31 January 2017 State and Local Tax Weekly for January 20 Ernst & Young's State and Local Tax Weekly newsletter for January 20 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. Registration by out-state-dealers under Tennessee's new economic nexus rule for sales and use tax purposes The Tennessee Department of Revenue (Department) has approved a new regulation, Rule 1320-05-01-.129, which adopts a bright-line, economic nexus standard for sales and use tax purposes. The new regulation became 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 months. The regulation requires out-of-state dealers meeting the threshold to register with the Department for sales and use tax purposes by March 1, 2017, and begin collecting and remitting Tennessee sales tax to the Department by July 1, 2017. The Department recently notified taxpayers that, consistent with the requirements of the new regulation, it has included a link on its web page to a new on-line registration application for remote sellers that meet the $500,000 threshold. The regulation is still subject to approval by the legislature and, as such, thus the collection requirement does not begin until July 1, 2017. The regulation received no recommendation during the Joint Government Operations Committee hearing and therefore, will become part of the omnibus rules legislation to be considered by the legislature in the spring. While the legislature is expected to approve the regulation, no collection activity will be required if the legislature does not take action, and the regulation is allowed to expire. For additional information on this development, see Tax Alert 2017-164. Michigan: The Michigan Supreme Court will not review the Michigan Court of Appeals (Court) decision in LaBella Management, Inc. In LaBella, the appellate court held that a group of three entities — two corporations and a limited partnership — were not a "unitary business group" as defined in MCL 208.1117(6) because no one member of the group owns, through an intermediary or otherwise, more than 50% of any other entity. In reaching this conclusion, the appellate court held that the Michigan Department of Treasury in using the federal income tax law definition of "constructive" ownership when defining Michigan's "indirectly" ownership requirement improperly broadened its interpretation of "unitary business group" beyond the scope intended by the Legislature. LaBelle Management, Inc. v. Mich. Dept. of Treas., No. 324062 (Mich. Ct. App. March 31, 2016), review denied, No. SC 154016 (Mich. S. Ct. Jan. 24, 2017). Minnesota: New law (HF 2) updates the state's date of conformity to the Internal Revenue Code for corporate and individual income tax purposes to Dec. 16, 2016 (from Dec. 31, 2014). The incorporated federal changes apply retroactively at the same time as the change is effective for federal purposes. Minn. Laws 2017, Ch. 1 (HF 2), signed by the governor on Jan. 13, 2017. Tennessee: The Tennessee Department of Revenue provided guidance on how taxpayers in the telecommunications industry should source their receipts from sales of non-tangible personal property under the franchise and excise tax in effect for tax years beginning July 1, 2016. Taxpayers that: (1) primarily sell telecommunications, mobile telecommunications, internet access, video programming, or direct-to-home satellite television programming services; and (2) are members of an affiliated group of taxpayers that has incurred more than $150 million in aggregate qualified expenditures or has made sales in excess of $150 million that are subject to Tennessee sales and use tax; should source their receipts from sales of non-tangible-personal property to Tennessee by averaging two sourcing methods. The two sourcing methods are cost of performance based on the earnings-producing activity, and market-based sourcing. These taxpayers should report Tennessee and everywhere receipts for tangible and non-tangible sales on Schedule N-Apportionment, and should also maintain detailed records to support their calculations. Tenn. Dept. of Rev., For purposes of the franchise and excise tax, how should taxpayers in the telecom industry source their receipts from other-than-tangible-personal-property sales? (Jan. 5, 2017). Texas: The sale of a prepaid calling card represents the sale or resale of a telecommunications service for franchise tax purposes and, therefore, only revenue from calls that both originated and terminated in Texas should be sourced to the state. In reaching this conclusion, the administrative law judge for the Texas Comptroller of Public Accounts found that although sales and use tax principles do not necessarily apply to the franchise tax, determining whether there has been a sale of tangible personal property or a service is informed by the pattern, coverage, and design of the sales and use tax, and determining the characterization of an item for franchise tax apportionment and sourcing purpose is informed by the pattern, coverage, and