30 August 2018 State and Local Tax Weekly for August 17 Ernst & Young's State and Local Tax Weekly newsletter for August 17 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. States issue guidance on conformity to and reporting of the IRC §§ 965 (the transition tax) and 951A/250 (GILTI) amounts for state tax purposes Over the last few weeks, a number of states have issued guidance on their conformity to certain provisions added to the Internal Revenue Code (IRC) by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA), notably IRC §§ 965 (the transition tax on repatriated income) and 951A/250 (global intangible low-taxed income or GILTI), among others including providing taxpayers with guidance on how to report such amounts for purposes of their state income taxes. Below is a summary of these developments. Emergency law (B22-901) prohibits individuals, trusts, and estates from taking a deduction under IRC § 199A, which was added by the TCJA and provides a 20% deduction of qualified business income for pass-through entities. This decoupling applies to all taxable periods beginning on or after Jan. 1, 2018. DC Laws 2018, Act 22-434 (B22-901), signed by the mayor on July 30, 2018 (expires Sept. 30, 2018). This change would be made permanent by B22-753, which is currently with the mayor. Once the mayor approves the bill, it will be sent to Congress for a mandatory 30 in-session day review. The Kentucky Department of Revenue issued guidance on the state's treatment of GILTI. For Kentucky income tax purposes, GILTI is considered nontaxable income and as such, Kentucky will not allow the GILTI deduction under IRC §250. In addition, any expenses related to GILTI must be added back to determine Kentucky taxable income. If actual expenses cannot be determined, Kentucky law provides for various estimation methods that may be used to calculate the amount of expenses related to the nontaxable income. Further, GILTI is not included in the sales factor for corporate income tax purposes or in the calculation of gross receipts for a limited liability entity tax that is based on the sales factor. This guidance applies to taxable years beginning on or after Jan. 1, 2018. Ky. Dept. of Rev., KY-TAM-18-02 (Aug. 16, 2018). The Minnesota Department of Revenue (MN DOR) issued guidance on the state's treatment of repatriated income under IRC § 965 (Section 965 income). The MN DOR has determined that even though Section 965 income is part of federal taxable income (FTI), which is used as the starting point for determining income subject to Minnesota income and franchise taxes, Section 965 income is not included in Minnesota net income. This is because Minnesota law currently does not conform to the changes made by the TCJA. Thus, Minnesota taxpayers will continue to report and pay tax on foreign source dividends when they are received and realized (i.e., when the taxpayer receives an actual distribution in cash or property from a foreign corporation's current or accumulated earnings and profits (E&P)). This income is subject to apportionment (using the Minnesota's apportionment formula) and the taxpayer may be entitled to a dividend received deduction on this distribution income. The guidance includes information on how taxpayers should adjust their 2017 Minnesota returns if Section 965 income is included on their federal return. Minn. Dept. of Rev., Deferred Foreign Income under the TCJA (Aug. 10, 2018). The New York State (NYS) Department of Taxation and Finance (Department) recently issued two separate Important Notices containing instructions for reporting Section 965 n income on the 2017 NYS tax returns and attachments for C corporations, insurance corporations and exempt organizations (Important Notice: N-18-7) and flow through entities (S corporation, partnership, and fiduciary returns) (Important Notice: N-18-8). The instructions set forth in these two Notices must be followed by all taxpayers that have Section 965 income and have not yet filed their 2017 NYS tax returns. If the tax year 2017 tax returns have been filed and taxpayers have Section 965 income then they must file an amended return following the instructions in the Notice applicable to their particular filing circumstance. N.Y. Dept. of Taxn. and Fin., N-18-7 and N-18-8 (Aug. 2018). The Philadelphia Department of Revenue announced that by law it is required to follow Pennsylvania's rules on bonus depreciation. Thus, for Philadelphia Business Income and Receipts Tax and Net Profits Tax purposes, the city decouples from the 100% bonus depreciation provided for under the TCJA. Taxpayers are required to add back to their federal taxable income any 100% bonus depreciation taken on their federal return, but can take normal depreciation under Section167. Philadelphia Dept. of Rev., Advisory Notice — Bonus Depreciation Policy Update (July 31, 2018). The Rhode Island Department of Revenue (RI DOR) adopted a final regulation (280-RICR-20-25-15) on the corporate tax treatment of IRC § 965. Under the regulation, C corporations must include as Rhode Island income for tax year 2017 