11 April 2017 State and Local Tax Weekly for March 31 Ernst & Young's State and Local Tax Weekly newsletter for March 31 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. The California Franchise Tax Board (FTB) recently issued guidance on the California Other State Tax Credit (OSTC) and allowable deductions for taxes paid to other states. In FTB Legal Ruling 2017-01 (issued Feb. 22, 2017, by the Legal Division of the FTB), the FTB explains general OSTC and deduction rules and its process for determining whether the tax paid to another state qualifies for an OSTC or deduction. The guidance also walks through various examples, including whether a taxpayer may claim an OSTC or deduction for the Texas franchise tax, the Tennessee franchise and excise taxes, and the New York City Metropolitan Commuter Transportation Mobility Tax, among others. The ruling applies retroactively to taxable years beginning on or after Jan. 1, 2016. The effective date is unusual for a legal ruling, which is an interpretation of law. This, arguably, means that the interpretation of the law set forth in the Legal Ruling may only be applied for taxable years beginning on or after Jan. 1, 2016, as to guidance which was newly issued. For additional information on this development, see Tax Alert 2017-596. All States: The state income tax quarterly newsletter, which provides a summary of the legislative, administrative and judicial updates that occurred during the period from Jan. 1, 2017 through March 21, 2017, is now available. Michigan: A company that supplies management and staff to its clients does not qualify as a "staffing company" for purposes calculating its modified gross receipts tax under the former Michigan Business Tax because its business activities do not meet the definition of "staffing company" under state law as the activities are not included in industry group 7363 (Help Supply Service) under the Standard Industrial Classification (SIC) code. In reaching this conclusion, the Michigan Tax Tribunal (Tribunal) found that the company is engaged in both staffing activities and management activities for its customers, and this requires the company to be classified according to the type of activity of its customers. Further, in order to qualify as a staffing company under SIC 7363, the staff that is provided must be under the direct or general supervision of the business to whom the help is furnished. Here, the company is responsible for the direct and general supervision of its on-site employees provided to its customers. Although one individual provides some periodic direct supervision to the employees, it is arguable that this individual is providing that supervision as the sole member and owner of the company rather than as a customer. Lastly, the Tribunal rejected the Michigan Department of Treasury's argument that the company's claims were frivolous and as such it was entitled to an award of costs, finding that the company relied on professional advice and reasonably believed that it qualified for the staffing company deduction. Coulter Building, LLC v. Mich. Dept. of Treas., No. 16-000260 (Mich. Tax Trib. Feb. 2, 2017). Ohio: New law (HB 11) updates Ohio's conformity date to the IRC to Feb. 14, 2016 (from April 1, 2015). The bill took immediate effect. Ohio Laws 2017, HB 11, signed by the governor on March 30, 2017. Texas: The Texas Comptroller of Public Accounts (Comptroller) provided guidance describing how to determine if a health care provider is classified as a health care institution for purposes of the Texas franchise tax. Under Texas law, a health care provider generally can exclude from its total revenue calculation 100% of payments received from these programs, while a health care provider that is identified as a "health care institution" only can exclude 50% of payments received from specific programs. A health care institution is any health care provider that: (1) is licensed under one of the following statutes, (2) provides services described by the one of the following statutes, or (3) is licensed under a similar statute in another state. The statutes identified by the Comptroller include pharmacies (Tex. Occupations Code, Ch. 560), and Tex. Health and Safety Code provisions for ambulatory surgical centers (Ch. 243), assisted living facilities (Ch. 247), emergency medical services providers (Ch. 773), home and community support services agencies (Ch. 142), hospice (Ch. 142), hospitals (Ch. 241), hospital systems (Ch. 311), immediate care facilities for the mentally retarded (Ch. 252), birthing centers (Ch. 244), nursing homes (Ch. 242), end stage renal facilities (Ch. 251). Tex. Comp. of Pub. Accts., No. 201611093L (Nov. 29, 2016). West Virginia: New law (HB 2590 and HB 2594) updates the state's conformity