06 June 2018 State and Local Tax Weekly for May 24 Ernst & Young's State and Local Tax Weekly newsletter for May 24 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. The IRS recently announced (Notice 2018-54) that it will issue proposed regulations addressing deductibility of state and local tax payments for federal income tax purposes and informing taxpayers that federal law controls the characterization of the payments for federal income tax purposes regardless of the characterization of the payments under state law. The pending regulations were apparently spurred by efforts in some states to enact an assortment of state legislative changes directly intended to work around the new federal $10,000 individual deduction limit for state and local tax liabilities added to the federal income tax law under the Tax Cuts and Jobs Act (P.L. 115-97) in December 2017. An IRS news release, issued concurrently with Notice 2018-54, notes that some state legislatures have adopted or are considering legislative proposals which would allow taxpayers to make payments to specified entities in exchange for a tax credit against state and local taxes owed; these payments are intended to qualify as "charitable contributions" to which, according to state legislative proponents, the federal state and local tax deduction limitation would not apply. Various workarounds have been proposed or enacted in a number of jurisdictions, including California, Connecticut, Illinois, New Jersey and New York. Notice 2018-54 states that the proposed regulations will: (1) "make clear that the requirements of the Internal Revenue Code, informed by substance-over-form principles, govern the federal tax treatment of such transfers" and (2) "assist taxpayers in understanding the relationship between the federal charitable contribution deduction and the new statutory limitation on the deduction for state and local tax payments." This two-page IRS notice is interesting for several reasons. First, taxpayers should separate the politics from the taxes — even though co-mingling those topics is the reason for the conflict between the federal and state approaches. Second, the IRS needs to walk a fine line in this guidance. What the notice does not mention is that the IRS has accepted that a state or local tax benefit is treated for federal tax purposes as a reduction or potential reduction in tax liability. As such, it is reflected in a reduced deduction for the payment of state or local tax under IRC §164, not as consideration that might constitute a quid pro quo, for purposes of IRC §170, or an amount realized includible in income, for purposes of IRC §§ 61 and 1001. Third, the notice issued to the public appears to lack basic elements needed to substantially describe the expected contents of the regulation. It lacks, for example, a description of when the regulation will be effective. For more on this development, see Tax Alert 2018-1119. California: On Friday, May 18, 2018, the California Franchise Tax Board (FTB) held its third Interested Parties Meeting (3rd IPM (preceding IPMs referred to sequentially as described later)) to continue ongoing discussions for the next round of proposed amendments to its market-based sourcing rules promulgated under California Code of Regulations, title 18, (CCR) section 25136-2. In anticipation of this meeting, the FTB released draft language (and a corresponding explanation) of the proposed amendments, including language that will affect asset managers, government contractors, research and development companies, and numerous other industries. For more on this development, see Tax Alert 2018-1098. Pennsylvania: In Corporate Tax Bulletin 2018-02, the Pennsylvania Department of Revenue (DOR) announced that it will permit taxpayers to use the flat-dollar cap on net loss carryforwards (NLCs) for tax years beginning before Jan. 1, 2017. Bulletin 2018-02 fills in the gap left by Corporation Tax Bulletin 2017-01 in which the DOR announced that it would not permit taxpayers to utilize the flat-dollar cap on NLCs for tax years beginning in 2017 and thereafter. Pa. Dept. of Rev., Corporate Tax Bulletin 2018-02 (May 10, 2018). For more on this development, see Tax Alert 2018-1036. Tennessee: New law (SB 2119) decouples from IRC §163(j) and changes made to IRC §118 by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). Effective for tax years beginning on or after Jan. 1, 2020, for purposes of computing "net earnings" or "net loss" IRC §163(j) (limiting the deductibility of certain interest) will be applied as it existed and applied immediately prior to passage of the TCJA. Effective for tax periods beginning on and after Jan. 1, 2017, Tenn. Code Ann. §67-4-2006(b)(2) is amended to require a taxpayer to subtract from net earnings or losses the amount the taxpayer would have excluded from federal taxable income as a result of applying IRC §118 (affecting capital contributions and particularly, the treatment of state and local tax credits) as it existed and applied immediately before enactment of the TCJA. Tenn. Laws 2018, Ch. 1011 (SB 2119), signed by the governor on May 21, 2018. Texas: Sales of wireless voice and data services by a limited liability company (LLC) to an out-of-state retailer that resells the services are sales of internet access services and wireless telecommunications services, not sales of an intangible asset. Thus, Texas Admin. Code tit. 34, §§ (Rule) 3.591(e)(12) and (e)(30)(A) apply to apportion the receipts from the sales to Texas when the receipts are earned from providing access to the internet