13 May 2016 State and Local Tax Weekly for May 6 Ernst & Young's State and Local Tax Weekly newsletter for May 6 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. On April 4, 2016, as part of a broader package of regulations targeting corporate inversion transactions in the international tax arena, including the practice of earnings stripping, the Treasury Department and the Internal Revenue Service (IRS) released proposed regulations (REG-108060-15) under IRC §385 (the Proposed Regulations). The Proposed Regulations would establish rules treating certain related-party interests in a corporation as stock, in whole or in part, rather than debt. Not only do the Proposed Regulations signal a significant change in federal tax policy, they also would affect the realm of state income tax because they affect the determination of the tax base. For instance, if the states do not conform to the consolidated group exception in the regulations or attempt to independently apply the proposed regulations, it could create significant cross-equity ownership issues within a federal consolidated group and possibly dilute stock ownership in some members below the 80% threshold for state income tax purposes, thus creating nonconformity problems in M&A transactions, subsidiary liquidations, distributions (including ineligibility for state dividends received deductions) and internal reorganizations. A disregarded LLC for federal tax purposes, with deemed cross-equity ownership that could technically be a partnership solely for state income tax purposes, might also be ineligible for entity classification elections. In addition, certain intercompany interest deductions could be disallowed even if they might otherwise qualify for an exception from a state's related-party interest expense add-back statute, among other implications and unintended consequences. Treasury Department and IRS officials have publicly indicated that the Proposed Regulations could be finalized as early as Labor Day 2016. Consequently, it is important for taxpayers to understand the Proposed Regulations and quickly consider their possible state income tax implications. Tax Alert 2016-824 provides more information on the state tax implications of the proposed regulations. Florida: New law (HB 7099) updates the state's date of conformity to the IRC to the IRC of 1986, as amended and in effect on Jan. 1, 2016 (from Jan. 1, 2015). Florida continues to decouple from bonus depreciation provisions for property placed into service after Dec. 31, 2007 and before Jan. 1, 2021, but adopts the permanent increase expensing limitation. Fla. Laws 2016, Ch. 2016-220 (HB 7099), signed by the governor on April 13, 2016. Mississippi: New law (SB 2858) phases-out the Mississippi Franchise Tax and reduces the income tax rates for individuals, corporations, trusts and estates. Specifically, SB 2858 will phase out the Mississippi Franchise Tax over 10 years starting in 2018. Currently, the tax applies to corporations and is imposed at a rate of $2.50 for each $1,000 of the value of a corporation's capital used, invested or employed within Mississippi. In 2018, the franchise tax rate will be reduced by $0.25 per year until it is eliminated for tax years after 2028. Provisions of SB 2858 also will exempt, starting in 2018, the first $100,000 of the value of capital used, invested or employed in Mississippi from the franchise tax. SB 2858 also reduces the income tax rates applicable to individuals, corporations, trusts and estates. Under current law, the first $5,000 of taxable income is taxed at 3%, the next $5,000 of taxable income is taxed at 4% and all taxable income over $10,000 is taxed at 5%. SB 2858 gradually reduces income tax rates between 2018 and 2022 to 0% on the first $5,000 of income, to 4% on income greater than $5,000 and up to $10,000, and to 5% on all income in excess of $10,000. Miss. Laws 2016, SB 2858, signed by the governor on May 13, 2016. For additional information on this development, see Tax Alert 2016-797. Ohio: In its recent ruling in MacDonald v. Cleveland Income Tax Board of Review, the Ohio Board of Tax Appeals (BTA) reversed the City of Cleveland Income Tax Board of Review's decision and held that amounts reported in Box 5 of an individual income taxpayer's Form W-2 attributable to a Supplemental Executive Retirement Plan (SERP) was a pension benefit exempted by the Cleveland Income Tax Ordinance. The taxpayer was a resident of the City of Shaker Heights and had been employed by a Cleveland-based bank until his retirement at the end of 2006. The taxpayer qualified for benefits under the bank's SERP and elected to receive SERP benefits in 2007. The present value of the SERP benefit was included in Medicare wages (Box 5) of the taxpayer's 2006 Form W-2. When the taxpayer filed his municipal income tax returns, he calculated his liability on the amount reported in local wages (Box 18) of the Form W-2 (i.e., excluding the SERP benefit). The City of Cleveland recalculated the taxpayer's Ohio local income tax liability by including as taxable income the amount appearing in Box 5. In issuing its decision, the BTA was influenced by its prior decision in MacDonald v. City of Shaker Heights, which was upheld by the Franklin County Court of Appeals. Ohio Rev. Code §§718.01(F) and 718.03(A)(2)(c) (which is part of the law authorizing the imposition of Ohio municipal income taxes) provides