20 June 2018 State and Local Tax Weekly for June 8 Ernst & Young's State and Local Tax Weekly newsletter for June 8 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. Connecticut enacts tax bill in response to changes in the federal Tax Cuts and Jobs Act, includes new tax on pass-through entities On May 31, 2018, Connecticut Governor Dannel Malloy signed into law SB 11, "An Act Concerning Connecticut's Response To Federal Tax Reform" (the Bill). The Bill makes various changes to Connecticut's tax laws, including the following: — Imposes a new 6.99% income tax on most pass-through entities (PTEs) and provides a credit to offset the tax at the personal or corporate income tax level; — Allows municipalities to provide a property tax credit to eligible taxpayers who make voluntary payments to municipally-approved "community supporting organizations"; — Requires individuals, for personal income tax purposes, to apportion the federal deduction for bonus depreciation over four tax years; — Requires individuals and corporations, for personal income and corporation business tax (CBT) purposes respectively, to apportion the federal asset expensing deduction over five years; — Specifies that for purposes of calculating the dividends received deduction under the CBT, the defined term "expenses related to dividends" includes 5% of all dividends received by a corporation during an income year (in essence, CBT taxpayers can only deduct 95% of the dividends received from 100% owned subsidiaries); and For an in-depth discussion of these changes, see Tax Alert 2018-1032. On May 30, 2018, Iowa Governor Kim Reynolds signed into law a tax reform bill (SF 2417) that makes a number of changes affecting Iowa's corporate, individual and sales/use taxes. Key changes in the bill include: — Eliminating for corporate income tax purposes Iowa's Alternative Minimum Tax and the ability to deduct federal income taxes, starting in 2021; — Lowering the top individual income tax rate in 2019 and providing for future contingent reductions; — Providing a deduction for income from pass-through entities consistent with that provided in IRC §199A; — Extending Iowa's sales and use tax to ride-sharing services, streaming video, video-on-demand and pay-per-view services, photography, information services, video game services and tournaments, online travel services, and software-as-a-service; and — Expanding Iowa's sales and use tax nexus provisions by adopting economic nexus, cookie nexus and marketplace provider provisions For an in-depth discussion of these changes, see Tax Alert 2018-0987. Indiana: New law (HB 1316) updates Indiana's date of conformity to the Internal Revenue Code (IRC) to conform to provisions of the federal Tax Cuts and Jobs Act (TCJA) and the Bipartisan Budget Act of 2018, with some exceptions. Effective Jan. 1, 2018, Indiana's date of conformity to the IRC is updated to Feb. 11, 2018 (from Jan. 1, 2016). Indiana, however, decouples from various provisions of the TCJA by: — providing for a 20-year net operating loss (NOL) carryforward (federal law limits NOLs to 80% but allows an unlimited carry forward); — requiring the addition of amounts related to IRC §965 (the transition tax) (see below for specifics); — requiring the addition of amounts equal to the deduction claimed under IRC §250(a)(1)(B) (global intangible low taxed income (GILTI) deduction) (taxpayers need to separately specify the amount of the GILTI reduction); — requiring the addition of amounts equal to the deduction for qualified business income claimed by the taxpayer under IRC §199A; — requiring the subtraction of the amount of interest expense paid or accrued in the current taxable year but not deducted due to the IRC §163(j) limit, and the addition of any interest expense paid or accrued in the previous taxable year but allowed as a deduction under IRC §163 in the current taxable year; — requiring the subtraction of the amount included in the taxpayer's gross income under IRC §118(b)(2) for taxable years ending after Dec. 22, 2017; — requiring the addition of any directly related interest expenses that reduce the corporation's adjusted gross income. In regard to the IRC §965 conformity provisions, the specific add back requirements are as follows or taxable years beginning after Dec. 25, 2016: (1) individuals are required to add an amount equal to the deduction for deferred foreign income that was claimed by the taxpayer for the taxable year under IRC §965(c); (2) corporations (except REITs) are required to add the amount reported on line 1 of the IRC 965 Transition Tax Statement and REITs add an amount equal to the deduction for deferred foreign income that was claimed by the taxpayer under IRC §965(c), but only to the extent the taxpayer including income recognized under IRC §965 in its federal taxable income or is required to add back dividends paid; (3) insurance/life insurance companies are required to add an amount equal to the amount reported by the taxpayer on line 1 of the IRC 965 Transition Tax Statement; (4) trusts and estates are required to add an amount equal to (A) the amount reported by the taxpayer on line 1 of the IRC 965 Transition Tax Statement, and (B) with regard to any amounts under IRC §965 distributed by the taxpayer, the deduction under IRC §965(c) attributable to the distributed amounts. Provisions of HB 1316 also address how to take into account amounts related to IRC §§ 965 and 951A (GILTI) when apportioning