November 30, 2017 State and Local Tax Weekly for November 22 Ernst & Young's State and Local Tax Weekly newsletter for November 22 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. ————————————————————————— Congress makes progress on tax reform On Nov. 16, 2017, the US House of Representatives passed the "Tax Cuts and Jobs Act" (HR 1) (Act), a key step in congressional Republicans' effort to enact the most extensive tax overhaul in 31 years. (See Tax Alert 2017-1941 and Breaking Tax News 2017-9022 for more information.) Later in the evening, the Senate Finance Committee approved its version of the Act on a party-line vote after adopting a manager's amendment by Chairman Orrin Hatch (R-UT) (see Tax Alert 2017-1946). The bill is expected to be considered on the Senate floor the week after Thanksgiving, with the goal of sending a final bill to President Trump for his signature by the end of 2017. New Jersey Tax Court rules limited partner is a deemed general partner with nexus to the state, denies investment company status In Preserve II,1 the New Jersey Tax Court (court) ruled that an out-of-state corporate limited partner of two partnerships doing business in New Jersey has nexus with the state because it is a deemed general partner as a result of its interrelation with the general partners and the operating partnership doing business in the state. This is the third New Jersey opinion to deal with the nexus status of corporate limited partners for purposes of New Jersey's corporate business tax (CBT), following earlier decisions in BIS 2 and Village Super Market. 3 The court also denied investment company status to the corporate limited partner (which would have allowed an effectively lower CBT tax rate). Relying on Manheim v. Director,4 the court found that Preserve II was not a passive investor entitled to investment company status. Rather, Preserve II's facts demonstrated that it had blurred the distinction among the partnerships, the general partners, and Preserve II, and that Preserve II in essence acted as a general partner. As such, it could not be a passive investor entitled to investment company status. The taxpayers in this case have filed a notice of appeal. If the court's decision stands, it will serve as additional guidance relating to the issue of whether limited partners have CBT nexus with New Jersey. The facts of this case are somewhat different from the facts in Village Super Market. Thus, this case can be seen as expanding the definition of nexus and clawing back even more of the no-nexus zone which was established in the court's ruling in BIS. Also, while neither this case nor Village Super Market explicitly relied on the unitary business principle that was critical to the conclusion in the court's ruling in BIS, it is clear that the court is incorporating many unitary business concepts in its ostensibly non-unitary nexus analysis. This case demonstrates that centralized management, functional integration, and economies of scale, in the form of elements such as shared officers, tax compliance, financing, and overall management goals, are important to the court's analysis of nexus for all partners in a partnership doing business in New Jersey. Taxpayers who utilize a similar limited partnership structure may face nexus inquiries or audits from the New Jersey Division of Taxation. Going forward, taxpayers may want to consider revising their legal entity structure and employment policies in order to minimize the centralized management, functional integration, and economies of scale between limited partners, on the one hand, and their operating partnerships and general partners, on the other. For additional information on this development, see Tax Alert 2017-1985. ————————————————————————— Multistate: Panelists on the recent Analyzing nexus and filing options issues webcast hosted by Ernst & Young LLP provided an historical overview of state income tax nexus, focusing on the constitutional foundations of state taxation and the developments that contributed to current interpretations of states' power to impose tax. This is the first of a five-part series on tax concepts that will address limitations on tax liability under federal law, nexus theories, filing options, and international operational complexities of state filing options. In this segment, panelists discussed the historical background of state income tax nexus; the US Constitutional and federal limits on a state's ability to impose income taxes on out-of-state businesses that derive income from the state; the historical context of Pub. L. 86-272 and what its limits on state income taxing authority mean in today's economy; and judicial developments leading to the seminal US Supreme Court ruling in Complete Auto Transit and other key opinions. For a summary of the webcast, see Tax Alert 2017-1948. A replay of the webcast is now available on the EY Thought Center website. Maryland: An out-of-state corporation that did not have non-management employees or real property in Maryland but received interest payments from its parent (and other affiliates) operating in the state has nexus with Maryland due to (1) the in-state presence of its parent's offices and the corporation's directors and corporate level officers and (2) the in-state activities of parent's providing support services (e.g., payroll, human