17 May 2017 State and Local Tax Weekly for May 5 Ernst & Young's State and Local Tax Weekly newsletter for May 5 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. Tennessee enacts fuel tax increase and single sales factor election for manufacturers, accelerates Hall income tax phase-out, reduces sales tax rate on food Governor Haslam signed into law the "Improving Manufacturing Public Roads and Opportunities for a Vibrant Economy (IMPROVE) Act" (HB 534) (Act). The Act permits manufacturers to elect single sales factor apportionment for purposes of the state's franchise and excise taxes, accelerates the phase-out of the Hall income tax, authorizes select cities and counties to adopt local option tax surcharges to fund mass transit and reduces the state sales tax on grocery food. Effective for tax years starting on or after Jan. 1, 2017, a taxpayer whose principal business in Tennessee is manufacturing may elect single sales factor apportionment for purposes of Tennessee franchise and excise taxes. A taxpayer's principal business in Tennessee is manufacturing if more than 50% of the revenue — excluding passive income — derived from its activities in the state is from fabricating or processing tangible personal property for resale and consumption off the premises. Once made, the election is binding for five years. The Act does not address how manufacturers that elect single sales factor apportionment and are members of a Tennessee consolidated net worth election affiliated group should calculate franchise tax; EY, however, anticipates, that the Tennessee Department of Revenue will issue guidance on this issue soon. The Act also accelerates the phase-out and repeal of the Hall income tax (i.e., the state personal income tax on interest and dividends), by reducing the current 5% rate by one percentage point annually, beginning with a rate reduction to 4% effective Jan. 1, 2017. With the phase-out, the Hall income tax will be fully repealed effective Jan. 1, 2021. The Act also permits certain local governments to impose, subject to referendum, "Local Option Transit Surcharges" dedicated to funding mass transit. Jurisdictions permitted to adopt such "surcharges" include counties with population over 112,000 (i.e., Blount, Hamilton, Knox, Rutherford, Shelby, Sullivan, Sumner, Washington, Williamson and Wilson) and cities with population over 165,000 (i.e., Chattanooga, Knoxville, Memphis, and Nashville). These jurisdictions may levy a surcharge on sales and use tax, business tax, motor vehicle tax, rental car tax, tourist accommodation tax or residential development tax. Such surcharges must be approved by a majority of the voters of the local government proposing the surcharge and the resulting revenue must be used for costs associated with a public transit system under a "transit improvement program." The sales and use tax surcharge may not exceed 2.75%. Combined with pre-existing local and state rates, this surcharge may result in an effective state and local sales tax rate in some jurisdictions of 12.5%. In addition, the combination of sales tax and hotel occupancy taxes — including state taxes — may not exceed a combined 20% on hotels, motels or other tourist accommodations. The business tax, rental car tax, and residential development tax may not exceed 20% of the current maximum applicable rate. The combination of the motor vehicle tax and motor vehicle tax surcharge may not exceed $200. The Act authorizes the specified local governments to begin pursuing local option transit surcharges effective immediately. Other tax changes in the Act include a $0.06 increase in the gasoline tax and a $0.10 increase in the diesel tax, each phased in over three years, as well as a reduction in sales tax on grocery food from 5% to 4% effective July 1, 2017, and an increase in property tax relief for disabled veterans by increasing the valuation threshold under the program from $100,000 to $175,000. For more on this development, see Tax Alert 2017-721. See also Tenn. Dept. of Rev., Important Notice 17-07 (April 2017) and Notice 17-09 (May 2017). California: In reversing its policy, the California Franchise Tax Board (FTB) announced that it will follow the IRC procedures for a change of accounting method involving unclaimed but allowable depreciation or amortization deductions set forth in Revenue Procedure 2016-26. Automatic consent is not provided; thus, an accounting method change under Revenue Procedure 2016-26 (or any other iteration) can only be made if the taxpayer has a deemed California election (i.e., when California conforms to a proper federal election) or with the FTB's prior consent. Lastly, FTB Notice 96-3, in which the FTB said it would not follow the federal procedures for making the accounting method change in Revenue Procedure 96-31, has been withdrawn. Cal. FTB, Notice 2017-03 (April 27, 2017). New Jersey: The New Jersey Tax