27 January 2016 State and Local Tax Weekly for January 22 Ernst & Young's State and Local Tax Weekly newsletter for January 22 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. New Jersey law allows participants in the NJ Business Employment Incentive Program to receive tax credits instead of cash grants On Jan. 11, 2016, New Jersey Governor Chris Christie signed S. 3232 which authorizes current participants in the NJ Business Employment Incentive Program (BEIP) program to make a voluntary one-time election to convert outstanding approved, but unpaid grant awards, to tax credits. The tax credit can be applied against the business's corporate, gross income, or insurance premium tax liability in an amount equal to the credit payment schedule provided in the bill. The election to convert the grant to a tax credit is irrevocable and must be made within 180 days (by July 11, 2016). Approved tax credits only may be applied in the tax period for which they are issued and are not to be carried forward. If the tax credit exceeds the amount of tax liability otherwise due from a business that pays corporate business taxes, the excess is deemed an overpayment and the business will receive a refund (without interest and subject to certain limitations to be clarified by New Jersey Economic Development Authority (NJEDA) at a later date.) The bill allows a business that does not pay corporate business taxes to apply to the NJEDA executive director for a tax credit transfer certificate, covering one or more years. The tax credit transfer certificate may be sold or assigned, in full or in part, in an amount not less than $100,000, or the amount of the refundable tax credit issued if less than $100,000, of tax credits to any other person that may have a corporate, gross income, or insurance premium tax liability. The sale or assignment of any amount of a tax credit transfer certificate is not to be exchanged for consideration received by the business of less than 75% of the transferred credit amount before considering any further discounting to present value, which is permitted. The tax credit transferee may not transfer its tax credit to any other party. The tax credit transfer certificate provided to the business shall include a statement waiving the business's right to claim the amount of the tax credit that the business has elected to sell or assign. Current BEIP participants should determine if they wish to opt into the program and convert existing BEIP cash grant awards to tax credits, thereby providing a mechanism for payment of these obligations over the time periods noted in the bill. Companies that do not elect to convert their BEIP grants to tax credits by July 11, 2016 will not be paid until (and if) New Jersey funds its outstanding BEIP grant liabilities. New Jersey has not allocated funds for BEIP payments in several years and has not issued any timetable nor communicated an intention to provide an allocation of funds for the BEIP program in the future. Therefore, the potential for future payment of BEIP cash grants is uncertain. For additional information on this development, see Tax Alert 2016-150. Montana: Montana has unusual laws regarding the water's-edge election for multinational unitary taxpayers. Unlike many unitary states, Montana does not allow taxpayers to make a water's-edge election with a tax return. Instead, Montana law requires unitary taxpayers to make the water's-edge election on or before the 90th day of the tax year for which the election is to be effective. For calendar-year taxpayers, a 2016 Montana water's edge-election must be made by March 30, 2016. Further, under Montana law, the water's-edge election is not automatic but must be approved by the Montana Department of Revenue (Department). Once made, the water's-edge election is valid for three tax years and must be reelected via a timely election during the fourth tax year. This approach differs from other states providing a water's-edge election. If time for filing the water's-edge election is short, the completed application may be faxed to the Department at the number listed on the form (Montana WE-ELECT). Nebraska: The Nebraska Department of Revenue recently adopted a number of regulations related to apportionment (Reg-24-301 et seq.) to implement the state's recent adoption of market-based sourcing to apportion income derived from sales other than sales of tangible personal property. The new market-based sourcing rules apply to tax years beginning on or after Jan. 1, 2014, the effective date of the legislature's adoption of market-based sourcing. For years beginning before 2014, the cost-of-performance rule applies to apportion income derived from sales of other than the sale of tangible personal property. For additional information on this development, see Tax Alert 2016-123. New York: On Jan. 7, 2016, the New York Department of Taxation and Finance (Department) issued TSB-M-15(4.1)C, (5.1)I to supplement the information in TSB-M-15(4)C, (5)I, regarding investment capital identification requirements for Article 9-A taxpayers by providing additional investment capital identification periods for certain non-dealers. The additional investment identification periods apply to specified circumstances involving non-dealer corporations and non-dealer partnerships occurring on and after Oct. 1, 2015. The additional periods do not apply to corporations and partnerships that are dealers under IRC §1236 (dealers in securities). EY expects New York City to follow these rules. For additional information on this development, see Tax Alert 2016-139. Oregon: A title insurance company's gains from the sale of its stock in a workers compensation administrator (administrator) and income attributable to a holding company (holding company) are allocable nonbusiness income. In reaching this conclusion, the Oregon Tax Court (Court) found that the administrator stock sale did not satisfy the transactional test for business income because the sale was not a transaction in the regular course of the unitary business that the title insurance company partially conducts in Oregon. Since the gain on the sale of the administrator stock does not meet the "transactional test," the parties agreed that it also is not business income under the "functional test," which requires that the acquisition, management, use or rental, and disposition of property be an integral part of a taxpayer's regular trade or business operations. The income from the title insurance company's interest in the holding company stock was nonbusiness income because the fact that the title insurance company regularly bought, managed and sold other businesses as a secondary business activity did not establish that the interest in the holding company stock was "inextricably mixed" with the title insurance business — this secondary activity must have been integrated with the activity that the title insurance company carries on in Oregon to be deemed business income. Fidelity Nat'l Fin., Inc. v. Or. Dept. of Rev., No. TC-MD 140440D (Or. Tax Ct., Magistrate Div., Jan. 15, 2016). Texas: A holding company of two affiliates did not qualify for a cost of goods sold (COGS) deduction from revised franchise tax (Margin tax) because it failed to establish by clear and convincing evidence that the revenue for which it claimed the deduction was based on transactions that contained elements of the sale of both a service and tangible personal property. The holding company's affiliates consulted with clients to design and maintain comprehensive substance abuse programs and provided drug testing services respectively, and the clear and convincing evidence standard applies to the deductions at issue because Texas treats a deduction as tantamount to an exemption. Under the COGS methodology of determining the tax due, "goods" are defined as real or tangible personal property sold in the regular course of business, and taxpayers with transactions that contain elements of both a sale of tangible personal property and a service are only permitted to subtract as COGS the costs otherwise allowed in relation to the tangible personal property sold. In addition, the Texas Comptroller of Public Accounts rejected the holding company's assertion that the assessments violate unspecified federal and state constitutional provisions, finding the arguments lacked substance. Tex. Comp. of Pub. Accts., No. 201509613H (Sept. 30, 2015). Alabama: Freight charges that are ultimately paid by the customers of a company that sells marketing and advertising products are not subject to sales tax because such transportation charges are excluded from taxable gross proceeds. In reaching this conclusion, the Alabama Tax Tribunal (Tribunal) found that in this case the company's customers indirectly paid the transportation charges at issue as they reimbursed the company for such charges and ultimately bore the economic burden for the deliveries. The Tribunal also found that the term "paid by the purchaser" (as set forth in Ala. Code §40-23-1(a)(5)) should be construed to include instances when the purchaser directly pays the transportation charges as well as when the purchaser indirectly pays (i.e., bears the economic burden) for costs of the deliveries. The Tribunal also found that the Alabama Department of Revenue improperly relied on regulations stating that similar transactions were taxable because the regulation was promulgated in 1982, before the Alabama Legislature amended the state's sales tax laws to provide that charges are not part of the selling price (i.e., not taxable) if they are separately stated and paid by the purchaser to a common carrier or to the U.S. Postal Service. Kilgo & Associates, Inc. v. Ala. Dept. of Rev., No. S 14-1060 (Ala. Tax Trib. Jan. 13, 2016). Iowa: The Iowa Department of Revenue (Department) amended, and adopted new, rules related to the definition of machinery and equipment for purposes of the sales and use tax manufacturing exemption, implementing a policy that tries to eliminate administratively burdensome distinctions that do not reflect modern manufacturing in Iowa. The amendments expand the number of items that qualify as exempt computers, machinery, or equipment, and the Department estimates that between 2017 and 2021, manufacturers will annually reduce both their sales and use tax burden and their local option sales tax burden. Included in the new rules are (1) exemptions for the sale of certain computers, machinery and equipment — those used for certain manufacturing purposes; (2) exemptions for certain sales of property directly and primarily used in processing by a manufacturer; (3) exemptions for certain sales of property directly and primarily used by a manufacturer to maintain integrity or unique environmental conditions, research and development for new products or processes, or for recycling or reprocessing of waste products; (4) exemptions for certain sales of computers used in processing or storage of data or information by an insurance company, financial institution, or commercial enterprise; and (5) exemptions for certain sales of pollution control equipment used by a manufacturer, certain sales of fuel or