25 May 2017 State and Local Tax Weekly for May 12 Ernst & Young's State and Local Tax Weekly newsletter for May 12 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 Texas Supreme Court (Court) ruled in ETC Marketing v. Harris County Appraisal District that the Harris County property tax as applied to surplus gas stored in Texas for future sale did not violate the Commerce Clause of the U.S. Constitution because it met all four prongs of the Complete Auto test (i.e., the taxpayer had substantial nexus with the state and the tax was fairly apportioned, nondiscriminatory and fairly related to the services provided by the state). ETC Marketing, Ltd. v. Harris County Appraisal District, No. 15-0687 (Tex. S. Ct. 2017). In upholding the imposition of the tax, the Court applied the "in transit" test, finding the taxpayer stored gas in Harris County while waiting for market forces to cause the demand and price to increase, and the storage was not due to a physical requirement of transporting the gas. Previous decisions from the Texas Court of Appeals (App. Ct.), including its earlier rulings in ETC Marketing and Peoples Gas, turned on whether the taxpayer, not the property, had substantial nexus with the state. The Court's ruling, however, rejected the App. Ct.'s reliance on the physical presence of the taxpayer (instead of being focused on the nature of the property subjected to the tax), finding such reliance was "misplaced." The Court also "disapproved" the App. Ct.'s analysis on the holding in Peoples Gas to the extent it was inconsistent with this decision. The Court observed that prior to Complete Auto, the established method for determining whether the Commerce Clause prohibited the taxation of property in interstate commerce was an "in transit" test established under Minnesota v. Blasius. [See Minnesota v. Blasius, 290 U.S. 1 (1933).] According to the Court, this test provides that property in transit is not taxable because it is in the flow of interstate commerce. On the other hand, property that lacks continuity of transit is considered outside of the flow of interstate commerce and, therefore, may be taxable. Lacking dispositive evidence that the Complete Auto test supplanted the "in transit" test, the Court harmonized these two tests. Notably, the "in transit" test is implicated twice in this analysis. First, as a threshold matter, the test is used to determine whether the property is in the stream of interstate commerce, thereby implicating the Commerce Clause or "dormant Commerce Clause." Second, the test is used to determine whether the substantial nexus prong of the Complete Auto test is satisfied. The Court discussed in detail the physical process of storing gas and the reasons the taxpayer stored the gas. The Court focused on whether the storage of the gas was a physical requirement of transit of the gas or simply for the convenience of the taxpayer. Since the taxpayer voluntarily stored the gas at its own convenience, the Court found that the taxpayer's storage of the gas broke continuity of transit and, therefore, established a taxable situs where it was stored. The Court examined precedential cases in which property was deemed to have remained in transit or to have broken continuity of transit, finding that the taxpayer's facts aligned with the latter line of cases. For additional information on this development, see Tax Alert 2017-790. Multistate: Panelists on Ernst & Young LLP's (EY) recent State income seminar series: analyzing tax base issues webcast provided insight on state taxation of international activities. Topics discussed included the varying state tax treatment of Subpart F income, the complexities of "80/20" companies and the increasing attention state legislatures are paying to tax havens. The panel also considered the state tax implications of the base erosion and profit shifting (BEPS) program of the Organisation for Economic Co-operation and Development (OECD) and issues taxpayers face with state conformity to US international tax treaties. Panelists also addressed the impact certain federal tax reform proposals would have on the state tax base. The webcast is now available for replay on the EY Thought Center website. A summary of the webcast is available at Tax Alert 2017-766. Iowa: New law (HF 608) updates the state's conformity date to the IRC to Jan. 1, 2016 (formerly Jan. 1, 2015) for purposes only of each of Iowa's own research activities and solar energy systems tax credits. The IRC conformity date for general corporate and individual income tax purposes remains Jan. 1, 2015 (note: in 2016, enacted legislation (HF 2433) temporarily updated the IRC conformity date for general corporate and individual income tax purposes to Jan. 1, 2016, effective for the period beginning Jan. 1, 2015 and ending Dec. 31, 2015). The updated conformity date does not incorporate any amendment to the IRC enacted after the adoption date, including those that are retroactively effective. In addition, the state continues to decouple from the 2015 bonus depreciation provisions under IRC §168(k), effective for purposes of computing state net income for tax years ending on or after Jan. 1, 2015. The changes to the research activities credit are retroactively applicable to Jan. 1, 2016. Iowa Laws 2017, HF 608, signed by the governor on May 11, 2017. Montana: New law (HB 511) adopts recent amendments to the Multistate Tax Compact (Compact) recommended by the Multistate Tax Commission (MTC). Most notably, effective for years beginning on and after Jan. 1, 2018, Montana replaces