09 May 2016 State and Local Tax Weekly for April 29 Ernst & Young's State and Local Tax Weekly newsletter for April 29 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. Hawaii: New law (SB 2921) updates the state's conformity to the IRC to Dec. 31, 2015 (from Dec. 31, 2014). This change applies to taxable years beginning after Dec. 31, 2015. Haw. Laws 2016, Act 33 (SB 2921), signed by the governor on April 29, 2016. Hawaii: Amended administrative rule (Ch. 18-235) on alternative apportionment lists alternative methods of apportionment and provides examples of when it would be sufficient for the Hawaii Department of Taxation (Department) to impose an alternative apportionment method. Under the amended rule, alternative apportionment methods the Department may use include: (1) separate accounting, (2) exclusion of one or more factors, (3) inclusion of one or more factors that will fairly represent the taxpayer's business activity in the state, or (4) employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income. Taxpayers petitioning the Department to use an alternative apportionment method must include certain information in the petition (e.g., data showing that the application of the standard formula is not reasonable and the taxpayers proposed method more clearly reflects its income attributable to Hawaii), and disclose the extent to which the taxpayer is using the proposed method in other states. The amended rule also provides examples of when the Department's imposition of alternative apportionment is sufficient. These instances include: (1) issuance of an assessment based on an alternative method accompanied by notification that an alternative method was used; (2) for a refund claim on an original return, denial of the taxpayer's claim accompanied by notification that an alternative method was used; (3) for a refund claim made on an amended original return, denial of the taxpayer's claim without more, provided that the alternative used by the Department consists wholly of the method used by the taxpayer in filing its original return; and (4) in all other cases, any notification that an alternative method was used. These changes took effect 10 days after filing with the Office of Lieutenant Governor. Haw. Dept. of Taxn., Admin Rules 18-235-5-02, 18-235-5-05, and 18-235-38-01 (adopted April 2, 2016). Kentucky: New law (HB 80) updates Kentucky's date of conformity to the IRC to Dec. 31, 2015 (from Dec. 31, 2013). Ky. Laws 2016, Ch. 138 (HB 80), signed by the governor on April 27, 2016. Louisiana: The Louisiana Department of Revenue issued guidance on recent legislative clarification to limitations placed on net operating loss (NOL) deductions enacted in 2015. Act 6 (2016) provides that the deduction for NOLs is equal to 72% of the NOL carried over to such taxable year, but never more than 72% of Louisiana net income for the taxable year. Thus, if after reducing the NOL carried forward to a given taxable year by 28%, the taxpayer will be limited to claiming a NOL equal to 72% of Louisiana net income for the taxable year. Excess amounts can be carried forward for up to 20 years. Act 6 took effect Jan. 1, 2016 and applies to any and all returns filed on or after July 1, 2015, regardless of the taxable year to which the return relates. La. Dept. of Rev., Revenue Information Bulletin No. 16-023 (April 8, 2016). New York City: The New York City Department of Finance has released various guidance related to tax reform changes enacted in 2015. The documents cover: (1) direct and indirect attribution of interest deductions under the Business Corporation Tax (Finance Memorandum 16-2 (Feb. 26, 2016)); (2) additional investment capital identification periods for certain non-dealers under the Business Corporation Tax (Finance Memorandum 16-3 (Feb. 26, 2016)); and (3) transitional filing relief for taxpayers affected by New York City's corporate tax reform legislation (Finance Memorandum 16-4 (March 31, 2016)). Alabama: An out-of-state book distributor that maintained no direct physical presence in the state had nexus for sales and use tax purposes based on its relationship with local schoolteachers, who acted as the distributor's implied agents. In reaching this conclusion, the Alabama Tax Tribunal (Tribunal) explained "the crucial factor governing nexus is whether the activities performed in (the) state on behalf of the taxpayer are significantly associated with the taxpayer's ability to establish and maintain a market in (the) state for the sales." Here, the activities of the teachers and parent educators were essential, necessary and directly related to the out-of-state book distributor's ability to make sales to customers in Alabama. The Tribunal noted that the teachers' motivation in participating in the distributor's sales program, whether the teachers or parent educators financially benefited from bonus points earned based on the amount of his/her sales is