01 March 2018 State and Local Tax Weekly for February 16 Ernst & Young's State and Local Tax Weekly newsletter for February 16 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 budget amendment addresses deemed repatriation under IRC §965, and includes an employer payroll tax On Feb. 15, 2018, Governor Cuomo released his 30-Day amendments to his Executive Budget Legislation issued on Jan. 16, 2018 (see Tax Alert 2018-0154). Notably, Part KK addresses Article 9-A corporate tax provisions related to the federal deemed repatriation under IRC §965 and Part MM would imposes a new employer compensation expense tax. Part KK of the 30-Day Amendments generally only addresses one aspect of the corporate tax provisions contained within the Tax Cuts and Jobs Act (TCJA) — the deemed repatriation or transition tax under IRC §965. Under Part KK the definition of "exempt controlled foreign corporation (CFC) income" in N.Y. Tax Law §208.6-a(b) would be amended to provide two categories of such income: 1. As under the current N.Y. Tax Law, income required to be included in the taxpayer's federal gross income under IRC §951(a) received from a corporation that is conducting a unitary business with the taxpayer but is not included in a combined report with the taxpayer, and 2. A new category of income that, to the extent not already included in Category 1 above, is required to be included in the taxpayer's federal gross income under IRC §951(a) by reason of IRC §965(a), as adjusted by IRC §965(b) and without regard to IRC §965(c), if the income is received from a corporation that is not included in a combined report with the taxpayer. In addition, the subtraction modification related to IRC §78 in N.Y. Tax Law §208.9(a)(6) would be amended to limit the subtraction modification to such dividends that also are not included in the computation of the IRC §250 deduction. It also would amend (1) N.Y. Tax Law §208.9(b) to provide a new addition modification for the amount of the IRC §965(c) deduction and (2) N.Y. Tax Law §1085(c)(1) to provide, for tax years beginning on or after Jan. 1, 2017 and before Jan. 1, 2018, relief from an estimated tax penalty with respect to the portion of tax related to: (i) the amount of interest deductions directly or indirectly attributable to the amount included in exempt CFC income under N.Y. Tax Law §208.6-a(b)(ii); or (ii) the 40% reduction of such exempt CFC income in lieu of interest attribution, provided the 40% safe harbor election is made. Part MM would allow employers to opt into a new Employer Compensation Expense Tax (ECET) that is intended to protect New York individual taxpayers from increased federal income taxes resulting from the state and local tax deduction cap in the TCJA. Covered employees could then apply an individual income tax credit against their New York personal income taxes (PIT) related to the amount paid by the employer under the ECET (but not dollar for dollar). Employers opting into the ECET could not deduct from wages or compensation of an employee any amount that represents all or any portion of the tax imposed on the employer under the ECTC. Governor Cuomo mentioned during his press release that employers could also claim a new tax credit to offset their administrative costs, but such a credit did not appear in the 30-Day Amendments. See Tax Alert 2018-0371 for an in-depth discussion of the proposed ECET. In addition, the 30-Day amendments contain the following new provisions: (1) Part JJ would address decoupling from certain PIT provisions of the TCJA and (2) Part LL would address the establishment of charitable contribution funds. For additional information on this development, see Tax Alert 2018-0452. Federal tax credits and incentives expanded, modified, and retroactively extended under the Bipartisan Budget Act of 2018 The Bipartisan Budget Act of 2018 (P.L. 115-123) (the "Act") contains a number of important tax provisions, including disaster tax relief and tax extenders. The Act creates an employee retention credit for employers in disaster zones caused by the California wildfires. The new California wildfires employee retention credit is very similar to the Hurricane Harvey, Irma and Maria employee retention credits created by the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (P.L. 115-63) (Disaster Tax Relief Act) on Sept. 29, 2017. The California wildfires employee retention credit is available to employers that have locations in specified disaster zones that were rendered inoperable as a result of the wildfires and that continued to pay wages to employees during the inoperable period. The credit equals 40% of qualified wages (maximum $2,400 credit per employee). For more on the California wildfires employee retention credit see Tax Alert 2018-0332. The Act modifies the Hurricane Harvey, Irma and Maria employee retention credits by amending IRC §§503(a)(3), (b)(3), and (c)(3) of the Disaster Tax Relief Act so that the rules of IRC §280C(a) now apply. The original Disaster Tax Relief Act as signed into law did not explicitly require employers to apply IRC §280C(a). This modification means that employers claiming the Hurricane Harvey, Irma or