03 May 2018 State and Local Tax Weekly for April 20 Ernst & Young's State and Local Tax Weekly newsletter for April 20 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. US Supreme Court hears oral arguments in Wayfair case; questions from the bench do not appear to favor either side On April 17, 2018, the U.S. Supreme Court heard oral arguments in South Dakota v. Wayfair,1 a case that may determine the future of the Quill2 physical presence nexus requirement for sales and use tax collection purposes. The case involves South Dakota SB 106, which was enacted in 2016 and which imposes an economic nexus standard on remote sellers that lack an in-state physical presence for collection of South Dakota sales and use taxes on sales to in-state customers. The state has conceded that the law is unconstitutional under current Commerce Clause jurisprudence, both the state's circuit court and Supreme Court agreed, but the state continues to assert that the Quill standard has become unworkable in light of advances in technology and the growth of Internet commerce. Before the arguments in Wayfair, consensus within the state tax community was that the Court granted certiorari for the sole purpose of overturning Quill. Following the arguments, this sentiment has changed, and it now seems that overturning Quill is not a foregone conclusion. The Justices' questioning focused on the consequences of overturning Quill, including retroactive application of any such ruling, the costs of compliance with states' sales and use tax collection and remittance requirements, the minimum standard for establishing nexus, and whether Congress is better equipped to deal with this issue than the Court. After asserting that the states are "losing massive sales tax revenues" and that local small businesses "are being harmed because of the un-level playing field created by Quill," South Dakota Attorney General Marty Jackley came under intense questioning regarding whether the problem was the Quill standard or whether it was the fact that the states lacked an effective mechanism by which to collect sales and use taxes. The Justices also expressed concern that if they were to abrogate the Quill standard, the states would have a free hand to apply a collection obligation retroactively against remote sellers and whether the removal of Quill would create bigger issues and ultimately increase costs for small businesses. In response to Justice Alito's question of which of the following is the preferred option — (A) eliminate Quill and let states do whatever they want in imposing a retroactive liability and setting a minimum sales threshold for creating nexus; or (B) a congressional law dealing with these issues, Mr. Jackley chose the first option, noting the lack of congressional action over the last 26 years. Justice Kagan, and later in the argument, Chief Justice Roberts, made the point that this is an issue Congress is aware of and perhaps Congress has intentionally chosen not to act. Justice Breyer further noted that the Court is "more willing to overturn a constitutional case … because Congress can't act. But, here, they can act." Speaking in support of the state, United States Solicitor General Malcolm Stewart noted that Congress ultimately can impose a solution, and that if states were given greater latitude to experiment with different taxing schemes, Congress would have more tax models to choose from and it could pick aspects of the various laws it liked. Stewart further pointed out that the Quill decision did not deal with the Internet. Stewart noted that "the Court used the term 'physical presence requirement,' … as shorthand for [the] principle [that if the out-of-state retailer's only contact with the taxing state was delivery of goods and catalogs by mail or common carrier that was insufficient], but the Court was not saying anything one way or the other about the role of a pervasive Internet presence in establishing sufficient contacts with the state to allow for the collection duty." Later in his argument Stewart referred back to this point, and suggested that as an alternative to overturning Quill, the Court could clarify it. Chief Justice Roberts questioned Stewart as to whether there is a constitutional minimum that would cause a small business to have a greater burden than large on-line retailers, to which Stewart replied that, based on dormant Commerce Clause jurisprudence, there is no constitutional minimum. Justices Ginsburg and Kagan questioned whether Congress is better equipped to deal with this issue and establish a minimum, with Justice Kagan noting that "Congress is capable on crafting compromises and trying to figure out how to balance the wide range of interests involved here." Justice Breyer expressed concern that entry barriers to the Internet marketplace would rise too high, and wondered if there was a way of "putting minimums in that would, in fact, preserve the possibility of competition … ." The Justices then questioned George Isaacson, counsel to Wayfair and the other respondents. The questions from the Justices, in particular from Justice Breyer, focused on the conflicting and wide ranging differing amounts before the