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Daily Tax Report: State

TAX VIRUS BRIEFING: Small-Time Fireworks a Win for State Coffers

July 3, 2020, 4:01 PM

In honor of the Fourth of July, we look at how states gain tax dollars as neighborhoods resound with backyard fireworks. At the IRS, staff is searching for people who should get relief checks, and is making progress on backlogs. More items appear on the list of aid sought in the next relief bill. And EU countries may not succeed in trying to block aid to companies that send money to tax havens.

Catch up on the ways the coronavirus outbreak continues to change the world.

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Fireworks Shows Blow Up, But ...

It seems that quarantine-weary Americans have been turning in extraordinary numbers to backyard fireworks, maybe anticipating this weekend’s absence of big community displays.

Few of the usual 16,000 displays will happen this Fourth of July, pushing that industry’s revenue down a whopping 80%, the American Pyrotechnics Association said. Meanwhile there’s an expected 40% surge in sales of sparklers, roman candles, and other neighborhood-fun items—a small sales arena but still a boomlet for states that have special fireworks taxes.

For the roughly 150 display-fireworks companies, there’s an effort for help from Congress in the form of more Paycheck Protection Program aid, tax breaks, and Economic Injury Disaster Loan help.

The backyard-type fireworks sales mean a modest boost in sales taxes for most states. For the eight states with specific excise taxes on fireworks, the boost will be bigger: Alabama, Alaska, Georgia, Indiana, Michigan, Texas, Pennsylvania, and West Virginia. And more than 30 states also impose registration fees on fireworks retailers.

IRS Tackling Problems, Backlog

With more employees in their offices and more on the way back, the Internal Revenue Service is wrestling with coronavirus-related problems.

The union that represents IRS workers is calling on the agency to shut down its Austin, Texas, campus after dozens of employees contracted Covid-19. The agency recalled employees to the Austin campus June 1.

Commissioner Charles Rettig talked about some of them at a Senate Finance Committee hearing Tuesday. The IRS is working with states and community groups, he said, to find people who should be, but aren’t, getting the government’s $1,200 coronavirus relief payments. About 12 million people, disproportionately Black and Latino, may be wrongly left out, according to the Center on Budget and Policy Priorities. That will matter even more as Congress starts negotiating a new virus-aid package later this month.

Rettig also said the agency is prioritizing payments to domestic violence survivors whose abusers have blocked relief payments to them. Such behavior “does not sit well with us,” he told Sen. Catherine Cortez Masto (D-Nev.).

And asked about racial wealth disparities, Rettig said, “I’m a huge proponent of inclusiveness, diversity, and I think you’re possibly aware of the fact that I’m the first commissioner whose spouse came to this country as a refugee.”

Meanwhile the IRS is chipping away at its backlog of unprocessed tax returns, he said, now reducing the pile by about 1 million a week.

Still, National Taxpayer Advocate Erin Collins reported that IRS workflow won’t be back to normal for a long time. For example, the IRS has only now begun to send out more than 20 million notices that had been generated but not mailed before facility closures began. Some are collection notices with old dates and response deadlines that have already passed. Inserts trying to explain the situation may not have helped recipients’ confusion.

As for corporate audits, the IRS launched 718 in April and May—71% fewer than the 2,445 in the same period last year, Collins’ report said. Partnership audits fell 79%. The decline in new audit launches comes after recent years’ low audit figures. Budget cuts left the agency with 15.5% fewer employees in 2018 than it had five years earlier.

The advocate’s report came as the IRS approaches a red-letter date, July 15—and it remains the tax filing and payment deadline, Treasury Secretary Steven Mnuchin decreed, despite some pleas for a further extension.

The agency did, however, extend deadlines for builders to meet certain requirements for low-income housing tax credits, where pandemic restrictions may have stymied activity.

On Capitol Hill

Going into lawmakers’ two-week holiday recess, several kinds of aid lead the negotiating-table list: more financial support for businesses and the unemployed, another round of checks to individuals, liability limits for employers, health care and infrastructure funding, and aid to state and local governments.

Talks to shape a fourth aid package won’t start until Congress returns late in the month, but before leaving town both houses used fast-track procedures to pass legislation (S. 4116) extending the deadline for applications to the Paycheck Protection Program to Aug. 8.

The action came within hours of the the time the Small Business Administration had to stop accepting applicants to the popular forgivable-loan program, on Tuesday night, with more than $134.5 billion still available for lending as of last Saturday. By Tuesday the program had made 4.8 million loans totaling $520.6 billion, the SBA said.

