26 June 2018 State and Local Tax Weekly for June 15 Ernst & Young's State and Local Tax Weekly newsletter for June 15 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. Missouri enacts corporate tax reform law — individual income tax reform bill awaiting new governor's signature In his final legislative action before resigning, former Governor Greitens on June 1, 2018 signed into law Missouri SB 884, which addresses corporate income tax reform. SB 884 provides for the mandatory use of the single sales factor formula, a corporate income tax rate reduction from 6.25% to 4%, and the elimination of intercompany transactions between corporations that file a consolidated Missouri income tax return. The Missouri Legislature also passed HB 2540, addressing individual income tax reform. That bill was delivered to the Governor for signature on May 30, 2018 but it has not yet been signed. HB 2540 provides for a 5.5% individual income tax rate effective for tax years beginning on or after Jan. 1, 2019, elimination of personal and dependent exemptions, and a phase out of the federal income tax deduction. Former Governor Greitens did not act on HB 2540 before leaving office. The fate of HB 2540 is unclear. If newly sworn-in Governor Michael Parson does not sign or veto the bill, under Missouri's constitution, HB 2540 will be enrolled with the Secretary of State and become law. Since the legislature has adjourned, Governor Parson will have 45 days after presentment of the bill on May 30 to act on the measure. For more on this development, see Tax Alert 2018-1153. New York State issues unincorporated business tax bill discussion draft as part of response to federal tax reform The New York State Department of Taxation and Finance (Department) released a discussion draft proposing a new unincorporated business tax (UBT) on partnerships doing business in New York. The UBT would be codified under proposed new Article 24-A and individuals and corporate partners of partnerships subject to the UBT would be provided a corresponding tax credit for their share of partnership income subject to the UBT. According to the Department, the proposal was made in response to the new $10,000 annual cap imposed on the federal state and local tax deduction under the recently enacted federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). The proposed UBT is structured both to preserve federal income tax deductibility for individuals on certain non-wage income and to maintain state revenue levels. Connecticut recently enacted a pass-through entity tax (see Tax Alert 2018-1142) that operates similarly to the proposed UBT. Other states are considering similar proposals. If enacted, the UBT generally would take effect for tax years beginning on or after Jan. 1, 2019. Attached to its proposal, the Department released a summary document that includes explanatory examples of how the UBT would apply. Interested parties are invited to provide feedback on both the statewide UBT generally as well as the structure of the proposed UBT by July 16, 2018. For additional information on this development, see Tax Alert 2018-1166. California: The California Franchise Tax Board (FTB) issued guidance on reporting IRC §965 amounts for taxable year 2017. Taxpayers may have to report additional tax under IRC §965 on their 2017 federal income tax return. California, however, does not conform to IRC §965; consequently, taxpayers reporting IRC §965 amounts on their federal return will have to make an adjustment on their California return as specified in the guidance. Taxpayers should write "IRC 965" on the top of their California return. CA FTB, CA Guidance — Taxable Year 2017 IRC §965 Reporting (rev. May 22, 2018). Colorado: The Colorado Department of Revenue (Department) issued guidance on the state's treatment of foreign earnings subject to the transition tax under IRC §965. Individual income taxpayers are required to include IRC §965 income as "Other income" on line 21 of Form 1040; no adjustment to the individual's federal taxable income (FTI) (as reported on their federal return) needs to be made on line 1 of their Colorado income tax return. Other taxpayers required to report IRC §965 amounts on the IRC §965 Transition Tax Statement (which is attached to the federal return), must report on line 1 of their Colorado returns the sum total of FTI reported on their federal return and the includible amount reported on line 1 of the Transition Tax Statement, less the deduction reported on line 3 of the statement. Colorado corporate income taxpayers that claim a federal deduction or credit for foreign taxes paid on IRC §965 income, can claim a corresponding portion of IRC §965 income as a foreign source income exclusion on their Colorado return. Taxpayers that underpay Colorado tax as a