30 August 2017 State and Local Tax Weekly for August 18 Ernst & Young's State and Local Tax Weekly newsletter for August 18 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. Amnesty programs: MTC program targeted at marketplace sellers, New Jersey program for click-through sales and use tax nexus, general tax amnesty programs in Oklahoma and Texas The Multistate Tax Commission (MTC) National Nexus Program is offering a voluntary disclosure initiative (VDI) from Aug. 17, 2017 through Oct. 17, 2017, for sellers that make sales through online marketplaces (online marketplace sellers). Participating states will consider VDI applications and, in exchange for executing a voluntary disclosure agreement (VDA), most states generally will waive sales/use and income/franchise tax liabilities for online marketplace sellers, including penalties and interest, for prior tax periods without regard to any lookback period. Both Wisconsin and Colorado are deviating from the general waiver.1 Wisconsin is requiring payment of back sales/use tax liability and interest beginning Jan. 1, 2015, and back income/franchise tax liability for the 2015 and 2016 tax years. Further, Wisconsin will limit the lookback period to prior years in which the marketplace seller had nexus. Colorado is providing relief from back tax liability for sales/use tax purposes, but for income/franchise tax purposes, it is requiring payment of back tax liability and interest for a four-year lookback period. In addition to Wisconsin and Colorado, other states and jurisdictions participating in the VDI include: Alabama, Arkansas, Connecticut, the District of Columbia, Florida, Idaho, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Minnesota, Missouri, Nebraska, New Jersey, North Carolina, Oklahoma, South Dakota, Tennessee, Texas, Utah and Vermont. For more on the MTC VDI, see Tax Alert 2017-1338. In New Jersey, the Division of Taxation (DOT) announced that a three-month voluntary disclosure program for remote sellers that have customer referral agreements with New Jersey will run from Aug. 21, 2017 through Nov. 21, 2017. For remote sellers participating in, and complying with the terms of the program, the DOT will waive all penalties, and consider periods prior to 2017 closed. This program is in addition to New Jersey's participation in the MTC's VDI for marketplace sellers. For additional information on this development, see Tax Alert 2017-1344. The Oklahoma Tax Commission (OTC) will conduct a voluntary disclosure initiative (i.e., a tax amnesty program) from Sept. 1, 2017 through Nov. 30, 2017. During the initiative, Oklahoma will provide a full waiver of penalties and interest due on eligible taxes to taxpayers that voluntarily file delinquent returns or reports and pay the taxes owed for eligible periods. The initiative applies to corporate and individual income tax liabilities due for tax periods ending before Jan. 1, 2016, and to the following eligible taxes for any tax period before Sept. 1, 2017: sales and use tax; withholding tax; mixed beverage tax; gasoline and diesel tax; and gross production and petroleum excise tax. For additional information on Oklahoma's VDI program, see Tax Alert 2017-1329. Lastly, included in the Texas budget bill (SB 1), is a provision directing the Texas Comptroller of Public Accounts (Comptroller) to establish a time limited tax amnesty program. The intent of the amnesty program is to "encourage voluntary reporting by delinquent taxpayers who do not hold a permit, or are otherwise not registered for a tax or fee administered by the Comptroller, or those permitted taxpayers that may have underreported or owe additional taxes or fees." The program will provide for waiver of penalties or interest or both. Amnesty will not be available for established tax liabilities or taxpayers currently under audit review.2 California: A trial court erred in failing to address a banking software and support company's argument that, even if its stock ownership in another entity was an integral part of its business operations at one time, it was a nonbusiness investment long before it was sold. In so holding, the California Court of Appeal (Court) reversed and remanded the case for further proceedings, finding that whether the sale of stock is integral is fundamentally different from whether the stock itself was integral, and it was error for the trial court to rule that it was not required to apply the functional test at specific moments in time. The Court noted that based on the trial court's other findings, it would likely conclude once again that the stock was integral to its business at the time of its sale and, therefore, gain from the sale would be taxable business income. Substantial evidence in support of the trial court's finding is that the provider's acquisition, management, and disposition of its equity purchase constituted an integral part of the taxpayer's regular trade or business operations. Fidelity National Info. Services, Inc. v. Cal. Franchise Tax Bd., No. C081522 (Cal. Ct. App., 3d App. Dist., July 27, 2017) (Unpublished). District of Columbia: New emergency law (B22-341) modifies various income tax related provisions. In February 2017, the District of Columbia's Chief Financial Officer certified that the revised revenue estimates for the FY 