05 February 2016 State and Local Tax Weekly for January 29 Ernst & Young's State and Local Tax Weekly newsletter for January 29 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. On Jan. 20, 2016, the California Supreme Court denied review in Lucent Technologies, letting stand the appellate court's ruling that a software license granted to a purchaser in California, and transferred with tangible media as part of a technology transfer agreement (TTA), was exempt from sales and use tax as a matter of law. Implicitly, by denying the petition, the Court upheld the California Appellate Court's (appellate court) findings in its earlier decision in the matter. This appellate court's ruling in Lucent Technologies together with the California Supreme Court's ruling which effectively upholds it expressly affirms and expands on the findings in the appellate court's earlier ruling in Nortel about the breadth and application of the TTA statutes. With this ruling, the value of any copyright or patent interest is not subject to the sales or use tax if it is licensed to a person with the contractual right to: (1) copy the copyrighted work transferred, (2) make or sell a product subject to the interest, or (3) use patented processes embodied by the item transferred. In light of the California Supreme Court's denial of the California State Board of Equalization's (Board) appeal of the Lucent Technologies decision, taxpayers should consider filing a TTA-based refund claim with the Board if they did not previously submit one. For additional information on this development, see Tax Alert 2016-168. New York State Department of Taxation and Finance releases draft regulations on combined reports under business corporation franchise tax reform On Jan. 22, 2016, the New York State Department of Taxation and Finance (Department) released draft regulations (Draft Regs. tit. 20 Section 6-2.1 through 6-2.8) on the new combined reporting filing requirements for Article 9-A taxpayers (i.e., business corporations) enacted as part of the New York State and New York City corporate tax reform in 2014 and 2015. Under the Tax Reform, and effective for tax years beginning on or after Jan. 1, 2015, New York State and City business corporation taxpayers must file a combined report when the capital stock and the unitary business requirements are met. In addition, a group of corporations satisfying certain capital stock ownership requirements may elect to file a combined report. Under prior law, combined reporting in New York was generally only required if, in addition to satisfying the unitary requirements, substantial intercorporate transactions existed among the unitary group members. The draft regulations provide an in-depth description of the new filing requirements. Once final, the draft regulations are intended to have retroactive effect and will be effective for tax years beginning on or after Jan. 1, 2015. We understand that New York City will likely follow the State's regulations in this area. New York's draft regulations address when combined reports are and are not required or permitted for New York business corporation franchise taxpayers. Taxpayers may provide comments on the draft regulations to the Department by April 21, 2016. Although the draft regulations cannot be relied upon until promulgated as final, taxpayers should consider such rules (i.e., the unitary presumptions and commonly owned group election) in determining their New York State and City combined groups for purposes of determining their 2015 extension payments, 2016 estimated tax, and current and deferred tax provisions, inasmuch as New York unitary combined reporting is effective for tax years beginning on or after Jan. 1, 2015. In addition, taxpayers may also consider combined unitary filings in other states (e.g., California, Illinois, Massachusetts and Texas) in comparing and contrasting such filings to their New York combined group. For a more in-depth discussion of the draft regulations, see Tax Alert 2016-215. Alaska: In his State of the State address on Jan. 21, 2016, Governor Walker unveiled a New Sustainable Alaska plan that would, of significant note, impose a personal income tax that in effect would operate as a surtax at the rate 6% of a resident's individual's federal income tax and at the same rate on a nonresident individual's federal income tax that is from a source in Alaska. If enacted, the tax would be effective Jan. 1, 2017. Colorado: The Colorado Department of Revenue (Department) is telling taxpayers not to rely on Revenue Regulation 39-22-303.12(c) that sets forth rules for excluding certain corporations that do not have property or payroll in the US from their Colorado combined returns. Colo. Rev. Stat. 39-22-303.12(c) is in essence Colorado's water's edge rule and provides that only C corporations that have more than 20% of their property and payroll located in the US may be included in a corporate taxpayer's combined return. The Department promulgated Regulation 39-22-303.12(c) in response to the statute and generally provides that corporations that have no property or payroll cannot have 20% or more of property or payroll located in the United States and therefore cannot be included in a Colorado combined report. Thus, according to the notice, a foreign sales corporation (FSC) that has no