16 April 2018 State and Local Tax Weekly for April 6 Ernst & Young's State and Local Tax Weekly newsletter for April 6 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 legislature sends governor budget bill addressing state and city tax effects of federal income tax reform, among other provisions On March 30, 2018, the New York State (NYS) Legislature passed the New York FY 2018-19 budget bill (A.9509-C/S7509-C) (Final Bill). The Final Bill was delivered to Governor Cuomo for signature on April 2, 2018 (it was signed April 12, 2018). The Final Bill includes some of the provisions that Governor Cuomo proposed in his Executive Budget Bill and some of the provisions included in the NYS Senate and Assembly's versions of the revenue legislation. Several of the key provisions in the Final Bill amend the NYS Tax Law and the personal and business income tax provisions of the New York City (NYC) Administrative Code to address some of the tax issues created by the enactment of the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) due to the state and city's rolling conformity to the federal tax law. The Final Bill contains the following provisions, among others: — Part KK, which addresses various provisions of the TCJA impacting Article 9-A (NYS corporate franchise tax), Article 33 (NYS tax on insurance companies) and the NYC Corporation Tax — Part LL, which addresses the establishment of government sponsored charitable contribution funds ostensibly to alleviate the effects of the $10,000 annual limitation on the federal state and local tax deduction wrought by the TCJA For additional information on this development, see Tax Alert 2018-0720. On April 3, 2018, Governor Scott Walker signed 2017 Assembly Bill 259 (AB 259) into law.1 AB 259 contains tax-related changes impacting individuals, corporations, S corporations and insurance companies. Some of these changes respond to the significant changes in federal tax law under the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). Wisconsin is a fixed conformity state with regard to its references to the Internal Revenue Code (IRC). For tax years beginning before Jan. 1, 2018, Wisc. Stat. § 71.22(4)(k)(3) is amended to provide that the reference to the IRC does not include amendments made after Dec. 31, 2016, except for certain provisions of the TCJA; specifically, those provisions of the TCJA relating to increased contributions to ABLE accounts, rollovers from 529 programs to ABLE accounts, and the modification of the treatment of S to C corporation conversions. Accordingly, Wisconsin adopts neither the transition tax under IRC § 965 nor the immediate expensing provisions under IRC § 179 of the TCJA for tax years ending before 2018. For tax years beginning after Dec. 31, 2017, Wisc. Stat. § 71.22(4)(L) is added to update the IRC reference to Dec. 31, 2017. AB 259 decouples from various provisions of the TCJA, including amendments to IRC §§162(r) (limitation on deduction for FDIC premiums); 199A (deduction for qualified business income); 461 (limitation on losses for non-C corporation taxpayers); 168(k) (bonus depreciation); 174 (amendments to amortization of research and experimental expenditures); 163(j) (limitations on business interest deductions); 162(m); 274 (modification of limitation on excessive employee remuneration and fringe benefit expenses); 245A, 1248 (deduction for dividends received from 10%-owned foreign corporations); 451 (accounting methods); 951A, 250 (GILTI and corresponding deduction, as well as the FDII deduction); 59A (BEAT); 965 (transition tax). Wisconsin Stat. §§ 71.10(1m)(c), 71.30(2m)(c) and 71.80(1m)(c) are amended to change the standard of proof a taxpayer must meet to establish a transaction has economic substance from a "clear and convincing evidence" standard to "clear and satisfactory evidence" standard. Lastly, AB 259 amends Wisc. Stat. § 73.16(3)(c) to preclude a taxpayer's reliance on the result of past audits when: (a) the Wisconsin Department of Revenue (Department) establishes, by clear and satisfactory evidence, that the taxpayer provided incomplete or false information relevant to the tax issue in the prior audit determination; (b) the tax issue was settled in the prior audit determination by a written settlement agreement between the parties that was entered before the law's effective date; or (c) the tax issue was settled in the prior audit determination by a written agreement between the parties entered on or after the law's effective date, and in which the parties acknowledged that the Department did not adopt the taxpayer's position. This provision is effective on the effective date of AB 