19 January 2018 State and Local Tax Weekly for January 19 Ernst & Young's State and Local Tax Weekly newsletter for January 19 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. New York governor's proposed budget includes tax law changes aimed at closing the budget gap; revenue department issues report on impact of federal tax reform On Jan. 16, 2018, New York Governor Andrew Cuomo released his proposed Fiscal Year 2018-2019 Executive Budget Bill (Budget Bill). With the exception of Parts P and DD of the Budget Bill (i.e., which would maintain the Empire State Child Tax Credit at the 2017 level and impose a healthcare insurance windfall profit fee, respectively), there are no provisions in the Budget Bill related to the recently enacted federal tax reform under the Tax Cuts and Jobs Act (TCJA) , nor are there any provisions related to Governor Cuomo's initiative to address the significant reduction of the personal state and local income tax deduction at the federal level. In addition, with the exception of a revision to the definition of "investment income" in Part M of the Budget Bill to close the purported federal loophole on the taxation of carried interests (i.e., treating such gain as capital gain at reduced federal tax rates), no provisions directly concern the corporate tax reform provisions enacted over the last few years by both New York State and New York City. — Close the carried interest loophole (provided certain other nearby states enact similar provisions); — Provide the New York Department of Taxation and Finance (Department) with expanded rights to appeal decisions adverse to it by the New York Division of Tax Appeals Tribunal; and In addition, on Jan. 17, 2018, the Department, at the request of Governor Cuomo, analyzed the recently enacted federal tax law changes and prepared and issued the "Preliminary Report on the Federal Tax Cuts and Jobs Act" (report). In the report, the Department considers the impact the TCJA will have on New York and its economy and its citizens and provide options for mitigating any detrimental effect. The report most notably addressed the federal $10,000 annual cap (on taxpayers filing a joint marital return) on the state and local tax (SALT) paid deduction individuals can claim on their federal income tax return. The report also addresses the impact the TCJA's international and business tax changes will have on New York's tax revenues and taxpayers as well as several federal conformity issues for New York personal income tax purposes, and analyzes options for re-implementing an unincorporated business tax on pass-through entities in response to the limitation on the federal SALT deduction. Missouri: The Missouri State Treasurer announced that general revenue collection met the revenue growth threshold to allow the phase-in of income tax cuts enacted 2014 to begin. Under SB 509 (Mo. Laws 2014) the top individual income tax rate of 6% gradually will be reduced to 5.5% and an individual income tax deduction for business income will be phased-in until it reaches 25%. The income tax rate will be reduced by 0.10%, and the deduction will be increased by 5%, in each calendar that the net general revenue collected in the previous fiscal year exceeds the highest amount of net general revenue collected in any of the three fiscal years prior to such fiscal year by at least $150 million. Beginning Jan. 1, 2018, the highest individual income tax rate is 5.9% and a 5% deduction for business income is allowed. Mo. Dept. of Rev., News Release "Tax Relief Coming in 2018" (Jan. 4, 2018). Ohio: New law (SB 8) retroactively clarifies that a pass-through entity (PTE) investor who is paid guaranteed payments and compensation by a professional employer organization hired by the PTE, can claim the business income deduction and apply the 3% flat tax on the income, as long as the investor holds at least a 20%, direct or indirect, interest in the PTE. SB 8 states that this change is intended to clarify the law as it previously existed and applies to taxable years beginning on or after Jan. 1, 2013. Ohio Laws 2017, Sess. Law No. 2017-39 (SB 8), signed by the governor on Dec. 22, 2017. Texas: An in-state entity's (entity) sales of mobile voice and data services to an out-of-state company that resells the services (company), are sales of internet access services and wireless telecommunication services and not the sale of an intangible asset. Therefore, they are apportioned to Texas under Tex. Admin. Code tit. 34, Rule 3.591(e)(12)1 and (30).2 The Texas Comptroller of Public Accounts (Comptroller) found the entity's wholesale supply agreement with the mobile telecommunication carrier to purchase and distribute services and its resale agreement with the company to sell wireless voice and data services, support a finding that the entity's receipts are from the resale of services. The Comptroller noted that although the entity is not a "telephone company" as referenced in the title of Tex. Admin. Code tit. 34, Rule 3.591(e)(30), it nevertheless sells the same kind of telecommunication services described in that rule. The Comptroller intends to propose amendments to Tex. Admin. Code tit. 34, Rule 3.591(e)(30) to modify the heading to reflect its application to all entities that sell telecommunication services. Tex. Comp. of Pub. Accts., No. 201711016L (Nov. 27, 2017). California: A special notice issued by the California Department of Tax and Fee Administration (Department) summarizes 2017 legislative changes to the manufacturing and research and development partial exemption from sales and use tax