14 March 2018 State and Local Tax Weekly for March 2 Ernst & Young's State and Local Tax Weekly newsletter for March 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. Georgia governor signs tax bill containing corporate and individual income tax changes and conformity responses to TCJA On March 2, 2018, Georgia Governor Deal signed into law HB 918, a tax bill containing corporate and individual income tax changes (hereafter, "the bill"). The bill temporarily reduces both the corporate and the highest individual income tax rates. Applicable to taxable years beginning on or after Jan. 1, 2019, the corporate income tax rate and the highest individual income tax rate, both currently 6%, are reduced to 5.75%. Applicable to taxable years beginning on or after Jan. 1, 2020, the corporate and the highest individual income tax rates would be further reduced to 5.5%, if the legislature approves, and the governor signs, a joint resolution ratifying this additional rate reduction. These reductions are temporary and will sunset on Dec. 31, 2025. On Jan. 1, 2026, the corporate and the highest individual income tax rates will revert back to the 6% rate — the rate in effect on the day before the bill was enacted. Effective for taxable years beginning on or after Jan. 1, 2017, the bill updates Georgia's date of conformity to the IRC to Feb. 9, 2018, with some very important exceptions. Thus, Georgia generally conforms to the changes to the IRC made by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) and the Bipartisan Budget Act of 2018 (P.L. 115-123), unless otherwise noted. Georgia continues to decouple from bonus depreciation and will decouple from the increased expensing under IRC §179. Georgia also has not adopted the new 30% business interest expense limitations under IRC §163(j) as amended by the TCJA by conforming to that subsection of the IRC as it existed on Dec. 21, 2017 (the day before enactment of the TCJA). Consistent with the state's determination to decouple from the IRC §163(j) provisions, the bill expressly decouples the Georgia tax laws from the new TCJA provisions adding IRC §§381(c)(20), 382(d)(3) and 382(k)(1), which are related to the carryover of disallowed interest under the new IRC §163(j) as well as the imposition of a annual valuation limitation upon a change of ownership of the entity holding such a carryover. Likewise, IRC §118, dealing with capital contributions and related to changes in the way governmental credits and incentives are accounted for in a taxpayer's basis is treated as it was in effect before the 2017 enactment of the TCJA (in other words, for Georgia purposes, taxpayers continue to get the full benefit of credits and incentives as under prior federal law). Applicable to taxable years beginning on or after Jan. 1, 2017, Ga. Code §48-7-21(8)(A) is amended to provide that when subtracting dividends received from taxable income, dividends received form sources outside the US will not include income specified in IRC §951A (i.e., global intangible low-taxed income (or GILTI)). The associated deduction provided for GILTI includable amounts in federal taxable income as well as the special deduction for "foreign derived intangible income" (FDII) contained in IRC §250 applies to the extent the same income was included in Georgia taxable net income. In effect, income included under IRC §951A is subject to tax. Further, deductions, exclusions or subtractions provided by IRC §§245A (the new 100% federal dividend received deduction for dividends from foreign subsidiaries), 965 (the so-called one-time federal transition tax of the accumulated earnings of foreign subsidiaries), or any other section of the IRC do not apply to the extent the related income has been subtracted under Ga. Code §48-7-21(8)(A). These changes apply to all taxable years beginning on or after Jan. 1, 2017. Also applicable to taxable years beginning on or after Jan. 1, 2017, Ga. Code §48-7-21(10.1)(A) is amended to allow a Georgia net operation loss (NOL) carryback to a year in which such carryback is allowed by the IRC. Any federal limit on NOL carryforwards, including the new 80% limitation under the TCJA, will apply equally for Georgia income tax purposes. (Note, these changes to the NOL provisions also will apply for Georgia individual income tax purposes.) For additional information on this development, see Tax Alert 2018-0504. Colorado: In a recent ruling, the Colorado Department of Revenue (Department) advised that the gain Company A realized from the sale of its interest in a limited liability company (LLC) to an unrelated entity is business income that is excluded from its Colorado apportionment factor, while its distributive share of the LLC's gross sales is included in its Colorado