The Year That Left Us SALT-y: Key State and Local Tax Developments in 2020; Yeah, there's the ripple effect from Wayfair and, that's right, a pandemic.

• Date: 01 November 2020
• Author: Friedman, Jeffrey

This year has been unusually eventful for just about everyone, not least of all payers of state and local tax. In this article, we provide highlights of some of the most important SALT developments of 2020, including:

* The Pandemic Playbook: key COVID-19 developments, including the CARES Act, tax issues created by telework, and various state-offered pandemic relief programs;

* Wayfair's Ripple Effects: the ongoing evolution of sales tax collection rules for marketplace facilitators and remote sellers;

* More Money, More Problems: the often-unsuccessful attempts of states to raise revenues through constitutionally dubious taxes; and

* Other Notable SALT Cases: additional highly anticipated cases from Pennsylvania, Mississippi, and Texas.

Recurring themes are increasingly "creative" efforts from states to increase revenues, constantly evolving and nonuniform guidance, and the ability of business taxpayers to secure surprising wins through vigorous advocacy in courtrooms and state legislatures.

The Pandemic Playbook

The economic consequences of COVID-19 dominated SALT developments in 2020 as tax practitioners analyzed the impact of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, state reactions to pandemic-related telework, and fallout from state tax incentive programs. Highlights of these areas follow.

THE CARES ACT

The CARES Act, a $2 trillion economic stimulus and health care assistance package, is the largest emergency relief bill in American history. The SALT impact of the CARES Act largely turns on whether and how states conform to the Internal Revenue Code (IRC) generally and on modifications to the IRC resulting from the CARES Act.

Signed into law on March 27, the CARES Act provides key relief as the pandemic transforms the US economy. Specifically, it:

* gives direct financial assistance to distressed businesses;

* significantly expands unemployment assistance; and

* provides rebates directly to taxpayers (so-called stimulus checks), with eligible taxpayers receiving up to $1,200 as individuals or $2,400 if married, and an additional $500 per child.

The CARES Act also includes several taxpayer-favorable changes to core federal tax provisions that were enacted or revised by the Tax Cuts and Jobs Act (TCJA) enacted less than three years ago. The CARES Act:

* establishes a new employee retention payroll tax credit;

* permits employers to defer the payment of payroll taxes; and

* creates modifications to:

o net operating loss (NOL) provisions under IRC Section 172, including:

** the temporary repeal of the TCJA's eighty percent limitation of NOLs applicable to tax ears beginning before January 1, 2021;

** the provision of a five-year carryback period for NOLs arising in 2018, 2019, or 2020; and

** changes to the TCJA's limitations for noncorporate taxpayers to deduct excess business losses;

o business interest limitation provisions of IRC Section 163(j);

o bonus depreciation provisions of IRC Section 168(k);

o excess business loss limitation provisions under IRC Section 461(1); and

o corporate alternative minimum tax (AMT) provisions under IRC Section 53(e).

New York was the first state to respond to the CARES Act through its fiscal year 2021 budget. The budget provides for temporary static conformity to the IRC as of March 1, 2020, through January 1, 2022, which effectively decouples the state and New York City from the federal changes to IRC Section 163(j) and the three-year ratable income inclusion for coronavirus-related distributions from retirement plans. New York will not have to deal with changes to NOLs, because the state had previously decoupled from the federal NOL provisions and provides specific rules for determining carrybacks. It remains to be seen how many states will follow New York's lead as state legislatures reconvene in the coming months. (1)

SALT IMPLICATIONS OF WFH

The large numbers of US employees forced to work from home due to the pandemic will create SALT issues for many employers, including changes in tax withholding obligations, income tax nexus, and eligibility for income tax incentives. Specifically:

* Employee withholding. As with nearly every other tax issue, states take nonuniform approaches to employee withholding requirements. Some states allow employers to retain their same withholding for employees' temporary pandemic-related tele-work locations, whereas other states have issued guidance indicating that changes may be needed. (2) Unemployment insurance and other withholding obligations should also be considered;

* Corporate income tax. The presence of a tele-working employee can create nexus for a state to impose a corporate income tax. For example, in 2010 the New Jersey Tax Court held that a Delaware company with its principal offices in Maryland was subject to the New Jersey Corporation Business Tax because it...