10 March 2017 State and Local Tax Weekly for March 3 Ernst & Young's State and Local Tax Weekly newsletter for March 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. Michigan Department of Treasury gives LaBelle decision full retroactive effect, unitary business groups should consider filing amended or stand-alone returns The Michigan Department of Treasury recently announced that it will give the Michigan Court of Appeal decision in LaBelle Management, Inc. full retroactive effect to all open tax years. In LaBelle, the court held that a group of three entities did not constitute a "unitary business group" (UBG) as defined in MCL 208.117(6) for purposes of the Michigan Business Tax (MBT) because no one member of the group owned, through an intermediary or otherwise, more than 50% of any other entity. The Department takes the position that, since the same control test is used for the MBT and the Corporate Income Tax, the decision in LaBelle applies to both. Further, the Department interprets the "decision as narrowing the UBG groups to those in which ownership or control is based upon a parent-subsidiary chain of relationships." If the UBG's membership is based upon brother-sister relationships as described in RAB 2010-1 (or mere custodial or possessory interest) the Department's position is that it does not meet the required level of control under LaBelle. UBG members should review their UBG determinations for all tax years open under statute and correct their filing to conform to the control test holding in the LaBelle decision. If, after applying LaBelle, the UBG does not include all of its prior members, the designated member of an affected UBG must file amended returns to reflect the activities only of those members that meet the control test under LaBelle. Those members that are determined to no longer be part of a UBG must determine whether they meet the control test for inclusion in a new UBG or should file a stand-alone return. The Department deems these affected members as non-filers for the years they filed in compliance with RAB 2010-1 and 2013-1, and requires these entities to file amended returns or an original return as a stand-alone filer for all open years. These returns should be accompanied by written correspondence identifying the return as a "LaBelle" return. The statute of limitations is generally four years as prescribed by MCL 205.27a(2). The Department will not impose penalties on amended UBG returns and stand-alone returns filed as a result of complying with its instructions in response to the ruling in LaBelle. Nor will it impose interest on any tax or additional tax due and reported on such returns, provided that such LaBelle returns are filed by Dec. 31, 2017. For more on this development, see Tax Alert 2017-417. Arizona: New law (SB 1290) updates the state's date of conformity to the IRC to the IRC as amended and in effect on Jan. 1, 2017. This update includes the provisions that became effective during 2016 with the specific adoption of all federal retroactive effective dates, but excluding any change to the IRC enacted after Jan. 1, 2017. Ariz. Laws 2017, Ch. 2 (SB 1290), signed by the governor on March 2, 2017. California: The California Franchise Tax Board (FTB) issued FTB Notice 2017-01 to inform taxpayers that it will not appeal the ruling by the California Court of Appeal (Court) in Swart Enterprises, Inc. (Swart) and that it will follow the Court's decision "in situations with the same facts." In Swart, the Court held that a corporation was not "doing business" in California within the meaning of the state's "doing business" statute and was not subject to the state's annual $800 minimum franchise tax where its sole connection with California was passively holding a 0.2% membership interest in a "manager-managed" limited liability company treated as a partnership for federal and California income tax purposes and having a mailing address and doing business in California. The FTB is advising taxpayers that have the "same facts" as Swart to consider their filing options — file a return and/or file a refund claim. Taxpayers filing a refund claim should cite the holding in Swart and explain how their facts are the same as the facts in that case. For more on the decision, see Tax Alert 2017-385. Massachusetts: The U.S. Supreme Court (USSC) will not review the Massachusetts Supreme Judicial Court (MSJC) ruling in First Marblehead in which the MSJC held that the Commissioner of Revenue properly treated the loans of an out-of-state "holding" company as being located wholly in Massachusetts and, therefore, included in the numerator of its property factor, because the company failed to rebut the presumption that the loans should be sourced to its commercial domicile, which was Massachusetts. In so holding, the MSJC found that Massachusetts' statutory provisions, as applied to the company, did not violate the internal consistency test (in light of the USSC's recent ruling in Wynne) or the dormant commerce clause. For additional information on the MSJC's ruling, see Tax Alert 2016-1504. The First Marblehead Corp. v. Commissioner of Revenue, No. SCJ-11609 (Mass. Sup. Jud. Ct. Aug. 12, 2016), cert. denied, Dkt. No. 16-777 (U.S. S. Ct. Feb. 21, 2017). For more on this development, see Tax Alert 2017-447. Alabama: Proposed amendments to Rule 810-6-5-.09 would make clear that digital transmissions and streaming subscription services are subject to the rental tax. The amendment would provide that digital transmissions (e.g., on demand movies, television programming, streaming video, streaming audio and other similar programs), regardless of how they are transmitted or whether they are rented/available for a definite or indefinite period, are considered tangible personal property subject to the rental tax. In addition, cable or satellite television providers, on-line movie and