November 27, 2017 State and Local Tax Weekly for November 10 Ernst & Young's State and Local Tax Weekly newsletter for November 10 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. ————————————————————————— Senate tax reform proposal has different state tax impacts from House Bill On Nov. 9, 2017, the Joint Committee on Taxation (JCT) released a conceptual explanation of the Senate tax reform proposals (the Senate Plan) titled the "Description of the Chairman's Mark of the 'Tax Cuts and Jobs Act'" (JCT Report). The Senate Plan, however, differs from the bill approved by the House Ways and Means Committee (the House Bill) in the design of their provisions, their timing and, most importantly for state and local tax professionals, their respective impact at the state and local tax level. In comparing the Senate Plan to the House Bill, the headline differences between the two include the following: — The Senate Plan would delay by one year the reduction of the corporate income tax rate to 20% until 2019, while the House Bill would reduce the rate for tax years beginning on or after Jan. 1, 2018 (both would make the reduction permanent). — With respect to the taxation of global businesses, while both proposals would move the US federal income tax to a territorial tax system (from the current worldwide tax regime) and impose a one-time transition tax on certain previously untaxed accumulated foreign earnings to get there, the Senate Plan differs from the House Bill on its approach to preventing base erosion. — The Senate Plan retains the Work Opportunity Tax Credit and the New Markets Tax Credit, both of which would be repealed under the House Bill. — The Senate Plan makes many other changes to business and partnership provisions that are not included in the House Bill. The Senate Plan also varies from the House Bill on the treatment of income from pass-through entities (e.g., sole proprietorships, partnerships and S corporations) and the limitations on the deductibility of business interest. The Senate Plan provides a 17.4% deduction for individuals who receive income from pass-through entities, subject to a cap equal to 50% of Form W-2 wages paid. The deduction would not apply to income from certain professional services. The House Bill approaches pass-through entity taxation by establishing a special 25% tax rate. Unlike the House Bill, the Senate Plan also creates new loss limitation rules whereby excess business losses of a taxpayer other than a C corporation would not be allowed for the tax year, but would be carried forward, if adjusted gross income exceeds $500,000 for married individuals filing jointly and $250,000 for other individuals (effectively meaning that Schedule E or C losses could not offset other income, such as interest, wages, pensions, etc.). The Senate Plan follows the House Bill by imposing a 30% limitation on the deductibility of most business interest (certain business interest of public utilities and real estate businesses would be excluded from the provision). When measuring "adjusted taxable income" (ATI) to determine the limitation, however, the Senate Plan excludes depreciation, thereby significantly lowering the impact of the 30% limitation threshold, and raising significantly more revenue than the approach in the House Bill. (The House Bill differs from its originally-introduced version by providing a special carve out for interest on "floor plan financing indebtedness," which is essentially interest related to automobile, motor vehicle and certain other equipment financing interest.) Neither proposal contains a "grandfathering" provision. Thus, existing indebtedness would be subject to the limitations if enacted. Both proposals impose similar limitations on interest paid to foreign related parties, essentially limiting the domestic business interest deduction to the lesser of the amount determined under the 30% business interest limitation previously described or interest deducted by a US taxpayer that exceeds 110% of the overall global average of its affiliated group's debt-to-equity ratio (although the two proposals differ in how they determine whether members are related: The House Bill looks to whether the members of the international group join in filing consolidated financial statements for GAAP or IFRS purposes while the Senate relaxes the ownership tests for affiliation under the IRC to 50% ownership (from 80%) and includes foreign entities for this purpose). Affected taxpayers would have to consider both the general interest limitation and the international one in assessing the limitation on annual deductible interest. The Senate Plan also differs from the House Bill in regard to individual income tax changes, including retaining the current seven tax rate brackets (which are reduced to four under the House Bill) with modified rates, fully repealing the state and local tax deduction (while the House Bill would mostly eliminate it except for retaining a $10,000 deduction for certain residential real property taxes), among