14 February 2017 State and Local Tax Weekly for February 3 Ernst & Young's State and Local Tax Weekly newsletter for February 3 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 Feb. 2, 2017, Delaware Governor John Carney signed Senate Bill 13 (SB 13) to amend the state's unclaimed property laws in response to the recent federal district court ruling in Temple-Inland, Inc. and adopt various sections of the Revised Uniform Unclaimed Property Act (RUUPA), which was released last July. Key changes to Delaware's unclaimed property laws included in SB 13: — Establish a 10-year record retention requirement and statute of limitations coupled with a 10-year plus dormancy look-back period both while under examination and under Delaware's voluntary disclosure agreement (VDA) program; See Tax Alert 2017-260 which provides an in-depth summary of these changes. Connecticut: The Connecticut Department of Revenue Services (Department) issued guidance on calculating corporation business tax on a combined unitary basis, answering specific frequently asked questions from taxpayers to supplement Special Notice 2016(1), which describes the mechanics of identifying the groups of companies that must file a Connecticut combined unitary tax return and the calculation of the group's Corporation Business Tax liability. Issues addressed in the guidance include: (1) elimination of sales for net income apportionment purposes between members of the combined group; (2) petitions for exclusion of an otherwise includable member from the combined group; (3) when income from certain taxable members should or should not be apportioned separately (e.g., manufacturer, broadcaster, air carrier); (4) exclusion of REITs and RICs from the combined group's capital base; (5) when a company in the combined group is considered to have "no tax liability" for purposes of the research and development credit exchange; (6) intercompany addbacks; (7) water's-edge filing; (8) tax attributes from previous tax years; and (9) aggregate maximum tax. The publication will be updated with additional taxpayer questions as warranted. Conn. Dept. of Rev. Svcs., OGC-3: Calculation of the Corporation Business Tax on a Combined Unitary Basis (Jan. 23, 2017). Florida: The Florida Department of Revenue determined that a business whose income is derived primarily from transporting people or goods from one location to another is a transportation company and, therefore, it may use a single sales factor formula to apportionment its income to Florida. The numerator of the sales factor is the business's Florida revenue miles (i.e., the total miles freight or people are transported in Florida), and the denominator is its everywhere revenue miles (i.e., the total miles traversed to transport freight or people). Further, the sales factor excludes "dead miles," which occur when the transporter does not carry any freight or passengers during transport, but includes "no-where miles," which are revenue miles not attributable to any state. Fla. Dept. of Rev., Technical Assistance Advisement No. 16C1-002 (Oct. 17, 2016). Michigan: The Michigan Supreme Court recently denied an appeal by the Michigan Department of Treasury (Department) of the ruling by the Michigan Court of Appeal (COA) in LaBelle Management, Inc. regarding the definition of "unitary business group" (UBG). Previously, the COA reversed a ruling of the Michigan Court of Claims and determined that a group of three entities — two corporations and a limited partnership — did not constitute a UBG as defined in MCL 208.117(6) because no one member of the group owned, through an intermediary or otherwise, more than 50% of any other entity. Since May 5, 2016, the effectiveness of the COA's decision was stayed pending the exhaustion of the Department's appeal rights. With the Michigan Supreme Court's ruling, it is likely that the Department will make no further appeals, the COA's decision will be final and the stay should be lifted shortly. The COA's decision clarifies the determination process for a Michigan UBG. Taxpayers affected by this decision should review their Michigan UBG determinations for all tax years open under statute to understand how they are impacted and whether additional or amended filings are required. For additional information on this development, see Tax Alert 2017-213. Michigan: As we enter the 2016 tax compliance season, taxpayers should consider a favorable Michigan Tax Tribunal (Tribunal) ruling clarifying the "materials and supplies" deduction for purposes of determining the Michigan Business Tax (MBT) modified gross receipts tax base. In Plastic Surgery Associates, the Tribunal held that "materials and