David Stewart:   0:01
Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: 50 states and COVID- 19. As the coronavirus has spread throughout the U. S, the response has been largely determined by state governments, and that includes when it comes to taxes. Here to discuss the state tax side of the coronavirus pandemic from her home in Virginia is Tax Notes senior reporter Lauren Loricchio. Lauren, welcome back to the podcast.  

Lauren Loricchio:   0:32
Thanks for having me.  

David Stewart:   0:34
This has been a time of great volatility for the states. This time of year is usually when states reap their biggest revenue from income taxes and set their budgets for the next fiscal year. Can you tell us about the interview you just did and what your guest had to say about the state tax response to the coronavirus pandemic?

Lauren Loricchio:   0:50
Sure. I spoke with Katie Quinn, a partner with McDermott Will & Emery LLP, who told me the three main issues facing taxpayers as a result of the COVID-19 crisis are liquidity, implications of the federal CARES Act, and some potential tax increases that could arise from teleworking.

David Stewart:   1:07
All right, let's go to the interview.

Lauren Loricchio:   1:10
Hi Katie, thanks for being on the podcast. 

Katie Quinn:   1:12
Hi Lauren, thanks so much for having me.  

Lauren Loricchio:   1:14
In your view, what are the major issues facing taxpayers at the state level as a result of the COVID-19 pandemic?

Katie Quinn:   1:20
So, there are three primary issues. The first is obviously preserving liquidity and keeping cash out of the pockets of the states and in the taxpayers' pocket. The second is the implications of the CARES Act; how those provisions flow to the states. And thirdly is just making sure that there aren't potential tax increases at the state level as a result of the COVID-19 crisis.  

Lauren Loricchio:   1:44
So how would you like to see states address those issues?  

Katie Quinn:   1:48
The best way for states to address these issues is to provide guidance to taxpayers in real time. So, now.  

Katie Quinn:   1:55
With respect to liquidity, the states have already helped taxpayers in that respect. So the states have extended filing and payment deadlines, which do give taxpayers temporary liquidity.  

Katie Quinn:   2:06
With respect to the implications of the CARES Act, there are some quirky issues at the state level, which could result in a state tax increase. So we would like the states to provide guidance to taxpayers letting them know that this federal relief package will not result in a state tax increase.

Katie Quinn:   2:24
And then finally, there are some nexus and withholding issues that states can address by just giving taxpayers guidance. And essentially-- and I can just touch on this issue quickly now. But essentially, employees working remotely can create income tax nexus and withholding obligations for employers in those states. So, what I think would be a good and a fair response to that issue is for state tax departments to come in and say, "We are not going to hold this COVID-19 crisis against you, and we're going to ignore employees that are forced to work from home, based on COVID-19 and shelter-in-place orders and everything else that's going on."

Lauren Loricchio:   3:00
In terms of the teleworking issue, could you explain a little bit why that would cause those withholding obligations? 

Katie Quinn:   3:07
Of course. So there are really two issues. There are nexus issues, income tax nexus issues, and withholding. So as we know, across the country employees are required to work from their homes. And for many employers, their employees do not work in the same state as they live. So, for example, if you have an employer that's in New York City, but their employees are working from home in New Jersey, that could potentially create sufficient presence for that taxpayer in New Jersey, such that they are now required to file income tax returns. Now I just caution you. That was just an example. They may be required to file income tax returns in New Jersey anyway. But if the nexus is created just because the employees are working remotely from home, to me that seems unfair. And I think that states should issue guidance saying, "We're not going to consider employees that are forced to work remotely from home to be nexus-creating activity." And New Jersey actually has been one state that has issued such guidance.

Katie Quinn:   4:03
Now with respect to withholding, the issue's a little different. So, employers are required to withhold state income tax on wages earned in the state, So, an employer is based in state A, and now their employee, who usually works in the office in state A, is now required to work from home in state B. Arguably, the employer would have to withhold state B income tax. So while that's not really a liquidity issue, that just creates a real administrative burden for employers. So again, I think the right answer would be for states to say, "We are not going to consider employees working from home to have earned those wages in the state for withholding purposes." So, essentially, let's disregard working from home and let's just act as though those employees are still working in the office for withholding purposes.

Lauren Loricchio:   5:34
Are there any states you're looking at specifically for this guidance?  

Katie Quinn:   5:37
No. So we're asking all states for this guidance. McDermott sent a letter to the MTC states asking those states to issue this guidance or to think about these concerns. We've heard from Mississippi, we've heard from New Jersey, and a couple of others. But largely we have not received that guidance yet. But this is really an issue across -- I won't say all states, but the vast majority of states.

Lauren Loricchio:   5:59
You had mentioned the deadline  extension. Do you think states are providing enough relief on this? And what do you think of the response so far? 

Katie Quinn:   6:06
I do think that states have been providing favorable extensions. So, I do think that they have been doing a pretty good job in this respect. Again, these extensions only provide temporary liquidity to taxpayers. Most of the income tax deadlines have been extended to July 15. You know, we don't know how long this is going to go on, so we don't know if additional extensions are going to be necessary. One thing, though, I will caution taxpayers about is with respect to extensions to pay sales taxes. So, sales taxes are trust fund taxes. So usually taxpayers aren't supposed to spend the money that they collect on sales tax. I think that the departments of revenue and the legislatures extending payment deadlines sort of implies that they are going to allow businesses to use that money to fund payroll or anything else that they need right now. But, what you have to be very careful about is making sure that you pay by the extended deadline, because otherwise there could be responsible person liability for officers and other managers and employees. And there could also be criminal penalties.  