others. Changes in the Senate Plan that are not in the House Bill include the following: — Repealing all itemized deductions subject to the 2% floor (e.g., home office deductions, license and regulatory fees, dues to professional societies and subscriptions to professional journals and trade magazines) — Reducing the amount of the deduction for dividends received from a domestic corporation to, according to the proponents, correlate with the reduction in the corporate rate — Repealing special rules for domestic international sales corporations — Shortening the recovery period for real property — Retaining but modifying and limiting the orphan drug credit — Reducing the credit for the rehabilitation of old and/or historic buildings — Eliminating the deduction for unused business credits For a more in-depth discussion of the Senate Plan and its potential state and local tax impacts, see Tax Alert 2017-1929. ————————————————————————— Minnesota: The Minnesota Department of Revenue issued a notice to announce its acquiescence to the Minnesota Tax Court's ruling in Sinclair Broadcasting Group,1 in which the tax 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. The notice took effect upon publication in the Minnesota State Register on Nov. 6, 2017. Minn. Dept. of Rev., Revenue Notice # 17-09 (Nov. 6, 2017) (revokes Revenue Notice #99-07). New York: In reversing the decision of the New York Division of Tax Appeals, the New York Tax Appeals Tribunal (Tribunal) cancelled deficiencies issued to two German insurance companies (companies) by the New York Division of Taxation (Division) under an alternative allocation method because the companies were being discriminated against in violation of the U.S.-German tax treaty. In reaching this conclusion, the Tribunal found that the companies' tax treatment (in which they had a zero premiums factor, leading the Division to use an alternative allocation method under its discretionary authority) subjected the companies to taxation or other connected requirements that are "other or more burdensome" than that of US insurance corporations. The companies were unauthorized non-life insurance companies, had zero US premium income because they only sold insurance in Europe (such premiums are excluded from the entire net income calculation), and their only US-source income was from partnership interests in US real estate investments. The Tribunal found that the companies were subject to the franchise tax on insurance corporations (N.Y. Tax Law § 1501), and since there were no premiums, the Division properly excluded them from the allocation method. The companies' alien status, however, triggered differential tax treatment from US insurance corporations, and the alternative allocation was discriminatory when the companies' status as alien insurance corporations prevents them from using a worldwide allocation. Matter of Bayerische Beamtenkrankenkasse AG, DTA No. 824762 (N.Y. Tax App. Trib. Sept. 11, 2017); Matter of Landschaftliche Brandkasse Hannover, DTA No. 825517 (N.Y. Tax App. Trib. Sept. 11, 2017). Tennessee: The Tennessee Department of Revenue issued guidance on changes to the intangible expense deduction that became effective July 1, 2016, following the enactment of the Revenue Modernization Act (the Act) in 2015. The Act established a bright-line factor presence nexus standard; as a result of this expanded definition of nexus most affiliated companies to whom an intangible expense is paid have a substantial nexus with Tennessee. Because both the payer and the recipient of the intangible expense will be subject to Tennessee franchise and excise tax, the taxpayer paying the expense is allowed to take a deduction for the intangible expense paid, provided the taxpayer files the required disclosure form. A taxpayer also is allowed to deduct disclosed intangible expenses paid to an affiliate when the affiliate is located in a foreign nation that is a signatory to a comprehensive income tax treaty with the US or is otherwise not required to be registered for or pay Tennessee excise tax. A taxpayer that takes a deduction for intangible expenses paid without filing the Form IE- Intangible Expense Disclosure, or that fails to add the expense to net earnings/losses on its originally filed return, will be subject to the negligence penalty, which is the greater of $10,000 or 50% of any adjustment to the originally filed return. Tenn. Dept. of Rev., Notice # 17-27 (Nov. 2017). ————————————————————————— District of Columbia: The District of Columbia Office of Tax and Revenue (OTR) issued guidance on the imposition of sales and use tax on the sale of digital goods. The OTR explained that sales of digital goods will not be considered the sale of tangible personal property for purposes of the District's sales and use tax, but a sale of digital goods that constitutes the sale of a taxable service is subject to tax. Digital goods subject to the District's sales tax include: applications, canned software, prepackaged software, and customized