in Texas or when wireless voice service both originates and terminates in Texas. The Texas Comptroller of Public Accounts noted that it intends to propose amendments to Rule 3.591(e)(30), changing the reference to "telephone companies" in the Rule's heading to show the Rule applies to all entities that sell telecommunication services. Tex. Comp. of Pub. Accts., No. 201802030L (Feb. 12, 2018). Virginia: New law (HB 365) provides an individual and corporate income tax subtraction for income attributable to an investment in a Virginia real estate investment trust (REIT) for investments made on or after Jan. 1, 2019 and before Dec. 31, 2024. A subtraction is not allowed for: (1) an investment in a trust that is managed by a family member or the taxpayer's affiliate; (2) a taxpayer that claimed a subtraction for income taxed as a long-term capital gain or as investment services partnership interest income for federal income tax purposes, for the same investment; (3) a taxpayer that claimed a subtraction for certain income attributable to an investment in a Virginia venture capital account for the same investment; or (4) an individual taxpayer that claimed a credit for qualified equity and subordinated debt investments for the same investment. The Virginia Department of Taxation (Department) must certify the Virginia REIT, which requires the trustee to register the trust with the Department before Dec. 31, 2024 stating an intent to invest at least 90% of trust funds in Virginia and at least 40% of trust funds in real estate in localities that are distressed or double distressed. The Department will certify the Virginia REIT when it actually makes the investments as specified, and will develop related guidelines and procedures before Dec. 31, 2018. HB 365 takes effect July 1, 2018. Va. Laws 2018, Ch. 821 (HB 365), governor's recommendations adopted by House and Senate on April 18, 2018. Arkansas: A company's sales of electronic video training courses accessible through an online portal are subject to Arkansas gross receipts tax as sales of specified digital products to an end user. The Arkansas Department of Finance and Administration opined that while the electronic video courses are not tangible personal property and are not an enumerated service subject to sales tax, they are digital audio-visual works that fall within the specified digital products classification, and those who purchase the video courses are end users. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20170814 (April 23, 2018). Iowa: The Iowa Department of Revenue (Department) issued a declaratory order addressing whether charges for a company's agricultural laboratory testing and consulting services are subject to the state's sales and use tax and if so how to source the sales. The Department advised that under state law the company's charges for laboratory testing services are subject to Iowa sales and use tax when the first use of the services occurs in the state (i.e., the location at which the purchaser can make first use of the test results). Thus, if the company first makes the test results available by delivering a hard copy by US mail to a location in Iowa, the sale is sourced to Iowa and the state sales tax, including any applicable local option sales tax, is due on the testing service's sales price, but no tax is due when lab results are first delivered in hard copy by US mail to an individual outside the state. If the company provides test results by email, the testing service may be subject to sales tax when the customer receives the email results at a location outside Iowa; taxability depends on the address the customer provided to the company — Iowa address provided on the order form — taxable sale, non-Iowa address provided on the order form — non-taxable sale. Customers' access to lab results through the company's secure portal in Iowa does not change the sourcing of the testing service when the company first delivers the test results in hard copy or by email, as the company's secure portal is a secondary means to access test results. Further, the services would still be sourced based on the location where the first use of the service occurs by statute, even if the company first made the test results available on the secure portal. Last, the sample's origination location does not affect sourcing of the company's testing service sales, because the location of first use of the service determines the sourcing of a service. In the Matter of Genetic ID, NA, Inc., No. 2017-300-2-0217 (Iowa Dept. of Rev., declaratory order, March 1, 2018). South Carolina: The South Carolina Department of Revenue in a revenue ruling advised that charges for destination marketing fees are subject to South Carolina's 7% sales tax on accommodations under SC Code § 12-36-920(A), since under the Meyers Arnold test, the hotel would not receive the marketing fee but for the furnishing of accommodations. S.C. Dept. of Rev., Rev. Ruling No. 18-7 (May 14 2018). Federal: The IRS has released the additional designation of Opportunity Zones in six states, 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. Submissions were approved for: Hawaii, Indiana, Iowa, Kansas, Louisiana and Maine. For more on this development, see Tax Alert 2018-1050. Maine: New law (LD 1903) amends Maine's credit for major business headquarters expansion, adding definitions of "base level of employment" and "base period," expanding reporting requirements, and outlining public policy and performance measures that can be evaluated in ongoing legislative review of the credit. LD 