22 July 2016 State and Local Tax Weekly for July 22 Ernst & Young's State and Local Tax Weekly newsletter for July 22 is now available. Prepared by Ernst & Young's State and Local Taxation group, this weekly update summarizes important news, cases, and other developments in U.S. state and local taxation. On July 14, 2016, Congressman Jim Sensenbrenner (R-WI) introduced HR 5893, the "No Regulation Without Representation Act of 2016." If enacted, the bill would codify the Quill physical presence nexus standard for sales and use tax collection and reporting purposes, applicable to calendar quarters beginning on or after Jan. 1, 2017. Under the bill, persons would have a physical presence with a state only if their business activities in the state include any of the following during the calendar year: — Owning, holding a leasehold interest, or maintaining real property (e.g., retail store, warehouse, distribution center, manufacturing operation, assembly facility) in the state; — Leasing or owning tangible personal property (other than computer software) of more than de minimis value in the state; — Having employees, agents or independent contractors in the state who solicit orders for goods and services from customers in that state, or prospective customers in that state, on behalf of the person; — Having employees or independent contractors in the state who provide on-site design, installation or repair services on behalf of a remote seller; or — Maintaining an office in the state at which it regularly employs three or more employees for any purpose. De minimis physical presence would include click-through agreements, presence in the state for less than 15 days during the tax year, delivery and product placement services offered by an inter- or intra- state common carrier, and internet advertising services provided by in-state residents that are not exclusively directed towards (or do not solicit exclusively) in-state customers. Although the bill's chance of passage is seen as low, its introduction does create a hurdle for states seeking a judicial challenge to Quill. Specifically, the courts may view the fact that a number of competing bills and positions have been put forth as a sign that Congress is working towards crafting a comprehensive solution to the issue of nexus for transaction tax purposes. If so, the courts may see overturning Quill at this time as unnecessary. For more on this development, see Tax Alert 2016-1252. California: In a recent legal ruling, the Franchise Tax Board (FTB) determined that for purposes of calculating California's limited liability company (LLC) fee the cost of goods sold (COGS) includes the adjusted basis of real property held for sale to customers in the ordinary course of business. Thus, LLCs that are dealers in real property must add the COGS (based on real property) back to gross income in calculating the LLC fee. If, however, the property is held for investment purposes rather than for sale to customers in the ordinary course of business, the adjusted basis in the sale will not be added back to the LLC's gross income for purposes of calculating the LLC fee. Cal. FTB, Legal Ruling 2016-01 (July 14, 2016). North Dakota: Adopted regulations (Regs. 81-03-09.2-01 through 81-03-09.2-06) provide guidance on the new sales factor weighting election provisions, which allow taxpayers to elect to weight their sales factor 50% for tax years 2016 and 2017, 75% for tax year 2018, and 100% for tax years 2019 and thereafter. To make the election, a corporation must check the sales factor weighting box on its original North Dakota income tax return for the first year to which the election applies. Once made, an election is binding for five consecutive tax years, and an election made in the sixth year constitutes a new five year election. For tax years not included in a sales factor weighting five-year election, income is apportioned using an equally weighted three-factor formula. If the taxpayer is a member of a unitary business group, the sales factor weighting election applies to each member of the unitary business group. The sales factor weighting election is rescinded if: (1) if a taxpayer that has more than 50% of its voting stock acquired by a nonaffiliated entity; (2) a taxpayer formed due to reorganization or spinoff from an existing taxpayer if, after the reorganization or spinoff, it is no longer an affiliated member of the unitary group; and (3) the taxpayer is completely liquidated (the election does not carryover to the taxpayer receiving the liquidated assets). If a taxpayer's election is rescinded, it is not precluded from making a new election in the first tax year following the rescission. The new regulations took effect July 1, 2016. N.D. Admin. Code, Supplement 361 (July 2016). Tennessee: Adopted regulation (Reg. 1320-06-01-.40) provides guidance on the franchise and excise tax treatment of