18 July 2016 State and Local Tax Weekly for July 8 Ernst & Young's State and Local Tax Weekly newsletter for July 8 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. At the end of June, Louisiana Governor John Bel Edwards signed a number of bills that impact the state's corporate income tax. Most notable, effective for taxable years beginning on or after Jan. 1, 2016, HB 20 requires all taxpayers, other than those in the oil and gas exploration and production industry, to use a single sales factor apportionment formula. The apportionment formula for the oil and gas exploration and production industry has been changed from a three-factor formula using equally-weighted sales, property and payroll factors, to a four-factor formula using a double-weighted sales factor. In addition, provisions of HB 20 adopt market-based sourcing for sales of non-tangible personal property and services and provide new sourcing rules for leases and sales of intangible property, providing specific examples of how to source these items. Lastly, HB 20 incorporates a sales factor "throw-out" rule for sales to states in which the taxpayer is not taxable or if the sale's state of assignment cannot be determined. — HB 25 reduces the amount of the Louisiana Citizens Property Insurance Corporation Assessment income tax credit from 72% to 25% of the amount of the surcharges, market equalization charges, or assessments paid, and repeals the sunset of the reductions. — HB 47 (enacted June 22, 2016) addresses prior Net Operating Loss (NOL) changes by clarifying that application of the present law will not apply to an amended return filed on or after July 1, 2015 if the claim refers to a NOL deduction properly claimed on an original return filed prior to July 1, 2015. — HB 29 changes the calculation of overpayment interest and authorizes the secretary to net any overpayments of corporate income tax against franchise taxes due, applicable to any refunds issued on or after Sept. 1, 2016. — HB 50 reduces the amount of deduction allowed for certain net capital gains, applicable only to the sale or exchange of an equity interest in or the assets of a nonpublicly traded business that is domiciled in Louisiana which the taxpayer held for a minimum of five years immediately prior to the sale or exchange. The amount of the deduction varies based on the length the business is domiciled in the state. This change applies to sales or exchanges of equity interests or assets that occur on or after June 28, 2016. — HB 24 (enacted and effective June 24, 2016) exempts certain health maintenance organizations from the 5% reduction of the investment tax credit, excepts these insurers from the modification of the type of investments that are no longer "qualified Louisiana investments" (for 2017 and 2018), and provides an opportunity for the investment credit against premium tax to be obtained for the single year of 2016. — HB 35 (enacted June 22, 2016) changes the previous annual license tax rate on health maintenance organizations from 2.25% to 5.5%. Unless otherwise noted, these bills were signed into law on June 28, 2016, and their provisions are effective/applicable to all taxable periods beginning on or after Jan. 1, 2016. For more on this development, see Tax Alert 2016-1204. New York City: The New York Supreme Court, Appellate Division (Court) affirmed New York City's Tax Appeals Tribunal's (TAT) ruling that New York City imposes a direct income tax on unincorporated businesses (UBT), such as a sole proprietorships, partnerships, and limited liability companies, doing business in the city. In computing unincorporated business taxable income, a deduction is not permitted for a payment to a partner for use of capital or services. In addition, the ability to deduct indirect payments to partners is also limited. In affirming the ruling, the Court determined that the taxpayer failed to establish its entitlement to the deduction it claimed and that the TAT's determination that the claimed deduction is not allowed is supported by substantial evidence and has a rational basis in law. In re Tocqueville Asset Management LP v. New York City Tax Appeal Trib., 2016 NY Slip Op 05343 (NY S. Ct., App. Div. 1st Dept., July 5, 2016). For more on the TAT ruling, see Tax Alert 2015-1568. Rhode Island: New law (HB 7454 Sub A) decreases the minimum tax imposed on corporations to $400 (from $450), effective for tax years beginning on or after Jan. 1, 2017. R.I. Laws 2016, Ch. 142 (HB 7454 Sub A), signed by the governor on June 24, 2016. Illinois: On June 30, 2016, the Illinois' sales tax exemption for expanded temporary storage expired and, as a result, holders of expanded temporary storage permits (permit holders) can no longer make tax-free purchases of tangible personal property using such permits. Starting July 1, 2016, retailers should no longer accept such exemption permits, and those allowing such exemptions will be subject to penalties and interest if the Illinois Department of Revenue (Department) determines the sales were taxable. Permit holders should use Form ST-2-TS to report tax due on purchases previously made tax free. In addition, permit holders do not need to update the registration of their tax accounts with the Department if they continue to temporarily store in Illinois previously purchased tax free tangible personal property, but they will need to close their expanded temporary storage tax account once they have shipped all previously purchased tangible personal property out of Illinois and