Court regarding compliance costs and lost revenues, among other figures. Justice Breyer also questioned how to determine which side is correct when both positions are logical. Justice Ginsburg wanted to know why requiring an out-of-state seller to collect tax on goods shipped into a state isn't equalizing rather than discriminatory against interstate commerce, while Justice Gorsuch wanted to know why the Court should favor "a particular business model that relies not on brick and mortar but on mail order?" Before Mr. Isaacson could fully respond to this question, Justice Breyer wanted to know how much it would cost to comply asking what would it cost a hypothetical mandolin seller who sells on the Internet to sell into all 50 states? What is the mandolin seller's cost to enter into the market? How much does it cost a large online retailer to comply? Justice Gorsuch asked Mr. Isaacson whether complying with the notice and reporting requirements adopted by Colorado are more burdensome than collecting and remitting the tax, and Justice Sotomayor asked whether there was "anything [the Court] can do to give Congress a signal that it should act more affirmatively in this area?" While Mr. Isaacson said he did not want to "advise this Court on … how it should relay to Congress," he suggested that "all the players involved in this issue are in favor of federal legislation." This led Justice Kennedy to question whether the assumption in asking Congress to act is that Quill was incorrectly decided, and Justice Ginsburg to ask whether the Court should "take responsibility to keep our case law in tune with the current commercial arrangements?" For more on this development, including potential implications, see Tax Alert 2018-0851. Alabama: New law (HB 384) starting in 2018 limits the applicability of Alabama's income tax credit for taxes paid to another state or territory so that the credit can only offset the portion of a taxpayer's Alabama income tax liability attributable to the income derived from sources outside the state for which the income taxes were paid for that tax year. This amount is determined by multiplying the taxpayer's Alabama income tax liability before consideration of the credit by a fraction, the numerator of which is the taxpayer's total adjusted gross income attributable to other states or territories for which the taxpayer paid (or an entity paid on taxpayer's behalf) income or equivalent taxes, and the denominator of which is total Alabama adjusted gross income. HB 384 further provides that taxpayers can file refund petitions for overpaid income tax for the 2013 through 2017 tax years, without being subject to this statutory limitation or the limitation in the version of Ala. Admin. Code r. 810-3-21-.03 in effect as of the effective date of HB 384.3 Refund petitions for these income tax overpayments paid for tax years before 2017 must be submitted by the earlier of the expiration of the statutory period for filing a refund claim or June 30, 2018. HB 384 took effect for tax years beginning on or after Jan. 1, 2018. Ala. Laws 2018, Act 465 (HB 384), signed by the governor on March 28, 2018. Connecticut: The Connecticut Department of Revenue Services (DRS) has issued Office of the Commissioner Guidance, OGC-4, detailing the state's treatment of the federal transition tax under IRC §965, and reporting requirements for Corporation Business Tax, Pass-Through Entity Tax, Personal Income Tax and Fiduciary Tax returns. A taxpayers must report its Section 965 income, in its entirety, on its 2017 Connecticut return. The guidance reinforces that Connecticut treats Subpart F income as dividend income, and will follow the federal dividend treatment of Section 965 income. Unlike federal law, however, Connecticut will not allow taxpayers to elect to defer payment of any portion of the tax associated with Section 965 income. For additional information on this development, see Tax Alert 2018-0842. Tennessee: The Tennessee Department of Revenue issued guidance on repatriated earnings subject to the transition tax under IRC §965, for corporations, S corporations, partnerships, and REITs. For Tennessee tax purposes, corporations and other entities filing federal Form 1120 should not include repatriated earnings in the net earnings calculation on Schedule J-4, nor should they be deducted as dividends or included in the apportionment formula. Similarly, S corporations should not include repatriated earnings, and related deductions from Form 1120-S, Schedule K, in the net earnings calculation on Schedule J-3, or deduct them as dividends or include them in the apportionment formula. Partnerships and other entities filing federal Form 1065 should include repatriated earnings and related exclusion amounts in the net earnings calculation on Schedule J-1. A dividends received deduction (DRD) from an 80% or more owned corporation may be made on Schedule J in the amount of the repatriated earnings less the exclusion amount. Further, the apportionment formula should include repatriated earnings less the related exclusion amount and DRD. Lastly, REITs filing federal Form 1120-REIT should include the amount of repatriated earnings less