18 December 2017 State and Local Tax Weekly for December 8 Ernst & Young's State and Local Tax Weekly newsletter for December 8 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. Connecticut budget provisions include delay to FAS 109 deduction, tax amnesty, a new ride sharing fee, changes to various credit programs, among others Recently enacted budget bills (SB 1502 (Special Session, enacted Oct.31, 2017) and SB 1503 (Special Session, enacted Nov. 11, 2017)) contain various changes to Connecticut's tax laws. For publicly traded companies eligible to claim the FAS 109 deduction put in place as a result of the state's adoption of combined reporting, both bills modify the deduction. SB 1502 extends to 30 years (from seven years), the period over which the deduction can be claimed, while SB 1503 delays the first year in which the deduction can be claimed to 2021 (from 2018). Provisions of SB 1502 establish the Fresh Start tax amnesty program, which runs until Nov. 30, 2018. Under Connecticut's program, the revenue department will waive penalties and 50% of the interest otherwise due, not pursue criminal prosecution, and three-year limited lookback period for non-filers. For more on the amnesty program, see Tax Alert 2017-2128. SB 1502 also requires transportation network companies (TNCs) to pay a 25 cent fee on each prearranged ride originating in Connecticut. TNCs that fail to pay the fee will be subject to a penalty equal to the greater of $50 or 10% of the amount due. This provision takes effect Jan. 1, 2018, In addition, provisions of SB 1502 establish new, and modify current, tax credit programs. The 7/7 Brownfield Revitalization program is established to provide corporate and individual income tax credits, sales and use tax exemptions and property tax relief to businesses that redevelop and utilize brownfields and real property that has been abandoned or underutilized for 10 or more years. This new brownfield credit applies to taxable and income years commencing on or after Jan. 1, 2017. SB 1502 restores and makes permanent the moratorium on issuing film and digital media production tax credits (the moratorium expired on July 1, 2017). The moratorium does not apply to a motion picture with 25% or more of its principal photography shooting days in Connecticut at a facility that receives not less than $25 million in private investment. Additionally, limits are placed on the amount of film and digital media production tax credit that is sold, assigned or otherwise transferred that may be claimed. Other credit and incentive related changes include: (1) eliminating the green building tax credit, effective for tax years beginning on and after Dec. 1, 2017; (2) lowering the neighborhood assistance tax credit cap to $5 million (from $10 million), effective Oct. 31, 2017; and (3) requiring the Department of Economic and Community Development to create a program that allows a taxpayer to use certain stranded tax credits in exchange for making certain capital or venture investments. — Expand affiliates that qualify for the sales and use tax exemption on sales of services between affiliates, effective July 1, 2019 California: The California Franchise Tax Board (FTB) announced in FTB Notice 2017-04 that it is extending the treatment of existing water's-edge elections set forth in FTB Notice 2016-02 and will not seek to terminate the election of a water's-edge combined reporting group that is unitary with a foreign affiliate that becomes a California taxpayer solely due to the state's bright-line nexus standard1 in a taxable year beginning on or before Dec. 31, 2017. FTB Notice 2017-04 "adheres to and incorporates by reference FTB Notice 2016-02 in all respects, except the specific date constraints listed as conditions for FTB Notice 2016-02 to apply." Cal. FTB, FTB Notice 2017-04 (Oct. 16, 2017). Indiana: The Indiana Tax Court (Court) recently held that the Indiana Department of Revenue (Department) erroneously used a transaction-based cost of performance method which would have resulted in market-based or customer-based approach in sourcing an online university's revenue to Indiana based on students' billing addresses. Rather, the online university's revenue should be sourced based on the location of its costs of income-producing activities. In so holding, the Court rejected the Department's identification of the opportunity to attend a class online as being the only income producing activity. Instead, the Court found its income producing activities encompass acts as a seller directly engaged in and with the purpose of generating revenue, finding that the University's eCampus platform, classroom instruction, curriculum development, and the graduation team were all considered income producing activities under Indiana's sourcing statute and regulation. The Court noted that the