06 December 2017 State and Local Tax Weekly for December 2 Ernst & Young's State and Local Tax Weekly newsletter for December 2 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 Senate on Dec. 2, 2017, passed its version of the Tax Cuts and Jobs Act (TCJA) by a vote of 51-49 after adopting a manager's amendment that differs from the version passed by the Senate Finance Committee on certain issues. Some of the key business tax changes from the Senate Finance Committee bill include: — Increasing the one-time transition tax on deferred foreign earnings from 10% to 14.5% for liquid assets and from 5% to 7.5% for illiquid assets — Modifying the limitation on net interest deductions, for US shareholders that are members of worldwide affiliated groups, so the calculation cannot be less than "1" and phasing in the "110%" in the calculation of excess domestic indebtedness between 2018 and 2021 (130%, 125%, 120%, and 115%, respectively) — Extending the placed-in-service date for certain property to be eligible for expensing from 2023 to 2027, but gradually phasing out the amount expensed from 100% in 2022 to 0% in 2027 — Increasing the amount of "domestic qualified business income" that certain pass-through business owners may deduct from 17.4% to 23% — Reinstating the individual AMT and increasing the "exemption amounts" for tax years beginning after 2017 and before 2026, including the amounts at which the exemption phases out See Tax Alert 2017-9024 for a discussion of the key tax provisions in the bill passed by the full Senate. The Connecticut Department of Revenue Services (Department) is conducting a Fresh Start tax amnesty program through Nov. 30, 2018. Amnesty applies to non-filed returns and underpaid amounts on tax returns due on or before Dec. 31, 2016. In exchange for participating in, and complying with the terms of, the amnesty program, the Department will waive penalties and 50% of the interest otherwise due, not pursue criminal prosecution, and may agree to limit the lookback period for non-filers. Amnesty applies to all taxes administered by the Department, except those imposed under Ch. 222 (International Fuel Tax Agreement). Covered taxes include corporation business tax, sales and use tax, individual income tax, withholding tax, among others. The Connecticut motor carrier road tax, property tax, payroll tax, and any tax or fee not administered by the Department are not eligible for amnesty. To participate in the amnesty program, taxpayers must voluntarily come forward and disclose their unreported tax liabilities to the Department by filing an online application and submitting the full amount of tax and interest due along with the application. Taxpayers that have not registered and have not filed a return for a tax type may be eligible for a three-year limited look-back for that tax type. Taxpayers cannot participate in the amnesty program to resolve outstanding tax liability for any tax type and period for which they have received a bill, are under audit, are party to a closing agreement with the Department, have made an offer of compromise that has been accepted by the Department, have protested a determination or audit, or are a party to litigation against the Commissioner. The Rhode Island Division of Taxation (Division) is conducting a tax amnesty program through Feb. 15, 2018. Amnesty applies to tax periods ending on or before Dec. 31, 2016, regardless of when the payment or return was due. In exchange for participating in, and fully complying with the terms of, the amnesty program, the Division will waive penalties and reduce interest by 25%, the state will not seek civil or criminal prosecution related to those taxes, and the state will not block the taxpayer's professional license, driver's license, motor vehicle registration, or sales tax permit. All Rhode Island state taxes and fees are eligible for amnesty, including the corporate and personal income taxes, sales and use taxes, bank excise tax, insurance tax, state unemployment insurance tax and temporary disability insurance taxes. Amnesty is open to persons, corporations, or other entities subject to Rhode Island tax and to non-filers. Taxpayers are not eligible for amnesty if they are in bankruptcy or receivership, currently under audit or in an administrative hearing or in court on a Rhode Island tax matter, or under criminal investigation for a tax matter. The Division, however, may make exceptions for certain taxpayers to participate in amnesty even when a taxpayer is under audit or in a hearing. Taxpayers can file for amnesty for a tax year that they are appealing or protesting provided they withdraw their request or appeal and pay the amount due under the terms and conditions of the amnesty program. A third party cannot apply for amnesty on behalf of an employer. For more on Rhode Island's tax amnesty program, see Tax Alert 2017-2025. Massachusetts: A parent corporation in calculating its net worth for purposes of the Massachusetts corporate excise tax, could not subtract from the book value of its total assets the book value of its investments in two subsidiaries held indirectly through a limited liability company (LLC) that is treated as a partnership for federal income tax purposes. The Massachusetts Department of Revenue (Department) explained