21 April 2017 State and Local Tax Weekly for April 7 Ernst & Young's State and Local Tax Weekly newsletter for April 7 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. Massachusetts Department of Revenue to apply sales tax economic nexus standard to internet vendors starting July 1, 2017 In Directive 17-1 (issue April 3, 2017) (Directive), the Massachusetts Department of Revenue (DOR) announced that it will impose an economic nexus standard in determining whether out-of-state vendors have a sales or use tax collection obligation for transactions with Massachusetts customers, starting July 1, 2017. The new standard, which applies only to "internet vendors," is based on a bright-line test that takes into account the internet vendor's dollar value of sales in Massachusetts and the number of transactions with customers in the commonwealth. Of particular concern, the Directive suggests that the new nexus standard may be applied retroactively to out-of-state internet vendors that have nexus under the new rule, but do not begin collecting on July 1, 2017. The Directive provides that an out-of-state internet vendor will be considered to have nexus during "each calendar year beginning with 2018 if during the preceding calendar year it had in excess of $500,000 in Massachusetts sales and made sales for delivery into Massachusetts in 100 or more transactions." From July 1, 2017 through Dec. 31, 2017, the same test will be applied for the period beginning July 1, 2016 and ending June 30, 2017. Critically, the bright line test does not function as a safe harbor, given that out-of-state internet vendors that otherwise establish nexus will be required to collect sales and use taxes even if they do not have the dollar volume of sales or the requisite number of Massachusetts customers. Although it adopts a bright line test, the Directive makes clear that the DOR is asserting an economic nexus rule based on the broad nexus standard set out in Massachusetts' statutes, which do not contain a bright-line nexus test. Rather, the DOR states that it is adopting the bright-line test to avoid having to apply the economic nexus rules "on a case-by-case basis." If the bright-line nexus test is met, the Directive does not provide any method for out-of-state internet vendors to show that they fall outside the statutory nexus rules. For additional information on this development, see Tax Alert 2017-607. Arizona: New law (HB 2438) provides that notwithstanding federal law, a change in the organizational structure of a corporation, an S corporation, a limited liability company, a partnership or any other entity into another organizational structure is not a taxable event for state income tax purposes if there is not a change in owners, their ownership interest or the organization's assets. This change takes effect 90 days after the legislature adjourns. Ariz. Laws 2017, Ch. 127 (HB 2438), signed by the governor on March 31, 2017. California: The California Franchise Tax Board (FTB) informed taxpayers in FTB Notice 2017-01 that it will not appeal the ruling of the California Court of Appeal (Court) in Swart Enterprises, and that it will follow the Court's decision "in situations with the same facts." In that case, the taxpayer, an Iowa farming corporation, had no other connection to California other than holding a 0.2% membership interest in a manager-managed limited liability company (LLC) that was involved in leasing equipment throughout the world including California. The LLC's business address was in San Francisco and was treated as a partnership for federal and California income tax purposes. The Court found that the LLC was itself doing business in California. The Court also found that the corporate taxpayer acquired its membership interest in the LLC after the original members decided the LLC should be manager-managed. The manager was given complete authority to manage the LLC, such that the corporate taxpayer was found not to be involved in the LLC's management. The Court held that the taxpayer was not "doing business" in California within the meaning of the state's "doing business" statute and therefore, was not subject to the state's annual $800 minimum franchise tax. In this Notice, the FTB stated that taxpayers believing they have the "same facts" as those in the Swart Enterprises case should consider whether they are required to file a return and/or whether a refund claim is appropriate. The FTB further instructed taxpayers filing a refund claim to cite the holding in Swart Enterprises in their claim and explain how their facts are the same as those in that case.For additional information on this development, see Tax Alert 2017-595. Utah: New law (SB 132) expands the list of taxpayers that qualify as a sales factor weighted taxpayer to include automobile manufacturing (as described in the North American Industry Classification System (NAICS) Code 336111). SB 132 also clarifies how a taxpayer determines whether it is an optional sales factor weighted taxpayer. Generally, for each taxable year, a taxpayer that is not a sales factor weighted taxpayer can determine whether it is an optional sales factor weighted taxpayer. This determination must be completed before the due date for filing the taxpayer's return for the taxable year, including extension. The bill takes effect for a taxable year beginning on or after Jan. 1, 2018. Utah Laws 2017, SB 132, signed by the governor on March 22, 2017. Arizona: A company's