13 January 2016 State and Local Tax Weekly for January 8 Ernst & Young's State and Local Tax Weekly newsletter for January 8 is now available. Prepared by Ernst & Young's State and Local Taxation group, this weekly update summarizes important news, cases, and other developments in U.S. state and local taxation. California Supreme Court issues ruling in Gillette Co., finds the Multistate Tax Compact equally weighted apportionment election is unavailable in the state The California Supreme Court (Court) reversed the Court of Appeal's ruling in Gillette Co., and held that corporate taxpayers cannot elect to use the equally weighted three-factor apportionment formula under the Multistate Tax Compact (Compact) for reporting income to California in lieu of the statutorily mandated formula (e.g., double-weighted sales or single sales factor formulae). In reaching this conclusion, the Court agreed with the Franchise Tax Board (FTB) that the Legislature's enactment of a new apportionment formula controls, and that the state is not bound by the Compact election. The Gillette Co. v. Franchise Tax Board, No. S206587 (Cal. S. Ct. Dec. 31, 2015). Specifically, the Court found that (1) the Compact is not a binding contract among the states; (2) the Compact does not satisfy any of the indicia of a binding interstate compact as stated in the U.S. Supreme Court's ruling in Northeast Bancorp (e.g., the Compact did not create reciprocal obligations among member states, especially with respect to maintaining the Compact's election provision, the Compact did not prohibit unilateral state action, the Multistate Tax Commission lacks binding authority over the member states and as such it is not a joint regulatory organization as contemplated by Northeast Bancorp); (3) the Legislature's amendment of the apportionment provisions intending to eliminate the Compact apportionment election did not violate the reenactment clause of the California Constitution (which requires a statute to embrace one subject that is expressed in its title); and (4) by stating that "Notwithstanding Section 38006 [i.e., the provisions of the Compact], all business income shall be apportioned to this state by" using the formula it sets out, the Legislature unambiguously intended the statutory sales factor formula set forth in Cal. Rev. & Tax Code §25128 (e.g., double weighted sales factor or single sales factor, depending upon the year) to supersede the Compact election provision. We expect several of the taxpayers who are party to this litigation will appeal the Court's ruling to the U.S. Supreme Court (USSC). Even if the USSC grants certiorari to the taxpayers in Gillette or any one of the companion cases in other states, the Court's decision will stand for California tax purposes until reversed by the USSC. The validity of Gillette could impact (1) a taxpayer's filing position in California tax returns filed after Dec. 31, 2015 for purposes of the Large Corporate Understatement Penalty (LCUP), (2) financial statement provisions or FIN 48 disclosure, or (3) the need to file amended returns for prior years. For more on this development, see Tax Alert 2016-24. California: The California State Board of Equalization (SBOE) held that for purposes of determining whether an online classified ad forum company is taxable in another state for purposes of applying the throw-out rule, the company must use the nexus rules in effect for the tax year at issue (2007) — in this case, a physical presence standard, and not the factor presence nexus standard that took effect in 2011. The Franchise Tax Board (FTB) granted the company's request to use an alternative apportionment formula that allowed it to source its gross receipts from advertising on a market basis (i.e., source its gross receipts to the state where the advertisement generating the income was targeted), but provided that the company's receipts would be subject to the throw-out rule. For the tax years at issue, 2007, the state adopted a physical presence nexus standard, and in 2011 it began using a factor presence nexus standard ($50,000 of payroll or property or $500,000 of sales in the state). The company argued that it was taxable in the states at issue based on having more than $500,000 of sales in those states and, as such, sales from these states should be thrown-out of the sales factor calculation. The FTB disagreed, arguing that to be taxable in these states the company must have a physical presence in those states, as required by the nexus standard in place during 2007. The SBOE ruled in favor of the FTB, stating that "[w]hile an increasing number of state court cases have