16 June 2017 State and Local Tax Weekly for June 2 Ernst & Young's State and Local Tax Weekly newsletter for June 2 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. On May 30, 2017, Governor Mark Dayton signed an omnibus tax bill (HF 1, 1st Spec. Sess.) (HF1), key provisions of which expand the reach of the state's sales and use tax to include marketplace providers and affiliates. A "retailer maintaining a place of business in this state" that makes retail sales in Minnesota or to a destination in Minnesota is required to collect and remit the state's sales and use tax to the revenue commissioner. HF1 expands the definition of "retailer maintaining a place of business in this state" to include a marketplace provider. The definition of "retailer maintaining a place of business in this state" as amended means a retailer: (1) Having or maintaining in Minnesota, directly or by a subsidiary or an affiliate, an office, place of distribution, sales, storage, or sample room or place, warehouse, or other place of business, including the employment of a resident of this state who works from a home office in this state; or (2) Having a representative, including … an affiliate, agent, salesperson, canvasser, marketplace provider, solicitor, or other third party operating in this state under the authority of the retailer or its subsidiary, for any purpose, including the repairing, selling, delivering, installing, facilitating sales, processing sales, or soliciting of orders for the retailer's goods or services, or the leasing of tangible personal property located in this state … A retailer is represented by a marketplace provider in this state if the retailer makes sales in this state facilitated by a marketplace provider that maintains a place of business in this state. (Emphasis indicates new text) A "marketplace provider" is defined as any person that facilitates a retailer's retail sale by: (1) listing or advertising for sale by the retailer in any forum, tangible personal property, services, or digital goods that are subject to Minnesota's sales and use tax; and (2) either directly or indirectly through agreements or arrangements with third parties collecting payment from the customer and transmitting that payment to the retailer regardless of whether the marketplace provider receives compensation or other consideration in exchange for its services. The term "total taxable retail sales" includes gross receipts from the sale of all taxable tangible goods, services, and digital goods. A safe harbor provision is provided for retailers with total taxable retail sales in Minnesota of less than $10,000 in the 12-month period ending the last day of the most recent calendar quarter if they are a "retailer maintaining a place of business in this state" due to its sales through a marketplace provider. (This safe harbor does not apply to a retailer that is or was register to collect sales and use tax in Minnesota.) HF1 also expands affiliate nexus provisions, which currently provide that an entity is an affiliate if it and the retailer are related parties and the entity uses its facilities or employees in the state to advertise, promote, or facilitate the establishment or maintenance of a market for sales of items by the retailer to purchasers in this state or for the provision of services to the retailer's purchaser in this state (e.g., accepting returns, resolving customer complaints). The revised provision is expanded to include entities that: (1) Have the same or a similar business name to the retailer and sells, from a location(s) in this state, taxable tangible personal property, digital goods, or services that are similar to that sold by the retailer; (2) Maintains an office, distribution facility, salesroom, warehouse, storage place or similar place of business in Minnesota to facilitate the delivery of tangible personal property, digital goods, or services sold by the retailer to its customers in Minnesota; (3) Maintains a place of business in this state and uses trademarks, services marks, or trade names in Minnesota that are the same or substantially similar to those used by the retailer, and that use is done with the express or implied consent of the holder of the marks or names; (5) Facilitates delivery of tangible personal property to the retailer's customers by allowing them to pick-up the property at a place of business the entity maintains in this state; or (6) Shares management, business systems, business practices, or employees with the retailer, or engages in intercompany transactions with the retailer related to the activities that establish or maintain the retailer's market in the state. HF1 includes procedures for the collection and remittance of sales and use tax for marketplace providers and marketplace retailers. The effective date of the above is the earlier of July 1, 2019 or the date of a decision by the United States Supreme Court modifying the Quill Corp. v. North Dakota1 decision. Florida: New law (HB 7099) updates the state's date of conformity to the IRC to the IRC of 1986, as amended and in effect on Jan. 1, 2017 (from Jan. 1, 2016). This change applies retroactively to Jan. 1, 2017. Fla. Laws 2017, Ch. 2017-67 (HB 7099), signed by the governor on June 2, 2017. Minnesota: An out-of-state bank and its affiliates, including