29 April 2016 State and Local Tax Weekly for April 22 Ernst & Young's State and Local Tax Weekly newsletter for April 22 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. In Administrative Determination 16-07 (April 18, 2016), Puerto Rico's Treasury Department (PRTD) issued new transition rules in preparation for the implementation of its new value added tax (VAT) scheduled to come into effect on June 1, 2016. The transition rules in AD 16-07 are based on earlier guidance that was announced last February and partially repealed on March 8, 2016 when Administrative Determination 16-04 postponed the implementation of the VAT until June 1, 2016. Topics covered by the guidance include: SURI (an electronic filing system), monthly VAT returns, merchant number and registry, small merchants, VAT exemption certificate, fiscal invoices and credit and debit notes, pre-existing contracts, and designated professional services using "cash basis" accounting. As reasons for the postponement, AD 16-04 cited the multiple requests for additional time from merchants, as well as certain bills that were presented in the Puerto Rico legislative assembly to modify the VAT statute. The issuance of AD 16-07 signals the PRTD's intent to move forward with the VAT implementation starting on June 1, 2016. The SUT transition rules in AD 16-07 can be categorized as a list of business considerations that must be addressed as Puerto Rico shifts towards a VAT in the coming weeks. Merchants must take steps to ensure the provisions covered in Tax Alert 2016-731 are analyzed within the context of their operations, as the effect of these provisions will be felt immediately upon implementation. In tandem, the effect on other areas of a business, such as supply chain, system planning and implementation, and compliance management, among others should be analyzed and addressed as part of a company's VAT readiness efforts. For additional information on this development, see Tax Alert 2016-731. Texas high court holds net losses from sale of investments and capital assets should not be included in apportionment factor denominator In Hallmark Marketing, the Texas Supreme Court (Court) reversed the lower courts and held that net losses from the sale of investments and capital assets are not includable in the apportionment factor denominator of the taxpayer's Texas franchise tax (i.e., Margin tax) because the applicable Texas statute provides that only net gains from such sales can be included. In reaching its conclusion, the Court found that a conflicting administrative rule requiring businesses to include net gain or net loss in the apportionment factor denominator conflicted with the plain language of the Texas Tax Code and required no deference. Hallmark Marketing Co., LLC v. Hegar, No. 14-1075 (Texas S. Ct. April 15, 2016). Texas taxpayers should reconsider their apportionment positions on their Margin tax returns for open tax years and determine whether they included a net loss in the computation of the apportionment factor and therefore, might be eligible for a refund under this new ruling. For additional information on this development, see Tax Alert 2016-723. New York: A New York State (NYS) Administrative Law Judge (ALJ) issued three determinations holding that two unauthorized non-life insurance companies and an unauthorized life insurance company, each of which held property in New York, were subject to the state's insurance franchise tax imposed under N.Y. Tax Law Article 33 on the higher of the entire net income (ENI) or capital base (although the Life Company was not subject to any additional tax liability because it did not have any apportionment to New York under the special insurance company apportionment method relying on New York sourced gross premiums and payroll). In the Matter of the Petition of Bayerische Beamtenkrankenkasse AG, DTA No. 824762 (N.Y. Div. Tax App. March 3, 2016); In the Matter of the Petition of Landschaftliche Brandkasse Hannover, DTA No. 825517 (N.Y. Div. Tax App. March 3, 2016); and In re Axa Versicherung, DTA No. 825518 (N.Y. Div. Tax App. March 3, 2016). For additional information on this development, see Tax Alert 2016-749. South Carolina: New law (HB 4328) updates South Carolina's date of conformity to the IRC to the IRC as amended through Dec. 31, 2015, and includes the effective date provisions contained in it. In addition, if IRC sections adopted by South Carolina expired on Dec. 31, 2015, are extended, but otherwise not amended, by congressional enactment during 2016, these sections or portions thereof also are extended for South Carolina income tax purposes in the same manner as they are extended for federal income tax purposes. S.C. Laws 2016, HB 4328, signed by the governor on April 21, 2016. Texas: An Arizona transportation management company that has employees and independent contractors in Texas, primarily engaged in solicitation activities but who spend 5% of