11 January 2018 State and Local Tax Weekly for January 5 Ernst & Young's State and Local Tax Weekly newsletter for January 5 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. Ohio's tax amnesty program, which is administered by the Ohio Department of Taxation (Department), runs through Feb. 15, 2018, and applies to most Ohio taxes that were unreported or underreported as of May 1, 2017. The Department is authorized under this program to abate all penalties and half of the otherwise applicable interest for qualified taxes reported through it. The following taxes qualify for Ohio tax amnesty: Commercial Activity Tax, Pass-Through Entity Tax, Sales and Use Tax, Financial Institutions Tax, Individual Income Tax, Individual School District Income Tax, Employer Withholding Tax, Employer Withholding School District Income Tax, Cigarette or Other Tobacco Products Tax, and Alcoholic Beverage Tax. Amnesty applications and the necessary tax reporting forms are available on the Department's amnesty website. In addition to the completed amnesty application, completed tax forms/returns, along with full payment of the total amount of tax and interest due, must be submitted with the application. The Department will issue letters to amnesty applicants within 30 days of its receipt of the application indicating whether the amnesty application has been approved or denied. Applications will be denied when the Department has already started an audit of, or has issued a billing or assessment notice for, the taxes for which an amnesty request is made. For additional information on this development, see Tax Alert 2018-0015. Pennsylvania Department of Revenue says it will disallow any recovery of 100% bonus depreciation until such asset is sold or disposed of On Dec. 22, 2017 in Corporation Tax Bulletin 2017-02 (the 2017 Bulletin), the Pennsylvania Department of Revenue (DOR) concluded that for Pennsylvania corporate income tax purposes, the commonwealth will decouple from the new federal 100% bonus depreciation deducted under IRC § 168(k) for assets placed in service after Sept. 27, 2017. Moreover, the 2017 Bulletin states that Pennsylvania will provide no recovery with respect to 100% bonus depreciation added back to taxable income until the asset to which it relates is sold or otherwise disposed. This guidance directly contradicts the DOR's earlier guidance in Corporation Tax Bulletin 2011-01, issued on Feb. 24, 2011 (the 2011 Bulletin), which interpreted the same Pennsylvania statute to mean that Pennsylvania would conform to 100% bonus depreciation for qualified property acquired after Sept. 8, 2010 and before Jan. 1, 2012. For additional information on this development, see Tax Alert 2018-0046. Multistate: The Q4 2017 State Income Tax Quarterly newsletter provides a summary of the corporate income and franchise tax legislative, administrative, and judicial updates that occurred during the period from Oct. 1, 2017 through Dec. 31, 2017. Highlights include: (1) A summary of legislative developments in Connecticut, Federal, Philadelphia, PA and Pennsylvania; (2) A summary of judicial developments in Colorado, Indiana, New Jersey, Pennsylvania, South Carolina and Texas; (3) A summary of administrative developments in Arkansas, California, Illinois, Massachusetts, Minnesota, Montana, New Mexico, Ne w York, Pennsylvania, Tennessee and Texas; and (4) A discussion of items to watch in California, Massachusetts and Vermont. Arkansas: A multistate corporation was not allowed to use the Multistate Tax Compact's equally weighted three factor formula instead of the statutorily mandated double weighted sales factor formula because the corporation did not file a petition requesting use of an alterative apportionment formula prior to utilizing such alternative. The Arkansas Office of Hearings and Appeals gave deference to the Arkansas Department of Finance and Administration's interpretation of statutory law as requiring the filing of a petition by a taxpayerfor authorization to use an alternative apportionment formula prior to filing of an original return; finding that this interpretation was "not clearly wrong." Ark. Dept. of Fin. And Admin., Dkt. Nos. 17-369 to 371, 17-459 (Ark. Off. Hearings & App. Dec. 1, 2017). California: The California Franchise Tax Board (FTB) determined that a global company's gross receipts arising from certain US divestments constitute substantial and occasional sale of assets used within the company's trade or business within the meaning of Cal. Code Regs. tit. 18, § 25137(c)(1)(A) and, therefore, are excluded from the company's California sales factor. The FTB explained that under California law "a sales is substantial if its exclusion results in a five percent or greater decrease in the sales factor denominator of the taxpayer's combined reporting group."1 In determining