10 September 2018 State and Local Tax Weekly for August 24 Ernst & Young's State and Local Tax Weekly newsletter for August 24 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 North American Free Trade Agreement (NAFTA), which entered into force on Jan. 1, 1994, created one of the world's largest free-trade areas. Under NAFTA, import duties on all covered goods traded within the United States (US), Canada and Mexico were gradually phased out and, as scheduled, on Jan. 1, 2008, all remaining duties and most quantitative restrictions on imports were eliminated. While heavily relied on by businesses to integrate the North American economy, NAFTA has become a focal point of President Trump's efforts to establish a trade policy that promotes America's security and prosperity by, among other initiatives, strengthening the US economy, negotiating new and renegotiating or withdrawing from other trade agreements and enforcing US trade laws and US rights under existing trade agreements. On Aug. 27, 2018 after more than a year and seven NAFTA renegotiation rounds, Mexico and the US announced a "preliminary agreement in principle." The agreement is not final, but rather it is subject to finalization and implementation that replaces the 24-year old original trade deal. Canada has now officially rejoined the US and Mexico negotiators to potentially join and maintain a trilateral agreement, but the ultimate outcome remains uncertain. For more information on this development, see Tax Alert 2018-1720. Proposed regulations would affect all state and local tax credit programs, not just those recently enacted in response to the federal $10,000 SALT deduction cap On Aug. 23, 2018, the Treasury and IRS published much-anticipated proposed regulations (REG-112176-18) on the deductibility for federal income tax purposes of charitable contributions for which a taxpayer received a state or local tax (SALT) benefit (to be codified under Prop. Treas. Reg. §§ 1.170A-1 and 1.642-XX) (the Proposed Regulations). The Proposed Regulations would limit the deductibility for federal income tax purposes of charitable contribution deductions under Section 170 when a taxpayer receives, or expects to receive, a corresponding SALT benefit, such as a credit against state or local personal income or property tax liabilities. The guidance also proposes changes to Treasury Regulations under Section 642(c) to apply similar rules to charitable contributions made by trusts and estates receiving similar SALT benefits. The Proposed Regulations respond to recently enacted state laws authorizing the creation of state-sponsored charities to which taxpayers could contribute and receive a credit against their personal income or property tax liabilities. These state "workarounds" are broadly viewed as an attempt to assist taxpayers in circumventing the $10,000 SALT deduction cap recently enacted under the 2017 Tax Cuts and Jobs Act, P.L. 115-97 (TCJA). The Proposed Regulations would apply broadly and, if finalized in their current form, would likely affect other long-standing state and local programs involving charitable contributions and SALT credits. The Proposed Regulations would apply to contributions made after Aug. 27, 2018. A public hearing is scheduled for Nov. 5, 2018. All requests to speak at the hearing and outline topics must be submitted to the IRS by Oct. 11, 2018 (45 days after the Proposed Regulations are published in the Federal Register). For additional information on this development see Tax Alert 2018-1714. Indiana: A corporation properly calculated its IRC §382 net operating loss (NOL) limitation when it followed the calculation required by the IRC and apportioned it to Indiana using its apportionment percentage for the same years as the loss. The Indiana Department of Revenue's application of an asset ratio of 15.05% to the corporation's IRC §382 limitation (stemming from the corporation's purchase of a company that included an Indiana company in 2013, through which the corporation absorbed the Indiana company and its NOLs) incorrectly restricted the corporation's NOL limitation to Indiana-based losses without the authority to do so. Ind. Dept. of Rev., Letter of Findings No. 02-20180708 (May 26, 2018) (posted July 25, 2018). New York: The member of a limited liability company (LLC) that is certified as a qualified empire zone enterprise (QEZE), is entitled to claim on his New York resident income tax return QEZE real property tax credits earned by the LLC based upon its use of a mortgage escrow account to pay real property taxes because such payments were deemed the functional equivalent of a "direct payment" to the taxing authority. In reaching this conclusion, the New York Supreme Court, Appellate Division (Court) found that the money was specifically earmarked for the payment of taxes under the applicable lender