supplies" are purchases from other firms, beyond those supporting inventory or depreciable property, and those "materials and supplies" are allowable as a subtraction in determining the modified gross receipts tax base. Further, since the Michigan Business Tax Act (MBTA) does not define the term "materials and supplies," taxpayers should look to a federal income tax definition when used in a comparable context as allowed under MCL 208.1103, which provides that a taxpayer can look to IRC §162 and corresponding regulations and relevant federal case law for the definition. For additional information on this development, see Tax Alert 2017-223. South Dakota: New law (SB 38) updates South Dakota's date of conformity with the IRC to the IRC as amended and in effect on Jan. 1, 2017, for purposes of the income tax imposed on financial corporations. S.D. Laws 2017, SB 38, signed by the governor on Feb. 3, 2017. Texas: A heavy machinery rental company (company) that charges delivery and pick-up fees as part of its contracts cannot include these charges in its cost of goods sold (COGS) deduction because costs related to producing, obtaining, manufacturing, or storing goods are eligible, while costs incurred in selling or in the post-sale handling of the goods are not. In reaching this conclusion, a Texas Court of Appeals (Court) held that by providing that companies like this one "may subtract as a [COGS] the costs otherwise allowed by this section [Tex. Tax Code §171.1012(k-1)] in relation to tangible personal property that the entity rents or leases in the ordinary course of business," the legislature intended to extend the COGS deduction to allow such companies to deduct their costs of obtaining the equipment they can rent out. The Court also held that the company's delivery and pick-up costs did not fall into an allowable category of expenses set out in other parts of the COGS deduction statute: delivery and pick-up costs are not "direct costs of acquiring or producing" the equipment that the company then rents; they are not eligible additional, indirect, or administrative costs; and they do not fall among the "certain other expenses" that may be included in a heavy equipment rental company's COGS deduction. The company's delivery and pick-up costs also did not constitute labor because although this statutory subsection may arguably apply to the company, the statute's subsection (k-1) definitely and specifically applies; therefore, the company's access to COGS is limited to subsection (k-1). The Court noted, however, that while the company cannot use the labor argument (because it does not provide labor that can be considered a direct component of the improvement projects, and the record does not reflect that the company's services could be considered an essential component of the projects), the company's customers might be able to assert that their labor on the projects were encompassed by the Tex. Tax Code § 171.1012(i) COGS extension. Hegar v. Sunstate Equipment Co., LLC, No. 03-15-00738-CV (Texas App. Ct., 3d Dist., Jan. 20, 2017). Virginia: New law (HB 1521) moves Virginia's date of conformity to the IRC to Dec. 31, 2016 (previously Dec. 31, 2015). Virginia continues to specifically decouple from the bonus depreciation provisions, the domestic production deduction, the five year carryback period for net operating losses generated in taxable years 2008 and 2009, among other provisions. Va. Laws 2017, Ch. 1 (HB 1521), signed by the governor on Feb. 3, 2017. For additional information on Virginia's conformity to the IRC, see Va. Dept. of Taxn., Tax Bulletin 17-1 (Feb. 6, 2017). New York: A technology provider's (provider) receipts from its fax service are subject to sales and use tax as telephony and telegraphy, but its sales of e-mail, internet meeting, and file management services generally are not taxable; except that the email and meeting services are taxable when sold along with certain taxable prewritten software for one price. The New York Department of Taxation and Finance explained that the Internet Tax Freedom Act's (ITFA) definition of internet access includes email and meeting services even if the email and messaging services are provided independently of any service that allows a subscriber to connect to the internet. Even though ITFA exempts internet service from sales and use tax, ITFA allows sales tax to be imposed if charges for internet access are aggregated with other taxable charges. Thus, when the provider transfers both email/meeting services with email/conferencing software, the entire charge is taxable. Finally, the file management service qualifies as non-taxable data storage service rather