25 July 2016 State and Local Tax Weekly for July 15 Ernst & Young's State and Local Tax Weekly newsletter for July 15 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. The Alabama Department of Revenue (Department) is conducting a two-month tax amnesty program that will run through Aug. 30, 2016. Amnesty applies to taxes due before Jan. 1, 2015, or taxes for tax periods that began prior to Jan. 1, 2015. In exchange for participating in, and fully complying with the terms of, the amnesty program, the Department will apply a three-year look-back period (i.e., require the filing of returns and payment of taxes for the last three full years of delinquent returns) and waive penalties and one-half of interest. The Department also will waive penalties (interest cannot be waived) for delinquent taxes due after Jan. 1, 2015, and tax periods beginning Jan. 1, 2015, if the delinquent returns are submitted with the amnesty return, along with full payment of tax and interest. For taxes filed annually, the limited look-back period is the last three years of returns that are past due prior to Jan. 1, 2015. For taxes filed on a monthly or quarterly basis, the three-year look back period applies to the last 36 months of delinquent returns for tax periods beginning before Jan. 1, 2015. Taxpayers that previously collected taxes held in trust (e.g., sales tax, withholding tax) and failed to remit those taxes are not eligible for the three-year look-back period to the extent those taxes were collected from customers or employees but are eligible for penalty waiver when those taxes are remitted. Amnesty applies to all taxes administered by the Department, including sales/use, corporate and individual income, withholding, pass-through entity income, business privilege, financial institution excise, oil & gas severance, mobile telecommunications service, utility gross receipts, and various tobacco taxes. Amnesty does not apply to motor fuel taxes. Click here for a complete list of eligible and ineligible taxes. Taxpayers participating in the amnesty program also must agree to waive the right to protest or initiate an administrative or judicial proceeding related to specific tax and tax periods for which amnesty is granted. Taxpayers, however, retain all administrative and appeal rights for any additional tax assessed by the Department. If an overpayment arises after the amnesty application has been filed, the taxpayer may be eligible for a refund or credit. For additional information on this development, see Tax Alert 2016-1213. The Ohio Board of Tax Appeals (BTA) has ruled that the outsourcing of a portion of a manufacturer's operations to a third party did not constitute a taxable employment service for Ohio sales tax purposes. Seaton Corp. v. Testa, Ohio BTA Case Nos. 2015-224, 2015-743 (July 13, 2016, unreported). The Ohio Department of Taxation (Department) determined that the parties entered into a contract for the provision of employment services, which are taxable under Ohio Rev. Code § 5739.01(B)(3)(k). "Employment services" are defined as providing or supplying personnel on a temporary or long-term basis to perform work under the supervision or control of another where the personnel provided received compensation from the service provider. One exception to the definition of a taxable employment service is where the service does not include acting "as a contractor or subcontractor, where the personnel performing the work are not under the direct control of the purchaser." The Department allows this exemption where the true object of the customer is the accomplishment of a specific task and not the supply of labor, as often occurs where consulting or advisory services are being performed. The taxpayer argued that this exemption applied but the Department rejected this argument under audit and in issuing its Final Determination. The BTA reversed the Department's determination concluding that the on-site management services arrangement met the contractor/subcontractor exclusion set forth in Ohio Rev. Code § 5739.01(JJ)(1). The BTA also disagreed with the Department's argument that because the manufacturer had control over the overall manufacturing process, they had effective control over the taxpayer's employees. Additionally, the BTA rejected the Department's argument that the manufacturer had to expressly cede control over the taxpayer's personnel. The BTA concluded that manufacturer had "given over a small portion of its authority to [the taxpayer], but only for the supervision and control of the [the taxpayer's] workers". Accordingly, this management model caused the arrangement to fall outside a taxable employment service. For more on this development, see Tax Alert 2016-1234. Massachusetts: A large bank, in its capacity as a corporate trustee of several inter vivos trusts, qualifies as a Massachusetts "inhabitant" for the purposes of fiduciary income tax because the trustee: (1) maintains an established place of business in Massachusetts where it conducts its business in the aggregate for more than 183 days of a taxable year; and (2) conducts trust