27 June 2016 State and Local Tax Weekly for June 17 Ernst & Young's State and Local Tax Weekly newsletter for June 17 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. Pennsylvania Commonwealth Court rules that the cap on net loss carryforwards in place for 2006 is unconstitutional In RB Alden Corp. v. Commonwealth, (RB Alden) the Pennsylvania Commonwealth Court (court) held that Pennsylvania's $2 million statutory cap on net loss carryforwards (NLCs) in place for tax year 2006 is unconstitutional in violation of the Pennsylvania Constitution's Uniformity Clause. In 2015, the court similarly ruled in Nextel that the $3 million statutory cap on NLCs in place for tax year 2007 violated the Pennsylvania Constitution's Uniformity Clause. RB Alden Corp. v. Commonwealth, 73 F.R. 2011 (Pa. Commw. Ct. June 15, 2016). The taxpayer, RB Alden, was the sole general partner and owned a 87.36% limited partnership interest in Eastview Associates, LP (Eastview) — a New Jersey limited partnership that owned an apartment complex in Pennsylvania. During the year ending June 30, 2007, RB Alden sold approximately one-half of its interest in Eastview, recognizing a $29.9 million gain. On its federal income tax return, RB Alden offset this gain with $5.4 million of current year operational losses from Eastview. On its Pennsylvania corporate income tax return, RB Alden reported the gain as nonbusiness income. The Pennsylvania Department of Revenue (Department) disagreed with the RB Alden's treatment of the gain as nonbusiness income, and issued an assessment asserting that the gain was business income wholly apportionable to Pennsylvania. The Department did allow RB Alden to deduct $5.4 million of the current year losses, but limited the NLC to $2 million, due to the statutory cap. On appeal, the court considered whether the gain from the sale of the partnership interest should be classified as business or nonbusiness income. The court ultimately found that the gain was business income under the functional test, as RB Alden's sale of the interest was in line with "the management or the disposition of property constitut[ing] an integral part of the [taxpayer's] regular trade or business operations management." Turning to the issue of apportionment, RB Alden argued that the sale of its interest in Eastview should be treated as the sale of an intangible and sourced to its headquarters in New York. The court disagreed, finding that RB Alden's "income-producing activity, the operation and management of the Apartment Complex and the Partnership, was performed in Pennsylvania." The court also held that the gain should not be excluded from the tax base under the doctrine of multiformity, and that the tax benefit rule does not preclude the inclusion of the gain in RB Alden's taxable income. Lastly, the court agreed with RB Alden and found that the $2 million cap on NLCs is unconstitutional. Because the cap allowed some taxpayers in the year at issue to reduce their taxable income to zero, but prevented others from reducing their taxable income to zero, the cap created two classes of taxpayers whose only distinguishing feature was whether their taxable income exceeded $2 million. Applying the reasoning in Nextel, which dealt with the constitutionality of the $3 million cap on NLCs in effect for tax year 2007, the court similarly held that the $2 million NLC limitation in place for tax year 2006 violated the Uniformity Clause. For additional information on this development, see Tax Alert 2016-1091. Alabama: The Alabama Department of Revenue (Department) repealed rules related to the Multistate Tax Compact apportionment provisions (Rules 810-27-1-4-.01; -.02; -.09 through -.19) and adopted renumbered rules, with some amendments (Rules 810-27-1-01; -.02; -.09 through -.19). Among the amendments is a new requirement that taxpayers get preapproval before using an alternative allocation or apportionment method. Pre-approval petitions must be written and submitted directly to the Department Secretary. Petitions attached to an original or amended return will not be considered valid. Taxpayers will receive written notification that their alternative method has been approved. Proposed alternative methods that are not approved within 90 days of the post mark date are denied, unless the taxpayer and the Department agree in writing to extend the deadline. Other amendments include new definitions of business activity and gross receipts; inclusion in the property factor of intangible drilling and development costs whether or not they have been expensed for either federal or state tax purposes; provisions regarding when to include in the payroll factor compensation paid to leased employees and temporary employees for personal services; payroll factor exclusions, and other amendments. These changes take effect June 25, 2016. Ala. Dept. of Rev., Ala. Regs. 810-27-1 (filed with the Legislative Reference Service May 11, 2016). New Hampshire: New law (SB 342) limits the inclusion in the business profits tax of the net increase due to certain sales or exchanges of an interest or beneficial interest in a business organization. Specifically, where an ownership interest in a business organization is sold or exchanged and the transaction results in an increase in the basis of the assets for federal income tax purposes, the business organization must: (1) add to the gross business profits of the business organization an amount equal to the annual depreciation or amortization attributable to the increase in the basis of the assets recognized by the parties to the transaction for federal income tax purposes; and (2) calculate the gain or loss on the sale or other disposition of an asset without regard to the basis increase recognized by any party to the transaction for federal income tax purpose, from the sale or exchange of the ownership interest in the business organization. A business organization can make an irrevocable election to recognize the basis increase of the asset. Such business organization for the purposes of the business profits tax shall: (1) be required to make an addition to gross business profits equal to the net income increase in the basis of the assets transferred or sold in the tax period in which the sale or exchange of the ownership interest occurs; (2) be allowed a deduction against its gross business profits for annual depreciation or amortization attributable to the increase in the basis of the assets recognized by the parties to the transaction for federal income tax purposes; and (3) calculate the gain or loss on the sale or other disposition of an asset with regard to the basis increase recognized by any party to the transaction for federal income tax purposes, from the sale or exchange of the ownership interest in the business organization. This change is effective for sales and exchanges of interests in business organizations that occur on and after Jan. 1, 2016. N.H. Laws 2016, Ch. 300 (SB 342), signed by the governor on June 21, 2016. New Hampshire: New law (SB 239) updates New Hampshire's date of conformity to the IRC, to the IRC of 1986 in effect on Dec. 31, 2015 (from Dec. 31, 2000), applicable for all taxable periods beginning on or after Jan. 1, 2017. New Hampshire decouples from various IRC provisions, including the following: (1) bonus depreciation under IRC §168(k); (2) the production deduction under IRC §199; (3) deduction for certain film and television productions under IRC §181. In addition, New Hampshire modifies its conformity to the increased expense deduction under IRC §179, by capping the deduction at $100,000 (from $25,000) for property placed in service on or after Jan. 1, 2017. N.H. Laws 2016, Ch. 295 (SB 239), signed by the governor on June 21, 2016. Texas: The Texas Comptroller of Public Accounts (Comptroller) has issued proposed amendments to 34 Tex. Admin. Code Section 3.584 regarding franchise tax reports and payments, defining previously undefined terms and providing guidance on various laws enacted in 2011, 2013 and 2015. Among the provisions in the draft regulations are new definitions (including a new definition of "primarily engaged in retail or wholesale trade"), franchise tax and information reports due dates, franchise tax calculations, taxability thresholds, electronic filing requirements and discounts, among others. As currently drafted, the new definition of "primarily engaged in retail or wholesale trade" would, in effect, retroactively limit the ability of certain taxpayers to qualify for the reduced franchise tax rate available to retailers and wholesalers, especially those in industries where the taxpayer creates or produces a component part that is installed or incorporated into the product before it is sold. For more information, see Tax Alert 2016-1090. Louisiana: A dialysis facility is not entitled to a refund of local sales tax it paid on certain prescription drugs it administered to its Medicare patients because its sales did not satisfy the statutory terms of the sales tax exclusions or the sales tax exemptions for the purchases at issue. In so holding, the Louisiana Court of Appeal concluded that the dialysis facility is not entitled to a refund because the prescription drugs are not sales directly paid for by Medicare nor were they sales made under the provisions of Medicare. The sales tax exclusion does not apply because Medicare is not a party to the transactions; the particular drugs purchased, the price negotiated, the vendor used, and the payment of sales tax are not controlled or governed under Medicare provisions; and only a portion of the drugs purchased in the sales are ultimately administered to Medicare patients. Finally, the sales tax exemption under La. Rev. Stat. § 47:337.9(F), which exempts