16 August 2017 State and Local Tax Weekly for August 4 Ernst & Young's State and Local Tax Weekly newsletter for August 4 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. The Ohio Board of Tax Appeals (BTA) recently issued its decision in Greenscapes Home and Garden Products, Inc. v. Testa, BTA Case No. 2016-350 (July 19, 2017). The BTA's decision is its first one analyzing the application of the situsing rule for sales of tangible personal property for Commercial Activity Tax (CAT) purposes provided in Ohio Rev. Code §5751.033(E). The taxpayer is a wholesaler of lawn and garden products based in Georgia. The taxpayer's sales were made primarily to "big box" retailers. After an audit, an assessment of CAT was made. The assessment, and eventual Tax Commissioner Final Determination, was based on sales information showing "ship to" addresses in Ohio. At the BTA hearing, the taxpayer presented testimony that it sold its products directly to the customer by providing its product at its Georgia location, loading it onto the customer's selected mode of transportation and provided a bill of lading to the truck driver that indicated the ultimate ship-to address. After that, the taxpayer no longer tracked the location of the product. In upholding the Tax Commissioner's determination, the BTA noted that the CAT situsing rule for tangible personal property was nearly identical to the situsing rule utilized for the now phased-out corporation Franchise Tax. Accordingly, the BTA looked to the Ohio Supreme Court's (Court) decision in Dupps Co. v. Lindley, 62 Ohio St.2d 305 (1980) for guidance in applying the CAT situsing rule. Dupps was a Franchise Tax case that presented the opposite situation before the BTA. In Dupps, the taxpayer was an Ohio-based manufacturer whose sales were picked up at its facility by its customers and transported out of Ohio. The Court held that the Franchise Tax apportionment statute looked to the ultimate destination of the goods after all transportation was completed. The Court concluded that the sales were sitused outside Ohio. The Court also said that whether the seller or the buyer designated the common carrier was irrelevant in making that determination. Applying Dupps to the facts before it, the BTA concluded that, "[a]t the time the taxpayer sold the goods to its customers, it knew their ultimate destination to be Ohio, based on its customer's orders and the bills of lading it provided to the drivers transporting the product." The BTA acknowledged that it may be possible that the taxpayer's customers, after the shipment to Ohio, could ultimately ship those same goods to retail stores outside Ohio. The BTA, however, dismissed that line of reasoning as the taxpayer did not present any information about such subsequent transportation. It is unknown at this time whether the taxpayer will appeal this decision. For additional information on this development, see Tax Alert 2017-1247. California: The California Franchise Tax Board (FTB) issued a Chief Counsel Ruling addressing the application of market-based sourcing rules for non-marketing services under Cal. Rev. and Tax Code §25136 and Cal. Regs. §25136-2 — specifically when both the customer and the customer's customer receive a benefit of the service. In this case, the taxpayer provides services in connection with managing and administering benefit programs that its customers (e.g., managed care organizations, health insurers, employers, union sponsored benefit plans, government health plans, worker's compensation plans, third-party administrators) are contractually obligated to provide under health plan agreements entered into with plan sponsors or their members. The FTB concluded that the taxpayer should assign the sales of its non-marketing services to California to the extent its direct customers and not the customers' customers, receive the benefit of service in this state. The FTB further determined that the benefit received by the taxpayer's customers "is that of being relieved of the obligation to perform the business functions required under their Health Plan Agreements." The FTB then applied the cascading rules set forth in Reg. §25136-2(c)(2) to determine the location of where the customer received the benefit — i.e., where the customer received the benefit of not having to perform the service provided by the taxpayer. In this case, the FTB determined that the customers' current base of operations may be the best indicator of where the customers would perform this service themselves. Cal. FTB, Chief Counsel Ruling 2017-01 (April 7, 2017). Michigan: The Michigan Department of Treasury (Department) has issued a notice to taxpayers clarifying how it will proceed with audits, informal conferences, and litigation relating to the retroactive repeal of the Multistate Tax Compact (Compact), a provision of which allowed a taxpayer to make an election to use the Compact's equally weighted three-factor apportionment formula to determine certain Michigan tax liabilities. With the litigation on this matter now final, the Department will proceed as follows regarding Compact election related matters: (1) All audits that were held in abeyance pending the final outcome of the Compact litigation will be processed. This may result in Intents to Assess or refund denials, as applicable. (2) Taxpayers