the adjusted gross income of corporations and nonresident persons, and amend the definition of foreign source dividends to include amounts under IRC §§ 965 and 951A. In addition, for a taxable year beginning after Dec. 31, 2016 and ending before Jan. 1, 2018, the bill allows a pass-through entity or its members, shareholders or partners, to elect to carryforward all or any portion of one or more of the following tax credits to the taxable year beginning after Dec. 31, 2017 and ending before Jan. 1, 2019: the enterprise zone investment cost credit, the industrial recovery tax credit, the community revitalization enhancement district tax credit, the venture capital investment tax credit, or the Hoosier alternative fuel vehicle manufacturer tax credit. Lastly, HB 1316 deletes the reference to IRC §199, which was repealed by the TCJA, and modifies individual income tax provisions in response to changes in the TCJA. Ind. Laws 2018 (1st Special Session), HB 1316, signed by the governor on May 14, 2018. Michigan: In its May 2018 quarterly update, the Michigan Department of Treasury (DOT) said that it is evaluating the impact of the federal Tax Cuts and Jobs Act (TCJA) on Michigan's corporate income tax (CIT). The DOT has formulated a preliminary conclusion on two provisions — IRC §§ 965 (the transition tax) and 951A (global intangible low tax income or GILTI). In regard to IRC §965, the DOT said that "it is arguable that this additional income, characterized as a deemed dividend to the U.S shareholder, is part of the shareholder's federal taxable income [FTI] — notwithstanding that the IRS in its March 2018 has directed that this income be separately identified and the taxes separately paid." If the IRC §965 income is included in the shareholder's pro rata share of Subpart F income, it would be deductible in determining the taxpayer's CIT tax base. If, however, separate reporting and paying tax on this tax is deemed outside FTI, the IRC §965 income is not included in the taxpayer's CIT tax base and, therefore, would have no effect on the taxpayer's CIT liability. In regard to IRC §951A, the DOT "preliminarily concludes that this income also would be excluded from a taxpayer's CIT tax base." Under Michigan law (Mich. Code §623(2)(d)) GILTI would be deducted from the tax base to the extent included in FTI. Further the DOT said that it "would view the amount of GILTI included in federal taxable income to be net of the 50% GILTI deduction and 37.5% FDII deduction provided under the IRC." Mich. Dept. of Treas., Tax Policy Quarterly Update (May 2018). Michigan: The Michigan Tax Tribunal (Tribunal) did not err in finding that an out-of-state holding company that possessed a Detroit mailing address but did not have any employees or property, provide services, or sell goods in Detroit lacked sufficient nexus with the city and, therefore, was not subject to Detroit's income tax on dividend income from its shares in a Canadian company (foreign co.) or the gain it received from the sale of those shares. In reaching this conclusion, the Michigan Court of Appeals (Court) found Detroit's income tax assessment on the corporation violated the Commerce Clause under Quill1 as the holding company lacked a physical presence in or substantial connection with Detroit. Additionally, the law firms and marketing consultants hired by the holding company were excluded from statutory physical presence considerations, since they facilitated the sale of foreign co. for the benefit of the investment entity that formed the holding company rather than to establish and maintain a market in Detroit. Apex Labs. Internat'l Inc. v. City of Detroit, No. 338218 (Mich. Ct. App. May 17, 2018)(unpublished). New York: A wireless telecommunications company is not entitled to a sales and use tax exemption for computer hardware and components purchased to upgrade its customer care and data center, when the hardware and components are not used or consumed directly and predominantly in the receiving, initiating, amplifying, processing, transmitting, retransmitting, switching or monitoring of switching of telecommunications services for sale. In reaching this conclusion, the administrative law judge (ALJ) for the New York State Division of Tax Appeals found that the company improperly relied on Niagara Mohawk2 and Matter of Peoples Telephone Co., Inc.,3 since the equipment at issue performs none of the functions provided by the exemption statute (N.Y. Tax Law § 1115(a)(12-a)), and instead was used to upgrade a system whose function was to manage customer accounts, rate customer usage, perform billing functions, control network access and provide customer service. The ALJ also determined that the hardware and components did not meet the statutory exemption terms. Matter of Petition of Cellco Partnership d/b/a Verizon Wireless, DTA No. 827179 (N.Y. Div. Tax App. April 12, 2018). North Carolina: The North Carolina Department of Revenue issued a directive related to 2017 sales and use tax law changes to repair, maintenance and installation services for real property and real property contracts. The directive: (1) provides a summary of the general application of the sales and use tax to services to real property derived from repair, maintenance and installation services; (2) defines terms such as "capital improvement," "mixed transaction contract," "real property," "repair, maintenance, and installation services," "sale or selling," and "sales