15 November 2017 State and Local Tax Weekly for October 27 Ernst & Young's State and Local Tax Weekly newsletter for October 27 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 House tax reform bill introduced on Nov. 2, 2017, and titled the "Tax Cuts and Jobs Act" (H.R. 1) (the House bill) introduced the most significant corporate and individual federal tax reform proposals in over 30 years. If enacted, the proposals will result in lower corporate and individual income tax rates with a trade-off of eliminating many federal tax credits and corporate and individual deductions. These changes would generally take effect for tax years beginning after Dec. 31, 2017, unless otherwise noted. — Reducing the corporate income tax rate to 20% (from 35%) — the reduction would be permanent and would be set without a phase-in or phase-out — Replacing the current US worldwide tax system with a territorial tax system that would exempt 100% of the foreign-source portion of dividends received by a US corporation from a foreign corporation in which the US corporation owns at least a 10% stake and would tax on a current basis potentially significant amounts of certain foreign income under anti-base erosion provisions and modifications to the Subpart F regime — Imposing a one-time 14% transition tax (from the originally proposed 12%) on certain previously untaxed accumulated foreign earnings (reduced to 7% for illiquid assets (from the originally proposed 5%) through a new mandatory one-time Subpart F inclusion (the US shareholder could elect to pay the transition tax over eight years or less) — Imposing a new 20% federal excise tax on certain payments made by US domestic corporations to a related foreign corporation unless the related foreign corporation elects to treat the receipt of such payments as effectively connected income and thus taxable in the US (with such income taxed on a net basis) — Allowing immediate expensing of 100% of the cost of qualified property acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023 — Significantly modifying the treatment of net operating loss (NOL) carryforwards by repealing carryback provisions (with certain exceptions), limiting the deduction of an NOL carryforward to 90% of a C corporation's taxable income for the year, and allowing NOLs arising in tax years beginning after 2017 to be carried forward indefinitely (currently limited to 20 years) subject to an interest factor to preserve its life (life insurance companies would be limited to a 20-year carryforward) — Limiting the deduction for net interest expense — IRC § 163(j) would be "revised" and expanded to limit the deduction for net interest expense of all businesses, thereby applying the limitation to net interest expense that exceeds 30% of adjusted taxable income, and new IRC § 163(n) would limit the deduction for net interest expense of domestic corporations that are part of an international financial reporting group. (If both limitations apply, the one resulting in the greater interest disallowance would take precedence, and the disallowed interest would be available as a carryover for five years) — Eliminating various deductions and credits, including the IRC § 199 domestic production deduction, the work opportunity tax credit and the new markets tax credit (terminated through disallowance of any additional allocation of credits with existing credits being available for up to seven years) — Preserving the research and development tax credit and Low-Income Housing Tax Credit without modification from current law — Expanding IRC § 179 expensing by increasing the dollar limitation from $500,000 to $5 million and increasing the phase-out amount from $2 million to $20 million — Limiting like-kind exchanges to those involving real property, thereby repealing rules allowing deferral of gain on like-kind-exchanges of business and investment property (a transition rule would apply to like-kind exchanges currently underway) The House bill would limit the individual income tax rate on qualified business income of small and family-owned businesses conducted as a pass-through entity to a maximum rate of 25%; however, pass-through entities engaged in certain professional services, such as those providing legal, accounting, engineering, architectural and other similar professional services, would be ineligible for the reduced rate. The House bill would also allow small businesses to continue to write off loan interest, and would distinguish wage income from pass-through entity business income. Transition rules would be provided if the tax year included Dec. 31, 2017. Key aspects of the House bill affecting individuals include reducing the income tax rate brackets from seven to four (12%, 25%, 35% and 39.6%), doubling the standard deduction, eliminating the personal exemption as well as many itemized deductions (but retaining the deductions for charitable donations and a slimmed down mortgage interest