29 December 2017 State and Local Tax Weekly for December 22 Ernst & Young's State and Local Tax Weekly newsletter for December 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. On Dec. 22, 2017, the "Tax Cuts and Jobs Act" (H.R. 1) (hereafter TCJA) was signed into law (P.L. 115-97). Most commentators agree that the TCJA make the most significant changes to the federal income tax laws since 1986 which will affect the tax positions of individuals, pass-through entities (PTEs) and corporations alike. Since most state corporate and personal income tax laws are inextricably tied to federal tax law determinations, the changes to the federal tax law brought about by the provisions of the TCJA will likely have significant implications for US state and local (collectively, state) personal, corporate and business taxes as well, although those implications could be radically different depending upon how each state responds to conformity to the new federal rules, which could include states considering radical changes to their own tax policies. — Limit deductions for business interest expense to 1) 30% of earnings before interest, taxes, depreciation and amortization through 2021 and of earnings before interest and taxes thereafter plus 2) business interest income (the TCJA does not contain a second, global limitation based on comparative debt levels between US and non-US affiliates, which had been in the previous Senate version of the bill but was apparently rejected in the conference agreement) — Allow businesses to expense 100% of the cost of certain new and used "qualified property" placed in service after Sept. 27, 2017, and before 2023, and gradually phasing down the increased expensing starting in 2023 by 20 percentage points for each of five following years — Impose a one-time transition tax on post-1986 tax-deferred foreign earnings through a deduction intended to create an effective rate of 15.5% for liquid assets and 8% for illiquid assets — Establish a participation exemption system by allowing a 100% dividends received deduction on qualifying dividends paid by foreign corporations to 10% US corporate shareholders (i.e., corporations that own 10% or more the stock of a foreign subsidiary) — Impose new anti-deferral rules to ensure that the imputed "intangible" returns of controlled foreign corporations are subject to a minimum rate of US and/or foreign tax — Create an incentive for US companies to sell goods and provide services abroad by effectively taxing income from those activities at a reduced rate — Impose a new "base erosion and anti-abuse tax" that is calculated by reference to all deductible payments made to a foreign affiliate for the year. The tax will apply to certain US corporations that are members of a global group with three-year average annual gross receipts of at least $500 million and which have made related-party deductible payments totaling 3% (2% in the case of banks and certain security dealers) or more of the corporation's total deductions for the year — Limit the net operating loss (NOL) deduction to 80% of taxable income, eliminating NOL carrybacks for most taxpayers and allowing indefinite carryforwards for losses arising in tax years beginning after 2017 compensated by an interest factor — Reduce the deductible percentages of the dividends received deduction for dividends received from a domestic corporation (dividends received from other than certain small businesses or those treated as "qualifying dividends" (e.g., dividends received from affiliated corporations) will be reduced from 70% to 50%, and dividends received from 20% or more owned corporations will be reduced from 80% to 65%) — Repeal the domestic production deduction under IRC § 199, effective for tax years beginning after 2017 — Allow individual owners of certain pass through entities (PTE)to deduct from federal taxable income 20% of "qualified business income," effective for tax years beginning after 2017 and before 2026, resulting in a lower effective federal tax rate for individual PTE owners. Although available at lower income levels, the PTE deduction is not available to PTE owners of certain professional services businesses (e.g., law and accounting firms) although an exception to this limitation was provided in the final version of the TCJA for engineering and architectural services — Limit the nonrecognition of gain in like-kind exchanges to those involving real property only, thereby repealing rules allowing deferral of gain on like-kind-exchanges of business personal property and investment property (a transition rule applies to like-kind exchanges currently underway), effective for exchanges completed after 2017 — Change the one-year holding period under IRC § 1222 to a three-year holding period in order for certain capital gains attributable to carried interests to be treated as long-term capital gain