price;" (3) discusses specific impositions of sales and use tax on repair, maintenance and installation contracts, on real property contracts, on mixed transaction contracts, and complementary use tax; and (4) describes capital improvement substantiation requirements and when parties are jointly and severally liable for the tax. The guidance also provides a list of transactions to help taxpayers determine the application of sales and use tax to various services to real property, categorized as capital improvements (gross receipts are exempt from sales and use tax provided the substantiation requirements are met) or repair, maintenance and installation services (sales price or gross receipts are taxable unless an exemption applies to the gross sales price or gross receipts). N.C. Dept. of Rev., Directive No. SD-18-1 (April 18, 2018). North Carolina: The North Carolina Department of Revenue (Department) issued guidance on the effective date of sales and use tax law changes applicable to certain monthly or other periodic billings for the lease or rental of tangible personal property or digital property. Effective Sept. 1, 2018, the Department will require persons who lease or rent tangible personal property or digital property to collect and remit sales and use tax on the gross receipts from leases or rentals in effect on the billing date, regardless of whether the agreement was entered into before Sept. 1, 2018. This collection and remittance requirement does not apply if the receipts from the lease are otherwise exempt from sales and use tax. N.C. Dept. of Rev., Directive SD-18-2 (May 21, 2018). Pennsylvania: Neither a computer software company nor an online search and display advertising business (collectively, taxpayers) qualify as a "referrer" under Pennsylvania's marketplace sales provisions. While the taxpayers met four of the criteria of a "referrer" — they (1) agreed to list or advertise for sale at retail of one or more products of the marketplace/remote seller on an electronic medium, (2) received consideration from the marketplace/remote seller from the sale offered in the listing, (3) transferred by telecommunications, internet link or other means a purchaser to a marketplace/remote seller or affiliate to complete the sale, and (4) do not collect a receipt from the purchaser for the sale — - the taxpayers fall within an exclusion. Specifically, the taxpayers do not provide the marketplace/remote seller's shipping terms or advertise whether the seller collects a sales or use tax. (Also excluded from the definition of "referrer" is a person that provides internet advertising services). Pa. Dept. of Rev., PA SUT Letter Ruling No. SUT-18-001 (Feb. 28, 2018). Federal: In Notice 2018-40, the Internal Revenue Service published the inflation adjustment factor for the credit for carbon dioxide sequestration under IRC § 45Q for calendar year 2018. The Notice also announces the amount of credit utilization as of May 11, 2018. For more on this development, see Tax Alert 2018-1118. New Jersey: New law (A. 3723) extends the application date for New Jersey's credit for a capital investment in a qualified wind energy facility located within an eligible wind energy zone to July 1, 2024 (from Aug. 1, 2016), and extends the date by which credit documents must be provided to the state to July 1, 2027 (from Aug. 1, 2019). Although the credit is capped at $100 million, the New Jersey Economic Development Authority may award additional credits to "meritorious offshore wind projects." A. 3723 also clarifies that a business is not allowed this tax credit if it receives a business employment incentive grant relating to the same capital and employees that qualify the business for the wind energy facility credit. In addition, A. 3723 amends New Jersey's clean energy and energy efficiency programs as well as the state's solar renewable energy portfolio standards, and requires the New Jersey Department of Labor and Workforce Development to establish job training programs for people who work in manufacturing and servicing of offshore wind energy equipment. A. 3723 took immediate effect. N.J. Laws 2018, Ch. 17 (A. 3723), signed by the governor on May 23, 2018. Iowa: New law (SF 2388) changes the manner in which telephone and cable company property is assessed from central assessment to local assessment (classified as commercial property), starting with assessment year (AY) 2022. Additionally, SF 2388 limits such a company's property subject to local assessment to its buildings and land; and provides that transmission property (such as cable and wire facilities, poles, aerial cable, underground cable, buried cable, intrabuilding network cable and other materials) will not be assessed and taxed as real property. SF 2388 phases in two property tax exemptions: (1) one for transmission property not subject to assessment under Iowa Code Ch. 433 (Telegraph and telephone companies tax) in increments of 25% reductions of the transmission property's actual value, beginning in 2019 until the assessment is phased-out starting in 2022; and (2) for companies assessed under Iowa Code Ch. 433, an additional tax exemption on the value of its property equal to 25% (AY 2019), 50% (AY 2020) and 75% (AY 2021) of the amount of the company's actual value remaining after applying the exemption under Iowa Code Ch. 433.4(2). The changes to the assessment of telephone and telegraph company property under Iowa Code Ch. 433 apply for