25 March 2016 State and Local Tax Weekly for March 18 Ernst & Young's State and Local Tax Weekly newsletter for March 18 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. During a recently concluded special session, the Louisiana Legislature approved, and the governor has signed, a number of business and individual income tax increases in order to close an estimated $950 million budget deficit in Louisiana's current fiscal year and an estimated $2 billion budget deficit next fiscal year. Key franchise, corporate income and sales and use tax law changes: — Expand the reach of the franchise tax (e.g., ownership interest, type of entity) With many of the sales tax law changes set to begin on April 1, 2016 and many of the income tax changes becoming effective retroactively to years beginning on or after Jan. 1, 2016 or Jan. 1, 2017, taxpayers will not have much time to respond to and prepare for these tax law changes prior to their effective dates. The numerous changes made to the sales tax rate will require careful consideration of which items still have exemptions, which items have reduced exemptions, and which items are taxed at the full rate. This will require vendors to keep track of multiple state level rates (in addition to local rates), and change these rates for transactions which occur at enumerated times. This will undoubtedly create compliance issues as taxpayers try to adjust to the changes. Additionally, some of the changes to Louisiana's income tax laws make it even more unique among the states, creating additional disconnects from basic state tax norms that will be traps for the unwary. For example, Louisiana's NOL ordering and priority rules are now completely decoupled from the federal provisions and taxpayers will have to track their NOLs in a way that is simply counter intuitive. As such, taxpayers must carefully consider their Louisiana tax posture, as work papers or calculation methods that worked in the past for Louisiana purposes or work well in preparing returns and calculations for other states will be irrelevant for Louisiana income tax purposes during the years covered by this new legislation. For additional information on this development, see Tax Alert 2016-520. Massachusetts revenue department releases details on 2016 tax amnesty program, announces new program allowing settlement of uncertain tax positions Two new procedures are now available to resolve existing Massachusetts state tax exposures. First, the Massachusetts Department of Revenue (DOR) has set out the details of the general tax amnesty authorized by the FY 2016 Budget (St. 2015, c. 46) (2016 amnesty program). The 2016 amnesty program applies to all delinquent returns and underpayments for any tax type administered by the DOR and provides a limited look-back period. Second, the DOR has issued Administrative Procedure 637, which announces a new program that allows business taxpayers to seek settlement of amounts that they have reserved in their books and records for uncertain Massachusetts tax positions. These programs allow taxpayers to resolve their Massachusetts tax exposures that would otherwise require reserves and that could result in the assessment of tax, interest and penalties if detected by the DOR. Although participation would result in a tax payment, taxpayers would receive the benefit of a waiver of penalties and interest on penalties and a potential reduction of tax through limited look-back (in the case of tax amnesty) and possible settlement (in the case of uncertain tax positions). With respect to the 2016 amnesty program, after it ends on May 31, it will likely be a long time before the next amnesty program is proposed by the Legislature, as the DOR has historically resisted general amnesties. The two prior programs applied only to taxes that were assessed but not paid. Further, when prior general amnesty programs ended, the DOR became much more aggressive in imposing penalties and in employing extended look-back periods against taxpayers that were eligible for amnesty and did not enter into the available amnesty program. For more on these developments, see Tax Alert 2016-508. Alabama: Adopted Reg. 810-9-1-.05 amends Alabama's rules related to apportionment and allocation of net income of financial institutions to bring the provision into conformity with the Multistate Tax Commission's model statute. The amended rules make several changes to receipts factor provisions, including provisions related to: (1) receipts from interest, fees, and penalties imposed in connection with loans secured by real property as well as loans not secured by real property; (2) receipts from fees, interest and penalties charged to card holders; (3) card issuer's reimbursement fees; and (4) receipts from merchant discount, ATM fees, services, financial institution's investment/trading assets and activity, and all other receipts. The rules also amend the denominator of the property factor. Other changes include new or amended definitions of card issuer's reimbursement fee, credit card, debit card and merchant discount. These changes are effective for operating years beginning on or after Jan. 1, 2016. Ala. Dept. of Rev., Regs. 810-9-1-.05 (final amended regulation filed Feb. 12, 2016, anticipated final approval March 28, 2016). California: A financial services corporation's (financial corporation) capital gain on the sale of stock in an another corporation (stock corporation) is business income, apportionable and taxable by California because the stock's acquisition, management and disposition of its equity purchase constitute an integral part of its regular trade or business operations, meeting the