26 May 2016 State and Local Tax Weekly for May 20 Ernst & Young's State and Local Tax Weekly newsletter for May 20 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. New law (SB 1288) details Arizona's conformity to the recently enacted federal partnership audit rules in new statutory section 43-1414 of the Arizona Revised Statutes. New Ariz. Rev. Stat. §43-1414 provides that if a partnership is audited by the IRS and is assessed an imputed underpayment under IRC §6225 or a partnership that makes the election under IRC §6226 to attribute the amounts of such underpayment to its partners shall file a return for the reviewed year on a form prescribed by the Arizona Department of Revenue (Department) that shows the adjustment to income or the gain, loss or deduction on which the federal imputed underpayment was based as well as any of the correlative adjustments to the additions required under Ariz. Rev. Stat. §43-1021 or the subtractions required under Ariz. Rev. Stat. §43-1022. If the federal adjustment results in a net increase in Arizona taxable income, the partnership has 90 days after the final determination to pay the tax on the adjustment in lieu of passing the adjustment through to the partners. The tax is imposed on the Arizona share of the adjustments at the highest tax rate imposed on individuals. For purposes of computing penalties, the due date of the return under these provisions is the 90th day after the final determination of the partnership adjustment by the IRS. If the federal adjustment results in a net reduction in Arizona taxable income or a net increase in Arizona taxable income of a partnership that makes the election under IRC §6226 within 90 days after the final determination regarding the adjustment from the IRS, the partnership must furnish to each partner of the partnership and to the Department a statement on a form prescribed by the Department of the partner's share of the adjustment as required above. The amount reported to the partner under this subsection is an adjustment to the partner's share of the partnership taxable income. A partnership that had a net increase and that fails to timely provide the required statements to the partners and to the Department shall pay the tax in lieu of the partners reporting the adjustment. The Department may issue a deficiency assessment if the partnership fails to file the required return or if the Department is not satisfied with the return or the payment of tax required to be paid. In addition, SB 1288 sets forth the procedures to follow if the partnership incorrectly reported the adjustment as well as the requirements a partnership must follow to recompute tax or amend a return following a federal adjustment and the time period within which the amended return must be filed. Ariz. Laws 2016, Ch. 155 (SB 1288), signed by the governor on May 11, 2016. Arizona Department of Revenue changes tax position, finds cloud storage file is subject to the Transaction Privilege Tax as the rental of tangible personal property The Arizona Department of Revenue (Department) modified Private Taxpayer Ruling LR 13-006 (June 25, 2013), to revise its position on the taxability of sales of cloud storage file from being not subject to the Transaction Privilege Tax (TPT) to being subject to the TPT. Initially, the Department determined that the taxpayer's cloud storage offering was not subject to the TPT because it did not satisfy the renting criteria. Based on further research and analysis, the Department has changed its position, concluding that cloud storage file is tangible personal property and that customers have sufficient possession and control over it to constitute the rental of tangible personal property. More specifically, the Department reasoned that a cloud storage file is tangible personal property as it uses an encryption that forms a "virtual container" to protect a customer's data by encoding it to keep the customer's data secure; further stating that "[t]o the extent these 'virtual containers' travel to and from data storage locations with the customer's data, they are considered tangible personal property." The Department also found that customers have full control over their cloud storage accounts and whether, when and what data is uploaded or downloaded to the taxpayer's servers. The customers also control who can access the cloud storage file, and they can manipulate the cloud storage more efficiently by making use of the software development kit or management console that is available free of charge. Moreover, the Department found the fact that the customer's monthly fee for using the cloud storage is based on the customer's activity, supports its finding that customers fully control their accounts. Lastly, the Department explained that for remote rental arrangements, the location of where a user uses the software or other files is essential and not the location of the server in order to determine whether the transaction is subject to the TPT. Accordingly, the taxpayer's gross income derived from the rental of tangible personal property in the form of cloud storage files is taxable when received from Arizona customers. Ariz. Dept. of Rev., Notice of Modification to Private Taxpayer Ruling LR 13-006 (March 23, 2016). Alabama: New law (HB 451) eliminates, for the purposes of the financial institution excise tax, the requirement that Alabama's allocation and apportionment formula prescribed by the Alabama Department of Revenue for financial institutions be substantially the same as the allocation and apportionment formula recommended by the Multistate Tax Commission (MTC). This change took effect upon becoming law. Ala. Laws 2016, Act 283 (HB 451), signed by the governor on May 10, 2016. Arizona: New law (SB 1288) updates the state's date of conformity to the IRC to the IRC as amended and