their time providing customer support services, does not provide revenue-generating services and, therefore, no portion of the commissions it earns from providing these services is apportioned to Texas. In reaching this conclusion, the Texas Comptroller of Public Accounts cited one of its previous decisions finding that the determination of where services are performed is based on the location at which the specific, end-product acts for which the customer contracts take place, not the location at which non-receipt producing, albeit essential, support activities are performed. In this case, the company earns revenue by matching shipping customers and transportation carriers through its proprietary online software, which is hosted on a server located in Arizona. The customer service activities performed in Texas, such as assisting a customer in setting up its account in the software system and assisting a newly signed customer to use the company's proprietary online software for the first time, are not the activities for which the customer contracts. In addition, shipping customers do not pay the company for incidental services such as supporting customers in completing online shipping documents. Texas Comp. of Pub. Accts., Letter Ruling No. 201604750L (April 12, 2016). All States: The EY Sales and Use Tax Quarterly Update provides a summary of major legislative, administrative and judicial sales and use tax developments. Highlights of this edition include: (1) a discussion of the effect of the Tenth Circuit's decision in the Direct Marketing Association case; (2) an overview of state legislative and regulatory adoption of economic nexus principles; and (3) a recap of recent sales and use tax developments related to technology, transactions, tax base, exemptions and compliance. Click here for a copy of the newsletter. Arkansas: A manufacturer's sales tax refund claim denial by the Arkansas Department of Finance and Administration (Department) was sustained in part and reversed in part by an Administrative Law Judge (ALJ). Based on the preponderance of the evidence standard, the ALJ found that the Department correctly denied the following refund claims: (1) cost of a testing equipment service contract that covered and included a taxable service — the inclusion of the taxable service made the entire purchase amount taxable; (2) repair services performed on rollers; (3) restoration of the manufacturer's testing machinery or equipment, by and through calibration, because it is a taxable alteration or repair of machinery or equipment; (4) laminator used to hand-laminate samples at printing presses and provide an idea of what a final product will look like — it does not qualify as equipment used directly in manufacturing or testing equipment ; (5) ink pumps used prior to the manufacturing process; (6) ultraviolet lights, which were taxable as partial replacements or repair parts; (7) stands purchased for bar code scanners to rest on; and (8) repair and replacement of the damper and duct work, even-though damper and duct work are component parts of a machine that is affixed to real property, because the repair or replacement of machinery is taxable under the Arkansas rules. The manufacturer, however, was entitled to refunds in the following situations: (1) its purchase of gases used in testing for quality control, which qualify as exempt chemicals consumed in manufacturing; (2) installations of data drops, which consisted of communication cable installed in conduit to protect the wiring; and (3) a software update for a computer that allows the press to operate and as such is necessary for the operation of machinery used directly in manufacturing. Ark. Dept. of Fin. and Admin., In the Matter of Acct. No. -SLS, No. 16-156 (April 8, 2016). Kentucky: The Kentucky Court of Appeals' decision in Louisville Edible Oil Products, Inc. (LEOP) was not a major change in the law that would bar the application of collateral estoppel in a case in which a business engaged in kiln-drying hardwood lumber argued that the Kentucky Department of Revenue (Department) is precluded from re-litigating the issue of whether lumber is included as a cost of production in the kiln-drying process for purposes of a sales and use tax manufacturing exemption. In reaching this conclusion, the Kentucky Board of Tax Appeals found that LEOP merely confirmed that all direct materials, including raw material costs, must be included in the cost of production, but it did not overturn the prior more specific ruling in Northland I that the lumber is not itself a direct material cost in the kiln-drying process for lumber. Accordingly, the business is entitled to a refund and the Department's assessment issued to the company is set aside. Northland Custom Processing, LLC v. Ky. Fin. and Rev. Cabinet, Dept. of Rev., No. K15-R-15 (Ky. Bd. Tax App. April 11, 2016). Oklahoma: A taxpayer is not entitled to a credit for Oklahoma sales