09 September 2016 State and Local Tax Weekly for September 9 Ernst & Young's State and Local Tax Weekly newsletter for September 9 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. The Arizona Department of Revenue (Department) is conducting 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. 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 periods ending before Feb. 1, 2015. Tax recovery is available for the following taxes: income (corporate, individual, and fiduciary); use tax; and transaction privilege (sales) tax. 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, withholding, property and estate. In order to participate in the program, eligible taxpayers must submit tax recovery program returns, the tax recovery program application and pay at least 33% of the full amount of tax due during the tax recovery program period (taxpayers can pay in full at the time of application). Taxpayers that elect to pay in installments should adhere to the following payment schedule: 33% of the liability by Oct. 31, 2016, 66% of the liability by Oct. 31, 2017, and 100% of the liability by Oct. 31, 2018. Taxpayers that receive amnesty under the tax recovery program must waive any right to refund or credit for the total amount of the tax liability for each taxable year included in the application. A tax recovery program application is an express and absolute waiver of all administrative and judicial rights of appeal available at the time that have not run or otherwise expired as of the application date. If, however, the Department audits a taxpayer for any period subject to the tax recovery program, the taxpayer may contest any deficiency determined by the audit. For additional information on the program, including taxpayer eligibility requirements, see Tax Alert 2016-1523. Indiana: A multistate clothing retailer was not required to reapportion its gross operating margin between itself and its related purchasing entity to more fairly reflect its Indiana-source income, because the Indiana Department of Revenue's (Department) audit did not provide sufficient grounds for rejecting the retailer's transfer pricing study under which it decreased its federal adjusted gross income. In reaching this conclusion, the Department cited the Indiana Tax Court's decisions in Rent-a-Center East, Inc. and Columbia Sportswear USA Corp., and found that the audit did not "address with sufficient specificity the perceived shortcomings in [the retailer's transfer pricing study]" or establish the "reasonableness" of the Department's decision to reallocate the parties' "gross operating margin." The Department acknowledged that the intercompany relationships between the retailer and its related purchasing entity raised a legitimate question as to whether or not the retailer's original reporting of its Indiana source income was or was not unduly affected by the method by which it reported the income received from selling products to Indiana customers. However, the Tax Court has previously found that application of the Department's authority to require an alternate, equitable apportionment of income is "ambiguous," and such ambiguities must be resolved against the Department. Ind. Dept. of Rev., Letter of Findings No. 02-20150171 and Letter of Findings No.02-20150117 (Aug. 31, 2016). Louisiana: A medical diagnostic testing company is entitled to a refund of corporate income tax because its receipts from testing Louisiana patient specimens at its Texas facility is sourced to Texas, not Louisiana. In reaching this conclusion, the Louisiana Court of Appeals held that the company is subject to the general three-factor apportionment formula under La. R.S. 47:287.95(F); the income from testing services qualifies as gross apportionable income, not net sales as asserted by the Louisiana Department of Revenue; a service business apportioning its income under the general apportionment formula must determine its gross income attributable to the state by sourcing its service income in the same manner as a service business apportioning its income using the two-factor apportionment formula under La. R.S. 47:287.95(D) — using the location-of-performance sourcing rule as opposed to the market-based sourcing rule. Thus, under the location-of-performance sourcing rule only income from services performed in Louisiana are attributable to the state. In this case, the services were performed in Texas and, as such, the income from these services is attributable to Texas. It should be noted, that effective for taxable periods beginning on and after Jan. 1, 2016, Louisiana has adopted a single sales factor apportionment formula for most businesses and market-based sourcing rules for sourcing sales of non-tangible property and services. Quest Diagnostics Clinical Laboratories Inc. v. Barfield, No. 2015 CA 0926 (La. Ct. App. Sept. 9, 2016). Massachusetts: On remand from the US Supreme Court, the Massachusetts Supreme Judicial Court (MSJC) affirmed its earlier decision in First Marblehead 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 US Supreme Court's recent ruling in Wynne) or