1903 specifies that certified applicants are allowed a credit equal to 2% of the lesser of either the amount of actual qualified investment specified on the certified applicant's certificate of completion, or the amount of qualified investment approved by the commissioner in the certificate of approval. Additionally, LD 1903 provides that a transferee is responsible for payment of any credit amounts that must be returned to Maine when the credit amounts are recaptured after a certificate of approval has been transferred. LD 1903 also adds specificity to reporting requirements, including information related to additional full-time employees added in Maine at specific intervals, average and median wage information of additional full-time employees, and information about certain additional full-time employees that have access to health insurance and retirement benefits. Lastly, LD 1903 subjects the credit to ongoing legislative review, and outlines what evaluation parameters may be considered. LD 1903 takes effect 90 days after the legislature adjourns. Me. Laws 2018, Ch. 405 (LD 1903), became law without the governor's signature on April 24, 2018. New Jersey: On May 4, 2018, New Jersey Governor Phil Murphy signed into law SB 1893 to allow New Jersey municipalities, school districts and counties (each, a "local unit") to create, at their option, charitable funds. The law further allows local property owners to make donations to the funds and receive a credit of up to 90% of the value of their donations that can be used to offset their property tax obligations. Owners of property within the local unit will be able to choose to apply their donations to specific properties in order to receive property tax credits. See Tax Alert 2018-0415. Local units are limited in allowing credits that exceed 85% of their prior year's budget, unless the State's Director of the Division of Local Government Services authorizes a higher percentage. In addition, the law allows the municipal tax collector to collect a fee of up to 2% of the aggregate credits issued for its costs of collection. The law takes effect July 3, 2018. For additional information on this development, see Tax Alert 2018-1067. Massachusetts: The Massachusetts Department of Revenue announced penalty relief for taxpayers that underpay their estimated Massachusetts corporate excise tax as a result of reporting income attributable to IRC §965 (the transition tax on post-1986 foreign earnings) on their Massachusetts corporate excise tax return. In order to receive penalty relief, taxpayers must include with their Massachusetts return: (1) MA Schedule M-2220 (Underpayment of MA estimated tax by corporations); and (2) MA Schedule TDS (Taxpayer Disclosure Statement), identifying the amount of federal gross income attributable to IRC § 965 as well as any explanation of the Schedule M-2220 calculation. Mass. Dept. of Rev., TIR 18-4: Estimated Tax Penalty Relief for Corporations Affected by the Transition Tax on Deferred Foreign Earnings (May 15, 2018). Nebraska: New law (LB 1090) amends Nebraska's income tax brackets, personal exemption, and standard deductions in response to federal tax law changes made by the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). For taxable years beginning on or after Jan. 1, 2015 and before Jan. 1, 2018, Nebraska's income tax brackets will be adjusted by the percentage determined under IRC § 1(f) as it existed before Dec. 22, 2017. For taxable years beginning on or after Jan. 1, 2018, the income tax brackets will be adjusted based on the percentage change in the Consumer Price Index for All Urban Consumers (CPI-U). The tax commissioner will prescribe new rate schedules. Through tax year 2017, Nebraska's personal exemption will be adjusted for inflation as provided by IRC § 151 as it existed before Dec. 22, 2017. Beginning with tax year 2018, the personal exemption will be calculated using the credit amount for the applicable year multiplied by the sum of the number of child credits and dependent credits taken on the federal return, plus two for a married filing jointly return or plus one for a single or head of household return. The credit amount is $134 in 2018, and will be adjusted for inflation each year thereafter. For tax years beginning on or after Jan. 1, 2018, the Nebraska individual income tax standard deduction is the smaller of the federal standard deduction actually allowed, or: (1) $6,750 for taxpayers filing as single or married filing separately; (2) $9,900 for head of household; or (3) $13,500 for married filing jointly. For tax years beginning on or after Jan. 1, 2019, the standard deduction amounts will be adjusted for inflation based on the percentage change in the CPI-U, rounded to the next lowest multiple of $50. Lastly, individuals who itemized federal deductions may subtract from federal adjusted gross income the greater of the standard deduction or his or her federal itemized deductions as defined in IRC § 63(d), except for the amount for state or local income taxes included in federal itemized deductions before any federal disallowance. LB 1090 takes effect 90 days after the legislature adjourns. Neb. Laws 2018, LB 1090, signed by the governor on April 17, 2018. California: As of May 10, 2018, the US Department of Labor's website shows that the California Employment Development Department (EDD) has repaid its federal unemployment insurance (UI) loan balance with first quarter 2018 receipts. According to senior EDD staff members, it is hoped that the state will not borrow again this year. If the state