08 April 2016 State and Local Tax Weekly for April 1 Ernst & Young's State and Local Tax Weekly newsletter for April 1 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. The Tennessee Supreme Court (Court) recently issued its much anticipated ruling in Vodafone upholding the imposition by the Tennessee Commissioner of Revenue (Commissioner) of a variance requiring a multistate mobile telecommunications company to use an alternative apportionment method to source its sales receipts for services to Tennessee customers in order to more accurately reflect its business activity in the state. The Court further held the Commissioner's variance, which uses the primary-place-of-use (PPU) (effectively, a market-based sourcing method) instead of the statutory costs of performance method (COP), is not an abuse of discretion as it is within the range of acceptable alternatives available to the Commissioner. Vodafone Americas Holdings Inc. v. Roberts, No. M2013-00947-SC-R11-CV (Tenn. S. Ct. 23 March 2016). Although the decision by the Court is binding only in Tennessee, many states have variance or alternative apportionment statutes that mirror those of Tennessee. In fact, this ruling shows a great deal of deference by the state's highest court to the determinations of the state's executive taxing authority, which bears striking similarities to the Mississippi Supreme Court's ruling in Equifax, which sparked outrage from the business community and ultimately resulted in a change of law to clarify that the party propounding an alternative method of apportionment has the burden of proof in all such cases as well as the adoption by the Multistate Tax Commission of changes to the model alternative apportionment rule in UDITPA. Moreover, since the Court agreed with the Commissioner, taxpayers should be wary that even if they follow the state's statutorily prescribed method, this decision's application of the abuse of discretion standard likely makes it easier for the Commissioner to impose a variance. Further, the Court upheld the justification that Vodafone presented a fact scenario that was specific, nonrecurring and unique, which may allow the Commissioner to require a variance with a lower burden of proof in other scenarios. In his letter imposing the variance on Vodafone, the Commissioner concluded that the COP method was not straightforward but rather complex, unreliable, and difficult to verify. In contrast, the Commissioner asserted that the PPU method was straightforward and easy to determine. Even if it is true that use of the PPU method may ease an administrative burden, the Court seems to have applied a standard to which the Commissioner is held to issue a variance that does not necessarily more accurately reflect a taxpayer's business in Tennessee. As a result, the decision permits the Commissioner to enact a policy decision that controverts that which has been established by the legislature. For additional information on this development, see Tax Alert 2016-649. Alabama: Update - Effective date change. Following a change required by the Alabama Legislative Council, the effective date of the changes to Reg. 810-9-1-.05, which 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, is delayed one year to 2017. The amended rules make several changes to the 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, 2017. Ala. Dept. of Rev., Regs. 810-9-1-.05 (final amended regulation filed Feb. 12, 2016, final approval March 28, 2016). Indiana: New law (SB 323) requires the Legislative Services Agency (LSA) to study the combined reporting approach to apportioning income for Indiana income tax purposes and issues related to transfer pricing under the adjusted gross income tax law. The LSA has until Oct. 1, 2016 to submit the report to the legislative council and to the interim study committee on fiscal policy. The report at minimum must include the following: (1) a review of combined reporting practices in other states, (2) a review of administrative costs of implementing combined reporting, (3) a review of studies and reports that have been prepared on combined reporting, (4) an estimate of the fiscal impact of implementing combined reporting in Indiana, and (5) a review of issues related to transfer pricing under the adjust gross income tax law. The interim study committee is required to hold a least one public hearing during which time the LSA's findings will be presented. This provision expires on Dec. 31, 2016. Ind. Laws 2016, Pub. Law 185 (SB 323), signed by the governor on March 24, 2016. Indiana: New law (HB 1290) updates the state's date of conformity to the IRC as amended and in effect on Jan. 1, 2016 (formerly Jan. 1, 2015). This change is retroactively effective to Jan. 1, 2016. Ind. Laws. 2016, Pub. Laws 204 (HB 1290), signed by the governor on March 24, 2016. Michigan: In reversing a lower court ruling, the Michigan Court of Appeals (Court) held that a group of three entities — two corporations and a limited partnership — were not a "unitary business group" as defined in MCL 208.1117(6) because no one member of the group owns, through an intermediary or otherwise, more than 50% of any other entity. In reaching this conclusion, the Court held that the Michigan Department of Treasury in using the federal income tax law definition of "constructive" ownership when defining Michigan's "indirectly" ownership requirement improperly broadened its interpretation of "unitary business group" beyond the scope intended by the Legislature. The Michigan Business Tax Act (MBTA) did not define indirect ownership or control, but provided that if a term was not defined by the MBTA it shall have the same