05 February 2018 State and Local Tax Weekly for January 26 Ernst & Young's State and Local Tax Weekly newsletter for January 26 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), will end Feb. 15, 2018. Amnesty 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. For additional information on this development, see Tax Alert 2018-0015. Rhode Island's tax amnesty program also will end on Feb. 15, 2018. Amnesty applies to tax periods ending on or before Dec. 31, 2016, regardless of when the payment or return was due. In exchange for participating in, and fully complying with the terms of, the amnesty program, the Rhode Island Division of Taxation will waive penalties and reduce interest by 25%, the state will not seek civil or criminal prosecution related to those taxes, and the state will not block the taxpayer's professional license, driver's license, motor vehicle registration, or sales tax permit. For additional information on this development, see Tax Alert 2017-2025. New Jersey: New law (SB 2180) exempts certain rural electric cooperative (REC) income from the New Jersey corporation business tax (CBT). Specifically, the income of a REC that is exclusively owned and controlled by the members it serves derived from the sales, exchanges or deliveries of electricity to customers using electricity within the REC's franchise area is exempt from CBT, provided the REC derives the income from electricity sales, exchanges or deliveries to customers using electricity within its franchise area. The CTB applies to the REC's income derived from sales, exchanges, or deliveries where electricity outside the REC's franchise area is used. The exemption takes effect during the accounting or privilege period beginning after Jan. 16, 2018. N.J. Laws 2018, Ch. 297 (SB 2180), signed by the governor on Jan. 16, 2018. New York: The New York State Appellate Division of the Supreme Court recently affirmed1 the decision of the New York City Tax Appeals Tribunal In the Matter of Aetna, Inc.,2 that, at least for the years at issue (2005 and 2006), health maintenance organizations are not exempt from New York City's General Corporation Tax as insurance corporations. For additional information on this development, see Tax Alert 2018-0208. Texas: A tax partnership that was created for federal income tax purposes when two unrelated companies entered into a joint operating agreement (JOA), also is a taxable entity for Texas franchise tax purposes (specifically a joint venture) and each company is entitled to deduct the portion of the cost of goods sold (COGS) relative to the amounts of contribution to the joint venture. The Texas Comptroller of Public Accounts found the tax partnership is a joint venture because under the terms of the JOA, it is a "partnership engaged in the joint prosecution of a particular transaction for mutual profit."3 In this case oil exploration and production. Further, the tax partnership did not elect out of federal partnership treatment and, therefore, it is not excluded from being a joint venture and a taxable entity for purposes of the Texas franchise tax.4 In regards to the COGS deduction, the tax partnership produces oil and natural gas, which may be deducted after distribution to each company in-kind in the ordinary course of business. Tex. Comp. of Pub. Accts., No. 201712002L (Dec. 11, 2017). Multistate: The EY Sales and Use Tax Quarterly Update provides a summary of the major recent state and local legislative, administrative and judicial sales and use tax developments. Highlights of this edition include discussions of: (1) the US Supreme Court decision to grant certiorari in South Dakota v. Wayfair, the case which may lead to the overturning of the Court's 1992 decision in Quill and a consequent rewriting of the sales and use tax nexus standard; (2) new challenges to the Massachusetts and Ohio "cookie nexus" provisions; and (3) the latest developments with respect to exemptions and credits, tax base determination, technology, and compliance and controversy. See Tax Alert 2018-0203 for a copy of the newsletter. Hawaii: The Hawaii Department of Taxation (Department) issued guidance on general excise tax (GET) obligations of transportation network companies (TNCs) and their drivers. According to the guidance, GET is imposed on the total amount a TNC collects from a rider (except for discretionary tips) at the retail rate (4% plus any applicable county surcharge) if any of the following apply, the TNC: (1) controls the manner in which the service is provided; (2) controls the price charged to the rider for transportation; (3) processes payments for the transaction, either directly or through third-party payment processors; or (4) provides insurance coverage for the