12 February 2016 State and Local Tax Weekly for February 5 Ernst & Young's State and Local Tax Weekly newsletter for February 5 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. North Carolina Department of Revenue issues guidelines for computing the sales factor based on market-based sourcing As a result of the enactment of HB 259 (S.L. 2015-268), the North Carolina Revenue Laws Study Committee (RLSC) will be evaluating the effect of market-based sourcing on state revenues. To assist the RLSC in its evaluation, every corporate taxpayer that meets certain criteria is required to file an informational report (Form CD-400 MS, Market-Based Sourcing Informational Report) by April 15, 2016, for the tax year beginning in 2014 with the North Carolina Department of Revenue (the Department). The report requires taxpayers to apportion income and the capital stock base using four different methodologies: 1. The 2014 North Carolina apportionment factor (i.e., as originally reported). For most corporations, this will be the standard, three-factor formula with a double-weighted sales factor. The Department has published two documents explaining the market-based sourcing guidelines to be used for purposes of completing Form CD-400 MS. The documents, along with Form CD-400 MS, are available on the Department's website. The first document issued by the Department, "Guidelines for Computing the Sales Factor Based on Market-Based Sourcing — Introduction and Summary," discusses the market-based sourcing principles and includes tables for how to source receipts from various services and intangibles. The second document, Guidelines for Computing the Sales Factor Based on Market-Based Sourcing, is a detailed notice that includes numerous examples intended to assist taxpayers in understanding the provisions of market-based sourcing. The guidelines are generally based on the Multistate Tax Commission's model market-based sourcing regulations. The North Carolina guidelines, however, do not include a throw-out provision, and the sourcing of receipts from the sale of real or tangible property does not differ. For additional information on this development, including criteria and due dates, see Tax Alert 2016-250. Oregon: A proposed initiative (Initiative Petition 28 (IP 28)) if approved by voters for the Nov. 8, 2016 ballot, would significantly increase Oregon's minimum corporate excise tax on corporations with $25 million or more in Oregon sales. Under current law, the minimum corporate excise tax rate ranges from $150 on corporations with less than $500,000 in Oregon sales up to $100,000 on corporations with $100 million or more in Oregon sales. If approved by the voters, for tax years beginning on or after Jan. 1, 2017, IP 28 would increase the minimum tax paid by corporations with more than $25 million in Oregon sales to $30,001, plus 2.5% of the excess over $25 million in Oregon sales. IP 28 has yet to be certified to appear on the November ballot and its supporters must obtain 88,184 valid signatures by July 8, 2016, for it to qualify to appear on the ballot. The group sponsoring the initiative believes it will be successful in obtaining the requisite signatures and that will likely mean that the measure will be placed before Oregon voters this Fall. For more information on this development, see Tax Alert 2016-224. Virginia: New law (HB 402) moves Virginia's date of conformity to the IRC to Dec. 31, 2015 (previously Dec. 31, 2014). Virginia continues to specifically decouple from the bonus depreciation provisions and the five year carryback period for net operating losses generated in taxable years 2008 and 2009. In Tax Bulletin 16-1, the Department of Taxation (Department) provides guidance on Virginia's conformity to federal law. According to the Department, Virginia will conform to federal provisions enacted under the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), including the increased expense deduction under IRC §179 and special rules for REIT spinoffs. The Department noted that Virginia already conforms to the change in due dates for the federal corporate income tax returns (from the 15th day of the third month to the 15th day of the fourth month) as the new federal due date is the same due date for Virginia's corporate income tax return. It also appears that Virginia conforms to the changes related to partnerships contained in the Bipartisan Budget Act of 2015 (e.g., IRS procedure for auditing partnerships, clarification that a person who owns a capital interest in a partnership may be considered a partner whether such interest was obtained by purchase or by gift). Va. Laws 2016, Ch. 2 (HB 402), signed by the governor on Feb. 5, 2016. For additional information on Virginia's conformity to the IRC, see Va. Dept. of Taxn., Tax Bulletin 16-1 (Feb. 5, 2016). All States: The EY Sales and Use Tax Quarterly Update provides a summary of the major legislative, administrative, and judicial sales and use tax developments. Highlights of this edition include: (1) a look ahead to potential sales and use tax issues and trends for 2016; (2) a brief review of the major sales and use tax developments of 2015; (2) an overview of recent sales and use tax developments related to technology, transactions, tax base, exemptions and compliance. For a copy of the quarterly, see Tax Alert 2016-238. Alabama: A corporation that holds a direct pay permit is not required to purchase all tangible personal property tax free, including tangible personal property that is clearly taxable, and then self-report and remit sales/use tax to the Alabama Department of Revenue (Department), because such requirement is unreasonably burdensome. In reaching this conclusion, the Alabama