than taxable storage of tangible personal property. N.Y. Dept. of Taxn. and Fin., TSB-A-16(30)S (Nov. 18, 2016). New York: A company's charges for providing specifically identified confidential medical records to authorized requestors, as well as related delivery charges (regardless of how delivered -printed or electronically), are services not subject to New York's sales and use tax. The company's provision of coding service, through which it adds additional information to the healthcare providers' medical records that the providers can then use and analyze, is an information service because it includes analyzing, compiling and organizing information by categorizing the original records and enabling searches within like diagnoses. Charges for the coding service are excluded from sales tax as an information service that is "personal or individual in nature" when the company provides this service solely to its healthcare provider customer or an authorized requestor. These charges, however, are taxable if provided to third parties as it would not satisfy the requirement that the information "is not or may not be substantially incorporated in reports furnished to other persons." The company's abstraction service is not an information service because it merely converts the customer's handwritten or typed information into an electronic medical record without adding any information or intelligence; this is not a taxable service. In addition, the company's charges for training provided to coders, physicians and ancillary hospital personnel are not taxable because education services are not among the enumerated taxable services. Finally, the company's data storage service is not taxable since the records are stored in electronic form. N.Y. Dept. of Taxn. and Fin., TSB-A-16(31)S (Dec. 2, 2016). Ohio: The Ohio Board of Tax Appeals (BTA) issued a decision in Pi in the Sky, ruling that a company's purchase of an aircraft is subject to Ohio's use tax because it does not qualify for the resale exemption. The decision is notable as it represents the first time the BTA has applied the general sham transaction provisions of Ohio Rev. Code § 5703.56(B), which authorizes the Tax Commissioner to disregard sham transactions (i.e., "a transaction or series of transactions without economic substance because there is no business purpose or expectation of profit other than obtaining tax benefits.") Pi in the Sky, LLC v. Testa, No. 2015-2005 (Ohio BTA Jan. 19, 2017). For additional information on this ruling, see Tax Alert 2017-203. Wyoming: The Wyoming Supreme Court (Court) upheld the Wyoming Department of Revenue's (Department) determination that the mouth of a coal producer's mine, and the point of valuation for the coal producer's coal, is located where the coal actually reached the surface of the ground. In reaching this conclusion, the Court relied on the plain meaning of the statute, which defines the mouth of the mine as "[t]he point at which a mineral is brought to the surface of the ground and is taken out of the pit, shaft or portal. For a surface mine, this point shall be the top of the ramp where the road or conveying system leaves the pit." The Court found that current statutory provisions do not envision hypothetical points of valuation or costs. In addition, the coal producer's constitutional right to uniform and equal taxation was not violated by the Department's decision because the Department consistently applies the statutory language to determine the mouth of the mine for Wyoming coal mines, and the coal producer's permanent mine mouth is the result of the coal producer's business decision and mine plan. The Court did not rule on a separate issue — whether the Department properly rejected the coal producer's reclassification of environmental and government-imposed expenses as indirect costs — because an audit of these expenses was still ongoing by the Department and, as such, the decision is not final and not ripe for review. Wyodak Resources Devel. Corp. v. Wyo. Dept. of Rev., No. S-16-0075 (Wyo. S. Ct. Jan. 23, 2017). Arkansas: New law (HB 1156) aligns the filing due date for Arkansas corporate income tax returns with the filing deadlines of federal corporate income tax returns (April 15). Under legislation enacted in 2015 (Act 896), the due date for filing the Arkansas corporate income tax return would have changed from March 15 to April 15, effective for tax years beginning Jan. 1, 2017. Under HB 1156 this change is now effective for tax years beginning Jan. 1, 2016. Ark. Laws 2017, Act 48 (HB 1156), signed by the governor on Jan. 27, 2017. California: Payment of and filing for San Francisco's Gross Receipts