under Cal. Rev. & Tax. Code (CRTC) §6377.1 that expand the reach of the exemption to include purchases of qualified tangible personal property for use in the generation of electric power, expand the definition of "qualified person" to include certain persons engaged in agricultural business activities, and extend the sunset period of the exemption to July 1, 2030 (from July 1, 2022). The Department also provides information about a related refund opportunity. "Qualified persons" that received a notice of determination for qualified property purchased or leased on or after July 1, 2014, and before Jan. 1, 2018, on the basis that the partial exemption does not apply because of deducted property under CRTC §§ 17201, 17255 or 24356, may be eligible to have the notice of determination cancelled and may be eligible for a refund. Such taxpayers must request the cancellation or refund to the Department by June 30, 2018. Cal. Dept. of Tax and Fee Admin., Special Notice L-518 (December 2017). Maryland: The Maryland Tax Court (Court) found that an online travel company (OTC) is required to collect and remit sales and use tax on sales of hotel rooms and car rentals to its customers but found reasonable cause existed to waive penalties and interest and to enforce the four-year statute of limitations. In so holding, the Court determined that the sales and use tax statute, which defines a taxable retail sale of tangible personal property to include the right to occupy a room or lodgings as a transient guest and short-term vehicle rentals, applies to OTCs. The Court also agreed with the Comptroller that since the OTC is making sales of tangible personal property located in Maryland, the OTC "falls within the definition of engaging in the business of a retail vendor" and "is under the same obligation as every other vendor to collect and remit sales tax on the sales they make … ." Turning to the question of whether the "taxable price" includes the tax recovery charge the OTC collects from its customers and forwards to hotels so that the hotels can pay all applicable taxes, the Court noted this issue was clarified by the General Assembly when it amended the statute in 2016 to make clear "that the intent of the law was to not include taxes within the meaning of 'taxable price,'" thus, excluding the OTC's tax recovery charge. The Court further found "a good faith dispute as to whether tax applies to [OTCs] … [and a]lthough the law supports the tax assessment by the Comptroller, reasonable cause exists to justify waiving penalties and interest and enforcing the four-year statute of limitations." The OTC and the Comptroller separately agreed that the OTC is entitled to receive credit for any sales tax paid by hotels and rental car companies to the Comptroller. Travelocity.com LP v. Comptroller of Maryland, No. 12-SU-OO-1184 (Md. Tax Ct. Dec. 18, 2017). New Mexico: A health care facility that provided home health and hospice services was entitled to deduct receipts from payments by managed health care providers or health care insurers for the 2009 through 2014 tax years because the payments met the statutory requirements for the deduction. The payments (1) were for commercial contract services or Medicare Part C services, (2) were provided by a health care practitioner, (3) were not otherwise deductible, and (4) were for services within the scope of practice of the health care practitioners who provided the services. The administrative law judge (ALJ) determined that the corresponding regulations, which limit the deduction to health care practitioners, conflicted with the statute, which did not restrict who may take the deduction, and were therefore void. The applicable statute was amended in 2016 such that the entity no longer qualified for the deduction, but the ALJ found that the amendment was a substantive change in law and applies prospectively rather than retroactively. In re Protest of Golden Services Home Health and Hospice, No. 17-50 (N.M. Admin. Hearings Off. Dec. 20, 2017). Ohio: New law (SB 8) expands the definition of "prosthetic devices" exempt from sales and use tax to include corrective eyeglasses or contact lenses, beginning July 1, 2019. Dental prosthesis continue to be excluded from the definition of "prosthetic device." Ohio Laws 2017, Sess. Law No. 2017-39 (SB 8), signed by the governor on Dec. 22, 2017. Ohio: New law (HB 69) permits counties and transit authorities to levy local sales and use taxes in rate increments of other 0.1% or 0.25%, beginning July 1, 2018. This amends recently enacted HB 49, which required that beginning July 1, 2018, a county or transit authority's sales and use tax could be levied in increments of 0.1% rather than 0.25%. Ohio Laws 2017, Sess. Law No. 2017-32 (HB 69), signed by the governor on Dec. 22, 2017. Massachusetts: The Massachusetts Department of Revenue (Department) erroneously denied three nonprofit universities' applications for environmental remediation tax credits (Brownfield tax credits) based on the Department's interpretation in Directive 13-4 that a law change allowing nonprofits to claim the credit applied to a nonprofits' Brownfield tax credit projects that achieved the required environmental remediation status after June 24, 2006 (the date of the law change). In reaching this conclusion, the Massachusetts Appeals Court found that nothing in the law makes June 24, 2006 relevant in determining whether the universities may be eligible for the credit. There is no language directed at limiting eligibility only to nonprofit organizations' projects that would achieve the requisite