software. Digital goods not subject to the District's sales tax include: digital books, digital audio books, digital music downloads and streaming, and digital video downloads. In addition, the OTR said that while streaming video services (i.e., video content sent in compressed form over the internet and played immediately, rather than being saved to a hard drive) are not subject to the District's sales tax, those who provide streaming video service are subject to the gross receipts tax on the provision of these services. D.C. OTR, Notice 2017-06 (Oct. 5, 2017). District of Columbia: Amended regulation (D.C. Mun. Regs. tit. 9, § 414) updates guidance regarding the District of Columbia's sales and use tax resale exemption certificates. Beginning Nov. 1, 2017, the District of Columbia for purposes of determining sales for resale will only recognize resale certificates on forms or copies of forms authorized by the D.C. Office of Tax and Revenue (OTR). Resale certificates expire annually, and are valid through the expiration date stated on the certificate. A purchase is for resale in the following circumstances: (1) the person purchases tangible personal property or taxable services to resell or rent in the same form; (2) the person purchases tangible personal property or taxable services to incorporate as an attachment to, or as a material part of other tangible personal property to be produced for sale or rental by manufacturing, assembling, processing, or refining; or (3) the person purchases taxable services to use or incorporate in the same form as a material part of other services to be provided for sale or rental. A vendor must refuse to accept a resale certificate for property and taxable services that it knows or should know is not for resale. A vendor will not be protected from paying sales tax on items purchased with resale certificates that are not for resale if it fails to exercise reasonable judgment in accepting the resale certificate. A retailer that purchases tangible personal property or services under a resale certificate and then gives the property or services away for no consideration is considered the consumer or user of the tangible personal property or services, and must reimburse the vendor for the sales tax or file a return and pay the tax as a consumer or user under the use tax. The amended regulations took effect Nov. 3, 2017. D.C. OTR, D.C. Mun. Regs. tit. 9, § 414 (adopted Oct. 26, 2017). Texas: Amended regulation (Tex. Admin. Code tit. 34, § 3.285) modifies provisions related to sales for resale and resale certificates. Amendments move the definition of "sale for resale" to a new subsection and modify the definition of the term as follows: (1) requiring a purchaser to acquire the taxable item for the purpose of reselling it "with or as a taxable item" (emphasis added to show added language); (2) expanding the definition to include the sale of certain wireless voice communication devices and certain sales of computer programs; (3) specifying that wrapping, packaging, and packaging supplies cannot be purchased for resale; (4) clarifying that an item sold to a purchaser for use in performing a service is not a sale for resale, with exceptions; (5) codifying the Comptroller's long-standing policy that the sale of tangible personal property for resale outside the US or Mexico does not fall within the definition of a sale for resale; and (6) explaining when the care, custody, and control of tangible personal property is transferred to the purchaser of a service. Additionally, amendments to the section entitled "Issuance and acceptance of resale certificates" cover: (1) when a purchaser may issue a resale certificate instead of paying sales or use tax on a taxable item purchase; (2) good faith acceptance of a resale certificate; (3) the provision that a broker or dealer who only buys and sells raw commodities in bulk is not required to hold a sales tax permit or issue a resale certificate on such purchases; (4) specifications that tax is not due on tangible personal property that is totally destroyed or permanently disposed of in a manner other than for use or sale in the normal course of business; and (5) which multi-jurisdiction resale certificates sellers may accept. The amendments took effect Nov. 1, 2017. Tex. Comp. of Pub. Accts., Tex. Admin. Code tit. 34, § 3.285 (Tex. Register Oct. 27, 2017). ————————————————————————— Federal: On Nov. 2, 2017, the House Ways and Means Committee released the text of its tax reform bill. Among its many business tax provisions, various deductions and credits would be eliminated, one of which was the New Markets Tax Credit (NMTC). Specifically, the bill would revise the calendar-year tax credit limitation expiration from 2019 to 2017, effective Dec. 31, 2017. In addition, any carryover of unused tax credit limitation would expire in calendar-year 2022. Together, if these provisions are enacted, the NMTC program would expire after the 2017 allocation round. All outstanding allocation awards would not be