to the IRC and adopts the federal law in effect after Dec. 31, 2015 but before Jan. 1, 2017. Amendments made to the IRC on or after Jan. 1, 2017, will not be given any effect. W. Va. Laws 2017, HB 2590 and HB 2594, both signed by the governor on March 23, 2017. All States: Panelists on Ernst & Young LLP's recent Transaction tax implications in the telecommunications sector webcast provided an overview of the sales and use and telecommunications tax issues related to telecommunications services. This included a discussion about technology trends in the transaction tax arena, how to leverage tax technology for these types of transactions, and how to engage in procurement planning. Click here for a summary of the webcast, or view a replay on the EY Thought Center website. Alabama: New law (SB 86) establishes remote seller notification provisions. Effective July 1, 2017, a remote retailer is required to report retail sales and customer notification when the remote seller does not collect sales, use or simplified sellers use tax on Alabama sales transactions. Penalties may be imposed for failure to report the required information. Ala. Laws 2017, Act 2017-82 (SB 86), signed by the governor on March 22, 2017. Alabama: The Alabama Supreme Court (Court) held that a constitutional amendment (Amendment No. 14, approved on Nov. 8, 2016, and referred to now as Ala. Const. of 1901 § 71.01(G)) can be retroactively applied to cure a constitutional deficiency affecting a piece of enacted legislation (Act No. 2015-226) that imposed a local sales and use tax in Jefferson County. In so holding, the Court found that Ala. Const. § 71.01(G) used "clear and express terms" to validate and confirm the legislative procedure used to pass budget isolation resolutions (BIR) underlying Act. No. 2015-226 and other affected local bills before Nov. 8, 2016. The Court's ruling reversed the trial court's judgment declaring Act. No. 2015-226 unconstitutional on the basis that the proper quorum was not present in the legislature pursuant to Ala. Const. § 71.01(C) when the BIR underlying Act No. 2015-226 was enacted. Jefferson Cnty. and Jefferson Cnty. Comn. v. Taxpayers and Citizens of Jefferson Cnty., Nos. 1150326 and 1150327 (Ala. S. Ct. March 17, 2017). Connecticut: The Connecticut Commissioner of Revenue (Commissioner) recently announced that the state will be "stepping up its effort to collect sales taxes not paid by on-line and other out-of-state retailers with a significant volume of sales into Connecticut." The Commissioner said that due to congressional inaction, "it's up to the states to assure the promise of the federal Commerce Clause that neither in-state nor out-of-state retailers will have an unfair advantage in the marketplace and in taxes paid to help maintain that marketplace." The Commissioner indicated that the state would not be pursuing out-of-state retailers that "make a modest amount of sales into Connecticut." Conn. Dept. of Rev. Serv., Media Release "Connecticut Pursues Sales Tax Not Paid By On-Line Retailers" (March 28, 2017). Florida: In response to a ruling request, the Florida Department of Revenue (Department) concluded that "manual and/or automated fraud prevention activities" performed by a business as part of its a coupon clearing service are not subject to sales tax because these activities do not fall within the North American Industry Classification System (NAICS) classifications listed by Florida statute as taxable. The business's purchase of third-party investigative services, however, is subject to sales tax when the services are used within Florida or when the primary benefit of the services is within Florida, because the investigative services are akin to the type of activity included in an enumerated taxable service. Lastly, the Department found that the business's purchase of taxable services is not exempt from sales tax as a resale. Florida law requires the purchase to provide direct and identifiable benefit to a single client or customer, and here the investigative services performed by the third party on behalf of the business "support the requirements of multiple manufacturers." Fla. Dept. of Rev., Technical Assistance Advisement No. 16A-019 (Dec. 9, 2016). New York: Electricity a communications company purchased to produce and provide telecommunications services to its customers is subject to New York's sales and use tax because it does not qualify for the resale exemption. In making this determination, an Administrative Law Judge (ALJ) for the New York State Division of Tax Appeals rejected the company's argument that the purchases of electricity qualified for the resale exemption in 20 NCYRR 526.6(c)(1) as a purchase of tangible personal property for use as a component part of its telecommunications