26 December 2017 State and Local Tax Weekly for December 15 Ernst & Young's State and Local Tax Weekly newsletter for December 15 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. Colorado appeals court holds in two separate rulings that corporate taxpayers must exclude domestic holding companies with no in-state property or payroll from their Colorado combined returns In two separate, recent opinions — Agilent Technologies Inc.1 and Oracle2 — the Colorado Court of Appeals (Court) held that corporate taxpayers are not required to include affiliated domestic holding companies that merely own the stock of foreign affiliates and that do not have property or payroll in Colorado in their respective Colorado combined returns because the holding companies do not fall within Colorado's statutory definition of an "includible C corporation" for purposes of its combined reporting rules. In Agilent, the Court also held that the statutory definition is not dependent upon the federal income tax treatment of lower tier foreign subsidiaries as disregarded entities for purposes of determining whether the holding company met the state's statutory definition of an "includable C corporation. By Colorado statute (Colo. Rev. Stat. (C.R.S.) §39-22-303(8)), corporate taxpayers are not required to include in a combined report the income of a C corporation that conducts business outside the US if 80% or more of its property and payroll is assigned (as determined by factoring formula for apportioning business income), outside the US. Another provision (C.R.S. §39-22-303(12)(c)) makes clear that an includable C corporation is one that has more than 20% of its property and payroll (as determined by factoring formula for apportioning business income), assigned to locations inside the US. Further, Colo. Taxpayer Serv. Div. Reg. 39-22-303.12(c) states that "corporations that have no property or payroll factors of their own cannot have 20% or more of their factors assigned to locations in the [US], such corporations, by definition, cannot be included in a combined report." In Agilent Technologies Inc., the Court held that the Colorado Department of Revenue (Department) erred in requiring a corporate taxpayer to include in its Colorado combined return an affiliated US domestic holding company that has no property or payroll of its own because the affiliated holding company does not meet the definition of "includable C corporation" under C.R.S. §39-22-303(12)(c) and its associated Departmental regulation. The only assets of the Delaware holding company was the equity of foreign entities that were disregarded for US federal income tax purposes but which themselves did not have any property or payroll in the US. The Court held that for purposes of the definitional statute, the federal income tax treatment of the holding company's subsidiary entities was irrelevant (i.e., they were treated as "disregarded entities" for US federal income tax purposes (DRE) and rejected the taxpayer's argument that the DREs' own factors should flow up and be used to determine the holding company's status under the "includable C corporation" definition. Nevertheless, the Court held that the holding company itself did not have any of the requisite factors on its own to be an "includable C corporation" under the statue. In so holding, the Court rejected the Department's argument that the regulation was intended to only apply to foreign sales corporations (FSCs), and declined to limit the application of the regulation in this manner given that FSCs are not specifically referred to in the regulation. The Court also rejected the Department's argument that despite the regulation, it is justified in including the holding company in the corporate taxpayer's combined return under factoring conducted in accordance with C.R.S. §24-60-1301. Specifically, the Department argued that the holding company has property in the state for purposes of C.R.S. §24-60-1301 — and consequently, C.R.S. §39-22-303(12)(c) — because it uses the corporate taxpayer's property and personnel for all purposes. The Court found that even though the record shows that corporate taxpayer's equipment and administrative staff were used by the affiliated holding company, the record did not show how the property was used by the holding company or whether the affiliated holding company obtained any legal interest in the property used by it. Lastly, the Court found the Department's inclusion of the affiliated holding company in the corporate taxpayer's Colorado combined return was not warranted under either Colorado's adjustment provision in C.R.S. §39-22-303(6) or the economic substance doctrine. Following its reasoning in Agilent, later in the month the Court ruled in Oracle that the parent corporation is not required to include the income of its wholly-owned domestic holding company, which did no business and had no property in Colorado, did no business of its own and whose only assets consisted of stock of its Japanese subsidiary, in its Colorado combined return. In this case, the Court also found that the affiliated holding company was not an includable C corporation within the meaning of the statutory definition and cannot