the amount of their "Net 965 Income," which is defined as IRC § 965 income less any federal deduction under IRC § 965. If Net 965 Income is includible income, no dividend received deduction (DRD) applies to offset the Net 965 Income attributable to a foreign corporation subsidiary that is a treated as a member of the combined group with the corporation that recognized the income. The regulation also addresses intercompany eliminations, unitary/nonunitary foreign corporate subsidiary, dividend income from pass-through entities, and apportionment issues. Taxpayers are not allowed to defer payment of tax related to IRC §965 income, but could request a payment plan based on the taxpayer's ability to pay. The regulation also addresses filing requirements and penalty relief. Taxpayers with Section 965 income are required to file RI Schedule 965, along with a copy of the federal "IRC 965 Transition Tax Statement," with their 2017 Rhode Island income tax return (taxpayers that already filed their 2017 returns will need to file an amended return that include RI Schedule 965). The RI DOR will consider penalty waiver request to the extent the underpayment is attributable to 965 income. The new regulation takes effect Aug. 22, 2018. R.I. Dept. of Rev., 280-RICR-20-25-15 (Aug. 2, 2018). The Utah Tax Commission issued guidance on the treatment of Section 965 income, which is subject to tax in Utah. To report the income, taxpayers should file Form TC-20R and attach the IRC 965 Transition Tax Statement. The tax due on the income must be paid by the due date of the 2017 return plus extensions. Installment payments (similar to IRC §965(h)) are allowed. Utah Tax Comm., Notice: Utah Tax on Deferred Foreign Income (Aug. 20, 2018). The Vermont Department of Taxes (Department) issued guidance to tax practitioners on the state's treatment of IRC §§ 951A and 250 (GILTI). The Department explained that as a result of GILTI being included in federal taxable income (IRC §951A), it automatically is included in Vermont taxable income and Vermont net income. Further, the GILTI deduction under IRC §250 is available to domestic corporations for Vermont corporate income tax purposes. The Department said it will issue additional guidance on GILTI in 2019. The Department also explained that a law enacted in 2017 changed the starting point for calculating Vermont taxable income for personal income tax purposes from federal taxable income (until 2018) to federal adjusted gross income (starting in 2018). Due to this change, the 20% deduction for qualified business income under IRC §199A, which was added by the TCJA, will not flow through to the Vermont return. Vt. Dept. of Taxes, 2018 VT Income Tax Guide for Tax Practitioners (Aug. 10, 2018). California: The California Franchise Tax Board (FTB) issued a technical advice memorandum (TAM) to address the apportionment of excess inclusion (EI) among non-economic residual interest holders (NERI) that are taxpayer members in a combined reporting group. The FTB advised that EI (i.e., the minimal amount of income that a NERI must annually report for income or franchise tax purposes) of all of the NERIs (i.e., a residual interest holder in a Real Estate Mortgage Investment Conduit (REMIC) that does not receive REMIC distributions) in a combined reporting group is aggregated and then apportioned according to each NERI's California apportionment factor percentage. In the TAM, the FTB illustrated with hypothetical situations that aggregation and apportionment according to each NERI's California apportionment factor applies both when every member of a combined reporting group is a NERI subject to the EI rule, and when the combined reporting group contains non-NERI members. Under both circumstances, each NERI's unitary contributions to the others support aggregating the EI from each of the NERIs and apportioning it as provided. Additionally, the TAM points out that attributing the EI relating to each NERI on a separate company basis would isolate each NERI's function on a geographic separate accounting basis, which is inconsistent with California's unitary apportionment principles. Cal. FTB, Tech. Advice Memo. No. 2018-02 (June 28, 2018). Kentucky: The out-of-state owner of a single member limited liability company (SMLLC) that (1) is treated as a disregarded entity for federal income tax purposes and (2) is doing business in Kentucky because it owns or leases property in, and derives income from, the state, also is considered to be doing business in and has nexus with Kentucky. Additionally, the owner must include the SMLLC's apportionment information in its Kentucky tax return. Ky. Fin. and Admin. Cabinet, Dept. of Rev., Gen. Info. Letter KY-GIL-18-01 (July 24, 2018). Alabama: The Alabama Court of Civil Appeals (Court) reversed the circuit court and held that a limited liability company's (LLC) sales of prepaid authorization numbers for wireless services on cellular telephones were subject to sales and use tax at the time the sales were made (under the law in place for the tax period at issue (Sept. 1, 2008 through