Although threatened in earlier versions of the TCJA in both the House and the Senate, the TCJA made no changes to and therefore, retains current law with respect to both the Work Opportunity Tax Credit and the New Markets Tax Credit (both of which expire after 2019). For more information on this development, including an overview of the individual income tax changes in the TCJA and an in-depth discussion of the state income tax implications of federal reform, see Tax Alert 2017-2171. Join panelists from Ernst & Young LLP on Jan. 4, 2018 at 1:00 P.M. (EST) (Noon (CST), 11 A.M. (MST) and 10 A.M. (PST)) for a webcast on the state tax implications of the TCJA and US federal tax reform generally Our panel of EY professionals will explain how the final TCJA provisions affect state and local taxes, how the state legislatures may respond and what you can do to adapt to the new tax federal and state tax landscape brought about through this once in a generation federal tax reform. Topics to be discussed include: (1) State income tax implications — conformity issues, application by the states of the federal transition tax, anti-deferral provisions, anti-base erosion provisions, interest expense limitation, new federal NOL rules, application at the state level of the deduction for owners of pass-through entities; (2) tax accounting considerations; (3) the potential state competition in credits and incentives to attract businesses to the expected repatriation to the US from the lowered federal corporate tax rate; and (4) looking forward — what taxpayers can do from a state tax policy perspective, including reaching out to state legislatures and revenue departments. You can register for this event here. Multistate: During the last two years, Connecticut, New Jersey and New York City have put hedge fund managers on notice that nonresident individuals receiving compensation for past services performed in the state generally would be subject to tax. As a result, certain hedge fund managers located in these jurisdictions that have deferred fees for services subject to IRC §457A must recognize income in 2017 under the IRC §457A transition rule. In particular, both the New Jersey Division of Taxation and the Connecticut Department of Revenue Services have focused on deferred compensation received by nonresident hedge fund managers. In addition, the New York City Department of Finance has indicated that it is focused on deferred compensation and has been highlighting situations in which taxpayers have attempted to break nexus with New York City. For additional information on this development, see Tax Alert 2017-2177. Montana: New and amended regulations (amended Mont. Admin. R. 42.23.802 and 805; new Mont. Admin. R. 42.26.245 through 42.26.260 (nonseq.) and amended Mont. Admin. R. 42.26.201 through .1204 (nonseq.); and new Mont. Admin. R. 42.26.1301 through .1303) implement statutory changes to Montana's net operating loss (NOL) provisions, general allocation and apportionment provisions, and allocation and apportionment provisions for financial institutions, and through regulatory amendment replace the "Joyce Rule" with the "Finnigan Rule" for purposes of computing the apportionment factor for a combined group. Mont. Admin. R. 42.23.802 and .805 are amended to be consistent with statutory changes to NOL provisions, including the extension of the NOL carryforward period to 10 years (previously, seven years) and limiting the carryback to $500,000 per taxable period, effective for taxable periods beginning after Dec. 31, 2017. New Mont. Admin. R. 42.26.245 through .250 provide guidance on Montana's recent adoption of market-based sourcing for sales other than sales of tangible personal property, receipts from sales of services, and receipts from the license or lease of intangible property (modeled after the Multistate Tax Commission's (MTC) Revised Model Compact Article IV). Additionally, new Mont. Admin. R. 42.26.260, amended Mont. Admin. R. 42.26.255, and the repeal of Mont. Admin. R. 42.26.251 provide guidance related to Montana's repeal of the "Joyce Rule" and adoption of the "Finnigan Rule" for purposes of calculating a unitary group's apportionment factor numerators. Amended Mont. Admin. R. 42.26.201 through .1204 (nonseq.) make further changes to implement law changes enacted in 2017, including redefining "business income" as "apportionable income," "nonbusiness income" as "nonapportionable income," and "sales factor" as "receipts factor," and amending rules related to the treatment of software transactions and sales of licenses of digital goods or services. Last, new Mont. Admin. R. 42.26.1301 through .1303 provide financial institutions with guidance regarding receipts in the numerator of the receipts factor for purposes of financial institutions allocation and apportionment provisions (also modeled after regulations