15 August 2016 State and Local Tax Weekly for August 5 Ernst & Young's State and Local Tax Weekly newsletter for August 5 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. New York sustains penalty after determining that combined reporting, not add-back of royalty payments, is required when substantial intercompany transactions exist under prior law In Whole Foods Market Group,the New York Division of Tax Appeals (DTA) held that a corporation operating a multistate grocery store chain and a related intangible holding company organized as a limited partnership that elected to be treated as a corporation for federal income tax purposes should have filed tax returns on a combined basis for the audit period (consisting of the 2008, 2009, and 2010 tax years), instead of adding-back the related party royalties payments. In reaching this conclusion, the DTA noted that New York law in effect at the time required combined reporting when 50% or more of a corporation's receipts included in the computation of entire net income are from one or more related corporations. Here, the parties stipulated that the intangible holding company organized as a limited partnership received more than 50% of its total receipts from the corporation for each of the years in the audit period. Moreover, the DTA sustained the penalty imposed. In the Matter of the Petition of Whole Foods Market Group, Inc., No. 826409 (N.Y. Div. Tax App. July 14, 2016). This determination, although not precedent, provides guidance on how members of a unitary group may compute the SIT test with respect to the requirement to file a New York combined return for tax years in effect for 2007 through 2014. Critically, according to this ruling, the substantial intercorporate transactions (SIT) test is computed before considering any New York intercompany modifications (e.g., the related-party royalty add-back). Accordingly, taxpayers may wish to reconsider their computation of the SIT test for such years based upon the ruling in this case. In addition, the decision provides insight into when the DTA will enforce penalties on an ambiguous and disputed tax issue. This ruling demonstrates the DTA's inclination to uphold the imposition of the substantial understatement of tax penalty when it deems a taxpayer's interpretation of the statute unreasonable, the taxpayer fails to disclose the issue; and it does not obtain professional advice, nor informal advice or an advisory opinion from the New York Department of Taxation and Finance. Accordingly, taxpayers should address and document the above criteria on all New York corporate franchise tax positions in order to withstand the imposition of this penalty. For more on this development, see Tax Alert 2016-1358. Massachusetts: The Massachusetts Supreme Judicial Court (SJC) recently held that a corporate trustee, in this case a national bank, is subject to Massachusetts fiduciary income tax as an "inhabitant" trustee if it: (1) maintains an established place of business in the Commonwealth at which it abides (i.e., where it conducts its business in the aggregate for more than 183 days of a tax year); and (2) conducts trust administration activities within the Commonwealth that include, in particular, material trust activities relating specifically to the trust or trusts whose tax liability is at issue. Bank of America, N.A. v. Commissioner of Revenue, No. SJC-11995 (Mass. S. Jud. Ct. July 11, 2016). For additional information on this development, see Tax Alert 2016-1329. New York: An out-of-state real estate services consulting firm is subject to New York's franchise tax on general business corporations because it was "doing business" in New York for the 2014 tax year. Factors that New York considers in determining whether a corporation is doing business in the state include: (1) the nature, continuity, frequency, and regularity of the activities of the corporation in New York; (2) the purposes for which the corporation was organized; (3) the location of its offices and other places of business; (4) the employment in New York of agents, officers, and employees; and (5) the location of the actual seat of management or control of the corporation. Here, the firm is a corporation organized to serve as the client's "de facto real estate department" and manage the client's "entire real estate process." It has a regional office located in Connecticut that serves the New York metropolitan area, and this office is one of two seats of management and control of the corporation. It earned $315,000 in New York commissions after relocating its office to Connecticut, and the firm's employee worked in New York on two sales for a total of 26 days in 2014. Based on these facts, including the nature, continuity, frequency and regularity of the firm's activities in the state, it is "doing business" in New York and, therefore, subject to the corporate franchise tax. N.Y. Dept. of Taxn. and Fin., TSB-A-16(6)C (July 1, 2016). North Carolina: New law (HB 1030) contains "proposed" market-based sourcing statutory provisions for sales of non-tangible personal property and services for general corporations and banks. HB 1030 requires the North Carolina Department of Revenue (Department) to adopt and submit to the Rules Review Commission proposed administrative rules regarding the implementation and