result of IRC §965 can request a waiver of late payment and estimated tax penalties attributable to IRC §965 income. In addition, Colorado does not follow the federal option to pay tax attributable to IRC §965 over eight years, therefore, the full amount is due at the same time that the Colorado return upon which the income is reported is due. Individual taxpayers, however, can request a monthly installment agreement, but penalties and interest will accrue. Colo. Dept. of Rev., "Colo. Treatment of Foreign Earnings Subject to Federal Transition Tax Under IRC §965" (June 11, 2018). New Mexico: For purposes of filing a New Mexico consolidated return, an administrative law judge (ALJ) has concluded that inclusion by the New Mexico Taxation and Revenue Department (Department) of foreign dividends and subpart F income in the corporate tax base, while treating domestic dividends more favorably by excluding them from the tax base, does not violate the US Constitution's Commerce Clause. In an issue of first impression, the ALJ for the New Mexico Administrative Hearings Office, citing a number of cases, found that, similar to combined reporting methods and in contrast to separate entity reporting methods, the consolidated group aggregation includes the income generation activity of the entire group in the tax base (i.e., income distributed through domestic dividends). Further, distinguishing Japan Line,1 the ALJ found that the Department imposed tax on the apportioned income of a consolidated group of domestic corporations whose parent does business in New Mexico, rather than on a foreign corporation. The ALJ rejected the corporation's argument that it was subject to multiple taxation, finding that the Department tried to mitigate this by using the Detroit Formula and allowing the corporation to make percentage deductions on the foreign-sourced income. Moreover, the consolidated group method does not unfairly apportion income from foreign commerce when the corporation did not establish that the "miniscule" percentage of income attributed to New Mexico was out of all appropriate proportion to its New Mexico business transactions. Although the Detroit Formula is no longer included within the state's regulations, the Department by law can equitably adjust apportionment. Lastly, the ALJ distinguished Kraft2 and Conoco, Inc.,3 finding these opinions expressly address separate entity filers and noted that Conoco has not been expressly extended to either combined return filers or consolidated group filers. In re Protest of General Electric Co. & Subs., D&O No. 18-12 (N.M. Admin. Hearings Ofc. April 6, 2018). Rhode Island: Proposed regulation (280-RICR-20-55-15) would provide guidance on the Rhode Island corporate income tax treatment of repatriated income in 2017 under IRC §965, as added by the Tax Cuts and Jobs Act (P.L. 115-97)(TCJA). Under the proposed regulation, C corporations would include in their Rhode Island taxable income the amount of their net IRC §965 income attributable to a foreign corporation subsidiary (i.e., IRC §965 income less federal deduction under IRC §965). The net 965 income would be includible in income and a dividend received deduction (DRD) would not apply if the net 965 income is attributable to a foreign corporation subsidiary that is a member of a combined group with the corporation that recognizes such income. The proposed regulation addresses whether a Rhode Island DRD would be allowed against IRC §965 income, the treatment of IRC §965 income when a foreign corporation subsidiary is a member of the Rhode Island combined group (i.e., application of intercompany eliminations) or if the IRC §965 income is attributable to a unitary/nonunitary foreign corporation subsidiary, or if the dividend income is from a pass-through entity. The proposed regulation also would provide that apportionment will be governed by Rhode Island's combined reporting regulation and apportionment of net income regulation. The proposed regulation, unlike federal law, would not allow taxpayers to defer payment of tax related to IRC §965 income over an eight year period. The proposed regulation also addresses filing requirements and penalty relief. Comments on the proposed regulation are due by July 12, 2018. Once approved, the regulation would take effect 20 days after filing with the Secretary of State. R.I. Dept. of Rev., Proposed regulation on 965 income (proposed June 11, 2018). Tennessee: New law (SB 2256) allows a financial asset management company to elect to apportion net earnings using a single receipts factor formula, applicable to tax years beginning on or after Jan. 1, 2018. To make this election, a financial asset management company must notify the Tennessee Department of Revenue (Department), in writing, on its return for the taxable