23 January 2018 State and Local Tax Weekly for January 12 Ernst & Young's State and Local Tax Weekly newsletter for January 12 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. U.S. Supreme Court accepts challenge to South Dakota economic presence sales tax nexus law; fate of Quill hangs in the balance On Friday Jan. 12, 2018, the U.S. Supreme Court (Court) granted certiorari in South Dakota v. Wayfair,1 a case that could ultimately determine whether remote sellers can be compelled to collect and remit sales and use taxes on transactions involving customers in states where the seller lacks any physical presence. The case is on appeal from the South Dakota Supreme Court, and involves a challenge to that state's economic presence nexus provision, which was enacted in 2016 as SB 106. The law requires remote sellers that sell tangible personal property, electronically transferred products, or taxable services for delivery into South Dakota to register, collect, and remit South Dakota sales taxes on those sales as if the seller has a physical presence in the state.2 Similar provisions have been implemented in at least 11 other states since 2015. At issue in the case is the continued viability of the physical presence nexus standard that was formally enunciated in the Court's 1992 Quill Corp. v. North Dakota3 decision. In Quill, the Court expressly stated that it was up to Congress to determine the appropriate constitutional standard for allowing states to impose a sales and use tax collection obligation. However, in the 26 years since the decision was issued, Congress has not adopted such a standard,4 leading a number of states in recent years to draft laws or promulgate regulations that directly contradict the Court's precedent in hopes of getting the Court to revisit the issue. Oral arguments are expected to take place in the Spring of 2018 with a decision by the end of the current term, expected in June 2018. New Mexico: A multistate corporation's gain on the sale of its interest in a separate entity that was a critical component of the corporation's business function is apportionable business income under the Uniform Division of Income for Tax Purposes Act, because the income met both the dispositional and functional tests set forth in the definition of business income. Accordingly, the gain is subject to New Mexico's corporate income tax. Matter of Agman Louisiana Inc. v. N.M. Taxn. and Rev. Dept., No. 17-47 (N.M. Admin. Hearing Off. Dec. 5, 2017). Tennessee: A parent company should include affiliated insurance companies in its affiliated group for purposes of the consolidated net worth election, but it should exclude their assets and liabilities from the consolidated net worth calculation because the affiliated insurance companies are exempt from the Tennessee franchise tax. Parent also should exclude their factors from both the numerator and denominator of the affiliated group's apportionment formula. The Tennessee Department of Revenue noted that the state's franchise tax law does not require exempt entities to be included in the affiliated group or use the consolidated net worth exemption. Tenn. Dept. of Rev., Letter Ruling No. 17-13 (Aug. 30, 2017)(released January 2018). Texas: An entity was not entitled to exclude from its revenue as pass-through funds sales commission payments made by an affiliate (Company B) to dealers on behalf of a real estate investment trust (REIT) because Company B was not acting as an agent of the REIT. The Texas Comptroller of Public Accounts (Comptroller) found no fiduciary duty regarding the payments to the dealers was created through agency as a matter of law. The Comptroller further determined that the payments were reportable receipts as they were contractual obligations. For agency relationship purposes, when Company B and the REIT agreed that the REIT did not have any responsibility concerning the payments, they explicitly removed the payment of commissions to the dealers from the purview of the agency relationship. Additionally, the Comptroller concluded that Company B did not have an informal fiduciary duty regarding payments made to dealers, finding insufficient evidence to demonstrate that Company B and the REIT had a relationship of trust and confidence that existed apart from the dealer manager agreement or that they relied on each other for support or guidance with regard to the payments to dealers. Tex. Comp. of Pub. Accts., No. 201711026H (Nov. 20, 2017). Florida: The U.S. Supreme Court will not review the Florida Supreme Court's ruling in EchoStar Satellite. In EchoStar the state court upheld Florida's communications services tax, which imposes a higher tax rate on satellite services than cable services. EchoStar Satellite LLC, nka Dish Network LLC v. Florida Dept. of Rev., No. SC15-1249 (Fla. S. Ct. April 13, 2017), petition for cert. denied, Dkt. No. 17-379 (U.S. S. Ct. Jan. 8, 2018). Florida: Private colleges that provide post-secondary education in design and technology did not qualify for an exemption from sales tax under Fla.Stat. §212.0602 on the lease of real property because the colleges did not demonstrate that they were primarily engaged in teaching students to perform qualified production services directly in connection with the production of a motion picture (as described in Fla.Stat. §212.031(1)(a)9). The administrative law judge noted that the coursework offered by the colleges during the relevant period (which included audio and video production and recording, digital media production, fashion design, film, graphic design, and photography) "intended to provide students with training for skills that were not focused to any specific industry," while the intent of the exemption was to facilitate investment in education and job training offered by an entity, institution or organization that primarily focused