30 June 2017 State and Local Tax Weekly for June 23 Ernst & Young's State and Local Tax Weekly newsletter for June 23 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 FTB holds second interested parties meeting to discuss next round of proposed amendments to its market-based sourcing rules On June 16, 2017, the California Franchise Tax Board (FTB) held its second Interested Parties Meeting (IPM) for the next round of proposed amendments to its market-based sourcing rules codified at California Code of Regulations tit. 18, (CCR) section 25136-2. The FTB released draft language for some of the proposed amendments including language that will impact asset managers, government contractors, and other industries. — Asset management fee issue — The proposed draft language revised the asset management fee examples, which were discussed at the first IPM. — Government contracts for services — The FTB also included proposed examples dealing with the sourcing of the location of where the benefit is received as to government contracts. — Subcontractor example — The FTB also included a general example that dealt with how to source services in which a subcontractor was hired to complete the service for the taxpayer. — Proposed change in approximations based on population — During the first IPM, the FTB suggested that in some cases including the population of a foreign country was not appropriate in determining the market. The proposed language would change the definition for "reasonably approximated" from the populations of "other countries" and replace it with "foreign jurisdictions or geographic areas." — Two comments by the FTB hearing officer that were not linked to proposed language — The FTB announced that after previously discussing the possibility of looking to CCR section 25137-2 for guidance in sourcing long-term contracts for services, it decided not to do this. The FTB hearing officer also stated there would be no special rules for long term R&D contracts because the normal rules were sufficient. — Dividends — The FTB said that it was no longer pursuing amendments with respect to the sourcing of dividends. — Reasonably approximated/reasonable approximation — The FTB announced that it planned to change the standard from "clear and convincing evidence" to "a preponderance of the evidence." — Freight forwarder examples — The proposed language also included examples for sourcing where the benefit of services from freight forwarding was received. — Marketing intangibles — The FTB put forth proposed language to apply a throw-out rule for sales of marketing intangibles, if such sales are assigned to jurisdictions where sales represent 5% or less of total sales. The example proposed indicates that such sales are viewed as de minimis. The FTB indicated that a third IPM would be held in 90 to 120 days, and updated proposed language would be provided prior to this third IPM. The FTB requested that written comments be received by Aug. 15, 2017 in order to be considered before the third IPM. For more on this development, see Tax Alert 2017-992. Multistate: The State Income and Franchise quarterly newsletter for the second quarter of 2017 is now available. This document provides a summary of corporate income and franchise tax legislative, administrative, and judicial updates that occurred during April 1, 2017 through June 19, 2017. Highlights include: (1) a summary of legislative developments in Alabama, California, Colorado, Florida, Georgia, Iowa, Maine, Minnesota, Montana, Nebraska, New Mexico, New York, Oklahoma, Oregon, Philadelphia, South Carolina, Tennessee, Texas and Vermont; (2) a summary of judicial developments in Iowa, Michigan, Minnesota, New Jersey, Oregon and Texas; (3) a summary of administrative developments in California, Connecticut, Michigan, New Mexico and New York City; and (4) a discussion of items to watch in California, New York, North Carolina, Oregon, Pennsylvania and Texas. Click here for a copy of the newsletter. Minnesota: New law (HF 1, 1st Spec. Sess.) modifies the test used to determine where an individual is domiciled to preclude the tax commissioner or judiciary from considering the following: (1) charitable contributions made by an individual within or without Minnesota; (2) the location of the individual's attorney, CPA, or financial adviser; or (3) the place of business of a financial institution at which the individual applies for any new type of credit or opens/maintains any type of account. 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 Hampshire: New law (HB 104) repeals the commuters income tax, effective Aug. 1, 2017. The commuters income tax is imposed on a resident's income derived outside the state and a nonresident's income derived in New Hampshire. N.H. Laws 2017, Ch. 54 (HB 104), signed by the governor on June 2, 2017. New York City: An investment consulting firm and related entities must file combined returns for the tax years at issue (2008-2010), because substantial intercorporate transactions occurred between the firm and three other related entities when a wholly owned subsidiary paid all or the majority of the gross receipts of the firm, its parent, and another wholly owned subsidiary. In addition, the New York City Tax Appeals Tribunal determined that the payroll and receipts factors must be recomputed for all years. There was no rational basis for the New York City Department of Finance (Department) to exclude certain individuals from the general executive officer category for payroll factor purposes and the Department's receipts factor computation did not eliminate intercompany