26 April 2018 State and Local Tax Weekly for April 13 Ernst & Young's State and Local Tax Weekly newsletter for April 13 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. Kentucky legislature overrides governor's veto on tax reform legislation; sends governor more sweeping tax changes including combined reporting On April 13, 2018, the Kentucky legislature overrode Governor Matt Bevin's veto of HB 366, adopting significant changes to Kentucky's tax code. During the interim period between the veto and the veto override a number of concerns were identified with regard to HB 366, in particular the impact on manufacturers by the expansion of the Kentucky sales and use tax to the installation and repair of tangible personal property. To address this, and other concerns, the legislature on April 14, 2018, passed and sent to Governor Bevin HB 487. In a surprising move, the legislature, as part of HB 487, adopted mandatory combined reporting which, if enacted, would apply to taxable years beginning on or after Jan. 1, 2019. HB 366 makes major changes to the corporate tax structure in Kentucky. One of the most notable changes is a shift from the three factor (property, payroll, and double weighted sales) formulary apportionment formula to a single sales factor. The second switches Kentucky from a cost-of-performance sales factor sourcing state to a market-based sourcing state for sales of non-tangible property (e.g., intangibles, services). In line with the market-based sourcing rules in other states, Kentucky excludes sales of intangible property/services from the factor if the sourcing cannot be reasonably estimated. Moreover, HB 366 excludes all receipts from treasury functions from the definition of gross receipts and, hence, the sales factor. This is a significant change from current law as Kentucky allows the net gains from certain treasury functions to be included in the determination of the sales factor. These changes are effective for taxable years beginning on or after Jan. 1, 2018. In addition, HB 366 updates Kentucky's IRC conformity date to Dec. 31, 2017 for tax years beginning on or after Jan. 1, 2018. Kentucky will continue to decouple from bonus depreciation and the expanded expensing consistent with current Kentucky law. In conjunction with the IRC conformity update, HB 366 adopts a rate reduction, decreasing the corporate tax rate to a flat 5%, and also removes the Kentucky Domestic Production Activities Deduction to conform to the elimination of that provision by the federal Tax Cuts and Jobs Act (P.L. 115-97). These changes are effective for taxable years beginning on or after Jan. 1, 2018. Other major changes in HB 366 include an expansion of Kentucky's sales tax base. Receipts from services such as landscaping, janitorial, fitness and recreation sports centers, and extended warranties will be subject to sales tax. Furthermore, the base expansion includes charges for labor or services rendered in installing or applying tangible personal property, digital property, or services sold. These changes apply to transactions occurring on or after July 1, 2018. HB 366 also readies Kentucky in the event the physical presence nexus standard formally enunciated in Quill 1 is overturned by the U.S. Supreme Court in South Dakota v. Wayfair, 2 which was heard by the Court on April 17, 2018 with a decision expected by the end of June 2018. In the event Quill is overturned, the legislation will require a remote retailer of tangible personal property or digital property making sales to Kentucky residents to collect and remit sales tax if the remote retailer had 200 or more separate transactions or gross receipts that exceeds $100,000 in either the previous or current year. HB 366 makes changes to a number of credits and incentives Kentucky currently provides, including and most notably the motion picture credit. Kentucky currently provides a refundable motion picture credit for sales and use taxes paid on purchases made in conjunction with the filming or producing of motion pictures in Kentucky. Under HB 366 all applications for the refundable sales tax credit currently allowed are suspended until July 1, 2022. Additional credits currently allowed that are also suspended until July 1, 2022 include the Industrial Revitalization Tax Credit, Investment Fund Tax Credit, and Angel Investor Tax Credit. Finally, HB 366 provides additional taxpayer protections regarding appeals and assessments. HB 366 increases the current protest period from 45 days to 60 days for assessments issued on or after July 1, 2018, and extends the period from 30 days to 90 days to notify