12 September 2016 State and Local Tax Weekly for September 2 Ernst & Young's State and Local Tax Weekly newsletter for September 2 is now available. Prepared by Ernst & Young's State and Local Taxation group, this weekly update summarizes important news, cases, and other developments in U.S. state and local taxation. On 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) a discussion of major judicial and administrative developments affecting state and local taxation. Click here to register for this event. In Wal-Mart Puerto Rico, Inc. v. Juan C. Zaragoza-Gomez, the First Circuit Court of Appeals (Court), affirming the district court decision, has ruled that a portion of Puerto Rico's corporate alternative minimum tax (AMT), as amended in 2015, violates the dormant Commerce Clause of the US Constitution. Puerto Rico's Treasury Secretary (the Secretary) argued that the AMT is not facially discriminatory against interstate commerce because it does not apply to specific "interjurisdictional transfers but is instead merely a component in calculating an annual tax formula." Rejecting that argument, the Court ruled that the amended AMT discriminates because "it taxes only cross-border transactions between a Puerto Rico corporate taxpayer and a home office or related entity outside of Puerto Rico." Citing Comptroller of Treasury of Md. v. Wynne, the Court also applied the internal consistency test to the AMT, and found that the AMT fails the internal consistency test because if every state were to apply the AMT, "multistate corporations doing business across state lines would be disadvantaged relative to corporations whose operations are consolidated in one state." Additionally, the Court observed that, while Puerto Rico has a legitimate local purpose (e.g., combatting profit-shifting abuse) in applying the AMT, there are a number of less restrictive alternatives to advance that purpose. It found "it would be a perverse outcome if the resource and administrative limitations of the Puerto Rico Treasury required us to hold that the otherwise unconstitutional AMT passes constitutional muster." Therefore, the Court ruled that the AMT "is a facially discriminatory law that does not survive heightened scrutiny under the dormant Commerce Clause." Since this ruling, the Secretary has indicated in public statements that the Government does not intend to appeal the Court's decision. Instead, the Government will implement new transfer pricing regulations. The Secretary has said that a draft of the transfer pricing regulations could be ready as early as October 2016. Because a portion of the AMT has been declared unconstitutional, local taxpayers might have overpaid taxes and should evaluate pertinent actions to recover those taxes. We expect the Puerto Rico Treasury Department to issue administrative pronouncements with guidelines for taxpayers that have been subject to the unconstitutional portion of the AMT. Moreover, the Puerto Rico legislative assembly may consider amending the AMT the next time it is in session. For additional information on this development, see Tax Alert 2016-1480. California: The California Franchise Tax Board (FTB) declined to issue a Chief Counsel Ruling addressing a taxpayer's request regarding California elections related to the federal repair regulations as it does not issue rulings involving a tax position taken on a previously filed tax return and, instead, provided general information on the topic. For personal income tax and corporate income and franchise tax purposes, California generally follows the repair regulations applicable for federal income tax purposes. If the IRS approves a taxpayer's request to change an accounting method for federal income tax purposes, the change applies for California corporate franchise and income tax purposes provided that California law conforms to, or is substantially similar to, the underlying law which is being applied. To obtain treatment other than that elected for federal income tax purposes, a separate election must be made for California tax purposes in the manner set forth in FTB Notice 2000-8. Commonly, there are differences between federal and California depreciable basis, useful life, or method of depreciation because California has expressly not adopted many federal income tax provisions in these areas. To the extent California law follows the federal income tax provision, the federal accounting method change will apply for California corporate franchise and income tax purpose even though the resulting federal numbers may be different than the California numbers, including any resulting IRC § 481 adjustments. When there is a federal-California difference, taxpayers must attach to their California tax return a copy of their federal Form 3115, "Application for Change in Accounting Method," as well as a pro forma Form 3115 with adjusted California figures. Cal. FTB, Information Letter No. 2016-1 (Aug. 4, 2016). Indiana: The Indiana Department of Revenue issued guidance regarding the change to local income tax rates effective Jan. 1, 2017. According to Department Notice #42, HB 1485 will not affect the resident tax rates in effect on May 1, 2016. The rates in effect on May 1, 2016, continue to be in effect on Jan. 1, 2017, unless the county acts to change its county income tax rates between July 1, 2016, and Oct. 31, 2016. Maryland: In Branch Banking and Trust Company v. Comptroller of the Treasury, the Maryland Tax Court (Court) found that the denial of refunds associated with a carryforward subtraction of federal bond interest was unconstitutional. In so holding, the