June 30, 2011)). The Court found that since "wireless" is defined in the dictionary as "telecommunication (as radiotelegraphy or radio-telephony) involving signals transmitted by radio waves rather than over wires," the LLC's sales related to wireless service on a cellular telephone are not distinguishable from "cellular telecommunications service" for sales and use tax purposes. Further, the state legislature intended to impose sales tax on sales of prepaid phone cards and prepaid authorization numbers for cellular telecommunication service. The opinion is also noteworthy from a procedural perspective in that it dispatches the Alabama Department of Revenue's claim that the taxpayer was barred from pursuing the refund claim since he, the single member owner of an LLC treated as a disregarded entity, should not have been the party pursuing the appeal but instead it should have been the entity. The Court, affirming the ruling of the tax court, affirmed that for Alabama tax purposes, a disregarded entity is treated as disregarded for all Alabama tax purposes, including sales tax. Ala. Dept. of Rev. v. Downing, No. 2170129 (Ala. Ct. Civ. App. July 20, 2018). District of Columbia: New law (B22-901) increases the general sales and use tax rate to 6.0% (currently 5.75%) and increases several other tax rates, including the rates on transient accommodations, alcohol, certain theaters or entertainment venues, ride sharing, and certain vehicle or trailer rentals. The tax on transient accommodations is increased to 10.20% (from 10.05%) of the gross receipts from the sale of or charges for any rooms, lodgings, or accommodations furnished to a transient by a hotel, inn, tourist camp, tourist cabin, or any other rooms, lodgings or accommodations regularly furnished to transients. The tax on alcoholic beverages is increased to 10.25% (from 10%) on sales of liquors, beers and wine sold for consumption off the premises where sold. Further, the tax on gross receipts from the sale of or charges for tangible personal property or services by legitimate theaters, or by entertainment venues with 10,000 or more seats is increased to 6% (from 5.75%). The tax rate on gross receipts from the sale of or charges for rental or leasing of rental vehicles and utility trailers is increased to 9.25% (from 9%). Lastly, B22-901 increases the tax on companies that use digital dispatch for private or public vehicles for hire (other than taxicabs) to 6% of gross receipts (previously 1%) for trips that physically originate in the District. These rate changes apply starting Oct. 1, 2018. DC Laws 2018, Act 22-434 (B22-901), signed by the mayor on July 30, 2018 (expires Sept. 30, 2018). These provisions would be made permanent by B22-753, which is currently with the mayor. Once the mayor approves, the bill will be sent to Congress for a mandatory 30 in-session day review. Louisiana: A paper mill is entitled to sales and use tax refunds on bleaching chemicals purchased for use in manufacturing paper because the purchases qualified for Louisiana's further processing exclusion (La. Rev. Stat. 47:301(10)(c)(i)(aa)). In so holding, the Louisiana Court of Appeal (Court) cited International Paper 1 and found that there was no evidence that the paper mill and the city/parish intended for a 1984 agreement regarding the taxability of certain chemicals to apply to the taxability of the chemicals more than 20 years later when the paper mill used a substantially different manufacturing process. The Court noted that in International Paper, the Louisiana Supreme Court settled a dispute between a taxpayer and taxing authority regarding the taxability of the same chemicals used in the same manufacturing process in the taxpayer's favor. Georgia-Pacific Consumer Operations, LLC (F/K/A Georgia-Pacific Corp.) v. City of Baton Rouge, 2017 CA 1553 and 2017 CA 1554 (La. Ct. App., 1st Cir., July 18, 2018). Michigan: The Michigan Supreme Court (Court) in partially reversing the Michigan Court of Appeals held that three financing companies could seek sales and use tax refunds under Michigan's bad debt statute (Mich. Comp. L. 205.54i) on the value of debts associated with repossessed property, including one company's written-off accounts, but the refunds are limited to claims for which the financing companies provide validated RD-108 forms, which evidenced the payment of sales and use tax. The Court after reviewing several definitions of bad debt, determined that the bad debt statute's exclusion of "repossessed property" includes only what the corporations already collected, not the entire value of the account before repossessing the property. Further, the Court found that the appellate court erred in holding that one of the finance company's previously written-off accounts were not "currently existing" at the time election form claiming the bad debt were executed, finding instead that written-off accounts are collectible and are only deemed worthless for tax computation and accounting purposes. The Court agreed with the appellate court that the Michigan Department of Treasury properly