29 August 2016 State and Local Tax Weekly for August 19 Ernst & Young's State and Local Tax Weekly newsletter for August 19 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. Kentucky Board of Tax Appeals to be consolidated with two unrelated boards into new Claims Commission as of October 1 On Aug. 8, 2016, Kentucky Governor Matthew Bevin issued Executive Order 2016-576 to reorganize and consolidate the Kentucky Board of Tax Appeals (BTA), the Crime Victims Compensation Board (CVCB) and the Board of Claims (BOC) into a single review board to be known as the new Kentucky Claims Commission (Commission). The new Commission becomes effective on Oct. 1, 2016. As part of its responsibilities, the Commission will hear and determine appeals from final rulings, orders and determinations of any state or county government agency affecting revenue and taxation. Current BTA related regulations as well as previous orders by the BTA will remain in force. According to Governor Bevin, this reorganization is being done to "create a streamlined process for citizens to have their claims and appeals heard" and to create efficiency and cost savings for the state. The Commission is an independent agency of the state, and it will consist of three members appointed by the Governor and approved by the Senate. The members will serve for a term of three years, except for the members first appointed. The Executive Order establishing the Commission requires that at least one member be a crime victim, a family member of a crime victim, or a victim advocate. In addition to hearing tax appeals, the Commission will promulgate administrative regulations, including those establishing hearing procedures and a dollar threshold to be heard before the full Commission as opposed to a hearing before a single member or employee. The Commission will also make available to the public all decisions and opinions, administrative regulations, written statements of policy, and interpretations formulated, promulgated or used by it in discharging its functions. In addition, and to the extent not inconsistent with the Executive Order, all duties, functions, responsibilities, records, equipment, staff and supporting budgets of the BTA will transfer over to the Commission. Further, current BTA related regulations, as well as previous orders by the BTA, will remain in full force and effect, unless inconsistent with the Executive Order. For more on this development, see Tax Alert 2016-1406. In August 2016, the Ohio Department of Taxation (DOT) issued revised Information Release ST 2001-01 to provide guidance on the standards it will apply to determine whether an out-of-state seller has nexus with Ohio and, therefore, be required to collect and remit the state's use tax. The information release addresses the following topics: — Standard DOT uses to determine whether an out-of-state seller is subject to Ohio's use tax collection responsibility — Safe harbor activities that may create nexus but where the DOT will not require an out-of-state seller to collect and remit Ohio use tax — Use tax registration and filing requirements for out-of-state sellers subject to Ohio's taxing jurisdiction — Voluntary registration for use tax collection and remittance for out-of-state retailers that do not have nexus with Ohio — Effective date of the information release and retroactive and prospective application of the provisions The DOT noted that this information release is not intended to be an all-encompassing or all-inclusive description of this subject, and that the release may be modified by a change in federal or state law or by a judicial decision. Oregon: On remand from the Oregon Supreme Court, the Oregon Tax Court (Court) held that a multistate power company's receipts from its sales of electricity that are shipped outside Oregon are not included in the company's Oregon apportionment formula, because state law requires shipments of tangible personal property such as electricity to be treated as a sale at the location of the purchaser. Thus, receipts from shipments of electricity that terminated in states other than Oregon are sourced outside the state. The Court noted that sourcing should not be based on physical delivery at a trading hub, since reference to delivery at a hub is a trading or contractual notion rather than a place of physical delivery, and reference to delivery at a hub is no different than an f.o.b. term, which by statute is ignored by the state in determining sourcing of receipts. Finally, the Court found that no transmission of electricity occurs in respect of "book-out" transactions. Powerex Corp. v. Or. Dept. of Rev., No. TC 4800 (Or. Tax Ct. Aug. 1, 2016). Hawaii: The Hawaii Department of Attorney General announced that a state circuit court judge ruled that online travel companies must pay Hawaii's general excise tax on certain rental car transactions in the state. The court upheld tax assessments on gross receipts from online travel car rentals not sold as part of a travel or tour package with other services (e.g., airline or hotel reservations). In addition, the court ruled that under a special provision in Hawaii's general excise tax law for tourism-related services, these companies owe general excise taxes on their net receipts from car rental transactions that were included in a travel or tour package sold to customers. Haw. Dept. of Atty. Gen., News Release 2016-51 (Aug. 6, 2016). Indiana: An industrial service company (company) is eligible for Indiana's equipment and consumption sales and use tax exemptions, because the company is a producer of scrap steel. In reaching this conclusion, the Indiana Tax Court (Court) held that the company's seven-step process transforms non-marketable metal into marketable scrap steel that it sold. The Court rejected the Indiana Department of Revenue's argument that the company was not engaged in production within the meaning of either exemption because the company's demolition