services, finding that the electricity at issue is not tangible personal property. The company's argument "fails to take into account the clear language of the exemption …" under 20 NYCRR 526.6, which pertains to retail sales of tangible personal property. Thus, the resale exemption for retail sales does not apply to the company's purchase of electricity. Moreover, the controlling provisions that pertain to the resale exemption for electricity (N.Y. Tax Law §1105(b)(1) and 20 NYCRR 527.2) allow an exclusion for purchases of electricity "for resale as such," and do not provide an exemption for electricity as a "component part." Here, the company failed to prove that it purchased the electricity "for resale as such" — customers did not purchase and pay for the electricity, the company did not bill its customers separately for it, and the direct current that customers receive cannot be used for anything other than the telecommunications signal. Rather, the purchases of electricity were an overhead expense that the company reported as a business expense, which it deducted. In the Matter of the Petitions of XO Communications Services, LLC, Nos. 826686 and 827014 (N.Y. Div. Tax App. March 9, 2017). New York: A wholesaler's purchase of utilities consumed by commercial pan, pot and kettle washers (pan washers) to clean and sanitize the equipment before it comes into contact with raw materials is not exempt from New York sales tax because the utilities are used to clean equipment before the equipment is used in the production process. In so holding, the New York Tax Appeals Tribunal (Tribunal) explained that to qualify for the exemption, "the consumption of utilities used in creating conditions necessary for tangible personal property production must have a direct and exclusive relationship to the actual production process and be consumed during that process." In this instance, the Division found that wholesaler's "pan washers' are not directly connected to production equipment and do not provide a vital function during the production process in maintaining a controlled environment necessary for production." Rather, the pan washers' activities occurred pre- and post-production. Thus, the utilities consumed by the pan washers' did not create "conditions necessary for production during the production phase of a process,"as required by law. In the Matter of Costco Wholesale Corp., DTA No. 825882 (N.Y. Tax App. Trib. March 6, 2017). South Carolina: The South Carolina Department of Revenue (Department) issued a revenue ruling to provide guidance on the application of the state's sales and use tax on various communications services. The revenue ruling provides a list of the communication services subject to sales and use tax as previously determined by the Department through formal advisory opinions, audits, or informal advice to taxpayers. The Department noted that charges for other communication services not listed are still subject to sales and use tax if they constitute charges for the ways or means for the transmission of the voice or messages that are not otherwise exempt. Communication services that are specifically subject to sales and use tax include certain telephone services, teleconferencing services, cable television services, cloud-based services, among others. In addition, prepaid wireless calling agreements and 900/976 telephone service are subject to tax by special imposition. The guidance also lists nontaxable communication services, and discusses the taxability of bundled telecommunications transactions for customer bills rendered on or after Jan. 1, 2004. The new revenue ruling applies to all open periods under the statute. S.C. Dept. of Rev., Rev. Ruling No. 17-2 (March 10, 2017) (supersedes SC Revenue Ruling No. 06-8 and all previous advisory opinions and any oral directives in conflict with Revenue Ruling No. 17-2). Washington: A beef processor is entitled to a refund of use tax on lease payments for pallets used to ship its products because the transfer of possession of the pallets to its customers satisfies the definition of lease and the beef processor's lease of the pallets from a vendor qualify for the lease-for-sublease exemption. In so holding, the Washington Board of Tax Appeals (Board) also rejected the Washington Department of Revenue's (Department) argument that the beef processor's transfer of the pallet was not a sublease because it was not a "transfer of possession … for consideration," noting that state law does not require consideration be separately stated in the sale documents. In addition, the Board concluded that the beef processor's lease of pallets from its vendor was a lease of "packing materials" for sublease to its customers and thus excludable from retail sales tax. The