11 October 2017 State and Local Tax Weekly for September 29 Ernst & Young's State and Local Tax Weekly newsletter for September 29 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 "Unified Framework for Fixing Our Broken Tax Code" (the Framework), released on Sept. 27, 2017, by the Trump Administration and Congressional Republican leaders, is meant to serve as a legislative template for federal tax-writing committees. The legislative priorities listed in the Framework are intended to simplify the US federal income tax code and lower corporate and individual income tax rates. — Reducing the corporate income tax rate to 20% The Framework also calls for limiting the tax rate on business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25%. The Framework also would include anti-avoidance rules to prevent the recharacterization of personal income into business income. — Reducing the income tax rate brackets from seven to three (i.e., 12%, 25% and 35%) The proposals contained in the Framework (or parts thereof) give valuable insight into the types of tax reform that the Trump Administration and Congressional Republican leaders are considering. Emerging themes from the Framework include corporate and individual income tax rate reductions coupled with base expansion and a move to a territorial tax system. Federal tax reform will affect states unless states change their income tax laws, although in different ways depending upon how they conform to the federal tax law. Generally, state income tax systems are inextricably tied to the federal income tax system: If federal tax base expansion occurs and the state conforms to that base expansion, state taxes would rise (immediately or in the near term) unless the state decreases its tax rates in step with the federal tax rate reductions. Unlike the federal government budget, all state government budgets (with the exception of Vermont) must be balanced each year. Accordingly, states will be more sensitive to the potential revenue effects of federal tax law changes. When federal tax changes increase state tax revenue, states are less inclined to decouple. For more on this development, see Tax Alert 2017-1619. Alaska: A corporation is entitled to an 80% dividends received deduction (DRD) from a domestic subsidiary that is excluded from the water's-edge return because less than 20% of its business activity is in the US. Under Alaska law, a 100% DRD is allowed for dividends from a domestic subsidiary, while an 80% DRD is allowed for dividends from foreign subsidiaries. Here, the Alaska Administrative Hearings Office held the logical result based on the purpose of the statute is to treat this domestic subsidiary like a foreign subsidiary. In the Matter of Costco Wholesale Corp., OAH No. 16-0868/1325-TAX (Alaska Ofc. Of Admin. Hearings June 12, 2017). California: An acquiring corporation (which had filed on a worldwide basis) is deemed to have made a water's-edge election when the goodwill of the acquired target company (which had filed on a water's-edge basis) is reflected in the total business assets of the target and, as a result, the target company's total business assets have a greater value than that of the acquiring corporation when the new unitary affiliate group was established. For purposes of the "deemed water's-edge election" business asset test, the definition of "business assets" includes intangible assets, except a unitary group member's stock; the relevant statutes and regulations do not specifically exclude "goodwill" from the definition of business assets. Cal. FTB, Chief Counsel Ruling 2017-02 (Sept. 8, 2017). New York: The New York Department of Taxation and Finance issued a technical memorandum summarizing amendments to personal income tax regulations regarding allocation of income from a business carried on partly in and outside New York State, the Metropolitan Commuter Transportation District (MCTD), or Yonkers. The amended regulations clarify that under the formula allocation method rented tangible personal property (and real property) must be included in the property percentage of the formulas when allocating business income, including net earnings from self-employment, for purposes of the New York State personal income tax, the Metropolitan Commuter Transportation District Mobility Tax, and the city earnings tax on Yonkers nonresidents. The fair market value of real and tangible personal property both in and outside New York State, the MCTD, and Yonkers that is rented by the taxpayer is determined by multiplying the gross rents payable during the tax year by eight. Amendments to the regulations specify what is included as gross rent. N.Y. Dept. of Taxn. and Fin., TSB-M-17(1)I (Aug. 10, 2017). South Carolina: In DIRECTV, Inc., the South Carolina Court of Appeals (Court) determined that 100% of the corporation's