resources, cash management, tax/legal/accounting services) and servicing the corporation's loans, as well as the corporation not having an operational existence as a separate entity independent of its parent. The Maryland Tax Court (Court) found this "continuous and regular management of the corporation in Maryland … and the loan servicing operations, taken together or independent of each other, are sufficient to create nexus … " for the corporation. The Court also held that the corporation "assumed the role of corporate financier and was functionally and economically dependent upon [its parent] for its existence," and the circular movement of funds from the corporation to its parent "is central and predominant legal justification of the Comptroller's assessment [of Maryland corporate income tax]." Lastly, the Court upheld the Comptroller's use of an alternative apportionment formula — in this case the apportionment factor used by its parent — finding the Comptroller's formula was not unreasonable or distorted the corporation's income. Michigan Host, Inc. v. Comptroller of Treasury, No. 12-IN-00-1187 (Md. Tax Ct. Feb. 1, 2017) Pennsylvania: The Pennsylvania Department of Revenue (Department) announced that it will revise its forms and procedures to prospectively implement the Pennsylvania Supreme Court's ruling in Nextel Communications5 which held that the $3 million flat dollar cap on the NOL deduction violated the Uniformity Clause of the Pennsylvania Constitution. (For more on the ruling,see Tax Alert 2017-1763.) The Department said that effective for taxable years beginning in 2017 and thereafter the flat-dollar cap on the NOL (currently $5 million) will not be available. The NOL limitation of 30% of taxable income, however, will continue to be effective. Pa. Dept. of Rev., Corp. Tax Bulletin 2017-01 (Nov. 16, 2017). Virginia: The Virginia Department of Taxation (Department) advised an out-of-state affiliated group of corporations that manufacturers, markets, and sells motor vehicles on whether the group's Virginia activities (e.g., selling its cars and trucks through a network of dealers, sending nonresident sales representatives into Virginia to solicit sales) create nexus and a positive apportionment formula for three affiliated corporations (Companies A, B, and C). The Department said that if a third party dealer providing warranty services is an independent contractor under Pub. L. 86-272, Co. A will be deemed to be purchasing services and the dealer's provision of warranty services will not create nexus for Co. A. If, however, the third party dealer is not independent of Co. A, the Department will attribute the dealer's unprotected activities to Co. A in determining whether Co. A has nexus with Virginia. The Department further advised that it generally considers a visit by a taxpayer's representative to investigate repair issues creates nexus as an activity that is not protected by Pub. L. 86-272, but exempts activity that is de minimis in nature. Last, the activities of Co. C's part-time, home-based Virginia employee who organizes owner events throughout the US, including an event in Virginia, creates nexus, as the activities are not limited to sales solicitation protected by Pub. L. 86-272, and a multi-day annual customer event in Virginia is not de minimis. The Department further advised that even if the Virginia employee's wages are not subject to the Virginia Unemployment Compensation Act, they still must be included in the numerator of the Virginia payroll factor if they are deemed to be paid or accrued in Virginia by statute. Here, Co. C must consider whether the employee's residence or any other location may be a base of operations, because as long as the employee performs part of her services in the state where her activities are directed and controlled and she has no base of operations in Virginia, her compensation would not be attributed to Virginia. Va. Dept. of Taxn., Ruling No. 17-161 (Sept. 8, 2017). ————————————————————————— Colorado: The Colorado Department of Revenue (Department) issued guidance on the application of the state's sales tax to a company's provision of certain software, products and related services. The Department advised that sales of canned/prepacked software, forms, scanners, and hardware are subject to sales tax, but custom programming, software licenses delivered electronically, accounting services, conversion services, charges for software delivered through an application service provider, and on-site travel reimbursement are not subject to sales tax. If the sale of computer software is taxable, charges for the sale and maintenance and support fees are also subject to sales tax unless the buyer has the option to not purchase the maintenance and support as part of its purchase of the taxable software and if the invoice separately states the charge for service. Additionally, customer services (labor), on-site training/consulting, phone training from outside Colorado, and training conferences in Colorado are charges for services that are generally not taxable unless the retailer requires the buyer to purchase the services as part of the sale of taxable tangible personal property or the invoice does not separate the charge for the service and the sale of taxable tangible personal property. Colo. Dept. of Rev., GIL-17-012 (July 28, 2017). Mississippi: New regulation (Miss. Regs. § 35.IV.1.08), adopted as amended from the original draft, clarifies when a transfer assessment occurs for sales and use tax purposes. Following the closure or sale of a business or the sale of the business's inventory, a return must be filed within 10 days and any sales tax liability due must be paid. A purchaser of a business is required to withhold an amount not to exceed the purchase price of the business — this assumes the purchase price is at arm's length (if the purchase price is not at arm's length, the amount withheld should not be below the fair market value of the business). The amount withheld is used to cover any tax liability when the seller cannot produce a tax clearance letter from the state showing the liability has been paid. If the purchaser fails to withhold and the liability due remains unpaid after 10 days, then the purchaser along with the seller are both liable for the tax due. In addition, a person owning stock/interest of 10% or more in a corporation/ a limited liability company (LLC) with 35 or fewer owners, and exercising responsibility for fiscal management at the time the liability is accrued are liable for the liability due. The regulation lists various activities that are considered " … exercising responsibility for fiscal management," including having the authority to sign business checks or tax returns or to direct payment of business funds to creditors or to pledge business assets as collateral or to bind the business to contracts. Further, ownership of more than a 50% interest in a corporation or LLC generally indicates exercising responsibility for fiscal management, unless an operating agreement exists at the time the tax liability is accrued specifying that the taxpayer is not responsible for fiscal management. The new regulation took effect Nov. 11, 2017. Miss. Dept. of Rev., Miss. Regs. § 35.IV.1.08, filed Oct. 12, 2017. Texas: The Texas Comptroller of Public Accounts (Comptroller) found that sales tax is not due on the purchase or rental of business application software licenses by a government contractor (contractor) on behalf of a tax-exempt governmental entity (entity) when: (1) the contractor procures specific software at an entity's request under the procurement provisions of the state's contract with the contractor; (2) the software vendor licenses the software directly in the name of the entity for the entity's use; and (3) the state's contract with the contractor requires the contractor to relinquish custody of the software to the entity if the contract ends. The Comptroller reasoned that the contractor's purchases of software are for resale to the entity and, therefore, qualify as exempt sales for resale. In addition, the entity is exempt from sales tax on software purchases and other taxable items. Tex. Comp. of Pub. Accts., Ruling No. 201708003L (Aug. 18, 2017). Texas: A foreign corporation was not entitled to a multi-state benefit exemption from sales and use tax for purchases of website hosting services (taxable data processing services) for locations in Canada and India since the locations were not separate identifiable segments of the business. The Texas Comptroller of Public Accounts (Comptroller) found that for the Canadian location, the corporation's provision of a summary listing of the proposed taxable amount per fiscal year did not meet the requisite burden that the services support a separate, identifiable segment of its business; therefore, the services are presumed to support the corporation's Texas headquarters. The corporation, however, is entitled to the exemption applied based on the number of employees at its New York location, because the corporation established that its New York location represents a separate identifiable segment of the business other than general administration or operation of the business. Tex. Comp. of Pub. Accts., No. 201708026H (Aug. 24, 2017). Virginia: A telecommunications company (company) is not entitled to a refund of consumer use tax paid on adapters provided, without charge, to its subscribers so that they can use Voice over Internet Protocol (VoIP) services because the company does not meet all the criteria required to qualify for a sales and use tax exemption for media-related equipment. The Virginia Department of Taxation (Department) found that although the company is regulated and supervised by the Federal Communications Commission (FCC) to some extent, it does not operate as a radio or television broadcaster, cable television company, video programmer, or open video system. Further, citing the definition of "broadcasting" in Winchester TV Cable,6 the Department determined that the adaptors do not function as broadcasting equipment because they are not amplification, transmission, and distribution equipment as intended by statute. The Department also found that the adapters are not used to provide direct access to the internet since the adapters are used to furnish a VoIP service connection only if the end-user subscriber has already established an independent internet connection. Va. Dept. of Taxn., Ruling No. 17-176 (Sept. 22, 2017). ————————————————————————— North Carolina: The North Carolina Department of Revenue (Department) advised that it will permit a limited liability company (LLC) that is constructing an