23 November 2016 State and Local Tax Weekly for November 18 Ernst & Young's State and Local Tax Weekly newsletter for November 18 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 Ohio Supreme Court (Court) recently issued its much anticipated decisions in three consolidated tax cases — Crutchfield, Newegg and Mason Companies — and upheld the constitutionality of the bright-line factor presence nexus standard for the Ohio Commercial Activity Tax (CAT). In reaching this conclusion, the Court held that the physical presence nexus requirement set forth in Quill does not apply to business-privilege taxes, such as the CAT, "as long as the privilege tax is imposed with an adequate quantitative standard that ensures that the taxpayer's nexus with the state is substantial." In the case, the Court determined that the $500,000 sales-receipts threshold "complies with the substantial-nexus requirement of the Complete Auto test," reasoning that "the burdens imposed by the CAT on interstate commerce are not 'clearly excessive' in relation to the legitimate interest of the state of Ohio in imposing the tax evenhandedly on the sales receipts of in-state and out-of-state sellers." Crutchfield, Corp. v. Testa, Slip Op. No. 2016-Ohio-7760 (Ohio S. Ct. Nov. 17, 2016), Newegg, Inc. v. Testa, Slip Op. No. 2016-Ohio-7762 (Ohio S. Ct. Nov. 17, 2016), and Mason Companies, Inc. v. Testa, Slip Op. No. 2016-Ohio-7768 (Ohio S. Ct. Nov. 17, 2016). The Ohio Department of Taxation (Department) has historically enforced the bright-line nexus standard since the CAT's inception in 2005. No doubt, this decision lends support to the Department's efforts in this area. It would seem likely that the taxpayers will appeal the decision to the United States Supreme Court. If accepted, a final resolution is likely still some time off in the future and, in the meantime, the Department will likely continue to aggressively enforce the CAT's bright-line nexus standard. The bright-line nexus standard is applied based on Ohio-sourced gross receipts. When considering its application to transactions such as dock sales, a business entity could attain bright-line nexus with Ohio without engaging in any attempt to purposefully direct market-making activity to the state (such as went on in Crutchfield). Whether the bright-line nexus standard is still vulnerable to an "as applied" constitutional challenge under the Due Process clause on different facts remains an open question. The Court's opinion seemed to acknowledge that Quill's physical presence standard is still applicable for sales/use taxes. Ohio recently enacted click-through nexus for sales tax purposes. Until, and if, the United States Supreme Court decides to revisit the continuing efficacy of Quill, these decisions under the CAT seem to support businesses wishing to challenge the new sales/use tax nexus standard. For additional information on this development, see Tax Alert 2016-1975. California: On remand, a California Superior Court (Court) held that a statutory provision that allows intrastate unitary businesses to file on a separate basis but not similar interstate businesses could result in discrimination under the dormant Commerce Clause; however, even assuming discrimination, the discriminatory provision is permissible under the strict scrutiny standards of the Commerce Clause. The Court found that the state "has a legitimate interest in avoiding the 'disruption of public services that are dependent on [tax] revenues.'" Moreover, the state has an interest in requiring combined reporting "to ensure that all business income from interstate business is accurately accounted for" and to prevent "the manipulation and hiding of taxable income." Lastly, the Court determined that there "does not appear to be a reasonable nondiscriminatory alternative that would adequately serve the state's interest." Harley-Davidson Inc. & Sub. v. Cal. Franchise Tax Bd., No. 37-2011-00100846-CU-MC-CTL (Cal. Super. Ct., San Diego Cnty., Oct. 31, 2016). New Jersey: In Bank of America Consumer Card Holdings, the New Jersey Tax Court (Court) held that a credit card bank's receipts from interest on purchases not paid within a grace period, interchange which occurs on all transactions, and service fees are allocated to New Jersey and, as such, are subject to the New Jersey Corporate Business Tax. While the interest and interchange are both fully allocable to New Jersey, the service fees are only 50% allocable to the state as the state's 25-50-25% regulation that specifically allocates certain services fee of financial institutions applies. Bank of America Consumer Card Holdings v. New Jersey Division of Taxation, No. 012945-2011 (N.J. Tax Ct. Oct. 6, 2016) (consolidated with four other cases). For additional information on this development, see Tax Alert 2016-1954. Ohio: The Supreme Court of Ohio (Court) in New York Frozen Foods, Inc. v. Bedford Hts. Income Tax Bd. of Rev., held that the applicable city ordinance barred an entity from changing its separate return to a consolidated return when filing an amended return. The Court reached concluded that such a change constituted a change in accounting methods which is generally prohibited by the local ordinance. For additional information on this development, see Tax