19 December 2016 State and Local Tax Weekly for December 9 Ernst & Young's State and Local Tax Weekly newsletter for December 9 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. On Dec. 7, 2016, the Portland City Council (Council) approved an ordinance that, beginning Jan. 1, 2017, will impose a surtax on certain publicly traded companies that operate in the city and that pay their chief executive officer (CEO) at least 100 times that of their median paid workers (based upon information available in their legally required investor reports as described below). The surtax will be imposed in addition to Portland's business license tax of 2.2% of adjusted net income. Publicly traded companies are required by the US Securities and Exchange Commission (SEC) to report the ratio of compensation of their CEOs to the median compensation of their employees for fiscal years beginning on or after Jan. 1, 2017. Under the new ordinance, Portland will impose a new surtax of 10% of the base business license tax liability if a company reports a CEO pay ratio of at least 100:1, but less than 250:1 on SEC disclosure documents. The surtax rises to 25% of the base business license tax liability if a company reports a CEO pay ratio of 250:1 or greater on these same SEC disclosure documents. According to the ordinance's impact statement, if a company pays its median worker nationally $50,000 per year, it could pay its CEO up to $4.9 million per year before it would be subject to the 10% surtax of its existing Portland business license tax liability. The CEO could be paid up to $12.4 million per year before his or her company would be subject to the higher surtax rate of 25%. For more on this development, see Tax Alert 2016-2099. Arkansas: The Arkansas Department of Finance and Administration acknowledged that an error in an example in Ark. Rule 1.26-51-405 creates a conflict with Ark. Code Ann. § 26-51-504(a)(1) regarding the treatment of income from sources outside of Arkansas. The rule correctly states that all partnership income from instate activities are allocated to Arkansas. A resident partner, however, must report income from all sources to the state. Under the statute, the income tax on an Arkansas resident's income derived from business transacted outside the state is first computed as if all of the income was earned within Arkansas, then a credit equal to the amount of income tax owed by the resident to the other states in which the business activity took place may be taken against the Arkansas income tax. Under the facts of the rule's example, the Arkansas resident with $50,000 in pass-through income would report gross income of $50,000 to Arkansas rather than the incorrectly stated $15,000. Ark. Dept. of Fin. and Admin., Revenue Legal Counsel Op. No. 20160910 (Dec. 1, 2016). California: The California Franchise Tax Board (FTB) recently adjusted the bright-line "doing business in California" brackets to reflect changes in the California Consumer Price Index as required by the applicable statute. The adjusted threshold values for taxable years beginning on and after Jan. 1, 2016 are as follows: (1) taxpayer's in-state sales that exceed the lesser of $547,711 or 25% of the taxpayer's total sales; (2) taxpayer's real and tangible personal property in California exceeds the lesser of $54,771 or 25% of the taxpayer's total real and tangible personal property; and (3) taxpayer's in-state compensation exceeds the lesser of $54,771 or 25% of the total compensation paid by the taxpayer. Illinois: The Illinois Department of Revenue (Department) is turning its attention to the personal service income/ reasonable compensation subtraction modification afforded partnerships in calculating their Personal Property Tax Replacement Income Tax (replacement tax or RT) liability. At its annual Tax Practitioners' meeting attended by EY tax professionals on Oct. 28, 2016, the Department announced that it is drafting a regulation to provide a framework for calculating the subtraction modification to coincide with renewed audit efforts. According to a Department representative, the draft regulation is currently being reviewed by the Department's regulatory policy group and is anticipated to be formally proposed for public comment later this year or early next year. For more on this development, see Tax Alert 2016-2059. Massachusetts: A corporation that took the position on its tax returns that it was a securities corporation was not entitled to classification as such because it did not file with the Massachusetts Commissioner of Revenue (Commissioner) an application seeking classification as a securities corporation before the end of the year nor was it so classified by the Commissioner in prior years. In reaching this conclusion, the Massachusetts Appellate Tax Board (Board) held that the plain language of the statute (Mass. G.L. c. 63, §38B) "indicates that application to the Commissioner for classification is not an alternative but a requirement" that can be satisfied either by application before the end of the year or prior year classification. Moreover, the corporation's statement on its returns, which were filed after the year closed, that it was a securities corporation did not qualify as an application for such classification. Because the corporation did not qualify as a securities corporation, it was required to file a combined return with a wholly owned subsidiary. The Board