administration of the proposed market-based sourcing principles by Jan. 20, 2017. The Department will accept comments on the proposed market-based sourcing rules for at least 90 days after publication. The proposed rules will not become effective unless and until the General Assembly passes further legislation enacting market-based sourcing rules. In addition, as provided in an information notice, any person who wants to receive notice of the text of the proposed market-based sourcing rules must contact the Department and request to be added to a notification list. The email address for this request is MBSRulesNotification@ncdor.gov. N.C. Laws 2016, Session Law 2016-94 (HB 1030), signed by the governor on July 14, 2016. For additional information on other changes included in HB 1030, see Tax Alert 2016-1366. North Carolina: The North Carolina Department of Revenue issued an important notice informing taxpayers of the corporate income tax rate reduction resulting from the General Fund exceeding the threshold for its tax collections for fiscal year 2015-2016 ($20.975 billion). The rate will be reduced from 4% to 3% for tax years beginning on or after Jan. 1, 2017. N.C. Dept. of Rev., Important Notice on rate changes (Aug. 4, 2016). South Carolina: The South Carolina Department of Revenue (DOR) issued Revenue Ruling No. 16-11 (July 27, 2016), providing guidance on nexus-creating activities for income tax purposes. The revenue ruling supersedes Revenue Ruling 03-04, and clarifies the minimum connection or contact between a taxpayer and South Carolina sufficient to subject the taxpayer to the taxing jurisdiction of the state. It addresses the nexus implications of the following categories of activities: (1) general activities; (2) registration with state agencies and departments; (3) ownership/leasing of property in-state; (4) ownership of interests in pass-through entities doing business in the state; (5) licensing of intangibles; (6) sales-related employee activities; (7) non-sales-related employee activities; (8) activities of unrelated parties; (9) distribution and delivery activities; (10) financial activities and transactions; (11) transactions with South Carolina printers; and (12) computer and Internet based transactions. In all of the categories, the revenue ruling presumes that the activity is not de minimis. The DOR noted that a combination of several different de minimis activities or relationships, even if each, by itself, does not create nexus, may create nexus with South Carolina. This new guidance largely updates the prior guidance, and represents a continuation of the DOR's fluid efforts to provide public guidance for income tax nexus determinations. For more on this development, see Tax Alert 2016-1341. Texas: Subsidiaries formed as "securitization trusts" to manage a large student loan portfolio are taxable business trusts and do not qualify as passive entities, because the evidence demonstrated that the trusts were "a device to carry on a profit-making business which normally would have been carried on through business organizations that are classified as corporations or partnerships." In reaching this conclusion, the Administrative Law Judge found that the trusts were formed for the primary purpose of commercial activity for the benefit of certificate holders and in furtherance of the parent's asset management business. To be considered passive, a trust must not be a "business trust" and must have 90% or more of its federal gross income attributable to specific passive sources (e.g., interest, dividends, distributive shares of partnership income, gains from the sales of securities, capital gains from the sale of real property, royalties, bonuses). The trust also must have no more than 10% of its federal gross income attributable to conducting an active trade or business. Tex. Comp. of Pub. Accts., Decision No. 201605896H (May 18, 2016). North Carolina: New law (HB 1030) modifies recent changes to North Carolina's sales tax treatment of repair, maintenance and installation services. HB 1030 provides temporary relief for the under-collection of sales or use tax for retailers due to the law changes if the retailer makes a good faith effort to comply with the law and collect the proper amount of tax. In addition, for real property contractors, any invoice for tax separately stated on an invoice given to a consumer is treated as an erroneous collection and must be remitted to the Secretary. However, HB 1030 provides that the contractor may apply the erroneous tax remittance to offset its use tax liability. Effective Jan. 1, 2017, HB 1030 amends the definition of "repair, maintenance, and installation services" to include repair, maintenance, and installation activities (RMI activities) performed on real property. Taxable RMI activities, however, do not include real property contracts and certain RMI services performed with respect to real property contracts. For example, services performed to resolve an issue that was part of a capital improvement if the services are performed within six months of the completion of the improvement or within 12 months of a new structure being occupied for the first time are outside of the scope of the taxable definition. HB 1030 defines such terms as real property contract, capital improvement; reconstruction, and remodeling. Further, the