23 June 2017 State and Local Tax Weekly for June 9 Ernst & Young's State and Local Tax Weekly newsletter for June 9 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. Over Governor's veto, new Kansas law repeals the personal income tax exemption for pass-through entity income, modifies other provisions On June 6, 2017, both houses of the GOP-controlled Kansas legislature voted to override Governor Sam Brownback's veto of SB 30, which repeals many of the individual income tax changes enacted in 2012. Key changes in SB 30 reinstate the income tax on certain non-wage business income from pass-through entities, allow taxpayers to claim certain non-wage business income losses, increase individual income tax rates, and add a new individual income tax bracket. These changes apply retroactively to Jan. 1, 2017, unless otherwise noted. Starting in 2017, non-wage business income of individuals reported by partnerships, LLCs, Subchapter S corporations, and sole proprietorships on lines 12, 17, and 18 of federal Form 1040 is no longer exempt from the Kansas individual income tax. The now repealed pass-through entity income tax exemption only applies to tax years beginning after Dec. 31, 2012 and ending before Jan. 1, 2017. The new law also rolls back certain adjustment modifications enacted by the 2012 tax law changes by adding a sunset date after which these adjustments are no longer required. In addition, effective for tax years beginning after Dec. 31, 2016, the federal NOL deduction no longer has to be added back to federal adjusted gross income (FAGI) to determine Kansas taxable income for individual income tax purposes. The federal NOL deduction, however, still must be added back to FAGI for corporate income tax purposes. SB 30 also eliminates the individual income tax rate cuts that were scheduled to take effect in Kansas beginning in 2018. Instead, the new law increases individual income tax rates (currently 2.7% on income not over $30,000 and 4.6% on income over $30,000) and adds a new, third income tax bracket. Additionally, the new law adds items that can be taken as itemized deductions and increases the amount that can be claimed with full allowance by 2020. Lastly, provisions of SB 30 extend the sunset date of the Sales Tax Revenue (STAR) Bond Financing Authority to July 1, 2020 (from July 1, 2017), and prohibit the establishment of new STAR bond project districts from July 1, 2017 (the effective date of SB 30) through July 1, 2018. Cities and counties with preexisting STAR bond projects are not subject to this moratorium and may continue to develop these projects, utilizing all provisions of the STAR bond financing act For additional information on this development, see Tax Alert 2017-927. Connecticut: The U.S. Supreme Court will not review the Connecticut Supreme Court's ruling that income from an individual's stock options that were granted while he was a resident of Connecticut but exercised after he moved out-of-state are taxable compensation because the options were granted as compensation for performing services within Connecticut. Jefferson Allen et al. v. Conn. Comr. of Rev. Svcs., No. SC 19567 (Conn. S.Ct. Dec. 28, 2016), petition for cert. denied, Dkt. No. 16-1192 (U.S. S. Ct. June 5, 2017). Georgia: New law (SB 133) amends the corporate net worth tax to exempt from the tax corporations that have a net worth (including capital stock, paid-in surplus, and earned surplus) of no more than $100,000. The exemption takes effect on, and applies to all tax years beginning on or after, Jan. 1, 2018. Ga. Laws 2017, Act 241 (SB 133), signed by the governor on May 9, 2017. Michigan: The Michigan Department of Treasury issued a notice explaining that Health Maintenance Organizations (HMOs) remain subject to the corporate income tax's business income tax rather than the tax on gross direct premiums. A 2016 law (Public Act 276) amended the Michigan Insurance Code to define HMOs as "insurers," and this change raised the issue of whether HMOs are subject to the tax on gross direct premiums. Under the Insurance Code, HMOs are insurers and, as such, are "authorized insurers" subject to the tax on gross direct premiums under the corporate income tax (CIT) if the HMOs also are "duly authorized, by a subsisting certificate of authority issued by the commissioner, to transact insurance" in Michigan. The Michigan Department of Insurance and Financial Services, however, concluded that HMOs are not "duly authorized." Consequently, HMOs are not "authorized insurers" and are not subject to the 1.25% tax on gross direct premiums under the CIT. Rather, HMOs are subject to the CIT's business income tax. Mich. Dept. of Treas., Notice