AYs beginning before Jan. 1, 2022 are repealed on July 1, 2024. SF 2388 also repeals the tax exemption for broadband infrastructure (under Iowa Code § 427.1(40)), effective July 1, 2024. Iowa Laws 2018, SF 2388, signed by the governor on May 17, 2018. Kentucky: The Kentucky Department of Revenue (Department) issued guidance on how it computes composite conversion factors used by communication service and multi-channel video programming service providers to estimate the fair cash value of business personal property. Beginning Jan. 1, 2018, the Department will calculate composite conversion factors for such service providers each year based on the Producer Price Index published by the US Bureau of Labor Statistics and the "percent good" determined from the six economic life classes on form 61A500 Schedule A-1 and A-2. The guidance provides the depreciation methods used to determine the "percent good" for each property classification, as well as an example calculation of a composite conversion factor. Ky. Dept. of Rev., KY-TAM-18-01 (May 2018). Michigan: A municipality erroneously uncapped the taxable value of a property that was transferred between two commonly controlled entities, where the transferee entity's operating agreement required a mere majority to act, and the same three individuals actually controlled both the transferor entity (60% ownership) and transferee entity (75% ownership). In affirming the Michigan Tax Tribunal, the Michigan Court of Appeals (Court) noted that the amount of control that constitutes common control was a matter of first impression, and without a definition of "commonly controlled" in Michigan's General Property Tax Act, the Court applied the definition of "under common control" from Mich. Comp. Laws 211.9o(7)(b).4 Although the definition does not expressly or directly apply to Mich. Comp. Laws 211.27a(7)(m), the Court found it to be indicative of the legislature's intent, it is consistent with other property tax laws, and it recognizes that different percentages of control may be necessary to direct the management of different corporate entities. Citing several federal cases, the Court found that the definition focuses on actual control of the business based on its corporate structure, and specifically declined to adopt a specific percentage as part of the common control definition. Lastly, the Court rejected the municipality's argument that the State Tax Commission's transfer of ownership guidelines and related revenue administrative bulletins must be followed regarding whether the transfer was excluded from uncapping under Mich. Comp. Laws 211.27a, since the guidelines impose requirements not included in the statute. TRJ & E Properties, LLC v. City of Lansing, No. 338992 (Mich. Ct. App. April 17, 2018). Texas: Reminder - The Texas tax amnesty program will end June 29, 2018. Amnesty applies to liabilities previously not reported to the Texas Comptroller of Public Accounts (including tax collected but not remitted) for periods before Jan. 1, 2018, and to most state and local taxes and fees administered by the Comptroller. In exchange for participating in, and complying with the terms of, the amnesty program, the Comptroller will waive otherwise applicable penalties and interest. Taxpayers will not be eligible for amnesty if certain conditions are met (e.g., if the taxpayer is under audit). During the amnesty period, taxpayers have the opportunity to file past due reports, amend reports with underreported tax, or register and file reports for taxes that should have been reported. In exchange for doing so, taxpayers will not have to pay applicable penalties and interest. For more on this development, see Tax Alert 2018-0920. Ohio: Ohio employers will soon receive a workers' compensation rebate that is expected to equal 85% of most employers' premium for the policy year ending June 30, 2017 (calendar year 2016 for public employers). This is on top of a 12% premium rate reduction that goes into effect starting July 1, 2018. The Ohio Bureau of Workers' Compensation will begin mailing rebate checks in early July 2018 with all checks expected to be mailed by early August 2018 (except for private employers in the Group-Retrospective Rating Program, who will receive their checks in Fall 2018). For more, see Tax Alert 2018-1141. New York City: A telecommunications company's fixed long distance telephone charges, including prescribed interexchange carrier charges (PICC) and non-usage access charges, are exempt from New York City's utility tax because they are integral to transactions that originate or consummate outside New York City (City). In affirming the administrative law judge, the New York City Tax Appeals Tribunal (Tribunal) found that this effectively rebuts the presumption that gross operating income of any person taxable in the City is derived from business conducted wholly within the City's territorial limits, and found that the company properly excluded the fixed charges from its gross operating income (and was not deducting them from its gross operating income as expenses). Further, consistent with Waldorf-Astoria,5 the separately billed PICC and non-usage access charges are inseparable parts of the entity's long distance service charges, even when they are itemized on bills. Matter of U.S. Sprint Comm. Co., LP, Nos. TAT(E)14-12(UT) and TAT(E)14-13(UT) (NYC Tax App. Trib. April 3, 2018). Federal: The Trump Administration issued a Statement on May 