apportionment factor. The Department determined that the gain is business income because Company A's ownership interest in the LLC, which is intangible personal property, was used in its trade or business in that Company A formed the LLC in furtherance of its purpose to manufacture and sell aerospace industry products and it contributed to the LLC contracts created in the regular course of its business. Additionally, the Department, assuming that Company A is commercially domiciled in Colorado, disregarded the gain in determining Company A's sales factor in order to effectuate equitable apportionment. The Department found that sourcing the entire gain based upon commercial domicile would not fairly represent Company A's activity in Colorado when all of its accounting, financial, payroll, engineering, manufacturing and distribution departments that account for and manage Company A's business activities that relate to the gain are performed in another state. Lastly, because the LLC is treated as a partnership for federal tax purposes the LLCs gross sales flow up to Company A, as a partner. Thus, to the extent the flow through income is business income, Company A's distributive share of the LLC's gross sales is included in Company A's Colorado apportionment factor. Colo. Dept. of Rev., Private Letter Ruling No. PLR-17-009 (Dec. 29, 2017). Michigan: New law (SB 748) updates Michigan's date of conformity to the IRC to the IRC in effect on Jan. 1, 2018 or, at the option of the taxpayer, in effect for the tax year. The bill also modifies provisions related to individual exemptions. The changes took immediate effect. Mich. Laws 2018, PA 38 (SB 748), signed by the governor on Feb. 28, 2018. Colorado: New law (HB 1022) requires the Colorado Department of Revenue to issue a request for information by June 30, 2018 for the potential to contract for an electronic sales and use tax simplification system that could be used by state or local governments that levy a sales or use tax, including home rule municipalities and counties. The system would have to provide: (1) accurate address location information to be used by a retailer to determine the correct taxing jurisdiction for which the retailer should collect and remit sales or use tax; (2) a single application process for state and local sales tax licenses; (3) a uniform sales and use tax remittance form; (4) a single point of remittance for state and local sales and use tax; and (5) a taxability or exemption matrix. The system must provide access to the data that the state or any local government may need for purposes of auditing taxpayers or for reconciling sales and use tax revenue projections. Colo. Laws 2018, HB 1022, signed by the governor on March 1, 2018. New York: Transfers of loaner motor vehicle titles from various dealerships to their parent company are subject to New York's sales tax because such transfers constitute taxable sales as there was consideration for the transaction. In so holding, the New York State Tax Appeals Tribunal (Tribunal) found that the parent company's acquisition of loaner motor vehicle titles resulted in the parent company becoming jointly and severally liable for claims against the related dealership in possession of the loaner vehicle and this "spreading of liability" as well as the benefit of centralized management constituted the consideration required to qualify as taxable retail sales. The Tribunal also rejected parent company's alternative argument that it was entitled to a credit for sales tax previously paid. The parent company is not entitled to such credit because it did not produce evidence of each of the trade-ins it claimed, and the New York Division of Taxation's audit method was reasonable in absence of other documentation of identifiable, traceable trade-ins. Parent company, however, is entitled to a credit for use tax paid by on loaners by the individual dealerships. Matter of CLM Associates, LLC, DTA No. 826735 (N.Y. Tax App. Trib. Feb. 12, 2018). North Carolina: In reversing an administrative law judge (ALJ) determination, a North Carolina Superior Court (Court) held that an energy company is liable for use tax on materials it purchased and used to fulfill contracts for the construction and installation of fuel storage and delivery systems on property owned by a governmental entity because the company is the consumer of the materials. In so holding, the Court citing Atlas1 and Morton Buildings,2 found that to perform its obligations, the company purchased necessary materials, incorporated those materials into fuel storage and dispensing systems and transferred to each property owner a completed, functioning system. The contracts at issue define a scope of work or job to be performed rather than