Tax Tribunal (Tribunal) invalidated the part of Ala. Reg. 810-6-4-.14(1) that requires direct pay permit holders to purchase all tangible personal property tax free. The Tribunal found that allowing the direct pay permit holder to pay sales/use tax to its vendors when tax is certain to be due expedites and in no way hinders the Department's tax administration and collection. Finally, the Tribunal rejected the Department's contention that a direct pay permit holder that already paid sales/use tax on certain, known taxable purchases should again pay sales tax on these purchases during the audit period and then file a refund claim, reasoning that this process would result in the corporation being double taxed on many of its purchases. Tyson Chicken, Inc. v. Ala. Dept. of Rev., No. S. 15-1338 (Ala. Tax Trib. Feb. 2, 2016). Georgia: Proposed amendments to Rule § 560-12-1-.16 would modify Georgia's direct payment permit provisions. Under the proposed rule, direct payment authorizations issued before Oct. 1, 2016 would expire Dec. 31, 2016, and direct payment permits issued on or after Oct. 1, 2016, would be effective the later of Jan. 1, 2017, or the date of issuance. Generally, each holder of a valid direct payment permit must accrue and pay directly to the Department of Revenue (Department) the taxes due for all taxable property and services purchased using a direct payment permit. Direct permit holders, however, would not be able to use their direct payment permit for certain transactions, such as purchases of meals and beverages, transportation, lodging, admission to places of amusement and other sources of entertainment, and certain motor vehicle rental charges. The proposed rule provides guidance on how to apply for a direct pay permit, reporting requirements, duties of the permit holder and vendor responsibilities. In addition, a taxpayer using a direct pay permit would waive interest on refunds of tax overpaid on the purchases made with the permit. Direct payment permits are nontransferable and, therefore, cannot be transferred or assigned to a third party, including affiliates or newly created business entity under a business restructuring (the permit holder would have to apply for a new permit). The Department would have the authority to revoke a direct payment permit at any time the Department determines that the permit holder has not complied with the provisions of this rule. Comments on the proposed changes are due March 3, 2016, the same day the Department will hold a hearing on the proposed rule. Ga. Dept. of Rev., Notice SUT 2016-001 (Jan. 28, 2016). Wyoming: An electric utility company is not entitled to a refund of sales/use tax paid on chemicals and catalysts used and consumed in the treatment of emissions in the manufacturing and processing of electricity because such purchases do not qualify for the production exemption or the wholesale sales exemption. In reaching this conclusion, the Wyoming State Board of Equalization (Board) found that the generation of electricity does not constitute manufacturing or processing under the production exemption. Further, neither coal nor water, which are used to help generate electricity, are raw or prepared materials that are transformed into electricity as Wyoming's statutory manufacturing definition requires. Rather, they are a fuel for the process of generating electricity. In addition, the various types of energy that change state or form during the company's generation of electricity do not ultimately become ingredients or components of electricity and, as such, electrical generation is not "processing" under Wyoming's production exemption. The Board also rejected the company's argument that chemicals used in the emissions control system qualify for the production exemption, finding that these chemicals are not "used directly in" the generation of electricity or "consumed or destroyed" during that process. Finally, the Board rejected the company's alternative argument that the purchases were tax exempt wholesale purchases. The Board reasoned that since the company did not buy the chemicals for resale, nor were the chemicals used directly in electrical generation and did not become a part of the electricity generated, the chemical purchases were not tax exempt wholesale purchases. In re Appeal of Pacificorp Inc., Nos. 2012-51 and 2013-03 (Wyo. State Bd. of Equal. Jan. 8, 2016). Federal: The US Department of Labor, Employment and Training Administration (ETA) has issued guidance to state workforce agencies (SWAs) regarding the processing of Work Opportunity Tax Credit (WOTC) applications now that the program is retroactively extended to Jan. 1, 2015. The ETA's guidance expresses the understanding that the IRS is considering transition relief for the 28-day certification requirement for calendar year 2015, as it has for past retroactive extensions of the WOTC. For additional information on this development, see Tax Alert 2016-263. New Jersey: New law (SB 3182) delays certain documentation submission deadlines under various business tax credit programs, among other miscellaneous amendments. The documentation deadline has been extended for the Urban Transit Hub Tax Credit Act and the Garden State Growth Zone to no later than April 26, 2019. In addition, the Urban Transit Hub Tax Credit amount for any tax period ending after July 28, 2019 during which the documentation of a business's credit amount remains uncertified will be forfeited, although credit amounts for the remainder of the years of the 10-year credit period will remain available to it. In addition, as amended, a business is not allowed credits for qualified business facilities under the Urban Transit Hub Tax Credit Act if it