Maria employee retention credits must reduce their deduction for salaries and wages by the amount of the credit. The same rule applies to the California wildfires employee retention credit. The Act retroactively extends multiple tax provisions that expired on Dec. 31, 2016, through Dec. 31, 2017. Included among the extended tax provisions are federal tax credits such as the Federal Empowerment Zone credit and the Indian Employment credit. The Act did not address the Work Opportunity Tax Credit, which is not set to expire until Dec. 31, 2019. For additional information on this development, see Tax Alert 2018-0331. California: The California Franchise Tax Board (FTB) issued a Preliminary Report on Specific Provisions of the Tax Cuts and Jobs Act (TCJA) (Part 1) that provides initial information on California conformity to the repatriation provisions, the SALT deduction cap and the reduction of the medical expense deduction floor. In regard to repatriation, the FTB explained the state's conformity to the IRC as follows: California corporate tax law (CTL) incorporates provisions of the IRC by reference as of a specific date (currently Jan. 1, 2015), with an exception to the specific date rule which applies to the water's-edge election provisions. For water's-edge purposes, when the provision refers to an IRC provision, it is the IRC provision in effect for federal purposes for the same taxable period. According to the FTB, current California CTL does not incorporate by reference IRC §§245A, 951A and 965, and the water's-edge provisions do not specifically refer to these provisions. Although California CTL does not currently conform to these changes, these changes nevertheless may impact California CTL because of the manner in which water's edge filers are required to use federal Subpart F income in computing an "inclusion ratio" for foreign unitary affiliates that are not part of the water's edge group. The FTB listed steps for calculating California corporate tax on repatriated amounts and provides an example. CA FTB, Preliminary Report on Specific Provisions of the TCJA (Part 1) (Feb. 12, 2018). Idaho: New law (HB 384) allows a taxpayer to use available net operating losses, Idaho credits and capital loss carryovers beyond the statute of limitations to offset an increase in Idaho taxable income due to a bonus depreciation adjustment. Idaho decouples from bonus depreciation provisions under IRC §168(k), requiring taxpayers to add back such amounts deducted on their federal returns. HB 384 takes effect July 1, 2018. Idaho Laws 2018, Ch. 7 (HB 384), signed by the governor on Feb. 15, 2018. Indiana: The Indiana Department of Revenue (Department) properly included multiple protested jurisdictions in a corporation's Indiana throwback sales calculation because the corporation did not establish that it was taxable in those jurisdictions. The corporation asserted that since it was included in its parent's combined return in certain states for the tax years at issue (2011 and 2012), it was taxable in those states. The Department disagreed, explaining that under Indiana Tax Policy 6, the Finnigan rule only applies to corporations that file Indiana combined returns. Here, the corporation filed separate Indiana returns; therefore, the corporation must include sales into states in which it filed a combined return in the Indiana throwback calculation. The Department noted that the corporation's filing of combined/unitary returns in certain jurisdictions does not mean that it is taxable in those jurisdictions. The corporation also did not establish that its solicitation of sales in certain jurisdictions warranted exclusion of the sales from the Indiana throwback sales calculation, without supporting documentation or substantive legal arguments (the provision of employee expense reports, without tax returns or business registrations, did not suffice). Lastly, the corporation's sales in foreign countries were properly included in Indiana throwback sales calculation because the corporation did not provide evidence that the actions of the corporation's parent or affiliates is more than mere solicitation. Ind. Dept. of Rev., Letter of Findings 02-20170298 (Jan. 31, 2018). Indiana: An Indiana company's Canadian rail sales were not subject to the Indiana throwback rule because, when viewing the company's Canadian activities as a whole, they exceeded mere solicitation and constituted "doing business" in Canada sufficient to establish nexus. In so finding, the Indiana Department of Revenue (Department) distinguished Kimberly-Clark1 and determined that the company's activities in Canada (i.e., supplying certain rails, transporting rails with a fleet of modified flat-bed train cars, using a specialized unloading car at the jobsite, engaging a railroad in Canada to transport the materials, employee travel to Canada to supervise unloading activities, locomotive rentals and provision of an unloading crew in Canada if necessary) were not "inextricably related to solicitation" and were more than "acts of courtesy." Further, citing Wrigley,2 the Department found that the company's activities took place because of a sale, but the services