27 June 2017 State and Local Tax Weekly for June 16 Ernst & Young's State and Local Tax Weekly newsletter for June 16 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. California legislature passes bill to overhaul the State Board of Equalization and create a new tax and fee department On June 15, 2017, the California General Assembly approved legislation to significantly minimize the powers of the California State Board of Equalization (SBE) and to transfer most of its non-Constitutional powers to a new state department of tax and fees. The legislation is part of the budget package (trailer bill, AB 102, the "Taxpayer Transparency and Fairness Act of 2017") and, if signed by California Governor Jerry Brown before July 1, 2017, it will become law and set into motion sweeping changes to the SBE. In particular, the bill would relieve the SBE of its duties relating to the administration of many state taxes and fees, including the responsibility to hear appeals of personal income and corporate franchise and income tax matters. The SBE would retain its property tax authority under the California Constitution. Under the bill, many of the SBE's responsibilities would be assumed by the newly created California Department of Tax and Fee Administration. Most of the SBE's employees would be transferred to this new agency. The bill also would create the Office of Tax Appeals, which would assume responsibility for the SBE's administrative tax appeals function. The Office of Tax Appeals would be required to publish a written opinion for each appeal decided by the tax appeals panel. For more on this development, see Tax Alert 2017-978. On June 14, 2017, the Pennsylvania Commonwealth Court (court) issued its ruling in Philadelphia Beverage Association, upholding the validity of the Philadelphia Sugar Sweetened Beverage Tax (Soda Tax). In rejecting the challengers' argument that the tax is a legally impermissible duplication of the state's sales tax, the court concluded that "[t]he subject matter of the tax, the non-retail distribution of sugar-sweetened beverages for sale at retail in the city, and the measure of the tax, per ounce of sugar-sweetened beverage, are distinct from the sales tax imposed under the tax code upon the retail sale of the sugar-sweetened beverage to the ultimate purchaser." The court concurred with the trial court's opinion that "[t]he respective taxes apply to two different transactions, have two different measures and are paid by different taxpayers." Philadelphia Beverage Association, et al v. City of Philadelphia, Nos. 2077 C.D. 2016 and 2078 C.D. 2016 (Pa. Common. Ct. June 14, 2017). The Soda Tax was enacted in June 2016 by Philadelphia and took effect Jan. 1, 2017. The tax is due monthly and is imposed at a rate of 1.5 cents per fluid ounce of qualifying product to be sold at retail within Philadelphia. The tax is imposed on distributors on the sale of qualifying beverages to dealers that will hold it out for sale in the City of Philadelphia. If a dealer cannot prove the distributor from whom it purchased the product is registered with the city and remitted the tax on the product being held for sale at retail, the tax burden falls on the dealer. The tax applies broadly to the sale of any non-alcoholic beverage that lists as an ingredient any form of caloric sugar-based sweetener (including, sucrose, glucose or high fructose corn syrup) or any form of artificial sugar substitute (including, stevia, aspartame, acesulfame potassium, sucralose and saccharin). It also applies to any a beverage that contains any syrup or concentrate listing such sweeteners as an ingredient. For more on this development, see Tax Alert 2017-977. Colorado: New law (SB 299) establishes an apportionment method that may be used by an entity making a capital investment in an enterprise data center operation in Colorado and enters into a memorandum of understanding (MOU) with the Office of Economic Development (OED). Under these provisions, a qualifying entity's sales from services are Colorado sales to the extent such sales constitute revenues from services delivered to the entity's customer's Colorado location, as demonstrated by the customer's billing address. To qualify, an entity's capital investment in an enterprise data center must equal at least $150 million within any consecutive five-year period beginning on or after Jan. 1, 2013. SB 299 also sets forth the information to be included in the MOU. An entity can use this apportionment formula for taxable years beginning on or after July 1 in the year in which the OED certifies that the entity has met the requirements of these provisions, but not before July 1, 2018. If an entity fails to fully fund the capital investment or fulfill the obligations stated in the MOU, it will no longer be allowed to use this apportionment method. SB 299 takes effect Aug. 9, 2017. Colo. Laws 2017, Ch. 318 (SB 299), signed by the governor on June 5, 2017. Minnesota: New law (HF 1, 1st Spec. Sess.) requires insurance companies that are not licensed in Minnesota or in another state that imposes retaliatory taxes on Minnesota companies to be included in the combined report if they are part of the unitary business. These changes are 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. Montana: New law (HB 550) revises