that cities can only tax "qualifying wages," which are further defined as those appearing in Box 5 of the Form W-2, including amounts attributable to nonqualified deferred compensation plans, unless such plans are specifically exempt under local ordinance. Cleveland, along with many other Ohio municipalities, does not exempt amounts attributable to nonqualified deferred compensation plans, but the Cleveland ordinance exempts pension benefits from tax and does not limit the exemption to "qualified" pension plans. Based on testimony and other evidence provided, the BTA concluded that the SERP was a pension within the meaning of the local ordinance and that the general inclusion of nonqualified deferred compensation within the local tax base in the Ohio Revised Code does not trump the specific exclusion for pensions under the local ordinance. MacDonald v. Cleveland Income Tax Board of Review, Case No. 2009-1130 (Ohio Bd. Tax App. April 20, 2016). For additional information on this development, see Tax Alert 2016-790. Tennessee: Approved bill (SB 47) would immediately reduce the Hall Income Tax on dividend and investment income to 5% and eliminate the tax entirely in 2022. Under the bill, the Hall Income Tax rate would be reduced by 1 percentage point per year effective Jan. 1, 2016, and eliminated entirely for tax years beginning on or after Jan. 1, 2022. The bill includes a statement of the legislature's intent to reduce the tax rate by 1 percentage point annually through the enactment of general bills, beginning with the 110th General Assembly next year. SB 47 passed the Senate on April 19, 2016, and the House on April 21, 2016, by margins of 31-1 and 78-9, respectively. A conference committee report, adding an immediate 1% reduction in the tax rate and eliminating the tax in 2022, was approved by a House vote of 66-17 and a Senate vote of 29-1. Governor Haslam has previously signaled opposition to this repeal of the Hall Income Tax through administration surrogates Deputy Governor Henry and Tax Commissioner Martin. Under the Tennessee Constitution, the Governor has 10 days to veto the bill before it becomes law. In light of the margins with which SB 47 and the conference report passed, if the bill is vetoed by the Governor, the legislature could vote to override the veto or approve a similar measure during the next session. For additional information on other legislation approved by Tennessee, see Tax Alert 2016-804. Texas: A Texas-based national radio network (network) may determine Texas receipts from national advertising revenue based on the ratio of licensee radio stations in Texas to total licensee radio stations. Under Texas law, receipts from advertising are receipts from the performance of a service (the dissemination of a customer's message nationwide), which are apportioned to the location where the service is performed. In determining where the service was performed, "the focus is on the specific, end-product acts for which the customer contracts and pays to receive." Here customers contract with the network to broadcast advertisements from radio stations nationwide. Therefore, the network's receipts are apportioned based on the locations of the radio stations from which those advertising messages are broadcast, and only those receipts from the broadcast of advertising messages from radio stations in Texas are Texas receipts. The Comptroller found another apportionment rule (Rule 3.591(e)(22)) for radio and television stations to be inapplicable because the network is not a radio station. Tex. Comp. of Pub. Accts., No. 201604755L (April 21, 2016). Alabama: A business that primarily provides commercial photography services is not required to collect and remit sales and use tax on various transactions (e.g., headshots, flat-rate photography sessions, digital studio photography, portraits, weddings and reception events) because the clients are purchasing nontaxable services (i.e., the photographer's skill and experience), and the transfer of personal property (i.e., photographs) is merely incidental to the professional services provided. In reaching this conclusion, the Alabama Court of Civil Appeals affirmed the trial court and cited stare decisis, seeing no meaningful difference between the photography services and the nontaxable advertising services provided in Harrison and the nontaxable portrait artist services provided in Kennington. Ala. Dept. of Rev. v. Omni Studio, LLC, No. 2140889 (Ala. Ct. Civ. App. April 29, 2016). Connecticut: Sales of powdered nutritional shake mixes and nutrition bars (snacks) and chewable tablets and capsules made from fruit, vegetables, and grains (concentrates) are exempt from Connecticut's sales and use tax as sales of food products for human consumption. Snacks fall within the statutory definition of "food products for human consumption" and are normally consumed by human beings for nutritive value or taste satisfaction. "Food products for human consumption" specifically excludes certain tablets and capsules sold as dietary supplements or adjuncts, but concentrates are exempt. Although the concentrates are in the form of chewable tablets or capsules, they are not dietary supplements because: (1) they are not marketed as a dietary supplement and are labeled with a "Nutrition Facts" box rather than a "Supplement Facts" box; (2) the concentrates are whole fruits, vegetables, and grains that have been