current costs-of-performance rules for sourcing sales of non-tangible property and services with market-based sourcing provisions, thus such sales are in Montana if the non-tangible property or service is delivered or shipped to a purchaser in the state. Receipts from certain intangibles are sourced based on usage in Montana. Intangibles enumerated for this purpose include intangibles utilized in marketing a good or service to a customer, intangibles that authorize a user to conduct a business activity in Montana and intangibles that are contingent on the productivity, use or disposition of the intangible property. All other income from intangibles is excluded from the numerator and denominator of the apportionment factor. "Reasonable approximation" will be used to determine the state(s) of assignment when the state of assignment cannot be determined. A throwout rule is adopted and applies if the taxpayer is not taxable in the state to which the receipt was assigned or if the state of assignment cannot be determined or reasonably approximated. Other changes to the Compact adopted by Montana (but consistent with the MTC's updates) include: (1) replacing the term "business income" with the broader term "apportionable income," defined to include all income apportionable under the U.S. Constitution unless otherwise provided by Montana law; (2) replacing the term "nonbusiness income" with "nonapportionable income," defined as all income other than apportionable income; (3) replacing the term "sales" with "receipts", defined as "all gross receipts of the taxpayer that are not allocated … and that are received from transactions and activity in the regular course of the taxpayer's trade or business, except that receipts from [hedging and securities transactions are] excluded;" (4) updating alternative apportionment provisions by specifying that the same burden of proof applies equally to the State and the taxpayer in showing that alternative apportionment is appropriate; and (5) prohibiting the imposition of penalties when the State asserts alternative apportionment where the taxpayer exercises "reasonable reliance" on the prescribed statutory apportionment rules. In addition, statutory provisions for calculating Montana source income for partnerships, S corporations, and certain disregarded entities (collectively, "entities") are modified to require such entities with business activity occurring both within and outside the state to calculate their Montana source income based on the allocation and apportionment provisions that apply for corporate income tax purposes. Mont. Laws 2017, Ch. 268 (HB 511), signed by the governor on May 3, 2017. Nebraska: New law (LB 234) updates the state's date of conformity to the IRC to May 10, 2017 (from Feb. 26, 2015). Neb. Laws 2017, LB 234, signed by the governor on May 10, 2017. Oregon: An out-of-state wholesale tire distributor that does not have property or employees in Oregon has nexus with the state because warranty services provided by an unrelated independent contractor on its behalf exceeded the protections of Pub. L. 86-272. In reaching this conclusion, the Oregon Tax Court (Court) determined that the wholesaler used an intermediary, in this case the independent contractor, to fill out warranty claims and transmit the tires back to the wholesaler, and the wholesaler provided a credit or a payment for the claims to the intermediary, and not the purchaser of the tires. The Court citing the wholesaler's payments and credits for the defective tires to the independent contractor, rejected the wholesaler's argument that the warranty work was not done on its behalf. Cheng Shin Rubber USA, Inc. v. Oregon Department of Revenue, TC-MD 150268D (Or. Tax Ct., Magistrate Div., March 31, 2017; final order entered May 11, 2017) Georgia: New law (HB 340) amends the definition of the term "fair market value of the motor vehicle" for purposes of calculating the title ad valorem tax (TAVT) on leased motor vehicles (Ga. Code Ann. §48-5C-1(a)(1)). HB 340 adds a new provision that specifies "[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 changes 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. HB 340 does not include specific provisions addressing how the new definition is to be administered, thereby raising a number of issues and questions related to the TAVT for leases of new motor vehicles. This change takes effect Jan. 1, 2018. Ga. Laws 2017, Act 197 (HB 340), signed by the governor on May 8, 2017. Illinois: An electronics company's sales of extended warranty contracts and conditional extended warranty contracts are sales of maintenance agreements not subject to the Illinois Retailer's Occupation Tax (ROT) or Service Occupation Tax (SOT). A customer's enrollment in a product upgrade program does not subject the sales to the ROT or the SOT, because the purchase of an extended warranty contract under the upgrade program does not change the fact that the purchase price of the product itself does not include the extended warranty contract, or that the extended warranty contract must be purchased separately from the product. Once the electronics company performs services under the warranty, it will be acting as a service provider and will be subject to the SOT on tangible personal property that is transferred. Ill. Dept. of Rev., Private Letter Ruling No. ST 17-0001-PLR (Feb. 9, 2017) (released April 2017). Massachusetts: A manufacturer's lease of mobile point of sale devices (device) that include pre-loaded prewritten software to a restaurant is subject to Massachusetts