exercised its discretion under the bad debt statute in requiring the financing companies provide validated RD-108 forms (applications for vehicle title and registration that are only issued once sales tax is paid) as evidence of the tax paid on each vehicle. Consequently, the financing companies are not entitled to refunds for which valid RD-108 forms were not provided. Ally Financial Inc. v. Mich. State Treas. consolidated with Santander Consumer USA Inc. v. Mich. State Treas., Nos. 154668, 154669 and 154670 (Mich. S. Ct. July 20, 2018). Minnesota: Intercompany payments made by one entity (C2, the lessee) to a related entity (C1, the lessor) for the use of construction equipment were taxable leases of tangible personal property but were exempt from sales and use tax because they were not made within C1's normal course of business. In reaching these conclusions, the Minnesota Tax Court found that the transactions fell under the broad definition of "lease," since C1 made its equipment available for use, and C2 only paid for the actual use of the equipment. Further, C1 did not make the leases in the normal course of business when there was no evidence that C1 sought to "attain profit or produce income" by leasing the equipment at below market rates and never to third parties. The balance of the legislature's nonexclusive factors and additional factors weighed in favor of finding that C1 was not acting in the normal course of business, such as: (1) C1's lack of advertising its equipment for lease; (2) C1's lack of separately tracking the equipment yard's profitability; (3) C1's payment of sales tax on the equipment it purchased rather than using an exemption certificate to avoid paying the tax; (4) equipment rates did not vary with market conditions; (5) the equipment sat idle when C1 and C2 weren't using it, rather than being rented out to third parties at market rates; and (6) a C1 official testified that C1's only intent in renting the equipment was to cover the equipment's cost. Knutson Construction Svcs. Rochester, Inc. v. Minn. Comr. of Rev., No. 8997-R (Minn. Tax Ct. July 16, 2018). District of Columbia: Emergency law (B22-901) provides a refundable tax credit for certain small retailers. For tax years beginning after Dec. 31, 2017, a qualified corporation or qualified unincorporated business can claim a refundable credit against the District's corporate franchise tax or unincorporated business franchise tax, that is either: (1) equal to 10% of the total rent paid by a corporation or unincorporated business for a qualified rental retail location during the taxable year not to exceed $5,000; or (2) equal to the total Class 2 real property taxes (under DC Code §47-811) that the qualified corporation or unincorporated business paid for a qualified retail owned location during the taxable year that does not exceed the lesser of the real property tax paid during the taxable year or $5,000. The credit does not apply if the qualified corporation or unincorporated business is exempt from or receives any credits toward its real property tax or the qualified rental retail location, or its qualified owned retail location is otherwise exempt from real property tax. A "qualified corporation" or "qualified unincorporated business" is engaged in the business of making retail sales, files a sales tax return, has less than $2,500,000 in federal gross receipts or sales, and is current on all District tax filings and payments. DC Laws 2018, Act 22-434 (B22-901), signed by the mayor on July 30, 2018 (expires Sept. 30, 2018). These provisions would be made permanent by B22-753, which is currently with the mayor. Once the mayor approves, the bill will be sent to Congress for a mandatory 30 in-session day review. Illinois: New law (SB 3527) creates a historic preservation tax credit and amends the existing River Edge Redevelopment Zone historic tax credit. For taxable years beginning on and after Jan. 1, 2019 and ending on or before Dec. 31, 2023, the new historic preservation tax credit is available against corporate and individual income tax, equal to 25% of qualified expenditures for certain historic structures. The total expenditure amount must (1) equal $5,000 or more, or (2) exceed the adjusted basis of the qualified historic structure on the first day the qualified rehabilitation plan began. The credit is nonrefundable, but unused credits may be carried forward for up to 10 taxable years. The credit is subject to recapture provisions. The annual credit cap is $3 million for any single rehabilitation plan or $15 million in the aggregate, and unused credits from one year may be rolled into and added to the allocated amount for the next taxable year. Additionally, SB 3527 amends qualified expenditure requirements for the River Edge Redevelopment Zone tax credit. For taxable years that begin on or after Jan. 1, 2012 and begin before Jan. 1, 2018 (previously Jan. 1, 2022), the expenditures must (1) equal $5,000 or more and (2) exceed 50% of the property's purchase price. For taxable years that begin on or after Jan. 1, 2018 and before