30 September 2016 State and Local Tax Weekly for September 23 Ernst & Young's State and Local Tax Weekly newsletter for September 23 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. An extensive, fast-moving unclaimed property (UP) audit campaign of all forms of health care and health insurance companies — including for-profit, tax exempt, private and state-funded — is being conducted by third-party contract audit firms and the underlying states that hire them. The audit notification may be from a "typical" UP contract auditor that examines the general ledgers of entities to determine if UP exposure exists beyond what is reported annually. One audit firm in particular, however, may be looking beyond the "typical" general ledger type assessment to property types and billing and reimbursement practices specific to the health insurance and health care industry. The type of UP that may be at issue for health care and health insurance companies include the following: accounts payable disbursements or voids, claim-related disbursements or voids, payroll, accounts receivable credit balances, patient and/or provider refunds, rebates, and reimbursements, and securities for public companies. Under this new health care-targeted audit initiative, specific to health insurance companies is Medicare and Medicaid, with an UP examination focus on: — Billing discrepancies between the amounts state governments are funding health insurance companies for Medicaid and the amounts health insurance companies are dispersing to patients and members In addition to the potential for having to remit UP to the states, these audits may expose health insurance or health care companies to reputational risk as the audits will focus on their financial practices, including the financial procedures behind Medicare and Medicaid reimbursement, to increased media, public and political scrutiny as unfair or detrimental to patients, policyholders, consumers, or state-funded health care plans. For additional information on this development, see Tax Alert 2016-1615. All States: The latest state income and franchise tax quarterly newsletter, which provides a summary of the legislative, administrative and judicial updates that occurred during July 1, 2016 through Sept. 15, 2016, is now available. Highlights include: (1) a summary of legislative developments in the District of Columbia, Missouri, North Carolina and Pennsylvania; (2) a summary of judicial developments in Louisiana, Maryland, Massachusetts, Michigan, New York and Oregon; (3) a summary of administrative developments in Alabama, Arizona, California, Indiana, New York, North Carolina, North Dakota, Oregon, South Carolina and Texas; and (4) a discussion of state and local tax items to watch in Federal, California, Louisiana, New Jersey, Oregon, South Carolina and Texas. A supplement covering the period from Sept. 16, 2016 through Sept. 30, 2016 will be released in early October 2016. Click here for a copy of the quarterly newsletter. Kansas: In response to a ruling request, the Kansas Department of Revenue (Department) explained that there are no specific requirements that must be met to end the election to use the two-factor apportionment formula before the end of the 10-year period. Instead, the Department will consider such a request on a case-by-case basis, based on the facts and circumstances. Kan. Dept. of Rev., P-2016-011 (Aug. 15, 2016). Michigan: The U.S. Supreme Court (Court) recently granted Sonoco Products Co. (Sonoco) and Gillette Commercial Operations North America and Subsidiaries (collectively, Gillette) separate requests for an extension of time to file a petition for a writ of certiorari to the Court. Sonoco and Gillette are appealing the Michigan Supreme Court's denial of application for leave to appeal the Sept. 29, 2015 judgment of the Michigan Court of Appeals upholding the constitutionality of the retroactive repeal of the Multistate Tax Compact (Compact), a provision of which allowed a taxpayer to make an election to use the Compact's equally weighted three-factor apportionment formula to determine certain Michigan tax liabilities. The extended deadline to file the certiorari petitions with the Court is Nov. 21, 2016. Sonoco Products Co. v. Dep't of Treasury, No. 152598 (Mich. Sup. Ct June 24, 2016), application to extend time to file granted, No. 16A250 (US S. Ct. Sept. 9, 2016); Gillette Commercial Operations North America and Subsidiaries v. Dep't of Treasury, No. 152588 (Mich. Sup. Ct June 24, 2016), application to extend time to file granted, No. 16A263 (US S. Ct. Sept. 13, 2016). For additional information on this development, see Tax Alert 2016-1636. Missouri: Vetoed bill (HB 1870) would have authorized a temporary income tax deduction for a small business for each full-time job created