17 July 2017 State and Local Tax Weekly for July 7 Ernst & Young's State and Local Tax Weekly newsletter for July 7 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. Illinois General Assembly overrides governor's veto; Budget bills enacted containing various tax law changes, including income tax rate hikes Averting a third year without a budget, the Illinois House July 6, 2017, following the Senate action on July 4, 2017, voted to override Governor Rauner's veto of FY 2018 budget bills SB 6 (appropriations bill), SB 9 (revenue bill) and SB 42 (budget implementation). Key changes contained in SB 9 include: — Permanently increasing the corporate income tax rate to 7.0% (from 5.25%), effective July 1, 2017, which subjects Illinois corporations to a 9.5% rate on income apportioned or allocated to Illinois when combined with the 2.5% personal property replacement tax. — Permanently increasing the individual income tax rate to 4.95% (from 3.75%), effective July 1, 2017. — Expanding the manufacturing and assembling machinery and equipment exemption to include graphic arts machinery and equipment, beginning July 1, 2017. — Requiring, for purposes of determining Illinois taxable income, the addback of amounts deducted for federal income tax purposes under the IRC §199 production deduction, effective for taxable years ending on or after December 31, 2017. — Reducing certain fees collected by the Secretary of State under the Business Corporation and Limited Liability Company Acts. — Updating the state's unclaimed property law by adopting the Revised Uniform Unclaimed Property Act with some modifications, most notably repealing the business to business exemption. Tax changes that were considered during the legislative process but did not make it into the final bills include a freeze on property tax rates (which had been actively promoted by Gov. Rauner as part of any tax deal), expansion of the sales and use tax base to include certain services, inclusion of production related tangible personal property under the manufacturing and assembling machinery equipment exemption, imposition of a new video service tax on streaming services, and changes to the false claims act, among other proposals. California Supreme Court affirms appellate court documentary transfer tax decision in 926 North Ardmore In a wide ranging decision that will have profound implications for investors in entities that own or lease real property located in California, the California Supreme Court, by a 6 to 1 majority, issued its opinion in 926 North Ardmore Avenue, LLC v. County of Los Angeles, affirming an appellate court decision allowing California counties and cities to impose a documentary transfer tax on real property when a transfer of an interest in a legal entity that owns real property located in California constitutes a "change in ownership" under the state's property tax law (Cal. Rev. & Tax Code (R&TC) § 64). The court held "the tax may be imposed if the document reflects a sale: that is, an actual transfer of legal beneficial ownership made for consideration." 926 North Ardmore Avenue, LLC v. County of Los Angeles, No. S222329 (Cal. S. Ct. June 29, 2017). Under this ruling, all California counties and municipalities conceivably are authorized to impose their documentary transfer taxes (sometimes called a real estate transfer tax) upon a change in ownership of a legal entity if that legal entity owns or leases real property located in the jurisdiction, regardless of whether they have specifically incorporated R&TC §64 into their transfer tax ordinances. Moreover, the court's ruling specifies no time limit on its application and consequently, it is possible that county assessors could retroactively assess their transfer taxes on transactions involving the transfer of more than 50% of a legal entity with real property located in California. Taxpayers who undertook past transactions that resulted in a change of ownership under R&TC §64 may need to file transfer tax returns and submit tax due as a result of the transaction. The property tax "change of ownership" rules under R&TC §64 are extremely complex and will need to be considered with respect to exposure on past transactions and transactions going forward. On July 13, 2017, a petition for rehearing was filed. If a rehearing is not granted, it is not known if the taxpayer will file an appeal to the US Supreme Court. Considering c that no federal question appears to be presented, and the ruling is one of a statutory interpretation of California law, it does not appear likely that the US Supreme Court would take an appeal of the ruling. For more on this development, see Tax Alert 2017-1066. Federal: The Treasury Department on July 7, 2017, identified eight regulations, including Final and Temporary Regulations under Section 385 on the Treatment of Certain Interests in Corporations as Stock or Indebtedness, as imposing an undue financial burden on US taxpayers or adding undue complexity to Federal tax laws. In Notice 2017-38 Treasury said, it "intends to propose reforms — potentially ranging from streamlining problematic rule provisions to full repeal — to mitigate the burdens of these regulations in a final report submitted to the President." Treasury requested comments by Aug. 7, 2017, on whether the regulations described in the Notice should be rescinded or modified, and how they should be modified. For additional information on this development, see Tax Alert 2017-1086. Delaware: New law (HB 175) increases the annual maximum franchise tax rate and establishes a new maximum rate for "large corporate filers." Effective Jan. 1, 2017, the maximum franchise tax is increased to $200,000 (from $180,000), and a new maximum franchise tax of $250,000 is imposed on large corporate filers. A "large corporate filer" is a corporation that: (1) had a class or series of stock listed on a national securities exchange; and (2) reported its financial statements prepared in accordance with GAAP or IFRS and included in its most recent annual report filed with the SEC both of the following: (a) consolidated annual gross revenues equal to or greater than $750 million or consolidated assets equal to or greater than $750 million; and (b) consolidated annual gross revenues not less than $250 million and consolidated assets not less than $250 million. In addition, provisions of the bill increase various fees imposed by the Delaware Secretary of State (effective Aug. 1, 2017), and increase the penalty for failure to file the annual franchise tax report (effective Jan. 1, 2018). Del. Laws 2017, HB 175, signed by the governor on July 2, 2017. Hawaii: New law (SB 1002) updates the state's conformity to the IRC to Dec. 31, 2016 (from Dec. 31, 2015). This change applies to taxable years beginning after Dec. 31, 2016. Haw. Laws 2017, Act 95 (SB 1002), signed by the governor on July 5, 2017. Massachusetts: The Massachusetts Department of Revenue (DOR) released for public comment a working draft of a "revision and restatement" to Technical Information Release (TIR) 10-16: Non-US Corporation with US Income Exempt from US Tax Pursuant to a Bilateral US Income Tax Treaty (TIR 10-16). (Click here for a redlined copy of the revised version.) The revisions focus on the calculation of the non-income measure of the corporate excise tax and exclusion of receipts, property or payroll related to treaty-exempt income from the corporation's Massachusetts apportionment formula. Comments should be emailed to the DOR's Rulings and Regulations Department at rulesandregs@dor.state.ma.us, by close of business on July 21, 2017. For additional information on this development, see Tax Alert 2017-1087. Minnesota: The Minnesota Tax Court recently ruled that the Minnesota resident trust statute, as applied, violated the due process provisions of the Minnesota and the United States constitutions because the grantor's domicile at the time a trust became irrevocable does not justify the resident tax treatment of an inter vivos trust. Fielding v. Minn. Comr. of Rev., Nos. 8911-R through 8914-R (Minn. Tax Ct. May 31, 2017). For additional information on this development, see Tax Alert 2017-1084. Oregon: New law (SB 28) replaces the current cost of performance method for sourcing sales of intangible property and services with a market-based sourcing method, applicable to tax years beginning on or after Jan. 1, 2018. Under the revised law, a taxpayer's market for sales of services is in Oregon to the extent the service is delivered in Oregon. Sales, rentals, licenses and leases of real and tangible personal property are in Oregon to the extent the property is located in the state. In general, a taxpayer's market for sales of intangible property that is rented, leased, or licensed is in Oregon to the extent the intangible property is used in this state. Intangible property utilized in marketing a good or service to a consumer is deemed to be used in Oregon if the good or service is purchased by an in-state consumer. If the intangible property is sold, the following guidance is provided: (1) a contract right, government license or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area is deemed to be used in Oregon if the geographic area includes all or part of this state; (2) intangible property sales that are contingent on the productivity, use or disposition of intangible property is treated as the rental, lease or licensing of intangible property (as described above); (3) all other intangible property sales are excluded from the sales factor. Reasonable approximation will be used if the state(s) of assignment cannot be determined. These rules do not apply to taxpayers required to allocate and apportion income under ORS 314.280 (financial institutions); nor do they affect the Oregon Department of Revenue's ability to adopt rules. Ore. Laws 2017, SB 28, signed by the governor on July 3, 2017. Kansas: New law (HB 2212) increases the threshold filing amounts for retailers to submit sales taxes to the Kansas Department of Revenue. Effective on and after Jan. 1, 2018, the threshold amounts are increased as follows: (1) $400 (from $80) for annual filings; (2) $4,000 (from $3,200) for quarterly filings; and (3) $40,000 (from $32,000) for monthly filings. Kan. Laws 2017, HB 2212, signed by the governor on June 23, 2017. Missouri: Entities that provide telecommunications services to customers (including television, internet, and telephone) were not entitled to a sales and use tax exemption for manufacturing equipment on their purchases of replacement equipment used in part to deliver telephone services because the items did not qualify as manufacturing equipment. In reaching this conclusion, the administrative law judge (ALJ) of the Missouri Administrative Hearing Commission found that IBM abrogates the expansive view of what constitutes manufacturing activity in the two Southwestern Bell cases (Bell I and Bell II). The Missouri Supreme Court found in IBM that, "To the