sales and use tax because both the device and the software are tangible personal property. The Massachusetts Department of Revenue (Department) determined that the pre-loaded software is pre-written software as it is neither designed nor developed by the manufacturer to the specifications of any specific restaurant, the manufacturer does not perform any modifications or enhancements to the software for any restaurant, and premium content on the device is available to each restaurant that elects to lease the device. In addition, charges for the premium license fee, which allows access and use of premium content software on the device, is subject to sales and use tax when the premium license fee includes the ability to access both taxable and nontaxable items (e.g., educational applications, puzzles, videos, and games) and is available only to customers who agreed to pay the fee. The Department noted that this is an additional taxable transfer of a license or right to use prewritten software and, as such, it must be separately stated on a restaurant customer's bill. Mass. Dept. of Rev., Letter Ruling No. 17-1 (March 23, 2017). Missouri: A separately stated fee that an out-of-state corporation charges airline and aircraft customers when reselling jet fuel to them is subject to Missouri state and local sales tax. The corporation pays the separately stated fee to its supplier upon purchase of fuel, and then separately states the fee when it resells the jet fuel to airlines and other aircraft users. Because the fee is part of the corporation's sales price for the fuel, the amount charged should be included in its gross receipts despite the fee being a separately stated charge from the fuel charge. Mo. Dept. of Rev., Private Letter Ruling No. 7807 (April 13, 2017). Maryland: New law (SB 758) provides a tax credit for energy storage systems. The credit, which will be available to projects installed in 2018 through 2022, equals 30% of the installed cost of the storage system and is capped as follows: $5,000 for residential projects, $75,000 for commercial projects, and $750,000 annually for the program. The credit covers a range of storage technologies, requiring only that the system be used to store "electrical energy, or mechanical, chemical, or thermal energy that was once electrical energy, for use as electrical energy at a later date or in a process that offsets electricity use at peak times." Md. Laws 2017, Ch. 389 (SB 758), signed by the governor on May 4, 2017. For additional information on this development, see Tax Alert 2017-760. Tennessee: New law (SB 1215) establishes a tax credit for the purchase of qualified broadband internet access equipment (e.g. asynchronous transfer mode switches, digital subscriber line access multiplexers, routers, servers, multiplexers, fiber optics, and related equipment) for use in Tier 3 or Tier 4 enhancement counties. The credit is equal to 6% of the equipment purchase price, and the amount of credit claimed on any franchise and excise tax return cannot exceed 50% of the combined franchise and excise tax liability shown on the return before the credit is taken. Any unused credit can be carried forward in any tax period until the credit is taken, up to 15 taxable years. The total credit available to all taxpayers is capped at $5 million in a calendar year. Prior to claiming the credit, a taxpayer must submit an application to the revenue department by October 15 following the calendar year in which the qualified broadband internet access equipment was placed into service. Taxpayers will receive notice of the amount of credit they may claim by the following December 15. These provisions apply to qualified broadband internet access equipment place into service on or after April 24, 2017. Tenn. Laws 2017, Ch. 228 (SB 1215), signed by the governor on April 24, 2017. West Virginia: New law (HB 2734) authorizes dealers of heavy equipment rental inventory to collect a fee from renters to pay the dealers' property taxes on rental equipment. The dealer may assign a fee to each item (not exceeding 2.5% of the rental charge), state the fee as a separate line item on the invoice or other billing statement, and collect the fee from the renter when the renter makes the payment. In addition, HB 2734 establishes parameters for collection and remittance of the rental fees. Fees remitted to a county in excess of the dealer's actual property tax liability will not be refunded. Lastly, the fees are excluded from the amount subject to state or municipal sales or use taxes. HB 2734 takes effect July 5, 2017. W. Va. Laws 2017, Ch. 228 (HB 2734), signed by the governor on April 26, 2017. Massachusetts: New law (HB 3448) updates the filing due dates for C corporations and partnerships to conform to recent congressionally mandated changes to the corresponding federal return filing due dates. Effective Jan. 1, 2018, the Massachusetts return due date for C corporations and financial institutions is the 15th day of the fourth month after the close of the corporation's/financial institution's tax year (for insurance companies and other corporations not taxed under Ch. 63, the due date is April 15) (previously, the dates were the 15th day of the third month/March 15, respectively). Massachusetts partnership and S corporation tax returns are due on the 15th day of the third month after the close of the partnership's/ S corporation's tax year (previously, partnership returns were due the 15th day of the fourth month). Mass. Laws 2017, Ch. 5 (HB 3448), signed by the governor on March 