10 April 2018 State and Local Tax Weekly for March 30 Ernst & Young's State and Local Tax Weekly newsletter for March 30 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 23, 2018, Governor Eric Holcomb signed into law SB 257 to temporarily exempt SaaS transactions from the state's sales and use tax. Effective July 1, 2018, the bill adds new Ind. Code §6-2.5-4-16.7, which explicitly expands the definition of a "retail merchant making a retail transaction" in Indiana's sales tax law to include individuals and entities that sell, rent, lease or license the right to use prewritten computer software delivered electronically. Under the new provision, transactions in which an end user purchases, rents, leases or licenses the right to remotely access prewritten computer software over the Internet, over private or public networks, or through wireless media (i.e., SaaS transactions) will not constitute the provision of prewritten computer software through electronic means, and specifically excludes such transactions from the definition of a "retail transaction" for purposes of Indiana's sales tax law. Currently, the Indiana Department of Revenue has administratively interpreted the Indiana sales tax law's definition of "tangible personal property," which includes "prewritten software" to apply to SaaS transactions. The bill would override that position effective for periods after June 30, 2018. The new provisions expire July 1, 2024. For more on this development, see Tax Alert 2018-0586. On March 6, 2018, the Ohio Board of Tax Appeals (BTA) issued two decisions affecting the Ohio Commercial Activity Tax (CAT). The decisions reviewed the CAT's situsing rules as applied to the sale of certain service contracts as well as the CAT's group reporting requirements. Situsing decision: The BTA's decision in Defender Security Company1 involved a taxpayer (hereafter, "Defender Direct") that was an authorized dealer for ADT Security Services, a multinational company providing home and small business security monitoring services (hereafter, "ADT"). In that capacity, Defender Direct sold and installed security equipment and obtained contracts for monitoring services. Defender Direct subsequently sold the monitoring contracts to ADT. Defender Direct had included the gross receipts from the contract sales to the extent they involved Ohio end-customers. Defender Direct filed refund claims arguing that the contract sales should have been sitused to Colorado, ADT's principal place of business where the contracts and customer information had been delivered. The Ohio Department of Taxation (Department) denied the refund claims and Defender Direct appealed. For Ohio CAT purposes, Ohio Rev. Code §5751.033(I) situses gross receipts from services and other gross receipts not otherwise sitused based on the purchaser's benefit received in Ohio. The BTA upheld the Department's denial of the refund claim rejecting Defender Direct's argument that the receipts were sitused outside Ohio. In applying Ohio Rev. Code §5751.033(I), the BTA noted that the contracts at issue would not exist without the security equipment located in Ohio by which the monitoring is performed. Accordingly, the BTA reasoned that the benefit to ADT was received "because of property in Ohio which ADT will monitor pursuant to the alarm services contracts" sold to it, the receipts from the sales of those contracts should be sitused to Ohio. The BTA also concluded there was no agency relationship between Defender Direct and ADT that would have sitused the receipts to the customer's principal place of business based on the application of an administrative rule situsing "agency services."2 Group reporting decision:Ohio Rev. Code §5739.012 requires persons more than 50% commonly owned that have nexus with Ohio to file a combined return as a single CAT taxpayer. A member of a combined CAT taxpayer group may not eliminate intermember gross receipts. Ohio Rev. Code §5751.011 permits a consolidated election to be made at either a 50% or 80% ownership threshold, but must include all members commonly owned without regard to Ohio nexus. The main advantage of the consolidated election is the elimination of intermember receipts. When registering for CAT as either a combined or consolidated taxpayer, all members of the CAT reporting group should be listed. As dispositions or acquisitions occur, members are dropped or removed, as the case may be, by filing Form CAT AR. Crab Addison, Inc.3 involved the appeal of an assessment for an affiliated entity where the Department concluded that an affiliate's Ohio-sitused gross receipts were not includable in the CAT consolidated return. The