Court (court) concluded that gain from the deemed sale of assets of a New Jersey S corporation pursuant to an election under IRC § 338(h)(10) is nonoperational (nonbusiness) income wholly allocated to New Jersey as the domiciliary state of the corporation. Citing the New Jersey appellate decision in McKesson1 as controlling, the court concluded that applying the Corporation Business Tax sourcing rules to the deemed gain on sale of assets under an IRC §338(h)(10) election is consistent with the taxation of such income as net gains from the disposition of property under the state's separate Gross Income Tax imposed on personal income. The court also voided an assessment of additional tax based on income attributable to three trust shareholders of the S corporation, finding that their retroactive S corporation election cured their prior failure to elect to be consenting shareholders as required by statute. Finally, the court abated the S corporation's underpayment penalties and found the shareholders' tax position reasonable based on the lack of certainty in the regulations and lack of judicial guidance. Xylem Dewatering Solutions, Inc. et al. v. N.J. Dir., Div. of Taxn., Nos. 011704-2015, 000056-2016, and 000057-2016 (N.J. Tax Ct. April 7, 2017). New York: New law (AB 3009/SB 2009, "the bill") makes various changes to New York state's corporate and individual income and franchise tax provisions. Effective for taxable years beginning on and after Jan. 1, 2017, the term "real property located in this state" is expanded to include an interest in a partnership, S corporation, limited liability company, or non-publicly traded C corporation with 100 or fewer shareholders (collectively, entities) that owns shares of stock in a cooperative housing corporation where the cooperative units related to the shares are located in New York provided that the sum of the fair market value (FMV) of such real property, cooperative shares, and related cooperative units equals or exceeds 50% of all of the entity's assets on the date of the sale or exchange of the taxpayer's interest in the entity. In addition, the bill treats any gain recognized on the sale or transfer of a nonresident partner's membership interest in a partnership that is subject to IRC §1060 as New York source income. Such gain is allocated in a manner consistent with the applicable statutory method in the year the assets were sold or transferred. Effective for taxable years beginning on or after Jan. 1, 2016, the bill modifies provisions related to qualified financial instruments (QFI) held by a RIC or a REITs provided that such RIC or REIT is not a captive RIC or REIT by defining QIF for single sales factor apportionment purposes and providing for a fixed dollar minimum on such RICs and REITs. Lastly, the bill extends for two years through 2019 the increased 8.82% tax rate imposed on high wage earners as well as the limitation on high income charitable contribution deduction, and for tax years 2018-2024 it gradually reduces the 6.45% and 6.65% tax rates to 5.5% and 6%, respectively. N.Y. Laws 2017, Ch. 59 (AB 3009/SB 2009), signed by the governor on April 10, 2017. Colorado: Online travel companies (OTCs) are required to collect Denver lodger's tax on the full customer purchase price including both the amount the OTCs contract for with the hotel to charge (net rate) and the amount of the OTCs' markup. In reaching this conclusion, the Colorado Supreme Court (Court) found inclusion of the net rate and the OTCs' markup was a fair and reasonable reading of the statute and embodied legislative intent, as purchasers must pay the full purchase price in a hotel room sale and cannot decline to pay either the net rate or the markup. The Court also determined that OTCs are properly characterized as "vendors" in merchant-model transactions and, therefore, are required to collect and remit taxes directly to the City of Denver, because OTCs deal directly in the transaction with the consumer-purchaser, set the price (consideration) for the room sale, collect the purchase price amounts directly from the consumers, and add to the purchase price amounts they determine to be sufficient for the lodger's tax. Denver v. Expedia, Inc., No. 14SC634 (Colo. S. Ct. April 24, 2017). Indiana: New law (HB 1129) establishes an economic nexus sales and use tax rule for remote retailers, effective July 1, 2017. Under the new provision, a retail merchant that does not have a physical presence in Indiana will collect and remit the gross retail tax on retail transactions made in Indiana, if the retail merchant meets either of the following conditions for the current or preceding calendar year: the retail merchant has gross revenue exceeding $100,000 from, or enters into 200 or more separate transactions from, any combination of the sale of tangible personal property delivered into Indiana, product transferred electronically