property or payroll could not be included in a Colorado combined return. The Department explained that while the regulation was intended to address FSCs, some taxpayers have interpreted it to apply to domestic holding companies with no foreign operations and are arguing that they can exclude any domestic C corporation from their combined returns if it doesn't have any property or payroll factor, regardless of whether it does business in a foreign country. The Department said that it disagrees with this interpretation and that this issue currently is being litigated in the state courts. The Department indicated that it will not take further action on the regulation until a final ruling from the courts and that taxpayers should not rely on the regulation except as it applies to a FSC until further notice. Colo. Dept. of Rev., Notice Regarding Revenue Regulation 39-22-303.12(c) (Jan. 2016). Delaware: New law (HB 235) phases in a single sales factor apportionment formula by 2020, but allows a telecommunications corporation and a worldwide headquarters corporation to use either a single sales factor or an equally weighted three-factor apportionment formula. The current equally weighted three-factor apportionment formula will be phased into a single sales factor apportionment formula as follows: (1) for taxable periods beginning after Dec. 31, 2016 and before Jan. 1, 2018 — a property, payroll and double weighted sales factor and a denominator of four; (2) for taxable periods beginning after Dec. 31, 2017 and before Jan. 1, 2019 — a property, payroll and triple weighted sales factor and a denominator of five; (3) for taxable periods beginning after Dec. 31, 2018 and before Jan. 1, 2020 — a property, payroll and six-times weighted sales factor and a denominator of eight; and (4) for taxable periods beginning after Dec. 31, 2019, a single sales factor formula. Provisions of HB 235 make clear that a foreign corporation doing business in Delaware cannot include non-US payroll and property in the denominator of the payroll and property factors. The new phased-in formula does not apply to an asset management corporation, a telecommunications corporation or a worldwide headquarters corporation. For taxable years beginning after Dec. 31, 2016, a telecommunications corporation and a worldwide headquarters corporation can annually elect to use either a single sales factor or an equally weighted three-factor apportionment formula. A "worldwide headquarters corporation" is defined as a corporation that: (1) listed in its filings with the SEC for the quarterly period immediately preceding the calendar quarter in which the act is effective, the site of its principal executive offices as a Delaware address; (2) as of Jan. 1, 2016, employed at least 400 full-time employees within its Delaware corporate headquarters; and (3) between July 1, 2014 and June 30, 2018, makes or contracts with a real estate developer that makes, a capital investment of not less than $25 million to renovate and improve its Delaware corporate headquarters. Del. Laws 2016, HB 235, signed by the governor on Jan. 27, 2016. New York: With the 2015 filing season just beginning, regulated investment companies (RICs) are reminded that recent, dramatic New York State and City corporate tax law changes are likely to affect the determination of a RIC's 2015 state and city corporate tax liability. Specifically, RICs that are subject to tax in New York State may see an increase in the minimum tax they owe, notably because the maximum tax was raised from a relatively low $5,000 maximum to $200,000 (depending on the amount of their New York-sourced receipts). Similarly, RICs subject to tax in New York City may see an increase in their minimum taxes because of an identical increase in the maximum minimum tax from $5,000 to $200,000. Calculating this tax liability may require a significant investment of time and effort for some RICs. These tax law changes most likely will affect fixed-income funds (including money market funds) but also may apply to some assets that equity funds hold. For additional information on this development, see Tax Alert 2016-207. Rhode Island: The Rhode Island Division of Taxation (Division) released revised proposed combined reporting regulations (CT 15-15) for public comment. The comprehensive proposed regulation addresses a number of topics, including the following: (1) definitions; (2) combined reporting - overview; (3) combined group - composition, water's edge, tax havens; (4) unitary business - further defined; (5) election to use federal consolidated group; (6) apportionment, single sales factor, market-based sourcing; (7) combined net income group; (8) corporate minimum tax; (9) net operating losses; (10) add-backs; (11) tax rate; (12) tax credits, tracing; (13) filing of return, estimated tax, designated agent; and (14) tax administrator's authority, special appeals and tax administrator's report. The regulation, once final, will be effective for tax returns filed for tax years beginning on or after Jan. 1, 2015. Comments on the proposed regulation are due Feb. 22, 2016, the same day the Division has scheduled a hearing on the proposed regulation. All States: On Thursday, Feb. 18, 2016 from 2:00-3:00 p.m. EST (1:00-2:00 p.m. CST; noon-1:00 p.m. MST; 11:00-noon PST) join EY for its new Sales and