23 August 2017 State and Local Tax Weekly for August 11 Ernst & Young's State and Local Tax Weekly newsletter for August 11 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. Rhode Island enacts expansive sales and use tax nexus provisions, includes marketplace and economic nexus as well as notification requirements for nonregistered remote sellers On Aug. 3, 2017, Rhode Island Governor Gina Raimondo (D) signed the state's FY18 appropriations bill, (HB 5175, Sub. A), which contains a number of provisions aimed at compelling remote sellers to collect and remit sales and use taxes on transactions with in-state customers. Rhode Island's new laws are the most expansive provisions aimed at remote sellers enacted by any state to date, as they effectively cobble together economic, affiliate, click-through, warehouse, and marketplace provider nexus measures that currently are in place in other states along with nonregistered remote seller notification requirements. These provisions are set to take effect on Aug. 17, 2017. The bill creates a new chapter under Title 44 of the General Laws of Rhode Island that begins by noting that while "the Commerce Clause of the United States Constitution prohibits states from imposing an undue burden on interstate commerce … it is no longer an undue burden for non-collecting retailers to accurately compute, collect and remit and/or report with respect to their sales and use tax obligations to Rhode Island." The bill also notes that the existence and/or presence of a non-collecting retailer's or its facilitator's "in-state software on the devices of in-state consumers constitutes physical presence," as required under Quill Corp. v. North Dakota.1 "In-state software" is defined as: "software used by in-state customers on their computers, smartphones, and other electronic and/or communication devices, including information or software such as cached files, cached software, or 'cookies', or other data tracking tools, that are stored on property in this state or distributed within this state, for the purpose of purchasing tangible personal property, prewritten computer software delivered electronically or by load and leave, and/or taxable services." Emphasis added. Under the newly enacted provisions, any non-collecting retailer that had in-state sales of $100,000 or more or engaged in 200 or more transactions with in-state customers in the preceding calendar year must register for a sales tax permit and begin collecting and remitting sales tax on all taxable sales in the state or comply with detailed notice and reporting requirements, similar to those that took effect in Colorado and other states on July 1, 2017.2 The bill broadly defines a "non-collecting retailer." In-state referrers must provide written notice within 30 days to retailers that their sales may be subject to Rhode Island sales and use tax. The bill defines in-state referrer as any person that contracts or agrees with a retailer to list or advertise for sale in the state tangible personal property or taxable services sold by the non-collecting retailer, that receive more than $10,000 in commissions in any calendar year. Beginning Jan. 15, 2018, retail facilitators must provide the Rhode Island Division of Taxation with a list of the retailers for whom the facilitator provided services (regardless of whether the facilitator collected sales or use taxes on their behalf). The bill defines retail facilitators generally as persons that facilitate a sale by a retailer by using in-state software, listing or advertising goods for sale, or directly or indirectly collecting payments from in-state customers and transmitting those payments to the retailer. The new law includes limited exceptions for referrers and facilitators that can provide a Rhode Island sales tax permit or a Rhode Island or Streamlined Sales Tax exemption certificate. Non-compliance with any of the new provisions, whether by a non-collecting retailer, referrer, or facilitator, is subject to a $10 per incident penalty, with a minimum annual penalty of $10,000, in addition to any other penalties that may be imposed under the state's tax laws. For additional information on this development, see Tax Alert 2017-1296. Indiana: For-profit higher education institutions (institutions) must include tuition payments for online courses paid by Indiana students in the numerator of their sales factor in computing their Indiana corporate income tax. The Indiana Department of Revenue (Department) determined that income from the online courses is Indiana source income because all of the income-producing activity (i.e., sales of online courses, including giving class instructions to Indiana students) is rendered in Indiana when the Indiana students attend the online courses. The Department rejected the institutions' argument that these costs were in