07 August 2018 State and Local Tax Weekly for July 27 Ernst & Young's State and Local Tax Weekly newsletter for July 27 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. Recently published Tax Alert 2018-1468 provides a summary of official state announcements and guidance in response to the U.S. Supreme Court's landmark decision in South Dakota v. Wayfair.1 In Wayfair, the Court overturned over 50 years of its precedent and both its prior rulings in Quill2 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). Since the alert was issued on July 20, 2018, other states have issued guidance on the impact of Wayfair on their sales and use tax laws, including application of existing economic nexus standards and when such standards will apply. Several of those are discussed below: The Indiana Department of Revenue (IN DOR) has indicated on its website that, pending the resolution of the declaratory judgment in the Indiana courts, it will begin enforcing the state's economic nexus provisions Oct. 1, 2018. Thus, as of Oct. 1, the IN DOR said that sellers who have met the economic nexus threshold for 2018 or at any point in 2017, must begin collecting and remitting Indiana sales tax on deliveries of taxable goods or services to customers in the state. The Kentucky Department of Revenue announced that under the state's new economic nexus provisions, which impose a $100,000 gross receipts or 200-transaction threshold and took effect July 1, 2018, remote retailers should register with the state and begin collecting sales and use tax by Oct. 1, 2018. The Minnesota Department of Revenue (MN DOR) announced that remote sellers will be required to collect and remit Minnesota sales tax by Oct. 1, 2018. In that announcement, the MN DOR stated that the small seller exception is (1) 100 or more retail sales shipped to Minnesota or (2) 10 or more retail sales shipped to Minnesota that total more than $100,000. The Nebraska Department of Revenue (NE DOR) said that remote sellers currently not registered to collect and remit sales tax in the state and that are engaged in business under Neb. Rev. Stat. §77-2701.13 are required to obtain a sales tax permit on or before Jan. 1, 2019 and must begin to collect and remit sales tax on sales to Nebraska customers. The NE DOR said that it plans to "administer the collection responsibility" consistently with the U.S. Supreme Court's ruling in Wayfair, which looked favorably on the $100,000 in sales or 200 separate transaction thresholds, and will not pursue retroactive sales tax collection from remote sellers that did not have a physical presence in the state. Click here for additional information. For more state responses, see Tax Alert 2018-1468, which provides a summary of official state announcements and guidance, as of July 19, 2018. Alaska: New law (HB 398) effective Jan. 1, 2019, requires public utilities to use an equally weighted, three-factor apportionment formula to apportion income, unless Alaska law specifies otherwise. Under prior law, Alaska did not require public utilities to use a specific apportionment formula. The Alaska Department of Revenue is directed to adopt regulations necessary to implement this change. Alaska Laws 2018, Ch. 55 (HB 398), signed by the governor on July 13, 2018. Indiana: The Indiana Department of Revenue (Department) posted general guidelines for reporting the IRC §965 transition tax for Indiana purposes. Under Indiana law, the amount of foreign earnings deducted in determining federal adjusted gross income (AGI) must be added back when determining Indiana AGI. The Department's webpage provides general guidelines for what to report, with specific guidance for resident and nonresident individuals, C corporations, REITs, estates and trusts, S corporations and partnerships. Ind. Dept. of Rev., "Overseas Earnings and Taxes" webpage (last accessed July 20, 2018). See also, Ind. Dept. of Rev., Information Bulletin #116 (revised July 2018) (provides guidance on changes to Indiana's income tax laws under HB 1316 (Laws 2018). Topics covered include: IRC conformity, IRC Section 965 transition tax, foreign source dividend treatment, GILTI, interest deduction, and NOLs). Texas: A company that provides telecommunications services cannot deduct expenses for electricity used to generate and transmit telecom products as costs of goods sold (COGS) when the telecom products are classified as services rather than goods. The Texas Court of Appeals (Court) found that the statute — Tex. Tax Code §171.1012 — classifies telecom products (i.e., supplying internet access, telephone connectivity and video streams) as services based on common usage of the term and, therefore, the company may not include the cost of providing such services as a COGS. Additionally, the company did not show that its video product is a "good" under the narrower definition of tangible personal property from Tex. Tax Code § 171.1012(a)(3)(A)(ii), since it did not explain how the films and television products that customers might view through its video product are tangible personal property or that it owns the tangible personal property as required by statute. The Court distinguished American Multi-Cinema,4 finding the statutory amendment (Tex. Tax Code §171.1012(t)) permitting movie theaters to include certain costs of showing films in its COGS applies only to movie theaters. Furthermore, the corporation could not deduct the electricity under the mixed-transaction rule because the COGS deduction applies only to the extent that tangible personal property is sold. NTC Comm., Inc. v. Hegar, No. 03-16-00771-CV (Tex. Ct. App., 3d Dist., June 7, 2018). Utah: New law (HB 2002) provides that for the last taxable year of a taxpayer beginning on or before Dec. 31, 2017, "unadjusted income" includes deferred foreign income described in IRC §965(a). For corporations making installment payments, the first installment shall be made on or before the due date, including extension, of the Utah 2017 tax return, and a subsequent installment on or before the due date, including extension, of the Utah corporate income tax return in each of the following seven years. Utah Laws 2018 (2nd Special Session), HB 2002, signed by the governor on July 21, 2018. Utah: New law (HB 2003 2nd Substitute) modifies Utah's net operating loss (NOL) provisions to conform to the changes made by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). Provisions of the new law prohibit the carryback of NOLs, limits NOLs that may be carried forward to 80% of Utah taxable income, and allows NOLs be carried forward to a future taxable year (the 15-year carryforward provision is deleted). These changes are effective Jan. 1, 2019. The "bill has retrospective operation for a taxable year beginning on or after January 1, 2018." Utah Laws 2018 (2nd Special Session), HB 2003, signed by the governor on July 21, 2018. Federal: On July 24, 2018, the House Judiciary Committee conducted a hearing on "Examining the Wayfair Decision and its Ramifications for Consumers and Small Businesses." During the Hearing, the Committee explored the reach of the U.S. Supreme Court's recent decision in South Dakota v. Wayfair on state collection of sales taxes from remote sellers and how Congress might respond, including by potentially enacting a moratorium preventing states from collecting the taxes. For more on this development, see Tax Alert 2018-1485. Connecticut: New law (SB 417) expands the state's sales and use tax nexus provisions to include an economic nexus standard and marketplace facilitator rules. The definition of retailer is expanded to include remote retailers that have gross receipts of at least $250,000 and made 200 or more retail sales from outside Connecticut to destinations within the state, and any marketplace facilitator. A marketplace facilitator is a person that (1) facilitates retail sales of at least $250,000 during the prior 12-month period by marketplace sellers by providing a forum that lists or advertises taxable tangible personal property, services (including digital goods) for sale by such marketplace sellers; (2) directly or indirectly through agreements or arrangements with third parties, collects receipts from the customer and remits payments to the marketplace sellers; and (3) receives compensation or other consideration for such services. Marketplace facilitators are considered the retailers of each sale such facilitator facilitates on its forum for a marketplace seller. These provisions take effect Dec. 1, 2018. Conn. Laws 2018, Pub. Act 18-152 (SB 417), signed by the governor on June 14, 2018. Hawaii: New law (HB 2416) exempts from general excise tax all of the value or gross proceeds arising from the use of intangible property outside the state, and imposes a 4% use tax on the value of intangible property acquired from an unlicensed seller and imported or used in Hawaii. Use tax accrues when the importer or purchaser acquires the intangible property and it becomes subject to Hawaii's taxing jurisdiction. For purposes of the general excise tax exemption, the purchaser must provide to the seller or licensor certification that the intangible property is to be used outside Hawaii. If this property is used in Hawaii, the purchaser must pay the additional tax to the seller or licensor on demand. In addition, HB 2416 amends the definition of "property" to add the term "intangible property" and specifically exclude the following: (1) certain securities; (2) commodities for future delivery and other agreements, options and rights that are permitted to be traded under the Commodity Exchange Act; (3) evidence of indebtedness; (4) interest in land; or (5) statutorily defined dividends. HB 2416 took immediate effect and applies to taxable years beginning after Dec. 31, 2018. Haw. Laws 2018, Act 183 (HB 2416), signed by the governor on July 10, 2018. Illinois: New law (HB 3342) adopts economic nexus provisions for sales and use tax purposes. Effective Oct. 1, 2018, a remote retailer selling tangible personal property to Illinois purchasers will be required to collect and remit tax if in the preceding 12-month period the remote retailer either: (1) had $100,000 or more in gross receipts from such sales; or (2) enters into 200 or more separate sales transactions. Ill. Laws 2018, Pub. Act 100-0587, signed by the governor on June 4, 2018. Pennsylvania: The Pennsylvania Supreme Court (Court) upheld the constitutionality of Philadelphia's sugar-sweetened beverage tax (soda tax), finding