Key Federal Corporate Tax Provisions of the CARES Act and the States Responses
Date: April 15, 2020
Good afternoon everyone and welcome to today’s webinar titled The Key Federal Corporate Tax Provisions of the CARES Act and the States Responses. My name is Cate Battin, and I am a partner in the state and local tax group in McDermott Will and Emery’s Chicago office. So thank you for joining us on this day, I guess formerly known as Tax Day. I’m joined today with three of my colleagues. Katie Quinn, who’s based in our New York office. She’s also in our state and local tax group. Elle Kaiser, based in our San Francisco office in our state and local tax group. And Elizabeth Lu in our US and international tax group here in Chicago. If you’re requesting CLE or CPE credit for any jurisdiction, note that you need to participate via a laptop computer and not by phone. I think that’s so that they can record your participate—participation. If you are requesting CLE credit in New York, please listen for the credit code at the end of our presentation. And that credit code we will provide, it’s required for you to obtain your CLE credit. You’ll need to enter that code into your evaluation in order to receive the CLE credit in New York. If you have any questions, and we encourage questions, please type those questions into the Q&A function in the webinar tool bar. It’s my understanding that you can submit anonymous questions there as well. We’ll do our best to answer your questions during your webinar, or, but in the event that we don’t cover your question or somehow missed it, please follow up with us via email. All of our email addresses will be listed at the end. You can always email me directly at cbattin—b a t t i n—@mwe.com, and I’ll be sure that your question is, is answered. So we’re going to talk today about the key corporate tax provisions from the CARES Act and the states responses. Elizabeth Lu is going to lead the discussion on the federal side. She’ll be covering NOLs, 163(j), the qualified improvement property deduction. And Katie Quinn will tell us a little bit about how the states have responded to these provisions, whether or not they’re adopting them at the state level. Elle Kaiser is going to lead our discussion on the unique state issues that are coming out of this, the COVID crisis, and some unique nexus and withholding issues that you should be thinking about in the state and local tax arena. I’ll also lead a discussion on the extensions. We’re seeing extensions across the board from the states in terms of filing extensions, estimated payments, deadlines for filing protests, and that type of thing. And then last, we’ll talk about some trends were seeing in state tax audits. So without further ado, I will turn it over to Elizabeth Lu. Thank you, Cate. So as we talk about the federal provisions of the CARES Act, I just wanted to start by pointing out a couple of common themes that we’ll notice across all the different provisions. So first, these provisions focus on getting companies cash flow and liquidity. As we know, liquidity is really important because many companies may only have cash on hand to get through a few days or weeks without additional revenue or cost cuts, and this can vary, vary a lo based on industries. For instance, tax companies may have more cash on hand than, say, retail stores or companies in other, other kinds of industries. Secondly, these provisions are focused on providing current relief to taxpayers who may be struggling. So, in general we’ll see a loosening of some restrictions that were imposed by the TCJA for taxable years beginning before 2020—before 2021. So moving on to the NOL provision, which is one of the most important ones to our clients. The CARES Act— I apologize for, I apologize for that sound that I am unable to stop, so I’m just moving around. My apologies. So in terms of the NOL provision, the CARES Act made some changes to the NOL rules to allow corporations to use NOLs and amend their prior year returns to promote cash flow and liquidity. Prior to the TCJA, companies could carry back NOLs 2 years and carry them forward 20 years. The TCJA eliminated the carryback, but they allowed indefinite carry forwards. The TCJA also provided that taxpayers can only use NOLs to offset 80% of their taxable income. The CARES Act repealed the 80% limit for taxable years beginning before 2020. It also provides that NOLs for taxable years beginning after 2017 and before 2021 can be carried back 5 years. This is really valuable because it means that NOLs arising in 2018, 2019, and 2020, which have a 21% corporate tax rate, could be used to offset income in a pre-TCJA year, when there was a 35% corporate tax rate. The CARES Act also treats the taxpayer as having made a 965(n) election, which is an election not to use NOLs against the Section 965 transition tax. This is generally favorable to taxpayers because it means you don’t have to use 21% NOLs against the income that was taxed at a lower transition tax rate. Unfortunately, the CARES Act did not change the unfavorable ways that NOLs interact with other international provisions of the TCJA, including BEAT, FDII and GILTI. We’ll focus here on GILTI, but the same principle applies for FDII purposes. Section 250(a2) reduces the taxpayers GILTI amount if guilty exceeds taxable income. The impact of that is that if a taxpayer has foreign profits but US losses, it will have to use valuable NOLs to offset income that would only have been taxed at the 10.5% GILTI rate. I’ll go through an example with you here. So, in general if a taxpayer has $100 of GILTI, it would get a $50-dollar 250 deduction, and the remaining $50 would be subject to a 21% tax rate at the federal level. So it would pay $10.5 in US federal tax. However, if the taxpayer has $100 of GILTI plus a $10 loss, the GILTI will be reduced by $10, which is the excess of the $100 GILTI over the $90 total taxable income. The taxpayer will have $90 of GILTI and a $45 section 250 deduction. The remaining $45 would be subject to a 21% tax rate, so it would pay $9.45 cents in federal tax. At the end of the day, this means that the $10 loss pays the taxpayer only a dollar and five cents, or 10.5% of tax instead of the $2.10, or 21% tax, that it would save if the NOL offset non-GILTI income. The situation could get even worse if the taxpayer has foreign tax credit that would have offset the US tax on GILTI. Then the NOLs are reducing income that may have