01 September 2016 State and Local Tax Weekly for August 26 Ernst & Young's State and Local Tax Weekly newsletter for August 26 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. Rep. Goodlatte releases discussion draft of Online Sales Tax Simplification bill — destination rates, but origin rules Representative Goodlatte (R-VA), Chairman of the House Judiciary Committee, recently released a discussion draft of his "Online Sales Simplification Act of 2016." Under the draft, a state may impose a sales or use tax (or other similar tax) on a seller or impose a sales/use tax collection obligation on a seller with respect to a remote sale of a product or service only if: (1) the state is the origin state for the remote sale, (2) the tax is applied using the origin state's tax base applicable to non-remote sales, and (3) the state participates in the State Tax Clearinghouse (clearinghouse). The tax rate imposed on remote sales would be applied at the destination rate. If, however, the destination state does not participate in the clearinghouse, then the tax would be applied at the origin rate. Each state participating in the clearinghouse would have to conform to the following: (1) establish a single state-wide destination rate to apply to sales by a remote seller; (2) determine the amount of sales, use or other similar tax paid or collected by remote sellers in that state for remote sales to each participating state; and (3) distribute tax received from remote sellers to each state that was a destination state using a method similar to the clearinghouse operated under the Intermodal Surface Transportation Efficiency Act of 1991. Each state not participating in the clearinghouse would not be allowed to receive distributions from the clearinghouse. The clearinghouse would be required to establish a method for submitting sales information reports by remote sellers in states that do not impose a sales, use or other similar tax and making such information available to destination states and providing purchasers with this information. The clearinghouse also would be required to adopt a uniform compliant purchaser certificate that includes features that would allow recognition by remote sellers of sales for resale, permit a business purchaser to directly pay applicable tax to the destination state, and provide for entity-and use-based exemptions of the destination state. A destination state would be allowed to establish its own rules governing purchaser qualification criteria, application process and reporting and tax remittance requirements for the grant and use of the uniform compliant purchaser certificates by purchasers in such state. A method would be established for a single audit of remote sellers whose origin state does not impose any sales, use or similar tax. The discussion draft also includes provisions on the treatment of sellers in states that do not impose a sales, use or other similar tax, or that lack a physical presence in any state, as well as the treatment of remote sellers in states that impose such taxes but do not participate in the clearinghouse. A state that participates in the clearinghouse would not be allowed to require a remote seller to pay or collect a sales, use or other similar tax with respect to a sale made to a customer in a state that does not impose such a tax and participates in the clearinghouse. Lastly, the discussion draft defines various terms including physical presence, origin rate, origin state, destination state, remote sale, and similar tax. California: Amendments to the California Franchise Tax Board's market-based sourcing regulations for sales of non-tangible personal property and services (Cal. Code Regs. tit.18, §25136-2) are expected to become final in mid-September. Once final, the amendments will be effective for tax years beginning on or after Jan. 1, 2015. The amendments will modify provisions related to sourcing of sales of marketable securities and other similar financial instruments, gross receipts from intangible property, and dividends and interest, however derived, and deletes certain benefit-of-service examples that had been proposed. For more information on this development, see Tax Alert 2016-1451. Indiana: The Indiana Department of Revenue (Department) issued guidance on the treatment of state and local income tax refund claims filed based on the US Supreme Court's (Court) ruling in Wynne, in which the Court held Maryland's tax scheme that did not provide a credit against county taxes for county taxes paid to counties in other states was unconstitutional. The Department found that Indiana's and Maryland's tax regimes differ, and that Indiana's tax regime meets the internal consistency test set forth in Wynne, because Indiana allows credits for out-of-state taxes against Indiana's state income tax and a credit for out-of-state local income taxes against