tax paid on tangible personal property purchased for its own use from an in-state vendor, which is stored in Oklahoma and later removed from Oklahoma for use outside the state, because Oklahoma does not provide a credit when property on which sales tax has been paid is removed from the state. The taxpayer, however, would be entitled to a credit for Oklahoma use tax on tangible personal property purchased for its own use from an out-of-state vendor and shipped to Oklahoma for storage, servicing or alteration when such property is removed from the state, regardless of whether the taxpayer knew where the property would be ultimately used at the time of importation. Okla. Tax Comn., LR-16-005 (March 29, 2016). South Carolina: Fees a retailer charged on the sale of liability damage waivers are included in the gross proceeds from the sale or rental of tangible personal property subject to South Carolina's sales tax, because a purchase-rental agreement and a liability damage waiver are fundamentally interconnected and are not separate agreements. In reaching this conclusion, the Administrative Law Court (ALC) found that purchasing a waiver may be optional, but once purchased it is merged into and becomes inextricable from the sale or rental agreement, and has no value apart from that underlying transaction. Citing the South Carolina Supreme Court ruling in Travelscape, LLC and the South Carolina Court of Appeals (SCCA) ruling in Meyers Arnold,the ALC concluded that the waiver fees are part of the value proceeding or accruing from the sale, lease, or rental of tangible personal property and become part of the income on which the retailers pay tax. In addition, citing the SCCA's ruling in Boggero, the ALC determined the true object of the transaction is to obtain the use of an item while minimizing the financial risk for its damage, loss or destruction. Rent-A-Center East, Inc., and Rent Way, Inc. v. S.C. Dept. of Rev., No. 13-ALJ-17-0601-CC (S.C. Admin. Law Ct. March 30, 2016). South Dakota: Purchases of materials that are incorporated into construction projects that were bid or entered into before June 1, 2016 are subject to South Dakota's 4% state sales tax rate plus applicable city tax, rather than the increased 4.5% rate that is otherwise effective beginning June 1, 2016. Contract change orders follow the tax rates in effect when the original contract was bid. To properly document the sales, the contractor must provide written documentation to the material retailer or supplier at the time the materials are purchased for the project, to verify that the contract was bid or entered into before June 1, 2016. The material retailer or supplier must retain documentation in its records. The South Dakota Department of Revenue has created a form for contractors to use as verification of the bid or contract date. S.D. Dept. of Rev., Construction Materials Bid Exception Fact Sheet (April 2016). Federal: The Community Development Financial Institutions Fund (CDFI Fund) recently announced that it will combine the 2015 and 2016 allocation award rounds for the New Markets Tax Credit (NMTC) Program. The next award round will provide $7.0 billion in allocation authority. Prior to this announcement, it was expected that the CDFI would award $3.5-5.0 billion in allocation authority for the current award round. This is the second major announcement concerning the NMTC Program. In December of 2015, the PATH Act extended the NMTC Program for an additional five years with $3.5 billion in annual allocation authority. Due to this change, the CDFI has amended its Notice of Allocation Availability (NOAA) for the calendar year 2015 round of the NMTC Program. The NOAA will be revised to include the following: (1) the combination of the CY 2015 and the CY 2016 NMTC allocation authorities into one allocation round (the "combined CY 2015 — 2016 allocation round"); and (2) an increase in allocation authority available to award for the combined CY 2015 — 2016 round from $5.0 billion to $7.0 billion. The CDFI Fund is not re-opening the combined CY 2015 — 2016 round for new applications. All allocation determinations will be made from the existing pool of applications submitted for the CY 2015 round. North Carolina: The North Carolina Department of Revenue (Department) issued guidance on how the federal tax law changes contained in the Protecting Americans From Tax Hikes Act of 2015 (PATH Act) will impact 2015 North Carolina corporate and individual income tax returns. Provisions of the PATH Act extended several tax provisions that expired at the end of 2014 and created some new provisions. According to the Department, these provisions will not apply unless legislation is enacted to update the state's date of conformity to the IRC to Dec. 18, 2015 or later. The North Carolina Revenue Laws Study Committee has reviewed the provisions of the PATH Act and recommended that the legislature approve legislation that would