the dormant commerce clause. For additional information on this development, see Tax Alert 2016-1504. Michigan: The Michigan Supreme Court will not review the March 15, 2016 decision of the Michigan Court of Appeals upholding the 2014 retroactive repeal by the Michigan Legislature of the Multistate Tax Compact, provisions of which taxpayers had argued allowed them to elect to use the Compact's equally-weighted three factor formula instead of the statutory heavily weighted sales factor formula. Harley Davidson Motor Co., Inc. v. Mich. Dept. of Treas., No. SC 153594 (Mich. S. Ct. Sept. 6, 2016) (consolidated with 14 other appeals); International Business Machines Corp. v. Mich. Dept. of Treas., No. 153281 (Mich. S. Ct. Sept. 6, 2016). California: The California State Board of Equalization (SBOE) reminded taxpayers that California's sales and use tax rate will decrease to 7.25% (from 7.5%) on Jan. 1, 2017, as the 2012 voter-approved (Prop 30) increase that took effect in 2013, is set to expire Dec. 31, 2016. The total tax rate in many counties and cities, however, will be higher than 7.25% because of voter-approved district taxes, which are imposed and added to the existing statewide rate. Cal. SBOE, News for Tax Practitioners Pub. No. 542, Ed. 4 (Sept. 1, 2016). California: The California State Board of Equalization (SBOE) explained that motor vehicle dealers may claim a deduction on their sales and use tax return to recover the sales tax paid on their purchases of gasoline or diesel fuel furnished with the sale of a vehicle. This deduction, however, may be problematic for taxpayers and tax preparers to properly claim because the sales tax rates that apply to gasoline and diesel fuel sales are different than the sales tax rate that applies to vehicle sales. To assist in properly claiming the deduction, the SBOE included new instructions and a sample worksheet in the revised BOE-401-INST, Instructions for Completing the BOE-401-A, and the online guide, Tax Guide for Motor Vehicle Dealers, Industry Topics tab. Cal. SBOE, News for Tax Practitioners Pub. No. 542, Ed. 4 (Sept. 1, 2016). California: The California State Board of Equalization reminded taxpayers that the state grants exclusions from sales or use tax for the purchase of advanced manufacturing machinery and equipment and other property through the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA). The exclusion also applies to tangible personal property purchased for a project related to alternative energy sources, advanced transportation technologies, and recycled feedstock. To qualify for the exclusion, the project also must provide a net benefit to the state, both fiscally and environmentally. Click here for more information on the program. Additionally, new form BOE-192, CAEATFA Exemption Certificate for Sales and Use Tax Exclusion, can be used to issue exemption certificates to project vendors. Cal. SBOE, News for Tax Practitioners Pub. No. 542, Ed. 4 (Sept. 1, 2016). Illinois: The Illinois Department of Revenue issued guidance on the lower 1% sales and use tax rate imposed on certain medical devices prescribed to treat cancer effective Aug. 19, 2016. The change was made via Public Act 99-858 (PA 99-858), and applies to sales of products classified as Class III medical devices by the US Food and Drug Administration that are used for cancer treatment pursuant to a prescription, as well as any accessories and components related to those devices such as tumor treating fields therapy. Ill. Dept. of Rev., Info. Bulletin No. FY 2017-04 (August 2016). Indiana: A transaction in which two parties exchanged planes did not qualify as a like-kind exchange for Indiana sales and use tax purposes because the transaction did not meet Indiana's statutory requirement for a like-kind exchange as the seller's primary purpose in acquiring the new plane was to assist the taxpayer in facilitating a federal IRC §1031 tax-deferred gain. Accordingly, the sales tax base of the transaction would not be reduced, and the full $1.5 million in consideration transferred by the taxpayer for the new plane would be the "net acquisition price" for statutory purposes. Each year, the taxpayer must collect an amount equal to or greater than 7.5% of that net acquisition price from renting or leasing the new plane in order to qualify for Indiana's sales and use tax exemption for the purchase of an aircraft for the purpose of renting or leasing the aircraft. The Indiana Department of Revenue noted that the requirements a taxpayer must meet to qualify for an IRC §1031 like-kind exchange for federal income tax purposes and a tax exempt like-kind exchange for Indiana sales and use tax purposes differ. Ind. Dept. of Rev., Rev. Ruling No. 2015-20ST (July 14, 2016). Michigan: The Michigan Department of Treasury reminded taxpayers that unless otherwise exempt, a contractor is liable for use tax for tangible personal property used or consumed in the performance of the construction contract regardless of whether the contractor purchased or owns the property that is ultimately affixed to real estate or acquired that