prescription drugs purchased through or pursuant to a Medicare Part B or D plan, does not apply as the drugs are purchased for administration to all patients of the dialysis clinic, including both Medicare and non-Medicare patients, the purchases are not made through any Medicare Part B or D plan, and the purchases are not paid by Medicare. Crowe v. Bio-Medical Application of Louisiana, LLC, Nos. 2014 CA 0917 and 2014 CA 0918 (La. App. Ct. 1st Cir. June 3, 2016); Crowe v. Bio-Medical Application of Louisiana, LLC, Nos. 2014 CA 0919 and 2014 CA 920 (La. App. Ct. 1st Cir. June 3, 2016)(unpublished). Oklahoma: New law (HB 3205) shortens the period in which taxpayers can file a sales and use tax refund claim to two years (from three years). This change takes effect Aug. 26, 2016. Okla. Laws 2016, HB 3205, signed by the governor on June 6, 2016. Pennsylvania: New law enacted in the City of Philadelphia imposes a tax on sugar-based beverages (i.e., soda tax). The tax is imposed on the sale from a licensed distributor to a dealer at a rate of 1.5 cents per fluid ounce of qualifying product to be sold at retail within Philadelphia. The tax applies to syrups and other concentrates at a rate that yields a tax of 1.5 cents per fluid ounce of the resulting beverage prepared to the manufacturer's specifications. The tax applies to any non-alcoholic beverage that lists as an ingredient any form of caloric sugar-based sweetener (including: sucrose, glucose or high fructose corn syrup) or any form of artificial sugar substitute (including: stevia, aspartame, acesulfame potassium, sucralose and saccharin). It also applies to any syrups or concentrates listing such sweeteners as an ingredient. Examples of beverages that qualify include, but are not limited to: soda, non-100% fruit drinks, sports drinks, flavored water, energy drinks, pre-sweetened coffee or tea and non-alcoholic beverages intended to be mixed into an alcoholic drink. The new tax takes effect Jan. 1, 2017. New Mexico: A technology company that has been approved by the state to receive an advanced energy combined reporting tax credit cannot protest the denial of a transfer of that credit to a third party, when the transfer has not yet occurred. The Administrative Law Judge (ALJ) reasoned that the matter was too speculative and hypothetical without an actual sale of the technology company's business, and without knowing the change in the business structure. The ALJ noted that the technology company can request guidance from the revenue department regarding the state tax consequences of the potential transaction. In re Protest of Emcore Solar New Mexico, LLC, No. 16-21 (N.M. Dept. of Rev., Admin. Law Judge, May 26, 2016). Oklahoma: A limited liability company that purchased a fuel station that had unused clean-burning motor fuel income tax credits cannot use the credits because the initial investment in the credits was made by the fuel station's former corporate owner. The proper application of the credit is for the former corporate owner to claim the credit on its 2012 income tax return, the year the fuel station was placed in service. Okla. Tax Comn., LR 16-016 (June 1, 2016). Florida: A nonprofit limited partnership's (LP) right to a property tax exemption under a Florida statute had not vested before the Florida legislature retroactively repealed the exemption; thus, applying the repeal to the LP for the 2013 tax year does not violate due process. In reaching this conclusion, the Florida Supreme Court found that the LP did not have an immediate and fixed right to the exemption, but rather an expectation, and the statute does not operate unconstitutionally if it "upsets expectations based in prior law." The legislature enacted the statutory repeal of the exemption for limited partnerships before the certification of the tax roll, meaning before the LP's right to the exemption had vested, and the amended statute was the law in effect when the property appraiser acted on the LP's application, which was binding. Sowell v. Panama Commons, L.P., No. SC15-774 (Fla. S. Ct. June 2, 2016). Kansas: New law (SB 280) makes various changes to real property tax laws, and increases the interest rate for delinquent real property taxes by 5% (making the delinquent rate the federally determined underpayment rate plus 5% rather than the previous 1%). Changes include amendments to property valuation procedure restricting information county appraisers can request from taxpayers and requiring county appraisers to provide certain valuation reasoning and support to taxpayers when a property's valuation has increased. Further, appraisal procedures and standards utilized by county appraisers are no longer required to be adaptable to mass appraisal. The new law takes effect July 1, 2016. Kan. Laws 2016, SB 280, enacted over the governor's veto on June 1, 2016. North Carolina: Amended regulation (N.C. Admin. Code § 6B.3501) makes the starting point for preparing North Carolina partnership income tax returns the total income or loss from federal Form 1065, Schedule K, Lines 1 through 11. The adjustment required for individuals under the state's modifications to adjusted gross income and adjustments when the state decouples from federal accelerated depreciation and expensing apply to partnerships. Previously, a partnership's taxable income under the IRC was the starting point for preparing North Carolina partnership income tax returns, and the same additions, deductions and transitional adjustments to federal income required for individuals applied to partnerships. The amended regulation took effect May 1, 2016. N.C. Dept. of Rev., Amended N.C. Admin. Code § 6B.3501 (N.C. Register June 1, 2016). North Carolina: Amended regulation (N.C. Admin. Code § 6B.3529) provides that although the interest income passed through to a partner in a partnership retains its same character as when it is received by the partnership, expenses incurred in earning interest income are either: a) deductible by the partnership, and net interest income after expenses must be reflected in the partner's pro rata share of the partnership income, or b) not deductible by the partnership, and interest income before expenses must be reflected in the partner's pro rata share of the partnership income. The amended regulation provides guidance on reporting net interest income when the activities are considered trade or business activities under federal law and when the activities are considered investment activities, and guidance on when interest income should be included in the partner's North Carolina return. The amended regulation took effect May 1, 2016. N.C. Dept. of Rev., Amended N.C. Admin. Code § 6B.3529 (N.C. Register June 1, 2016) Kansas: New law (SB 280) clarifies statutory provisions related to the issuance and review of Kansas Board of Tax Appeals (BOTA) decisions. Under the revised provisions, aggrieved parties in cases in which a full and complete BOTA opinion has been issued now can file a petition for review in the Kansas Court of Appeals. In addition, taxpayers may appeal any summary decision or full and complete BOTA opinion to the District Court; these are considered de novo trials with full evidentiary hearings. District Court reviews of BOTA property valuation-related orders are to be conducted by the court of the county in which the property in question is located. The new law takes effect July 1, 2016. Kan. Laws 2016, SB 280, enacted over the governor's veto on June 1, 2016. All States: On Tuesday, June 28, 2016 from 1:00 - 2:30 p.m. EDT (10:00 - 11:30 a.m. PDT), EY will host a webcast on current developments in state and local tax audits. The following topics will be discussed on the upcoming webcast: (1) states' applications of old nexus and sourcing laws to new ways of doing business; (2) how some states are applying their own interpretation of the Internal Revenue Code; (3) states that are stretching income and sales tax nexus in audits and the double-edged sword this creates; (4) how retail loyalty points programs precipitate qui tam and class action lawsuits; and (5) other timely audit issues affecting state and local taxation. Click here to register for this webcast. All States: Over 20 states are suing Delaware in the U.S. Supreme Court (Court) claiming that Delaware is unlawfully misdirecting hundreds of millions of dollars in unclaimed and abandoned "official checks" issued by MoneyGram Payment Systems, Inc. (MoneyGram) to the state. Led by Arkansas and Texas, the plaintiff states are invoking the original jurisdiction of the Court under the U.S. Constitution since their claim arises because of a disagreement among the states. For more on this development, see Tax Alert 2016-1057. Pennsylvania: New law (HB 1436) prohibits the use of consolidated tax savings adjustments (CTSA) in public utility ratemaking. A CTSA is an adjustment to the revenue requirement in a rate case that attempts to capture, for ratepayers, the tax benefits associated with the losses of unregulated operations that a utility holding company may realize by filing a consolidated tax return. Typically, a state public utility commission attempts to implement a CTSA by either: (1) reducing a utility's rate base by the tax savings the utility may experience when its parent company files a consolidated tax return; or (2) computing the federal income tax expense included in a utility's cost of service with reference to the utility's pro rata share of its parent company's net operating losses and the related tax benefits. Pa. Laws 2016, Act 40 (HB 1436), became law without the governor's signature on June 12, 2016. For additional information on this development, see Tax Alert 2016-1033. * 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: 2016-1115 |