on motion picture production. International Academy of Design, Inc. et al v. Fla. Dept. of Rev., Nos. 17-1562 and 17-1563 (Fla. Dept. of Rev. Dec. 28, 2017). New Jersey: The New Jersey Division of Taxation issued a press release reminding taxpayers that effective Jan. 1, 2018, the sales and use tax rate is reduced to 6.625% (from 6.875%) and the state sales tax rate in Urban Enterprise Zones is reduced to 3.3125% (from 3.4375%). N.J. Div. of Taxn., Press Release (Dec. 27, 2017). Puerto Rico: In Administrative Determination (AD) 18-01, Puerto Rico's Treasury Department (PRTD) announced that the sales tax exemption for prepared food ended on Jan. 7, 2018. In AD 17-12, the PRTD exempted prepared food from the payment of sales tax until Sept. 24, 2017, as a result of the extensive damage caused to the island by Hurricane Maria. AD 17-13 extended the exemption to Oct. 8, 2017 and AD 17-17 extended the exemption until further notice. Under AD 18-01, the sales tax exemption for prepared food in effect under AD 17-12 and then extended under ADs 17-13 and 17-17 will no longer apply as of Jan. 8, 2018. The last day the exemption applied is Jan. 7, 2018. For additional information on this development, see Tax Alert 2018-0059. Missouri: The Missouri Housing Development Commission (Commission) voted to end the Missouri state tax credits for low income housing in 2018. The Commission, however, will continue administering the federal low income housing tax credits program. Mo. Housing Dev. Comn., Final FY2018 Qualified Allocation Plan (approved Dec. 19, 2017). New York: New law (SB 5892) establishes an energy-related public utility mass real property central assessment pilot program for counties with a population of more than 940,000 and less than 1.2m inhabitants, effective Jan. 1, 2018 until Jan. 1, 2023. (The only New York country that qualifies within this range of population is Westchester County, a relatively suburban area north of New York City.5) Local energy-related public utility mass real property will be assessed, subject to an assessment ceiling as established by the revenue commissioner, based on the property value multiplied by the equalization rate factor. If the assessed valuation exceeds the final certified assessment ceiling, the local energy-related public utility mass real property is exempt from tax to the extent of the excess and the assessor must reduce the assessment, so that the taxable assessed valuation of the property does not exceed the certified assessment ceiling. Owners of property in the pilot program must pay an annual fee for the program and if required by the revenue commissioner must file an annual report that includes information related to the establishment of a ceiling assessment. NY Laws 2017, Ch. 501 (SB 5892), signed by the governor on Dec. 18, 2017. Michigan: New law (2017 PA 215) amends MCL 205.21 and 205.28 to allow for a new alternative dispute resolution process in Michigan. Before 2017 PA 215, the only method available to settle disputes with the Michigan Department of Treasury (Department) was to negotiate a settlement through the formal judicial process. Under 2017 PA 215, the Department now may settle disputes with taxpayers by accepting less than the full amount of tax in dispute, or increasing the amount of the taxpayer's refund through a non-judicial settlement process. This non-judicial settlement process is only available before the commencement of litigation. Taxpayers that have made a timely request for informal conference with the Department may take advantage of the new alternative dispute resolution process. Taxpayers, however, may not request to pursue alternative dispute resolution more than 21 days after the informal conference is held. For additional information on this development, see Tax Alert 2018-0067. Pennsylvania: The Pennsylvania Department of Revenue announced that it will start mailing non-participation penalty assessments to eligible taxpayers who failed to participate in the 2017 Tax Amnesty Program. These individuals and businesses will be assessed a 5% penalty on their unpaid amnesty-eligible delinquencies. Penn. Dept. of Rev., Release: Penalty assessments to be mailed in final step of Pa. Tax Amnesty program (Jan. 8, 2018). Multistate: Employers are by now aware of the significant federal impact of the Tax Cuts and Jobs Act of 2017 (P.L. 115-97)(TCJA); however, the greater administrative burden lies ahead as states (and localities) grapple with conformity. Close to half the states requiring income tax withholding on wages are automatically coupled with the federal IRC while other states require periodic legislative approval, usually annually. For additional information on this development, see Tax Alert 2018-0039. California: The California Employment Development Department (EDD) has issued the wage-bracket and percentage method withholding tables for calendar year 2018 to its website. The 2018 tables continue to include the extension of the personal income tax on high wage earnings; approved by California voters on Nov. 8, 2016, that was originally approved by voters in 2012 (Proposition 30) and was effective retroactively to Jan. 1, 2012. Originally scheduled to expire at the end of calendar year 2018, 2016 Proposition 55 extended the expiration date for the tax increase to the end of calendar year 2030. For additional information on this development, see Tax Alert 2018-0030. Indiana: The Indiana Department of Revenue announced that 12 counties have changed their local withholding income tax rates effective Jan. 1, 2018. See recently released Departmental Notice #1 for the local income tax rates effective Jan. 1, 2018. The local income taxes collected by Indiana counties are combined into one local income tax rate per county. For additional information, see Tax Alert 2018-0060. Missouri: According to a