Ernst & Young's State and Local Tax Weekly newsletter for October 28 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.

—————————————————————————
Top Stories

Nebraska Supreme Court holds common law tax avoidance doctrines not applicable in capital gains case

InStewart v. Nebraska Dept. of Rev., the Nebraska Supreme Court (Court) held that common law economic substance and sham transaction doctrines did not apply to a special statutory capital gains election on sales of qualified capital stock. The Court concluded that the taxpayers, all individuals, met the statutory requirements for the election and that the lack of express language in the statute invoking the tax avoidance doctrines evidenced the legislature's intent that those doctrines should not apply.

While it is always a best practice to document business purpose and economic substance for any transaction, the Court's decision may serve as an example of how a state court could restrict application of a "clear and unambiguous" statute to its plain language and preclude a state tax authority from requiring a business purpose. This may especially be true where the state legislature has invoked the federal common law doctrines in some areas of state tax law but not in others. Stewart v. Nebraska Dep't. of Rev., 294 Neb. 1010 (Neb. S. Ct. Oct. 14, 2016). For more information on this development, see Tax Alert 2016-1809.

Texas announces $60 million in grant funding for replacement or repowering of diesel vehicles

The Texas Commission on Environmental Quality (TCEQ) has opened a new round of funding under the Texas Emissions Reduction Incentive Grants (ERIG) program. The program will provide $60 million in grant funding to cover up to 80% of the eligible costs of replacement, purchase, lease, repower or retrofit of heavy duty diesel vehicles and equipment in Texas.

The ERIG program is open to any entity that operates diesel vehicles or equipment in Texas. The program has broad applicability, and includes on-road and off-road vehicles, marine vessels, locomotives and stationary equipment. An applicant must commit to replacing existing diesel powered vehicles and equipment with newer, cleaner diesel vehicles and equipment over an 18-24 month period, resulting in a reduction of NOx emissions of 25% or more. The vehicles being replaced must have been operated in Texas for at least two years, must be in operating condition with at least five years of useful life remaining, and must be destroyed within 90 days of receipt of funding. Vehicles must be used in designated areas in Texas for at least 75% of their annual mileage and at least 25% in eligible counties.

There are over 40 eligible counties covering areas around Austin, Corpus Christi, Dallas, Fort Worth, El Paso, Houston, Galveston, San Antonio, Tyler and Longview and several other counties.

The grant awards are made on a competitive basis considering emission reductions and costs of the project. Grants will be paid on a reimbursement basis, after the qualifying vehicle or equipment has been purchased. Successful applicants must monitor and make annual reports of the location of use and mileage traveled over the activity life of the vehicle to the TCEQ. The application must provide details on the description of vehicles and equipment to be replaced and the purchased vehicles or equipment as well as the projected emission reductions for the new vehicles or equipment. The application deadline is Jan. 10, 2017.

—————————————————————————
Income/Franchise

Alabama: A percentage limitation imposed by regulation on the credit Alabama permits for income tax paid to other jurisdictions is contrary to statutory law and, therefore, is rejected. In reaching this conclusion, the Alabama Tax Tribunal (Tribunal) cited Robinson Land, finding that contrary to the statutory intent of avoiding taxing the same income twice when an Alabama resident has foreign-source income, applying the percentage limitation in the regulation would subject a portion of the taxpayer's income to double taxation. Instead, the amount of income tax "actually paid" by the taxpayers to the state of Mississippi in 2013 under the plain meaning of the statute must be allowed to be taken as a credit. Moody v. Ala. Dept. of Rev., No. INC 15-797 (Ala. Tax Trib. Sept. 29, 2016).

California: The California Franchise Tax Board (FTB) announced that in early 2017 it will conduct an interested parties meeting to discuss possible amendments to the recently amended market based sourcing rule (Cal. Code Regs. tit. 18, §25136-2). According to the FTB, this round of proposed amendments will include discussion on asset management fee examples (these were deleted from the recently amended rule), possible changes to existing terms, additional definitions and specific industry examples, and other items of interest. Cal. FTB, taxnews (Nov. 2016).

