02 February 2018 State and Local Tax Weekly for February 2 Ernst & Young's State and Local Tax Weekly newsletter for February 2 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. Missouri Governor's tax reform proposal would cut income tax rates, require single sales factor apportionment, and cause the state to join the Streamlined Sales and Use Tax Agreement On Jan. 29, 2018, Missouri Governor Eric Greitens released details of his proposed tax reform, which would reduce individual and corporate income tax rates but also end certain tax breaks. The governor's tax plan is being introduced as Senate Committee Substitute for SB 939 (hereafter "SB 939"). In addition, it would eliminate the election to use the Multistate Tax Compact three-factor apportionment formula (Compact election), require the use of a single sales factor apportionment formula, implement market-based sourcing, and cause Missouri to join the Streamlined Sales and Use Tax Agreement (SSUTA). SB 939 would cut the corporate income tax rate to 4.25% (from 6.25%), and would prohibit corporations from deducting their federal tax liability paid. (Under current law, corporations can deduct 50% of their federal income tax liability in determining their Missouri tax liability.) In addition, the top individual income tax rate would be reduced to 5.3% from 6%. (If SB 939 is not enacted, the top rate may eventually be reduced to 5.5% as various revenue triggers under current law are met.) SB 939 also would eliminate a corporation's ability to make an election to use the three-factor apportionment formula under the Compact and instead, require the use of a single sales factor apportionment formula. SB 939 would also modify current sourcing provisions by adopting a throwback rule for sales of tangible personal property and impose market-based sourcing rules for sales of intangible property and services. These sourcing changes are similar to the model language issued by the Multistate Tax Commission. In addition, SB 939 would eliminate an employer's ability to deduct and retain part of withholding taxes due, and sellers' abilities to deduct and retain part of the sales tax due, when remitting taxes on or before the due date. Last, SB 939 would direct the Missouri Department of Revenue to join the SSUTA, and would make various amendments necessary to bring the state's sales and use tax provisions into compliance with the SSUTA. If enacted, these changes would apply to tax years beginning on or after Jan. 1, 2019. For more on this development, see Tax Alert 2018-0282. Louisiana: Proposed regulation (Proposed La. Admin. Code § 61:I.1115) would implement a 2016 statute establishing related party add back rules for otherwise deductible interest expenses, intangible expenses and management fees paid to related parties, subject to specific exceptions (including unreasonable, paid to another state/foreign country, conduit). The proposed regulations would define key terms including "indirectly paid," "intangible expenses," "management fees," "related entity," "related member," "related party," "subject to a tax based on or measured by the related member's net income," "reported and included in income for purposes of a tax on net income," among other terms. Operating rules would provide information and examples related to what qualifies for the various exceptions to the add-back requirements. Comments are due by 4:00 p.m. on Feb. 23, 2018; a public hearing will be held at 10:00 a.m. on Feb. 26, 2018. La. Dept. of Rev., Proposed La. Admin. Code § 61:I.1115 (La. Register Jan. 20, 2018). Maine: The Maine Office of Tax Policy (OTP) issued a preliminary report on the impact the federal Tax Cuts and Jobs Act (TCJA) will have on Maine corporate and individual income taxes. Business tax changes in the TCJA that have conformity implications for Maine include 100% bonus depreciation (partial, as modified by Maine law), increased IRC §179 expensing, 30% limit on the net interest deduction (if Maine conforms to the TCJA, this change will flow through to the returns of Maine taxpayers), modification to net operating loss (NOL) provisions (partial — Maine law currently doesn't allow an NOL carryback, federal NOL carryforward changes apply through Maine conformity), repeal of the corporate alternative minimum tax (AMT) (conforming to the TCJA would effectively repeal the corporate AMT for Maine corporate income tax purposes), and modifications to certain contributions to capital (treatment of certain contributions made by Maine is still under review). The OTP said the 20% deduction for pass-through entity income (a special deduction) is not linked to Maine's tax provisions because it is not considered in calculating federal adjusted gross income. With respect to the international tax provisions of the TCJA, the OTP determined that the following provisions of the TCJA would have conformity implications for Maine: (1) changes for the US from a worldwide to a territorial income