subscription receipts from South Carolina customers should be included in the numerator of its gross receipts ratio, because all of its income-producing activities (IPA) related to South Carolina customers (i.e., delivery of the signal into the homes and onto the television screens of the corporation's South Carolina customers) occurred entirely within South Carolina. Under a South Carolina statute, receipts from services are in South Carolina if the entire IPA is within the state, but if the IPA is performed partly within and partly outside the state, sales are attributable to South Carolina to the extent the IPA occurs within the state. The relevant issue in this case involved determining what the IPA is and where that activity occurs. The South Carolina Department of Revenue (Department) argued that the only IPA is the delivery of the signal into the homes and onto the television screens of corporation's customers and, as such, it sourced 100% of the subscription receipts from South Carolina customers to the state. The corporation argued that its IPA in South Carolina are based on four value drivers: (1) content and programming, (2) acquisition and distribution of the content to customers, (3) marketing and sale of its service, and (4) customer services. The Court agreed with the Department's determination that the corporation's IPA is the delivery of the signal into the homes and onto the television sets of its customers. The Court further found the activities the corporation engaged in for the production of it programming and marketing are not IPA, because these activities do not produce income, but rather, are "income-anticipatory" activities. All of the income-producing activities related to South Carolina customers occurred entirely within South Carolina; therefore, 100% of the corporation's subscription receipts from South Carolina customers must be sourced to South Carolina. DIRECTV, Inc. & Subs. v. South Carolina Dept. of Rev., Op. No. 5513 (S.C. Ct. App. Aug. 30, 2017). Virginia: A multinational corporation with a Virginia headquarters is not entitled to use an alternative apportionment method to source its income to Virginia because it failed to prove that its proposed destination-based sourcing method more accurately assigned its income to Virginia. The corporation's income is derived from an annual fee for internet access to bundled products and tools executives can use to analyze business functions and processes as well as for data, insights, classroom and web-based learning. For the years at issue (2011-2013), Virginia used a double weighted sales factor apportionment formula and the costs of performance method to source income from the sale of non-tangible property to customers in the state. The corporation filed a refund claim arguing that by applying the commonwealth's standard apportionment method, it paid significantly more Virginia tax than the commonwealth was "constitutionally entitled" effectively resulting in double taxation. The corporation filed amended returns applying a single sales factor apportionment formula using a destination-based method to source its service revenues to Virginia (the destination of the customer determined using its billing address — "zip code method"). A circuit court (court) rejected the corporation's arguments, finding that it failed to meet its burden of proving that income attributed to Virginia through the use of the standard method was in fact out of all appropriate proportion to the corporation's business activity in the commonwealth or that the standard method led to a grossly distorted result. Rather, the court found that the corporation's interstate activities were related to its in-state activities at its headquarters, its activities that resulted in the income taxed under the standard method has some minimal connection to Virginia, the income produced was rationally related to the corporation's activities at its headquarters and to the values connected to Virginia, and the double-weighted sales factor formula is not in fact out of all appropriate proportion to the corporation's business activities in Virginia or that the statutory method lead to a grossly distorted result. Lastly, the court found that the tax commissioner did not act in an arbitrary, capricious or unreasonable manner in denying the corporation's request to use an alternative apportionment method, nor did the tax commissioner abuse his discretion in applying the standard method of apportionment to the corporation's income producing activities in Virginia. Corporate Executive Board v. Virginia Dept. of Taxn., No. No. CL16-1525 (Va. Cir. Ct., Arlington Cnty., Sept. 1, 2017). Wisconsin: New law (AB 64) makes a number of changes to Wisconsin's corporate income/franchise tax. Effective for taxable years beginning after Dec. 31, 2016, Wisconsin's