21 March 2017 State and Local Tax Weekly for March 17 Ernst & Young's State and Local Tax Weekly newsletter for March 17 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. South Dakota circuit court rules state's economic nexus law for sales and use tax is unconstitutional On March 6, 2017, a South Dakota Circuit Court (court) held that the state's economic nexus standard for sales and use tax is unconstitutional, in light of the US Supreme Court's 1992 ruling in Quill, which formalized the physical presence requirement. South Dakota v. Wayfair Inc., Overstock.com, Inc. and Newegg Inc., No. 32CIV16-000092 (S.D. Cir. Ct., 6th Cir., March 6, 2017). In 2016, South Dakota enacted SB 106, which required a remote seller selling tangible personal property, electronically transferred products or taxable services (collectively, goods) for delivery into South Dakota to register, collect and remit South Dakota sales taxes on such sales as if the seller had a physical presence in the state. This requirement applied only if, in the previous calendar year, the seller either: (1) has over $100,000 in gross revenue from delivery of these goods into South Dakota, or (2) sold these goods for delivery into South Dakota in 200 or more separate transactions. Lawsuits were filed challenging this new law. On appeal, the state acknowledged that it "is prohibited from imposing sales tax collection and remittance obligations" on the defendants, which are both remote retailers without a physical presence in the state, and that the court is required to rule in favor of defendants based on Quill. The court agreed, stating it is "duty bound to follow applicable precedent of the United State Supreme Court … This is true even when changing time and events clearly suggest a different outcome." The court also noted that it is not its role to disregard such precedent. Provisions of SB 106 include appeal process and procedures that direct the courts to act as expeditiously as possible in regard to taxpayer challenges and provide further that an appeal of a circuit court ruling must be made directly to the South Dakota Supreme Court. Should the South Dakota Supreme Court rule on the court's decision before the end of the year, an expected appeal to the US Supreme Court could be filed in the October 2017 term. For additional information on this development, see Tax Alert 2017-441. Federal: Proposed bills (SB 540 and HR 1393) (commonly known as "Mobile Workforce State Income Tax Simplification Act of 2017") would limit the extent to which states may tax compensation earned by nonresident telecommuters and other multistate workers. Specifically, an employee who performs employment duties in more than one state would be subject to income tax in the employee's state of residence and the state within which the employee is present and performing employment duties for more than 30 days during the calendar year the wages were earned. An employee would be deemed present and performing employment duties within a state for a day if the employee performs more of his/her employment duties within that state than in any other state during a day. If, however, the employee performs duties in his/her resident state and only one nonresident state during one day, the employee would be considered to have performed more of his/her employment duties in the nonresident state than in the resident state for that day. If approved, these provision would take effect on January 1 of the second calendar year that begins after the date of the bill's enactment. SB 540 and HR 1393 were both introduced on March 7, 2017. Similar bills have been considered in prior legislative sessions. District of Columbia: The District of Columbia's Chief Financial Officer (CFO), Jeffrey DeWitt, certified that as of February 2017, the revised revenue estimates for the FY 2017-2021 District of Columbia Budget and Financial Plan, have been revised upward. These revisions will allow the remaining tax reform measure to be implemented. Accordingly, effective Jan. 1, 2018, the rate of incorporated and unincorporated business franchise tax will be reduced to 8.25% (from 9.0%). In addition, the amount of the personal exemption and standard deduction will increase, and the estate threshold will conform to the federal amount. D.C. CFO, Letter - February 2017 revenue estimates (Feb. 28, 2017). New Jersey: A company that engaged in a sale-leaseback transaction for buses with the New Jersey Transit Corporation (NJ Transit) did not obtain a sufficient ownership interest in the buses for the buses to be included in the property fractions of the company's business allocation formula for corporation business tax (CBT) purposes. Consequently, imputed rental income from the buses is not included in the receipts fractions of the company's business allocation formula for the tax years at issue. In support of this conclusion, the New Jersey Tax Court (Court) citing Donnelley, found that the parties to the transaction were solely motivated by the desire to transfer the tax benefits associated with the buses — depreciation and amortization — to the company. Here, the company retained none of the "incidents, benefits and burdens of ownership" of the buses, because NJ Transit: (1) was responsible for all costs, including taxes, associated with operating, insuring, and maintaining the buses; (2) was responsible for any loss of the buses and bore the risk of all damages and liabilities arising from the buses' operation; and (3) had significant responsibilities at the end of the lease to either opt to purchase the buses or arrange for another entity to manage them on behalf of the company. General Foods Credit Investors #3 Corp. v. N.J. Dir., Div. of Taxn., No. 011330-2015 (N.J. Tax Ct. Feb. 22, 2017). Pennsylvania: The Pennsylvania Department of Revenue (Department) has pulled from its website recently issued legal ruling SUT-17-001, which provided that all support services of canned computer software is subject to state sales and use tax when transferred in a sale at retail or made use of after being obtained