extent cases such as Bell I and Bell II suggest that an expansive interpretation of the word 'manufacturing' is authorized by the 'manufacturing' exemption, and to the extent that they hold that the electronic transfer of voices is itself manufacturing as that term is used in the exemption, they are no longer to be followed." In addition, the ALJ concluded that IBM was not "unexpected," as it was reasonably foreseeable to anyone who knew the Missouri Supreme Court's 2010-2015 decisions on the issue. Finally, the Missouri Director of Revenue was not required to notify taxpayers whose tax obligation was changed by the IBM decision. Cebridge Acquisition LP and Friendship Cable of Ark. Inc. v. Mo. Dir. of Rev., No. 13-1629 RS (Mo. Admin. Hearing Comn. May 19, 2017). South Carolina: A book seller's club memberships are included in its gross proceeds of sales and, therefore, are subject to South Carolina's sales tax. In reaching this conclusion, the South Carolina Administrative Law Court (ALC) cited both the plain meaning of applicable statutes (S.C. Code Ann. §§ 12-36-910(A) and 12-36-90) and applicable case law, finding that the memberships fees constitute value proceeding or accruing from the sale of tangible personal property. In this case, the ALC determined that because the membership program is so intertwined with and inseparable from the sales of tangible personal property, the membership program is part of the sales of that tangible personal property. Books-A-Million, Inc. v. S.C. Dept. of Rev., No. 16-ALJ-17-0113-CC (S.C. Admin. Law Ct. June 6, 2017). (see case attached below) Arizona: New law (HB 2191) permits the Arizona Commerce Authority to certify up to $2.5 million in additional capital investment tax incentives for qualified investments made in a qualified small business for each fiscal year beginning from and after June 30, 2017 through June 30, 2021, plus any unused credit capacity carried over from the preceding fiscal year(s). Through June 30, 2017, this small business tax credit is limited to an aggregate $20 million cap, which the Arizona House of Representatives bill summary stated was reached in June 2015. HB 2191 takes effect Aug. 9, 2017. Ariz. Laws 2017, Ch. 319 (HB 2191), signed by the governor on May 22, 2017. Michigan: New laws (SB 111, SB 112, SB 113, SB 114 and SB 115) comprise a tax increment financing legislative package that creates "Transformational Brownfield Plans" (TBPs) through Dec. 31, 2022. SB 111 defines a TBP, describes the majority of the program requirements, including (1) the minimum capital investment required proportionate to a locality's size; (2) the criteria to meet the mixed-use development standard; and (3) the capture of three kinds of revenues — construction period tax capture revenues, income tax capture revenues, and withholding tax capture revenues — subject to caps and a 20-year time limit. SB 112 requires an amount equal to the capture revenue set to be transferred under a TBP to be deposited each fiscal year into the State Brownfield Redevelopment Fund. SB 113 exempts from sales tax the sale of tangible personal property that will be affixed and made a structural part of the real property or infrastructure improvements included with the TBP. SB 114 exempts from use tax tangible personal property acquired by a person engaged in the business of altering, repairing, or improving real estate for others, or the manufacture of a specific product, if the property or product is going to be affixed or made a structural part of real property improvements within a TBP, to the extent those improvements are eligible activities on eligible property within a TBP. Lastly, SB 115 amends the Michigan Renaissance Zone Act to provide that when a portion of a Renaissance Zone is included within a TBP, the real property owner and the local government unit that designated the zone can request that the Income Tax Act and City Income Tax Act exemptions do not apply in the portion of the TBP that overlaps with the Renaissance Zone. New TBPs will not be approved after Dec. 31, 2022, and unused plans cannot be carried over after that. These bills take effect July 24, 2017. Mich. Laws 2017, Pub. Act. 46 (SB 111), Pub. Act. 47 (SB 112), Pub. Act 48 (SB 113), Pub. Act. 49 (SB 114), Pub. Act 50 (SB 115), all signed by the governor on June 8, 2017. Colorado: An assessor had the statutory authority to retroactively assess property taxes on an oil and gas leasehold operator (operator) whom the assessor determined had underreported the wellhead selling price of carbon dioxide gas produced at the leaseholds by claiming excess transportation deductions. In reaching this conclusion, the Colorado Supreme Court found that based on legislative history and the state's self-reporting property tax scheme for oil and gas leaseholds, underreporting the selling price or the quantity of oil and gas sold from a leasehold is a form of omitted property, which may be retroactively assessed. In addition, the court found the Board of Assessment Appeals did not err in determining that the operator had underreported the wellhead selling price because the operator held a 50% partnership ownership interest in the pipeline company used to transport the gas, making the operator and pipeline company "related parties." The operator deducted the full transportation tariff it paid to the pipeline company, but as a related party it was only entitled to a partial deduction of the amount paid for those services. Kinder Morgan