09 July 2018 State and Local Tax Weekly for June 29 Ernst & Young's State and Local Tax Weekly newsletter for June 29 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 Alabama Department of Revenue (Department) will conduct a tax amnesty program from July 1, 2018 through Sept. 30, 2018. Through the program, certain taxpayers for eligible tax types may voluntarily file and pay delinquent taxes to the Department in exchange for a waiver of all interest and penalties and a three-year (36-month) look-back period of tax liability. Amnesty applies to eligible taxes due before, or tax periods that began before, Jan. 1, 2017. Most taxes administered by the Department, including corporate and individual income tax, sales and use taxes, business privilege tax, financial institution excise tax and withholding tax, are eligible for the amnesty program. Motor fuel tax, motor vehicle tax and property taxes, however, are not included in the amnesty program. A full list of eligible and ineligible taxes is available here. To be eligible, a taxpayer must not have had contact with the Department for the past two years. That includes contact with the Department or an agent about possible liability for the tax type in the amnesty request (such as receiving a nexus questionnaire, filing returns, undergoing audits or receiving audit notices, registering to do business with the Alabama Secretary of State or the Department, filing a return extension request, receiving payment notices/billings for delinquent returns or estimated tax, and failing to comply with a request issued in response to a taxpayer's application for good standing or certificate of compliance). A taxpayer is not eligible to participate in the amnesty program if it has outstanding debt in the Department's records, has been issued a final assessment for which the appeal period is closed, entered into a Voluntary Disclosure Agreement (VDA) with the Department before Dec. 31, 2017, or was granted amnesty for the tax type under Alabama's 2016 amnesty program. The three-year look-back period applies to all eligible taxes, but a taxpayer is not eligible for the three-year limited look-back period if it collected taxes from a customer or employee (such as sales or withholding tax). Such a taxpayer can, however, receive a penalty waiver when it remits these taxes during the amnesty program if it did not already have an account set up to remit these taxes. Alabama's tax amnesty webpage provides examples of tax periods that are included in the look-back period. For additional information on this development, see Tax Alert 2018-1334. On June 24, 2018, Louisiana Governor Edwards signed into law HB 10 (Act 1, 3rd special session), to extend the additional one cent sales tax enacted in 2016 (i.e., the Clean Penny),1 but at a lower rate. Effective July 1, 2018 through June 30, 2025, the rate of the additional sales tax is 0.45%, bringing the total state sales and use tax rate down to 4.45% (from 5%). Louisiana parishes and cities may impose their own sales tax rates so the actual state and local rate applied to taxable transactions will be much greater. Additionally, as Louisiana's total sales tax rate is a compilation of a variety of rates from different acts, the new law generally makes exemptions and exclusions among these various sales tax laws uniform among the various rates (except those applicable to business utilities) imposed from July 1, 2018 through June 30, 2025. For a full list of the exemptions, and when they apply (pre- and post- July 1, 2018), see the Louisiana Department of Revenue's (Department) exemption table. In response to the law change, the Department issued RIB No. 18-016 (June 24, 2018) to explain these changes. In RIB No. 18-016, the Department said dealers charging the total 5% rate on or after July 1, 2018, must remit the excess tax collected to the Department, reporting the excess on Line 8 of the Sales Tax Return Form R-1029. From July 1, 2018 through June 30, 2025, the total sales tax rate for business utilities is 2% as provided by La. Rev. Stat. § 47:302; business utilities are exempt from the other sales tax levies. The 2% tax is imposed on the sale at retail, use, consumption, distribution and storage of steam, water, electric power or energy, natural gas, or other energy sources for non-residential use. For additional information on this development, see Tax Alert 2018-1333. Colorado: On June 4, 2018, Governor John Hickenlooper signed into law HB 1185 which, among other things, replaces Colorado's current cost-of-performance method of sourcing sales from intangible property and services for sales factor apportionment purposes with a market-based sourcing method. This provision will be effective for income tax years beginning on and after Jan. 1, 2019. The new provisions are modeled after similar provisions in the Multistate Tax Commission's (MTC) model act. For additional information on this development, see Tax Alert 2018-1323. Massachusetts: Motor vehicles held in inventory by a dealer cannot be excluded from its parent's non-income measure of the corporate excise tax when the inventory is not "subject to local taxation." The Massachusetts Department of Revenue (Department) explained that tangible property is "subject to local taxation" for purposes of the non-income measure of the corporate excise if it is not exempt from local real and personal property tax or the motor vehicle excise tax. Motor vehicles and trailers, however, are exempt from local property tax when they are either subject to or exempt from tax under Mass. Gen. L. ch. 60A (an excise tax on registered motor vehicles in lieu of local tax). Further, in lieu of paying a motor vehicle excise tax on each motor vehicle in its inventory, a dealer is subject to a special excise tax for the privilege of getting general registration and dealer plates on a per plate basis. Thus, to the extent the dealer's motor vehicles held in inventory are subject to the dealer's special registration or operated with dealer plates, they are exempt from both motor vehicle excise tax and local personal property tax. Mass. Dept. of Rev., Letter Ruling 18-2 (May 16, 2018). Montana: New and amended rules (new Mont. Admin. R. 42.9.112 and 42.9.303; amended Mont. Admin. R. 42.9.107 and 42.15.120) adopt income apportionment and allocation rules for pass-through entities, adopt rules on the sourcing of guaranteed payments made to an individual partner, and update certain terms and references. New Mont. Admin. R. 42.9.112 applies to income allocation and apportionment for pass-through entities. Under the rule, partnerships that are unitary with the business operations of a corporate partner and whose apportionment factors are included in the computation of that corporate partner's apportionment factors are considered to be part of the corporate group for purposes of applying the Finnigan rule. Similar allocation and apportionment regulations applicable to individuals, trusts and estates are found at amended Mont. Admin. R. 42.15.120, with provisions related to pass-through entities removed and new reporting requirements added related to certain telecommunication services and financial institutions. Additionally, new Mont. Admin. R. 42.9.303 relates to sourcing of guaranteed payments to individual partners. Guaranteed payments are sourced as follows: (1) when the payments are made to a retired partner the payments are sourced to the recipient's state of domicile; (2) if the guaranteed payments are made to an individual partner as compensation for services, the payments are sourced to Montana if the individual performed the services in Montana; and (3) otherwise, guaranteed payments made to individual partners pursuant to IRC §707 are sourced to Montana based upon the partnership's Montana apportionment factor. Lastly, amendments to R. 42.9.107 change references from "business and nonbusiness" income to "apportionable or nonapportionable" income. These changes took effect April 28, 2018. Mont. Dept. of Rev., new Mont. Admin. R. 42.9.112 and 42.9.303; amended Mont. Admin. R. 42.9.107 and 42.15.120 (Mont. Admin. Register, adopted April 27, 2018). New Hampshire: New law (SB 564) excludes from business profits tax and business enterprise tax an entity that elects to be treated as a qualified regenerative manufacturing company. Additionally, no part of an entity's earnings or losses will be included in the gross business profits tax or business enterprise tax calculations of the entity owners. A qualified regenerative manufacturing company is any business organization that during the entire taxable year properly elects to be a qualified regenerative manufacturing company, and at least 75% of its business activities over the course of the tax year meet the requirements for an active regenerative manufacturing business, or , in the case of a subsidiary located in New Hampshire, 75% of that subsidiary's business activities meet the requirements of an active regenerative manufacturing business. An active regenerative manufacturing business means the conduct of any business activity the primary focus of which is one or more of the following areas related to regenerative manufacturing: (1) performing research; (2) performing regenerative manufacturing activities; (3) researching, developing, manufacturing, or supplying technical services in support of such manufacturing (e.g., process engineering, automation, facility set-up, distribution services); (4) researching, developing, manufacturing, or supplying technologies used in such manufacturing (e.g., cellular and non-cellular source materials, tools, equipment, reagents, and other supplies); and (5) performing any activity necessary to bring such products to market (e.g., seeking patents, regulatory approval, clinical trials, sales). An entity has until the 15th day of the third month immediately following the end of the taxable period to make an election to be treated as qualified regenerative manufacturing company. Once made, the election is effective for the taxable period for which it is made and for all succeeding taxable periods until it is terminated or revoked. The exemption applies for taxable periods beginning after Dec. 31, 2017, and the election terminates for all taxable periods