in effect on Jan. 1, 2016. This update includes the provisions that became effective during 2015 with the specific adoption of all federal retroactive effective dates, but excluding any change to the IRC enacted after Jan. 1, 2016. Ariz. Laws 2016, Ch. 155 (SB 1288), signed by the governor on May 11, 2016. Tennessee: New law (SB 47) reduces the Hall Income Tax on dividend and investment income to 5% and eliminates the tax entirely in 2022. Under the bill, the Hall Income Tax is reduced by 1% per year effective Jan. 1, 2016. The bill includes a statement of the legislature's intent to reduce the tax rate by 1% annually through the enactment of general bills, beginning with the 110th General Assembly next year. Tenn. Laws 2016, Ch. 1064 (SB 47), signed by the governor on May 20, 2016. Arizona: New law (SB 1310) exempts from personal property rental transaction privilege tax the leasing or renting of billboards that are designed, intended or used to advertise or inform and that are visible from any street, road or other highway. This change takes effect Aug. 6, 2016. Ariz. Laws 2016, SB 1310, signed by the governor on May 12, 2016. Georgia: Amended regulation (Ga. Comp. R. & Regs. 560-12-1-.16) effective April 24, 2016, modifies Georgia's sales and use tax direct pay reporting provisions. Under the amended regulation, direct payment authorizations not issued through the Georgia Tax Center online application process (including all permits, letters, and certificates) will expire on Dec. 31, 2016, and direct payment permits issued through the Georgia Tax Center online will be effective the later of Jan. 1, 2017 or the date of issuance. The amended regulation addresses the application process, waiver of interest in exchange for the privilege of making purchases with a direct payment permit, reporting the tax, prohibited transactions, duties of permit holders, vendors' responsibilities, the nontransferability of the direct payment permit, what happens to the permit in the event of business restructuring, and permit revocation. Ga. Dept. of Rev., Ga. Comp. R. & Regs. 560-12-1-.16 (April 4, 2016). New Mexico: A for-profit hospital/facility is allowed to deduct receipts from managed health care providers or heath care insurers for services provided by a healthcare practitioner, because the regulations of the New Mexico Department of Revenue (Department) impermissibly limited the deduction's availability to small organizations that are owned by health care practitioners or where health care practitioners are employed, but not to hospitals. In reaching this conclusion, the Administrative Law Judge (ALJ) found that the plain meaning of the deduction statute (N.M. Stat. Ann. § 7-9-93) does not restrict which group of taxpayers may take the deduction. Rather, it only imposes requirements as to where the receipts come from and if they were performed by a health care practitioner. The ALJ noted that the Department had previously permitted for-profit hospitals to use the deduction, but later changed course without legislative approval. In addition, the ALJ compared the Department's treatment of this deduction to a similar statutory deduction that is not limited by which taxpayer may claim it. Because there is no statutory prohibition barring the hospital from using the deduction, it is entitled to a refund of gross receipts tax. In re Protest of Healthsouth Rehab., No. 16-16 (N.M. Dept. of Rev., Admin. Hearing Off., May 11, 2016). Tennessee: A national department store (store) is not entitled to claim a sales tax deduction for bad debts associated with private label and co-branded credit card programs because for the tax periods 2004-2007 the store was not the entity that actually charged off the bad debts, and for tax period 2008 (the year amendments to the bad debt statute took effect) the store along with the third party bank that owned the accounts did not qualify as a single "claimant" within the meaning of the bad debt statute. For tax years before Jan. 1, 2008, the Tennessee Court of Appeals (Court) found that under the statute's plain meaning, the store was not a dealer and as such it could not claim the bad debt credit/deduction. The Court further reasoned that the store would be unjustly enriched if permitted to claim the credit because some credit card customers failed to pay the bank, and the bank fully compensated the store. The bad debt statute provides a credit for bad debts, not indirect economic loss. For the 2008 tax year, the amended statute requires the bad debts to be written off in the claimant's books, and the bank rather than the store wrote off the bad debts. The Court rejected the store's argument that it and the bank were a "group or combination acting as a unit" for purposes of the bad debt provision, noting that even though the entities have an ongoing relationship for marketing and operating the credit card program, the entities' governing document specifically states that the two entities are "independent contractors" and are not partners, joint venturers, fiduciaries, or any association for profit. Sears, Roebuck & Co. v. Roberts, No. M2014-02567-COA-R3-CV (Tenn. Ct. App. May 11, 2016). Alabama: New law (SB 90) provides a tax credit against income tax or financial institution excise tax for eligible employers that employ an apprentice under the Apprenticeship Tax Credit Act of 2016 for at least seven full months of the prior taxable year. The credit equals up to $1,000 for each apprentice employed, for up to five apprentices. It is not available for an individual apprentice for more than four taxable years, it cannot decrease a taxpayer's tax liability to less than zero, and it is nonrefundable and nontransferable. The credit is available on a pro rata basis to the owners of qualified employers that are entities taxed as S corporations or