California: An IRC §338(h)(10) election pertaining to the sale of an insurance company's stock (target) is respected for California tax purposes, but pursuant to California regulations related to federal provisions that deal with complete liquidations of subsidiaries (IRC §332), the corporate seller (seller) will be treated as receiving a distribution of all of the target's earnings and profits (E&P), which will be treated as a dividend for purposes of the dividend received deduction (DRD) allowed under CR&TC §24410. California regulations require that the seller, in the case of an IRC §332 liquidation involving an insurance company, treat any related distribution as a distribution of the E&P of the insurance company. Further, the distribution will be treated as a dividend for which the insurance company DRD is available. Therefore, the seller is treated as receiving a dividend representing all of the target's E&P, and a portion of this dividend is deductible under California statutes and regulations. In this case, the seller owned more than 80% of the stock of the target, and because the dividend will be received after Jan. 1, 2008, 85% of the dividend is eligible for deduction, but the extent of the actual deduction is a function of the amount of premiums written over the preceding five-year period compared to the insurance company's total income over the same period. Cal. FTB, Chief Counsel Ruling No. 2016-05 (Sept. 16, 2016).

California: A single member limited liability company (SMLLC) that is owned by a state chartered credit union, which is exempt from California corporate franchise and income tax, and will be transacting intrastate business in California the income from which is not unrelated business taxable income (UBTI) for California franchise or income tax purposes, will be doing business in the state and, therefore, should annually file the California Limited Liability Company Return of Income (Form 568) and pay the annual LLC tax ($800) and the LLC fee (up to $11,790 annually). In addition, if the state chartered credit union obtains (and subsequently maintains) exemption from California franchise and corporate income tax as an organization under California law, it should annually file California Form 199. In any taxable year that the organization has UBTI for California franchise or income tax purposes, it also should file the California Exempt Organizations Business Income Tax Return (California Form 109) and report and pay California corporate franchise or income tax on its UBTI apportioned or allocated to California. Cal. FTB, Chief Counsel Ruling No. 2016-04 (Sept. 7, 2016).

—————————————————————————
Sales & Use

Florida: The US Supreme Court has been asked to review the Florida Supreme Court's decision in American Business USA Corp., in which it held that an in-state florist that sold flowers, gift baskets and other goods via its online website is liable for sales tax on all its sales, including sales to out-of-state customers for out-of-state deliveries, as the imposition of tax does not violate the dormant Commerce Clause or the Due Process Clause of the US Constitution. Florida Department of Revenue v. American Business USA Corp., No. SC14-2404 (Fla. S. Ct. May 26, 2016), petition for cert. filed, Dkt. No. 16-567 (US S.Ct. filed Oct. 24, 2016).

Georgia: New regulation (Reg. 560-12-2-.21) regarding tax itemization requires retailers to add applicable sales and use taxes at the appropriate rate to the sales price unless the retailer absorbs the tax in compliance with Georgia law. The retailer can add the tax to the sales price by either separately itemizing the sales price and the tax or including the tax in the total charge. Retailers that include the sales tax in the total charge must provide written notification to each customer that the charge includes sales tax (except for sales made from a vending machine). Generally, retailers cannot advertise or directly or indirectly represent to the public that the retailer will absorb all or any part of sales and use tax, or that the retailer will relieve the purchaser of the payment of such taxes, unless (1) the retailer includes in the advertisement that any portion of the tax not paid by the purchaser will be remitted on behalf of the purchaser by the retailer, and (2) the retailer furnishes the purchaser with written notification that the retailer will be liable for and pay any tax the purchaser was relieved from paying. In addition, if the retailer advertises that any portion of the tax not paid by the purchaser will be remitted by the retailer on the purchaser's behalf, the retailer is solely liable for and must pay that portion of the tax. The regulation, which includes explanatory examples, took effect on Oct. 31, 2016. Ga. Dept. of Rev., new Reg. 560-12-2-.21 (approved Oct. 18, 2016).

