27 April 2017 State and Local Tax Weekly for April 14 Ernst & Young's State and Local Tax Weekly newsletter for April 14 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. FY 2018 New York State budget provision eliminates resale exemption for related-party transactions involving single member LLCs and partnerships On April 10, 2017, New York Governor Andrew Cuomo (D) signed the FY 2018 Executive Budget (A. 3009C), which contains sales and use tax changes that might significantly affect a number of related-party leasing structures and similar arrangements. Before enactment of these provisions, New York law exempted purchases of tangible personal property or services for resale from sales and use tax. Under this new provision, which took effect immediately, disregarded single member LLCs or subsidiaries may not claim the resale exemption when purchasing property that they will resell (including by lease or rental) to their own member or owner. Instead, such purchases will be deemed to be retail sales immediately subject to sales tax. The change also applies to transactions involving other related-party entity structures, including partnerships and trusts. The goal of this change is to remove the incentive for creating entities for the "purpose of sales tax avoidance." Specifically, the New York Department of Taxation and Finance has concluded that certain related entities were taking advantage of the resale exemption by purchasing property exempt from sales tax and leasing it to a member or owner using long-term leases, or imposing lease payments that were a small fraction of the fair market value of the property when originally purchased. For additional information on this development, see Tax Alert 2017-633. Ohio: The Ohio Department of Taxation (Department) issued guidance on the meaning of "indirect ownership" for purposes of calculating a taxpayer's distributive share of pass-through entity (PTE) income. The Department determined that "based on a reading of Ohio law … the phrase 'indirect ownership' must refer to a situation where the investor owns an interest in a PTE that owns an interest in another PTE." The phrase does not refer to an individual's constructive ownership of a PTE based on the IRC's attribution rules. The Department noted that an explanation of the small business investor deduction (SBD) included incorrect guidance as to the meaning of "indirect" (stating that "indirect" included IRC attribution rules) was provided in presentations and publications, but was later fixed. To remedy this mistake, the Department will do the following: (1) for taxpayers that filed 2013 and 2014 individual income tax returns and claimed the SBD based on the incorrect guidance, the Department will not challenge the taxpayer's filing position; (2) taxpayers that paid a bill or assessment for additional tax as a result of the guidance may file a refund claim — the claim must be filed within four years of the date the bill or assessment was paid; and (3) taxpayers filing an original or amended return to claim the SBD for tax years 2013 or 2014 or the business income deduction for tax year 2015, must apply the correct interpretation of "indirect" in accordance with this guidance. Ohio Dept. of Taxn., Taxpayer Notice "Personal Income & Pass-Through Entity Tax: Meaning of "Indirect" Ownership" (March 29, 2017). Pennsylvania: On April 5, 2017, the Pennsylvania Supreme Court (Court) heard oral argument in Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth. The question presented by this case is whether the statutory cap imposed on Pennsylvania's net loss carryover (NLC) deduction violates the Uniformity Clause of the Pennsylvania Constitution and, if so, what is the proper remedy? A summary of the argument is available in Tax Alert 2017-632. South Carolina: New law (SB 250) updates South Carolina's date of conformity to the IRC to the IRC as amended through Dec. 31, 2016, and includes the effective date provisions contained in it. In addition, if IRC sections adopted by South Carolina expired on Dec. 31, 2016, are extended, but otherwise not amended, by congressional enactment during 2017, these sections or portions thereof also are extended for South Carolina income tax purposes in the same manner as they are extended for federal income tax purposes. S.C. Laws 2017, Act 4 (SB 250), signed by the governor on April 5, 2017. Texas: A company is not entitled to deduct from its cost of goods sold (COGS) a payment it made to a federal asbestos trust fund for personal injury claims related to asbestos litigation because the payment does not qualify as a "cost of quality control" under Tex. Tax Code § 171.1012(d)(9). In reaching this conclusion, the Texas Court of Appeals (Court) viewed the "costs of quality control" as a subset of COGS and, as such, limited these costs as "costs in relation to the taxable entity's goods." The Court distinguished the statutory examples of "costs of quality control," which all involve a cost spent on the product or good itself to improve its quality (e.g., cost of replacing defective components under standard warranty policies, the cost of inspection directly allocable to the production of goods, and the cost of repair and maintenance of goods)., from the company's payment, which was not used to improve the quality of the asbestos-containing products or goods themselves .Owens Corning v. Hegar, No. 04-16-00211-CV (Tex. App. Ct., 4th Dist., April 5, 2017). Alabama: On remand from the U.S. Supreme