11 March 2016 State and Local Tax Weekly for March 4 Ernst & Young's State and Local Tax Weekly newsletter for March 4 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. Delaware issues VDA invitation letters — unclaimed property holders urged to participate to avoid third-party audit and receive shortened look-back period The Delaware Secretary of State (Secretary) recently began issuing hundreds of Voluntary Disclosure Agreement (VDA) invitation letters to businesses, individuals and organizations it has identified as holders of unclaimed property (hereinafter, each a "holder"). The Secretary is sending the VDA letters to comply with a 2015 law change (SB 141, amending Del. Code tit. 12, Section 1155 and adding new subsections (c), (d) and (e)) that, effective July 1, 2015, prohibits the State Escheator from initiating any new unclaimed property audits unless the holder has been notified in writing by the Secretary that it may enter into an unclaimed property VDA. A significant increase in the number of unclaimed property audits is expected to follow upon the lapse of the deadline for responding to the unclaimed property VDA invitations. Holders that have received these letters should consider entering into Delaware's unclaimed property VDA program, to receive a waiver of interest and a shortened look-back period. Failure to respond will result in a third-party initiated audit. In order to participate, holders must respond to the Secretary within 60 days after the request to enter the VDA program was mailed; otherwise, the holder will be referred to the State Escheator for audit. After the properly executed VDA forms are returned to the Secretary, the holder must complete a review of its books and records and file reports of abandoned property related to the following transaction years: — For holders that enter into the Delaware unclaimed property VDA during 2016, the look-back period extends back to Jan. 1, 1996. The Secretary will not assess interest under the VDA program on late filed unclaimed property returns unless the participant does not make a good faith effort to complete the requirements of the VDA program. Holders that do not participate in the VDA program (those under audit) may be assessed 0.5% interest per month on unpaid amounts from the date the amounts or property were due until paid, with a cap of 25% of the value of unclaimed property due. Also note that the look-back period under a Delaware initiated unclaimed property audit currently can extend as far back as 1991. Thus, an additional five years of exposure would be estimated instead of the reduced period available under the VDA program. For additional information on this development, see Tax Alert 2016-431. The Puerto Rico Treasury Department (PRTD) recently issued transition rules (Administrative Determination (AD) 16-01) in preparation for the value added tax (VAT) scheduled to come into effect on June 1, 2016. The AD focuses on procedural matters, such as the use of the Unified Internal Revenue System (SURI for its Spanish acronym) to report VAT transactions and file returns, merchant registration procedures and the issuance of VAT fiscal invoices. The PRTD has also circulated proposed regulations, providing guidance on Subtitle DD of the Puerto Rico Internal Revenue Code of 2011, as amended (VAT Act). The proposed regulations provide much needed explanations surrounding the collection, remittance and administration of the VAT, along with guidance and examples clarifying the process for claiming credits, overpayments and refunds. Although the PRTD has announced that it is accepting comments on the proposed regulations, it is unclear if the regulations will be finalized following the statutorily mandated mechanism that affords the public the opportunity to provide comments within a given time period or the emergency procedure in place for special circumstances that allows the Governor to certify their effectiveness immediately. For additional information on this development, see Tax Alert 2016-410. Connecticut: The Connecticut Department of Revenue Services issued a special notice on the new combined reporting provisions that are effective for tax years beginning on or after Jan. 1, 2016. The special notice "describes the mechanics of identifying the groups of companies that must file a combined unitary tax return and the calculation of the group's Corporation Business Tax liability." Topics addressed include: determination of the combined group, determination of the combined group's net income, apportionment of a combined group's net income, application of net operating losses (NOLs), application of tax against apportioned net income, capital base tax, application of credits, net deferred tax liability (DTL) deduction, tax havens, maximum tax calculations/nexus combined base tax, and miscellaneous provisions. The notice includes examples on: charitable contribution limitation, capital gains/losses, assignment of nontaxable members' receipts, apportionment by taxable members, elimination of pass-through entity receipts, NOLs, capital base tax, proration of capital base tax, comparison of net income and capital bases, credit ordering, calculation of net DTL deduction, and attribution of maximum tax. Conn. Dept. of Rev. Serv., Special Notice 2016 (1) (March 2, 2016). Illinois: Adopted amendments to Illinois Regulation Sec 100.3380, an income tax regulation on alternative apportionment, add guidance on hedging transactions and IRC §988 transactions related to foreign