Department did not dispute that it used a market-based method, nor did it present facts that it was entitled to use market-based sourcing as an alternative apportionment method to the cost-based method required under Indiana law. Thus, the Court concluded that the Department used a market-based method that was contrary to the explicit direction in Indiana's sourcing statute when it sourced all the receipts from students with Indiana billing addresses to the Indiana numerator of the online university's sales factor. The Court also rejected the Department's reliance on the Oregon Supreme Court's ruling in AT&T Corp.,2 in support of its position that the University's cost study should have identified and determined the income-producing activities' direct costs on a transaction-by-transaction basis, rather than on the aggregate or operational-level approach used by the online university. The Court further held that the use of the word "transactions" in the respective regulation broadly describes the type of transaction described in the regulation (i.e., transactions involving the sale of other than tangible personal property), and does not refer to looking at each separate item of income. As such, the Court found that the online university's cost study was probative evidence which demonstrated that the greater proportion of its income-producing activities were performed outside of Indiana and, therefore, should not be sourced to Indiana. The University of Phoenix, Inc. v. Indiana Dept. of Rev., No. 49T10-1411-TA-65 (Ind. Tax Ct. Nov. 30, 2017). New York: The New York Department of Taxation and Finance enacted an emergency regulation to change the Article 9-A Metropolitan Transportation Business Tax Surcharge (MTA surcharge) rate. Under the emergency regulation, the MTA surcharge is increased to 28.6% (from 28.3%) for taxable years beginning on or after Jan. 1, 2018 and before Jan. 1, 2019. The 28.6% rate will remain in effect for succeeding tax years unless the Commissioner determines a new rate. N.Y. Dept. of Taxn. & Fin., 20 NYCRR 9-1.2(d) (emergency adoption Dec. 1, 2017); TSB-M-17(4)C (Dec. 4, 2017). Washington: The City of Seattle's recently enacted law3 imposing an income tax on residents who are high-income wage earners is not a "tax" authorized by any Washington statute and it is prohibited by state law.4 In so holding, a Washington Superior Court granted the taxpayers' cross-motions for summary judgement, which sought a judgement declaring the law void and an injunction preventing the City from enforcing the law. The City is appealing this ruling. Kunath et al. v. Seattle, No. 17-2-18848-4 SEA (Wash. Super. Ct. Nov. 22, 2017). Arkansas: A company that buys and refurbishes used steel shipping drums that no longer have commercial value is not entitled to a manufacturing and equipment exemption from sales and use tax because the company's refurbishing process does not create a new and different article of commerce. The Arkansas Department of Finance and Administration cited Westark Poultry Processing Corp.5 and Carrothers Construction Co.,6 explaining that "a taxpayer is not a manufacturer unless a new and different article of commerce results from the actions taken upon raw materials." Here, the company's refurbishing process began with steel drums and ended with steel drums that are in a marketable form, and not a new and different article of commerce. Ark. Dept. of Fin. and Admin., Nos. 17-096 and 17-097 (Ark. Ofc. of Hearings and Appeals Oct. 30, 2017) (revision request). Colorado: The payment from a lessee to a company for the loss or damage of oil-drilling rental equipment is not subject to sales or use tax. Citing Steamboat Springs Rental & Leasing,7 the Colorado Department of Revenue reasoned that the lessee does not pay the charges to acquire any additional right of possession or title to the company. Colo. Dept. of Rev., PLR 17-007 (Aug. 29, 2017). Texas: An out-of-state corporation in the business of providing electrical maintenance services to retail and commercial operators that contracted with independent contractors to perform taxable repair and maintenance services for retail chain stores with Texas locations was engaged in business in, and has substantial nexus with, Texas and, therefore, should collect and remit sales/use tax from its Texas customers on the services it provided. The Texas Comptroller of Public Accounts determined that the corporation's service contracts (including the agreement to perform the services, payment to Texas-based independent contractors to perform the services, bills to Texas customers for the services, payment collections, and the corporation bore the risk of default) established the requisite minimum contacts with Texas for purposes of the Due Process Clause of the US Constitution. The corporation had physical presence