have satisfied their sales tax liability on any tangible personal property they used in Illinois. Ill. Dept. of Rev., Info. Bulletin FY 2016-12 (June 2016). Louisiana: New law (HB 1121) requires remote retailers at the time of sale to notify Louisiana purchasers that the purchase is subject to Louisiana use tax unless the item is specifically exempt. The notice requirement must include a statement that Louisiana law requires that use tax liability be paid annually on the individual income tax return or by other administrative means. The remote retailer has until January 31 of each year to send the notice to Louisiana purchasers. The notice must include the total amount paid by the purchaser for purchases made during the preceding calendar year and other information required by the revenue secretary, and the exterior of the notice must include the statement "IMPORTANT TAX DOCUMENT ENCLOSED." By the first of March each year, the remote retailer must submit to the revenue secretary an annual statement for each purchaser. The statement must include the total amount paid by the purchaser to the retailer in the immediately preceding year, but it cannot contain details as to the specific property or services purchase. The revenue secretary has the authority to subpoena, compel witnesses and the production of documents for purposes of enforcing these provisions. These requirements take effect July 1, 2017. La. Laws 2016, Act 569 (HB 1121), signed by the governor on June 17, 2016. Rhode Island: New law (HB 7454 Sub A) expands the definition of taxable services to include "transportation network companies" (TNC). A TNC is defined as "an entity that uses a digital network to connect TNC riders to transportation network operators who provide prearranged rides." Effective July 1, 2016, any TNC operating in Rhode Island is a retailer and is required to file a business application and registration form and obtain a permit to make sales at retail with the tax administrator to charge, collect and remit the state's sales and use tax. R.I. Laws 2016, Ch. 142 (HB 7454 Sub A), signed by the governor on June 24, 2016. See Notice 2016-02 (June 30, 2016). Alaska: New law (HB 247) amends oil and gas tax credit provisions to require the Alaska Department of Revenue (Department) to make public by April 30 of each year the following information from the preceding calendar year: (1) the name of each person from which the Department purchased a transferable tax credit certificate; and (2) the aggregate amount of the tax credit certificates purchased from persons in the preceding calendar year. HB 247 also disallows the Department from purchasing a total of more than $70 million in tax credit certificates from a person in a calendar year and requires the Department must find that the application is not the result of the division of a single entity into multiple entities that would reasonably be expected to apply as a single entity if the $70 million limitation did not exist. The Department must give preference when awarding an oil and gas production tax credit to the applicant with the higher percentage of resident workers in the applicant's workforce, including workers employed by the applicant's direct contractors, in Alaska in the previous calendar year. Finally, for lease expenditures incurred on or after Jan. 1, 2014, and before Jan. 1, 2017, to explore for, develop, or produce oil or gas deposits located south of 68 degrees North latitude, a producer or explorer may elect to take a tax credit in the amount of 25% of a carried-forward annual loss. For lease expenditures incurred on or after Jan. 1, 2017, to explore for, develop, or produce oil or gas deposits located south of 68 degrees North latitude, a producer or explorer may elect to take a tax credit in the amount of 15% of a carried-forward annual loss, except that a credit for lease expenditures incurred to explore for, develop, or produce oil or gas deposits located in the Cook Inlet sedimentary basin may only be taken if the expenditure is incurred before Jan. 1, 2018. HB 247 generally takes effect Jan. 1, 2017. Alaska Laws 2016 (4th Special Session), Ch. 4 (HB 247), signed by the governor on June 28, 2016. California: The Franchise Tax Board (FTB) announced that following its revisions of Form FTB 3541, California Motion Picture and Television Production Credit, for all open tax years (2012 to 2015), taxpayers can include prior year assignable credit carryovers to determine the total amount of credit available for assignment in the current year. In order to include prior year assignable credits carryovers in determining the total amount of available credit: (1) taxpayers must include prior year "assignable" credit to compute the total amount of credit available for assignment in the year being reported (credits that are purchased or received through assignment are not assignable); (2) if the total amount of credit available for assignment is greater than the amount assigned on the original return, taxpayers must file an amended return; and (3) taxpayers must complete form FTB 3541, listing both the originally reported credit assignments and the additional assignments, and attaching the completed FTB 3541 to the amended return. In addition, motion picture credit that is in excess of current year tax liability is available for assignment. Taxpayers claiming the old credit and the new credit in the same year must complete a separate form FTB 3541 for each credit. The Tax News item provides examples of how to