two limited liability companies (LLCs) treated as partnerships for Minnesota tax purposes, are not subject to additional bank franchise tax, substantial understatement penalty and interest based on the Minnesota Commissioner of Revenue's (Commissioner) use of an alternative apportionment formula, because the Commissioner failed to prove the standard apportionment method did not fairly and correctly determine LLCs' Minnesota taxable income. In so holding, the Minnesota Tax Court (tax court) explained that under Minnesota law, the general apportionment provisions apply to the LLCs resulting in the exclusion of interest income when calculating the sales factor and the exclusion of intangible property when calculating the property factor. The Commissioner argued that application of the general apportionment method did not fairly capture the LLCs' Minnesota taxable income, and instead invoked the alternative apportionment provisions, asserting that they gave her "broad statutory authority to disregard business entities, like [LLCs], structured to minimize Minnesota tax liability." Citing HNM Financial2 the tax court held that the Commissioner cannot meet the alternative apportionment's burden of proof requirement by disregarding the bank's business organizational structure attained by using the LLCs. Further, the tax court held that the Commissioner cannot apply the financial institution's apportionment rules instead of the general apportionment rules to the LLCs since the LLCs are not financial institutions. The tax court reasoned that the state's alternative apportionment rule "does not authorize the Commissioner to effectively reverse legislative judgement that partnerships must not use the financial institution apportionment formula by adjusting the members' factors as if the partnership were financial institutions." Associated Bank, N.A. and Affiliates v. Minnesota Comm'r of Rev., No. 8851-R (Minn. Tax Ct. April 18, 2017). Minnesota: New law (HF1, 1st Spec. Sess.), was enacted in part in response to the Minnesota Tax Court's ruling in Associated Bank, by amending and expanding the definition of financial institution to include any corporate and non-corporate entities that are more than 50% owned by financial institutions or that derive more than 50% of their total gross income for financial accounting purposes from finance leases. Types of "financial institutions" in the revised definition also include: any corporation or other business entity registered as a bank holding company or savings and loan holding company; a national bank; a savings association or federal savings bank; corporations registered under 12 U.S.C. §§ 611-631; a bank or thrift institution; and any agency or branch of a foreign depository. For purposes of these provisions, a finance lease means any lease transaction that is the functional equivalent of an extension of credit and that transfers substantially all the benefits and risks incident to the ownership of property, including any direct financing lease or leverage lease that meets the criteria of Financial Accounting Standards Board Statement No. 13, accounting for leases, or any other lease that is accounted for as financing by a lessor under generally accepted accounting principles. Further, gross income does not include income from nonrecurring, extraordinary items. This change is effective for taxable years beginning after Dec. 31, 2016. Minn. Laws 2017 (1st Spec. Sess.), Ch. 1 (HF1), signed by the governor on May 30, 2017. New York City: The New York City Department of Finance (Department) explained in a "Statement of Audit Procedure" when adjustments to the basis of partnership assets under IRC §§734 and 743 affect the calculation of New York City unincorporated business tax (UBT) taxable income. Distributions of partnership assets and transfers of partnership interests have different potential effects on unincorporated business taxable income (UBTI) because they trigger different federal income tax consequences under IRC §§734 and 743. Under IRC §734(b), a partnership generally may not adjust the basis of its assets after a property distribution to a partner, unless the partnership made an election under IRC §754 or the transaction would result in a substantial basis reduction. In this instance, the partnership adjusts its common basis in its undistributed property, and does not make adjustments that apply separately to any particular partner. Under IRC §743(b), a partnership generally may not adjust its assets' basis when a partner transfers its interest in the partnership. This general rule, however, does not apply if an IRC §754 election has been made or the partnership has substantial built-in loss immediately following the transfer. In this case, the partnership makes a basis adjustment regarding the transferee partner only, without adjusting its common basis in property, and makes a separate distributive share calculation. The Department concluded that IRC § 734(b) basis adjustments will ultimately affect the partnership's subsequent calculations of income, gain, loss, and deduction, but an IRC § 743(b) basis adjustment will not have such an affect as it only impacts the transferee's income, gain, loss, and deduction. Thus, the UBT incorporates the IRC §734 basis adjustments into the computation of the