dividends paid in the net earnings calculation on Schedule J-4. REITs can deduct the amount received from an 80% or more owned corporation, net of any exclusion amount, to the extent they are included on Schedule J-4. Similar to partnerships, REITs should include repatriated earnings less the related exclusion amount and any DRD in its apportionment formula. Tenn. Dept. of Rev., Notice #18-05 (April 2018). Alabama: New law (HB 470) amends sales and use tax provisions related to remote entity nexus and marketplace facilitators and sellers. HB 470 allows an out-of-state vendor that is an eligible seller participating in Alabama's Simplified Sellers Use Tax (SSUT) Remittance Program to continue its participation in the program after it establishes substantial nexus in Alabama through the acquisition of an in-state business. Further, HB 470 expands the definition of "eligible seller" to include a marketplace facilitator for all sales made through its website by or on behalf of a marketplace seller. Eligible sellers can keep 2% of the SSUT collected and timely remitted; for tax periods beginning on or after Jan. 1, 2019 the allowance for discount does not apply to any taxes collected and remitted in excess of $400,000. Marketplace facilitators must, by Jan. 1, 2019, either (1) register with the Alabama Department of Revenue to collect and remit SSUT on retail sales made through the marketplace by or on behalf of a marketplace seller that are delivered in Alabama, or (2) report the retail sales and provide customer notifications. (HB 470 defines marketplace facilitator and marketplace seller.) This applies to any marketplace facilitator that for the previous 12 months has more than $250,000 in Alabama retail sales through the marketplace (by both the marketplace facilitator and marketplace sellers). The collection and remittance of SSUT relieves the marketplace facilitator, the marketplace seller and the purchaser from any additional state or local sales and use taxes on the transactions. In addition, HB 470 prohibits class action suits against marketplace facilitators for overpayment of SSUT collected and remitted on sales facilitated by the marketplace facilitator. HB 470 takes effect June 1, 2018. Ala. Laws 2018, Act 539 (HB 470), signed by the governor on April 6, 2018. Utah: New law (SB 233) will expand the sales and use tax exemption if Utah collects $55 million from remote sellers. If this threshold is met, the revenue will be used to fund the expansion of the sales and use tax exemption to include purchases or leases of machinery, equipment, normal operating repair or replacement parts, and materials (except office equipment and office supplies) by certain Utah manufacturing facilities, mining establishments, web search portals and medical laboratories. In conjunction, the economic life provision requiring the machinery, equipment, or normal operating repair or replacement parts to have an economic life of three or more years will be repealed. In addition, narrower exemptions for drilling equipment manufacturers, automobile manufacturing establishments, and industrial gas manufacturing facilities are repealed, as are certain reporting requirements related to these exemptions. Once the revenue threshold is met, these provisions will take effect on the first day of the calendar quarter after a 90-day period that begins on the day the legislative general counsel notifies the Legislative Management Committee that the Division of Finance has provided the notice required by statute. If, however, the new exemption provision is not in effect by Dec. 31, 2028, it is repealed on that date. Utah Laws 2018, SB 233, signed by the governor on March 27, 2018. Wisconsin: A corporation's purchase of fuel and electricity used to power air makeup units in industrial plants is exempt from use tax for the tax years at issue (2008 through 2011) when the air makeup units in the plants were components of a "waste treatment facility." In reaching this conclusion, the Wisconsin Tax Appeals Commission (Commission) rejected the Wisconsin Department of Revenue's (Department) argument that the air makeup units could not qualify as part of the waste treatment facility because they were not "built, constructed or installed" at the same time as other components of the exhaust ventilation and air treatment systems (EVAT System). Instead, the Commission found that reading the language of Wis. Admin. Code § Tax 12.40(3)(a)4 (repealed in 2014) to require "a waste treatment facility be built, constructed or installed as a unit, all at the same time, it is inconsistent with the exemption statute which contains no such requirement." Moreover, the Commission did not believe the legislature intended the exemption to exclude improvements made to the facility after its initial purchase or construction. The Commission also rejected the Department's argument that the air makeup units were not functionally part of the corporation's waste treatment facilities, finding that they performed an integral function in the process of removing contaminants from the air. Lastly, the Commission rejected the Department's final argument that because the air makeup units performed