26 September 2016 State and Local Tax Weekly for September 16 Ernst & Young's State and Local Tax Weekly newsletter for September 16 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. Immediate action may be required as changes to California's market-based sourcing regulations for interest, dividends, securities and other intangibles, coupled with bright-line nexus provisions, may create nexus for non-filers On Sept. 15, 2016, the California Office of Administrative Law approved amendments proposed by the California Franchise Tax Board (FTB) to Cal. Code Regs. (CCR) tit. 18, Section 25136-2 (the Amendments) relating to the sourcing of revenues from sales other than sales of tangible personal property. The Amendments change the state to which revenues derived from dividends, interest, securities and other intangible property are assigned for purposes of determining the California sales factor. Coupled with California's bright-line nexus standards, companies that are not currently filing tax returns in California may now be subject to California taxation, including the state's $800 minimum tax. (As of Jan. 1, 2015, any taxpayer with more than $536,446 of revenues assigned to the state (with such sales assigned based upon California's own market-based sourcing regulations) is deemed to be "doing business" in California and is obligated to file a corporate franchise tax return.) These nexus provisions apply not only to corporations, but also to all other types of legal entities. Moreover, since California is not bound by international tax treaties and does not recognize the concept of "permanent establishment," foreign taxpayers that believe they are protected from all US taxation under their nation's tax treaties with the US may find that the new rules subject them to California taxation. The Amendments are retroactive to tax years beginning on or after Jan. 1, 2015 (although taxpayers can elect to apply those changes to all open years for which market-based sourcing was required). Taxpayers that already file returns in California may see little effect from the Amendments, other than adjustments in their sales factor numerators that may reduce or increase their California sales factor and accordingly, their California tax liability. Such California taxpayers may be required to amend their California tax returns to reflect the effect of these new sourcing rules. The bigger question, though, is the effect the Amendments will have on business entities that are not intending to or have not previously filed in California. For more on this implication, and other impacts of the changes to the regulation, see Tax Alert 2016-1584. Missouri: New law (HB 2030) allows a taxpayer to deduct from its federal adjusted gross income an amount equal to 50% of the net capital gain from the sale or exchange of employer securities of a Missouri corporation to a qualified Missouri stock ownership plan if upon completion of the transaction, the qualified Missouri employee stock ownership plan owns at least 30% of all outstanding employer securities issued by the Missouri corporation. The term "taxpayers" includes individuals, corporations, partnerships, S corporation shareholders, limited liability company members, firms, and partners in a firm. The deduction is allowed for all tax years beginning on or after Jan. 1, 2017. The deduction is allowed for all tax years beginning on or after Jan. 1, 2017. This provision will automatically sunset in six years, unless reauthorized in which case it will sunset 12 years after the effective date of the reauthorization. Mo. Laws 2016, HB 2030, enacted over the governor's veto on Sept. 14, 2016. Texas: In response to a ruling request, the Texas Comptroller of Public Accounts (Comptroller) found that when liquefied natural gas (LNG) is loaded into a vessel in a Texas port, and the vessel is chartered by the LNG purchaser under a time-charter agreement with industry-standard terms, the LNG is delivered in Texas and the sale of the LNG results in Texas receipts. Texas is a "point of delivery" state for apportionment purposes, and receipts from the sale of tangible personal property are apportioned to Texas if the purchaser takes delivery of the property in Texas, even if the property is then transported outside Texas. The sale and delivery in Texas of tangible personal property that is loaded into a vessel or any other means of conveyance that the purchaser of the property leases and controls or owns is an example of a transaction that involves the sale of tangible personal property and results in Texas receipts. The control over the use of the vessel given to the charterer is more important than the operational control exercised by the vessel's crew in determining which party is in control of a vessel under Texas law, and the Comptroller noted that the taxpayers had a substantially similar time charter to that in Tidewater, Inc., which concluded that the charterer maintained control over every aspect of the vessel. Vessels time-chartered under a model time-charter agreement are vessels under the control of the LNG purchaser for purposes of determining where the LNG purchaser takes delivery for the LNG for franchise tax apportionment. Tex. Comp. of Pub. Accts., No. 201608003L (Aug. 26, 2016) Texas: The