in a purchase at retail. It is EY's understanding that the Department is updating and clarifying the ruling. No timeline has been set for reissuing the ruling. Wyoming: New law (SF 70) extends until Dec. 31, 2027 (previously, Dec. 31, 2017) Wyoming's sales and use tax exemption for the sale or lease of machinery to be used in the state directly and predominantly in manufacturing tangible personal property, if the sale or lease: (1) is to a manufacturer classified by the Wyoming Department of Revenue under the North American Industry Classification System (NAICS) code manufacturing sector 31-33, and (2) does not include noncapitalized machinery except machinery expenses related to certain depreciable assets (IRC Sec. 179). The new law takes effect July 1, 2017. Wyo. Laws 2017, Ch. 181 (SF 70), signed by the governor on March 9, 2017. Wisconsin: New law (SB 2) updated the due dates for filing income and franchise tax returns to conform to federal filing deadlines. Under the revised provisions, both corporate income and partnership returns are required to be filed on the date on which the federal return is due, not including any extension, under the IRC. Provisions of the bill also modified the due date of estimated tax payments. These provisions apply retroactively to taxable years beginning on Jan. 1, 2016. Following the enactment of SB 2, the Wisconsin Department of Revenue (Department) issued guidance on the 2016 corporate and partnership tax return due dates. (1) Partnership Form 3: unextended due date April 18, 2017 - NOTE: provision of SB 2 changed the due date to March 15, however, given that SB 2 was enacted close to the return due date, the Department will accept 2016 returns and payments filed by the due date under prior law - April 18, 2017; extended due date is Sept. 15, 2017; (2) Corporate Form 4/6: unextended due date April 18, 2017; extended due date: Nov. 15, 2017; (3) Corporate Form 4/6 (fiscal year end 6/30): unextended due date Sept. 15, 2017; extended due date: May 15, 2018; (4) Corporate Form 4/6 (fiscal year): unextended due date 15th day of the 4th month; extended due date: 15th day of 11th month; (5) Exempt Corporation Form 4T: unextended due date May 15, 2017; extended due date: Dec. 15, 2017; (6) Exempt Fiduciary Form 4T: unextended due date April 18, 2017; extended due date: Oct 2, 2017; and (7) Partnerships Form PW-1: unextended due date April 18, 2017; extended due date: Oct. 16, 2017. Wis. Laws 2017, Act 2 (SB 2), signed by the governor on March 9, 2017; Wis. Dept. of Rev., "2016 Wisconsin corporate and partnership tax return due dates" (March 10, 2017). California: After a lengthy delay, the Supreme Court of California (Court) has set an argument date for the appeal of 926 North Ardmore Avenue, LLC v. County of Los Angeles (926 N. Ardmore), on Wednesday, April 5, 2017, at 9:00 a.m. in Los Angeles. It is the Court's policy to file its opinion within 90 days of oral argument. This policy is almost always followed, as a provision of California's Constitution provides that the judges may not be paid if a case remains pending and undetermined for 90 days after it has been submitted for decision. Therefore, an opinion is expected no later than July 4, 2017. In 926 N. Ardmore, the Court of Appeal (COA) held that Los Angeles County (County) can collect a transfer tax upon a change of control of a legal entity that owns real property in the County without having to enact a separate ordinance explicitly incorporating the property tax change of ownership provisions under Cal. Rev. & Tax Code (CR&TC) Section 64 into its transfer tax ordinance. If upheld by the Court, all local jurisdictions in the state could be authorized to impose the documentary transfer tax on changes in ownership of a legal entity. If overturned, only those jurisdictions in California that have specifically incorporated CR&TC Section 64 into their transfer tax statutes will be authorized to impose the transfer tax based on a change in control (although other challenges to these jurisdictions' transfer tax statutes may still be looming). For additional information on this development, see Tax Alert 2017-429. New York City: An Administrative Law Judge (ALJ) for the New York City Tax Appeals Tribunal (Tribunal) determined that real estate investment trusts (REITs) paid the correct amount of real property transfer tax (RPTT) for transfers of controlling interests in real property to REITs because all requirements for a REIT transfer were met. New York City imposes RPTT on REITs at half the rate imposed on other entities, and consideration (the base for computing RPTT) is the estimated market value (EMV) shown in the New York City Department of Finance's most recent real property tax assessment. In a qualified REIT transfer, the consideration that the grantor receives must not be less than 40% of the equity interests in the real property or economic interest conveyed. The RPTT is based on the EMV rather than the fair market value or the consideration received. The legislature clearly intended to allow the REITs to use EMV as consideration and receive a double benefit — half the tax rate, which is then applied to the deemed consideration, which is less than half the consideration estimated by the auditor. In this case, where the debt exceeded the EMV, resulting in a negative equity, the ALJ found that if the 40% test is applied and the result is no equity in the property, and the REITs retained some interest, "then by definition that interest is at least 40% of the equity, which is zero" and the 40% equity test is met. The ALJ noted that the grantees' payment of RPTT should not be included in determining consideration for a REIT transfer because the applicable administrative code provision unequivocally states that consideration is the EMV of the property or interest in property (unless the taxpayer establishes a different value). In the Matter of the Petition of VCP One Park REIT, LLC et al., No. TAT(H)14-26(RP) (N.Y.C. Tax App. Trib. Jan. 24, 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: 2017-0503 |