electricity used in exempt property, or certain sales of services for designing or installing new industrial machinery or equipment. All of these exemptions require the sale to occur as part of a contract on or after July 1, 2016. Iowa Dept. of Rev., Amended Regs. §§ 701-15.3(422, 423), 701-18.29(7)(422, 423), 701-18.58(422, 423), 701-219.11(423), 701-219.12(423), and 701-219.13(3) (nonconsec.) and New Regs. §§ 701-230.14(423) through 701-230.22(423) (effective Feb. 10, 2016). North Carolina: The North Carolina Department of Revenue (Department) issued guidance on the repeal of the installation charges exemption to the state's sales and use tax. Effectively March 1, 2016, installation charges by a retailer as part of the retail sale of tangible personal property, digital property and taxable services are subject to sales and use tax regardless of whether the installation charges are separately stated on the invoice. Prior to March 1, 2016, "installation charges" separately stated on an invoice or billing statement are exempt from sales and use tax. Additionally, on or after March 1, 2016, installation charges for items not billed on a monthly basis are subject to the general rates of sales and use tax; however, for installation charges billed on a monthly or other periodic basis, the sales and use tax will be imposed on charges included in the first billing period that starts on or after March 1, 2016. N.C. Dept. of Rev., Important Notice: Repeal of Installation Charges Exemption (Jan. 11, 2016). Utah: A company's sales of online banking, finance and budget tools, online bill payment, and mobile banking (offerings) to financial institutions are sales of tangible personal property and are subject to sales and use taxes when the financial institutions (that are not federal credit unions) are located in Utah. In reaching this conclusion, the Utah Tax Commission (Commission) determined that the essence of the transaction between the company and the financial institutions is the sale of the use of the company's prewritten computer software and not the sale of services of the company's personnel. The Commission reasoned that the primary purpose of the webpages and the mobile websites that the company makes for the financial institutions is to establish the means through which the company provides offerings to the financial institutions; the company's application software is integral in providing the offerings; and the financial institutions, rather than the company, provide technical support to the account holders using the financial institutions' online banking systems. Finally, the sales of the company's offerings to financial institutions are not exempt as amounts paid or charged to access a database, because the financial institutions are paying the company to use the company's application software. Utah Tax Comn., PLR 15-005 (Nov. 16, 2015). New Jersey: New law (AB 4518) amends the GROW NJ Assistance Program (GROW), the Economic Redevelopment and Growth Grant Program (ERG), and a tax credit program for redevelopers that provide public infrastructure to government entities. The tax credit program is amended by reducing the total value of tax credits the New Jersey Economic Development Authority can approve for redevelopers that provide public infrastructure to government entities from $25 million to $22 million. The bill also provides that the time period when a redeveloper may apply for a tax credit is retroactive to Oct. 24, 2014. Further, under the bill, large development projects involving a business may qualify as mega projects under the GROW program if the business is involved in either the research, development or manufacture of drugs and medical devices, or has a license to provide clinical laboratory services. If the business qualifies, it will be entitled to an increase of its GROW tax credits, effective July 1, 2016. Finally, AB 4518 amends the provisions governing the ERG program. Under the amendments, a municipal redeveloper no longer needs to create a "mixed use parking project" in order for the project to qualify for an incentive grant or an award of tax credits. In addition, the total value of all tax credits under the ERG program for qualified residential projects and mixed use parking projects is increased from $600 million to $603 million. N.J. Laws 2015, ch. 217 (AB 4518), signed by the governor on Jan. 11, 2016. New Jersey: New law (SB 3004) eliminates the restrictions that prohibit municipalities with an urban enterprise zone (UEZ) from participating in the Downtown Business Improvement Zone Loan Fund program. The bill allows businesses located in UEZ's to obtain long-term zero interest rate loans in order to participate in the redevelopment and rehabilitation opportunities within the UEZ. The municipality, however, is still required to adopt ordinances that establish the UEZ as a special improvement district and a downtown business improvement zone. N.J. Laws 2015, ch. 189 (SB 3004), signed by the governor on Jan. 11, 2016. New Mexico: The New Mexico Energy, Minerals and Natural Resources Department (Department) issued regulations that explain the new sustainable building tax credit for residential buildings or commercial buildings that can be used to offset either the New Mexico corporate income or personal income tax. To receive a certificate of eligibility for the credit, an applicant must submit an application after the building is completed, the applicant must have fulfilled all other requirements, and the total annual cap for the new sustainable building tax credit has not been met. The credit