functional test in Hoescht Celanese. In reaching this conclusion, a California Superior Court (Court) determined that the financial corporation was not a passive investor that was simply seeking a return on its investment, finding: (1) lower IT costs outsourced to the stock corporation in India benefited the financial corporation's financial status and gave the financial corporation a strategic and economic advantage; (2) the financial corporation acquired some management control over the stock corporation through the standstill agreement; (3) the financial corporation's equity in the stock corporation allowed the financial corporation to develop a go-to-market strategy with its banks and other customers; (4) the financial corporation and the stock corporation negotiated a Master Services Agreement, which increased the value of the financial corporation's own stock in the stock corporation; (5) the financial corporation made the equity investment to protect against the stock corporation encroaching on client relationships; and (6) the financial corporation tried to acquire a 100% interest in the stock corporation, and when that failed, it divested itself of its holdings. The Court also found that the transaction did not meet the transactional test in Hoescht Celanese as the disposition of stock was a "once-in-a-corporate lifetime event". In addition, the Court found that the state's treatment of the financial corporation's capital gain as apportionable business income does not violate the Due Process Clause of the US or California constitutions, because the capital transaction served as an operational rather than an investment function. Accordingly, the financial corporation was not entitled to a refund of the taxes, interest or penalties paid. Fidelity Nat'l Info. Services, Inc. v. Cal. FTB, No. 34-2013-00148015 (Cal. Super. Ct., Sacramento Cnty., Dec. 31, 2015). Iowa: New law (HF 2433) updates the state's conformity date to the IRC to Jan. 1, 2016 (formerly Jan. 1, 2015). The state also decouples from the 2015 bonus depreciation provisions under IRC §168(k), effective for purposes of computing state net income for tax years ending on or after Jan. 1, 2015 but before Jan. 1, 2016. These changes are retroactively applicable to tax years beginning on and after Jan. 1, 2015. Iowa Laws 2016, HF 2433, signed by the governor on March 21, 2016. New York: Proposed bill (A.9459) would address the so-called "carried interest loophole", by requiring certain owners of investment partnerships to pay New York State tax on income from intangibles. The distributive share of income certain partners and shareholders receive from partnerships or S-corporations (Funds) would be re-characterized as fees from services. Historically, corporate and individual nonresident partners have paid little or no tax to New York State on income from a carried interest. The bill would apply if the partner or shareholder receives a distributive share of income from a Fund in excess of his or her distributive share from its capital investment, and the partner or shareholder performs a substantial quantity of investment management services. Investment management services include: (1) advising a partnership, S corporation or entity as to the advisability of investing in, purchasing or selling any specified asset; (2) managing, acquiring or disposing of any specified asset; (3) arranging financing with respect to acquiring specified assets; or (4) any activity in support of any service described in items (1) through (3). A partner would not be deemed to be providing investment management services if at least 80% of the net fair market value of the Fund consists of real estate. Specified asset would include securities, real estate held for rental or investment, interests in partnerships, commodities, or options or derivative contracts with respect to any of the foregoing. The bill does not include comparable changes to either the New York City corporation tax or the New York City unincorporated business income tax. As currently drafted, the bill's effective date is notable in that it would not be effective until similar legislation was enacted by New Jersey, Connecticut and Massachusetts. A.9459 was introduced on March 4, 2016. Oregon: New law (HB 4025) updates the state's IRC conformity date to Dec. 31, 2015 (from Dec. 31, 2014). This change applies to transactions or activities occurring on or after Jan. 1, 2016. If a deficiency assessed against a taxpayer for a tax year beginning before Jan. 1, 2016, is attributable to any retroactive treatment under this law change, then any assessed interest and penalties with respect to the deficiency (or portion thereof) will be canceled. Refunds due as a result of the law change will be paid without interest. Or. Laws 2016, HB 4025, signed by the governor on March 14, 2016. Virginia: New law (HB 95) excludes any voting power or value of the beneficial interests or shares in a real estate investment trust (REIT) that is held in a segregated asset account of a life insurance corporation when determining whether a REIT is a captive REIT subject to Virginia income tax. This change is effective for taxable years beginning on and after Jan. 1, 2016. Va. Laws 2016, Ch. 342 (HB 95), signed by the governor on March 14, 2016. Iowa: New law (HF 2433) rescinds administrative rules promulgated by the Iowa Department of Revenue in 2015 (and effective July 1, 2016) related to the application of the state sales and use tax (SUT) to manufacturing inputs (e.g., supplies, replacement parts) and to certain tangible personal property (TPP) that becomes a part of real property, and replaces the rule with a