converted into a powdered form and then incorporated into chewable tablets and capsules; and (3) the company markets the concentrates as natural nutrients to be consumed for nutritive value, rather than as multivitamins, medicines, treatments or cures for any disease. Conn. Dept. of Rev., Ruling No. 2016-2 (April 29, 2016). Florida: New law (HB 7099) makes permanent the exemption for industrial machinery and equipment purchased by an eligible manufacturing business, and adds a permanent exemption for postharvest machinery and equipment. The definition of "industrial machinery and equipment" is expanded to include tangible personal property or other property that has a depreciable life of three years or more which is used as an integral part in recycling of metals for sale. "Postharvest activity" includes services performed on crops, after their harvest, with the intent of preparing them for market or further processing (e.g., crop cleaning, sun drying, shelling, fumigating, curing, sorting, grading, packing, and cooling). "Postharvest machinery and equipment" is defined as tangible personal property or other property that has a depreciable life of three years or more which is used primarily for postharvest activities, and generally does not include building or structural components and heating and air conditioning units, unless these items are closely related to, or necessary to meet the requirements of, the postharvest activities. In addition, the exemption for a mixer drum affixed to a mixer truck that is used at any location in Florida to mix, agitate and transport freshly mixed concrete in a plastic state for sale is repealed April 30, 2017. Provisions of HB 7099 also clarify the sales and use tax exemption for aircraft used in foreign jurisdictions (i.e., a jurisdiction outside the US or any of its territories). Under the revised rule, to qualify for the exemption, the aircraft must be registered in a foreign jurisdiction and: (1) application for the aircraft's registration is properly filed with a civil airworthiness authority or a foreign jurisdiction within 10 days after the date of purchase, (2) the purchaser removes the aircraft from the state to a foreign jurisdiction within 10 days after the date it is registered, and (3) the aircraft is operated in the state solely to remove it from Florida to a foreign jurisdiction. These changes take effect July 1, 2016. Fla. Laws 2016, Ch. 2016-220 (HB 7099), signed by the governor on April 13, 2016. New York: A company's fees for tablet-based health monitoring product and its sales of scales and tablets are subject to sales tax unless they are sold to an exempt organization, but the company's sales of blood pressure cuffs and transmitters for glucometers are exempt from sales tax as medical equipment and supplies. The fee for the tablet-based health monitoring product gives the client access and right to use prewritten software, which is a taxable transfer based on constructive possession of the software via the right to use, control, or direct the use of the software. Scales and tablets do not qualify for the sales tax exemption for medical equipment and supplies because they are each generally useful for purposes other than the treatment of illness, injury, or physical incapacity. The sale of blood pressure cuffs and transmitters for glucometers, however, qualify for the medical equipment exemption because they are primarily and customarily used for medical purposes and are not generally useful in the absence of illness, injury, or physical incapacity. N.Y. Dept. of Taxn. and Fin., TSB-A-16(8)S (March 15, 2016). Tennessee: New law (SB 2537) reduces the required capital investment for purposes of claiming qualified data center sales and use tax exemptions from $250 million to $100 million and reduces the job creation requirement from 25 net new full-time jobs to 15 net new full-time jobs. In addition, provisions of SB 2537 exempts cooling equipment and backup power infrastructure sold to or used by a qualified data center from the sales and use tax. These provisions are effective for tax years ending on or after July 1, 2016. Tenn. Laws 2016, Pub. Ch. 1001 (SB 2537), signed by the governor on April 27, 2016. For additional information on other legislation approved by Tennessee, see Tax Alert 2016-804. Florida: New law (HB 7099) clarifies Florida's enterprise zone (EZ) program provisions. The state's EZ provisions expired on Dec. 31, 2015, and, according to the legislative bill analysis, the expiration of the credit created uncertainty about whether the exemption could be granted to a business in an expired EZ area if the city or county began the process of seeking authorization prior to Dec. 31, 2015, or if exemptions have already been granted within 10 years of the expiration of the EZ program. Provisions of HB 7099 modify the definition of "new business" and "expansion of an existing business" to include a new or expanding business located in an area that was designated as an EZ as of Dec. 30, 2015, and clarifies that the ad valorem tax exemption may be granted to a new or expanding business located in an area that was designated as an EZ as of Dec. 30, 2015, but is not a brownfield area, but only if approved by motion or resolution of the local governing body, subject to ordinance adoption, or by ordinance enacted before Dec. 31, 2015. Provisions of HB 7099 also provide that all data