that under Massachusetts law a corporation's net worth can be reduced by the book value of investment in a "subsidiary business corporation" but not by investments in other entities, and since the LLC elected to be treated as a partnership it is not a "business corporation." Further, the Department found no look-through or constructive ownership principle that would apply to treat the parent as owning its proportionate share of the LLC's investments, and federal constructive ownership rules (which in certain circumstances attribute to a partner in a partnership stock owned directly by the partnership), have not been specifically adopted by Massachusetts for purposes of the net worth measure. Essentially, the parent's interest in the LLC is treated as a separate property interest rather than an interest in the underlying assets of the LLC. Lastly, in strictly construing the exemption statute, the Department found that the statute does not expressly or necessarily authorize a parent corporation to subtract the value of its investment in an entity that is not a business corporation, or in a business corporation that the parent does not directly own. Mass. Dept. of Rev., Letter Ruling 17-3 (Oct. 23, 2017). New York: An alien insurer's premiums associated with broker activities permitted under NY Insurance Law § 2117(k) do not qualify to be treated as "total premiums" and therefore cannot be treated as "New York premiums." The New York Department of Taxation and Finance (Department) explained that alien insurers are not authorized insurance corporations and do not file annual statements with the Superintendent of Financial Services; they do not report premiums to the Department of Financial Services; and the life insurance risks associated with the statutory activities reside outside the US. In a footnote, the Department said that since NY Insurance Law § 2117(k) took effect on July 2, 2015, its "analysis pertains to tax years beginning on or after Jan. 1, 2015." N.Y. Dept. of Taxn. and Fin., TSB-A-17(2)C (Oct. 4, 2017). Illinois: A technology company that provides remotely accessed software is acting as a serviceman and as such the taxability of the transaction with its customer will depend upon whether any tangible personal property has been transferred to its customers. The Illinois Department of Revenue explained that computer software provided through a cloud-based delivery system generally is not subject to Retailers' Occupation Tax or Service Occupation Tax. Downloading a PDF or printing a documents from a user's device does not subject the transaction to tax because these activities do not involve the transfer of computer software to the user. Transferring to the customer an application programming interface (API), applet, desktop agent, or a remote access agent to enable the customer to access the corporation's network and services subjects the transaction to tax, as it appears the customer is receiving computer software, unless the transfer of software qualifies as a non-taxable license of computer software. Ill. Dept. of Rev., Private Letter Ruling ST 17-0006-PLR (Aug. 14, 2017). Illinois: A chemical corporation's (corporation) purchases of metallurgical coke do not qualify for the manufacturing and assembly exemption from use tax because the coke does not directly and immediately cause a change in zinc, the product sold by the corporation. In so holding, the Illinois Independent Tax Tribunal (Tribunal) found that coke is not a catalyst (a substance that enables a chemical reaction to proceed at a faster rate or under different conditions than possible), and instead is a chemical compound necessary to be integrated in the overall chemical processes used to extract zinc and iron oxide. The Court rejected the corporation's reliance on PPG Industries, Inc.,1 noting it is non-precedential and that it incorrectly determined the term "direct" which, for exemption statute purposes, should be defined to include any chemical reaction that was in proximate causal relationship with the ultimate item being manufactured. Horsehead Corp. v. Ill. Dept. of Rev., No. 14 TT 227 (Ill. Indep. Tax Trib. Oct. 13, 2017). Indiana: An insurance company (company) is entitled to a credit against its Indiana use tax liability for the full amount of use tax it paid to Texas, including local use tax, on the purchase price of software that was delivered to the company and first loaded on its servers located in Texas and subsequently used in Indiana. In so holding, the Indiana Tax Court rejected the Indiana Department of Revenue's argument that the credit applies only to state-level sales, purchase or use tax, finding that the Indiana legislature did not limit the tax types eligible for credits beyond requiring that the tax is a "sales tax, purchase tax, or use tax paid to another state, territory, or possession of the United States." Additionally, although the Texas Comptroller distributes the local use taxes to municipalities, Indiana's credit statute does not require looking beyond the Comptroller as payee to the ultimate municipal tax recipient. American United Life Insurance Co. v. Ind. Dept. of Rev., No. 49T10-1610-TA-00053 (Ind. Tax Ct. Oct. 27, 2017). Tennessee: A subscription sold by a company to provide cloud-based employee scheduling