net operating loss (NOL) carryback and carryforward provisions, applicable to tax years beginning after Dec. 31, 2017. For NOLs sustained for any tax period ending before Jan. 1, 2018, the NOL may be carried back three tax periods and may be carried forward seven tax periods (from five tax periods). For an NOL for any tax period beginning after Dec. 31, 2017, the carryback period remains 3 tax periods but the amount of NOL carryback is capped at $500,000; the NOL carry forward period is increased to 10 tax periods. Mont. Laws 2017, Ch. 409 (HB 550), signed by the governor on May 22, 2017. New Mexico: Two out-of-state related entities, both wholly owned by the same parent (a multinational pharmaceutical company) are subject to New Mexico corporate income tax because their activities in the state (including engaging in collaborative work with external parties and hospitals to develop treatment protocols, providing ongoing education) exceeded the protections of Pub. Law 86-272, as the activities were not entirely ancillary to sales or de minimis. Further, a related company's sponsorship of clinical trials at two New Mexico hospitals can be attributable to the entities as this activity helped further the goodwill of the entities' brand with its New Mexico customers and increased the entities' market and market potential in the state. In Matter of the Protest of Aventis Pharmaceuticals Inc. to Assessment Issued Under Letter ID No. L0233517888 and In Matter of the Protest of Sanofi-Synthelabo Inc. to Assessment Issued Under Letter ID No. L1206618944, Dkt. No. 17-23 (N.M. Taxn. and Rev. Dept. May 19, 2017). Oregon: New law (SB 30) allows the Oregon Department of Revenue (Department) in determining whether two or more corporations included in the same federal consolidated return are engaged in a unitary business to consider any corporation that is owned or controlled directly or indirectly by the same interest. Thus, the Department may consider foreign affiliates when making a unitary group determination. This change applies to tax years beginning on or after Jan. 1, 2018. Ore. Laws 2017, Ch. 181 (SB 30), signed by the governor on May 30, 2017. Oregon: New law (HB 2275) replaces the terms "business income" and "nonbusiness income" with the broader terms "apportionable income" and "nonapportionable income," respectively, to align the corporate income tax apportionment provisions with the Multistate Tax Compact. The term "apportionable income" includes: (1) income arising from transactions and activity in the regular course of the taxpayer's trade or business; (2) income arising from the acquisition, management, employment, development or disposition of tangible and intangible property if the acquisition, management, employment, development or disposition is related to the operation of the taxpayer's trade or business; (3) any other income that is apportionable under the U.S. Constitution and not allocated under Oregon laws; and (4) any income that would be allocable to this state under the U.S. Constitution, but is apportioned rather than allocated under Oregon laws. The term "nonapportionable income" is defined as "all income other than apportionable income." These changes apply to tax years beginning on or after Jan. 1, 2018. Ore. Laws 2017, Ch. 43 (HB 2275), signed by the governor on May 15, 2017. Tennessee: The Tennessee Department of Revenue (DOR) issued guidance on the application of the recently enacted single sales factor (SSF) apportionment formula available to qualifying manufacturers. The SSF can be elected by manufacturers in tax years beginning on and after Jan. 1, 2017. The election must be made on the manufacturer's original franchise and excise tax return for the taxable year the election first applies. Once the election is made, it is binding for a five year period. The election may be revoked after the five year period and, if revoked, a new election cannot be made until five years have passed from the revocation. Electing manufacturer's that are part of an affiliated group bound by a consolidated net worth election, will apportionment consolidated net worth by multiplying the group's consolidated net worth by the following fraction: the taxpayer's total sales in Tennessee over the affiliated group's total sales everywhere. SSF apportionment only applies to the electing manufacturer. Non-manufacturers and manufacturers not making the election will continue to use the same apportionment formula it used prior to this Act (the current standard apportionment formula is property, payroll and triple weighted sales). Tenn. Dept. of Rev., Notice 17-11 (May 2017). Texas: New law (HB 4002) clarifies the definition of "production" for purposes of the cost of goods sold deduction, to specifically exclude installation. Under the new definition, which takes effect Sept. 1, 2017, "production" means "construction, manufacture, development, mining, extraction, improvement, creation, raising, or growth." Tex. Laws 2017, HB 4002, signed by the governor on June 1, 2017. Vermont: New law (HB 516) updates the state's adoption of federal income tax statutes to the law in effect for taxable year 2016. This change is effective retroactively to Jan. 1, 2016. Vt. Laws 2016, Act 134 (HB 873), signed by the governor on June 13, 2017. Federal: Proposed bill (HR 