retains its zero balance as of Nov. 10, 2018, the state's employers should see a return to the minimum federal unemployment insurance (FUTA) rate of 0.6% for calendar year 2018. For more on this development, see Tax Alert 2018-1025. New York City: Amendments to New York City's paid sick leave law which will include paid safe time are effective as of May 5, 2018. The revised law expands New York City's paid sick leave law to allow workers to use paid leave to address safety concerns and access critical services related to specified criminal offenses. The amended law also expands the definition of family for whom safe and sick leave can be used to any individual whose close association with the employee is the equivalent of family. Employers are required to provide notice of the updated law to employees by June 4, 2018. For additional information on this development, see Tax Alert 2018-1034. Oklahoma: New law (HB 3156) changes the due date for filing Forms W-2 with the Oklahoma State Tax Commission (OTC) from February 28 to January 31 effective with tax year 2018 (filed in 2019). Employers are required to file Forms W-2 electronically over the Oklahoma Taxpayer Access Point electronic reporting system. According to OTC representatives, the due date for the calendar year 2018 annual withholding reconciliation also will be Jan. 31, 2019. For additional information on this development, see Tax Alert 2018-1068. West Virginia: New law (SB 338) changes the deadline for filing Forms W-2/1099 and the annual withholding tax reconciliation (Form IT-103) from February 28 to January 31, matching the federal Form W-2 deadline. This change is effective with calendar year 2018, with returns due by Jan. 31, 2019. For additional information on this development, see Tax Alert 2018-1062. Massachusetts: An insurer that provides dental coverage through preferred provider arrangements (PPAs) owes gross premiums tax only on natural persons who, as employees, receive insurance coverage for dental services under a group insurance plan and reside in Massachusetts, and does not owe gross premium tax on employer entities with whom the insurer contracted to provide coverage. Under Massachusetts law (Mass. Gen. Laws Ch. 176I, § 1), insurers operating PPAs must annually pay an excise tax equal to a specified percentage "of the gross premiums received during the preceding calendar year for coverage of covered persons residing in this [C]ommonwealth," and "covered person" is "any policy holder or other person on whose behalf the organization is obligated to pay for or provide health care services." The Massachusetts Supreme Judicial Court found that "policy holder" can be interpreted only as an individual, natural person because a corporate or other organizational employer cannot be provided with health care services. Moreover, the Division of Insurance's administration of Mass. Gen. L. ch. 176I supports this interpretation of "covered person," since it treats "covered persons" as meaning natural individual persons in administering reporting requirements for health benefit plans that include PPAs. Dental Service of Mass., Inc. v. Mass. Comr. of Rev., No. SJC-12346 (Mass. Sup. Jud. Ct. April 13, 2018). Puerto Rico: On April 16, 2018, Puerto Rico's House of Representatives proposed House Bill 1544 (HB 1544), which would amend the Puerto Rico Internal Revenue Code of 2011 (PR Code). This draft legislation has been 18 months in the making and, if approved, would modify the way individuals and corporations are taxed in Puerto Rico. A noteworthy feature of HB 1544 is the requirement that income tax rate reductions for corporations and individuals depend on meeting certain revenue-based fiscal tests. Namely, total revenues to the Puerto Rico general fund must exceed the budgeted amounts for fiscal year 2017-18 by 2% and for the first period of fiscal year 2018-19 by 3%. If these tests are not met, any income tax rate reductions would be limited to tax revenues collected in excess of the government's budget amounts for those periods. Similarly, HB 1544 also would require the elimination and reduction of certain sales and use taxes to be financed by a special account that would be funded by the reduction of subsidies and tax credits established in special laws (i.e., tax incentive laws) and previously included in the budget for fiscal year 2017-18. For more on this development, see Tax Alert 2018-1028. Oregon: An out-of-state telecommunications provider that lacked an Oregon physical presence must collect Oregon's emergency communications tax (9-1-1 tax) from its subscribers, when imposition of such tax is not prohibited by the Due Process or Commerce Clauses. The Oregon Tax Court (Court) found that the Due Process Clause does not prevent Oregon from requiring the corporation to collect the 9-1-1 tax because the corporation purposefully solicited sales from Oregon residents as evidenced by it entering into thousands of contracts with Oregon residents to provide Voice over Internet Protocol (VoIP) services, its growth in lines in service and billings, and sales of more than 2,000 devices to Oregon retailers and residents. Additionally, under the Commerce Clause, the corporation had substantial nexus with Oregon and the tax was fairly related to the Oregon services provided. In so holding, the Court distinguished the 9-1-1 tax from sales and use taxes, finding the 9-1-1 tax is a fixed charge that is not measured by sales price, and it does not mimic a sales or use tax in form when it is imposed on those who have access to the emergency communications