Court, the U.S. District Court for the Northern District of Alabama (Court) issued its decision in CSX Transportation and upheld Alabama's tax scheme of imposing a 4% sales and use tax on dyed diesel fuel and a 19-cents-per-gallon fuel-excise tax on clear diesel purchases, finding that it does not violate the Railroad Revitalization and Regulatory Reform Act (4-R). In so holding, the Court determined that since Alabama does not force rail carriers to use dyed diesel (rail carriers can use either dyed diesel or clear diesel), any "discrimination" results from the rail carrier's business practices and not Alabama law. Alternatively, the Court found the sales tax and the fuel-excise tax are roughly equivalent because the rail carriers pay, on average, less than half the amount of tax motor carriers pay. Thus, the evidence does not support a finding that the state's failure to exempt rail carriers from the sales tax for dyed diesel results in discrimination against the rail carriers. Lastly, the Court found no discriminatory treatment from the state's exemption of water carriers from the sales tax, noting that the state's failure to provide this exemption could violate the Commerce Clause. Moreover, the rail carrier suffered no competitive injury from Alabama's exemption of water carriers from the sales tax. CSX Transportation, Inc. v. Ala. Dept. of Rev., No. 2:08-cv-00655-AKK (N.D. Ala. March 29, 2017). Alabama: A chemical manufacturer was entitled to a state and county use tax refund on materials used by its contractor on a project to remove an existing sulfuric acid converter and furnish, fabricate, and install a new converter at one of its facilities because the materials were taxable upon the contractor's purchase of them ("contractor provision"). The Alabama Tax Tribunal (Tribunal) noted that although the converter is an integral part of and used in the chemical manufacturer's process, Alabama law requires that if the "contractor provision" applies, as it does in this case, it is irrelevant that the structure or machine involved is subsequently used in the manufacturing or production processes. The Tribunal also rejected the Alabama Department of Revenue's argument that the manufacturer was liable for sales/use tax on parts used to repair its machinery at the machine rate, finding instead that that the contractors engaged to repair machinery were liable for tax because the contractors (not the manufacturer) used the parts. In addition, the gas chromatographs and attachments and a dry max unit are both necessary parts of the manufacturer's manufacturing process and, therefore, they are taxable at the machine rate (1.5%, as opposed to the general 4% rate). Akzo Nobel Functional Chemicals, LLC v. Ala. Dept. of Rev., Nos. S. 15-1278, County. 16-107 (Ala. Tax Trib. March 23, 2017). Arizona: An Arizona electric power cooperative (cooperative) is not entitled to a refund of use tax paid on coal and natural gas purchased from out-of-state vendors because the purchases do not qualify for the resale exemption since the cooperative uses and consumes the coal and natural gas (tangible personal property) to generate electricity. In reaching this conclusion, the Arizona Court of Appeals (Court) found that the cooperative failed to rebut the statutory presumption that its purchases of coal and natural gas fall outside the scope of the use tax. Rather, the cooperative's expert's testimony reflected that the cooperative uses and consumes the coal and natural gas in the process of generating electricity. The coal and natural gas purchases also are not exempt from tax as an ingredient or component part of electricity generated by the cooperative. The Court reasoned that just as fuel used or consumed in a manufacturing process is not considered to be incorporated into a manufactured product and, therefore, is taxable, fuel is consumed in the process of generating electricity and it does not directly enter into or become an ingredient or component part of the electricity as required by statute. Ariz. Electric Power Coop., Inc. v. Ariz. Dept. of Rev., No. CA-TX 16-0004 (Ariz. App. Ct., Div. 1, March 28, 2017). Arkansas: New law (SB 362) establishes sunset dates for the InvestAkr retention tax credit and the increased sales and use tax refund for major maintenance and improvement projects, and clarifies existing provisions for, and increases the amount of, the refund available for sales and use tax paid on repair and replacement parts of manufacturing and machinery equipment. The InvestAkr retention tax credit for manufacturers will sunset July 1, 2017, however, projects that qualify prior to the credit based on applications filed prior to July 1, 2017 will continue to earn credits, which may be claimed and carried forward as provided under current law. The increased sales and use tax refund for major maintenance and improvement projects will sunset June 30, 2022. SB 362 also increases the sales and use tax refund available for partial replacement and repair of certain machinery and equipment over four years until the sales are exempt beginning July 1, 2022. Until then, taxes in excess of these rates are subject to a refund as follows: (1) 3.875%, beginning July 1, 2018; (2) 2.875%, beginning July 1, 2019; (3) 1.875%, beginning July 1, 2020; and (4) 0.875%, beginning July 1, 2021. Finally, the new law clarifies the required method to claim a sales or use tax refund for partial replacement and repair of certain machinery and equipment. SB 