2887, "No Regulation Without Representation Act of 2017") would codify the Quill physical presence nexus standard for sales and use tax collection and reporting purposes, applicable to calendar quarters beginning on or after Jan. 1, 2018. Under the bill, persons would have a physical presence with a state only if their business activities in the state include any of the following during the calendar year: (1) maintaining its commercial or legal domicile in the state; (2) owning, holding a leasehold interest, or maintaining real property (e.g., office, retail store, warehouse, distribution center, manufacturing operation, assembly facility) in the state; (3) leasing or owning tangible personal property (other than computer software) of more than de minimis value in the state; (4) having employees, agents or independent contractors in the state who provide on-site design, installation or repair services on behalf of a remote seller; (5) having one or more employees, exclusive agents or exclusive independent contractors in the state who engage in activities that substantially assist the person in establishing or maintaining a market in the state; or (6) regularly employing in the state three or more employees for any purpose. De minimis physical presence would include click-through agreements, presence in the state for less than 15 days during the tax year, delivery and product placement services offered by an inter- or intra- state common carrier, internet advertising services provided by in-state residents that are not exclusively directed towards (or do not solicit exclusively) in-state customers, a nonresident's ownership interest in a LLC or similar entity organized or with a physical presence in the state, furnishing information to customers or affiliates in the state (or covering events or other gathering of information in the state) which is used or disseminated from a point outside the state, or business activities directly relating to such person's purchase (actual or potential) of goods or service within the state if the final decision to purchase is made outside the state. Under HR 2887, tax could only be imposed on a purchaser or seller having a physical presence in the state. HR 2887 includes dispute resolution provisions and defines key terms. HR 2887 was proposed by Congressman Jim Sensenbrenner (R-WI) on June 12, 2017. He introduced a similar measure in July 2016. South Carolina: New law (HB 3516) increases the maximum sales and use tax on aircraft, motor vehicles, motorcycles, boats, trailers or semitrailers, recreational vehicles, and certain self-propelled light construction equipment to $500 per item (from $300). This maximum tax only applies if the aforementioned item is not subject to the new infrastructure fee. This change takes effect July 1, 2017. S.C. Laws 2017, Act 40 (HB 3516), enacted over the governor's veto on May 10, 2017. Texas: An out-of-state information technology service provider (provider) that had an employee working in Texas during in the assessment period, did not owe estimated sales tax in Texas because its sales were for the provisions of services occurring outside the state. In so holding, an Administrative Law Judge for the Texas Comptroller of Public Accounts, found the provider's invoices and contracts showed that the services at issue were not for storage, use or consumption in Texas. Tex. Comp. of Pub. Accts., No. 201702037H (Feb. 24, 2017). Utah: An out-of-state information technology infrastructure provider's (provider) sale to a Utah customer of remote storage and/or remote access to computing equipment are not subject to Utah sales and use tax because the essence of both transactions is the use of the computer hardware located outside the state. In so holding, the Utah State Tax Commission found that although software is used in the storage item (management console and software development kit) and in the computing item (operating system software, application programming interfaces, and software development kit), use of the software is incidental to the use of the computer hardware. Further, the taxability of the computing item does not vary based on whether an open source or a third party operating system is used. In both situations the purchaser primarily seeks the use of the provider's computer hardware. Since the hardware is located outside the state, the sale of the hardware is sourced outside the state and the transaction is not subject to Utah's sales and use tax. Finally, usage charges incurred in conjunction with the storage item or computing item purchase are not subject to sales and use tax since neither are subject to the tax. Utah Tax Comn., Private Letter Ruling No. 16-004 (March 31, 2017). Minnesota: New law (HF 1, 1st Spec. Sess.) increases the research and development credit from 2.5% to 4% on all qualifying expenses over $2 million, effective for taxable years beginning after Dec. 31, 2016. In addition, HF 1 increases the available sales tax exemption for a business participating in the Greater Minnesota Job Expansion Program to $5 million annually, and $40 million over the life of an agreement. Businesses may increase the eligibility period to 10 years by agreeing to invest over $200 million. HF 1 also provides an additional $3 million of funding for the state border city