gross income derived from providing electronic billing and payment services, which it processes through the use of cloud-based software, is not subject to the Arizona transaction privilege tax because the use of the software does not fall within the scope of the personal property rental classification. The company stores end user customer payment data on servers after it is uploaded by the client, that information is used to request payment, and the company updates information on its portal manually or automatically so that its clients may see the status of payments processed and other analytical information. The Arizona Department of Revenue found that this is not the type of exclusive control required by the Arizona Supreme Court's decision in State Tax Commission v. Peck, 106 Ariz. 394 (1970) to constitute the rental of software as tangible personal property. In addition, no rental of software was determined to have occurred when the payments were not fixed or based on software usage, and instead could vary month by month based on the dollar amount of successful payments generated. Ariz. Dept. of Rev., Taxpayer Information Ruling LR16-011 (Sept. 23, 2016). Arizona: An out-of-state data service company (company) does not have to pay use tax on fees it pays to third party developers (developers) to create and host material and software (material) on its behalf because there is no transfer, barter or exchange of tangible personal property. The developers create and store the material on their own servers; they must maintain, update and support these materials; and they must destroy or return to the company all confidential information and terminate access to the material by the third party offices upon termination of the agreement. Ariz. Dept. of Rev., Private Taxpayer Ruling LR16-012 (Dec. 5, 2016). Arkansas: An online retailer's website membership (membership) that entitles customers to use various goods, services, and other benefits upon payment of a single monthly or annual price is subject to Arkansas sales and use tax as a bundled transaction when one or more of the products provided are subject to tax. The Arkansas Department of Finance and Administration (Department) found that a membership is a subscription based on its common and ordinary meaning, and is a bundled transaction under Arkansas law because it includes the retail sale of two or more products that are distinct and identifiable and that are sold for one non-itemized price, such as unlimited access to view movies and television shows, access to a selection of other original programs, comedy, lectures, and audio editions of articles, and access to broadcast streaming video games. All of these are subject to sales and use tax when sold separately. A free one-month trial membership, however, is not subject to sales and use tax as there is no gross receipts or gross proceeds on which to levy the sales tax and no purchase price on which to levy the use tax. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Opinion No. 20170117 (Feb. 24, 2017). Illinois: A car company must exclude from the calculation of its trade-in credits the amount of cash back payments to car purchasers, and it cannot combine the trade-in credit with the advance trade-in credit when the trade-in credit belongs to a third party. In so holding, the Illinois Independent Tax Tribunal (Tribunal) found the trade-in regulation, which provides that the overall trade-in credit is the value of the trade-in minus any cash back to the purchaser, does not impermissibly narrow the scope of the trade-in statutes; rather, it creates a chronological process for when trade-in credits can be recognized. The Tribunal noted cash back amounts are not part of any trade-in and any resulting trade-in calculation, and that there is no basis for demanding unrelated third party trade-in credits be grouped with advance trade-in credits. Motor Werks of Hoffman Estates, Inc. v. Ill. Dept. of Rev., Nos. 14 TT 222 and 15 TT 37 (Ill. Indep. Tax Trib. March 27, 2017). Michigan: In response to a ruling request, the Michigan Department of Treasury advised that the transfers of "human organs" are not subject to sales and use tax in Michigan, but transfers of certain non-transplantable tissues are subject to tax based on sale price. Michigan characterizes the legal transfer of a human organ, a term which is broadly defined, as a pure service transaction and, as such, these transactions generally are not subject to sales and use tax; however, sales of non-transplantable human tissues used for research and training where those tissues are not "human organs" (e.g., various blood products, human hair) are subject to tax because non-transplantable human tissues are considered tangible personal property. Mich. Dept. of Treas., Letter Ruling 2017-1 (March 21, 2017). Utah: New law (SB 132) adds additional sales and use tax exemptions for purchases or leases of certain machinery, equipment, and parts, and requires an annual study of these exemptions. One exemption includes amounts paid or charged for a purchase or lease of machinery, equipment, or normal operating repair or replacement parts by a manufacturing facility that: (1) is an establishment; (2) is described in the NAICS Code 336111 (Automobile Manufacturing); (3) is located in the state; and (4) uses the machinery, equipment, or normal operating repair or replacement parts in the manufacturing process to manufacture an item sold as tangible