28, 2017. Multistate: According to the US Department of Labor website, the state of California repaid its outstanding federal loan balance of more than $878 million as of May 5, 2017. According to a representative of the California Legislative Analyst's Office, the state is expected to borrow again this year and have a loan balance as of Nov. 10, 2017. As a result, California employers are expected to again face a federal unemployment insurance credit reduction for calendar year 2017, payable in 2018. For additional information on this development, see Tax Alert 2017-772. Missouri: New law (HB 130) regulates transportation network companies (TNCs) and requires qualified TNCs to obtain a license from, and pay a $5,000 license fee to, the Missouri Department of Revenue (Department) by Aug. 28, 2017. The fee is imposed annually and covers all TNC drivers (thus, no per driver or per vehicle fee is assessed). A TNC is defined as a licensed corporation, partnership, sole proprietorship, or other entity operating in Missouri that uses a digital network to connect TNC riders to TNC drivers who provide prearranged rides. In addition, TNC drivers will be considered independent contractors, not employees, of the TNC if certain conditions are met, including the TNC does not set specific work hours, the TNC does not impose restrictions on the TNC driver's ability to use the digital networks of other TNCs or from engaging in other work and the independent contractor status is agreed to in writing. HB 130 also prohibits municipalities or other local or state entities from imposing a tax on, or requiring a license for, a TNC, a TNC driver, or a vehicle used by a TNC driver where the tax or license relates to providing prearranged rides, or subjecting a TNC to the municipality or other local or state entity's rate, entry, operational, or other requirements. Any municipality or other local entity's ordinance or policy that is inconsistent with the applicable statutes is void and has no force or effect. HB 130 does not prohibit an income tax imposed by the state or an earnings tax. HB 130 takes effect Aug. 28, 2017. Mo. Laws 2017, HB 130, signed by the governor on April 24, 2017. Ohio: On May 2, 2017, the Ohio House passed Am. Sub. HB 49 containing its version of the 2018-19 biennial budget legislation, including a provision that would increase use tax collections by adopting a bright-line nexus standard for out-of-state sellers having annual Ohio sales over $200,000 (or 200 separate transactions). Sub HB 49 was passed by a vote of 58-37 and has been sent to the Ohio Senate for further consideration. Senate changes, if any, will then require that the legislation go to a Conference Committee of House and Senate members where differences will be ironed out before sending the final legislation to Governor John Kasich for signature by June 30, 2017. Sub HB 49 is the product of months of deliberations in the House after hearing input by many interested parties. The House version does not contain most of the tax-related proposals made by Governor Kasich in February (see Tax Alert 2017-226), including the proposed 17% in additional personal income tax rate reductions. For additional information on this development, see Tax Alert 2017-758. Tennessee: Tennessee's tax system, which imposes a sales tax on diesel fuel purchased by rail carriers and a motor fuel tax on diesel fuel purchased by motor carriers, does not discriminate against the rail carriers under the federal 4-R Act because the taxes are roughly equivalent. In reaching this conclusion, the U.S. District Court for the Middle District of Tennessee cited the U.S. Supreme Court's decision in CSX Transportation II, finding that by the parties' stipulation, motor carriers paid more tax per gallon than railroads in every year except one from 1941 through 2010, refuting rail carriers' overall disadvantage. Moreover, rail carriers can choose to use either dyed diesel fuel, which is not exempt from sales and use tax, or clear diesel fuel, which is exempt from sales and use tax but subject to the motor fuels tax. Ill. Central Railroad Co. v. Tenn. Dept. of Rev., No. 3:10-cv-00197 (M.D. Tenn. April 12, 2017). International: The Qatar Council of Ministers announced the approval of the Qatar Value Added Tax (VAT) Law and Excise Law and Executive regulations on May 3, 2017. The new laws are based on the Gulf Cooperation Council (GCC) VAT and Excise Tax Framework Agreements. The text of the Qatar laws is expected to be published in the Official Gazette in the near future. Until these laws are published, it is still unclear as to whether the VAT law represents the final VAT law to be adopted in Qatar or whether the Council of Ministers' approval constitutes only the formal adoption of the GCC VAT Framework Agreement. For additional information on this development, see Tax Alert 2017-753. Multistate: On Tuesday, June 6, 2017, from 1:00-2:30 p.m. EDT (10:00-11:30 a.m. PDT), EY will host a webcast discussing current developments in state and local tax controversy. The following topics will be discussed on the upcoming webcast, which will include participation from current and former government representatives: (1) Comparison of California, Pennsylvania and Texas appeals processes; (2) California State Board of Equalization update with Chairwoman, Diane Harkey; and (3) Update on the state and local tax impact of federal tax reform. To register for this event, go to State and local tax controversy. 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. Document ID: 2017-0865 |