  • Tax proposals continued to surface. Rep. Kevin Brady (R-Texas), the Ways and Means Committee ranking member, said Republicans are preparing bills offering tax incentives to promote healthy workforces. “The tax incentives will be targeted toward helping businesses offset some of the costs of testing, protective gear, the technology, as well as reconfiguring their workplaces so that they are safe both for their employees and customers as well,” Brady said.
  • In the Senate, a bipartisan group introduced a bill to revive tax-exempt advance refundings, which were eliminated by the 2017 tax law. The measure would help the municipal bond market as communities deal with virus-related budget holes.
  • There’s been broad interest in bringing medical-supply manufacturing back to the U.S., and one approach some favor is providing tax breaks for it. This too could be part of a big relief bill. A bill that appears to have some legs is H.R. 6930, which offers incentives for companies that open production plants in high-poverty communities. Puerto Rico could be a beneficiary of such a measure. It’s already a medical manufacturing hub thanks, in part, to a tax incentive known as Section 936, which sunsetted in 2006.

Corporate Tax Chat: Intel

Sharon Heck, chief tax officer and treasurer at Intel Corp., talked to Bloomberg Tax about how the chipmaker’s tax team is adjusting to the coronavirus pandemic, which regulations Intel is most eagerly awaiting from IRS this year, and her quest for a decent cup of coffee.

Global Developments

A number of countries have put a condition on their aid packages for companies: The businesses can’t send money to tax havens. But the restrictions may lack real teeth.

“It is not appropriate to ask for tax money in dire times and avoid tax at the same time. That is why the cabinet explicitly sets conditions for supporting individual companies,” Hans Vijlbrief, the Netherlands State Secretary for Finance, Taxation and Tax Administration, said June 19.

But the measures target a narrow list of so-called tax haven countries, and governments only look at the corporate structure one step beyond their own jurisdictions, critics say. Even stronger measures are unlikely to change corporate behavior because in some cases existing rules already penalize companies for using tax havens.

Germany: The government is speeding passage of measures, including tax breaks and bonuses, to pave the nation’s way out of its worst recession since World War II. A temporary value-added tax cut to 16% from 19% went into effect Wednesday—a step the government estimated would generate 20 billion euros in extra purchasing power.

Italy: Government leaders haven’t decided on a VAT-rate cut, Prime Minister Giuseppe Conte said Wednesday.

Philippines: The deadlines for filing value-added tax refund claims are extended again for areas that are under the country’s relaxed quarantine rules. For areas not yet in that category, the deadline will be 30 days after strict quarantines are lifted.

More international news and information on coronavirus is here.

In the States

Eleven states haven’t yet passed budgets for the fiscal year that started Wednesday. And those that have done it have had to slash spending and hope for billions in support from the federal government—a contentious element of debate still to come in Washington.

House Democrats’ latest aid package would provide governments with about $1 trillion of aid, but the measure has little Senate backing.

“The biggest theme that we are seeing across state budgets is uncertainty,” said Eric Kim, senior director of public finance at Fitch Ratings. “Even with states that have enacted full-year budgets, this will be a banner year for mid-year adjustments,” he said.

Texas: Sales tax collections fell 6.5% in June from a year ago, Comptroller Glenn Hegar said Wednesday. The May drop was 13.2%, the biggest since January 2010. Texas is especially sensitive to business shutdowns since it’s one of the few states without an income tax and relies on sales taxes for more than half of its revenue.

Georgia: In a bill the governor signed this week (H.B. 846), the state conformed to most of the federal CARES Act (Public Law 116-136) virus-relief provisions, but not to sections that allow businesses to carry back net operating losses from 2018 through 2020 for up to five years and that remove the 80% limit on use of operating losses after 2017.

The new law also creates a $1,250-per-employee tax credit for manufacturers producing certain types of personal protective equipment.

New Mexico: Tax filing deadlines remain, but a law signed this week (H.B. 6) waives interest and penalties for late payments during the pandemic. The measure also de-links the state’s treatment of business net operating losses from CARES Act provisions. Plus, payments to some health care providers under the CARES Act will be exempt from gross receipts tax.

California: Gov. Gavin Newsom signed a measure that suspends corporate net operating loss deductions and caps business tax credit claims, to raise revenue by $9.2 billion over three years. The suspension and cap apply retroactively to Jan. 1 and expire Dec. 30, 2022. More changes are likely when the state plans to update the budget again in August.

Bloomberg Tax has a state-by-state roadmap logging all developments as they happen.

Dive Deeper With Bloomberg Tax Insights

  • David Klass of Hunton Andrews Kurth: How governments, including the European Union, are eyeing digital services taxes as revenue sources as they start figuring out how to pay for the pandemic’s enormous costs.
  • Justice Deno Himonas of the Utah Supreme Court, and Scott Bales, former chief justice of the Arizona Supreme Court: The unmet need for legal services will balloon because of the pandemic and a host of issues arising from it—making it all the more urgent to expand the field of who can provide legal services and how.
  • Steve Wlodychak of Ernst & Young: The CARES Act may have increased state taxes for many people even as it gave federal tax breaks to businesses. Part one of what will be two parts deals with state provisions that don’t explicitly refer to federal tax law.

To contact the reporter on this story: Kathy Larsen in Washington at klarsen@bloombergtax.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com

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