transaction. A driver owes GET on his or her gross income (i.e., the total amount the TNC and/or the rider remits to the driver); however, the driver may be eligible to pay GET at the reduced wholesale rate of 0.5% on the non-tip portion of income received, provided certain conditions are met. If the driver is a TNC employee, salary or wage amounts are exempt from GET. In regard to tip income, the person who ultimately receives a discretionary tip is subject to GET on the total amount received at the retail rate; the GET is ratably divided if the TNC and driver divide the tip. Mandatory tips are taxable to the TNC at the retail rate with no deductions or income splitting. Haw. Dept. of Taxn., Tax Info. Release No. 2018-01 (Jan. 8, 2018). Kansas: A casino is entitled to a refund of use tax it paid on electronic gaming machines (EGMs) purchased out of state on behalf of the Kansas Lottery because it did not exercise a right or power incident to ownership of the EGMs and, therefore, its purchases of the EMGs are not subject to tax. In reaching this conclusion, the Kansas Supreme Court (Court) cited General Motors5 in finding that the casino must have been the owner of the EGMs in order to be subject to the use tax. By law and under the casino's management agreement with the Kansas Lottery, the state through the Kansas Lottery is the owner and licensee of all software required to operate the EGMs, it retains the right to deactivate and take possession of all EGMs at any time without prior notice to the casino, the agreement between the Kansas Lottery and the casino states that "the Kansas Lottery maintains at all times full control over all decisions" about the EGMs, and any revenue that the casino receives as compensation for managing the gaming facility first flows to the state for distribution. In re Appeal of BHCMC, LLC, No. 112,911 (Kan. S. Ct. Dec. 29, 2017). California: The California Film Commission issued information on its website regarding upcoming application dates for California Film and TV Tax Credit Program 2.0. For TV projects the next application period is Feb. 12-16, 2018 with credit allocation letters (CAL) scheduled to be issued on March 19, 2018 (application open for recurring and new relocating TV series). The program year four application window is May 21-25, 2018 (with the CAL scheduled to be issued on July 1, 2018). All relocating TV series must have pick up orders. Recurring series may apply without a pick up order, but the recurring series must have a pick up order to be issued a CAL. For feature films — independent and non-independent — the next application period is March 7-13, 2018 with the CAL scheduled to be issued on April 9, 2018. The application window for program year four is June 18-22, 2018, with the CAL scheduled to be issued on July 23, 2018. The application portal closes at noon on the last day of every allocation period. Cal. Film Comn., Tax Credit Program 2.0: Upcoming Application Dates (Jan. 19, 2018). New Jersey: New law (SB 3305) revises both tax credit transfer provisions for the Grow New Jersey Assistance Act (Grow NJ) and the Public Infrastructure Project (PIP) tax incentive programs and the treatment of gains and income associated with the sale or assignment of these tax credit transfer certificates. SB 3305 extends the time period during which a tax certificate holder may transfer the tax credit amount to 20 successive tax periods (previously, three) after the date of issuance. SB 3305 also allows the sale or assignment of a tax credit transfer certificate under the Grow NJ and PIP credit programs to an affiliate for less than the 75% minimum measure of consideration irrespective of whether the affiliate met the capital investment and employment requirements specified in the incentive agreement. Last, applicable to New Jersey Corporate Business Tax and Gross Income Tax periods/years beginning on and after Jan. 1, 2017, SB 3305 excludes from entire net income gain or income derived from the sale or assignment of Grow NJ and PIP tax credit transfer certificates. SB 3305 took immediate effect. N.J. Laws 2018, Ch. 313 (SB 3305), signed by the governor on Jan. 16, 2018. New Jersey: New law (SB 3341) extends certain document submission deadlines under the Urban Transit Hub Tax Credit program (UTHTC), Economic Redevelopment and Growth Grant (ERGG) program and the Grow New Jersey Assistance Program. Specifically, for a business seeking tax credits under the UTHTC, the business must submit documentation for approval of the amount of the business's tax credit by April 26, 2021 (previously, April 26, 2019). SB 3341 also extends to July 28, 2019 (previously, July 28, 2018) the date upon which a business forfeits an annual tax credit award due to