irrelevant. What matters is their activity in Alabama is significantly related to the distributor's ability to establish and maintain a sales market in the state. Scholastic Book Clubs Inc. v. Ala. Dept. of Rev., No. S. 14-374 (Ala. Tax Tribunal March 25, 2016). Alabama: New law (SB 233) amends the definition of "eligible seller" for purposes of the Simplified Sellers Use Tax Remittance Act. An eligible seller is an individual, trust, estate, fiduciary, partnership, LLC, LLP, corporation, or other legal entity that sells tangible personal property or a service, but does not have a physical presence in Alabama or is not otherwise required to be subject to requirements for collecting and remitting state and local sales or use tax for sales delivered into the state. SB 233 adds that such a seller will remain eligible to participate in the simplification program unless the seller establishes presence through a physical business address for the purpose of making in-state retail sales within Alabama or becomes otherwise required to collect and remit sales or use tax through an affiliate making retail sales at a physical business address in Alabama, provided the seller was a participant in the simplification program for at least six months before establishing such physical presence or filing obligation. This change took effect upon becoming law. Ala. Laws 2016, Act 2016-110 (SB 233), signed by the governor on April 4, 2016. See also, recently adopted regulation (Ala. Admin. Code §810-6-2-.90.02) on the Simplified Sellers Use Tax Remittance Program, which took effect April 23, 2016. Louisiana: The Louisiana Department of Revenue (Department) issued guidance on the applicability of a recently enacted 1% state sales and use tax (i.e., clean penny) on certain construction contracts.). When there is an increase of the state's sales and use tax rate, La. Rev. Stat. § 47:305.11, enacted in 1970, provides that no new or additional sales or use tax applies to construction contracts meeting the requirements set forth in La. Rev. Stat. § 47:305.11. Specifically, the provisions of La. Rev. Stat. § 47:305.11 apply only to the sale of materials or services involved in a lump sum or unit price contract, after the contractor has become liable for performance and completion of a contract that did not provide for new or additional taxes. In addition, La. Rev. Stat. § 47:305.11 applies to sales and services involved in a lump sum or unit price construction contract reduced to writing within 90 days after the effective date of a statute levying a new tax (April 1, 2016, as applied here), but only if the contractor had a contractual obligation entered into prior to the effective date. The provision does not apply to contracts entered into on a cost plus or fixed fee basis. Contracts meeting these requirements are not subject to the new clean penny tax. Contractors who have entered lump sum or unit price construction contracts meeting the statutory requirements should complete Form R-1075 and attach a copy of the contract containing the signatures of all parties. La. Dept. of Rev., RIB 16-016 (April 19, 2016). Nebraska: New law (L. 774) provides sales and use tax exemptions for purchases by nonprofit centers for independent living and substance abuse treatment centers and county agricultural societies. In addition, it changes sales tax exemption provisions relating to certain purchases of energy and fuels. These provisions take effect Oct. 1, 2016. Neb. Laws 2016, L. 774, signed by the governor on April 18, 2016. South Carolina: A hospital is not entitled to a sales tax exemption for orthopedic prosthetic devices purchased for specific patients because the South Carolina Administrative Law Court (ALC) erred in finding a prescription is required for the sale of an orthopedic prosthetic device (device) between a hospital and vendor by federal regulations. In reversing the ALC, the South Carolina Supreme Court (Court) found that the statute expressly allows a practitioner to be in possession of a device without a prescription or order, and the ALC's broad interpretation of the federal regulation is fundamentally at odds with the plain meaning of the regulation and the strict construction afforded a tax exemption. Generally, the retail sale of a device to a hospital or doctor is a taxable sale if the device is furnished to a patient as part of a service being rendered by a hospital, but there is a sales tax exemption for prosthetic devices sold by prescription. Citing Home Medical, a device is sold by prescription if (1) the sale requires a prescription, (2) the device is actually sold by prescription, and (3) the device replaces a missing part of the body. Here, the Court found the first prong failed. The ALC also erred in finding that the other bone, muscle and tissue implants replace a missing part of the body because the hospital did not present evidence to support its finding. CareAlliance Health