the Philadelphia city council did not exceed an express statutory limitation on its taxing authority delegated to it by the Pennsylvania General Assembly under the Sterling Act, when it created the soda tax. Under the Sterling Act, the city does not have the authority to impose a tax that is duplicative of a tax already imposed by the state. The Court found the city's soda tax, which is generally paid at the distributor/dealer level, is not a duplicate of the state's sales and use tax, which is levied on the purchase price of tangible personal property, including soft drinks. The Court reasoned that the state sales tax and the soda tax have different legal incidences because they have different subjects (sales at retail versus distributor/dealer-level transactions and/or subjects made with the purpose of holding the beverages out for resale in Philadelphia), measures (purchase price versus volume of distributed beverage fluid ounces), and payers (consumers versus distributors or dealers). Further, the city's broad taxing power granted under the Sterling Act is not preempted when the state could, but does not, tax the distributor/dealer-level transactions like the soda tax. Williams v. City of Philadelphia, Nos. 2 & 3 EAP 2018 (Pa. S. Ct. July 18, 2018). Massachusetts: The Massachusetts Department of Revenue (Department) issued guidance on what the ruling in Northeastern University5 means for brownfields tax credit applicants. Previously, Department Directive 13-4 (DD 13-4) concluded that nonprofit organizations were not eligible for the credits based on documentation provided in a taxable year beginning before the 2006 effective date of statutory amendments that permitted nonprofit organizations to claim the credit and authorized the transfer, sale or assignment of the credit. Nonprofit organizations challenged the denials of their pending applications, which included remediation costs in tax years beginning before the 2006 amendment, and prevailed — the Northeastern University decision. In the new guidance, the Department explained that nonprofit organizations that meet brownfields tax credits requirements may apply for and receive the credits based on costs incurred on or after Aug. 1, 1998, even if the expenses were incurred or projects were completed before 2006. Further, otherwise eligible credits issued before 2006 also may be sold, transferred or assigned according to statutory terms. The Department noted that DD 13-4 is still in effect for provisions that are not inconsistent with the court decision. Mass. Dept. of Rev., TIR 18-6: Northeastern Univ. v. Comr. of Rev. — Eligible Costs for Brownfields Tax Credit (July 18, 2018). Nevada: Amended regulations (Nev. Admin. Code Ch. 231) establish requirements governing transferable tax credits available to new or expanding businesses in Nevada. The regulations include application requirements for certificates of eligibility for transferrable tax credits, and establish the required elements of an agreement between the Nevada Governor's Office of Economic Development (Office) and the certified entity. Transferable tax credit agreements must include: (1) the number of primary jobs that a certified entity must create, and the average wage a certified entity must pay, to be awarded transferable tax credits; (2) the required offer of health insurance to those who hold each primary job that the certified entity creates; (3) a transferable tax credits disbursement schedule; (4) the certified entity's consent to public disclosure of certain information related to the transferable tax credits; (5) when the agreement may be voided, including notice requirements; (6) when interest accrues on the amount of transferable tax credits to be refunded by the certified entity after an agreement becomes void; and (7) any other necessary agreements. The amended regulations also define terms (including certified entity, new primary job, and primary job), and establish the procedures for requesting certain records or documents be kept confidential. These amendments took effect June 26, 2018. Nev. Gov. Ofc. of Econ. Dev., Nev. Register, LCB File No. R159-16AP, amending Nev. Admin. Code Ch. 231 (adopted June 26, 2018). Missouri: A corporation's solar energy systems equipment (including solar panels, sunny central inverters, boxes, transformers, a racking system and piping) is exempt from ad valorem tax as a solar energy system not held for resale, because it is energy-producing property built for long-term use and not to resell to a consumer. In making this determination, the Missouri State Tax Commission (Commission) found persuasive the corporation's testimony that the initial contract for the solar energy system was to construct it, it was built on behalf of the corporation, the corporation does not intend to sell the property, and any provision in the corporation's agreement to sell power to the Missouri Joint Municipal Electric Utility Commission (MJMEUC) is the MJMEUC's exclusive option. In considering the assessor's argument that the exemption statute is unconstitutional since an exemption for solar energy systems not held for resale is not specifically enumerated in the Missouri Constitution, the Commission said that it lacks the authority