Lauren Loricchio:   7:07
And then, in terms of the CARES Act, the economic relief package recently passed by Congress, do you see any areas where it would have a major impact at the state level?

Katie Quinn:   7:15
So I think one of the biggest areas where it will have an impact at the state level is on GILTI, and this is not a multistate issue. But this is an issue in states that passed GILTI and allow the deduction in IRC section 250.

Katie Quinn:   7:29
So the way that the CARES Act works at the federal level is it allows the carryback of NOLs. And there's mechanics under IRC section 250 that essentially say if your taxable income is reduced, your section 250 deduction could potentially be reduced. That's a complicated mechanic that I won't go into because, frankly, I'm not a federal tax expert. But when you get to the state level, the state -- I'll pick on New Jersey again.  

Katie Quinn:   0:00
New Jersey does not allow federal NOLs, so the federal NOL carryback provisions have no impact on the amount of the NOLs that can be taken in New Jersey. But New Jersey does tax GILTI and does allow the section 250 deduction. So, in New Jersey, if the 250 deduction is reduced federally, that means that there's going to be more GILTI tax in New Jersey. So GILTI typically says we tax 50 percent of GILTI. But now that you have these NOL carryback and in 2018, for example, taxpayers could see a tax increase in New Jersey. And that will be retroactive, so they'll have to file amended returns. So, it just seems like the wrong answer when to the federal relief bill. But it could result in taxpayers filing amended returns and paying additional tax to the state.

Lauren Loricchio:   0:00
You're picking on New Jersey because Jersey is one of the only states that actually taxes GILTI, right?

Katie Quinn:   0:00
Right. So it's one of the very few states that taxes a material portion of GILTI. Some states will tax 5 percent, 15 percent. But very few states tax 50 percent of GILTI. Or potentially now New Jersey is taxing even more than 50 percent. And New Jersey is not the only one. This issue can arise in New York City, Nebraska, Iowa. Those are the ones I can think of off the top of my head. But it's not a issue across all states.

Lauren Loricchio:   0:00
And then, in terms of conformity to the CARES Act, are you watching any states in particular? 

Katie Quinn:   9:08
We're really watching all states. New York just did something interesting with respect to 163( j). The CARES Act increased the amount of the interest expense that can be deducted at the federal level by 20 percent. So you used to be able to deduct interest up to 30 percent of your adjusted taxable income. The CARES Act increased that federally to 50 percent. So most states, if they conform to the Internal Revenue Code as amended by the CARES Act and conform to the Tax Cuts and Jobs Act 163(j) limitations, still allow that additional 20 percent deduction. It wasn't publicized widely until after it was enacted, because I think taxpayers would have been very upset about it. But New York came in and said, "We're not going to allow that additional 20 percent deduction for state tax purposes." And that applies in both New York state and New York City.

Katie Quinn:   9:55
So, I think we have to watch out for that type of stuff because the CARES Act was supposed to provide liquidity and tax savings to businesses under these unprecedented circumstances. So, it would be an odd result, a potentially unfair result, for the CARES Act to create additional state tax. Or, I guess, for the states to not allow the federal benefit.  

Lauren Loricchio:   10:16
So, you would like to see states conforming to provisions of the CARES Act?.  

Katie Quinn:   10:19
I would like to see states conform to provisions of the CARES Act to the extent that they provide benefits to taxpayers. Again, if conforming because of the mechanics of the federal code and the state code, if conformity results in a state tax increase, then I think states should be careful that that's not the result, and should prevent the results. Tax increases shouldn't be anyone's intention right now, but it certainly wasn't the intention of the CARES Act.

Lauren Loricchio:   10:42
Which provisions of the CARES Act are most beneficial in terms of conformity?

Katie Quinn:   10:47
163(j) is definitely beneficial. So in states that conform to the CARES Act and conform to 163(j), they get an additional interest expense deduction. So, I think that is helpful.  

Katie Quinn:   11:00
The only other provision that really has an impact at the state level is the new NOL provisions. And that will only impact the states that conform to the IRC as amended by the CARES Act and follow the federal NOLs. A lot of states have their own NOL regime, so the NOL provision really wouldn't provide a benefit. But if the states do follow the federal NOL provision, then it is certainly a benefit. So that would be the second beneficial aspect of the CARES Act.  

Lauren Loricchio:   11:24
Thanks for joining us on the podcast.  

Katie Quinn:   11:26
Thanks so much for having me, Lauren. And stay safe everyone.

David Stewart:   11:40
And now, coming attractions. Each week we preview commentary that will be appearing in the Tax Notes magazines. Joining me now from her home is Content and Acquisitions Manager Faye McCray. Faye, what will you have for us?.

Faye McCray:   11:40
Thank you, Dave. In Tax Notes Federal, Maggie Goff and T. Keith Fogg examine the Tax Court’s rule governing remote electronic access to documents. Michael Karlin analyzes recent IRS guidance regarding nonresidents who have been forced to remain in the United States as a result of COVID-19. In Tax Notes State, Joseph Endres discusses voluntary compliance and taxpayer education in New York. Roxanne Bland considers the possible solution to robocalls. In Tax Notes International, Raul-Angelo Papotti and Andrea Alcara review OECD guidance on transfer pricing and financial transactions. Yue “Daisy” Dai discusses how the OECD and G-20 digital tax reforms would affect marketplaces. And on the Opinions page, Marie Sapirie writes that the earned income tax credit is a good solution for getting immediate assistance to taxpayers facing economic hardship amid the coronavirus crisis.

David Stewart:   12:34
You can read all that and a lot more in the May 4 editions of Tax Notes Federal, State, and International. That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.