year for which the election apples. The election once made is binding for a minimum of five years and thereafter until revoked. To revoke an election, the financial asset management company must notify the Department, in writing, on the first taxable year the revocation applies. After an election is revoked, a new election to use a single receipts factor cannot be made for a five-year period. The bill defines key terms such as "financial asset management company," "financial asset management services" and "financial investments," among other terms. Tenn. Laws 2018, Ch. 656 (SB 2256), signed by the governor on April 9, 2018. Virginia: New law (HB 798) requires a debt buyer, regardless of its business location, to apportion income using a single sales factor, effective for taxable years beginning on or after Jan. 1, 2019. A debt buyer's sales, other than sales of tangible personal property, are in Virginia if they consist of money recovered on debt that the debt buyer collected from a person that is a resident of, or an entity that has its commercial domicile in, Virginia. If the debt buyer cannot determine whether the sale is in Virginia, the debt buyer may estimate the dollar value (or portion of such) in Virginia. The Virginia Department of Taxation is charged with adopting remedies and corrective procedures for cases in which it determines the taxpayer abused the sourcing rules. Va. Laws 2018, Ch. 807 (HB 798), signed by the governor on April 9, 2018. Colorado: New law (HB 1350) expands the sales and use tax exemption for machinery and machine tools purchased by scrap metal processors. Specifically, the definition of "recovered materials" is expanded to include materials that have been derived from scrap metal or end-of-life-cycle metals for remanufacturing, reuse or recycling into new metal stock that meets applicable standards for metal commodities sales. The term "scrap metal processor" is defined in the statute. Various items that are purchased by a scrap metal processor and used in manufacturing prepared grade recycled metals are excluded under the statute including: mobile and stationary metal shears; metal shredders; conveyors/loaders used to move/load metal scraps or stock; bailers to bundle metal stock; material handlers used for metal scrap or metal stock; excavators, magnets, grapples and torches used to break down metal scrap; and all other equipment directly used predominantly in the manufacturing of commodity-grade recycled materials. HB 1350 takes effect Aug. 8, 2018, and applies to sales of machinery and machine tools that occur on or after Jan. 1, 2019. Colo. Laws 2018, Ch. 388 (HB 1350), signed by the governor on June 6, 2018. Connecticut: A restaurant chain is not required to collect sales tax on meals sold to a delivery company if the company provides a resale certificate. The delivery company, however, must collect sales tax on the meals it sells to customers at retail. Connecticut specifically imposes sales tax on the furnishing, preparing or serving of food, meals or drinks for consideration. The delivery company, which is a retailer of the meals purchased from the restaurant and maintains the website where customers purchase the meals, must register as a retailer and remit the applicable tax to the Connecticut Department of Revenue Services. The delivery company's taxable gross receipts includes the meal delivery charge since a retailer's charges to a purchaser for shipping or delivery are included within "gross receipts." Conn. Dept. of Rev. Svcs., Legal Ruling No. 2018-1 (May 15, 2018). Maryland: New law (SB 743) temporarily imposes an 8% sales and use tax on sales and charges made in connection with a shared motor vehicle used for peer-to-peer car sharing and made available on a peer-to-peer car sharing program. The taxable price for such a program is all sales and charges, including insurance, freight handling, equipment and supplies, delivery and pickup, cellular telephone, and other accessories, but excluding sales of motor fuel subject to motor fuel tax. The new tax will be imposed starting July 1, 2018 and will be repealed June 30, 2020. Md. Laws 2018, Ch. 852 (SB 743), became law without the governor's signature on May 26, 2018. New York: Electricity a communications company purchased to produce and provide telecommunications services to its customers is subject to New York's sales and use tax because it does not qualify for the resale exemption. In so holding, the New York Tax Appeals Tribunal rejected the company's argument that the purchase of electricity qualified for the resale exemption in 20 NCYRR 526.6(c)(1) as a purchase of tangible personal property for use as a component part of its telecommunications services, finding that the electricity at issue is not tangible personal property. In