Tax is due on or before Feb. 28, 2017. Taxpayers can request a 60-day extension provided they file the request in writing and pay at least 90% of the tax due by the filing deadline. In addition to the Gross Receipts Tax, San Francisco also requires payment of a Business Registration Fee. Taxpayers must register or renew their business registration every year. The due date for registration or renewal is May 31, 2017. The Business Registration Fee may be filed online at the San Francisco Treasurer's website (last accessed Jan. 31, 2017). For additional information on this development, see Tax Alert 2017-209. California: Payment of and filing for the Los Angeles Business Tax is due Feb. 28, 2017. Taxpayers may file their 2017 Business Tax Renewal form either by mail or electronically. The city provides both copies of its forms for download and completion as well as access to an electronic filing system (with applicable instructions) on its website at finance.lacity.org. To be considered timely filed, a taxpayer must postmark or electronically file the forms no later than 11:59 p.m. PST on Feb. 28, 2017. Interest and penalty will be assessed starting March 1, 2017. Taxpayers can apply for a maximum filing extension of 45 days. An extension request must be made in writing, accompanied by at least 90% of the total tax due, and received or postmarked by the Feb. 28, 2017 filing deadline. For additional information on this development, see Tax Alert 2017-209. Rhode Island: The Rhode Island Department of Revenue (Department) announced that C corporations with a calendar-year end are eligible for an automatic six-month extension of time to file, effective for tax years beginning on or after Jan. 1, 2016. For example, a 2016 corporate tax return with an original due date of April 18, 2017, would have an extended due date of Oct. 16, 2017. Note: this is a change from prior guidance issued in September 2016 (ADV 2016-16) in which the Department said that calendar-year C corporations would have a five-month extension. R.I. Dept. of Rev., ADV 2017-06 (Feb. 8, 2017). All States: On Feb. 22, 2017 from 1:00-2:30 p.m. EST (10:00-11:30 a.m. PST), EY will host a webcast on state tax policy issues and recent noteworthy developments. Guest Speaker Ferdinand Hogroian, with the Council on State Taxation (COST), will join Ernst & Young LLP panelists in a discussion of the following topics: (1) tax policy matters, including an overview of the current state of the economy, state budget proposals, and emerging trends; (2) statewide issues including nexus expansion, combined reporting consideration, "tax haven" designation, retroactive tax law, "pay ratio" surtax proposals, gross receipts tax proposals, sales tax on business inputs, and federal tax law proposals impacting the states; and (3) an update covering major judicial and administrative developments at the state level. To register for this event, go to State tax matters. Florida: A faith-based, non-profit hospital does not qualify as a "religious institution" exempt from communications services tax (CST) on communications services bills because the hospital's essence is that of a medical facility. The Florida Department of Revenue reasoned that exemptions must be narrowly construed and the hospital does not function as a "religious institution" as defined by statute because only 2% of the hospital's square footage is devoted to the hospital's chapels and the provision of religious services. Fla. Dept. of Rev., Technical Assistance Advisement No. 16A19-001 (Nov. 9, 2016). Ohio: On Jan. 30, 2017, Governor John Kasich released the framework of his proposal for Ohio's budget for fiscal years 2018 and 2019. The proposal reflects Governor Kasich's continued commitment to reducing Ohio Individual Income Tax rates. Further personal income tax rate reductions, however, present a greater challenge in this budget cycle due to federal rules resulting in the elimination of the Ohio sales tax on Medicaid managed care plans. The general fund revenue effect of eliminating this tax is estimated to be approximately $1.1 billion for the biennium with another $400 million in estimated revenue losses to county governments. The Governor also has proposed increasing the state portion of the Ohio sales and use tax rate and expanding the tax to certain services that are currently not subject to the tax. He also recommended additional changes to Ohio's Municipal Income Tax system that will surely be the subject of intense discussions as the legislative process moves forward. For more on the governor's budget proposal, see Tax Alert 2017-226. 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: 2017-0309 |
