Ernst & Young's State and Local Tax Weekly newsletter for October 14 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.

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Top stories

US Supreme Court will not review California Multistate Tax Compact apportionment election case; status of other cases on the horizon

On Oct. 11, 2016, the US Supreme Court (the USSC) denied certiorari in Gillette Co. v. Franchise Tax Board. Accordingly, the California Supreme Court's ruling in Gillette, which prohibited corporate taxpayers from electing to use the equally weighted three-factor apportionment formula under the Multistate Tax Compact (Compact) for reporting income to California in lieu of the statutorily mandated formula (e.g., double-weighted sales or single sales factor formulae), will stand, as it cannot be further appealed.

This past February, the Franchise Tax Board (FTB) issued Notice 2016-01 advising taxpayers and their representatives of its intended course of action following the California Supreme Court's ruling in Gillette regarding the use of the Compact apportionment election. The FTB paused action on any refund claims while the case was pending before the USSC. Since the case has been finally resolved by the USSC's denial of certiorari, the FTB will take action on these claims.

While the Compact apportionment election litigation has been resolved in California, similar litigation is on-going in Colorado, Michigan, Minnesota, Oregon and Texas. Taxpayers involved with the Michigan litigation, which is now addressing whether the state's retroactive repeal of the Compact is constitutional, have until November 21, 2016, to file a certiorari petition with the USSC. Kimberly-Clark Corporation, the taxpayer in the Minnesota litigation, filed its certiorari petition with the USSC on October 20, 2016.

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Income/Franchise

Ohio: The Ohio Department of Taxation (Department) issued an individual income tax Information Release in response to the Ohio Supreme Court's (Court) unanimous decision in Corrigan v. Testa, which held that the application of Ohio Rev. Code § 5747.212 to a nonresident's capital gain from his sale of ownership interests in a limited liability company that was doing business in Ohio violated the Due Process Clause of the US Constitution. In Corrigan, the Court held that the statute was unconstitutional as applied to the taxpayer, not on its face. The Court concluded that an ownership interest in a business is an intangible asset and that the sale of that asset was allocable, as nonbusiness income, to the taxpayer's state of domicile. In response to numerous inquiries about the decision, the Department provided the following guidance: (1) If a taxpayer has already filed a refund claim or has a protest outstanding on the applicability of Ohio Rev. Code § 5747.212, its case will be reviewed in light of Corrigan. Taxpayers with additional information after reviewing Corrigan should provide that information to their Department contacts as soon as possible. (2) Taxpayers who believe they are entitled to a refund based on Corrigan should file amended Ohio individual income tax returns and refund claims, along with a citation to the case in the "Reasons and Explanations of Corrections" page, along with a detailed statement of facts and analysis as to why the decision applies to the taxpayer's situation. Ohio Rev. Code§ 5747.11 provides a four-year statute of limitations on refund claims. Finally, the Department states that any capital gain to which Ohio Rev. Code § 5747.212 does not apply will be treated by the Department as allocable nonbusiness income, with that income being assigned to the taxpayer's state of domicile. Since the gain is nonbusiness income, it will not be eligible for Ohio's Small Business Deduction. Ohio Dept. of Rev., Information Release IT 2016-01 — Guidance on an equity investor's apportionment of gain from the sale of a closely held business (O.R.C. § 5747.212 (Oct. 7, 2016). For additional information on this development, see Tax Alert 2016-1731.

