Diagnosing the SALT effects of COVID.

• Author: McCann, Bridget
• Position: Part 2 - State and local taxation

The novel Coronavirus pandemic that spread throughout the country this year is already having a deep and widespread--and sure to be long-lasting--impact on the state and local tax landscape. State governments were forced to respond to this unique crisis at alarming speeds and contend with loads of new questions, resulting in an assortment of both formal legislative and informal administrative guidance across states on unprecedented state tax matters, much of which has yet to be clarified or otherwise codified by legislation.

Part 1 of this column, on p. 594 of the September issue, looked at state conformity to certain federal relief provisions, income tax nexus and apportionment issues affecting businesses, and income tax issues for employers and employees. Part 2 reviews sales and use tax consequences, looks at local property tax matters, and discusses what is next for taxpayers and state and local governments as taxpayers continue to seek relief and as states look to replace lost revenue as well as consider new opportunities to support taxpayers and streamline outdated procedures.

Sales and use tax consequences

While garnering less overall attention than the state income tax issues stemming from both conformity to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and COVID-19 teleworking employees, the sales and use tax implications of newly remote employees as well as the all-out public movement to battle the spread of the Coronavirus are particularly noteworthy. Fundamentally, the sales and use tax nexus implications of COVID-19 teleworking employees are not unlike those for income tax, and the questions will remain whether those employees trigger nexus for their employer based on their physical presence in a state outside their normal office location for however long they are instructed--or otherwise choose, as it pertains to their health--to remain there, as well as however long any specific relief from creating nexus might last.

Unlike for state income tax, though, no federal statutory protection exists like P.L. 86-272, the Interstate Income Act of 1959, relative to a nexus determination for sales and use tax; therefore, the overall threshold can be lower. Additionally, in light of stay-at-home orders and a consequential spike in online shopping, the Wayfair minimum economic nexus thresholds based on either a volume of sales receipts from and/or a certain number of transactions with customers in a state are now infinitely more significant for both well-established and new businesses selling any goods or services online (see South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)).

Apart from nexus, individuals and businesses that sell personal protective equipment (PPE) (e.g., face masks) or other COVID-19-related goods to thwart the transmission of the corona-virus are particularly prone to obscure sales tax requirements because they are either unaware of state nexus rules and sales tax registration requirements or unfamiliar with the application of sales tax to the specific sales transactions in which they now engage, or both. What started out as relatively de minimis sales of those goods or services in early 2020 could lead to sufficient month-over-month revenue, triggering nexus in more than one state and corresponding sales tax registrations and return filing requirements.

These requirements--and possibly others--may exist even if COVID-19-related PPE, for example, is exempt from sales tax or the sale is otherwise exempt because the PPE is purchased and used by a medical professional, hospital, or other exempt organization. Furthermore, it certainly should not be assumed that sales of face masks or other COVID-19-related PPE and goods are always exempt from sales tax. In the absence of specific COVID-19 sales tax relief, existing state and local sales and use tax rules relative to the sale of those articles within each distinct customer base will guide any sales tax collection and exemption documentation obligations.

On the other hand, businesses or other groups that donate PPE or other COVID-19-related supplies to doctors and other organizations are likely to contend with use tax issues. Use tax is typically due on items withdrawn from inventory for either personal use or donation, if sales tax is not paid on their original purchase. While the specific application of use tax to donated items will depend on each state's rules, Indiana, for instance, provides direct relief now by waiving use tax on COVID-19 supplies donated by manufacturers and other organizations. A host of items are eligible for Indiana's waiver, including, but not limited to, medicine, medical supplies, disinfectants, certain food, clothing, and beds donated to fight the pandemic. Notably, companies and organizations must apply directly to the Indiana Department of Revenue to claim the COVID-19 waiver and, if the waiver is granted, will not be required to report donations on any return. Other states may or may not provide such direct relief.

Lastly, alcoholic beverage distilleries and other manufacturers that shifted operations to manufacture and sell alcohol-based hand sanitizer could face the same sales tax nexus and product taxability concerns as those selling PPE, in addition to customary state alcohol excise tax obligations. Certain states are making relief from alcohol excise taxes clear, however, by providing either a deduction from the tax base or a direct exemption for alcohol purchases. Illinois, for instance, instructed...