not been subject to any residual US corporate tax. This is one reason why carryback to the pre-TCJA years before there was GILTI is really important. But for taxpayers with US losses and foreign profits in 2018, 19, or 20, it’s also possible that the current NOLs could offset current year GILTI, which means there may not be any NOLs to carry back to those valuable pre-TCJA years. The issue will arise again if NOLs are carried forward to post-TCJA years. Here’s a chart that goes through the new post-CARES Act rules for NOLs, net operating losses, that arise in a particular year. The losses that arise in a pre-TCJA a period, 2017 and before, have the same rules that applied pre-TCJA. With two back—two-year carryback and 20-year carryforward and no taxable income limits. Losses that arise in 2018, 2019, and 2020 were affected by the CARES Act. These losses could be carried back 5 taxable years and carried forward indefinitely. Many taxpayers may have, may not have had NOLs in 2018 or 19, but, but may have it in 2020 because of COVID. And the NOLs can be carried back, the 2020 NOLs can be carried back to 2015. This means there’s a few pre-TCJA years that the NOL can be carried back to when the corporate rate was 35%. For losses that arise in 2021 and later years, those were not affected by the CARES Act. Those NOLs are still subject to the TCJA rule, so there’s no carryback and indefinite carry forward, and the 80% of taxable income limit applies. And with that, I think I’ll turn it over to Katie to talk about the state implications of the NOL rule that the carryback—of the CARES Act. Thanks, Elizabeth. So, just some themes at the state level. So the CARES Act was amended at the federal level to provide some relief to taxpayers and provide them some immediate cash in the form of tax savings. So when you get to the state level, that’s not necessarily the case. And the reason that CARES, the CARES act impacts the state is due to the states’ conformity to the Internal Revenue Code. So, the vast majority of states use federal taxable income as the starting point for computing the tax base. So that means that any change to the Internal Revenue Code will flow down to the states. But, there’s a caveat. Some states say that they conform to the Internal Revenue Code as it is currently in effect, those are called rolling conformity states. And others say, we conform to the Internal Revenue Code as it was in effect on a specific date, those are called static conformity states. Now, fortunately, static conformity states, they typically update their conformity to the IRC regularly as a matter of course. So, you know, every year they’ll say, we conform to the IRC as in effect of December 30th, 2019. Next year it will be December 31st, 2020, and so on. But that creates a bit of an issue when we get to the state level, the difference between the rolling and the static conformity states. So with respect to the, the NOLs, the first question that you should ask in determining the state impact is does the state follow the federal NOL regime, or do they have their own NOL regime? A lot of states say we don’t allow the federal NOL, we have our own NOL regime. So obviously these, these NOL changes will not flow through to the state NOLs. The second question, does the state, is the state a rolling conformity state, and if not, what is the date of conformity to the IRC? So in most static conformity states, even if they conform to the federal NOL, these CAREs Act relief provisions will not flow through to the states. It’s possible, likely even, that these static conformity states do update their conformity to the Internal Revenue Code, and, in which case, you know, you have to look at the language to make sure that it’s retroactive and, and that it applies. But the NOL provisions in those states will likely, will likely flow through. So I’m going to have you go to the next slide, Angie. So this is one very interesting wrinkle with respect to the NOL provisions at the states, and Elizabeth touched on it. Now this is why I said that there was, perhaps, not a taxpayer cash relief at the state level. There could actually be a cash increase or tax increase to some taxpayers at the state level. And we’ll go through why. So, as Elizabeth said, the mechanics of the NOL carrybacks and the 250 deduction could result in a decreased, reduced IRC 250 deduction at the federal level. So that, that just to remind everyone, the IRC 250 deduction is a deduction for a global intangible low tax income, GILTI, and foreign derived intangible income, FDII. So, just, so assume that you, the taxpayer uses a carryback, and NOL carryback, and in 2019— in 2018 that results in them having a reduced 250 deduction. So now we’ll go to the state level. And I’ll pick on New Jersey, because New Jersey is notorious for being one of the few jurisdictions to tax GILTI. So, New Jersey, what they do is they, they conform to federal taxable income, they’re a rolling conformity state, and they, so they include GILTI in tax base. And then they say, we’re going to allow the deduction for GILTI in IRC Section 250 so that we tax about 50% of GILTI. So New Jersey is known throughout the country as taxing 50% of GILTI. But now, if you have a reduced IRC 250 deduction, that means that at the state level, even though those there’s no NOL carry back in New Jersey because New Jersey doesn’t follow the federal NOLs, at the state level they’re now taxing GILTI under 951(A, but then they have a significantly reduced 250—IRC 250 deduction, which means that New Jersey now taxes far more than 50% of GILTI. So, like Elizabeth said earlier, this is something that should have been, or, you know, I think taxpayers hoped would have been fixed in the CARES Act. But at the state level, the results are really dramatic because the taxpayer doesn’t get the benefit of a NOL carryback. They just get a reduced 250 deduction. This also could reduce the FDII deduction in New Jersey, which is likewise, perhaps, was unintended, but what, I think that’s the consequence. And this issue isn’t limited New Jersey. This will be an issue in New York City. I think it will be an issue in Iowa, Nebraska, essentially any state that is seeking to tax GILTI, allowing the deduction in 250, and is a rolling conformity state. And just one, one point, so this is an issue that’s—this has nothing to do with the CARES Act, really, because this issue was always out there. If there’s a reduced 250 