property from an entity (e.g., government agency or nonprofit organization) that originally purchased it exempt from sales and use tax. In addition, unless an exemption otherwise applies, a contractor is liable for use tax on tangible personal property that is ultimately affixed to, and/or made a structural part of, real estate by the contractor in the performance of the contract with its customer even if: (1) the property was acquired from its customer and the customer claimed an exemption from sales or use tax; or (2) the contractor received a claim of exemption from its customer and the basis for the exemption was one related to property that is not affixed to real estate, such as the industrial processing exemption or a direct pay authorization. Mich. Dept. of Treas., Treasury Update Vol. 1, Issue 4 (Aug. 1, 2016). Tennessee: The Tennessee Department of Revenue (Department) issued guidance on the sales and use tax exemption for machinery, apparatus, and equipment necessary to and primarily for research and development (R&D) activities, which took effect July 1, 2015. To qualify as R&D, the taxpayer's activities must have one of the following as its ultimate goal: (1) basic research in a scientific field of endeavor, (2) advancing knowledge or technology in a scientific or technical field of endeavor, (3) development of a new product, (4) improvement of an existing product, (5) development of new uses of an existing product, or (6) design and development of prototypes. Eligible taxpayers must apply for the R&D sales and use tax exemption certificate, which is posted on the Department's website. Taxpayers that want to claim a refund for tax paid on purchases of qualifying items used in R&D made on or after July 1, 2015 must use the following procedure: (1) request a refund from the vendor and provide the vendor with the R&D certificate of exemption issued by the Department, (2) the vendor must file a refund claim within three years from Dec. 31 of the year in which the tax was remitted to the Department, (3) the vendor must provide a copy of the taxpayer's certificate of exemption with the claim for refund, and (4) the vendor must refund or issue a credit memo for the collected tax to the taxpayer and submit documentation that the taxpayer has received a refund or credit for the tax paid on the qualifying R&D machinery purchases. Tenn. Dept. of Rev., Important Notice No. 16-08 (Aug. 1, 2016). Washington: The date for filing an annual tax incentive survey or report has changed to May 31 each year (formerly April 30), starting with the annual survey or report due May 31, 2017. In addition, starting after July 1, 2017, businesses that do not timely file the annual survey or report will be assessed 35% (instead of 100%) of the claimed tax incentive amount. Businesses that have filed late more than once for the same tax incentive will be charged an additional 15% of the tax incentive claimed. Interest and additional penalties may not be assessed on those amounts. Waivers and extensions may be requested before the due date. Wash. Dept. of Rev., Special Notice: Changes to Annual Tax Incentive Reports and Surveys (Aug. 30, 2016). Michigan: The Michigan Department of Treasury provided additional information about a new law (Public Laws 2016, PA 158) that effective for tax years beginning after June 30, 2016, no longer requires flow-through entities to withhold income tax on each member's or owner's distributed share of income (flow-through withholding). A flow-through entity with a calendar tax year ending Dec. 31, 2016, that was required before PA 158 to withhold must continue to withhold on behalf of its members for its full tax year. For tax years after calendar year 2016, withholding will no longer be required. A flow-through entity with a tax year beginning July 1, 2016, and ending June 30, 2017, is not required to withhold for that tax year or any succeeding tax year. Flow-through entities in a tiered structure should withhold and apply the cut-off based on their own tax year. If a taxpayer under the Corporate Income Tax (CIT) or Individual Income Tax (IIT) has a distributive share of business income attributable to a flow-through entity's tax year beginning after June 30, 2016, that taxpayer will not have withholding from that flow-through entity to claim on its annual return, and this should be considered by the CIT or IIT taxpayer when determining its quarterly estimated payments. Flow-through entities that file a Composite Individual Income Tax Return (Form 807) on behalf of nonresident individuals may now be required to file quarterly estimated payments. Even though the flow-through entity will no longer be required to withhold, it nevertheless must continue to report information to its members necessary to complete their income tax returns. Mich. Dept. of Treas., Treasury Update Vol. 1, Issue 4 (Aug. 1, 2016). New York: The New York Department of Taxation and Finance updated its corporate tax reform FAQ page and explained that unused net operating losses (NOLs) from tax years beginning before Jan. 1, 2015, are not reported on