local income taxes owed in Indiana. Although Indiana does not permit out-of-state state income taxes to offset local county income taxes, Indiana's tax system is internally consistent because Indiana allows both state-to-state and county-to-county credits, and there is nothing discriminatory in how Indiana treats out-of-state income. The Department, however, will allow a credit for out-of-state local income taxes against pre-2015 county economic development income tax (CEDIT) liabilities, because Indiana did not provide a credit for out-of-state local income taxes before Jan. 1, 2015. Taxpayers whose credit for out-of-state local income taxes (not state income taxes) has not previously been permitted against the taxpayer's CEDIT liability may file a claim for a refund or a credit, but the allowable credit amount cannot exceed the lesser of: (1) the out-of-state local income tax liability on the adjusted gross income taxed by a non-Indiana locality, reduced by the credit permitted by statute on that same income; or (2) the amount the taxpayer's CEDIT liability would have been reduced by eliminating the adjusted gross income taxed by a non-Indiana locality from the taxpayer's Indiana adjusted gross income. Ind. Dept. of Rev., Comr.'s Directive #57 (July 2016). Massachusetts: On remand from the US Supreme Court (USSC), the Massachusetts Supreme Judicial Court (MSJC) affirmed its earlier decision that the Commissioner of Revenue properly treated the loans of an out-of-state "holding" company as being located wholly in Massachusetts and, therefore, included in the numerator of its property factor, because the company failed to rebut the presumption that the loans should be sourced to its commercial domicile which was Massachusetts. In doing so, the MSJC found that Massachusetts statutory provisions, as applied to the company, did not violate the internal consistency test (in light of the USSC's recent ruling in Wynne) or the dormant commerce clause. The MSJC concluded that if the Massachusetts tax provisions at issue were in effect in every state, no more than 100% of the company's income would be subject to tax and that the company would not be disadvantaged from operating in interstate commerce as opposed to wholly intrastate commerce. The First Marblehead Corp. v. Commissioner of Revenue, No. SCJ-11609 (Mass. Sup. Jud. Ct. Aug. 12, 2016). Oregon: Adopted amendments to Or. Regs. 150-314.280-(O) makes apportionment provisions related to public utilities applicable to all periods open to examination. Previously, the provisions were effective for tax years beginning on or after Jan. 1, 2016. The substance of the regulation requires that the sale of a commodity such as electricity, water, steam, oil products or gas, including natural and liquid gas, which is delivered or shipped to a purchaser with a contractually specified point of physical delivery in Oregon, is a sale in Oregon. If the contract states that the point of delivery is at the Oregon border with another state, the sale is presumed to be in Oregon unless the taxpayer can demonstrate to the Oregon Department of Revenue's satisfaction that the delivery occurred in some other place. The amended regulation took effect July 1, 2016. Ore. Dept. of Rev., Ore. Regs. 150-314.280-(O) (published, Ore. Bulletin Aug. 1, 2016). South Carolina: The South Carolina Department of Revenue is circulating for public comment a draft revenue ruling providing an overview of the Bank Franchise Tax. Topics covered include: (1) tax returns and payments — estimated payments, tax year of a bank, filing extensions, consolidated bank returns; (2) franchise tax base — determining the base for calculating the bank franchise tax, whether certain IRC provisions apply, whether the base includes interest obligations, whether the federal dividends received deduction and NOL deductions are allowed, claiming bad debt deductions, reporting income from investments in corporations, accounting for bank investments in partnerships; (3) apportioning and sourcing income — apportionment of bank income, sourcing of interest, yearly credit cards fees, late fees and credit card swipe fees, claims for alternative apportionment; (4) which credits banks can claim; and (5) miscellaneous issues — the eligibility of banks to elect S corporation status, treatment of single member LLCs for bank tax purposes, reporting an error correction to financial statements, penalty and interest assessment. Comments on the draft ruling are due Sept. 22, 2016. S.C. Dept. of Rev., SC Revenue Ruling #16-x (draft Aug. 25, 2016). Texas: The Texas Comptroller of Public Accounts (Comptroller) recently released guidance on the treatment of vendor funded incentives (VFI) (e.g., volume-based purchase price adjustments, sales-based incentives, product placement incentives, new store allowances, depletion allowances) in computing the