a function that did not remove contaminants (e.g., heating air drawn into the plants during cold weather) neither the units nor the EVAT system of which they are a part qualify as a waste treatment facility. The Commission, distinguishing Wausau Paper,4 found that replacing the heat that the EVAT System removed from the plant was part of the pollution abatement process. PMFC Holding, LLC v. Wis. Dept. of Rev., No. 16-S-079 (Wis. Tax App. Comn. Jan. 29, 2018). Multistate: On April 18, 2018, the IRS announced the additional designation of Opportunity Zones in five states and one territory, 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 zones located in: Alabama, Delaware, Missouri, Ohio, Texas, and the Northern Marianas Islands. Submissions were previously approved for zones located in: 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 2018-0865. New York: The New York Department of Taxation and Finance (Department) issued guidance on qualifying for the tangible property and site preparation components of the Brownfield Redevelopment Tax Credit — specifically when tangible property is considered "placed in service" when portions of the project will remain in use while remediation and redevelopment are conducted. Because New York statutes, regulations and case law do not define the term "placed in service," the Department looked to federal law addressing depreciation for guidance, and concluded that tangible property will be considered to be "placed in service" for purposes of the tangible property component when any one of the separately occupied portions of the site is "available to serve its assigned function." It will not be "placed in service" if a limited portion of the building is occupied and used during pending remediation and/or redevelopment of other portions of the site, and no tangible personal property associated with the occupied portion is placed in service. If tangible property on the site is placed in service before a Certificate of Completion (CoC) is issued, it will be eligible for the tangible property component only if it is placed in service in the same year that the CoC is issued. The Department also determined whether costs for certain activities will qualify for the site preparation component. The Department determined that the activities listed by the taxpayer (with some exceptions) are "site preparation costs" when they are properly chargeable to the capital account and are paid or incurred in connection with the site's qualification for a CoC (or are otherwise paid or incurred in connection with preparing the site for a building or building component or to establish the site as usable for its industrial or commercial purpose). Costs associated with the conversion from warehouse to office space and the modification and renovation of existing fire suppression, plumbing, HVAC and electrical systems may be eligible as costs included in the tangible property component if they are not treated as site preparation costs, and the property to which they relate meet the qualified tangible property requirements. N.Y. Dept. of Taxn. and Fin., TSB-A-18(1)I (March 7, 2018). Wisconsin: New law (AB 489) requires that qualified new business ventures seeking certification for the Angel and Early Stage Seed Investment Tax Credits (the credits) must not have received more than $12 million (previously, $8 million) in investments that have qualified for the credits. This change applies to taxable years beginning after Dec. 31, 2017. AB 489 took effect April 5, 2018. Wis. Laws 2018, Act 234 (AB 489), signed by the governor on April 3, 2018. Washington: New law (SB 6614) temporarily reduces Washington's property tax rate to $2.40 per $1,000 of assessed value (from $2.70 per $1,000 of assessed value) for the 2019 calendar year. In calendar years 2018, 2020 and 2021, the property tax rate is $2.70 per $1,000 of assessed value. Wash. Laws 2018, Ch. 295 (SB 6614), signed by the governor on March 27, 2018. Puerto Rico: The Puerto Rico Treasury Department (PRTD) issued Administrative Determination 18-07 (AD 18-07) which lengthened the automatic extension period for filing a 2017 tax return from three months to six months. Taxpayers receiving the six-month automatic extension will not be granted an additional three-month extension, as their total extension period may not exceed six months. For additional information on this development, see Tax Alert 2018-0823. Virginia: New law (HB 373) directs the Tax Commissioner to take the steps necessary for Virginia to become an Associate Member of the Multistate Tax Commission (MTC). This will allow Virginia to participate in MTC meetings and discussions on model legislation and uniform tax policies that could affect Virginia. Provisions of HB 373 take effect July 1, 2018. Va. Laws 2018, Ch. 343 (HB 373), signed by the governor on March 19, 2018. Utah: Recently enacted HB 293 reduces Utah's state income tax rate from 5% to 4.95%. The change is effective retroactively to Jan. 1, 2018. According to a Utah State Tax Commission representative, a revised Publication 14, Employer Withholding Tax Guide, will soon be issued, containing revised withholding tables. Employers