found that a physical presence is not necessary, the United States Supreme Court has not so held, and there is no [SBOE] decision or California court decision finding that nexus to impose an income tax may be established without a physical presence." Moreover, the SBOE held that if it found physical presence was not required during 2007, such finding "would establish a new rule of law in an unsettled area." Matter of Craigslist Inc., Nos. 725838 and 843070 (Cal. St. Bd. of Equal. Dec. 16, 2015). California: In a recently issued Technical Advice Memorandum, the California Franchise Tax Board (FTB) advised that when reducing tax attributes for excluded cancellation of indebtedness income (CODI) pursuant to IRC §108, post-apportioned CODI is applied. The FTB explained that California incorporates by reference IRC §61, which includes gross income from discharge of indebtedness (CODI), as well as the exception to this general rule, IRC §108, which excludes CODI from gross income if the debt is discharged due to bankruptcy or insolvency. In addition, IRC §108(b)(1) requires certain tax attributes (e.g., NOLs, certain tax credits, capital loss carryovers and the basis in property) be reduced to the extent the CODI was excluded from gross income. If CODI occurs for a reason other than bankruptcy or insolvency, the CODI would be taken into account as an item of income and apportioned to California. The FTB reasoned that since CODI would generally be apportioned to the state, it follows that post-apportioned excluded CODI should be applied to reduce tax attributes when applying IRC §108. Further, certain items of tax attributes (e.g., NOLs and capital loss carryovers) that are reduced are post-apportioned amounts. Cal. FTB, TAM 2015-02 (Dec. 22, 2015). Connecticut: New law (SB 1601) makes additional changes to the mandatory combined reporting provisions enacted in 2015 as well as making certain other changes to Connecticut's corporate and personal income tax statutes. Key tax law changes include: (1) adoption of a single receipts factor effective Jan. 1, 2016 (this change only applies to the income tax base of the Connecticut corporate tax); (2) elimination of the requirement that the combined group include a member that earns more than 20% of its gross income, directly or indirectly, from the sale or ownership of intangible property or service-related activities, the costs of which generally are deductible for federal income tax purposes against the income of other group members; (3) modification of the tax haven provisions; (4) that the tax calculated for a combined group on a unitary basis, prior to surtax and application of credits, cannot exceed the "nexus combined base tax" by more than $2.5 million; (5) modification of NOL elections available to certain combined groups; (6) increased reliance of the Connecticut tax laws on the IRC, including the application of the federal consolidated return regulations to determinations of the taxable income of a combined reporting group; (7) adoption of other changes to the combined reporting provisions related to foreign corporations in the combined group, the treatment of income derived from investment partnerships, apportionment for groups that include a multi-state financial services company, and capital tax base eliminations; (8) gradually increasing the cap on the total value of credits that a corporation can claim back to 70% over a four year period beginning in 2016, but only with respect to the R&D credit and credits related to urban and industrial sites development projects; and (9) an exclusion from Connecticut personal income tax (and more significantly, from its withholding taxes) for a nonresident employee who is present in the state for 15 days or less during a tax year. Conn. Laws 2015, SB 1601, signed by the governor on Dec. 29, 2015. For a more in-depth discussion of these changes, see Tax Alert 2015-2348. Idaho: The Idaho State Tax Commission announced that it will follow the de minimis safe harbor threshold under the final repair regulations issued by the IRS (Treas. Reg. 1-263(a)-1(f)) provided for in IRS Notice 2015-82. Idaho St. Tax Comm., Press Release (Dec. 17, 2015). Indiana: The Indiana Tax Court (Court) ruled that adjustments made by the Indiana Department of Revenue (Department) to a multistate corporate retailer's Indiana net income were improper because neither the state's alternative apportionment provision (Ind. Code §6-3-2-2(I)(4)) nor the state's IRC §482-type adjustment provisions (Ind. Code §6-3-2-2(m)) authorized the Department to increase the retailer's net income tax base for purposes of assessing Indiana