to decide this issue. MCP-Rolla, LLC v. Stoltz, No. 17-78000 (Mo. State Tax Comn. June 19, 2018). Georgia: New law (HB 849) establishes provisions for reporting federal partnership audit adjustments. Partnerships subject to a federal audit are required to report final federal audit adjustments no later than 90 days after the date of the final determination. An audited partnership also is required to notify each of its direct partners of adjustments to their distributive shares and file an amended composite return and pay any additional amount due. Direct partners for whom the audited partnership did not pay tax on their behalf have no later than 180 days after the final determination to: (1) file a completed federal adjustment report reporting their distributive share of the adjustments; (2) if the partner is a tiered partner, notify all of its partners that hold an interest directly in such tiered partner of their distributive share adjustment or, if appropriate, file an amended composite return if such was originally filed; and (3) pay any additional amount due. Additional guidance is provided for indirect partners for whom the partnership or tiered partner did not pay tax on their behalf, as well as for audited partnerships and tiered partners making an election to pay tax, penalties and interest on behalf of it partners. The election to pay tax once made is irrevocable. HB 849 further provides that the state partnership representative for the reviewed year is the same person as the federal partnership representative, unless another person is designated. HB 849 also includes guidance on assessment of additional state taxes, interest and penalties; refund claims; the scope of adjustments and extensions. These provisions took effect upon the governor's approval. Ga. Laws 2018, Act 381 (HB 849), signed by the governor on May 3, 2018. Kentucky: The Kentucky Department of Revenue has released a revised Form K-4, Employee's Withholding Certificate, to its website. The revised Form K-4 also replaces Form K-4E, Special Withholding Exemption Certificate, by including the option to claim exemption from withholding under the remaining four types of exemptions. The updated form was released in response to recent legislation that, effective Jan. 1, 2018, replaces the graduated personal income tax tables with a flat income tax rate of 5% and removes any withholding tax exemptions from the law. For more on this development, see Tax Alert 2018-1487. Maryland: New law (SB 134) provides an income tax credit to certain employers with less than 15 employees that provide paid sick and safe leave to their employees. The legislation is effective July 1, 2018. As previously reported, effective Feb. 11, 2018, employers of 15 or more employees are required to provide paid sick and safe leave to their employees. Employers with less than 15 employees must at least provide unpaid sick and safe leave to their employees. Md. Law 2018, Ch. 571 (SB 134), signed by the governor May 15, 2018. New Jersey: Recently enacted AB 1827 establishes a statewide requirement for employers of all sizes to provide paid sick leave to their employees and preempts the numerous local sick pay ordinances. The law is effective 180 days from Governor Phil Murphy's approval, projected to be Oct. 29, 2018. The labor commissioner will release a form that employers must use to inform employees of their rights under the paid sick leave law, including the amount of paid sick leave to which employees are entitled. Employers must also post a notification to all employees in a conspicuous place and provide a copy of the notice to employees. Employers must retain records documenting hours worked and paid sick leave taken by employees for five years. Penalties for failure to comply with the paid sick leave law shall be the same as provided for under the New Jersey State Wage and Hour Law. For more on this development, see Tax Alert 2018-1476. Vermont: The Vermont Department of Labor announced that employers will see the second decrease in a row in state unemployment insurance (SUI) tax rates for fiscal year (FY) 2019 (July 1, 2018-June 30, 2019). For FY 2019, the SUI rate schedule will change from Tax Rate Schedule IV to Tax Rate Schedule III. As a result, FY 2019 tax rates will range from 0.8% to 6.5%, down from a range of 1.1% to 7.7% for FY 2018.The FY 2018 rates were down from a range of 1.3% to 8.4% on Schedule V for FY 2017. Newly liable employers will continue to pay SUI contributions at the rate of 1%, with the exception of certain foreign construction classifications. For more on this development, see Tax Alert 2018-1498. Michigan: New law (SB 1016) imposes a reduced insurance company premiums tax rate on gross direct premiums attributable to qualified health insurance policies. For 2019, the tax rate on such premiums is 0.95% (from 1.25%). In 2020 and each year thereafter, the tax on such premiums will be determined annually, based on the formula set forth in SB 1016. Mich. Laws 2018, Pub. Act 222 (SB 1016), signed by the governor on June 25, 2018. New York: The financial obligations imposed on US opioid manufacturers and distributors under New York's recently enacted Opioid Stewardship Act (OSA) has raised questions about