CO2 Co., LP v. Montezuma Cnty. Bd. of Comrs., 2017 CO 72 (Colo. S. Ct. June 19, 2017). Kansas: New law (HB 2212) exempts from property tax all buildings, related land, and associated tangible personal property owned by a redevelopment authority and located in a redevelopment district within a former federal enclave. To qualify for the exemption, the property must be leased to a business and then used exclusively for manufacturing, research and development, or processing and storing goods or commodities sold or traded in interstate commerce. An exemption granted under this provision shall not be in effect for more than 10 calendar years after the calendar year in which the business begins its operations or the calendar year after the expansion of an existing business is completed. Additionally, HB 2212 expands the list of tax exempt property for which Kansas does not require the owner to first file an initial request for exemption to include recreational vehicles exempt from property or ad valorem taxation, property acquired by a land bank exempt from property or ad valorem tax, and property that exclusively belongs to the United States and is exempt from ad valorem tax (this exemption does not apply to property declared to be subject to state and local tax by Congress). Further, applicable to exemption requests filed after June 30, 2017, a property owner seeking an exemption for certain crude oil or natural gas pipeline property is required to file an initial exemption request within two years of the date in which construction of a new qualifying pipeline property began. These provisions took effect July 1, 2017. Kan. Laws 2017, HB 2212, signed by the governor on June 23, 2017. New Hampshire: A municipality lacked the statutory authority to tax a telecommunications company's use of the municipality's rights of way because the telecommunications company had not consented to be taxed. In reaching this conclusion, the New Hampshire Supreme Court found that even though the telecommunications company used or occupied the municipality's rights of way, it did not do so under a lease or other agreement that provided for payment of real or personal property taxes by the party using or occupying the property. Rather, the municipality and utility providers were parties to a pole license that provided for the payment of property tax. Because the telecommunications company is not a party to the pole license, it is not subject to its terms. segTEL, Inc. v. City of Nashua, No. 2016-0305 (N.H. S. Ct. June 9, 2017). Tennessee: New law (HB 1367) requires the property of "modern market telecommunications providers" to be assessed at the commercial and industrial property rate applicable to the same property type, except that leased personal property is assessed as that used by a public utility company. This change applies to all ta periods beginning on or after Jan. 1, 2017. Further, beginning Jan. 1, 2023, the operating property of a municipal or similar provider of broadband services that provides local exchange telephone services or interconnected voice over internet protocol services (collectively, "services") through a dedicated telecommunications division, and that makes in lieu of tax payments and is currently paying the lieu of taxes based on an assessment rate of 55%, will be classified and assessed in the same manner as the operating property of a modern market telecommunications provider for purposes of calculating the in lieu of tax payments to be paid on its operating property used to these services. Tenn. Laws 2017, Ch. 490 (HB 1367), signed by the governor on June 6, 2017. Tennessee: New law (HB 1367), beginning Jan. 1, 2018, subjects modern market telecommunications providers to an annual privilege tax for the privilege of competing with public utilities to provide telecommunications in Tennessee. The amount of the privilege tax is equal to the sum of: (a) the taxpayer's pro rata share percentage multiplied, as applicable, by: (1) $4 million for the tax imposed in 2018, (2) $3 million for the tax imposed in 2019, (3) $2 million for the tax imposed in 2020, (4) $1 million for the tax imposed in 2021, and (5) $0 for the tax imposed in 2022; and (b), the pro rata share percentage multiplied by: (A) $750,000 for the tax imposed in 2018, 2019, and 2020; or (B) $500,000 for the tax imposed in 2021 and 2022. A taxpayer's pro rata share percentage is the taxpayer's pro rata share of the total assessed value of all operating property used by the modern market telecommunications providers in Tennessee during 2017. The total privilege tax imposed cannot exceed a calculated amount. The privilege tax is due annually on or before April 20, and it is repealed on Dec. 31, 2022. Tenn. Laws 2017, Ch. 490 (HB 1367), signed by the governor on June 6, 2017. Delaware: New law (Senate Substitute 1 for SB 79), modifies some of the recently enacted changes to the state's unclaimed property law. Notably, provisions of the bill give the Secretary of Finance (consulting with the Secretary of State) until Dec. 1, 2017 (formerly July 1, 2017) to adopt regulations regarding Delaware's estimation method. The requirements for what must be included in the regulations are unchanged from previous reform efforts. For consistency purposes, an amendment in the bill removes the July 1, 2017 notification deadline for holders that choose to convert pending State Escheator examinations authorized on or before July 22, 2015 into a review under the Delaware