Puerto Rico: The Puerto Rico Treasury Department (PRTD) has issued guidance (Administrative Determination (AD) 16-11) on the application of the alternative minimum tax (AMT) to tax years 2015 and 2016. The PRTD determined that taxpayers subject to the AMT will not have to calculate the sum of their related-party expenses and personal property under Section 1022.03(b)(2) of the PR Code (Second Measure) to determine the minimum tentative tax for the 2016 tax year. The PRTD also determined that, for tax years beginning on Jan. 1, 2016, taxpayers subject to the AMT under Section 1022.03(a) of the PR Code should determine their minimum tentative tax by calculating 30% of the amount by which their alternative minimum net income for the tax year exceeds the exempt amount, reduced by the alternative minimum credit for taxes paid abroad for the tax year (30% Rule). The PRTD determined that taxpayers that were subject to the AMT under Section 1022.03(a) of the PR Code by reason of the Second Measure for the 2015 tax year will be able to recalculate the AMT without taking into consideration Section 1022.03(b)(2). The taxpayer should recalculate the AMT by calculating the minimum tentative tax only under the 30% Rule. Once the minimum tentative tax is calculated, the taxpayer must determine whether it overpaid taxes by computing the difference, if any, between the minimum tentative tax and the regular tax. If the amount of the AMT paid on the original return filed for the 2015 tax year exceeds the recalculated AMT, taxpayers may claim a credit for the overpaid taxes. Taxpayers that have a credit for overpaid AMT may opt to use the excess as a: (1) credit of AMT in subsequent years, subject to the limitations in Section 1051.02 of the PR Code; or (2) payment of estimated tax for the 2016 tax year. Taxpayers that opt to treat the overpaid AMT as an estimated tax payment for the 2016 tax year should file an amended income tax return for the 2015 tax year with new Form 483.3, "Corporation Schedule A — Part V 2015 Tax Year." The new form is available here under Returns, Forms and Schedules. Taxpayers may not claim a refund on the amended return for the amount of overpaid AMT. Taxpayers that have not filed an income tax return for the 2015 tax year should file a return with the new Form 483.3. For additional information on this development, see Tax Alert 2016-1705.

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Sales & use

Florida: A seller's sales of car tracking GPS devices to car dealerships are subject to sales and use tax because they are sales of tangible personal property, not sales for resale, and as such, the GPS seller cannot accept resale certificates on the sales in good faith. The contract states that the car dealer cannot resell the GPS device unless the car dealer was simultaneously given written permission to resell, but the GPS seller never limited or challenged transfers and stated that its acceptance of the resale certificate is an approval of the subsequent resale. The Florida Department of Revenue found that the GPS seller's failure to enforce the terms of the contract do not change the nature of the agreement. Therefore, the GPS seller cannot in good faith accept resale certificates from car dealers when the contract states that the car dealer cannot resell the device, unless the car dealer was simultaneously given written permission to resell. Fla. Dept. of Rev., Technical Assistance Advisement 16A-007 (June 9, 2016).

Illinois: The Illinois Department of Revenue (Department) offered guidance regarding the taxability of shipping charges for a grocery business that gives customers the options to: (1) order, pay a fee, and pick up groceries at a designated location; (2) pay more to have the order delivered; or (3) sign up for a prepaid "all inclusive" delivery charge for various lengths of time. The Department citing Kean v. Wal-Mart, explained that outgoing transportation and delivery charges are part of the gross receipts subject to retailers' occupation tax when an "inseparable link" exists between the sale and delivery of the merchandise (e.g., when the transportation and delivery charges are not separately identified to the purchaser on the contract invoice; the transportation and delivery charges are separately identified but the seller does not give the purchaser the option to receive the property in any manner except by delivery from the seller). Under the order-and-pickup option, the grocery business' costs incurred in moving the groceries from one location to the customers' pickup location are taxable because the charges reimburse the grocery business for its costs of doing business and are not a charge for outgoing transportation and delivery. In addition, although the order-and-pickup charge is taxable as a cost of doing business, the charge demonstrates that the customer has a pickup option and, therefore, the charges for outgoing transportation under the model in which the customer orders and receives delivery of the grocery items at the customers' address are not included in gross receipts. Ill. Dept. of Rev., Private Letter Ruling No. ST 16-0006-PLR (July 29, 2016).

