27 July 2018 State and Local Tax Weekly for July 20 Ernst & Young's State and Local Tax Weekly newsletter for July 20 is now available. Prepared by Ernst & Young's State and Local Taxation group, this weekly update summarizes important news, cases, and other developments in U.S. state and local taxation. On June 21, 2018, the U.S. Supreme Court (the Court) issued its decision in South Dakota v. Wayfair, 1 in which the Court overturned both its prior rulings in Quill 2 and National Bellas Hess, 3 finding that the physical presence nexus standard articulated in the two earlier opinions "is [an] unsound and incorrect" interpretation of the Court's dormant Commerce Clause jurisprudence. (See Tax Alert 2018-1269). In the wake of the Court's decision, a number of states have issued guidance as to the impact on their sales and use tax laws, including application of existing economic nexus standards. For example: The Alabama Department of Revenue announced that its economic nexus rule 810-6-2-.90.03 (which was approved in 2015 and applied starting in 2016) will be applied prospectively for sales made on or after Oct. 1, 2018. Although Indiana has statutorily enacted economic nexus provisions, the Indiana Department of Revenue (IN DOR) said that it "is currently prohibited from enforcing the obligation to collect sales tax from remote sellers until a declaratory judgment action currently pending in Indiana is resolved." The IN DOR further indicated on its websitethat it will not apply the law retroactively. The Louisiana Sales and Use Tax Commission for Remote Sellers (Commission) indicated that the state is working on a collection and remittance system for remote retailers, with the goal of having it up and running by Jan. 1, 2019 (Note: this date is subject to the Commission's approval and may change; the Commission is scheduled to vote on the date during its Aug. 9, 2018 meeting). The North Dakota Tax Commissioner announced that remote retailers not meeting the small seller exception must register and start collecting North Dakota sales or use tax by the later of Oct. 1, 2018 or 60 days after the remote retailer meets the small seller exception threshold. The threshold is $100,000 or more, or 200 separate transactions, in taxable sales shipped to locations in North Dakota. On July 18, 2018, and in response to the ruling in Wayfair, the Utah legislature approved SB 2001 to establish economic nexus provisions for sales and use tax purposes. The bill, which was signed by the governor on July 21, 2018, adopts economic nexus provisions that require sellers receiving gross revenue from taxable sales of more than $100,000 or in 200 or more separate transactions to collect and remit Utah sales tax. These provisions apply starting Jan. 1, 2019. The Vermont Department of Taxes advised that as a result of the Court's decision in Wayfair, economic nexus provisions enacted in 2016 are now effective. Consequently, remote retailers are required to register with the state and starting July 1, 2018 should begin collecting and remitting sales tax to the state. Following Wayfair, the Wisconsin Department of Revenue announced that remote retailers are required to collect and remit sales tax starting Oct. 1, 2018. The department said that the remote retailer provisions will be administered through an administrative rule establishing a threshold of $100,000 of sales or 200 separate Wisconsin transactions. For more state responses, see Tax Alert 2018-1468, which provides a summary of official state announcements and guidance, as of July 19, 2018. Further, in response to questions, Tax Alert 2018-1318 has been updated to address the application of the Court's Wayfair decision to accounting for income tax nexus exposure under ASC740. Neither the original discussion in the Alert nor its conclusions on the sales tax accounting under ASC450 has changed. Louisiana: New law (HB 18) extends and amends Louisiana's limit on individual income tax credits for taxes paid to other states, and provides a deduction for certain entity-level taxes paid to other states. The current limit on individual income tax credits for taxes paid to other states is extended to June 30, 2023 (from June 30, 2018). The amendments related to the credit clarify that the credit is not permitted for tax paid on income that is not subject to tax in Louisiana. The credit amount cannot exceed a ratio, calculated by multiplying the taxpayer's Louisiana income tax liability before the credit by a fraction, the numerator of which is the taxpayer's Louisiana tax table income attributable to other states to which the resident individual paid net income taxes, and the denominator of which is total Louisiana tax table income. Additionally, individual partners, members or shareholders that, on or after Jan. 1, 2018, pay another state's entity-level tax that is based only on net income included