its failure to document and attain certification that it has met its capital investment and employment requirements related to the UTHTC. Last, a business that applied for a tax credit under the Grow New Jersey Assistance Act before July 1, 2014 can submit its credit documentation no later than July 28, 2019 (previously, July 28, 2018) indicating it has met the capital investment and employment requirements in the incentive agreement for certification of the tax credit amount. SB 3341 took immediate effect. N.J. Laws 2018, Ch. 314 (SB 3341), signed by the governor on Jan. 16, 2018. New Jersey: A for-profit entity's property that is exclusively occupied and used as an offsite medical care facility by a sister non-profit entity is not entitled to exemption from property tax because the owner entity's incorporation as a for-profit entity disqualifies it from obtaining a property tax exemption. In reaching this conclusion, the New Jersey Tax Court (Court) relied on its prior ruling in Fountain House,6 where it found that the for-profit entity was not formed under New Jersey's non-profit corporation statutes, and it was not organized exclusively for tax-exempt hospital purposes when its certificate of incorporation or its bylaws do not recite any non-profit or hospital purpose as its exclusive purpose. The Court noted that the for-profit entity was fully cognizant of its for-profit status as evidenced by its bylaws, but chose not to incorporate as a non-profit entity. Twp. of Freehold v. CentraState Healthcare Services, Inc., Nos. 000047-2016, 000048-2016, 002998-2016, and CentraState Healthcare Services, Inc. v. Twp. of Freehold, No. 007636-2016 (N.J. Tax Ct. Jan. 5, 2018) (unpublished). Florida: Amended regulations (Fla. Admin. Code Ann. r. 12C-1.0222 and 12C-1.034) implement statutory changes to Florida's corporate income tax administration provisions enacted in 2017 conforming to the timing of filing federal returns, making payments and filing declarations. Fla. Admin. Code Ann. r. 12C-1.0222 specifies that for taxable year ends other than June 30, extensions to file corporate income tax returns are effective until six months (previously, five months) after the original due date. Additionally, the Florida corporate income/franchise tax return due date for a corporation with a taxable year end of December 31 is May 1 and, if the corporation follows the proper extended return due date procedures, it will be granted an extension of time to file the return until November 1 (previously, October 1). Amendments to Fla. Admin. Code Ann. r. 12C-1.034, relate to special rules for estimated taxes, and provide that installment due dates that fall on a Saturday, Sunday or legal holiday extend to the next business day, except for installments due on the last day of June, which must be paid on or before the last Friday of June. The amended regulations take effect Jan. 17, 2018. Fla. Dept. of Rev., Fla. Admin. Code Ann. r. 12C-1.0222 and 12C-1.034 (filed Dec. 28, 2017). 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 on this development Tax Alert 2018-0162. Kentucky: The Kentucky Department of Revenue has released the 2018 income tax withholding computer formula and wage-bracket tables. The Kentucky 2018 standard deduction amount increases to $2,530, up from $2,480 for 2017. For additional information on this development, see Tax Alert 2018-0160. Maryland: The Maryland Comptroller's office has released the 2018 income tax withholding percentage and regular methods and a reminder to provide employees with information about the earned income credit by Dec. 31, 2017. Note that an exemption from withholding is provided for students and single persons if their yearly income is less than $10,350 annually. (2018 Maryland Employer Withholding Guide.) For additional information on this development, see Tax Alert 2018-0187. Massachusetts: The Massachusetts Department of Unemployment Assistance (DUA) released final regulations regarding the new second tier Employer Medical Assistance Contribution (EMAC) (referred to in the regulations and below as the EMAC Supplemental contribution) that applies to covered employers for 2018 and 2019. For additional information on this development, see Tax Alert 2018-0173. Minnesota: The Minnesota Department of Revenue has released the 2018 withholding tax guide, computer formula and wage-bracket withholding tables to its website. The annual computer formula in effect for wages paid on and after Jan. 1, 2018 is shown on page 2. As we reported earlier this year, HF1 changed the deadline for employers to submit Forms W-2 to the state Department of Revenue to January 31, effective with calendar year 2017 Forms W-2 due in 2018. As a result, the deadline to file 2017 