center equipment for a data center will be exempt from ad valorem taxation for the term of the approved exemption. Lastly, HB 7099 makes clear that any such exemption will remain in effect for up to 10 years with respect to any particular facility or up to 20 years for a data center, regardless of the expiration of the EZ program. The changes related to the EZ businesses are remedial in nature and apply retroactively to Dec. 31, 2015, while the changes related to data center equipment apply on April 13, 2016 (the date the bill became law). Fla. Laws 2016, Ch. 2016-220 (HB 7099), signed by the governor on April 13, 2016. Tennessee: New law (SB 2539) establishes a credit against the Hall Income Tax for up to 33% of the investments made by an "angel investor." An angel investor is defined as a natural person who is an accredited investor under federal law and invests in a company that falls into one of three groups of small businesses. Eligible investments must be at least $15,000 but represent less than 40% of the company's capitalization. The company must have been in business for no more than five years, have no more than $3 million gross annual revenue, and 50 or fewer full time employees — 60% of whom must perform their duties in state. The credit is limited to $50,000 per investor per year, available on a first-come-first-serve basis. Funding is limited to $3 million in 2017, $4 million in 2018, and $5 million in 2019 and thereafter. These changes are effective for tax years beginning on or after Jan. 1, 2017. Tenn. Laws 2016, Pub. Ch. 1055 (SB 2539), signed by the governor on April 28, 2016. For additional information on other legislation approved by Tennessee, see Tax Alert 2016-804. Tennessee: New law (HB 2570) expands the job tax credit by creating a fourth tier of counties where qualified business enterprises may qualify for the credit and reduces the job creation requirements for businesses in Tier 3 and 4 counties to qualify for these credits. Under the "Rural Economic Opportunity Act of 2016" (HB 2570), newly designated Tier 4 enhancement counties are defined in terms of unemployment rates, per capita income and poverty levels, in the same manner as Tiers 1, 2 and 3 counties. HB 2570 also reduces the job creation requirement necessary to qualify for the job tax credit from 25 jobs to 20 for Tier 3 counties and from 25 to 10 for Tier 4 counties. Provisions of HB 2570 extend the additional job tax credit to qualified business enterprises located in Tier 4 counties for five years and give such businesses located in Tier 4 counties up to five years to create the required jobs. Further, HB 2570 allows an additional job tax credit for qualified business enterprises located in an "adventure tourism zone" in a Tier 4 county that create at least 10 qualified jobs. In addition, HB 2570 creates a Propelling Rural Economic Progress (PREP) fund, funded through specific appropriations by the General Assembly, as well as gifts, grants and other specific donations. The fund is created for the purpose of making grants in counties where they will directly affect employment and future investment opportunities, as determined by the Commissioner of Economic and Community Development. Grant recipients will be limited to local governments, their economic development organizations, other political subdivisions of the state, any subdivision of state government, or not-for-profit organizations. Use of the funds will be limited to facilitating economic development activities in rural areas or in a manner that directly affects rural areas. The provisions of HB 2570 are effective for tax years ending on or after July 1, 2016. Tenn. Laws 2016, Pub. Ch. 1019 (HB 2570), signed by the governor on April 28, 2016. For additional information on other legislation approved by Tennessee, see Tax Alert 2016-804. Maryland: New law (SB 597) modifies exemption provisions for recordation tax related to certain transfers of a controlling interest in a real property entity. According to the bill's fiscal analysis, the amendments are intended to update Maryland law regarding the transfer of a controlling interest so that corporations and LLCs that transfer controlling interests in real estate receive the same tax treatment under the same circumstances. The amendments specifically provide that: (1) a transfer of a controlling interest in a real property entity is not subject to recordation tax if the transfer of the real property owned by the real property entity is between the same transferor and transferee of the controlling interest and under the same circumstances would have been exempt; and (2) recordation tax is not imposed on the transfer of a controlling interest in a real property entity to another entity if the ownership interests in the transferee entity are owned, directly or indirectly, by the same persons and in the same proportions as those persons own, directly or indirectly, the transferor entity or the real property entity the controlling interest of which was transferred. Provisions of the bill take effect July 1, 2016. Md. Laws 2016, Ch. 223 (SB 597), signed by the governor on April 26, 2016. South Carolina: New law (HB 4712) for ad valorem property tax purposes classifies an off-premises outdoor advertising sign as tangible personal property and requires the sign owner to file a business personal property tax return annually with the South Carolina