adjusted gross income. In disallowing the Department's attempted use of the alternative apportionment provisions, the Court explained that the effect of the Department's audit adjustment was to increase the retailer's net income tax base by approximately $100 million for each year at issue and not to divide the retailer's tax base differently than it had done under the state's standard sourcing rule. Indiana's alternative apportionment rule allows the Department to use a reasonable alternative method to the standard sourcing rules only for dividing the tax base. Here the Department attempted to use these provisions to adjust the net income tax base. The Department also could not rely on the state's "482-type" provisions to adjust the tax base because it failed to show that the standard sourcing rules did not fairly represent the retailer's Indiana source income. The Department argued that the retailer's state tax treatment of its intercompany transactions improperly reduced its profits because the retailer's related entities purchased products from an independent foreign manufacturer and resold them to the retailer at an inflated price. The Department also argued that the retailer's transfer pricing studies did not rebut that its assessments were correct. The Court rejected the Department's arguments, finding that the Department failed to present evidence showing that the retailer's transfer pricing studies were invalid or unreliable, and that the disclaimer in the transfer pricing report that it does not reach any conclusions regarding state tax issues does not render the study irrelevant. Rather, the Court found that the disclaimer merely limits the professional responsibility of the accounting firm that provided the report. Moreover, the Court found the Department's claim that use of the standard sourcing rule distorted the retailer's Indiana source income because of a "big variance" between the percentages of gross profit for the consolidated group in comparison to the retailer, was insufficient to entitle the Department to summary judgment as a matter of law. The evidence, the Court found, established that the intercompany transactions were conducted at arm's length rates and, therefore, the standard sourcing rules fairly reflected the retailer's Indiana source income. Lastly, the Court found that even if the application of the standard sourcing rules did not fairly reflect the retailer's Indiana source income, the Department's adjustments, which would have attributed nearly all of the consolidated group's gross income to the retailer without adjusting the retailer's apportionment percentage, are still improper because the adjustments are unreasonable. Columbia Sportswear USA Corp. v. Indiana Dept. of Rev., No. 49T10-1104-TA-00032 (Ind. Tax Ct. Dec. 18, 2015). Minnesota: The Minnesota Department of Revenue announced adjustments to the corporation franchise tax minimum fee for 2016. The minimum fee ranges from zero if the taxpayer's total Minnesota property, payroll and sales is less than $970,000; up to $9,690 if the taxpayer's total Minnesota property, payroll and sales is $38,770,000 or more. Minn. Dept. of Rev., Release (Dec. 15, 2015). Nebraska: On Dec. 22, 2015, the Governor approved a number of regulations related to apportionment (Reg-24-301 et seq.), implementing the state's market based-sourcing rules that took effect in 2014. The regulations provide guidance on various topics including: the sales factor of business entities as owners in a partnership or joint venture; sales factor sourcing for tangible personal property and non-tangible personal property (e.g., services, intangible property, selling or leasing real property, leasing tangible personal property, sales not specifically addressed) in Nebraska; special apportionment rules for airlines, pipeline companies, trucking companies, insurance companies; property and payroll factor issues; and alternative apportionment. The regulations became effective Dec. 27, 2015. New Jersey: The New Jersey Superior Court, Appellate Division, affirmed the New Jersey Tax Court's ruling in Lorillard Licensing Co., regarding the appropriate standard the Division of Taxation (Division) must use when applying the since repealed throw-out rule in determining a multistate company's receipts for corporate business tax apportionment purposes. Under Whirlpool, the state's throw-out rule is facially constitutional when applied to receipts from states lacking jurisdiction to impose tax either due to insufficient nexus or because of the protections afforded under PL 86-272, but not when applied to receipts from states that opt to not impose