personal property. Another exemption includes amounts paid or charged for a purchase or lease of equipment or normal operating repair or replacement parts with an economic life of less than three years by a manufacturing facility that: (1) is an establishment; (2) is described in NAICS Code 325120 (Industrial Gas Manufacturing); (3) is located in the state; and (4) uses the equipment or normal operating repair or replacement parts to manufacture hydrogen. A purchaser that receives either exemption for the previous calendar year must report to the state, on or before Oct. 1: (1) the total purchase or lease price for all machinery, equipment or normal operating repair or replacement parts for which the purchaser received the sales and use tax exemption, and (2) the total amount of sales and use tax that the purchaser would have owed on the purchase or lease price but for the exemption. These changes take effect on July 1, 2017. Utah Laws 2017, SB 132, signed by the governor on March 22, 2017. Washington: The Washington Department of Revenue (Department) issued guidance on the tax treatment of computer software maintenance agreements. According to the Department, sales tax does not apply to separately itemized charges when these agreements do not include software upgrades or updates, but are taxable under the service and other activities Business and Occupation (B&O) tax classification. When a maintenance agreement sale is considered a mixed element (i.e., there are software updates and upgrades), then the taxpayer is subject to both retail sales tax and retailing B&O tax as a bundled transaction (assuming the updates or upgrades represent at least 10% of the total price). When professional service charges and the updates or upgrade changes are itemized separately, then each change is taxed on the nature of the activity. For example, help desk support charges and diagnostic service charges are generally taxed under the services and other activities classification under the B&O tax, while update/upgrade charges are subject to retail sales tax and retailing B&O tax. Lastly, the B&O tax determined under the service and other activities classification may be owed on support service sales or maintenance sales if the sale relates to either custom software or to the customized elements of prewritten computer software. Wash. Dept. of Rev., Tax Topic: Tax treatment of computer software maintenance agreements (March 1, 2017). Alaska: The Alaska Department of Revenue (Department) issued guidance on when a tax credit certificate can be used to reduce a taxpayer's liability below the minimum statutory amount. Alaska Stat. §43.55.024(j) provides a sliding scale credit for "legacy" oil production, and contains a "hard floor" such that it may not be used to reduce the tax on gross below the 4% minimum tax in Alaska Stat. §43.55.011(f). The following tax credits, however, are not subject to the minimum tax limitation, and if not claimed in combination with the sliding scale credit, these credits may be used to reduce a taxpayer's oil and gas production tax liability below the minimum tax to zero: (1) tax credits issued under Alaska Stat. §§43.55.023(a) (qualified capital expenditures), 43.55.023(b) (carried forward annual loss), and 43.55.023(l) (certain well lease expenditures); (2) Alaska Stat. §§43.55.024 (a), (c), and (i) (additional non-transferable credits); and (3) Alaska Stat. § 43.55.025 (alternative tax credit for oil and gas exploration). None of the tax credits are mandatory, and a producer/taxpayer is not required to include the sliding scale credit in determining the producer's tax liability. A taxpayer eligible for the sliding scale credit could choose to use the credit in combination with other credits to reduce the oil and gas production tax liability down to the minimum tax and carry forward any remaining credits as allowable. Alternatively, during periods of extended low prices the taxpayer may forego the sliding scale credit and use other available credits, including purchased credit certificates, to reduce tax liability down to zero. If an oil and gas production tax levy is at or below the minimum tax before application of any credits, then a taxpayer cannot use the sliding scale credits. Alaska Dept. of Rev., Tax Div., Advisory Bulletin 2017-01 (March 31, 2017). Illinois: The Illinois Supreme Court (Court) vacated the ruling of an Illinois Appellate Court that a statutory provision providing a charitable property tax exemption without requiring an exclusively charitable use of the property is facially unconstitutional, finding the appellate court lacked appellate jurisdiction under Illinois Supreme Court Rule 304(a) (regarding when judgments may be appealed) to issue a decision addressing the constitutionality of these exemptions. In reaching this conclusion, the Court found that the circuit court's order granting a motion for summary judgment disposed not of a "claim," but only of an "issue" relating to a claim. Because the two matters addressed — the property tax exemption claims and the request for a declaration as to what law governs those claims — are so closely related, they must be deemed part of a single claim for relief. Accordingly, the circuit court's order was not appealable under Rule 304(a). Carle Foundation v. Cunningham Twp., 2017 IL 120427 (Ill. S. Ct. March 23, 2017). Illinois: Individuals who through a partnership (P1) indirectly owned an interest in another partnership (P2) that reached a settlement agreement with the IRS finally adjusting P2's 2002 returns (i.e., federal RAR), as pass-thru partners were bound by the settlement and are required, under Illinois law, to notify the Illinois Department of Revenue of the adjustment within 120 days after the adjustment "has been agreed to or finally determined." In reaching this conclusion, the Illinois Appellate Court found that the individuals, a married couple, "agreed to" the adjustment when the husband signed a settlement agreement with the IRS on behalf of P1, "agree[ing] to the determination of partnership items and partnership level determinations." Moreover, the individuals also agreed that absent fraud, malfeasance, or misrepresentation of fact, the matter would not be reopened; therefore, the settlement agreement was a final agreement as to the adjustment of partnership items. Rogers v. Ill. Dept. of Rev., No. 1-15-1449 (Ill. App. Ct., 4th Div., March 23, 2017). Arkansas: New law (HB 1564 (Act 433)) accelerates the deadline for filing Forms W-2 with the Arkansas Department of Finance and Administration from the current February 28 to January 31, matching the federal deadline. The legislation is effective 90 days from the date of enactment, making the accelerated deadline effective for calendar year 2017, with Forms W-2 due Jan. 31, 2018. Employers filing 250 or more Forms W-2 are required to file electronically (or on CD or DVD). For more on this development, see Tax Alert 2017-598. North Dakota: New law (SB 2199) creates a limited tax and registration exemption for an out-of-state business operating in North Dakota to perform disaster or emergency remediation work or services during a disaster recovery period. Under SB 2199, such business is not considered to have established a business presence that would subject it or its out-of-state employees to certain state and local taxes or fees, including state income tax, state and local sales and use taxes, unemployment insurance, workers' compensation, or other types of state and local taxes. The out-of-state business will not have to pay sales and use tax on equipment used or brought into North Dakota temporarily during the disaster response period if the equipment is removed within a reasonable period of time after the disaster response period ends. All activity of the out-of-state business conducted in North Dakota, for purposes of any state or local tax measured by net or gross income or receipts, is disregarded for tax filing purposes, and apportionment factors attributable to the performance of the disaster or emergency remediation work may not be sourced to North Dakota by that business or any member of its affiliated group. Out-of-state businesses and employees, however, remain subject to transaction taxes and fees) on materials or services purchased, consumed, or used in North Dakota that are subject to sales and use taxes, hotel taxes, or car rental taxes or fees. SB 2199 takes effect Aug. 1, 2017. N.D. Laws 2017, SB 2199, signed by the governor on March 29, 2017. Arkansas: New law (HB 1752) amends notice requirements for holders of unclaimed property and adds provisions related to unclaimed securities and tangible property held in a safe deposit box or depository. Under the revised provisions, the holder of property presumed abandoned is required to send written notice to the apparent owner no more than 180 days (previously 120 days) or not less than 90 days (previously 60 days) before filing the report stating the holder possesses the unclaimed property, if: (1) the holder has the apparent owner's address that its records do not indicate to be inaccurate, (2) the apparent owner's claim is not barred by the statute of limitations, and (3) the property is valued at $50 or more. HB 1752 also adds the requirement that if the property presumed abandoned is a security or security entitlement under the Uniform Commercial Code — Investment Securities (Ark. Code Ann. §4-9-101 et seq.), or tangible property held in a safe deposit box or other safekeeping depository in Arkansas, the holder is subject to the same notice requirements. HB 1752 takes effect 90 days after the legislature adjourns. Ark. Laws 2017, Act 622 (HB 1752), signed by the governor on March 24, 2017. Idaho: New law (HB 152), for the purpose of unclaimed capital credits, exempts nonprofit corporations providing telecommunications service or delivery of electric power from certain unclaimed property reporting requirements, and instead permits them to use a streamlined unclaimed property reporting process applicable to Idaho counties. A capital credit is an amount paid by a member for telecommunication or electric service in excess of the costs and expenses incurred by a nonprofit corporation in furnishing the service that is credited to the member's capital account by the nonprofit corporation and distributed to the member. HB 152 takes effect July 1, 2017. Idaho Laws 2017, Ch. 133 (HB 152), signed by the governor on March 24, 2017. International: In 2016, Italy enacted new and significant measures (the Fiscal Decree) with respect to the Value Added Tax (VAT) warehousing regime to address tax evasion. On February 23, 2017 a Ministerial Decree - published in the Official Gazette no. 64 of March 17, 2017 - was enacted by the Ministry of Economy and Finance. For additional information on this development, see Tax Alert 2017-589. 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: 2017-0696 |