date of conformity to the IRC is updated to Dec. 31, 2016 (from Dec. 31, 2013), while expressly decoupling from certain provisions. One notable decoupling provision is that Wisconsin expressly excludes itself from the recent changes due to the enactment of the new federal partnership audit rules. The bill also modifies income sourcing (apportionment) rules for taxable years beginning on or after Jan. 1, 2017. Under former law, gross receipts from services were sourced to Wisconsin if the purchaser of the service received the benefit of the service in Wisconsin. Under the revised provisions, the benefit of the service is received in Wisconsin if the service relates to tangible personal property delivered directly or indirectly to Wisconsin customers. As revised, the benefit of the service is deemed to be in Wisconsin if the service is purchased by an individual who is physically present in Wisconsin at the time the service was provided. Further, new sourcing rules for broadcasters apply to taxable years beginning on or after Jan. 1, 2019. In addition, the bill amends Wisconsin's net operating loss (NOL) provisions, to provide that NOLs are not allowed unless the incurred loss was computed on a return filed within four years of the unextended due date for filing the original return for the taxable year in which the loss was incurred. An NOL carryback will not be allowed unless claimed within four years of the unextended due date for filing the original return for the taxable year to which the loss is carried back. These changes to the NOL rules first apply to losses claimed on or after Sept. 23, 2017, regardless of the year in which they were incurred. Lastly, effective for taxable years beginning after 2018, the alternative minimum tax is eliminated for individual income tax purposes. Wis. Laws 2017, Act 59 (AB 64), signed by the governor on Sept. 21, 2017. For additional information on this development, see Tax Alert 2017-1599. New Mexico: An out-of-state staffing company's receipts from providing temporary employee staffing services at New Mexico healthcare facilities for remuneration are subject to New Mexico gross receipts tax because the company failed to overcome the presumption that all of its receipts derived from providing these services are subject to tax. The Administrative Law Judge (ALJ) of the New Mexico Administrative Hearings Office determined that these gross receipts were not excluded from tax as "amounts received solely on behalf of another in a disclosed agency capacity." The company was not a disclosed agent of the New Mexico facilities where it provided staffing because the contract it entered into with the healthcare entity required: (1) the company to be solely responsible for any employment issues, payment of wages and benefits, and submission of taxes for the employees in question; (2) the individuals were the company's employees; and (3) the company was an independent contractor lacking the authority to bind the healthcare entity in any manner with a third party. Further, under the MPC LTD.1rationale, there was no evidence that the company's employees were informed of an agency relationship between the company and the healthcare entity, or their ability to enforce payroll and benefit obligations against the healthcare entity. Additionally, the company has substantial nexus with New Mexico because its 100 in-state employees provide it with a New Mexico market in which to sell its staffing services. The ALJ also found the company did not establish entitlement to any claimed deduction for providing staffing in the medical profession. In re Protest of All Medical Personnel Inc.,No. 17-35 (N.M. Admin. Hearings Ofc. Aug. 8, 2017). Wisconsin: New law (AB 64) makes a number of changes to Wisconsin's sales and use tax laws. Key changes: (1) exempt from sales and use tax tractors, machines and other items used exclusively and directly in beekeeping (effective Dec. 1, 2017); (2) expand the sales tax exemption for building materials for local government or certain nonprofit facilities to include a technical college district, the University of Wisconsin System or the University of Wisconsin-Extension (effective for contracts entered into on or after July 1, 2018); (3) expand the lump sum sales contract exemption, which applies if the total sales price of taxable products is less than 10% of the total contract price, to all construction contracts involving real property construction activities (effective Dec. 1, 2017); (4) increase the occasional sale exemption threshold from $1,000 to $2,000 per year (effective Jan. 1, 2018); (5) delay to July 1, 2018, the effective date of bad debt provisions for private label credit cards; (6) repeal the sales tax on internet access services (effective July 1, 2020). Wis. Laws 2017, Act 59 (AB 64), signed by the governor on