Secretary of State's voluntary disclosure program (VDP). As amended, the notice must be received within 60 days of the adoption of the estimation regulations for a holder to convert the examination into a review under the VDP. The bill also amends the effective date for due diligence mailing requirements to July 1, 2017. Additionally, the bill clarifies that when a holder pays or delivers property to Delaware's State Escheator in good faith, the state will indemnify and defend that holder against a foreign jurisdiction's claims to the property. Finally, provisions of the bill permit the State Escheator to waive interest under certain circumstances. Interest will be waived for any holder that filed its intent to enter the Delaware Department of Finance's expedited estimation process within 60 days of the adoption of the required regulations, provided the holder acts in good faith to complete the examination. Additionally, for good cause shown, the State Escheator can offer the following relief: (1) the partial or full waiver of interest due for unclaimed property remitted with certain statutorily required reports; (2) before Jan. 1, 2019, the partial or full waiver of interest for unclaimed property remitted to Delaware from securities examinations that do not require estimation; or (3) the waiver of up to 50% of other unclaimed property interest due by statute. Del. Laws 2017, Sen. Sub. 1 for SB 79, signed by the governor on June 29, 2017. International: In accordance with the Mexican President's request to maintain a permanent public comment process to guide the North American Free Trade Agreement (NAFTA) modernization, the Ministry of Economy announced, on June 26, 2017, a new website that will serve as the mechanism for public comments on the NAFTA modernization. Using the website, interested parties may publish comments and attach their proposals regarding the NAFTA modernization from June 26 through July 26, 2017. For additional information on this development, see Tax Alert 2017-1072. International: Effective June 1, 2017, Ecuador reduced the value added tax (VAT) rate from 14% to 12%, reversing the temporary increase established in the Solidarity Contribution Law. The Solidarity Contribution Law for the Reconstruction and Reactivation of the Zones Affected by the Earthquake of April 16, 2016, was published in Official Gazette Supplement No. 759 on May 18, 2016. The Second Transitory of the Solidarity Contribution Law increased the VAT rate from 12% to 14% for one year beginning the month following the Act's publication (i.e., June 1, 2016). On June 1, 2017, the VAT rate returned to 12%. This VAT rate applies for all tax effects. For additional information on this development, see Tax Alert 2017-1065. International: India's comprehensive dual Goods and Services Tax (GST) has replaced the complex multiple indirect tax structure as of July 1. The concept of GST was introduced in 1999. On August 8, 2016, the Constitutional Amendment Bill for implementation of the GST was passed by the Parliament, followed by ratification of the bill by more than 15 states and enactment of the bill in early September. For additional information on this development, see Tax Alert 2017-1080. Federal: On Tuesday, July 18, 2017 from 2:00 - 3:15 p.m. EDT New York (11:00 a.m. - 12:15 p.m. PDT Los Angeles), join Ernst & Young LLP for a webcast on the latest developments with respect to the Affordable Care Act (ACA). With the House passage of the American Health Care Act (AHCA) on May 8, 2017, the focus of healthcare reform shifts to the Senate, which is drafting its own bill to repeal and replace the ACA. While including many AHCA provisions, the Senate's Better Care Reconciliation Act (BCRA) differs significantly from the House bill. Further changes to the BCRA are likely, as Senate Republicans work to get the votes needed to pass their bill. Join our panel of EY professionals for a discussion of how US healthcare reform may affect your business and your employees. Topics to be discussed include: (1) potential effects of the AHCA and the BCRA on businesses; (2) next steps in the legislative process; (3) possible state reactions to enactment of the proposed legislation; (4) potential effects of the proposed legislation on employer reporting requirements; (5) the possibility of new IRS guidance on large employer information reporting; (6) employers' reactions to the uncertainty in the current healthcare legislative and regulatory environment, particularly as it relates to their employees. Register for this event. Multistate: On Wednesday, July 26, 2017 from 1:00-2:15 p.m. EDT New York (10:00-11:15 a.m. PDT Los Angeles) Ernst & Young LLP presents its 2017 state tax legislative session round-up webcast. During the webcast, the following topics will be discussed: (1) focused discussion of California's overhaul of the State Board of Equalization and establishment of the new Department of Tax and Fee Administration and the new Office of Tax Appeals; (2) Kansas's repeal of pass-through entity individual income tax exemption; (3) states' continued expansion of sales and use tax nexus provisions aimed at remote retailers; (4) other significant state tax law changes enacted across the US, including the new Illinois budget; and (5) identification of state legislative action to watch during the remainder of 2017. To register for this event, go to 2017 state tax legislative round-up. 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: 2017-1140 |