deduction, when it flows to New Jersey, they’ll be, New Jersey will be taxing more than 50% of GILTI. The issue is now that the NOL, that NOLs can be carried back at the federal level. That means that taxpayers may have to go back and amend their 2018 returns to report a tax increase in New Jersey, which seems odd, considering that the CARES Act was intended to provide relief to taxpayers. And with that, I think we’ll go back to Elizabeth to discuss the next 163(j) limitation in the CARES Act. Great. So, thank you, Katie. The CARES Act relaxed the Section 163(j) limit on interest Expense. So the TCJA, going back a little bit, the TCJA has already modified Section 163(j)’s limit on business interest expense. And under the TCJA for taxable years beginning after the TCJA but before 2022, business interest expense is generally limited to the sum of, one, business interest income. Two, floor plan financing interest expense, which applies to retailers and other industries. And three, 30% of earnings before interest, taxes, depreciation and amortization, or EBITA. And we’re focusing on the 30% of EBITA limit. So what the CARES Act does is that it modifies 163(j) so that for a taxable years beginning in 2019 and 2020, the 163(j) limit includes 50%, not just 30% of EBITA. Also, taxpayers can elect to use their 2019 EBITA for their 2020 163(j) limit. That means that taxpayers can use higher earnings from last year to calculate the amount of interest expense they can deduct this year. This provision aims to reduce the tax that companies must pay, by increasing the amount of deductions they can take. And it may be particularly helpful for companies that need to increase borrowing to address present cash flow and liquidity needs. In addition, this provision interacts helpfully with the NOL provisions. To the extent that a greater 163(j) deduction causes a taxpayer to have an NOL in 2019 or 2020, that NOL can be carried back five years, and it’s not subject to the 80% taxable income limit. So it could be used to reduce income, potentially, that was taxed at the pre-TCJA 35% rate. There are also some special rules for partnership. In some, the 30% EBITDA limit still applies, but 50% of any excess business interest expense is treated as paid or accrued in 2020 and is deductible by the partner without being subject to a 163(j) limit. This rule was basically so that partnerships could get some 163(j) relief without requiring them to issue amended K-1s for 2019. And so with that, I’ll turn it over back to Katie to talk about the impact of the 163(j) rules on the states. Thanks, Elizabeth. So again, the impact of the 163(j) amendments at the state level will depend on whether the state couples to 163(j), or decouples from 163(j), and whether the state is a rolling conformity state or a static conformity state. And so, I just want to take a step back and talk about 163 generally. We have been, taxpayers have been yelling and screaming, attorneys at McDermott, including myself, have been yelling and screaming that 163(j) is really a mess to administer at a state level. And the reason for that is because the, the limitation is computed on a of consolidated group basis at the federal level, but then when you get to the state level, we have separate filers. We have groups that don’t mirror the federal consolidated group. So you have to recompute the limitation at the state level. And then there are other issues with related party addbacks and the interaction with 163(j). It’s just a slew of issues that we have been yelling and screaming and saying states, you should decouple from this because it doesn’t make sense. So part of the reason we’re saying it doesn’t make sense for states to couple to 163(j) is because the reason that state’s conform to federal taxable income is because they say, you know, we, we want simplicity in our audits and compliance, and this makes it easier for taxpayers and for us to administer the tax law. But then 163(j) really creates a nightmare in compliance, a nightmare for auditors. So, so that’s one reason that we’re saying states should decouple. So the CARES Act amendments just make everything a bit more complicated. So from a corporate income tax perspective at the state level, the states that conform to 163(j) should allow the increase, the 20% increased expense allowance, but only if the state has rolling conformity to the IRC. If the state is a static conformity state, so if they conform to the IRC, that pre-amendment by the CARES Act, the provisions of the CARES Act don’t flow through to the state. So in those states, not only do they not get the benefit of the increased expense allowance, they also have to re— add in yet another computation of 163(j). So we’ll use Virginia as an example. Virginia is a static conformity state. They conform to 163(j), but then the state says we’re going to allow a state deduction of 20% of the amount that was disallowed under the federal provision. So from a compliance perspective in Virginia, and this is assuming Virginia doesn’t update its conformity, a taxpayer would have to recompute the federal limitation under the old pre-CARES Act rules, so using the 30% instead of the 50% limitation. Then they have to recompute the state, the limitation on a state taxpayer. So either separate entity or whatever the Virginia filing group is. Then they have to account for the 20% expense allowance. So that, and the 20% expense allowance will be based on the former 30% limitation. So this makes complying with 163(j) even more of a headache than it already was. So you know, I’m hopeful that states will, you know, update their conformity. Or maybe this will be something that the states look at and say this truly doesn’t make sense anymore from a simplicity perspective, so let’s just decouple from 163(j). That’s obviously optimistic because the states are going to be in need of revenue, so I don’t know that they will do that. But, you know, that’s what we’ll continue to push for. And then one other point is New York is stuck in some legislation providing an add back for the additional interest expense deduction allowed under the CARES Act. So that I found a little surprising because the federal CARES Act was enacted to provide relief and New York, pretty blatantly, took away that relief, at least for corporate taxpayers under article 9A. But, you know, that’s just something to be aware of. Other states may follow suit, but again, as these states follow suit, they