Department of Revenue (Department) based on the original cost of the sign structure less allowable depreciation. Any sign permit required by local, state, or federal law must be considered as intangible personal property for ad valorem property tax purposes. In addition, if the off-premises outdoor advertising sign site is one-quarter of an acre or less, or is otherwise limited to an area large enough only to accommodate the necessary building structure, foundation, and provide for service or maintenance, is leased from an unrelated third party, or it is owned by the owner of the site, and the sign owner has filed a business personal property tax return with the Department, then the off-premises outdoor advertising sign site real property must be assessed to the site owner at its value before the lease or construction of the sign without regard to the structure, lease, or lease income, and no separate assessment may be issued for the sign company's lease or ownership interest. The lease or construction of the property does not constitute an assessable transfer of interest, and the real property constituting the sign must maintain its same property tax classification as commercial, manufacturing, agricultural or utility property as it had before the lease. The law is effective April 29, 2016, and first applies to property tax years after 2014. S.C. Laws 2016, Act No. 167 (HB 4712), signed by the governor on April 29, 2016. Florida: New law (HB 7099) amends the due date for filing various tax returns, including the corporate income tax and partnership returns. Effective for taxable years beginning after Jan. 1, 2016, all partnership information returns should be filed on or before the 1st day of the 4th month (formerly the 5th month) after the close of the taxable year, all other returns (including the corporate income tax return) should be filed on or before the 1st day of the 5th month (formerly the 4th month) after the close of the taxable year or the 15th day after the due date, without extension, for the filing of the related federal return for the taxable year, unless an extension not to exceed six months in the aggregate is granted. For taxable years beginning before Jan. 1, 2026, returns of taxpayers with a taxable year ending on June 30 shall be filed on or before the 1st day of the 4th month after the close of the taxable year or the 15th day after the due date, without extensions, for the filing of the related federal return for the taxable year, unless one or more extensions of time is granted. Provisions of HB 7099 also modify extension periods. For tax years beginning before Jan. 1, 2026, the six month extension period is seven months for taxpayers with a taxable year ending June 30 and is five months for taxpayers with a taxable year ending December 31. Fla. Laws 2016, Ch. 2016-220 (HB 7099), signed by the governor on April 13, 2016. Alaska: An Alaska Department of Revenue (Department) regulation that bifurcates the process for valuation appeals (handled by the State Assessment Review Board, or SARB) from that for taxability appeals (handled by the Department) for oil and gas property is inconsistent with the plain text, legislative history, and purpose of the applicable statute. In reaching this conclusion and reversing the lower court, the Alaska Supreme Court (Court) found that the Department's interpretation of "assessment" through its regulation is not consistent with statutory text because "assessment" encompasses the initial taxability determination, based on the text of the overall scheme, the common usage of the term "assessment" in property tax context, and the significant consequences of the Department's interpretation of the statute in cutting off the statutory right to a trial de novo for taxability determinations but not valuation determinations. The Department's interpretation of "assessment" through its regulation is not consistent with the legislative history of the statute because the Alaska Legislature modeled the SARB after municipal boards of equalization and was aware of the importance of a uniform assessment process overseen by a single entity. Finally, the Department's interpretation of "assessment" is not consistent with the purpose of the statute because from its inception, SARB has understood its jurisdiction to encompass the taxability appeals currently handled by the Department. In addition, the lengthy process of taxability appeals heard by the Department is contrary to the expedited timeline the Legislature set out for appeals before SARB, and can prevent valuation appeals before SARB from being timely decided annually, as legislatively prescribed. City of Valdez v. Alaska et al., No. S-15840 (Alaska S. Ct. April 29, 2016). Massachusetts: Reminder: The Massachusetts tax amnesty program will end on May 31, 2016. Amnesty applies to business and individual taxpayers that are not currently registered with the Massachusetts Department of Revenue (Department), that have not filed a tax return, or have not reported the full amount of tax owed on a previously field return for any tax return due on or before Dec. 31, 2015 (with some exceptions). Amnesty applies to all taxes administered by the Department except the Preferred Provider excise and those covered under the International Fuels Tax Agreement. In exchange for participating in the amnesty program, the Department will waive otherwise applicable