to Taxpayers Regarding Tax Treatment of HMOs Under the Corporate Income Tax (May 18, 2017). Minnesota: New law (HF 1, 1st Spec. Sess.) accelerates recognition of installment sale gain from the sale of the assets or, or an interest in, an S corporation or partnership for nonresident individuals and individuals who become a nonresident during the tax year. The taxable net income of these individuals includes the allocable amount realized upon such sale during the year of the sales, including any income or gain that will be recognized in future years under an installment sale. An individual who becomes a nonresident in any year after an installment payment is made is required to recognize the full amount of any income or gain on his/her final Minnesota resident tax return to the extent such income has not been recognized in a prior year. Individuals can make an election to defer recognizing unrecognized installment sale gain. Income or gain recognized under these provisions is excluded from taxable net income in any future years in which the taxpayer files a Minnesota return, to the extent such income has already been taxed. This change is effective for taxable years beginning after Dec. 31, 2016. Minn. Laws 2017 (1st Spec. Sess.), Ch. 1 (HF 1), signed by the governor on May 30, 2017. For information on other tax changes enacted as part of HF 1, see Tax Alert 2017-972. New Jersey: In BMC Software Inc., the New Jersey Tax Court held that payments made by a subsidiary to its parent under a license agreement that granted the subsidiary non-exclusive rights to license, market and distribute parent's prewritten software for use by the subsidiary's customers and to use parent's tradenames and trademarks in connection with such distribution qualify as an intangible expense/cost for purposes of New Jersey's related party intangible property add-back rules. The payments, however, are excepted from the addback requirement because they are "substantively equivalent" to payments made to unrelated third parties under similar transactions and to require addback would be unreasonable. BMC Software, Inc. v. Director, Div. of Taxn., No. 000403-2012 (N.J. Tax Ct. May 24, 2017). New Mexico: New law (SB 391) expands base income to include the amount of any deduction claimed in calculating taxable income for all expenses and costs directly or indirectly paid, accrued or incurred to a captive real estate investment trust (REIT). SB 391 also adds definitions of "captive REIT" and "REIT." This change applies to taxable years beginning on or after Jan. 1, 2017. N.M. Laws 2017, Ch. 95 (SB 391), signed by the governor on April 6, 2017. Texas: A company's gross receipts from the sale of payment risk and fraud prevention solutions are receipts from the sale of services for franchise tax purposes and are apportioned based on the location of the company's customers. Under Texas law, to determine where a service is performed, the Texas Comptroller of Public Accounts (Comptroller) said "the focus is on the specific, end-product act for which the customer contracts and pays to receive, not on non-receipt producing, albeit essential, support activities." Here, the Comptroller found the specific end-product act customers pay to receive is the display of the company's response to the requested information at the customers' locations (i.e., through customers' computers). In this instance, the location of the company's servers does not determine apportionment of its receipts because the processing of information is essential to perform the company's service, it is a support activity and is not the service for which the company's customers contract. Tex. Comp. of Pub. Accts., Private Letter Ruling No. 201703005L (March 15, 2017, released May 2017). Georgia: New law (HB 247) effective July 1, 2017 until July 1, 2020, exempts from sales and use tax maintenance and replacement parts for machinery and equipment used to mix, agitate, and transport freshly mixed concrete in a plastic and unhardened state. Qualifying parts include the following items and their related components: mixers, engines, interior and exterior operational controls, hydraulics, all structural components, and all safety components. Sales and use taxes paid on motor fuel used as energy in a concrete mixer truck are not exempt or refundable. HB 247 takes effect July 1, 2017. Ga. Laws 2017, Act 220 (HB 247), signed by the governor on May 8, 2017. Minnesota: New law (HF 1, 1st Spec. Sess.) removes language stating that "large ponderous machinery and equipment used in a business or production activity which at common law would be considered to be real property," from the definition of what