Alert 2016-1971. Illinois: A large national bank is entitled to a refund of Retail Occupation Tax Act (ROTA) taxes attributable to the uncollected debts as a result of the assignments from retailers because the retailers' assignments of the right to refund was not precluded or limited by statute. In reaching this conclusion, the Illinois Appellate Court (Court) reasoned that the assignment of the right to a ROTA tax refund does not violate public policy as unfair in allowing the bank to collect a tax refund where it has already been compensated through vendor discounts, cardholder charges, and interest payments, because the compensation the bank receives for its services has no bearing on whether the right to a tax refund is assignable, and it is not the province of the Court to police what is considered to be fair compensation for the bank's services. Further, the Court found that any deficiency in the bank's refund application or supporting documentation is moot because the Illinois Department of Revenue stipulated to the amount of ROTA taxes attributable to the uncollected debt. A case involving another financing company with similar facts was dismissed for lack of jurisdiction. Citibank, N.A. v. Ill. Dept. of Rev., 2016 IL App (1st) 133650 (Ill. App. Ct., 1st Jud. Dist., Nov. 2, 2016). Nevada: Adopted regulation (R137-15) provides guidance for remote retailers to collect and remit Nevada sales and use taxes. Under the regulation, the term "activity that is significantly associated with a retailer's ability to establish or maintain a market in [Nevada] for the retailer's products or services" is interpreted to include: (1) the soliciting of sales of goods in Nevada; (2) installing, assembling or repairing goods in Nevada; (3) constructing, installing, repairing or maintaining real property or tangible personal property located in Nevada; (4) delivering products into Nevada other than by mail or common carrier; (5) having an exhibit at a trade show to maintain or establish a market for products in Nevada (but is not to be construed to include mere attendance at trade shows in the state); (6) selling products online and having a brick and mortar store in Nevada that accepts returns of such online purchases; or (7) performing activities designed to establish or maintain customer relationships (e.g., meeting with customers, being available to provide services associated with a product or marketing information). The regulation includes guidance on how taxpayers can rebut the presumption of nexus under Nevada's affiliate and click-through nexus provisions. In regard to the click-through nexus provision, "commission or other consideration based upon the sale of tangible personal property" includes money based on the level of completed sales, cost per mille advertising, payment of a flat fee in exchange or a referral, payment of a fixed price in exchange for providing a referral link, or any other item in exchange for a referral. The regulation took effect Nov. 2, 2016. Nev. Tax Commission, R137-15 (approved Nov. 2, 2016). Tennessee: Approved regulation (Rule 1320-05-01-.129) adopts an economic nexus standard for sales and use tax purposes. The new regulation will become effective Jan. 1, 2017, but will expire on July 1, 2017 if not approved by the legislature. Under the regulation, an out-of-state dealer is deemed to have substantial nexus with Tennessee if the dealer engages in the regular or systematic solicitation of Tennessee consumers through any means, and makes sales exceeding $500,000 to Tennessee consumers during the previous 12-month period. The regulation requires out-of-state dealers meeting the threshold to register with the Tennessee Department of Revenue (Department) for sales and use tax purposes by March 1, 2017, and begin collecting and remitting tax to the Department by July 1, 2017. In a notice filed with the Secretary of State on Oct. 3, 2016, the Department summarized and responded to the public comments it received to the proposed regulation released in June. Due to concerns over whether out-of-state dealers would be required to retroactively collect sales tax if they did not anticipate meeting the $500,000 threshold, but then met the threshold by calendar year's end, the Department changed the rule to require dealers to register and prospectively collect and remit tax starting three months after the end of any 12-month period during which the dealer meets the threshold. The Department also acknowledged that the regulation may not be approved by the legislature and clarified that the collection requirement does not begin until July 1, 2017, but only if the legislature approves the regulation by that time. The Department noted that if the Legislature does not take action, and the regulation is allowed to expire, no collection activity will be required. For additional information on this development, see Tax Alert 2016-1988. Michigan: A laboratory that was a wholly owned subsidiary of a non-profit entity is not entitled to a charitable institution exemption from real property tax because it is a for-profit entity. In reversing the Michigan Tax Tribunal (Tribunal), the Michigan Court of Appeals (Court) found that the laboratory was neither a non-profit trust nor owned and occupied by a