Texas Comptroller of Public Accounts (Comptroller) stated its policy on whether a taxable entity may include empty miles in the apportionment formula for transportation receipts. Under the Comptroller's policy, a taxable entity may either include or exclude empty or deadhead miles (i.e., traveled without goods or passengers) in both the numerator and denominator in the apportionment formula for transportation receipts. A taxable entity, however, may not exclude empty miles from the numerator but include those miles in the denominator. The exclusion of empty miles from the numerator but not the denominator skews the percentage for apportionment, does not accurately reflect receipts from intrastate transportation in Texas, and results in a disproportionate percentage from that calculated when using revenue to apportion transportation receipts. Texas' special apportionment formula rule for transportation receipts will be amended to clarify this. This policy applies to all open tax report years. Tex. Comp. of Pub. Accts., Letter No. 201609008L (Sept. 8, 2016). All States: As companies explore new ways of doing business and adopt innovative business models, they face a complicated array of statutes and regulations at the state and local level that have often failed to keep pace with the rapid changes in the markets. In the third installment of Ernst & Young LLP's (EY) sales and use tax webcast series, which addresses the sales and use tax implications of Software as a Service (SaaS), cloud-based businesses, and related technology, the panelists discuss the current sales tax landscape around these issues and how states are working to adapt existing laws to new ways of doing business. The panelists also discuss the effect of recent case law, legislation and other guidance provided by the states. Finally, the webcast covers some of the challenges and risks that taxpayers encounter as they evaluate their tax positions on SaaS and cloud-computing when the application of existing laws is uncertain. The webcast is now available for on-demand replay through the EY Thought Center. For a summary of the webcast, see Tax Alert 2016-1539. Colorado: A company's charges for web collaboration services as well as its premium services provided to consumers in Colorado by means of servers located outside the state are not subject to Colorado sales tax because they are each an interstate service. In reaching this conclusion, the Colorado Department of Revenue (Department) distinguished AT&T, which dealt with a transmission service (which is necessarily tied to a geographic location), not routing and conferencing services (which are not tied to a geographic location). Because the transmission service is a separate transaction from the company's web collaboration service, the Department views this as a series of single participant calls from their point of origin to the server located outside Colorado and, therefore, all calls from Colorado are interstate. Moreover, the Department determined that each transaction between a participant and his or her telecommunications provider is a separate transaction, as is the transaction of purchasing the conference bridging service by the customer from the company. Thus, the out-of-state call bridging service is not subject to tax because each call is an interstate call. Colo. Dept. of Rev., PLR-16-014 (Aug. 1, 2016). Colorado: An out-of-state company with no physical presence in Colorado but which has a Colorado affiliate that does not act as its agent, is properly collecting and remitting use tax (not sales tax) on purchases by Colorado customers. In this instance, sales tax does not apply because the company's sales take place outside of Colorado and the company does not own any sales offices, warehouses, or inventory in Colorado, and all sales orders are received, reviewed, negotiated, and accepted at out-of-state headquarters. The Colorado affiliate does not act as the company's agent because the products of the company and the affiliate are distinctly different, they do not share employees or facilities, and the affiliate does not solicit offers to buy or accept offers on behalf of the company. Colo. Dept. of Rev., PLR-16-011 (July 6, 2016). Colorado: The Colorado Department of Revenue (Department) issued guidance on the applicability of sales tax to advanced payments for vehicle rentals. While taxability of these payments is not explicitly addressed in a statute, regulation or published guidance, the Department found state regulations and guidance on the taxability of hotel room rentals analogous. Consequently, the Department determined that any advance payment applied toward the charge of a motor vehicle rental is taxable. A nonrefundable advance payment exceeding 50% of the daily rental charge for the vehicle that is forfeited due to cancellation or the customer's failure to appear at the scheduled time is classified as a charge for the rental of the vehicle and as such is taxable. The Department said that the state can collect sales tax at the time the nonrefundable advance payment is made, noting that the payment is taxable either in its application toward the charge for the ultimate vehicle rental or as a forfeited deposit if the vehicle rental is cancelled. However, a nonrefundable advance payment