2017-2021 District of Columbia Budget and Financial Plan, will allow the remaining tax reform measure enacted in 2015 to be implemented — reducing, starting in 2018, the rate of incorporated and unincorporated business franchise tax to 8.25% (from 9.0%). B22-341 incorporates this rate change (and prior year rate changes) into the statute. As implemented, the rate of incorporated and unincorporated business franchise tax is 9.4% for 2015, 9.2% for 2016, 9.00% for 2017, and 8.25% for 2018 and thereafter. Provisions of B22-341 also modify personal income tax provisions, including the amount of the standard deduction and the personal exemption, and repeals the low income credit, by incorporating into the statute the tax reform changes enacted in 2015. As implemented, and effective for 2017, the standard deduction is as follows: (1) for single individuals or married individuals filing a separate return, $5,650; (2) for heads of household, $7,800; and (3) for surviving spouses or married individuals filing jointly, $10,275. For each of these categories, the standard deduction for taxable years beginning after Dec. 31, 2017 is the standard deduction as described in Section 63(c) of the IRC of 1986. For taxable years beginning after Dec. 31, 2017, the personal exemption amount is amended to the amount prescribed in Section 151 of the IRC of 1986 without reduction for the phase out of Section 151(d)(3). DC Laws 2017, A22-104 (B22-341), signed by the mayor on July 20, 2017, expires Oct. 18, 2017. A bill (B22-244) that would make these changes permanent was approved by the Mayor on July 31, 2017, and will next be sent to Congress for a 30 in-session day mandatory review period. Indiana: In a recent decision, the Indiana Tax Court (Court) held the Indiana Department of Revenue (Department) has the authority to make adjustments to a manufacturer's net operating losses (NOLs), without accompanying assessment, in closed years resulting in lower NOL carry forwards which the manufacturer may deduct in future years. In so holding, the Court rejected the manufacturer's argument that Indiana law prohibited the Department from making an adjustment to a closed year and that there are strong policy reasons against such adjustments (e.g., disruption of settled expectations, create uncertainty). The Court also found that the gain from the sale of a subsidiary does not qualify as business income under the transactional test (manufacturing was the company's regular trade or business, not sales of subsidiaries) or functional test (the acquisition, management, and disposition of the subsidiary was not an integral part of the company's business) and, as such, it is nonbusiness income allocated to another state. Further, the Court found the Department improperly denied the manufacturer's interest expense deductions from intercompany loans because the transactions had a valid business purpose and economic substance. The Court, however, determined the manufacturer improperly deducted its R&D expenses. The Court waived penalties on the actions based on reasonable cause rather willful neglect. E.I. DuPont de Nemours and Co. v. Ind. Dept. of Rev., No. 49T10-1307-TA-00065 (Ind. Tax Ct. July 11, 2017). Minnesota: In Sinclair Broadcast Group, Inc. and Subsidiaries, the Minnesota Tax Court (court) held that under the plain meaning of the statute, Minnesota conforms to the IRC § 382 valuation limitation for acquired NOLs on a pre-apportioned basis. In so holding, the court rejected the Minnesota Commissioner of Revenue's interpretation of the statute under which she attempted to apply the IRC § 382 limitation under a "double application" — first to Minnesota net income and second to Minnesota taxable income. Sinclair Broadcast Group, Inc. and Subsidiaries v. Commissioner of Revenue, No. 8919-R (Minn. Tax Ct. Aug. 11, 2017). For additional information on this development, see Tax Alert 2017-1343. District of Columbia: New emergency law (B22-341) repeals the planned increase in the parking sales tax, keeping the rate at 18% (an increase to 22% was previously scheduled to take effect Oct. 1, 2017) of the gross receipts from the sale of or charges for the service of parking or storing motor vehicles or trailers, with certain exceptions. B22-341 also imposes an additional 0.3% tax on gross receipts for transient lodgings or accommodations on all vendors. Bookings arranged by room remarketers are determined based on the net charges and additional charges received by the room remarketer. DC Laws 2017, A22-104 (B22-341), signed by the mayor on July 20, 2017, expires Oct. 18, 2017. A bill (B22-244) that would make these changes permanent was approved by the Mayor on July 31, 2017, and will next be sent to Congress for a 30 in-session day mandatory review period. New Mexico: The New Mexico Department of Taxation and Revenue is not preempted by federal law from collecting gross receipts tax on a company's transportation of railroad crew members from point to point in New Mexico because this service does not qualify as "transportation of a passenger traveling in interstate commerce by motor carrier" under a federal statute (49 USC § 14505). In reaching this conclusion, the New Mexico Court of Appeals (Court) found that the company's service may affect interstate commerce provided by railroads, but