disregarded entities. The new regulation provides that a limited liability company (LLC) is disregarded for franchise and excise tax purposes only if it is disregarded for federal income tax purposes and its single member is classified as a corporation for federal income tax purposes. If the LLC does not meet both of these requirements, it will be treated separately for franchise and excise tax purposes and must file its own returns. Further, all other taxpayers subject to the franchise and excise tax purposes will be treated separately, regardless of whether they are otherwise disregarded for federal income tax purposes. In determining whether an LLC indirectly owned by a corporation qualifies as a disregarded entity, the analysis must take a "top down" approach and begin with the corporation and all directly-owned entities that directly or indirectly own the LLC. The rules are effective Sept. 26, 2016. Tenn. Dept. of Rev., Reg. 1320-06-01-.40, filed June 28, 2016. Tennessee: Adopted regulation (Reg. 1320-06-01-.42) provides guidance on the state's new market-based sourcing rules for sourcing sales of non-tangible personal property and services, which are effective for tax years beginning on or after July 1, 2016. Under the new rules, sales of non-tangible property and services are sourced to Tennessee if and to the extent the taxpayer's market for the sales is in Tennessee. The new regulation establishes uniform rules for determining whether and to what extent the market for a sale of non-tangible personal property and services is in Tennessee, reasonably approximating the state of assignment where such state or states cannot be determined, and excluding the sale where the state or states of assignment cannot be determined or reasonably approximated. Topics covered by this regulation include: (1) general rules; (2) defined terms; (3) sales, rentals, leases or licenses of real property; (4) rentals, leases or licenses of tangible personal property; (5) sales of service; (6) licenses or leases of intangible property; (7) sales of intangible property; (8) special rules for software transactions, sales or licenses of digital goods and services, enforcement of legal rights. The rules are effective Sept. 26, 2016. Tenn. Dept. of Rev., Reg. 1320-06-01-.42, filed June 28, 2016. Louisiana: New law (HB 27) adds criteria necessary to qualify for the further processing exemption, and prohibits "byproducts" from qualifying for the exemption. In order to qualify for the exemption: (1) the raw materials produced must become a recognizable and identifiable component of the end product; (2) the raw materials must be beneficial to the end product; and (3) the raw materials must be materials for further processing and, as such, be purchased for the purpose of inclusion into the end product. Raw materials purchased for processing into a byproduct for sale cannot be deemed to be a sale for further processing and are thus taxable. If the byproduct is sold at retail, and sales and use tax has been paid by the seller on the cost of the base or raw materials, a credit is authorized in an amount equal to the sales tax collected by the seller on the taxable retail side of the byproduct. This law change is intended to clarify the original intent of the prior law and, therefore, will be applied retroactively to all claims for refund after June 23, 2016, the effective date of HB 27. The changes will not be applicable to any existing claim for refund filed or assessment of additional taxes due issued prior to the effective date of HB 27 for any tax period prior to July 1, 2016, which is not barred by prescription. La. Laws 2016 (2nd Special Session), Act 3 (HB 27), signed by the governor on June 23, 2016. For more on other sales and use tax changes enacted during the second special session, see Tax Alert 2016-1276. Louisiana: New law (HB 53) addresses state and local sales tax exemptions on sales, services or other transactions related to athletic events in certain facilities, applicable to taxable periods beginning on or after Sept. 1, 2016. La. Laws 2016 (2nd Special Session), Act 13 (HB 53), signed by the governor on June 28, 2016. For more on other sales and use tax changes enacted during the second special session, see Tax Alert 2016-1276. Louisiana: New law (HB 51) reinstates certain exemptions and exclusions that were repealed during the 2016 First Extraordinary Session. Highlights of exemptions and exclusions reinstated includes isolated and occasional sales, sales of meals made to institutions, blood and tissue products, admissions to certain entertainment events, and butane, propane, or other liquefied petroleum gases for private residential consumption. The exemption for certain medical equipment has also been reinstated. The items listed in this Act are exempt as of July 1, 2016. La. Laws 2016 (2nd Special Session), Act 12 (HB 51), signed by the governor