an income (or similar) tax. Thus, the Division may 'throw out' of the denominator of the receipts fraction only that income which is realized by the taxpayer from other states which lack the jurisdiction to tax it. The tax court also rejected the Division's application of different standards for determining whether a taxpayer "is subject to tax" for purposes of nexus and for purposes of throw-out. Under the nexus principles articulated in Lanco, the taxpayer in this case is subject to tax in every state by virtue of an affiliate's sale of products using the taxpayer's trademarks and trade names in those jurisdictions. Therefore, since for New Jersey tax purposes the taxpayer was subject to tax in every other state, the taxpayer did not have any receipts that could be thrown out under the throw-out rule. The court noted that "[w]hether or not the other States actually collected a tax from [Lorillard] does not control the inquiry. It is the ability to tax, not actual taxation, which determines if the throw-out rule applies under Whirlpool." Lorillard Licensing Company LLC v. Director, Division of Taxation, No. A-2033-13T1 (N.J. Superior Ct., App. Div., Dec. 4, 2015) (unpublished). Note, on Jan. 6, 2016, the New Jersey Tax Court published its 2014 ruling in Lorillard. New York: The New York State Department of Taxation and Finance (Department) issued a technical memorandum on direct and indirect attribution of interest deductions for Art. 9-A (corporate franchise) taxpayers. The memorandum contains new definitions of "investment capital," "investment income" and "other exempt income," sets forth the required methodology for the attribution of interest deductions, and explains the safe harbor election. The Department noted that this guidance does not cover the attribution of liabilities in computing the tax on business capital as this is addressed in the applicable tax return instructions. The memorandum is effective for tax years beginning on or after Jan. 1, 2015. N.Y. Dept. of Taxn. and Fin., TSB-M-15(8)C, (7)i (Dec. 31, 2015) (supersedes TSB-M-88(5)C and TSB-M-95(2)C). Ohio: New law (HB 340) contains language to remedy the conflict between the disparate treatment of Ohio-chartered banks and national banks with regard to the tax credit against the Ohio Financial Institutions Tax (FIT) for regulatory fees paid by state-chartered banks to the Ohio Department of Commerce. By way of review, O.R.C. §5726.51 provides a tax credit against the Ohio FIT for the annual assessment that state-chartered banks pay during the tax year to the Ohio Department of Commerce's Division of Financial Institutions. On Sept. 17, 2015, the U.S. Office of the Comptroller of the Currency (OCC) opined that this credit violated 12 U.S.C. §548 since national banks would not be entitled to this credit, and Section 548 requires that, for purposes of state tax law, a national bank shall be treated as a state bank chartered by the state in which the national bank has its principal office. HB 340 remedies this conflict by: (1) eliminating the regulatory assessments and fees imposed on state-chartered banks by the Department of Commerce; (2) refunding the regulatory assessments and fees collected by the Department of Commerce after Jan. 1, 2015; and (3) repealing the FIT credit allowed for Ohio-chartered banks' payments of regulatory assessments and fees. As such, HB 340 will remedy the issue for the 2016 tax year report, computed based upon the tax year ending in 2015. Ohio Laws 2015, HB 340, signed by the governor on Dec. 22, 2015. Rhode Island: Final regulation (Regulation CT 15-02) effective Jan. 12, 2016, provides guidance on nexus for corporate income tax purposes. A previously issued regulation relating to the state's recent tax reform dealt almost entirely with the applicability of PL 86-272. The amended regulation provides more broad-based nexus guidance in addition to significant coverage of PL 86-272. The old nexus regulation provided that corporate limited partners would not generally have nexus with the state solely due to their ownership of a limited partnership interest. The amended regulation, however, expands this nexus position providing that ownership of an interest in any partnership or other pass-through entity whose activities, if conducted by a foreign corporation, will create tax nexus unless the activities of the partnership or pass-through entity are limited to activities protected under PL 86-272. The amended regulation makes clear that Rhode Island will apply economic nexus "to the fullest extent permitted by the United States Constitution and the laws of the United States." The amended