it does not provide the direct link in the stream of commerce as addressed in Yellow Cab.3 Additionally, the company's activity is not an integral part of the flow of commerce that Congress addressed in the federal statute, which was intended to overrule Jefferson Lines,4 and the company's business activity is outside the scope of both the federal statute and Jefferson Lines when it transports railroad crew members apart from ticketed travel between states. In addition, the preemption exclusively applies to state taxation and charges, and it does not relate to persons who, like the railroad crew members, did not generate revenues for the entity traveling in interstate commerce that could be subject to state taxation. Renzenberger, Inc. v. N.M. Taxn. and Rev. Dept., No. 34,999 (N.M. Ct. App. July 26, 2017). Pennsylvania: The Pennsylvania Department of Revenue (Department) advised that a company's information retrieval products (e.g., subscription to specialized internet-based research services) are subject to the state's sales and use tax as tangible personal property. The information retrieval products are an electronically accessed subscription-fee based product maintained on servers located outside Pennsylvania, but that also can be accessed from a mobile device application (app). Subscribers interact with the product through an advanced search function. Through this function, search commands are transmitted by the subscriber's web browser to the company's servers then application software processes the search command and returns results to the subscriber. The Department determined that by utilizing the search function, the subscriber "is exercising a license to access canned computer software … [and] is exercising power and control over the software." Further, the subscriber is accessing tangible personal property when he/she accesses content of the information retrieval products; thus, the "resource content constitutes electronic access to taxable tangible personal property." Pa. Dept. of Rev., PA Sales and Use Tax No. SUT-17-002 (May 17, 2017). Alaska: New law (HB 111) makes various changes to Alaska's oil and gas production tax credit. Effective beginning Jan. 1, 2018, the carried-forward annual loss (NOL) credit available for the North Slope (35% rate) and the middle earth (15% rate) is repealed. In addition, the state will no longer offer cashable tax credit certificates, effective for expenditures incurred on or after July 1, 2017. Taxpayers will be able to carryforward unused losses and apply them against their oil and gas production taxes. Certain credit carryforwards related to lease expenditures will be reduced in value in future years. Lastly, HB 111 increases the interest due on all delinquent tax administered by the Alaska Department of Revenue, beginning on and after Jan. 1, 2018, to 5.25 percentage points (previously, 3 percentage points) above the annual federal reserve rate, and for purposes of the oil and gas production tax it eliminates the "zero interest rate" after three years of delinquency. Alaska Laws 2017 (2nd Spec. Sess.), Ch. 3 SSSLA 17 (HB 111), signed by the governor on July 27, 2017. Illinois: New law (SB 1783) extends the River Edge Redevelopment Zone tax credit through taxable years ending prior to Jan. 1, 2022 (from Jan. 1, 2018). Ill. Laws 2017, Pub. Act 100-0236 (SB 1783), signed by the governor on Aug. 18, 2017. Michigan: New laws (SB 242, SB 243, and SB 244) permit authorized businesses to "capture" state income taxes withheld from certified new employees as an incentive to create Michigan jobs. To qualify, an eligible business must submit an application and, if approved, enter into an agreement with the Michigan Strategic Fund. The amount of withholding tax capture revenues available vary as follows: (1) a business that creates 3,000 or more certified new jobs in Michigan with an average annual wage that is equal to or greater than the prosperity region average wage may receive up to 100% of withholding tax capture revenue for up to 10 years; (2) a business that creates 500 or more certified new jobs in Michigan with an average annual wage that is equal to or greater than the prosperity region average wage may receive up to 50% of the withholding tax capture revenue for up to five years; and (3) a business that creates 250 or more certified new jobs in Michigan with an average annual wage that is equal to 125% or more of the prosperity region average wage may receive up to 100% of withholding tax capture revenue for up to 10 years. The amount of withholding tax capture revenues certified to be paid to an authorized business will be reduced by 5% for administrative expenses. An eligible business will have five years from the date the agreement was entered into, to create the requisite number of new certified jobs. If an eligible business does not maintain the required number of jobs as provided in the agreement, it will forfeit the withholding recapture revenues for the calendar year of such failure (but the business may be able to receive the forfeited revenue if prior to the expiration of the original agreement it satisfies the terms of the agreement). Michigan can enter into up to 15 agreements each year and cannot disburse more than $200 million in total withholding tax capture revenues