adopted by the MTC). These changes and additions were adopted on Dec. 8, 2017 and take effect Jan. 1, 2018. New York: The discretionary adjustments of an Implementing Agreement between a publishing corporation (corporation) and the New York State Division of Taxation regarding the corporation's tax calculation under former N.Y. Tax Law § 209 for tax years 2004 and 2005 do not apply in the calculation of the corporation's metropolitan transportation business tax (MTA) surcharge liability. Therefore, MTA tax surcharge savings are not subject to the Implementing Agreement's tax savings cap, which applies only to the computation of the corporation's business allocation percentage. An administrative law judge (ALJ) for the New York State Division of Tax Appeals further found no statutory authority to "flow through" or "carry down" such adjusted amounts to the calculation of the corporation's Metropolitan Commuter Transportation District (MCTD) allocation percentage. Rather, the MCTD apportionment factor are computed on the basis of the corporation's actual, unadjusted MCTD property, payroll and receipts amounts. The ALJ, summarized by stating "[a]ny MTA surcharge tax 'savings' in this case are realized simply as the mechanical result of applying the statutory MTA surcharge tax calculation rules of apportionment and allocation, without making adjustments under the Implementing Agreement, to the actual … amount of [the corporation's] [N.Y. Tax Law] § 209 tax liability." In re Petition of S&P Global, Inc., f/k/a the McGraw-Hill Cos., Inc., DTA No. 825598 (NY Div. Tax App. Nov. 16, 2017). Colorado: An out-of-state online retailer has substantial nexus in Colorado because it does business in the state by selling taxable goods at retail to Colorado customers, and has an employee who resides in Colorado working remotely for the retailer as a contract researcher and negotiator. The Colorado Department of Revenue (Department) noted that constitutional nexus does not require that the retailer's Colorado employee relate to the taxable transaction at issue. In support of this conclusion, the Department cited the US Supreme Court's ruling in National Geographic Society1 that a seller has nexus in a state if it maintains employees in that state, even if the employees' activities are completely unrelated to the sales transaction at issue. Therefore, the retailer must collect sales tax on Colorado sales. Colo. Dept. of Rev., PLR-17-008 (Oct. 3, 2017). Indiana: A company that provides telecommunication services is entitled to a refund of sales tax paid on the purchase of equipment and supplies used to provide these services because the equipment is exempt from tax and the company verified its exemption eligibility. The Indiana Department of Revenue found the following documentation provided by the company to verify its exemption eligibility persuasive: detailed information on each item of equipment at issue, where the equipment was installed, how it was utilized, and documentation establishing that it paid state sales tax when the equipment was originally purchased. Ind. Dept. of Rev., Memo. of Decision No. 04-20170174R (Nov. 29, 2017). Iowa: The Iowa Department of Revenue (Department) issued guidance that multi-function devices (MFDs) (i.e., office equipment that incorporates the functionality of multiple office machines, such as the all-in-one print, scan, email and photocopier), are generally exempt from sales and use tax under the computer exemption when they are used by insurance companies, financial institutions and commercial enterprises. The Department said that it will accept refund claims for tax paid on exempt MFDs, provided that the refund claim is filed within the statute of limitations and must not have been previously denied by the Department. Iowa Dept. of Rev., Tax Treatment of Multi-Function Devices (December 2017). Tennessee: An out-of-state professional licensing education and test preparation service provider's sales of self-study online training courses to Tennessee customers are subject to sales and use tax, but its sales of live instructor-led webinars are not subject to tax. The Tennessee Department of Revenue explained that for the self-study classes, students are paying to remotely access computer software. Students interact with the computer program by reading online text and by answering questions at knowledge checkpoints, and the computer program's provision of feedback through narrative explanations and pre-recorded audio or video, is analogous to taxable pre-packaged software accessed through a tangible medium, such as a DVD or CD purchased to study for career advancement or college entrance exams. With the live instructor-led webinars students are paying for access to a live class, and although a software platform is used to access real time presentations, the software platform is merely incidental