CPAs must be aware of current tax developments in key states to properly advise entities doing business in multiple jurisdictions. Below is an overview of some key developments in the state of California.
On February 9, 2022, California Governor Gavin Newsom signed legislation that, among other coronavirus (COVID-19) relief measures, expands the Transmitting Entity Tax (PTE), reinstates the deduction for net operating loss (NOL) and business tax credits, and provides relief to restaurant and venue operators, just in time for the March 15, 2022 filing deadline (SB-113 Economic Relief: COVID -19 Pandemic).
Transfer Entity Tax (PTE)
Legislation expands PTE tax (for an overview of California’s PTE tax, see August/September 2021 column, “California Approves SALT CAP Workaround” https://bit.ly/3KwTtHI). Effective January 1, 2021, the new law—
- allows the PTE tax to reduce the tax owing below the taxpayer’s California Provisional Minimum Tax (TMT);
- allows a disregarded entity i.e. a Single Member Limited Liability Company (SMLLC) to claim the credit, however, the choice must be made by the owner of the SMLLC;
- allows flow-through entities that have partnerships as one of their owners to elect and file a PTE tax return (however, tax still cannot be paid in the name of the partnership owner ); and
- includes guaranteed payments to partners in the entity’s qualifying net income for tax purposes.
On or after January 1, 2022, the PTE tax credit will be applied to net tax after credits for taxes paid to other states.
Retroactive relief for closed restaurants and venues.
The legislation, retroactive to the 2020 tax year, is consistent with California’s tax treatment of federal Restaurant Revitalization Fund (RRF) grants. Additionally, California will partially comply with the federal closed-site operator (SVOG) subsidy exclusion, retroactive to the 2019 tax year.
NOL and business loans.
The legislation restores for the 2022 tax year the currently suspended NOL deduction for businesses with income over $1 million and lifts the business tax credit limit by $5 million.
Expanded filing requirements
On February 14, 2022, the California Franchise Tax Board (FTB) issued Technical Advisory Memorandum (TAM) 2022-01, outlining activities that exceed federal protections under the Interstate Income Act of 1959 (PL 86-272 ) and, therefore, create a tax filing requirement for out-of-state businesses that would otherwise not have to file a California tax return. As CPAs generally know, Congress established PL 86-272 to add restrictions on how states could claim corporate income tax nexus on businesses beyond a physical presence in their respective jurisdictions.
Essentially, TAM 2022-01 incorporates all positions of the Multistate Tax Commission (MTC) adopted in its “Statement of Information Regarding the Practices of the Multistate Tax Commission and Supporting States Under Public Law 86-272” revised (August 4, 2021). The MTC’s amended statement focused on which internet activities would or would not benefit from PL 86-272 protections.
Additionally, TAM 2022-01 clarifies that telecommuting for employees in non-business functions exceeds the protections provided by PL 86-272 and therefore creates a California tax filing requirement.
With respect to Internet activities, TAM 2022-01 provides that the following activities in California exceed the protections afforded by PL 86-272 and therefore create a California tax reporting requirement:
- After-sales support via online chat and email through a company’s website
- Soliciting and submitting applications online through a branded credit card company’s website that generate interest and fee income
- The ability to upload or complete resumes on a website for non-commercial positions
- Websites that download Internet cookies and similar items for the purpose of collecting customer information used to adjust inventory and other business activities such as the production and development of new products
- Remotely repair and transmit computer code to repair or upgrade previously purchased products
- Selling extended warranties through a company website
- Maintain inventory in California at a Market Facilitator’s fulfillment center or warehouse.
TAM 2022-01 also provides three activities that do not exceed the limits of PL 86-272 and, therefore, do not on their own create a California tax filing requirement:
- After-sales support by posting answers to an FAQ on the Internet.
- Downloading Internet cookies solely for the purpose of soliciting sales of tangible goods; Internet cookies can be used to—
- memorize the items that customers have placed in their basket,
- store the customer’s personal information so that the customer does not need to re-enter it, and
- remind customers of previously viewed items.
- A website that only sells tangible personal property and whose capabilities are limited to posting product descriptions, selecting items to purchase, choosing delivery options, and issuing payment.
CPAs should be aware that the above tax provisions will benefit many taxpayers in California. Additionally, CPAs should also be aware that TAM 2022-01 could create nexus and California corporate income tax reporting requirements for taxpayers located outside of California while benefiting taxpayers. located in California. CPAs should review these recent developments to see how the changes may impact specific tax positions or calculations and, if so, whether it would be beneficial to modify tax filings.