Use Tax seminar webcast series. Our first sales tax seminar in this series will address state sales and use tax nexus issues. The panelists will discuss the historical context of nexus standards and provide a brief overview of the most recent nexus developments. The discussion also will cover the practical nexus considerations taxpayers must deal with on a daily basis, including operational issues (e.g., telecommuting, hiring third parties), transactional issues (e.g., mergers, acquisitions), changing business models, and traps for the unwary. Click here to register for this event. Alabama: Representatives of the Alabama Department of Revenue (Department) have indicated that the Department has revoked revenue rulings that were over 10 years old and were related to technology or how items are delivered. The Department did not provide a list of which rulings were revoked. Maryland: New law (SB 190) requires accommodations intermediaries (e.g., online travel companies) to collect and remit sales and use tax on the full amount of consideration that a buyer paid, but not including any tax that is remitted to a taxing authority. In addition, the taxable price does not include a commission paid by an accommodations provider to a person after facilitating the sale or use of the accommodation. The law expands the state's definition of vendor to include an accommodations intermediary and amends the definition of tangible personal property to include an accommodation. The law defines "accommodation" as a right to occupy a room or lodgings as a transient guest, and "accommodations intermediary" as a person, other than an accommodations provider, who facilitates the sale or use of an accommodation and charges a buyer the taxable price for the accommodation. It includes any person who brokers, coordinates, or in any other way arranges for the sale or use of an accommodation by a buyer. The new law took effect July 1, 2015. Md. Laws 2015, SB 190, governor's veto overridden on Jan. 21, 2016. Missouri: The Missouri Supreme Court (Court) held that a dance school is considered a place of amusement or recreation for sales tax purposes and, therefore, it must collect sales tax on dance class fees and charges because amusement or recreational activities comprise more than a de minimus portion of the school's business activities. In reaching this conclusion, the Court rejected the school's argument that its primary purpose is teaching, noting that Missouri no longer uses the primary purpose test (rather, it uses the de minimus test set forth in Spudich v. Dir. of Revenue, 745 S.W.2d 677 (Mo. banc 1988)). After considering the facts of this case, the Court found that: (1) the school held itself out to the public as a place providing diversion or amusement or recreational activities by emphasizing participants' fun and enjoyment on its website and in promotional materials; (2) the school intertwines amusement or recreational activities with education via its dance classes; and (3) fees for dance classes make up about two-thirds of its revenue. The dissent disagreed with the majority's opinion implying that dancing is an "amusement activity" because a participant may enjoy the endeavor, no matter what the educational value — and instead stated that determining whether dancing is an "amusement activity" should be viewed within the context of the facts of the particular case, and the factors used could be more exhaustive than those used by the majority. In this case, the school's amusement activities are de minimus because it holds itself out as a school, it does not have a patron-directed portion of its business (which another Missouri case distinguished to establish the presence of amusement activity), and patrons are only at the school when they are enrolled in a class to receive instruction in a particular dance form. Miss Dianna's School of Dance, Inc. v. Mo. Dir. of Rev., No. SC95102 (Mo. Sup. Ct. Jan. 12, 2016). Rhode Island: A medical device implanted in the male urinary tract is exempt from sales and use tax because it is an exempt prosthetic device under Rhode Island law (R.I. Gen. Laws § 44-18-7.1(t)) as it corrects a physical deformity. The medical device also qualifies for a sales and use tax exemption as a prosthetic device under R.I. Gen. Laws § 44-18-30(11) as it must be prescribed by a physician. The Rhode Island Division of Taxation (Division) further reasoned that even though this specific prosthetic device is not included on a list of exempt prosthetic devices under the Rhode Island Streamlined Sales Health Care Item List, the device is already exempt under other statutes, and the definition of prosthetic device under R.I. Gen. Laws § 44-18-7.1(t) mirrors the prosthetic device definition under the Streamlined Sales and Use Tax Agreement, providing an additional basis for exemption. Finally, R.I. Gen. Laws § 44-18-30(5)(i) and Regulation SU 07-48 provide another ground for sales and use tax exemption, even though the taxpayer did not propose them — these provisions exempt the devices from sales or use tax only for devices that are sold to non-profit hospitals with valid exemption certificates from the Tax Administrator. R.I. Div. of Taxn., Ruling Request No. 2016-01 (Jan. 14, 2016). Tennessee: A subscription package in which a taxpayer licenses its proprietary software to