29 March 2018 State and Local Tax Weekly for March 16 Ernst & Young's State and Local Tax Weekly newsletter for March 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. On March 13, 2018, New Jersey Governor Phil Murphy (who was just inaugurated in January 2018) issued his fiscal year 2019 state budget. The budget contains many significant proposed tax law changes. The proposed changes to the Corporation Business Tax include adopting market-based sourcing and worldwide combined reporting, with exceedingly limited "water's-edge" elections, and reinstituting the taxation of international holding companies. The budget proposes a one-time boost to revenue through the taxation of deemed repatriated accumulated earnings and profits of foreign subsidiaries, based on the recently enacted transition tax provisions set forth in Section 965 of the Internal Revenue Code of 1986, as amended by the recently enacted federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). Moreover, the Governor proposed revising New Jersey's tax laws to inoculate itself from any possible tax base reductions attributable to the TCJA. The budget also would impose a "fairness fee" on carried interest. In addition, the budget proposes significant changes to the New Jersey Gross Income Tax, the state's personal income tax. The changes include a proposal to increase the New Jersey Earned Income Tax Credit to 40% of the federal level, a childcare and dependent care credit, and an increase of the top bracket rate to 10.75% for income over $1 million. The state property tax deduction cap would also be raised to $15,000. The budget would increase New Jersey's sales tax rate to 7% and extend it to cover ridesharing services and transient accommodations. Further, the state's sales tax nexus provisions would be extended to reach certain remote sellers and there would be enhanced focus on tax enforcement for certain remote sales (i.e., increased audit activity in this area). For additional information on this development, see Tax Alert 2018-0563. Federal: The IRS has posted to IRS.gov new guidance under IRC § 965 in the form of frequently asked questions (FAQs) to help taxpayers meet their reporting, filing and payment requirements under IRC § 965 (the transition tax) enacted by the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. The guidance addresses how to report the amount of gross income recognized by US shareholders as an inclusion of deferred foreign income as required by IRC §§ 965 and 951(a) (a Section 965 mandatory inclusion) and how to report and pay the "net tax liability" with respect to the inclusion. The guidance also provides details on certain elections taxpayers can make under IRC § 965 and Notice 2018-13 (including how to elect to pay the associated liability in installments). For addition information on this development, see Tax Alert 2018-0602. Idaho: New law (HB 463) updates Idaho's date of conformity to the IRC, requires add back of certain amounts deducted from federal income tax under provisions enacted by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA), reduces the corporate and individual income tax rates, revises Idaho's net operating loss (NOL) provisions, and modifies certain individual income tax provisions. Effective for tax years beginning on or after Jan. 1, 2017, Idaho conforms to the IRC in effect on Dec. 21, 2017 (the day before enactment of the TCJA), except that IRC §§ 965 and 213 are applied as in effect on Dec. 31, 2017 (in essence, incorporating into Idaho tax law the changes to those sections brought about under the TCJA). For taxable years beginning on or after Jan. 1, 2018, Idaho conforms to the IRC as amended and in effect on Jan. 1, 2018. HB 463 also requires a corporation to add back to federal taxable income the amounts deducted under IRC §§ 245A, 250, 965 (relating to foreign dividends received by corporations, the new federal deductions for global intangible low-taxes income (GILTI) and foreign derived intangible income (FDII) and the deductions authorized under the federal transition tax on post-1986 accumulated earnings and profits of foreign subsidiaries), among other items, as limited by IRC § 246(b)(1). In addition, in calculating the Idaho NOL, taxpayers are required to add any amount limited by IRC § 461. Provisions of HB 463 also lower the Idaho corporate income tax rate to 6.925% (from 7.4%) and the state's individual income tax rates for each of the seven brackets (new rates range from 1.125% to 6.925%). Other changes in HB 463 related to individuals include a new nonrefundable child tax credit and college savings programs. These provisions take effect Jan. 1, 2018, unless otherwise noted. Idaho Laws 2018, Ch. 46 (HB 463), signed by the governor on March 12, 2018. Arizona: New law (HB 2484) requires a city, town or other taxing jurisdiction (hereafter, "local jurisdiction") that imposes a transaction privilege, sales, use, franchise or other similar tax (collectively, "tax") or fee on food items intended for human consumption to apply the tax uniformly with respect to all food. Further, local jurisdictions may not assess or apply an additional tax or fee with respect to any specific food item. The bill also prohibits a local jurisdiction from levying a tax or fee on the following: (1) the manufacture, wholesale or distribution to any wholesalers, distributors or retailers of food items intended for human consumption; (2) containers or packaging used exclusively for transporting, protecting or consuming food items