Forms W-2 with the Department is Jan. 31, 2018. For additional information on this development, see Tax Alert 2018-0164. North Carolina: The North Carolina Department of Revenue released the 2018 state income tax withholding tables and guide to its website. Effective Jan. 1, 2017, a 2015 legislative change (Session Law 2015-241) lowered the state income tax rate to 5.499%, down from 5.75%. The new law also requires North Carolina income tax withholding at a rate 0.1% higher than the individual income tax rate; therefore, the withholding rate on wages paid on or after Jan. 1, 2018, will continue to be 5.599%. For additional information on this development, see Tax Alert 2018-0174. Ohio: The Ohio Department of Taxation has released employer withholding tax guidance for calendar year 2018 to its website with no changes to the income tax withholding rates or limits that have been in effect since Aug. 1, 2015. For additional information on this development, see Tax Alert 2018-0165. Rhode Island: The Rhode Island Division of Taxation has released the state income tax withholding tables for tax year 2018. For additional information on this development, see Tax Alert 2018-0175. Delaware: A stock purchase agreement permitted an acquired company to claim the full amount of transaction tax deductions (TTDs) on its pre-closing tax filings. In reaching this conclusion, the Delaware Chancery Court examined the contract terms between the acquired company and the purchaser as well as the parties' negotiation history, finding that the agreement terms only specify a payment from the purchaser to the acquired company for post-closing refunds or savings. The purchaser failed to identify evidence explicitly stating that the parties would split pre-closing tax benefits equally under all circumstances. Additionally, the acquired company's contract interpretation prevents an unusual overpayment of taxes and it is consistent with the ordinary course of business. Last, it prevents an absurd result under the net working capital adjustment, because any expected tax refund that would have resulted if the TTDs had not been used to decrease the acquired company's fourth quarter estimated taxes would have been paid for by the purchaser as an adjustment to net working capital. LSVC Holdings, LLC v. Vestcom Parent Holdings, Inc., No. 8424-VCMR (Del. Chanc. Ct. Dec. 29, 2017). New Hampshire: The New Hampshire Department of Revenue Administration (Department) in two separate rulings determined that the state's real estate transfer tax (RETT) does not apply to transfers of title pursuant to general partnerships' statutory conversions to limited liability companies (LLCs) because in both instances no consideration was exchanged, the assets and liabilities of the transferee immediately preceding and immediately following the change in the organizations' form are the same, and at the time of the transfer of title the ownership percentages of the owners of the transferor and transferee are identical. The Department also found that the transfer of property from the estate of a former partner (which the general partnership indicates that it owns and that the property is held by the estate as nominee and agent for the partnership) to the LLCs pursuant to the statutory conversion also did not trigger imposition of the RETT. N.H. Dept. of Rev. Admin., Declaratory Ruling Nos. 12433 and 12434 (Dec. 12, 2017). New York City: A limited liability company (LLC) that sponsored a condominium development did not prove that one of the member's beneficial interests in the LLC was greater than 25% at the time of a 2012 transfer of a condominium unit and, therefore, it is only entitled to a real property transfer tax "mere change of form" exemption to the extent of 25% of the condominium unit distribution. In reaching this conclusion, the New York City Tax Appeals Tribunal (Tribunal) found that nothing in the record indicated that a 2006 letter signed by two of the three LLC members (purporting to increase one member's (M1) interest from 25% to 50% of condominium units to be distributed and correspondingly reduce a second member's (M2) interest to 0%) satisfies any of the requirements for amending the original 2002 Agreement entered into by all three members. The record also does not indicate that the 2002 Agreement's requirements governing LLC transfers of interests were met. The 2002 Agreement requires transfers of any portions of a member's interest or rights in the LLC to strictly comply with the 2002 Agreement terms, or else the transfers are null, void and of no force and effect. Last, the Tribunal found that M1's beneficial interest in the LLC at the end of 2011 was about 41% and at the end of 2012 was less than 4% of the LLC's