on June 28, 2016. For more on other sales and use tax changes enacted during the second special session, see Tax Alert 2016-1276. Louisiana: New law (SB 15) requires certain non-profit entities receiving state sales tax exclusions or exemptions to electronically provide an annual report (due September 30th of each year) to the Louisiana Department of Revenue containing (1) the name of the organization; (2) its federal and state tax identification numbers; (3) the annual gross sales of tangible personal property or services that are not subject to the sales and use taxes; (4) any other information the Secretary requires to determine the revenue loss to the state to comply with Tax Exemption Budget reporting. These reporting requirements do not apply to nonprofit entities and their affiliates that are exempt from federal income taxes under IRC §501(c)(3). This legislation is effective July 1, 2016. La. Laws 2016 (2nd Special Session), Act 6 (SB 15), signed by the governor on June 28, 2016. For more on other sales and use tax changes enacted during the second special session, see Tax Alert 2016-1276. Texas: An out-of-state commercial waste removal consultant (consultant) that had no property or employees in Texas is subject to the state's sales and use tax because its business activities within the state (i.e., providing taxable waste-hauling services in the state using contractors) were sufficient to create a taxable nexus under the Due Process and Commerce Clauses. The Administrative Law Judge (ALJ) concluded that the consultant's Texas activities met the minimum contacts requirement of the Due Process Clause, because the consultant entered into agreements to perform waste-hauling consulting, implementation, and management for numerous shopping centers in Texas, and billed Texas tenants for the services, collected payment, and bore the risk of default. The consultant also had nexus with Texas under the Commerce Clause, because its activities (including contracting with local waste-hauling companies) established physical presence in the state and the activities were significantly associated with its ability to establish and maintain a market in Texas. The tax was fairly apportioned because it was limited to the services provided by the consultant in Texas through the use of Texas contractors. Finally, even though the consultant provided waste-hauling management services outside of the state, the ALJ nevertheless found that it was providing taxable waste-hauling services by contracting with local waste-haulers to perform the services on its behalf. Tex. Comp. of Pub. Accts., Decision No. 201605888H (May 10, 2016). Vermont: A wholesale grocer's purchases of reusable freezer tubs and reefer fuel for use in transporting refrigerated goods to retailers are not exempt from Vermont's sales and use tax under the packing and shipping materials exemption because they are not components of a parcel to be shipped. Rather, the freezer tubs and reefer fuel are components used in shipping that have come to rest with the wholesale grocer in the stream of commerce. In affirming this conclusion, the Vermont Supreme Court (Court) narrowly construed the exemption statute, finding it is limited to the components of the parcel being shipped, and the freezer tubs and reefer fuel do not move through the stream of commerce. The freezer tubs are returned to the taxpayer to be used again and would otherwise escape taxation. The Court declined to address the wholesale grocer's challenge to Vermont's rule allowing a sales and use tax exemption for packaging with a useful life of three years or less, finding it has no effect on the case because the freezer tubs have a life expectancy of more than three years and are thus excluded regardless of the rule.C&S Wholesale Grocers, Inc. v. Vt. Dept. of Taxes, No. 2015-282 (Vt. S. Ct. July 15, 2016). Kentucky: The New Markets Tax Credit cap ($5 million of the $10 million credit cap) for fiscal year June 30, 2017, is available. Applicants must submit a refundable performance fee with their applications, equal to 0.5% of the amount of the equity investment or long-term debt security requested to be certified as a qualified equity investment, not to exceed $500,000. Applicants also must submit a $1,000 application fee. The Kentucky Department of Revenue (Department) began accepting credit applications on July 15, 2016. Applicants should consult 103 KAR 15:180E regarding the process for acceptance and consideration of an application, as well as check the Department's website for updates on the amount of available tax credit. Applications must be received via hand delivery, mail, express mail or courier. The Department will not accept applications sent by facsimile, CD-Rom, CD, or electronic means. The date the application is stamped as received by the Office of Income Taxation, Division of Corporation Tax, Tax Credits Section is