be a member of an affiliated group which could be included in a combined report because it did not have more than 20% of its property and payroll assigned to locations inside the US. The Court also found that C.R.S. §39-22-303(6) did not provide the Department with an alternative basis for taxing the corporate taxpayer's income by including the affiliated holding company in the combined return because the Department did not present evidence that the corporation created or used the holding company in a manner consistent with the plain and ordinary meaning of abuse. On Dec. 6, 2017, the Ohio Supreme Court (Court) issued its decision in Accel, Inc.,3 holding that a taxpayer's purchases of temporary labor from an employment staffing agency are exempt from Ohio's sales and use tax when the employees are assigned on a permanent basis. In determining whether an employee is assigned on a permanent basis, the Court will review both the contract and the facts and circumstances of the employee's assignment. The Court's decision brings some clarity around what otherwise taxable employment services arrangements may qualify for exemption from the statutorily defined term. Moreover, the ruling might provide taxpayers with a potential refund opportunity if they have procured temporary employment services. The Court's decision makes clear that a static number of employees is not required to be entitled to the (JJ)(3) exemption. That question had been addressed by the Board of Tax Appeals in A.M. Castle and Co.4 but that decision had not reached the Court. What is required for the (JJ)(3) exemption is that employees be indefinitely assigned by the staffing agency to the customer and that the employee not be provided as a substitute for an employee on leave or for seasonal demands. Whether any fluctuations in the number of personnel provided is seasonal (taxable) versus changing customer business conditions (exempt) will require a careful review of the facts and circumstances of staffing arrangements to determine if refund opportunities exist. Ohio's statute of limitations for claiming refunds is four years and generally runs on a monthly basis. On an unrelated point, the Court held that the assembly of the gift boxes constituted "manufacturing," entitling the taxpayer to the Ohio manufacturing exemption from sales and use tax on certain purchases used in creating the gift boxes. For additional information on this development, see Tax Alert 2017-2098. New Jersey: The New Jersey Division of Taxation cannot impose corporate business tax (CBT) on a multinational corporation's foreign source income that is not taxable for US federal income tax purposes because New Jersey law5 adopts federal taxable income (Federal 1120-F Line 29) as the tax base. The New Jersey Tax Court (Court) explained that the entire net income (ENI) for purposes of the CBT is linked by statute to "taxable income before net operating loss deduction and special deductions" on the federal income tax return forms of a corporation, including a foreign corporation and statutory add-back exceptions do not include worldwide income that is excluded from the federal income tax. Moreover, in finding the facts in IBM6 to be more closely parallel to the facts in this case, the Court reasoned the state legislature intended to couple ENI to federal taxable income, with limited exceptions, and the corporation's tax base should match the federal income as indicated on Line 29 of the taxpayer's unconsolidated federal Form 1120-F. Infosys Limited of India Inc. v. NJ Dir., Div. of Taxn., No. 012060-2016 (NJ Tax Ct. Nov. 28, 2017)(Unpublished). New York: The New York Tax Appeals Tribunal (Tribunal), reversing an earlier determination by an Administrative Law Judge (ALJ), cancelled deficiencies issued to two German insurance 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 US-German tax treaty . 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 applied to US insurance corporations. For more information on this development, see Tax Alert 2017-2097. South Carolina: The South Carolina Supreme Court will not review the appellate court's ruling in Rent-A-Center West, Inc., in which the South Carolina Department of Revenue (DOR) was found to have not met its burden of proof in asserting an alternative apportionment method to assess corporate tax liability. Rent-A-Center West Inc. v. South Carolina Dept. of Rev., No. 2012-208608 (S.C. Ct. App. Oct. 26, 2016), review denied, 2017-000265 (S.C. S. Ct. Dec. 13, 2017). For more on the appellate court's ruling, see Tax Alert 2016-1848. Texas: A multistate entity that builds ships and performs related repair services is not entitled to a cost of goods sold deduction from Texas franchise tax, because the entity did not distinguish costs related to selling tangible personal property for ship building from costs related to selling repair and remodeling services for which the deduction is not allowed. The Texas Comptroller of Public Accounts also rejected the entity's contention that it should be allowed to make an election to use of the Multistate Tax Compact's three-factor apportionment formula instead of the statutorily mandated single-factor sales apportionment