their headquarters state (which was in all cases Illinois), finding the institutions did not offer any documentation in support of this argument. The Department, however, abated the institutions' underpayment penalty based on the reasonable argument that, when the returns were filed, their online revenue was sourced based on their interpretation of Indiana law. Ind. Dept. of State Rev., Letter of Findings 02-20150399, 02-20150400, and 02-20150401 (July 26, 2017). New Hampshire: New law (SB 225) requires interest and dividend income received by foundations treated as grantor trusts under IRC § 671 be included in the grantor's return to the extent that the grantor is a New Hampshire inhabitant or resident. Income reported by, and taxed federally as interest or dividends to, a trust or foundation beneficiary who is a New Hampshire inhabitant or resident with respect to distributions from a trust or foundation that is not treated as a grantor trust under the IRC is included as interest or dividends in the beneficiary's return and subject to tax. For purposes of business profits tax and business enterprise tax, trusts or foundations treated as grantor trusts under IRC § 671 are included in their owner's return, and the owners are subject to the tax to the extent the owner would be considered a business organization or business enterprise, notwithstanding the existence of a trust or foundation. Finally, for purposes of the business profits tax, a foundation (except a grantor trust under IRC § 671 (as well as other pass-through entities) whose net income is reportable by true owners either directly or indirectly), is subject to tax at the entity level, and no part of the earnings or loss is included in the calculation of the gross business profits of the entity owners. These changes take effect Oct. 1, 2017. N.H. Laws 2017, Ch. 257 (SB 225), signed by the governor on July 18, 2017. Massachusetts: The Massachusetts Department of Revenue (DOR) issued a proposed regulation that would impose a modified bright-line nexus standard for purposes of determining nexus and sales or use tax collection responsibilities for out-of-state internet vendors. The proposed regulation, 830 CMR 64H.1.7 (Proposed Internet Seller Regulation), includes nexus rules that are slightly more narrow than the broad, bright-line nexus standard previously set out in Directive 17-1 (issued by the DOR on April 3, 2017 which it repealed before it went into effect with Directive 17-2 (issued on June 28, 2017)). Once approved, the Proposed Internet Seller Regulation would apply for sales starting on Oct. 1, 2017. EY Tax Alert 2017-1299 summarizes the rules in the Proposed Internet Seller Regulation and the pertinent changes from those rules originally set out in the since repealed Directive 17-1. The DOR will hold a public hearing on the Proposed Internet Seller Regulation on Aug. 24, 2017. Massachusetts: In D&H Distributor, the Massachusetts Supreme Judicial Court (Court) affirmed the appellate tax board ruling that certain deliveries by an out-of-state wholesale distributor (wholesaler) who had nexus with Massachusetts to Massachusetts customers are subject to the state's sales tax, because under the state's drop shipment rule, Massachusetts treats the party that supplied the product and ultimately affected its delivery into the state as the vendor who sold the products to the ultimate consumer. In so holding, the Court rejected the wholesaler's burden-shifting argument that before the drop shipment rule can be applied to a wholesaler, the Massachusetts Commissioner of Revenue (Commissioner) must make a preliminary determination that a retailer is not actually engaged in business in the state. The Court found the Commissioner "must provide an evidentiary basis for an assessment," the assessment is "presumptively correct," and the taxpayer bears the burden of proof that they are entitled to an abatement. Here, the wholesaler, even though it had a business practice of requiring retail customers to disclose states in which they did business, failed to rebut the presumption that its retail customers were doing business in Massachusetts. Lastly, the Court ruled that the drop shipment rule does not discriminate against interstate commerce because scenarios involving in-state and out-of-state vendors are equally subject to tax and there is no greater burden on the transaction using an out-of-state vendor. D&H Distributor Co. v. Massachusetts Comm'r of Rev., No. 477 Mass. 538 (Mass. S. Jud. Ct. July 31, 2017). Rhode Island: New law (HB 5175, Sub. A) provides that new exemption certificates for charitable, educational and religious organizations will be valid for four years from the date of issue. Exemption certificates issued before July 1, 2017 to such organizations will expire four years from the effective date of this provision. HB 