were not ancillary to requesting purchases even though the services may help increase purchases. The employees were not sales people and were not engaging in solicitation in Canada. Additionally, the company's use of an unloader car, the locomotive rental, and the provision of unloading services in Canada fall under Indiana's "doing business" standard. Lastly, the Department noted that while the company's activities within the rail market are at issue, its non-rail sales activities and sales tax filings in Canada "tip the company beyond the 'mere solicitation' test." Ind. Dept. of Rev., Letter of Findings No. 02-20170109 (Jan. 31, 2018). Oregon: Proposed bills (SB 1529 A and SB 1528 A), if enacted, would update the state's date of conformity to the Internal Revenue Code, decouple from certain changes contained in the federal Tax Cuts and Jobs Act (TCJA) (P.L. 115-97), and retroactively repeal the state's tax haven provisions. TCJA provisions targeted for Oregon modification by these bills include the so-called transition tax on accumulated foreign subsidiary earnings under IRC §965 and the 20% pass-through entity deduction under IRC §199A. SB 1528 is currently being considered by the Senate, and SB 1529, as amended, was approved by the Senate on Feb. 13, 2018 and is now being considered by the House. For additional information on this development, see Tax Alert 2018-0354. Illinois: The Illinois Department of Revenue (Department) issued a general information letter to a multi-level marketer (MLM) addressing whether a monthly fee for access to its mobile application program, either alone or as part of a bundle of services, is subject to sales and use tax. The Department does not consider membership fees to be gross receipts from the sale of taxable tangible personal property. Rather the charge is for a nontaxable intangible, but it may be subject to tax if the membership entitles the customer to receive an item of tangible personal property, or to receive a service and tangible personal property is transferred incident to the service. The Department further explained that computer software that is provided through a cloud-based delivery system is not subject to tax; however, if the MLM provides the software through an application program interface, applet, desktop agent, or a remote access agent to enable the subscriber to access the network and service, the transaction is subject to tax unless the transfer qualifies as a non-taxable license of computer software. Ill. Dept. of Rev., Gen. Info. Letter ST 17-0036-GIL (Nov. 21, 2017). Indiana: A remote retailer's sales of an annual membership fee and free one-month trial membership, which the Indiana Department of Revenue (Department) previously found are not subject to sales and use tax in 2015, still are not subject to tax based on the addition of three new features: a spoken audio streaming channel, a reading service, and a video game platform. Consistent with its 2015 ruling, the Department found that the additional membership transactions (like the pre-existing benefits such as shipping, streaming video, loaned e-books, free e-books and others) do not meet the definition of retail transaction since no property was transferred for consideration upon the purchase of the annual membership. Adding benefits does not change the determination because paying the annual membership fee still does not with certainty constitute or include sales of tangible personal property, specified digital products, prewritten computer software or telecommunication services. If, however, the remote retailer charges additional amounts for specified digital products, tangible personal property, delivery charges or taxable services, these charges would be subject to sales or use tax. Ind. Dept. of Rev., Rev. Ruling No. 2017-05ST (Dec. 20, 2017). North Carolina: The sale of a company's servers and other computer related equipment (e.g., software, other tangible personal property) to a buyer as part of the buyer's acquisition of the company's information technology division located in the US is not subject to sales tax because the transaction is an occasional or isolated sale. In support of this finding, the North Carolina Department of Revenue determined that the company is not in the business of selling servers and other computer-related equipment and did not hold itself out to be selling these items in its regular course of business. N.C. Dept. of Rev., SUPLR 2018-0002 (Jan. 19, 2018). California: The California Franchise Tax Board (FTB) announced that it will follow the recent IRS Directive Accounting Standards Codification (ASC) 730 on research expenditures related to the California research credit when taxpayers meet certain conditions and file a California return. The IRS directive provides certain taxpayers a "safe harbor" regarding the examination of Qualified Research Expenditures included in a federal research credit computation, applicable for original tax returns filed after Sept. 11, 2017. For California purposes, eligible taxpayers must (1) have assets equal to or more than $10 million and (2) follow Generally Accepted Accounting Principles (GAAP) to prepare their