to the transaction. Here, the student is interacting with the instructor and not computer software. Further, the instructor-led webinars are not specifically enumerated as a taxable service by statute and, therefore, are not subject to Tennessee sales and use tax. Tenn. Dept. of Rev., Letter Ruling No. 17-17 (Oct. 31, 2017). Oregon: On remand from the Oregon Supreme Court (OSC), the Oregon Tax Court (OTC) determined that for the 2009-10 tax year (1) a cable company properly adjusted the cost of net additions to determine the value of new property for purposes of calculating its maximum assessed value under Measure 50, and (2) the Oregon Department of Revenue (Department) did not discriminate against the company in subjecting it to central assessment. In regard to the discrimination claim, the OTC found that the Department's decision to subject cable providers but not broadcasters to central assessment in the 2009-10 year was an excusable error in judgment rather than intentional discrimination. Citing the OSC's earlier ruling in Comcast,2 the OTC reasoned that the OSC's delay in determining whether broadcasters are subject to central assessment validated the Department's delay. Further, the Department did not intentionally discriminate against the cable company when it further delayed assessments on broadcasters "until issues critical to the assessment process are determined with finality." The OTC further reasoned that the central assessment of cable and internet companies (including the taxpayer), but not broadcasters, is not a discriminatory tax on internet access in violation of the Internet Tax Freedom Act (ITFA), as the ITFA, a federal law, prohibits state and local taxes on certain transactions rather than on property values of affected businesses. Moreover, the cable company did not show by fact or law that the Department's central assessment of its property had subjected the property to a "higher tax rate" in any county in which it must ultimately pay the tax. Comcast Corp. v. Or. Dept. of Rev., TC 4909 (Or. Tax Ct. Nov. 30, 2017). Texas: The Texas Comptroller of Public Accounts (Comptroller) announced that its tax amnesty program will run May 1, 2018 through June 29, 2018. The amnesty program applies to tax periods before Jan. 1, 2018, and only for tax liabilities not previously reported to the Comptroller. Eligible taxpayers participating in, and complying with the terms of, the amnesty program will have otherwise applicable penalties and interest waived. Amnesty will not apply to tax periods under audit, International Fuels Tax Agreement (IFTA) taxes, Texas Public Utilities Commission (PUC) gross receipts assessments, local motor vehicle tax, and unclaimed property payments. Tex. Comp. Pub. Accts., Press Release (Dec. 21, 2017). Connecticut: The Connecticut Department of Revenue Services released its 2018 income tax withholding calculation rules and wage-bracket tables to its website. According to the guidance, the 2018 withholding calculation rules and 2018 withholding tables are unchanged from 2017. There is no percentage method available to determine Connecticut withholding. For additional information on this development, see Tax Alert 2017-2143. Maine: Maine Revenue Services (MRS) has released the 2018 Maine employer withholding tax guide, including the percentage method and wage-bracket tables. The calendar year 2017 Forms W-2 are due to the MRS by Jan. 31, 2018, accelerating the deadline from the previous February 28. The deadline for electronically filing the 2017 Maine Form W-3ME, Reconciliation of Maine Income Tax Withheld in 2017, remains at Feb. 28, 2018. For additional information on this development, see Tax Alert 2017-2176. Illinois: Online travel companies (OTCs) are not required to collect and remit additional local hotel taxes based on the full price that the customer pays the OTC (and not based on the amount the OTC pays the hotel) because none of the municipal ordinances at issue place such a duty on the OTCs. In reaching this conclusion, the US Court of Appeals for the Seventh Circuit (Court) analyzed the three general types of municipal ordinances involved: (1) those that impose tax on the owners, operators and managers; (2) those that impose tax on the persons engaged in renting hotel rooms; and (3) hybrids of these two approaches. OTCs in the seven municipalities that have ordinances imposing tax on the use and privilege of renting, leasing or letting hotel and motel rooms are not subject to tax because the OTCs are not the hotel owners, operators or managers. Although four ordinances also place the duty to collect and remit taxes on hotel room owners, OTCs do not own hotel rooms because they have no independent right to convey hotel rooms to consumers when they contract with hotels for the ability to make reservations for customers. Likewise, OTCs are not managers of