digital music providers, app stores and similar providers of digital transmissions would be treated as engaged in the business of leasing personal property and would be subject to the rental tax. The rental tax would be based on gross receipts derived from chargers for digital transmissions used in the state. A digital transmission would be considered to be in Alabama if the customer's service address is in the state. Monthly video programming subscriptions under which a customer must view pre-set linear programming, on pre-set schedules, would not be subject to the rental tax provided that such charges are separately stated on the invoice and the nonlinear programming associated with the subscription is of nominal value. Cable television boxes used solely to access basic cable services would not be subject to the rental tax, however, multifunctional boxes (e.g., digital recorder) and other accessories (e.g., remote controls, modems, routers) would be subject to the rental tax. If approved, these amendments would apply to taxable transactions occurring on or after July 1, 2017. Arkansas: New law (HB 1162) imposes Arkansas' full gross receipts and use taxes on candy and soft drinks. Candy is defined as "a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts, or other ingredients or flavorings in the form of bars, drops, or pieces." Candy does not include a preparation containing flour and shall not require refrigeration. Soft drinks are "nonalcoholic beverages that contain natural or artificial sweeteners," but does not include drinks containing milk (or milk substitutes), or that is greater than 50% of vegetable or fruit juice by volume. These changes are effective for tax years beginning on and after Jan. 1, 2018. Ark. Laws. 2017, Act 141 (HB 1162), signed by the governor on Feb. 7, 2017. Colorado: The Colorado Department of Revenue (Department) and the Data & Marketing Association (formerly known as the Direct Marketing Association or DMA) (collectively, the parties), have reached a settlement agreement in a case challenging Colorado's non-collecting remote retailer reporting and notification requirements. As part of the agreement, DMA will file a joint stipulation of dismissal of claims pending in a state action and claims that could be refiled in a federal action, and file a motion to dissolve the preliminary injunction against enforcement of Colorado's reporting and notification requirements. In turn, the Department agrees that it will not require enforcement of these requirements until July 1, 2017, and will waive any and all penalties for non-collecting retailers that fail to comply with these requirements prior to July 1, 2017. Penalty waiver applies to: (1) transactional notice requirement - penalty waiver for non-collecting retailers that fail to issue such notice prior to July 1, 2017; (2) annual summary - waiver of penalties with respect to non-collecting retailers that do not include customer purchases made before July 1, 2017 in any annual summary provided to a Colorado customer on or before Jan. 31, 2018; (3) customer information report - waive all penalties for non-collecting retailers that do not include customer purchases made before July 1, 2017 in their customer information report provided to the Department by the March 1, 2018 deadline. In addition, the Department agrees not to adopt any regulations or new rules inconsistent with the terms of the agreement. Colorado's reporting and notification requirements will be in fully implemented and enforced on and after July 1, 2017. Georgia: An out-of-state educational book seller (book seller) has substantial nexus with Georgia through its reliance on Georgia schools, Georgia teachers, and Georgia parent educators to solicit and sustain a consumer market in the state and, therefore, is subject to sales and use tax. In reaching this conclusion, the Georgia Tax Tribunal (Tribunal) determined that Georgia teachers and parent educators serve as the sole conduit through which the book seller makes its Georgia sales and, as such, the activities they perform are "significantly associated with [the book seller's] ability to establish and maintain a market" in Georgia under the Commerce Clause of the U.S. Constitution. Virtually all of the book seller's operations are conducted by Georgia teachers or parent educators who, in turn, are rewarded with bonus points based upon sales volumes and referrals of other teachers. In addition, the Tribunal found that the book seller meets three different statutory definitions of "dealer" for state sales and use tax purposes, and that the book seller did more than merely function as a mail-order company. Scholastic Book Clubs, Inc. v. Riley, No. 1552367 (Ga. Tax Trib. Feb. 14, 2017). Virginia: New law (HB 1518) amends the definitions of "retail sale" and "sale at retail" to specifically include separately stated charges made for supplies used during automotive repairs, regardless of whether the supplies transfer title or possession or are attached to the automobile. An automotive repairer's purchase of these supplies for sale to the repair services customer is exempt from tax as a sale for resale. These changes take effect July 1, 2017. Va. Laws 2017, Ch. 104 (HB 1518), signed by the governor on Feb. 21, 2017. Wyoming: New law (HB 19) adopts an economic nexus standard for sales and use tax purposes. Effective July 1, 2017, a seller of tangible personal property (TPP), admissions or taxable services and who does not have physical presence in Wyoming is required to remit the state's sales tax if the seller meets either of the following requirements during the current or immediately preceding 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 may bring an action to obtain a declaratory judgment that the seller has an obligation to remit sales tax. The filing of a declaratory judgment action operates as 