participates in a business employment incentive agreement under the Business Employment Incentive Program Act that relates to the same capital and employees that qualify the business for the credit, or if the business receives assistance pursuant to the Business Retention and Relocation Assistance Act. Additionally, under amendments to the local Economic Redevelopment and Growth Grant program, the developer of a qualified residential project seeking an award of credits toward the funding of its incentive grant must submit an incentive grant application before July 1, 2016, and if approved, later must submit a temporary certificate of occupancy for the project no later than July 28, 2019. Finally, a business that applied for a tax credit under the amended Grow New Jersey Assistance Act (N.J. Rev. Stat. § 34:1B-242 et seq.) before July 1, 2014, must submit its documentation to the authority no later than July 28, 2018, indicating that it has met the capital investment and employment requirements specified in the incentive agreement for certification of its tax credit amount. Provision of the SB 3182 took effect immediately. N.J. Laws 2015, SB 3182, signed by the governor on Jan. 19, 2016. New York: A corporation may aggregate the activities and employees of two majority owned partnerships for purposes of satisfying the principally used and employment tests of the New York State Investment Tax Credit (ITC). Because the corporation may be considered to have purchased the property placed in service by Partnership A and is deemed to be a registered broker-dealer under the ITC (as it is a corporate partner in both Partnerships A and B, both of which are deemed to be a registered broker-dealer, and it also uses the aggregate method with respect to its interests in Partnerships A and B to compute its franchise tax), the corporation may aggregate its uses of the property and the uses of the property of its affiliated regulated broker-dealers for purposes of determining if the property is principally used in the ordinary course of the trade or business as a broker or dealer in connection with the purchase or sale of stocks, bonds or other securities, or of commodities. To satisfy the use test, the aggregated qualifying activities of the employees of single-member limited liability companies (SMLLCs) owned by Partnerships A and B must constitute more than 50% of the total use of the property placed in service by Partnership A. Finally, to satisfy the ITC's employment test, the corporation can aggregate the employees of Partnerships A and B, insofar as they are employees of one of the SMLLCs owned by the partnerships, because these employees are deemed to be employees of one of the respective partnerships because the SMLLCs are disregarded entities and Partnerships A and B are deemed to be registered broker-dealers based on the SMLLCs' status as registered broker-dealers. N.Y. Dept. of Taxn. and Fin., TSB-A-16(1)C (Jan. 11, 2016). Illinois: In October 2015, the City of Chicago, Illinois (City) passed a record-breaking $588 million property tax increase in the City's portion of the local property tax bill. This increase is composed of two portions: The first portion totals $543 million, and is expected to be phased in over the next four years beginning with the 2015 second installment tax bills. The second portion of the increase, which totals $45 million, is related to school constructions for the Chicago Public Schools. This increase is expected to occur in year one. For additional information on this development, see Tax Alert 2016-225. Tennessee: The Tennessee Department of Revenue (Department) issued guidance on reporting changes as a result of a federal audit. According to the Department, federal income revisions must be reported on the Department's Federal Income Revision Form in lieu of filing amended returns. Taxpayers must mail this form with a letter of explanation and supporting documentation to the address show on the form. Tenn. Dept. of Rev., Reporting requirements as the result of an IRS audit (Jan. 28, 2016). 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. California: The Los Angeles Business Tax — a gross receipts tax the rate of which varies among different business classifications — is due Feb. 29, 2016. Taxpayers may file their 2016 Business Tax Renewal form either through the mail or electronically. Both the written tax form and electronic filing system are accessible on the city's finance office's webpage, which includes links to the forms and instructions. To be considered timely, a taxpayer must postmark or electronically file its form no later than 11:59 pm PST on Feb. 29. 2016. Interest and penalties will be assessed for later filed returns beginning March 1, 2016. Taxpayers can request a maximum 45-day extension to file a return. The extension request, however, must be in writing and must be accompanied by at least 90% of the total tax due. Any such request must be received or postmarked by Feb. 29, 2016. For additional information on the renewal of the Los Angeles Business Tax, please visit the Los Angeles City Office of Finance website. California: The San Francisco Gross Receipts Tax is due on or before Feb. 29, 2016. A 60-day extension can be filed if the taxpayer pays at least 90% of the tax due by the date of the extension request. In addition to the Gross Receipts Tax, San Francisco also imposes a Business Registration Fee. Taxpayers must register or renew their business registration every year. The due date for registration or renewal is on the last day of May. The Business Registration Fee may be filed online on the San Francisco Treasurer's website. (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: 2016-0310 |