the Matter of the Petitions of XO Communications Services, LLC, Nos. 826686 and 827014 (N.Y. Tax App. Trib. May 9, 2018). Federal: The IRS has released the additional designation of Opportunity Zones in 20 states and two 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. This leaves only four states pending approval. Submissions were approved for: Alaska, Arkansas, Connecticut, Guam, Illinois, Maryland, Massachusetts, Minnesota, Montana, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Oregon, Rhode Island, Tennessee, Virginia, Washington, West Virginia, Washington, DC, and Wyoming. Earlier in 2018, the IRS designated Opportunity Zones in: Alabama, American Samoa, Arizona, California, Colorado, Delaware, Georgia, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Mississippi, Missouri, Nebraska, New Jersey, Northern Marianas Islands, Ohio, Oklahoma, Puerto Rico, South Carolina, South Dakota, Texas, Vermont, Virgin Islands, and Wisconsin. For additional information on this development, see Tax Alert 2018-1070. New Jersey: On May 30, 2018, New Jersey Governor Phil Murphy signed into law SB 846 to restore five Urban Enterprise Zones (UEZs) that had expired on Dec. 31, 2016. UEZs are designated areas in New Jersey in which the sales tax rate is reduced to one-half of the state rate for qualifying businesses and are state remnants of federal UEZs. Businesses also may qualify for other benefits such as complete exemption from tax on qualified purchases, financial assistance from the New Jersey Economic Development Authority, subsidized unemployment insurance, and eligibility for an energy sales tax exemption. In 2016, the UEZs located in Bridgeton, Camden, Newark, Plainfield and Trenton expired, resulting in the sales tax reverting to the regular state rate and the loss of the other benefits. The new law reinstates these UEZs and the associated reduced UEZ sales tax rates and benefits until Dec. 31, 2023, effective immediately. The law also requires the New Jersey Department of Community Affairs to prepare, or have prepared, a report on the effectiveness of the UEZ program and recommend changes to the program for the future. The state must notify qualified businesses in the five UEZs that the benefits have been extended through 2023. Qualifying businesses will be required to submit new certification applications through their New Jersey premier business accounts. Other details related to the reinstatement of the UEZs will be provided as they become available. For additional information on this development, see Tax Alert 2018-1152. Washington: The Washington Department of Revenue (Department) issued a special notice on the reinstatement and expansion of tax incentives for anaerobic digesters and certain landfills, and the expansion of the definition of wood biomass fuel for purposes of biomass fuel manufacturers' lower business and occupation (B&O) tax rate (see Wash. Laws 2018, Ch. 164 (ES HB 2580)). Owners and operators of anaerobic digesters and biogas processors from a landfill or anaerobic digester may qualify for a retail sales and use tax exemption on their purchases of certain tangible personal property and services. The notice also discusses the property and leasehold excise tax exemption that is available to owners and operators of anaerobic digesters on property primarily used to operate an anaerobic digester. Taxpayers cannot apply for this exemption after Dec. 31, 2014. The Department noted beginning July 1, 2018, anaerobic digesters and landfills no longer qualify for the sales and use tax exemption (75% refund of tax paid) as energy sources for equipment used directly in generating electricity, but qualify for 100% exemption under HB 2580. Lastly, beginning July 1, 2018, the wood biomass fuel definition is expanded to mean "a liquid or gaseous fuel that is produced from lignocellulosic feedstocks, including wood, forest, field residue, and dedicated energy crops, and that does not include wood treated with chemical preservations such as creosote, pentachlorophenol, or copper-chrome-arsenic." The aforementioned sales and use tax exemptions and preferential B&O tax rate expire Jan. 1, 2029. Wash. Dept. of Rev., Special Notice: Tax incentives for converting biogas into marketable coproducts and manufacturing wood biomass fuel (June 2018). Federal: On June 4, 2018, the IRS updated "Questions and Answers about Reporting Related to Section 965 on 2017 Returns" (the FAQs, originally released March 13, 2018). In the new FAQs (FAQs 15-17), the IRS announced that it will waive certain late-payment penalties on estimated tax payments resulting from the application of tax year 2017 overpayments to the transition tax (provided all required estimated tax payments are made by June 15, 2018). The FAQs also include relief for certain