formula, noting that Texas law does not provide for such an election. Tex. Comp. of Pub. Accts., No. 201709020H (Sept. 18, 2017). Florida: A web company's charges for memberships and free one-month trial memberships to a website that allows members to shop for groceries, everyday essentials, and items from local shops and restaurants while receiving shipping benefits are not subject to sales and use tax because none of the individual services provided in the memberships are subject to tax. The Florida Department of Revenue determined that Florida's sales tax on admissions does not apply to the company's memberships because the tax only applies to membership benefits to "a place of amusement, sport, or recreation" or "recreational or physical fitness facilities." The company's services include same day or next day delivery, free delivery on orders of $40 or more, access to certain products, and discounts on certain products. Fla. Dept. of Rev., Tech. Assistance Advisement No. 17A-017 (Aug. 30, 2017). Illinois: The Illinois Supreme Court (Court) in reversing an appellate court's ruling in a bad debt case, held a bank that financed sales of goods at retailers, which ultimately resulted in uncollectible/bad debts, is not entitled to a refund of Retailers' Occupation Tax Act (ROTA) taxes (a form of Illinois sales tax) because the bank was not the retailer that remitted the tax to the state as required by statute. Citing Snyderman,7 the Court found the statutory framework provided for ROTA reporting, remission, and refund only through the retailer to avoid the possibilities of unjust enrichment. Specifically, the applicable statute, 35 ILCS §120/6d(b)(4)(C), provides that the deduction or refund "may only be taken by the taxpayer, or its successors, that filed the return and remitted the tax on the original sale on which the deduction or refund claim is based." (Emphasis added). Citibank, NA v. Ill. Dept. of Rev., 2017 IL 121634 (Ill. S. Ct. Nov. 30, 2017). Nevada: The U.S. Supreme Court has been asked to review the Nevada Supreme Court decision in Southern California Edison, that a California electric utility was not entitled to a refund of use tax for the transaction privilege tax paid in Arizona of its coal purchases from an Arizona coal mining company because it failed to show the existence of substantially similar entities that gained a competitive advantage due to a discriminatory tax scheme (here a scheme that exempts minerals mined in Nevada from the use tax while imposing the use tax on minerals mined outside the state). Southern California Edison v. Nevada Department of Taxation, No. 67497 (Nev. S. Ct. July 27, 2017), petition for cert. filed, Dkt. No. 17-755 (U.S. S. Ct. filed Nov. 21, 2017). New York: A regional supermarket chain's purchase of competitors' pricing information, a taxable information service, qualified for the exclusion from sales and use tax under N.Y. Tax Law §1105(c)(1) because the information purchased was personal and individual in nature and was not substantially incorporated into reports of others. In reaching this conclusion, the New York Supreme Court Appellate Division (Court) found that although the information collected on the corporation's behalf is available to the public, under the circumstances it did not derive the information from a singular, widely accessible common source or database, and it was not available or shared with third parties. The Court noted that in its view "to expand the interpretation of [N.Y.] Tax Law §1105(c)(1) to allow … the subject tax exclusion based solely on the fact that the information ultimately furnished derived from a public source, would, under the circumstances presented, serve to defeat the purpose of the exclusion." (Citations omitted). Matter of Wegmans Food Markets, Inc. v. NY Tax Appeals Tribunal, 2017 NY Slip Op 08225 (NY Sup. Ct., App. Div., 3d Dept., Nov. 22, 2017). Texas: An out-of-state corporation's advisory services sold with subscriptions to a cloud-based customer relationship management (CRM) platform are taxable as part of the sales price of the corporation's data processing services. Advisory services are classified by Texas law as nontaxable consulting services, and the platform subscriptions are classified as taxable data processing services. Tex. Admin. Code tit. 34, §3.330(d)(2) further provides that when a nontaxable service is provided with a taxable data processing service, the nontaxable service will not be taxed as a data processing service if it is unrelated and the charge for the nontaxable service is separately stated. Here, the Texas Comptroller of Public Accounts determined that the advisory services are part of the sale of taxable data processing services (i.e., not unrelated) because: (1) the advisory services are not offered on a stand-alone basis apart from the platform subscriptions; (2) only certain platform subscribers have the option to purchase the advisory services; (3) the advisor's role is to advise on the "best practices recommendations on use of the [CRM] platform;" and (4) the advisory subscription terminates when the agreement otherwise ends, unless the parties have contracted otherwise. Texas exempts from tax the