is available to owners of a building that has been constructed, renovated or manufactured to be a sustainable residential building and that receives certification beginning on or after Jan. 1, 2017. A subsequent purchaser of a sustainable residential building may receive a certificate if no tax credit has previously been claimed for the building. The credit is calculated based on the qualified occupied square footage of the sustainable building, the rating system under which the applicant achieved certification, and the certification level the applicant achieved. N.M. Energy, Minerals, and Nat. Resources Dept., Regs. §§ 3.4.21.1. through 3.4.21.13; §§ 3.4.22.1. through 3.4.22.14; §§ 3.3.34.1. through 3.3.34.13; and §§ 3.3.35.1. through 3.3.35.14 (effective Dec. 30, 2015). Illinois: An Illinois Appellate Court (Court) held that a statutory provision (35 ILCS 200/15-86), which provides a charitable property tax exemption without requiring an exclusively charitable use of the property, is facially unconstitutional because it creates a property tax exemption unauthorized by the Illinois Constitution. Rather than adhering to the Illinois Constitution's requirement that property must be used exclusively for charitable purposes to qualify for the charitable property tax exemption, according to the Court, 35 ILCS 200/15-86 requires a hospital entity to essentially pay for its property tax exemption by providing certain services of equivalent value. The appropriate test to determine constitutionality, the Court said, is the present use of the property, rather than the ultimate use of the proceeds derived from the property sought to be exempted. Thus, omitting a provision required by the Illinois Constitution is an inherent and inescapable flaw that renders the statute invalid no matter what the circumstances. Therefore, the statute is inapplicable to the question of whether a foundation's four land parcels (which included hospitals, a day care facility and a power plant) are exempt from real estate property taxation based on charitable use. The Court remanded the case for further proceedings. The Carle Foundation v. Cunningham Twp., et al., Nos. 4-14-0795, 4-14-0845 (Ill. App. Ct., 4th Dist., Jan. 6, 2016). Tennessee: An Administrative Law Judge (ALJ) from the Tennessee State Board of Equalization (Board) determined that Tennessee properly assessed personal property tax on equipment used in a timber management business because the equipment is taxable business property and does not qualify for an agricultural exemption. Citing a bulletin issued to all county assessors by the general counsel for the Division of Property Assessment of the Tennessee Comptroller of the Treasury (Comptroller) on July 16, 2015 specifically addressing the issue, the ALJ stated that a person who holds himself out to be a timber harvester for livelihood or gain is a business, is subject to tangible personal property tax, and should report all equipment used or held for use in the conduct of the business. In this case, the timber business estimated that 60-70% of its business is associated with its own properties, while 30-40% of the for-profit business is conducted via timber harvesting services on property owned by others. The ALJ further noted the Comptroller's directive clearly finds that a property owner who harvests timber growing on his own property is not subject to intangible personal property taxation and that "it seems clear that the Assessor would not have imposed the assessment had the [timber business] only been managing the timber on property owned by the taxpayers." In re Revel Logging, LLC, Nos. 88076 and 102810 (Tenn. State Bd. of Equal. Jan. 13, 2016). Texas: The Texas Court of Appeals (Court) held that a CT scanner is exempt from personal property tax after a public Hospital District (Hospital District) established that it was the owner of the CT scanner as defined in a property tax exemption statute. In Texas, property owned by the state or a political subdivision of the state generally is exempt from tax if the property is used for public purposes. The Jack County Appraisal District argued that the Hospital District did not own the CT scanner within the meaning of the property tax governmental exemption statute because it was subject to a lease-purchase agreement under which the public party is entitled to compel delivery of the property's legal title to the state or political subdivision at the end of the lease term. In this case, the Hospital District had the right to compel delivery of legal title to the CT scanner at the end of the lease term by purchasing it at its fair market value, or otherwise using the average of values determined by two appraisers. The Court found that under the statute's plain language, the property tax exemption does not require that a lease-purchase agreement provide a fixed sales price or credit of the lease payments toward the sales price, and does not require that the state or political subdivision have the necessary funds or approval to purchase the equipment at the end of the lease for the exemption to apply. The Court did not address whether the lease agreement created a security interest in the CT scanner or consider a due process argument based on the location to which the notice of appraised value was delivered. Jack Cnty. Appraisal Dist. v. Jack Cnty. Hospital Dist., No. 02-14-00188-CV (Tex. Ct. App., 2nd Dist., Jan. 14, 2016). Rhode Island: The Rhode Island Division of Taxation (DOT) in a tax news publication said that as of now it will not follow a federal law change to some federal filing