nonprofit charitable institution, and Michigan law does not permit a for-profit entity to use a nonprofit parent's tax-exempt status. The Tribunal erred in concluding that Ann Arbor v. The University Cellar, Inc. stood for the proposition that a tax-exempt parent could extend its tax-exempt status to a related entity, because in that case the Michigan Supreme Court specifically did not decide that issue. In addition, National Music Camp v. Green Lake Township, in which the Court concluded the Tribunal should grant tax-exempt status because four educational corporations were one corporation for all practical purposes, is distinguishable because the corporations in that case were all tax-exempt. Here, the lab is not a tax-exempt entity, which Michigan requires in seeking such property tax exemptions. Trinity Health-Warde Lab, LLC v. Charter Twp. of Pittsfield, No. 328092 (Mich. App. Ct. Nov. 3, 2016). California: The Franchise Tax Board (FTB) in Notice 2016-04 (issued Nov. 4, 2016) announced a reduction of the automatic paperless return filing extension period for corporations and other taxpayers subject to the Corporation Tax Law to six months (from seven months), effective for filing returns for tax years beginning on or after Jan. 1, 2016. Legislation (AB 1775) enacted in September changed the due dates for filing California tax returns for most partnerships, corporations and limited liability companies effective for tax years beginning in and after 2016. The FTB issued Notice 2016-04 to provide guidance on modifications to the automatic paperless extension for Corporation Tax Law purposes. The FTB has the authority to determine the extension period for filing corporate returns, which by statute cannot exceed seven months. Since 1992, the FTB has allowed corporations an additional seven-month period to timely file. In Notice 2016-04, however, the FTB reduced the return filing extension period for corporations and other taxpayers subject to the Corporation Tax Law to six months. For additional information on this development, see Tax Alert 2016-1952. New Jersey: On Nov. 22, 2016, Governor Christie issued a press release stating that thanks to health benefit reforms enacted since the FY17 budget passed that will save New Jersey's taxpayers over $200 million for calendar year 2017, he is now able to preserve the reciprocal income tax agreement with Pennsylvania and intends to rescind it. We will provide more information when the rescission is finalized. Connecticut: The Connecticut Hospital Association and various hospitals are appealing the Connecticut Departments of Revenue Services and Social Services' determination that the Connecticut Hospital User Fee, which is a tax on the net patient revenue of a hospital, is constitutional. The hospital association is asserting that the tax is being illegally implemented, while the hospitals argue that the tax scheme violates federal Medicaid laws. Conn. Dept. of Rev. Serv., DRS Declaratory Ruling No. 2016-1 (Sept. 22, 2016), appealed filed (Nov. 1, 2016). Maine: In vacating a lower court ruling, the Maine Supreme Judicial Court (Court) held that amounts a telecommunications provider (provider) received for presubscribed interexchange carrier charges (PICCs) from certain multi-line business customers are subject to a state service provider tax as part of the sale price for telecommunications services, because the provider did not require all multi-line business customers to pay these charges to access services, and the charges were part of the total compensation paid for telecommunications services. The provider imposed the PICC charge in part to recover PICCs that it paid to local exchange carriers and in part to realize a profit — the PICC charge listed on customers' bills was more in the nature of a pass-through charge, and it significantly exceeded the provider's cost. The Court also found that the tax exemption for interstate telecommunications services does not apply to the charges since the provider failed to show that all or any identified portion of the PICC charges that it imposed on Maine customers arose from the sale of interstate telecommunication services in Maine. BCN Telecom, Inc. v. Me. State Tax Assessor, No. Ken-15-541 (Me. Sup. Jud. Ct. Nov. 8, 2016). Pennsylvania: New law (HB 1403) amends Pennsylvania's life insurance provisions by adding provisions on unclaimed life insurance benefits. The new provisions require life insurance providers to implement procedures to at least semi-annually compare insureds' in-force life insurance policies, contracts and retained asset accounts against the Social Security Administration's death master file, to identify potential matches of insureds. If beneficiaries of the life insurance policy cannot be found, the benefits escheat to Pennsylvania as unclaimed property three years after knowledge of the death of the insured. At an insurer's written request, the Insurance Commissioner can make exceptions and exemptions to the requirements upon the insurer's demonstration of hardship. The Insurance Commissioner can also phase in compliance. The new law takes effect Oct. 29, 2017. Pa. Laws 2016, Act 132 (HB 1403), signed by the governor on Nov. 3, 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: 2016-2008 |