into Indiana, or a service delivered in Indiana. The Indiana Department of Revenue (Department) may bring a declaratory judgement action in any Indiana circuit or superior court against a person in order to establish if the person has an obligation to collect and remit tax. During the pendency of the declaratory judgement action, the Department is prohibited from enforcing collection and remittance requirements against any person that does not affirmatively consent or otherwise remit the tax on a voluntary basis. A retail merchant that voluntarily or otherwise remits tax under these provisions is not liable to a purchaser who claims the tax was over collected. Ind. Laws 2017, P.L. 247 (HB 1129), signed by the governor on April 28, 2017. New York: New law (AB 3009/SB 2009) makes clear that sales and use tax applies to the sale of gas service or electric service of whatever nature if the charge is by the vendor for transportation, transmission or distribution regardless of whether such transportation is provided by the vendor or a third party. This change took immediate effect. N.Y. Laws 2017, Ch. 59 (AB 3009/SB 2009), signed by the governor on April 10, 2017. Tennessee: New law (HB 318) delays the effective date of certain Streamlined Sales Tax conformity changes to July 1, 2019 (from July 1, 2017). Provisions that will be delayed include sourcing sales to the delivery or shipping destination, modifications to the single article limitation on local option sales taxes, use of a single sales/use tax return covering multiple dealer locations and implementation of certain privilege taxes in lieu of sales taxes. Tenn. Laws 2017, Ch. 196 (HB 318), signed by the governor on April 19, 2017. See also, Tenn. Dept. of Rev., Important Notice No. 17-06 (April 19, 2017). Federal: The US Department of Treasury's Community Development Financial Institutions Fund (CDFI Fund) has released its Notice of Allocation Availability (NOAA) for the calendar year 2017 round of the New Market Tax Credit (NMTC) program, announcing an allocation of up to $3.5 billion for the CY 2017 round. For more on this development, see Tax Alert 2017-750. New York: New law (AB 3009/SB 2009, the bill) extends and/or modifies various New York tax credits and incentives. Applicable to taxable years beginning on or after Jan. 1, 2018, the Excelsior Jobs Program Act is expanded to include life sciences companies (i.e., an entity that devotes the majority of its efforts in the various stages of research, development, technology transfer and commercialization related to any life sciences field), making qualifying companies eligible for the Excelsior investment tax credit, R&D tax credit, jobs tax credit and real property tax credit. The bill also expands the employee training incentive program to include life sciences companies. Other changes include: (1) extending the Empire State film production tax credit and post-production tax credit for three years, through 2022; (2) renaming the Urban Youth Jobs Program the New York Youth Jobs Program tax credit and extending the program for five years, through 2022 (effective immediately); (3) establishing the Empire state apprenticeship tax credit, applicable to taxable years beginning on and after Jan. 1, 2018; (4) modifying the Investment Tax Credit (ITC) provisions by providing that the ITC is not allowed for the production or distribution of electricity or steam or the delivery of natural gas after extraction from wells and the production of water through pipes or mains (this change took immediate effect); (5) treating a single member limited liability company (SMLLC) that is disregarded for federal income tax purposes as a disregarded SMLLC for purposes of determining whether its owner qualifies for certain state tax credits (this provision took immediate effect and applies to tax years for which the statute of limitations has not run); (6) allowing a qualified entity that has previously been designated as a New York state incubator and has not fully disbursed any awarded grants to continue being designated as such for an additional three years; (7) increasing the limit of the Excelsior R&D credit to not exceed 6% (from 3%) of the qualified R&D expenditures attributable to activities conducted in New York, applicable to taxable years beginning on or after Jan. 1, 2018; and (8) expanding the eligibility to participate in the Excelsior jobs program, and defining the term "significant capital investment," this change took immediate effect. N.Y. Laws 2017, Ch. 59 (AB 3009/SB 2009), signed by the governor on April 10, 2017. Tennessee: New law (HB 844) requires the tax commissioner to file an annual report providing information regarding franchise and excise tax credits claimed for tax periods ending in the previous fiscal year. The report, which is due by Jan. 1, 2018 and each January 1 thereafter, must contain the following information: (1) the number of taxpayers claiming the credit; (2) the total amount of credit claimed; (3) the number of jobs created during the fiscal year by the taxpayer (only if it involves a credit based on jobs created); (4) the total amount of credit carry forward for prior years; and (5) the nature of business of the taxpayer claiming the credit (if available). HB 844 took effect upon becoming law. Tenn. Laws 2017, Ch. 251 (HB 844), signed by the governor on May 2, 2017. Indiana: New law (SB 449) effective July 1, 2017, prohibits boards of county commissioners, county assessors, or township assessors from entering into contracts for property tax audit services for the discovery of property that has been undervalued or omitted from assessment that otherwise provide for payments based in any way on increases of the assessed value or the property tax revenue that is attributable to the discovery of property that has been undervalued or omitted from assessment. The law essentially imposes state law restrictions on the use of contingent fee auditors by county commissioners and county and township assessors. Such prohibition continues to apply to contracts for services on a percentage basis. Contracts entered into after June 30, 2017 cannot exceed three years, including any extensions. Ind. Laws 2017, P.L. 119 (SB 449), signed by the governor on April 21, 2017. Montana: New law (SB 252) expands the current waiver from filing a composite return or tax withholding to include certain domestic second-tier pass-through entities held directly or indirectly by domestic C corporations and other entities. Specifically, SB 252 amends the definition of a "domestic second-tier pass-through entity" to mean "a pass-through entity whose interest is entirely held, either directly or indirectly, by one or more resident individuals, domestic C corporations, or any other entities, organizations, or accounts whose principal place of business or administration is located in … Montana or any combination of interests held by resident individuals, domestic C corporations, or any other entities, organizations, or accounts whose principal place of business or administration is located in … Montana." A "domestic C corporation" is a corporation that is engaged in or doing business in the state. HB 252 took effect immediately and applies retroactively to tax years beginning after Dec. 31, 2016. Mont. Laws 2017, Ch. 185 (SB 252), signed by the governor on April 11, 2017. Tennessee: New law (HB 320) permits franchise and excise taxpayers to elect to calculate the excise tax component of quarterly estimated franchise and excise tax payments based on an annualized method as provided by IRC §6655(e)(2) (Failure by a corporation to pay estimated income tax). For taxpayers that make this election, the franchise tax component of each quarterly estimated payment is the lesser of: (1) 25% of the franchise tax shown on the tax return for the preceding year, annualized if the preceding tax year was for less than 12 months; or (2) 25% of 80% of the franchise tax liability for the current tax year. In addition, HB 320 amends the due date for excise tax exemption applications, requiring applications be filed on or before the 15th day of the fourth month following the close of the first tax year for which the exemption is claimed (previously, within 60 days of the beginning of the first tax year for which the exemption was claimed). Finally, HB 320 reduces the penalty for failing to timely file excise tax exemption applications to $200 (previously $1,000). HB 320 took immediate effect and applies retroactively to tax years beginning on or after Jan. 1, 2017. Tenn. Laws 2017, Ch. 194 (HB 320), signed by the governor on April 19, 2017. Multistate: The Governmental Accounting Standards Board (GASB) issued guidance that "clarifies, explains, or elaborates" on GASB statements, including GASB 77. The guidance contains new questions and answers that address characteristics of a tax abatement as defined in GASB 77 and the applicability of the GASB 77 requirements in cases where one government's agreements with individuals and entities result in a second government foregoing tax revenues. GASB, Implementation Guidance Update No. 2017-1 (April 2017). Maryland: The Maryland General Assembly passed HB 1, which effective Jan. 1, 2018, would require employers of 15 or more employees to provide paid sick leave to their employees. Employers of 14 or less employees would be required to provide unpaid sick leave to their employees. The bill now rests on Governor Hogan's desk, where it is expected that he will veto it. Legislators have pledged to override his veto at the start of the 2018 legislative session. For more on this development, see Tax Alert 2017-729. New York: New law (AB 3009/SB 2009) imposes a surcharge on the retail sale of each prepaid wireless communication service at a rate of 90 