deduction), eliminating the personal state income tax and corresponding elective sales tax deductions (but allowing a deduction of not more than $10,000 of domestic real property taxes) and repealing the individual AMT, among other proposed changes. Many of the proposed federal tax reform measures, if enacted, will affect the income taxes imposed by state governments. Generally, most state income tax systems use federal taxable income as a starting point for state income tax computations, but do not automatically conform to federal tax rate changes. Thus, state income taxes would rise (immediately or in the near term) in response to federal tax law changes which expand the tax base (e.g., elimination or narrowing of certain tax deductions), unless states decouple from those provisions or reduce their tax rates in proportion to federal tax rate reductions. States that do not adjust their rates could see their tax revenues significantly increase without taking any action and certain taxpayers could see a dramatic rise in their tax liabilities and their state effective tax rates because of such federal tax law changes. For an in-depth discussion on the state tax implications of the House tax reform bill, see Tax Alert 2017-1850. Pennsylvania law removes NOL dollar cap and increases its NOL percentage cap, establishes sales tax provisions for marketplace providers, and makes other changes On Oct. 30, 2017, Pennsylvania Governor Tom Wolf signed into law House Bill 542 (HB 542), a $1.6 billion revenue bill aimed at addressing the state's $2.3 billion budget deficit. Most of the anticipated revenue for this bill comes from $1.5 billion generated by borrowing against future revenues due to the state from the 1998 national tobacco settlement.1 H.B. 542 also includes Pennsylvania tax law changes, such as: — Removing the $5 million cap on NOL deductions and increasing the percentage cap (currently 30% of taxable income) to 35% in 2018 and 40% in 2019 and thereafter — Requiring remote sellers, marketplace facilitators and referrers with aggregate Pennsylvania sales of $10,000 or more in the previous calendar year to elect either to: (1) collect and remit the sales tax; or (2) comply with new Pennsylvania notice and reporting rules — Shortening the time a taxpayer has to file a petition to appeal a Board of Appeals (BOA) decision to the Board of Finance Revenue (BFR) from 90 days to 60 days. These changes have various effective dates and are summarized in greater detail in Tax Alert 2017-1857. Ohio Department of Taxation opens registration for businesses to elect into centralized municipal net profits tax filing and administration On Oct. 19, 2017, the Ohio Department of Taxation (Department) announced that it has opened registration for businesses (e.g., corporations and pass-through entities) to elect to participate in the centralized filing and state administration of municipal net profits tax for the 2018 tax year. Businesses that elect into the centralized system will be able to file a single municipal net profits tax return that will encompass every municipality in which they are required to file returns. The Department will be responsible for all administrative functions including audits and appeals. The centralized system will be limited to municipal net profits (e.g., business) taxes and will not apply to individual taxation or employee withholding and those elements of Ohio municipal income taxation will continue to be administered at the local level. Taxpayers electing to participate in the centralized system must do so for all cities in which there is an obligation to file returns. A taxpayer cannot "opt in" to centralized filings for some cities and continue to file separately with other cities. The election must be made by the first day of the 3rd month after the beginning of the taxpayer's taxable year by filing Form MNP-R with the Department. For calendar year taxpayers, the election to participate for taxable year 2018 (e.g.,return to be filed in 2019) will need to be made by March 1, 2018. Once made, the election is binding for the taxable year for which it is made and for all subsequent taxable years until terminated. For more information on this development, see Tax Alert 2017-1761. California: On Dec. 18, 2017, at 10:00 a.m. (PST) the California Franchise Tax Board (FTB) will hold a meeting to solicit public feedback on its proposed amendments to its regulations on apportioning and allocating partnership income (under Cal. Code Regs. tit. 18, § 25137-1) and income from a business, trade or profession (under Cal. Code Regs. tit. 18, § 17951-4). Links to the notice of proposed rulemaking, the initial statement of reasons for the proposed action, and the language of the proposed regulations are included for reference and available on the FTB's website. Maryland: An out-of-state company that has nexus with Maryland based on the in-state activities of its employees is not entitled to a refund