certified financial statements and show a separate line item or state the amount of expenses ASC 730 research costs. The FTB will use GAAP expenditures to calculate the California research credit. Taxpayers following the directive also make the following adjustments to the federal "safe harbor" when computing the California credit: from the computations of Adjusted ASC 730 Financial Statement R&D, subtract all in-house and contract expenses performed outside of California. Cal. FTB, Tax News (February 2018). Alabama: New law (SB 98) permits counties to abate rollback ad valorem taxes for certain projects that qualify for Alabama Jobs Act incentives. A county may abate all or a portion of tax due on property located within the county if all of the following are met: (1) the property must be used for a qualifying project as determined by statute; (2) the qualifying project must create at least the number of jobs required by the Alabama Jobs Act; (3) the property must be in an area within which not less than $50 million of capital expenditures in connection with the establishment, expansion, construction, equipping, development, or rehabilitation of the qualifying project is anticipated to be made based on representations and information provided by the anticipated user(s) of the qualifying project and other information available to the county; and (4) if the property is located within a municipality, the municipality's governing body must consent. SB 98 took effect on Feb. 6, 2018. Ala. Laws 2018, Act 53 (SB 98), signed by the governor on Feb. 6, 2018. Florida: Property that is legally owned by a private entity but is used for student housing is equitably owned by a university and, thus, is immune from ad valorem taxation. Under Florida law "property need not be legally owned by an immune entity to be immune from taxation, but can instead by equitably owned." The Florida District Court of Appeal (Court) citing similarities to Hartsfield,3 found the entity's involvement in a project benefitted a public body. Specifically, the university acknowledged in the Student Housing Agreement its "direct and substantial benefit from the development, operation and management of the Facility" as a "much needed addition to the housing supply" and in furtherance of its educational purposes and objectives. The entity's sole member is a non-profit corporation that, as one of its charitable functions, assists public universities to acquire develop and operate student housing. Moreover, citing Russell,4 the Court found that the university had the right to approve project plans, use, financing, operations, and rental terms; allowed the use of the university's name and affiliation to attract tenants; and provided services on-site. The university was entitled to legal title without payment when the project's repayment obligations are satisfied, and would be entitled to compensation in any condemnation proceedings once any remaining repayment obligations are paid. Last, documents establish the existence of a trust for the university's benefit. Crapo v. Provident Group-Continuum Properties, LLC, No. 1D17-280 (Fla. Dist. Ct. App. Feb. 8, 2018). Idaho: New law (HB 382) extends to 120 days (from 60 days) the time period in which taxpayers have to report a change to their federal taxable income or in any tax paid to another state for which the taxpayer claimed a credit. Taxpayers that fail to timely notify the revenue department of these changes could be subject to a negligence penalty. These changes take effect July 1, 2018. Idaho Laws 2018, Ch. 6 (HB 382), signed by the governor on Feb. 15, 2018. Louisiana: The Louisiana Attorney General (AG) issued an opinion finding that the Legislative Auditor may not access confidential tax returns and tax return information (generally, all non-ad valorem taxes) held by the Louisiana Department of Revenue (Department) unless the Department is the auditee. Based on statutory language ("for the purpose of making an examination and audit of the books and accounts of the Department of Revenue" in La. Rev. Stat. §47:1508(B)(10)) and by reading two statutes together (La. Rev. Stat. §§24:513.1(A) and 47:1508(B)(10)), the AG concluded that the exception for the disclosure of confidential tax information to the Legislative Auditor is only triggered where the Department is the auditee. The AG presumed the omission of "including tax returns and tax return information" from La. Rev. Stat. §24:513, which governs non-Department audits, was intentional; thus, the AG found no statutory exemptions to the general prohibition of disclosing confidential tax information when the Legislative Auditor is conducting non-Department audits. La. Atty. Gen., Op. No. 17-0147 (Feb. 7, 2018). California: Legislation enacted in2016 modifies the law requiring that California employers notify employees of the earned income tax credit (EITC). Specifically, California employers must notify employees of both the federal and California EITC. Previously, employers were required only to notify employees of the federal EITC. For additional information on this development, see Tax Alert 2018-0320. Louisiana: The Louisiana Department of