services is subject to sales and use tax because the true object of the transaction is to remotely access and use the company's employee scheduling software. The Tennessee Department of Revenue (Department) reasoned that since subscribers (rather than just the company's engineers) can access and update the software to reflect employee schedule changes (even though this happens on occasion), the interface is a necessary component of the company's services, without which its services would be of no value to the subscribers. Tenn. Dept. of Rev., Letter Ruling No. 17-15 (Oct. 11, 2017). Texas: A company's separately stated Cross-Connect charges for access to fiber optic cable to establish connections from customers' equipment to internet service providers, or to establish connections between customers within an operator's carrier-neutral colocation center (center), are charges for the rental of real property and are not subject to Texas sales and use tax. The Texas Comptroller of Public Accounts (Comptroller) citing Hutchins v. Masterson,2found the fiber optic cables that the company located in underground conduits are improvements to real property, and pre-wired cables in conduits and cables in overhead trays within center facilities are affixed to real property with the intention that they remain permanently. The Comptroller noted that this ruling applies only to charges for fiber optic cables permanently incorporated into or annexed to real property. Tex. Comp. of Pub. Accts., No. 201709001L (Sept. 7, 2017). Arkansas: The Arkansas Department of Taxation and Finance (Department) issued two opinions advising two related single member limited liability companies that it would approve the transfer of InvestArk tax credits from one entity to the other during a merger transaction, provided conditions are met. Under the conditions: (1) the surviving entity must continue to operate subject to the same terms and conditions of the original projects certified by the Arkansas Economic Development Commission or the Arkansas Department of Economic Development; (2) if the Department has not audited the tax credits, the surviving entity must acknowledge that the credits are subject to audit and adjustment, and may be liable for any billbacks from audit of the transferred credits; and (3) the other entity forfeits any rights to the credits. The credits transfer will not change the eligibility limitations imposed by the InvestArk statutes. Ark. Dept. of Fin. and Admin., Opinion Nos. 20170823 and 20170824 (Oct. 24, 2017). Arkansas: A county circuit court did not err in upholding an ad valorem tax assessment on natural gas pipeline properties because the Arkansas Public Service Commission Tax Division (Tax Division) properly considered a company's evidence purporting to show that the pipeline was economically obsolete. In reaching this conclusion, the Arkansas Court of Appeals (Court) cited Arkansas Electric Cooperative3 and found that the applicable statute gave the Tax Division the option and discretion to consider economic and functional obsolescence in valuing taxable property. The Tax Division implicitly considered obsolescence in valuing the company's property, as a component of the depreciation subtracted from original cost. The company did not meet its burden to explain how economic obsolescence tests performed by the Tax Division were not accurate. Additionally, the Tax Division's use of only two years of the company's income rather than three was not error because the company's previous year's income did not accurately reflect its value. The Tax Division's use of an industry-wide capitalization rate also was not error, because the company did not provide sufficient evidence to allow the Tax Division to calculate an individualized capitalization rate for the company. The Court did not reach the company's argument that the Tax Division's failure to consider economic obsolescence violated professional appraisal standards because the argument was not raised below. Fayetteville Express Pipeline, LLC v. Ark. Public Service Comn., 2017 Ark App 557 (Ark. App. Ct. Oct. 25, 2017). Maine: Maine Revenue Services issued a bulletin regarding property tax exemptions for benevolent and charitable institutions. The exemption qualification requirements explained in the bulletin include satisfaction of legal tests of ownership, occupancy or use, the institution being incorporated by Maine, the prohibition of certain individuals from receiving a portion of the institution's profit, and the requirement to file a report with the assessor. The bulletin also provides a summary of relevant case law and information on what could constitute proof of entitlement to the property tax exemption for benevolent and charitable institutions. Aside from an application for exemption, a local assessor also may require certain business incorporation and property deed records in making exemption decisions. Me. Rev. Svcs., Property Tax Bulletin No. 5 (Nov. 13, 2017). Tennessee: A non-profit entity's property tax exemption was revoked because it no longer qualified as an exempt institution for Tennessee ad valorem tax purposes as it was an instrument of a for-profit entity under an asset purchase and management agreement. An administrative judge for the Tennessee State Board of