12 December 2016 State and Local Tax Weekly for December 2 Ernst & Young's State and Local Tax Weekly newsletter for December 2 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 New Jersey Division of Taxation recently announced that, beginning Jan. 1, 2017, qualified businesses located in five Urban Enterprise Zones (UEZs) will no longer be allowed to collect sales tax at a reduced rate and will have to begin collecting and remitting sales tax at the state's 6.875% uniform sales tax rate. The affected UEZs are: Bridgeton, Camden, Newark, Plainfield and Trenton. Accordingly, businesses located in these zones are no longer eligible for UEZ incentives or benefits including: (1) collecting sales and use tax at half the uniform sales tax rate, (2) UEZ sales tax exemption certificates, (3) UEZ corporation business tax employees credit/investment tax credit and credit carryforward, and (4) sales and use tax exemption for natural gas and electricity purchased by certain manufacturers. Businesses located in the affected UEZs must file the December 2016 monthly UEZ return by Jan. 20, 2017. Beginning Jan. 1, 2017, businesses will be required to file a New Jersey Sales and Use tax return (ST-50) on a quarterly basis. Monthly remittance is required if a business collected more than $30,000 in sales tax in 2016 and the amount of sales tax collected for the month is greater than $500. Additionally, effective Jan. 1, 2017, businesses will no longer be allowed to use the UEZ Exemption Certificate or the Contractor's Exemption Certificate on purchases of tangible personal property and services used or consumed by qualified businesses in any of the five UEZs. Note: A bill is still pending in the state legislature which, if enacted, would extend the exemptions in the five UEZs for an additional two years. Action on the bill is expected prior to the end of the year. As matters develop with respect to this legislation, we will provide updates. For additional information on this development, see Tax Alert 2016-2053. All States: Ernst & Young LLP's (EY) new quarterly webcast series, "State income tax seminar series: analyzing the income tax base," kicked off with its first seminar addressing federal and state "disconnects," focusing particularly on state conformity matters relating to the IRC. Companies engaged in multistate operations face a multitude of state and local tax challenges, such as complying with each state's unique tax system and understanding the manner in which each state's revenue department administers its tax law. The panelists discussed components of the state income tax base, the IRC and its connection to the state tax base and unconventional business taxes, such as the Ohio Commercial Activity Tax and the Nevada Commerce Tax. A replay of the webcast is available on EY's Thought Center website. For a summary of the webcast, see Tax Alert 2016-2034. Colorado: A Colorado district court granted the state's and taxpayer's "stipulation of dismissal with prejudice" in a case challenging the determination of the Colorado Department of Revenue that a multistate corporation was not allowed to elect to use the Multistate Tax Compact's equally weighted three-factor apportionment formula instead of the state mandated single sales factor apportionment formula. The Sherwin-Williams Co. v. Colorado Dept. of Rev., No. 2016CV31072 (Colo. Dist. Ct., Denver Cnty., Nov. 18, 2016). Michigan: The U.S. Supreme Court (Court) has been asked to review the Michigan Court of Appeals ruling upholding the constitutionality of the retroactive repeal of the Multistate Tax Compact (Compact), a provision of which allowed taxpayers to elect to use the Compact's equally weighted three-factor apportionment formula to determine certain Michigan tax liabilities. IBM Corp. v. Mich. Dept. of Treasury, No. 325484 (Mich. Ct. App. Sept. 29, 2015), petition for cert. filed, Dkt. No. 16-698 (U.S. S. Ct. Nov. 18, 2016); Gillette Commercial Operations North America and Subs. v. Mich, Dept. of Treasury, No. 325258 (Mich. Ct. App. Sept. 29, 2015), petition for cert. filed, Dkt No. 16-697 (US S. Ct. Nov. 18, 2016); Sonoco Products Co. v. Dept. of Treasury, No. 325505 (Mich. Ct. App. Sept. 29, 2015), petition for cert. filed, Dkt. No. 16-687 (US S. Ct. Nov. 21, 2016); Goodyear Tire & Rubber Co. v. Mich. Dept. of Treasury, No. 326585 (Mich. Ct. App. Sept. 29, 2015),petition for cert. filed, Dkt. No. 16-699 (U.S. S. Ct. Nov. 21, 2016); Skadden, Arps, Slate, Meagher & Flom LLP v. Mich. Dept. of Treasury., No. 326135 (Mich. Ct. App. March 15, 2016), petition for cert. filed, Dkt. No. 16-688 (U.S. S. Ct. Nov. 21, 2016). Michigan: Self-insurer group funds made up of groups of employers doing business in the same industry who have received permission from the Director of the Bureau of Worker's Compensation (BWC) to pool their resources to secure payment for worker's compensation liability claims for the purpose of qualifying as self-insurers, and which are not organized as partnerships, corporations, or any other particular type of business structure registered with Michigan, are not subject to Michigan's corporate income tax (CIT). These funds are not subject to CIT as corporations because they are not incorporated, are not defined as corporations under the IRC, and have/will not elect or be required to file as C corporations. The funds are not subject to CIT as insurance companies because the funds have not been issued and are not required to obtain a certificate of authority from the Michigan Insurance Commissioner, and instead are governed and regulated by the BWC. Finally, the funds are not subject to CIT as financial institutions because a group of employers pooling their funds to pay worker's