whether a transaction occurred outside a company's normal course of business, the FTB, referencing the analysis in Hoechst Celanese Corp.,2 considers the "nature of the particular transaction" generating the income as well as the frequency of the transaction. Here, the FTB found that the day-to-day operations of the global company did not involve developing and building a business for sale at a profit, and that the global company's US divestments during the period at issue were infrequent. Cal. FTB, Chief Counsel Ruling 2017-03 (Oct. 18, 2017). Massachusetts: A group of cable franchise companies (hereafter, companies) could not amend their sales factor calculation based upon costs of performance sourcing, claim intercompany interest expense deductions, make Massachusetts corporate excise adjustments based upon federal changes, allocate certain interest expenses to Massachusetts rather than to Pennsylvania, or receive an abatement based on a processing error by the Commissioner, but the companies could include reimbursements at cost in the sales factor for 2007 and 2008. In reaching these conclusions, the Massachusetts Appellate Tax Board (Board) found that the relevant income-producing activity engaged in by the companies (for sales receipts from video and internet services provided to Massachusetts subscribers) was to function as cable franchise licensees with Massachusetts cities and towns, and this took place wholly in Massachusetts. Even if the activities took place inside and outside Massachusetts, the Board found that the costs of performance (costs itemized by statute and in the cable franchise licenses) were greater in Massachusetts than in any other state. Additionally, certain companies could not claim intercompany interest expenses because, based in part on the application of factors enumerated in Overnite,3 the companies failed to establish any bona fide debt existed when there was no indicia of arm's-length dealings between the parties and no intent to engage in a true debtor/creditor relationship. The Board noted that even if the interest expense qualified as true indebtedness, the companies failed to establish that add-back was unreasonable. The companies also were not entitled to abatements based on the filing of federal changes with the Commissioner because the companies did not offer any substantive argument, evidence, or legal authority to support their claims. Finally, the Board found that the companies failed to establish that interest expenses underlying certain dividend shares should be allocated to Massachusetts rather than Pennsylvania. Comcast of Massachusetts I, Inc., et al. v. Mass. Comr. of Rev., Nos. C321986 through C321994 and C322268 (Mass. App. Tax Bd. Nov. 10, 2017). Texas: The Texas Supreme Court (Court) issued its long anticipated ruling in Graphic Packaging Corp., and upheld an earlier appellate court decision and found that a multistate corporation cannot elect to use the Multistate Tax Compact's equally weighted three-factor apportionment formula (Compact formula) under the revised franchise tax (i.e., Margin Tax), because the Compact formula cannot be reconciled with the single sales factor formula mandated by Texas statutory law. The Court also held that the Multistate Tax Compact is not a binding regulatory compact; thus, Texas' membership in the Compact does not prevent the Texas legislature from requiring a taxpayer to use the statutorily mandated formula (in this case a single sales factor formula) to apportion its taxable margin. The Court did not rule on the issue of whether the Margin Tax is an income tax. Graphic Packaging Corp. v. Hegar, No. 15-0669 (Tex. S. Ct. Dec. 22, 2017). Iowa: An agricultural corporation was not entitled to a refund of sales and use tax paid on purchases of component parts and fully operational machinery and equipment that it used in research activities, because the purchases did not qualify for the exemption from sales and use tax for machinery and equipment. The Iowa Department of Revenue (Department) determined that the component parts integrated into the corporation's prototypes for the limited purpose of research, which were scrapped, sold, or returned after research was complete, were "supplies" due to a limited useful life in the context of research and development, and were not "machinery," "equipment" or "replacement parts" for purposes of the exemption. The Department noted that 2016 legislation expanding the exemption to classify prototype materials as "supplies" indicated that prototype materials and other supplies are not machinery and equipment, and did not qualify as exempt property by statute until 2016 (after the tax years at issue). Additionally, the corporation's purchases of fully operational machinery and equipment, which underwent comparative testing to help the corporation