environmental remediation status after the 2006 effective date. Northeastern Univ. & Others v. Mass. Comr. of Rev., No. 16-P-387 (Mass. App. Ct. Dec. 28, 2017). Ohio: New law (SB 8) establishes the rural growth investment credit for insurance companies that make loans to or invest in special purpose "rural business growth funds" that invest in certain small businesses. This nonrefundable tax credit is equal to an insurance company's credit-eligible capital contribution, and is claimed ratably over four taxable years. Excess credits can be carried forward for not more than four ensuing taxable years. The aggregate credits are capped at $45 million, and are subject to recapture if the funds do not meet certain investment requirements. This provision takes effect on March 23, 2018. Ohio Laws 2017, Sess. Law No. 2017-39 (SB 8), signed by the governor on Dec. 22, 2017. Ohio: New law (HB 69) amends provisions related to enterprise zones (EZ) and joint economic development zones (JEDZ). Retail businesses are generally ineligible for EZ incentives unless they are located within a statutorily defined "impacted city" or if the affected school board waives the exclusion. HB 69 clarifies that school board waivers apply on a facility-by-facility basis, and permits townships to negotiate EZ agreements with a retail business after a school board's waiver, when the county that created the EZ designates its zone authority to the township. In addition, HB 69 changes the definition of "substantial amendment" of a JEDZ to allow municipal corporations and townships that created a JEDZ to remove territory from the zone. These changes take effect March 23, 2018. Ohio Laws 2017, Sess. Law No. 2017-32 (HB 69), signed by the governor on Dec. 22, 2017. California: A number of California local municipal tax filing deadlines are quickly approaching and are commonly overlooked or misunderstood. Such jurisdictions include the City of Los Angeles and the City and County of San Francisco and administer a business tax based on gross receipts, payroll, or some other measure. A company does not have to be profitable or maintain a fixed place of business to be subject to and liable for such taxes. For additional information on Los Angeles and San Francisco filing deadlines, see Tax Alert 2018-0134. California: Tax Alert 2018-0133 provides information on California's 2018 state unemployment insurance, state disability insurance and Employment Training Tax rates and limits, which are posted on the California Employment Development Department website. Missouri: The Missouri Department of Revenue (Department) issued its 2018 Employer's Tax Guide, reflecting the lower 5.9% maximum income tax withholding and supplemental withholding rate. The Department, however, notes that due to the Tax Cuts and Jobs Act, further changes will be required to the state's income tax withholding worksheets and tables. It hopes to issue the revised 2018 income tax withholding tables sometime in February 2018. For additional information on this development, see Tax Alert 2018-0110. New Mexico: The New Mexico Taxation and Revenue Department has released the 2018 wage-bracket and percentage method tables for state income tax withholding. For more on this development, see Tax Alert 2018-0127. Illinois: Compressed natural gas (CNG) used by a waste management company did not fall within the definition of "motor fuel" and, therefore, it is not subject to the motor fuels tax. In reaching this conclusion, an Illinois Appellate Court (Court) found that the legislature expressly defined "motor fuel" to specifically apply to volatile and inflammable liquids and to exclude combustible gases like CNG, and this prohibited the Court from expanding the law beyond the statutory definition of "motor fuel." Waste Mgmt. of Illinois, Inc. v. Ill. Indep. Tax Trib. and Ill. Dept. of Rev., 2017 IL App (1st) 162830-U (Ill. App. Ct., 1st Dist., Dec. 29, 2017) (unpublished). Pennsylvania: The Pennsylvania Department of Revenue (Department) issued revised guidance on its treatment of IRC § 1031 like-kind exchanges for Pennsylvania personal income tax (PIT), sales and use tax (SUT), and realty transfer tax (RTT) purposes. The Department advised that IRC § 1031 cannot be used as a basis to defer gain from the exchange of properties for PIT purposes because Pennsylvania's PIT law does not contain a provision analogous to IRC § 1031. In regard to the SUT, tax applies when a party makes a like-kind exchange of tangible personal property. A vendor providing the replacement property as part of a like-kind exchange can reduce the purchase price by the amount the vendor gave the purchaser for the trade-in, as long as the trade-in must occur at the same time as the purchase. If a qualified intermediary (QI) is used and the exchanged property is eligible for the isolated sale exemption, the sale to the intermediary is not subject to SUT but the replacement property purchased from the QI is taxable. If the like-kind exchange involves real estate, the documents that effectuate or evidence the transfer of title to the real estate are subject to the RTT. Multiparty deferred exchanges can result in multiple impositions of tax on the same property (either relinquished or replacement property), since transactions involving QI or exchange accommodation titleholders (EAT) require two transfers to convey the real estate between the grantor and ultimate grantee (i.e., a transfer from the grantor to the QI or EAT and a later transfer from the QI or EAT to the ultimate grantee). The Department explained that the agent or straw