also upheld the imposition of the 20% understatement penalty because the corporation failed to prove that its failure to comply with statutory requirements was not negligent or in disregard of the law. TechTarget, Inc. et al v. Mass. Comr. of Rev.,Nos. C314726 and C314725 (Mass. App. Tax Bd. Nov. 18, 2016). New York City: The New York City Department of Finance (Department) issued an update on audit issues related to allocation of receipts within and without New York City (City) — specifically whether an entity may invoke the receipts allocation provision if it is not a registered securities or commodities broker or dealer and whether an entity may invoke the registration status of a registered single member limited liability company (SMLLC) in order to apply the allocation provision. The Department has observed that some taxpayers have broadly interpreted "registered securities or commodities broker or dealer" and "registered securities broker or dealer" based on two Finance Letter Rulings in which the Department permitted unregistered limited partnerships to characterize themselves as "registered." These Finance Letter Rulings, however, are not precedential and bind the Department only to the taxpayer and facts set forth in the ruling. Therefore, taxpayers may not rely on the broker-dealer rulings to take the position that unregistered entities may characterize themselves as registered under the broker-dealer provisions. In addition, the Department has determined that the representations in the broker-dealer rulings are not reliable and, therefore, they do not reflect the Department's current analysis regarding application of the broker-dealer provisions. The Department stated that it may consider the application of the broker-dealer provisions on a case-by-case basis to entities that establish they are themselves legally acting in the capacity of a broker or dealer with respect to receipts that are specifically enumerated in the broker-dealer provisions. However, the Department would not permit entities to apply the broker-dealer provisions on the same facts presented in the broker-dealer rulings. Finally, and similarly, no basis exists under the New York State opinion or otherwise, for extending the application of broker-dealer provisions to unregistered owners of registered SMLLCs apart from receipts the SMLLCs earn. NYC Dept. of Fin., Update on Audit Issues: Business Income Taxes Income Allocation (Nov. 25, 2016). Utah: A Utah District Court (court) has determined that the Utah Tax Commission abused its discretion in denying a candy company's total deduction based on classifying the transactions as per se outside of arm's length pricing rather than analyzing them under established IRC §482 transfer pricing standards. In reaching this conclusion, the court found that the language in the Utah statute was modeled upon and nearly identical to the IRC § 482 statute such that the review of a transaction under that standard should be applied by the state. The court, however, adjusted the deduction downward resulting in a 10% reduction of the royalty listed in the company's return. See's Candies Inc. v. Utah State Tax Commission, No. 140401556 (Utah 4th Jud. Dist. Ct. Oct. 7, 2016). Arizona: Effective Jan. 1, 2017, the Arizona Department of Revenue (DOR) will be the single point of administration and collection of state, county and municipal transaction privilege tax (TPT). Taxpayers are to conduct all TPT-related activity with the DOR, regardless of the business' location. This transition begins with the January 2017 TPT return, which is filed in February 2017. The DOR also reminded taxpayers that TPT license renewals are due Jan. 1, 2017. Ariz. Dept. of Rev., TPT Changes and News (Dec. 2016). Louisiana: A facility's provision, for a consideration, of a building and its contents for athletic and recreational entertainment is subject to sales and use tax because the use of the facility and its contents is a non-taxable lease of an immovable. In reaching this conclusion, the Louisiana Court of Appeal (Court) reasoned that since the facility retained ultimate control of the building, the customers' payments to use the building could not be transformed by designating the agreement as a "lease" in which the customers paid "rent." The Court noted that the legislature did not envision this kind of a lease as being tax free and instead, to qualify for such a provision, the legislature envisioned a party having sole continuous control over a building with the legal rights that would go along with it, such as an apartment rental. Topshelf Sports, Inc. v. Simpson, No. 15-1111 (La. App. Ct., 3d Cir., March 23, 2016); No. 2016-C-0751 (La. S. Ct. June 3, 2016) (writ denied). Massachusetts: A corporation that sells computers and related products must collect sales tax on the entire sales price for the "single solution … package" as reflected on the invoice or order acknowledgement sent to a customer, including charges for nontaxable services (e.g., service contracts, accidental damage contracts, and/or extended warranties), because the amounts paid for these nontaxable services were not separately stated on a customer's invoice or order acknowledgement. Service contracts, accidental damage contracts, and extended warranties are generally not taxable; however, when these additional services are purchased as part of a retail sale of computer hardware, the additional services