in the entity's federal taxable income without any capital component, can deduct a proportionate share of the entity-level tax paid. The deduction is limited to the proportionate share of the related income on the tax paid to the other state that is included in the Louisiana taxable income reported on the individual partner or member's Louisiana return. HB 18 took effect June 12, 2018. La. Laws 2018 (2nd Extraordinary Session), Act 6 (HB 18), signed by the governor on June 12, 2018. Minnesota: In Associated Bank, N.A. and Affiliates, 4 the Minnesota Supreme Court (Court) reversed the Minnesota Tax Court and held that the Minnesota Tax Commissioner (Commissioner) is not precluded by the Court's prior ruling in HMN Financial 5 from applying an alternative apportionment formula to include the income from a bank's two related entities disregarded for federal income tax purposes and not financial institutions when the Commissioner proved that the application of the standard apportionment formula did not "fairly reflect" the bank's Minnesota income sources while the proposed alternative method did. In so holding, the Court distinguished HMN Financial, finding that the Commissioner in HMN Financial relied on Minn. Stat. § 290.20 (the alternative apportionment statute) as "as an example of general implicit statutory authority" to tax a transaction based on its economics, whereas in this case the Commissioner relies on Minn. Stat. § 290.20 "as specific authority" to use an alternative apportionment formula to fairly reflect the bank's taxable net income allocable to Minnesota. For more on this development, see Tax Alert 2018-1452. New York: A corporation that provides wholesale energy is not a "qualified New York manufacturer" and is not entitled to the corporate franchise tax capital base's $350,000 liability cap for the tax years at issue (2010, 2011 and 2012) because electricity producers are excluded from the capital base's liability cap. In so holding, the administrative law judge (ALJ) for the New York Division of Tax Appeals found that the legislative history supports a finding that since the statutory language defining "manufacturer" for purposes of the liability cap is leveraged from the New York investment tax credit (ITC) provision and the ITC provisions specifically excludes the property of a manufacturer principally engaged in producing electricity, such exclusion also is incorporated into the "qualified New York manufacturer" requirements. Lastly, the ALJ did not abate the corporation's substantial understatement penalties, finding the corporation's statutory interpretation was unreasonable and it did not seek the state's view on its interpretation of the statute before filing its return in the manner in which it did. Matter of TransCanada Facility USA, Inc., DTA No. 827332 (NY Div. of Tax App. June 7, 2018). North Carolina: New law (SB 75) sends to voters an amendment to the North Carolina Constitution that if approved would reduce the maximum income tax rate that can be imposed on individuals to 7% (currently 10%). The change will be on the November 2018 ballot and, if approved by a majority of the voters, will apply to taxable years beginning on or after Jan. 1, 2019. N.C. Laws 2018, Ch. SL 2018-119 (SB 75), approved June 28, 2018. North Carolina: New law (SB 99) modifies North Carolina's corporate income and franchise tax provisions. Under current law, partnerships that elect to be taxed as corporations are not subject to the North Carolina franchise tax. Effective Jan. 1, 2019, and applicable to the calculation of franchise tax reported on the 2018 C Corporation tax returns, the definition of "corporation" under N.C.G.S. §105-114(b)(2) is amended to include partnerships electing to be taxed as corporations for federal income tax purposes. As a result, such electing partnerships will be subject to the North Carolina franchise tax as if they were corporations. Additionally, SB 99 amends N.C.G.S. §105-122(b), removing vague language to clarify that the net worth base of a corporation that does not maintain its books in accordance with Generally Accepted Accounting Principles (GAAP) is computed in accordance with the method it uses for federal income tax purposes. For franchise tax purposes, these taxpayers will be required to calculate asset valuation, depreciation, depletion, and amortization using the same method used for federal income tax purposes. SB 99 also prevents a double deduction of treasury stock that is already included in the current franchise tax calculation by striking N.C.G.S. §105-122(b)(3) from the statute. This change is effective Jan. 1, 2019 and applies to the calculation of franchise tax reported on the 2018 C Corporation tax returns. For corporate income and franchise tax purposes, SB 99 provides guidance to the North Carolina Department of Revenue regarding the sourcing of service income