deadlines for tax years beginning after Dec. 31, 2015. Specifically, the DOT noted that while the federal due date for a calendar-year C corporation will change from March 15 to April 15 starting in filing season 2017, Rhode Island will still use March 15 as the original due date for a calendar-year C corporation in the 2017 filing season. R.I. Div. of Taxn., Rhode Island Tax News (Special Edition: Filing Season 2016). Virginia: The Virginia Department of Taxation (Department) issued updated guidelines for Pass-Through Entity Withholding (guidelines) that, once finalized, will supersede the previous guidelines issued in 2007 (PD 07-150). Virginia imposes a withholding tax on any pass-through entity doing business in the Commonwealth and having taxable income derived from Virginia sources, in an amount equal to 5% of its nonresident owners' share of Virginia-source income. The updated guidelines address the following: (1) definitions; (2) an electronic filing mandate; (3) withholding tax requirements including exemptions from the requirements based on the nonresident owners' status (e.g., individuals and entities exempt from taxation, individuals and corporations with no Virginia income tax liability, tiered pass-through entities, and individuals included in composite returns), nonresident owners claiming an exemption, and exemptions based on the pass-through entity's status (e.g., disregarded entities, publicly traded partnerships, undue hardship, four or fewer dwelling units, and investment pass-through entities); (4) amount of pass-through entity withholding tax; (5) application of corporate allocation and apportionment (e.g., modified methods of apportionment for manufacturing companies and retail companies respectively, alternative method of allocation and apportionment, and tiered pass-through entities); (6) penalties and interest; and (7) filing requirements for pass-through entities as well as nonresident owners. The guideline revisions are expected to be effective for taxable years beginning on or after Jan. 1, 2015. Va. Dept. of Taxn., PD 15-240 (Dec. 22, 2015). New York: On Jan. 13, 2016, New York State Governor, Andrew Cuomo, introduced legislation as part of his FY 2016-17 budget (hereinafter, Budget Bill) that proposes technical amendments to New York State and New York City corporate tax reform as previously enacted in 2014 and 2015 (A. 8559-D / S.6359-D; A. 3009-B / S. 2009-B and S. 4610-A/ A. 6721-A, collectively Tax Reform). In addition, the Budget Bill would bring New York State's and New York City's tax filing deadlines into conformity with new federal deadlines, permanently extend tax shelter reporting requirements and make other changes certain of the State's and City's tax credit programs. For additional information on this development, see Tax Alert 2016-149. Washington: The Washington Department of Revenue (Department) announced that unclaimed property holders (holders) may qualify for a penalty and interest waiver for prior unreported periods if they report and pay outstanding unclaimed property before Nov. 1, 2016. To qualify, the holders must complete an application for a penalty and interest waiver, file a report that includes all property for which the waiver is requested, and pay and deliver all amounts identified on the report, subject to certain restrictions. In addition, effective July 1, 2016, holders must file and pay reports electronically, but exceptions may be granted for good cause. Furthermore, beginning July 1, 2016, the Department has restructured its penalty provisions, with penalties applicable based on amounts unpaid and the value of any property not delivered unless otherwise noted. Finally, effective July 1, 2015, newly enacted legislation made several changes to the provisions governing how the Department administers unclaimed property, including establishing a three-year statute of limitations for enforcement actions on assessments, clarifying that gift certificates presumed abandoned and compliant with gift certificate laws do not need to be reported as unclaimed property, allowing the Department to publish unclaimed property notices in either a printed or online version of a newspaper of general circulation in Washington, and allowing the Department to forgo mailing notice to an apparent owner of unclaimed property if the address appears to be insufficient for mailing purposes. Wash. Dept. of Rev., Special Notice: Penalty and Interest Waiver for Unclaimed Property Holders and Administrative Changes (Dec. 18, 2015). Puerto Rico: On Feb. 4, 2016, from 2:00 - 3:00 p.m. EST (New York); 11:00 a.m. - Noon PST (Los Angeles); 3:00 - 4:00 p.m. (AST) San Juan, PR, EY will host a webcast addressing recent developments affecting Puerto Rico's newly enacted VAT. Our panel of Puerto Rico VAT professionals will provide insights into Puerto Rico's new VAT requirements, explore practical steps for addressing implementation and share some examples of how leading-practice organizations are getting ready for this significant change in the Commonwealth's tax system. Discussion topics include: (1) sales and use tax (SUT) transition rules and proposed regulations for business-to-business (B2B) and the taxation of designated professional services; (2) timeline for implementation of Phase I — April 2016 and Phase II — June 2016 VAT implementation; (3) essential VAT areas that need to be urgently addressed; and (4) methodology for a successful transition to VAT and how to get started. Click here to register for this event. (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: 2016-0190 |