compensation claims lacks the status of a bank holding company or national bank, and there is no indication that the fund has either a state or federal charter as a bank, savings association or credit institution. Mich. Dept. of Treas., Letter Ruling 2016-1 (Nov. 15, 2016). Michigan: The Michigan Department of Treasury (Department) provided updated guidance on how to calculate the five-year average of net equity capital for financial institutions combining with other financial institutions. Financial institutions calculate their Michigan Business Tax (MBT) or Corporate Income Tax (CIT) net capital tax base by averaging net capital over a five-year period (or the number of years in existence if fewer than five years). When two or more financial institutions combine into one, the law requires the combined financial institution to be treated as if it had been a single financial institution for the entire tax year in which the combination occurs and for each tax year after the combination. Under the Department's previous interpretation, a financial institution that combined with another financial institution was required to consider the net capital for both the acquired and surviving entities for tax years prior to the year of combination when calculating the tax base. Now, however, the Department will no longer calculate net capital for years prior to the combination using both the acquired and surviving entities' net capital. Only the surviving financial institution's net capital for years prior to combination will be considered to calculate the five-year average. The Department will give the policy full retroactive effect, applicable to all open tax years. If a taxpayer previously filed a return under the prior policy and the tax period remains open, the taxpayer may amend accordingly. Mich. Dept. of Treas., Notice to Taxpayers Regarding Five-Year Averaging Calculation of Net Equity Capital for Financial Institutions Combining with Other Financial Institutions (Rescind MBT FAQ F5 and CIT Insurance Companies/Financial Institutions FAQ 6) (Nov. 21, 2016). For additional information on this development, see Tax Alert 2016-2077. Virginia: The Internet Tax Freedom Act (ITFA) does not bar the imposition of communication sales tax on picture mail service (service) because the service does not meet the definition of "internet access" under the ITFA as it does not give customers access to the internet. The service also is not incidental to the provision of internet access, and is not a type of e-mail or messaging described under the ITFA. Lastly, the communications sales and use tax was correctly assessed on the service since it is more in line with Virginia's definition of picture messaging, which is not the same or a similar service as e-mail or instant messaging service exempt under ITFA. Va. Dept. of Taxn., Ruling of the Comr. PD No. 16-195 (Oct. 13, 2016). Virginia: If an out-of-state management company (company) begins leasing portable buildings to Virginia customers, nexus would be created for the company. As a result, the company would be required to register with Virginia for the collection and remittance of all sales tax on taxable leases to Virginia customers, in lieu of individual investors who purchase the contract registering separately. The company would be required to file a monthly Form ST-8, Out-of-State Dealer's Sales Tax Return, and Form ST-8A, Schedule of Local Sales and Use Taxes, allocating the local tax to localities in which the company places portable buildings. Va. Dept. of Taxn., Ruling of the Tax Commissioner No. 16-203 (Oct. 17, 2016). West Virginia: A transportation corporation (corporation) that is required to pay West Virginia's motor fuel use tax is entitled to a credit for sales tax paid to both other states and to the subdivisions of other states on purchases of motor fuel in the respective jurisdictions. Under West Virginia law, a credit is allowed for sales taxes paid to other states, which offsets the use tax a fuel importer must pay under state law. At issue is the scope of the sales tax credit and whether it is allowed for sales taxes paid to cities, counties and localities of other states. In holding the credit is allowed for both state and local sales taxes paid, the West Virginia Supreme Court (Court) applied the Complete Auto test and determined that both the use tax imposed and statutory sales tax credit have substantial nexus with West Virginia and both are fairly related to the services provided to the corporation by West Virginia as well as to the corporation's presence and activities in the state. However, although the use tax is fairly apportioned as the use tax charged to the corporation directly correlates to the fuel that it uses for the miles it travels within West Virginia, the corresponding sales tax credit is not fairly apportioned. Citing Wynne, the Court found that the disallowance of the sales tax credit for sales tax imposed by the subdivisions of other states would produce a total tax burden on interstate commerce higher than a purely intrastate transaction and, therefore, the sales tax credit violates the dormant Commerce Clause. In addition, allowing the sales tax credit only for sales tax paid to other states unfairly discriminates against interstate commerce. Matkovich v. CSX Transportation, Inc., No. 15-0935 (W.Va. S. Ct. Nov. 16, 2016). Nebraska: The Nebraska Department of Revenue (Department) updated the minimum wage and investment requirements to qualify for benefits under the Nebraska Advantage Act, for applications filed on or after Jan. 1, 2017. The revised requirements are as follows: (1) Tier 1 applicants must meet an investment requirement of $1 million, and an average