Illinois: Amended regulation 86 Ill. Admin. Code § 130.330 was modified to clarify when the manufacturing machinery and equipment exemption applies to extractive activities and to reflect statutory changes that the exemption does not apply to machinery and equipment used to generate electricity. Under the amended regulation, the extractive process of quarrying will constitute manufacturing in some cases. This change makes the regulation consistent with an Illinois appellate court's ruling in Nokomis Quarry Co. in which it held that a calculated blasting method performed with specific desired results and changes limestone deposits into minerals with a different form, possessing new qualities or combinations, constitutes manufacturing. The amended regulation provides additional examples of equipment and machinery that qualifies for exemption, including machinery and equipment used in the general maintenance or repair of such exempt machinery and equipment for in-house manufacture of exempt machinery and equipment. The term "equipment" includes any independent device or tool separate from any machinery but essential to an integrated manufacturing or assembling process (e.g., computer used primarily in operating exempt machinery and equipment). The regulation lists equipment the exemption does not apply to such as hand tools, supplies, protective gear, electricity, and other types of energy. The regulation also was amended to provide that it does not include machinery and equipment used in the generation of electricity for wholesale or retail sale or the generation or treatment of natural or artificial gas for wholesale or retail sale that is delivered to customers through pipes, pipelines, or mains; or the treatment of water for wholesale or retail sale that is delivered to customers through pipes, pipelines, or mains. The amended regulation took effect Sept. 9, 2016. Ill. Dept. of Rev., 86 Ill. Admin. Code § 130.330 (Sept. 23, 2016).

Ohio: The Ohio Department of Taxation (Department) recently updated its sales and use tax guidance on online services in response to HB 466, in which Ohio added "digital advertising services" to the definition of nontaxable "personal and professional services," which is an exception to the definition of taxable "automatic data processing," "computer services" and "electronic information services." Ohio Dept. of Taxn., Information Release ST 1999-04 — On-line services and internet access (updated September 2016). For additional information on this development, see Tax Alert 2016-1731.

Ohio: The Ohio Department of Taxation (Department) revised Information Release ST 2001-01 to update its guidance on use tax collection nexus to take into account the changes adopted in HB 64, which adopted Ohio's version of "click-through nexus." HB 64 added Ohio Rev. Code § 5747.01(I)(2)(g) to provide that an out-of-state seller is presumed to be subject to an Ohio use tax collection obligation if it enters into an agreement with a state resident in which the resident receives a commission for referring potential customers to the seller, provided that the cumulative gross receipts from such sales referred to the seller by the resident exceed $10,000 in the preceding 12 months. A seller may rebut this presumption by obtaining evidence that each resident engaged by the seller did not engage in any activity in Ohio during the preceding 12 months that was significantly associated with the seller's ability to establish or maintain a market. Such evidence may include written statements advising that the state residents did not engage in solicitation in Ohio on behalf of the seller. Ohio Dept. of Taxn., Information Release ST 2001-01 — Use tax nexus standards (revised August 2016). For additional information on this development, see Tax Alert 2016-1731.

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Property tax

Tennessee: A statute exempting electric cooperatives from property tax violates the Tennessee Constitution because the statute has no authority to grant a charitable tax exemption to organizations that have no elements of charity associated with them. In reaching this conclusion, the Tennessee Court of Appeals (Court) found that an organization must be a charitable institution and use the property exclusively for its charitable purposes to receive the exemption. Electric cooperatives are organized for the mutual benefit of their members rather than the general public, and there is no element of charity associated with electric cooperatives as members and nonmember patrons of electric cooperatives pay for the services they receive. Caney Fork Electric Cooperative, Inc., et al. v. Tenn. State Bd. of Equal., No. M2016-00316-COA-R12-CV (Tenn. App. Ct. Sept. 23, 2016).

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Controversy

Arizona: Reminder: The Arizona tax recovery program will end Oct. 31, 2016 (tax recovery program period). In exchange for paying the tax due, the Arizona Department of Revenue (Department) will abate or waive all penalties and interest due and not seek criminal prosecution. Eligible taxpayers must submit tax recovery program returns, the tax recovery program application and pay the full amount of tax due during the tax recovery program period. 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 those periods ending before Feb. 1, 2015. According to the tax recovery application and information about the program on the Department's website, tax recovery is available for the following taxes: income (corporate, individual, and fiduciary); use tax; and transaction privilege (sales) tax. Note, however, that 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 tax, withholding tax, property tax and estate tax.

