17 March 2016 State and Local Tax Weekly for March 11 Ernst & Young's State and Local Tax Weekly newsletter for March 11 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. Puerto Rico's Treasury Department (PRTD) has postponed the effective date of the value added tax (VAT) until June 1, 2016 (from the originally scheduled April 1, 2016 date). As a result, the sales and use tax (SUT) will remain in effect until May 31, 2016. The special 4% SUT for services between merchants and designated professional services (also known as business to business) will remain in effect until May 31, 2016. Recent guidance issued under Administrative Determination 16-01 will likely be modified (covering areas such as the merchant registration and filing of returns). To the extent the 4% SUT will continue in place, the tax will be a cost of doing business and will not be recoverable (i.e., subject to credit). California: A single-member limited liability corporation (SMLLC) classified as a disregarded entity for federal income tax purposes and wholly owned by a tax-exempt pension trust has a California filing requirement and is subject to the state's annual limited liability corporation (LLC) tax ($800) and fee (based on gross receipts at a maximum annual amount of $11,790) because it is doing business, and organized, in the state. Although California generally follows the federal entity classification rules and an eligible business entity that is disregarded for federal income tax purposes is generally disregarded for California corporate franchise or income tax purposes, this general rule does not apply to the LLC tax, the LLC fee or the LLC return filing requirement. Under California law, a disregarded SMLLC has a California filing requirement and is subject to the LLC tax and LLC fee if one or more of the following conditions apply to it during a given taxable year: (1) the LLC is registered to do business in California, (2) the LLC is organized under California law, or (3) the LLC is doing business in California. In addition, a governmental benefit plan that is doing business in California does not have a filing requirement because of its exempt status as a governmental benefit plan under IRC § 401(a), to which California conforms. A governmental benefit plan, however, will have a filing requirement if it has taxable unrelated business taxable income. Cal. FTB, Chief Counsel Ruling 2015-02 (Dec. 8, 2015). Maine: New law (LD 1583) updates Maine's date of conformity to the IRC to Dec. 31, 2015, effective for taxable years beginning on or after Jan. 1, 2015. Also effective for taxable years beginning on or after Jan. 1, 2015, the state decouples from the bonus depreciation provisions under IRC §168(k); however, taxpayers claiming bonus depreciation for property placed in service in Maine are allowed a credit as follows: (1) the credit for corporations equals 9% of the amount of the net increase in the depreciation deduction reported as an addition to income for the taxable year; and (2) the credit for individuals is 8% of the amount of the net increase in the depreciation deduction reported as an addition to income for the taxable year (decreased to 7% for taxable years beginning on or after Jan. 1, 2016). The credit does not apply to certain, excluded property, including property owned by a public utility, a cable television company, a person that provides radio paging services, a person that provides mobile telecommunications services, a person that provides satellite-based direct television broadcast services, a person that provides multichannel/multipoint television services, and property that is not in service in Maine for the entire 12-month period following the date it is placed in service in Maine. The credit cannot reduce the tax otherwise due to less than zero, and any unused portion of the credit may be carried forward for up to 20 years. The credit must be fully recaptured to the extent claimed by the taxpayer if the property forming the basis for the credit is not used in Maine for the entire 12-month period following the date it is placed into service in the state. Maine Laws 2016, Ch. 388 (LD 1583), signed by the governor on March 10, 2016. Rhode Island: Final regulation (CT 16-11) provides guidance on Rhode Island's mandatory combined reporting provisions, which are effective for tax returns filed for tax years beginning on or after Jan. 1, 2015. The comprehensive 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, Jobs Development Act, Life Sciences rate reduction; (13) filing of return, estimated tax, designated agent; and (14) tax administrator's authority, special appeals and tax administrator's report. The final regulation was posted to the website of the Department of Revenue (Department) on March 10, 2016. The Department also posted FAQs on combined reporting and related topics. Alabama: A circuit court (court) ruled that a transportation company is subject to Alabama's lease tax on its leased trucks and trailers that traveled through Alabama and stopped at in-state terminals for repairs. Under Alabama law, a taxpayer is subject to Alabama's lease tax when tangible personal property is used or processed in the state. In addition, the court found that the transportation company's purchases