the 2015 Form CT-3 or CT-3-A, Part 3, Line 18, NOL deduction. These losses must be converted into a prior net operating loss conversion (PNOLC) subtraction pool to be applied against apportioned business income over a period of years. Taxpayers compute the pool and the amount to annually deduct on Form CT-3.3, PNOLC Subtraction, and report the deduction on Part 3, line 16 on Form CT-3 or CT-3-A. Taxpayers that have already filed their 2015 Form CT-3 or CT-3-A and incorrectly reported the deduction for their prior year NOLs must file an amended 2015 tax return and include Form CT-3.3 to avoid a denial of the incorrectly reported deduction and the issuance of a deficiency notice. NY Dept. of Taxn. and Fin., Guidance on the proper treatment of net operating losses incurred prior to 2015 (Sept. 1, 2016). California: The California State Board of Equalization reminded taxpayers that certain motor vehicle fuel and diesel fuel tax rates will change on Jan. 1, 2017, and that the excise tax on motor vehicle fuel decreased effective July 1, 2016. The aircraft jet fuel prepayment sales and use tax rate will decrease to 7.25% (from 7.5%) on Jan. 1, 2017, and the diesel fuel prepayment sales and use tax rate will decrease to 9% (from 9.25%) on Jan. 1, 2017. In addition, beginning July 1, 2016, the gasoline tax (i.e., the motor vehicle fuel excise tax) decreased to $0.278 per gallon (from $0.30 per gallon), effective through June 30, 2017. Cal. SBOE, News for Tax Practitioners Pub. No. 542, Ed. 4 (Sept. 1, 2016). California: The California State Board of Equalization (SBOE) reminded taxpayers that prepaid mobile telephony services (MTS) sellers (other than direct sellers) with less than $15,000 of sales of prepaid MTS in the previous calendar year are no longer required to collect the surcharge from their customers, effective Jan. 1, 2017. Sellers that have more than one location must use sales of prepaid wireless services and products from all locations to determine annual sales. Prepaid MTS sellers must maintain adequate records that show that their annual wireless services and products sales are less than $15,000. Customers that purchase prepaid wireless services and products in retail transactions in California from sellers that do not charge and collect the prepaid MTS surcharge are responsible for paying the surcharge directly to the SBOE, but prepaid MTS sellers with less than the requisite sales may continue to charge and collect the surcharge on those retail sales and report and pay the amounts to the SBOE. As of Jan. 1, 2017, sellers that are no longer required to charge and collect the prepaid MTS surcharge on sales of prepaid MTS and do not want to continue to voluntarily collect the surcharge from their customers may close out their prepaid MTS account by contacting their local SBOE office or calling the customer service center. Cal. SBOE, News for Tax Practitioners Pub. No. 542, Ed. 4 (Sept. 1, 2016). Illinois: New law (HB 4633) sets forth processes for insurers to search for and identify beneficiaries and owners of unclaimed life insurance benefits. If the beneficiaries or owners of the unclaimed life insurance benefit cannot be found, these items will be reportable to the State Treasurer pursuant to the Uniform Unclaimed Property Act. Provisions of HB 4633 take effect Jan. 1, 2017. Ill. Laws 2016, Pub. Act 99-893 (HB 4633), signed by the governor on Aug. 26, 2016. Michigan: The Michigan Department of Treasury reminded taxpayers that a transfer of a controlling interest in an entity may trigger the state real estate transfer tax (SRETT). Most transfers of real property are subject to SRETT, and some are also subject to county real estate transfer tax. The term "controlling interest" means more than 80% of the total value of all classes of stock of a corporation; more than 80% of the total interest in capital and profits of a partnership, association, limited liability company, or other unincorporated form of doing business; or more than 80% of the beneficial interest in a trust. To trigger the tax, real property must comprise 90% or more of the fair market value of the entity's assets as determined under generally accepted accounting principles. A transfer of a controlling interest in an entity with an interest in real property is exempt from the SRETT if the transfer of the property would have otherwise qualified for an exemption if the transfer was one that could have been accomplished by deed between the parties to the transfer. Mich. Dept. of Treas., Treasury Update Vol. 1, Issue 4 (Aug. 1, 2016). Washington: The U.S. Supreme Court has been asked to review the Washington Supreme Court's ruling that the retroactive application of the state legislature's amendment to a B&O tax exemption to narrow its scope does not violate a taxpayer's rights under due process, collateral estoppel, or separation of powers principles. Dot Foods, Inc. v. Wash. Dept. of Rev., No. 92398-1 (Wash. S. Ct. March 17, 2016), cert. petition filed, Dkt. No. 16-308 (U.S. S. Ct. filed Sept. 9, 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: 2016-1619 |