Court held that the Maryland Comptroller of the Treasury's (Comptroller) policy of not allowing a carryforward of unsubtracted exempt federal obligation interest discriminates against holders of federal obligations in favor of similarly situated holders of Maryland obligations. After the ruling was issued, the Court granted the Comptroller's motion to withdraw its ruling. In its motion to withdraw, the Comptroller argued that the decision only addressed the legal issue in the case and not the factual issue of whether the taxpayer met its burden of substantiating the amount of refund claimed. The Comptroller's motion did not address the legal question that was resolved by the court. For more on the original decision, see Tax Alert 2016-1471. Colorado: The US Supreme Court (USSC) has been asked to review the 10th Circuit's ruling in Direct Marketing Association, in which it held a Colorado statute that requires remote sellers lacking physical presence within the state to file an annual statement with the Colorado Department of Revenue showing the total amount paid for Colorado purchases during the preceding calendar year for each Colorado purchaser, does not violate the dormant Commerce Clause of the US Constitution. Specifically, the USSC is being asked the following questions: (1) whether a state statute that imposes regulatory obligations solely to out-of-state companies, but does not use "language explicitly identifying geographical distinctions" in its text, discriminates against interstate commerce; (2) whether the 10th Circuit erred in adopting a "comparative burdens" test for discrimination, under which the burden of regulatory requirements imposed solely on out-of-state retailers may be offset by different obligations imposed on in-state retailer; and (3) whether the 10th Circuit erred in concluding that out-of-state retailers that do not collect Colorado sales tax are "not similarly situated" to their direct in-state competitors who collect Colorado sales tax. Direct Marketing Ass'n. v. Brohl, No. 12-1175 (10th Cir. Feb. 22, 2016), cert. petition, Dkt. No. 16-267 (filed Aug. 29, 2016). Ohio: The Ohio Court of Appeals (Court) held that the Ohio Board of Tax Appeals (BTA) reasonably concluded that medical transcription services purchased by a group of physicians (physicians) did not constitute a personal or professional service and, therefore, the physicians are not entitled to a sales tax refund on the transactions. In reaching this conclusion, the Court affirmed that the true object of the physicians' purchase of medical transcription services was to produce a written transcript from which the physician could verify its accuracy and apply his or her professional skills to adjust or alter to complete the medical record needed for patient care. The physicians' purchase of medical transcriptionist services had the sole objective to create a verbatim record of the physician's dictation, and the transcriptionists did not apply cognitive skills or analytical thought to study, alter, analyze, interpret, or adjust the data. The Court noted, however, that a finding that the true object of the contract is a personal service may be correct in situations where the facts show that a taxpayer is not purchasing just a medical transcription service where data is transcribed into a different form, but instead has contracted with a company and received additional services of a personal nature. In addition, a nontaxable professional service may be found when a taxpayer enters into a written contract with a transcriptionist service specifying that each transcriptionist must hold a certificate from an approved college program and must utilize specific professional skills acquired from the certificate program to complete the transcriptionist's task. Dayton Physicians, LLC v. Testa, No. 26881 (Ohio App. Ct., 2nd App. Dist., Aug. 12, 2016). Texas: In response to a ruling request, the Texas Comptroller of Public Accounts determined that web security services, including provision of a digital certificate, authentication services, and resolution services, are not subject to the state's sales and use tax. The taxpayer's digital certificates do not fall within the definition of taxable computer programs because they do not provide a set of coded instructions designed to process data or perform a task, and instead represent a nontaxable intangible — the confirmation that a website can be trusted by web browsers. The taxpayer's sale of authentication and resolution services, including the provision of a digital certificate, is not taxable data processing since the taxpayer does not compile and produce records of transactions, maintain information, and enter and retrieve information, and the taxpayer is not encrypting or decrypting data on its customer's behalf. Further, customers who pay a subscription fee for authentication and resolution services in which a digital certificate is provided are not purchasing information services according to its definition. Finally, initial authentication services, provision of a digital certificate, and resolution services do not fall within Texas' definition of telecommunication services. Tex. Comp. of Pub. Accts., No. 201608960L (Aug. 19, 2016). Louisiana: The Louisiana Department of Revenue (LDR) issued guidance on the application of penalties and interest for taxpayers denied a motion picture credit due to the credit cap being met. For fiscal year 2016-2017, the $180 million film credit has been exceeded. Therefore, funds are no longer available to satisfy any additional claims or transfers to the state (buy-backs) for the duration of this fiscal year. Claims submitted prospectively will be denied and any claims received during this period will be given priority based upon the date filed or submitted for purposes of administering the Fiscal Year 2017-2018 credit cap (note, the credit is administered on a first-come, first-served basis). For taxpayers that claimed the credit on a return filed prior to July 14, 2016 and the credit is subsequently denied as a result of the credit cap being reached after the original due date of the tax (May 15 for individual filers, April 15 for corporate filers), any amount of tax due must be submitted to the LDR by Sept. 15, 2016, to avoid liability for the application of penalties and interest from the original due date of the tax. For taxpayers that purchased the credit on or before July 14, 2016 and have not yet filed a return claiming the credits, if the original due date of the 2015 return, without regard to extension, was on or before July 14, 2016, the payment of any tax due for the 2015 return must be submitted to the LDR by Sept. 15, 2016 in order to avoid penalties and interest. Tax due as a result of the denial of the credit due to the cap on a return filed on or after July 15, 2016 remains subject to penalties and interest. La. Dept. of Rev., Revenue Information Bulletin No. 16-051 (Sept. 2, 2016). New Jersey: Vetoed provision in AB 2576 would have extended all Urban Enterprise Zones (UEZ) for an additional 10-year period from the date they are set to expire. Citing adverse fiscal impact of the UEZ programs, Governor Christie conditionally vetoed the provision on Aug. 31, 2016. New York: A management company's (lessee) payments into a lender's escrow account established to pay real property taxes to taxing jurisdictions do not constitute "eligible real property taxes" for purposes of the qualified empire zone enterprise (QEZE) tax credits and, therefore, the lessee is not entitled to a refund of income tax. In so holding, the New York Tax Appeals Tribunal (Tribunal) affirmed that the statute's plain meaning requires the lessee to pay taxes directly to a taxing authority rather than through a third party. In support of its conclusion, the Tribunal contrasted the statute with the absence of any direct payment requirement where the QEZE real property tax credit is claimed by a QEZE-owner of the real property. The Tribunal noted that the lessee's proposed statutory construction would read the direct payment requirement of QEZE-lessees out of the statute and thereby treat QEZE-lessees the same as QEZE-owners, contrary to the legislature's intent. In the Matter of the Petition of Balbo, Nos. 825765 and 826269 (N.Y.S. Tax App. Trib. Aug. 18, 2016). Oregon: Individuals were entitled to a refund of Oregon individual income tax based on a credit for taxes paid to other states on pass-through entity income because even though the claims were filed outside the three-year statute of limitations for filing individual income tax returns the claims were timely filed within the extended period for filing refund claims for pass-through entity returns. In reaching this conclusion, the Oregon Tax Court (court) explained that while the statute of limitations for filing income tax refunds is three years from the date the individual income tax return was due, a statutory exception to this rule (ORS 314.410(10)) extends the period for income from a pass-through entity. Under this provision, the period for claiming a refund or assessing a deficiency is three years from the date of the filing of a pass-through entity return to which the item on the taxpayer's return relates and that is attributable to the pass-through entity. The court rejected the Oregon Department of Revenue's contention that this exception applies only to Oregon entity returns, instead finding that the statutory provision "refers to any entity return provided it is attributable to a pass-through entity and is shown or required to be shown on the taxpayers' individual Oregon return." Tomseth v. Or. Dept. of Rev., No. TC-MD 150434C (Or. Tax Ct., Magistrate Div., Aug. 23, 2016). Washington: The Washington Department of Revenue (Department) announced its non-acquiescence to the Washington Board of Tax Appeals' (BTA) decision in Cascade Concrete Industries, Inc., in which the BTA held that Washington law and regulation precluded the Department from netting an assessment and credit during an audit, because the four-year limitation for the 2006 individual tax year, which was within the audit period, had run by the date the adjustment was issued. According to the Department, the BTA did not follow PACCAR Inc., which allowed the netting of tax amounts due against allowable credits for periods covered by an assessment, and is not beyond the statutory limitation, if the assessment is pending administrative review before the Department and is not final yet. Wash. Dept. of Rev., Excise Tax Advisory ETA 3055.2016 (Aug. 22, 2016). Delaware: As a result of the ruling in Temple-Inland, the Delaware Secretary of State (the Secretary) said that voluntary disclosure agreements (VDAs) entered into will be settled based on a 10-year look back period plus dormancy from the date the holder enrolled. (The prior look back period was 20 years.) The Secretary also indicated that when the legislature reconvenes in January 2017, his office will seek additional "common sense changes" to Delaware's unclaimed property law to address issues raised by the court in Temple-Inland. Del. Sec. of St., letter (Aug. 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: 2016-1529 |