can no longer cite simplicity in audits and compliance as their reason for coupling to 163(j). Because if they disallow the, the CARES Act amendments, it makes the administration of this provision way more complicated at the state level. Okay, Elizabeth, back to you. So the last federal provision of the CARES Act that we’ll talk about today is a, it’s a small technical glitch that was changed from the TCJA, but it actually has had a fairly large impact on some of our clients. So the TCJA introduced the term QIP, which generally refers to subsequent improvements to the interior of a building that is non-residential real property. The TCJA introduced this term but accidentally neglected to include it on the list of 15-year property. That had two negative impacts. First, that meant that QIP wasn’t eligible for the 100% bonus depreciation for a QIP that was placed in service after 2017. And it also, secondly, it also defaulted to having to be depreciated over an even longer 39-year period, instead of 15 years. The CARES Act fixes this glitch by identifying QIP, qualified improvement property, as 15-year property. And that means that it’s eligible for the 100% bonus depreciation, or if the taxpayer doesn’t elect into that, depreciation over 15 years, instead of 39. And these changes apply only to improvements that are made by the taxpayer. So it doesn’t you apply to used QIPs. Taxpayers may want to file amended federal returns or apply for automatic accounting method changes to obtain the benefit of this technical correction. And we’re anticipating that the IRS will provide more procedural guidance on this front. So that was it from the federal side, and then Katie can jump in with how this impacts the states. Yeah. So this provision will impact the states just like the other provisions impact the states. Consider, does the state even allow bonus depreciation? Many states do decouple from bonus depreciation or provide their own depreciation schemes. So obviously if the state doesn’t follow the federal depreciation, these amendments won’t flow through to the states. And then secondly, we also have to look at the date of conformity, the state’s date of conformity to the IRC. One point here, it seems as though this provision is a clarification. So it’s possible that that, that even if the state doesn’t conform to the current version of the IRC, there seems to me to be an argument that, that these provisions could apply anyway, since they’re just a clarification of existing law. So I think that winds up our, our discussion of the CARES Act at the federal level and also at the state level, and I think we turn it over to Elle. One, one quick thing. This is Cate, just to interject. Elizabeth, we did get one question asking whether the QIP includes leasehold improvements. Is that something you know? I do not know it off the top of my head, but I’d be happy to follow up afterwards on that point. Okay, so we’ll get back to you on the leasehold improvements. Okay, on to Elle. Thanks, Cate. So I’m going to talk about some potential nexus and withholding issues that companies should be aware of. Over the past several weeks, business operations have undergone a fundamental shift in response to COVID 19. In an effort to comply with state and city mandated shelter orders, many non-essential businesses that did not previously engage a remote workforce are now fully reliant on remote employees. And while the shift in location where the work occurs is meant to protect company employees, the same shift maybe exposing companies to taxation in new jurisdictions where they might not have otherwise had a sufficient presence. This is because under the traditional nexus rules, states have asserted nexus over employers due to the in-state presence of even a single remote employee. And although many individuals work and reside in the same state, this is not always the case. So, for example, I’m from Iowa and my mom lives in a town named Bettendorf. Bettendorf is one of the four cities known as the quad cities, located on the border of Iowa and Illinois. My mom, like many other quad city residents, lives in Iowa but works in Illinois. And like most everyone else, she has now been working remotely from home as a result of the social distancing guidelines that her employer put in place. Due to the shift to a remote work environment, her, her employer may find itself, for the first time, having employees performing significant work in Iowa, a state where it does not otherwise have a presence. And the situation is not unique. Although this issue is likely to be more common along state borders, it may arise anywhere if employees from one state travel to another state to quarantine with their family during the pandemic. Consequently, states are now faced with answering the question of whether an employee’s physical presence will continue to be a nexus creating activity or businesses during phases of mandated shelter. Given that companies are generally intentional about the decision to locate employees in states where they otherwise lack nexus, it seems really unfair for states to imposed nexus on companies whose telework policies have been put in place in response to state mandated shelter orders. It’s one thing for a company to consciously avail itself of a new market, but it’s another for a company to generate nexus in the state simply because some employees are working remotely from there, temporarily, in response to the pandemic. So what sort of implications does this have? Go ahead and move to the next slide, Angie. Thank you. From an apportionment perspective, changes in employee work location may impact the company’s payroll in sales factor calculations. For example, if remote employees are located in the state that utilizes a three-factor apportionment formula, the state may now assert that the compensation paid to those remote employees creates a payroll factor numerator in the state for the employer. Even if a state has moved to single sales factor apportionment, the in-state presence of a remote employee could also trigger nexus for a company that has sales in a state, but that previously had no other economic activity there. For example, some states require revenue from the sales of service is or intangibles to be sourced to the state where the underlying income producing activity occurs, based upon the related costs of performance. If a large number of the company’s employees have shifted to working in