determine the credit available for assignment. Cal. FTB, Tax News "Good News, a Chance to Assign Additional Motion Picture Credit and More … " (July 2016). California: New law (SB 836) authorizes the Governor's Office of Business and Economic Development (GO-Biz) to consider additional factors when determining whether to enter into a written agreement with a taxpayer regarding the California Competes Tax Credit. The additional factors include the following: (1) the financial solvency of the taxpayer and the taxpayer's ability to finance its proposed expansion; (2) the taxpayer's current and former compliance with federal and state laws; (3) current and former litigation involving the taxpayer; (4) the reasonableness of the fee arrangement between the taxpayer and any third party providing any services related to the credit allowed; and (5) any other factors GO-Biz deems necessary to ensure that the administration of the credit allowed is a model of accountability and transparency and that the effective use of the limited amount of credit available is maximized. Cal. Laws 2016, Ch. 31 (SB 836), signed by the governor on June 27, 2016. California: The California Competes Tax Credit Program is a five-year competitive income tax credit incentive program aimed at companies either planning to move to California or expanding their existing business operations within the state. The program is administered by the Governor's Office of Business and Economic Development (GO-Biz). There will be three application periods for FY 2016/2017 — Round one application dates July 25, 2016 - Aug. 22, 2016, with $75 million in funds available; Round two application dates Jan. 2, 2017 - Jan. 23, 2017, with $100 million in funds available; and Round three application date March 6, 2017 - March 27, 2017, with $68.3 million in funds available. Allocation of credits is based on a competitive and discretionary application process. For more on this development, see Tax Alert 2016-1192. Louisiana: New law (HB 735) modifies provisions related to transferable income and corporation franchise tax credits. These changes apply for income tax periods beginning on and after Jan. 1, 2016 and corporate franchise tax periods beginning on and after Jan. 1, 2017. Under the revised provisions, to claim a credit on a tax return, either: (1) the effective date of the credit transfer must be on or before the due date of the return, without regard to the granting of any extension; or (2) on or before the due date of the return, without regard to the granting of any extension, the transferor and transferee must have executed a binding agreement to transfer the credit (the agreement must be on a form approved by the revenue secretary; the specific project from which the credit is generated, specific type of transferable credit, and exact amount of credit to be transferred are not required terms of the agreement). For purposes of this provision, "effective date of transfer" is defined as the date of transfer reflected in the Tax Credit Registry. A credit acquired through transfer can be applied to any allowable tax liability that is due for the year the credit was originally earned or to any year due afterward until the applicable carryforward period expires. La. Laws 2016, Act 661 (HB 735), signed by the governor on June 17, 2016. Louisiana: Governor John Bel Edwards issued an executive order setting forth the terms and conditions for participation in the industrial tax exemption program (program). For pending contract applications for which no advance notification is required, except for contacts that provide for new jobs at the completed manufacturing plants or establishments, this order is effective immediately. For all contracts for which advance notification is required, this order is effective for notifications filed after June 24, 2016. The governor only will consider contacts accompanied by advance notifications. The governor will not approve or issue exemption contracts for applications for miscellaneous capital additions or applications for tax exemptions for maintenance capital, required environmental capital upgrades and new replacements for existing machinery. The governor said that he will not approve contracts unless the Board of Commerce and Industry (Board) has determined that the establishment meets the constitutional definition of manufacturing. The governor will favor exemption contracts for new manufacturing plants or establishments, while exemption contracts for additions to any existing plant or establishment will not be favored by the governor unless it provides for new jobs or presents compelling reasons for the retention of existing jobs. All contracts providing for the industrial tax exemption must include Exhibits A and B, which consists of approvals and information as described in the executive order. Only contracts including these exhibits will be approved by the governor. In addition, the Board may address, by rule, other contractual arrangements that it deems necessary and submit those to the governor for consideration as amendments to the executive order. Contracts subject to this executive order will be reviewed annually. Contracts for exemption are valid for an initial term of five years, and can be renewed for an additional five year period. Contracts approved after June 24, 2016, can be rendered void if an occurrence happens that changes or suspends the terms of the contract as approved by the Board and the governor. La. Gov., Executive Order JBE 2016-26 (June 24, 