cost of goods sold (COGS) under the Texas revised franchise (Margin) tax. Tex. Comp. of Pub. Accts., No. 201608950L (Aug. 11, 2016). For additional information on this development, see Tax Alert 2016-1443. Texas: The Texas Comptroller of Public Accounts (Comptroller) issued a letter ruling providing guidance on the proper apportionment of gross receipts resulting from the sale of substantially all of the assets of a Texas company (company) to a Delaware corporation. The Comptroller determined the company's sale of tangible personal property (TPP) that was located in Texas at the time of sale results in Texas receipts, while its sale of TPP deployed in a foreign jurisdiction at the time of the sale does not result in Texas receipts because the TPP was not delivered or shipped to a buyer in Texas. The company's sale of contract rights is the sale of an intangible asset, the gross receipts from which are apportioned to the payor's state of incorporation — in this case Delaware. In addition, the Comptroller found the net gain calculation used to determine a seller's basis in certain assets inapplicable in this case, because there is no evidence that the sold intangible assets are capital assets or investments since none of these assets were created or purchased for investment purposes and none had been assigned a book value before the purchase agreement was executed. The Comptroller noted that it will amend its rules to clarify the definition of "investment." Finally, the same allocation of the sales price to specific assets that the company used for federal income tax purposes should be used for apportioning the gross receipts for Texas franchise tax purposes. Tex. Comp. of Pub. Accts., No. 201607948L (July 22, 2016). California: Adopted amended regulation (Cal. Regs. tit. 18, § 1590) clarifies the application of sales and use tax to charges for mixed newspaper subscriptions that include the right to access digital content. For sales of mixed newspaper subscriptions made on and after Oct. 1, 2016, 47% of the subscription charge is presumed to be the taxable measure from the sale of tangible personal property and tax applies to that amount, and the remaining 53% is presumed to be the nontaxable sale of the right to access the digital content. Taxpayers can overcome this presumption with evidence demonstrating to the satisfaction of the California State Board of Equalization that the digital-only subscription rate divided by the sum of the print-only subscription rate and the digital-only subscription rate is greater than 53%, with records maintained to substantiate a nontaxable allocation greater than 53%. Rates must not be computed more often than once per quarter. For nonprofit organizations, the regulation amends the application of sales and use tax, making tax inapplicable to the sale or use of any newspaper or periodical regularly issued by the nonprofit organization at average intervals not exceeding three months. Related exemption certificates were amended to reflect these changes. The amendments take effect Oct. 1, 2016. Cal. St. Bd. of Equal., Amended Cal. Code of Regs. tit. 18, § 1590 (approved Aug. 16, 2016). California: The California State Board of Equalization (SBOE) issued a special notice regarding its role and responsibilities following the appellate court's ruling in Lucent Technologies that a software license granted to a purchaser in California, and transferred with tangible media as part of a technology transfer agreement (TTA), was exempt from sales and use tax as a matter of law. The notice: (1) defines TTA; (2) provides an overview of the Lucent decision; (3) discusses when the SBOE will hold public/interested party meetings on proposed amendments to Sales and Use Tax Regulations §§1507 (TTAs) and 1502 (Computers, Programs and Data Processing); (4) provides guidance on filing refund claims on sales or purchases of non-custom software transferred on storage media as part of a TTA and on existing refund claims based on software transactions similar to the software TTAs in the Lucent case; and (5) lists resources for additional information on Lucent. Cal. St. Bd. Equal., Special Notice - Lucent's Court Case: Lucent Charges for Software on Storage Media as Part of a Technology Transfer Agreement are Not Subject to Tax (Aug. 2016). Illinois: In response to a private letter ruling request, the Illinois Department of Revenue (DOR) concluded that a company's software license fees are exempt from Illinois Retailers Occupation Tax, regardless of whether the software is on-premises or accessed electronically, and since the software license fees are nontaxable, the related support fees also are nontaxable. The DOR explained that the software license is not a taxable retail sale if: (1) it is evidenced by a written agreement signed by the licensor and the customer; (2) it restricts the customer's