beginning after Dec. 31, 2027. N.H. Laws 2018, Ch. 157 (SB 564), signed by the governor on May 30, 2018. Michigan: New law (SB 887) clarifies that existing law as originally intended excludes from use tax tangible personal property acquired by a person engaged in the business of installing tangible personal property (i.e., constructing, altering, repairing or improving real estate for others) if that property is purchased by another party who is not exempt from sales/use tax for installation on behalf of that other person. To qualify for the exclusion, the tangible personal property must have been acquired for the sole purpose of affixing it to real estate on behalf of that other person. This clarification took effect June 20, 2018. Mich. Laws 2018, Act 201 (SB 887), signed by the governor on June 19, 2018. Missouri: New law (SB 768) makes clear that for purposes of Missouri's sales and use tax exemption for certain manufacturing, the term "product" includes "telecommunication services" and the term "manufacturing" includes "the production, or production and transmission, of telecommunications services." SB 768 states that this "does not make a substantive change in the law and is intended to clarify that the term 'manufacturing' has included and continues to include the production and transmission of 'telecommunication services.'" The clarification abrogates the Missouri Supreme Court's (Court) interpretation of these exemptions in IBM Corp. v. Dir. of Rev.2 to the extent the decision is inconsistent with the Court's earlier interpretations of these exemptions in Southwestern Bell I and II opinions.3 Further, the legislature affirmed the construction and application of these exemptions as expressed by the Court in DST Systems, Inc. 4 and Southwestern Bell I and II. SB 768 takes effect Aug. 28, 2018. Mo. Laws 2018, SB 768, signed by the governor on June 1, 2018. Federal: In Notice 2018-59, the IRS provides additional guidance on the Section 48 investment tax credit to reflect the extension and modification of the credit by the Consolidated Appropriations Act, 2016 (the 2016 Act) and the Bipartisan Budget Act of 2018 (the 2018 Act). The Notice provides guidance for determining when construction begins on energy property, which prior guidance did not cover. For additional information on this development, see Tax Alert 2018-1324. Connecticut: New law (HB 5590) permits taxpayers with accumulated tax credits for research and experimental expenditures and accumulated rolling tax credits for research and development (R&D) expenses to sell, assign or transfer all or part of the credits no more than once to one or more taxpayers for the sole purpose of exchanging the accumulated credits. The transfer must be executed at an innovation investment fund tax credit auction or by agreement with the state to allow a taxpayer to use the credits in exchange for making an investment in a corporate venture fund. These changes are effective July 1, 2018. Conn. Laws 2018, Pub. Act No. 18-178 (HB 5590), signed by the governor on June 14, 2018. Puerto Rico: Puerto Rico's Treasury Department (PRTD) has finalized guidance (Circular Letter (CL) 18-11) and established a website for employers to claim a benefit for retaining employees in the wake of Hurricanes Irma and Maria. The guidance follows an agreement between US Treasury and PRTD officials under the Federal Disaster Tax Relief and Airport and Airway Extension Act of 2017 (the Act), which was signed into law on Sept. 29, 2017. For more information on this development, see Tax Alert 2018-1297. Louisiana: New law (HB 598) authorizes a local taxing authority to enter into advance payment agreements that permit taxpayers to pay certain ad valorem taxes in advance in exchange for tax credits for property under contract for the industrial tax exemption, plus interest. A taxpayer may not claim more than 20% of the total value of the credits in any tax year. Additionally, the credits may only be applied to tax liabilities that become due on the taxpayer's property that is subject to the industrial tax exemption under La. Const. Art. VII, § 21(F). Entering into an advance payment agreement does not affect the taxpayer's eligibility for or continued benefit from the industrial tax exemption. HB 598 took effect upon enactment. La. Laws 2018, Act 328 (HB 598), signed by the governor on May 15, 2018. Missouri: New law (SB 768), beginning Jan. 1, 2019, permits telephone companies to make a one-time election within the tax year to be assessed using the methodology (1) applied to railroads under current law; or (2) for railroad property that includes land and buildings under a depreciation schedule for all other forms of property. A telephone company that does not make a timely election will be deemed to have elected the current methodology of assessment applied to railroads. If, however, a school district receives less tax revenue from a specific telephone company that exercised its election, the school board may impose a fee by resolution to obtain the lost revenue from the telephone company (if voters approve a rate increase, the fee would no longer