10 March 2017 State and Local Tax Weekly for March 10 Ernst & Young's State and Local Tax Weekly newsletter for March 10 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. In Manheim NJ Investments, Inc., the New Jersey Tax Court (court) voided regulation N.J.A.C. 18:7-1.15(b)(9), which disallowed taxpayers from regarding investments in flow-through entities, such as a limited partnership interests, as securities for purposes of determining whether a taxpayer meets a 90% investment asset test to qualify for investment company status (resulting in a 3.6% un-apportioned tax rate, rather than 9% apportioned Corporate Business Tax rate (CBT) rate). In voiding the regulation, the court concluded that the New Jersey Division of Taxation (DOT) exceeded its rule-making authority by excluding classes of securities outside of the contemplation of New Jersey's statutory investment company asset test. The court also articulated a limitation of the application of the DOT's discretionary authority to revise the definition of a taxpayer's income under N.J.S.A 54:10A(10)(a) to instances where a taxpayer distorts its reported income, rather than to effectuate equitable adjustments. It is not yet known whether the DOT will appeal the court's decision. If the court's decision stands, it will expand the classes of taxpayers that may be eligible for investment company treatment and provide significant planning opportunities to reduce CBT by up to 60% for corporations that primarily hold passive interests in flow-through entities. In addition, taxpayers that were previously unable to utilize investment company status in prior tax years due to N.J.A.C. 18:7-1.15(b)(9) should consider filing amended returns for tax years open under the statute of limitations to preserve potential refunds. Manheim NJ Investments, Inc. v. Director, Div. of Taxation, Dk. No. 015083-2014, 2017 N.J. Tax Lexis 5 (N.J. Tax Ct. Feb. 27, 2017). For additional information on this development, see Tax Alert 2017-438. All States: During a special meeting held Feb. 24, 2017, the Multistate Tax Commission (MTC) adopted amendments to its Model General Allocation and Apportionment Regulations (Model Regulations) to repeal cost of performance sourcing rule for sales of non-tangible property and replace it with new market-based sourcing provisions that are based on those adopted by Massachusetts. Other amendments to the Model Regulations include: (1) changing the terms "business income" to "apportionable income" and "nonbusiness income" to "nonapportionable income;" (2) amending the definition of "apportionable income" to reference the Constitutional standard to determine what income is subject to apportionment and to clarify the transactional and functional tests included in the definition; (3) changing and narrowing the definition of "receipts" (previously, "sales") to specifically exclude receipts from hedging transactions and receipts from the maturity, redemption, sale, exchange, loan, or other disposition of cash or securities; (4) removing the requirement to equally weight the three-factor apportionment formula; and (5) changing the equitable apportionment authority and providing certain procedural safe guards in Section 18. It is important to note that although these changes have been adopted by the MTC, they are not automatically adopted in states that have previously adopted this regulation. Rather, states will have to formerly adopt these changes. MTC, Model General Allocation and Apportionment Regulations (amended Feb. 24, 2017). New York City: A New York appellate court in affirming a New York City Tax Appeals Tribunal ruling held that a credit rating agency is not allowed to source its receipts from generating credit ratings using the special allocation method that applies to publishers and broadcasters (the place-of-audience method) instead of the standard allocation method (the place-of-performance method), because the receipts are derived from providing a service and not from the sale of subscriptions, advertising, or broadcasting. S&P Global Inc. f/k/a McGraw Hill Financial, Inc. v. New York City Tax App. Trib., 2017 NY Slip Op 01448 (N.Y. S. Ct., App. Div. 1st Dept., Feb. 23, 2017). Alabama: A steel manufacturer is not entitled to a refund of sales tax paid on railcar brackets used to hold products in place during transport because a railcar bracket is not a container under the statute when it is merely used to secure the steel during transit to the customer after it is sold. In addition, the Alabama Tax Tribunal (Tribunal) determined that the steel manufacturer is not eligible for a resale exemption for the railcar brackets since it is in the business of manufacturing and selling steel products only, not railcar brackets, and it billed customers for the brackets as part of shipping fees rather than the sales price. The Tribunal noted that "[t]he fact that the customers ended up with physical possession of the brackets does not equate with a transfer of title." The steel manufacturer, however, is entitled to a refund of tax paid on work rolls because they are component parts of machines that it uses to produce steel products and the rolls "wear" during the manufacturing process. These items have a useful life of less than a year and, thus, are not subject to depreciation, and are not machines by statute. Finally, the Alabama Department of Revenue correctly denied the refunds relating to coiler rolls because they have a useful life of more than a year, so they are subject to depreciation, and are specifically excluded from the statutory wholesale provision and, therefore, the ingredient or component part provision does not apply. IPSCO Steel (Alabama), Inc. v. Ala. Dept. of Rev., Nos. S. 07-370, S. 10-269, S. 11-564, and S. 12-1435 (Ala. Tax