intermodal facility to claim the tax credit for constructing a railroad intermodal facility available under N.C. Gen. Stat. § 105-129.6. The Department found that since the LLC constructed the intermodal terminal, incurred the cost of equipment and infrastructure within the terminal limits, and will lease the intermodal facility, the LLC will be deemed to have placed the railroad intermodal facility in service if the facility is operated under the leasing agreement. The Department, however, could not rule on the specific costs and computation of amounts that will qualify toward the costs of construction of the proposed railroad intermodal facility. In addition, since the LLC is treated as a partnership for federal income tax purposes, the Department will respect the LLC's distribution of the credit to its members/partners, and it will allow the credit to be passed through in accordance with the operating agreement, provided that certain criteria are met. N.C. Dept. of Rev., Private Letter Ruling No. CPLR 2017-01 (Aug. 16, 2017). ————————————————————————— Tennessee: County property tax assessors' utilization of the income approach appraisal method to value an owner's real property that contained oil and gas reserves (mineral interests) did not result in the imposition of an additional unlawful severance tax. In reaching this conclusion, the Tennessee Court of Appeals (Court) found that the absence of guidelines regarding apportionment and sub-classifications as contemplated by Tenn. Code Ann § 67-5-801 (i.e., guidance for when real property is used for more than one purpose, which would result in different subclassifications and different assessment percentages on the property) did not relieve the owner from being subject to taxation on its mineral interest, and the assessors' use of the income approach in valuation sufficiently exercised their duty under the Tennessee Constitution and other applicable law. Further, because the owner did not produce evidence as to the value of its mineral interest, there was no basis under the Court's standard of review to modify the assessors' values. The Coal Creek Co. v. Anderson Cnty., Tenn., No. E2017-00661-COA-R3-CV (Tenn. App. Ct. Oct. 5, 2017). West Virginia: A meditation center that is exempt from federal income taxes under IRC § 501(c)(3) (non-profit) was not entitled to an exemption from ad valorem property tax because it does not use the property exclusively for charitable purposes as required under Wellsburg.7 In reaching this conclusion, the West Virginia Supreme Court held that similar to Maplewood,8 the property is not used exclusively for charitable purposes since the non-profit narrows the pool of the state's citizenry who can potentially benefit from the non-profit's services by: (1) excluding women and married men, (2) imposing significant financial barriers based on the costs of the workshops and seminars it offers, and (3) limiting the use of the property to its members and certain specific other groups. Global Capital of World Peace, Inc. v. Wagoner, No. 16-1061 (W.Va. S. Ct. Nov. 9, 2017). ————————————————————————— Oklahoma: Reminder — The Oklahoma voluntary disclosure initiative (i.e., a tax amnesty program) ends on Nov. 30, 2017. For more on the program, see Tax Alert 2017-1329. ————————————————————————— Multistate: According to the US Department of Labor's tax chief, California and the Virgin Islands are again the only two US jurisdictions to have a FUTA credit reduction for calendar year 2017. Employers in California and the Virgin Islands will pay their FUTA taxes for calendar year 2017 at a higher federal unemployment (FUTA) tax rate than employers in other states because the state and territory failed to repay their respective outstanding federal UI loans by Nov. 10, 2017. For additional information on this development, see Tax Alert 2017-1920. New Jersey: The New Jersey Division of Taxation (Division) has released a booklet containing the calendar year 2017 Form W-2 electronic filing specifications. According to the specifications, the deadline for filing remains at Feb. 28, 2018. A Division representative also confirmed that the filing deadline for calendar year 2017 remains at Feb. 28, 2018, rather than conforming to the federal Form W-2 deadline of Jan. 31, 2018. For additional information on this development, see Tax Alert 2017-1950. ————————————————————————— Arkansas: A furniture and electronics rent-to-own company owes short-term rental tax on its weekly and semimonthly rental contracts as both types of contracts represent leases of tangible personal property for terms of less than 30 days. An administrative law judge (ALJ) for the Arkansas Department of Finance and Administration found the transactions are leases for purposes of the short-term rental tax since a customer in exchange for certain payments receives a transfer of possession of the company's items for a certain period of time (the rental term). Specifically, the ALJ found that: (1) the company retains ownership of the property during the transaction, such that customers only have possession; (2) each payment only entitles a customer to possession of the property for the "rental term;" and (3) each additional payment is referred to as a "renewal" of the lease in the contract. In re [redacted] (Acct. No. [redacted]), Dkt. Nos. 17-492 and 17-493 (Ark. Dept. of Fin. and Admin., Ofc. of Hearings and App., Oct. 10, 2017). Maine: In affirming a lower court ruling, the Maine Supreme Judicial Court (Court) held that Maine's broadband sustainability fee was properly classified by the state legislature as a fee rather than as a tax. In reaching this conclusion, the Court cited Butler9 and City of Lewiston v. Gladu,10 finding that: (1) nearly all (95%) of the fees collected were used to further the specific statutory regulatory goals of expanding broadband infrastructure into unserved and underserved areas and to carry out statutory regulatory duties; (2) the fee provided both direct and indirect benefits to the taxpayer, a telecommunications service provider that used the expanded broadband infrastructure, as the expansion provided access to more potential customers, and the entity responsible for constructing the lines built initial segments in locations that would benefit the taxpayer's important commercial customers; (3) the taxpayer voluntarily used the expanded broadband infrastructure, which was available on an open access basis; and (4) only 5% of the collected fees were used to defray the costs in implementing the broadband sustainability fee, but in return the taxpayer and its customers received significant tangible and intangible benefits. The Court noted that the trial court's error in classifying the fee as a tax was harmless because the taxpayer was required to pay the fee regardless of its classification. Maine et al. v. Biddeford Internet Corp., 2017 ME 204 (Me. S. Jud. Ct. Oct. 10, 2017). Pennsylvania: A freight broker cannot deduct freight and delivery charges from its gross receipts before calculating local business privilege tax (BPT) because as a middle man rather than a seller of goods, it does not fall within the freight delivery exception of the Local Tax Enabling Act (LTEA) or regulations. The Pennsylvania Commonwealth Court (Court) found that the BPT statute's plain language broadly defines "business" to include the provision of services, including freight brokerage services. Here the freight broker does not fall within the plain language of the exclusion; rather, it is merely a broker of services. Moreover, the freight broker is not a freight carrier and it does not transport anything or sell anything that is transported. The Court also rejected the freight broker's agency argument and its argument that language in the LTEA and tax Ordinance carve out an exclusion for funds that "pass through" a corporation. Lastly, the trial court erred in applying a fairness standard to the BPT, because the Court examines legislative intent in determining tax issues rather than fairness arguments. S&H Transport, Inc. v. City of York, No. 242 C.D. 2017 (Pa. Commw. Ct. Oct. 5, 2017) (Opinion Not Reported). ————————————————————————— International: The State Duma in the third reading passed a draft law on the introduction of a tax-free system in Russia under which citizens of countries outside the Eurasian Economic Union ("foreign purchasers") will be able to claim back value added tax (VAT) on goods purchased in Russia. Provided that the law is approved by the Federation Council and signed by the President, this tax-free system will begin operating in Russia in 2018. For additional information on this development, see Tax Alert 2017-1983. ————————————————————————— Illinois: On Nov. 8, 2017, the Illinois legislature approved a technical trailer bill (SB 868), intended in part to clarify and correct the definitions of "gift cards" and "stored value cards" for purposes of the Illinois Revised Uniform Unclaimed Property Act. For additional information on this development, see Tax Alert 2017-1971. ————————————————————————— 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 John 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 nexus, 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. 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 Preserve II, Inc. v. Director, Div. of Taxation, Dkt. No. 010921-2013, Pulte Homes of NJ, L.P. v. Director, Div. of Taxation, Dkt. No. 010920-2013, and Pulte Communities of NJ, L.P. v. Director, Div. of Taxation, Dkt. No. 010922-2013 (N.J. Tax Ct. Oct. 4, 2017). 2 BIS LP, Inc. v. Director, Div. of Taxation, 25 N.J. Tax 88 (Tax 2009); aff'd, 26 N.J. Tax 489 (2011). 3 Village Super Market v. Director, Div. of Taxation, 27 N.J. Tax 394 (Tax 2013). 4 Manheim NJ Invs., Inc. v. Director, Div. of Taxation, 30 N.J. Tax 18 (Tax 2017). 5 Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, No. 6 EAP 2016 (Pa. S. Ct. Oct. 18, 2017). 6 Winchester TV Cable Co. v. Va. State Tax Comr., 216 Va. 286, 217 S.E.2d 885 (Va. S. Ct. 1975). 7 Wellsburg Unity Apts., Inc. v. Cty. Comm'n of Brooke Co., 202 W.Va. 283, 284, 503 S.E.2d 852, 854 (W.Va. S. Ct. 1998) (for real property to be exempt from ad valorem property taxation, a two-prong test must be met: (1) the corporation or entity must be a charitable organization under IRC §§ 501(c)(3) or (c)(4); and (2) the property must be used exclusively for charitable purposes and not be held or leased out for profit). 8 Maplewood Community, Inc. v. Craig, 216 W.Va. 273, 607 S.E. 2d 379 (W.Va. S. Ct. 2004). 9 Butler v. Supreme Judicial Court, 611 A.2d 987 (Me. S. Jud. Ct. 1992). 10 City of Lewiston v. Gladu, 40 A.3d 964 (Me. S. Jud. Ct. 2012). | ||||
|