Jan. 1, 2022, the total expenditure amount must (1) equal $5,000 or more and (2) exceed the adjusted basis of the qualified historic structure on the first day the qualified rehabilitation project begins. The eligible credits equal 25% of qualified expenditures incurred during the eligible tax years, with certain exceptions. The credit is nonrefundable, but excess credits may be carried forward and applied to the taxpayer's tax liability of the five taxable years following the excess credit year. SB 3527 takes effect Jan. 1, 2019. Ill. Laws 2018, Pub. Act 100-0629 (SB 3527), signed by the governor on July 26, 2018. Tennessee: A business's timber harvesting operation is exempt from property tax under Tenn. Const. Art. II, Sec. 28 and Tenn. Code Ann. § 67-5-216(a) when the business's predominant revenue stream (in this case approximately 80% or more) relates to trees grown on its property for the tax years at issue (2013 through 2016). The Tennessee State Board of Equalization administrative law judge found that the predominance of revenue from growing trees on the property "substantially aligns" with statutory requirements, which exempts from property tax "all growing crops … including … timber, nursery stock … the direct product of the soil of this state … ." In re: Revel Logging, LLC, Nos. 88076, 106314, 102810 and 106748 (Tenn. State Bd. of Equal. July 27, 2018). Virginia: Governor Ralph S. Northam announced that he has signed an executive order to establish an interagency taskforce to develop comprehensive recommendations for identifying and preventing worker misclassification and payroll fraud. The creation of the Inter-Agency Taskforce on Worker Misclassification and Payroll Fraud (Taskforce) is a response to a 2012 report of the Joint Legislative Audit and Review Commission (JLARC) that one-third of employers misclassified their workers as independent contractors placing compliant employers at a competitive disadvantage. JLARC also estimated that worker misclassification lowers Virginia's state income tax collections as much as $28 million a year. The taskforce is required to complete its work plan by Nov. 1, 2018 and report its progress to the Governor by Aug. 1, 2019. For more on this development, see Tax Alert 2018-1632. District of Columbia: New law (B22-901) exempts from recordation tax a security interest instrument (including a mortgage or deed of trust) that secures debt incurred to acquire, develop or redevelop property eligible for the IRC § 42 low-income housing tax credit, or a refinancing or debt modification on the property. Both the owner granting the security interest and the property with the security interest must be certified as exempt. This change applies starting Oct. 1, 2018. DC Laws 2018, Act 22-434 (B22-901), signed by the mayor on July 30, 2018 (expires Sept. 30, 2018). These provisions would be made permanent by B22-753, which is currently with the mayor. Once the mayor approves, the bill will be sent to Congress for a mandatory 30 in-session day review. International: On Aug. 3, 2018, the Colombian government issued Decree No. 1415 of 2018, which requires foreign service providers to register in the Colombian tax registry when providing services to Colombian recipients who are not required to collect value added tax (VAT) via the "reverse charge mechanism." (Generally, Colombians must collect VAT via the "reverse charge mechanism" on payments to nonresidents.) For more on this development, see Tax Alert 2018-1654. New Jersey: A replay of the Aug. 2, 2018, Ernst & Young LLP webcast on the sweeping corporate business tax changes recently enacted in New Jersey is now available. 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 discussed: (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 New Jersey Corporate Business Tax from certain provisions of the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA); (6) the increased gross income tax (i.e., the individual income tax) rate on high wage earners; and (7) new provisions that would impose an additional New Jersey state tax on carried interests. Click here to access a replay. Multistate: On Thursday, Sept. 6, 2018 from 1:00 — 2:30 p.m. EDT (from 10:00 — 11:30 a.m. PDT) Ernst & Young LLP (EY) will host its state tax quarterly webcast. For this webcast, EY panelists will discuss the following topics: (1) state tax policy issues, including an overview of the upcoming November 2018 federal, state and local elections, including a description of many of the important initiatives that will appear on the ballot this November; (2) states' legislative and administrative responses to the Tac Cuts and Jobs Act; (3) state and federal responses to the U.S. Supreme Court's historic sales and use tax decision in South Dakota v. Wayfair; and (4) an update covering major legislative, judicial and administrative developments at the state level. Click here to register for this event. 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. 1 International Paper, Inc. v. Bridges, 2007-1151, 972 So.2d 1121 (La. Jan. 16, 2008). Document ID: 2018-1726 |