362 took effect on March 13, 2017. Ark. Laws 2017, Act 465 (SB 362), signed by the governor on March 13, 2017. Georgia: Approved bill (HB 340), which, if signed by the governor, would amend the definition of the term "fair market value of the motor vehicle" for purposes of calculating the title ad valorem tax on leased motor vehicles. HB 340 would add a new provision specifying "[f]or a new motor vehicle that is leased, the total of the base payments pursuant to the lease agreement" to the definition. In effect, the amendment would change Georgia from an "up-front" state, where the transaction tax for leased motor vehicles is based on the value of the vehicle, to an "accelerated lease stream" state, where the tax is based on the total of the lease payments with the tax due, in-full, on the first day of the lease. For more on this development, see Tax Alert 2017-626. Louisiana: A resolution (HCR 8) passed during the 2015 legislative session to suspend certain business utility exemptions for state sales tax laws from July 1, 2015 until 60 days after the 2016 Regular Session of the legislature, was not unconstitutional. In so holding, the Louisiana Court of Appeal (Court) found HCR 8 is a later expression of legislative will, and is not inconsistent with or superseded by a previous act of the legislature that made operable previously inoperable tax exemptions. In addition, HCR 8 was not required to pass with a vote of two-thirds of the legislature, because the suspension of tax (a temporary delay of it) is not the same as the repeal of an exemption (the abrogation of existing law by express legislative act). HCR 8 is a suspensive resolution rather than a bill, and it is not a revenue raising measure, as a tax levy raises revenues and the grant of an exemption does not change the underlying tax levy. Finally, the language of HRC 8's suspension of all of the exemptions from the tax levied pursuant to La. Rev. Stat. §47:331 for sales of steam, water, electric power or energy, and natural gas, is not vague or ambiguous. La. Chemical Assn. v. La. Dept. of Rev., No. 2016 CA 0501 (La. Ct. App., First Cir., April 7, 2017). Nebraska: Two agricultural cooperatives were properly denied sales and use tax refunds for "depreciable repairs or parts" for agricultural machinery and equipment because neither provided the Nebraska Department of Revenue with the information needed to verify that the claimed repairs or parts were taxes as personal property. In reaching this conclusion, the Nebraska Supreme Court (Court) found the term "depreciable repair or parts" ambiguous because it is not defined in Neb. Stat. §. 77-2708.01 or elsewhere in the tax statute and the ordinary definitions of "depreciable" did not clarify the meaning. Legislative history, however, indicated the legislative intent was to prevent double taxation by providing a sales tax refund for purchases of depreciable repairs and parts subject to personal property tax. The Court ultimately concluded that without providing the personal property tax return or depreciation schedules, the cooperatives failed to meet their burden of proof that the items for which they sought refunds were also taxed as personal property and qualified for a sales and use tax refund. Farmers Cooperative v. Nebraska, 296 Neb. 347(Neb. S. Ct. April 7, 2017). Tennessee: On April 10, 2017, a Tennessee chancery court stayed the enforcement of Rule 1320-05-01-.129 (Rule 129), by which the Tennessee Department of Revenue (Department) adopted an economic nexus standard for sales and use tax purposes, until a lawsuit challenging Rule 129 is decided (April 10th Order). Under Rule 129, an out-of-state dealer is deemed to have substantial nexus with Tennessee if the dealer engages in the regular or systematic solicitation of Tennessee consumers through any means, and makes sales exceeding $500,000 to Tennessee consumers during the previous 12-month period. On March 30, 2017, two retail groups filed suit against the Department, claiming Rule 129 is unconstitutional under the U.S. Supreme Court's 1992 ruling in Quill Corp. because it requires out-of-state companies with no physical presence in Tennessee to collect and remit sales tax. The April 10th Order prohibits the Department from enforcing Rule 129 until the suit is resolved. The April 10th Order, however, does not preclude dealers from voluntarily complying with Rule 129 or the Department from collecting sales tax from dealers that voluntarily comply. For more on this development, see Tax Alert 2017-642. Federal: The IRS announced that the Section 45 renewable electricity production credit for 2017 is: (i) 2.4 cents per kilowatt hour on the sale of wind-produced electricity, closed-loop biomass, geothermal energy and solar energy (from 2.3 cents in 2016); and (ii) 1.2 cents per kilowatt hour on the sale of electricity produced in open-loop biomass facilities, small irrigation power facilities, landfill gas facilities, trash combustion facilities and qualified hydropower facilities (unchanged from 2016). With regard to coal, the credit is $6.909 per ton on the 2016 sale of qualified refined coal. For calendar year 2017, the credit for Indian coal production has expired. For additional information on this development, see Tax Alert 2017-641. New York: A company that owns and operates a power generating station was properly denied qualified empire zone enterprise (QEZE) credit for the 2009 taxable year because its Empire Zone Program decertification was not due