total capital account and as such M1 did not have a beneficial interest in the LLC that was greater than 25% at the time of the distribution of the condominium unit in 2012. In the Matter of Vestry Acquisition LLC, Dec. No. TAT(E) 15-14(RP) (NYC Tax App. Trib. Dec. 1, 2017). Washington: A corporation operating multiple grocery store pharmacies (corporation) is not entitled to a refund of retailing business and occupation (B&O) tax paid on amounts received from insurance carriers that participate in the Federal Employees Health Benefits Act (FEHBA), Medicare Advantage (MA), and TRICARE federal health insurance programs because the imposition of the B&O tax is not preempted by federal law. In so holding, the Washington Department of Revenue (Department) found that the corporation did not establish that the tax is a direct or indirect tax imposed on a FEHBA carrier that is preempted by federal statute. The corporation is not a "carrier" under federal law as it does not provide group insurance policies or similar arrangements in exchange for premiums or other periodic dues. Rather, it sells prescription items to its customers who are patients insured by carriers. Further, the corporation does not receive payments from the federal insurance fund. Additionally, the Department did not find as persuasive authority letters from the US Office of Personnel Management (OPM) to several states concluding that FEHBA preempts the imposition of a variety of taxes on pharmacy sales as an indirect tax on FEHBA carriers, because: (1) the corporation is not a carrier; (2) the OPM's opinions are not binding authority for Washington taxation purposes; and (3) the taxes at issue in the letters appear to be predominantly taxes specifically targeted at health care providers or pharmacies, rather than a general gross receipts tax such as the B&O tax at issue. Citing US v. West Virginia and Mobility Medical, the Department found that taxing the gross income of a business that receives payments from a FEHBA, MA or TRICARE carrier was not an indirect imposition of a tax on these entities.7 For purposes of MA, the corporation is not a MA plan or MA organization since it is not a risk-bearing entity and does not receive any payments from the federal Centers for Medicare & Medicaid Services or the Medicare fund, and instead it receives payments from MA plans for the sale of covered items to customers/patients who are MA enrollees. The B&O tax is not preempted as related to TRICARE because the tax is imposed on the corporation's receipts from insurance carriers, not on the premiums or other payments the insurance carriers may receive from the TRICARE program. Wash. Dept. of Rev., Det. No. 15-0343, 36 WTD 547 (Nov. 30, 2017). 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 Friday, Feb. 16, 2018 from 1:00 - 2:00 p.m. EST New York; 10:00 - 11:00 a.m. PST Los Angeles, join EY for a discussion of the upcoming U.S. Supreme Court (Court) hearing in South Dakota v. Wayfair — a case challenging the continued viability of the Court' historic 1992 ruling in Quill, which formally established a physical presence standard for sales and use tax nexus purposes. During this webcast, a panel of EY Indirect Tax practitioners will discuss the elements of the South Dakota statute, the Wayfair case itself and the possible rulings the Court might make, including most significantly, the possibility it will overturn Quill. The panelists also will: (1) review the possible outcomes and what they mean for taxpayers and state and local governments; (2) provide an overview of the current state sales tax nexus landscape; (3) discuss the status of federal legislation pending before Congress that addresses the Quill question; and (4) consider the steps remote sellers should consider now and after the Court renders its decision. Click here to register for this event. Multistate: On Tuesday, Feb. 20, 2018 from 2:00 - 3:00 p.m. EST New York (11:00 - 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 Matter of Aetna, Inc. v. New York City Tax Appeals Trib., 2017 NY Slip Op 07311 (NY App. Div. Oct. 19, 2017). 2 In the Matter of AETNA, Inc., Nos. TAT (E) 12-3 (GC), TAT (E) 12-4 (GC) (N.Y.C. Tax App. Trib. June 3, 2016) (the Tribunal overruled an Administrative Law Judge's ruling that an HMO was "doing an insurance business" in New York and, therefore, was exempt from the GCT). 4 Under the definition of "taxable entity" in Tex. Tax Code § 171.0002(a), a "joint venture" does not include a joint operating or co-ownership arrangement that elects out of federal partnership treatment. 7 Mobility Medical, Inc. v. Miss. Dept. of Rev., 119 So. 3d 1002 (Miss. S. Ct. 2013); US v. West Virginia, 339 F.3d 212 (4th Cir. 1995). Document ID: 2018-0257 |