partnerships or are limited liability companies or professional corporations authorized to do business in Alabama. Employers must apply for the credit each year to receive the credit for the preceding calendar year, and the cumulative amount of tax credits is capped at $3 million annually. The credit is available for taxable years 2017 through 2021. Ala. Laws 2016, Act 314 (SB 90), signed by the governor on May 10, 2016. Alabama: New law (SB 312) makes additional jobs credits available under the Alabama Jobs Act to any incentivized company that employed eligible employees by or through a qualifying project located within a former active duty military installation closed by the Base Realignment and Closure process. The additional jobs credit equals 0.5% based on wages paid during the prior year to its eligible employees, on top of the 3% jobs credit under the Alabama Jobs Act. The incentive period is 10 years. Finally, effective Oct. 1, 2016, for purposes of the Enterprise Zone Act, the definition of "enterprise zone" means any Alabama county with 25,000 people or less. Any eligible business having received an approved application from the Alabama Department of Revenue before Oct. 1, 2016, will continue to receive those approved exemptions for the period of time specified in those agreements. Unless otherwise noted, these changes took effect upon becoming law. Ala. Laws 2016, Act 321 (SB 312), signed by the governor on May 10, 2016. Alabama: New law (HB 400) provides that any law enacting or amending tax credits allowed to a financial institution that becomes effective on or after Jan. 1, 2016, can be applied only to the state portion of the taxpayer's financial institution excise tax liability and cannot be used to offset or reduce the financial institution excise tax paid to municipalities and counties. The new law does not amend, repeal or supersede any financial institution excise tax credit in effect on Dec. 31, 2015. Ala. Laws 2016, Act 280 (HB 400), signed by the governor on May 10, 2016. Alabama: New law (SB 208) requires the head of each state agency that administers any economic tax incentive to prepare and submit to the Legislature a report on incentives it administers, with the first report due no later than the second legislative day of the 2018 regular session and each year thereafter. The report must include an assessment of each economic tax incentive based on the following criteria: (1) whether or not each economic tax incentive has been successful in meeting the purpose for which it was enacted; (2) whether or not the state receives a positive return on investment, specifically the direct and indirect impact on state and local tax revenues, from the business or industry for which the economic tax incentive is intended to benefit and any other economic benefits produced by such incentive; (3) the economic results of each economic tax incentive, taking into account the extent to which the incentive successfully changes business behavior, and the unintended or inadvertent effects, benefits or harm caused by the economic tax incentive. An "economic tax incentive" includes tax credits, deductions, exemptions, abatements, preferential rates, or rebates given as an economic incentive. The provisions of SB 208 took effect upon becoming law. Ala. Laws 2016, Act 389 (SB 208), signed by the governor on May 12, 2016. Maryland: New law (SB 1112) creates a refundable credit against state income tax for a business certified by the Maryland Department of Economic Competitiveness and Commerce (Department) as operating a qualifying aerospace, electronics or defense contract (AEDC) tax credit project. The credit earned is $250 multiplied by the number of qualified employees employed by the qualified business entity during the credit year. The Department may certify a project as an AEDC tax credit project if the business entity creates or retains at least 10,000 qualified positions and expends at least $25 million in qualifying expenditures during the credit year. A qualified position is full time and of indefinite duration; has an annual salary of at least $85,000, including associated benefits; is located in Maryland; is newly created or retained as a result of the AEDC tax credit project; and the position is filled for a period of at least 12 months. The qualified positions and qualified expenditures must result from an aerospace, electronics or defense contract project in this state. The Department may award a maximum of $7.5 million in AEDC tax credits each year, and the credit earned by a qualified business entity for the AEDC tax credit project may not exceed $2.5 million for any credit year. Maryland can recapture the credit if, during either of the two years after the credit year, the number of qualified positions of the qualified business entity falls below a rolling average over the past two years of 10,000 (reduced credit) or 9,000 (all credits recaptured). The bill takes effect July 1, 2016, and terminates June 30, 2021. Md. Laws 2016, Ch. 320 (SB 1112), enacted on May 10, 2016. Maryland: New law (SB 137) amends Maryland's existing preservation and conservation easement income tax credit to allow a pass-through entity member to claim the credit and to allow easements conveyed to the Maryland Department of Natural Resources to qualify for it. The sum of all credits claimed by members of a pass-through entity may not exceed $200,000 in a taxable year. The Board of Public Works will approve credits for conveyances for pass-through entities on a first-come, first-served basis. The bill takes effect July 1, 2016, and is applicable to all taxable years beginning after Dec. 31, 2015. Md. Laws 2016, Ch. 351 (SB 137), signed by the governor on May 10, 2016. Louisiana: New law (SB 144) requires immovable property subject to a 10 year divestiture period held