Equalization found that: (1) the non-profit entity enriched the for-profit entity with all profits from the services provided by the non-profit entity, and gave the for-profit entity discounted rent; (2) the non-profit and for-profit entities intended that the for-profit entity would acquire contracts on the non-profit entity's entire book of business; and (3) the non-profit and for-profit entities share at least one director. Lastly, the non-profit entity failed to submit sufficient evidence that it qualified for the exemption when it did not provide its charter, bylaws, financial information, and extent and nature of its dealings with the for-profit entity on matters outside of the building occupancy arrangement. In re: LifeCare Family Services, Inc., Exempt No. 66516(Tenn. State Bd. of Equal. Oct. 13, 2017). Chicago, IL: The City of Chicago Department of Finance (Department) has indicated that effective immediately, it will offer reduced interest calculated on taxes due under voluntary disclosure agreements. According to the Department's voluntary disclosure informational website the Department will agree to waive all penalties and half the interest that would otherwise apply. This represents a change from the Department's prior practice, which was to waive penalties, but require the taxpayer to pay full interest on that tax due. It is Ernst &Young LLP's understanding that the updated policy applies not only to future voluntary disclosure agreements, but also to all current voluntary disclosures that have not yet been completed and paid. Pennsylvania: On Nov. 22, 2017, the Pennsylvania Supreme Court (Court) ruled in Mission Funding Alpha that the "actual payment of the tax" — the date from which the statute of limitations begins to run to file a refund claim - occurred on the original due date of the return, not the date the taxpayer actually filed its return pursuant to an extension (or late without an extension), reversing the Commonwealth Court. The Pennsylvania statute of limitations rules for claiming a refund now differ significantly from those applied by many other states. Mission Funding Alpha v. Commonwealth, No. 2 MAP 2016 (Pa. S. Ct. Nov. 22, 2017). For additional information on this development, see Tax Alert 2017-2023. Nevada: The Nevada Department of Employment, Training and Rehabilitation anticipates repaying its remaining bond balance in December 2017. The bond balance was incurred several years ago to pay off its federal unemployment insurance loan. This anticipated payoff is six months earlier than originally projected and if the goal is met, Nevada employers will avoid paying the state unemployment insurance quarterly bond assessment for calendar year 2018. For additional information on this development, see Tax Alert 2017-1993. Wisconsin: New law (AB 64, Act 59) lowers the threshold at which an employer must file Forms W-2/1099 electronically with the Wisconsin Department of Revenue from 50 or more forms to 10 or more. The bill also changes the deadline to file Forms 1099 with no Wisconsin income tax withheld reported to January 31 (formerly due to the Department by February 28, or March 15 if filed electronically). Currently, all Forms W-2 and those Forms 1099 that report Wisconsin income tax withheld must be filed with the Department by January 31. These changes are effective for calendar year 2017 returns filed in 2018. The Department has released information on the law change and the filing of calendar year 2017 Forms W-2 in 2018. For additional information on this development, see Tax Alert 2017-2036. Minnesota: A Florida-based pharmacy that received prescription drugs from wholesalers and drug manufacturers at several pharmacies located outside of Minnesota and later sold and shipped the drugs to Minnesota customers is not subject to the Minnesota Legend Drug Tax on the transactions because the pharmacy did not receive any of the legend drugs within Minnesota. The Minnesota Tax Court found that the statute taxes only the act of receiving legend drugs, rather than distribution or delivery, and the Revenue Commissioner's arguments that the tax is imposed upon the resale or use of drugs, or on the drugs themselves, to be unsupported by the plain meaning of the statute. Additionally, there is no textual support for the Revenue Commissioner's argument that delivery is a taxable activity in its own right, rather than a mere potential trigger of liability. Walgreens Specialty Pharmacy, LLC v. Minn. Comr. of Rev., No. 8902-R (Minn. Tax Ct. Oct. 16, 2017). Multistate: Unclaimed property laws across the country have been going through rapid change in the past few years, with the latest significant changes coming in Illinois. In 2017, Illinois adopted the Revised Uniform Unclaimed Property Act (IL RUUPA) bringing with it substantial and potentially material statutory changes affecting holders of unclaimed property operating, or transacting business with customers and other businesses located, in Illinois. These statutory changes include the retroactive repeal of the business-to-business (B2B) exemption and the related requirement to report additional unclaimed property by the May or November 2018 reporting deadlines. Ernst & Young LLP recently hosted a webcast where the panelists discussed this ever-changing