rights to duplicate and use the software; (3) it prohibits the customer from licensing, sublicensing or transferring the software to a third party without the permission and continued control of the licensor; (4) the licensor has a policy of providing another copy at minimal or no charge if the customer loses or damages the software or permits the licensee to make and keep an archival copy (such a policy must be stated in the license agreement or supported by the licensor's books and records or a notarized statement); and (5) the customer must destroy or return all copies of the software to the company at the end of the license period. In this case, the DOR determined that license agreements met all of the statutory criteria. Ill. Dept. of Rev., ST 16-0003-PLR (March 23, 2016, posted in August 2016). Missouri: A refundable or nonrefundable reservation fee on motor vehicle rentals or the refundable or nonrefundable advance payment for the entire motor vehicle rental are subject to sales tax because the payments represent a deposit that is later applied to the taxable rental of a motor vehicle. Sales tax should be remitted at the time the actual rental is completed as this is when the taxable transaction occurs. If a customer forfeits his or her reservation, the nonrefundable fee or nonrefundable payment for the entire motor vehicle rental is not part of the company's gross receipts for the rental of tangible personal property and, therefore, is not subject to sales tax. Mo. Dept. of Rev., LR 7704 (June 29, 2016). New York: Governor Andrew Cuomo recently announced 12 new brownfield opportunity areas located across the state. Projects in brownfield areas are given priority status for grants and project developers may be entitled to additional Brownfield Cleanup Program tax credits and incentives. The new brownfield areas are: (1) Downtown Waterfront Core Brownfield Opportunity Area, City of Ogdensburg; (2) Kingston Waterfront Brownfield Opportunity Area, City of Kingston; (3) Peconic River/Route 25 Corridor Brownfield Opportunity Area, Town of Riverhead; (4) Hamlet of Riverside Brownfield Opportunity Area, Town of Southampton; (5) Huntington Station Brownfield Opportunity Area, Town of Huntington; (6) Harlem River Brownfield Opportunity Area, Bronx; (7) Cypress Hills Brownfield Opportunity Area, Brooklyn; (8) West Brighton Brownfield Opportunity Area, Staten Island; (9) First Ward Brownfield Opportunity Area, City of Binghamton; (10) North Chenango River Corridor Brownfield Opportunity Area, City of Binghamton; (11) Southside Rising Brownfield Opportunity Area, City of Elmira; (12) Waterfront Heritage Brownfield Opportunity Area, City of Amsterdam. N.Y. Gov., Press Release "Designation of 12 New Brownfield Opportunity Areas" (Aug. 22, 2016). Nebraska: A grain storage enclosure is personal property rather than real property and, thus, is subject to significantly lower valuation for property tax purposes, because the enclosure can be easily moved from one location to another, it is not fastened or bolted to any kind of concrete or other structure, and it has no roof other than a movable tarp covering the grain. In reaching this conclusion, the Nebraska Tax Equalization and Review Commission (Commission) reviewed the definitions of real and personal property. Nebraska's definition of real property includes all land, buildings, improvements, and fixtures (except trade fixtures). A building is "a structure designed for habitation, shelter, storage, trade, manufacture, religion, business, education and the like. A structure or edifice enclosing a space within its walls, and usually, but not necessarily, covered with a roof." An improvement is "any addition made to real property, amounting to more than mere repairs, such as sidewalks, streets, sewers, or utilities." Fixtures other than trade fixtures are "any item of property that is: annexed or physically attached to or incorporated into the real property; appropriated to the use of the real property to which it is annexed." However, tangible personal property includes all personal property possessing a physical existence, excluding money, and includes trade fixtures, meaning machinery and equipment, regardless of the degree of attachment to real property, used directly in commercial, manufacturing, or processing activities conducted on real property, regardless of whether the real property is owned or leased. The Commission noted that the grain storage enclosure consists of five-feet-by-six-feet walls staked to a dirt floor, and at least some of the walls are periodically moved to allow access to the grain located within the walls. Green Plains, Inc. v. Merrick Cnty. Bd. of Equal., No. 15A 0021 (Neb. Tax Equal. and Rev. Comn. Aug. 11, 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. All States: On Tuesday, Sept.6, 2016 from 3:00-4:00 ET, EY will host a webcast