such a state, the state could now assert that the costs related to the provision of service’s have also shifted to that state based on the employee’s remote work location. There may also be implications for companies under the Interstate Commerce Act, also known as PL86-272. Under PL86-272, corporations are generally insulated from taxes on the income where their only connection to a state is a solicitation of orders for tangible personal property. Now, however, the presence of telework employees could constitute another connection, thereby jeopardizing the company’s former PL86-272 protection and exposing the company to income tax. Companies may also have increased withholding obligations as a result of the temporary telework force they have established in response to COVID 19. Very generally speaking, employers withhold taxes on behalf of their employees with each paycheck, and typically this withholding is done in the state where the employer’s office is located, even if the employer resides in another jurisdiction. Now, however, employees maybe teleworking from a state where their employer does not have an office. Technically, that means these businesses should now begin withholding in the states where their employees work, even if they’re only working there temporarily. This, however, could be a very costly compliance measure for businesses that are not already accustomed to having a workforce spread out across multiple states. In light of the situation, like expanded nexus rules, this expanding withholding treatment seems unfair. In states that utilize the convenience of the employer test, a remote employees’ wages our source to the employer’s location, unless the employee worked remotely due to necessity instead of convenience. For example, in New York, the convenience rule dictates that when a New York based employee works remotely from a location outside of the state, those days count as New York workdays for income allocation purposes. As the name of the rules suggests, however, New York typically only applies the rule when the employee works remotely for his or her own convenience, as opposed to at the employer’s necessity. For out of state employees that would normally work at a New York office but who must now work from their home in a location outside of New York, as a result of the shelter order, the convenience rule could mandate the same tax treatment as if they spent those days working at the New York office. In addition to Connecticut, Delaware, Nebraska, New York, and Pennsylvania, Philadelphia uses a convenience of the employer test for purposes of its city wage tax. And although we haven’t seen guidance on this issued at the state level, last week, Philadelphia announced that employers can stop withholding the city tax from the paychecks of non-Philadelphia residents who are now required to work remotely outside of the city. Employers are, however, still required to withhold the city tax from the paychecks of essential workers who report to the city for their jobs. Moving on to the next slide. While only a few states have— Elle, I just want, I just want to make one point. I’m sorry to interrupt you but, I thought this was interesting. State Tax Notes had an article from Wally Hellerstein and he said, with respect to withholding, also with respect to personal income tax, but when you apply the convenience of the employer test, he said that he would actually take the case on contingency to argue that working from home under these circumstances is certainly not for the convenience of the employer. So at least he felt that, you know, that people are working from New Jersey because they can’t get to their office in New York. It’s not them working from New Jersey because—for the convenience of the employer. So I just wanted to, I think it was a pretty big name, so I just wanted to make sure everyone was aware of his point of view. Yeah, Katie. I think we ought to hold Wally to that. I know. He says contingency, I hear pro bono. I know. Well, actually, I, I work in based in New York, but live in New Jersey, so maybe I could be the plaintiff in this case. I love it. Yeah. Yeah, I think that makes sense, and it definitely, you know, feels like we’re all working from working from home out of necessity and definitely not convenience. So, hopefully that will be the case. So to date, though, only a few states, not including New York, have explicitly addressed topics of expanding nexus in light of the COVID 19 pandemic. And in some states, it seems that the decision to waive nexus for telework activity is, sort of, gaining traction as another relief effort. So, for example, the New Jersey Division of Taxation issued a statement providing that it is temporarily weighting the impact of its nexus loss as applied to employees who are working from home solely as a result of closures due to the Coronavirus outbreak or the employers social distancing policy. The Mississippi Department of Revenue has similarly indicated that it will not use changes in an employee’s temporary telework location due to COVID 19 to impose nexus or to alter any income apportionment while temporary telework requirements are in place. The Mississippi deal are also stated that it will not change withholding requirements for a business based on an employee’s temporary telework location due to COVID 19. Moving to the next slide. More recently, the District of Columbia’s Office of Tax and Revenue also issued a statement providing that it will not seek to impose corporation franchise or unincorporated business franchise tax nexus solely on the basis of employees or property used to allow employees to work from home, such as computers, computer equipment, similar property, that are temporary—temporarily located in the District during the period of the declared emergency. In Ohio, Bill 197 has specified that for municipal income tax purposes, the physical presence of employees that are working outside of their place of employment does not create nexus in the municipality at least for the length of the emergency period plus 30 days. The Chief Counsel for the Pennsylvania Department of Revenue has similarly announced that the state does not plan to assert nexus for taxpayers who are working remotely. So although these states have issued helpful guidance regarding their telework policies, a majority of states have not yet followed suit. I think it seems like a really good idea, given the situation that companies