the date that the application is recorded as received. Ky. Dept. of Rev., New Markets Development Program Tax Credit (July 15, 2016). Oregon: In reversing the Oregon Tax Court, the Oregon Supreme Court (Court) held that a satellite TV company is a "communications" business and, as such, its property in Oregon is subject to central assessment. Under Oregon law (ORS §308.515(1)), the property of a communications business is subject to central assessment. For purposes of this provision, "communications" includes "data transmission services." The Court citing its ruling in Comcast Corp., held that for purposes of ORS §308.505(3), the term "data transmission services" means "services that provide the means to send data from one computer or computer-like device to another across a transmission network." Similar to the taxpayer in Comcast, the taxpayer in this case is in the business of transmitting electronically coded data between computer-like devices, including set top boxes. The Court remanded the case back to the Tax Court for further proceedings. DIRECTV, Inc. v. Or. Dept. of Rev., SC S061294 (Or. S. Ct. July 14, 2016). New Jersey: In a technical bulletin, the New Jersey Division of Taxation explained that New Jersey's Form PART-100, which partnerships previously used to report both the gross income tax filing fee and the corporation business tax, is eliminated for tax years beginning on or after Jan. 1, 2015, and that for tax years beginning on or after Jan. 1, 2015, the Division has created two new partnership tax returns, Forms NJ-1065 and NJ-CBT-1065. Each partnership that derives income or loss derived from New Jersey sources, or that has any type of New Jersey resident partner, must file Form NJ-1065 and must pay the partnership filing fee, due on the fifteenth day of the fourth month after the end of the tax year. A partnership with two or more owners and New Jersey source income (or loss) must pay a per owner filing fee (maximum of $250,000), subject to exceptions. Partnerships with nonresident partners also must file Form NJ-CBT-1065 and submit tax on behalf of nonresident partner's with New Jersey-allocated income. The technical bulletin provides information regarding how much tax is due, due dates, prepayment of the next year's partnership fee, forms, estimated payments, exceptions, partnerships not required to remit tax, and nonresident partner tax exemptions, among other information. N.J. Div. Taxn., TB-55(R) (July 13, 2016). All States: On July 13, 2016, the Uniform Law Commission adopted the Revised Uniform Unclaimed Property Act. Revisions include the following: (1) amendments regarding when property is presumed abandoned, including the addition of terms of presumptive abandonment for gift cards, stored-value cards, and securities; (2) addition of indications of an apparent owner's interest in property; (3) amendments to rules for taking custody of property, to reports required of holders, to notice requirements by holders for owners of unclaimed property, to administration and disposition of unclaimed property, to record retention requirements, and to remedies; and (4) the additions of provisions related to complaints about the conduct of the person conducting the examination, an administrator's contract with another to conduct an examination; and confidentiality and security of information. The Uniform Unclaimed Property Act was last revised in 1995. Uniform Law Commission, Model Unclaimed Property Act (approved July 13, 2016). Pennsylvania: New law (HB 1605) amends abandoned and unclaimed property provisions, adding notice provisions for holders of abandoned or unclaimed property, amending provisions for property held by fiduciaries, and permitting Pennsylvania to take custody of abandoned or unclaimed US Savings Bonds of Pennsylvania residents, among other provisions. A holder of unclaimed property must provide notice to the owner between 60 and 120 days before an unclaimed property report must be submitted to the state if the holder has an address for the owner and the property is valued at $50 or more. The provisions related to property held by fiduciaries was repealed and reenacted to include agents-in-fact, and provides time periods after which property can be considered abandoned by fiduciaries and agents-in-fact, and outlines the timing of required communications. Finally, US Savings Bonds will escheat to the state three years after the bond's date of final maturity, during which the owner has not indicated an interest. Provisions of HB 1605 describe the procedure the State Treasurer must follow through the Pennsylvania Commonwealth Court to take custody and control of the property. Some provisions took effect July 13, 2016, and others take effect 60 days after July 13, 2016. Pa. Laws 2016, Act 85 (HB 1605), signed by the governor on July 13, 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: 2016-1332 |