is not included in the definition of tangible personal property. The bill also adds language to exclude from the definition of real property any: " … tools, implements, machinery, and equipment attached or installed into real property for use in the business or production activity conducted thereon, that qualify for exemption under [Minn. Stat.] section 297A.68, regardless of size, weight, or method of incorporation into the real property." The purpose of these changes is to synchronize the definitions of tangible personal property and real property under the sales tax and property tax statutes, and to codify the holding in Dahmes Stainless, Inc. v. Commissioner of Revenue.1 These changes took effect May 31, 2017. Minn. Laws 2017 (1st Spec. Sess.), Ch. 1 (HF 1), signed by the governor on May 30, 2017. For information on other tax changes enacted as part of HF 1, see Tax Alert 2017-972. New York: A company's charges for on-line video-generating services constitutes the sale of access to prewritten computer software and, as such, the charges are subject to New York State and local sales taxes when sold to customers located in the state. The New York Department of Taxation and Finance determined the video-generating service is prewritten computer software because the same software is used to produce videos for all customers. In addition, customers use a software interface to dictate the content and text of videos and to control other significant aspects of videos, giving customers constructive possession of the video-generating software. To determine the proper local tax rate and jurisdiction, the situs is the location associated with the right to use the software (i.e., location of the customer or its employees). Customers with employees located both in and outside New York who use the software should collect tax based on the portion of receipts attributable to the customers' employee user located in New York. N.Y. Dept. of Taxn. and Fin., TSB-A-17(4)S (March 1, 2017). Georgia: New law (SB 133) establishes the "Georgia Agribusiness and Rural Jobs Act," which provides a credit against state insurance and corporate tax liability for capital investment in rural small businesses. An entity (rural investor) that makes a capital investment in an eligible entity (rural fund) has a vested right to a credit against its tax liability that may be used on each credit allowance date of such capital investment. The credit is applied on each credit allowance date (the date on which the capital investment is made and each of the next five anniversary dates). For the first two credit allowance dates 0% the investment is available as a credit, and then 15% of the investment is available as a credit for each of the next four credit allowance dates. The credit is nonrefundable and nontransferable, but it may be carried forward for use in any subsequent taxable year. SB 133 outlines application procedures, certification requirements, and recapture rules. These provisions take effect July 1, 2017, and apply to all tax years beginning on or after Jan. 1, 2018. Ga. Laws 2017, Act 241 (SB 133), signed by the governor on May 9, 2017. Maryland: New law (HB 373) expands the eligibility for Maryland's biotechnology investment tax credit and establishes revocation and recapture provision under certain circumstances. The definition of "qualified Maryland biotechnology company" is amended to include a company that: (1) has been in active business no longer than 12 years (from 10); (2) has been in active business for up to 15 years (from 12) if the state determines that the company requires additional time to complete the process of regulatory approval; (3) has been in active business no longer than 12 years (from 10) from the date the company first received a qualified investment under the program, or (4) a company that within two months of receiving the investment meets the requirements to be a Qualified Maryland biotechnology company. In addition, HB 373 defines a "biotechnology company" as a company organized for profit that is, or within two months will be, primarily engaged in the research, development, or commercialization of innovative proprietary technology that comprises, interacts with, or analyzes biological material (e.g., biomolecules, cells, tissues, or organs). If a company within two months of receiving the investment fails to meet the requirements to be a Qualified Maryland biotechnology company, the Maryland Department of Revenue shall revoke any final tax credit certificates that have been issued and recapture credits that have already been claimed by the qualified investor. HB 373 takes effect June 1, 2017 and applies to all