meeting a salary threshold, among other changes. HB 1870, vetoed by the governor on July 1, 2016; failed to pass over veto on Sept. 14, 2016. Missouri: An out-of-state information technology service company's (company) charges for Voice over Internet Protocol (VoIP) services are subject to sales tax because they are taxable telecommunications services used by an instate customer. The Missouri Department of Revenue noted that the new state and local sales tax exemption for use of internet access does not apply because goods and services that were subject to sales tax on Jan. 1, 2016, such a VoIP services, remain subject to sales tax. Further, the applicable local sales tax rate applicable to the VoIP service is based upon its Missouri customer's service address, in this case Branson's sales tax rate. The company's support services (excluding VoIP), however, are not subject to sales tax because the company's managed computer and server updating, managed antivirus service, and managed email service are not enumerated services subject to sales tax. Finally, the company must collect and remit vendor's use tax on computer hardware and computer software it sells and ships to its Missouri customers, because the company is a vendor engaging in business activities within Missouri, selling tangible personal property to individuals located in Missouri, and its employees enter Missouri to assist its customers if necessary. Mo. Dept. of Rev., LR 7735 (Aug. 29, 2016). Pennsylvania: The constitutionality of the City of Philadelphia's new 1.5 cent tax on sugar-based beverages (i.e., soda tax), which takes effect on Jan. 1, 2017, is being challenged. A group of taxpayers, businesses and beverage associations are arguing, among other things, that the soda tax is being imposed on zero or low calorie beverages that are sweetened with non-sugar sweeteners, the soda tax duplicates the state's sales and use tax on soft drinks, the soda tax is an unlawful attempt by the city to circumvent the state's tax supremacy and the Pennsylvania Constitution's uniformity requirement, the soda tax would disadvantage the city's small businesses that sell soda relative to comparable businesses outside the city's borders, the city is expressly prohibited from taxing subjects and property already taxed by the state, and the soda tax is preempted under Pennsylvania law because the tax is contrary to the purposes of the state's prohibition of charging the sales and use tax on purchases made using Supplemental Nutrition Assistance Program funds. Williams et al v. City of Philadelphia,Case ID: 160901452 (complaint filed Sept. 14, 2016). In a related development, on Sept. 9, 2016, the Philadelphia Department of Revenue (Department) proposed the Sugar-Sweetened Beverage Tax Regulations that would implement the new soda tax. Additional information on the soda tax, including who pays the tax, discounts and exemptions, important dates, and forms and instructions, is available on the Department's website. Alaska: New law (HB 100) establishes a credit against net income tax for an in-state processing facility that manufactures urea, ammonia, or gas-to-liquid products, equal to the percentage of the amount of royalty paid on natural gas from a state lease that is delivered in the taxable year of the taxpayer for use at the in-state processing facility equal to the percentage of the ownership interest held by the taxpayer in the in-state processing facility. The credit may not reduce the taxpayer's tax liability below zero, and an unused credit cannot be carried forward. The credit is available for arm's length transactions on or after July 1, 2017 and before Jan. 1, 2024. Alaska Laws 2016, Ch. 58 (HB 100), signed by the governor on Sept. 15, 2016. Delaware: New law (SB 221) provides a tax credit to employers that hire individuals with disabilities who are referred from vocational rehabilitation. A "vocational rehabilitation referral" means an individual who is certified by the designated state agencies as: (1) having a physical or mental disability which, for such individual, constitutes or results in a substantial impediment to employment; and (2) having been referred to the employer upon completion of, or while receiving, rehabilitative services pursuant to an individual plan for employment for, or program of, vocational rehabilitation services. The credit is equal to 10% of the gross wages paid by the qualified employer to a vocational rehabilitation referral in the course of the employee's sustained employment during the tax year, not to exceed $1,500. Unused credits are refundable. This credit is available for vocational rehabilitation referrals hired on or after Jan. 1, 2017. Del. Laws 2016, SB 221, signed by the governor on Aug. 29, 2016. Florida: Approved Constitutional amendment (Amendment 4, included in HJR 193) authorize the legislature to exempt from ad valorem taxation the assessed value of solar or renewable energy source devices subject to tangible personal property tax and to prohibit consideration of solar or renewable energy source devices in assessing the value of real property for ad valorem taxation purposes. This amendment is effective from Jan. 1, 2018 through Dec. 31, 2037. Fla. Dept. of Rev., Property Tax Information Bulletin No.16-06 (Sept. 20, 2016). Arizona: The Arizona Department of Revenue (Department) updated its composite individual income tax returns guidance. The Department will accept a composite return of qualifying nonresident shareholders of an S corporation or of the qualifying nonresident individual partners of a partnership in lieu of each nonresident shareholder or partnership filing a separate Arizona individual nonresident income tax return if certain conditions are met. Each member must execute an affidavit stating that the member qualifies for inclusion in a composite return under the stated conditions (e.g., nonresident, have not income from sources within the state other than his/her distributive share), and a power of attorney authorizing the S corporation or partnership to file a nonresident income tax return on members' behalf for each year of inclusion in the composite return. The proper form — Form 140NR, Arizona Nonresident Personal Income Tax Return — must be identified as a composite return. The guidance also describes how to compute separately each member's deductions, exemptions, and liability, and how members participating in the composite return can elect to waive their right to claim all allowable exemptions, subtractions, and deductions. The members, rather than the S corporation or partnership, must pay the state income tax liabilities included in the composite return, and individual members are liable for any proposed assessment resulting from an audit, even though a composite return has been filed. Finally, the filing of a composite return on behalf of nonresident shareholders or partners does not relieve the S corporation or partnership from the requirement to file its own state entity return for the tax year. Ariz. Dept. of Rev., Individual Income Tax Ruling ITR 16-2 (Sept. 13, 2016) (supersedes ITR 13-2). Arizona: The Arizona Department of Revenue (Department) issued guidance and examples on how an individual that claims bonus depreciation for federal income tax purposes, can claim bonus depreciation for Arizona individual income tax purposes based on recent law changes that increased the bonus depreciation allowance a taxpayer can deduct from Arizona gross income. For tax year 2016, Arizona requires a taxpayer that claimed bonus depreciation on its federal return to claim Arizona bonus depreciation on its Arizona income tax return. For 2016, the Arizona bonus depreciation is 55% (up from 10% allowed in 2014 and 2015) of the amount claimed on the taxpayer's federal income tax return. For tax years 2017 and beyond, the Arizona bonus depreciation is increased to 100% of the amount of bonus depreciation claimed on the federal income tax return. Ariz. Dept. of Rev., Ariz. Indiv. Income Tax Procedure ITP 16-2 (Sept. 13, 2016), superseding ITP No. 15-1 (Jan. 22, 2015). California: A revised version of the California Franchise Tax Board's Publication 1016, Real Estate Withholding Guidelines, provides a new section with guidance for qualified intermediaries (QI), which are entities that facilitate a like-kind exchange. A QI is required to withhold and remit the withholding in a deferred like-kind exchange, unless the seller or transferor qualifies for an exemption on Form 593-C. If a QI disburses money or other property (in addition to property that is a part of the like-kind exchange) exceeding $1,500 from the sale, withholding is required unless the seller or transferor certifies to an exemption on Form 593-C other than the transfer that qualifies as a simultaneous or deferred like-kind exchange. Withholding is required for a failed exchange unless the seller or transferor certifies to an exemption on Form 593-C, other than the exemption that qualifies as a simultaneous or deferred like-kind exchange. If the deferred like-kind exchange fails in a second tax year, then the transaction qualifies as an installment sale. The QI must file Form 593 in the year the deferred like-kind exchange failed and final distribution was made. In addition, QIs must verify certifications on Form 593-C to the extent that they have actual knowledge of the facts; however, if the QI does not have actual knowledge of the facts, the QI must only verify that Form 593-C is completed, signed, and received by the close of the deferred like-kind exchange transaction and any cash is distributed to