wage requirement of $25,709 for at least 10 new employees; (2) Tier 2 applicants must meet an investment requirement of $3 million, and an average annual wage requirement of $25,709 for 30 new employees; (3) Tier 2 large data center applicants must meet an investment requirement of $200 million in qualified property at the data center, and an average annual wage requirement of $25,709 for 30 employees at the data center; (4) Tier 3 applicants must meet an average annual wage requirement of $25,709 for 30 new employees; (5) Tier 4 applicants must meet an investment requirement of $11 million, and an average annual wage requirement of $25,709 for 100 new employees; (6) Tier 5 applicants must meet an investment requirement of $34 million; (7) Tier 5 renewable energy project applicants must meet an investment requirement of $20 million; and (8) Tier 6 applicants must meet an average annual wage requirement of at least $64,272, and either must meet an investment requirement of $10 million and an employment requirement of 75 new employees or an investment requirement of $100 million and an employment requirement of 50 new employees. Wage requirements may vary based on the counties where the project is located, and a list of such required wages are included in the revenue ruling. Neb. Dept. of Rev., Rev. Ruling No. 29-16-1 (Nov. 21, 2016). Washington: The World Trade Organization (WTO) recently determined that various tax incentives enacted by Washington State in 2013 and provided to an airplane manufacturer (e.g., reduced business and occupations (B&O) tax rate, various credits and exemptions) violated international trade rules because it disadvantaged European airplane manufacturers in violation of the WTO's agreement on subsidies. WTO, Report of Panel No. DS487 (Nov. 28, 2016). Oregon: A qualified charitable organization through which youth perform charitable work while completing religious study and worship on a communal property was denied a property tax exemption because the organization failed to satisfy certain statutory and regulatory documentation requirements. Citing SW Oregon Public Defender Services, the Oregon Tax Court (Court) found that the organization was charitable and generally eligible for property tax exemption and that the organization's primary purpose is for the advancement of both religion and charity, and the property is reasonably necessary for the organization to accomplish its goals. The organization, however, was properly denied the claimed property tax exemption because its lease fails the statutory exemption documentation requirements. Specifically, it is not expressly agreed in the lease that the organization's rent has been established to reflect the savings below market rent resulting from the exemption from taxation. In addition, the organization did not satisfy further documentation requirements in applicable regulations, such as current rental rate for any portion of the property occupied by nonexempt tenants, historic rental rate data of the property, rental rate used in a real market value appraisal of the property, or a rent study of other comparable properties. Tivnu: Building Justice v. Multnomah Cnty. Assessor, No. TC-MD 150486R (Or. Tax Ct. Oct. 20, 2016). Alabama: The Alabama Court of Civil Appeals (Court) affirmed that a mobile telephone provider's (provider) prepaid wireless services were subject to sales tax because the provider failed to assert during administrative proceedings that the Alabama Department of Revenue (Department) had violated state rule-making provisions when assessing sales taxes on the prepaid wireless services. Because the provider raised this argument for the first time in an amended complaint filed with the Alabama Circuit Court (circuit court), the circuit court could not exercise jurisdiction over this issue as it was not previously considered by the Alabama Tax Tribunal. Atheer Wireless, LLC v. Ala. Dept. of Rev., No. 2150645 (Ala. Civ. App. Ct. Nov. 10, 2016). District of Columbia: Approved law (B21-763) amends District of Columbia law to conform to the six-year federal statute of limitations when an overstatement of unrecovered cost or other basis results in a substantial omission from gross income reported on a taxpayer's income tax return. The provision will apply to returns filed after the effective date of the new law to the extent the statute of limitations with respect to the return has not expired as of the date the return was filed. D.C. Laws 2016, Act 21-542 (B21-763), signed by the mayor on Nov. 18, 2016, and will become final law after a 30-day Congressional review period. Massachusetts: The Massachusetts Department of Revenue (Department) issued a technical information release establishing a consent process that protects a taxpayer's appeal rights in cases where the Department treats a taxpayer's amended return as an application for abatement. For amended returns filed on or after the issuance of TIR 16-11, the act of filing an amended return electronically or on paper is considered the taxpayer's written consent to grant the Massachusetts Tax Commissioner (Commissioner) additional time to act on an amended return treated as an abatement application. The Department will provide additional information about this process via the instructions to the yearly tax form, and the instructions will be available on the Department's website, www.mass.gov/dor. Unless the taxpayer withdraws consent, the Commissioner will be able to act on the deemed application beyond the initial six-month period from the date of its filing. The taxpayer may withdraw consent at any time by contacting the Department in writing. This process is consistent with the consent granted under the