hotels because they do not supervise the affairs of hotels, and they are not hotel operators when they do not perform the function of running a hotel and instead perform one set of a hotel's functions (e.g., reservations). Furthermore, three municipalities impose tax on persons engaged in the business of renting, leasing or letting hotel rooms, but OTCs cannot independently rent hotel rooms to customers without owning hotels or hotel rooms. The last three municipalities have ordinances encompassing elements of both approaches, but as the OTCs are neither engaged in the business of renting nor are owners or operators of hotels, they have no obligations regardless of how the ordinances are interpreted. Village of Bedford Park, et al. and Village of Lombard v. Expedia, Inc. et al., Nos. 16-3932 and 16-3944 (7th Cir. Nov. 22, 2017). New York City: New law (Int. 799-B) provides a tax credit against the New York City (NYC) Commercial Rent Tax (CRT) for small businesses with total income of $10 million or less. 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. 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 will 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 will see a reduction in their NYC CRT liability. Specifically, such tenants will 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 total income of over $10 million or NYC CRT rent base of over $550,000 are not affected by the law change and thus, will not be eligible for any credit under the new law. N.Y.C. Law 2017, Int. 799-B, signed by the mayor on Dec. 22, 2017. For additional information on this development, see Tax Alert 2017-2090. Texas: In reversing a lower court, the US Court of Appeals for the Fifth Circuit (Court) held that the service fee an online travel company (OTC) charges for facilitating a hotel reservation is not included in the "cost of occupancy" and, therefore, is not subject to the hotel occupancy tax ordinances of the challenged municipalities. The Court, citing City of Houston v. Hotels.com,3 concluded that the hotel occupancy tax applies only to the discounted room rate paid by OTCs to hotels because hotels offer occupancy in exchange for payment of the invoiced discounted room rate, while an OTC provides websites and information but does not own or control any rooms for occupancy. In this class action brought by 173 Texas municipalities, the Court found that the differing language in the ordinances does not affect the case outcome. For example, Dallas-type ordinances tax the amount "paid by the occupant of the room to the hotel," and the taxable consideration excludes costs "not related to cleaning and readying the room or space for occupancy" — thus, only the discounted room rate the OTC pays to the hotel can be related to such costs. San Antonio-type ordinances tax "the consideration paid for a sleeping room" including "all goods and services provided by the hotel" — thus, only the discounted room rate paid to the hotel covers such services. City of San Antonio, Texas v. Hotels.com LP et al., No. 16-50479 (5th Cir. Nov. 29, 2017). Illinois: New law (SB 868) clarifies and corrects the definitions of "gift cards" and "stored value cards" for purposes of the Illinois Revised Uniform Unclaimed Property Act (IL-RUUPA), which was adopted as part of the FY 2018 budget bill (Pub. Act 100-0022) earlier in 2017. Revisions to the IL-RUUPA definitions of "gift cards" and "stored value cards" eliminate the hierarchical definitions laid out in IL-RUUPA, and instead, treat the two types of cards differently and as mutually exclusive (i.e., a "gift card" cannot be a "stored value card"). The revised definitions are modeled after the definitions used by the Federal Reserve in Regulation E. Additionally, in response to the Seventh Circuit's decision in Kolton,4 the bill adds a provision for Illinois to pay interest to owners on interest-bearing accounts (enumerated as demand, savings, or time deposit accounts) delivered to the unclaimed property administrator on or after July 1, 2018. The changes take effect Jan. 1, 2018. Ill. Laws 2017, Pub. Act 100-566 (SB 868), signed by the governor on Dec. 15, 2017.For additional information on this development, see Tax Alert 2017-1971. International: The Government of Ghana has presented to Parliament the Value Added Tax (Amendment) (No. 2) Act, 2017 (the Bill) to amend sections of the Value Added Tax Act, 2013 (Act 870). The purpose of introducing this Bill is to redefine the place of supply rules for telecommunications services, amend provisions related to the Value Added Tax (VAT) withholding agents, and to provide for other VAT-related matters. For additional information on this development, see Tax Alert 2017-2139. 3 City of Houston v. Hotels.com, LP, 357 S.W.3d 706 (Tex. App. — Houston [14th Dist.] 2011, pet. denied). 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: 2017-2227 |