are considered "part of the sale" and any amounts charged for the additional services are subject to sales tax unless the separately stated charges are clearly stated on both the bill or invoice presented to the customer and the vendor's books and records. The Massachusetts Department of Revenue based its ruling on the assumption that the value of the taxable components of the single solution package price (e.g., the computers, software) is not inconsequential (more than 10% of the value), in relation to the total amount charged by the corporation for the single solution package price. Mass. Dept. of Rev., Letter Ruling 16-3 (March 24, 2016, released Nov. 22, 2016). Wyoming: Proposed bill (HB 19) would adopt an economic nexus standard for sales and use tax purposes. Under the provision, a seller of tangible personal property (TPP), admissions or taxable services and who does not have physical presence in Wyoming would be required to remit the state's sales tax if the seller meets either of the following requirements during the current calendar year: (1) the seller's gross revenue from the sale of TPP, admissions or services delivered into the state exceeds $100,000; or (2) the seller sold TPP, admissions or services delivered into the state in 200 or more separate transactions. The revenue department would have the authority to bring an action to obtain a declaratory judgment that the seller has an obligation to remit sales tax. Upon filing of this action, the court would grant an injunction during the pendency of the action prohibiting the revenue department or any other state entity from enforcing the tax remittance obligation against any seller who is a party to the action. Any seller who voluntarily remits the sales tax would not be liable to any person who claims the sales tax has been over-collected if any provision of the bill is ultimately deemed unlawful. If enacted, the provisions of the bill would take immediate effect. These provisions would not apply to any tax liability arising prior to the bill's effective date. HB 19 was introduced in the state legislature on Dec. 8, 2016. Missouri: A health care provider that uses its real property to house hospital clinics and departments is exempt from property tax under the Missouri Constitution because there is no evidence of anyone being denied admission to the medical facilities due to an inability to pay, no evidence that any non-hospital areas did not dovetail or rounded out the charitable use, and no evidence of profit to individuals or corporations. Therefore, the equalization board's decision that the property was taxable is set aside. Skaggs Community Hospital Assn. v. Pennel, No. 15-89509 (Mo. State Tax Comn. Nov. 22, 2016). Illinois: The Illinois Department of Revenue (Department) announced updated corporate filing deadlines to be consistent with federal filing due date changes enacted in 2015. The due dates for C corporations required to file Form IL-1120, Corporation Income and Replacement Tax Return, whose tax year begins on or after Jan. 1, 2016, are as follows: (1) calendar year C corporations will receive an extra month, with a due date of April 18, 2017 (previously March 15, 2017); (2) fiscal year C corporations whose tax year ends on a date other than June 30 will receive an extra month, with their original filing and payment due date changed to the 15th day of the fourth month following the close of the tax year; (3) fiscal year C corporations whose tax year ends on June 30 will retain an original filing and payment due date of the 15th day of the third month following the close of the tax year (original filing and payment due date will be Sept. 15 until 2026, when it will change to Oct. 15); and (4) cooperatives that file Form IL-1120 will retain an original filing and payment due date of the 15th day of the ninth month following the close of the tax year, regardless of when their tax year ends. There are no changes to original filing or payment due dates for S corporations, partnerships, trust/estates, or exempt organizations in Illinois. In addition, Illinois provisions accommodate the federal filing due date changes related to extended due dates. The Department will grant an automatic extension of six months to taxpayers whose returns are due on the 15th day of the fourth month following the end of the tax year and seven months for all other taxpayers. For most taxpayers this means there will be no change to their extended due date, which will remain the 15th day of the 10th month following the close of the tax year. Ill. Dept. of Rev., Changes to 2016 Illinois Business Income Tax Filing and Payment Due Dates (Dec. 2, 2016). Massachusetts: The Massachusetts Department of Revenue (Department) announced the changes in Technical Information Release (TIR) 15-13 related to the implementation of the Department's new integrated tax system, MassTaxConnect (MTC) are extended to most other tax types effective Dec. 5, 2016, including personal income, personal use, estate, and fiduciary income taxes. MTC allows taxpayers to access their accounts, make payments, file applications for abatement, and perform many other functions online. In the TIR, the Department discussed the process for filing amended returns and applications for abatement after Dec. 5, 2016, and how a taxpayer's rights will remain protected under the new processes, including the new consent process for extending the time to