nexus. “With economic nexus a nearly foregone conclusion in nearly all states for sales and use tax purposes, states have begun shifting their sights on the applicability of Wayfair to income taxes,” Yesnowitz said. “Sellers should be aware that Hawaii, Pennsylvania and Massachusetts now impose a gross receipts tax on out-of-state sellers, with similar legislation being considered in Texas. Businesses operating in multiple states may need to conduct a complex sale sourcing analysis to determine how best to source their own sales, especially where services and intangibles are concerned.”
3. Continued state reaction to the TCJA. “For the second straight year, states’ reaction to the TCJA continued to receive major attention in state legislatures and by state taxing authorities,” Yesnowitz said. “The two primary issues considered this past year were the treatment of international tax provisions and the disallowance of the interest expense deduction.”
4. The rise of pass-through entity tax regimes. The limitation on the SALT deduction prompted a number of states to propose “workarounds,” many of which have already been disallowed by the IRS. Mandatory and elective pass-through regimes are intended to shift the tax from the owner to the entity at the federal level. A number of states have adopted some form of this workaround. “To date, the IRS has not ruled on whether these laws will stand,” Yesnowitz cautioned.
5. The U.S. Supreme Court decides Kaestner Trust. The court, in a unanimous decision, ruled that North Carolina could not tax the trust’s undistributed income based solely on the residence of a contingent beneficiary in the state. “Trusts paying North Carolina taxes on undistributed trust income based only on the presence of in-state beneficiaries should have their tax obligations re-examined,” said Yesnowitz. “Even trusts in similar circumstances in other states could be bound by this ruling.”
6. Widespread adoption of marketplace facilitator nexus provisions. Although the adoption of sales tax economic nexus legislation was initially focused on remote retailers after Wayfair, many states have interpreted the decision broadly enough to apply to marketplace providers or facilitators, according to Yesnowitz. “Forty states have enacted laws interpreting the Wayfair decision as applying to marketplace providers whose online marketplaces serve as a forum for retailers to market and sell products and services,” he said.
7. Adoption of sales tax economic nexus standards by local taxing authorities. “A number of states allow home-rule authority to local jurisdictions,” Yesnowitz said. “Some of these local jurisdictions imposed sales and use taxes for remote sellers following the Wayfair decision ... But businesses should be aware that because Wayfair addressed a state law, there is no guarantee this authority will be recognized for municipalities, if challenged.”
8. Further adoption of marketplace sourcing. “During 2019, a number of states engaged in legislative activity concerning apportionment of income and the adoption of market-based sourcing for sales other than sales of tangible personal property,” Yesnowitz observed. “Six states adopted market-based sourcing rules for services, but they vary on how and where they are applied.”
9. Combined reporting expanded and clarified. “Compared with market-based sourcing, efforts to shift from separate to combined reporting for affiliated corporations slowed, with New Mexico the only state to pass such legislation,” said Yesnowitz. “Kentucky and New Jersey passed laws or adopted guidance with the intent of ‘cleaning up’ uncertainties in the method.”
10. Adoption of the Oregon CAT. “After years of failed legislative and referendum efforts, Oregon finally joined the growing list of states imposing entity-level commercial activity tax,” said Yesnowitz.
Looking at 2020
For 2020, SALT National Tax Office directors Chuck Jones and Lori Stolly and manager Patrick Skeehan offered these predictions:
- Federal tax reform. States will continue to react to the TCJA changes, especially the IRC Section 163(j) interest deduction limitation and the GILTI provisions, according to Jones. ”Specifically, at least three states will decide to decouple from the IRC Sec. 163(j) interest deduction limitations; and at least four states will clarify apportionment treatment of GILTI,” he predicted.
- Wayfair. “In 2019, we saw continued adoption (and the beginning of adjustment) of Wayfair-like nexus standards with respect to remote sellers and marketplace facilitators,” commented Skeehan, “During 2020, this trend will continue marching forward with: enactment of marketplace provider standards in at least three additional states; enactment of changes to marketplace facilitator/provider laws to achieve further uniformity in at least three additional states (in line with Multistate Tax Commission/National Conference of State Legislatures standards); and removal of transactional thresholds from sales tax economic nexus standards in at least three additional states.”
- Income tax economic nexus. “At least four more states will adopt an economic nexus threshold for income taxes via legislation, regulation or administrative action,” Skeehan forecasted.
- Additional PTE taxes. “At least three additional states will enact legislation establishing optional [pass-through entity] taxes as a workaround to the $10,000 SALT deduction limitation,” said Jones.
- U.S. Supreme Court litigation. “In 2019, the Utah Supreme Court rejected a Utah District Court’s determination that the state’s treatment of foreign business income violated the foreign commerce clause, citing the U.S. Supreme Court Wynne decision. During 2020, the U.S. Supreme Court will grant certiorari to hear the Steiner dispute,” said Stolly.
- Illinois constitutional amendment referendum. “Voters will not approve a graduated personal income tax at the November 2020 election,” predicted Jones.
- Reclassification of workers from independent contractors to employees. “At least two states will enact independent contractor reclassification laws as a means to address ride-sharing business practices,” said Skeehan.
- Market-based sourcing. Sales factor sourcing uncertainty will return as a point of focus, predicted Stolly: “At least two significant decisions addressing the calculation of market-based sourcing will be released in 2020.”
- Income tax rate reductions tied to revenue. “At least two states will legislatively adopt income tax rate reductions tied to state revenue measures,” said Stolly.
- Gross receipts taxes. While many states are enjoying economic prosperity, some are not, Stolly indicated: “In an effort to raise revenue, at least one state will follow Oregon’s lead and adopt a gross receipts tax.”