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The top 10 developments in state tax in 2019

The aftershocks of events at the federal level continued to have major tax repercussions at the state level throughout 2019.

As was the case last year, the annual list of the top developments in the state tax arena compiled by Jamie Yesnowitz, principal and SALT practice and National Tax Office leader at Top Five Firm Grant Thornton, is dominated by two issues: the Tax Cuts and Jobs Act, which was enacted at the end of 2017, and the Supreme Court decision in South Dakota v. Wayfair, Inc. which was decided six months later in June 2018..

In fact, “The top two spots, and four of the top seven spots deal with the states response to Wayfair,” Yesnowitz said. “The states’ and localities’ overwhelming reactions to Wayfair through sales tax and income tax nexus changes and the expansion of sales tax responsibilities to marketplace facilitators are impacting all businesses in a significant way. On the sales tax side, remote sellers and online marketplace operators face a brave new world with expanded compliance, and the need to collect the correct tax amount — not too much,and certainly not too little.”

Here are Yesnowitz’s top SALT stories of the year, listed this year, for the first time, in order of importance:

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, Yesnowitz said. The tax is 0.57 percent on Oregon-based sourced “taxable commercial activity” over $250.
9. Combined reporting expanded and clarified
“Compared with market-based sourcing, efforts to shift from separate to combined reporting for affiliated corporations slowed this year, 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.”
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,” Yesnowitzobserved. “Six states adopted market-based sourcing rules for services, but they vary on how and where they are applied. The differences between ‘billing address’ or ‘delivery’ or ‘benefit received’ approaches used by various states can lead to much confusion.”
7. Adoption of sales tax economic nexus standard by local taxing authorities
“A number of states allow home-rule authority to local jurisdictions,” Yesnowitz remarked. “Some of these local jurisdictions imposed sales and use taxes for remote sellers following the Wayfair decision. Alaska, which allows home rule, saw localities across the state pass such standards. 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.”
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. “One nagging issue for some businesses is that many terms, particularly the term ‘marketplace provider,’ have a wide range of definitions in these state laws. A careful, state-by-state assessment of collection responsibilities is crucial for many marketplace sellers.”
5. The U.S. Supreme Court decides Kaestner Trust
The Supreme 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.”
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 Internal Revenue Service. 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.
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.”
2. The next frontier: 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.
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.”