currency gain or loss. These amendments took effect Jan. 5, 2016, and apply to tax years beginning on or after the effective date of the rulemaking. Thus, for a calendar-year taxpayer, the amendment will not be effective until years beginning on or after Jan. 1, 2017. These changes apply only to the determination of the sales factor under Section 304(a)(3) of the Illinois Income Tax Act (IITA) and, therefore, do not apply to insurance companies, financial organizations, federally regulated exchanges, and persons providing transportation services. There is, however, one possible exception. Regulation §100.3405 instructs a financial organization to look to IITA §304(a)(3) and Reg. §§ 100.3370 and 3380 if a receipt, includable in the denominator, is not one of the eight types of receipts explicitly enumerated in the regulation. Accordingly, if a financial organization has receipts from hedging or IRC §988 transactions that are not covered by one of the eight specific categories addressed in the financial organization apportionment statute and regulation, it would be required to apply the hedging and IRC §988 transaction rules as described in this newly amended regulation. For additional information on this development, see Tax Alert 2016-427. Louisiana: New law (HB 7) increases to 100% (from 72%) the amount of dividend income received from certain banking corporations that a corporation can exclude from gross income. Specifically, this change applies to dividend income received from banking corporations organized under the laws of Louisiana, from national banking corporations doing business in Louisiana, and from capital stock whose stock is subject to ad valorem taxation. This change applies to all exclusions from taxable income claimed on any return filed for any taxable year beginning on or after Jan. 1, 2015. La. Laws 2016 (1st Extraordinary Session), Act 1 (HB 7), signed by the governor on March 3, 2016. Wisconsin: New law (SB 503) amends the factors used to determine whether a transaction has economic substance for Wisconsin income and franchise tax purposes. Under the revised provisions, a transaction has economic substance only if the transaction is treated as having economic substance for federal purposes under IRC §7701(o), except that the tax effect is determined using federal, state, local and foreign taxes. Under former law, a transaction was deemed to have economic substance if the taxpayer showed that the transaction changed its economic position in a meaningful way, apart from federal, state, local and foreign tax effects and the taxpayer had a substantial nontax purpose for entering into the transaction and the transaction is a reasonable means of accomplishing this purpose. These changes apply to taxable years beginning on and after Jan. 1, 2016. Wis. Laws 2016, Act 218 (SB 503), signed by the governor on March 1, 2016. Kentucky: A company that provides laundry services to non-profit hospitals is entitled to a refund of use tax paid on natural gas it purchased and used in its business, because the tax falls within the scope of the exemption for institutions of purely public charity under Kentucky Constitution §170. In reaching this conclusion, the Kentucky Court of Appeals (Court) cited City of Elizabethtown, in which the Kentucky Supreme Court (KSC) determined that although the tax was classified as an excise tax on the use of goods, rather than a property tax on the goods themselves, the tax violated the Kentucky Constitution because regardless of the label, the tax functioned as a property tax. While City of Elizabethtown dealt with purchases by a governmental entity, the Court saw "no reason why the rule should be applied differently with respect to institutions of purely public charity." Lastly, the Court distinguished the tax at issue in this case and that at issue in Children's Psych, in which the KSC concluded that a provider tax imposed on institutions of purely public charity did not violate the same Kentucky Constitution provision because the constitutional exemption applied only to ad valorem taxes. The Court found that the provider tax in Children's Psych did not function in any way similar to a property tax. Interstate Gas Supply, Inc. v. Kentucky, No. 2013-CA-001766-MR (Ky. Ct. App. Feb. 26, 2016) (unpublished). Oklahoma: A company's purchase of an aircraft that it immediately leased to an entity that at the start of the lease did not have its federal air carrier certification did not qualify for an aircraft excise tax exemption because it was not an aircraft purchased or used by a commercial airline. In reaching this conclusion, the Oklahoma Court of Civil Appeals (Court) found reasonable the Oklahoma Tax Commission's (OTC) argument that only aircraft used by air carriers that have completed the Part 135 Air Carrier Certificate application process with the Federal Aviation Administration at the time of transfer of ownership can qualify for the exemption. Because the entity had only started the Part 135 application process at the commencement of the lease, the entity did not constitute a commercial airline for purposes of the exemption, and as such, the exemption does not apply. In re BMB Aircraft, LLC v. Okla. Tax Comn., No. 111080 (Okla. Ct. Civ. App. Feb. 18, 2016). Alabama: The Alabama Department of Revenue issued a notice informing taxpayers that for the 2015 tax year, it added Schedule DE to Form 65, requiring partnerships to report certain information related to their ownership of disregarded entities (DE), including the total income and Alabama source income of each DE. To the extent the partnership did not maintain separate books and records for the DE that would allow the partnership to report the DE's income information, the partnership is relieved from the responsibility of reporting the DE's information on Schedule DE. Ala. Dept. of Rev., Notice "Form 65 — Partnership/LLC Return of Income" (March 1, 2016). New Mexico: New law (HB 249) amends the due dates of the state corporate income tax returns to align with the federal due dates. Effective for taxable years beginning on or after Jan. 1, 2016, corporate returns are due on or before the due date of the corporation's federal corporate income tax return (formerly, the 15th day of the third month following the end of the taxable year). This due date does not apply to corporations that have received a filing extension from New Mexico or an extension from the IRS for the same taxable year. N.M. Laws 2016, Ch. 15 (HB 249), signed by the governor on Feb. 29, 2016. New York: The New York Department of Taxation and Finance advised taxpayers that they must electronically file the appropriate six-month extension request, if the necessary forms to file the 2015 Article 9-A corporate franchise tax return and 2015 MTA surcharge return are unavailable to be e-filed. The extension forms are: Form CT-5, Request for Six-Month Extension to File (for franchise/business taxes, MTA Surcharge, or both), Form CT-5.3, Request for Six-Month Extension to File (for combined franchise or combined MTA Surcharge return, or both), or Form CT-5.4, Request for Six-Month Extension to File New York S Corporation Franchise Tax Return. N.Y. Dept. of Taxn. and Fin., Release: Income Tax/Corporation Tax — NYS provides guidance regarding the inability to e-file certain 2015 corporate franchise tax and partnership forms (Feb. 26, 2016). Puerto Rico: Puerto Rico's Treasury Department (PRTD) has issued guidance (Circular Letter (CL) 16-03), addressing how to request an automatic extension of time to file an income tax return. For additional information on this development, see Tax Alert 2016-439. Puerto Rico: Circular Letter 16-02 (CL 16-02), issued on Feb. 17, 2016, by Puerto Rico's Treasury Department (PRTD), provides guidance on the mandatory electronic filing requirement for 2015 individual income tax returns. For additional information on this development, see Tax Alert 2016-440. Massachusetts: The Massachusetts Department of Revenue (Department) announced a new pilot Voluntary Disclosure Program (VDP) for the settlement of uncertain tax issues. Under the VDP, taxpayers that voluntarily come forward and propose a settlement related to uncertain tax issues — an issue for which there is no clear-cut guidance from case law or written guidance from the Department — will have all penalties associated with these issues waived. The VDP is available to business taxpayers with potential uncertain tax liability of at least $100,000 (excluding interest and penalties); issues included in an audit notice or are currently being audited are not eligible for the VDP. To apply for the VDP, an eligible business (or its representative) should submit an anonymous letter to the Department, describing the uncertain tax issue and requesting participation in the program. The Department will review the letter and notify the taxpayer of whether the Department has accepted the matter into the VDP. Once the taxpayer receives the Department's notification of acceptance into the VDP, the taxpayer has 45 days to notify the Department of its decision to participate in the VDP, and to disclose its identity as well as include a settlement proposal. In addition, Department release AP 637 provides guidance on information and documentation the taxpayer must provide regarding the uncertain tax issue. If a settlement is not reached, the case will be closed. If the taxpayer's returns are subsequently audited and the taxpayer is assessed additional tax for the uncertain tax issues that were not accepted into the VDP, penalties applicable to the uncertain tax issue will be waived provided that the taxpayer acted in good faith. Mass. Dept. of Rev., AP 637: VDP for Settlement of Uncertain Tax Issues (Feb. 2016). Massachusetts: A two month tax amnesty program will run April 1, 2016 through May 31, 2016. Amnesty applies to business and individual taxpayers that are not currently registered with the Massachusetts Department of Revenue (Department), that have not filed a tax return, or have not reported the full amount of tax owed on a previously field return for any tax return due on or before Dec. 31, 2015 (with some exceptions). Amnesty applies to all taxes administered by the Department except the Preferred Provider excise and those covered under the International Fuels Tax Agreement. In exchange for participating in the amnesty program, the Department of Revenue will waive otherwise applicable penalties and interest due on the penalties, and apply a three-year lookback period. Amnesty is not available to taxpayers that have been the subject of a tax-related criminal investigation or prosecution, have previously filed false or fraudulent returns or statements, or filed a fraudulent tax amnesty return. In addition, the amnesty program does not cover existing tax liabilities. Taxpayers that participated in the 2014 or 2015 tax amnesty programs are not eligible to participate in the 2016 program for the same tax types or tax periods. Eligible taxpayers that do not