intended for human consumption; (3) the sale of food or other items when purchased with food stamps; (4) the sale of low or reduced-cost articles of food or drink to eligible elderly or homeless persons with a disability by certain restaurants. Provisions of the bill take effect 90 days after the legislature adjourns. Ariz. Laws 2018, Ch. 17 (HB 2482), signed by the governor on March 16, 2018. California: Gratuities a restaurant operator automatically adds to the bill of a large party without first conferring with the party (i.e., a large party gratuity) are "mandatory payment designated as a tip, gratuity, or service charge" subject to sales tax under Cal. Code of Regs. tit. 18, § 1603(g) (hereafter "Reg. 1603(g)"). In so holding, the California Court of Appeal (Court) concluded that sales tax applies because large party gratuities were automatically added by the restaurant without asking or receiving customer approval, and customers did not receive the option to write in the tip on the bill. The Court further reasoned that any amount added by the restaurant is presumed to be mandatory, even if the menu states the large party gratuity is "optional" and it was possible to remove, increase or decrease the amount by the customer upon request. Lastly, the Court upheld the validity of Reg. 1603(g), finding that the lack of a mandatory/optional distinction in Cal. Rev. & Tax Code § 6012 does not invalidate Reg. 1603(g), when Reg. 1603(g) properly provides details of what it means for a payment for services to be considered "part of the sale" under § 6012. GMRI, Inc. v. Cal. Dept. of Tax and Fee Admin., No. C081471 (Cal. Ct. App., 3rd App. Dist., March 9, 2018). Alabama: New law (HB 83) renames the Heroes for Hire Tax Credit of 2012 the Veterans Employment Act, expands its applicability, and increases the amount of the tax credit available. For tax years beginning on or after Jan. 1, 2018, qualified employers are eligible for the additional nonrefundable credit in an amount equal to $2,000 (increased from $1,000) for each new unemployed or combat veteran hired after passage of the Act for a full-time position that pays at least $14 per hour, with the majority of duties at an Alabama business location. The additional credit is available in the tax year during which the employee has completed 12 months of consecutive employment. The term "combat veterans" is newly defined as a member of the US Armed Forces who served in a US Department of Defense-designated combat zone and was an Alabama resident when he or she served. HB 83 took effect Jan. 1, 2018, and is not available to unemployed veterans hired after Dec. 31, 2023. Ala. Laws 2018, Act 194 (HB 83), signed by the governor on March 12, 2018. Colorado: New law (SB 103) adds additional requirements for issuing performance-based incentives for Colorado film production activities. A production company seeking a performance-based incentive must provide documentary evidence that as of the incentive application date: (1) it was engaged in Colorado production activities for other projects for the past 12 consecutive months; or (2) if it created a business entity for the sole purpose of conducting Colorado production activities, the manager of the business entity has been a Colorado resident for the past 12 consecutive months. A production company must apply to the Colorado Office of Film, Television, and Media (Office) before beginning production activities in the state, and the Office cannot issue a performance-based incentive to a production company until the production company and the Office have entered into a contract in accordance with Colorado's procurement laws. Production companies must provide, through a state-approved certified public accountant, a written report with proof of qualified local expenditures and that the production company hired the in-state workforce required by statute. SB 103 took effect upon signature of the governor. Colo. Laws 2018, SB 103, signed by the governor on March 15, 2018. Texas: In reversing an appellate court ruling, the Texas Supreme Court (Court) upheld the constitutionality of a statutory formula1 used to determine the value of leased natural-gas compressors located within a county's jurisdiction, and further held that the tax is assessed in the county where the inventory is maintained. In reaching these conclusions, the Court found that the state legislature has the authority to decide how property should be valued for taxation when the classifications are not unreasonable, arbitrary or capricious, and, contrary to the county's argument, that the constitution does not compel market-value-based valuation. Citing Enron,2 the Court rejected the county's argument that the legislature's tax classification distinction between those who own compressors for their own use and those who own them to lease out violates the constitution's equal and uniform provisions, finding the county did not argue why this classification is impermissible. Additionally, reading Tex. Tax Code §§ 23.1241 and 23.1242 together, the Court concluded that the legislature intended to fix the situs of dealer-held heavy equipment at the location where the dealer maintains its inventory, rather than at the various locations where the equipment might otherwise be physically located. EXLP Leasing, LLC and EES Leasing, LLC v. Galveston Central Appraisal Dist., No. 15-0683 (Tex. S. Ct. March 2, 2018). Montana: As discussed in Tax Alert 2018-0028, a corporation wishing to make a new water's-edge election, or