Trib. Feb. 23, 2017). Missouri: A subcontractor's purchases of concrete, rebar, anchor bolts, and electrical conduit are exempt from sales tax because the subcontractor is using them to construct the foundation of a wind turbine that is going to be used to manufacture electricity at a new manufacturing facility. The Missouri Department of Revenue (Department) determined that the materials are foundation parts necessary to hold a wind turbine firmly in place in the ground and connect the wind turbine's electrical system to the collector station. The Department noted that while electrical conduit installed as part of the wind turbine itself is exempt from tax, any electrical conduit the subcontractor purchases and uses for transmission and distribution of electricity from the collector system station to other locations is subject to tax because the conduit is not used or consumed directly in the manufacturing of electricity. Mo. Dept. of Rev., Letter Ruling LR 7780 (Feb. 16, 2017). Texas: Appraisals of oil refineries' individual accounts may be challenged as unequal under the Texas Constitution because they can be appraised using different accounts for separate components. In reaching this conclusion, the Texas Supreme Court (Court) found that if tax accounts are appropriate, then as a matter of law, the property in each account can be valued in isolation. A property is appraised unequally if its appraised value exceeds the median appraised value of a reasonable number of comparable properties appropriately adjusted, and the Court found that the uniqueness of refineries does not preclude the properties from being compared. It also noted that the refinery taxpayer presented evidence that it and two other refineries had the same business functions (such as processing crude oil), similar storage facilities, equal access to utilities, and on-site support. The appraisal district's use of similar accounts and appraisal methods for the refineries shows a measure of comparability, and this supports the jury's finding that another refinery was a comparable facility for the purpose of the equal-and-uniform challenge. Valero Refining-Texas, L.P. v. Galveston Central Appraisal Dist., No. 15-0492 (Tex. S. Ct. Feb. 24, 2017). Massachusetts: The Massachusetts Department of Revenue announced that due to the change in federal return due dates and the state's current non-conformity to those changes, it anticipates waiving statutory late-filing penalties for certain C corporation tax returns that are filed after the state due date but filed on or before the federal return due date. For tax years beginning on or after Dec. 31, 2015, the federal government changed the federal tax return filing due dates for C corporations and partnerships. The federal C corporation tax return due date is the 15th day of the fourth month after the close of the corporation's tax year or April 15 for calendar-year filers (previously, March 15), and the new federal partnership tax return due date is the 15th day of the third month after the close of the partnership's tax year or March 15 for calendar-year filers (previously, April 15). Massachusetts tax return filing due dates have not yet been amended by statute to conform to the new federal due dates; legislation that will conform these due dates is pending before the Massachusetts Legislature. It is important to note that any payment due with the return remains due by the date prescribed by statute. Mass. Dept. of Rev., TIR 17-3 (March 2, 2017). Puerto Rico: Puerto Rico's Treasury Department (PRTD) has issued guidance (Informative Bulletin (IB) 17-05) on obtaining the release of imports in light of the problems affecting the PRTD's electronic information systems, including SURI. IB 17-05 sets forth a manual authorization process for the release of the following imported items: food, medicine, raw material, animals, perishable goods, articles introduced by bonded importers. Under the manual authorization process, an importer should visit a satellite office of the Consumption Tax Bureau that corresponds to the sea or land carrier used to deliver the merchandise to Puerto Rico and submit the bill of lading, the manifest, and a copy of the importer's bond (if applicable). The IB provides the names of the location of the satellite offices that are available for the manual authorization release process. For additional information on this development, see Tax Alert 2017-440. Georgia: A wireless internet service provider's (internet provider) request for a refund of sales and use tax that customers paid for wireless internet access for the tax years at issue was properly dismissed by the lower court because the internet provider did not repay the tax to its customers before seeking the refund as required by regulation (Ga. Comp. R. & Regs. 560-12-1-.25(2)). In reaching this conclusion, the Georgia Court of Appeals (Court) explained that the relevant regulation requires that when tax is illegally or erroneously collected, the dealer can secure a refund if the dealer affirmatively shows that either it paid the tax, or that the tax was collected from and has since been refunded to the consumer. Although the relevant statute authorizes such refunds and does not require a dealer give customers its own funds before knowing whether it will receive a refund, the Georgia Revenue Commissioner has explicit statutory authority to make regulations for revenue enforcement. The Court deferred to the Georgia Department of Revenue's interpretation of the regulation requiring dealers to refund the tax to customers/consumers prior to requesting a refund. New Cingular Wireless PCS, LLC et al. v. Ga. Dept. of Rev., No. A16A2003 (Ga. App. Ct. Feb. 21, 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: 2017-0502 |