penalties and interest due on the penalties, and apply a three-year lookback period. Amnesty is not available to taxpayers that have been the subject of a tax-related criminal investigation or prosecution, have previously filed false or fraudulent returns or statements, or filed a fraudulent tax amnesty return. In addition, the amnesty program does not cover existing tax liabilities. Taxpayers that participated in the 2014 or 2015 tax amnesty programs are not eligible to participate in the 2016 program for the same tax types or tax periods. Eligible taxpayers that do not participate in the amnesty program could be subject to double the amount of tax due and other penalties, they will lose the limited lookback period, and will face "escalating enforcement efforts". Tennessee: New law (SB 2558) provides for lower penalties for deficient or delinquent excise and franchise taxes; relaxation of estimated quarterly payment thresholds and the taxpayers subject to the requirement; and a new discretionary standard for waiving deficiency penalties. Previously, taxpayers with a combined franchise and excise tax liability of $5,000 or more for the current tax year were required to make four equal quarterly estimated franchise and excise tax payments. Under SB 2558 only taxpayers with a combined franchise and excise tax liability of $5,000 in both the current and previous year, after applying all franchise and excise tax credits, will be required to make estimated payments. The law reduces quarterly payments from 25% to 20% of the combined liability. SB 2558 also reduces the penalty for deficiencies and delinquencies from 5% a month to 2% and reduces the maximum total penalty from 25% to 24%. Previously, taxpayers that made four quarterly estimated payments, each of which equaled at least 25% of the current year's liability, were not subject to deficiency penalty for any quarterly payment. This bright line statutory protection is eliminated. Instead, the law now defines even underpaid estimated payments as timely filed, to allow the Commissioner discretion to waive delinquency penalties for taxpayers that made quarterly payments for two prior years. These provisions apply to all tax years beginning on or after Jan. 1, 2016. Tenn. Laws 2016, Pub. Ch. 881 (SB 2558), signed by the governor on April 27, 2016. For additional information on other legislation approved by Tennessee, see Tax Alert 2016-804. Federal: On Wednesday, May 25, 2016 from 1:00-2:00 p.m. EDT New York; 10:00-11:00 a.m. PDT Los Angeles, EY will host a webcast to provide an update on WOTC and other federal and state credits. The enactment of the PATH Act resulted in the short-term and long-term extension of several expiring or expired federal income tax credits and incentives. EY's Credits & Incentives practice has introduced a four-part webcast series that will explore and discuss the extensions of these credits and incentives and the opportunities they may create. Our second seminar in this series will address the extension of the WOTC program; from Jan. 1, 2015 through Dec. 31, 2019, as well as the provision that modifies the credit beginning on Jan. 1, 2016, by adding a target group for employers who hire qualified long-term unemployed individuals. Due to this unprecedented extension, employers may want to take a fresh look at this opportunity. Additionally, we will cover legislative updates on other federal and state credits. Topics that will be covered in this webcast include: PATH Act and legislative updates, eligibility categories, tax credit screening process options, leading practices, additional federal and state credit opportunities, and tax implications. Click here to register for this event. Colorado: An oil company is allowed to deduct the cost of capital related to its transportation and processing facilities from revenue generated by natural gas sales subject to severance tax because the plain language of the deduction for any transportation, manufacturing or processing costs includes the cost of capital resulting from investment in transportation and processing facilities. In reaching this conclusion, the Colorado Supreme Court (Court) reversed the Colorado Court of Appeals, finding the statutory deduction language for "any … costs" does not distinguish between different types of costs and, therefore, all costs related to transportation, manufacturing or processing are deductible. "Cost" unambiguously means the "price or expenditure" borne by the taxpayer's predecessors, and because the oil company's predecessor companies (predecessors) invested in transportation and processing facilities, but the predecessors had not recovered the cost of capital associated with their investment, the oil company is entitled to deduct that cost. The cost is the difference between the amount of cost recovery that the predecessors actually received from constructing the facilities, and the amount of cost recovery or deductions that the predecessors could have received if they had invested in other ventures. Allowing the oil company to deduct the cost of capital does not mean the oil company will recover its cost twice, because the cost of capital measures the cost of making the investment, while depreciation measures the useful life of the asset. BP America v. Colo. Dept. of Rev., No. 13SC996; 2016 CO 23 (Colo. S. Ct. April 25, 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: 2016-0873 |