of corporate income tax because it is not immune from the corporate income tax as these activities exceeded the protections of P.L. 86-272 and were not de minimis. In so holding, the Maryland Tax Court rejected the company's argument that its activities in Maryland were limited to the solicitation of orders for sales of tangible personal property, finding that the evidence suggest that the activities of the employees served a business purpose other than requesting orders. Activities that went beyond the solicitation of orders, include: meeting with customers and providing them with education, training and demonstrating the selling points of the product; attending community events such as pet adoptions and community pet walks (these activities built goodwill); gathering competitive information and market data; engaging in quality control, inventory issues, and reworking displays in certain retail establishments; and encouraging customers to make in-store purchases of the company's products. Blue Buffalo Co., LTD v. Comptroller of Treasury, No. 16-IN-00-0364 (Md. Tax Ct. Aug. 30, 2017). Massachusetts: Amended regulation (830 CMR 63.42.1) modifies the Massachusetts Department of Revenue's alternative apportionment provisions. As amended, an applicant's proposed alternative method may include, with respect to all or part of the applicant's business activity, one or more of the following: (a) the exclusion of one or more factors; (b) the inclusion of one or more factors; (c) the allocation of particular items of income, gain, deduction or loss; or (d) the employment of other adjustments or methodology. (Emphasis was added to highlight the new provisions in (c) added to the regulation). In addition, the amendments make clear that the Commissioner when considering a corporate taxpayer that is a member of a Massachusetts combined group, will consider the business activities of all of the members of the combined group members and the Massachusetts apportionment percentages of all such taxable members in determining whether the combined group's table income attributable to Massachusetts reasonably reflects the business activity of the combined group within Massachusetts. Lastly, the Commissioner's determination of an alternative apportionment method may be effective for up to three tax years (increased from one year under the prior regulation), absent any material changes to law or facts. The amended regulation took effect Oct. 6, 2017. New Jersey: The New Jersey Superior Court, Appellate Division, affirmed the New Jersey Tax Court's (the tax court) ruling in Toyota Motor Credit Corp., for the same reasons expressed in the tax court's opinion. In Toyota Motor, the tax court held that a vehicle leasing company that benefited from bonus depreciation for federal income tax, but not for New Jersey Corporation Business Tax (CBT), purposes was allowed to adjust its federal basis when determining gain from the sale of property for CBT purposes. The court also held the state's decoupling from the 2001 federal bonus depreciation provisions commenced with the taxpayer's first fiscal year that began after Jan. 1, 2002 and applied to property purchased after Sept. 10, 2001, even if the property was purchased before the start of taxpayer's fiscal year. Lastly, the court held that the Division of Taxation erred in applying the throwout rule to the taxpayer's receipts sourced to Nevada, South Dakota and Wyoming (states which don't impose a corporate income tax) as the company had a sufficient presence in those states to create nexus. Toyota Motor Credit Corp. v. Director, Div. of Taxn., No. A-5189-14T3 (N.J. Super. Ct., App. Div., Oct. 23, 2017)(unpublished). Texas: The net gain an out-of-state holding limited liability company (LLC) received from the stock sale of a subsidiary is included in the denominator of the apportionment factor (the combined group's everywhere gross receipts) but is not included in the numerator of the apportionment factor (the combined group's receipts from business done in Texas) because the LLC does not have nexus with Texas. For Texas franchise tax purposes, the subsidiary is a regarded entity and, as such, the LLC is not considered to own the subsidiary's assets directly. Therefore, the LLC's stock sales are treated as the sale of an intangible. Further, LLC does not have nexus with Texas as it does not maintain a place of business in Texas and does not manage, direct, or perform services in Texas for its subsidiaries. Tex. Comp. of Pub. Accts., No. 201709010L (Sept. 12, 2017). Texas: A company was not entitled to a cost of goods sold (COGS) deduction for the telecommunication products (i.e., voice and data transmissions in the form of electronic signals, dial tones, busy signals) it sold during the tax year at issue because these products are services for Texas franchise tax purposes rather than tangible personal property. An administrative law judge (ALJ) from the Texas Comptroller