cents per retail sale. A sale of prepaid wireless service occurs in New York if the sale takes place at the seller's New York business location. If the sale does not take place at a business, then the sale is deemed to take place at the purchaser's shipping address; if the item is not shipped, the sale is deemed to take place at the purchaser's billing address. If the seller does not have the billing address, then the sale is deemed to take place at an address approved by the commissioner. The surcharge must be added as a separate line item. The surcharge applies to wireless communications services provided on and after Dec. 1, 2017. N.Y. Laws 2017, Ch. 59 (AB 3009/SB 2009), signed by the governor on April 10, 2017. New York: New law (AB 3009/SB 2009) imposes a surcharge on the retail sale of each prepaid wireless communications service, and imposes a state assessment fee on transportation network company (TNC) services. Applicable to wireless communications services provided on and after Dec. 1, 2017, a surcharge is imposed on the retail sale of each prepaid wireless communications service at a rate of 90 cents per retail sale. A sale of prepaid wireless service occurs in New York if the sale takes place at the seller's New York business location. If the sale does not take place at a business, then the sale is deemed to take place at the purchaser's shipping address; if the item is not shipped, the sale is deemed to take place at the purchaser's billing address. If the seller does not have the billing address, then the sale takes place at an address approved by the commissioner. Provisions also regulate TNC services and impose a state assessment fee of 4% of the gross trip fare of every TNC prearranged trip that originates anywhere in the state outside the city (a city of 1 million or more located in the metropolitan commuter transportation district (which is essentially limited to New York City)) and terminates anywhere in the state. A "TNC" is defined as a person or entity that "is operating in New York State exclusively using a digital network to connect [TNC] passengers to [TNC] drivers who provide TNC prearranged trips." The changes related to TNCs take effect July 9, 2017. N.Y. Laws 2017, Ch. 59 (AB 3009/SB 2009), signed by the governor on April 10, 2017. Multistate: On May 24, 2017, from 1:00-2:30 p.m. EDT New York (10:00-11:30 a.m. PDT Los Angeles) EY will host a webcast discussing recent state tax policy matters and current tax topics of interest. On this webcast, Greg Matson, Executive Director, and Helen Hecht, General Counsel, of the Multistate Tax Commission (MTC), will join Ernst & Young LLP panelists to discuss current MTC uniformity projects, including its partnership audit information project and its Section 18 uniformity regulatory project, the adoption of the MTC's Section 17 Model Market-Sourcing regulations; and the latest on its new State Intercompany Transactions Advisory Service Committee work with a focus on state transfer pricing. Other projects and developments as well as its National Nexus and Joint Audit programs will also be discussed. The panelists also will discuss tax policy matters, including an overview of the current state of the economy, 2017 legislative trends, the renewed focus by the states on enacting gross receipts taxes on business activities, an update on sales tax nexus expansion, and the impact of federal tax proposals on the states as well as providing an update on major judicial and administrative developments at the state level. Click here to register for this event. Multistate: On June 21, 2017, from 1:00-2:30 p.m. EDT New York (10:00-11:30 a.m. PDT Los Angeles), EY will host a webcast on US multistate payroll tax developments. In this webcast, our panelists will explain the general concept of nexus, its symbiotic ties to employment, how sourcing rules differ for income tax withholding and employer tax purposes and how proposed federal legislation could reduce compliance burdens for both businesses and employees. The panelists also will share the key findings from the EY/Bloomberg BNA 2016 Multistate Payroll Tax Compliance Survey identifying trends in compliance, governmental audits and payroll tax policy design. Specific topics of focus will include: (1) 2016 survey results — key compliance trends, (2) 2016 survey results — state and local tax audit trends, (3) 2016 survey results — policies governing business travelers, (4) business tax nexus generally, (5) employment and voluntary income tax withholding and their impact on nexus, (6) sourcing for income tax withholding vs. unemployment insurance, (7) policy design considerations, and (8) where and how benchmarking can matter. 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. 1 McKesson Water Prods. Co. v Director, Div. of Taxation, 408 N.J. Super. 213 (App. Div. ), certif. denied, 200 N.J. 506 (2009) Document ID: 2017-0805 |