Services v. S.C. Dept. of Rev., No. 27627 (S.C. S. Ct. April 20, 2016). South Dakota: Two lawsuits have been filed challenging South Dakota's new economic nexus standard for sales and use tax (S.D. Laws 2016, SB 106). The state through declaratory judgment actions, is seeking a determination that it may require remote retailers that lack a physical presence in the state to collect and remit state sales tax on sales of tangible personal property and services for delivery into South Dakota. The state acknowledges that a declaration in its favor would require abrogation of the US Supreme Court's ruling in Quill, which requires a physical presence for sales and use tax nexus purposes, and ultimately seeks a decision from the US Supreme Court to that effect. In a competing case filed by American Catalog Mailers Association and Netchoice (hereinafter plaintiffs), the plaintiffs seek a declaratory judgment challenging the constitutionality of the new law. The plaintiffs argue that the new law is plainly unconstitutional as it "violates the Quill physical presence requirement, usurps the role of Congress in regulating interstate commerce, and unlawfully expands the State's taxing authority over companies, individuals, and organizations located throughout the United States, and potentially the world, based solely on their having customers in South Dakota … ." South Dakota v. Wayfair, Inc, Systemax, Inc., Overstock.com Inc., and Newegg Inc., No. 32 Civ. 16-___ (S.D. Cir. Ct., 6th Cir., filed April 28, 2016); American Catalog Mailers Association and Netchoice v. Gerlach, No. 32 CIV 16-___ (S.D. Cir. Ct., 6th Cir., filed April 29, 2016). Nebraska: New law (L. 774) provides a nonrefundable income tax credit to employers of recipients of certain public assistance, effective for taxable years beginning or deemed to begin on or after Jan. 1, 2017. The credit is equal to 20% of the employer's annual expenditures for any of the following services provided to eligible employees and that are incidental to the employer's business: (1) provision of tuition at a Nebraska public institution of post-secondary education or costs associated with a high school equivalency program for eligible employees, and (2) transportation to and from work. The employer can claim the credit for two years. Provisions of L. 774 also amend the nonrefundable income tax credit for historically significant real property, to provide that taxpayers claiming this credit will not be required to pay any additional retaliatory tax as a result of claiming the credit, and any tax credit claimed will be considered a payment of tax for income tax purposes. Neb. Laws 2016, L. 774, signed by the governor on April 18, 2016. Kansas: A clean energy business that has turbines on its property is exempt from Kansas ad valorem tax because the business uses the property predominantly to produce and generate electricity utilizing renewable energy resources or technologies. The Kansas Board of Tax Appeals further held that the exemption should begin with the commencement of construction, and continue each year so long as the business continues to use the property for exempt purposes. In re Application of NJR Clean Energy Ventures II for Exemption from Ad Valorem Taxation in Rush Cnty. Kan., No. 2015-7546-TX (Kan. Bd. Tax App. March 9, 2016). Maine: Equipment owned by a business taxpayer, but leased to others, does not qualify for the stock-in-trade personal property tax exemption because it does not fall "unmistakably within the spirit and intent" of the exemption provision. Citing Hurricane Island Outward Bound, the Maine Supreme Judicial Court found that neither the plain language of the exemption statute nor the legislative history supports treating leased equipment as inventory. In addition, under Eagle Rental, the stated purpose of the legislation is to prevent taxation on inventory that is earning no profits while awaiting sale. In this case, the equipment was leased for compensation, as opposed to a mere "test drive." Only inventory in a taxpayer's possession, and held for sale on the assessment date, is exempt from the personal property tax. Chadwick-BaRoss, Inc. v. City of Westbrook et al., No. 2106 ME 62 (Me. S. Jud. Ct. April 21, 2016). Oklahoma: New law (HB 2775) amends return due dates for corporations and partnerships. Effective for tax years beginning on or after Jan. 1, 2016, calendar and fiscal year corporation returns as well as partnership returns are due no later than 30 days after the due date established by the IRC. Okla. Laws 2016, HB 2775, signed by the governor on April 11, 2016. All States: A sales and use tax case working its way through the Texas court system could cost the state $4 billion and wipe out a large chunk of its rainy day fund, but revenue officials told Ernst & Young LLP (EY) panelists during EY's quarterly state tax webcast that Texas is carrying on business as usual until the decision comes out. The