through the addition of a statutory definition of the term "income-producing activity." Under amended N.C.G.S. §105-130(l)(3)(c), an "income-producing activity" is an activity "directly performed by the taxpayer or its agents for the ultimate purposes of generating the sale of the service. Receipts from income-producing activities performed within and [outside] [North Carolina] are attributed to [North Carolina] in proportion to the income-producing activities performed in [North Carolina] to total income-producing activities performed everywhere that generate the sale of service." Additionally, SB 99 clarifies that income from incidental services is sourced to North Carolina if the services are performed in connection with the sale of tangible property located in North Carolina. Lastly, SB 99 amends N.C.G.S. §105-130(l)(3)(b), to clarify that receipts from intangible income are sourced to the state where the intangible property is used. N.C. Laws 2018, SB 99, enacted over governor's veto on June 12, 2018. For addition tax changes in SB 99, see Tax Alert 2018-1429. Pennsylvania: New law (SB 1056) addresses the bonus depreciation issues raised by the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) and certain controversial depreciation guidance issued by the Pennsylvania Department of Revenue (Department). Under IRC §168(k) as amended by the TCJA, a 100% depreciation deduction (i.e., bonus depreciation) is allowed for "qualified property" placed in service after Sept. 27, 2017, and before 2023. Following enactment of the TCJA, the Department issued guidance in Corporation Tax Bulletin 2017-02 that, for Pennsylvania corporate income tax purposes, no recovery would be allowed with respect to 100% bonus depreciation added back to taxable income until the asset to which it relates is sold or otherwise disposed. Pennsylvania law as amended by SB 1056 continues to disallow federal bonus depreciation, but for property placed in service afterSept. 27, 2017, allows a deduction equal to depreciation under the Modified Accelerated Cost Recovery System (MACRS). Further, SB 1056 codifies the Department's policy of allowing the remaining unrecovered bonus deprecation to be deducted in the year the property is fully depreciated for federal income tax purposes, is sold or disposed of. Further, in Corporation Tax Bulletin 2018-03, which supersedes Bulletin 2017-02, the Department acknowledged that some taxpayers may have already filed their 2017 Corporate Net Income Tax returns and may need to file amended returns eliminating that bonus depreciation and instead claim the additional deduction allowed under MACRS. Pa. Laws 2018, SB 1056, signed by the governor on June 28, 2018. For more on this development, see Tax Alert 2018-1430. Multistate: The most recent sales and use tax quarterly provides a summary of recent significant legislative, administrative and judicial actions from April — June 2018. See Tax Alert 2018-1460 for the full summary. New Jersey: New law (AB 4132) expands the Tobacco Products Wholesale Sales and Use Tax Act to include liquid nicotine. Liquid nicotine will be taxed at the rate of $0.10 per milliliter. The tax base is the number of milliliters of liquid nicotine sold by a distributor or wholesaler to retail dealers or consumers. A complementary use tax is also imposed. AB 4132 further requires retail dealers, wholesalers, and distributors of tobacco products to file returns disclosing their inventories of liquid nicotine. The law takes effect Sept. 29, 2018. N.J. Laws 2018, P.L. 2018, c. 50 (AB 4132), signed by the governor on July 1, 2018. For more on this development, see Tax Alert 2018-1424. North Carolina: New law (SB 99) makes various changes to North Carolina's sales and use tax laws. SB 99 amends the definition of "qualifying datacenter" to require a non-operating datacenter to certify, when applying for a written determination, that it "will satisfy" the wage standard, "will provide" health insurance for all of its full-time employees as long as the datacenter operates, and "will pay" at least 50% of health care as required by statute. The bill expands N.C.G.S. §105-164.4B to provide that bad faith does not include sourcing gross receipts derived from the renewal of a service contract for prewritten software to the address where the purchaser received the underlying prewritten software, provided the seller has not received information from the purchaser indicating a change in the location of the underlying software. Additionally, language was added to the general sourcing provisions providing that the sourcing provisions are to assist a seller in determining where to source the sale of product and do not alter the application of use tax imposed on a purchaser under N.C.G.S. §105-164.6. In addition SB 99 (1) expands and further clarifies the list of activities in N.C.G.S. §105-164.4G(e) where gross