2016). Pennsylvania: The City of Philadelphia expanded its Sustainable Business Tax Credit by changing the criteria for eligibility, increasing the number of eligible businesses, increasing the total tax credit amount, and by permitting the credit to apply against sustainable businesses' total business income and receipts tax liability. The number of eligible businesses is increased to 50 in each tax years 2017 and 2018, and increased to 75 in each tax years 2019 through 2022 (previously 25 businesses in each tax year). Through tax year 2022, an eligible business will receive a tax credit of $4,000, to be used against the applicant's total business income and receipts tax liability (previously applied against applicants' tax based on annual receipts). The ordinance took effect on June 28, 2016. City of Philadelphia, Pa., Bill No. 160133, signed by the mayor on June 28, 2016. Rhode Island: New law (HB 7454 Sub A) extends the sunset date of the motion picture production tax credit to July 1, 2021 (from July 1, 2019) and the historic preservation tax credit to June 30, 2017 (from June 30, 2016). R.I. Laws 2016, Ch. 142 (HB 7454 Sub A), signed by the governor on June 24, 2016. Alaska: The Alaska State Assessment Review Board (Board) affirmed the Alaska Department of Revenue Tax Division's (Division) assessment of oil production and pipeline property owned by an oil and gas exploration corporation (corporation) in the North Slope Borough of Alaska (North Slope), leaving in place the Division's assessment of the project at full and true value based on the project's actual cost, excluding intangible drilling expenses from the value but including intangible development expenses in the assessed value. In reaching this conclusion, the Board found that, the corporation did not establish that the Division erred by not excluding additional costs the corporation characterized as intangible drilling expenses because the corporation takes an aggressive view of intangible drilling expenses and what it means for an expenditure or an item to be "incident and necessary to drilling wells" under the regulation, when it argues that all costs associated with gravel and gravel installation and construction, costs associated with drilling except for tangible tubulars and jewelry, and costs associated with completion except for tangible tubulars and jewelry are also intangible drilling expenses. In the Matter of Pioneer Natural Resources USA Inc., OAH Nos. 11-0154-TAX, 12-0091-TAX, and 16-0423-TAX (Alaska State Assess. Rev. Bd. May 27, 2016). Louisiana: New law (HB 735) modifies return filing deadlines. Corporate returns and partnership composite returns are due on or before May 15 for calendar year filers, and for fiscal year filers on or before the fifteenth day of the fifth month following the close of the fiscal year. Partnership returns for calendar year filers are due on or before April 15, following the close of the calendar year; while returns for fiscal year filers are due on or before the fifteenth day of the fourth month following the close of the fiscal year. These changes apply for income tax periods beginning on and after Jan. 1, 2016 and corporate franchise tax periods beginning on and after Jan. 1, 2017. La. Laws 2016, Act 661 (HB 735), signed by the governor on June 17, 2016. Rhode Island: New law (HB 7454 Sub A) modifies the filing return deadlines for various entities. For tax years beginning after Dec. 31, 2015, the following returns are due on or before the date the federal tax return is due to be filed, without regard to extensions: limited liability partnership, limited partnership, S corporation and C corporation. If, however, a C corporation has a tax year ending June 30, in accordance with federal tax filing requirements, the filing date will not change until mandated by federal law, which is currently set to take effect at the close of the fiscal year ending June 30, 2026. Effective for tax years on or after Jan. 1, 2016, limited liability company returns are due on or before the due date of the federal return, without regard to extensions. R.I. Laws 2016, Ch. 142 (HB 7454 Sub A), signed by the governor on June 24, 2016. Alaska: New law (HB 247) amends provisions related to interest on oil and gas production taxes and the oil surcharge. HB 247 requires that on and after Jan. 1, 2017, for the first three years after a tax becomes delinquent, it bears interest in each calendar quarter at a rate of seven percentage points above the annual rate charged member banks for advances by the 12th Federal Reserve District as of the first day of the calendar quarter, compounded quarterly as of the last day of the quarter. After the first three years after a tax becomes delinquent, it does not bear interest. Alaska Laws 2016 (4th Special Session), Ch. 4 (HB 247), signed by the governor on June 28, 2016. District of Columbia: The District of Columbia Court of Appeals (Appeals Court) found that the District's Office of Administrative Hearings (OAH) abused its discretion in applying offensive non-mutual collateral estoppel against the District of Columbia Office of Tax and Revenue (OTR) in granting oil companies motion for summary judgment in a case challenging the validity of a transfer pricing study. The Court overruled the OAH because neither OTR nor the oil companies in the case cited to Gould, a binding decision on the matter, and OAH did not address the question of whether exceptional circumstances exist to warrant application of offensive non-mutual