administration activities within Massachusetts that include material trust activities relating specifically to the trust or trusts whose tax liability is at issue. In reaching this conclusion, the Massachusetts Supreme Judicial Court (Court) affirmed the Appellate Tax Board's (Board) decision on somewhat different grounds, stating that the Board had not created a formal "presence and activities" test that focuses on a corporation's general business presence in Massachusetts. Instead the Court found that the Board evaluated the specific, agreed-upon facts presented and reached its conclusion that the bank qualified as a Massachusetts inhabitant based on those facts, which included Massachusetts-based activities such as general banking transactions, maintaining over 200 branch offices staffed by bank employees, and performing work as a corporate trustee for the particular trusts at issue. The statutory language requires a focus on actions within Massachusetts of a corporation acting as a corporate trustee, including specifically acting as a trustee of the trust or trusts potentially subject to fiduciary income tax liability, and not just on the corporation's general business activities. Bank of America, N.A. v. Mass. Comr. of Rev., No. SJC-11995 (Mass. S. Judicial Ct. July 11, 2016). Arizona: The Arizona Department of Revenue (Department) implemented changes to the state's Transaction Privilege Tax (TPT) licensing and reporting processes, beginning July 1, 2016. The Department strongly encourages all businesses to register and file their TPT using www.AZTaxes.gov, and all businesses must file by location number (found on the TPT license) on the city detail section of the tax return. Businesses with more than one physical location in Arizona must file tax returns electronically. In addition, the Department no longer accepts the TPT-1 form for reporting periods beginning on or after June 1, 2016. Form TPT-2 replaces TPT-1 for use by multi-location or multi-jurisdiction businesses, and the TPT-EZ is a simplified tax form for businesses with one location or jurisdiction. These changes do not apply to Non-Program Cities, where taxpayers should continue to report as they have been, using their respective cities' forms and procedures, until centralized reporting takes effect for Non-Program Cities (expected fall 2016). Ariz. Dept. of Rev., Transaction Privilege Tax (TPT) Changes (effective July 1, 2016). Illinois: The City of Chicago is imposing a surcharge on the rental or lease of any hotel accommodation, which is expanded to include shared housing units, at any vacation rental or shared housing unit in the city at a rate of 4% of the gross rental or leasing charge. The following are exempt from the surcharge: (1) an accommodation which the lessee or tenant occupies, or has a right to occupy, as his/her domicile and permanent residence; (2) any temporary accommodation provided in any building or structure owned or operated, directly or indirectly, by or on behalf of a not-for-profit medical institution, hospital, or allied educational institution; or (3) an accommodation in a licensed bed-and-breakfast establishment. The ordinance also establishes the following license fees: (a) for a short term residential rental intermediary, $10,000 license fee plus a $60 per unit fee for each short term residential rental listed on its platform; (b) for a short term residential rental advertising platform, $10,000, if the intermediary has 1,000 or more short term residential rentals listed on its platform, or $5,000, if the intermediary has 999 or fewer short term residential rentals listed on its platform; or (c) for a shared housing unit operator, $250. The ordinance took effect July 1, 2016. City of Chicago, Ord. No. O2016-5111 (approved June 24, 2016). New Mexico: An out-of-state heavy equipment franchise (franchise) that paid tax twice on the sales and leases of heavy equipment to a New Mexico pipeline company is entitled to a refund of New Mexico gross receipts tax because the sales transaction occurred in Texas. In reaching this conclusion, the New Mexico Hearing Officer (Hearing Officer) cited Dell's destination principle — taxing the sale of goods that cross state lines at the point of destination or where the goods are consumed, which may be different from the point of delivery and where title is transferred. The Dell analysis, however, does not apply to cases in which the entire transaction occurs out-of-state and the parties are present out-of-state at the time and place of the transaction. Ultimately, the Hearing Officer concluded that the receipts from the sales at issue in this case are receipts from sales occurring in Texas since the orders were placed in Texas, the seller is in Texas, the possession of the equipment occurred in Texas, and the purchase agreements were finalized in Texas. In addition, the Hearing Officer found that the gross receipts tax on the leases of heavy equipment must be refunded because there is no way to know where the equipment was being employed in the Permian Basin (which sits both in Texas and New Mexico). Lastly, the Hearing