regulation discusses the use of the "Finnigan" method of apportioning the sales of non-nexus members of the combined reporting group. The regulation provides that if one combined group member has nexus with Rhode Island, then the Rhode Island receipts of a combined group member that lacks nexus with Rhode Island or that is protected from Rhode Island taxation by PL 86-272 must always be included in the numerator of an apportionment fraction on the combined return. Lastly, the amended regulation includes a list of in-state activities of foreign corporations that would create nexus. Such activities include: providing consulting services, performing services, installing or supervising installation of tangible personal property at or after shipment or delivery, ownership of an in-state pass-through entity, licensing the use of non-trademark intangible property to in-state affiliates, entering into franchising or licensing agreements, etc. R.I. Div. of Taxn., Reg. Ct 15-04, approved Dec. 23, 2015. Rhode Island: Final regulation (Regulation CT 15-04), effective Jan. 12, 2016, provides guidance on the apportionment of Rhode Island net income, specifically setting forth rules to determine the state or states of assignment of sales other than sales of tangible personal property. In general, receipts from the lease or license of intangible property are sourced based on where the intangible property is used, while receipts from sales of services are sourced where the "benefit of the service is received." The regulation provides various rules depending on the type of service, the method of delivery and/or the type of customer. The regulation is modeled closely after the recent Massachusetts market sourcing regulation (830 CMR 63.38.1(9)) by breaking down the sourcing of services into three broad categories — "in person" services; "services delivered to the customer or on behalf of the customer, or delivered electronically through the customer;" and "professional services" — and providing a separate set of cascading rules for each. The regulation provides guidance on mixed groups with members that use special industry apportionment (but still under Rhode Island's general corporate income tax), essentially providing that members using a special industry apportionment method (such as those for motor carriers or mutual fund services providers) will continue to apportion their receipts as part of the combined group's income, and other corporations in the group will use either the general rule or the applicable industry rule. Banks and insurance companies generally cannot be included in a combined group return. R.I. Div. of Taxn., Reg. Ct 15-04, approved Dec. 23, 2015. Federal: New law (HR 2029) extends the Internet Tax Freedom Act (ITFA), which prohibits non-grandfathered states from taxing charges for internet access or imposing new and discriminatory taxes, through Oct. 1, 2016. The House had approved a permanent extension with a phase-out of the grandfather provisions by 2020, but the measure faced opposition in the Senate. Pub. Law 114-113, signed by the President on Dec. 18, 2015. Illinois: The Department of Finance (the Department) of the City of Chicago (City) released an Information Bulletin which provides further guidance on the application of the Personal Property Lease Transaction Tax (Transaction Tax) to Nonpossessory Computer Leases. The Information Bulletin (the Bulletin) was issued in response to widespread requests for additional guidance regarding Transaction Tax Ruling #12 issued in June and the City Council's subsequent amendments to the Transaction Tax Ordinance (Chicago (IL) Mun. Code §3-32-010 et seq.) The Bulletin reiterates the general topics covered in Ruling #12 (e.g., the types of software platforms that might be subject to the tax, at what point is a lessor obligated to collect the tax from its lessee, and when the lessee is required to self-assess and remit the tax). The Bulletin also provides examples to assist lessors and lessees in determining whether prospective registration as of Jan. 1, 2016 is acceptable, or whether lessors and lessees should consider participating in the City's voluntary disclosure program (VDP), including a tailored voluntary disclosure agreement (VDA) program specially aimed at certain nonpossessory computer leases. For additional information on this development, see Tax Alert 2015-2386. Louisiana: A company that performed repair services on magnetic resonance imaging systems (MRIs) that were installed at various medical facilities is liable for sales tax on the proceeds from performing such services, because the MRI equipment was movable tangible