who timely requested (and were acknowledged for) an informal conference, which is in abeyance, will be contacted by the Department to determine how the taxpayer would like to proceed. The taxpayer will be given the option to withdraw from informal conference or proceed as there may be other non-Compact tax issues in dispute. (3) Regarding cases before the Michigan Tax Tribunal or the Michigan Court of Claims, the Department intends to file motions for summary disposition unless the taxpayer stipulates to dismiss. Cases involving issues beyond the Compact election will proceed as normal. If a taxpayer wishes to discuss the status of its case with the Department, the taxpayer's legal counsel or representative should contact the Assistant Attorney General representing the Department. For additional information on this development, see Tax Alert 2017-1277. Minnesota: The Minnesota Supreme Court, in Ashland Inc. and Affiliates, affirmed the decision of the Minnesota Tax Court that Minnesota state law clearly provides for conformity with the status of an eligible foreign entity electing to check the box to be disregarded as a separate entity from its parent, and that Minnesota's water's edge provisions could not render the conformity provisions superfluous. Accordingly, the income and apportionment factors of the disregarded foreign entity were properly included in the taxpayer's Minnesota unitary combined report. Ashland Inc. and Affiliates v. Minn. Comm'r of Revenue, No. A16-1257 (Minn. S. Ct. Aug. 2, 2017). For additional information on this development, see Tax Alert 2017-1306. Missouri: The Missouri State Treasurer announced that general revenue collection met the revenue growth threshold to allow the phase-in of income tax cuts enacted 2014 to begin. Under SB 509 (Mo. Laws 2014) the top individual income tax rate of 6% gradually will be reduced to 5.5% and an individual income tax deduction for business income will be phased-in until it reaches 25%. The income tax rate will be reduced by 0.10%, and the deduction will be increased by 5%, in each calendar that the net general revenue collected in the previous fiscal year exceeds the highest amount of net general revenue collected in any of the three fiscal years prior to such fiscal year by at least $150 million. Accordingly, for tax year 2018, the highest individual income tax rate will be 5.9% and a 5% deduction for business income will be allowed. Mo. State Treasurer, News Release "Tax cuts on the way for Missourians in 2018" (July 6, 2017). Oregon: New law (HB 2273) eliminates the functional test for purposes of determining a corporation's apportionable income. In addition, the definition of "sales" under ORS 314.610(7) is amended to mean "all gross receipts of the taxpayer that are not allocated … and that are received from transactions and activity occurring in the regular course of the taxpayer's trade or business" and excludes receipts from hedging and securities transactions; property or money received or acquired by a person acting on another's behalf in excess of the recipient's commission, fee or other remuneration; or amounts received from others and held in trust by the taxpayer. The Oregon Department of Revenue can designate by rule other exceptions. The amended definition of "sales" under ORS 314.610(7) does not apply to taxpayers required to allocate and apportion income under ORS 314.280 (i.e., financial institutions, public utilities). These changes apply to tax years beginning on and after Jan. 1, 2018. Ore. Laws. 2017, Ch. 622 (HB 2273), signed by the governor on Aug. 2, 2017. California: New law (AB 398) extends and expands the sales and use tax exemption for manufacturing. The exemption is extend through periods before July 1, 2030, and expanded as follows: (1) effective on and after July 1, 2014 and before July 1, 2030, the exemption applies to qualified property purchased for use primarily in the generation or production, or storage and distribution, of electric power; (2) effective on and after Jan. 1, 2018 through July 1, 2030, the exemption applies to special purpose buildings and foundations used for the generation or production or storage and distribution of electric power; and (3) effective on and after Jan. 1, 2018 through July 1, 2030, the definition of qualified person is expanded to include a person primarily engaged in the business of electric power generation. Cal. Laws 2017, Ch. 135 (AB 398), signed by the governor on July 25, 2017. New York: Cloud collaboration services constitutes prewritten software and, therefore, a company's charges for such services are subject to state and local sales taxes. The New York Department of Taxation and Finance found the essence of the company's product is software because it facilities the operation of a customer's telecommunication system by allowing the customer to remotely access its software, which then "instructs" the customer's own equipment to perform various functions (i.e., voice, video, messaging, presence, audio conferencing, web conferencing, and mobility services). Moreover, the company's receipts from the service constitute receipts from the sale of prewritten software since the customer obtains constructive possession of the software when engaging in a contract to purchase a license to use the product (e.g., the customers have the right to use, control, and direct the use of the company's software to facilitate the operation of the customers' telecommunication systems). The company's start-up charges for modifying its software to enable it to interact with and direct the customer's telecommunication system constitute receipts from custom software and are not subject to sales tax, provided the charge for the customization is reasonable and separately stated on the invoice. Additionally, the company's purchases of hardware it uses to provide the cloud collaboration service will not be subject to sales or use tax if the hardware is not delivered or used by the company in New York. Finally, if the company purchases software in New York that is intended exclusively for resale to its customers, the purchases would be exempt from sales tax, provided the company provides the vendor with a resale certificate. N.Y. Dept. of Taxn. and Fin., TSB-A-17(9)S (July 6, 2017). Puerto Rico: On July 19, 2017, Puerto Rico enacted Act 46-2017, which amends various sections of Puerto Rico's Internal Revenue Code (PRIRC), including the sales and use tax (SUT) provisions. Specifically, Act 46-2017 amends the SUT provisions to require taxpayers to pay the sales tax on a bimonthly basis. To address the new rules, the Puerto Rico Treasury Department (PRTD) issued Administrative Determination 17-07 (AD 17-07) to establish the process taxpayers must follow to comply with the new deposit rules and to extend the effective date. For additional information on this development, see Tax Alert 2017-1266. Texas: A limited liability company (LLC) is entitled to a partial exemption on its purchases of taxable items if: (1) one or more of its members qualifies for an exemption from the sales and use tax as a religious, educational, or public service organization; (2) it has a medical purpose; (3) it operates similarly to a joint venture; (4) it files as a partnership for federal income tax purposes; and (5) the items purchased relate to the tax-exempt purpose of the exempt member. The partial exemption is equal to the percentage of the LLC owned by an exempt member(s), while the total tax exemption claimed by the LLC cannot exceed the amount of charity care and government-sponsored indigent health care it provides. This ruling applies to all open periods; thus, eligible LLCs that did not claim a sales tax exemption on qualifying purchases may file a refund claim. Tex. Comp. of Pub. Accts., No. 201707003L (July 7, 2017). Virginia: Out-of-state dealers whose only contact with the state is the storage of resale inventory of tangible personal property in fulfillment centers located in Virginia as of June 1, 2017 have sufficient activity in the state to require them to register for sales and use tax in Virginia. The Virginia Department of Taxation explained that under a recent law change, which took effect June 1, 2017, a dealer has sufficient activity to require registration if the dealer owns tangible personal property that is for sale located in Virginia. Accordingly, the dealers must file monthly out-of-state dealer's sales tax returns (Form ST-8) and Schedule of Local Sales and Use Taxes (Form ST-8A) to allocate local tax to the localities where the tangible personal property is delivered. Additional information about the law change is available in Virginia Tax Bulletin 17-3 (May 3, 2017). Va. Dept. of Taxn., Ruling of the Tax Comr. 17-102 and Ruling of the Tax Comr. 17-104 (both issued June 21, 2017). Connecticut: New laws (SB 966 and HB 7316) expand the scope and information required to be included in the annual economic development-related report submitted by the Department of Economic and Community Development (DECD) to also include business assistance or incentive programs not administered by the DECD. The bills further require the DECD to include in its annual report the following information: (1) economic impact information (number of new jobs created, the state's borrowing cost, and the estimated impact of the program on annual state revenues) about various business assistance and incentives programs; (2) whether the goals of each business or incentive program are being met; (3) recommendations as to whether the program should be continued, modified, or repealed, or if additional data information is needed to better inform future evaluations of these programs; and (4) methods and assumptions the DECD used in its analyses of these business and incentive programs. In addition, SB 966 amends the DECD report requirements related to First Five Plus, a financial assistance program for businesses. The report requirements for First Five Plus must include the net rate of return to the state for the entire program portfolio (including all forgiven loans and permitted tax credits) and recommendations regarding whether the program should continue. Further, the Auditors of Public Accounts must audit the DECD's reports, and the joint standing committees of the Connecticut General Assembly annually must hold joint or individual public hearings on the analyses included in the reports. These changes took effect from passage. Conn. Laws 2017, PA 17-219 (SB 966) and PA 17-226 (HB 7316), each signed by the governor on July 11, 2017. California: New law (AB 652) prohibits new construction in progress from