Iowa: Amended regulations (amended Iowa Admin. Code § 701-230.5, .14 through .22(423)) implement statutory modifications to sales and use tax exemptions primarily benefiting manufacturers and other persons engaged in processing (see 2016 Iowa Acts, HF 2433). The amendments exempt supplies and define replacement parts and supplies, and relate to exemption of sales of the following occurring on or after July 1, 2016: (1) gases used in the manufacturing process (no sales date specified); (2) computers, machinery, equipment, replacement parts, supplies, and materials used to construct or self-construct computers, machinery, equipment, replacement parts, and supplies used for certain manufacturing purposes; (3) the sale of property directly and primarily used in processing by a manufacturer; (4) the sale of property directly and primarily used by a manufacturer to maintain integrity or unique environmental conditions; (5) the sale of property directly and primarily used in R&D of new products or processes of processing; (6) for the sale of computers used in processing or storage of data or information by an insurance company, financial institution, or commercial enterprise; (7) the sale of property directly and primarily used in recycling or reprocessing of waste products; (8) the sale of pollution-control equipment used by a manufacturer; (9) the sale of fuel or electricity used in exempt property; and (10) for the sale of services for designing or installing new industrial machinery or equipment. Amendments to the previously proposed version of the regulations include: (1) an amendment to Iowa Admin. Code §701-230.14(2)(c) to explain that tables on which property is assembled on an assembly line may be exempt equipment when the tables are used for an exempt purpose; (2) an amendment to Iowa Admin. Code §701-230.14(2)(h) to include water used for cooling as a potentially exempt item when the cooling water is used for an exempt purpose; (3) an amendment to Iowa Admin. Code §701-230.14(4) to clarify a claimant's responsibility to keep records to qualify for exemption; (4) an amendment to Iowa Admin. Code §701-230.15(4)(b) to explain that self-produced patterns may be exempt supplies; (5) an amendment to Iowa Admin. Code §701-230.16(3) to clarify that a cooling or heating system may qualify as exempt machinery used to maintain the environmental conditions necessary for other machinery and equipment directly and primarily used in processing by a manufacturer; and (6) expansion of Iowa Admin. Code §701-230.17(423) to add an exemption for prototype materials directly and primarily used in R&D of new products. The amended regulations take effect Nov. 16, 2016. Iowa Dept. of Rev., amended Iowa Admin. Code §701-230.5, .14 through .22(423) (published Oct. 12, 2016).

Puerto Rico: Puerto Rico's Treasury Department issued guidance (Circular Letter (CL) 16-12 and CL 16-13) on the new electronic unified system, SURI, which merchants will use to validate their registrations and file monthly sales and use tax returns. Beginning Oct. 31, 2016, all new merchants must register with SURI and request a Merchant Registration Certificate. Once they complete the registration, they should print their certificates and display them in a place visible to the general public. If they do business in various localities, they should identify each locality in which they are registered. For additional information on this development, see Tax Alert 2016-1816.

—————————————————————————
Property tax

Minnesota: A private appraiser's fee appraisal valuing a gas transmission pipeline at 20% less than the state's valuation is sufficient to overcome the prima facie validity of the Minnesota Revenue Commissioner's (Commissioner) Rule 8100 utility assessment. In addition, a state appraiser's statement that Rule 8100's default method is unlikely to accurately estimate the market value of a gas transmission pipeline constitutes substantial evidence creating a genuine issue of material fact, and the Minnesota Tax Court (Court) allowed the case to continue. In reaching these conclusions, the Court highlighted two concerns regarding the Commissioner's conduct. First, the Court cited MERC's holding that a fee appraisal based on generally accepted appraisal practices is competent evidence of market value in tax court proceedings, and noted that the Commissioner took a directly contrary position in this case when the Commissioner argued that a fee appraisal is not competent evidence of the market value of the gas transmission pipeline system. The Court further noted that the Commissioner willfully withheld evidence of a valuation draft, creating genuine issues of material fact, after multiple requests from the taxpayer and after attempting to get the case dismissed by arguing, in part, that the taxpayer could not identify any evidence showing that the Commissioner's valuation using Rule 8100 does not reflect the market value of the taxpayer's gas transmission pipeline. Lastly, the Court noted that the "Commissioner's proposals would transform prima facie validity — a device meant simply to allow affirmance when a taxpayer fails to appear in court with substantial evidence — into a bar locking the courtroom door against all taxpayers by deeming their evidence per se insubstantial." CenterPoint Energy Resources Corp. v. Minn. Comr. of Rev., No. 8763-R (Minn. Tax Ct. Oct. 14, 2016).

—————————————————————————
Compliance & Reporting

New Jersey: An S corporation will not lose its status as a New Jersey S corporation, although it would for federal income tax purposes, if a shareholder trust fails to make a New Jersey Electing Small Business Trust (ESBT) election. The instructions for Form NJ-1041SB make clear that a trust electing to be treated as an ESBT for federal income tax purposes is not automatically treated as an ESBT for New Jersey tax purposes. In order for a trust to be treated as an ESBT for New Jersey tax purposes, the trust must affirmatively file a New Jersey ESBT election (by filing Form 1041SB and signing the election statement in the form). Because this election is permissive and not mandatory, a federal ESBT is permitted to file Form NJ-1041 with New Jersey when the ESBT election is not made for New Jersey purposes, provided that NJ Form CBT-2553 is properly filed. Further, the trust will compute its tax in the same manner as a non-ESBT trust when the S corporation retains its status as a New Jersey S corporation despite the trust's failure to make a New Jersey ESBT election. There are no other ancillary New Jersey tax consequences from the trust's failure to make a New Jersey ESBT election. N.J. Div. of Taxn., LR: 2016-1-GIT (Sept. 28, 2016).