personal property rather than exempt immovable property. In reaching this conclusion, the Louisiana Court of Appeal (Court) found no evidence of unequivocal detrimental reliance by the company on the Louisiana Department of Revenue (Department) for failing to collect the tax due because (1) the available information regarding whether the MRI repair services were taxable was uncertain; (2) a universal rule on the classification of MRI scanners for taxable purposes is not possible because determining whether an MRI is a component part through permanent attachment to an immovable requires an analysis of all facts surrounding the attachment; (3) private letter rulings (upon which the company relied) are not binding as they provide guidance only to a specific taxpayer, and the company did not request the private letter rulings upon which it relied; and (4) a summary of a law in a Department publication does not contain clear guidance or advice. Hitachi Medical Systems America, Inc. v. Bridges, No. 2015 CA 0658 (La. Ct. App., 1st Cir., Dec. 9, 2015) (unpublished). New York: A data center located in New York constitutes more than the slightest physical presence in the state and establishes sales tax nexus for a cloud-based service provider (provider) and the provider's predecessor limited liability company. In addition, the provider's sales of its five levels of enterprise service and of its home service to New York customers (blocking malware, botnets, phishing, etc.) are subject to sales or use tax because the primary function of each is the sale or use of a taxable protective service. The taxability of plug-ins (software) that the provider uses related to its enterprise services depends upon whether it was designed and developed specifically for the provider and whether the provider sells it to anyone else. However, the provider's free stand-alone DNS service (converting written internet site names to numerical IP addresses, thus speeding up internet services) is not subject to sales or use tax because the DNS service does not constitute a protective service when it replaces the DNS service that a customer would otherwise use for internet access service provided by the customer's internet service provider. Finally, the provider must register for sales tax purposes and collect and remit tax on its sales to New York customers because the provider is a vendor providing protective services to New York customers and the receipts of those sales are taxable. N.Y. Dept. of Taxn. and Fin., TSB-A-15(47)S (Nov. 18, 2015). New York: A company that produces and sells software must collect and remit sales tax on its sales of software that performs administrative functions rather than manufacturing or R&D activities because the software does not qualify for either a production or R&D exemption. The software does not meet the manufacturing exemption's definition of "directly" or "prominently" used in the production of tangible personal property because the software provides information about administrative and distributive activities such as tracking, scheduling, costs, and shipping, rather than directly interacting with the item being produced. In addition, the software does not qualify for the exemption of tangible personal property used in R&D as the software performs tasks such as processing and shipping orders, controlling materials, and tracking labor rather than activities aimed at advancing science and technology, developing new products, or improving or developing new uses for existing products. N.Y. Dept. of Taxn. and Fin., TSB-A-15(44)S (Nov. 13, 2015). Federal: The Consolidated Appropriations Act, 2016 (the Act), signed into law on Dec. 18, 2015, extends a number of expiring tax provisions and incentives, including the Section 45 Production Tax Credit (PTC), Section 48 Investment Tax Credit (ITC), Section 45D New Markets Tax Credit (NMTC), a special rule applicable to the Low-Income Housing Tax Credit (LIHTC), and bonus depreciation. For more on this development, see Tax Alert 2015-2462. Federal: The Consolidated Appropriations Act, 2016, which was signed into law by President Obama on Dec. 18, 2015, included a number of tax extenders provisions affecting tax credits related to energy production and conservation. Such credits include: (1) Section 25C credit for nonbusiness energy property; (2) Section 30C credit for alternative fuel refueling property; (3) Section 30D credit for electric motorcycles; (4) Section 40(b)(6) credit for second-generation biofuel producers; (5) Section 40A credit for biodiesel, biodiesel mixtures, renewable diesel; (6) Section 45 credit for production of