design of the sales and use tax. Moreover, both the NAICS Code and the SIC Manual characterize the sale of a prepaid calling card as the sale or resale of a telecommunications service. Accordingly, for the taxpayer's report years 2009 through 2013, its franchise tax due should be recalculated by utilizing a flat 30% deduction and an apportionment factor of 1.31%. Further, because the taxpayer is selling a service, it is not entitled to a cost of goods sold deduction. Tex. Comp. of Pub. Accts., No. 201610114H (May 20, 2016). Texas: A payment processing company (company) could not exclude interchange fees from total revenue for franchise tax purposes because the fees did not qualify as flow-through amounts. Rather, the administrative law judge (ALJ) was not persuaded that the company's obligations were anything more than contractual, particularly when the parties did not have contracts with issuer banks and instead relied on complex relationships of trust and confidence, and the company recognized the interchange fees on its federal income tax return in the years at issue. In addition, although the company did not become aware of a business loss until after the completion of a federal audit in 2010, it is not allowed to claim a temporary credit for business loss carryforwards because it did not preserve a business loss carryforward of any amount in its 2008 report as required by law. Tex. Comp. of Pub. Accts., 201609095H (Sept. 23, 2016). Indiana: An online travel company (OTC) did not owe sales and innkeeper's tax assessments based on the retail rate of Indiana hotel rooms rather than the wholesale rate used because the hoteliers, as the retail merchants, were liable for the taxes instead. In reaching this conclusion, the Indiana Tax Court (Court) found that the OTC was not a retail merchant because the hoteliers (not the OTC, which acted as an independent contractor) delivered or transferred possession and control of hotel rooms to customers during the check-in process. The Court's finding that the OTC is not a retail merchant relieves the OTC of liability for sales or innkeeper's taxes regardless of the statutory proclamation that each rental or furnishing of a hotel room is a unitary transaction. Instead, the hoteliers are liable for any additional tax due. Orbitz, LLC v. Ind. Dept. of Rev., No. 49T10-0903-TA-00010 (Ind. Tax Ct. Dec. 20, 2016). Michigan: New law (SB 1172) stops the collection of the Medicaid managed care use tax after Dec. 31, 2016. The tax will be effectively reinstated when the Health Insurance Claims Assessment (HICA) Act sunsets on July 1, 2020, when the HICA Act is repealed, or when the HICA rate is reduced to 0.0%, whichever occurs first. The law took effect Dec. 28, 2016. Mich. Laws 2016, PA 390-2016 (SB 1172), signed by the governor on Dec. 28, 2016. Wisconsin: Taxpayers' provisions of dredging/pollution service is subject to Wisconsin's sales and use tax because while it is not an enumerated taxable service it nevertheless is taxable as "processing" of tangible personal property. In reaching this conclusion, the Wisconsin Court of Appeals (Court) found the Tax Appeals Commission's (Commission) use of a recognized dictionary definition of "processing" when no statutory definition was available to be reasonable. The Court rejected the taxpayers' argument that the Commission's interpretation of "processing" to mean "to put through the steps of a prescribed procedure; or, to prepare, treat, or convert by subjecting to a special process," was overly broad, finding the argument unpersuasive. The Court noted that "processing" has "to mean something" and found it compelling that the taxpayers failed to offer an alternative definition. The Court further held that although the Commission has interpreted "processing" broadly, its application is limited to tangible personal property, it is inapplicable to retail services not involving tangible personal property, and only retail services falling within one of the specifically enumerated services are subject to sales and use tax. In addition, state law does not preclude the Wisconsin Department of Revenue (Department) from raising an alternative legal basis for taxation before the Commission that was not raised in the taxpayers' written notices. The Department complied with statutory procedures because state law only requires notices of determination to be in writing; it does not require, as taxpayers argued, that the Department "provide every possible statutory or legal basis for taxation in its notice of determination." Tetra Tech EC, Inc. and Lower Fox River Remediation LLC v. Wis. Dept. of Rev., No. 2015AP2019 (Wis. App. Ct., 3rd Dist., Dec. 28, 2016). Federal: In furtherance of implementing changes that were made to the Work Opportunity Tax Credit (WOTC), the US Department of Labor (the Department) has issued guidance that provides employers with an additional grace period for submitting certification requests for all target groups using forms previously