be imposed). In addition, the bill provides that for accounting purposes, a telephone company that issues such a payment to a school district would treat the payment as a tax. These provisions expire when no school district is eligible for a fee. Mo. Laws 2018, SB 768, signed by the governor on June 1, 2018. Maryland: The part of the Maryland Budget Reconciliation Act of 2014 that sets a lower interest rate for refunds related to the U.S. Supreme Court ruling in Wynne5 than other income tax refunds is unconstitutional. Therefore, Maryland must pay Wynne refunds at 13% interest. Further, recently enacted legislation (HB 686) allows local jurisdictions two additional years (until February 2021) to reimburse Maryland's local income tax reserve account for their shares of refunds and interest issued pursuant to the Wynne decision. Wynne v. Maryland Comptroller, No. 16-IN-OO-0216 (Md. Tax Ct. May 23, 2018); Md. Laws 2018, Ch. 824 (HB 686), enacted without the governor's signature on May 26, 2018. Maine: A ballot initiative is awaiting voter approval that would establish the Universal Home Care Program, which would be funded by a shared employer/employee payroll tax on high income earners (defined as an employee who earns annual wages of more than the Social Security wage base in effect for the year) and a tax on nonwage income. Voters will decide on this initiative on Nov. 6, 2018. For more on this development, see Tax Alert 2018-1301. New Jersey: The New Jersey House and Senate recently passed a bill (A4163/S2581) that would allow New Jersey municipalities to impose a payroll tax on businesses of up to 1% of wages. The bill now goes to Governor Phil Murphy for his signature. Under current law, a municipal payroll tax is allowed only if it was enacted during the two-year period prior to July 1, 1995. Additionally, current law does not explicitly provide that a municipality may change the rate of an employer payroll tax so long as the rate does not exceed 1%. This bill would explicitly allow a municipality to make that change. The bill restricts the ability to impose a payroll tax to those municipalities with a population over 200,000. Currently, only Newark and Jersey City meet this requirement; however, Newark already imposes a 1% payroll tax on businesses. For additional information on this development, see Tax Alert 2018-1316. Philadelphia, PA: The Philadelphia Department of Revenue announced that effective July 1, 2018, the Philadelphia wage tax rates will decrease. The rate as of July 1, 2018 for residents of Philadelphia decreases from 3.8907% to 3.8809%, and the rate for nonresidents of Philadelphia decreases from 3.4654% to 3.4567%. The City of Philadelphia wage tax is a tax on salaries, wages, commissions and other compensation paid to an employee who is employed by or renders services to an employer. Covered wages follow those that apply for Pennsylvania income tax purposes with certain exceptions noted in the Philadelphia regulations. Employers must begin withholding at the new rates from paychecks issued after June 30, 2018. Philadelphia's Net Profits Tax (starting Jan. 1, 2018) and School Income Tax (starting July 1, 2018), which mirror the wage tax, are also 3.8809% for residents and 3.4567% for non-residents. The School Income Tax applies only to resident of Philadelphia. For additional information on this development, see Tax Alert 2018-1317. Delaware: New law (HB 377) permits any county with a population of greater than 500,000 to impose by ordinance a local lodging tax of up to 3% of the rent for any room or rooms in a hotel, motel or tourist home located within the county's unincorporated area. This is in addition to any amount imposed by the state. Delaware Department of Natural Resources and Environmental Control rentals are exempt from the local lodging tax. HB 377 took effect June 18, 2018. Del. Laws 2018, HB 377, signed by the governor on June 14, 2018. Illinois: The Illinois Circuit Court of Cook County (Court) upheld Chicago's 9% amusement tax on internet-based streaming services, finding the tax does not violate the US Commerce Clause, Internet Tax Freedom Act (ITFA), or the Illinois Constitution's Uniformity Clause, and it is not an extraterritorial application of Chicago's taxing power. The amusement tax is valid under Complete Auto Transit 6 as it : (1) has substantial nexus with Chicago through its application to customers who receive the services in Chicago; (2) is fairly apportioned — the parties agreed the application of the tax is internally consistent, and it is externally consistent as a reasonable reflection of the way consumers purchase streaming services (despite not being purely local), and apportioning the intangible movement of electronic streaming services would be administratively burdensome; and (3) is fairly related to benefits provided by the city. (The third prong of Complete Auto Transit, discrimination against interstate commerce, was not at issue). The amusement tax does not impose discriminatory taxes on electronic commerce in violation of the ITFA, because the streaming services are not sufficiently similar to live