tax system, (2) the deemed repatriation of cash and non-cash assets held in foreign countries by a US-owned corporate entity, (3) the taxation of global intangible low taxed income (GILTI), and (4) the deduction for foreign-derived intangible income (FDII). The OTP determined that if the state conforms to the dividend deduction under the territorial income tax system, the portion of dividends included in Subpart F income at the federal level would be included in Maine's tax base and would be subject to the state's 50% dividend received subtraction in certain instances. Similarly, the earnings and profits under a deemed repatriation under the transition tax in IRC §965 would flow through to Maine and be subject to the 50% dividend limitation mentioned above. Unlike federal law, however, which permits a taxpayer to recognize the income over an eight-year period, the Maine liability determined would be due all at once. In regard to GILTI, the OTP said it is not yet clear whether it would be subject to Maine's 50% dividend received deduction limitation. The FDII deduction would flow through to Maine, if Maine conforms to the TCJA. The OTP further determined that the new base erosion and anti-abuse tax (BEAT) would not flow through to Maine. The OTP noted that it will engage a third-party for assistance in reviewing the impact of these changes. The OTP also considered the impact the changes to the TCJA will have for individual income tax purposes. Changes that have conformity implications for Maine include the following: the TCJA's elimination of the personal exemption deduction, the cap on the state and local tax paid deduction, the change in the mortgage interest deduction limitation and the increase of the charitable deduction. Maine Rev. Services, Off. of Tax Policy, Preliminary Report on the Effects on Maine Taxes of the Federal Tax Cuts and Jobs Act (Jan. 2018). Michigan: Legal services provided by an attorney that is physically located within Detroit city limits to a client outside city limits is considered "out-of-city" services for purposes of the Detroit City Income Tax and is sourced outside of Detroit. The Michigan Court of Appeals (Court) found that the relevant consideration in the sales factor calculation is where the service is delivered to the client, not where the attorney performs the service. The Court considered the legislature's references to "services rendered" in its sales factor statute and its choice not to reuse "services performed" as written in the payroll factor statute. It found that since the payroll factor looks to where the work is done or performed, the legislature likely intended "services rendered" in the sales factor statute to have a different meaning. Honigman Miller Schwartz and Cohn LLP v. City of Detroit, No. 336175 (Mich. Ct. App. Jan. 18, 2018). New Jersey: Proposed bill (SB 786) would adopt mandatory combined reporting for members of a unitary business group, applicable to privilege periods ending after the date of enactment of this bill. The draft language includes tax haven provisions. SB 786 was introduced on Jan. 9, 2018. Utah: The Utah Supreme Court scheduled arguments in the appeal of the See's Candies decision for March 14, 2018. The state appealed the District Court's ruling that the Utah Tax Commission abused its discretion in denying the company's total deduction based on classifying the transactions as per se outside of arm's length pricing rather than analyzing them under established IRC §482 transfer pricing standards. A live stream of the arguments will be available on the Court's website. Wisconsin: The Wisconsin Department of Revenue in a tax bulletin said that the following provisions contained in the federal Tax Cuts and Jobs Act (P.L. 115-97) automatically apply for Wisconsin tax purposes: (1) the IRC § 179 Increased $1 million expensing with a phase-out range beginning at $2.5 million, (2) the repeal of technical termination of partnerships, and (3) the requirement that the historic rehabilitation credit be claimed over a five-year period. Wis. Dept. of Rev., Wisconsin Tax Bulletin No. 200 (Jan. 2018). Arkansas: The Arkansas Department of Finance and Administration (Department) issued guidance on sales and use tax liability related to fiber installation. Among the findings related to an entity as well as a tax-exempt cooperative: (1) the initial purchase of internet, television and telephone equipment and related supplies intended to be resold to customers is not subject to sales and use tax if the entity has an Arkansas gross receipts tax permit; (2) installation activities, whether performed by an entity's employees or a third-party contractor, are exempt from sales and use tax, but the materials used in the installation are subject to tax; (3) when a third party contractor pays sales and use tax on materials consumed in providing fiber installation and splicing service, sales tax is not due on amounts later billed by the third-party contractor