of Public Accounts (Comptroller) office found that while some transactions can include elements of both a sale of tangible personal property and a service, the mixed transaction rule permits a COGS deduction only for the tangible personal property elements sold, not services. The ALJ further explained that since the franchise tax law does not define the term "services," the starting point for defining the term in this matter begins with the fact that the company reported to the Comptroller that its business activity was described by Standard Industrial Classification Code 4813, which includes establishments that furnish services. Tex. Comp. of Pub. Accts., No. 201707006H (July 19, 2017). Arkansas: A vendor's sales of food, food ingredients, and prepared food to customers on a for-profit basis in Arkansas public schools are subject to state and local sales and use tax (to qualify for the exemption, a school cafeteria cannot be operated for profit). The vendor is responsible for reporting and remitting the tax to the state. In addition, the vendor's charges for cleaning the school's kitchen and lunchroom to rid it of impurities and extraneous matter are subject to state and local sale and use tax. The vendor, however, can use its valid exemption certificate to purchase food products (and the items from which it will be dispensed) exempt from tax as a sale for resale. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Opinion No. 20170715 (Sept. 11, 2017). Maine: The Maine Revenue Services (MRS) issued an informational bulletin to provide guidance to out-of-state sellers in determining whether they are required to register as "retailer" with the MRS for Maine sales and use tax purposes. The guidance lists activities that would require a person to register with the MRS and collect and remit tax, including maintaining a place of business in Maine, making or soliciting retail sales in Maine, leasing tangible personal property located in Maine, and having a substantial physical presence in Maine. Activities that would constitute a "substantial physical presence" in Maine include delivery of tangible personal property by the seller into Maine by means of the seller's own vehicles or by a 3rd party carrier other than an interstate common carrier, and repair or installation of tangible personal property by the seller's employees or by a 3rd party contracted by the seller. In addition, under Maine law, an out-of-state seller, not already registered, is rebuttably presumed to be engaged in the business of selling tangible personal property or taxable services for use in Maine and is required to register as a retailer with the MRS under certain circumstances, including: (1) maintaining a warehouse/distribution facility/ storage place or similar location to facilitate the delivery of property or services to the seller's customers; (3) using trademarks/service marks/trade names in Maine that are the same or substantially similar to those used by the seller; (4) delivering/installing/assembling/performing maintenance services for the seller's customers within Maine; (5) facilitating deliveries of seller's property by allowing customers to pick up the property at an office/distribution facility/warehouse/storage place or similar place of business maintained in Maine; and (6) conducting activity in Maine that is significantly associated with the seller's ability to establish and maintain a market in Maine for the seller's sales. Nexus also is rebuttably presumed to be created if the out-of-state seller has an agreement with a person who, while in Maine, refers potential customers to the seller (provided the seller's retail sales in Maine exceed $10,000 during the prior 12 months). Further, according to the MRS pronouncement, nexus will be established for out-of-state sellers that meet the state's new "economic nexus" provisions (i.e., have gross revenue from such Maine sales which exceeds $100,000, or have at least 200 separate Maine sales transactions). The guidance also describes when a person acting under contract with, or acting on behalf of, a seller must register with the MRS; and it lists activities that, by themselves, would not establish a presence in Maine (e.g., soliciting business in Maine through catalogs, using a vendor in Maine for printing, attending a trade show, maintaining a bank account or banking relationship in Maine). The guidance includes examples. Maine Rev. Serv., Sales Tax Instructional Bulletin No. 43 "Registration of out-of-state sellers and other persons" (Nov. 1, 2017). Massachusetts: The constitutionality of Massachusetts's new remote seller nexus regulation is being challenged by online retailer, Crutchfield Corp. Crutchfield filed its complaint in a Virginia circuit court under a Virginia law allowing in-state business to challenge whether another state's law imposing an obligation on a business to collect and remit tax is an undue burden on interstate commerce. Crutchfield