of tires and repair parts from Alabama vendors are exempt from sales tax because the company was subject to lease tax. US Xpress Leasing, Inc. v. Magee, No. CV-2015-901123.00 (Ala. Cir. Ct., Montgomery Cnty., Feb. 25, 2016). Massachusetts: The Massachusetts Department of Revenue (Department) issued a directive requiring vendors using a Point of Sale (POS) system to comply with Massachusetts' records retention requirements. Similar to the requirements for paper recordkeeping, a POS system must record all transactions in a manner that will allow the Department to verify what was sold and whether the appropriate amount of tax was collected. To be considered complete, electronic records must permit the direct reconciliation of the receipts, invoices and other source documents with the entries in the books and records and on the returns of a taxpayer. If reconciliation is not possible, the records may be deemed inadequate to permit a detailed audit and another audit methodology (such as sampling) may be used. Civil and criminal penalties will apply in circumstances where sales suppression software or other means are utilized in a willful attempt to underreport sales. Mass. Dept. of Rev., Directive 16-1: Recordkeeping Requirements for Sales and Use Tax Vendors Utilizing Point of Sale (POS) Systems (March 3, 2016). South Dakota: New law (HB 1182) increases the state's sales and use tax, the excise tax and the amusement device tax rates from 4% to 4.5% effective June 1, 2016. If the state is allowed to enforce the obligation to collect and remit sales tax on remote sellers that deliver goods and services to South Dakota residents, these rates will be gradually reduced but not below 4%. S.D. Laws 2016, HB 1182, signed by the governor on March 11, 2016. Wisconsin: New law (AB 682) clarifies that, for purposes of Wis. Stat. §77.585(8)(a) (determining when a sale or purchase involving a transfer of ownership of tangible personal property or items or property under Wis. Stat. §77.52(1)(b) or (c) is completed), a common carrier or the U.S. postal service must be considered the agent of the seller, regardless of any f.o.b. point and regardless of the method by which freight or postage is paid. This change took effect March 2, 2016. Wis. Laws 2016, Act 191 (AB 682), signed by the governor on Feb. 29, 2016. Federal: The IRS issued a notice providing guidance and transition relief for employers claiming the Work Opportunity Tax Credit (WOTC) under IRC §§ 51 and 3111(e) that was retroactively extended and expanded by the Protecting Americans from Tax Hikes Act of 2015 (PATH), Pub. L. No. 114-113. Generally, under the law, employers seeking the WOTC credit have 28 days after an employee begins work to complete the credit requirements. Since WOTC was retroactively extended under PATH, the IRS notice provides employers with guidance and transition relief beyond the normal 28-day deadline for employers that hired members of targeted groups (other than qualified long-term unemployment recipients) on or after Jan. 1, 2015 and on or before May 31, 2016. For eligible individuals that begin work during this period, employers will have until June 29, 2016, to submit completed Forms 8850 to the designated local agencies to request certification. In addition, because PATH's amendments to WOTC expanded the scope of "targeted groups" of individuals to include qualified long-term unemployment recipients, the notice provides guidance and transition relief beyond the 28-day deadline for employers who hire qualified long-term unemployment recipients on or after Jan. 1, 2016 and on or before May 31, 2016. For purposes of the notice, a qualified long-term unemployment recipient is any individual who on the day before the individual begins work for the employer, or, if earlier, the day the individual completes IRS Form 8850 as a prescreening notice, is in a period of unemployment that is (1) not less than 27 consecutive weeks, and (2) includes a period (which may be less than 27 weeks) in which the individual received unemployment compensation. IRS, Notice 2016-22, 2016-13 IRB. For more on this development, see Tax Alert 2016-482. Utah: New law (HB 31) amends the Enterprise Zone Act, modifying the population requirements to be designated as an enterprise zone for a county (now 70,000, previously 50,000) or municipality (now 20,000, previously 15,000) and modifying requirements to receive an enterprise zone tax credit, including those related to obtaining a tax credit certificate from the Governor's Office of Economic Development . Under the provisions of HB 31, a business entity may carry forward the nonrefundable enterprise zone tax credit for a period that does not exceed three taxable years (provided the business does not claim the targeted business income tax credit in the same year). The law narrows the definition of "new full-time employee position" to a position that has been newly created in addition to the highest baseline count of employment positions that existed within the business entity during the previous three taxable years and is filled by an employee working at least 30 hours per week for at least six consecutive months. In addition, the law repeals a tax credit of 50% of the value of a cash contribution to a private