20 November 2016 State and Local Tax Weekly for November 11 Ernst & Young's State and Local Tax Weekly newsletter for November 11 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 Treasury Department (Treasury) and the Internal Revenue Service (IRS) recently released much-anticipated final and temporary debt-equity regulations under Section 385 (TD 9790; collectively, the Final Regulations) which follow the release of extremely controversial proposed regulations by just six months (REG-108060-15; the Proposed Regulations). Like the Proposed Regulations, the Final Regulations establish threshold documentation requirements that must be satisfied in order for certain related-party interests in a domestic corporation to be treated as debt, and they also treat as stock certain related-party interests in a domestic corporation that otherwise would be treated as debt. On the other hand, the extremely controversial and somewhat ambiguous "bifurcation" rule in the Proposed Regulations (which would have implemented the authority granted the IRS in IRC §385 to reclassify certain instruments as part debt and part equity) was not included in the Final Regulations. In response to over 200 comment letters, the IRS significantly narrowed the scope from what had been in the Proposed Regulations. Moreover, while focused on the federal income tax consequences of related-party transactions and providing a broad exception for transactions between members of a federal consolidated group, the Final Regulations, like the Proposed Regulations before them, appear to continue to have potentially broad, unexpected and unclear consequences for state income tax purposes. Although the Final Regulations retain much of the general approach of the Proposed Regulations, they also contain numerous and significant modifications. Regardless, it is clear that the Final Regulations represent a significant change in federal tax policy and will affect the realm of state income tax because they affect the determination of the tax base. Consequently, it is important for taxpayers to understand the Final Regulations and quickly consider their possible state income tax implications. For additional information on this development, see Tax Alert 2016-1919. On November 8, 2016, voters across the United States approved and rejected various ballot measures that affect state and local taxes. Two of the most watched measures — Oregon's 2.5% gross receipts tax on C corporations with $25 million or more in Oregon sales and Washington's first in the nation statewide carbon tax — were both rejected. While these measures failed, voters in Missouri approved a constitutional amendment to prohibit new sales and use (or other similar transaction-based) taxes on services not subject to the state's sales and use (or other similar transaction-based) taxes as of Jan. 1, 2015. Voters in four states — Arizona, Colorado, Maine and Washington — approved minimum wage increases, while voters in California and Maine said "yes" to individual income tax increases for high wage earners. In Oklahoma, however, voters rejected a ballot measure that would have increased the sales tax rate. Similarly, voters in Louisiana voted down a constitutional amendment that would have disallowed the deduction for federal taxes paid for corporate tax purposes, which was tied to a legislative measure that would have turned the graduated corporate income tax into a flat rate tax. Tax increases on cigarettes and tobacco products did not fare well, with measures failing in Missouri and North Dakota, but passing in California. There also were a number of tax related ballot measures considered at the local level. Most notable, local jurisdictions in California and Colorado approved "soda taxes" on sugary beverages, while two jurisdictions in California amended their utility users tax to extend to video programming services (e.g., video on demand, video games, pay-per-view television), regardless of the technology used to deliver such services. See Tax Alert 2016-1928 for a summary of the results of the significant, tax related state and local ballot measures voters considered on November 8. Alabama: Amended regulation (Ala. Reg. 810-27-1-.18) moves special rules for the allocation and apportionment of certain industries (without making substantive changes) from Ala. Reg. 810-27-1-.18 to separate regulations to make the information more readily available to taxpayers. Among the industry rules moved are those for: (1) airlines (Ala. Reg. 810-27-1-.18.01); (2) construction contractors (Ala. Reg. 810-27-1-.18.02); (3) publishing (Ala. Reg. 810-27-1-.18.03); (4) railroads (Ala. Reg. 810-27-1-.18.04); (5) television and radio broadcasting (Ala. Reg. 810-27-1-.18.05); (6) trucking (Ala. Reg. 810-27-1-.18.06); and (7) telecommunications and ancillary service providers (Ala. Reg. 810-27-1-.18.07). The changes take effect Nov. 20, 2016. Ala. Dept. of Rev., Ala. Reg. 810-27-1-.18 (filed Oct. 6, 2016). Alabama: Amended regulation (Ala. Reg. 810-27-1-.18) permits a taxpayer to file a refund claim while waiting to hear results of a proposed alternative apportionment method if there is less than 91 days remaining to timely file the claim. The amendments also require, for nexus determinations, that a business whose property, payroll and sales attributable to Alabama are determined by a special rule also must consistently apply the rule when measuring against nexus thresholds. These changes take effect Nov. 20, 2016. Ala. Dept. of Rev., Ala. Reg. 810-27-1-.18 (filed Oct. 6, 2016). New York: The New York State Department of Taxation and Finance (Department) posted for comment amended draft proposed Article 9-A corporate franchise tax regulations (N.Y. Comp. Codes R. & Regs. tit. 20, Sections 4-2.15 and 4-2.3) addressing the sourcing of receipts from "other services