is arguing that the regulation violates both the Commerce Clause of the U.S. Constitution and the Internet Tax Freedom Act. Michigan: New law (HB 4999) prohibits local governments from imposing an excise tax or a tax or fee on the manufacture, distribution, wholesale sale, or retail sale of food for consumption. The term "food" is the same as it is defined under MCL 289.1107 (the food law) — "articles used for food or drink for humans or other animals, chewing gum, and articles used for components of any such article." This provision took immediate effect. Mich. Laws 2017, Act 135 (HB 4999), signed by the governor on Oct. 26, 2017. Mississippi: New rule (Miss. Reg. 35.4.03.09) establishes an economic nexus provision for sales and use tax purposes. Under the new rule, a seller that does not have a physical presence in Mississippi but purposefully or systematically exploits the Mississippi market has a "substantial economic presence" in the state for use tax purposes if its sales into the state exceed $250,000 for the prior 12 months. The term "purposefully or systematically exploiting the market" includes the following: (1) advertising on a Mississippi TV or radio station; (2) telemarketing to Mississippi customers; (3) advertising on a billboard, wallscape, bus bench, on buses or other signage in Mississippi; (4) advertising in Mississippi newspapers, magazines or other print media; (5) sending directed emails, texts, tweets and any form of messaging directed to a Mississippi customer; (6) online banner, text or pop up advertisement directed toward a Mississippi customer; (7) advertising to Mississippi customers through apps or other electronic means on customers' phones or other devices; or (8) direct mail marketing to Mississippi customers. Sellers meeting any of these thresholds are required to register with the Mississippi Department of Revenue and collect and remit Mississippi sales and use tax as provided by state law. These provisions apply to all transactions occurring on or after Dec. 1, 2017; however, a seller that collected but did not remit Mississippi tax on sales made before Dec. 1, 2017, will still be liable for any tax collected. Miss. Dept. of Rev., Miss. Reg. 35.4.03.09 (adopted Nov. 1, 2017). North Carolina: A company that cuts, shapes, polishes, and finishes natural stone to customer specifications does not produce a "new and different article" and is not classified as a "manufacturing industry" for purposes of the privilege tax on mill machinery purchases. The North Carolina Department of Revenue found that the character of the stone remains unchanged, and since the company's purchases of machinery and equipment are not subject to the 1% privilege tax rate imposed on the purchase price of mill machinery and mill machinery parts or accesses by statute, the purchases are not exempt from sales and use tax by state law (the state rate, the local rate as applicable, and applicable transit rates). N.C. Dept. of Rev., Priv. Letter Ruling SUPLR 2017-0004 (Aug. 9, 2017). Ohio: A multistate fast food chain is not entitled to a refund of use tax paid for access to an internet-based food ordering system because the agreement between the food chain and the company providing the service gives the company access to the food chain's computer equipment for purposes of examining or acquiring data stored in its database as needed to provide e-commerce services, and, therefore, are taxable electronic information services. In affirming the Ohio Tax Commissioner's decision, the Ohio Board of Tax Appeals found that the restaurant did not affirmatively demonstrate error in the Commissioner's determination by merely asserting an argument in the notice to appeal without reliable documentary and testimonial evidence. America's Pizza Co., LLC v. Testa, No. 2016-1551 (Ohio Bd. Tax App. Sept. 5, 2017). Ohio: The Ohio Department of Taxation (Department) issued guidance on changes to the state's sales and use tax nexus standards, which under Am. Sub. HB 49 (Laws 2017) were expanded to reach remote retailers by adopting "software" and "network" nexus provisions. The new law presumes that an out-of-state seller has nexus with Ohio if the seller uses software in Ohio, including software located on the consumers' computers, mobile devices, and the servers of third party service providers (i.e., content distribution networks), to sell or lease taxable tangible personal property or services to consumers. Nexus also may be created "when an out-of-state seller engages in nexus-creating activities which enhance the out-of-state seller's ability to establish and maintain its market in Ohio … consistent with the demand of the Due Process Clause and the Commerce Clause." These provisions take effect Jan. 1, 2018, and apply only if the seller has gross receipts in excess of $500,000 in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in Ohio or from providing services in the state. An out-of-state seller