receipts derived from such activities are not admission charges subject to sales and use tax; (2) allows a retailer that pays sales and use tax on property or services and subsequently resells the property or services at retail before using them to recover the sales or use tax originally paid to a seller; (3) clarifies the exemption language for over-the-counter drugs and provides that pet food is subject to sales and use tax, even if the manufacturer of that food may require the food to be sold on prescription; (4) provide a sales and use tax exemption for property management contracts related to real property used for business, commercial, educational or income-producing purposes; (5) provides that receipts received from a charitable contribution described under IRC § 170(l)(2) do not qualify as taxable admission charges to an entertainment activity for sales and use tax purposes; (6) extends the exemption from sales and use tax to purchases of remedies, medications, vaccines and other certain items by a person for use in providing a service on plants and animals held for commercial purposes by qualifying farmers; (7) amends N.C.G.S. §105-164.4(a) to merge the imposition of sales and use tax of repair, maintenance, and installation services (RMI) with the taxation of the items themselves, and as a result of this change, taxpayers will no longer need to make the determination of whether the imposition is on the sale of the item plus installation or on the RMI service; (8) amends direct pay permit provisions; and (9) extends the grace period under the Sales Tax Base Expansion Protection Act for an additional year and adds additional transactions to the grace period that were not originally included. N.C. Laws 2018, SB 99, enacted over governor's veto on June 12, 2018. For addition tax changes in SB 99, see Tax Alert 2018-1429. Rhode Island: New law (HB 7200Aaa) expands items subject to Rhode Island sales and use tax, including vendor-hosted prewritten computer software and some services. Effective Oct. 1, 2018, the sales and use tax base is expanded to impose tax on the sale, storage, use or other consumption of vendor-hosted prewritten computer software. "Vendor-hosted prewritten computer software" is defined as "prewritten computer software that is accessed through the Internet and/or a vendor-hosted server regardless of whether the access is permanent or temporary and regardless of whether any downloading occurs." The definition of taxable services is expanded to include investigation, guard and armored car services. HB 7200Aaa also removes from the definition of "food and food ingredients" seeds and plants used to grow food and food ingredients. Lastly, HB 7200Aaa exempts from sales and use tax keg and barrel containers regardless of whether they are returnable when they are sold to alcoholic beverage producers who place alcoholic beverages in the containers. These changes took effect July 1, 2018. R.I. Laws 2018, Ch. 47 (HB 7200Aaa), signed by the governor on June 22, 2018. Texas: A company's purchases of various component parts for use in building custom drilling equipment are not exempt from the state's sales and use tax under either the drilling equipment exemption or temporary storage exemption because the company did not establish that it intended to use the purchased items out of state, or that the items were "temporarily stored" in Texas, respectively. In reaching these conclusions, the Texas Court of Appeals (Court) partially affirmed the lower court ruling that the company did not prove that the items it purchased and incorporated into its drilling equipment were "built for exclusive use outside Texas," when it did not know the situs of future use of any of the items at the time of purchase or were first incorporated into a tool. To claim the exemption, the company was required to prove that it intended each item purchased to be used out of state. For the items that "happened to have been used only on out-of-state jobs," the company failed to establish that these items were built into motors or tools for the purpose of being used exclusively outside the state, as required by the exemption. Additionally, in partially reversing the lower court, the Court found the company's purchases did not qualify for the temporary storage exemption. The Court reasoned that the company stored the items in Texas more than once (the statute contemplates storing an item only once before permanently shipping it out of state), and both the items repeated storage for indeterminate time periods and the company's purchase of items to replenish stock are more like ordinary, general storage instead of temporary storage. Nabors Drilling Tech. USA, Inc. v. Hegar, No. 03-17-00284-CV (Tex. App. Ct., 3d Dist., June 6, 2018). Louisiana: New law (SB 3) amends sales and use tax rebate timelines for enterprise zone (EZ) incentives and quality