individuals who failed to timely pay the full first installment of the transition tax or failed to timely elect to pay the transition tax in installments. For additional information on this development, see Tax Alert 2018-1168. Connecticut: Under recently enacted legislation and effective Jan. 1, 2019, Connecticut income tax is imposed on nonresidents who perform their services outside of the state for the convenience of the employee. The new telecommuter rule applies only when nonresident employees are residents of a state imposing a similar rule. This new telecommuter rule will not apply to sources of income from a business, trade, profession, or occupation carried on in Connecticut other than compensation for personal services rendered by a nonresident employee, and does not apply to sources of income derived by an athlete, entertainer or performing artist, including, but not limited to, a member of an athletic team. For additional information on this development, see Tax Alert 2018-1150. Louisiana: The Louisiana Workforce Commission (LWC) and the Department of Revenue (DOR) recently announced that they are ramping up their efforts to fight worker misclassification in 2018. A worker misclassification task force known as GAME ON (Government Against Misclassified Employees Operational Network) is based in Louisiana, and is comprised of the LWC's unemployment and workers' compensation divisions and the DOR, in cooperation with the IRS and US Department of Labor. For more on this development, see Tax Alert 2018-1079. Maryland: New law (HB 979) subjects travel insurance to insurance premium tax. Amounts allocable to travel insurance (excluding amounts received for travel assistance services or cancellation fee waivers) are included within taxable premiums when sold to: (1) a Maryland resident individual policyholder, (2) a primary certificate holder who is a Maryland resident and elects coverage under a group travel insurance policy, or (3) certain blanket travel insurance policyholders. Blanket travel insurance policyholders are subject to the premium tax if the policyholder is a Maryland resident or has its principal place of business or the principal place of an affiliate or subsidiary in Maryland and has purchased blanket travel insurance in Maryland for eligible blanket group members. The bill also requires the travel insurer document a policyholder's state of residence. HB 979 takes effect and applies to all travel insurance policies and travel protection plans offered, sold or issued in Maryland on or after Oct. 1, 2018. Md. Laws 2018, Ch. 197 (HB 979), signed by the governor on April 24, 2018. International: A recently released publication, the first in a series to be published by EY's Quantitative Economics and Statistics (QUEST) group, discusses the economic implications of key trade issues and trends. This edition focuses on the importance of US trade with China and possible adverse effects of a trade war between the two countries. For a copy of the publication, see Tax Alert 2018-1082. International: The Bahamian Government in its 2018-19 budget communication has proposed an increase in the rate of Value Added Tax (VAT) from the current 7.5% to 12%, effective July 1, 2018. The rate increase and other changes to the VAT regime were announced in the House of Assembly on May 30, 2018.For more on this development, see Tax Alert 2018-1181. International: Luxembourg has proposed a Value Added Tax (VAT) group regime to be effective as of July 31, 2018. This follows the filing of draft bill n°7288 with Parliament on April 16, 2018 on the adoption of a VAT group regime in Luxembourg. The introduction of this regime comes following the decisions of the Court of Justice of the European Union on the inapplicability of the cost-sharing VAT exemption in the financial and insurance sectors. For more on this development, see Tax Alert 2018-1180. International: The Central Bank of the United Arab Emirates (UAE Central Bank) on May 17, 2018, began publishing daily foreign currency exchange rates that UAE VAT-registered businesses should use when converting the Value Added Tax (VAT) due on a tax invoice from a price denominated in a foreign currency. This is a requirement provided by Article (69) of the Federal Decree-Law No. (8) of 2017 on Value Added Tax. The UAE Central Bank has confirmed that these exchange rates are published solely for VAT reporting and compliance purposes. Consequently, this is likely to result in reconciliation differences with amounts converted to Dirhams in accordance with accounting rules. For more on this development, see Tax Alert 2018-1108. 3 Conoco, Inc. v. Taxn. and Rev. Dept., 1997-NMSC-005, ¶ 13, 122 N.M. 736, 931 P.2d 730 (N.M. 1997). 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: 2018-1304 |
