In this installment of Board Briefs, Tax Notes State advisory board members, including HMB’s Marilyn A. Wethekam, welcome the 2022 new year. Read the entire Board Briefs here.
Download Marilyn’s article here.
2022: The New Normal
By Marilyn A. Wethekam
2020 could be characterized as the year one learned to manage the shock of COVID. 2021 could be characterized as the year of learning to adjust lifestyles, work environments and business models to deal with what seems to be a never-ending pandemic. Hopefully, there is light at the end of the tunnel, so as we bid farewell to 2021, we should examine recent history and determine what can be learned from it and the impact those lessons may have on 2022.
At the onset of COVID, the fear was the economy would tank and state revenues would plummet. Those fears, at least in the short term, seem to have been unfounded. One reason is that the federal government has provided billions of dollars of relief to cover the costs incurred by the state and local governments’ response to the pandemic. An outstanding question to be addressed in 2022 is how the state and local governments may use the additional $350 billion that was allocated in ARPA. Even absent the infusion of federal funds, the dire predictions for state revenues have thankfully not come true. States have seen increases in both corporate and individual income tax collections. Similarly, in what should be a shock to no one, sales tax revenues have also increased. There is a saying that timing is everything. Clearly, the timing of the Wayfair decision and the legislation it spawned is a key factor in the increased sales tax collections. These increased state revenues have led some states to cut tax rates, phase out taxes and issue refunds. How long will this prosperity last is a question for 2022. One thing history has taught us is that states’ economic outlooks change quickly, and it is difficult to raise tax rates and/or to reenact taxes if or when the bubble bursts.
In 2017 Congress enacted the Tax Cuts and Jobs Act, and four years later, tax administrators and taxpayers alike are still grappling with the effects of federal tax reform. Is more federal tax reform on the horizon in 2022? Will any portion of the Made in America Tax Plan be enacted? If so, how will the states respond to changes in the GILTI calculation or the enactment of the stopping harmful inversions and ending low-tax developments proposal? If any or all the proposed tax plan is enacted, once again, states will be required to evaluate the impact of the federal changes on both revenue and tax policy to determine if they should adopt or decouple from certain provisions of the Internal Revenue Code. Taxpayers again will be faced with uncertainty and possibly increased compliance burdens.
It is unlikely that 2022 will see a decrease in SALT litigation, and history is likely to repeat itself with respect to the issues that are raised. Nexus has been and will continue to be at the forefront of litigation issues. The new twist to nexus litigation may involve P.L. 86-272. The MTC took an ambitious step revising its statement addressing the application of P.L. 86-272 to update the application of the concepts to new business models, including the business activity conducted by an online seller. The updated statement raises several questions. How will the revised statement be applied? How will taxpayers test the updated concepts? More importantly, will it result in increased nexus litigation? There has been an uptick in merger and acquisition activity in the last couple of years. As a result, there is a potential for an increase in cases dealing with the characterization of the income — for example, business versus nonbusiness income — as well as the methods used to apportion that income. The apportionment of the income recognized on the divestiture of a passthrough entity or the assets of a passthrough entity could be the apportionment issue for 2022. New issues percolating in 2022 revolve around the taxation of passthrough entities, the treatment of related party transactions, the taxation of digital goods and services and the increased enforcement of local taxes, just to name a few.
2022 will bring challenges both old and new to practitioners and administrators alike. Recent history has shown the SALT world is resilient and up to the challenge of dealing with the “new normal.”