following services have been specifically exempted from sales tax: (1) inspection services required by law; (2) services performed for related persons; (3) services performed to resolve an issue that was part of a real property contract (e.g., punch-list items); (4) real property cleaning services (other than cleaning services related to the taxable rental of an accommodation or to pools, fish tanks, and similar aquatic features); (5) services on roads, driveways, parking lots, and sidewalks; (6) removal services for waste, trash, debris, grease, and snow (other than removal of waste from portable toilets); (7) home inspection services related to the sale of real property; (8) landscaping services; (9) alteration and repair services with respect to clothing (other than alteration and repair to belts, shoes, and rental clothing); (10) pest control services; (11) moving services; and (12) self-service car washes. Lastly, HB 1030 includes special Mixed Transaction Contract rules for determining the taxability of real property contracts that include repair, maintenance, and installation services. N.C. Laws 2016, Session Law 2016-94 (HB 1030), signed by the governor on July 14, 2016. For additional information on these and other changes included in HB 1030, see Tax Alert 2016-1366. North Carolina: New law (HB 1030) expands the definition of property subject to the mill machinery tax to include: (1) machinery and equipment, including related parts and accessories, used to unload and process bulk cargo at a ports facility; (2) capitalized equipment used by certain metal recyclers, metal fabricators, and precious metal extractors; and (3) fuel, piped natural gas, and electricity sold to a secondary metals recycler for use in a recycling facility. These changes are effective retroactively to purchases made on or after July 1, 2013. The tax rate remains 1% with a maximum of $80 per article. N.C. Laws 2016, Session Law 2016-94 (HB 1030), signed by the governor on July 14, 2016. For additional information these and other changes included in HB 1030, see Tax Alert 2016-1366. Tennessee: The Tennessee Department of Revenue (Department) summarized recent changes to requirements for qualified data centers. Effective July 1, 2016, a taxpayer must do the following over a three-year investment period to be considered a qualified data center: (1) make a capital investment of more than $100 million in real property, tangible property or computer software; and (2) create at least 15 new full-time permanent jobs paying at least 150% of the state average occupational wage with minimal health care. Before July 1, 2016, the required capital investment was $250 million and the requirement for new jobs created during the investment period was at least 25 jobs. Beginning July 1, 2016, qualified data centers may make purchases of cooling equipment (cooling systems, cooling towers, and other temperature control infrastructure) and backup power infrastructure (backup power generation, battery systems, and related infrastructure) exempt from sales and use tax. Sales and use tax exemptions for qualified data centers available before July 1, 2016, are still available for computers, computer networks, computer software, or computer systems, and peripheral devices such as printers, plotters, external disc drives, modems, and telephone units, that are used in the operation of the data center. Finally, qualified data centers continue to be taxed at the reduced sales tax rate of 1.5% on the purchase and use of electricity. Taxpayers must use a new application with instructions available via the Department's website to receive the certificate authorizing the taxpayer to make qualifying purchases for use in the operation of a qualified data center exempt from sales and use tax. Tenn. Dept. of Rev., Sales and Use Tax Notice #16-06 (July 2016). Texas: A company's charges for asset management services that compiles and stores data concerning oil and gas from monitoring equipment and is retrievable on demand by the customer is subject to the Texas sales and use tax as the sale of data processing services. Generally monitoring services are not taxable, however, the company's collection, manipulation and storage of data retrieved from the monitoring equipment exceeds what is considered to be nontaxable monitoring services, and instead falls within the definition of taxable data processing services. In addition, this service does not qualify as a taxable security service because Texas law does not require a license to perform asset management services, and it is excluded from the definition of information services, either taxable or nontaxable, because the company is not selling information to its customers. Tex. Comp. of Pub. Accts., Decision No. 201607899L (July 13, 2016). Hawaii: New law (HB 1527) requires an independent, periodic review by the state auditor of certain income and financial institutions tax credits, exclusions, and deductions to determine their tax expenditures, benefits, and continued merit and necessity. During the review, the auditor must: (1) determine the amount of tax expenditure for the credit, exclusion, or deduction for each of the previous three fiscal years; (2) estimate the amount of tax expenditure for the credit, exclusion, or deduction for the current fiscal year and