meaning as when used in a comparable context to that used in the federal income tax laws. The Court found that there is not a directly comparable federal income tax provision and, therefore, the lower court should have resorted to normal rules of statutory construction to determine the meaning of the undefined terms. After reviewing various definitions of "indirect" and "indirect possession", the Court determined that "indirect ownership" means "ownership through an intermediary, not ownership by operation of legal fiction ... " The Court noted that federal constructive ownership rules may apply when a statute involves stock "owned or considered owned," but does not apply to expand the unitary business definition beyond what the legislature intended. LaBelle Management, Inc. v. Mich. Dept. of Treas., No. 324062 (Mich. Ct. App. March 31, 2016). New Jersey: A foreign multistate bank (bank) must include in the numerator of its New Jersey receipts factor interest income, origination fee income, and gross proceeds from sales attributed to mortgage loans to New Jersey borrowers because such income constitutes other business income earned within New Jersey for purposes of the corporation business tax. In reaching this conclusion, the New Jersey Tax Court (Court) found that the taxable situs of the New Jersey mortgage loans originated and acquired by the bank was in New Jersey because they were integrated with a business carried on in New Jersey. The Court found inconsequential the bank's distinction between the origination of loans to New Jersey borrowers and the purchase of mortgage loans from New Jersey mortgage brokers and correspondent lenders, reasoning that in both cases the bank intentionally entered into the New Jersey marketplace not simply to sell its loans, but to buy mortgages. The bank is not required to include mortgage service fee income or income from mortgage servicing rights in the sales factor as neither is subject to the state's corporation business tax. Lastly, the Court found that: the since repealed throw-out rule is inapplicable in this case, upheld the imposition of the underpayment penalty, and reversed the imposition of the amnesty penalty. Flagstar Bank, FSB v. N.J. Dir., Div. of Taxn., No. 019335-2010 (N.J. Tax Ct. March 22, 2016). New York: The New York Division of Tax Appeals (NY Div. of Tax Appeals) recently ruled that a parent company cannot deduct premiums paid to a subsidiary captive insurance company from its New York entire net income because the premiums paid did not constitute insurance for federal income tax purposes. Matter of Stewart's Shops Corporation, DTA No. 825745 (NY State Div. of Tax App. March 10, 2016). For additional information on this development, see Tax Alert 2016-608. South Dakota: New law (SB 53) modifies the bank franchise tax by: (1) removing "interest and dividends from obligations of the US government and its agencies that the state is prohibited from taxing" from the list of items to be subtracted from taxable income; (2) amending carryback and carryforward deduction provisions to remove "capital losses"; and (3) amending the payroll factor to provide that "compensation" does not include any payment to an independent contractor or any other person not classified as an employee. These changes apply to returns related to tax years ending in 2015 and thereafter and filed after Dec. 31, 2015. SD Laws 2016, SB 53, signed by the governor on March 1, 2016. Texas: A geoseismic company is entitled to use the cost of goods sold (COGS) deduction to determine its tax liability under the revised franchise "margin" tax, because the company furnished labor and materials to projects for the construction, improvement, remodeling or repair of oil and gas wells within the meaning of the COGS deduction. In reaching this conclusion, a Texas Court of Appeals (Court) rejected the argument of the Texas Comptroller of Public Accounts that the company provides only services to companies engaged in the exploration and production of oil and gas, none of its costs were associated with furnishing labor to a project, and as a matter of law the company was not entitled to take a COGS deduction at all. The Court found the Comptroller's argument ignored evidence. Hegar v. CCG Veritas Serv. (U.S.) Inc., No. 03-14-00713-CV (Tex. Ct. App., 3rd Dist., March 9, 2016). Texas: The Texas Comptroller of Public Accounts issued a letter clarifying the applicability of the cost of goods sold (COGS) deduction for transmission and distribution costs for integrated utility companies as well as deregulated markets (which includes transmission and distribution utilities (TDU) and retail electricity providers (REP)). Texas franchise tax law allows a taxable entity that produces or acquires goods to sell to include in its COGS deduction handling costs, which include processing costs, but cannot include costs related to distribution of the electricity in COGS. An integrated utility company owns the electricity and can therefore include in its COGS deduction the costs of transmission to the point of step-down and the step-down. It cannot include the cost of distributing the electricity once it has been stepped down. An integrated utility also may include in its COGS deduction franchise fees, property taxes and the costs of insurance related to its transmission assets. In deregulated markets, a REP may include in COGS the costs of acquiring the electricity it resells, including handing costs. Thus, the REP may deduct any fees or charges it pays for the transmission of the electricity to the point of step-down and the step-down, but cannot include fees or charges it pays for the distribution