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 does not affirmatively consent or otherwise remit sales tax on a voluntary basis. Any seller who voluntarily remits the sales tax is not liable to any person who claims the sales tax has been over-collected if any provision of the bill is ultimately deemed unlawful. Wy. Laws 2017, Ch. 85 (HB 19), signed by the governor on March 1, 2017. Florida: Qualified target industry businesses subject to the Florida corporate income tax from March 20, 2017 through March 26, 2017, may apply online for an allocation of the state research and development (R&D) tax credit for expenses incurred in 2016. Only the following qualified target industry businesses may qualify for the R&D credit: those in manufacturing, life sciences, information technology, marine sciences, aviation and aerospace, homeland security and defense, cloud information technology, materials sciences, and nanotechnology industries. Only corporations qualify for the R&D credit; businesses that are partnerships, limited liability companies (LLC) taxed as partnerships and disregarded single member LLCs are not corporations and as such do not qualify for an allocation of the R&D credit, unless the owner of the partnership is a corporation. A corporate partner and members of disregarded entities may apply for an allocation of the credit based on the corporation's separate research expenses. In addition, a business must obtain a letter from the Department of Economic Opportunity certifying that it is a qualified target industry business. Virginia: New law (HB 1665) extends the sunset date of Virginia's motion picture production tax credit through taxable years beginning prior to Jan. 1, 2022 (formerly Jan. 1, 2019). HB 1665 takes effect July 1, 2017. Va. Laws 2017, Ch. 108 (HB 1665), signed by the governor on Feb. 21, 2017. Virginia: New law (HB 1814) extends the sunset date for the Worker Retraining Tax Credit to taxable years beginning before Jan. 1, 2022 (formerly Jan. 1, 2018), and shifts to the Virginia Economic Development Partnership Authority the responsibility for certifying eligible worker retraining courses (previously, the Department of Small Business and Supplier Diversity). HB 1814 also extends the sunset date for the Telework Expenses Tax Credit and the date before which an employer must enter into a telework agreement with a participating employee to taxable years beginning before Jan. 1, 2022 (formerly Jan. 1, 2017). HB 1814 takes effect July 1, 2017. Va. Laws 2017, Ch. 177 (HB 1814), signed by the governor on Feb. 23, 2017. Virginia: New law (HB 2193) increases to $500 (from $250) the maximum original cost of each item of tangible personal property that localities must permit business taxpayers to report in an aggregate summary (in lieu of an itemized list) of miscellaneous and incidental tangible personal property it uses. This provision does not apply to such property classified as machinery and tools, merchants' capital, or short-term rental property. The provisions of HB 2193 take effect July 1, 2017. Va. Laws 2017, Ch. 116 (HB 2193), signed by the governor on Feb. 21, 2017. Arizona: Pass- New law (SB 1290) provides that a partnership that has no Arizona income, deductions or credits for a taxable year is not required to file a partnership return for that year. SB 1290 takes effect 90 days after the legislature adjourns. Ariz. Laws 2017, Ch. 2 (SB 1290), signed by the governor on March 2, 2017. Idaho: New law (HB 1) amends Idaho's Administrative Procedures Act to clarify that the legislature's authority to approve or reject rules in whole or in part applies to the entirety of a provision, such as a subsection or a subparagraph, or any new or amended language in the provision. Specifically, if the rule is reviewed, the legislature may adopt a concurrent resolution approving the rule, or rejecting the rule if it determines that the rule (or a previously promulgated and reviewed rule), or part of the rule, is not consistent with the legislative intent of the statute it was written to interpret, prescribe, implement or enforce. The legislature does not have the authority to reject certain and select words or phrases that would alter the meaning or purpose of the entire rule. The law took effect on Feb. 13, 2017. Idaho Laws 2017, HB 1, signed by the governor on Feb. 13, 2017. All States: On Thursday, March 16, 2017 from 2:00 - 3:00 p.m. EDT (11:00 a.m. - 12:00 noon PDT), EY will host a webcast discussing transaction tax implications in the telecommunications sector. During the webcast, the panelists will discuss the current transaction tax landscape and how such laws apply to emerging trends, and the impact of recent case law, legislation and other guidance provided by the states. The webcast also will address some of the challenges taxpayers face when there is cross over between cloud computing, telecommunications and digital goods. Given the complexities and the myriad of taxing jurisdictions that could be applicable to such service offerings, the panelists also will provide insights into data management and process automation that can assist with tax function processes such as audit management, taxability determinations and compliance. Click here to register for this event. Idaho: New law (HB 54) revises fees that the Idaho Secretary of State charges under the Idaho Uniform Business Organizations Code. The new law removes the fee for combined statement of partnership authority and qualification of limited liability partnership (previously $100), eliminates the fee for articles of dissolution (previously $30), and increases the fee for a certificate of administrative action to $10 (previously, no fee). These changes are effective July 1, 2017. Idaho Laws 2017, Ch. 34 (HB 54), signed by the governor on Feb. 22, 2017. 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: 2017-0459 |