renew an existing election starting in 2018 must file a Form WE-ELECT by March 31, 2018. Montana's corporate income tax requires members of a unitary business to file returns on a worldwide combined basis, unless a water's-edge election is made. While many states require a water's-edge election to be made by the due date or extended due date of the return for the year for which it is intended to be effective, Montana is unique in that a water's-edge election must be made within 90 days of the beginning of the first year in which it is first intended to become effective. For more information on this development, see Tax Alert 2018-0562. Alabama: New law (SB 63) permits direct refund petitions for sales and use tax, public utilities tax, and any transient occupancy tax involving the taxpayer who collected and paid the tax to the Alabama Department of Revenue (Department) and the consumer/purchaser who paid the tax to the taxpayer. Refund petitions for these taxes may be filed: (1) by the consumer/purchaser who paid the tax directly to the taxpayer collecting the tax; (2) by the taxpayer if the taxpayer remitted more than the tax due but never collected the tax from the consumer/purchaser; or (3) by the taxpayer if the consumer/purchaser paid the tax directly to the taxpayer. The Department will not pay a refund to the taxpayer until after the taxpayer has credited or repaid the tax to the consumer/purchaser. SB 63 also repeals the requirement that refund petitions for sales and use tax, public utilities tax, and any transient occupancy tax be filed jointly by the taxpayer who collected and paid the tax and the consumer/purchaser who paid the tax to the taxpayer. These changes took immediate effect. In conjunction with this law change, the Department issued Form ST-5, Direct Petition for Refund, for tax paid directly to the Department, and Form ST-6, Petition for Refund of Taxes Paid to Seller, to be filed by consumers/purchasers who paid the tax directly to the seller. All petitions must be signed and documented. Ala. Laws 2018, Act 180 (SB 63), signed by the governor on March 8, 2018. New Mexico: New law (HB 276) requires all employers to file Forms W-2 with the New Mexico Department of Taxation & Revenue Department by the accelerated deadline of January 31 of the calendar year. Employers filing 25 or more Forms W-2 will be required to file electronically. The bill is effective for taxable years on or after Jan. 1, 2019. N.M. Laws 2018, Ch. 59 (HB 276), signed by the governor on March 2, 2018.) For additional information on this development, see Tax Alert 2018-0553. Puerto Rico: The federal Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Federal Disaster Tax Relief Act), signed by President Trump on Sept. 29, 2017, provides a broad array of relief measures aimed at assisting in the recovery efforts of both individuals and businesses in affected by Hurricanes Harvey, Irma and María. The Federal Disaster Tax Relief Act provides temporary tax relief for victims in hurricane disaster zones. For employers, the Federal Disaster Tax Relief Act includes tax relief in the form of a tax credit for wages paid to eligible employees (HDZ Retention Credit) during the disaster period (but no later than Dec. 31, 2017). Tax Alert 2018-0585 summarizes the key features of the HDZ Retention Credit and the eligibility rules. Maryland: The City of Baltimore's tax on outdoor advertising is a constitutional tax on the privilege of continuing in business, rather than an unconstitutional tax on the exercise of free speech. In so holding, the Maryland Tax Court (court) determined that the tax is rationally related to a legitimate governmental purpose of raising revenue from the privilege of exhibiting outdoor advertising displays, it does not impose a burden on speech when the tax is directed toward a means of expression rather than the expression's substance, and it does not suppress speech even though a limited number of corporations are subject to the tax. The court noted that the city's long-standing zoning regulations controlling billboards and the concentrated marketplace in the city (not the tax ordinance's structure) caused the majority of the tax to fall on the corporation. Clear Channel Outdoor, Inc. v. Baltimore City Dept. of Fin., No. 16-MI-BA-0571 (Md. Tax Ct. Feb. 27, 2018). International: The International Monetary Fund (IMF) recently published the preliminary findings of its 2018 official visit to Qatar. The Staff Concluding Statement, which is available on the IMF website, indicates that the Qatar Government's projections include the implementation of Value Added Tax (VAT) during the second half of 2018. The introduction of VAT and excise tax is a fundamental shift in Qatar's fiscal policy aimed at significantly broadening the tax base and growing the sources of Government revenues, thereby reducing the reliance on the contribution of the hydrocarbon sector to the country's fiscal budget. For additional information on this development, see Tax Alert 2018-0575. 1 The formula requires appraisal based on the lease revenue the compressors generated during the previous taxable year divided by 12, to reach a monthly income average. 2 Enron Corp. v. Spring Indep. Sch. Dist., 922 S.W.2d 931 (Tex. S. Ct. 1996) (Court held that the legislature may constitutionally draw distinctions for tax classification purposes, provided that the classifications are not unreasonable, arbitrary, or capricious). 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: 2018-0688 |