evaluate equipment performance against competing equipment, did not qualify for the exemption because it was not directly and primarily used in research and development of new products or processes of processing as required by statute. In re CNH Industrial America, LLC, No. 2015-320-1-0071 (Iowa Dept. of Rev. Oct. 11, 2017). Rhode Island: A food service management company's purchases of supplies that it used and consumed on behalf of public schools are subject to sales and use tax because the company is an independent contractor that paid for the items and used or consumed them in the course of its business activities. The Rhode Island Division of Taxation (Division) applied the legal incidence test, finding that the company is ultimately liable for the tax because it paid for the supply items and made taxable use of them. Moreover, even though the agreement between the company and the schools designated the company as an agent, the Division determined that the company does not qualify as an agent under a strict and narrow reading of the exemption statute. The statutory exemption applies strictly to sales to political subdivisions, not their contractors, and a school must have purchased the items itself to qualify for the tax exemption. Lastly, the purchases do not qualify as exempt sales for resale because there is no evidence the schools provided resale certificates to the company showing that the purchases were for resale. RI Div. of Taxn., Ruling Request No. 2017-05 (Nov. 17, 2017). South Dakota: In Valley Power Systems v. South Dakota Dept. of Revenue, the South Dakota Supreme Court (Court) ruled that, when evaluating whether contractors are installing fixtures, it will not look to the intended design of the property installed but to the actual use to determine whether mobile power units are fixtures for contractor gross receipts tax and sales and use tax purposes. In so holding, the Court upheld the imposition of both the contractor's gross receipts tax and the sales and use tax on the sale and installation of exhaust manifolds on mobile power units. Valley Power Systems v. South Dakota Dept. of Rev., 2017 S.D. 84 (S.D. S. Ct. Dec. 13, 2017). For additional information on this development, see Tax Alert 2018-0034. Wyoming: An out-of-state corporation that manufactures and installs signs for businesses is not a contractor because the signs are not real property and, therefore, it is not subject to sales and use tax as an end user of all materials and supplies used for installation of the signs. In so holding, the Wyoming State Board of Equalization (Board) reversed the Wyoming Department of Revenue, and found that the signs are designed to be easily removed with little or no damage to the building, and the demonstrated intent of the parties annexing the signs to real property is for each sign to remain where it is installed only so long as the business it serves remains in place and wants the sign to remain. Based on the statutory plain meaning of real property under Wyo. Stat. Ann. § 39-15-101(a)(v)(D), the Board could not reasonably infer that the corporation's customers intended to make the signs a permanent part of the real property to which they were attached. In re Appeal of Anchor Sign, Inc., Dkt. No. 2016-51 (Wyo. State Bd. of Equal. Nov. 28, 2017). Multistate: The month of December contained several updates for employers that take advantage of federal employment-related tax credits. For additional information on this development, see Tax Alert 2017-2226. Michigan: New law (HB 4420) amends the Michigan Business Tax Act to extend the time provided to complete certain brownfield development projects. An eligible project includes one (1) approved before Dec. 31, 2008 for 20% of the qualified taxpayer's eligible investment and a total of less than $2 million for all credits for that project, and (2) the project has received a funding reservation for an allocation of the federal Low-Income Housing Tax Credit (LIHTC) administered by the Michigan State Housing Development Authority of more than $1.1 million. The duration of the time provided to complete an eligible project may be extended to the placed-in-service date of the carryover allocation agreement for the LIHTC. This change took effect Dec. 20, 2017. Mich. Laws 2017, P.A. 217 (HB 4420), signed by the governor Dec. 19, 2017. Ohio: Property owned by a state university, including the portion of the property that was being renovated, is entitled to a property tax exemption for the 2012-2016 tax years because the property was used to support the university. The Ohio Board of Tax Appeals (Board) reasoned that while a portion of the property was being renovated during 2012, it was entitled to exemption for that tax year under the prospective use doctrine since it was being prepared for use by one of the university's