transfers. Further, the Department had to recalculate the receipts factor for all tax years using the methodology required by regulation and to allocate the receipts to reflect the location where services were rendered. In the Matter of the Petition of HMC-New York Inc., Det. No. TAT(H)14-15(GC) (N.Y.C. Tax App. Trib., ALJ Div., April 27, 2017). Oklahoma: New law (HB 2348) decouples Oklahoma's standard deduction amounts from the limits established and adjusted annually by the IRS. Effective for taxable years beginning on and after Jan. 1, 2017, the following standard deduction amounts apply: (1) $6,350 for single or married filing separately; (2) $12,700 for married filing jointly or qualifying widower with dependent child; and (3) $9,350 for head of household. Okla. Laws 2017, HB 2348, signed by the governor on May 12, 2017. Oklahoma: New law (SB 170) repeals a statutory provision that would have decreased the top personal income tax rate to 4.85% if a certain revenue target was reached. As a result of the repeal, the maximum personal income tax rate remains at 5.0%. This change takes effect Nov. 1, 2017. Okla. Laws 2017, SB 170, signed by the governor on May 15, 2017/ Philadelphia, PA: New law (Bill 170198) reduces the tax rate on net profits earned in businesses, professions or other activities. Effective Jan. 1, 2017, the tax rate for residents of Philadelphia is 2.3907% (from 2.4004%) and the tax rate for nonresidents is 3.4654% (from 3.4741%). Philadelphia Laws 2017, Bill 170198, signed by the Mayor on June 14, 2017. Texas: New law (HB 2126) amends the franchise tax to provide that the provision of telecommunications services does not include the sale of prepaid calling cards, applicable to franchise tax reports originally due on or after Jan. 1, 2018. According to the bill's fiscal note, in order for an entity to be eligible for the lower wholesaler/retailer tax rate, the entity may not provide retail or wholesale utilities, including telecommunications services. Tex. Laws 2017, HB 2126, signed by the governor on May 29, 2017. Texas: The Texas Supreme Court has accepted for review the Texas Court of Appeals ruling in Graphic Packaging in which the court held that a multistate corporation cannot use the equally weighted, three-factor apportionment formula under the Multistate Tax Compact (Compact) for purposes of apportioning margin under the revised franchise tax (i.e., Margin Tax) because the Margin Tax is not an income based tax. An argument date has not yet been set. Graphic Packaging Corp. v. Hegar, Dkt. No. 15-0669, petition for review granted (Tex. S. Ct. June 16, 2017). Maine: New law (LD 1405) establishes an economic nexus standard for sales and use tax purposes. Effective Oct. 1, 2017, a person selling tangible personal property or electronically transferring products or services for delivery into Maine (collectively, "goods") are required to collect and remit the state's sales tax if: (1) the person's gross revenues from such taxable goods into the state in the previous, or current, calendar year exceeds $100,000; or (2) the person sold such taxable goods for delivery into the state in at least 200 separate transactions in the previous, or current, calendar year. Under the bill and anticipating legal challenges to the efficacy of the statute, the state may bring a declaratory judgement action against a person that appears to meet any of these requirements in order to establish whether the person has a tax collection obligation under the new law. Under the bill, Maine courts are directed to act on the declaratory judgement action "as expeditiously as possible." During the pendency of a declaratory judgement action, and if a question is presented regarding the constitutionality of the economic sales tax nexus provisions, the court (on the state's motion or on its own initiative) is instructed under the law to enjoin the state from enforcing the sales tax collection obligation against any person that does not affirmatively consent to collect sales and use tax on a voluntary basis. The obligation to collect and remit tax established under the economic nexus provision may not be applied retroactively, and following the lift of an injunction, tax will be assessed and the collection obligation will be applied prospectively. The bill includes legislative findings and legislative intent for enacting this provision. Maine Laws 2017, Ch. 245 (LD 1405), legislature overrode governor's veto on June 21, 2017. Puerto Rico: The Puerto Rico Treasury Department (PRTD) issued Administrative Determination (AD) 17-04 to extend the effective date for the obligation to remit the 1% municipal sales and use tax (SUT) on imports of tangible personal property from the municipality to the PRTD and to confirm that the new reporting requirements for non-withholding agent merchants are effective July 1, 2017. The effective date for the collection of the 1% municipal SUT on imports of tangible personal property is extended from April 29, 2017 to Aug. 1, 2017. As such, all taxpayers that import tangible personal property for use or consumption in Puerto Rico and are required to pay the 1% municipal SUT, must pay it to the PRTD, instead of the municipalities beginning Aug. 1, 2017. For more on this development, see, Tax Alert 2017-1012. South Carolina: An Administrative Law Judge (ALJ) of the South Carolina Administrative Law Court upon a motion for reconsideration of its initial ruling, vacated its prior order, and again held that a hospital system that is a "political subdivision" and is exempt from state property tax and federal income