and other business activities" and "sales of digital products" for receipts factor apportionment purposes, respectively. These draft proposed regulations provide notable changes from the prior draft regulations dated Oct. 15, 2015 that include rules for sourcing for digital products delivered via physical means; an inquiry safe harbor for certain taxpayers; a retail location exception for receipts from digital products; and clarifications of the rules for intermediary transactions. For additional information on this development, see Tax Alert 2016-1911. Massachusetts: Various items of pollution control equipment used in connection with the construction of an electric generating unit (e.g., a dry-low-NOx combustor system, selective catalytic reduction (SCR) system, ammonia injection skid, oxidation catalyst system, dilution air system for the SCR and oxidation catalyst systems, exhaust stack, and aqueous ammonia) are exempt from sales and use tax as machinery that is used directly and exclusively as part of the integrated and synchronized system that furnishes electricity to consumers through mains, lines, or pipes. In addition, the aqueous ammonia is exempt from sales and use tax as a material, tool, or fuel that is consumed and used in the furnishing of electricity to consumers through mains, lines, or pipes, provided that its normal useful life is less than one year, or its cost is allowable as an ordinary and necessary business expense for federal income tax purposes. Mass. Dept. of Rev., Letter Ruling 16-2 (Oct. 25, 2016). Pennsylvania: The Pennsylvania Supreme Court will not hear arguments in a lawsuit challenging 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. Rather, the case will be heard by the Philadelphia Court of Common Pleas, with a ruling expected before the new tax takes effect. Williams et al v. City of Philadelphia, Case ID: 160901452 (complaint filed Sept. 14, 2016). 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. New York: A cell phone provider company (company) is not entitled to a refund of real property taxes paid on antennas and other cellular radio equipment housed on rooftops in its service area because the equipment (e.g., fiber optic and coaxial cables, connections between the company's equipment and that of the local exchange carrier), are "lines" or "wires" within the statutory definition of real property and, as such, are properly taxed as real property. The New York appellate court further held that the company's base receiver stations containing primary and battery backup power systems and equipment are properly characterized as "inclosures for electrical conductors" and also fall within the statutory definition of real property. Similarly, the company's rooftop antennas can be properly characterized as "inclosures for electrical conductors" to the extent they are a part to the base transceiver station cabinet. The company's rooftop antennas also can be taxed as fixtures because the equipment is fastened to the host buildings by bolts, frames, pipes, and brackets, and is weighted down with I-beams and cinder blocks, and the conditions in the company's leases permitting it to remove its equipment at the end of its leaseholds for undisclosed lease terms and renewal terms show the company's intent to make the equipment permanent for the term of the leasehold. In the Matter of T-Mobile Northeast, LLC v. DeBellis, 2016 NY Slip Op 07031 (NY S. Ct., App Div. Oct. 26, 2016). Florida: The Florida Department of Revenue issued guidance on new filing and extension deadlines for corporate income and franchise tax returns and partnership information returns. For tax years beginning on or after Jan. 1, 2016, the Florida corporate income and franchise tax return for calendar year taxpayers is due on the first day of the fifth month after the close of the taxable year (May 1). The extension period for calendar year corporate taxpayers is five months for tax years beginning on or after Jan. 1, 2016 and before Jan. 1, 2026, and increased to six months starting in 2026. For corporate taxpayers with a June 30 year end, the return is due the first day of the fourth month after the close of the taxable year, effective for tax years beginning on or after Jan. 1, 2016 and before Jan. 1, 2026. Starting in 2026, the due date is the first day of the fifth month after the close of the taxable year. The extension period is seven months for tax years beginning on or after Jan. 1, 2016 and before Jan. 1, 2026, and decreased to six months starting in 2026. For corporate taxpayers with a year end other than Dec. 31 or June 30, the return is due on the first day of the fifth month after the close of the taxable year, and it may be extended for six months. For all tax years beginning on or after Jan. 1, 2016, Florida partnership information returns are due on the first day of the fourth month after the close of the taxable year, and can be extended to the first day of the tenth month following the close of the taxable year. The Department's guidance includes due date information for estimated tax payments. Fla. Dept. of Rev., TIP No. 16C01-03 (Oct. 14, 2016). Montana: Amended regulations (Mont. Admin. R. 42.9.110, 42.9.111, 42.9.203, 42.15.219 and 42.15.526) address pass-through entity audit adjustments, the computation of composite tax, pension and annuity income exclusions, and small business liability funds. The amendments implement 2015 Laws Ch. 308 (HB 379), which reduced the statute of limitations for audit adjustments of pass-through entities information return or composite return from five years to three years, effective for tax years beginning after Dec. 31, 2014. Other amendments reflect the modification in the steps that must be taken when calculating the composite tax on Montana pass-through returns, and provide a step-by-step approach