that has nexus with Ohio must obtain a seller's use tax permit and thereafter, collect and remit tax on taxable sales made to consumers located in the state. Ohio Dept. of Taxn., ST 2017-02 — Sales and Use Tax: Software Nexus and Network Nexus (Oct. 2017). Texas: An out-of-state corporation that designs, produces, markets, and distributes luxury decorative items established that the processing it performs on the merchandise at its Texas facility constitutes manufacturing. Therefore, its purchases of wrapping and packaging supplies it uses to package its products are exempt from sales and use tax under the manufacturing exemption. The corporation's processing includes the inspection, final assembly, repair, enhancement, and replacement of damaged or missing parts before placement in customized packaging. Further, the administrative law judge from the Texas Comptroller of Public Accounts found that although the corporation subcontracted the primary manufacturing functions to third parties, it performed the last stages of manufacturing at its Texas facility when it processed and fabricated the products as items for final sale. Tex. Comp. of Pub. Accts., No. 201706033H (June 16, 2017) (released September 2017). Wyoming: The Wyoming Department of Revenue announced that it has suspended enforcement of its sales and use tax economic nexus provisions, which took effect earlier this year, while the constitutionality of the law is being challenged. Both Netchoice and the American Catalog Mailer Association have filed complaints with the First Judicial District Court, seeking a declaratory judgment that the law violates the U.S. Constitution. Arizona: A limited liability company (LLC) that constructed water pollution control facilities as part of its development of a master-planned community was eligible for an income tax credit to control or prevent pollution, because the pollution control facilities project was "used in the LLC's trade or business." Under Arizona law (A.R.S. §§ 43-1081(A) and 43-1170(A)), a credit is allowed for expenses incurred by the taxpayer to purchase real or personal property "used in the taxpayer's trade or business" in Arizona to control or prevent pollution. At issue in this case is the scope of the phrase "used in the taxpayer's trade or business." The Arizona Superior Court explained that under Arizona case law an item indirectly used in the taxpayer's trade or business can qualify for the exemption and that it will look at the item's "ultimate function" in the process.1 Here, the LLC was in the business of manufacturing houses, and the facilities played no part in controlling the resultant pollution of the manufacturing activity and, as such, the facilities were not being "used in the taxpayer's trade or business." Nevertheless, the facilities qualify as "being used in the taxpayer's trade or business" because the LLC's goal was to sell the houses at a profit and in order to legally sell the houses, the houses had to have facilities compliant with the legally imposed standards governing water pollution. Thus, the facilities' ultimate function was to allow the completion of the home sale process. Dorrance v. Ariz. Dept. of Rev., No. TX 2015-000606 (Ariz. Superior Ct., Tax Ct., July 24, 2017). Illinois: Emergency rules (Emer. Amended 14 Ill. Admin. Code 527.20 through .100, and Emer. New 14 Ill. Admin. Code 527.110), which also function as proposed rules, address amendments to the recently reinstated Economic Development for a Growing Economy (EDGE) Program under Pub. Act. 100-0511 (Ill. Laws 2017). Amendments to the rule: (1) define applicant, local workforce investment area, noncompliance date, related member, training cost, and underserved area, and revise definitions related to the credit amount, incremental income tax, new employee and retained employee; (2) discuss eligibility determinations, application requirements, and terms and conditions to be included in the tax credit agreement (e.g., a detailed description of the number of new employees to be hired and retained employees to be maintained, the total number of full-time employees employed by the applicant and any related member in Illinois at the time of the application, demonstrate that if not for the credit the project would not occur in Illinois); (3) expand verification requirements; and (4) add provisions regarding enhanced recapture and reallocation of recaptured credits. Under the new recapture rules, if a credit recipient ceases principal operations at a project location with the intent to terminate operations in Illinois, the entire credit amount awarded under the agreement prior to the date the taxpayer ceases principal operations can be recaptured. The emergency rules took effect Oct. 3, 2017 for a maximum of 150 days, and the Illinois Department of Revenue is accepting comments on the proposed regulations. Ill. Dept. of Rev., Emer. Amended 14 Ill. Admin. Code 527.20 through .100, and Emer. New 14 