clients, who access the software via a web portal using a user name and password, is subject to sales and use tax as remotely accessed software because in Tennessee the access and use of computer software is subject to sales and use tax regardless of a customer's chosen method of use. A business process outsourcing package that includes both remotely accessed software and services, however, is not subject to sales and use tax as the true object of the package is the provision of nontaxable business process management services. The Tennessee Department of Revenue reasoned that in this case, the clients' access to the software is merely incidental or secondary to the primary purpose of outsourcing the clients' business process management operations and, as such, the true object of the transaction is the provision of nontaxable services. Tenn. Dept. of Rev., Letter Ruling #15-07 (Nov. 23, 2015). Rhode Island: A wind turbine is manufacturing equipment exempt from personal property tax. In affirming the lower court, the Rhode Island Supreme Court (Court) found that the turbine meets the terms of the Rhode Island manufacturing exemption because the wind turbine is used exclusively for the purposes of transforming raw materials (wind) into a finished product (electricity), the wind turbine is not a public utility, and it is a non-regulated power producer selling electricity at retail. The Court rejected the town's argument that manufacturing equipment exemption was inapplicable in this case because the taxpayer's sale of electricity from the turbine to National Grid constitutes a "sale at wholesale," which the town argued excludes the turbine from the definition of manufacturing equipment. The Court found that those brokering electricity "for sale at wholesale" were not included in the exclusion from the exemption. The Court also rejected the town's argument that renewable energy systems are exempted from tax only upon municipal ordinance, finding instead that the statute on which the town based this argument merely grants the various cities and towns the authority to grant tax exemptions to renewable energy systems in addition to the tax exemptions already provided. DePasquale et al. v. Cwiek, No. 2015-83-Appeal (R.I. Sup. Ct. Jan. 14, 2016). Delaware: New law (HB 235) modifies estimated tax payment requirements for small corporations. In general, corporations must pay 50% of their estimated tax liability for the first quarter of their taxable year, with additional payments of 20%, 20% and 10% of their estimated tax liability in each of the second, third and fourth quarters. Effective for tax periods beginning after Dec. 31, 2016, small corporations will be allowed to make estimated tax payments using an equally weighted schedule (25% each quarter). For purposes of this provision, a "small corporation" means any corporation, including an S corporation, that had aggregate gross receipts from sales of tangible personal property and gross income from other sources both within and without the Delaware of less than $20 million for any two of the three taxable years immediately preceding the taxable year for which estimated tax is being computed. Provisions of HB 235 also increase the threshold at which businesses have to file monthly gross receipts tax and withhold filings. Del. Laws 2016, HB 235, signed by the governor on Jan. 27, 2016. New Hampshire: Reminder: New Hampshire's tax amnesty program will end Feb. 15, 2016. Amnesty applies to taxes administered and collected by the New Hampshire Department of Revenue Administration (Department) that were due but unpaid on or before Feb. 15, 2016. In exchange for participating in the amnesty program, the Department will waive all penalties and 50% of the applicable interest. Following the close of the amnesty program, neither the Department nor any administrative tribunal or court with jurisdiction, will have the discretionary authority to waive, abate, reduce or remit, for good cause or otherwise, any penalties assessed with respect to taxes administered by the Department and due before Dec. 1, 2015. Click here for additional information on New Hampshire's amnesty program New Mexico: New Mexico's Government Accountability Office, Office of the State Auditor (OSA), released a bulletin providing information about Governmental Accounting Standards Board (GASB) 77, which requires governments that enter into tax abatement agreements to present certain information in the notes to their financial statements, effective for financial periods beginning after Dec. 15, 2015. Under GASB 77, a tax abatement agreement is a reduction in tax revenues that results from an agreement between one or more governments and an individual in which (a) one or more governments promise to forgo tax revenues to which they are otherwise entitled and (b) the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the government or the citizens of those governments. Fiscal year 2017 will be the first year for which GASB 77 is effective for agencies with a June 30 fiscal year end. The OSA indicated that it will work with national groups to "gain clarity on what GASB 77 will cover" and will issue additional guidance on this topic. OSA stated that Industrial Revenue Bonds clearly fall under GASB 77, and it believe that letters or agreements intended to attract companies