Indian coal facilities; (7) Section 45 and 48 credits for renewable energy production; (8) Section 45L credit for energy- efficient new homes; (9) Section 168(l) allowance for second-generation biofuel plant property; (10) Section 179D energy-efficient commercial buildings deduction; (11) Section 451(i) rule for sales or dispositions restructure qualified electric utilities; (12) Section 6426 and 6427 excise tax credits and payment provisions for alternative fuel; (13) Section 30B fuel cell vehicles; and (14) Exclusion from gross income of certain clean coal power grants. For additional information on these developments, see Tax Alert 2015-2441. Arizona: In affirming a lower court ruling, the Arizona Court of Appeals (Court) held that the valuation by the Arizona Department of Revenue's (Department) of the companies' renewable energy equipment for the 2014 tax year using the 2008 version of Ariz. Rev. Stat. § 42-14155 (2008 version) rather than the version amended effective July 24, 2014 (2014 amendment) was correct. The Court concluded that (1) the 2014 amendment to property tax valuation law is not retroactive and cannot be applied to a tax appeal that is already pending; and (2) the 2014 amendment changes rather than clarifies the law and, therefore, cannot be used to interpret the prior meaning of the statute. The Court rejected the companies' argument that under the 2008 version, the Department improperly valued the renewable energy equipment by adding back the amounts of cash grants and tax credits to the valuation calculation, and rejected the companies' further argument that the 2014 amendment (which permits the deduction of investment tax credits and cash grants in lieu of tax credits in the valuation calculation) applied to their tax appeals because the amendment became effective before the taxes in question were assessed. Siete Solar, LLC v. Ariz. Dept. of Rev., No. 1 CA-CV 15-0126 (Ariz. Ct. App., Div. 1, Dec. 10, 2015). Tennessee: The Tennessee State Board of Equalization (Board) adopted the value and assessment for a light industrial/warehouse facility presented by the assessor because the taxpayer failed to demonstrate that the facility should have a lower valuation via three different alternative valuation methods. In reaching this conclusion, an administrative law judge (ALJ) found the taxpayer's cost approach valuation was not materially different from the current tax appraisal value of the facility. In regard to the taxpayer's sales comparison approach, which examined four sales, the ALJ found the assessor successfully discredited the sole directly competitive sale presented as a comparable sale transaction, because the sale involved an industrial development board that was extremely eager to attract jobs. Finally, in the taxpayer's income approach to value, the ALJ found that the taxpayer's heavy reliance on the facility's lease may have been misplaced because the taxpayer first disregarded the most recent sale price of the facility as potentially inflated, but then attributed significant weight to the lease of that property in its valuation computation — when the inflated sale price led the ALJ to find that, absent additional proof, the lease would tend to reflect depressed rental rates. In re Centurion Vonore GP, Nos. 96408 and 102661 (Tenn. State Bd. of Equal. Dec. 8, 2015). Illinois: Effective Jan. 1, 2016, the Chicago Department of Finance requires tax collectors and taxpayers to file their tax returns electronically. Real property transfer tax declarations must be filed online. All other city taxes must be filed online. Chicago Dept. of Fin., URPO Ruling No. 5 (Dec. 11, 2015). Alabama: The Alabama Tax Tribunal (Tribunal) granted business privilege tax refunds and interest for the 2010 through 2012 tax years to an insurance company, and directed the Alabama Department of Revenue (Department) to pay the insurance company additional interest on a refund issued for the 2013 tax year. In making this determination, the Tribunal found that the Department failed to dispute the applicability of a case in which the result favored the insurance company, and rejected the Department's argument that the insurance company's refund claims were untimely. In rejecting the timeliness argument, the Tribunal affirmed and adopted a previous opinion and preliminary order issued in the same case, which found that the 2010, 2011, and 2012 amended returns (rather than the 2010, 2011, and 2012 original returns) were refund requests that were deemed denied six months after filing and then were timely appealed. The fact that the Department issued adjustment notices to the insurance