259, regardless of when the prior audit determination was issued. For additional information on this development, see Tax Alert 2018-0736. Arizona: New law (SB 1405) allows a multistate service provider to include sales from intangibles in the calculation of the percentage of revenue generated inside or outside Arizona in determining whether it can elect to use the revenue sourcing method (i.e., elect to treat sales from services as being in Arizona),. The term "sales from intangibles" is defined as "sales derived from credit and charge card receivables, including fees, merchant discounts, interchanges, interest and related revenue." These changes take effect and apply to taxable years beginning from and after Dec. 31, 2019. Ariz. Laws 2018, SB 1405, signed by the governor on March 29, 2018. New Jersey: On March 19, 2018, the New Jersey Tax Court (Tax Court), responding to a motion to reconsider its ruling in Infosys Limited of India, again held that the New Jersey Division of Taxation (Division) cannot impose the state's corporate business tax (CBT) on a multinational corporation's foreign-source income that is not taxable for US federal income tax purposes because New Jersey law adopts federal taxable income (Federal 1120-F Line 29) as the starting point for its tax base. In this ruling, the Tax Court amplified its prior decision, and analyzed the statutory language of N.J.S.A. 54:10A-4(k)(2)(A), which permits addback of specific exemptions and credits allowed under the federal income tax law but not the CBT. The Tax Court emphasized that the state statute did not apply because a treaty is not a federal income tax law providing a specific exemption or credit. Rather, a treaty is a separate part of the supreme law of the land, and it categorically removes certain items from even being considered as income. For additional information on this decision, see Tax Alert 2018-0729. North Carolina: The North Carolina Department of Revenue (Department) issued guidance on how to compute gross income from corporations in determining whether a taxpayer meets the definition of a "holding company" for purposes of calculating a corporation's annual franchise tax liability. The Department advised taxpayers to compute gross income from corporations as computed for corporate income tax purposes in applying the test in N.C. Gen. Stat. § 105-120.2(c)(2). Under this test, amounts received from a corporation meeting the ownership test would include gross income items from disregarded limited liability entities because they do not file separate federal or state tax returns. N.C. Dept. of Rev., Directive CD-18-1 (issued March 6, 2018). Ohio: New law (Sub. SB 22) updates Ohio's conformity to the Internal Revenue Code (IRC), incorporating certain provisions of the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) that affect individual taxpayers. SB 22 amends Ohio Rev. Code § 5701.11(A)(1) to define the IRC to be the version in existence as of the effective date of the legislation, March 30, 2018. Ohio Rev. Code § 5747.01(B)(1) allows a taxpayer with a tax year ending after March 30, 2017, and before March 30, 2018, to irrevocably elect to incorporate changes made to the IRC for that tax year but before the effective date. Taxpayers make the election by filing their Ohio returns incorporating those changes. A second bill, Sub. H.B. 24 (HB 24), retroactively expands the individual income tax deduction for certain medical expenses. Both bills went into immediate effect. Ohio Laws 2018, SB 22 and HB 24, signed by the governor on March 30, 2018. For additional information on these developments, including TCJA implications (with a focus on Sections 199A, 168(k), 163(j), and NOLs), see Tax Alert 2018-0730. Utah: New law (HB 293 and SB 27) reduces the corporate income tax rate and phases in a mandatory single sales factor apportionment formula to be used by most corporations. Effective retroactively for taxable years beginning on and after Jan. 1, 2018, Utah's corporate income tax rate is reduced to 4.95% (from 5.00%). Starting in 2019, a mandatory single sales factor apportionment factor will be phased in for corporations, except for corporations that already are sales factor weighted taxpayers or are optional apportionment taxpayers (i.e., are required or permitted to use different apportionment formulae). The Utah single sales factor apportionment formula will be phased-in as follows: (1) for a taxable year beginning in 2019, the apportionment formula is the property factor, the payroll factor and four times sales factor and a denominator of six; (2) for a taxable year beginning in 2020, the apportionment formula