04 August 2016 State and Local Tax Weekly for July 29 Ernst & Young's State and Local Tax Weekly newsletter for July 29 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 enacts revenue bill that includes sales tax on digital goods, change to the calculation of the Bank Shares Tax, a tax amnesty program On July 13, 2016, Governor Tom Wolf signed into law Act 84 of 2016 (HB 1198) (Act 84), which includes various tax law changes. Most notably, Act 84 imposes sales and use tax on streamed and electronically delivered digital goods, effective Aug. 1, 2016. Specifically, Act 84 expands the definition of taxable tangible personal property to include videos, photographs, books, any otherwise taxable printed matter, applications (apps), games, music, any other audio (including satellite radio service), canned software (notwithstanding the function performed), and "any otherwise taxable tangible personal property electronically or digitally delivered, streamed or accessed." Tax applies to these digital goods "whether electronically or digitally delivered, streamed or accessed and whether purchased singly, by subscription or in any other manner, including maintenance, updates and support." Act 84 also characterizes software maintenance, updates and support for canned software as taxable tangible personal property. — Modifies provisions relating to the filing of amended CNIT returns and requires the Pennsylvania Department of Revenue (Department) to review the amended report and notify the taxpayer in writing of its decision whether to accept the amended report within 12 months of filing such report; — Creates new tax credits, including the manufacturing and investment tax credit, the Coal Refuse Energy and Reclamation credit, and additional Keystone Opportunity Zones, Keystone Innovation Zones and a Mixed-Use Development Tax Credit; and For a more in-depth discussion of these and other changes, see Tax Alert 2016-1269. Michigan: The Michigan Court of Appeals (COA) issued its ruling in the IBM case, holding that the Michigan Court of Claims (COC) did not have the authority, on reconsideration, to rule that legislation enacted in September 2014 to retroactively repeal the Multistate Tax Compact (Compact) to 2008 applied to the taxpayer (preventing the taxpayer from receiving refunds), rather than entering summary judgment in favor of the taxpayer's right to elect the Compact's equally weighted three-factor apportionment formula, as ordered by the Michigan Supreme Court (MSC). In so ruling, the COA held that the MSC's mandated ministerial entry of judgment in favor of the taxpayer foreclosed all other possibilities and any renewed litigation over the taxpayer's 2008 business taxes, and the COC erred in taking an action that contradicted the mandate. Thus, the COC effectively exceeded the remand's jurisdictional scope. Further, the "plain and unambiguous remand directive cannot be construed as having provided any room for the exercise of discretion by the [COC] … For all intents and purposes, the case was over once it left the jurisdiction of the [MSC]; there was not to be any further substantive litigation, proceedings, or decision-making." Lastly, this court's opinion in Gillette upholding the retroactive repeal of the Compact, does not overrule or reverse the MSC earlier ruling in IBM, which applied to the taxpayer's 2008 tax year only. Accordingly, the taxpayer is entitled to make an election to use the Compact's apportionment formula for tax year 2008. All other years fall under the scope of the Compact's repeal. International Business Machines Corp. v. Michigan Dept. of Treas., No. 327359 (Mich. Ct. App. July 21, 2016). New York: The New York State Department of Taxation and Finance (Department) issued two technical services bulletins addressing the taxation of foreign surplus lines insurance companies (Surplus Lines Companies) (the June 2016 TSB-A's). The Department concluded that Surplus Lines Companies were subject to New York's Article 33 insurance franchise tax based on the highest of the allocated entire net income (ENI), capital, income and salaries, or the fixed dollar minimum tax base of $250 (collectively, Four Tax Bases). For additional information on this development, see Tax Alert 2016-1285. North Carolina: In affirming a lower court ruling in Kaestner, the North Carolina Court of Appeals held that the state violated the Due Process Clause of the US Constitution, as well as the North Carolina Constitution, by taxing a New York resident trust on income accumulated for, but never distributed to, a beneficiary in North Carolina. Here, the trust's only connection with North Carolina was that the current beneficiary, who received no distributions during the tax years in issue, was a resident of North Carolina. N.C. Gen. Stat. §105-160.2 states "taxes are computed on the amount of taxable income of the estate or trust that is for the benefit of a resident of this State." The appeals court held that assessing an income tax under the North Carolina statute in this case violated the Due Process Clause of the US Constitution and the Law of the Land Clause of the North Carolina Constitution. Kimberly Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue, No. COA15-896 (N.C. Ct. App. July 5, 2016). South Carolina: The South Carolina Department of Revenue (DOR), in a recent revenue ruling, provided an overview of the state's net operating losses (NOLs), the application of IRC §382 limitations on South Carolina NOL carryforwards, and the application of §382 limitations and other NOL use limitations on South Carolina consolidated returns. In general, South Carolina adopts IRC §172 for purposes of calculating NOLs, including the 20 year carryforward period. South Carolina does not adopt the IRC provisions related to NOL carrybacks. As such, a South Carolina NOL deduction is computed in accordance with the IRC as adopted by South Carolina, subject to certain modifications. For taxpayers conducting business within and without the state, South Carolina NOLs are apportioned in the year the loss is incurred. South Carolina also adopts IRC §382, however, the South Carolina §382 limitation amount depends