system. The Court further found that: (1) the 9-1-1 tax is not an undue burden on interstate commerce as a statewide, fixed charge on each VoIP line with access to Oregon's emergency communications system; (2) "settled expectations" do not favor establishing a bright-line, physical presence rule for 9-1-1 taxes, as it is the legislature's rather than the Court's role to do so; and (3) the doctrine of stare decisis does not apply when the 9-1-1 tax is not a sales or use tax. Lastly, the Court held the 9-1-1 tax is fairly related to the emergency communications services provided, because the telecommunications provider benefits from (1) "the privileges of *** an organized society" in Oregon, with a marketplace that provides it with thousands of customers and from (2) the services provided to its customers, and the measure of 9-1-1 tax corresponds exactly with its in-state activities. Ooma, Inc. v. Or. Dept. of Rev., No. TC-MD 160375G (Or. Tax Ct., Magistrate Div., April 13, 2018). International: Angola's Presidential Legislative Decree no. 3/18, of May 9, 2018 approved the new Customs Tariff for imports and exports. The new Customs Tariff introduces several changes to the regime, namely increasing the customs duties applicable for several types of goods, in order to protect and promote the Angolan productive sector. It does not provide for a general standard rate increase. Goods must be reviewed individually to determine the applicable increase, if any. For additional information on this development, see Tax Alert 2018-1064. International: Algeria's Tax Directorate published, on May 2, 2018, Circular N°09/MF/DGI/DLRF/LF18 regarding Article 30 of the 2018 Finance Act, which amended Article 9-14 of the Taxes on Turnover Code. Previously, services rendered for the direct benefit of foreign ships and aircraft were exempt from Value Added Tax (VAT). Such services are now subject to VAT at the common rate of 19%. Bunkering operations remain exempt from VAT. For additional information on this development, see Tax Alert 2018-1078. International: The new Prime Minister of Malaysia has reaffirmed the intention of the country's new Government to abolish the Goods and Services Tax (GST) and to replace it with a version of the Sales and Service Tax (SST) that was in effect prior to the introduction of GST. GST came into effect on April 1, 2015. For more on this development, see Tax Alert 2018-1020. International: On May 14, 2018, Argentina published, in the Official Gazette, General Resolution No. 4240/2018 (GR. 4240), implementing the mechanism for the payment of VAT on digital services provided by foreign entities and used in Argentina (see Tax Alert 2018-0932). GR. 4240 establishes the terms and conditions for VAT collection. Resident intermediaries that make payments abroad will be required to act as reverse withholding agents and remit the VAT (21%) to the Argentinian tax authorities. The payment of the tax will be made through the general withholding system known as SICORE. This general mechanism applies when the payments are directed to the foreign service providers included in Exhibit II, Section A to GR 4240. The provisions of GR. 4240 will be effective June 27, 2018. For more information on this development, see Tax Alert 2018-1080. Federal: On Wednesday, June 6, 2018 from 1:00-2:00 p.m. EDT New York (10:00-11:00 a.m. PDT Los Angeles), Ernst & Young LLP tax professionals will provide an overview of the new Opportunity Zone program that was created under the federal Tax Cuts and Jobs Act (P.L. 115-97). The Opportunity Zone program (codified in IRC §§ 1400Z-1 and 1400Z-2) authorizes states to designate Opportunity Zones in qualified low-income census tracts to spur investment in those areas. The following topics will be discussed during the webcast: (1) federal economic development policy behind Opportunity Zone program; (2) overview of the benefits of investing in Opportunity Zones and the applicability to diverse sectors including: individual investors; corporations; real estate; financial services; venture capital; and others; (3) key definitions and requirements for the Opportunity Zone program; (4) mechanism required to secure the benefits and on-going compliance of the Opportunity Zone investment; and (5) aspects of the Opportunity Zone program that may seem simple, but have technical complexity. Click here to register for this event. Multistate: On June 7, 2018 from1:00-2:00 p.m. EDT New York; 10:00-11:00 a.m. PDT Los Angeles, Ernst & Young LLP international trade professionals will be hosting a webcast on US trade reform and providing an update on recent actions taken by the Trump Administration. Many multinational companies that import into, or export from, the US need to closely monitor each of the actions as they progress to properly gauge impact and costs to their operations. Manufacturers, distributors, importers and consumers should map their complete, end-to-end supply chain to fully understand the extent of products impacted, potential costs, and alternative sourcing options and to assess any opportunities to mitigate impact. Throughout this webcast, panelists will provide the latest status of each action and their thoughts on how companies should be evaluating and planning next steps, especially with so many variables and actions occurring in the trade environment. The following topics will be discussed: Section 232 actions, North American Free Trade Agreement (NAFTA) update, and Section 301 and China Trade Negotiations. 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: 2018-1164 |