Ill. Admin. Code 527.110 (issued Oct. 20, 2017). Illinois: The Illinois Department of Revenue (Department) issued an information bulletin explaining the eligibility for the Invest in Kids Act of 2017 (see Pub. Act 100-0465), which provides income tax credits to taxpayers that make authorized contributions to organizations providing scholarships for eligible Illinois students to attend non-public Illinois schools. Approved Illinois taxpayers can receive state income tax credits of 75% of their total qualified contributions during the taxable year, up to $1 million per taxpayer, per year. Taxpayers can now submit applications for approval to participate in the program on the Department's website; tax credit applications will be available beginning Jan. 2, 2018. (Note: in order to apply for the credit, the taxpayer must have a registered MyTax Illinois account. The Department is encouraging taxpayers to create the account as soon as possible (i.e., before the credit applications can be accepted), in order to avoid processing delays that may occur when the application system goes live). Unused credits can be carried forward for five years but cannot be carried back. The Department will not grant the credit for any qualified contribution for which the taxpayer claims a federal income tax deduction. The aggregate credits cap is $75 million per calendar year, and credits are awarded on a first-come, first-served basis in a way that is geographically proportionate to enrollment in recognized non-public Illinois schools. Ill. Dept. of Rev., Info. Bulletin FY 2018-07: Invest in Kids Act of 2017 (October 2017). Ohio: The Ohio Board of Tax Appeals (BTA) erred in using the sale price from a sale/leaseback to determine the value of property for property tax purposes because as a sale/leaseback the sale was not at arm's-length, which resulted in a sale price that was not indicative of the market value of the property. The Ohio Supreme Court (Court) explained that under Ohio law "the 'true value in money' is the basis for assessing real property and usually equates to 'market value' … ;" and at issue in this case is whether the sale price from a sale/leaseback satisfies the "market value" criterion — the Court held it does not. The Court found that the ordinary presumption favoring the use of the sale price under Berea City School District Board of Education v. Cuyahoga County Board of Revision2 does not apply, as the contemporaneous negotiation of the sale price and the lease terms creates a reciprocal interaction that is atypical of the kind of seller-to-buyer transaction that is understood to fix market value for tax purposes. Further, the Court found that "case law demonstrates a broader range of reasons why the sale price from a sale/leaseback does not indicate market value." Columbus City Schools Bd. of Edn. v. Franklin Cnty. Bd. of Revision, Slip. Op. No. 2017-Ohio-7578 (Ohio S. Ct. Sept. 14, 2017). Texas: A power cooperative that purchased and used heat recovery steam generators (HRSGs) at its two power plants was not entitled to an ad valorem tax exemption that is reserved for devices installed to comply with state and federal regulations aimed at abating air pollution. In reaching this conclusion, the Eighth District Texas Court of Appeals (Court) found that the Texas Commission on Environmental Quality (TCEQ) has the discretion to decide whether and on what terms a statutorily listed applicant receives a tax break. The statute at issue (Tex. Tax Code Ann. § 11.31(m)) only requires the TCEQ give such applicants certain administrative preferences during its decision process, rather than requiring such applicants receive a tax break. The Court noted that an appeals court in another district held that TCEQ exceeded its statutory authority by denying tax breaks to HRSGs because the statute required TCEQ to issue some sort of tax break to a statutorily listed applicant.3 Brazos Electric Power Co-op., Inc. v. Tex. Comn. on Envir. Quality, No. 08-16-00069-CV (Tex. App. Ct., 8th Dist., Sept. 15, 2017). New York City: The New York City Department of Finance (Department) in Fin. Memo. No. 17-5 provides guidance to taxpayers subject to the Business Corporation Tax, General Corporation Tax, Banking Corporation Tax and Unincorporated Business Tax (collectively, taxpayers) on how they should report tax base adjustments to the Department, including adjustments that affect income, receipts or capital allocation. For more information on this development, see Tax Alert 2017-1768. Puerto Rico: Puerto Rico's Department of Labor and Human Resources has granted (Administrative Order 17-07) an automatic extension from Oct. 31, 2017 to Dec. 15, 2017, for employers to file the Quarterly Unemployment and Disability Tax Report and the Quarterly Report for the Non-Occupational Disability Benefits Program. The extension also applies to any corresponding taxes. For additional information on this development, see Tax Alert 