party exclusion does not apply to QI or EAT transfers, because an exchange cannot occur when a taxpayer holds title to both the relinquished and replacement property at the same time. Pa. Dept. of Rev., PIT Bulletin 2006-07, RTT Bulletin 2006-01, SUT Bulletin 2006-01 (revised Dec. 21, 2017). Washington: New and amended regulations (amended Wash. Admin. Code 458-20-19404 and new Wash. Admin. Code 458-20-19404A) provides guidance on how financial institutions must apportion gross income for business and occupation (B&O) tax purposes. The regulations incorporate amendments made to the Multistate Tax Commission's model apportionment method for financial institutions (which was amended effective Jan. 1, 2016). New Wash. Admin. Code 458-20-19404A sets forth the apportionment rules for the period from June 1, 2010 through Dec. 31, 2015, and amendments to Wash. Admin. Code 458-20-19404 adopt apportionment rules for periods after Dec. 31, 2015. The amended rules change several receipts factor provisions, including those related to: (1) receipts from interest, fees, and penalties imposed in connection with loans secured by real property as well as loans not secured by real property; (2) receipts from fees, interest, and penalties charged to card holders; (3) card issuer's reimbursement fees; and (4) receipts from merchant discount, ATM fees, loan servicing fees, the financial institution's investment/trading assets and activities, and all other receipts. Other changes include new or amended definitions of card issuer's reimbursement fee, credit card, debit card and merchant discount. The new and amended regulations took effect Jan. 8, 2018. Wash. Dept. of Rev., amended Wash. Admin. Code 458-20-19404 and new Wash. Admin. Code 458-20-19404A (WSR 18-01-019 filed Dec. 8, 2017). International: Further to the amending Value Added Tax (VAT) legislation, on building land and immovable property leasing, the Cyprus House of Parliament and Tax Department have released Regulations and Circulars respectively. This legislation clarifies the applicability of VAT imposition on non-developed land as well as on the taxation of commercial rents. For more this development, see Tax Alert 2018-0120. International: The Romanian Ministry of Finance published an Ordinance on the implementation of the Value Added Tax (VAT) split payment mechanism in August 2017. Accordingly, taxable persons registered for VAT purposes in Romania according to art. 316 of the Fiscal Code (as well as the public institutions registered according to that article) were required to open separate accounts for the collection and payment of VAT. The VAT split payment applies to all taxable supplies of goods/services, for which the place of supply is in Romania (although some exceptions are provided). For more on this development, see Tax Alert 2018-0135. International: Russia's Federal Law No. 335-FZ includes changes to the Value Added Tax (VAT) rules for electronic services provided by foreign companies. The Law eliminates the current tax agent mechanism with respect to electronic services provided by foreign companies to companies and private entrepreneurs registered with the Russian tax authorities. From Jan. 1, 2019, foreign suppliers of electronic services and foreign intermediaries involved in settlements with Russian taxpayers for electronically supplied services will be obliged to register for the purpose of paying VAT on those supplies. For additional information on this development, see Tax Alert 2018-0096. International: From Jan. 1, 2018, several changes were introduced to the Value Added Tax (VAT) rules in Ukraine. As of July 1, 2017, the tax authorities were entitled to block the registration of VAT invoices if they qualified under the risk criteria. Blocking the registration of VAT invoices has been postponed until the Government approves the new blocking procedure (no later than March 1, 2018). For additional information on this development, see Tax Alert 2018-0142. Multistate: On Friday, Feb. 9, 2018 from 1:00-2:15 p.m. EST New York (10:00-11:15 a.m. PST Los Angeles), EY will host a second webcast on the state and local tax implications of the federal Tax Cuts and Jobs Act (TCJA) and effective strategies to adapt to the new tax landscape. Please join our panelists for a discussion of the following topics: (1) Tax accounting implications; (2) How states will approach the new pass-through entity deduction; (3) Impact of the TCJA on tax credits and incentives and on the location of anticipated inbound US investment; (4) State tax policy considerations and strategies to engage in the upcoming state legislative responses to the TCJA; (5) Highlight issues related to the financial services industry; and (6) EY's perspective on taxpayers' and state governments' responses to the TCJA, including innovative proposals to mitigate the impact of the federal limitation on the state and local tax deduction. Click here to register for the event. Multistate: On Tuesday, Feb. 20, 2018 from 2:00 - 3:00 p.m. EST New York (11:00 a.m.- noon PST Los Angeles), EY 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. Join us and hear our team of EY 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 Under Texas Admin. Code tit. 34, Rule 3.591(e)(12), receipts from the sale of internet access are apportioned to Texas when the receipts are earned from providing access to the internet in Texas. 2 Under Tex. Admin. Code tit. 34, Rule 3.591(e)(30), receipts from the sale of telecommunication services are apportioned to Texas when the service is performed in Texas. Document ID: 2018-0256 |