Pennsylvania: The Pennsylvania Department of Revenue (Department) announced that the tax amnesty program will run from 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 Agreement owed to other states (e.g., fuels taxes collected by Pennsylvania but 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 properly will not be liable for any taxes of the same type due before Jan. 1, 2011. For additional information on this development, see Tax Alert 2016-1682.

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Miscellaneous tax

All States: On Wednesday, Nov. 2, 2016 from 1:00-2:15 p.m. EDT New York (10:00-11:15 a.m. PDT Los Angeles), EY will host a webcast on tax issues in debt modifications and restructurings and bankruptcy. During this webcast, the following topics will be discussed: (1) federal and state income tax implications of an out-of-court debt modification or restructuring; (2) federal and state income tax implications of a bankruptcy filing; (3) tax administration and non-income tax issues and opportunities in bankruptcy; and (4) tax strategies that may yield cash savings. To register for this event, go to Debt modifications/restructurings and bankruptcy.

All States: On Thursday, Nov. 10, 2016 from 1:00-2:30 p.m. EST New York (10:00-11:30 a.m. PST Los Angeles), EY will host a post-election webcast. Following the November 8th US federal elections, policymakers will turn their attention to other pressing matters, including funding the federal government beyond December 9th, dealing with the more than three dozen tax "extenders" set to expire at year-end and addressing the federal debt limit. Lawmakers are also signaling their intent to move forward with federal tax reform in 2017. On the state side, tax departments will need to address the results of ballot initiatives impacting businesses and individuals, and some legislatures may have to address budget shortfalls. Join our panel as we discuss the election results and what they mean for tax and non-tax business executives. Topics will include: (1) Congressional makeup and political landscape — state and federal focus; (2) Outlook for federal tax policy and tax reform; (3) Outcome of key state ballot initiatives affecting tax — significant changes may be on the horizon. Click here to register for this event.

All States: On Friday, Oct. 28, 2016 from 1:00-2:00 p.m. EDT New York (10-11 a.m. PDT Los Angeles) EY will co-host a health care webcast with a focus on state unclaimed property audits. The webcast will explore the potential impact of the extensive, fast moving unclaimed property audit campaign focused on health care and health insurance companies. Panelists will provide insight into the processes of third-party contract audit firms which dominate the state unclaimed property audit world, discuss what to expect during a state unclaimed property audit and what property types will likely be reviewed, and offer best practices for business organizations preparing for such audits, whether they are under examination or not. Click here to register for this event.

Delaware: The US Supreme Court (Court) consolidated two cases brought by nearly half of the states arguing that Delaware is unlawfully collecting hundreds of millions of dollars-worth of unclaimed and abandoned "official checks" issued by MoneyGram Payment Systems, Inc. (MoneyGram). All of the states involved, including Delaware, invoked the Court's original jurisdiction under the US Constitution since their claims arise from of a disagreement among the states. In consolidating the two cases, the Court also granted the parties' motions for leave to file Bills of Complaint and for leave to file counterclaims within 30 days. For additional information on this development, see Tax Alert 2016-1690.

Delaware: The US Federal District Court for the District of Delaware (Court) dismissed an unclaimed property case because the plaintiff business' argument that Delaware's audit of it is preempted by the "Texas Trilogy" cases, which establish priority rules used to disburse unclaimed or abandoned property to competing states, applies only to disputes between states rather than disputes between private entities and the states. Delaware's audit also does not constitute an unreasonable search and seizure in violation of the Fourth Amendment because the plaintiff business did not allege that it is required to cooperate with the audit. On the other hand, the Court rejected the state's argument that the plaintiff business' claim was not ripe, finding instead that it was ripe because plaintiff business stands to suffer actual and imminent injury because of the real and detrimental effects of the audit process, the uncertainty regarding their operating funds and the harm caused by the ongoing, and possibly unconstitutional, audit process. Marathon Petroleum Corp. et al. v. Cook, No. 16-80-LPS (D. Del. Sept. 23, 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.