Department's assessment was predicated on the fact that the affiliated entity whose receipts were assessed was not included in the original CAT consolidated election nor added at any point in time thereafter. In addition, the Department averred that the taxpayer did not support its claim that the receipts from this affiliate were included in the CAT consolidated filing. The taxpayer did not request a hearing before the BTA and, accordingly, its submission of additional information with its appeal was not considered. The BTA upheld the assessment concluding that the taxpayer did not meet its burden of proving the Department's assessment incorrect. For additional information on these cases, see Tax Alert 2018-0603. Multistate: The latest state income tax quarterly newsletter, which provides a summary of the corporate income and franchise tax legislative, administrative, and judicial updates that occurred during the period from January 1, 2018 through March 31, 2018, is now available. Highlights in this issue include: (1) a summary of legislative developments in Alabama, Arizona, Florida, Georgia, Idaho, Michigan, New Jersey, South Dakota, Utah, Virginia and West Virginia; (2) a summary of judicial developments in New Jersey and Virginia; (3) a summary of administrative developments in Colorado, Illinois, Indiana, Louisiana, Massachusetts, New Jersey, New York, North Carolina and Vermont; and (4) a discussion of state and local tax items to watch in Colorado, Iowa, Maryland, Missouri, New Jersey, New York, Oregon, Pennsylvania, Utah and Wisconsin. For a copy of the newsletter, see Tax Alert 2018-0758. Florida: New law (HB 7093) updates the state's IRC conformity date, decouples from certain provisions of the IRC, reduces the corporate tax rate, and requires the Florida Department of Revenue (Department) to study the impact of the Tax Cuts and Jobs Act (TCJA). Retroactively effective to Jan. 1, 2018, the date of the state's conformity to the IRC is Jan. 1, 2018. Provisions of HB 7093 also require corporate taxpayers to add back 100% of any amount deducted for federal income tax purposes as bonus depreciation (IRC §168(k)) for property placed in service after Dec. 31, 2017 and before Jan. 1, 2027. Taxpayers are allowed to subtract the amount added back over a seven-year period. HB 7093 also requires the state's corporate tax rate be reduced if revenue thresholds are met. The rate adjustment will be computed as provided in HB 7093; it is not a fixed adjustment. Lastly, HB 7093 requires the Department to study the impact of the TCJA and provide a report to the legislature by Feb. 1, 2019. Fla. Laws 2018, Ch. 2018-119 (HB 7093), signed by the governor on March 23, 2018. Georgia: New law (SB 328) excludes global intangible low tax income (GILTI) (as described in IRC §951A) from the Georgia corporate income tax base. Enactment of SB 328 reverses a recently enacted law change (HB 918, enacted March 2, 2018) that effectively subjected GILTI to Georgia taxation. Ga. Laws 2018, SB 328, signed by the governor on March 27, 2018. For additional information on this development, see Tax Alert 2018-0678. Idaho: New law (HB 624) modifies Idaho's conformity to the IRC in effect for a taxable years beginning on any date of 2017, to adopt certain provisions enacted by the Bipartisan Budget Act of 2018 (P.L. 115-123). Generally, Idaho conforms to the IRC in effect on Dec. 21, 2017. Effective retroactively to Jan. 1, 2018, HB 624 provides that IRC §§108, 163, 168(e), 168(i), 179D, 179E, 181, 199, 222 and 451 are applied as in effect on Feb. 9, 2018 . (Under other legislation enacted in 2018 (HB 355 and HB 463) IRC §§965 and 213 apply as in effect on Dec. 31, 2017). Idaho Laws 2018, Ch. 198 (HB 624), signed by the governor on March 20, 2018. Massachusetts: A stock sale of an S corporation (target) for which the target shareholders and the purchaser jointly elected under IRC §338(h)(10) to treat the sale as a disposition of the target's assets for federal income tax purposes and was treated the same for Massachusetts corporate excise tax purposes, triggered the statutory recapture provisions for Massachusetts's investment tax credits (ITC) and economic opportunity area credits (EOAC) previously taken. The Massachusetts Department of Revenue (Department) explained that it treats the target's assets as if they were disposed of to calculate basis and gain and as such the assets are treated as having been disposed of for credit recapture purposes. Further, the target is treated as having acquired the qualifying property in the transaction and as such the target (and not the purchaser) is allowed new ITCs on the acquisition of qualifying