performances or automatic amusement machines. Further, the amusement tax as applied to streaming services does not violate the Illinois Constitution's Uniformity Clause in that: (1) it is based on real and substantial differences between those who are taxed and not taxed (based on Chicago address), and the streaming services are substantially different from the automatic amusement devices and live theater performances; and (2) the tax classification is reasonably related to the object of the legislation. Lastly, distinguishing Hertz Corp.,7 under Chicago's home rule authority the amusement tax is facially valid since the city is taxing an event that occurs within its boundaries and in an area for which it provides services. It also is valid on an as-applied basis, as the main use of the services is primarily within Chicago, with residents billed at the address provided to the streaming services companies. Labell v. City of Chicago, No. 15 CH 13399 (Cook Cnty. Cir. Ct. May 24, 2018). Philadelphia, PA: New law (Bill No. 180167) increases the Philadelphia realty transfer tax rate to 3.278% (from 3.10%) beginning July 1, 2018 through Dec. 31, 2036, and then reduces the rate to 3.178% (instead of the previously scheduled reduction to 3.0%), beginning Jan. 1, 2037 and thereafter. According to the ordinance, the rate increase is intended to offset an increase to the homestead exclusion, which will reduce the School District's real estate tax receipts. Phila., Pa. Laws 2018, Bill No. 180167, signed by the mayor on June 20, 2018. International: The latest edition of Trade Watch, a quarterly communication prepared by Ernst & Young LLP's Customs & International Trade Practice, is now available. Click here for a copy of the latest edition. International: A recently released publication published by EY's Quantitative Economics and Statistics (QUEST) group discusses possible Chinese responses to the escalating trade war with United States, whom they would affect, and their likelihood of occurring. For a copy of the publication, see Tax Alert 2018-1312. International: The Department of Inland Revenue in the Bahamas has released a number of general and industry specific value added tax (VAT) guides to the public. These include the Bahamas General VAT Guide, Transitional Arrangements, guidance on Insurance Services, Construction, Retail & Wholesale Sectors, Cash Accounting & Flat Rate Schemes and Transportation of Goods & Passengers. The purpose of the guides is to provide additional clarity on the updates to the VAT Act and outline the transitional provisions. For additional information on this development, see Tax Alert 2018-1320. International: The Italian Court of Cassation (Court) issued a landmark judgment on May 11, 2018 concerning the Value Added Tax (VAT) treatment of coinsurance fees. The Court ruled that the services supplied by the delegated insurer to the other co-insurers are neither exempt financial services nor ancillary to insurance services and therefore subject to VAT. For more on this development, see Tax Alert 2018-1302. International: The Kingdom of Saudi Arabia (KSA) introduced Value Added Tax (VAT) from Jan. 1, 2018. Those businesses on a monthly tax period have already filed a number of returns since Jan. 1, 2018 while those taxpayers on a quarterly tax period filed their first VAT return due on April 30, 2018. During the VAT return preparation and review process, a number of common issues were identified across many businesses in the KSA. For additional information on this development, see Tax Alert 2018-1294. Multistate: On Wednesday, July 18, 2018, Ernst & Young LLP will host its third webcast in its state income tax nexus and filing options webcast series. This webcast will focus on the limitations on tax liability provided by P.L. 86-272 and a discussion of the income tax implications of the recent U.S. Supreme Court decision in South Dakota v. Wayfair. Specifically, the webcast will cover: (1) an in-depth analysis of the specific requirements of P.L. 86-272 and the activities that may exceed its protections; (2) important judicial developments interpreting P.L. 86-272, including Wrigley; and (3)a discussion of the recent U.S. Supreme Court decision in South Dakota v. Wayfair and how it may impact state income tax nexus determinations. Click here to register for this webcast. Federal: A replay of the June 6, 2018 Ernst & Young LLP webcast on the new Opportunity Zone program that was created under the federal Tax Cuts and Jobs Act is now available. The Opportunity Zone program (codified in IRC Sections 1400Z-1 and 1400Z-2) authorizes states to designate Opportunity Zones in qualified low-income census tracts to spur investment in those areas. Topics discussed during the webcast include: (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: 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 access a replay of the webcast. 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 Southwestern Bell Tel. Co. v. Dir. of Rev., 78 S.W.3d 763 (Mo. en banc 2002); Southwestern Bell Tel. Co. v. Dir. of Rev., 182 S.W.3d 226 (Mo. en banc 2005). Document ID: 2018-1352 |