under IRC §501(c)(3), is not entitled to the South Carolina sales and use tax exemption for meals sold in its on-site hospital dining facility because the exemption's statutory language "expressly omitted governmental entities and 'charitable institutions in the nature of hospitals.'" In so holding, the ALJ declined to extend the "liberal construction of exemptions from property tax related to real estate owned by government agencies to a sales tax issue." Greenville Hospital System v. SC Dept. of Rev., No. 13-ALJ-17-0523-CC (S.C. Admin. Law Ct. June 20, 2017). Georgia: New law (HB 73) provides a tax credit for certified entities and investors to promote revitalization of vacant rural Georgia downtowns. A certified entity can receive a $2,000 annual income tax credit for each new full-time equivalent job credited, up to $40,000 per taxable year, for five years beginning with the first taxable year in which the new jobs are created in the revitalization zone. If the net employment increase falls below a specified requirement, the credit is not allowed during the tax year. Certified investors who acquire and develop property in a revitalization zone on or after Jan. 1, 2018, can claim a credit of 25% of the purchase price up to $125,000, provided the investor demonstrates the property's ongoing commercial benefit. The credit must be prorated in five equal installments over five taxable years, beginning with the year the property is placed in service. Finally, a certified investor or entity can receive a credit of 30% of qualified rehabilitation expenditures for a project for up to $150,000, prorated equally in three installments over three taxable years, beginning with the year the property is placed in service. The business must maintain at least two full-time equivalent jobs for each year the credit is claimed. The credit is nonrefundable, nontransferable and may not be carried back to prior tax years. Unused credit may be carried forward for 10 years from the close of the taxable year in which the credit is claimed. HB 73 took effect May 8, 2017, and sunsets Dec. 31, 2027. Ga. Laws 2017, Act 205 (HB 73), signed by the governor on May 8, 2017. Montana: New law (HB 308) creates a nonrefundable corporate and individual income tax credit program for employers of registered apprentices. The credit is $750 for apprentices and $1,500 for veteran apprentices who work as a new employee in a state-registered apprenticeship training program. The credit is available after the apprentice has completed the apprentice training program's probationary period or six months, whichever is earlier. The employer must apply for the credit and the Montana Department of Labor and Industry (MT DOLI) must verify the employee meets the credit's qualifications. The credit cannot be claimed for more than five tax years for each individual apprentice, it cannot be carried forward or carried back, and it can only be claimed in the tax year in which the MT DOLI approved the credit. Provisions of HB 308 apply to tax years beginning after Dec. 31, 2017. Mont. Laws 2017, Ch. 380 (HB 308), signed by the governor on May 11, 2017. Montana: New law (HB 226) increases the property tax abatement available for new or expanding industry. It requires that in the first five years after a construction permit is issued, qualifying improvements or modernized processes that represent new industry or expansion of an existing industry must be taxed at either 25% or 50% (previously only 50%) of taxable value. As under prior law, the percentage is annually increased by equal percentages until the property reaches its full taxable value in the 10th year. Thereafter, the property is taxed at 100% of its taxable value. HB 226 applies to new or expanding industry tax abatements granted on or after May 11, 2017. Mont. Laws 2017, Ch. 379 (HB 226), signed by the governor on May 11, 2017. Federal: The IRS re-issued proposed regulations (REG-136118-15) on the new partnership audit regime. As part of the Bipartisan Budget Act of 2015 (the BBA), Congress enacted legislation that overhauls the way in which partnerships are audited. The BBA installs a new regime to allow for assessment and collection of tax at the partnership level under centralized audit procedures, along with a number of other changes to the process. These new rules are generally effective for most partnerships for tax years starting after Dec. 31, 2017. No doubt, the implications of the federal regime will have wide ranging implications at the state level and Indirect tax practitioners should monitor these developments. For more on this development, see Tax Alert 2017-1002. Federal: The US House of Representatives approved a bill (HR 1393, commonly known as "Mobile Workforce State Income Tax Simplification Act of 2017") which, if enacted, would limit the extent to which states may tax compensation earned by nonresident workers who have limited presence in a nonresident state. Specifically, an employee who performs employment duties in more than one state would be subject to nonresident state income taxes only if the employee is present and performing employment duties for more than 30 days during the calendar year and only on the wages earned for performing those duties in the nonresident state. (The bill has no impact on the ability of a resident state to continue to subject the employee's wages to state resident income tax regardless of where the compensation was earned. Moreover, the proposed law would not apply to compensation earned by professional athletes, professional entertainers, qualified production employees and