non-profit corporation, up to $100,000. Finally, on or before Oct. 1, 2018, and every five years after, the Revenue and Taxation Interim Committee must study the tax credit and make recommendations concerning whether the tax credit should be continued, modified, or repealed. HB 31 operates retrospectively for a taxable year beginning on or after Jan. 1, 2016. Utah Laws 2016, HB 31, signed by the governor on March 1, 2016. Virginia: New law (SB 58) modifies Virginia's research and development (R&D) credit and creates a similar credit — the Major Research and Development Expenses Tax Credit — for businesses with Virginia R&D expenses in excess of $5 million for the taxable year. The existing R&D credit is modified by:(1) increasing the annual credit cap to $7 million (from $6 million); (2) increasing the amount of credits that each taxpayer can claim to 15% of the first $300,000 (previously 15% of the first $234,000), but capped at $45,000 for the taxable year (increased to $60,000 if the Virginia qualified research was conducted in conjunction with a Virginia public or private college or university); (3) allowing taxpayers to use a simplified calculation method in lieu of the statutory method; (4) extending the sunset date to taxable years beginning before Jan. 1, 2022 (previously 2019); and (5) excluding taxpayers with Virginia qualified R&D expenses in excess of $5 million from claiming the credit. Taxpayers with Virginia R&D expenses in excess of $5 million can claim the new Major Research and Development Expenses Tax Credit. (MR&D), which will be available for taxable years beginning on or after Jan. 1, 2016 but before Jan. 1, 2022. The MR&D (as well as the simplified computation method under the R&D credit) is equal to 10% of the difference between (1) the Virginia qualified R&D expenses paid or incurred by the taxpayer during the taxable year; and (2) 50% of the average Virginia qualified R&D expenses paid or incurred by the taxpayer for the three taxable years immediately preceding the taxable year for which the credit is being determined. The amount of the credit would be reduced to 5%, if the taxpayer did not pay or incur Virginia qualified R&D expenses in any one of the three taxable years immediately preceding the taxable year for which the credit is being determined. The total amount of MR&D available is limited to $20 million. Va. Laws 2016, Ch. 300 (SB 58), signed by the governor on March 7, 2016. Kentucky: In affirming a circuit court ruling, the Kentucky Court of Appeals (Court) held that textbooks stored in a warehouse distribution center in Kentucky when not leased to out-of-state students qualify for the property tax exemption under the warehouse/distribution center exemption, because the books were shipped outside the state within the required six month time period. The taxpayer operates an online network for student college textbook rentals, whereby textbooks stored in a Kentucky warehouse are sent to students out-of-state within six months of the books arriving at the warehouse facility. After the books are returned, they are again rented out. The taxpayer argued that it qualified for an exemption for personal property placed in a warehouse or distribution center for subsequent shipment outside the state under Ky. Rev. Stat. Ann. §§ 132.097 and 132.099. Under Kentucky law, personal property is deemed to be held for shipment to an out-of-state destination if the owner can reasonably demonstrate that the personal property will be shipped out of state within six months. Even though the taxpayer satisfied the six-month requirement, 89% of books shipped out of state were returned to the Kentucky distribution center. The circuit court held that the exemption: (1) does not require the personal property be sent to a final or permanent destination, just a destination outside the state; (2) does not except from its application personal property that is leased or rented; and (3) does not require that the property owner prove to any high degree of certainty that the property will leave the state, just that the property owner demonstrate that the property will be shipped outside of Kentucky within the ensuing six months. On appeal, the Department of Revenue (Department) argued that the word "destination" as used in the exemption provision is ambiguous and as such should be construed to mean "final destination" and since the final destination of the taxpayer's textbooks was not an out-of-state location, the taxpayer was not entitled to the exemption. In rejecting the Department's argument, the Court said it agreed with and incorporates the circuit court's reasoning and resolution of this issue. In addition, the Court found the Department's interpretation of the provision would "impermissibly limit the effect of the statutes by adding language of qualification," reasoning that the "word [destination] does not denote or require permanence." Department of Revenue v. Chegg, Inc., No. 2014-CA-001922-MR (Ky. Ct. App. March 2, 2016). Virginia: A cable company is entitled to a refund of property tax paid on its set-top boxes because the set top boxes are intangible personal property exempt from the business tangible personal property tax under Va. Code §58.1-1101(A)(2a). In reaching this conclusion, the