identifying any specific items for sale. Additionally, the Court found that the ALJ erroneously applied Bulletin 31-1, which address contractors and building materials, when the bulletin is consistent with the relevant statute and appellate precedents applying sales and use tax laws. N.C. Dept. of Rev. v. First Petroleum Services, Inc., No. 17 CVS 1663 (N.C. Super. Ct., Wake Cnty., Feb. 23, 2018). Texas: The taxpayer, a limited partnership electing to be taxed as an S corporation for federal income tax purposes, and four subsidiaries (Companies A-D) created after a corporate restructuring are "affiliated entities" for purposes of the Texas sales and use tax intercorporate services exemption even though the taxpayer does not file a consolidated federal return with two of the subsidiaries. Therefore, no tax is due on sales or purchases of taxable services between the entities. In so advising, the Texas Comptroller of Public Accounts explained that the taxpayer and Companies A and B are members of an affiliated group under IRC §1504(a)(1), but under IRC §1504(b) the taxpayer, because it is an S corporation, is excluded from the affiliated group for federal tax purposes. However, Texas law (Tex. Tax Code §151.346 and Rule 3.330(c)(2)), for purposes of the sales and use tax intercorporate services exemption, includes S corporations (i.e., the taxpayer) as an affiliated entity if it cannot file a consolidated federal income tax return because of the IRC §1504(b) exclusion. Further, Companies C and D, which are disregarded entities for federal income tax purposes whose receipts and losses are treated as the taxpayer's receipts and losses for federal income tax purposes, qualify for the intercorporate services exemption because the taxpayer, their parent company, reports their income on a single consolidated federal income tax return with other affiliated entities. Consequently, while Companies A and B file a single federal consolidated return and the taxpayer (along with Companies C and D) file a separate federal income tax return due to IRC §1504(b) exclusion, the intercorporate service exemption still applies to services these entities buy from or sell to each other because they are affiliated entities under Rule 3.330(c)(2). Tex. Comp. of Pub. Accts., No. 201801017L (Jan. 8, 2018). California: The California Franchise Tax Board announced that applications for the California Competes Tax Credit (CCTC) are being accepted on the CCTC website from March 5, 2018 until March 26, 2018 for the credit's third allocation period. For fiscal year 2017/2018, $230.4 million of the California Competes Tax Credit (CCTC) is available for allocation during three application periods, which includes $55.4 million for the third allocation period plus any remaining unallocated amounts from previous application periods. Cal. FTB, March Tax News (March 1, 2018). Pennsylvania: The Pennsylvania Department of Revenue (Department) issued guidance on the application and sale of restricted tax credits. The guidance applies, to the following credits: the Research and Development Tax Credit, FILM Production Tax Credit, Neighborhood Assistance Program (NAP), Resource Enhancement and Protection Tax Credit (REAP), Keystone Innovation Zone Tax Credit (KIZ), Keystone Special Development Zone Tax Credit (KSDZ), Historic Preservation Tax Incentive, Coal Refuse Energy and Reclamation Tax Credit Innovate in Pennsylvania Tax Credit, and Mixed Use Development Tax Credit. Many of the tax credits are applied first against the tax liability for the period in which the credit is approved. Unpaid tax liability must be satisfied before any portion of the credit can be carried forward, sold or passed through. Prior year credits are applied on a first-in-first-out basis until all tax liabilities are satisfied, and restricted credits will be applied before any cash payments. The guidance also provides information about the application of restricted credits to corporate accounts; requirements for sellers before approval (including that assignment of a restricted credit will not be approved if the seller has any unpaid state taxes); waiting periods before sale for the KSDZ, NAP and REAP credits; special requirements for KIZ tax credit sales; pass-through requirements; requirements for purchased credits (including that the a buyer of a restricted credit must use the credit in the year in which the purchase or assignment is made); credit buyer tax liability offset limits; additional buyer and seller tax return reporting requirements; frequently asked questions; and a quick reference table of the credits. Pa. Dept. of Rev., Restricted Tax Credit Bulletin 2018-01 (Feb. 2018) (replacing Corporation Tax Bulletins 2014-04, 2011-03 and 2008-02). Utah: The Utah State Tax Commission provided general guidance on business personal property taxes. The guidance describes what kinds of property constitute personal property, information about tangible personal property that is exempt from personal property tax, how assessments are completed, how to apply for a personal property tax exemption, how business personal property is valued (generally, acquisition or original cost multiplied by a percent good factor), how and when tax is imposed, the appeals process, how audits work generally, and miscellaneous notes and information. Utah State Tax Comn., Publication 20 (revised Feb. 2018). Colorado: The Colorado Department of Revenue (Department) announced that it has rescinded all prior revenue bulletins and policy positions. The Department stated: "These documents, which were last published by the Department during the late 2000s, do not represent an official articulation of any position held by the Department nor does the Department consider them binding with respect to any tax matter." The Department said a taxpayer seeking guidance can request a private letter ruling, which is binding, or a general informational letter, which is non-binding. Colo. Dept. of Rev., Revenue Bulletin 18-01 (Feb. 28, 2018). North Dakota: The North Dakota State Tax Department released the 2018 Income Tax Withholding, Rates and Instructions for Wages Paid in 2018, including the percentage method for North Dakota state income tax withholding for use with wages paid on or after Jan. 1, 2018. The supplemental rate of withholding remains at 1.84% for calendar year 2018. For additional information on this Alert, see Tax Alert 2018-0444. Texas: An insured is not subject to independently procured insurance premium tax on loan guarantees procured in Canada from a corporation wholly owned by the Canadian government because although Texas is the insured's principal place of business, Texas is not its home state for purposes of the tax when none of the risk covered by the guarantees is located in Texas. The Texas Comptroller of Public Accounts explained that under Texas law independently procured insurance premium tax is imposed on an insured whose home state is Texas. A business's home state is the state in which it maintains its principal place of business, however, if 100% of the insured risk is located outside that state, then the insured's home state is the state in which the largest percentage of its taxable premium is allocated. Tex. Comp. of Pub. Accts., No. 201801013L (Jan. 18, 2018). Washington: The Washington State Transportation Commission is conducting a road usage charge pilot program, which is testing the viability of charging drivers based on in-state miles driven versus gallons of fuel purchased. The program is intended to help answer questions such as how would a road usage charge work for different drivers throughout the state, how do the reporting methods work for drivers, and whether a road usage charge would enable Washington to better fund its transportation system in the future. The program will simulate participants paying 2.4 cents per mile — equivalent to what the average car in Washington currently pays under the 49.4-cent-per-gallon gas tax. Wash. State Transportation Comn., Wash. Road Usage Charge Pilot Program (last accessed March 2, 2018). International: A Value Added Tax (VAT) rate increase has been expected in South Africa for many years. The Government has not previously taken this action due to the effect of a rate increase on the lower economic levels of the population. However, the country's current budget deficit requires action to be taken as a VAT rate increase will generate significant revenue. The 1% rate increase, from 14% to 15%, effective from April 1, 2018 is expected to generate an additional ZAR22b (approx. US$1.89b) for the Government. The increase was announced on Feb. 21, 2018 in the Government's 2018 Budget review. For additional information on this development, see Tax Alert 2018-0427. International: In South Africa's 2018 National Budget Speech, released on Feb. 21, 2018 the Minister of Finance announced that the regulation defining "electronic services" for Value Added Tax (VAT) purposes would be updated. An amended draft regulation was published on the same date. Foreign suppliers of "electronic services" into South Africa are required to register and account for VAT in South Africa as of June 1, 2014. The current regulation defining electronic services, includes a specific list of services and only foreign suppliers of these services fall within the ambit of the South African VAT regime. For additional information on this development, see Tax Alert 2018-0440. 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: 2018-0554 |