find themselves in, but while waiting for additional guidance, companies should definitely be thinking proactively about whether or not they may have established nexus or if they’re required to withhold in additional states as a result of their COVID 19 telework policies. And with that, I think— Just one, one follow up on that, Elle. So we, we being McDermott, sent a letter to the MTC. And we also forwarded that letter on to New York State and New York City, basically saying, you know, there’s a lot of stuff going on to, with COVID 19. These are things that you should be aware of, and one of them was the withholding issue and the nexus issue. And I just caution people that if you have issues in states because of this, it, it may be wise to try and seek guidance now, because, you know, now we all know what it feels like to work from home. We remember that it was mandatory. We remember that it wasn’t just the convenience of the employer that we’re working from home. I you know, when these issues come up in audit three years from now, I mean, hopefully three years from now we are out of this situation. But the employees, the states are going to be short on revenue, and I just am not sure if everyone is going to remember exactly what this situation was like. So I think seeking guidance now rather than later is probably advisable. I think that’s a good point, Katie. I mean, now the states are more sympathetic, but as they get to a place where they’re facing probably unprecedented deficits, we may see them act a little bit more greedily. That makes sense. That that was all I had so we can move to state trends in extensions. Cate, if you want to kick it off. Absolutely. So here we are seeing some positive trends. There’s 45 states and the District of Columbia that impose income tax on corporations. And in response to the pandemic, 40 of those 45 jurisdictions have established income tax relief to corporate taxpayers in the form of taxed payment extensions, return filing extensions, or other penalty and interest relief during the extension period. Arkansas, Minnesota, and Montana have essentially announced that no income tax relief will be provided to corporate taxpayers. They’re really, you can see, sort of, the outliers. Massachusetts has announced that it, I’d say, allegedly, doesn’t have the authority to extend filing payment deadlines for corporations and business entities. But they have provided some late filing and late penalty relief. Florida has not yet made a decision. Currently, Florida is not offering income tax filing or payment relief to corporations or other business entities. But if you’re following the news, I think Florida was late to the, perhaps, the stay at home orders and that type of thing. So perhaps we’ll see some movement from Florida. The Florida Department of Revenue did issue some COVID 19 guidance, providing that it will be reviewing the applicability and impact of potentially providing state income tax filing and payment relief. And we’ll be looking at those taxpayers on a case-by-case basis. And so that is, you know, there is mud as to whether or not corporations will be getting some relief. Sales and property tax relief has been a little bit more limited. Many jurisdictions are eliminating—are limiting relief to certain types of taxpayers. You know, for example, Illinois is offering certain sales tax relief to the taxpayers that are operating eating and drinking restaurant-type establishments that incurred a total sales tax liability of less than $75,000 in a calendar year. So they’re really limiting it to more small business, small businesses. There are a number of states that have issued guidance on protests that were due or claims for refund extending out those deadlines. So, that’s something you, obviously an area that we’re exceptionally carefully—careful on in terms of you don’t want a low statutory deadline. We have been tracking the various states and we have included on this slide the link to our chart, which is updated every day that there’s a new pronouncement from a state, and so it could capture any of these extensions that the states are going. So I would encourage you to visit that or take down that website. I think they will be sending the slides afterwards so that you’ll have that link to the most updated chart. We are seeing, you know, several nuances in the different states. So we’re going to talk about our favorite states, just individually. First, Elle’s going to talk about California. Cate, what—just one, one point on the sales tax. So, when this first happened and states started to extend their payments deadlines for sales tax, my first instinct was to say, oh God, like, companies are going to think that they have all this cash that they can, you know, they can now spend until they have to pay their, their sales taxes. But technically, in a lot of states, sales taxes are trust fund taxes. So that’s money that, this, the companies are holding for the state. Now, so that definitely raised some red flags for me. But I think, after thinking about it some more and talking about, talking to our colleagues about that, I think, because the states are extending the payments deadline, they’re implicitly saying, we know that you’re going to use this money to fund your payroll and fund other expenses because you don’t have revenue coming in. So I think the risk of a state saying, you know, you can’t use that money because it’s supposed to be held in trust for us is low. But I think you have to be very careful and make sure that you’re able to pay the sales tax at the deadline, because if you can’t, that tax was collected from your customers. So there could be potential criminal liability and your officers could be, could be responsible for that sales tax as responsible persons. That’s a good point. That’s a very scary, scary territory if you if you come up short on the day you have to pay. Sorry, go ahead, Elle. All right. Well, moving on to California, which is one of the states that has enacted some sales tax relief measures. California has actually acted pretty quickly to grant some, some tax relief measures in response to the Coronavirus. So, in addition to extending the income tax filing and payment deadline for individuals, California extended the filing and payment deadline for all business entities filing income tax returns due between March 15th and July 15th. So the deadline for both filing and payment is now 7/15/2020. This extension