enterprise zone program. Unless otherwise noted, these changes are effective July 1, 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. Nebraska: New law (LB 217) amends several business-related credits. The affordable housing credit amendments permit: (1) any reduction of credit allowable in the first year of the credit period due to the calculation of the federal low-income housing credit to be claimed in the seventh year of the credit period; (2) a qualified project owner that is a partnership, LLC, or S corporation to allocate the credit among some or all of the entity's partners, limited liability company members, or S corporation shareholders; and (3) the transfer, sale, or assignment of all or part of the ownership interest, including the tax credit interest. The transferor is required to notify the Nebraska Department of Revenue of the transfer, sale or assignment and provide the tax identification number of new owner at least 30 days before the new owner claims the credit. The employer tax credit for hiring Temporary Assistance for Needy Families recipients is amended to clarify who can qualify as an eligible employee by adding that the individual's hiring date is on or after the first day of the taxable year for which the credit is claimed. Additionally, LB 217 amends the Nebraska Advantage Microenterprise Tax Credit Act and the Angel Investment Tax Credit Act to remove "distressed area" references. LB 217 further amends the Angel Investment Tax Credit, by eliminating the credit for 35% of the qualified investment; the credit for 40% of the qualified invest is still available to a qualified investor or qualified fund. These provisions are operative three calendar months after the adjournment of the 2017 legislative session. Neb. Laws 2017, LB 217, signed by the governor on April 27, 2017. South Carolina: New law (HB 3516) provides a manufacturing property tax exemption for 14.2857% of the property tax value of manufacturing property. If the exemption is applied to real property, it must be applied to the property tax value as it may be adjusted downward to reflect the limit under the South Carolina Constitution. Up to $85 million of the revenue loss from this exemption must be reimbursed and allocated to political subdivisions by the state. In years when the Revenue and Fiscal Affairs Office projects that reimbursements will exceed the cap, the exemption amount must be proportionately reduced. The percentage exemption amount is phased-in in six equal installments and cumulative percentage installments, applicable for property tax years beginning after 2017. S.C. Laws 2017, Act 40 (HB 3516), enacted over the governor's veto on May 10, 2017. South Carolina: New law (HB 3516) increases various motor fuel, road, and related taxes and fees to support transportation infrastructure projects. Beginning July 1, 2017, and each July 1 thereafter through 2022, the motor fuel user fee on fuel sales (each currently $0.16 per gallon) will increase by $0.02 each year, for a total $0.12 increase to $0.28 per gallon by 2022. The road tax is imposed and increased in the same manner, with a credit available for certain motor carriers. Motor vehicles and motorcycles are excluded from the casual excise tax base (imposed at 5% of the fair market value), and a road use fee is imposed on all large commercial motor vehicles and buses beginning Jan. 1, 2019. Finally, among other changes, the new law increases various registration fees (effective Jan. 1, 2018) and adds the infrastructure maintenance fee (effective Jan. 1, 2017) and a road use fee on alternative fuel vehicles (effective Jan. 1, 2018). HB 3516 takes effect July 1, 2017, unless otherwise specified. S.C. Laws 2017, Act 40 (HB 3516), enacted over the governor's veto on May 10, 2017. Washington: An employment services company for several affiliated clients, which operate nursing and assisted living centers, does not qualify for a business and occupation tax deduction for professional employer organizations (PEO) because the documents the company gives to its employees do not provide written notice of a co-employment relationship. In so holding, the Washington Court of Appeals (Court) noted that "RCW 82.04.540(3)(d) unambiguously requires that the employee be given written notice of the employee's co-employment relationship with the PEO and the client." After analyzing information provided by an employee handbook, an employee's paystub, the letter of understanding, and a notice to employees on the company's intranet, the Court determined that this information neither clarifies who is the PEO nor provides actual or constructive notice of a co-employment relationship. Heartland Employment Services, LLC v. Wash. Dept. of Rev., No. 48893-1-II (Wash. Ct. App., Div. 2, May 2, 2017) (Unpublished). International: The latest edition of Trade Watch is now available. Trade Watch is a quarterly communication prepared by Ernst & Young's Customs & International Trade Practice. Highlights of this edition include: Spotlight on changing trade blocks, global developments, and developments from Americas (Argentina, Canada, US), Asia-Pacific (Japan, Thailand), and Europe/Middle East/Africa (EU, Gulf Cooperation Council, Nigeria, Switzerland, Uganda). 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: 2017-1021 |