2017-1838. California: The California Franchise Tax Board (FTB) is permitting taxpayers and their representatives to request permission to make oral presentations to FTB staff in connection with a petition to use an alternative apportionment formula. Previously, FTB staff considered these petitions based entirely on written materials submitted on behalf of the taxpayer. Taxpayers who want to make an oral presentation need to state such in the alternative apportionment petition or notify the assigned FTB staff as early in the proceeding as possible. Cal. FTB, Notice 2017-05 (Nov. 19, 2017). Oklahoma: Reminder — The Oklahoma voluntary disclosure initiative (i.e., a tax amnesty program) ends on Nov. 30, 2017. Taxpayers participating in, and complying with the terms of, the initiative will have otherwise applicable penalties, interest and other collection fees waived. Eligible Oklahoma taxes include the following: income tax for tax periods ending before Jan. 1, 2016; sales and use tax; withholding tax; mixed beverage tax; gasoline and diesel tax; and gross production and petroleum excise tax. To participate in the initiative, taxpayers must not have (1) outstanding tax liabilities other than those reported under this initiative; (2) been contacted by the Oklahoma Tax Commission (OTC) (or a third party acting on the OTC's behalf), with respect to the taxpayer's obligation to file a return or make a payment to the state; (3) collected tax from others (e.g., sales and use tax, payroll tax) and not reported the tax; and (4) within the preceding three years, entered into a voluntary disclosure agreement for the type of tax owed. The OTC will limit the lookback period for additional tax assessments to three taxable years for annually filed taxes or 36 months for taxes that are not filed annually (e.g., monthly, quarterly). For more on the program, see Tax Alert 2017-1329. California: Businesses are reminded of two important changes in the San Francisco payroll expense tax for 2017 — a decrease in the tax rate and the requirement for quarterly estimated tax payments. Additionally, 2018 is the last year of the payroll expense tax. Starting in 2019, businesses pay only the gross receipts tax. For additional information on this development, see Tax Alert 2017-1764. Massachusetts: The Massachusetts Department of Labor and Workforce Development posted additional information on the changes to the Employer Medical Assistance Contribution (EMAC) effective Jan. 1, 2018. For additional information on this development, see Tax Alert 2017-1827. New Jersey: The New Jersey Department of Labor and Workforce Development announced that employer state unemployment insurance tax rates continue to range from 0.5% to 5.8% on Rate Schedule C for fiscal year (FY) 2018 (July 1, 2017 through June 30, 2018). For more on this development, see Tax Alert 2017-1823. Oklahoma: The Oklahoma Employment Security Commission (OESC) announced that the 2018 state unemployment insurance (SUI) taxable wage base will be $17,600, down from $17,700 for 2017. The 2018 SUI tax rates will continue to range from 0.1% to 5.5%. The new employer rate for 2018 will remain at 1.5%. Due to the continued strength of the UI trust fund, SUI tax rates will again not be based on a conditional factor. For additional information on this development, see Tax Alert 2017-1795. South Carolina: The South Carolina Department of Revenue issued revised withholding tables that are effective with wages paid on and after Jan. 1, 2018. The annual computer formula can be found here and the wage bracket withholding tables are here. As we reported previously, starting with the calendar year 2017 withholding tables and formula the Department will issue updates every year. For more information on this development, see Tax Alert 2017-1816. Federal/ Multistate: On Dec. 5, 2017 from 2:00 p.m. (EST), Ernst & Young LLP will host a webcast providing a review of employment tax developments from the past year. The following topics will be covered on the webcast: 2017 and 2018 rates and limits; Form W-2 reporting and other federal tax and reporting changes; State Form 1099 reporting update; 2017 unemployment insurance trends and developments; other state and local payroll tax developments; 2017 hot topics — disaster relief and paid family leave; the payroll year-end checklist; federal tax reform and state outlook for 2018; and frequently asked questions. Click here to register for the webcast. 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. 1 See Chevron U.S.A. Inc. v. Arizona Dept. of Revenue, 238 Ariz. 519, 523 (App. 2015); Duval Sierrita Corp. v. Arizona Dept. of Revenue, 116 Ariz. 200 (App. 1977). 2Berea City School Dist. Bd. of Edn. v. Cuyahoga Cty. Bd. of Revision, 106 Ohio St.3d 269, 834 N.E.2d 782 (Ohio S. Ct. 2005). 3 See Freestone Power Generation, LLC v. Tex. Comn. on Envir. Quality, No. 03-16-00692-CV (Tex. App. Ct., Austin, July 11, 2017). Document ID: 2017-1935 |