Sept. 21, 2017. For additional information on this development, see Tax Alert 2017-1599. Wyoming: An electricity-generating corporation (corporation) is a manufacturer under Wyoming law, but the purchase of certain chemicals used to treat water and sulfur dioxide emissions for the generation of electricity do not qualify for either the manufacturers' or wholesalers' sales tax exemptions. The Wyoming Supreme Court found that even though the corporation engages in manufacturing when it generates electricity (regardless of whether it is a public utility and its Northern American Industry Classification System designation) the chemicals it used in the water systems and in the pollution control system are not ingredients of the electricity because they do not enter or become a component part of the electricity. The corporation does not qualify for the wholesalers' sales tax exemption since it does not purchase the chemicals at wholesale for the purpose of resale; rather, the corporation is treated as the ultimate consumer of the chemicals. PacifiCorp., Inc. v. Wyo. Dept. of Rev., No. S-16-0084 (Wyo. S. Ct. Sept. 14, 2017). Massachusetts: New law (HB 3800) provides an income or corporate excise tax credit equal to $2,000 for each qualified veteran hired by an entity in Massachusetts. To qualify for the credit, the entity must: (1) employ not more than 100 employees, (2) be certified by the Veterans' Services Commissioner, and (3) qualify for and claim the federal Work Opportunity Tax Credit under IRC § 51 for hiring qualified veterans in Massachusetts. A second credit of $2,000 can be claimed in the subsequent taxable year, provided the veteran's continued employment is certified. If the qualifying entity is a pass-through, the credit is attributed on a pro rata basis to the owners, partners, or members of the legal entity entitled to the credit. For corporations, the amount of the credit cannot reduce its excise to an amount less than the minimum excise tax. The credit is not transferable and is not refundable, however, unused credit can be carried forward to any of the three subsequent taxable years. The cumulative credit value Massachusetts will authorize cannot exceed $1 million each year. The credit takes effect and is available for veterans hired after July 1, 2017, and is available for the tax year beginning on Jan. 1, 2017 and for subsequent taxable years. Mass. Laws 2017, Ch. 47 (HB 3800), approved in part by the governor on July 17, 2017. Wisconsin: New law (AB 64) modifies the research tax credit and the manufacturing and agricultural credit. For taxable years beginning after 2017, the research tax credit becomes partially refundable in an amount not to exceed 10% of the allowable amount of the credit claimed for that taxable year. The statute does not specifically define what "credit claimed" means raising the question of whether the potentially refundable credit would include credits carried forward from prior years into 2018 or the credit computed for 2018 (and forward). For taxable years beginning after 2016, the amount of eligible qualified production activities income an individual can claim under the manufacturing and agriculture credit is reduced for multistate taxpayers by the amount of qualified production activities income taxed by another state upon which the credit for taxes paid to other states is claimed. No guidance has been offered as to how this will work in practice, given the amount of credit may vary by shareholder/partner based on each's personal filing situation and how these calculations may be accounted for at the entity level. Wis. Laws 2017, Act 59 (AB 64), signed by the governor on Sept. 21, 2017. For more on this development, see Tax Alert 2017-1599. Wisconsin: New law (AB 64) exempts machinery, tools and patterns, not including such items considered manufacturing property under current law, from the personal property tax effective with property assessed as of Jan. 1, 2018. It also eliminates the state portion (forest mill tax) of the property tax beginning in 2017. Wis. Laws 2017, Act 59 (AB 64), signed by the governor on Sept. 21, 2017. For more on this development, see Tax Alert 2017-1599. California: New law (AB 525) extends the repeal date of the California State Board of Equalization (SBE) and the California Department of Tax and Fee Administration (CDTFA) offer in compromise program to Jan. 1, 2023 (from Jan. 1, 2018). Under the program, the SBE or CDTFA where the SBE's duties, powers and responsibilities have been transferred to it, have the authority to accept an offer in compromise on a final tax liability if the liability was generated from a business that has been discontinued or transferred, and the taxpayer or feepayer no longer has a controlling interest or association with a similar business as the transferred or discontinued