22 March 2018 State and Local Tax Weekly for March 9 Ernst & Young's State and Local Tax Weekly newsletter for March 9 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. A new joint study on the impact of federal tax reform on state corporate income taxes by Ernst & Young LLP (EY) and the Council on State Taxation (COST) forecasts the state-by-state revenue impact from the expansion of the state corporate tax base that will occur as states begin to conform to the changes to the IRC of 1986, as amended (IRC) by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). The TCJA contains the most significant changes to the IRC in 30 years. At the federal level, the TCJA includes various provisions which, on net, broaden the corporate tax base while dramatically reducing the federal corporate tax rate and providing an overall reduction in federal corporate income tax liability. In contrast, at the state level, conformity with the federal corporate tax base expansion without corresponding state corporate tax rate reductions will likely result in increased corporate tax collections, but the magnitude of that impact for each state will depend on how it conforms to the IRC, the composition of the industry sectors in its economy, and the way in which specific provisions contained within the TCJA are implemented at the federal level. All states levying a corporate income tax reference the IRC in some fashion. Most start with taxable income from the federal Form 1120, then apply specific adjustments which vary by state. Varying conformity to the federal tax law provisions will cause differences in the magnitude of the impact of federal tax reform across states. In some "rolling conformity" states which conform directly to the IRC as it is amended, the changes in the TCJA are already part of that state's tax law. In other "fixed" or "static" conformity states, the TCJA changes will generally be incorporated when the state's legislature enacts legislation to conform. This study provides estimates of the potential impact on state corporate tax bases over the next decade if all states (both rolling and fixed conformity) update their conformity dates to link to the TCJA, but remain coupled to specific provisions as they have in the past. The analysis is intended to provide a baseline reflecting the potential magnitude of the state corporate tax base expansions that could occur with state conformity to the provisions of the TCJA. The estimated nationwide overall increase in state corporate income tax revenues is 12% over the 10-year period, with significant variations among the states. The study also forecasts that the impact on state corporate tax revenues is expected to fluctuate over the 10-year period. The average expansion in the state corporate tax base is estimated to be 8% from 2018 through 2022, which increases to 13.5% for the period from 2022 through 2027. Multistate: In 2017, legislators in several states introduced legislation intended to close the "carried interest loophole" by enacting an additional state tax on an investment manager's performance allocation. In general, these bills would have imposed a new state tax on the performance allocation at a rate equivalent to the difference between the highest federal ordinary income tax rate and the highest federal rate on capital gains. Bills to address just that were introduced in New York, Illinois, Massachusetts, New Jersey, and Rhode Island. While none of the bills were enacted, the issue is surfacing again because, in the view of some state legislators, the enactment of the Tax Cuts and Jobs Act (P.L. 115-97) did not sufficiently address the perceived "carried interest loophole" and these bills, if enacted, would impose a special fee or tax which combined with the federal capital gains rate would reach a rate equivalent of the highest personal income tax rate (i.e., an additional state tax or fee of 17%). For additional information on this development, see Tax Alert 2018-0536. Colorado: The Colorado Department of Revenue (Department) updated guidance on the criteria that must be met in order for taxpayers (including individuals, corporations, pass-through entities) to claim a Colorado income tax subtraction for qualifying capital gain income included in their federal taxable income. The guidance lists the criteria the capital gain must meet in order to qualify for the Colorado capital gain subtraction, including that the gain must be included in the taxpayer's federal taxable income for the year of the subtraction, it must be earned on real or tangible personal property, the taxpayer must have acquired the property on or after May 9, 1994 and must own the property for five uninterrupted years prior to the property's sale, among other requirements. Additional criteria includes: (1) acquisition date and holding period requirements related to grantor trusts, divorce settlements, pass-through entities and their members (including property transfers between pass-through entities and members, with examples), and installment sales (with examples); (2) limitations on the capital gain subtraction that a taxpayer can claim (with examples); and (3) documentation requirements to file a Colorado Source Capital Gain Affidavit (DR 1316) with the Colorado tax return that includes the subtraction as well as copies of the federal Schedule D and/or Form 4797 used in determining the amount of federal net capital gain. Taxpayers that at the time of the claim either have overdue state tax liabilities or are in default on any contractual obligations owed to the state or local government, are not eligible to claim the Colorado capital gain subtraction. Colo. Dept. of Rev., FYI Income 15: Colorado Capital Gain Subtraction (Feb. 2018). Arkansas: In reversing a circuit court ruling, the Arkansas Supreme Court (Court) held that a fast food restaurant chain (chain) that provides meals to its managers free of charge owes sales and use tax on the retail value of the meals (and not on the value of the individual ingredients) because the goods withdrawn from stock to create the meals are produced goods. The parties agreed that the chain qualified for the sale-for-resale exemption, the manager prepared meals were a withdrawal from