property in the transaction. The Department did not determine whether the purchaser and/or the target could take EOACs for property transferred in the transaction. Mass. Dept. of Rev., Letter Ruling 18-1: Impact of Federal 338(h)(10) Election on Certain Corporate Excise Credits (Feb. 23, 2018). New Jersey: On March 16, 2018, the New Jersey Division of Taxation (Division) issued guidance (NJ 965 Guidance) on the state corporate business and gross income (personal income) tax treatment of deemed repatriation dividends reported under IRC § 965 as amended by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). According to the NJ 965 Guidance, for New Jersey Corporation Business Tax (CBT) purposes, whether the deemed repatriation dividends are excludable from entire net income of a corporation that is a New Jersey taxpayer will be determined under N.J.S.A. 54:10A-4(k)(5). Under this provision, if the corporation owns 80% or more of a subsidiary, 100% of an amount treated as a dividend is excluded from entire net income. If the corporation owns between 50% and 80% of the foreign subsidiary, 50% of the deemed dividends are excluded. If the New Jersey taxpayer owns less than 50% of the stock of the foreign subsidiary, the entire amount of the deemed dividend is includable in entire net income. Further, the Division described the treatment of the IRC § 965 transition tax under the New Jersey Gross Income Tax (GIT), which applies to individuals, estates and trusts (including the treatment of amounts in the distributive share of income of individuals from partnerships and S corporations). For GIT purposes, the NJ 965 Guidance stated that dividends are an enumerated category of income. Thus, deemed repatriation dividends reported under IRC § 965 must be included in New Jersey gross income in the same tax year and in the same amount as reported for federal income tax purposes. For additional information on this development, see Tax Alert 2018-0666. New Jersey: The New Jersey Division of Taxation (Division) cannot assess Corporation Business Tax (CBT) against a partnership whose nonresident partners filed Form NJ-1065E with the partnership. The CBT, the New Jersey Tax Court (the court) held, is not directly assessed against partnerships. Instead, the only obligation of partnerships under the CBT is to collect Form NJ-1065E or pay the CBT on behalf of the nonresident partner. Thus, if the nonresident partner filed Form NJ-1065E with the partnership but failed to pay the tax due, the Division's only course of action is against the nonresident partner. National Auto Dealers Exchange, L.P. v. Director, Div. of Taxn., Dkt. No. 000028–2014 (N.J. Tax Ct. Feb. 26, 2018). For additional information on this development, see Tax Alert 2018-0696. New York (State and City): On March 22, 2018, the New York Department of Taxation and Finance (NYS Department) in TSB-M-18(1)C (TSB) announced that certain New York State (NYS) corporate taxpayers have until June 1, 2018 to withdraw the commonly owned group election previously made by their designated agent on a timely 2015 or 2016 Form CT-3-A, General Business Corporation Combined Franchise Tax Return (NYS combined return). Similarly, on March 29, 2018, the New York City (NYC) Department of Finance (NYC Department), in Finance Memorandum 18-3 (Finance Memorandum), announced the same commonly owned group election withdrawal procedures to be followed by June 1, 2018 on a tax year 2015 or 2016 Form NYC-2A, Combined Business Corporation Tax Return (NYC combined return). According to the TSB and the Finance Memorandum, the NYS and NYC Departments found several instances in which a designated agent made the election, which is irrevocable and binding for seven years, but not all corporations meeting the ownership requirements for the combined group were included in the 2015 and 2016 combined returns. Instead, corporations included in the combined group were the same corporations included in the designated agent's federal consolidated return for that tax year. Under the commonly owned group election requirements, all corporations that meet the ownership requirements must be included, regardless of whether the corporations are included in the same federal consolidated return. Given the confusion around which corporations are included in the combined group once the election is made and because the composition of the combined group may differ significantly when all the required corporations are properly included, the NYS and NYC Departments are temporarily permitting the designated agent to withdraw the election under certain limited circumstances. For additional information on this development, see