for computing the composite tax on an expanded basis to remove uncertainty about the calculation. In addition, thresholds of pension and annuity exclusion are updated in the rule to correspond with the modifications enacted via 2015 Laws Ch. 418 (HB 359), which revised laws related to inflation indexing of income taxes. Other amendments update statutory references or make grammatical corrections. Mont. Sec. of State, Mont. Admin. Reg. Notice 42-2-962 (Nov. 10, 2016). New Jersey: The New Jersey Division of Taxation (Division) determined that a New Jersey resident taxpayer cannot claim a credit on his or her New Jersey Gross Income Tax Return for amounts paid for the Pennsylvania local services tax (LST) because LST is not an income tax or a wage tax. Under New Jersey law, a resident taxpayer can claim a credit on his or her gross income tax return for income or wage taxes paid to another state or political subdivision of such state. The LST is a local tax payable by all individuals who hold a job or profession within a taxing jurisdiction in Pennsylvania that imposes the tax and is similar to an occupational privilege tax, not an income or wage tax. N.J. Div. of Taxn., N.J. State Tax News (Fall 2016). Illinois: On Nov. 10, 2016, the Cook County (IL) Board approved its executive budget recommendations for FY 2017, a provision of which imposes a sweetened beverage tax. Effective July 1, 2017, the new tax will be imposed on retail sales of sweetened beverages in Cook County at a rate of one cent per fluid ounce. Canned, bottled and fountain sweetened beverages subject to the tax include carbonated soft drinks (including diet drinks), sweetened fruit drinks (but not drinks that are 100% fruit juice), flavored/enhanced water drinks, sports drinks, ready-to-drink teas and coffees, and energy drinks. Ohio: Ohio law requires the state Tax Commissioner (Commissioner) to journalize, but not mail, a final determination of the amortizable amount of the taxpayer's Commercial Activity Tax-net operating loss credit by June 30, 2010. In reaching this conclusion, the Ohio Supreme Court (Court) held that based on a liberal construal of the statute in favor of the Commissioner, journalization of the final determination constitutes "issuance." Thus, the Commissioner's journalization of the final determination on June 8, 2010 satisfied the June 30, 2010, deadline, even though the Commissioner did not mail the final determination to the taxpayer until July 12, 2010. Finally, the taxpayer did not need to file a protective cross-appeal to preserve its merits argument because there was no ruling on this substantive issue from the Ohio Board of Tax Appeals (BTA) and, therefore, no need for the Court to exercise jurisdiction to decide the issue, in whole or in part. The Court remanded the case to the BTA for reconsideration of the taxpayer's substantive challenge to the Commissioner's amortization credit determination. Int'l Paper Co. v. Testa, Slip Op. No. 2016-Ohio-7454 (Ohio S. Ct. Oct. 26, 2016). Tennessee: In partially granting a taxpayer's motion of summary judgment, a Tennessee Circuit Court (Court) held that definition of short term rental property (STRP) in an ordinance of the Metropolitan Government of Nashville and Davidson County (Metropolitan Government) is unconstitutionally vague because "a person of average intelligence would not be able to understand the differences and/or distinctions between STRPs and hotels, bed and breakfasts, and boarding houses." In reaching this conclusion, the Court found that the definitions of STRP, bed and breakfast, boarding house, and hotel overlap, such that a single property could fall into one, several, or all of the property classifications. Based on this finding, the Court could not conclude that the property at issue was exempt from the STRP ordinance or that the ordinance applies to the taxpayer's property. In partially granting the Metropolitan Government's motion for summary judgment, the Court determined that the ordinance's cap on the number of non-owner-occupied STRPs available in a single census tract does not violate the Equal Protection Clauses of the US and Tennessee Constitutions nor does it violate the Anti-Monopoly Clause of the Tennessee Constitution. Anderson v. The Metro. Govt. of Nashville and Davidson County, No. 15C3212 (Tenn. Cir. Ct., 20 Jud. Dist., Oct. 28, 2016). All States: On Wednesday, Nov. 30, 2016, from 2:00 - 3:30 p.m. EST New York; 11:00 - 12:30 p.m. PST Los Angeles, EY will host its 2016 payroll tax year in review webcast. The following are the topics included in this year's webcast: (1) ACA information reporting — what's new this year?, (2) ACA information reporting — meeting the challenges, (3) 2016 and 2017 rates and limits, (4) Form W-2 reporting and due date changes, (5) mandatory and recommended employee notices, (6) Form W-2 frequently asked questions, (7) common payroll reporting errors, (8) 2016 unemployment insurance trends and developments, (9) other state and local payroll tax developments in 2016, (10) legislative and regulatory outlook for 2016 and 2017, and (11) the payroll year-end checklist. Click here to register for this event. All States: On Wednesday, Dec. 7, 2016 from 1:00-2:30 p.m. EST (10:00-11:30 a.m. PST), Ernst & Young LLP will hold its next domestic tax quarterly webcast. During the webcast the following topics will be discussed: (1) the results from the new business tax study; (2) our assessment of the Top 10 state and local tax developments for 2016; (3) tax policy matters, including an overview of the current state of the economy and looking forward to 2017; and (4) an update covering major judicial and administrative developments at the state level. To register for this event, go to State tax matters. 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: 2016-1987 |