participate in the amnesty program could be subject to double the amount of tax due and other penalties, they will lose the limited lookback period, and will face "escalating enforcement efforts". An amnesty return will be posted to the Department's website starting April 1, 2016. Wisconsin: New law (SB 503) revises penalty provisions for failure to produce records and documents requested by the Wisconsin Department of Revenue (Department) to substantiate information required to be shown on a tax return. Under the revised provisions, the penalties cannot be imposed on the taxpayer until after the Department issues a summons seeking the information and the taxpayers that fail to comply in good faith with the summons. These changes first apply to audits commenced, or a summons issued, on or after March 3, 2016. Wis. Laws 2016, Act 218 (SB 503), signed by the governor on March 1, 2016. Kentucky: The sale of B100 biodiesel fuel manufactured in Kentucky was not subject to a special fuels tax assessment and petroleum environmental assessment fee because it was delivered to an out-of-state destination, regardless of whether the dealer arranged for the pick-up of the fuel in Kentucky or that the terms of delivery were FOB Kentucky. In reaching this conclusion, the Kentucky Board of Tax Appeals (Board) explained that in order to establish that the fuel is not subject to tax, the statute requires a showing by the dealer/purchaser that the gasoline and special fuel that was loaded within Kentucky into a tank car or tank truck is consigned to a "destination outside of this state," rather than one "within this state." Thus, based on the plain meaning of the statute, no tax is due as long as the fuel is shown to have gone out of state. Owensboro Grain Co., LLC v. Ky. Dept. of Rev., No. K14-R-23 (Ky. Bd. Tax App. Feb. 25, 2016). Michigan: The Michigan Court of Appeals (COA) recently ruled that for tax years 2005-2007 the mandatory apportionment provisions of the former Michigan Single Business Tax Act (SBTA) did not impliedly repeal provisions of Michigan's enactment of the Multistate Tax Compact (MTC) that allowed multistate taxpayers to make an election to apportion their tax base using the MTC's equally weighted, three-factor formula (Compact election). Accordingly, for the tax years at issue, the legislature provided the taxpayers with the option of using either the Compact election or the SBTA apportionment formula. The COA also confirmed the Michigan Court of Claims (COC) ruling that the Single Business Tax (SBT) was an income tax, as defined by the MTC, but it rejected arguments by the Michigan Department of Treasury that the retroactive repeal of the MTC to 2008 by 2014 Public Act 282 extended to tax years at issue under the SBT. For additional information on this development, see Tax Alert 2016-441. Tennessee: The Tennessee Department of Revenue (Department) issued a number of proposed amendments to current regulations as well as new regulations related to law changes enacted in 2015, including a new regulation on the state's market based sourcing provisions, as well as changes related to the business tax, the sales and use tax, the franchise and excise taxes, and remedies for disputed taxes. Comments on the proposals are due by April 26, 2016, the same day the Department will hold hearings on these proposed regulations. Click here for a copy of the proposed regulations. Washington: The Washington Department of Revenue (Department) properly characterized restaurant franchisees' compulsory contributions to an advertising trust (Trust) as "gross income of the (Trust's) business" subject to the business and occupation tax, and not income that is passed-through to third-party advertisers as the Trust argued. In reaching this conclusion, the Washington Board of Tax Appeals (Board) explained that the only statute or regulation potentially applicable to the Trust's pass-through or exclusion argument is WAC 458-20-111 (Rule 111) on the exclusion of advances and reimbursements in the gross income of a taxpayer's business, and that Rule 111's applicability to this case is controlled by the Washington Supreme Court's (Court) ruling in Washington Imaging Services, LLC. In Washington Imaging Services the Court held that in order for Rule 111 exclusion to apply, the three prongs of the "Christensen test" must be satisfied": (1) the client's payments must be advances or reimbursements, (2) the client's payments must be for services the taxpayer did not or could not provide, and (3) the taxpayer's liability for the payments must be as the client's agent. The Court further explained that the third prong can only be satisfied if (1) a true agency relationship exists (i.e., a relationship in which the principal controls agent), and (2) the agent's duty to pay "constitutes 'solely agent liability.'" In this case, the Trust and the franchisees lacked a true agent-principal relationship, because in contracting with third-party advertisers, the Trust was not controlled by the franchisees, and no obligation ran from the thousands of franchisees to the third-party advertisers. Since the Trust had a contractual duty to pay third-party advertisers, the Trust's liability was not solely agent liability. Finally, the Board determined it had no jurisdiction to address the Trust's constitutional claims. Subway Franchisee Advertising Fund Trust v. Wash. Dept. of Rev., No. 13-053 (Wash. Bd. Tax App. Feb. 10, 2016). (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: 2016-0486 |