business. Cal. Laws 2017, Ch. 272 (AB 525), signed by the governor on Sept. 25, 2017. Oregon: New law (SB 398) requires Oregon employers to give written notice to their employees of the availability of the Oregon and federal earned income tax credits (EITC). The written notice must: (1) be in English and the language the employer typically uses to communicate with employees; (2) effective with the calendar year 2017 Forms W-2, due to employees by Jan. 31, 2018, be included annually with the employee's Form W-2; and (3) provide the state and federal EITC websites where employees can find additional information. The Oregon Employment Department also is required to provide information to unemployment insurance benefits recipients about the state and federal EITCs. These provisions take effect Oct. 6, 2017. Or. Laws 2017, Ch. 333 (SB 398), signed by the governor on June 14, 2017. For additional information on this development, see Tax Alert 2017-1566. Wyoming: According to a Wyoming Department of Workforce Services unemployment tax division representative, the state unemployment insurance (SUI) taxable wage base will decrease again for calendar year 2018, down by $700 to $24,700 for 2018. For calendar year 2017 the taxable wage base decreased to $25,400, down from $25,500 in 2016. For additional information on this development, see Tax Alert 2017-1579. Virginia: A county is barred by the US Constitution's Import-Export Clause from imposing its business, professional, and occupational license (BPOL) tax on a retailer's gross receipts from sales of merchandise to international passengers (i.e., export goods in transit). In so holding, the Virginia Supreme Court (Court) found the county's BPOL tax is similar to the California tax invalidated in Richfield Oil,2in that the BPOL tax, like the California tax, is imposed on a percentage of gross sales. Further, the BPOL tax, even though it is imposed on the gross receipts of the business, in "operation and effect" is a direct tax on the export goods in transit. The Court also found "no constitutional significance in the fact that the retailers in California were authorized to collect the tax from consumers, as opposed to the BPOL tax, for which the liability lies with the business." Dulles Duty Free, LLC v. Loudoun Cnty., No. 160939 (Va. S. Ct. Aug. 24, 2017). International: Swiss voters rejected the Federal Act on the 2020 pension reform on Sept. 24, 2017. The public vote has resulted in a change of Swiss value added tax (VAT) rates as of Jan. 1, 2018. The rate reductions are: (1) the standard VAT rate will be reduced from 8% to 7.7%; and (2) the special VAT rate for accommodation services will be reduced from 3.8% to 3.7%. The reduced VAT rate of 2.5% will remain unchanged. For additional information on this development, see Tax Alert 2017-1560. All States: On Tuesday, Oct. 17, 2017, from 1:00-2:00 p.m. EDT, Ernst & Young LLP's State Income Tax practice will kick off a new webcast series focused on analyzing nexus and filing options issues. The first webcast in this series will provide a historical and general overview of state income tax nexus. Topics to be discussed include: (1) US Constitutional and federal limits on states' ability to impose income taxes on out-of-state businesses that derive income from the state, (2) the substantial nexus prong of the seminal US Supreme Court's ruling in Complete Auto Transit and other key opinions of the Court, (3) what the denial of review by the Court in Geoffrey, Inc. v. South Carolina Tax Commission means in the context of state taxation, and (4) the historical context of Public Law 86-272 and what its limits on state income taxing authority mean in today's economy. To register for this event, go to Analyzing nexus and filing options issues. All States: On Thursday, Oct. 19, 2017, from 12:00-1:00 p.m. EDT, Ernst & Young LLP will host a webcast on disaster relief, employee retention credits and other essential employer updates. Immediately after the extreme devastation caused by Hurricanes Harvey, Irma and Maria in the Southeastern US, Puerto Rico and the US Virgin Islands, Congress enacted legislation creating a federal employee retention credit to assist employers that continued to pay wages to employees displaced because of inoperable work locations. In this webcast, EY professionals will explain where this federal tax credit is available, the employers that can benefit and the process for claiming the credit. Following are the topics included in this webcast: (1) understanding the federal employee retention credit, (2) legislative update, (3) update on IRS disaster relief announcements, and (4) employer considerations for future disasters. To register for this event, go to Disaster relief: employee retention credit. 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: 2017-1674 |