first 20% of the total sales price of taxable data processing services, and that 20% applies to the total sales price of the platform and the advisory services since both are taxed as part of the selling price of the platform subscription. Tex. Comp. of Pub. Accts., No. 201709026L (Sept. 25, 2017). Colorado: The Colorado Supreme Court (Court) in OXY USA reversed the decision of an appeals court and held that a corporation is entitled to an abatement of tax and a refund for erroneously levied taxes based on the corporation's overvaluation error. In so holding, the Court found the appeals court's reliance on Coquina8 and HealthSouth9 was misplaced. The Court reasoned that a statutory amendment adding "overvaluation" as a ground for abatement superseded Coquina's holding that a taxpayer-caused overvaluation could not be abated, and the statutory amendment's legislative history reflects the legislature's intent to provide broad relief from overvaluation. Further, the ruling in HealthSouth does not preclude an abatement for taxpayer-caused overvaluation for inadvertent errors. OXY USA, Inc. v. Mesa County Bd. of Comrs., 2017 CO 104 (Colo. S. Ct. Nov. 13, 2017). New York: A developer of a mixed-use residential/commercial facility is not entitled to property tax exemptions from both a city and county for the same mixed-use development. In so holding, the New York Supreme Court Appellate Division (Court) found that NY Real Property Tax Law §485-a(4)(d), has two equally plausible constructions. Section 485-a(4)(d) states that the municipal exemption for real property cannot be "granted concurrent with or subsequent to any other real property tax exemption granted to the same … real property." This could mean either: (1) that taxpayers cannot receive more than one tax exemption when the exemptions are both from one jurisdiction, or (2) that taxpayers cannot be granted an exemption when the property has concurrently or previously received another tax exemption from any taxing jurisdiction. Ultimately, the Court found the developer failed to prove that it was entitled to the exemption. In the Matter of LAPC Lofts, LLC v. City of Buffalo Dept. of Asmt. and Taxn., 2017 NY Slip Op. 07805 (NY Sup. Ct., App. Div., 4th Jud. Dept., Nov. 9, 2017). Texas: The U.S. Supreme Court will not review the Texas Supreme Court's ruling in ETC Marketing, in which the Texas court held that the Harris County property tax as applied to surplus gas stored in Texas for future sale did not violate the Commerce Clause of the U.S. Constitution because it met all four prongs of the Complete Auto test (i.e., the taxpayer had substantial nexus with the state and the tax was fairly apportioned, nondiscriminatory and fairly related to the services provided by the state). ETC Marketing, Ltd. v. Harris County Appraisal District, No. 15-0687 (Tex. S. Ct. April 28, 2017), petition for cert. denied, Dkt. No. 17-422 (U.S. S. Ct. Dec. 11, 2017). Ohio: The Ohio Department of Taxation (Department) will conduct a tax amnesty program from Jan. 1, 2018 to Feb. 15, 2018, with respect to most Ohio taxes. The program applies only to taxes that were due and payable as of May 1, 2017, which were unreported or underreported, and which remain unpaid on the date on which the program commences. Amnesty does not apply to any tax for which a notice of assessment or audit has been issued, for which a bill has been issued, that relates to a still-open tax period, or for which an audit has been conducted or is pending. Taxes covered by amnesty include the following: Commercial Activity Tax, pass-through entity tax, sales/use tax, financial institutions tax, individual/individual school district income tax, employer withholding tax/school district income tax, cigarette or other tobacco products tax, and alcoholic beverage tax. Eligible taxpayers reporting under the Ohio amnesty program will have all applicable penalties and half of any interest that accrued on the taxes waived, if during the program a person pays the full amount of delinquent taxes owed along with half of any interest on the taxes. Additional information on Ohio's amnesty program is posted on the Department's website. Multistate: State unemployment insurance (SUI) trust funds are largely financed by employer contributions (except in Alaska, New Jersey and Pennsylvania, where employees also make contributions). States are required to maintain a SUI wage base of no less than the limit set under the Federal Unemployment Insurance Tax act (FUTA). The 2018 FUTA wage base of $7,000 has remained unchanged since 1983, despite increases in the federal minimum wage and annual cost-of-living adjustments over the last 35 years. According to the U.S. Department of Labor (DOL), 23 states and the Virgin Islands had a flexible wage base in 2017, meaning, the wage base can increase automatically based on certain triggers. Conversely, in 2017, the wage base was fixed in 28 states and Puerto Rico, where legislation is required for its increase or decrease. For additional information on this development, see Tax Alert 2017-2112. Missouri: According to a recent update to the Missouri Department of Revenue's Employer Tax Guide, (and as confirmed by a Department