SUT exemption for the purchase of certain items used in certain manufacturing, research and development (R&D), data processing or storage, or recycling activities. Specifically, for purchases made on and after July 1, 2016, the current SUT exemption is expanded to include certain items considered "supplies" and "replacement parts" (e.g., manufacturing consumables). "Replacement parts" means TPP other than computers, machinery, equipment, or supplies, regardless of the cost or useful life of the TPP, that meets all of the following conditions: (1) the TPP replaces a component of a computer, machinery or equipment, which component is capable of being separated from the computer, machinery or equipment; (2) the TPP performs the same or similar function as the component it replaced; and (3) the TPP restores the computer, machinery or equipment to an operational condition, or upgrades or improves the efficiency of the computer, machinery or equipment. The term "supplies" is defined as TPP, other than computers, machinery, equipment or replacement parts, that meets one of the following conditions: (1) the TPP is to be connected to a computer, machinery or equipment and requires regular replacement because the property is consumed or deteriorates during use (e.g., saw blades, drill bits, filters); (2) the TPP is used in conjunction with a computer, machinery or equipment and is specifically designed for use in manufacturing specific products and may be used interchangeably and intermittently on a particular computer, machine or piece of equipment (e.g., jigs, dies, tools); (3) the TPP comes into physical contact with other TPP used in processing and is used to assist with or maintain conditions necessary for processing (e.g., fluids, oils, coolants, lubricants); (4) the TPP is directly and primarily used in an activity described in Iowa Code §423.3(47)(a)(1)-(6) (with respect to the construction or self-construction of computers, machinery and equipment), including prototype materials and testing materials. HF 2433 does not change any tax exemption related to TPP that become part of the real property. Iowa Laws 2016, HF 2433, signed by the governor on March 21, 2016. Mississippi: A commercial kitchen equipment supplier is not required to collect sales tax at the time of sale if a contractor provides a valid material purchase certificate. In reaching this conclusion, the Mississippi Supreme Court held that the issue of deference to decisions made either by the Mississippi Board of Tax Appeals or the Mississippi Department of Revenue's (Department) Board of Review is not dispositive, because the Department's statutory interpretation was not the best reading of the statute, and such interpretations are not entitled to deference. Miss. Dept. of Rev. v. Hotel and Restaurant Supply, No. 2014-CA-01685-SCT (Miss. S. Ct. March 10, 2016). New York: The New York State Department of Taxation and Finance advised that a product, which provides website owners with real-time analytics data on the website's performance, is not subject to the state's sales or use tax because it is a nontaxable information service as the information provided is personal or individual in nature and may not be substantially incorporated in reports furnished to other persons. In addition, incidental benchmarking statistics that the taxpayer makes available to its customers at no additional charge does not make the information service taxable, since the benchmark information is a de minimis part of the overall information provided, and the taxpayer does not provide customers with the raw data underlying the benchmarking information. Finally, dashboard software made available to customers to view the provided information is not taxable because it is incidental to the information service. N.Y. Dept. of Taxn. and Fin., TSB-A-16(3)S (Feb. 22, 2016). Ohio: The Ohio Department of Taxation (Department) has revised Information Release ST 2003-01 — Direct Payment Authority Program (issued December 2004, Revised March 2016) to reflect changes in how it will administer its direct payment authority program (i.e., the program that allows some Ohio businesses to self-assess and remit use tax on their taxable purchases instead of relying solely on their vendors to collect and remit sales tax on such purchases). These changes were adopted last year in response to the Department's review of the direct payment program where it discovered instances where direct payment taxpayers, upon audit, were found to have had both large overpayments and underpayments of tax. These changes are intended to improve compliance by adding new requirements direct payment authority holders will have to meet. For additional information on this development, see Tax Alert 2016-507. Virginia: New law (HB 872) amends the sales and use tax exemption for purchases of equipment by a data center. The current exemption is available for data centers that (1) are located in a Virginia locality; (2) result in a new capital investment of at least $150 million on or after Jan. 1, 2009; and (3) result in the creation by the data center and its tenants, on or after Jan. 1, 2009, of at least 50 new jobs that pay at least one-and-one-half the prevailing average local wage, or 25 new jobs that pay at least one-and-one-half the prevailing average local wage if the data center is located in a locality that has an unemployment rate for the preceding year of at least 150% of the average statewide unemployment rate or is located in an enterprise zone. Under the revised law, a data center for which a person made a capital investment of at least $500 million on or after July 1, 2016, may count jobs