Board noted that the ingredient or component exclusion does not apply because shrink-wrapping beef products to a pallet does not make the pallet an essential ingredient of the beef products. Tyson Fresh Meats, Inc. v. Wash. Dept. of Rev., No. 14-091 (Wash. Bd. Tax App. Jan. 13, 2017). Arkansas: New law (SB 253) increases the credit available under the Arkansas historic rehabilitation income tax credit. For projects that begin on or after July 1, 2017, the credit amount is equal to 25% of the total qualified rehabilitation expenses incurred by the owner to complete a certified rehabilitation up to the first $1.6 million of qualified rehabilitation expenses on income-producing property. For projects that start on or after Jan. 1, 2009 and before July 1, 2017, the credit remains at 25% of the total qualified rehabilitation expenses up to the first $500,000 of qualified rehabilitation expenses on income-producing property. Ark. Laws 2017, Act 393 (SB 253), signed by the governor on March 7, 2017. New Jersey: New law (SB 2477) gives businesses with unused portions of tax credits issued to insurance premiums taxpayers under New Jersey's Business Employment Incentive Program (BEIP) the option of receiving a tax credit transfer certificate instead of a refund of the remaining amount of credit that cannot be used by the business to reduce its tax liability. This provision is effective retroactively to Jan. 11, 2016. The new law also exempts certain business development incentives purchasers from state tax notification requirements under the sales and use tax and the "bulk sale" laws. The applicable incentives programs include the corporation business tax credit and insurance premiums tax credit certificate transfer program, the Business Retention and Relocation Assistance Program, the BEIP, the Urban Transit Hub Tax Credit Program, the Grow New Jersey Assistance Program, and the state or local Economic Redevelopment and Growth Grant program. This portion of the law took effect Feb. 6, 2017. N.J. Laws 2017, Ch. 12 (SB 2477), signed by the governor on Feb. 6, 2017. Utah: New law (SB 267) enacts the Utah Rural Jobs Act, providing a nonrefundable tax credit for investments in eligible small businesses primarily located in rural counties. An "eligible small business" is a business that at the time of the initial growth investment in the business by a rural investment company: (1) as fewer than 150 employees; (2) has less than $10 million in net income for the previous taxable year; (3) maintains the business' principal business operations in Utah; and (4) is engaged in an industry related to aerospace, defense, energy and natural resources, financial services, life sciences, outdoor products, software development, information technology, manufacturing, or agribusiness. A tax credit cannot be claimed without a tax credit certificate issued by the Governor's Office of Economic Development (OED), which will start accepting applications on Nov. 1, 2017. On the date on which a rural investment company has collected all the investments (i.e., the "closing date"), a credit claimant whose affidavit was included in an approved application earns a vested tax credit equal to the amount of the claimant's credit-eligible capital contribution to the rural investment company. In each of the taxable years that includes the fourth through seventh anniversaries of the closing date, the OED will issue a credit certificate to each approved claimant specifying a tax credit amount for the taxable year equal to 25% of the claimant's total credit-eligible capital contribution. A taxpayer can carry forward the credit for the next seven taxable years if the amount of the tax credit exceeds the taxpayer's tax liability for the year in which the credit is claimed. The OED can revoke a tax credit certificate if the rural investment company does or fails to do certain actions before it exits the program, which it may apply to do on or after the seventh anniversary of the closing date. Utah Laws 2017, SB 267, signed by the governor on March 22, 2017. Kansas: The Kansas Court of Appeals (Court) held that a cattle company's mixer-feeder trucks are exempt from property tax as "farm machinery and equipment" under Kan. Stat. Ann. §79-201j and do not fall within the statutory definition of "truck" in Kan. Stat. Ann. § 8-126(nn), which is expressly excluded from the farm machinery and equipment exemption. In reaching this conclusion, the Court determined that the mixer-feeder trucks are actually and regularly used in farming or ranching operations, and are not used to carry more than 10 passengers or to transport or deliver freight and merchandise. Rather, the mixer-feeder trucks are used to mix raw ingredients of cattle feed and deliver it to cattle within