Revenue released an emergency rule, revising the state income tax withholding tables and formula for the first time since July 2009. According to the rule's preamble, employers should begin using the 2018 withholding tables as soon as possible, but no later than Feb. 16, 2018. For additional information on this development, see Tax Alert 2018-0348. Vermont: The Vermont Department of Taxes announced that it will not be updating the state income tax withholding tables for 2018 at this time. Employers are instructed to continue to use the 2017 withholding tables and instructions for calendar year 2018 until further notice. For additional information on this development, see Tax Alert 2018-0311. Iowa: New law (SF 512) establishes a water service excise tax and exempts from sales and use tax water sales by utilities. The 6% water service tax is imposed on the sales price from the sale or furnishing by a water utility of a water service in the state to consumers or users. The tax is repealed on the earlier of July 1, 2029, or when the rate of the sales tax in effect on July 1, 2016 is increased. SF 512 takes effect July 1, 2018. Iowa Laws 2018, SF 512, signed by the governor on Jan. 31, 2018. Federal: On Feb. 9, 2018, two weeks before the Congressionally mandated date for the US Customs and Border Protection (CBP) to publish final regulations and begin accepting electronic filings of drawback claims made under the Trade Facilitation and Trade Enforcement Act (TFTEA), CBP announced that it would not have regulations in place. Further, it issued interim guidance on drawback filing. The interim guidance has material impact for exporters who may benefit from TFTEA drawback. For additional information on this development, see Tax Alert 2018-0315. Federal: The sixth round of North American Free Trade Agreement (NAFTA) negotiations concluded on Jan. 29, 2018, in Montreal, Quebec, Canada. According to press reports, the parties conveyed an overall optimistic tone following this round, but USTR Robert Lighthizer expressly noted that progress seems to be moving slow, in part due to the trilateral nature of the negotiations. Post-round commentaries from all three parties indicate agreement that progress was made in several important areas. For example, negotiations surrounding the "Transparency & Anti-corruption" Chapter were completed, providing legal certainty for further investment in NAFTA countries. "Customs procedures and trade facilitation" is another area moving forward that should improve overall efficiencies for the cross-border movement of goods. Additional topics showing progress include digital trade, telecommunications, and sanitary and phytosanitary measures, among others. For additional information on this development, see Tax Alert 2018-0334. International: Nigeria's Federal High Court (the Court) upheld the judgment of the Lagos Division of the Tax Appeal Tribunal (the TAT or the Tribunal) on Dec. 19, 2017, in the case of Vodacom Business Nigeria Limited (VBNL or the Appellant) vs. Federal Inland Revenue Service (FIRS), regarding the imposition of value added tax (VAT) on services rendered by a nonresident Company (NRC) to the Appellant. The Tribunal had, on Feb. 12, 2016, in an appeal by VBNL on the assessment made by the FIRS for the payment of VAT on services received from New Skies Satellite (NSS), held that the transaction between VBNL and NSS for the provision of bandwidth services, was subject to VAT and as such, VBNL was liable to pay the VAT due on the transaction (the TAT judgment). The key implication of the Court's judgment is that the determination of whether VAT is applicable on the invoice issued by an NRC is if there is a supply of goods or services for consideration in line with Section 2 of the VAT Act and not necessarily where the service was rendered or whether the provider of the service is required to register under Section 10 of the Vat Act. For additional information on this development, see Tax Alert 2018-0336. Multistate: On March 7, 2018 from 1:00 - 2:30 p.m. EST, join EY for its domestic tax quarterly webcast. Guest speaker Ferdinand Hogroian, with the Council On State Taxation (COST), will join the panel in a discussion of the following topics: (1) the forthcoming joint study by COST and Ernst & Young LLP on the forecasted state-by-state, industry-by-industry impact of federal tax reform on the state corporate tax base if the states were to conform to these various new provisions; (2) an overview of current state tax policy matters, including a review of the current state of the economy, state budget proposals, and state responses to federal tax reform; (3) the US Supreme Court's grant of certiorari in South Dakota v. Wayfair, a sales tax remote sellers case that is specifically targeted by the states to seek the overruling of the Court's physical presence nexus standard last articulated in its 1992 ruling in Quill v. North Dakota along with a survey of how states have responded to this development; and (4) an update covering major judicial and administrative developments at the state level. 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. Document ID: 2018-0453 |