of the electricity once it has been stepped down. TDUs do not own the electricity and provide transmission and distribution services and, as such, may not include transmission or distribution costs in COGS. Further, because TDUs do not own the electricity, they cannot deduct from COGS, franchise fees, property taxes or insurance related to transmission assets. Tex. Comp. of Pub. Accts., Policy Letter 201603710L (March 3, 2016). Utah: New law (HB 190) modifies adjustments certain manufacturers that pay an income tax to a foreign country have to make to adjusted gross income. Specifically, a pass-through entity generating taxable income primarily from metal tank (heavy gauge) manufacturing (NAICS Section 33242), is allowed to make an adjustment to its adjusted gross income for net foreign source taxable income generated from metal tank (heavy gauge) manufacturing establishments. This change applies to taxable years beginning on or after Jan. 1, 2017. Utah Laws 2016, Ch. 374 (HB 190), signed by the governor on March 29, 2016. Utah: New law (HB 61) modifies the state's apportionment provisions for corporate franchise and income tax purposes. Under the revised law, a taxpayer (except for a sales factor weighted taxpayer and an optional sales factor weighted taxpayer), can elect to use either an equally weighted three factor (property, payroll and sales) apportionment formula or a double weighted sales factor (property, payroll and twice the sales) apportionment formula. A sales factor weighted taxpayer must use a single sales factor apportionment formula. An optional sales factor weighted taxpayer may use any of these formulae. An "optional sales factor weighted taxpayer" generally is defined as a taxpayer having greater than 50% of its total sales everywhere generated by economic activities performed by the taxpayer if the economic activities are classified in NAICS subsector 334 of the 2002 or 2007 version (e.g., computer and electronic product manufacturing). There is a difference in the definition of "optional sales factor weighted taxpayer" if the taxpayer is or is not part of a unitary business. These changes apply retroactively to taxable years beginning on or after Jan. 1, 2016. Utah Laws 2016, Ch. 311 (HB 61), signed by the governor on March 28, 2016. See also, Ch. 323 (SB 15), signed by the governor on March 28, 2016, which includes the election for general taxpayers to use the equally weighted or double weighted sales factor apportionment formulas, but does not include provisions related to the optional sales factor weighted taxpayers. Virginia: The Virginia Department of Taxation (Department) issued a ruling clarifying that a fixed date conformity subtraction (FDCS) can be carried forward when the FDCS exceeds the taxpayer's federal taxable income (FTI) and fixed date conformity addition (FDCA), because this results in a negative Virginia FTI resulting in a net operating loss (NOL). The NOL could be carried back and then carried forward as a NOL deduction pursuant to Virginia's conformity with IRC §172. Generally Virginia income tax law does not address NOL deductions, but because Virginia starts its computation of corporate income tax with FTI, the Department allows a NOL deduction to the extent it is allowable in computing FTI as calculated for Virginia tax purposes. Title 23 of the Virginia Administrative Code §10-120-325 provides the methodology that a corporation must use to calculate the NOL deduction carrybacks and carryforwards for purposes of corporate income tax, requiring that a Virginia NOL deduction modification must be determined for the taxable year in which an NOL occurred, and the Virginia NOL deduction modification must be carried back and forward in the same manner as the federal NOL deduction. Va. Dept. of Taxn., PD Ruling No. 16-22 (March 8, 2016). Colorado: New law (HB 1119) modifies the number of days an aircraft may remain in Colorado after it is purchased for purposes of the sales and use tax exemption of certain aircraft. Under the revised law, and provided the other requirements of the exemption are met, the sale of a new or used aircraft is exempt from sales and use tax if the aircraft is removed from the state within the longer of the following periods: 120 days after the date of the sale or 30 days after the completion of maintenance, interior refurbishment, paint or engine work associated with the sale of the aircraft. Colo. Laws 2016, HB 1119, signed by the governor on March 23, 2016. Colorado: The 10th Circuit rejected the taxpayer's request for it to review its recent ruling in Direct Marketing Association, in which it held a Colorado statute that requires remote sellers lacking physical presence within the state to file an annual statement with the Colorado Department of Revenue showing the total amount paid for Colorado purchases during the preceding calendar year for each Colorado purchaser, does not violate the dormant Commerce Clause. Direct Marketing Ass'n. v. Brohl, No. 12-1175 (10th Cir. Feb. 22, 2016), reh'g denied (April 1, 2016). Nebraska: The sale of Guaranteed Asset Protection (GAP) waiver contracts made between the purchaser of a motor vehicle (borrower) and the retailer seller of the motor vehicle (creditor) is part of the sales or lease price of the motor vehicle that is subject to the state's sales and use tax. Note, GAP waiver contracts are distinguishable from GAP insurance contracts, which are subject to the premiums tax. Neb. Dept. of Rev., Revenue Ruling 01-16-1 (March 7, 2016). Federal: The Protecting Americans from Tax Hikes Act of 2015 (PATH), signed into law by President Barack Obama on Dec. 18, 2015, retroactively