company concerning those tax years does not change the Tribunal's rationale, because the taxpayer had not requested refunds on any of those original returns, and as such, had no reason to appeal from the later adjustment notices showing no refunds due. Finally, for the outstanding 2013 interest, the Tribunal found that the Department is statutorily required to pay interest on any overpayment from the date of overpayment, noting that a taxpayer is not required to affirmatively request interest or raise the issue of whether the Department has a duty to pay interest under Alabama law. American Equity Investment Life Ins. Co. v. Ala. Dept. of Rev., No. BPT 15-612 (Ala. Tax Trib. Nov. 16, 2015). Pennsylvania: In its ruling in Mission Alpha Funding, the Pennsylvania Commonwealth Court (court) held that a taxpayer was entitled to file a refund of corporate net income and franchise tax for a claim filed within three years of the date the taxpayer filed its return. In reaching this conclusion, the court rejected the argument of the Pennsylvania Department of Revenue, and long-standing unpublished policy, that the statute of limitations expired three years after the original due date of the return. Mission Alpha Funding v. Comm'w., 313 F.R. 2012 (Pa. Comm'w. Ct. Dec. 10, 2015). For additional information on this development, see Tax Alert 2015-2356. Federal: In the Bipartisan Budget Act of 2015 enacted by Congress and signed by the President, the 2.3% medical device manufacturers excise tax (MDET) has been suspended for two years for all sales of taxable medical devices after Dec. 31, 3015 and continuing through Dec. 31, 2017. Manufacturers will, however, be required to report and pay the MDET on all sales through Dec. 31, 2015. Because the MDET was suspended rather than repealed, manufacturers also may want to continue their current record-keeping requirements to identify taxable articles and to flag taxable sales for the two-year suspension period so that they do not incur any unnecessary expenses implementing these systems for sales that will become taxable after Dec. 31, 2017. For additional information on this development, see Tax Alert 2015-2438. Nevada: The Nevada Department of Taxation (Department) hosted a workshop on Dec. 7, 2015 during which it took public comments on Proposed Regulation R123-15 intended to provide guidance on the Nevada Commerce Tax. The Department has not said when the proposed regulations will be finalized, but has said that it will shortly end the time to make public comments and thus, interested parties are encouraged to submit comments as soon as possible. For more information on this development, see Tax Alert 2015-2408. Nevada: Opponents of the controversial Nevada Commerce Tax enacted earlier this year won their first legal battle against the new business tax and its supporters when a Nevada court refused to suspend their petition to include a referendum relating to the tax on a statewide ballot. A statewide referendum is now one step closer towards being placed on the November 2016 ballot, signaling an uncertain future for the Commerce Tax. For additional information on this development, see Tax Alert 2015-2358. Puerto Rico: In Administrative Determination 15-26 (AD 15-26), issued on Dec. 29, 2015, the Puerto Rico Treasury Department (PRTD) announced that it will implement the new Value Added Tax (VAT) established under Act 72-2015 in two phases, beginning April 1, 2016. Act 72-2015 generally provides that the VAT will be effective April 1, 2016. If the PRTD is not ready by that date, however, Act 72-2015 allows the PRTD to extend the VAT's effective date by 60 days, until June 1, 2016. In AD 15-26, the PRTD establishes a phased-in or progressive approach for the VAT to become effective. The effective dates under the two-phase implementation are as follows: (1) effective April 1, 2016 — VAT base and tax rate of 10.5%, Services (i.e. B2B, designated professional services), Credit for VAT paid, Fiscal voucher, debit and credit notes, New tool for VAT reporting, payment and remittance; (2) effective June 1, 2016: VAT refunds. SUT certificates are valid until VAT certificates are issued by the PRTD, while SUT eligible reseller certificates are valid until June 1, 2016. For additional information on this development, see Tax Alert 2015-2461. (Note: Tax Alerts are available in the EY Client Portal. If you are not a subscriber to EY Client Portal and would like to subscribe to EY Client Portal and receive our Tax Alerts via email, please contact your local state tax professional.) Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor. Document ID: 2016-0079 |