departments. The Board distinguished this case from the Ohio Supreme Court's 2011 decision in Columbus City School District Board of Education v. Testa,4 finding that in this case the university's property was being used and occupied by departments of the university rather than being used and occupied by unaffiliated commercial and residential tenants (i.e., for profit entities). Columbus City School Dist. Bd. of Ed. et al. v. Testa, No. 2016-965 (Ohio Bd. Tax App. Nov. 29, 2017). Montana: Montana's corporate income tax law requires members of a unitary business to file returns on a worldwide combined basis, unless a water's-edge election is made to exclude foreign affiliates from the combined group. A Montana water's-edge group pays tax at a rate of 7.00% instead of the regular rate of 6.75%. While many states require a water's-edge election to be made by the due date or extended due date of the return for the year for which it is intended to be effective, Montana is unique in that a water's-edge election must be made within 90 days of the beginning of the first year in which it is first intended to become effective. Accordingly, a corporation wishing to make a new water's-edge election, or renew an existing election, that would be effective starting in the 2018 tax year must file a Form WE-ELECT with the Montana Department of Revenue by March 31, 2018. The election is only effective if all affiliated corporations subject to Montana taxes consent. Consent by the common parent of an affiliated group is deemed to be consent by all members of the group. For additional information on this development, see Tax Alert 2018-0028. California: Emergency regulations (Emer. Cal. Code of Regs., tit. 18, §§ 30100 through 30832 (nonconsecutive)) set forth the procedures for appealing decisions of the California Franchise Tax Board and the California Department of Tax and Fee Administration to the California Office of Tax Appeals (OTA). The emergency regulations also provide guidance on the transition of appeals and petitions for rehearing from the California State Board of Equalization (SBE) to the OTA — as of Jan. 1, 2018 the OTA has jurisdiction over certain appeals formerly handled by the SBE (e.g., corporate and individual income taxes, sales and use tax). The OTA is required to issue a written opinion for each appeal decided by a panel (the deciding panel will draft the opinion); it also has the authority to designate an opinion as precedential or not precedential, and may withdraw the precedential status of an opinion in a later appeal. Precedential opinions of the SBE adopted before Jan. 1, 2018 may be cited as precedential authority to OTA unless a panel removes, in whole or in part, the precedential status of the opinion. A written opinion becomes final 30 day following issuance unless a petition for rehearing is filed, and will be published within 100 days after becoming final. Hearings of the OTA are open to the public, unless ordered to be closed. The regulations also provide guidance on the following: the OTA's jurisdiction (including issues the OTA will not consider, such as the constitutionality of a California statute), requirements for filing an appeal (including filing deadlines), briefing schedules and procedures, requesting and scheduling oral hearings, decisions, opinions and frivolous appeal penalties, petitions for rehearing and rehearings, and other matters. The emergency regulations took effect Jan. 5, 2018. Cal. OTA, Emer. Cal. Code of Regs., tit. 18, §§ 30100 through 30832 (nonconsecutive) (adopted Jan. 5, 2018). Multistate: To assist you in reviewing your state income tax withholding rates for 2018, Tax Alert 2018-0016 includes a chart of the most recent income tax withholding tables published by the states. Reference the column "Last update" to identify the last year the publication was updated. If the last update was prior to 2018 and the pending column is "no", we have confirmed with the state that no update is expected for 2018. Multistate: Similar to the federal supplemental income tax withholding rate, most states allow for an optional flat percentage of income tax withholding for wages that are in addition to regular pay. When allowed, the supplemental rate greatly simplifies income tax withholding calculations on irregular payments such as bonuses, equity compensation and separation pay. In light of the enactment of the Tax Cuts and Jobs Act (TCJA), some uncertainty will initially exist for 2018 supplemental income tax withholding in some states. That is because states may already be coupled with the IRC or may go that direction in the near future, affecting not only tax rates but the matter of the personal allowance deduction suspended through 2025 under the TCJA. Already several states have announced that their 2018 income tax withholding tables