the next two fiscal years; (3) determine whether the credit, exclusion, or deduction has achieved and continues to achieve its legislative purpose; (4) determine whether the credit, exclusion, or deduction is necessary to promote or preserve tax equity or efficiency; (5) determine whether a benefit has resulted, quantify the benefit to the extent possible, and comment on whether the benefit outweighs cost, if the credit, exclusion, or deduction was enacted because of its purported economic or employment benefit to the state; and (6) estimate the cost of the credit, exclusion, or deduction per low income Hawaii resident. The auditor must recommend whether the credit, exclusion, or deduction should be retained without modification, amended, or repealed based on the review, and the auditor also may recommend that the credit, exclusion, or deduction be removed from review. Finally, the new law enumerates the credits, exclusions, and deductions that must be reviewed every five years beginning in 2019 through 2023. HB 1527 takes effect July 1, 2018. Haw. Laws 2016, Act 245 (HB 1527), signed by the governor on July 12, 2016. Hawaii: New law (SB 2547) requires the state auditor to periodically review certain tax exemptions, exclusions, and credits under the general excise and use taxes, public service company tax, and insurance premium tax. During the review, the auditor must: (1) determine the amount of tax expenditure for the exemption, exclusion, or credit for each of the previous three fiscal years; (2) estimate the amount of tax expenditure for the exemption, exclusion, or credit for the current fiscal year and the next two fiscal years; (3) determine whether the exemption, exclusion, or credit has achieved and continues to achieve the purpose for which it was enacted; (4) determine whether the exemption, exclusion, or credit is necessary to promote or preserve tax equity or efficiency; (5) determine whether a benefit has resulted, quantify the benefit to the extent possible, and comment on whether the benefit outweighs costs, if the exemption, exclusion, or credit was enacted because of its purported economic or employment benefit to the state; and (6) estimate the cost of the credit, exclusion, or deduction per low income Hawaii resident. Finally, the new law enumerates the exemptions and exclusions that must be reviewed every 10 years beginning in 2018 through 2027. SB 2547 takes effect July 1, 2017. Haw. Laws 2016, Act 261 (SB 2547), signed by the governor on July 12, 2016. Oklahoma: In reversing the lower court, the Oklahoma Court of Civil Appeals (Court) held that natural gas severed from realty qualifies as "goods, wares, and merchandise" for purposes of the Freeport Exemption from property tax. In reaching this conclusion, the Court found persuasive the consistent statutory definition of personal property, the applicable ballot title language did not differentiate between different types of tangible personal property, the treatment of severed natural gas as "goods" in other contexts, and the Oklahoma Tax Commission interpretation of the Freeport Exemption to apply to petroleum products in storage. The Court further upheld the prospective and retroactive application of a law change enacted during the pendency of the case clarifying that natural gas in storage qualified as goods, wares, and merchandise for Freeport Exemption purposes. However, the Court also found that natural gas stored at an Oklahoma facility for approximately nine months has a taxable situs in Oklahoma, because its "sojourn of storage" gives it at least minimal nexus sufficient to establish tax situs and survive a due process attack. The Court remanded the case to determine the amount of gas that is exempt from ad valorem taxation due to the Freeport Exemption — i.e., the amount of gas originating outside Oklahoma, whether the gas was stored in Oklahoma for nine months or less, and the amount of the gas shipped and sold outside of Oklahoma. Missouri Gas Energy v. Grant County Assessor, No. 114405 (Okla. Civ. App. Ct., Div. 1, May 13, 2016). North Carolina: New law (HB 1030) increases the standard deduction for 2016 and 2017 tax years. The deduction increases by $1,000 each year for surviving spouses and taxpayers filing jointly, $800 each year for head of household taxpayers, and $500 each year for single taxpayers and married taxpayers filing separate returns. N.C. Laws 2016, Session Law 2016-94 (HB 1030), signed by the governor on July 14, 2016. For additional information on other changes included in HB 1030, see Tax Alert 2016-1366. New York: The New York Department of Taxation and Finance properly responded to a credit rating agency's Freedom of Information Law (FOIL) request seeking all records "relating to the sourcing of credit rating receipts for tax years 2004 to present" by releasing some documents and withholding or redacting others, because New York's tax documents confidentiality law extends to any document that reflects information covered in a tax return. In reaching this conclusion, the Appellate Division of the New York Supreme Court determined that construing the statute to only protect the secrecy of the return would not serve the statute's purposes, which are: (1) to protect personal privacy interests in the information on a return, which may reveal information concerning a