Texas Supreme Court heard oral arguments for SW Royalties during the second week of March, and is considering whether certain oil and gas processing equipment could qualify for a manufacturing exemption from sales and use tax. Besides this case, EY and guests discussed the Texas economy and related tax issues, remote seller nexus news, the basics of unclaimed property and other state tax developments since the end of 2015. For more on this development, see Tax Alert 2016-782. California: The California State Controller (Controller) issued notices advising holders of unclaimed property of recent law changes related to interest on lawyers' trust accounts and safe deposit boxes that took effect Jan. 1, 2016. Pursuant to SB 134 (2015), funds held in Interest on Lawyers' Trust Accounts (IOLTA), which has a three year dormancy period, that escheat to California must be deposited into a new Abandoned IOLTA Property Account within the Unclaimed Property Fund. The law provides for an annual transfer to the Public Interest Attorney Loan Repayment Account; when reporting the IOLTA funds, use code TR89. In addition, pursuant to AB 355 (2015), the Controller is authorized to mail a separate notice to an apparent owner of a US savings bond or military award inside a safe deposit box or other safekeeping repository whose name is shown or can be associated with the item. This notice is in addition to the original notice sent to the reported owner of the safe deposit box or other repository account, and the holder is not required to take any new action other than as already required. Cal. State Controller, Unclaimed Property Div., Notice to Holders: New Law Changes, Interest on Lawyers' Trust Accounts — Escheated Funds (April 2016) and Notice to Holders: New Law Changes, Safe Deposit Boxes — U.S. Savings Bonds and Military Awards (April 2016). Mississippi: New law (HB 393) requires taxing entities to file an annual report with the state auditor providing the amount of tax revenues received by the entity during the prior fiscal year; the total tax revenues distributed to the taxing entity from state sales tax diversions, fuel tax diversions, ad valorem taxes, local sales taxes, payments in lieu of taxes, gaming fees and taxes and other sources; and the amounts received from each source. The report is due not later than 90 days after the close of the fiscal year for which the report is prepared, and must be filed on the state auditor's website. The law defines "taxing entity" and "tax revenue." This provision took effect upon passage. Miss. Laws 2016, HB 393, signed by the governor on April 18, 2016. Washington: The Washington Department of Revenue (Department) adopted emergency regulations to remain consistent with the Multistate Tax Commission's change in its model method of apportionment for financial institutions that is effective Jan. 1, 2016. Under the emergency regulations, all service and other activities income, regardless of where that income is attributed, is apportioned to Washington by multiplying the income, less certain deductions or exemptions, by the appointment percentage, and the apportionment percentage is determined by the taxpayer's receipts factor. The emergency regulations add or amend several definitions and amend several receipts' factor calculations. As amended, the general receipts factor calculation is a fraction, the numerator of which is the service and other activities income of the taxpayer in Washington during the taxable period and the denominator of which is the service and other activities income of the taxpayer inside and outside Washington during the taxable period. Other amended receipts factors include: (1) interest, fees and penalties imposed in connection with loans secured by real property as well as with loans not secured by real property; (2) net gains from the sale of loans; (3) receipts from fees, interest and penalties charged to card holders; (4) net gains from the sale of credit card receivables; (5) card issuer's reimbursement fees; (6) receipts from a merchant discount; (7) receipts from ATM fees; (8) loan servicing fees; (9) receipts from the financial institution's investment assets and activities and trading assets and activities; and (10) all other receipts. On Jan. 6, 2016, the Department proposed similar rules to implement these changes on a permanent basis, noting that Wash. Admin. Code 458-20-19404A would describe the application of single sales factor receipts apportionment to gross income for financial institutions from June 1, 2010 through Dec. 31, 2015, and Wash. Admin. Code 458-20-19404 applies for periods beginning on and after Jan. 1, 2016. Wash. Dept. of Rev., Emergency Rule WAC 458-20-19404, adopted April 21, 2016. The rule may be used to determine tax liability until Aug. 19, 2016, unless the Department adopts a permanent rule prior to that date. (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: 2016-0828 |