in Texas for Commerce Clause purposes through its establishment, operation, and maintenance of a consistent presence in Texas through independent contractors and the generation of revenue from repair and maintenance services. Additionally, in providing repair and maintenance services for commercial properties by making agreements with independent contractors, the corporation sold taxable services to customers with stores located in Texas. Tex. Comp. of Pub. Accts., No. 201709018H (Sept. 29, 2017). Pennsylvania: New law (Philadelphia Bill No. 170717) expands tax relief provided to new sustainable businesses and makes technical changes to the provisions. Beginning Jan. 1, 2018, the income of a new sustainable business will be subject to a 0% rate net profits tax (NPT) during the first three years that it qualifies as a new sustainable business. These businesses already are subject to a 0% rate business income and receipts tax (BI&RT) during the first three years they are considered a new sustainable business. To qualify for both 0% rates, businesses must, as of the 12-month anniversary of becoming subject to the BI&RT and continuously through the 18-month anniversary of becoming subject to the BI&RT, have at least two full-time employees who are not family members and who work in the city at least 60% of the time. If the number of qualifying employees subsequently drops below the required minimum, the BI&RT and NPT relief will no longer be available, and all BI&RT and NPT will be due retroactively. The Philadelphia Department of Revenue, however, can waive these requirements or prorate the amount of tax that may become due, if it finds that the number of qualifying employees dropped because of circumstances beyond the business's control (e.g., natural disasters, acts of terrorism, unforeseen industry trends or loss of a major supplier or market). Philadelphia, Pa. Laws 2017, Bill No. 170717, signed by the mayor on Nov. 27, 2017. Tennessee: A business that invested in the creation or expansion of software to support its core lines of business is not entitled to the Tennessee franchise and excise tax job tax credit because it is not a qualified business enterprise through its investment in the software. The Tennessee Department of Revenue (Department) determined that the business invested in technology to better provide its services, rather than investing in the creation or expansion of computer services. The Department noted that using software to provide a service does not equate to creating or expanding "computer services" as defined by the jobs credit statute, even if the business designed its own software rather than purchasing software from a separate vendor. Tenn. Dept. of Rev., Letter Ruling No. 17-16 (Oct. 30, 2017). New Mexico: The New Mexico Court of Appeals (Court) reversed the district court and held that the New Mexico Taxation and Revenue Department properly reclassified the property of a cable company as a "communications system" after the company repurposed parts of its existing system, which provided cable television programming (one-way communications service), to also provide internet and interconnected voice over internet protocol (VoIP) services (two-way communications service). The Court reasoned that the repurposed property falls within New Mexico's statutory definition of "communications system" and, as such, subjects it to central assessment as intended by the state legislature when it expanded the types of communication-related property subject to such provisions. Cable One, Inc. v. N.M. Taxn. and Rev. Dept., No. A-1-CA-35126 (N.M. App. Ct. Oct. 30, 2017). West Virginia: A company's inventory of jet engine repair parts that it stores at its West Virginia facility and at the same facility installs these parts into malfunctioning jet engines are not exempt from ad valorem property taxation under the Freeport Amendment (which exempts certain personal property of inventory and warehouse goods from ad valorem taxation), because the parts are used to create a product with a different utility (such a functioning jet engine). The West Virginia Supreme Court (Court) further found that the Freeport Amendment does not exempt the repair parts as tangible personal property moving in interstate commerce, as the repair parts were not brought to West Virginia simply "for storage in transit to a final destination outside the State." Lastly, the Court noted that the inventory is not exempt despite the Court's liberal construction of the exemption in the company's favor, since witness testimony indicated that the company's activities result in a new or different product or a product with a different utility, and therefore the jet engine repair parts do not meet the Freeport Amendment language. Pratt & Whitney Engine Services v. Steager, No. 16-0903 (W. Va. S. Ct. Nov. 