with the promise of tax incentives also would require disclosure. The OSA also may require disclosure on a fixed set of tax expenditures that may be broader than the requirements of GASB 77. N.M. Office of the State Auditor, Govt. Accountability Office, Bulletin GASB 77 Is Coming (Jan. 2016). Puerto Rico: At a meeting of the Puerto Rico chapter of the CPA Society, officials from the Puerto Rico Treasury Department (PRTD) shared certain preliminary facts about the upcoming transition to the new Value Added Tax (VAT). Although not binding on the PRTD, these comments offer insight into the PRTD's plans for implementing the VAT. At the forum, PRTD officials outlined developments that are likely to occur around the VAT in the coming weeks. Those developments include the following: (1) PR VAT draft regulations addressing the tax technical aspects of the VAT statute are expected the first week of February 2016; (2) guidance on the administrative aspects of VAT implementation is likely to be issued the second or third week of February 2016; (3) businesses currently registered in the Sales and Use Tax (SUT) Merchant Registry will receive instructions from the government on how to register for VAT purposes by validating certain information in a government website; (4) SUT-registered merchants with any outstanding tax debts may face problems registering in the new VAT merchant registry; (5) the PRTD is evaluating three options for the manual version of the VAT fiscal invoice (VATFI) that will be in effect on April 1, 2016, including: (i) a PRTD-provided VATFI form; (ii) altering the merchant's existing invoice to include the required VATFI information; or (iii) stamping the required VATFI information to the back of the merchant's existing invoice and entering specific merchant information manually; (6) as of April 1, 2016, merchants can satisfy the sequential numbering requirement for the VATFI if they: (1) continue using their existing methods for tracking or numbering invoices; or (2) adopt a system for tracking or numbering invoices if they do not currently have one. As long as merchants have a system by April 1, the PRTD will not intervene at this stage; and (7) a new electronic filing system for certain VAT returns will be announced in the coming weeks. For additional information on this development, see Tax Alert 2016-183. Puerto Rico: In Tax Policy Circular Letter 15-16, Puerto Rico's Treasury Department (PRTD) has announced the benefits and contribution limits for qualified retirement plans under Section 1081.01(a) of the Puerto Rico Internal Revenue Code of 2011, as amended (the PR Code) for tax years that begin on or after Jan. 1, 2016. Section 1081.01(h) of the PR Code requires the PRTD to report the applicable limits announced by the US Internal Revenue Service (IRS) that will apply to plans qualified under the PR Code. For additional information on this development, see Tax Alert 2016-205. Washington: The Washington Department of Revenue (Department) adopted emergency regulations to remain consistent with the Multistate Tax Commission's change in its model method of apportionment for financial institutions that is effective Jan. 1, 2016. Under the emergency regulations, all service and other activities income, regardless of where that income is attributed, is apportioned to Washington by multiplying the income, less certain deductions or exemptions, by the appointment percentage, and the apportionment percentage is determined by the taxpayer's receipts factor. The emergency regulations add or amend several definitions and amend several receipts factor calculations. As amended, the general receipts factor calculation is a fraction, the numerator of which is the service and other activities income of the taxpayer in Washington during the taxable period and the denominator of which is the service and other activities income of the taxpayer inside and outside Washington during the taxable period. Other amended receipts factors include: (1) interest, fees and penalties imposed in connection with loans secured by real property as well as with loans not secured by real property; (2) net gains from the sale of loans; (3) receipts from fees, interest and penalties charged to card holders; (4) net gains from the sale of credit card receivables; (5) card issuer's reimbursement fees; (6) receipts from a merchant discount; (7) receipts from ATM fees; (8) loan servicing fees; (9) receipts from the financial institution's investment assets and activities and trading assets and activities; and (10) all other receipts. On Jan. 6, 2016, the Department proposed similar rules to implement these changes on a permanent basis, noting that Wash. Admin. Code 458-20-19404A would describe the application of single sales factor receipts apportionment to gross income for financial institutions from June 1, 2010 through Dec. 31, 2015, and Wash. Admin. Code 458-20-19404 applies for periods beginning on and after Jan. 1, 2016. A hearing on the proposed regulations is scheduled for Feb. 18, 2016, and the proposed regulations' intended adoption date is Feb. 25, 2016. Wash. Dept. of Rev., Emergency Wash. Admin. Code 458-20-19404 (adopted Dec. 28, 2015); Wash. Dept. of Rev., Prop. Wash. Admin. Code 458-20-19404 (Jan. 6, 2016). * 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: 2016-0255 |