unclaimed property landscape and provided an overview of the major changes occurring nationwide. Tax Alert 2017-2024 provides a summary of the webcast, or follow this link to listen to the replay of the webcast. International: The United Kingdom (UK) Government introduced a new Taxation (Cross-border Trade) Bill (the Customs Bill) to the House of Commons on Nov. 20, 2017, and the Customs Bill was given its First Reading. No dates have yet been set for future stages. The Bill follows the Trade Bill released on Nov. 7, 2017, which makes provisions relating to international trade which are not directly tax-related. This includes the power to implement non-tariff obligations and the establishment of a Trade Remedies Authority, to deliver the UK's trade remedies function. The two Bills together are intended to, "set the groundwork for the UK to become an independent global trading nation." For additional information on this development, see Tax Alert 2017-2018. International: The United Arab Emirates (UAE) Federal Tax Authority (FTA) released on its website, Cabinet Decision No. (52) of 2017 on the Executive Regulation of Federal Decree-Law No. (8) of 2017 on Value Added Tax (VAT) on Nov. 28, 2017. The Executive Regulations provide the underlying detail to the UAE VAT Law (Federal Decree-Law No. (8) of 2017 on Value Added Tax). The document clarifies the VAT treatment of fundamental aspects of the law that have been eagerly anticipated by businesses, including the application of VAT to UAE Free Zones.For additional information on this development, see Tax Alert 2017-2011. International: The Court of Justice of the European Union (CJEU) released its decision in the Italian referral C-246/16 Di Maura on Nov. 23, 2017, regarding limits applied to the application of bad debt relief (BDR) for value added tax (VAT) purposes. BDR allows suppliers a reduction in the amount of VAT they are liable to pay if a customer is not likely to ever pay (i.e., in the case of bad debts). The CJEU held that the European Union (EU) VAT Directive does not permit a disproportionate restriction of the possibility of adjusting VAT through a claim for BDR. It does, however, permit Member States to take into account the uncertainties surrounding non-payment by requiring the taxable person to take certain reasonable measures. However, the requirement that insolvency proceedings be concluded in relation to the customer represents a disproportionate restriction. For additional information on this development, see Tax Alert 2017-2019. International: Following the approval and publication of the Gulf Cooperation Council (GCC) Value Added Tax (VAT) Framework Agreement, officials at the Saudi Arabian Ministry of Finance have confirmed the introduction of VAT via the Saudi Arabia VAT Implementing Regulations (published in the Official Gazette on Aug. 29, 2017). The United Arab Emirates (the UAE) followed suit with the official announcement of the landmark Federal Law No. 8 of 2017 (Law No. 8) regarding tax procedures. Law No. 8, "sets the foundations for the planned UAE tax system, regulating the administration and collection of taxes and clearly defining the role of the Federal Tax Authority (FTA)." These official affirmations are in line with similar pronouncements made by government officials from Bahrain, Kuwait, Oman and Qatar. For additional information on this development, see Tax Alert 2017-2027. International: Following the approval and publication of the Gulf Cooperation Council (GCC) Value Added Tax (VAT) Framework Agreement, officials at the Saudi Arabian Ministry of Finance have confirmed the introduction of VAT via the Kingdom of Saudi Arabia (Saudi Arabia) Approved Implementing Regulations. The General authority for zakat and tax (GAZT) in Saudi Arabia has initiated the process of auto-VAT registration for large businesses with revenue over SAR40m (approx. US$10.7m), which are registered with GAZT for Tax. For additional information on this development, see Tax Alert 2017-2026. International: Effective Jan. 1, 2018, Finland will implement new rules for the payment of value added tax (VAT) on the importation of goods imported into the country from outside the European Union (EU). Under the new rules, Finnish VAT-registered businesses will no longer pay VAT at importation; instead, the import VAT due on imported goods will be self-assessed and recovered by VAT-registered businesses using their periodic VAT returns. This procedure is known as "postponed accounting." For additional information on this development, see Tax Alert 2017-2013. International: Value added tax (VAT) provisions contained in Italy's 2017 European Union (EU) Law (Law n. 167 of Nov. 20, 2017) were published in the Official Gazette on Nov. 27, 2017; the new rules are effective from Dec. 12, 2017. The changes relate to financial compensation for costs associated with obtaining a bank or insurance guarantee for a VAT refund, provisions regulating the recovery of VAT charged in error, and amendments to the definition of zero-rated export supplies. The new measures are aimed at bringing Italian domestic VAT law into line with the EU rules. For additional information on this development, see Tax Alert 2017-2014. 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. Document ID: 2017-2058 |