on the Government Accounting Standards Board (GASB) Statement 77 Tax Abatement Disclosures. During this webcast, panelist will discuss thought-provoking questions and insightful revelations we are hearing from state and local governments as they prepare their GASB 77 disclosures for the first time. Click here to register for this Thought Center Webcast. Arizona: Online travel companies (OTCs) unambiguously fall within the Model City Tax Code's (MCTC) definition of "broker," as amended in 2013, because they solicit customers and receive their payments, and these plainly constitute an important part of the business activity of a hotel. Accordingly, the OTCs must pay Arizona's business activity assessments for tax periods starting in 2013. While the cities sought to impose the tax on the OTC covering activities from 2000-2009, the Arizona Superior Court denied this request, explaining that the cities are barred from assessing any tax, penalty, or interest retroactively before 2013. Specifically, the MCTC disallows a city from assessing these if the city determines that any provision applies to a new or additional category or business type, based on that interpretation change. City of Phoenix, et al. v. Orbitz Worldwide Inc., et al., No. TX 2014-000470 (Ariz. Super. Ct. for Maricopa Cnty., Tax Ct., April 11, 2016). Massachusetts: New law (HB 4570) imposes a surcharge on a transportation network company's (TNC) intrastate operating revenues and a per-ride assessment. A TNC is defined as "a corporation, partnership, sole proprietorship or other entity that uses a digital network to connect riders to drivers to pre-arrange and provide transportation." A TNC must annually report by March 31 its intrastate operating revenues for the prior calendar year to a newly created division in the Department of Public Utilities (division). The division will issue a notice of surcharge, which must be paid by the TNC within 30 days from the date of the notice. Failure to timely pay the surcharge could result in the suspension or revocation of the TNC's permit. By February 1 of each year, the TNC must submit to the director of the division the number of rides from the previous calendar year that originated within each city or town and a per-ride assessment of $0.20. The TNC cannot charge the TNC rider or TNC driver for the cost of the per-ride assessment. In addition, HB 4570 prohibits a municipality or other local or state entity, except the Massachusetts Port Authority, from imposing a tax or any additional license on a TNC, a TNC driver or vehicle used by a TNC driver. Mass. Laws 2016, Ch. 187 (HB 4570), signed by the governor on Aug. 5, 2016. Nevada: The Nevada Department of Taxation (Department) issued a bulletin explaining modified business tax (MBT) changes as a result of AB 389 (2015), which permits the client company of an employee leasing company to be viewed as the employer of the employees it leases. The MBT previously was imposed on the aggregate payroll of an employee leasing company and not based on the separate payroll of each client company. Thus, employee leasing companies could not disaggregate wage information for purposes of the MBT because the employee leasing companies were required to provide wage information in the aggregate to the Employment Security Division. Under the 2015 law change, the client company can now compute and pay the MBT based on its separate payroll. Client companies, however, also are required to register and pay unemployment insurance based on their own respective calculated contribution rate. Nev. Dept. of Taxn., Tax Bulletin MBT 16-0005 (Aug. 15, 2016). Puerto Rico: On June 30, 2016, President Obama signed into law HR 5278, known as the "Puerto Rico Oversight, Management, and Economic Stability Act" or "PROMESA." PROMESA responds to Puerto Rico's fiscal crisis, which has resulted in the government's inability to make payments on public debt estimated to be over $72 billion, adequately fund the public pension systems and meet other basic financial obligations. The law creates a seven-member fiscal control board that will control Puerto Rico's budget, laws and regulations and will be vested with the power to force the Commonwealth to balance its budget and restructure existing debt with bondholders, among other broad powers. For additional information on this development, see Tax Alert 2016-1442. © 2016 Ernst & Young LLP. The information contained herein is general in nature and is not intended, and should not be construed as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no responsibility for loss occurred to any person acting or refraining from action as a result of any material provided herein. For additional information on the developments discussed in this newsletter, please contact your Ernst & Young LLP SALT 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: 2016-1486 |