stock, the chain was required to report and remit taxes on the withdrawal, and the tax should be assessed on the "value of goods … withdrawn." At issue is whether "value" for purposes of assessing sales tax refers to the wholesale value (i.e., the cost paid by the chain to purchase the individual food ingredients) or the retail value (i.e., the retail sales price paid by the customers to purchase identical meals). Without a statutory definition of "value," the Court turned to the rules promulgated by the Arkansas Department of Finance and Administration — Ark. Gross Receipts Tax Rule GR-18(D)(1) and (2). Under Section (D)(1), sales tax is assessed on the wholesale price paid when the "purchased goods" bought for resale are later withdrawn from stock and given away; under Section (D)(2), sales tax is assessed based on what would have been the sales price of the goods when the goods withdrawn from stock and given away were manufactured or produced by the seller. The Court concluded that the chain is providing a produced good (i.e., a meal), and not individual ingredients. Thus, Section (D)(2) applies and tax is assessed on the retail value of the meal. Walther v. FLIS Enterprises, Inc., 2018 Ark. 64 (Ark. S. Ct. March 1, 2018). Michigan: The Michigan Department of Treasury (Department) set forth its approved reasonable method of apportioning the industrial processing exemption for electricity and natural gas providers when their transmission and distribution systems simultaneously perform exempt and non-exempt activities for sales and use tax purposes. Citing Detroit Edison's1 recognition that "conditioning" electricity for ultimate sale at retail is exempt while the movement of electricity between stations, substations, and the final consumer are non-exempt distribution and shipping activities, the Department provided apportionment percentages as follows: (1) the electricity transmission system (may be apportioned 60% exempt); (2) the electricity distribution system (various categories with exemption, amounts ranging from 25% to 90%); (3) natural gas interstate lines (industrial processing equipment within interstate systems may be apportioned as 100% exempt); and (4) natural gas intrastate lines (intrastate distribution system beyond the citygate may be apportioned as 50% exempt). Taxpayers may request to use an alternative, reasonable apportionment method, but must provide supporting documentation and evidence showing the alternative calculation is reasonable. Mich. Dept. of Treas., Rev. Admin. Bulletin 2018-4 (Feb. 28, 2018). Oklahoma: New law (HB 1034) caps the income tax credits for coal production used to offset tax or paid as a refund at $5 million for tax years beginning on or after Jan. 1, 2018. The Oklahoma Tax Commission (Commission) must annually calculate and publish a percentage by which the authorized credits will be reduced, such that the total credits used to offset tax or refunded to not exceed $5 million per year (calculated by dividing $5 million by the credits claimed in the second preceding year). If the total tax credits exceed the $5 million cap in any calendar year, the Commission will permit the excess but must factor it into the percentage adjustment formula for later years. Any coal production credits that are authorized but not used or that are unable to be used because of the cap may be carried over until the credits are fully used. Okla. Laws 2018, HB 1034 (2nd extraordinary session), signed by the governor on March 6, 2018. Oklahoma: New law (HB 1036) caps at $2 million annually the total amount of railroad reconstruction expenditures income tax credits for tax years beginning on or after Jan. 1, 2018. The Oklahoma Tax Commission (Commission) must annually calculate and publish a percentage by which the credits will be reduced to the annual cap ($2 million divided by the credits claimed in the second preceding year). If the total of these authorized credits exceed $2 million in any calendar year, the Commission must permit any excess but must factor the excess into the percentage adjustment formula for subsequent years. Okla. Laws 2018, HB 1036 (2nd extraordinary session), signed by the governor on March 6, 2018. Virginia: New law (HB 828 and SB 268) creates a separate tangible personal property tax classification for computer equipment and peripherals used in data centers for personal property tax valuation purposes. The equipment and peripherals must be valued by a means of a percentage or percentages of original cost, or by another method that may reasonably be expected to determine the actual fair market value. This change takes effect July 1, 2018. Va. Laws 2018, Ch. 28 (HB 828) and Ch. 292 (SB 268), signed by the governor on Feb. 26, 2018 and March 9, 2018, respectively. Alabama: New law (HB 137) establishes a tax amnesty program that will run from July 1, 2018 through Sept. 30, 2018. Amnesty applies to all taxes administered by the Alabama Department of Revenue (Department), except for motor fuel, motor vehicle, and property taxes, for taxes due before/taxable periods that began before Jan. 1, 2017. In exchange for participating in the program and complying with its terms, the Department will waive penalties and interest and apply a limited look-back period. Amnesty will not be granted to taxpayers that have been contacted by the Department in the past two years concerning the tax type for which amnesty has been applied. In addition, amnesty will not be granted to taxpayers that are party to a criminal investigation or criminal litigation for nonpayment, delinquency, or fraud in relation to any state tax imposed by Alabama and administered by the Department; the taxpayer has been issued a final assessment for which the appeal period has ended; the taxpayer entered into a voluntary disclosure agreement with the Department prior to Dec. 31, 2017; or the taxpayer was granted amnesty for the tax type under the 2016 amnesty program. Ala. Laws 2018, HB 137, signed by the governor on March 6, 2018. Maryland: In reversing a lower court's ruling, the Maryland Court of Special Appeals (Court) held a corporation is not entitled to interest on amounts that were refunded due to the corporation's error in paying sales and