to the entity; (4) charges incurred by the entity for installation of television equipment, or labor and materials to repair or replace hardware head-end equipment, nodes and other related equipment in a customer's home is subject to sales tax as installation or repair service charges incurred in connection with the provision of television services, assuming costs are not separately billed to customers; and (5) assuming that a lease term for strands of dark fiber is longer than 30 days, when a lessor pays sales tax on the fiber cable when it is acquired, the subsequent lessee payments made for the long-term lease are not subject to sales tax, or alternatively the lessor could purchase the items as a sale for resale and collect sales tax on the subsequent lease. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Opinion No. 20170426 (Nov. 29, 2017). Colorado: The Colorado Department of Revenue (Department) issued guidance for non-collecting retailers with Colorado use tax reporting obligations. Non-collecting retailers or their third-party submitters must file an Annual Customer Information Report with the Department by March 1 of the year following the year in which the qualifying purchases were made. Information that must be in the report includes the purchaser's name, billing and shipping address, and total annual dollar amount of each Colorado customer's purchases. It cannot include identification of the particular items purchased. Prior to submitting the report, non-collecting retailers and third party submitters must register with the Department. The guidance also provides instructions on how to register with, and how to submit the report to, the Department, as well as answers to frequently asked questions. Colo. Dept. of Rev., Use Tax Reporting Instructions, Format & FAQ for Non-Collecting Retailers (January 2018). Colorado: The Colorado Department of Revenue (Department) has changed its rounding rule for sales tax licensees. Beginning with sales in January 2018, the Department is requiring all Colorado sales tax licensees to report and pay sales taxes to the penny, regardless of the taxpayer's filing format. Previously, the Department allowed taxpayers to round to the nearest penny, depending on filing format. Colo. Dept. of Rev., Form DR 0100 (Feb. 2018). Georgia: Proposed bill (HB 61) would establish economic nexus and notification requirements for sales and use tax purposes. HB 61 would amend the definition of "dealer" to include one that receives gross revenue exceeding $250,000 in the prior or current calendar year from retail sales of tangible personal property, or conducts 200 or more separate retail sales of tangible personal property in the prior or current calendar year, to be delivered electronically or physically to a location within Georgia for use, consumption, distribution or storage in the state. Dealers making retail sales of tangible personal property outside of Georgia that is to be delivered electronically or physically to a location within Georgia would be liable for tax on purchases delivered in the state. Further, a delivery retailer — a non-collecting retailer that meets the above economic/transaction threshold — would be required to either collect sales/use tax due or notify each purchaser prior to the completion of the sales transaction that sales or use tax may be due to Georgia. Delivery retailers also would be required to file a sales and use tax report with the state. A penalty would be imposed for failure to comply with the notification requirements. If enacted, these changes would apply to all sales made on or after Jan. 1, 2019. HB 61 was passed by the House of Feb. 15, 2018 and is now being considered by the Senate. New York: Sales to medical facilities and laboratories of non-transplantable human tissue for use in medical research and training is not subject to state and local sales and use tax. The New York Department of Taxation and Finance found that the transfer of a tissue specimen to a medical facility or laboratory for medical research and training purposes is not a sale of taxable tangible personal property, but rather is a sale of a nontaxable service that involves the removal, transportation, processing, preservation and storage of a human organ. N.Y. Dept. of Taxn. and Fin., TSB-A-17(23)S (Dec. 28, 2017). Texas: The Texas Comptroller of Public Accounts (Comptroller) issued guidance on the application of motor vehicle sales tax (tax) on related finance companies (RFC) and seller-financed sales. When a seller-financed motor vehicle dealer (dealer) sells an account receivable or "note" relating to the sale of a motor vehicle to another entity, the tax due on the transaction accelerates and the dealer must remit the tax on the next motor vehicle seller-financed tax return. An exception, however, applies and the remaining tax due does not accelerate when a dealer sells a note to a qualifying RFC. The dealer will continue to collect and remit the remaining