is the property factor, the payroll factor and eight times sales factor and a denominator of ten; and (3) for a taxable year beginning in 2021 and thereafter, a single sales factor apportionment formula applies. In addition, HB 293 and SB 72 modify provisions related to "sales factor weighted taxpayers" and "optional apportionment taxpayers," including how these terms are defined. Utah Laws 2018, HB 293, signed by the governor on March 26, 2018; SB 27, signed by the governor March 27, 2018. Virginia: On a motion for rehearing in Kohl's Department Stores, the Virginia Supreme Court again ruled that a multistate retailer is required to add-back royalties paid to an out-of-state related corporation (in this case, an Illinois entity) because these payments did not qualify for the "subject to tax" safe harbor exception to Virginia's intercompany addback statute. In so holding, the court upheld a lower court ruling and concluded the "subject to tax" exception "applies only to the extent that the royalty payments were actually taxed by another state" (i.e., it applies on a post-apportionment basis only). The court, however, also held that the exception applies to the extent the royalties were actually taxed in another state regardless of which entity paid the tax. Kohl's Dept. Stores, Inc. v. Virginia Dept. of Taxn., No. 160681 (Va. S. Ct. March 22, 2018) (replaces the Aug. 31, 2017 opinion).2 Arizona: New law (SB 1390) establishes an additional 0.6% Transaction Privilege Tax (TPT). The additional TPT will be imposed from and after June 30, 2021 through June 30, 2041. (Note: an additional 0.6% TPT approved in 2000 (through ballot measure), expires June 30, 2021). Ariz. Laws 2018, Ch. 74 (SB 1390), signed by the governor on March 24, 2018. Idaho: New law (HB 578) expands Idaho's sales and use tax nexus standard by adopting click-through nexus provisions. Under the new provisions, a retailer is presumed to have nexus with the state if the retailer enters into an agreement with one or more persons engaged in business in this state and the person, for commission or other consideration, refers potential purchasers to the retailer, directly or indirectly, through a link on an internet website, written or oral presentation, or otherwise. The presumption only applies if the cumulative gross receipts from such sales are greater than $10,000 during the immediately preceding 12 months. Retailers can rebut this presumption. These provisions take effect July 1, 2018. Idaho Laws 2018, Ch. 220 (HB 578), signed by the governor on March21, 2018. South Carolina: A big-box home improvement company is liable for sales tax based on the retail selling price of materials used in install contracts sold to customers rather than use tax on the wholesale cost of the material used in the install contracts (the company used its resale certificate to purchase the materials free of sales tax, and paid use tax on the wholesale cost when the material was sold). While the company is both a retailer and a contractor at different stages of the install contractor process, it was acting as a retailer at the point of the install contract transaction when the customer pays for the materials listed in the install contract. In so holding, an administrative law judge (ALJ) with the South Carolina Administrative Law Court found that the company's offer of installation services is contingent upon the customer purchasing materials from its store; consequently, "the purchase of materials cannot be subsumed into the service part of the install contract where [the company] functions as a contractor." Further, the sale of the materials "fits within the description of a traditional retail sale" as the materials are selected from tangible personal property sold by the company, the customer pays for materials at the cash register and pays the retail sales price for the materials, the customer is paying for the materials separately from the charge for labor, and the customer obtains title to the property at the point of paying for the materials as part of the install contract. Moreover, the ALJ found that the company's interpretation of SC Code Regs. Ann. 117-314, allowing it to pay use tax on the wholesale cost of materials unlike any other contractor, was absurd. The ALJ further concluded that the South Carolina Department of Revenue incorrectly categorized the retail sale as the withdrawal, use or consumption of the install contract material, but this mistake did not change the assessment. Home Depot U.S.A, Inc., d/b/a The Home Depot v. SC Dept. of Rev., No. 15-ALJ-17-0253-CC (SC Admin. Law Ct. March 12, 2018). Idaho: New law (HB 591) clarifies