reinstated Work Opportunity Tax Credit (WOTC) for five years, from Jan. 1, 2015 and effective in 2016 extends the credit to the long-term unemployed. The IRS has now issued guidance in Notice 2016-22 concerning the procedures that now apply under the PATH act including an extended 28-day deadlines for filing IRS Form 8850 and to June 29, 2016 for the US Department of Labor, Employment and Training Administration (ETA) Forms 9061 and 9062 for the purpose of claiming the WOTC through the designated state workforce agencies. For additional information on this development, see Tax Alert 2016-589. Delaware: New law (SB 200) expands the state's Research and Development (R&D) Credit and reinstates and expands the New Economy Jobs Tax Credit (jobs credit), which sunset in 2014. Amendments to the R&D credit make it refundable and remove the provision that if the amount of approved credits exceeds $5 million, the credits are prorated among the approved companies. Under the revised provision, all approved companies will receive the full credit amount. The jobs credit provides a refundable tax credit that ranges from 25% to 65% of the added withholding attributable to new jobs created in Delaware. The jobs credit is expanded to make employees retained following qualified companies emerging from a corporate restructuring, eligible for the jobs credit. These changes are effective for tax years beginning after Dec. 31, 2016. Del. Laws 2016, SB 200, signed by the governor on March 17, 2016. New Jersey: The New Jersey Tax Court (Court) held that in valuing an environmentally contaminated property, the Court is required to consider "normal assessment techniques" in attempting to find the true value of the subject property based upon its "in use" status, but the techniques must be tempered by the taxpayer's costs to address the environmental condition of the property. In reaching this conclusion, the Court found that without competent and qualified testimony from environmental and property valuation experts from the appraisal community, it would be premature at the time of the ruling for the Court to offer a methodology to account for the effect contamination has on the true market value of the subject property, and it granted the property owner's motion for partial summary judgment. The Court noted that the facts of this case are an anomaly because they materially differ from existing precedent, in that no windfall tax benefit would occur if the Court were to recognize the effect of environmental contamination on the true market value of the property as there was no statutory trigger to cure the contamination, the taxpayer embraced, rather than avoided or shirked, its legal obligation to investigate and commence cleanup of the environmental contamination on the subject property, and there is no evidence that the taxpayer caused, contributed, or exacerbated the environmental contamination. However, the Court found that the costs to be incurred during an environmental cleanup and the party bearing responsibility for those cleanup costs plays no role in determining the property's true market value. ACP Partnership v. Garwood Borough, Nos. 009227-2010, 002452-2011, 000971-2012, 001049-2013, 003566-2014, and 000431-2015 (N.J. Tax Ct. March 22, 2016). Utah: New law (SB 16) repeals a provision that prohibits a person from carrying forward a tax credit if the State Tax Commission (Commission) is required to remove the tax credit from a tax return. SB 16 exempts corporate and individual historic preservation tax credits from provisions requiring the Commission to remove the tax credits from a tax return under certain circumstances. The changes apply retroactively to taxable years beginning on or after Jan. 1, 2016. Utah Laws 2016, SB 16, signed by the governor on March 18, 2016. Virginia: New law (HB 643) requires the Virginia Department of Taxation (Department) to cease efforts to collect a tax seven years after assessment of tax, effective for assessments made on and after July 1, 2016. According to the HB 643 fiscal statement, the Department interpreted broadly the exception for collections efforts made or initiated before the court cutoff date and since some form of collection action is usually taken early on within the seven-year limitation period, most assessments remain collectible until satisfied. Under HB 643, the Department is required to cease all collection actions seven years after an assessment was made, even if the collection action was initiated before the end of the seven-year period, except for collection actions pursuant to the execution of a lien created by a judgment lien or a memorandum lien. Va. Laws 2016, Ch. 634 (HB 643), signed by the governor on April 1, 2016. All States: On Wednesday, April 20, 2016, from 1:00-2:00 p.m. EDT New York; noon-1:00 p.m. CDT Chicago; 11:00 a.m.-noon MDT Denver; 10:00-11:00 a.m. PDT Los Angeles, EY will host a webcast analyzing allocation and apportionment issues. Our sixth income tax seminar will address the quirks of apportionment and allocation. The panelists will discuss apportionment related to specific industries and provide an in-depth analysis on the unique provisions used in the financial services industry. They will also discuss the differences between flow-up apportionment factors versus apportioning income at the partnership level. Finally, the panelists will discuss the factors to be considered in determining whether income should be classified as business or nonbusiness income and when it is appropriate to allocate instead of apportion income. Click here to register for this event. (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: 2016-0651 |