on whether the loss corporation conducts its entire business within the state or conducts its business partly within and partly without the state during the year of the ownership change occurs. If during the change year, the business operated entirely within the state, the federal and state §382 limitations are the same. If the business conducts its operations within and without South Carolina during the taxable year during which the ownership change occurs, the South Carolina §382 limitation is calculated by apportioning the federal §382 limitation using the South Carolina apportionment ratio for the taxable year that the ownership change occurs. The §382 limitation amount will remain the same each year, except in case of certain built-in gains. The DOR ruling includes a detailed discussion on adjustments that must be made to account for built-in gains and built-in losses. In regard to the §382 limitation for consolidated return members, because South Carolina does not have a federal type consolidated return, the South Carolina §382 limitation, as well as the net unrealized built-in gains/losses, must be computed separately for each member of the South Carolina consolidated group. This ruling applies to all periods open under the statute. S.C. Dept. of Rev., SC Revenue Ruling # 16-7 (July 6, 2016). Texas: An out-of-state commercial waste removal consultant (consultant) that had no property or employees in Texas is subject to the state's franchise 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, the taxes assessed were reasonably related to the services the consultant provided in Texas because the services being taxed took place exclusively in Texas and the tax at issue is measured solely by the value of the services purchased. Tex. Comp. of Pub. Accts., Decision No. 201605888H (May 10, 2016). All States: The EY Sales and Use Tax Quarterly Update provides a summary of the major legislative, administrative and judicial sales and use tax developments. Highlights of this edition include: (1) a discussion of the sales and use tax challenges posed by the new "sharing economy;" (2) an update on recent state legislative and regulatory changes with respect to sales and use tax nexus; and (3) a recap of recent sales and use tax developments related to technology, transactions, tax base, exemptions and compliance. See Tax Alert 2016-1296 for a copy of the quarterly. Indiana: A medical equipment vendor (vendor) is entitled to a sales and use tax refund on sales of certain medical equipment, because the Indiana Department of Revenue (Department) is bound by its interpretation of the durable medical equipment exemption set forth in a published 1998 ruling. In so holding, the Indiana Tax Court (Court) found that the Department's own regulation interpreting administrative duties, powers, and responsibilities clarifies that the Department is not limited to interpreting a statute through a regulation because the Department provides advice to taxpayers in many different forms. In addition, the Court previously ruled that a ruling must eventually be published in the Indiana Register for the Department to be bound by it, and the 1998 ruling at issue was so published. The Department's argument the vendor cannot rely on the 1998 ruling because it was not issued to the vendor failed because the plain statutory and regulatory language permits taxpayers other than the taxpayer to whom a ruling is issued to rely on that ruling. Since the vendor's facts are substantially identical to those in the 1998 ruling and, therefore, could rely on the 1998 ruling.Fresenius USA Marketing, Inc. v. Ind. Dept. of Rev., No. 49T10-1008-TA-00045 (Ind. Tax Ct. July 15, 2016). Louisiana: The Louisiana Department of Revenue (Department) issued a revenue information bulletin (RIB) to provide guidance on the sales and use tax treatment of items of tangible personal property purchased or leased for use outside of Louisiana. La. Rev. Stat. § 47:305(E) provides that it is not the intention of any taxing authority to levy a tax upon articles of tangible personal property imported into Louisiana, or produced or manufactured in Louisiana, for export. La. Admin. Code § 61:I.4401(I) provides that specific pieces of property must be clearly labelled for transshipment outside of Louisiana at the time of manufacture or importation into the taxing jurisdiction in order to the meet the requirement of La. Rev. Stat. § 47:305(E). Under this RIB, the Department states that the transshipment outside of Louisiana of items clearly labelled for shipment to the offshore area beyond the territorial limits of Louisiana at the time of its purchase are eligible for the interstate commerce exclusion provided by La. Rev. Stat. § 47:305(E). Items that are stored and awaiting shipment in Louisiana will not be subject to state sales tax if they are clearly labelled for transshipment to a federal offshore area. The RIB provides that an item leased for use both in interstate and intrastate commerce may be subject to state sales and lease tax depending upon its usage. If the average operation in intrastate commerce in Louisiana is less than or equal to 10% of the total operational usage of the tangible personal property during a lease payment billing cycle, then the leased property, according to the Department, is being used exclusively in interstate commerce, and no state lease tax will be due. Furthermore, the Department stated that, if a leased item of tangible personal property is used in an offshore area beyond the territorial limits of Louisiana, state sales and lease tax does not apply. Under La. Rev. Stat. § 47:305(E), refund opportunities for taxes paid on offshore purchases are available from April 1, 2016, forward. Although the RIB does not address repairs, it does not appear as though repairs destined for offshore use are exempt, as La. Rev. Stat. § 47:305(E) only addresses tangible personal property for export. La. Dept. of Rev., RIB No. 16-034 (July 14, 2016). For more on this development, see Tax Alert 2016-1253. South Carolina: The South Carolina Department of Revenue (DOR) in a recent revenue ruling determined that charges paid by a customer for