effected by the House Bill, but all previously awarded NMTC allocation, including the 2017 awards that have yet to be announced, would not expire until 2022. The pertinent section as currently drafted is described in Tax Alert 2017-1895. West Virginia: New law (HB 203) increases and extends the income tax credit for qualified rehabilitated buildings investment. The amount of the credit, which is available to both residential and nonresidential buildings, is increased to 25% (from 10%) of qualified rehabilitation expenditures made after Dec. 31, 2017; however, credits for these expenditures cannot be used to offset a taxpayer's tax liabilities before the tax year beginning on or after Jan. 1, 2020. The credit is eliminated after Dec. 31, 2022, but any authorized credits that are eligible to be claimed before Jan. 1, 2023 will continue to be eligible to be claimed. The credit can be carried forward or carried back in conformity with IRC § 39, subject to the following exceptions: (1) the amount of credit taken cannot exceed the tax liability due for the taxable year; (2) it is not refundable; and (3) for tax years beginning on or after Jan. 1, 2020, any unused portion of the credit may not be carried back but may be carried forward to each of the next 10 tax years until the credit is exhausted or forfeited due to lapse of time. For purposes of the corporate net income tax, each certified rehabilitation is capped at $10 million of the tax credits and the aggregate credits are capped at $30 million per fiscal year. The credit is awarded on a first-come, first-served basis; taxpayers applying for the credit must submit an application along with a fee equal to the lesser of 0.5% of the amount of the tax credits requested for in such application or $10,000. HB 203 took effect Oct. 17, 2017. W. Va. Laws 2017 (2nd Extra. Session), Ch. 5 (HB 203), signed by the governor on Oct. 24, 2017. ————————————————————————— California: The County of Los Angeles may impose property tax on the full value of aircraft owed by a corporation providing on-demand air-taxi service because the aircraft's out-of-state landings, without more, does not establish situs over the aircraft in those other states under the traditional due process test for situs. The California Court of Appeal (Court) explained that "property has situs in a state when it is 'habitually employed' or 'habitually situated' in that state." The determination of whether either of these conditions is met "turns on two considerations: (1) the '[l]ength of time th[e] property is in the [state] and the intent of its presence,' and (2) the 'nature of the property owner's contact with the [state].'"2 The burden of proving situs in other states was on the corporation; it failed to meet this burden. The corporation never established that the time the aircraft spent in each state outside of California was more than the sum of incidental touch downs in that state and never showed the benefits and protection any particular state conferred upon the aircraft. Further, the corporation failed to show that the aircraft were "just passing through" the states where they landed, and that they intended to drop off passengers and to fly elsewhere at the earliest opportunity. The Court also rejected the corporation's argument that California's special situs rule for fractionally owned aircraft, which establishes situs over a fleet of fractionally owned aircraft if any aircraft within the fleet makes a landing in the state, should be extended to reach all aircraft, finding that adopting this argument would lead to the displacement of well-settled due process-based rules for assessing situs. Lastly, the Court found Utah's taxation of the corporation's aircraft in 2013 has no weight in this case and does not dictate a finding that Utah had situs over the corporation's aircraft in the "representative period" for the taxes at issue in this case - 2010. JetSuite, Inc. v. Cnty. of Los Angeles, No. B279273 (Cal. App. Ct., 2d App. Dist., Oct. 10, 2017). ————————————————————————— California: The California Franchise Tax Board (FTB) announced that since Indiana stopped recognizing California as a reverse-credit state, for purposes of California's Other State Tax Credit (OSTC) Indiana is no longer a reverse-credit state. Thus, effective for the 2017 tax year and later, California will allow the credit for taxes paid to Indiana on income sourced to Indiana. Cal. FTB, Tax News (November 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. ————————————————————————— Massachusetts: The Massachusetts Department of Unemployment Assistance (DUA) has released draft proposed regulations regarding the new second tier Employer Medical Assistance Contribution (EMAC) (referred to in the regulations and here as the EMAC Supplemental contribution) that applies to covered employers for 2018 and 2019. In this two-year period, the Commonwealth is expecting to generate employer contributions of $125 million. The proposed regulations provide details on how the EMAC Supplemental