approved by the Office of Management and Budget (OMB). The guidance also clarifies the verification process that State Workforce Agencies (SWAs) must use when determining eligibility for the Qualified Long-Term Unemployment Recipient target group. (Training and Employment Guidance Letter (TEGL) 25-15, Change 1.) For additional information on this development, see Tax Alert 2017-94. Michigan: New law (SB 908) amends provisions related to the Brownfield Redevelopment Financing Act. Key changes: (1) modify provisions pertaining to the contents of a brownfield plan, and the recovery and use of money from tax increment financing; (2) establish a procedure for abolishing or terminating a brownfield plan or plan amendment, and allow termination in two years instead of five years; (3) prohibit the Michigan Department of Environmental Quality from conditioning a work plan approval on modifications pertaining to activities funded by certain tax increment revenue; and (4) allow the Michigan Strategic Fund chairperson to approve plans that addressed eligible activities totaling $1 million (previously $500,000), among other provisions. In addition, the prohibition on a brownfield redevelopment authority from capturing tax increment revenue from taxes levied before Dec. 31, 1996 is repealed. Provisions of SB 908 take effect April 5, 2017. Mich. Laws 2016, PA 471 (SB 908), signed by the governor on Jan. 4, 2017. Michigan: New law (HB 5912) amends a property tax provision to exclude from a foreclosure judgment certain personal property owned by oil and gas companies, utility companies, pipeline companies, and others. This change takes effect March 29, 2017. Mich. Laws 2016, PA 433 (HB 5912), signed by the governor on Jan. 3, 2017. Louisiana: The Louisiana Department of Revenue (Department) notified taxpayers that Act 661 of the 2016 Regular Session changed the dates on which corporate franchise tax returns/payments must be filed to the 15th day of the fourth month after the tax is due, applicable to corporation franchise tax periods beginning on and after Jan. 1, 2017. Thus, for calendar year filers, the payment due date is May 15. Further, while the due date for the initial franchise tax remains unchanged and payable on or before the 15th day of the third month after the month in which the tax is due, an extension of one month is being provided for the filing and payment of the initial franchise tax, making the filing and payment due date May 15 for a corporate or other entity that initially became taxable in January. La. Dept. of Rev., Rev. Info. Bulletin No. 17-006 (Jan. 4, 2017). Connecticut: The Connecticut Department of Revenue Services (Department) announced that each insurer that is a member (member insurer) of the Connecticut Insurance Guaranty Association (CIGA) must pay a portion of their recently refunded assessments with respect to Legion Insurance Company (Legion) to the Department on or before Feb. 17, 2017. CIGA mailed to member insurers an assessment statement dated Jan. 2, 2017, and refunded to member insurers a portion of prior CIGA assessments made to meet CIGA's obligations with respect to Legion for the 2003 base year. For state insurance premiums tax purposes, a CIGA assessment paid by a member insurer during a calendar year beginning on or after Jan. 1, 2000, is permitted to be offset against the member insurer's state insurance premiums tax liability for the five calendar years following the calendar year in which the CIGA assessment was paid, provided that if a CIGA assessment paid during a calendar year beginning on or after Jan. 1, 2000, is refunded to a member insurer, the member insurer must pay the amount of the refunded assessment to the Department. If a member insurer did not offset any portion of an original assessment by CIGA with respect to Legion for the 2003 base year against its state insurance premiums tax liability for any calendar year, the member must notify the Department in writing. Failure to notify the Department may result in an assessment being issued. Conn. Dept. of Rev. Svcs., Announcement No. 2017(6) (Jan. 5, 2017). Washington: The task force created to develop options for centralized and simplified administration of local business and occupation (B&O) taxes and business licensing as required by HB 2959 (Wash. Laws 2016), has released its recommended options for achieving this goal. The task force evaluated: (1) improvements to the local business licensing process; (2) options for centralized administration of local B&O taxes for those cities and towns that desire to participate in a state-provided alternative; (3) examining the difference in nexus between the state and cities, and allocation and apportionment methods; and (4) implementing data sharing between the revenue department and FileLocal. Wash. State and Local Tax & Licensing Simplification Task Force, A report to the Legislature per Engrossed House Bill 2959 (Dec. 30, 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: 2017-0198 |