acquiring a new base year value until the completion date (under prior law, construction in progress on the lien date had to be appraised at its full value on that date, and each lien date thereafter, until construction was completed). For taxpayers seeking a reduction in assessment, AB 652 authorizes an application for reduction in the value of new construction that is in progress on the lien date on the current roll to be filed during the regular filing period for that year. It also authorizes an application for reduction in the base year value determined upon completion of new construction to be filed during the regular equalization period for the year in which the assessment is placed on the assessment roll or in any of the three succeeding years. AB 652 prohibits the state from reimbursing local agencies for property tax revenues lost by virtue of the new law, but permits reimbursements to local agencies and school districts for costs that the Commission on State Mandates determines to be state mandated. AB 652 took immediate effect. Cal. Laws 2017, Ch. 80 (AB 652), signed by the governor on July 21, 2017. Maine: Recently enacted LD 1551 changes the deadline to submit Forms W-2/1099 to Maine Revenue Services (MRS) to January 31, effective with calendar year 2017 forms, due in 2018. According to a senior MRS representative, the deadline for filing Form W-3ME, Reconciliation of Maine Income Tax Withheld, will remain at February 28. For additional information on this development, see Tax Alert 2017-1270. Maine: The Maine Revenue Services has released revised 2017 withholding tables that employers are instructed to begin using immediately. The tables contained in the employer's withholding tax guide have been updated to reflect the recent repeal of the 3% income tax surcharge on individuals with income greater than $200,000. Employers are instructed to discard the 2017 guide with a "12/16" revision date in the lower right corner of the front cover, and instead begin immediately using the tables in the revised guide with a "7/17" revision date. For additional information on this development, see Tax Alert 2017-1262. New Hampshire: The merger of three multi-member limited liability companies is not exempt from the real estate transfer tax because the transactions are not specifically exempt by statute. The New Hampshire Department of Revenue Administration determined in a private letter ruling that no existing statutory exemptions applied to the merger of multiple entities with identical ownership. N.H. Dept. of Rev. Admin., Doc. No. 12204 (effective June 8, 2017). Washington: The Washington Department of Revenue (Department) advised that merchant discount amounts are gross income to the credit card processor and, therefore, are subject to tax under the business and occupation (B&O) tax service and other business activities classification. The Department noted that in limited situations where both the parties' practices and contractual documents show that a merchant bank (or another entity that markets processing services to merchants) pays the processor fees for services that the processor performs solely as an agent of the merchant bank (or other entity), the fees are the measure of the processor's gross income. In this situation, the merchant discount is gross income to the merchant bank (or other entity). The Department provided explanatory examples. Wash. Dept. of Rev., ETA 3204.2017 (June 26, 2017). International: Saudi Arabia's Tax Authority, General Authority of Zakat and Tax (GAZT), has released a draft bilingual version of the Value-added Tax (VAT) Implementing Regulations (the Bylaw) on its portal for public consultation. With the official publication of the finalized VAT law in the Saudi Gazette, businesses should be able to assess their operation and prepare for the implementation of VAT on Jan. 1, 2018. The scope of the standard rate VAT is wide and there are very few zero-rated or exempt items, as food, health, education and first sale of residential property are not zero-rated. For additional information on this development, see Tax Alert 2017-1268. All States: On Wednesday, 30 August 2017, from 1:00-2:00 p.m. EDT New York (10:00-11:00 a.m. PDT Los Angeles), EY will host a webcast in our state income tax base seminar series. Our fourth and last income tax seminar in the tax base series will address state tax issues that arise with respect to net operating losses (NOLs). The panelists will provide an overview of the differences between federal NOL and dividend received deduction provisions and those in a variety of states, with a focus on state conformity problems with the IRC §382 annual NOL valuation limitations and the separate return limitation year (SRLY) rules, notably with respect to the differences between federal consolidated reporting and state combined and separate return reporting. The panelists also will discuss state tax accounting implications that affect a company's workpapers and provisions in measuring, reporting and adjusting NOL reporting both in response to different state statutory limitations and changes in business operations that affect these sometimes enormously complex calculations. To register for this event, go to Analyzing tax base issues. 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: 2017-1327 |