use tax on lease payments for printers that qualified for a sales tax exemption because such error was attributable to the corporation and not attributable to the state. The Court, citing the SAIC and DeBois standards for attributing the corporation's error to the State,2 explained that the Maryland Comptroller of Public Accounts (Comptroller) may not pay interest on refunds where: (1) the tax payment error was completely within the corporation's knowledge and control; (2) the statute and regulations regarding the exemption from sales tax were clear; (3) the corporation never claimed to misunderstand the law; and (4) the Comptroller maintained a policy in applying the law that was consistent with the exemption statute. Ultimately the Court found "no substantial evidence to support the conclusion that [the corporation] was led by any law, regulation or policy to its mistaken belief that the tax was due when it paid the sales tax." Rather, the Court found that once the corporation was aware of the exemption, the only uncertainty or mistaken belief it could find in the record that prompted the corporation's payment of the tax related to whether the corporation could show what proportion of printed materials were for sale and would meet the exemption. Md. Comp. of the Treas. v. Jason Pharma., Inc., No. 1952 (Md. Ct. Spec. App. March 1, 2018). Virginia: New law (HB 495) permits the revenue commissioner, treasurer, director of finance, or other similar local official who collects or administers taxes for a county, city or town to disclose tax information to nongovernmental entities that have contracted with the locality to provide tax administration services such as refund processing or other non-audit services. Before officials disclose such information, they must obtain the entity's written acknowledgement that confidentiality and nondisclosure obligations and penalties apply and that the entity will abide by these obligations. This provision takes effect July 1, 2018. Va. Laws 2018, Ch. 40 (HB 495), signed by the governor on Feb. 26, 2018. Texas: The Austin, Texas city council recently passed an ordinance that, effective Oct. 1, 2018, will require employers operating in the city to provide paid sick leave to their employees. Mayor Steve Adler is expected to sign the ordinance into law. The Mayor has stated that Austin will be first city in the South to mandate paid sick leave. For additional information on this development, see Tax Alert 2018-0505. Washington: The Washington Department of Revenue (Department) advised that the recent update to revenue recognition standards in Financial Accounting Standards Board (FASB) Topic 606 does not affect how it determines whether an agency relationship exists for Washington business and occupation tax and retail sales tax purposes. Rather, the Department still follows the requirements provided in Wash. Admin. Code 458-20-159 and 458-20-111 for determining if there is an agency relationship. The recent revisions to FASB Topic 606 applies only for financial reporting purposes. Wash. Dept. of Rev., Tax Topic: Agency and FASB Topic 606 (March 2018). Ohio: Amended regulation (Ohio Admin. Code § 1301:10-3-04) makes changes to Ohio's unclaimed property voluntary disclosure rules. The amendments permit a holder of unclaimed property (holder), at any time before the holder is selected for examination and at an administrator's discretion, to comply voluntarily with unclaimed property reporting requirements. The administrator is prohibited from unreasonably withholding permission to a holder that has not been selected for examination from participating in the unclaimed property voluntary compliance program. The amendments also specify when a holder may be subject to an involuntary examination by a contract auditor or a division auditor, on a random basis, the selection process for which is based on generally accepted auditing standards. In addition, holders may be subject to a state-initiated involuntary examination on a non-random selection basis if: (1) the holder is part of an examination initiated by another state in which Ohio joins; (2) the state initiates the investigation of the holder after receiving a complaint of its non-compliance with unclaimed property laws; or (3) a holder has records that are subject to the records review period and are located outside Ohio's physical borders. Lastly, the amendments provide flexibility in the manner in which a closing review may be completed (e.g., face-to-face, telephone, mail or delivery service, electronic means). Amendments to the regulation took effect Feb. 1, 2018. Ohio Dept. of Taxn., amended Ohio Admin. Code § 1301:10-3-04 (filed Jan. 16, 2018). Federal: The President signed Presidential proclamations on March 8, 2018 imposing additional tariffs of 25% on specifically defined articles of steel, and additional tariffs of 10% on specifically defined articles of aluminum, effective on March 23, 2018. Both proclamations specifically exclude Canada and Mexico, and leave the door open to approving exemptions for additional countries that are able to reach agreement with the US on "satisfactory alternative means to address the threat to the national security" caused by imports from that country. For additional information on this development, see Tax Alert 2018-0534. International: In a public notice issued Feb. 26, 2018 the Uganda Revenue Authority's (the URA) Commissioner General made an announcement to suppliers of aid-funded projects and the general public to address the treatment of Value Added Tax (VAT) relating to such projects with effect from March 1, 2018. The VAT amendment Act 2015, initially considered only tax payable deemed on a taxable supply made by a contractor to a licensee undertaking mining or petroleum operations deemed to have been paid by the licensee to the contractor provided the supply was for use by the licensee solely and exclusively for mining or petroleum operations. For additional information on this development, see Tax Alert 2018-0533. 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. 2 Comptroller v. SAIC, 405 Md. 185 (2008); DeBois Textiles Int'l v. Comptroller, Income Tax No. 1630 (Md. Tax Ct. Aug. 23, 1985). Document ID: 2018-0625 |