over the program's life. The state cannot enter into new agreements after Dec. 31, 2019. Professional sports stadiums, casinos, retail businesses, and those portions of eligible businesses used exclusively for retail sales are not eligible to participate. These bills take effect Aug. 25, 2017. Mich. Laws 2017, Pub. Act 109 (SB 242), signed by the governor on July 26, 2017; Mich. Laws 2017, Pub. Act 110 (SB 243) and Pub. Act 111 (SB 244), signed by the governor on July 25, 2017. Ohio: A provision of the recently enacted Ohio biennial budget bill (HB 49) eliminates the bottom two income tax brackets, effective retroactively to Jan. 1, 2017. As a result, income up to $10,500 will not be taxed. The income tax brackets will be indexed each year by inflation. A senior representative of the Ohio Department of Taxation stated that revised withholding tables will not be issued for calendar year 2017, but may be in the works for 2018. Affected taxpayers will pay any adjusted amount of tax on their 2017 state income tax returns. For additional information on this development, see Tax Alert 2017-1328. Nevada: The Nevada Department of Employment, Training and Rehabilitation, Employment Security Division announced that the state unemployment insurance (SUI) taxable wage base for calendar year 2018 will increase to $30,500 (from $29,500 for 2017). The taxable wage base is calculated each year at 66 2/3% of the average annual wage paid to Nevada workers. Nevada is one of many states that automatically adjusts the SUI wage base each year. For additional information on this development, see Tax Alert 2017-1323. Vermont: New law (HB 516) moves the administration of the quarterly employer health care contribution from the Vermont Department of Labor to the Vermont Department of Taxes, effective Jan. 1, 2018. As a result, effective with the filing of the fourth quarter 2017 health care contribution return, which is due by Jan. 31, 2018, employers will submit the quarterly health care contribution return to the Vermont Department of Taxes, rather than the Vermont Department of Labor. For additional information on this development, see Tax Alert 2017-1345. International: The Saudi Arabia Government has approved the final Kingdom of Saudi Arabia Value-Added Tax Law and published the statute in the official gazette, Um Al Qura Edition 4681, on July 28. The Law will be effective from the beginning of the financial year following the date of publication of the Law in the official gazette. Accordingly, VAT will become effective in Saudi Arabia on Jan. 1, 2018. For additional information on this development, see Tax Alert 2017-1348. Federal: On Sept. 6, at 1:00 p.m. your local time, EY will host a webcast on planning for renegotiated rules under the North American Free Trade Agreement (NAFTA) reform. The highly anticipated renegotiation of the NAFTA among the US, Canada and Mexico is under way, with the first session having launched Aug. 16, 2017. Renegotiation is anticipated to tighten the rules of origin so that increased NAFTA region content will be required. Changes to the rules of origin could have a significant effect on duties. Additionally, certain historically limiting provisions, such as NAFTA Article 303, may be lifted, giving NAFTA traders additional benefits. To assist businesses with potential changes, our panel will discuss key NAFTA rules, potential changes, an anticipated timeline for renegotiation, and steps companies can take to prepare. Topics include: (1) key provisions of NAFTA, such as rules of origin and the structure and timeline for amendments; (2) potential effects of the renegotiated rules; (3) potential improvements and opportunities arising from renegotiation (e.g., NAFTA Article 303 limitation): (4) country-specific programs or preferences that could be addressed as part of NAFTA renegotiations; (5) recommended data analytics and NAFTA modeling to preserve or potentially improve a company's position; and (6) an industry perspective on preparing for change. This webcast will be of interest to global trade professionals, as well as tax and supply chain professionals. Click here to register for this webcast. Federal: On Sept. 7, 2017, at 1:00 p.m. your local time, EY will host a webcast on the Work Opportunity Tax Credit (WOTC). The panelists will discuss the current WOTC legislative environment and how businesses can effectively participate in this program. Topics that will be covered in this webcast include: (1) WOTC and tax reform — legislative update and outlook; (2) leading practices — how national companies implement and operate successful WOTC programs; (3) WOTC and the state workforce agencies — trends, automation, processing times; and (4) talent outreach — building a more robust applicant pool with positive WOTC implications. Click here to register for this event. 1 Other jurisdictions that may deviate from the general waiver include the District of Columbia, Massachusetts and Minnesota. 2 Tex. Laws 2017, SB 1, signed by the governor on June 12, 2017. See also, Tex. Comp. of Pub. Accts., Tax Policy News (August 2017). 3 United States v. Yellow Cab Co., 332 U.S. 218 (1947), overruled on other grounds by Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752 (1984). 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: 2017-1391 |