the feedlots, and are rarely driven off the feedlot. The Court further held that the cattle feed is not merchandise as it is not a good or commodity to be bought or sold, and it is not freight because the feed is not cargo and the mixer-feeder truck is not a commercial carrier. In the Matter of the Appeal of Reeve Cattle Co., Inc., No. 116,005 (Kan. Ct. App. March 17, 2017). Utah: New law (SB 158) creates a process for pass-through entities to obtain a refund for qualifying excess withholding in lieu of a pass-through entity taxpayer claiming a credit. Effective for a taxable year ending on or after July 1, 2017, a pass-through entity may claim the refund, if the amount of the qualifying excess withholding equals or exceeds $250,000. "Qualifying excess withholding" means an amount that is paid or withheld by a pass-through entity that has a different taxable year than the pass-through entity that requests a refund, and is paid or withheld on behalf of the pass-through entity that requests the refund, if the pass-through entity that requests the refund also is a pass-through entity taxpayer. The amount is equal to the difference between: (1) the amount paid or withheld for the taxable year on behalf of the pass-through entity that requests the refund, and (2) the product of 5% and the business income of the pass-through entity that requests the refund. SB 158 provides information regarding when the refund must be claimed, which could be on the day it files its income tax return, or within 30 days after the earlier of the date it files an income tax return or the due date of its income tax return, including any extension. On or before Nov. 1, 2018, Utah will review the $250,000 threshold to determine whether it should be maintained, increased, or decreased. Utah Laws 2017, SB 158, signed by the governor on March 22, 2017. California: In FTB Notice 2017-02, the California Franchise Tax Board (FTB) provided guidance on requesting relief from the late payment penalty attributable to recently adopted amendments to the market-based sourcing regulations (Cal. Code Regs., tit. 18, §25136-2). These amendments were retroactively effective to tax years beginning on or after Jan. 1, 2015, but did not become final until Sept. 15, 2016. Given this timeframe, the FTB said that it will "presume reasonable cause and not willful neglect" with respect to late payments attributable to the amendments to the market-based sourcing regulation, and waive the associated penalties. This relief is limited to late payment penalties imposed on liabilities shown on timely filed returns for taxable years beginning on and after Jan. 1, 2015 and before Jan. 1, 2016. Similar relief will not be granted for delinquent filing penalties, or for penalties that cannot be waived for reasonable cause (e.g., underpayment of estimated tax). The penalties relief is available to business and individual taxpayers, including nonresidents individuals included in a group return. Notice 2017-02 explains the process for requesting relief and forms that must be used. Cal. Fran. Tax Bd., Notice 2017-02 (March 29, 2017). Kentucky: New law (HB 245) permits the Kentucky Department of Revenue (Department) to respond to the public's and taxpayers' questions, and publish the responses. The Department may include examples as part of any response or publication to help taxpayers and the public understand and interpret Kentucky's tax laws. The examples may include demonstrative, nonexclusive lists of items, if the Department determines that the list would be helpful to taxpayers in understanding how the tax laws apply. Ky. Laws 2017, Acts, Ch. 95 (HB 245), signed by the governor on March 21, 2017. Mississippi: New law (HB 686) permits an income taxpayer to request a revision of a return, and sales and use taxpayer to request a revision of tax assessed, within a three-year/36-month period. An income taxpayer may apply to the Mississippi Revenue Commissioner to revise any income tax return at any time within three years from the due date, or if an extension of time to file was granted, three years from the date the return was filed. If the taxpayer fails to file the return by the extension due date, the three years begin to run from the final day of the extension period. For sales and use tax purposes, a taxpayer can apply to the Commissioner to revise the tax assessed against or paid by the taxpayer, at any time within 36 months from the assessment date or the date the return was filed. No credit or refund will be allowed unless the taxpayer claims the credit or refund by filing within the 36-month period. These provisions took effect retroactively on Jan. 1, 2017. Miss. Laws 2017, HB 686, signed by the governor on March 13, 2017. Pennsylvania: Reminder — the Pennsylvania