collateral estoppel. In reaching this conclusion, the Appeals Court found that it is bound by Gould and it guides the Court's analysis because the "judicial mind" passed on the precise question faced in this case: whether offensive non-mutual collateral estoppel applies to the District of Columbia and its entities. Therefore, collateral estoppel claims against the District of Columbia or its entities involve a three-step process: (1) determining whether a case meets the traditional requirements for invoking collateral estoppel; (2) a discretionary balancing of a long list of factors to determine whether the offensive use of non-mutual collateral estoppel would be fair; and (3) (per Gould) whether circumstances are rare and unusual, or exceptional, such that application of estoppel is warranted, especially where their application would have an adverse impact on the public fisc. The OAH's orders granting the oil companies' summary judgment were vacated and the case remanded to the OAH for further proceedings. District of Columbia Office of Tax and Rev. v. Exxonmobil Oil Corp., Nos. 14-AA-1401, 14-AA-1403, and 14-AA-1404 (D.C. App. June 30, 2016). Missouri: New law (HB 1435) clarifies that the limits on sales tax refund claims does not apply in certain situations, including when the refund claim is filed by a purchaser that originally paid sales or use tax to a vendor or seller and submits the refund claim directly to the Missouri Department of Revenue (Department). The limitation also does not apply if the refund claim is for use tax remitted by the purchaser, or an additional refund claim is filed by a person legally obligated to remit the tax due to: (1) receipt of additional information or an exemption certificate from the purchaser of the item at issue, (2) a decision of a court of competent jurisdiction or the administrative hearing commission, or (3) changes in regulations or policy by the Department. These changes take effect Aug. 28, 2016. Mo. Laws 2016, HB 1435, signed by the governor on June 28, 2016. All States: On Tuesday, July 26, 2016 from 2:00 - 3:30 p.m. EDT New York (11:00 a.m. - 12:30 p.m. PDT Los Angeles), EY will host a webcast during which panelists will share highlights and insights from the results of the EY/Bloomberg BNA 2015 multistate payroll withholding survey and examine key areas of risk that are frequently overlooked. Specific topics of focus will include: (1) 2015 survey results — key compliance trends; (2) 2015 survey results — trends in technology, knowledge and data gathering; (3) 2015 survey results — governmental audit trends; (4) developments affecting income tax withholding for US business travelers; (5) the top 15 withholding tax audit flags; (6) data necessary for withholding and reporting and how it might be gathered; (7) the records necessary in compliance and audit defense; and (8) inside a New York withholding tax audit. Click here to register for this event. Alaska: New law (HB 247) amends the oil and gas production tax for a calendar year requiring that it may not exceed $1 per barrel of oil for oil produced from a lease or property in the Cook Inlet sedimentary basin. Previously, for a lease or property engaging in commercial production of oil, the oil and gas production tax could not exceed an amount based on a formula. HB 247 also amends certain installment payment provisions of estimated oil and gas production taxes and oil surcharge, and permits 20% and 10% reductions in the gross value at the point of production of oil or gas in the calculation of an annual production tax value of a producer in certain situations, subject to limitations. HB 247 generally takes effect Jan. 1, 2017. Alaska Laws 2016 (4th Special Session), Ch. 4 (HB 247), signed by the governor on June 28, 2016. Nevada: The Nevada Tax Commission (Commission) adopted regulations related to administration, calculation, and payment of Nevada's new commerce tax, which is imposed annually on each business entity whose Nevada gross revenue in a fiscal year (July 1 through June 30) exceeds $4 million. The rate of the commerce tax varies based on the industry in which the business entity is primarily engaged. Among the provisions clarified by regulations are: (1) certain activities by a business entity in Nevada that constitute conducting a business in Nevada and therefore subject the business entity to the commerce tax; (2) adoption of a standard for determining whether a good or service is provided on a complimentary basis and thus, excluded from the gross revenue of a business entity when calculating the amount of commerce tax owed by the business entity; (3) provisions for the situsing of gross revenue of a business entity to Nevada (such as how to situs gross revenue from services); and (4) the method for determining the industry in which a business entity is primarily engaged for the purpose of determining the commerce tax rate of the business entity. The adopted regulations also authorize a business entity that is a member of an affiliated group of entities and provides certain payroll services for the other members of the affiliated group to receive a credit in an amount equal to 50% of the sum of the commerce tax paid by the payroll provider and certain other members of the affiliated group if the state determines that the payroll provider satisfies certain criteria. The commerce tax return is due Aug. 15, 2016. Nev. Tax Comn., Adopted Reg. R123-15 (effective June 28, 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: 2016-1241 |