act on an amended return treated as an application for abatement. Disputes filed through MTC will be processed much more quickly, but taxpayers seeking to appeal a responsible person determination or a state-collected motor vehicle excise assessment, a purchaser filing a refund claim on behalf of a vendor, or tax types not yet supported on MTC must file a paper form Application for Abatement (Form ABT). Mass. Dept. of Rev., TIR 16-13: Changes to the Amended Return Process Expanded to Most Tax Types (Dec. 2, 2016) (supersedes TIR 15-13). Federal: In the wake of elections that gave Republicans control of both the White House and Congress, the chances of enacting comprehensive tax reform are greater than they have been in many years. The House Republican tax reform "Blueprint," released in June 2017 (available on the Internet at https://waysandmeans.house.gov/taxreform/), provides the broad framework for legislative action on tax reform in 2017. EY Washington Counsel has prepared an overview that explains some of the key elements of the Blueprint and provides context for the policy debates ahead. For additional information on this development see Tax Alert 2016-2097. New Hampshire: The New Hampshire Department of Revenue Administration announced that the filing threshold for the Business Enterprise Tax (BET) has been adjusted as required by a 2015 law change. Effective for taxable periods beginning on Jan. 1, 2017, the adjusted BET thresholds are: gross business receipts in excess of $208,000; or enterprise value tax base greater than $104,000. N.H. Dept. of Rev. Admin., TIR 2016-010 (Dec. 9, 2016). Tennessee: A corporation's sales of security related electronic equipment to licensed alarm contractors is subject to a higher tax rate under the Business Tax Act (BTA) because the sales were properly classified as retail sales, not wholesale sales, for purposes of the BTA. In so holding, the Tennessee Court of Appeal (Court) found that the contractors do not further process or simply resell the equipment, rather the equipment becomes a component part of the structures in which it is installed. The Court noted that the contractors were the true users of the equipment as they use the equipment to conduct their service-oriented alarm-monitoring business, and that the equipment is useless to the homeowner or business otherwise. In addition, an administrative rule provides guidance as to when a sale constitutes a sale for resale under the BTA, and specifically classifies as a retail sale a sale to a contractor who in the course of performing his contract installs property or uses services in a structure, as a component part thereof. Security Equipment Supply, Inc. v. Roberts, No. M2016-00423-COA-R3-CV (Tenn. App. Ct. Nov. 28, 2016). Federal: On Thursday, Jan. 5, 2017, from 1:00 - 2:15 p.m. EST New York (10:00 - 11:15 a.m. PST Los Angeles), EY will host a webcast on the border adjusted cash flow tax plan floated as a potential component of federal tax reform. As a result of the 2016 election, the Republican Party will soon control the House, Senate, and the White House, increasing the likelihood of US tax reform. President-elect Trump issued tax reform proposals during the campaign, and his 100-day action plan includes a commitment to individual and corporate tax changes, as well as a commitment to repeal and replace the Affordable Care Act (ACA). House Republicans have released a separate tax reform "Blueprint" outlining their proposals, which is expected to be a starting point for legislative development of federal tax reform. Understanding these proposals and the impact they may have on American business is critical to determining what steps to take now in order to be prepared. Join our panel of Ernst & Young LLP professionals for the third part of our three-part US tax reform series, which will focus on understanding the proposed shift to a consumption-based tax included in the House Republican Blueprint. Our panelists will discuss: (1) What is a border adjusted cash flow tax? (2) The proposed tax legislation driving the change, and (3) Considerations to prepare for change. Click here to register for this event. All States: On Thursday, Jan. 12, 2017, from 1:00-2:30 p.m. EST New York (10:00-11:30 a.m. PST Los Angeles), Ernst & Young LLP will host a webcast on tax issues in debt modifications/restructuring and bankruptcy. In the context of debt restructuring (including bankruptcy), understanding the details and nuances of tax technical and administrative demands — in all areas of tax — is key. How a tax executive navigates these issues can make the difference between positive and adverse tax results. To help address this challenge, a panel of EY professionals will continue our discussion of the tax implications of both in- and out-of-court distress situations. The following topics will be discussed: (1) federal income tax impacts to creditors with regard to in- and out-of-court restructurings; (2) restructurings and alternative minimum tax (AMT) — traps for the unwary; (3) Section 382 computation of net unrealized built-in gain (NUBIG) or loss (NUBIL), and treatment of deductions on the change date; (4) state income tax attribute reductions — disconnects from federal income tax treatment; and (5) tax administration and "above-the-line" strategies that may yield cash savings. Register for this event. 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: 2016-2160 |