the Kentucky Department of Revenue of a final Revenue Agents Report in the event of a federal audit. For a discussion of the pending changes in HB 487, including the combined reporting provisions, see Tax Alert 2018-0819. Arizona: New law (HB 2647) modifies Arizona's date of conformity to the Internal Revenue Code (IRC). Arizona conforms to the IRC in effect as of Jan. 1, 2017. HB 2647 provides that for the purpose of computing income tax, for taxable years beginning from and after Dec. 31, 2016 through Dec. 31, 2017, the IRC means the IRC in effect on Jan. 1, 2017, including provisions of the Tax Cuts and Jobs Act (P.L. 115-97) that are retroactively effective during the taxable years beginning from and after Dec. 31, 2016 through Dec. 31, 2017. For taxable years beginning from and after Dec. 31, 2017, IRC means the IRC in effect on Jan. 1, 2017. Ariz. Laws 2018, Ch. 142 (HB 2647), signed by the governor on April 5, 2018. Idaho: New law (HB 514), retroactively effective to Jan. 1, 2018, amends what constitutes "qualified property" under the capital gains deduction provisions for property held by an estate, trust, S corporation, partnership, limited liability company or individual. "Qualified property" is expanded to include a partnership interest, other than a publicly traded partnership, held by an individual for at least 12 months, but only to the extent the gain from the interest's sale or exchange is attributable to the partnership's real property classified as a capital asset under IRC §1221 and is qualified real property held for at least 12 months. If the partnership holds property in addition to qualified real property, the taxpayer can choose one of two methods to determine the portion of the capital gain attributable to qualified real property: fair market valuation or adjusted basis allocation (these terms are defined by the bill). Idaho Laws 2018, Ch. 186 (HB 514), signed by the governor on March 20, 2018. New York: The New York Department of Taxation and Finance (Department) issued guidance on how individuals should treat IRC §965 repatriation income. Because individuals are required to include the net IRC §965 amount in their federal adjusted gross income (FAGI), such amount also is included in the individual's New York taxable income. For New York individual income tax purposes (including S corporations), no exemption or deduction for this income is available. Further, unlike the federal tax law which allows the tax to be paid over eight years (or in the case of an S corporation shareholder, defer the liability until a future specified triggering event happens), individual taxpayers must pay the additional New York tax generated by IRC §965 in the year it is recognized and included in FAGI. Due to the end of year enactment of IRC §965, it may cause taxpayers to underpay their New York personal income tax liabilities. The Department has determined that this "constitutes a reasonable cause" and suggests that taxpayers who receive a bill for underpaid tax, file a penalty waiver request (including a copy of their federal IRC §965 Transition Tax Statement with the request). N.Y. Dept. of Taxn. and Fin., Important Notice N-18-4 (April 13, 2018). Oregon: New law (SB 1528) requires an addition to federal taxable income for the amount allowable as a deduction under IRC §199A(a) — the deduction for qualified income of pass-thru entities — effective tax years beginning on or after Jan. 1, 2018. Provisions of SB 1528 also allow a credit against personal or corporate income and excise taxes for certified Opportunity Grant Contributions made to the newly established Opportunity Grant Fund. These credit/grant provisions apply to tax years beginning on or after Jan. 1, 2018 and before Jan. 1, 2024. Or. Laws 2018, Ch. 108 (SB 1528), signed by the governor April 13, 2018. Oregon: New law (SB 1529) updates Oregon's date of conformity to the IRC, requires add back of income under IRC §965, and repeals the state's tax haven laws. Effective for tax years beginning on or after Jan. 1, 2018, Oregon conforms to the IRC as amended and in effect on Dec. 31, 2017. The effective and applicable dates contained in the federal Tax Cuts and Jobs Act (TCJA) apply for Oregon corporate excise and income tax and individual income tax purposes, to the extent they can be made applicable, in the same manner as they are applied under the IRC and related federal law. Applicable to tax years beginning on or after Jan. 1, 2017, taxpayers are required to add back amounts deducted for repatriated income under IRC §965 (added by the TCJA). In addition, taxpayers are allowed to take a