contribution will be administered by the DUA. For additional information on this development, see Tax Alert 2017-1898. South Dakota: As the result of legislation enacted earlier this year, the South Dakota 2018 state unemployment insurance rates will range from 0.0% to 9.35% on new Rate Schedule B, a reduction of 0.15% for most employers. For additional information on this development, see Tax Alert 2017-1883. Washington: The Washington Department of Labor & Industries is proposing an average decrease in employer workers' compensation insurance premiums of 2.5% for 2018 (down from a 0.7% increase for 2017, a 2.0% increase for 2016 and a 1.8% increase for 2015). For additional information on this development, see Tax Alert 2017-1870. ————————————————————————— Washington: The Washington Department of Revenue issued a notice to explain that under the state's trailing nexus concept, nexus will continue for a person even after it stops the activities that originally created nexus. Thus, a person will have nexus with Washington for a calendar year if it meets an applicable nexus standard during the current or prior calendar year. Washington's one-year trailing nexus concept apples to all taxes a taxpayer reports on the excise tax return, including retail sales tax. Wash. Dept. of Rev., Special Notice: Trailing Nexus (Nov. 2, 2017). ————————————————————————— International: The new Government of the Netherlands has announced that the reduced rate of VAT will increase from 6% to 9%. It seems that this increase will only take effect from Jan 1, 2019. For additional information on this development, see Tax Alert 2017-1904. International: The Cyprus House of Parliament voted on Nov. 3, 2017, to amend the Value Added Tax (VAT) legislation with respect to building land taxation and impose a 19% tax rate to harmonize the national VAT legislation with the European Union (EU) VAT Directive. In addition to the imposition of VAT on building land, commercial rents will now be subject to VAT under certain circumstances and the reverse charge will be applicable on the acquisition of immovable property in the settlement/restructuring of loans under certain conditions. For additional information on this development, see Tax Alert 2017-1866. ————————————————————————— Federal: On Nov. 28, 2017, from 1:00-2:30 p.m. (EST), please join our panel of Ernst & Young LLP professionals as we discuss recently released IRS FAQs on employer responsibilities under the Affordable Care Act (ACA), which indicate the IRS is moving forward with compliance efforts that could potentially result in penalty notices and audits. Topics that will be covered include: findings from our recent ACA Large Employer Market Survey; ACA legislative and enforcement update, including the Employer Shared Responsibility Payments process; upcoming changes to Forms 5500, benefit plan compliance and benefit plan audits; and developments related to equal pay. To register for this event, go to The Affordable Care Act series. Federal/ Multistate: On Dec. 5, 2017, from 2:00-3:30 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. Multistate: On Dec. 6, 2017, from 1:00-2:15 p.m. (EST), Ernst & Young LLP (EY) will host a webcast on state and local tax controversy issues. On this webcast, Louisiana Governor Jon Bel Edwards and Kimberly L. Robinson, the Secretary of Revenue for the Louisiana Department of Revenue, will sit down with EY's Joe Huddleston to provide their first-hand perspective of the pressures a state feels when setting tax policy, pushing tax reform and enforcing the tax laws. In addition, EY panelists will discuss the following topics: the most recent judicial, legislative and administrative developments related to sales and use tax nexus; an update on California's new Office of Tax Appeals; and recent income tax trends including those relating to state approaches to apportionment and tax base. To register for this event, go to Current developments in state and local tax controversy. Multistate: On Dec. 13, 2017 from 1:00-2:30 p.m. (EST), EY will host the domestic tax quarterly webcast focused on state tax matters. On this webcast, EY panelists will discuss the following topics: (1) our assessment of 2017's Top 10 state and local tax developments; (2) state tax implications of federal tax reform; (3) key state and local payroll tax developments from 2017; (4) state tax outlook for 2018; and (5) an update covering major judicial and administrative developments at the state level. To register for this event, go to State tax matters. ——————————————— 1 Sinclair Broadcast Group, Inc. and Subsidiaries v. Commissioner of Revenue, No. 8919-R (Minn. Tax Ct. Aug. 11, 2017). For additional information on this ruling, see Tax Alert 2017-1343. 2 Citing Ice Capades, Inc. v. County of Los Angeles, 56 Cal. App. 3d 745, 753-754 (1976); County of San Diego v. Lafayette Steel Co., 164 Cal. App. 3d 690, 694 (1985). 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. | ||||
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