1, 2017). Illinois: The Illinois Department of Revenue (Department) issued guidance on using a blended income tax rate on the 2017 Illinois income tax return. Effective July 1, 2017, both the corporate and individual income tax rates were increased to 7%8 (from 5.25%) and 4.95% (from 3.75%), respectively. The blended rate for individual, calendar year filers is 4.3549%, while the blended rate for corporate, calendar year filers is 6.1322%. The guidance includes 2017 blended income tax rate schedules for both individual and corporate income tax rates. Fiscal year, short-year or 52/53 week filers whose tax year ends on or after July 1, 2017, will be subject to two different tax rates. A taxpayer whose taxable year begins before July 1, 2017 and ends after June 30, 2017, may calculate the amount of tax due using one of the following methods: (1) apportionment method (divide net income received based on the total number of days in one accounting period in equal ratio to the total number of days in the second accounting period); or (2) specific accounting method (treat net income or loss and modifications as though they were received in two different taxable years (prior to July 1, 2017 and after June 30, 2017) and calculate the income tax due at the applicable rate for each period (complete Schedule SA if using this method). The calculation method must be selected on or before the due date of the extended return; the selected method is irrevocable. Ill. Dept. of Rev., FY 2018-14 (Nov. 2017). Kentucky: The Kentucky Department of Revenue (Department) issued a revenue procedure explaining the types of guidance it will issue to assist in the administration of its laws. Types of the guidance the Department will issue includes technical advice memorandums (TAM), revenue procedures (RP), private letter rulings (PLR), and general information letters (GIL). Guidance issued through a TAM, RP, PLR, and GIL remains effective until it is withdrawn, superseded or modified by a change in statute, regulation, case law, or other Department guidance. If a taxpayer disagrees with guidance issued by the Department, the taxpayer can challenge the Department's position by filing a return taking a position contrary to that taken by the Department, and either seek a refund or protest an assessment. The revenue procedure sets forth the process for requesting guidance from the Department, as well as the Department's procedures for issuing guidance. Ky. Dept. of Rev., KY-RP-17-01 (Nov. 22, 2017). Connecticut: Effective Jan. 1, 2018, payers that maintain an office or transact business in Connecticut and make distributions of taxable pensions, annuities or other nonpayroll amounts to a Connecticut resident individual are required to deduct and withhold income tax from such distributions. Taxable pension or annuity distributions subject to mandatory withholding include distributions from the following: an employer pension, an annuity, a profit sharing plan, a stock bonus, a deferred compensation plan, an individual retirement arrangement, an endowment, and a life insurance contract. Prior to Jan. 1, 2018, a payer of pension or annuity distributions was required to deduct and withhold Connecticut income tax from pension and annuity distributions only when the resident individual recipient requested that income tax be deducted and withheld. If the recipient did not make such request, the payer had no obligation to withhold income tax from such payments. Affected businesses are instructed by the Connecticut Department of Revenue Services to withhold state income tax using the same method that Connecticut employers use to determine the amount to withhold from wages. Conn. Dept. Rev. Services; Special notice 17-5(Oct. 17, 2017). For additional information on this development, see Tax Alert 2017-2084. Iowa: The Iowa Department of Revenue (Department) announced that employers of less than 50 employees will not be required to file Forms W-2 for calendar year 2017. Instead, the Department is delaying this requirement for small employers until calendar year 2018, due in 2019. Employers of 50 or more employees continue to be required to submit Forms W-2 electronically to the Department. The deadline for employers of 50 or more employees to file calendar year 2017 Forms W-2 is Jan. 31, 2018. In addition, the requirement to file Forms 1099/W-2G also is delayed by one year. No employer is required to file Forms 1099/W-2G with the Department for calendar year 2017. For additional information, see Tax Alert 2017-2064. Montana: The Montana Department of Revenue announced that the 2018 income tax withholding tables will remain the same as they were for 2017. The tables were last revised on Jan. 10, 2005. Employers are reminded that legislation enacted earlier this year changes the state Form W-2 filing due date to