credit against their corporate excise and income tax for Oregon tax attributable to income reported under IRC §965 as post-1986 deferred foreign income. The credit may not exceed the lesser of (1) the amount of Oregon tax attributable to income reported under IRC §965 as post-1986 deferred foreign income for tax years beginning in 2017 or (2) the amount of Oregon tax paid attributable to the tax haven addition requirement, for tax years beginning in 2014 and before 2017. Further, Oregon's tax haven laws (ORS §§317.716 and 317.317) are repealed retroactively effective for tax years beginning on and after Jan. 1, 2017. Lastly, SB 1529 requires the Oregon Department of Revenue by Dec. 1 2020, to issue a report to the legislature regarding the relative efficacy of the provisions of ORS §317.716 (addition to unitary group income of taxable income or loss of certain corporations incorporated in offshore jurisdictions), in comparison to the provisions of IRC §951A, requiring the shareholders of controlled foreign corporations to include global intangible low-taxed income (GILTI) in gross income. Or. Laws 2018, Ch. 101 (SB 1529), signed by the governor April 10, 2018. Following the passage of SB 1529 the Oregon Department of Revenue (Department) posted guidance to its website regarding the required add back of amounts deducted for repatriated income under IRC §965. When computing Oregon taxable income, include the amount from Line 1 of the IRC 965 Transition Tax Statement (hereafter, federal statement) on Schedule OR-ASC-CORP (use code 184) and attach a copy of the federal statement to the Oregon return. The Department noted that Oregon's law does not conform to the federal provision allowing repatriated income to be paid over an eight- year period; thus, for Oregon tax purposes the entire amount of repatriated income is due by the due date of the Oregon return, excluding extensions. The Department further explained that the Oregon dividend received deduction (DRD) taken against the Oregon repatriation amount is not computed using Form OR-DRD. Rather, if the repatriation is derived from a 20% owned corporation, the subtraction is computed by multiplying the repatriation addition by 80% (otherwise the subtraction is computed by multiplying the repatriation addition by 70%). The subtraction is included on Schedule OR-ASC-CORP (use code 377). Lastly, the Department indicated that it is working on an administrative rule to provide guidance on how to compute the repatriation credit enacted under SB 1529. (It's anticipated that the draft regulation will be available for public comment beginning the first of May and effective the first of July.) Taxpayers will use Oregon Form OR-REPAT-CR, Repatriation Credit, (Due to IRC 965) (use code 870) to compute the credit. Or. Dept. of Rev., Current Corporate Tax Topics: SB 1529 has been signed by Governor Brown and will become effective on June 2, 2018 (last checked April 20, 2018). Arkansas: Mobile point-of-sale tablet devices used by a restaurant for tabletop access to menus, customer ordering, bill paying and premium content are not amusement devices subject to sales tax, amusement device privilege tax or other regulatory fees. The vendor that leases the tablets to the restaurant, however, has nexus with Arkansas and is required to collect and remit sales tax on certain tablet lease transactions. The restaurant's payment of premium content fees to the vendor as consideration for the tablets' lease may be subject to tax based on the lease length and whether the vendor initially paid sales or use tax on the tablet's acquisition. In terms of premium content fee commissions, premium content fees would be part of the total amount of consideration for which the tablet is leased, but if premium content revenue exceeds the amount the restaurant must pay as a service fee, the restaurant also is required to pay a percentage of that revenue as a premium content fee. If the restaurant collects only premium content fees as consideration for the tablets' leases, the premium content fees are the consideration for the lease and are subject to gross receipts tax, except for long-term rentals where the vendor already paid state sales tax. If the restaurant charges and customers pay a single, non-itemized fee for access to premium content that includes song selection among multiple features, gross receipts tax is due on the transaction. Lastly, a single premium content fee charged for unlimited access to games stored on the tablets and unlimited access to news events and social media is not subject to tax in Arkansas. Ark. Dept. of Fin. and