5175 also exempts from sales and use tax sales of seeds and plants used to grow food. These changes took effect July 1, 2017. R.I. Laws 2017, HB 5175, Sub. A, signed by the governor on Aug. 3, 2017. Texas: The Texas Comptroller of Public Accounts (Comptroller) issued a letter ruling addressing the sales and use taxability of various labor charges for work related to an underground pipeline. Labor charges for the following are not subject to sales/use tax as either new construction or complete demolition: (1) the placement of a new pipeline next to existing pipeline, (2) the construction of a new pipeline in a new trench that is "substantially deeper" (at least one-third greater depth) than the trench of the existing pipeline, (3) the placement of a new pipeline in a new trench that is substantially shallower (existing pipeline is at least one-third greater depth) than an existing pipeline, (4) the removal of existing pipeline from a trench before constructing a new pipeline at a depth that is at least one-third greater than the depth of the existing pipeline, and (5) the labor to fill an existing pipeline with concrete in order to abandon the pipeline. Labor charges for the following, however, are subject to sales/use tax as nonresidential real property repair or remodeling: (1) the replacement of the existing pipeline with a new pipeline at the same depth, (2) the excavation of the existing pipeline, (3) the labor to insert a new pipeline inside of an existing pipeline, (4) the connection of new pipeline to an existing pipeline, and (5) the labor to cap the ends of an existing pipeline. Charges to remove excavated, nonoperational pipe from the job site and transport it to the taxpayer's service yard or to a recycler are subject to sales/use tax as a taxable real property service. Finally, a contract that includes both taxable tie-in labor and nontaxable new construction labor is rebuttably presumed to be taxable in total if the tie-in labor represents more than 5% of the total charge, unless the charge for new construction labor is separately stated. Tex. Comp. of Pub. Accts., No. 201706007L (June 26, 2017). Maine: New law (LD 1639) establishes a refundable tax credit to encourage major businesses to locate or expand their headquarters in Maine. The refundable credit is equal to 2% of the certified applicant's qualified investment, beginning with the later of the tax year during which the certificate of completion is issued or the tax year beginning in 2020. It is available for each of the subsequent 19 years, but it is not allowed for any tax year during which the taxpayer does not meet or exceed specific employment targets. Cumulative credit may not exceed $16 million under any one certificate. Qualified applicants, at the time an application for a certificate of approval is submitted, must meet the following criteria: (1) have a headquarters that is or will be located in Maine, (2) employ at least 5,000 full-time employees worldwide of which at least 25% are or will be based in Maine, (3) have business locations in at least three other states or foreign countries, and (4) intend to make a qualified investment in Maine within five years following the date of the application. A qualified investment means an investment of at least $35 million to design, permit, construct, modify, equip or expand the headquarters in Maine. A qualified applicant must aggregate the investments and activities of the entities that are members of its unitary business to determine whether a qualified investment has been made; qualified investment does not include an investment made before the issuance of a certificate of approval or after Dec. 31, 2022. In addition, a certified applicant that obtains approval from the Maine Commissioner of Economic and Community Development may transfer the certificate of approval (or, if obtained, a certificate of completion), provided certain conditions are met. Finally, the legislation includes credit evaluation requirements that the state must complete by Feb. 28, 2018. Provisions of LB 1639 take effect Nov. 1, 2017. Me. Laws 2017, Ch. 297 (LD 1639), signed by the governor on July 24, 2017. Rhode Island: New law (HB 5777, Sub A) extends the sunset date of Rhode Island's Motion Picture Production Tax Credits to July 1, 2024 (from July 1, 2021). Credits will not be issued after that date unless the production received initial certification before that date. In addition, video games are removed from the definition of "motion picture." These changes took immediate effect. R.I. Laws 2017, HB 5777, Sub. A, signed by the governor on July 18, 2017. Oklahoma: A corporation filing a combined Oklahoma franchise and corporate income tax Form 512 or 512-S for 2016 will satisfy the franchise tax filing requirement for 2017 (this is NOT a unitary return). To make this election, a