relocated from a data center that previously qualified for the exemption when meeting the thresholds to qualify for the exemption. Lastly, the sunset date of exemption is extended to June 30, 2035 (from June 30, 2020). The bill is effective July 1, 2016. Va. Laws 2016, Ch. 343 (HB 872), signed by the governor on March 11, 2016. Virginia: New law (HB 1305) provides a sales and use tax exemption for machinery, tools and equipment used by a public service corporation to generate energy derived from sunlight and wind beginning Jan. 1, 2017 through June 30, 2027. Va. Laws 2016, Ch. 346 (HB 1305), enacted on March 11, 2016. Virginia: New law (HB 1305) expands the types of projects that will qualify for the property tax exemption for solar photovoltaic (electric energy) systems, which currently applies to projects of 20 megawatts or less. Under the revised provisions, the exemption applies in full to (1) projects equaling 20 megawatts or less for which an initial interconnection request form is filed with an electric utility or regional transmission organization on or before Dec. 31, 2018; (2) projects equaling 20 megawatts or less that serve a public institute of higher education or a private college in Virginia; and (3) projects equaling 5 megawatts or less for which an initial interconnection request form is filed on or after Jan. 1, 2019. In addition, a local property tax exemption applies to 80% of the assessed value for (1) projects greater than 20 megawatts first in service on or after Jan. 1, 2017, for which an initial interconnection request form was filed after Jan. 1, 2015; and (2) projects greater than 5 megawatts for which an initial interconnection request form is filed on or after Jan. 1, 2019. The local exemption for solar photovoltaic projects greater than 20 megawatts would not apply to projects upon which construction begins after Jan. 1, 2024. The new law is effective Jan. 1, 2017. Va. Laws 2016, Ch.346 (HB 1305), signed by the governor on March 11, 2016. Wisconsin: The Wisconsin Department of Revenue (Department) verified that satellite TV boxes are still assessable in Wisconsin as "all other personal property" and do not qualify for the digital broadcasting exemption. The digital broadcasting exemption requires ownership and use of the equipment by a radio station, television station or video service network. Satellite TV providers are not radio or television stations and do not meet the definition of a video service network, which is defined as part of a wireline facility, located in the public right-of-way, or a cable system. Accordingly, the Department recommended that property tax assessors verify that satellite TV boxes are being correctly reported as taxable on the Statement of Personal Property Schedule H, and distribute Notices of Assessment as appropriate. Wis. Dept. of Rev., Release: Verification of Satellite TV boxes (March 11, 2016). Ohio: The Ohio Department of Taxation (Department) recently changed how it applies penalties in audits. A law change enacted in 2000 (HB 612) allowed the Tax Commissioner some discretion in applying penalties based on the facts of a particular case. Prior to this change, the Tax Commissioner had no discretion to abate penalties even in cases of taxpayer cooperation and compliance. In response to the move from mandatory to discretionary penalties, the Department developed procedures in applying penalties. The Audit Division would start an audit with no penalties. Using a penalty worksheet, the auditor would build up penalties based on factors such as lack of registration, non-compliance, lack of improvement from prior audits and lack of cooperation during the audit. The penalty worksheet provided some measure of objectivity in applying the discretionary penalties and any penalties applied were still subject to possible abatement upon appeal of the audit assessment. It is our understanding that, for new audits and current audits for which the penalty worksheet has not been introduced, the maximum statutory penalties will automatically apply to any assessment. Statutory penalties vary based upon the type of tax and other facts and circumstances (e.g., sales tax collected and not remitted). It appears that under this revised policy any attempts to abate penalties will have to be made by appealing the assessment. For additional information on this development, see Tax Alert 2016-498. California: A national retailer (retailer) is entitled to a refund of merchandise return credits (MRCs) erroneously escheated to the state because the MRCs are not subject to California's Unclaimed Property Law (UPL). In reaching this conclusion, a California superior court (court) held that the retailer does not "owe" money to the owner of the MRC because the MRCs are redeemable only for merchandise (not for cash) at the retailer and its affiliates. The court rejected the state's argument that the property was properly escheated since the MRCs are "intangible personal property," finding that only intangible property that is actually "owing" to the owner would be escheated. In addition, the court found that the UPL does not apply to the retailer's store credits because they are in the form of a gift certificate. Bed Bath & Beyond Inc. v. Chiang, No. 37-2014-00012491-CU-MC-CTL (Cal. Super. Ct., San Diego Cnty., March 4, 2016). Wyoming: New law (HB 95) repeals the July 1, 2019 sunset date for provisions related to the abandonment of gift certificates, merchant store value cards and credit memos. The new law is effective July 1, 2016. Wyo. Laws 2016, HB 95, signed by the governor on March 4, 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: 2016-0570 |