streaming television programs, movies, music and other similar content are charges for communications services subject to South Carolina's sales and use tax. Under South Carolina law, sales of tangible personal property are subject to tax. The definition of tangible personal property in S.C. Code §12-36-60 includes services and intangible such as communications services. The DOR has long held that "charges for the ways or means of communication include charges for access to, or use of, a communications system (the manner, method or instruments for sending or receiving a signal of the voice or message)." Examples of taxable communications services include cable television services, satellite programming services and other programming transmission services (e.g., emergency communications services, television, radio, music). Since, South Carolina law does not specifically define "streaming" or "streaming media", the DOR looked to industry definitions. Based on these definitions, the DOR determined that streaming transmission of television programs, movies and music using the internet is not different from cable and satellite transmission of television programs, movies, music and other similar content, all of which are taxable communications services. Charges for these services are taxable regardless whether paid for a part of a subscription service, per item or per event. This ruling applies to all periods open under the statute. S.C. Dept. of Rev., SC Revenue Ruling #16-5 (July 6, 2016). South Carolina: In a recently issued private letter ruling, the South Carolina Department of Revenue (DOR) determined that an annual website membership fee that allows members to receive certain benefits that are associated with on-line shopping (e.g., discounted pricing on certain goods, access to certain products, free or discounted shipping, flat shipping rate for bulk items, streaming of videos and music, early access to sales, free borrowing of e-books, cloud storage for photographs, videos and files) is subject to the state's sales and use tax as part of the consideration paid for purchasing tangible personal property. The membership fee is charged in advance of the year to which it applies and is not refunded if the membership is not used or if only some of the benefits are used. Further, at the time of purchase of the paid membership, neither the member nor the company knowns how many (if any) of the benefits the member will use. The DOR has concluded that in certain instances membership fees related to the anticipated sales of tangible personal property are includable in the gross proceeds of sales, the measure of the sales tax and, therefore, subject to the state's sales and use tax. Examples of taxable membership fees include: (1) a membership fee that allows for the purchase of tangible personal property for no additional consideration (i.e., the membership fee is the sales price of the tangible personal property, such as direct mail movie rental fee that allows members to receive movies for short term use); and (2) a membership fee that allows members to receive a discount on the purchase of tangible property that nonmembers or other categories of paying or nonpaying members do not also receive. Examples of when membership fees related to the anticipated sales of tangible personal property are not included in gross proceeds of sales and, therefore, are not subject to the state's sales and use tax include the following: (1) a retailer sells its product only to members and charges a membership fee that is in lieu of a security deposit or constitutes only a nominal processing fee; (2) a retailer sells its product only to members and charges a membership fee that allows all members to purchase the tangible personal property at the same lower price; and (3) a retailer only sells products that are exempt from South Carolina sales and use tax. The DOR also determined that "gross proceeds" of sales includes certain delivery charges. In this case, the delivery charges are not deductible by the seller in computing its sales tax liability since the seller contracts to deliver the tangible personal property to the buyer's home or business. Lastly, the DOR determined that a free one-month trial membership offering the same benefits as the paid membership fee is not subject to tax because it is not a sale of tangible personal property for consideration. S.C. Dept. of Rev., SC Private Letter Ruling #16-1 (July 6, 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. Illinois: New law (HB 5607) provides that a US Savings Bond held or owing in Illinois will be presumed abandoned after remaining unclaimed and unredeemed for five years after its date of final extended maturity, and will escheat to the state. The new law provides the process the state must use to take custody and control of the property, including the commencement of a civil action in Sangamon County Circuit Court and required service or process/notice provisions, and also includes the actions that owners of US Savings Bonds must take to attempt to reclaim the property prior to the entry of final judgment. This change takes effect Jan. 1, 2017. Ill. Laws 2016, P.A. 99-0556 (HB 5607), signed by the governor on July 15, 2016. Illinois: New law (SB 2783) reduces the amount of time that funds and intangible personal property held for an owner by any court, public authority, or public officer of the state or its political subdivisions can be unclaimed by the owner before they are presumed abandoned to five years (from seven years). The new law also reduces the amount of time to five years (from seven years) that tangible personal property or intangible personal property and all debts owed or entrusted funds or other property held by any federal, state, or local government or governmental subdivision, agency, entity, officer, or appointee can be unclaimed by the owner before it is presumed abandoned. This change applies to abandoned property held by the federal, state or local government on or after Jan. 1, 2017. Ill. Laws 2016, P.A. 99-0577 (SB 2783), signed by the governor on July 15, 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: 2016-1333 |