the seller or transferor. Finally, QIs must keep a copy of all completed real estate withholding forms for five years following an exchange that failed or that disbursed boot of the final distribution. Failure to comply with these rules could result in the imposition of penalties. Cal. FTB, FTB Pub. 1016, Real Estate Withholding Guidelines (revised August 2016). California: New law (AB 1775) changes the due dates for filing California tax returns for most partnerships, corporations and limited liability companies (LLCs) to be consistent with changes to the federal due dates. Effective for tax years beginning on and after Jan. 1, 2016, changes to the California tax return due dates are as follows: (1) returns for partnerships, S corporations and LLCs classified as partnerships are due the 15th day of the 3rd month following the close of the tax year; (2) returns for corporations and LLCs classified for corporations are due the 15th day of the 4th month. Single member LLCs will follow the due date of its owner. AB 1775 makes corresponding changes to the payment due dates for taxes and fees due by the original return due date. AB 1775, however, does not change the periods for extensions. Corporations will continue to have extensions of time to file not to exceed seven months and partnerships will have extensions of time to file not to exceed six months. Cal. Laws 2016, Ch. 348 (AB 1775), signed by the governor on Sept. 14, 2016. For additional information on this development, see Tax Alert 2016-1617. Louisiana: The Louisiana Governor extended the suspension of deadlines in legal proceedings in courts, administrative agencies, and boards in the 26 parishes affected by Louisiana's recent flooding event until and through Sept. 30, 2016, provided that any litigant, interested party or attorney certifies that they are unable to meet a legal deadline due to the declared disaster. In addition, courts, administrative agencies, and boards throughout the state must use due diligence in accommodating requests for delays or continuances from any litigant, interested party, or attorney who may have been impacted by the declared disaster. La. Gov., Exec. Order No. JBE 2016-66 (Sept. 9, 2016) (amending Exec. Order Nos. JBE 2016-53 and JBE 2016-57). Louisiana: A corporation that participated in the state's tax amnesty program to satisfy a 2012 tax obligation can file an amended 2012 return to claim a research and development (R&D) credit that was awarded after the close of the amnesty program, because the R&D credit is unrelated to the company's amnesty. At issue in this case is the scope of a provision of the amnesty program that bars a participating taxpayer from subsequently initiating an administrative or judicial proceeding. The Louisiana Board of Tax Appeals (Board) determined that this provision is directed only at the tax liability at issue for the amnesty, and is not directed at a separate R&D credit that had not ripened at the time of the amnesty. The Board also noted that if the credit had been reviewed more timely, then the corporation would not have needed to participate in the amnesty program and the corporation would have been owed a refund at the time of the amnesty application. Medtron Software Intelligence Corp. v. La. Dept. of Rev.,No. 9527D (La. Bd. Tax App. Aug. 10, 2016). Federal: Proposed bill (HR 2315 — the Mobile Workforce State Income Tax Simplification Act), as approved by the House on Sept. 21, 2016, would limit the authority of states and localities to impose tax on certain income of nonresident employees. Specifically, under the Act, states will only be able to impose net income taxes on employees who are residents of the state or who are present and performing employment duties in the state for more than 30 days during the calendar year in which the income is earned. Similar legislation has been considered in prior legislative sessions. HR 2315 will now be sent to the Senate for consideration. See also, the Senate version of the Mobile Workforce bill, S. 386, which was introduced on Feb. 5, 2015. Illinois: New law (O2016-7090) imposes a tax upon on the use or consumption of water in the City of Chicago that is purchased from the Department of Water Management, and the transfer of wastewater to the City sewer system from property located in the City. In 2017, the tax is $.000295 per gallon of water used or consumed; (2) in 2018, the tax is $.00064 per gallon of water used or consumed; (3) in 2019, the tax is $.001005 per gallon of water used or consumed; and (4) in 2020 and each year thereafter, the tax is $.001255 per gallon of water used or consumed. The same tax rates apply to water for sewer use. Chicago Laws 2016, O2016-7090, signed by the mayor on Sept. 21, 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: 2016-1665 |