of 50% or less of the daily rental charge is a nontaxable cancellation charge if it was forfeited due to cancellation, and no tax need be collected on these transactions. Further, tax is not due on refundable advance payments refunded due to cancellation. Colo. Dept. of Rev., GIL-16-011 (July 6, 2016). Kentucky: A retroactive $1,500 per-taxpayer cap on reimbursement for collecting and remitting sales tax is constitutional under the Kentucky Constitution. The portion of the state constitution at issue disallows repurposing tax levied and collected for a particular purpose, and the statute at issue was repealed and reenacted to include the $1,500 per-taxpayer cap. The Kentucky Court of Appeals (Court) found that the statute does not violate the state constitution because it merely provides for a tax allowance or deduction, and is not itself a tax statute. In addition, the retailers seeking refunds have no property interest or private right to any of the funds collected from consumers as sales tax because that money is collected for the state with the retailers acting as trustees of the money. Thus, the law change does not impermissibly transfer money from a private fund to the General Fund. The Court also found compensation caps enacted for other years constitutional. Wal-Mart Stores East, LP v. Ky. Dept. of Rev., No. 2015-CA-001054-MR (Ky. App. Ct. Sept. 9, 2016). New Jersey: New law (SB 2041) authorizes an additional $90 million worth of Economic Redevelopment and Growth Grant program tax credits for two specific municipalities for qualified residential projects, and increases the credit cap to $718 million (previously $628 million).This change took effect on Sept. 7, 2016. NJ Laws 2016, Ch. 51 (SB 2041), signed by the governor on Sept. 7, 2016. Indiana: A retailer's property appraisal, which included the use of "dark stores," better reflected the subject property's market value-in-use than an assessor's appraisal, which used data from sales of big box retailers with leases to either the retailer or another "first generation" user that were in place of the time of the sale. In reaching this conclusion, the Indiana Tax Court (Court) rejected the assessor's argument that Meijer, Trimas Fasteners, and Millennium were wrongly decided and the assessor's belief, that contrary to the Court's ruling in those cases, the sales of properties to secondary users cannot be the type of comparables contemplated under Indiana's market value-in-use standard because they simply do not provide evidence of utility, and thus, value, for the "first generation" user. Indiana assesses and taxes property based on its "true tax value," which is a property's "market value-in-use" — the value of a property for its current use, as reflected by the utility received by the owner or a similar user, from the property. The retailer's appraisal used the sales comparison approach, the income approach, and the cost approach to value the property's market value-in-use, and relied on data from the fee simple sales of nine Midwestern big box retail stores, which the retailer's appraiser argued were comparable in valuing the subject property because (1) they were vacant at the time of the sale and so their sales prices reflected the value of the real property alone (as opposed to intangible values such as tenant quality, that are often included in the sale of leased fees); (2) they all sold for a continued retail use; and (3) similar big box properties were regularly sold in the market. Howard County Assessor v. Kohl's Indiana, LP, No. 49T10-1502-TA-00004 (Ind. Tax Ct. Sept. 7, 2016). California: New law (AB 1559) allows the California State Board of Equalization (SBOE) to extend filing and payment deadlines for up to three months in the case of a disaster (e.g., fire, flood, storm, tidal wave, earthquake or similar public calamity, whether or not resulting from natural causes). The same conditions that apply to the extension for good cause apply to the extension for a disaster. The SBOE can extend the deadline for the following taxes: sales and use, motor vehicle fuel, use fuel, cigarette and tobacco products, alcoholic beverage, timber yield, hazardous substances, and diesel fuel; as well as for the energy resources and emergency telephone users surcharges and the integrated waste and underground storage tank maintenance fees. This law change took immediate effect. Cal. Laws 2016, Ch. 257 (AB 1559), signed by the governor on Sept. 9, 2016. Pennsylvania: The Pennsylvania Department of Revenue (Department) announced that the tax amnesty program will run April 21, 2017 through June 19, 2017. The amnesty program applies to all taxes administered by the Department, for tax periods where a known or unknown delinquency exists as of Dec. 31, 2015. Amnesty does not apply to taxes, interest and penalties collected under the International Fuel Tax Agreements owed to other states. In exchange for participating in the amnesty program, the Department will waive all penalties and collection and lien fees, and one-half of the interest due. In addition, taxpayers with unknown liabilities reported and paid during the amnesty period will not be liable for any taxes of the same type due before Jan. 1, 2011. (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: 2016-1620 |