Idaho's tax exemption for new capital investments of at least $1 billion. The definition of "qualifying new capital investment" and the calculation to determine the qualifying new capital investment value are modified to include an investment in operating property (previously, the investment provided for an investment in real and personal property). The bill also modifies the definition of "qualifying period" for the exemption to mean 84 months, beginning with the issuance of a building permit (previously, the 84-month period began with first inspection), for a permanent building structure at a project site. Lastly, the definition of "project site" is amended to make clear that that the qualifying investment includes personal property and fixtures constructed off-site but installed on-site; specifically it means "an area or areas at which the new plant and building facilities are built, installed or constructed." (emphasis added to show new text) Idaho Laws 2018, Ch. 151 (HB 591), became law without the governor's signature on March 20, 2018. Nebraska: New law (LB 936) lengthens the business incentives performance audit schedule, clarifies business incentives benchmarks and metrics, and provides definitions. The schedule to conduct tax incentive performance audits is extended to once every five years (from, once every three years). In analyzing whether a tax incentive program is strengthening the state's economy overall by increasing employment of full-time workers, Nebraska will consider whether the job growth in businesses receiving tax incentives is at least 10% above industry averages. Additionally, in analyzing economic and fiscal impacts of tax incentives, the analysis may consider the costs per full-time worker (when practical and applicable, such cost will be considered by estimation including either (1) the minimum investment required to qualify for benefits or (2) all investment). In addition, the bill includes new definitions of distressed areas, full-time worker, high-quality job, high-tech firm, Nebraska average weekly wage, new business, renewable energy firm, rural area and unitary group. LB 936 takes effect three months after the Nebraska legislature adjourns. Neb. Laws 2018, LB 936, signed by the governor on March 21, 2018. New Jersey: An entity that operates a for-profit restaurant under a management subcontract agreement (MSA) with a New Jersey public university is subject to local property tax on the portion of the building it occupies as it does not qualify for the property tax exemption. The New Jersey Tax Court (court) found the entity ineligible for the property tax exemption under NJ Stat Ann. § 54:4-3.3, which exempts government property used for a public purposes, because neither the entity nor the university (which is a governmental entity) established that the restaurant was used for public purpose. The court found that: (1) the restaurant operates for-profit and is not devoted to serving the basic needs of the student body, administrators, or faculty, and thus fails to be "directly related to the functions of government;" (2) there was no contractual requirement that the entity remit a percentage of money to the university's foundation for scholarships; and (3) neither the temporary employment of university students nor alleged environmental stewardship (compostable waste removal and purchases of produce from the university) satisfied the statutory requirement of "used for public purpose." Further, the entity does not qualify for exemption based on the property's actual use because it receives the profits, and the property does not constitute a use for "colleges, school, academies or seminaries." The entity, university, or university foundation also are not agents of the New Jersey Educational Facilities Authority (NJEFA); therefore, the exemption under NJ Stat. Ann. § 18A:72A-18 for a project or any property used by the NJEFA or its agent does not apply. The court noted that no legal precedent or statutory authority exists providing a tax exemption for an agent of an agent of the NJEFA. Lastly, the court found the entity's leasehold interest in and to the property is subject to assessment and taxation under NJ Stat. Ann. § 54:4-2.3 because the entity has the exclusive use, enjoyment and possession of the property. Gourmet Dining, LLC v. Union Twp., Kean Univ. and NJ Educ. Facilities Auth., Nos. 016504–2013 and 012334–2014 (N.J. Tax Ct. March 14, 2018). Alabama: New law (SB 182) imposes certain disclosure requirements related to commercial and industrial property valuations in protests and appeals of commercial or industrial property valuation before