activities, which are part of the seven-step process, are not specifically listed as exempt activities and are inextricable from the process. The Court stated that the list of activities in the equipment and consumption exemptions is illustrative, and not exhaustive. Here, the undisputed facts demonstrate that the company's multi-step process involves more activities than demolition. Lastly, the Court cited precedent recognizing that the measure of whether a process transforms property inputs into other tangible personal property is whether a taxpayer's integrated production process yields a product that enters the marketplace. Brandenburg Industrial Service Co. v. Ind. Dept. of State Rev., No. 49T10-1206-TA-00037 (Ind. Tax Ct. Aug. 10, 2016). Missouri: The Missouri Department of Revenue notified businesses that based on a recent Missouri Supreme Court case, they may be required to collect and remit tax on delivery charges. The case, Alberici Constructors, Inc., held that charges for delivery of a rented crane are subject to use tax because the parties intended for delivery of the crane to be part of the crane rental. Generally, if parties intend delivery to be part of the sale of the tangible personal property, the delivery charge is subject to tax even when the delivery charge is separately stated. Factors discussed in another Missouri Supreme Court case, Southern Red-E-Mix Co., can help determine whether delivery is intended to be part of a sale, including: (1) when title passes from the seller to the purchaser, (2) whether the delivery charges are separately stated, (3) who controls the cost and means of delivery, (4) who assumes the risk of loss during delivery, and (5) whether the seller derives financial benefit from delivery. Similarly, shipping and handling charges that are part of the sale of tangible personal property are subject to tax regardless of whether they are separately stated. Shipping and handling charges that are not part of the sale of tangible personal property are not subject to tax if they are separately stated, but are subject to tax if they are not separately stated. Mo. Dept. of Rev., Notice, Sales Tax on Delivery Charges (Aug. 8, 2016). Pennsylvania: A construction contractor (contractor) must collect use tax on the nuts, bolts, and washers connecting guardrail panels that are part of a horizontal guardrail, because although the materials fall within the building machinery and equipment (BME) exemption, the contractor cannot quantify the amount or percentage of nuts, bolts, and washers it used to connect the guardrail panels. Affirming in part and reversing in part the decision of the Board of Finance and Review', the Pennsylvania Commonwealth Court (Court) also determined that the contractor is entitled to a credit for use tax paid to another state on tangible personal property or services purchased for use outside Pennsylvania, because the contractor paid tax on construction materials on West Virginia highway projects that were used in West Virginia; West Virginia's statute satisfies Pennsylvania's statutory reciprocity requirement; and Pennsylvania assessed use tax on the same materials without credit. The Court further held that because Pennsylvania's statute does not restrict where property is purchased or first delivered with respect to eligibility for the credit, the regulation restricting location of purchase and first delivery for credit eligibility is invalid as it is contrary to the clear wording of the statute. Furthermore, torque wrench repair is a taxable service as a repair of tangible personal property. In addition, traffic control invoices state that they are charges for rental of temporarily placed, movable equipment that is used at the contractor's construction sites, and rentals of tangible personal property are subject to use tax. Finally, the contractor did not owe any use tax on three vehicles because the contractor showed that it paid sales tax on them. Green Acres Contracting Co., Inc. v. Pennsylvania, No. 81 F.R. 2013 (Pa. Commw. Ct. Aug. 10, 2016)(opinion not reported). Wisconsin: A corporation that provides management, supervision and labor necessary to perform laundry services at nursing homes, retirement centers, and rehabilitation centers must collect sales and use tax on the service because laundry services are specifically taxable by statute. In reaching this conclusion, the Wisconsin Tax Appeals Commission (Commission) rejected the corporation's argument that it is providing management support services for laundry and housekeeping, and that the ancillary activities such as supervising its own employees and having its managerial personnel participate in meetings with other departments at each client facility sufficiently broadens the laundry-related activity to bring it outside the definition of taxable laundry services. The Commission found this argument attempts to frame the corporation's services completely as department management and ignores the role of its own employees who are performing an essential service (i.e., laundry service) for the client. Moreover, the primary purpose of the service is for the client to obtain laundry services, not laundry management services. Further, the corporation, citing Manpower, argued that it merely manages employees who perform laundry services, but the Commission distinguished the case, noting that the corporation in this situation runs a business that supplies onsite laundry services, supplies employees, directs its employees with respect to specific day-to-day duties, and, except at the initiation of a contract, provides the detergent and other necessary supplies. Healthcare Services Group, Inc. v. Wis. Dept. of Rev., No. 14-S-208 (Wis. Tax App. Comn. July 27, 2016). Massachusetts: New law (HB 4569) provides credits and incentives for economic development. These include: (1) an economic development incentive program administered by the Economic Assistance Coordinating Council that provides