Officer did not rule on whether compensating tax is due on the buyer or the pipeline company, who purchased and used the equipment, and whether the franchise should be an agent for compensating tax on its transactions with New Mexico customers. In the Matter of the Protest of Yellowhouse Machinery Company to Denial of Refund Issued Under Letter No. L0980206128, No. 16-33 (N.M. Admin. Hearings Office June 30, 2016). Ohio: New law (HB 466) exempts digital advertising services from sales and use tax. Specifically, HB 466 amends the definition of "personal and professional services" by adding "digital advertising services" to the list of exceptions to the definitions of otherwise taxable data processing, electronic information services and computer services. "Digital advertising services" is defined as "providing access, by means of telecommunications equipment, to computer equipment that is used to enter, upload, download, review, manipulate, store, add, or delete data for the purpose of electronically displaying, delivering, placing, or transferring promotional advertisements to potential customers about products or services or about industry or business brands." HB 466 was enacted, in part, in response to the Ohio Department of Taxation's (Department) amended Information Release 1999-04, On-line Services and Internet Access (January 1999; Updated December 2015). The Information Release was intended to memorialize what the Department indicated were long-standing audit positions. One of the categories of service specifically enumerated was digital advertising services. The sale of advertising space has historically never been taxable in Ohio. The Department, however, had come to view the provision of advertising space over the Internet, in certain cases, as a taxable electronic information service. Information Releases do not carry the weight of law, but represent the Department's position on the tax treatment it will apply. With the enactment of HB 466, this issue is now moot with regard to digital advertising. HB 466 should be effective as of Dec. 1, 2016. Ohio Laws 2016, HB 466, signed by the governor on July 12, 2016. For additional information on this development, see Tax Alert 2016-1223. Vermont: A large bank (lender) and a national retailer (retailer) that partnered to operate a private label credit card program through the retailer's stores were not entitled to sales tax refunds related to bad debts because the parties were not a business unit under their contract, and they could not combine themselves on a limited basis to qualify for a bad debt refund where neither of the entities alone can qualify. In reaching this conclusion, the Vermont Supreme Court (Court) affirmed the superior court, finding no compelling indication of error by the Vermont Commissioner of Revenue (Commissioner), because the lender is not a registered vendor under Vermont law that remitted the sales tax sought for recovery, and the retailer did not incur the bad debt at issue. In addition, the Court found that Vermont law permits the Commissioner to refuse to extend a bad debt credit or refund without violating the state law limit on the sales tax rate. Finally, the retailer's good faith in claiming relief from bad debts does not relieve it of penalties imposed by the state, because penalties are authorized where a taxpayer has failed to pay any tax owed. Citibank, N.A. v. Vt. Dept. of Taxes; and Sears, Roebuck & Co. v. Vt. Dept. of Taxes, Nos. 2015-280 and 2015-281 (Vt. S. Ct. June 16, 2016). Hawaii: New law (SB 2652) establishes a renewable fuels production tax credit (credit) that can be claimed against the income tax. For each taxpayer producing renewable fuels, the annual dollar amount of the credit during the five-year credit period is equal to $0.20 per 76,000 British thermal units of renewable fuels using the lower heating value sold for distribution in Hawaii. However, the taxpayer's production of renewable fuels must not be less than 15 billion British thermal units of renewable fuels per year, and the amount of the tax credit claimed by a taxpayer cannot exceed $3 million per taxable year. If the credit exceeds the taxpayer's net income tax liability, the excess may be carried forward and used in subsequent years until exhausted. Prior to production of any renewable fuels for the year, the taxpayer must provide written notice of its intention to begin production of renewable fuels. The credit is capped at $3 million per year and the Department of Business, Economic Development, and Tourism must immediately discontinue certifying credits and notify the Department of Taxation of such action. The credit applies to taxable years beginning after Dec. 31, 2016 and sunsets on Dec. 31, 2021. The new law also repeals the ethanol facility tax credit, effective July 6, 2016. Haw. Laws 2016, Act 202 (SB 2652), enacted on July 6, 2016. New Jersey: New law (AB 4002) revises the priority schedule for issuance of converted tax credits under the Business Employment Incentive Program. For grants accrued but not paid during calendar years 2008 through 2013, the tax credit is equal