Department of Revenue (Department) will conduct a tax amnesty program from April 21, 2017 through June 19, 2017. The amnesty program applies to all taxes administered by the Department for tax periods where a known or unknown delinquency exists as of Dec. 31, 2015. Amnesty does not apply to taxes, interest and penalties collected under the International Fuel Tax Agreement owed to other states (e.g., fuels taxes collected by Pennsylvania but owed to other states). In exchange for participating in the amnesty program, the Department will waive all penalties and collection and lien fees, and one-half of the interest due. In addition, taxpayers with unknown liabilities reported and paid during the amnesty properly will not be liable for any taxes of the same type due before Jan. 1, 2011. Federal: On March 22, 2017, the House Judiciary Committee approved HR 1393 (commonly known as "Mobile Workforce State Income Tax Simplification Act of 2017"), which would limit the extent to which states may tax compensation earned by nonresident telecommuters and other multistate workers. A similar bill (SB 540) is being considered by the Senate. Montana: New law (HB 63) accelerates the deadline for filing Forms W-2 with the Montana Department of Revenue from the current February 28 to January 31, matching the federal deadline. The legislation is effective for tax years beginning after Dec. 31, 2016, making the accelerated deadline effective for calendar year 2017, with Forms W-2 due Jan. 31, 2018. Form MW-3, Annual Reconciliation, will also be due on Jan. 31, 2018. MT Laws 2017, HB 63, signed by the governor on Feb. 17, 2017. Arizona: Legislation passed in 2013 by a simple majority rather than a super majority constitutionally authorized an assessment on hospitals to be set by the director of the Arizona Health Care Cost Containment System (AHCCCS). In reaching this conclusion, the Arizona Court of Appeals found that the hospital assessment is not a tax as it is imposed by the director of AHCCCS on hospitals, and it is intended to provide additional funding for hospitals caring for indigent individuals. In addition, the hospital assessment fits within the Ariz. Const. Art. 9, § 22(C)(2) exception to a requirement of a super-majority vote to increase state net revenues because the plain language of the exception does not require a super majority before it can apply to a fee or assessment, and the federal approval and federal medical assistance requirements do not place a formula or limit on the assessment under the exception. Biggs, et al. v. Betlach, No. 1 CA-CV 15-0743 (Ariz. App. Ct., Div. One, March 16, 2017). Federal: On April 12, 2017, from 1:00-2:00 p.m. EDT (10:00-11:00 a.m. PDT) EY will host a webcast to provide an update on Affordable Care Act (ACA). While the President and House leadership begin to focus on US tax reform and other matters, questions remain around the timing and context of potential future changes to the ACA. Despite the ever-changing environment, employers must move forward with 2018 health plan design and other compliance with ACA requirements as they plan for the year ahead. During this webcast panelists will discuss a range of topics, including: (1) a review of possible alternatives for healthcare reform in the wake of the cancelled vote on the American Health Care Act; (2) a discussion about how employers are approaching the current legislative and regulatory environment and what impact it has on employers' healthcare offerings; (3) a review of large employer information reporting requirements and a discussion of relevant guidance from the Internal Revenue Service; and (4) an update on large employer considerations following the 2016 ACA reporting season. Click here to register for this event. Multistate: On April 19, 2017 from 2:00-3:00 p.m. EDT (11:00 a.m.-noon PDT), EY will host a webcast on analyzing tax base issues that focus on international complexities. Our third income tax seminar in this series will address international complexities of state taxation. The panelists will provide an overview of international tax issues that affect state taxation, including a focus on international, federal and state disconnects arising from subpart F income and 80/20 companies, and states' use of tax haven legislation to reach foreign income. The panelists will also discuss state implications from the base erosion and profit shifting (BEPS) program of the Organization of Economic Cooperation and Development (OECD) and state conformity problems with United States international tax treaties. Finally, they will address the impact various federal income tax reform proposals would have on the state tax base. Click here to register for this event. 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: 2017-0621 |