tax due as each payment is received. The Comptroller noted that the tax due continues to accelerate when a note is sold to an unrelated lender, a non-qualifying RFC or a RFC that is not registered with the Comptroller at the time of the sale. Tex. Comp. of Pub. Accts., Publication 98-820 (January 2018). New Jersey: Governor Phil Murphy signed an executive order directing the Office of the State Comptroller to "conduct a complete performance audit of the Grow New Jersey Assistance Program and the Economic Redevelopment and Growth Grant Program, and predecessor programs, from 2010 onward." Information expected to be generated by the audit will include the following: (1) a comparison of the actual economic benefits realized (such as new jobs created by granting the incentive) against the economic benefit projected during the credit approval process; (2) information about the types of jobs that have been created and where they are located; (3) a review of the credit approval process, with a focus on how the Economic Development Authority has exercised its discretion; and (4) an examination of the application process for credit awards, including documentation and disclosure of expenses incurred by the applicants. The audit is set to be completed by Dec. 31, 2018. N.J. Gov., Executive Order No. 3 (Jan. 19, 2018). Michigan: A scrap metal corporation (corporation) was not entitled to an exemption from ad valorem personal property tax for eligible manufacturing personal property (EMPP) under the essential services assessment exemption because the corporation did not establish that the property was predominantly used in industrial processing or direct integrated support. In so holding, the Michigan Tax Tribunal (Tribunal) determined that the corporation failed to establish accurate values required to calculate the exemption, including: (1) what personal property was and was not located at the corporation's occupied real property as of tax day, (2) whether that personal property was of the type required to be included in the EMPP calculation, (3) the original cost of all personal property included in the EMPP calculation, and (4) the percentage of use in industrial processing or direct integrated support of all personal property included in the EMPP calculation. In support of this conclusion, the Tribunal found no controlled process sufficiently implemented within the corporation's chain of command to ensure that assets are accounted for in a manner sufficient to determine the corporation's EMPP percentage. Last, the Tribunal found that the corporation did not make a good faith effort to determine whether the property was actually used predominantly as EMPP when it did not attempt to calculate the property's percentage usage in direct integrated support. GLE Scrap Metal, Inc. v. City of Warren, No. 16-000900 (Mich. Tax Trib. Dec. 14, 2017). Ohio: On Feb. 5, 2018, the Ohio Department of Taxation (Department) announced that the ability to register for centralized Ohio city net profits tax filings and administration through the Ohio Business Gateway (OBG) is now open. This is a follow-up to the Department's opening up of registration in October 2017. The deadline for "opting in" to this elective centralized registration is March 1, 2018. Details regarding this new system, which applies to business entities of all types (e.g., corporations and pass-through entities) are discussed in Tax Alert 2017-1761. The Department has developed the format of the various forms that will be used by taxpayers using the system. Implementation of the system, however, will require upgrades to the OBG. These upgrades are in process and must be completed, by law, by Jan. 1, 2019. For additional information on this development, see Tax Alert 2018-0297. Alabama: The Alabama Tax Tribunal (Tribunal) held that it did not have jurisdiction to determine the facial constitutionality of a statute requiring a pass-through entity to file a composite income tax return with the Alabama Department of Revenue (Department) on behalf of its nonresident members and pay income tax on nonresident members' distributive shares of the pass-through entity's income. A limited liability company (LLC) challenged the statute on an as applied basis on both Due Process and Commerce Clause grounds, but the Tribunal found that the effective remedy that would be granted if it ruled in favor of the LLC would be to strike the statute as facially unconstitutional, reasoning that there was nothing particular about the LLC's situation that would distinguish it from other pass-through entities required to file a composite return. The Tribunal said neither the Alabama constitution nor the Alabama legislature has given it the authority to rule on a facial challenge. Ultimately, the Tribunal affirmed the Department's assessment on the LLC for failure to make composite tax payments on behalf of its nonresident members. Black Eagle Minerals, LLC v. Ala. Dept. of Rev., Nos. BIT. 11-975-JP