also applies to 2020 1st and 2nd quarter estimated payments into the 2020 LLC taxes and fees. And I think the application to the 2nd quarter estimated payments that California is granting is a little bit different than quite a few other states that we’ve seen. The normal seven-month automatic filing extension period for corporations and the normal six-month automatic dialing extension period for most business entities remains the same. But interest in penalties will not accrue on the extension period through July 15th. On the non-income tax side, California’s implemented a number of non-income tax relief measures, although these are generally aimed at supporting the state’s small businesses. In accordance with Executive Order N-40-20, the California Department of Tax and Fee Administration, the CDTFA, announced that all small businesses will have an additional three months to file returns and to pay taxes administered by the department. Additionally, CDTFA is grating all businesses an extra 60 days to file claims for refund from CDTFA or to appeal a CDTFA decision to the Office of Tax Appeals. California has also implemented small business relief payment plans effective April 2nd, 2020. Pursuant to this plan small business pay—small business taxpayers, which are those with less than $5 million in taxable annual sales, can take advantage of a 12-month interest free payment plan for up to $50,000 of sales and use tax liability. Qualifying sales and use taxpayers with different liabilities, up to $50,000, will pay their tax due in 12 equal monthly installments, and no interest of, or penalties will be assessed against the liability. Here in San Francisco, we’ve seen the city and county implement tax relief measures for both individuals and businesses. Last week, San Francisco County was one of only a few counties to extend the April 10th property tax deadline. In San Francisco County, the new property tax deadline is currently May 4th, 2020, which is the first business day after the current shelter in place order is lifted. And then for businesses with up to $10 million in gross receipts, the city is deferring payment of quarterly estimated business taxes, including, and there are a number of them, the gross receipts tax, the payroll expense tax, the commercial rents tax, and the homelessness gross receipts tax until the end of February 2021 with no interest or penalties. And those taxes would have normally been due on April 30th, 2020. So, then moving to the next slide. And across the country to the next state, New York, which Katie feel free to chime in at any time here, we’ve seen a number of state and local tax relief measures implemented there as well. So for corporations filing corporate income tax returns originally due on April 15th, New York has extended both the filing and payment deadline to July 15th, 2020. I was just going to say, this is, this is Cate, I’m speaking out of turn, out of New York. But this, I think, is pretty typical here where we’re seeing states, you know, extending the deadline for the first estimate to July 15th. It creates an awkward situation because essentially, you would have your second payment due before your, before your first, because that would be due on June 15th. So it’ll be interesting to see. California, I think, did it right where they just they extended both. But it be interesting to see if these states will issue other guidance that will extend out that date as well. You know, because there’s going to be some estimation needed, I guess, to make that second payment before the first. I just want to point that out. But it’s, it’s pretty common out there. That’s a good point, Cate. And I think additional guidance might be necessary with regard to a lot of tax relief measures that states have been providing. New York, for example, sales tax payments and returns were due on March 20th and that deadline was not extended. But the department indicated that penalty and interest may be waived for quarterly and annual filers who are unable to file or pay on time due to COVID 19. And, you know, as you kind of alluded to earlier, these abatements of penalties and interest are provided on a case-by-case basis. And its sort of clear as mud as to what the standard might be for a taxpayer who wants to prove that it was unable to file or pay on time due to COVID 19. So New York has issued a little bit of guidance on that point. Department notice N-20-1 provided a list of examples. It stated that the commissioner is authorized to abate interest on quarterly sales and used tax filings intermittences with a March 20th due date for taxpayers who were unable to meet tax filing payment or other deadlines because key employees were treated or suspected to have COVID 19. Taxpayers whose records are necessary to meet tax filing payment or other deadlines are not available due to the outbreak. Taxpayers who have difficulty in meeting the deadlines because of the closure orders or similar business disruptions directly resulting from the outbreak. And taxpayers whose tax practitioners were unable to complete work to meet tax filing payment and other deadlines on behalf their clients due to the outbreak. So again, although that’s sort of helpful, it’s also not because it doesn’t really articulate a clear standard for, well, how do I show that the employees were treated or suspected to have COVID 19? Or how does one show that, you know, the closure orders cause this as disruptions that resulted directly from the outbreak? I don’t really know, and I think it’ll be interesting to see in the months to come, sort of how that case-by-case basis is implemented. There’s one other point— One point on interest. So this is another thing that we included in our letter to the MTC. So as we know, all state courts that I know have closed, … have closed, yet interest continues to accrue on appealed assessments. You know, which is fine. It’s supposed to represent the time value of money, but states are charging 6, 7, 8% interest. So some, you know, in this climate, that’s extremely high. So one thing that we put in the letter to the MTC is let’s suspend interest because, you know, we don’t know how long it’s going to take for these appeals to be sorted out and eventually be heard, since there is already a backlog. COVID 19 created an additional backlog, so let’s suspend interest? So, you know, we’ll see. That, that for many states, most states that will have to be done by the legislator. So