prior process when taxpayers filed Form ABT, Application for Abatement. Mass. Dept. of Rev., TIR 16-11 (Nov. 17, 2016). Michigan: The Tax Injunction Act (TIA) bars federal courts from hearing a case challenging assessments for local water and cable services through city-owned utilities because the charges are taxes rather than fees when they were used for revenue-raising purposes. In reaching this conclusion, the U.S. Court of Appeals for the Sixth Circuit (Court) determined that although city residents who voluntarily receive the respective utility services are the ones who pay the fees (which suggests the fees are not taxes), the facts that local city council imposes the assessments and the revenue's ultimate use is to pay for services provided to all city residents, such as police and fire protection and services of the Department of Public Works, establish that the fees are taxes. Ultimately, the Court vacated the judgement of the district court and ordered the case be remanded to the state court. Page v. City of Wyandotte, Mich., No. 15-2442 (6th Cir. Nov. 17, 2016) (not recommended for publication). All States: Following an historic and tumultuous election season in which Republicans gained control of the White House with the election of President-elect Donald J. Trump and held onto majorities in both the US Senate and the US House of Representatives, policymakers are turning their attention to the next pressing matters, including funding the federal government beyond December 9, 2016, transitioning the Executive branch to a new President, and preparing for potentially comprehensive tax reform. At the state level, Republicans made net gains but state revenue shortfalls may temper potential tax reform efforts. Finally, voters across the US approved and rejected various state and local ballot measures that were intended to affect various state and local taxes. Ernst & Young LLP's (EY) webcast analyzing the election results and what the future may hold for federal and state tax law reform, is available for replay on the EY Thought Center website. For a summary of the webcast, see Tax Alert 2016-2054. New Jersey: New law (AB 3988) allows certain fuel dealers and distributors refunds of petroleum products gross receipts tax and a credit against motor fuel tax for certain bad debts from the sale of fuel. Fuel dealers and distributors are allowed a refund of the portion of the bad debt from the sale of fuel that constitutes the petroleum products gross receipts tax, as determined from the dealer's/distributor's purchase and sale records. Those recognized as licensed companies allowed to directly pay petroleum products gross receipts tax, as an alternative, can elect to receive the value of the refund as a deduction on their tax return. A fuel distributor is allowed a credit for the portion of the bad debt from the sale of motor fuel that constitutes motor fuel tax, as determined by statements required to be delivered with the consignment of fuel to a purchaser. The credit is applied on the report for the period in which the bad debt is written off. Unused deductions and credit can be carried forward to subsequent periods, as necessary. A bad debt is uncollectible when it becomes a bad debt deduction for federal income tax purposes. For each tax, if a portion of the bad debt that was previously written off as uncollectible is ultimately collected, a dealer or distributor who was allowed a refund or credit must pay the portion of the amount collected that represents the tax liability. The law took effect Nov. 21, 2016 and applies to fuel sold on or after the first day of the third month next following the date of enactment. NJ Laws 2016, Ch. 66 (AB 3988), signed by the governor on Nov. 21, 2016. Washington: An out-of-state company's national and drop-shipped sales delivered into Washington are subject to Washington's business and occupation (B&O) tax because the activities of an in-state related entity were "significantly associated" with establishing a marketplace for the company's retail sales in Washington. The company argued that the dormant Commerce Clause bars imposition of B&O tax on its national and drop-shipped sales into Washington because the in-state entity was not utilized in the placing or completion of these sales. The Washington Supreme Court (Court) found that the company failed to demonstrate dissociation with the in-state entity sufficient to avoid B&O tax liability. The Court noted that "merely showing that an in-state office was not involved in the placing or completion of a nation or drop-shipped sales is insufficient from the bundle of in-state activities that are essential to establishing and holding the market for its products." In this instance, the in-state entity performed a variety of functions for the company in Washington, including soliciting orders, responding to quote requests and questions, providing the company's corporate office with "marketing intelligence" on Washington markets, meeting with the company's sales teams to brainstorm on how to create a greater demand for the company's products, among other activities. These activities, the Court found, help maintain a market in Washington for the company's products. The Court also rejected the company's argument that Rule 193, which bars imposition of B&O tax on drop-shipped sales unless the goods are received by the purchaser in the state and the seller has nexus with the state, finding that that the Washington customer is the company's de facto purchaser and, as explained above, the company has nexus with the state. Avnet, Inc. v. Wash. Dept. of Rev., No. 92080-0 (Wash. S. Ct. Nov. 23, 2016). 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: 2016-2109 |