the board of equalization or the circuit court. Any party that intends to use a sale or lease transaction as evidence of the property's value must disclose each of the following: (1) whether the proposed comparable property was occupied or unoccupied at the time of the transaction; and (2) whether the proposed comparable property was subject to any use, deed or lease restriction at the time of the transaction that prohibits the property on which a building or structure sits from being used for the purposes for which the building or structure was designed, constructed, altered, renovated or modified. If this information is not disclosed when the sale or lease transaction is offered into evidence, the sale or lease transaction will not be admissible. This provision took immediate effect. Ala. Laws 2018, Act 265 (SB 182), signed by the governor on March 20, 2018. Arizona: In partially reversing the tax court, the Arizona Court of Appeals (court) upheld the validity of a car-rental surcharge enacted to generate revenue to pay for a sports stadium,3 finding the surcharge does not violate the anti-diversion provision in Ariz. Const. Art. IX, Sec. 14 (which directs that revenue collected from certain fees, excises or license taxes related to registration, operation, or use of vehicles on public highways and streets be spent on highways and streets), or the Dormant Commerce Clause. The court, citing three Ohio appellate cases,4 found that based on the anti-diversion provision's text, context and history, the provision does not apply to every tax or fee "relating to" vehicles. Rather, it applies to taxes and fees that are "a prerequisite to, or triggered by, the legal operation or use of a vehicle on a public thoroughfare." In this case, Section 14 does not encompass the surcharge at issue, because the surcharge is imposed on car-rental businesses and not car-rental customers. The court affirmed the tax court's ruling that the surcharge did not violate the Dormant Commerce Clause, finding: (1) no facial discrimination, since the tax is imposed on all car-rental business revenues generated in Maricopa County regardless of where customers live; (2) no discriminatory effect, when the surcharge is imposed at the same rates on all car-rental revenues; and (3) no discriminatory purpose sufficient to invalidate the surcharge. Saban Rent-A Car LLC, et al. v. Ariz. Dept. of Rev., No. 1 CA-TX 16-0007 (Ariz. App. Ct., Div. 1, March 13, 2018). Virginia: The U.S. Supreme Court will not review the Virginia Supreme Court decision in Dulles Duty Free that a county is barred by the US Constitution's Import-Export Clause from imposing its business, professional, and occupational license (BPOL) tax on a retailer's gross receipts from sales of merchandise to international passengers (i.e., export goods in transit). Dulles Duty Free, LLC v. Loudoun Cnty., No. 160939 (Va. S. Ct. Aug. 24, 2017), petition for cert. denied, Dkt. No. 17-904 (U.S. S. Ct. April 2, 2018). California: Legislation proposed in California, AB 2773, if enacted, would establish a voluntary disclosure program (VDP) to resolve unclaimed property (UP) claims. In exchange for participating in the VDP, the California State Controller (Controller) would waive otherwise applicable interest and penalties imposed on UP holders. The VDP would end Jan. 1, 2024. For additional information on this development, see Tax Alert 2018-0739. Federal: The United States Trade Representative (USTR) published a proposed list on April 3, 2018, of Chinese goods targeted for assessment of an additional 25% duty upon importation into the United States (US). The detailed list of targeted products contained in the "USTR Notice" follows President Trump's announcement on March 22, 2018 that China's alleged theft of US intellectual property, estimated to cost US$50 billion per year, will be offset through the suspension of commensurate trade concessions to China. As reported on March 22, 2018 the President ordered the USTR to propose a list of products from China, pursuant to an investigation under Section 301 of the Trade Act of 1974 (Section 301). For additional information on this development, see Tax Alert 2018-0727. 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. 2 The court reached the same conclusion, but modified its rationale, specifically the weight given to the Virginia Department of Taxation's interpretation of the law. 4 Ohio Trucking Assn. v. Charles, 983 N.E.2d 1262 (Ohio 2012); Beaver Excavating Co. v. Testa, 983 N.E.2d 1317, 1319-20, 1 (Ohio 2012); and Fowler v. Ohio Dpt. Of Pub. Safety, No. 16AP-867 (Ohio Ct. App. Aug. 1, 2017). Document ID: 2018-0816 |