move the state's date of conformity to the IRC to Jan. 1, 2016, but decouple from certain provisions contained in the PATH Act, including bonus depreciation and increased IRC § 179 expenses. N.C. Dept. of Rev., Impact of PATH Act (April 13, 2016). South Carolina: New law (HB 4328) amends the filing deadline for corporate and pass-through entity returns. Tax returns for corporations are due on the 15th day of the fourth month following the taxable year, while S corporations and partnership returns must be filed on or before the 15th day of the third month following the taxable year. Returns for foreign corporations that do not maintain an office or place of business in the US are due on the 15th day of sixth month following the taxable year. S.C. Laws 2016, HB 4328, signed by the governor on April 21, 2016. Alabama: The Alabama Department of Revenue (Department) will conduct a two month tax amnesty program from June 30, 2016 to Aug. 30, 2016. Amnesty applies to taxes due before Jan. 1, 2015 or taxes for taxable periods that began prior to Jan. 1, 2015. The amnesty program applies to all taxes administered by the Department, including sales/use, corporate and individual income, withholding, pass through entity income, business privilege, financial institution excise, oil & gas severance, mobile telecommunications service, utility gross receipts, and various tobacco taxes. Amnesty does not apply to motor fuel taxes. In exchange for participating in, and fully complying with the terms of, the amnesty program, the Department will apply a three-year look-back period (i.e., the last three full years of delinquent returns) and waive penalties and one-half of interest. Taxpayers eligible to participate in the program include those who have not been contacted by the Department regarding the tax types included in the amnesty application within the last five years. Taxpayers that have been contacted by the Department within the last five years or who have been party to any criminal investigation or criminal litigation in any US or Alabama court cannot participate in the amnesty program. Taxpayers that participate in but fail to fully comply with the terms of the amnesty program may be subject to a negligence penalty. Click here for additional information on Alabama's amnesty program. Federal: Proposed bill (SB 2813) would limit the extent to which states may tax compensation earned by nonresident telecommuters and other multistate workers. A state would only be able to tax the compensation of a nonresident individual for the period of time the nonresident is physically present in the state. For purposes of the physical presence test, a state would not be able to deem a nonresident individual to be present in or working in a state on the grounds that: (1) the nonresident is present at or working at home for convenience, or (2) such nonresident's work at home or office at home fails any convenience of the employer test or any similar test. For purposes of determining the period of time with respect to which compensation is paid, a state may not deem a period of time during which a nonresident individual is physically present in another state and performing certain tasks. SB 2813 was introduced on April 18, 2016. Vermont: New law (HB 538) amends Vermont's captive insurance laws to include association captive insurance companies and sponsored captive insurance companies. In addition, HB 538 allows for protected cell conversion into an incorporated protected cell, without affecting the protected cell's assets, rights, benefits, obligations, and liabilities, subject to the prior written approval of the commissioner, and with the prior consent of each participant of the affected protected cell. It also allows for the sale, transfer, or assignment of protected cells, and any such sale, transfer, assignment, or conveyance will be deemed for all purposes to be a continuation of the protected cell's existence together with all of its assets, rights, benefits, obligations, and liabilities, as a protected cell of the transferee. Provisions of HB 538 permit the conversion of one or more protected cells or incorporated protected cells into a single protected cell or incorporated protected cell, new sponsored captive insurance company, new sponsored captive insurance company licensed as a special purpose financial insurance company, new special purpose financial insurance company, new pure captive insurance company, new risk retention group, new industrial insured captive insurance company, or new association captive insurance company. Lastly, HB 538 amends the governance standards for risk retention groups and amends the definition of "material service provider" to exclude defense counsel retained by a risk retention group. The act took effect upon passage. Vt. Laws 2016, Act 74 (H. 538), signed by the governor on April 13, 2016. * 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: 2016-0785 |