UBTI. In addition, the Department noted that in analyzing transfer of partnership interest and assets, it will follow IRC §§707(a)(2)(B) and 755 (and related federal guidance), and Rev. Rulings 99-5 and 99-6 when the transfer results in the formation and dissolution of partnerships for tax purposes. N.Y.C. Dept. of Fin., UBT-2017-1 (May 5, 2017). Tennessee: A savings association should include trusts that are otherwise exempt from Tennessee's excise and franchise taxes in its financial institution affiliated group for purposes of the excise tax and its consolidated net worth election because the trusts were represented to be financial institutions that are unitary with the savings association. Even though the trusts are included in the affiliated group and included in the saving associate's combined FAE 174 ("Franchise and Excise Financial Institution and Captive Real Estate Investment Trust Tax Return"), the trusts' net earnings are excluded from the net earnings of the financial institution affiliated group, and its receipts are excluded from both the numerator and the denominator of the affiliated group's apportionment formula. Similarly, the trusts' net worth is excluded from the consolidated net worth calculation for franchise tax purposes, and its receipts are excluded from both the numerator and denominator of the combined group's apportionment formula. Tenn. Dept. of Rev., Letter Ruling No. 17-06 (April 19, 2017). Indiana: Interface software which a diagnostic medical testing company (company) purchases from third-party vendors so that its proprietary software can communicate with various medical facilities' software systems are a nontaxable service and do not constitute or include sales of taxable tangible personal property, prewritten computer software, or telecommunication services. The Indiana Department of Revenue (Department) determined that the charges for interface software are exempt because neither the company nor the medical facilities acquire the interface software for their own independent use and neither are granted any rights to use, control, or access the software. Rather, the software is used by the third party to provide translating services between various software platforms and, as such, the interface software is used incident to the service provided. The Department also found the company satisfied all of the requirements of the serviceperson test, which supports the conclusion that the interface software is nontaxable. Finally, the service is not a telecommunication service, as that does not encompass the third parties' interface services of "data processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser whose primary purpose for the underlying transaction is the processed data or information." Ind. Dept. of Rev., Rev. Ruling No. 2015-07ST (March 7, 2017). Indiana: The Indiana Department of Revenue (Department) found that although cloud-based software did not subject a company's mobile messaging service to Indiana's sales and use tax, the mobile messaging service nevertheless is subject to sales and use tax as a telecommunications service. The Department also found the company's separately listed printer usage fees are subject to sales or use tax as a charge for the rental of tangible personal property. Finally, the company is subject to Indiana utility receipts tax on the gross receipts from the mobile messaging service, as the definition of telecommunications services for purposes of the utility receipts tax includes transmission of such messages. Ind. Dept. of Rev., Rev. Ruling No. 2015-08ST (March 7, 2017). South Carolina: An energy company is entitled to a refund of use tax on its out-of-state purchases of canister systems it used to contain spent nuclear fuel rods following the manufacture of electricity because the canister systems qualify for the use tax exemption for pollution control machines. In reaching this conclusion, the South Carolina Administrative Law Judge (ALJ) found that the canister systems are machines that prevent or abate nuclear radiation originating from machines used to manufacture electricity and are necessary to comply with the regulations of a federal agency that has the responsibility to oversee control of this type of pollution. Duke Energy Corp. v. SC Dept. of Rev., No. 12-ALJ-17-0031-CC (SC Admin. Law Ct. April 28, 2017). Utah: A company that develops and operates a website marketplace (company) that enables various unrelated businesses (vendors) to offer products for sale to consumers is not required to collect and remit Utah sales or use tax on consumer marketplace purchases since the company does not make the sales between vendors and consumers. The Utah Tax Commission found that the company does not make the transfer of title, the exchange, or a barter of the vendors' products. Further, the company is not a retailer of the products sold through the marketplace, as it is not a commission merchant, an auctioneer, or a "person regularly engaged in the business of selling to users or consumers." Finally, the company is not required to collect and remit sales or use taxes on its sales of services to the vendors that offer products for sale through the marketplace, because the company's services of processing orders, providing vendors with purchase order information, and