will be delayed due to this issue (e.g., Oregon and Vermont). For additional information on this development, see Tax Alert 2017-2225. District of Columbia: The District of Columbia's Office of Tax and Revenue released the 2018 Publication FR-230, Income Tax Withholding Instructions and Tables, to its website. Withholding booklets are not mailed to employers and are only available online. For additional information on this development, see Tax Alert 2017-2220. Nevada: According to a department representative, the Nevada Department of Employment, Training and Rehabilitation anticipates that it has repaid its remaining bond balance in full. Accordingly, the Department has decided that the third quarter 2017 is the last period that employers will pay the bond assessment. Employers will not submit a bond assessment return or pay the bond assessment starting the fourth quarter 2017. Employers will be notified of the elimination of the bond assessment in the mailing of the fourth quarter 2017 blank SUI tax return. For additional information on this development, see Tax Alert 2018-0009. North Dakota: The North Dakota State Office of the Tax Commissioner announced that due to the passage of the federal Tax Cuts and Jobs Actit will delay its issuance of the 2018 income tax withholding tables. Certain changes contained in the federal legislation will affect how North Dakota income tax withholding is calculated. For additional information on this development, see Tax Alert 2018-0010. Ohio: The Ohio 2018 state unemployment insurance tax rates will range from 0.3% to 9.0%, up from the 2017 range of 0.3% to 8.8% (many brackets remained the same, while others increased by 0.1%-0.2%). Employers, however, will not pay the additional 0.6% mutualized surcharge that applied in 2017. New employers, with the exception of those in the construction industry, will continue to pay at 2.7%. New construction employers will pay at 6.0% for 2018, down from 6.2% for 2017. For additional information on this development, see Tax Alert 2017-2217. Oregon: The Oregon Department of Revenue announced that, due to the enactment of the federal Tax Cuts and Jobs Act it will delay its issuance of the 2018 income tax withholding tables. According to the Department's 2018 payroll withholding tax information website, the 2018 formulas and tables are "to be updated when the 2018 federal formulas and tables are released." For additional information on this development, see Tax Alert 2017-2219. Vermont: The Vermont Department of Taxes announced that it will delay until late January 2018 its 2018 income tax withholding tables as it awaits the final passage of the federal Tax Cuts and Jobs Act.Employers are instructed to use the 2017 income tax withholding tables until such time as the 2018 income tax withholding tables are available. For additional information on this development, see Tax Alert 2017-2211. Alabama: The Alabama Supreme Court affirmed without opinion the Alabama Circuit Court's (circuit court) ruling in Elbow River Marketing LP that a foreign entity, which delivered products into Alabama by rail and truck carrier, was not subject to business license tax. In support of this conclusion, the circuit court found the entity did not engage in a trade, occupation or business within the City of Birmingham (City) as required by state and local law when it had no physical operations or activities within the City; none of its employees entered the City in connection with the sales transactions; and it had no agents or representatives within the City. The circuit court further found that although the entity had title to products for a limited period of time while the products were in possession of the delivering rail or truck carrier, this was not enough to allow the imposition of a business license tax. Barnett v. Elbow River Marketing LP, No. 1160678 (Ala. S. Ct. Dec. 8, 2017), aff'g Elbow River Marketing LP v. Barnett, No. CV-2014-000624.00 (Ala. Cir. Ct., Jefferson Cnty., March 17, 2017). Virginia: The U.S. Supreme Court is being asked to review the Virginia Supreme Court decision in Dulles Duty Free that a county is barred by the US Constitution's Import-Export Clause from imposing its business, professional, and occupational license (BPOL) tax on a retailer's gross receipts from sales of merchandise to international passengers (i.e., export goods in transit). Dulles Duty Free, LLC v. Loudoun Cnty., No. 160939 (Va. S. Ct. Aug. 24, 2017), petition for cert. filed, Dkt. No. 17-904 (U.S. S. Ct. filed Dec. 26, 2017). 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. 3 Overnite Transportation Company v. Commissioner of Revenue, Mass. ATB Findings of Fact and Reports 1999-353, 369. 4 Columbus City School Dist. Bd. of Ed. v. Testa, 130 Ohio St.3d 344, 2011-Ohio-5534 (Ohio S. Ct. 2011). Document ID: 2018-0081 |