jobs incentives, and provides an application filing exception for certain quality jobs incentives. Under the revised law, the Louisiana Department of Revenue (Department) has 60 days (previously 10 business days) from when it receives a properly completed rebate request for EZ incentives or quality jobs incentives to rebate 80% of the eligible amount claimed (for purposes of the EZ incentives, the Department also must account for a statutory limitations period). Within six months (previously three months) of the rebate request filing date, the Department must audit the rebate request, disallow ineligible items, and rebate the remaining 20% of the amount claimed (minus any properly denied amounts) within 10 business days of the expiration of the six-month period. For purposes of the EZ credit, the Department will make additional sales and use tax rebates from a rebate request after certification by the Department of Economic Development that additional net new jobs have been created. Lastly, for purposes of the quality jobs incentives, SB 3 provides an exception for when applications for quality jobs incentives rebates must be filed, permitting applications to be filed any time before Jan. 1, 2018 for advance notifications that were filed on or after June 1, 2015 and before July 1, 2015. These changes took effect on June 12, 2018. La. Laws 2018 (2nd Extraordinary Session), Act 11 (SB 3), signed by the governor on June 12, 2018. Rhode Island: New law (HB 7200Aaa) increases available resources for the Motion Picture Production Tax Credits program and amends sunset provisions for several other business incentives. The Motion Picture Production Tax Credits amount is increased to 30% (previously 25%) of the state certified production costs incurred that are directly attributable to activity within the state, when the primary locations are in Rhode Island and the total production budget is at least $100,000. In addition, the credit cap is increased to $7 million (from $5 million), and reality television shows are excluded from the definition of motion picture. Additionally, the Jobs Training Tax Credit sunsets for tax years beginning on or after Jan. 1, 2018, but extends the sunset date for certain economic development related business incentives to June 30, 2020 (from Dec. 31, 2018), including: Rebuild Rhode Island Tax Credit, Rhode Island Tax Increment Financing, Tax Stabilization Incentive, First Wave Closing Fund, Small Business Assistance Program, Innovation Initiative, Industry Cluster Grants, and the Rhode Island New Qualified Jobs Incentive Act 2015. These provisions took effect upon passage. R.I. Laws 2018, Ch. 47 (HB 7200Aaa), signed by the governor on June 22, 2018. Puerto Rico: The Puerto Rico Department of State has extended the due date for filing the 2017 corporate annual report from July 18, 2018 to Oct. 17, 2018, for taxpayers that originally requested an extension on or before April 20, 2018, and then filed a second extension request on or before June 18, 2018. Rhode Island: New law (HB 7200Aaa), for tax years beginning on or after 2018, decouples Rhode Island's personal exemption amounts from the changes enacted through the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA), and adopts the definition of "exemption amount" in IRC §§ 151 and 152 as in effect prior to the enactment of the TCJA (i.e., prior to Dec. 22, 2017). Additionally, to preserve Rhode Island's tax base under state law before the TCJA was enacted, the tax administrator, after providing notice to the state, may amend tax forms and instructions in response to changes made by the IRS to its own forms, regulations, or processing that will materially impact state revenues. If the IRS changes forms, regulations or processing effective during the current tax year or within six months of the beginning of the next tax year, and those changes materially impact state revenue, the tax administrator may promulgate emergency rules and regulations. This authorization takes effect July 1, 2018 and sunsets on Dec. 31, 2021. R.I. Laws 2018, Ch. 47 (HB 7200Aaa), signed by the governor on June 22, 2018. Rhode Island: New law (HB 7200Aaa) permits the director of the Rhode Island Department of Revenue (Department) to establish a pilot program collections unit within the Department to help state agencies collect delinquent debts owed to the state. Participating state agencies must first reconcile the nature and amount of the debts referred, and the debt must be the subject of: (1) a written settlement agreement and/or written waiver agreement, of which the delinquent debtor is in violation; (2) a final administrative order or decision and the debtor has not timely appealed; or (3) a final court order, judgment or decision and the debtor has not timely appealed. These provisions took effect July 1, 2018, and sunset on June 30, 2021. R.I. Laws 2018, Ch. 47 (HB 