corporation must use Form 200-F, Oklahoma Tax Commission Franchise Election Form (Form 200-F), to notify the Oklahoma Tax Commission (OTC) of its election to file its annual franchise tax along with its corporate income tax return. Once an election is made, it is binding until a corporation submits a request to the OTC to reverse the election. Further, the OTC indicated in FAQs posted on its website that taxpayers who did not file Form 200-F by the due date for 2016 can still submit Form 200-F and file a combined franchise and corporate income tax return. For additional information on this development, see Tax Alert 2017-1304. Rhode Island: New law (HB 5175, Sub. A) modifies Rhode Island's estimated tax payment schedule to conform to federal rules. Effective for taxable years beginning after Dec. 31, 2017, corporations will make quarterly estimated tax payments each equal to 25% due the 15th day of the fourth, sixth, ninth and twelfth month of the taxpayer's tax year (from two estimated payments equal to 40% due March 15 and 60% due June 15). In addition, HB 5175 modifies pass-through entity withholding provisions to change the withholding rate for income distributed to corporate members to 7% (from 9%) to conform with the reduction of the state's corporate income tax rate that took effect in 2015. R.I. Laws 2017, HB 5175, Sub. A, signed by the governor on Aug. 3, 2017. Virginia: The Virginia Department of Taxation announced that it is following the additional federal corporate income tax filing extension. Accordingly, effective for taxable year 2016 returns and returns filed thereafter, corporate income tax filers will be granted a seven-month filing extension for Virginia corporate income tax purposes. The extension due date is unchanged for nonprofit corporations. Va. Dept. of Taxn., Tax Bulletin 17-9 (July 28, 2017). Alabama: The Alabama Attorney General (AG) issued an opinion that draft documents, such as versions of proposed administrative rules and legislation, used internally by the Alabama Department of Revenue (Department), are not subject to disclosure under Alabama's Open Records Law. Additionally, draft documents shared externally, as well as internal and external correspondence such as emails, on actions the Department might take are not subject to disclosure. The AG noted it has consistently opined that only completed records in final form are subject to disclosure, and that the preliminary nature of documents is not changed by virtue of the outside communication. Ala. Atty. Gen., No. 2017-036 (June 20, 2017). Rhode Island: New law (HB 5175, Sub. A) establishes a 75-day tax amnesty program that will run from Dec. 1, 2017 through Feb. 15, 2018. Amnesty applies to taxable periods ending before Dec. 31, 2016. For taxpayers participating in, and complying with the terms of, the amnesty program, the Rhode Island Department of Revenue will waive penalties and 25% of interest. Amnesty will not be granted to taxpayers currently under criminal investigation or are a party to any civil or criminal proceeding pending in any federal or Rhode Island court. Taxes covered under the amnesty program include corporate and individual income taxes, sales/use taxes and unemployment insurance tax. R.I. Laws 2017, HB 5175, Sub. A, signed by the governor on Aug. 3, 2017. Rhode Island: New law (HB 5175, Sub. A) allows the Rhode Island tax administrator to impose various administrative penalties on a licensee or taxpayer that violates any provision of the tax code or regulations. Administrative penalties include any one, or combination of, the following: (1) revoke or suspend a license or permit issued by the division of revenue, (2) impose a penalty not to exceed $50,000, and/or (3) order the violator to cease such action. The tax administrator also has the authority to issue a jeopardy determination when he/she believes that collection of tax, interest and penalty assessed will be jeopardized by delay. In addition, HB 5175 increases the cap on the amount of penalty that can be imposed on retailers or other persons that violate the provisions of Rhode Island's sales and use tax enforcement and collection rules to $25,000 (from $10,000). These provisions took effect July 1, 2017. R.I. Laws 2017, HB 5175, Sub. A, signed by the governor on Aug. 3, 2017. Iowa: The Iowa Workforce Development Department announced that the state unemployment insurance (SUI) taxable wage base will increase to $29,900 for calendar year 2018, up from $29,300 for 2017. For additional information on this development, see Tax Alert 2017-1295. Rhode Island: New law (HB 5175, Sub. A) increases the rate of the licensing fee imposed on hospitals to 5.856% (from 5.652%) upon the net patient-services revenue for the hospital's first fiscal year ending on or after Jan. 1, 2016. (Note, the rate of the licensing fee imposed on hospitals