incentives to stimulate job creation and investment of private capital and promotes economic growth and expands economic opportunity to all areas of Massachusetts; (2) tax increment exemptions from annual property taxes as part of the Urban Center Housing Tax Increment Financing program; (3) business corporation tax credits related to low-income housing; (4) provides $45 million in capital to the Brownfields Redevelopment Fund; and (5) amendments to the Massachusetts historic rehabilitation tax credit, among other credits and incentives amendments. Among the vetoed provisions was the allowance of the creation of "Community Benefit Districts," which would have been areas in which a group of property owners, with the city or town's approval, could have agreed to a program of assessments to pay for benefits that accrue to the properties assessed. Mass. Laws 2016, Ch. 219 (HB 4569), signed in part and vetoed in part by the governor on Aug. 10, 2016. Tennessee: A 2004 statutory law change that allowed Tennessee to reclassify an interstate pipeline company's property as public utility property and tax the company's pipeline and surface equipment as real property (instead of personal property, which is subject to a lower ad valorem tax rate) are facially constitutional because the classifications are rationally related to a legitimate state interest and do not violate the Equal Protection or the Commerce Clauses of the US Constitution and the Tennessee Constitution or the Uniformity Clause of the Tennessee Constitution. In rejecting the company's equal protection argument, a Tennessee Chancery Court (Court) found that construing pipelines as real property and thus subjecting them to a higher tax rate does not create a legitimate question about whether it and other companies involved in the transportation of refined petroleum products through other conveyances (e.g., trucks, barges, and rail) should be similarly classified. The state argued, and the Court agreed, that these industries, although part of the petroleum distribution chain, are not similarly situated for equal protection purposes. The Court also held that there is a rational basis for classifying the company and its property as a public utility because the company has market and eminent domain power, its rates are subject to government regulation, its pipelines cannot be used or rented by other companies, and it has certain features of a natural monopoly. Further, there is no constitutional infirmity on the face of the real property utility classification under the Uniformity Clause of the Tennessee Constitution as there is a rational basis for the classification of the property at issue. Finally, there is no facial Commerce Clause infirmity with the challenged real property and public utility property statutory classifications, because the challenged classification statutes do not contain language indicating a difference in treatment based on local versus interstate interests. Colonial Pipeline Co. v. Wilson, No. 05-478-IV (Tenn. Chanc. Ct., 20th Jud. Dist., July 29, 2016). New Hampshire: The New Hampshire Department of Revenue Administration (Department) issued guidance on the recently enacted law change in SB 342, which eliminates the requirement that a business organization make an addition to gross business profits when an interest or beneficial interest in the business organization is sold or exchanged in an amount equal to the net increases in the basis of all underlying assets, applicable to the sale or exchange of an interest in a business organization occurring on or after Jan. 1, 2016. SB 342 requires that any portion of the annual depreciation or amortization attributable to the increase in basis from the sale of an ownership interest federally must be added back to the gross business profits of the business organization and that the gain or loss of the sale or disposition of the asset must be calculated without regard to the basis increase recognized federally. A business may make an irrevocable election to recognize the basis increase for any particular sale or exchange, and if the irrevocable election is made, the business organization must make an addition to gross business profits in an amount equal to the net increase in the basis of its assets in the tax period when the sale or exchange of the ownership interest occurs. Then, the business organization can deduct against gross business profits any annual depreciation or amortization attributable to the increased basis, and if this election is made, the gain or loss on the sale or disposition of an asset must be calculated taking into consideration the basis increase. New Hampshire's 2016 Business Profits Tax Forms will be updated with the change for both electing and non-electing taxpayers. New Hampshire's 2015 Business Profits Tax Forms will not be updated, and taxpayers using those forms to report a sale or exchange transaction occurring on or after Jan. 1, 2016, must file an addendum to their return, meeting certain requirements based on whether they elect or do not elect to recognize the basis increase associated with the sale or exchange in an interest in the business organization. N.H. Dept. of Rev. Admin., TIR 2016-007 (Aug. 12, 2016). New York: The New York State Department of Taxation and Finance (Department) recently updated its instructions for the 2015 Article 9-A tax forms on its website to provide additional comments highlighting the Department's position on "other financial instruments." The updates state that in determining whether "other financial instruments" should be treated as qualified financial instruments (QFIs) and how they should be treated under the marked-to-market (MTM) apportionment section, taxpayers should not view the entire "other financial instruments" bucket of NY Tax Law Section 210-A.5(a)(2)(H) as one broad type of financial instrument. Rather, taxpayers must narrowly review each financial instrument on an "instrument-by-instrument" basis. For