by banks to be entered on the bank's books in accordance with generally accepted accounting principles (GAAP). Previously, Louisiana required banks holding this kind of immovable property to be entered on the bank's books at the lower of fair market value or acquisition cost. Immovable property held by a state bank that is valued at greater than $250,000 must be appraised annually by a qualified appraiser based on its fair market value, and must be accounted for in accordance with GAAP. Previously, banks were required to reduce the value of such property on its books if the fair market value had declined. Finally, for property valued at less than $250,000, a state bank must annually perform an adequate evaluation of the property, and afterward, must account for the property in accordance with GAAP. Previously, a state bank was required to reduce the book value of the property, if it had a value less than its book value, to reflect the correct valuation of the property. These changes take effect Aug. 1, 2016. La. Laws 2016, Act 74 (SB 144), signed by the governor on May 11, 2016. Alabama: New law (SB 263) changes the corporate and individual income tax return filing deadlines. Effective for taxable years beginning on or after Jan. 1, 2016, individual and corporate returns must be filed by the same date as the corresponding federal income tax returns are required to be filed. In addition, the balance of tax due after credits and withholding (for individuals) and estimated payments (corporations) is the same time as the due date of an original return. Ala. Laws 2016, Act 412 (SB 263), signed by the governor on May 13, 2016. Arizona: New law (SB 1288) changes the due date of the partnership return. Effective for taxable years beginning from and after Dec. 31, 2015, partnership returns are due on or before the 15th day of the third month following the close of the taxable year. Ariz. Laws 2016, Ch. 155 (SB 1288), signed by the governor on May 11, 2016. Arizona: New law (HB 2708) requires the Director of the Arizona Department of Revenue (Department) to establish a tax recovery program that will run Sept. 1, 2016 through Oct. 31, 2016. The recovery program applies to taxes and surcharges administered or collected by the Department. For taxpayers filing annually, the recovery program applies to any tax period ending before Jan. 1, 2014, and for all other taxpayers it applies to any taxable period ending before Feb. 1, 2015. For taxpayers participating in and complying with the terms of the recovery program, the Department will abate or waive all civil penalties and interest without the taxpayer having to show reasonable cause or absence of willful neglect. Certain taxpayers, including those party to any tax related criminal investigation or criminal administrative proceeding pending on Jan. 1, 2016 in any federal or Arizona court or party to a closing agreement with the Department for the tax periods included in the recovery period, are not eligible to participate in the recovery program. An application for recovery constitutes an express and absolute waiver of all administrative and judicial rights of appeal available at the time the application is made. (This waiver does not apply to any additional tax assessed in a subsequent audit by the Department.) Ariz. Laws 2016, Ch. 125 (HB 2708), signed by the governor on May 10, 2016. Hawaii: The Hawaii Department of Taxation (Department) revised its frequently asked questions regarding its offers in compromise program. Under the program, taxpayers can make a request to the Department to pay less than the total amount of delinquent tax, penalty, and interest actually owed to the state to settle the taxpayer's delinquency. Among the issues addressed are when an offer in compromise is appropriate, the procedure for seeking an offer in compromise, which forms to use in the request, whether the Department will continue collection activities after a taxpayer submits an offer in compromise, whether taxpayers on installment plans must continue paying installments monthly while their offer in compromise request is being processed, how much money should be offered for the compromise, what happens after an offer in compromise is submitted, what collateral agreements are, the non-confidential nature of offers in compromise, ways in which Hawaii's offer in compromise program differs from its federal counterpart, what happens to liens once an offer in compromise is accepted, and whether payment plans are available after the Department accepts an offer in compromise, among others. Haw. Dept. of Taxn., Hawaii Tax Facts 2000-2 (revised May 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). 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 certain taxpayers. In addition, the amnesty program does not cover existing tax liabilities. 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". South Carolina: Electronic "table top ordering devices" used by restaurants are not subject to license tax on coin-operated amusement machines or devices, because they are used to streamline customer ordering and customer payment, not the playing of amusements or video games. While the device allows the patron to use or play educational applications, puzzles, cartoons, videos, and/or games for a small fee that is added to the patron's bill, patrons can use the devices to display detailed descriptions of menu items, order food and beverages, look at advertisements and promotions, order, pay their bill and complete customer satisfaction surveys. Because the purpose of the table top ordering devices is streamlining ordering and bill payment and not the playing of amusement or video games, the devices are not subject to the license tax. S.C. Dept. of Rev., Rev. Ruling No. 16-3 (May 5, 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: 2016-0936 |