Tax Alert 2018-0703. Utah: New law (SB 244) permits corporate taxpayers to pay the portion of Utah tax on the accumulated earnings for foreign corporations through its conformity to IRC § 965 in installments. The same provisions that apply to an election made under IRC § 965(h) for federal income tax purposes apply to an installment payment under this section. Utah Laws 2018, SB 244, signed by the governor on March 21, 2018. Vermont: The Vermont Department of Taxes (Department) issued a technical bulletin summarizing the state's corporate and business income tax nexus provisions and the circumstances under which a foreign business entity is deemed to have nexus in the state. The Department stated its view that under the state's laws a physical presence is not required to have a substantial nexus with the state. Instead, a foreign corporation will establish income tax nexus with Vermont when it "intentionally or regularly exploits Vermont's market." Examples of nexus creating activities include the following: using or selling intangible property in Vermont (e.g., receiving royalties, licensing software and other properties), meeting with clients in Vermont, holding an inventory of goods on consignment in Vermont, making loans using Vermont property as collateral and providing services in Vermont through an employee or an independent contractor, among others. Vt. Dept. of Taxes, TB-70 (March 1, 2018). Arkansas: Online educator professional development material in the form of written text, recorded video and recorded audio content (educational material) offered to public school teachers is subject to Arkansas's sales and use tax as a specified digital product. The educational material does not qualify for the sales and use tax exemption for "instructional material" (defined by Ark. Code Ann. §26-52-437 and Revenue Rule GR-69) because the term "student" under the statute does not include a professional teacher who is receiving instruction in the form of professional development. Additionally, the educational material does not meet the definitional requirement that the materials "be used in the learning process," which requires use as part of the classroom curricula and refers to the learning by students in public schools rather than learning by teachers to improve their educational practices and to meet state accreditation requirements. The education material, however, would be exempt from tax when sold over the internet to out-of-state schools and teachers. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Opinion No. 20180217 (March 1, 2018). Florida: New law (HB 7087) reduces the commercial real property rental tax to 5.7% (previously 5.8%) on the total rent or license fee charged for commercial real property, effective Jan. 1, 2019. Fla. Laws 2018, Ch. 2018-118 (HB 7087), signed by the governor on March 23, 2018. Florida: New law (HB 7087) exempts from sales and use tax the purchase of fencing materials used to repair agricultural fencing and certain building materials used to repair nonresidential farm buildings, each damaged as a direct result of Hurricane Irma. Both exemptions apply to purchases made between Sept. 10, 2017 and May 31, 2018, and are available through a refund of previously paid taxes. HB 7087 sets forth procedures for filing a refund and the information the application must include. These provisions took immediate effect and apply retroactively to Sept. 10, 2017. Fla. Laws 2018, Ch. 2018-118 (HB 7087), signed by the governor on March 23, 2018. West Virginia: New law (HB 4022) provides a sales and use tax exemption for purchases of certain services and tangible personal property sold for the repair, remodeling and maintenance of aircraft operated under a fractional ownership program. Applicable to sales made on and after Sept. 1, 2018, the exemption applies to the following sales associated with an aircraft operated under a fractional ownership program, sales of: (1) aircraft repair, remodeling and maintenance services; (2) permanently affixed or attached tangible personal property; and (3) machinery, tools or equipment directly used or exclusively consumed in the repair, remodeling and maintenance of aircraft, aircraft engines or aircraft component parts. A taxpayer entitled to the exemption must first pay tax to the vendor and then apply to the West Virginia Tax Commissioner for a refund or credit, or the taxpayer must give the vendor his or her West Virginia direct pay permit number. W. Va. Laws 2018, HB 4022, signed by the governor on March 20, 2018. Federal: In AM 2018-002, the IRS outlined several factors to assist in determining if investors in a partnership that operated