to retroactive application of 2009 amendments changing program eligibility requirements. In reaching this conclusion, the New York Division of Tax Appeals found that the state provided the decertification notice in June 2009, and a Jan. 1, 2009 decertification effective date meets the terms of the statute, which requires a business enterprise to be considered decertified as of the beginning of the tax year in which the state revoked the business' certification. In addition, while James Square held that the 2009 amendments were not entitled to retroactive application to the 2008 taxable year, the 2009 amendments applicable to the 2009 taxable year are not a retroactive application of law. Finally, the company's equal protection rights were not violated as a result of selective enforcement of the 2009 amendments, because the company failed to prove the New York Division of Taxation intentionally planned to discriminate in rejecting its credit claim, and the statute unambiguously states when a business enterprise is considered to be decertified. In the Matter of the Petition of NRG Energy, Inc., No. 826921 (N.Y. Div. Tax App. March 30, 2017). Pennsylvania: Reminder — the Pennsylvania Department of Revenue (Department) will conduct a tax amnesty program 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. Arizona: The Arizona Supreme Court unanimously upheld the voter-approved Proposition 206, The Fair Wages and Healthy Families Act, which will increase the minimum wage incrementally to $12 an hour by Jan. 1, 2020 and establish a statewide paid sick leave requirement effective July 1, 2017. For more information on this development, see Tax Alert 2017-638. South Dakota: New law (SB 34), which took immediate effect, requires the state treasurer to sell abandoned stocks, bonds and other negotiable instruments within 90 days of confirmed receipt of such instrument, unless it is on an open claim. SB 34 also requires all securities, stocks, bonds or other intangible ownership interests in business associations held by the state treasury department's unclaimed property division (division) be sold after the passage of this Act. Following the enactment of SB 34, the South Dakota State Treasurer said letters will be sent to the owners of securities currently held by the division and they will have the opportunity to claim the securities or have the division sell them and return the sale proceeds to the owner. All securities held prior to the passage of SB 34 will be sold after the deadline for contacting the division has passed, but the owner will still be able to claim the sale proceeds. S.D. Laws 2017, SB 34, signed by the governor on March 27, 2017; S.D. State News, News Release (March 27, 2017). Utah: New law (SB 175) repeals and reenacts the Revised Uniform Unclaimed Property Act, which was amended in 2016. Amended provisions relate to: (1) the standards for determining when property is presumed abandoned, (2) rules for taking custody of property presumed abandoned, (3) reports required by holders of abandoned property, (4) notice to apparent owners of property presumed abandoned, (5) taking custody of property by an administrator, (6) public sale of property by an administrator, (7) property administration, (8) claims to recover property from an administrator, (9) verified reports of property and examination of records, (10) determination of liability and putative holder remedies, (11) enforcement by the administrator, (12) agreement to locate property of apparent owner held by the administrator, and (13) confidentiality and information security. The provisions of this act take effect 60 days after the legislature adjourns, which would be May 8, 2017 (with an adjournment date of March 9 2017). Utah Laws 2017, SB 175, signed by the governor on March 24, 2017. International: Non-European Union businesses that have incurred value added tax (VAT) in Europe during 2016 may be able to recover the VAT by applying to the relevant EU countries for a refund — provided they comply with the rules. In general, claims by non-EU businesses must be submitted within six months after the end of the calendar year. The deadline for applications for 2016 for most EU countries is June 30, 2017, so taxpayers should be collecting the required information now to support a successful claim. For additional information on this development, see Tax Alert 2017-622. International: The Commissioner General of Rwanda Revenue Authority has issued Rule No. 01/2017 of Feb. 22, 2017, which provides the value added tax procedures to implement the zero-rating of goods and services supplied to special persons. For additional information on this development, see Tax Alert 2017-628. Multistate: On Wednesday, May 3, 2017, from 2:00 - 3:00 p.m. EDT (11:00 a.m. - noon PDT), EY will host a webcast focused on unclaimed property. Members of Ernst & Young LLP's Unclaimed Property and Escheat Services practice will address the historic changes in the unclaimed property landscape and what they may mean for your organization. During this webcast, the panelists will provide an update of these recent legislative and judicial developments as well as trends in unclaimed property governance. The panelists also will discuss the impact on current and future compliance issues, in addition to leading practices that are vital to an effective unclaimed property compliance program. Click here to register for this program. 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: 2017-0697 |