7200Aaa), signed by the governor on June 22, 2018. Connecticut: The Connecticut Business and Industry Association reports that several bills that would have negatively affected Connecticut employers failed to pass before the end of the 2018 legislative session, including provisions that would have affected unemployment insurance, paid family and medical insurance, paid sick leave and the state's minimum wage. For more on this development, see Tax Alert 2018-1448. Nevada: According to a Nevada Department of Employment, Training and Rehabilitation, Employment Security Division representative, all Nevada employers are now required to file quarterly contribution and wage reports electronically over the Department's Employer Self Service (ESS) online reporting system. The final regulation is effective July 1, 2018, and is applicable to the filing of the second quarter 2018 return, due July 31, 2018. For more on this development, see Tax Alert 2018-1446. Oregon: As EY previously reported, legislation enacted in 2017 created a new payroll tax on Oregon residents and nonresidents working in Oregon to fund state highway upgrades. The new tax, which must be withheld by Oregon employers, went into effect July 1, 2018. The Oregon Department of Revenue recently issued clarification concerning the guidelines for withholding and report in its recent frequently asked questions. For more on this development, see Tax Alert 2018-1461. San Francisco, CA: San Francisco commercial real estate lessors will see a significant increase in their gross receipts tax starting on Jan. 1, 2019. On June 5, 2018, San Francisco voters passed Proposition C, which imposes a new gross receipts (GRT) tax on taxpayers leasing commercial real estate within San Francisco as described in NAICS Code 53. The new GRT is called the Early Care and Education Commercial Rents Tax and will be imposed at rates of 1% for gross receipts related to "warehouse space" and 3.5% for gross receipts related to all other "commercial space." The new GRT is in addition to the GRT the City already imposes on commercial real estate lessors, which ranges from 0.285% to 0.3%. Proceeds from the new GRT are slated to be used to fund childcare and early education programs. For more information on this development, see Tax Alert 2018-1423. Rhode Island: New law (HB 7200Aaa) authorizes sports wagering at specific gaming facilities in Rhode Island and allocates 51% of the sports wagering revenue to the state. The bill defines key terms including "sports wagering revenue," "sporting event," and "sports wagering," among other terms. Unclaimed prize money, including unclaimed sports wagering payoffs, will be held for one year; thereafter it will automatically revert to the state's lottery fund. These provisions took effect upon passage. R.I. Laws 2018, Ch. 47 (HB 7200Aaa), signed by the governor on June 22, 2018. Rhode Island: New law (HB 7200Aaa) imposes a hospital licensing fee of 6% on the net patient-services revenue of every hospital for the hospital's first fiscal year ending on or after Jan. 1, 2017. (The license fee for hospitals located within Washington County, Rhode Island, however, is discounted by 37%, subject to approval by the Secretary of the US Department of Health and Human Services.) Hospitals must pay the licensing fee to the tax administrator by July 10, 2019, and must file a return by June 14, 2019 that includes the correct computation of net patient-services revenue for the hospital fiscal year ending Sept. 30, 2017, and the licensing fee due on the amount. These provisions took effect July 1, 2018. R.I. Laws 2018, Ch. 47 (HB 7200Aaa), signed by the governor on June 22, 2018. New Jersey: On Thursday, August 2, 2018 from 1:00 - 2:00 p.m. EDT (10:00 - 11.00 a.m. PDT), Ernst & Young LLP will host a webcast to discuss the sweeping corporate business tax changes recently enacted in New Jersey, some of which are retroactively effective and impact 2017 returns. One of the most significant changes is that New Jersey no longer is a separate return state; starting in 2019 New Jersey requires water's-edge combined reporting. Panelists also will discuss: (1) the overhaul of the state's net operating loss (NOL) carryforward rules to include the conversion of pre-law NOLs to a new combined reporting regime; (2) the temporary corporate surtax; (3) limits on the deductibility of dividends; (4) new market-based sourcing rules for sales of services; (5) decoupling the CBT from certain provisions of the federal Tax Cuts and Jobs Act; (6) the increased gross income tax (i.e., the individual income tax) rate on high wage earners; and (7) new carried interest tax provisions. Click here to register for this external 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. 4 Associated Bank, N.A. and Affil. v. Minn. Comr. of Rev., No. A17-0923 (Minn. S. Ct. July 5, 2018). Document ID: 2018-1514 |