how to account for payments made under the Act. This Alert addresses the OSA's financial reporting considerations. For more on this development, see Tax Alert 2018-1497. Hawaii: New law (SB 208) creates the Unclaimed Life Insurance Benefits Act, which adopts the National Conference of Insurance Legislators' Model Unclaimed Property Life Insurance Benefits Act. Under the law, an insurer is required to compare its insureds' in-force life insurance policy, contract, or retained asset account (collectively, "policy") against a death master file, on a semi-annual basis. After a potential match is identified, SB 208 sets forth the procedures insurers must follow to confirm the death and the benefits due. SB 208 provides that the benefits of a policy plus any accrued contractual interest are first payable to designated beneficiaries or owners. If the beneficiaries or owners cannot be found, the policy benefits escheat to Hawaii as unclaimed property, where interest is not payable. An insurer is required to notify the director of finance when the statutory escheat time period expires that: (1) a beneficiary or owner has not filed a claim with the insurer; and (2) the insurer has in good faith performed the statutorily required searches for the beneficiary or owner, documented such searches, and has not been able to contact the beneficiary or owner. SB 208 defines terms, provides for the adoption of rules and regulations to implement the law, and gives the commissioner reasonable discretion to provide flexibility in meeting statutory requirements under specific circumstances. SB 208 took immediate effect. Haw. Laws 2018, Act 202 (SB 208), signed by the governor on July 10, 2018. Federal: The latest article in a series by EY's Quantitative Economics and Statistics (QUEST) group on the economic implications of key trade issues and trends is now available. This edition discusses the escalation of the trade dispute between the United States (US) and China and the potential adverse consequences of a trade war for the US economy. For a copy of the article, see Tax Alert 2018-1482. International: The Canada Border Services Agency (CBSA) on July 6, 2018 released its semiannual list of trade compliance verification priorities designed to update the importing community on ongoing verification priorities and set the stage for new priorities for the upcoming calendar year. At the midpoint of 2018, the CBSA remains focused on tariff classification as a priority audit area, with the introduction of three new tariff classification product categories and five new rounds to the list of existing priorities. For more on this development, see Tax Alert 2018-1500. International: In 2013, the New Zealand Customs Service embarked on the process of reviewing and modernizing the country's current customs legislation. The Customs and Excise Act 2018 represents a major re-write of New Zealand's current customs legislation. The new legislation is effective Oct. 1, 2018. The new legislation has resulted in a myriad of changes to the current framework — everything from the movement of international passengers to information sharing provisions. For more on this development, see Tax Alert 2018-1479. International: Her Majesty's Revenue & Customs, the UK Tax Authority, on July 13, 2018 published its much anticipated VAT Notice 700/22 (Notice) which explains the rules for Making Tax Digital for Value Added Tax. The Notice explains: (1) the digital records businesses must keep; (2) ways to record transactions digitally in certain special circumstances; (3) what counts as "functional compatible software"; and (4) when software programs need to be digitally linked where a combination of programs are used. For more on this development, see Tax Alert 2018-1493. International: Since the beginning of June 2018, the United Arab Emirates Federal Tax Authority has commenced the publication on its website of various public clarifications on complex Value Added Tax matters and issues on the application of Federal Decree-Law No. 8 of 2017 on Value Added Tax and Cabinet Decision No. 52 of 2017 on the Executive Regulations of the Federal Decree-Law No. 8 of 2017 on Value Added Tax. One of the new public clarifications addresses the use of exchange rates for VAT purposes. For more on this development, see Tax Alert 2018-1477. International: Since the beginning of June 2018, the United Arab Emirates Federal Tax Authority has commenced the publication on its website of various public clarifications on complex Value Added Tax matters and issues on the application of Federal Decree-Law No. 8 of 2017 on Value Added Tax and Cabinet Decision No. 52 of 2017 on the Executive Regulations of the Federal Decree-Law No. 8 of 2017 on Value Added Tax. These new public clarifications discuss VAT treatment of compensation type payments, profit margin scheme for eligible goods, labor accommodation for residential versus serviced property and the use of exchange rates for VAT purposes. For more on this development, see Tax Alert 2018-1478. 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 American Multi-Cinema, Inc. v. Hegar, No. 03-14-00397-CV, 2017 WL 74416 (Tex. App. — Austin Jan. 6, 2017, pet. filed)(mem. op. on reh'g). Document ID: 2018-1584 |