initial tax credit certificates issued after June 30, 2017. Md. Laws 2017, Ch. 475 (HB 373), signed by the governor on May 4, 2017. Minnesota: New law (HF 1, 1st Spec. Sess.) excludes the first $100,000 of market value of each parcel of commercial-industrial property from the commercial-industrial tax capacity base, effective for taxes payable in 2018 and after. Minn. Laws 2017 (1st Spec. Sess.), Ch. 1 (HF 1), signed by the governor on May 30, 2017. For information on other tax changes enacted as part of HF 1, see Tax Alert 2017-972. California: On June 1, 2017, the California senate passed along party lines by a vote of 23-14 the Californians for a Healthy California Act (SB 562) that establishes the framework for establishing a universal single-payer healthcare coverage program within the state. The bill now moves to the California Assembly where new tax revenues to fund the system must be agreed to by a two-thirds majority. For more on this development, see Tax Alert 2017-906. Minnesota: Minnesota Governor Mark Dayton vetoed SF 3 of the 2017 special legislative session. The bill would have prevented local government entities from passing an ordinance that requires private employers to provide benefits (e.g., paid sick leave) or pay a minimum wage greater than that under state law. As a result, paid sick leave ordinances scheduled to take effect July 1, 2017, in Minneapolis and St. Paul will go forward. For additional information on this development, see Tax Alert 2017-923. New York: As previously reported, New York Governor Andrew M. Cuomo signed into law in 2016 a measure that effective Jan. 1, 2018 establishes a system of insurance for paid family leave (PFL) with the premium paid by employees through payroll deduction. Further details concerning the New York Paid Family Leave law are available in final regulations recently issued by the New York Workers' Compensation Board. For additional information on this development, see Tax Alert 2017-922. South Carolina: New law (SB 218), effective April 5, 2017, prohibits South Carolina local governments from requiring employers to provide employee benefits (i.e., paid sick leave). Under the bill, a South Carolina political subdivision may not establish, mandate, or otherwise require an employee benefit. Employee benefits are defined as anything of value that an employee may receive from an employer in addition to wages, including any health benefits, disability benefits, death benefits, group accidental death and dismemberment benefits, paid days off for holidays, paid sick leave, paid vacation leave, paid personal necessity leave, retirement benefits, and profit-sharing benefits. For additional information on this development, see Tax Alert 2017-915. Pennsylvania: An out-of-state wholesale seller (seller) of electricity is an electric light company engaged in the electric light and power business and is subject to the utilities gross receipts tax (GRT). In reaching this conclusion, the Pennsylvania Commonwealth Court found that: (1) the applicable statute imposes GRT on all entities that are "engaged in electric light and power business" and receive revenue from "the sale of electric energy;" (2) the seller's sales to customers, including an industrial development authority, are activities conducted in the commonwealth for the purpose of both establishing and maintaining a market for electricity sales; and (3) sales of electric generation are not limited to retail sales. Additionally, seller's sales of electricity to an industrial development authority do not qualify for the resale exemption because the development authority is not a political subdivision. American Electric Power Service Corp. v. Pennsylvania, No. 861 F.R. 2013 (Pa. Commw. Ct. May 4, 2017). International: Effective Jan. 1, 2018, the new Belarusian value-added tax (VAT) rules for electronic services (e-services) come into force. These new rules introduce an obligation for nonresident providers of e-services to register for VAT and apply Belarusian VAT to their services provided to private individuals. For additional information on this development, see Tax Alert 2017-935. International: The Swiss Federal Council confirmed on June 2, 2017, that the revised Swiss Value Added Tax (VAT) Law will come into force on Jan. 1, 2018. The most significant change is the effective elimination of the turnover threshold for foreign entities doing business in Switzerland. This change is expected to lead to an additional 30,000 foreign businesses having to register for Swiss VAT. For additional information on this development, see Tax Alert 2017-936. 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: 2017-1020 |