will start using the revised withholding tables as of the date of the revision and will not be required to retroactively adjust withholding. For additional information on this development, see Tax Alert 2018-0837. Oklahoma: New law (HB 1010) increases motor fuel taxes and oil and natural gas production taxes, while a subsequently enacted bill (HB 1015) extends the fuel tax exemption to the additional tax levied by HB 1010. Under HB 1010, the per-gallon tax on diesel fuel increases by $0.06 and the per-gallon tax on gasoline increases by $0.03. Provisions of HB 1015 apply previously existing fuel tax exemptions set forth in Okla. Stat. Ann. tit. 68, §500.10 to motor fuel taxes imposed by Okla. Stat. Ann. tit. 68, § 500.4 and to the per-gallon diesel and gasoline tax increases established in HB 1010. These exemptions include exemptions for certain motor fuels for export, certain uses by public schools, governments or in certain agricultural settings, and diesel fuel used as heating oil or in specified railroad locomotives or equipment. Additionally, HB 1010 increases the oil and gas production incentive tax rate to 5% (from 2%), beginning with the month of first production for 36 months for new and existing wells that currently qualify for the 2% incentive reduced rate. This change is effective beginning with the July 2018 production month. (The 7% tax on production thereafter remains unchanged.) A proposed ballot measure (State Question No. 795) that would have imposed an additional 5% oil and natural gas gross production tax (and as provided in HB 1010 such approval would have resulted in the statutory tax on oil or gas production reverting back to 2% for the first 36 months of production), has been withdrawn. Both laws take effect June 27, 2018. Okla. Laws 2018 (Second Extraordinary Session), HB 1010, signed by the governor on March 29, 2018; HB 1015, signed by the governor on April 3, 2018. Oklahoma: New law (HB 1010) imposes an additional excise tax on cigarettes (50 mills per cigarette, or $1.00 per 20-pack) and changes the taxes on little cigars so that they will be imposed in the same manner as that applied to cigarettes. HB 1010 takes effect June 27, 2018. Okla. Laws 2018 (Second special session), HB 1010, signed by the governor on March 29, 2018. Washington: Beginning March 15, 2018, a hospital owned by a municipal corporation or political subdivision, a hospital affiliated with a state institution, or an accountable community of health that receives Delivery System Reform Incentive Payments (DSRIPs) from the Washington State Healthcare Authority can take a business and occupation (B&O) tax deduction for DSRIPs, provided the payments are sourced from the "Medicaid Transformation Project." DSRIP payments must be reported under the Service and Other Activities B&O tax classification, and then can be deducted. The Washington Department of Revenue provides two sets of instructions for claiming the deduction — (1) periods through August 2018 and (2) periods beginning in September 2018 and thereafter — as it plans on changing the online return during fall 2018. Wash. Dept. of Rev., Special Notice: B&O Tax deduction available for your Delivery System Reform Incentive Payments (DSRIP) (March 2018). Wisconsin: New law (AB 773) prohibits the state from entering into unclaimed property audits on a contingent fee basis, or from purchasing information or documents arising from such an audit, unless the holder is not domiciled in Wisconsin and the contingent fee is capped at 12% of the total unclaimed property reportable and deliverable under the audit. It also prohibits the use of statistical sampling in unclaimed property audits to estimate the holder's liability unless the holder consents. These provisions apply to contracts or agreements entered into, renewed, or modified on or after April 5, 2018. Wis. Laws 2018, Act 235 (AB 773), signed by the governor on April 3, 2018. All States: Panelists on Ernst & Young LLP's (EY) recent Domestic tax quarterly webcast series: a focus on state tax matters highlighted the impact of federal tax reform (Tax Cuts and Jobs Act (P.L. 115-97) (TCJA)) on the states and described the findings in a joint study by EY and the Council On State Taxation (COST) that state corporate tax bases could expand by about 12% over the first 10 years. Panelists also discussed the possibilities arising from the US Supreme Court's (Court) decision to hear an appeal of South Dakota v. Wayfair — which could result in a change to the Court's physical presence nexus standard last articulated in its 1992 ruling in Quill v. North Dakota. The webcast is now available for replay on the EY Thought Center website. For a summary of the webcast, see Tax Alert 2018-0818. 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. 3 The Alabama Department of Revenue in Notice: Act 2018-465 — Changes to Credit for Tax Paid Limitation for Tax Years 2013-2017 (issued April 6, 2018), noted that this legislative action "operates to remove the AGI limit previously imposed under … Rule No. 810-3-21-.03 on the calculation of the credit for tax paid to other jurisdictions for the 2013 through 2017 tax years. Document ID: 2018-0935 |