Admin., Opinion No. 20160412 (March 21, 2018). Hawaii: New regulations (Haw. Admin. R. §§ 18-237-29.53-01 through -13) clarify how to determine whether gross income from services or contracting is exempt from Hawaii's general excise tax as exported services or contracting. Hawaii generally exempts from its general excise tax all of the value or gross income from contracting and services used or consumed out of state, and requires contracting or services that are used or consumed both inside and outside the state in proportion to the benefit received in Hawaii. The new regulations provide sourcing guidance, related definitions, and examples for the following: contracting, services related to real property and tangible personal property, services provided by a travel agency or tour packager at noncommissioned negotiated contract rates, legal services, debt collection services, services requiring a customer to be physically present, services performed by commissioned agents, and other services. The regulations do not apply to cancellation and forfeiture charges or telecommunication services. The regulations took effect March 17, 2018. Haw. Admin. R. §§ 18-237-29.53-01 through -13 (adopted March 8, 2018); see also Haw. Dept. of Taxn., Announcement No. 2018-05 (April 2, 2018). Kentucky: In reversing the appellate court, the Kentucky Supreme Court (Court) held that a corporation's purchases of natural gas it used to perform laundry services for three charitable hospitals is exempt from use tax because the tax exemption in Kentucky Constitution §170 for "institutions of purely public charities" only applies to property taxes. In so holding, the Court cited Children's Psych. Hosp.3 and overruled City of Elizabethtown,4 finding that the use tax on the corporation's natural gas purchases is not a property tax and should not be characterized as sufficiently similar to a property tax such that it qualifies for the exemption under Kentucky Constitution §170. Additionally, citing Gillis,5 the Court noted that from the historical context of the 1890 Kentucky constitutional debates, Kentucky Constitution §170 dealt only with property tax. The Court strictly construed the exemption and found that the use tax is an excise tax that is a complementary tax to the sales tax that is beyond the scope of the constitutional exemption. Ky. Fin. and Admin. Cabinet, Dept. of Rev. v. Interstate Gas Supply, Inc., No. 2016-SC-000281-DG (Ky. S. Ct. March 22, 2018). Louisiana: A business that welds and fabricates metal is not entitled to a sales tax refund for welding gases it purchased between January 2011 and February 2014 when two laws passed by the Louisiana legislature during its 2008 Second Extraordinary Session (Act 1 and Act 9) addressing a relevant exemption (La. Rev. Stat. 47:301(10)(x)) were in conflict, and the last expression of the legislature's will (Act 9) did not exempt the welding gases from tax. In so holding, the Louisiana Court of Appeal found that Act 9 (exempting only butane and propane gases) impliedly repealed Act 1 (excluding from tax any fuel or gas purchased) since the two Acts could not be reconciled consistent with legislative intent. Metals USA Plates & Shapes Southeast, Inc. v. La. Dept. of Rev., No. 17-699 (La. App. Ct., 3d Cir., March 21, 2018). Federal: On April 9, 2018, the IRS announced its designation of Opportunity Zones in 15 states and 3 territories, which will remain in effect for 10 years. New investments of capital gain properly made in these Opportunity Zones will now qualify for preferential tax treatment. The preferential tax treatment offered under the Opportunity Zone program is threefold: (1) Investors can defer tax on capital gains invested into Opportunity Zones until no later than Dec. 31, 2026; (2) Investors that hold the Opportunity Fund investment for five or seven years can receive a 10% or 15% reduction on their deferred capital gains tax bill; and (3) Investors that hold the Opportunity Fund investment for at least 10 years can receive the added benefit of paying no tax on any realized appreciation in the Opportunity Fund investment. Submissions were approved for: American Samoa, Arizona, California, Colorado, Georgia, Idaho, Kentucky, Michigan, Mississippi, Nebraska, New Jersey, Oklahoma, Puerto Rico, South Carolina, South Dakota, Vermont, Virgin Islands, and Wisconsin. For additional information on this development, see Tax Alert 2018-0806. New Mexico: The New Mexico Taxation and Revenue Department (Department) properly denied a corporation's application for the Technology Jobs and Research and Development Tax Credit for 2015 because