located in Washington County is discounted by 37%). Payment of the licensing fee is due by July 10, 2018. This change took effect July 1, 2017. R.I. Laws 2017, HB 5175, Sub. A, signed by the governor on Aug. 3, 2017. Rhode Island: New law (HB 5175, Sub. A) subjects domestic and foreign limited liability companies, domestic and foreign limited partnerships, or any other domestic or foreign business entities (collectively, "entities") to the same notice requirements as domestic and foreign corporations when there is a sale or transfer of a major part in value of the assets of the entities. Such entity has five business days before the sale or transfer to notify the tax administrator of the proposed sale or transfer and of the price, terms, and conditions of the sale and character and location of the assets by requesting a letter of good standing from the Rhode Island Division of Taxation. These requirements also apply for sales and use tax purposes, but do not apply to sales made by debtors in possession in bankruptcy, among others engaged in distressed debtor situations. These changes took effect July 1, 2017. R.I. Laws 2017, HB 5175, Sub. A, signed by the governor on Aug. 3, 2017. Delaware: The Delaware Department of Finance after receiving public comments on proposed amendments to the state's abandoned or unclaimed property regulations, issued revised proposed amendments for comment. Modifications were made to various provisions, including the following: (1) Section 2.5 — Indication of Owner Interest in the Property; (2) Section 2.8 — Address of Owner to Establish Priority; (3) Section 2.9 — Retention of Records by Holder; (4) Section 2.13 — Third-Party Advocates; (5) Section 2.14 — Confidentiality and Non-Disclosure Agreement; (6) Section 2.15 — Opening Conference; (7) Section 2.19 — Projection; (8) Section 2.22 — Remediation; and (9) Section 2.25 — Expedited Examinations. Comments on the revised proposed amendments are due by 4:00 p.m. (Eastern) on Aug. 31, 2017. North Carolina: New law (HB 294) modifies North Carolina's unclaimed property laws. Effective retroactively to Oct. 1, 2015, the provision permitting the State Treasurer (Treasurer) to destroy or otherwise dispose of property he/she determines has no substantial commercial value is reinstated. Effective Oct. 1, 2017, a holder of presumptively abandoned property is required to provide the apparent owner of the property with written notice by first-class mail not more than 120 days and at least 60 days before filing the statutorily mandated report. The notice must be sent when (1) property that is a security or other equity interest in a business association (including certain security entitlements) is valued at $25 or more (from $50 or more); or (2) other property is valued at $50 or more. HB 294 expands the list of information that must be included in the notice. Such information includes the contact information of the person holding the property and a statement that, once property is placed in the custody of the Treasurer, all interest, dividends, income, and gains earned on the property will remain with the Treasurer, even if the owner subsequently reclaims the property. A holder that willfully fails to adhere to the notice requirements is subject to interest and penalties. N.C. Laws 2017, Session Law 2017-134 (HB 294), signed by the governor on July 20, 2017. All States: On Aug. 30, 2017, from 1:00-2:00 p.m. EDT (10:00-11:00 a.m. PDT), EY will host a webcast in our state income tax base seminar series. The 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") and dividends received deductions ("DRDs"). The panelists will provide an overview of the differences between the federal NOL and DRD rules and those in a variety of states, with a focus on state conformity problems with the IRC §382 annual NOL valuation limitations and the SRLY rules. Of particular attention will be those differences which exist between the determinations under federal consolidated reporting and state combined and or separate company 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. Click here to register for this event. All States: Panelists on the recent 2017 state tax legislative round-up webcast hosted by Ernst & Young LLP (EY) highlighted some of the key state tax legislation enacted so far this year. Among the topics addressed were California's sudden and dramatic change in its tax administration, rate changes in various states, expansion of state sales and use tax nexus provisions aimed at remote retailers and a forecast of other state legislative action to watch during the remainder of 2017. For a summary of the webcast, see Tax Alert 2017-1310. The webcast is now available for replay on the EY Thought Center website. 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. 2 See EY Tax Alert 2017-1104. Document ID: 2017-1361 |