and BIT. 12-1229-JP(Ala. Tax Trib. Jan. 23, 2018). District of Columbia: An administrative law judge (ALJ) with the DC Office of Administrative Hearings denied a Motion for Summary Judgement filed by three oil companies in a case challenging the District of Columbia Office of Tax and Revenue's (OTR) assessments of additional corporate income tax based on transfer pricing analysis completed by a third-party consultant, finding that the companies did not establish that the third party analyses were arbitrary, capricious and unreasonable as a matter of law. The ALJ directed the parties to reevaluate their settlement positions in light of the opinion and exhaust all settlement possibilities before a March status conference. Hess Corp., ExxonMobil Oil Corp., and Shell Oil Co. v. DC Ofc. of Tax and Rev., Nos. 2012-OTR-00027, 2011-OTR-00047 and 2011-OTR-00049 (DC Ofc. of Admin. Hearings Jan. 26, 2018). Oregon: The Oregon Department of Revenue has released to its website the 2018 withholding tax formulas and wage-bracket withholding tables, effective with wages paid on or after Feb. 1, 2018. The 2018 withholding tables have not yet been released, but should quickly follow the release of the withholding formulas. For additional information on this development, see Tax Alert 2018-0250. Pennsylvania: Under legislation enacted in late 2017 (2017 Act 43) and effective Jan. 1, 2018, certain payers of nonemployee compensation (and lessees of Pennsylvania real estate) are required to withhold personal income tax from payments made to certain nonresidents of Pennsylvania. For additional information on this development, see Tax Alert 2018-0238. Federal: A provision in the continuing resolution (HR 195) signed by President Trump on Jan. 22, 2018, extends for two years (through 2019) the moratorium on the 2.3% excise tax imposed on the sale of medical devices (the MDET), retroactive to sales made after Dec. 31, 2017. Consequently, a deposit of MDET due for taxable sales made during the period from Jan. 1, 2018 through Jan. 15, 2018 is no longer required. For additional information on this development, see Tax Alert 2018-0221. Washington: The Washington Department of Revenue recently set the economic nexus minimum thresholds for calendar year 2018 for business and occupation tax purposes. The thresholds, which are changed from 2017, are: $57,000 in property (from $53,000); $57,000 in payroll (from $53,000); and $285,000 in receipts (from $267,000). Wash. Dept. of Rev., ETA 3195.2017 (Dec. 27, 2017). Federal: On Jan. 22, 2018, the Trump Administration announced the imposition of a new tariff on imported crystalline-silicon photovoltaic (CSPV) solar panel modules. The tariff, which will be in effect for four years, is initially 30%, then drops by five percentage points each year, ending at 15%. The tariff applies after 2.5 gigawatts of solar cells have been imported each year, whether or not fully assembled into other products. For context, in 2016, nearly 13 gigawatts of solar panels were imported. While much discussion has been made of modules imported from China, all other countries that export modules to the United States will be subject to the tariff, including Mexico, Malaysia, Korea, Vietnam and Thailand. For additional information on this development, see Tax Alert 2018-0217. International: The Greek Ministry of Finance issued a Press Release on Dec. 19, 2017, by virtue of which an extension was granted for the application of the reduced Value Added Tax (VAT) regime (a 30% reduction in rates compared to the standard VAT rates) until June 30, 2018. The extension is for the islands of Lesvos, Chios, Samos, Kos and Leros, all affected by the refugee crisis. For additional information on this development, see Tax Alert 2018-0234. International: The Value Added Tax (VAT) liability of nonresidents providing electronic services (E-services) to Turkish resident individuals who are not VAT-registered in Turkey, is effective as of Jan. 1, 2018. On Jan. 31, 2018, the Turkish Revenue Administration issued a Communiqué regarding this tax liability. The Communiqué provides a transition period for the first tax return and accordingly, the VAT on the E-services provided during January, February and March 2018 must be declared by April 24, 2018. The corresponding VAT must be paid by April 26, 2018. For additional information on this development, see Tax Alert 2018-0230. International: The Ugandan Government issued Public Notices in January 2018 to address the preservation of the Value Added Tax (VAT) self-policing mechanism/audit trail and to prevent VAT fraud. The Uganda Revenue Authority (URA) has established a 90-day grace period from Jan. 1, 2018 to March 31, 2018 for taxpayers to verify their business records and correct any irregularities in their VAT reporting without incurring penalties. For additional information on this development, see Tax Alert 2018-0254. 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: 2018-0391 |