processing consumers' payments are not services specifically enumerated as subject to tax. Utah Tax Comn., Private Letter Ruling No. 16-003 (March 31, 2017). Maryland: New law (SB 873) increases the amount of the Job Creation Tax Credit (job credit), expands the job credit's eligibility requirements, and adds verification and reporting requirements. The amount of the job credit is increased to $5,000 (from $3,000) for each qualified employee employed in a revitalization area facility by a qualified business entity during the credit year, and increased to $3,000 (from $1,000) for other qualified employees. Amendments permit the job credit value to be claimed in one tax year (previously it could be claimed ratably over two years), and caps at $4 million the total amount of job credits certified by the state for qualified business entities in a taxable year. Credit eligibility is expanded by lowering the number of jobs required to be created in certain counties. SB 873 also lowers the qualified position wage threshold to at least 120% of the state minimum wage (previously, 150% of the federal minimum wage), and establishes a new job creation threshold (10 qualified positions in a county with an annual average employment that is less than 75,000 or a median household income that is less than two-thirds the statewide median household income and is engaged in certain specified industry sectors). Lastly, state credit verification and reporting requirements have been adopted. SB 873 takes effect July 1, 2017, and applies to job credits certified after Dec. 31, 2017. Md. Laws 2017, Ch. 489 (SB 873), signed by the governor on May 4, 2017. New York: The recently enacted FY 2018 New York State budget (AB 3009/SB 2009, enacted April 10, 2017), renames the Urban Youth Jobs Program the New York Youth Jobs Program (hereafter, "youth jobs program") and allocates $200 million to extend the program through 2022. This program recently expanded eligibility to all employers throughout the state hiring eligible part-time or full-time employees aged 16 to 24. For additional information on this development, see Tax Alert 2017-883. Texas: New law (SB 550) expands the type of entities that can purchase and use tax credits for the rehabilitation of historic structures to include entities subject to certain premium taxes under the Texas Insurance Code (property and casualty insurance premium tax; life, health, and accident insurance premium tax; title insurance premium tax; and reciprocal and interinsurance exchange premium tax). The historic rehabilitation tax credit provisions (including provisions related to total amount of credit that can be claimed, credit carryforward, and sale/assignment of credit) apply to the same extent they apply for franchise tax purposes. An entity that claims all or part of a historic rehabilitation tax credit is not required to pay any additional retaliatory tax under the Insurance Code as a result of claiming the credit. SB 550 took effect May 4, 2017. Tex. Laws 2017, SB 550, signed by the governor on May 4, 2017. Florida: New law (HB 7099) grants taxpayers an automatic six month extension to file a corporate tax return and amends estimated tax payment provisions. Specifically, HB 7099 amends Fla. Stat. §220.222 by deleting a provision that for taxable years beginning before Jan. 1, 2026, granted an automatic five month extension to taxpayers with a taxable year ending December 31. The law change leaves in place the automatic seven month extension for taxpayers with a taxable year ending June 30 (applicable for taxable years beginning before Jan. 1, 2026). This change applies retroactively to taxable years beginning on or after Jan. 1, 2016. In addition, HB 7099 amends estimated tax payment provisions to require any estimated tax payment that would otherwise be due on the last Saturday or Sunday of June to be paid on or before the last Friday of June. Fla. Laws 2017, Ch. 2017-67 (HB 7099), signed by the governor on June 2, 2017. Pennsylvania: Reminder - The Pennsylvania tax amnesty program will end 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 December 31, 2015. Amnesty does not apply to taxes, interest and penalties collected under the International Fuel Tax Agreement 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. Arkansas: New law (Act 643) prohibits Arkansas localities from passing and enforcing laws/ordinances (i.e., minimum wage increases, paid sick leave) that require employers to provide employment benefits exceeding those mandated under federal or state law. Act 643 does not retroactively preempt local ordinances enacted prior to the effective date of the Act; however, there is currently no Arkansas locality imposing a minimum wage higher than the state minimum. The Arkansas state minimum wage is currently $8.50 per hour. For additional information on this development, see Tax Alert 2017-890. Maryland: Vetoed bill (HB 1) would have required employers of 15 or more employees to provide paid sick leave to their employees. Employers of 14 or fewer employees would have been required to provide unpaid sick leave to their employees. Legislators continue to pledge to override this veto at the start of the 2018 legislative session (or sooner, if a special session is called later in 2017). For additional information on this