person's activities, associations, and beliefs; and (2) to encourage voluntary compliance with the tax laws by preventing use of return information to harm the reporting taxpayer. The Court also affirmed that certain documents were intra- or inter-agency materials and were properly withheld pursuant to New York's Public Officers Law, the purpose of which is to protect the deliberative process of the government by ensuring that personnel in an advisory role will be able to express their opinions freely to agency decision makers. Finally, the Court found that documents that were shared outside the agency should not have been exempted under the Public Officers Law. In the Matter of Moody's Corp. and Subs. v. N.Y. Dept. of Taxn. and Fin., No. 522169 (N.Y. Sup. Ct., App. Div. 3d. Jud. Dept., July 21, 2016). North Carolina: New law (HB 533) provides taxpayers with the option to contest denied refund claims that have been barred based on the statute of limitations. Taxpayers may contest the statute of limitations determination by filing a petition for a contested case hearing at the Office of Administrative Hearings (OAH). The remedy is available to taxpayers immediately upon enactment of HB 533. Statute of limitations refund denials issued prior to June 30, 2016 may be contested with the OAH until Aug. 29, 2016. Under prior law, a taxpayer was not permitted to contest such determinations with the OAH. N.C. Laws 2016, Session Law 2016-76 (HB 533), signed by the governor on June 30, 2016. See also, N.C. Dept. of Rev., Important Notice: A Taxpayer May Contest the Department's Determination That an Amended Return or Claim for Refund Was Not Filed Within the Statute of Limitations (July 13, 2016) for details on the new procedures. North Carolina: New law (SB 481) requires the North Carolina Department of Revenue (Department) to publish redacted versions of all written determinations on its website within 90 days of issuance to the taxpayer. Additionally, the Department must, within 120 days of enactment of SB 481, publish redacted versions of all written determinations issued since Jan. 1, 2010 and before enactment of SB 481. Written determinations include alternative apportionment rulings, private letter rulings, and redetermination private letter rulings. N.C. Laws 2016, Session Law 2016-103 (SB 481), signed by the governor on July 22, 2016. For additional information on other recently enacted changes in North Carolina, see Tax Alert 2016-1366. Nevada: The first return for the Nevada Commerce Tax (NCT) enacted in 2015 is due on Aug. 15, 2016. The first return will cover the period from its first effective date of July 1, 2015 through June 30, 2016. Unlike business taxes imposed by other states, the NCT is calculated based on Nevada's fiscal year, July 1 — June 30, not the taxpayer's tax year. The NCT is imposed on business entities with Nevada gross revenue exceeding $4 million. Even if a business entity does not have annual revenues that exceed this gross revenue threshold and thus, no NCT liability, but has physical presence in Nevada, according to directions from the Nevada Department of Taxation (Department), it is still required to file a NCT return. Taxpayers may not have final gross revenue data by the filing deadline. As such, the state permits taxpayers to rely on the prior-year federal income tax return to estimate the gross receipts for the fiscal year. If relying on prior year data, the NCT return requires filers to disclose by checking the "estimates used" box on the tax form. The taxpayer must also file an amended return once the final amounts are available. Recognizing the novelty of the new Nevada business tax system, for 2016 only, the Department will allow taxpayers that cannot reasonably comply by the due date to petition for a waiver of penalty if the return is filed prior to Feb. 15, 2017. To qualify, however, the taxpayer must submit a waiver request representing that it made a good faith effort to comply by the deadline and did not willfully neglect its filing obligation. These waiver requests will be reviewed on a case-by-case basis. For additional information on this development, see Tax Alert 2016-1331. Virginia: A power company is not subject to a local consumer utility tax on natural gas consumed at its gas-fired electric generation station because Virginia law does not permit a locality to impose a tax on natural gas consumed for the sole purpose of generating electricity. In reaching this conclusion, the Virginia Supreme Court (Court) reasoned that since the term "power" was used alongside "heat" and "light" in the provision defining "commission" but not in the provision defining "pipeline distribution companies," this difference in the choice of language was intentional. In a context relevant to the statute at issue, the Court found that the legislature intended the word "power" to mean "a source of supplying energy … esp[ecially] electricity," and the omission of the word "power" from the definition of "pipeline distribution companies" reflects the legislature's intention to not permit localities to impose a tax on natural gas consumed solely for the purpose of generating electricity. City of Richmond v. Va. Electric and Power Co., No. 150617 (Va. S. Ct. June 30, 2016). (Note: 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: 2016-1395 |