match the federal filing due date effective for calendar year 2017. As a result, Montana 2017 Forms W-2 must be filed by Jan. 31, 2018. The Department will provide disaster relief for those taxpayers affected by recent natural disasters (fire, flood, earthquake, wind, etc.), waiving penalties and interest for late income tax withholding filings and payments. For additional information on this development, see Tax Alert 2017-2071. Alabama: A company is not entitled to deduct the value of its decentralized wastewater treatment systems in calculating its net worth in Alabama for purposes of the business privilege tax (BPT), because it did not acquire or construct the systems primarily to eliminate pollution caused as a result of its activities in the state. The Alabama Tax Tribunal found that although the company's systems greatly reduce or control ground pollution, the system did not primarily eliminate pollution caused by the company's in-state activities as required by statute. Ala. Wastewater Systems v. Ala. Dept. of Rev., No. BPT 15-424 (Ala. Tax Trib. Oct. 25, 2017). Illinois: Federal statutory exemptions from state and local real estate transfer tax for certain federal entities (e.g., Fannie Mae, Freddie Mac, Federal Housing Finance Agency (FHFA)) do not apply to private buyers that purchase real estate from these exempt entities. In reaching this conclusion, the US Court of Appeals for the Seventh Circuit (Court) reversed the district court, finding that nothing in the statutory terms of the exemptions indicate that the "clear and manifest purpose of Congress" was to exempt from taxation entities that interact with Fannie Mae, Freddie Mac, and FHFA. The Court also found that while charging a transfer tax to private buyers might affect the exempt federal entities, this does not result in a tax on the entity itself or on any of the entity's exempt assets or property. Fed. Nat'l Mortgage Assn. v. City of Chicago, No. 16-4140 (7th Cir. Oct. 30, 2017). New York City: On Nov. 30, 2017, the New York City Council passed Int. 799-B (the Bill) to provide a tax credit against the New York City (NYC) Commercial Rent Tax (CRT) for small businesses with total income of $10 million or less. The Bill has been sent to NYC Mayor Bill de Blasio, who indicated that he will sign the measure in the coming weeks. Generally, the NYC CRT is imposed on tenants that pay annual rent of at least $250,000 on commercial premises in certain locations in Manhattan (i.e., below 96th Street and above Murray Street). The effective CRT rate is 3.9% on base rent. If enacted, beginning July 1, 2018, and each year thereafter: (1) Tenants with a NYC CRT base rent of under $500,000 and "total income" of less than $5 million would no longer have a CRT liability; (2) Tenants with a NYC CRT rent of between $500,000 to $550,000 and total income between $5 million and $10 million would see a reduction in their NYC CRT liability. Under the Bill, such tenants would be able to claim a credit determined by multiplying the amount of CRT imposed on the tenant, minus any allowable credits or exemptions allowed by the income and rent factors; and (3) Tenants with either: (1) total income of over $10 million or (2) NYC CRT rent base of over $550,000 would not be affected by the law change and thus, would not be eligible for any credit under the Bill. For additional information on this development, see Tax Alert 2017-2090. International: The European Union (EU) has agreed on new rules to simplify value added tax (VAT) compliance obligations for e-commerce in goods to support the digital economy by accelerating growth for online businesses, in particular start-ups and small and medium enterprises. The changes will progressively come into force by 2021. Key measures include: (1) a single point of VAT registration for online sales, (2) removal of the current exemption from VAT for imports of small consignments worth not more than €22 from outside the EU, and (3) simplified rules for businesses with cross-border sales of less than €100,000. In addition, large online marketplaces will be responsible for ensuring VAT is collected on sales on their platforms. For additional information on this development, see Tax Alert 2017-2067. 1 Cal. Rev. and Tax. Code §23101(b) (effective for taxable years beginning on and after Jan. 1, 2011). 6 Walther v. Carrothers Construction Co. of Ark., LLC, 2016 Ark. 209, 492 S.W.3d 504 (Ark. S. Ct. 2016). 7 Steamboat Springs Rental & Leasing, Inc. v. City and Cnty. of Denver, 15 P.3d 785 (Colo. Ct. App. 2000). 8 Coupled with the separately imposed personal property replacement tax income tax levied at the rate of 2.5%, corporations in Illinois are subject to tax at the rate of 9.5% on their income apportioned or allocated to Illinois. 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: 2017-2136 |