29, 2018 announcing upcoming release dates for actions related to the Section 301 of the Trade Act of 1974 (Section 301) investigation. The Statement announces that by June 15, 2018 the US Trade Representative (USTR) will publish the final list of covered products, comprising $50 billion of imported goods from China, to be subject to a 25% tariff (in addition to normal tariffs). The effective date for the tariffs will be imposed shortly thereafter. For more on this development, see Tax Alert 2018-1125. Federal: US Department of Commerce Secretary Wilbur Ross announced on May 31, 2018 that President Trump signed two Presidential proclamations to suspend the previous exemptions granted for the additional tariffs of 25% on specifically defined articles of steel, and additional tariffs of 10% on specifically defined articles of aluminum goods imported into the US from Member States of the European Union (EU), Canada and Mexico. A statement released by the White House notes that the US has secured measures to address the impairment to the national security threatened by imports of steel and aluminum from Argentina, Brazil, and Australia, while noting that without such measures in place for imports from Canada, Mexico, or the EU, the Administration will continue discussions with each country, and remains open to discussions with other countries impacted by the tariffs. For additional information on this development, see Tax Alert 2018-1138. Federal: A recently released publication is the second in a series to be published by EY's Quantitative Economics and Statistics (QUEST) group on the economic implications of key trade issues and trends. This edition examines the potential benefits and costs of the US signing the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership, which is a revised version of the Trans-Pacific Partnership agreement. For a copy of the publication, see Tax Alert 2018-1143. International: The United Arab Emirates (UAE) Cabinet (Cabinet) released decisions No. 25 and No. 26, each dated May 22, 2018 relating to the application of value added tax (VAT) on gold and diamonds and the refund of VAT paid on services provided in exhibitions and conferences respectively. In addition, the UAE Federal Tax Authority (FTA) released decision No. 3, dated May 20, 2018, on Tax Invoices. For more on this development, see Tax Alert 2018-1144. International: The Parliament of Ghana has enacted into law, Taxation (Use of Fiscal Electronic Device) Act, 2018, Act 966 (the Act). The Act came into force on May 4, 2018. The purpose of this Act, among others, is to provide for the mandatory use of a Fiscal Electronic Device (FED) by specified categories of taxable persons at each point of sale on the premises of the taxable persons and to promote non-cash sales transactions. For more on this development, see Tax Alert 2018-1126. International: The finance ministers of the German Bundesländer (Federal States of Germany) announced on May 25, 2018 that they have agreed on a draft law intended to counter value added tax (VAT) evasion involving online commerce. It is expected that the draft legislation will now enter into the necessary parliamentary procedures and that the implementation date will be Jan. 1, 2019. For more on this development, see Tax Alert 2018-1127. International: Non-EU businesses that have incurred value added tax (VAT) in Europe during 2017 may be able to recover the VAT by applying to the relevant European Union (EU) countries for a refund — provided they comply with the rules. In general, claims by non-EU businesses must be submitted within six months after the end of the calendar year. The deadline for applications for 2017 for most EU countries is June 30, so taxpayers should be collecting the required information now to support a successful claim. For more on this development, see Tax Alert 2018-1131. Multistate: On May 23, 2018, Ernst & Young LLP (EY) held a webcast providing an update on recent developments. During this webcast, EY panelists discussed the following topics: (1) current state tax policy matters, including a review of the current state of the economy, the upcoming state elections and their possible impact on state taxation, and state responses to federal tax reform, including New York's new elective employer compensation expense tax; (2) tax reform in Kentucky and Iowa; (3) the latest developments in sales and use tax nexus, including an overview of the U.S. Supreme Court hearing in Wayfair; and (4) major judicial, legislative and administrative developments at the state level. Click here to listen to a replay of this event. 2 Niagara Mohawk Corp. v. Wannamaker, 286 App. Div. 446 (N.Y. S.Ct. 4th Dept. 1955), aff'd without opinion 2 NY2d 764 (1956). 4 Mich. Comp. Laws 211.9o(7)(b) defines "under common control" in pertinent part as "the possession of the power to direct or cause the direction of the management and policies of a related entity, directly or indirectly, whether derived from a management position, official office, or corporate office held by an individual; by an ownership interest, beneficial interest, or equitable interest; or by contractual agreement or other similar arrangement …" 5 Matter of Hotel of Waldorf-Astoria Corp., 1994 WL 76618 (NYC Tax App. Trib. 1994), aff'd sub. nom. Matter of Hilton Hotels Corp. v. Comr. of Fin. of the City of NY, 219 AD2d 470 (1st Dept. 1995). 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: 2018-1250 |