Missouri Department of Revenue (Department) representative, due to the passage of the federal Tax Cuts and Jobs Act, the Department will delay issuance of the 2018 income tax withholding tables. Employers should continue to use the 2017 computer formula and tables for wages paid on or after Jan. 1, 2018 until such time as the 2018 income tax withholding tables are available. For additional information, see Tax Alert 2018-0017. Puerto Rico: The Puerto Rico Treasury Department (PRTD) has issued guidance (Informative Bulletin (IB) 18-01) on the automatic waiver from withholding at source on payments made for services performed by taxpayers engaged in trade or business in Puerto Rico in 2018. Additionally, the PRTD extended the effective date of the waivers issued for 2017 from Dec. 31, 2017 to Jan. 31, 2018. For additional information on this development, see Tax Alert 2018-0024. Washington: The Washington Department of Labor & Industries announced that the 2018 employer workers' compensation premiums are decreased overall; however, the supplemental pension rate is increased. As previously reported, an average decrease of 2.5% goes into effect for 2018 (down from a 0.7% increase for 2017, a 2.0% increase for 2016 and a 1.8% increase for 2015). The decrease is an average; individual employers may see smaller or larger decreases or an increase depending on an employer's industry and claims history. For additional information on this development, see Tax Alert 2018-0076. International: The Italian Budget Law for 2018 (Law no. 205, published on Dec. 29, 2017, entered into force on Jan. 1, 2018) and Law Decree no. 148/2017 (Law no. 172/2017, published on Dec. 5, 2017, entered into force on Dec. 6, 2017), introduced several changes to the Italian Value Added Tax (VAT) Law. The increase of the ordinary VAT rate has been postponed to 2019, 2020 and 2021. Therefore, the 22% ordinary and 10% reduced VAT rates continue to apply in 2018. For additional information on this development, see Tax Alert 2018-0050. International: The Italian Budget Law for 2018 has implemented, with effect from Jan. 1, 2018, the principles set in the Skandia judgment of the Court of Justice of the European Union (C-7/13). The new provision brings within the scope of Value Added Tax (VAT) certain head office-branch and branch-to-branch transactions, where one or both parties are members of VAT groups. The provision reflects the Skandia decision, which held that VAT groups are separate taxpayers for VAT purposes. For additional information on this development, see Tax Alert 2018-0037. International: Latvia has introduced a number of changes to its Value Added Tax (VAT) law, effective Jan. 1, 2018. The changes include: (1) reduction of threshold for reporting VAT transactions; (2) extension of the domestic reverse charge regime; and (3) application of reduced VAT rate of 5% on supplies of vegetables, fruits and berries. For additional information on this development, see Tax Alert 2018-0070. International: In December 2017, the Lithuanian Parliament approved the Lithuanian Budget Proposal for 2018, which included amendments to the Lithuanian Law on Value Added Tax. Several changes were enacted and came into effect as of Jan. 1, 2018. For additional information on this development, see Tax Alert 2018-0071. International: The Federal Tax Authority of the United Arab Emirates (UAE) published two key pieces of legislation on Jan. 9, 2018, relating to the recent implementation of Value Added Tax (VAT) in the UAE. The first piece of legislation addresses designated zones for VAT purposes and the other addresses zero-rating for the healthcare sector. For additional information on this development, see Tax Alert 2018-0062. Federal: On Wednesday, Jan. 31, 2018 from 3:00-4:15 p.m. EST (12:00-1:15 p.m. PST), Ernst and Young, LLP will host a webcast on important developments in employment-related federal business tax credits and what to watch for in 2018. Topics that will be discussed on the webcast include: (1) the current legislative landscape — what's next? (2) Work Opportunity Tax Credit (WOTC) update; (3) new tax credit for family and medical paid leave under the Tax Cuts and Jobs Act; (4) Hurricane Disaster Zone credits and potential expansion for California wildfires; and (5) status of renewal of the Federal Empowerment Zone and Indian Employment credits. Click here to register for this event. Federal: On Tuesday, Feb. 20, 2018 from 2:00 - 3:00 p.m. EST (11:00 - 12:00 p.m. PST), Ernst and Young, LLP will host a webcast on the implications of the Tax Cuts and Jobs Act (TCJA) for employers. The TCJA has broad implications for payroll, fringe benefits and tax accounting operations. Our team of professionals discuss the TCJA provisions of interest to employers with a focus on action steps necessary to achieve compliance and realize opportunities. Click here to register for this event. 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. 1 South Dakota v. Wayfair, Inc. et al, 2017 S.D. 56 (S.D. S. Ct. Sept. 13, 2017), petition for cert. granted, Dkt. No. 17-494 (U.S. S. Ct. Jan. 12, 2018). 2 The registration requirement applies only if, in the previous calendar year, the seller either: 1) had over $100,000 in gross revenue from delivery of these goods into South Dakota, or 2) sold these goods for delivery into South Dakota in 200 or more separate transactions. 4 Only once in the succeeding years, in 2013, has a sales tax nexus bill been considered by either chamber of Congress. That bill, the Marketplace Fairness Act of 2013 (S. 743) passed the Senate by a vote of 69-27 before dying in the House Judiciary Committee. 5 See Empire Center for Public Policy "Population — NYS & Counties- 2010 & 2016 Population and Population Change - New York Counties" [2016 Estimates] (available on the Internet here) Document ID: 2018-0156 |