to an approved amount and will be issued in average installments over a five-year period beginning in the 2017 tax accounting or privilege period of the business or tax credit transferee in the following percentages: (1) in year one, 5% of the accrued amount (from 30%); (2) in year two, 20% of the accrued amount (from 30%); (3) in year three, 25% of the accrued amount (from 20%); and (4) in years four and five, 25% in each year of the accrued amount (from 10% in each year). These changes apply retroactively to Jan. 11, 2016. N.J. Laws 2016, Ch. 9 (AB 4002), signed by the governor on June 30, 2016. Georgia: A hospital authority's leasehold interest in a continuing care retirement facility is public property exempt from ad valorem taxation. In reaching this conclusion, the Georgia Court of Appeals (Court) applied Douglas County v. Anneewakee, Inc., to find that when a for-profit company leases property to a nonprofit, tax-exempt hospital, the property interest held by the tax-exempt entity, when severed from the private and taxable fee owned by the for-profit corporation, takes on the tax-exempt status of the holder of that interest. In addition, the Court affirmed the bond validation proceedings determination that the hospital authority property is exempt from ad valorem taxes because the use of the property or its income furthers the legitimate functions of the hospital authority as the "residential retirement community" at issue is a project contemplated under the Hospital Authorities Law. Columbus, Ga., Board of Tax Assessors v. The Medical Center Hospital Authority, Nos. A16A0638 and A16A0639 (Ga. Ct. App. July 7, 2016). Georgia: The Georgia Department of Revenue issued a policy bulletin on the new interest rate and new refund procedures for sales and use tax, withholding tax and motor fuel distribution tax under HB 960. Effective July 1, 2016, past due taxes and interest-bearing refunds bear interest at an annual rate equal to the bank prime loan rate as posted by the Federal Reserve System Board of Governors plus 3%, to accrue monthly. The rate is adjusted annually and, beginning July 1, 2016, the interest rate for 2016 is 6.5%. Under the new refund procedures, which also took effect on July 1, 2016, taxpayers must file refund claims electronically through the Georgia Tax Center if they are required to file returns electronically by law. Beginning Oct. 1, 2016, the Georgia Department of Revenue (Department) will reject all claims filed in paper format if they are required to be filed electronically. In addition, effective July 1, 2016, all sales and use tax refund claims, including claims filed on paper Form ST-12, must break down the local sales and use tax portion of the claim or the Department will reject them. Lastly, the Department is required to notify each political subdivision of refund claims of local significance. Ga. Dept. of Rev., Policy Bulletin ADMIN 2016-01, Policy Bulletin SUT 2016-02 (July 2016). Pennsylvania: The Pennsylvania Board of Finance and Revenue (Board) amended administrative and procedural provisions, rescinding Chapter 701 (Special Rules of Administrative Practice and Procedure) and adopting Chapters 702 (relating to practice and procedure before the Board) and 703 (relating to tax and other appeal proceedings). The rules were amended to make them consistent with statutory changes enacted in 2013, which established new procedures for practicing before the Board. Chapter 702 regulations include: an extensive definition section; filing procedures and deadlines; representation before the Board (includes attorneys, accountants or other representatives provided that such representation does not constitute an unauthorized practice of law); and ex parte communications. Chapter 703 regulations include: requirements for submissions to the Board; compromise procedures; prehearing conferences and hearing procedures; and information regarding requests for consideration. Pa. Bd. of Fin. and Rev., Amended 61 Pa. Code CHS 701, 702 and 703, 46 Pa.B. 3646 (effective July 9, 2016). All States: On Aug. 11, 2016, from 2:00-3:00 p.m. EDT New York (11:00 a.m.-12:00 noon PDT Los Angeles), EY will address the sales and use tax implications of Software-as-a-Service (SaaS), cloud-based businesses, and related technology. As companies explore new ways of doing business and adopt innovative business models, they face a complicated array of statutes and regulations at the state and local level that have often failed to keep pace with the rapid changes in the markets. The panelists will discuss the current sales tax landscape around these issues and how states are working to adapt existing laws to new ways of doing business. The panelists will also discuss the impact of recent case law, legislation and other guidance provided by the states. Finally, the webcast will cover some of the challenges and risks that taxpayers face when evaluating their tax positions on SaaS and cloud-computing when the application of existing laws is uncertain. Click here to register for this event. * 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: 2016-1281 |