any Article 9-A taxpayers that may have already filed 2015 returns and that have any QFIs that are affected by the updates to the instructions, the Department recommends that they amend their previously filed returns to conform to the new guidance. In addition, the Department has indicated that a partnership with any Article 9-A taxpayer partners should monitor updates to the 2015 corporation tax forms and instructions. Similar to Article 9-A taxpayers, a partnership with an Article 9-A taxpayer partner that has already filed its Form IT-204 for the 2015 tax year will need to consider if an amended 2015 tax return should be filed and a revised IT-204-CP form provided to each corporate partner. For more on this development, see Tax Alert 2016-1396. Alabama: Reminder: The Alabama tax amnesty program ends Aug. 30, 2016. Amnesty applies to taxes due before Jan. 1, 2015 or taxes for taxable periods that began prior to Jan. 1, 2015. The amnesty program applies to all taxes administered by the Alabama Department of Revenue (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. 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., the last three full years of delinquent returns) and waive penalties and one-half of interest. Taxpayers eligible to participate in the program include those who have not been contacted by the Department regarding the tax types included in the amnesty application within the last five years. Taxpayers that have been contacted by the Department within the last five years or who have been party to any criminal investigation or criminal litigation in any US or Alabama court cannot participate in the amnesty program. Taxpayers that participate in but fail to fully comply with the terms of the amnesty program may be subject to a negligence penalty. Click here for additional information on Alabama's amnesty program. Arizona: Reminder: The Arizona Department of Revenue (Department) will conduct a tax recovery program from Sept. 1, 2016 to Oct. 31, 2016 (tax recovery program period). In exchange for paying the tax due, the Department will abate or waive all penalties and interest due and not seek criminal prosecution. Eligible taxpayers must submit tax recovery program returns, the tax recovery program application and pay the full amount of tax due during the tax recovery program period. For taxes due on an annual basis, the tax recovery program applies to any taxable period ending before Jan. 1, 2014. For taxable periods due on a monthly or quarterly basis, the tax recovery program applies to those periods ending before Feb. 1, 2015. According to the tax recovery application and the Department's website, tax recovery is available for the following taxes: income (corporate, individual, and fiduciary); use tax; and transaction privilege (sales) tax. Note, however, that transaction privilege tax for non-program cities (i.e., cities that collect their own transaction privilege tax) are not included in the amnesty program. In addition, tax recovery cannot be requested for the following taxes: bingo, luxury tax, withholding tax, property tax and estate tax. Illinois: Adopted regulations (86 Ill. Adm. Code §§ 100.9320 and 100.9410) related to the income tax statutes of limitation for the Illinois Department of Revenue (Department) to issue notices of deficiency and for taxpayers to file refund claims, were amended to reflect legislative changes and case law. Generally, no notice of deficiency for a taxable year may be issued later than three years after the date the return for the taxable year was filed or deemed filed. The expiration of the period for issuing a notice of deficiency for a taxable year, however, does not preclude the Department from asserting any adjustments: (1) to net income or credits reported by a taxpayer to the extent the adjustments would reduce or eliminate a refund claimed by the taxpayer for that taxable year; or (2) related to certain amounts of net loss credits and deductions carryforward in order to compute net loss deduction or credit carryforward allowable in another taxable year, so that a timely notice of deficiency may be issued for that other taxable year or a claim for refund for that other taxable year may be denied in whole or in part. The deficiency provisions also address omissions of more than 25% of base income, failure to include any return or statement related to a reportable transaction, failure of a member of a combined group to be included in the combined return, not filing a return or filing a fraudulent return, failure to report a federal change, reporting a federal change, extensions by agreement, erroneous refunds, time when a return is deemed filed, request for prompt determination of liability, withholding tax, transferee liability, and net losses. In addition, the Department will not issue a credit or refund with respect to any year unless a claim for refund or credit was filed on or before the later of: (1) three years after the date the return was filed or, for withholding tax purposes, the fifteenth day of the fourth month following the close of the calendar year in which the withholding was made; or (2) one year after the date the tax was paid. The amended regulations took effect July 29, 2016. Ill. Dept. of Rev., Amended 86 Ill. Adm. Code §§ 100.9320 and 100.9410 (Ill. Register Aug. 10, 2016). All States: On Wednesday, Sept. 14, 2016 from 1:00-2:30 p.m. EDT New York (10:00-11:30 a.m. PDT Los Angeles), Ernst & Young LLP will hold its next domestic tax quarterly webcast. During the webcast the following topics will be discussed: (1) a state tax policy discussion with a focus on notable 2016 statewide ballot initiatives involving state business taxes, (2) an update on sales tax nexus expansion efforts by the states, (3) a recap of 2016 state tax legislation, and (4) major judicial and administrative developments affecting state and local taxation. 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: 2016-1463 |