Virginia Circuit Court of Henrico County found that although the statute granting the exception was ambiguous, the Virginia Legislature intended to exclude converters from local taxation, based on its removal of cable companies and certain related items such as cable converters from a 1984 statute imposing tax. In addition, despite technological advances, the set-top boxes at issue have the same primary purpose as converters from 1984, which is to provide television customers with the ability to watch cable television programming. Walter v. Verizon Online, LLC, No. CL13-3050 (Va. Cir. Ct., Henrico Cnty., March 2, 2016). Kentucky: Pass-through entities doing business in Kentucky (except publicly traded partnerships) must withhold income tax on their distributive share income, whether distributed or undistributed, of each: (1) nonresident individual partner/member/shareholder (including trusts and estates); and (2) corporate partner/member doing business in Kentucky only through its ownership interest in a pass-through entity. If a corporate partner/member is doing business in Kentucky for reason other than its ownership interest in a pass-through entity, withholding is not required. In addition, withholding is not required if its net distributive share income is not subject to Kentucky income tax. A Nonresident Withholding and Composite Income Tax Return should be submitted on Form 740NP-WH, with copy A of PTE-WH completed for each partner/member/shareholder, by the 15th day of the fourth month following the close of the tax year at the maximum rate imposed on individuals. Extensions of time to file Form 740NP-WH can be obtained by filing Form 40A201NP-WH-SL with the Kentucky Department of Revenue before the return's due date, but this does not extend the deadline to pay tax due. A partner/member/shareholder may be exempt from withholding if the appropriate tax return (KY 720, KY 740-NP, KY 741, etc.) was filed for the prior year. Ky. Dept. of Rev., Pass-Through Entities Tax, Nonresident Withholding Filing Requirement (Feb. 24, 2016). Puerto Rico: On March 1, 2016, the Puerto Rico Treasury Department (PRTD) issued Administrative Determination 16-02 (AD 16-02) delaying the filing due date from March 15, 2016 to April 15, 2016 of the information income tax returns for partnerships, special partnerships, limited liability companies, corporations of individuals, revocable trusts and grantor trusts (collectively, flow-through entities or FTEs) with tax years ending on Dec. 31, 2015. The extended filing date does not apply to special employee-owned corporations, which must continue to file income tax returns no later than the 15th day of the fourth month following the end of the tax year. Moreover, FTEs with tax years ending on Dec. 31, 2015, also will have until April 15, 2016, to electronically file the informative declarations to their partners, members or grantors, as applicable. For more on this development, see Tax Alert 2016-476. California: New law (SBX2 2) establishes a managed care organization provider tax, to be administered by the State Department of Health Care Services (Department), that will be imposed the later of July 1, 2016, or the date the Department certifies that the federal Centers for Medicare and Medicaid Services has approved the tax, until July 1, 2019. The tax will be assessed on licensed health care service plans, managed care plans contracted with the Department to provide Medi-Cal services, and alternate health care service plans (AHCSP), except as excluded by the bill. By the later of Oct. 14, 2016, or within 10 business days following receipt of the notice of federal approval, the Department must send a notice to each health plan subject to the tax that includes the annual tax due for each fiscal year and the dates on which the four installment tax payments are due per fiscal year. The law establishes applicable taxing tiers and per enrollee amounts for the 2016-17, 2017-18, and 2018-19 fiscal years, for Medi-Cal enrollees, AHCSP enrollees, and all other enrollees. The qualified health care service plan income of health plans that are subject to the managed care organization provider tax will be excluded from the definition of gross income for purposes of taxation. The gross premiums tax rate is reduced from 2.35% to 0% for those premiums received on or after July 1, 2016 and on or before June 30, 2019, for the provision of health insurance paid by health insurers providing health insurance that has a corporate affiliate, that is a health care service plan or health plan that is subject to the managed care organization provider tax. Cal. Laws 2016 (2nd Special Session), Ch. 2 (SBX2 2), signed by the governor on March 1, 2016. Nevada: On April 11, 2016, the Nevada Tax Commission will hold a public hearing on a proposed Commerce Tax regulation R123-15RP1. This regulation would establish provisions for the administration, calculation and payment of the Commerce Tax. The proposed regulation also would adopt provisions for the administration and calculation of the credit against the payroll tax imposed on certain business for the payment of the Commerce Tax. Click here for additional information on the hearing. * 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: 2016-0516 |