development, see Tax Alert 2017-879. California: New law (SB 1), effective Nov. 1, 2017, increases fuel excise taxes and related transportation fees, including increasing the gasoline excise tax by $0.12 to $0.398 per gallon , the diesel excise tax by $0.20 to $0.36 per gallon, and the diesel sales tax by an additional 4% increment (currently, 6.5%). SB 1 also creates new motor vehicle fees, including: (1) an annual Transportation Improvement Fee ranging from $25 to $175 per year depending on the vehicle's market value, starting Jan. 1, 2018; and (2) a Road Improvement Fee of $100 per vehicle for zero-emission vehicles, effective July 1, 2020 for model year 2020 and later. Effective July 1, 2019, SB 1 eliminates California's annual "Gas Tax Swap" and re-establishes the Price Based Excise Tax at its original rate of $0.173 per gallon. All of the taxes and fees in SB 1 except for the diesel sales tax are adjusted annually based on the California Consumer Price Index. Cal. Laws 2017, Ch. 5 (SB 1), signed by the governor on April 28, 2017. Indiana: New law (HB 1002), effective July 1, 2017, increases the rates of the gasoline license tax, special fuel license tax, and motor carrier surcharge tax by the lesser of the rate resulting from a multiyear index factor or $0.10 more per gallon. The Indiana Department of Revenue announced that for the period July 1, 2017 through June 30, 2018, the new tax rates are as follows: (1) gasoline license tax $0.28/gallon (from $0.18); (2) special fuel license tax $0.26/special fuel gallon (from $0.16), and (3) motor carrier surcharge tax $0.21/surcharge gallon (from $0.11). Beginning July 1, 2018, and each July 1 through 2024, the Indiana Department of Revenue will adjust these rates, capping the increase at the rate in effect June 30 plus $0.01 per gallon. Additionally, effective July 1, 2017, provisions of HB 1002: (1) exempt special fuel from sales tax; (2) increase the aviation fuel excise tax to $0.20 per gallon (from $0.10 per gallon); and (3) increase annual fees for alternative fuel decals, certain motor vehicle registration fees, and electric and hybrid vehicle fees. Finally, HB 1002 changes the deadlines for local governments to adopt ordinances imposing, amending, or rescinding county motor vehicle excise surtax, the county wheel tax, the municipal motor vehicle license excise tax, and the municipal wheel tax. Ind. Laws 2017, P.L. 218 (HB 1002), signed by the governor on April 27, 2017. Nebraska: New law (LB 217) requires that, if an amendment to the IRC would impact state revenue by $5 million or more for the fiscal year that begins during the calendar year in which the amendment was enacted, the Nebraska Tax Commissioner must prepare and submit a report to various state officials within 60 days of the amendment. The report must list the changes to the IRC, and describe the impact these changes will have on state revenue and on various classes of taxpayers. LB 217 took effect April 27, 2017. Neb. Laws 2017, LB 217, signed by the governor on April 27, 2017. Federal: Following the May 18, 2017 notification to Congress of President Trump's intention to renegotiate the North American Free Trade Agreement (NAFTA), US Trade Representative (USTR) Robert Lighthizer published a notice in the May 23, 2017 Federal Register seeking public input into the development of US negotiating objectives and positions. 82 Fed. Reg. 23,699. A public hearing is set for June 27, 2017. For additional information on this development, see Tax Alert 2017-871. International: The General Authority of Zakat and Tax (GAZT) of Saudi Arabia is moving swiftly toward implementing the value-added tax (VAT) regime, conducting workshops and meetings to increase awareness among business groups on the implementation. It is imperative for businesses operating in the Gulf Cooperation Council (GCC) region to take immediate steps to become compliant with the respective GCC Member States' VAT laws. For additional information on this development, see Tax Alert 2017-889. International: The Polish Ministry of Finance published a draft law on May 12, introducing split payments into the Polish Value Added Tax (VAT) law, as of January 1, 2018. The new regulation will have a major impact on cash flow and the VAT settlements. Pursuant to the draft law, split payment will be applied on a voluntary basis. Buyers will have a choice to pay the VAT amount into a dedicated bank account of the seller. If they do so, they will enjoy the benefits. Therefore, due to business reasons, participation in the split payment process may in practice be obligatory for the sellers. For additional information on this development, see Tax Alert 2017-887. 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 U.S. multistate payroll tax developments. In this webcast, our panelists will explain the general concept of nexus, its symbiotic ties to employment taxes, 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, state and local tax audit trends, and policies governing business travelers; (2) business tax nexus generally; (3) employment and voluntary income tax withholding and their impact on nexus; (4) sourcing for income tax withholding versus unemployment insurance; (5) policy design considerations; and (6) 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: 2017-0976 |