—————————————————————————
Miscellaneous Tax

Illinois: Compressed natural gas (CNG) is a taxable motor fuel because the plain language of the Motor Fuel Tax Law (MFTL) statute can be read flexibly and fairly to include motor fuels, liquid and non-liquid, that are used in internal combustion engines to propel vehicles down Illinois' roadways. The Illinois Independent Tax Tribunal (Tribunal) found that the statutory language shows the state's intent to tax the use of each motor vehicle on Illinois' highways and to measure the tax based on the consumption of motor fuel. There is no exemption for CNG. It is also considered to be a motor fuel in the Retailer's Occupation Tax Act (ROTA) regulations, which the Tribunal found should be read together with the MFTL in considering legislative intent. Furthermore, CNG is expressly referred to as a taxable motor fuel in regulations concerning the MFTL, and the parties have stipulated to that language. Finally, the Tribunal rejected the taxpayer's argument that the Illinois Department of Revenue's (Department) actions in assessing motor fuel tax on the taxpayer on its use of CNG in this case violated the Illinois Constitution, finding that since the Department is entitled to administer and enforce the MFTL, the Department acted under its authority derived from the MFTL in determining CNG was a taxable motor fuel and did not make that determination without legal authority. Waste Mgmt of Ill., Inc. v. Ill. Dept. of Rev., No. 15 TT 130 (Ill. Indep. Tax Trib. Oct. 3, 2016).

Michigan: New law (HB 5283) allows the Michigan state treasurer to sell or otherwise provide unclaimed property account information to a locator for accounts that remain unclaimed for not less than 24 months after the date payment or delivery is made if the value of the unclaimed property is $10,000 or more. A locator is a registered person who locates owners of unclaimed property and enters into a written agreement with an owner to document entitlement to property and to locate, deliver, recover, or claim (or assist in such), property that is presumed abandoned, for compensation. The locator must register with the state and pay a $1,200 fee. A locator who receives unclaimed property account information from the state must not distribute that information to other locators or any other person, other than the apparent owner, for compensation. The new law took effect Oct. 6, 2016. Mich. Laws 2016, PA 312 (HB 5283), signed by the governor on Oct. 6, 2016.

Pennsylvania: In Mount Airy #1, LLC, the Pennsylvania Supreme Court (Court) held that Section 1403(c) of the Pennsylvania Race Horse Development and Gaming Act (the Gaming Act), which imposes a municipal local share assessment (LSA) on casinos based on the greater of $10 million or 2% of gross terminal revenue (GTR), violates the Uniformity Clause of the Pennsylvania Constitution because it creates variable tax rates. Ultimately, the Court severed the offending provisions from the Gaming Act, but stayed its decision for 120 days to allow the General Assembly an opportunity to craft a constitutional LSA. Mount Airy #1, LLC v. Pennsylvania Dept. of Rev., No. 34 EM 2015 (Pa. S. Ct. Sept. 28, 2016). For additional information on this development, see Tax Alert 2016-1802.

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 November 16, 2016 from 2:00-3:00 p.m. EST, EY will host its fourth webcast in its sales tax seminar webcast series. The webcast will address issues related to the systems and processes used by companies to effectively manage sales and use taxes. Panelists will discuss the strategic and operational challenges and risks that taxpayers face when evaluating current business requirements and identifying existing systems and process gaps. Panelists will also discuss ways to improve the effectiveness of the tax function and the implementation of tax processes and software. Click here to register for this webcast.

All States: On Tuesday, November 15, 2016 from 2:00 - 3:00 p.m. EST New York (11:00 - 12:00 noon PST Los Angeles), EY will host a webcast to discuss global VAT compliance. The global tax policy and tax administration landscape is shifting at a quick pace. Staying up to date and compliant with these changes is a significant challenge for any multinational company. To help you navigate this challenging global indirect tax compliance environment, a panel of EY indirect tax professionals will address the potential risk areas companies are facing with respect to VAT compliance obligations and share leading practices around optimization of VAT compliance processes. Discussion topics include: (1) Introduction to global VAT compliance; (2) High-level overview of requirements and challenges by region; (3) Recent (regulatory) changes and trends (e.g., introduction of new VAT/GST regimes, electronic data exchange, additional reporting requirements, SAF-T, e-audits); (4) Benefits of streamlining the global VAT compliance process globally; (5) Leading practices around implementation and use of data analytics in your global VAT compliance process. Click here to register for this event.

* 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.