certain public figures, all as defined in the bill. The bill also does not address or change the treatment of nonresident taxation of partners or S corporation owners.) Provisions of the bill also provide guidance on the counting of days for purposes of determining if an employee has exceeded the 30-day threshold limitations imposed by the bill. If approved, these provisions would take effect on January 1 of the second calendar year that begins after the date of the bill's enactment. HR 1393 was approved by the House on June 20, 2017, and now moves to the Senate, where a similar bill (SB 540) was introduced on March 7, 2017. A similar bill was enacted in an earlier Congress. The bill faces an uncertain future in the Senate although SB 540 reportedly has 44 Senate sponsors (60 votes are needed for cloture under the Senate's rules.) For additional information on this development, see Tax Alert 2017-1010. Washington: New law (HB 2005) simplifies the administration of municipal general business licenses, requiring most cities that impose a general business licensing obligation to partner with the Washington Department of Revenue (Department) to have the license issued (and later renewed) through the Department's Business Licensing Service. HB 2005 provides a phase-in schedule through Dec. 31, 2027 for cities that require a general business license as of July 1, 2017 and do not already partner with the Department. A city that did not require a general business license as of July 1, 2017 and imposes a new general business license requirement thereafter must notify the Department of its intent to do so at least 90 days before the requirement takes effect. A city can decline to partner with the Department if the city participates in the online local business license and tax filing portal, "FileLocal," as of July 1, 2020. If the city stops participating in FileLocal after that date, it will be required to partner with the Department for license issuance and renewal. Finally, the Washington Legislature directs cities, towns, and identified business organizations to recommend simplifications for the two-factor apportionment formula under the municipal business and occupation (B&O) tax. HB 2005 creates a local B&O tax apportionment task force, and requires it to issue a report providing a method for assigning gross receipts to a local jurisdiction using a market-based sourcing model by Oct. 31, 2018. HB 2005 takes effect July 23, 2017. Wash. Laws 2017, Ch. 209 (HB 2005), signed by the governor May 5, 2017. Delaware: Proposed bill (Senate Substitute 1 for SB 79 (SS1 for SB 79)), as approved by the Senate on June 8, 2017, would modify some of the recently enacted changes to the state's unclaimed property laws. The proposed bill would move back the state's deadline to adopt unclaimed property estimation method regulations, and it would clarify holder-friendly indemnification and interest waiver provisions. SS1 for SB 79 is currently in the House for consideration. If SS1 for SB 79 is enacted into law, it would take effect immediately. For more on this development, see Tax Alert 2017-984. Washington: In Special Notice (June 2, 2017), the Washington Department of Revenue (Department) announced that holders of unclaimed property (UP) who report and pay outstanding UP before Nov. 1, 2017, may be eligible to receive a waiver of otherwise applicable penalties and interest on prior unreported periods. To qualify for the penalty and interest waiver, holders before November 1st must: (1) complete a penalty and interest waiver application, (2) file a report that lists all property for which waiver is being sought, and (3) pay and deliver all amounts identified on the report. Holders will not be granted a penalty and interest waiver on any amounts included in an assessment or identified through an investigation or examination or on any amounts paid, delivered, or reported to the Department before July 1, 2015. Holders participating in this program cannot apply for a refund for any amounts paid or delivered to the Department under this program or otherwise challenge whether the amounts were properly due. The Department will be issuing additional guidance on this penalty and interest waiver program. International: Members of the House Ways and Means Committee on June 22, 2017, questioned United States Trade Representative Robert Lighthizer about the Administration's views on protections for intellectual property (IP), data flows, agricultural products, and other issues ahead of a planned renegotiation of the North American Free Trade Agreement (NAFTA) and the Administration's pursuit of other trade agreements. For more on this development, see Tax Alert 2017-1001. International: On June 2, 2017, Panama published Executive Decree No. 128 of May 29, 2017 (the Decree), changing the purchase amount from $10 million to $5 million under the withholding requirement stated in subparagraph (d) of Article 19 of Executive Decree No. 84 of 2005. Under the Decree, entities with annual purchases of goods and services in an amount equal to or greater than US $5 million will be considered VAT withholding agents. A VAT withholding agent is required to withhold 50% of the VAT included in the invoice or equivalent document submitted by the supplier. In light of this Decree, the Tax Authorities issued Resolution No. 201-3493 dated June 2, 2017, which contains a list of VAT withholding agents identified according to the new criterion set out in the Decree. For more on this development, see Tax Alert 2017-1009. 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: 2017-1056 |