the corporation was not a "taxpayer" for purposes of the credit statute. Further, a subsequent correction, in which the corporation sought to substitute itself with another entity and that was submitted after the credit application deadline, could not relate back to the original application and, therefore, the amended application was not timely filed. In so holding, the administrative law judge with the New Mexico Administrative Hearings Office explained that there is no statutory authority permitting the substitution of entities to relate back to the initial application date, or permitting the Department to accept a late-filed application. In re Protest of Wall Co. Inc. v. NM Taxn. and Rev. Dept., No. 18-08 (NM Admin. Hearings Ofc. March 8, 2018). West Virginia: New law (HB 4522) permits the West Virginia Tax Commissioner (Commissioner) to enter into written agreements with other state agencies to share certain tax information about a vendor or prospective vendor (vendor) for public contracts to confirm whether the vendor is in good standing. HB 4522 also permits the State Auditor to request and the Commissioner to provide confirmation regarding whether a vendor is in good standing with the Commissioner, including by reviewing and advising the State Auditor how much tax, interest and additions to tax are due and owing by a vendor to the Commissioner that should be either offset or referred to the vendor to resolve. HB 4522 takes effect June 7, 2018. W. Va. Laws 2018, Ch. 239 (HB 4522), signed by the governor on March 22, 2018. Colorado: The Colorado Department of Revenue released revised 2018 withholding tables in response to the federal Tax Cuts and Jobs Act. Employers are instructed to immediately begin using these revised withholding tables and continue to use them for the remainder of calendar year 2018. There is, however, no need to make retroactive withholding changes. Despite the adjustment in its 2018 income tax withholding tables, the Department states that federal tax changes may increase taxpayers' 2018 federal taxable income, which may, in turn, increase their Colorado state income tax liability. For additional information on this development, see Tax Alert 2018-0793. Oklahoma: The Oklahoma State Tax Commission (OTC) recently released a new state withholding allowance certificate, Form OK-W-4, Employee's Withholding Allowance Certificate, in response to federal changes under the federal Tax Cuts and Jobs Act. The new form should be used by new employees and any employee that wishes to make changes to their Oklahoma state income tax withholding. Use of the federal Form W-4 for Oklahoma state income tax withholding purposes is no longer allowed. For additional information on this development, see Tax Alert 2018-0777. Indiana: New law (HB 1290) repeals Indiana's motor carrier surcharge tax, increases the special fuel tax, and amends the commercial vehicle excise tax (CVET) calculation. For July 1, 2018 through June 30, 2019, the special fuel tax is the rate in effect on June 30 plus $0.21 multiplied by the annual index factor determined under Ind. Code §6-6-1.6-3. Beginning July 1, 2019, and each July 1 through July 1, 2024, the special fuel tax rate is the rate in effect on June 30 multiplied by the annual index factor. The rate is rounded to the nearest $0.01. After June 30, 2018 and before July 1, 2019, the new rate may not exceed the rate in effect on June 30 plus $0.23. After June 30, 2019, the new rate may not exceed the rate in effect on June 30 plus $0.02. Lastly, provisions of the bill exclude the transportation infrastructure improvement fees and the supplemental fees to register electric vehicles and hybrid vehicles from the CVET factor, which is used in determining the CVET. Unless otherwise noted, these changes take effect July 1, 2018. Ind. Laws 2018, PL 185 (HB 1290), signed by the governor on March 21, 2018. International: After Thailand's Revenue Department proposed a draft bill in relation to the Value Added Tax (VAT) rules for nonresident e-commerce, it invited the public to provide comments on the draft bill in early February 2018. The results of this public consultation were reported during the week of April 2. Of the 23 comments received, 17 expressed disagreement with the proposed draft bill while six were in agreement. For additional information on this development, see Tax Alert 2018-0780. 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 South Dakota v. Wayfair, Inc. et al, 2017 S.D. 56 (S.D. S. Ct. Sept. 13, 2017), petition for cert. granted, Dkt. No. 17-494 (U.S. S. Ct. Jan. 12, 2018). Document ID: 2018-0894 |