representative) employers filing less than 250 calendar year 2017 Forms W-2 have until Feb. 28, 2018 to file on paper, CD, flash drive or electronically. The law change that accelerates the due date to Jan. 31, 2018, applies only to large employers filing 250 or more Forms W-2. For additional information on this development, see Tax Alert 2017-2118. Vermont: The Vermont Department of Taxes (DOT) released information on how employers will report and pay the Health Care Contribution beginning with the fourth quarter 2017 return, due Jan. 25, 2018. As EY reported previously, under HB 516, enacted earlier this year, effective Jan. 1, 2018, the administration of the quarterly employer health care contribution is moved from the Vermont Department of Labor to the Vermont DOT, effective with the filing of the fourth quarter 2017 withholding tax return, by Jan. 25, 2018. Employers should take note that two big changes resulting from the move are that (1) the due dates for the health care contribution are changed to the 25th of the month following the end of the quarter, instead of the last day of the month; and (2) the health care contribution will be reported on, and remitted with, the quarterly withholding tax return. The change in the filing due date was implemented to sync to the withholding due date to eliminate the need to file an additional form. No changes were made in who is required to pay the health care assessment. As a result, the fourth quarter 2017 health care contribution payment is due by Jan. 25, 2018, rather than Jan. 31, 2018. Washington: The Washington Department of Revenue issued guidance on the taxability of various telecommunications support payments and miscellaneous fees received by telecommunications service providers under the Washington business and occupation (B&O) tax. Telecommunications support payments received by carriers that are not directly tied to a telecommunications services sale are generally subject to the service and other activities classification of the B&O tax, because these payments represent income from business activities that are not otherwise taxable under a different classification. Additionally, the wholesaling classification of the B&O tax applies to payments to local exchange carriers from revenue pools in exchange for originating or terminating calls within a local loop, because the transaction provides telecommunications services to other carriers at wholesale. Lastly, the retailing classification of the B&O and the Washington retail sales tax may apply to funds received by carriers as direct support payments for credits or discounts provided to subscribers on their telephone bills, as these payments are receipts paid in exchange for the sale of telecommunications services if the telecommunications service is provided to the end consumer. The guidance provides examples of these transactions. Wash. Dept. of Rev., ETA 3205-2017 (Nov. 17, 2017). New Jersey: The New Jersey Unclaimed Property Administration released proposed amendments to N.J.A.C. 17:18-3.1 and a proposed new rule N.J.A.C. 17:18-3.3 to implement certain provisions of the Uniform Unclaimed Property Act. Amendments to N.J.A.C. 17:18-3.1 would define various terms, including "customer loyalty program," "stored value card," "promotional program," and "holder," among others. New rule N.J.A.C. 17:18-3.3 would provide guidance on the exemption for reporting stored value cards sold for merchandise or services prior to July 1, 2010, and the exemption for reporting stored value cards issued under a promotional, customer loyalty, or charitable program where no consideration was tendered or where stored value cards issued in the prior year have an aggregate total value of $250,000 or less. The proposed new rule would differentiate between reporting requirements for (1) stored value cards issued by retailers on or after July 1, 2010, that may be redeemed for merchandise or services only at the retailer's store or website and (2) stored value cards issued by banks and other financial institutions that may be redeemed at multiple merchants. In addition, the proposed new rule would require that funds associated with stored value cards issued on or after Dec. 1, 2012, be valued until redemption and that they not expire. Written comments on the proposed amendments and proposed new rule are due by Feb. 2, 2018. International: The latest edition of Trade Watch, a quarterly communication prepared by EY's Customs & International Trade Practice, is now available in Tax Alert 2017-2108. International: Changes to the Italian Value Added Tax (VAT) Law, introduced by Law Decree no. 148/2017 (Law no. 172/2017, published in the Official Gazette no. 284 of December 5) entered into force on Dec. 6, 2017. Specifically, the Law provides for: (1) Changes regarding the Communication of issued and received invoices (so called Spesometro); and (2) Application of the split payment mechanism to all companies controlled by the Public Administration (PA). For more information on this development, see Tax Alert 2017-2095. 4 A.M. Castle and Co. v. Testa, Ohio BTA Case No. 2013-5851 (March 9, 2015). 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: 2017-2205 |