let’s see if we get some relief there. But I think continuing to charge such high interest rates is really unfair. That’s a really good point, Katie, and we’ve already sought and obtained, in one jurisdiction, a freeze on the interest from accruing. It was a whopping 12% a year, 1% a month. So it’s something to put out there if you do have matters pending, it’s certainly something you can ask for. Right. And you’re right, and a lot of—that’s a good point. A lot of jurisdictions do have, give the tax department the authority to waive interest. I know Texas is one. So if you have a matter in Texas, it may be worth trying to get interest waived, because I think these circumstances certainly warrant interest abatement. Yeah. Cate, do you want to move on Illinois? Yeah, absolutely. So Illinois I’ve been complaining about because it’s my home state and I guess most importantly, I woke up to snow this morning. But other than that, my biggest complaint is that Illinois has not extended the time for payment of the 1st quarter estimated taxes. The state did extend the income tax filing and payment deadlines, like many of the others, to July 15th, but no relief for that 1st quarter estimated taxes. So if that’s catching you by surprise, you can still get to the mailbox in time to make that 1st quarter estimated payment. The Department of Revenue issued some statements and guidance. They said that they didn’t have the authority to extend that payment for estimated taxes, and that the legislature would need to do so. And of course, they’re not in session. But they did say that you could base your estimated payment on your 201 8return rather than the 2019 to avoid penalties. So, we have had some other relief in the state. I think we’ve got to move on to the Illinois slide. Pritzker has announced some special waiver of penalties and interest for late sales taxes, I said for certain qualifying restaurants and bars, as they’re very sensitive to that segment of the business industry that’s particularly suffering. Chicago has even extended due dates for tax payments until the end of the month for some of their city taxes, which they’ll typically, you know, it’s the restaurant, food and beverage, grocery industries that are going to be impacted. So we’ll see, you know, right now that April 30th deadline corresponds with the stay at home order through the end of the month. We’ll see if any of the deadline gets kicked out even further. So Illinois gets a C from me. So moving on, I think, to the last slide. And the last topic is, you know, what’s happening with state tax audits. We’re hearing from our clients, kind of, a variety of different things. Interestingly, Illinois had before the pandemic, or before they even knew about COVID, they launched a program. It was what they called a remote audit program, and their rationale was that they were going to save money on travel expenses for their auditors. And they had started that in January. Taxpayers were receiving notices with the intent to audit notices saying that, you know, the audits could be conducted electronically through protected e-rooms. And so, Illinois already had some of the technology in place that is necessary as we see states moving to conducting audits remotely. We know some states have placed auditors on administrative leave for periods of time. We heard that, you know, from Kansas, we heard that from other states. So those states, obviously, the audit activity has decreased. But in most states, auditors are, you know, just working remotely and asking taxpayers to upload the documents to the secure sites. I think that there has been a lot of patience, I think on both ends, in terms of trying to accomplish this as people are out of the office and access to the documents may be more difficult. But one obvious trend we’re seeing is a significant increase in requests for extensions of waivers as statute of limitations. And, you know, that is, is, obviously, you want to be reasonable during this time period, but I guess I would recommend, you know, to look at what your individual corporate policy is. Some folks have policies not to extend waivers, and I think the auditors are coming right out of the door now with waivers, even if a statute were expiring in, say, November or December, as a way to kind of get things back burnered. And so maybe just take a breath before signing those waivers and to see how long this lasts. These kind of stay at home orders before we, you know, kind of swiftly execute waivers to the extent you have an interest in getting your audits closed. And, you know, we had mentioned in the context of interest abatement in terms of things that are already proceeding, you know, it’s perhaps something you could offer up, you know, to the extent of the Department of Revenue is insisting on, you know, you signing a waiver. But perhaps there could be some relief requested in terms of interest. One final point on New York. This is something that we just started to see. It looks like New York is starting to show an interest in settling old cases to bring, to bring money in the door. I think that this will probably be a trend in other states, but if you have audits that have been going on for years and years, and you, you know, you want to use this opportunity to close them out, you may be able to get a favorable settlement. That’s a really good point. And I think that’s something that’s going to be, that’s going to be true across the nation. I mean, states are going to be really starved for revenue and there’s going to be a backlog of audits, of cases, of things when, you know, things get restarted. So now maybe the time to close up some of the things and see if you can get a favorable settlement. And I, I think that’s going to be true of most states. Looking, we do have some questions that we can try to, try to go through. I think on this last slide, I just wanted to emphasize we’ve got everybody’s email address. So please feel free to reach out with questions, and—that we haven’t answered during the presentation, you know, or things that you think of afterwards. We’ll be sending around the slides as well. The most important thing for those of you hanging on to the bitter end in New York is the secret code for New York for your CLE form that proves that you’ve hung in there through the end and listened. And that is APPLE15. Apple like the fruit, 15. Okay, great. I think that concludes this webinar. Thank you so much everyone.