refined coal production facilities may deduct Section 45 refined coal tax credits. As the credits may not be sold, investors must intend to become producers of refined coal through an investment in the partnership venture. The factors outlined can be used to determine the economic substance of a partnership agreement and the investor's entrepreneurial risk, but are not absolute. For additional information on this development, see Tax Alert 2018-0621. Arkansas: The Arkansas Department of Finance and Administration opined that there is no minimum portion of a tax year that an apprentice must participate in an approved apprenticeship program for the employer to claim the apprentice for the full $2,000 Apprenticeship Program Tax Credit. The employer claims the credit based on the amount and date payments are made to the apprentice, subject to the statutory limit of 10% or $2,000. The credit, however, can only be used once the apprenticeship classes have started; therefore, an employer that hires and enrolls an employee in the apprenticeship program cannot claim the credit before the apprenticeship program begins. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20171208-S (March 2, 2018). Florida: New law (HB 7087), to help ease a backlog of tax credit claims, authorizes a one-time additional tax credit of $8.5 million for fiscal year 2018-2019 for rehabilitation of dry cleaning-solvent-contaminated sites and brownfield sites in designated brownfield areas. Thus, the total amount of credit available for FY 2018-19 is $18.5 million, and $10 million for each year thereafter. This change takes effect July 1, 2018. Fla. Laws 2018, Ch. 2018-118 (HB 7087), signed by the governor on March 23, 2018. Arizona: In partially affirming the tax court's ruling, the Arizona Supreme Court held that the Arizona Department of Revenue is not authorized by Ariz. Rev. Stat. §42-14151(A) to centrally assess a corporation's leased solar panels because the corporation does not operate electric generation facilities and, consequently, the valuation method for renewable energy equipment under Ariz. Rev. Stat. §42-14155(A) is inapplicable. In partially reversing the tax court's ruling, the Court determined that leased solar panels are not real property since they are not land, mines or fixtures that are taxable as part of the real property, and instead are business personal property under Ariz. Rev. Stat. §42-12001(13) when the corporation uses them for a commercial purpose by leasing them to customers for a profit. The Court remanded to the tax court the question of whether county assessors have the authority to value the solar panels and if so, whether Ariz. Rev. Stat. §42-11054(C)(2) applies to mandate a zero-value assessment. If it does, the tax court also must determine whether the statute's application to the leased solar panels would violate the Arizona Constitution's Exemptions Clause or Uniformity Clause. Solarcity Corp., et al. v. Ariz. Dept. of Rev., No. CV-17-0231-PR (Ariz. S. Ct. March 16, 2018). Puerto Rico: The Puerto Rico Treasury Department has issued guidance (Circular Letter (CL) 18-03) for the electronic filing of corporate income tax returns for tax year 2017. For additional information on this development, see Tax Alert 2018-0653. Hawaii: The Hawaii Department of Labor & Industrial Relations announced that the state unemployment insurance (SUI) tax rates for 2018 will continue to range from 0.0% to 5.6% on Rate Schedule C. New employers continue to pay at 2.4% for 2018. Hawaii employers also continue to pay an Employment & Training Assessment for 2018 of 0.01%. For more on this development, see Tax Alert 2018-0695. Florida: New law (HB 7087) exempts from tax certain fuel purchased and used in Florida from Sept. 10, 2017 through June 30, 2018 in any motor vehicle driven or operated in Florida for agricultural shipment. The exemption applies to all state and county taxes authorized or imposed on motor fuels or special fuels, excluding taxes imposed under Fla. Stat. §§206.41(1)(a) and (h) (the 2-cent second gas tax/constitutional fuel tax and the additional 0.125 cents per net gallon tax, respectively). The exemption is only available through a refund from the Florida Department of Revenue. The refund application deadline is Dec. 31, 2018, and the refund application must include certain information. Lastly, HB 7087 provides that the sales tax on diesel fuel for business purposes does not apply to fuel that qualifies for this exemption. This provision took immediate effect and applies retroactively to Sept. 10, 2017. Fla. Laws 2018, Ch. 2018-118 (HB 7087), signed by the governor on March 23, 2018. Indiana: New law (HB 1323), effective Jan. 1, 2019, excludes heavy rental equipment from personal property tax and subjects it to heavy equipment rental excise tax. The heavy equipment rental tax is imposed at 2.25% of the gross retail rental income by a retail merchant at an Indiana location. Heavy rental equipment is defined to mean personal property (including attachments used in conjunction with the personal property) that: (1) is owned by a person or business classified under 532412 of the North American Industry Classification System Manual in effect on Jan. 1, 2018 (i.e., construction, mining and forestry machinery and equipment rental and leasing), and is a retail merchant in the business of renting heavy equipment; (2) is not intended to be permanently affixed to any real property; and (3) is not required to be registered for use on a public highway. Heavy rental equipment excludes equipment rented for mining purposes or equipment eligible for a property tax abatement deduction for rehabilitation or redevelopment of real property in economic revitalization areas. Ind. Laws 2018, PL 188 (HB 1323), signed by the governor on March 21, 2018. International: The Supreme Administrative Court of Lithuania (SACL) filed, in 2016, a request for preliminary ruling (case C-387/16) from the Court of Justice of the European Union (CJEU), with respect to the reduction of the late payment interest, payable on the tax receivable amount to Nidera B.V. (Nidera). Specifically, the SACL referred to the CJEU the question of whether Article 183 of Council Directive 2006/112/EC (the Directive), read in conjunction with the principle of fiscal neutrality, shall be interpreted as precluding a reduction in the interest that is normally payable under national law on a Value Added Tax (VAT) overpayment (excess), which was not refunded (set off) in due time, due to circumstances other than those resulting from the actions of the taxable person himself. For additional information on this development, see Tax Alert 2018-0619. International: The European Union (EU) has published new EU Value Added Tax (VAT) rules that are intended to simplify the VAT regime for e-commerce. The full set of new rules will enter into force on Jan. 1, 2021. However, from Jan. 1, 2019, businesses can begin to benefit from the simplified "place of supply rules" for the supply of electronic services as well as telecoms and broadcasting services. According to the European Commission, the new package of EU VAT rules could reduce the compliance costs for businesses selling to multiple EU Member States through online portals by up to 95%. For more information on this development, see Tax Alert 2018-0693. International: The Court of Justice of the European Union (CJEU) has rendered a preliminary ruling in the form of an order on case C-314/17 (Geocycle). The CJEU's decision addresses situations in which Value Added Tax (VAT) remains as a cost to a purely business to business supply chain due to the fact that the national legislation, in this case Bulgaria's national legislation, does not allow for the correction of invoices after a tax audit is completed. For more information on this development, see Tax Alert 2018-0694. International: The Saudi Arabian Ministry of Finance has issued Circular No. 71664 dated March 22, 2018 (05/07/1439H) to all government entities detailing their obligation to pay Value Added Tax (VAT) properly chargeable after Jan. 1, 2018 on supplies made to them by VAT-registered suppliers, in certain circumstances. For additional information on this development, see Tax Alert 2018-0677. All States: On April 18, 2018, from 1:00 -2:00 p.m. EDT (10:00-11:00 a.m. PDT), join Ernst & Young LLP for a webcast on state tax nexus judicial developments, with a focus on the impact of the court rulings in Quill, Geoffrey, Inc.; and the US Supreme Court oral arguments in South Dakota v. Wayfair. Building on our first webcast's historical overview of state income tax nexus, this second webcast in the series will provide an in-depth analysis of how state tax nexus theories have evolved. Specifically, the webcast will cover: (1) important state tax nexus judicial developments since Complete Auto Transit, with a focus on Geoffrey, Inc., and Quill; (2) an update on the US Supreme Court hearing in South Dakota v. Wayfair, a sales tax case challenging the continued viability of Quill, including highlights from the oral arguments scheduled for April 17, 2018, the day before the scheduled date of the webcast, and a discussion of how the Court may rule and potential implications for state income tax purposes. 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: 2018-0767 |