agreement once the LLC deposited it into its mortgage escrow account. In this case, neither the LLC (property lessee that agreed by contract to pay the property taxes), nor the realty corporation (property owner) that shared the same sole shareholder as the LLC, had control over the funds. Additionally, the bank servicing the mortgage could not change how the money was used. The Court noted that in analogous circumstances, the state legislature has approved "special legislation" allowing similar property lessees to receive QEZE real property tax credits when certain payments in lieu of taxes did not specifically conform to statutory requirements. Lastly, the Court found that there was no cogent policy argument from the state tax authority or based on legislative history to support why using a mortgage tax escrow account to pay the taxes due would preclude a taxpayer's claim to QEZE tax credit to which they are otherwise so entitled. Matter of Angelo Balbo v. NY State Tax App. Trib., No. 524161 (NY Sup. Ct., App. Div., 3d Jud. Dept., July 26, 2018). North Dakota: The North Dakota State Tax Commissioner (Commissioner) issued guidance on the treatment of the international tax provisions in the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). For North Dakota purposes deemed repatriation of deferred foreign income under IRC §965 (Section 965 Inclusion, which is treated as Subpart F income) and the accompanying deduction (Section 965 Deduction) is reflected in federal taxable income (FTI) that is used as the starting point for computing North Dakota taxable income. The Section 965 Deduction is treated as other federal deductions for dividends received, and is required to be added back to North Dakota taxable income. Taxpayers with Section 965 income that file a worldwide combined report can deduct as an intercompany dividend elimination Section 965 Inclusion amounts attributable to a controlled foreign corporation (CFC) that is included in the world wide combined report. Those filing a water's-edge combined report may deduct as a foreign dividend, 70% of the Section 965 Inclusion amount. Taxpayers with Section 965 Inclusion and Deduction must attach a copy of the federal Transition Tax Statement with their North Dakota return. North Dakota does not follow the federal option to pay Section 965 amounts over an eight year period. Taxpayers with Section 965 income that already filed their 2017 return but did not include Section 965 income will need to file an amended return. In regard to global intangible low-taxed income (GILTI)(IRC §951A), North Dakota considers it to be a foreign dividend includable in FTI. Since GILTI, and the GILTI deduction under IRC §250, are reflected in FTI, which is used as the starting point for computing North Dakota taxable income, the Commission will treat the GILTI deduction the same as other federal deductions for dividends received and require the GILTI deduction be added back to North Dakota taxable income. Taxpayers filing a worldwide combined report can deduct as an intercompany dividend elimination GILTI amounts attributable to a CFC that is included in the combined report. Those filing a waters-edge combined report may deduct as a foreign dividend, 70% of the GILTI. Further, 30% of GILTI is includable in the sales factor for those filing a water's-edge combined report. The Commissioner further determined that foreign-derived intangible income (FDII) is not included in the North Dakota addback of the federal deductions for dividends received , and base erosion anti-abuse tax (BEAT) does not affect FTI and, therefore, does not impact the computation of North Dakota tax. This guidance applies to the 2017 and subsequent tax years. N.D. Tax Comm., Notice: TJCA of 2017 ND Tax Treatment of International Tax Provisions (Aug. 2018). Oregon: A financing company is required to include in its Oregon consolidated tax return the income of two affiliated out-of-state banks that is derived from sources within Oregon (e.g., $150 million in fees from Oregon residents for various consumer financing products). In so holding, the Oregon Supreme Court (Court) determined that the statute did not require the banks to have physical presence in Oregon to be subject to corporate income tax. The Court further concluded that the Oregon Department of Revenue (Department) could raise the issue of the banks' corporate income tax liability for the first time before the Oregon Tax Court even though the Department's notices of deficiency only asserted the corporate excise tax. Capital One Auto Finance, Inc. v. Or. Dept. of Rev., No. SC S064803 (Or. S. Ct. Aug. 9, 2018). New Jersey: On Aug. 27, 2018, New Jersey Governor Phil Murphy conditionally vetoed a sales tax nexus expansion bill, AB 4261 (the Bill), which was introduced and approved by the New Jersey legislature (Legislature) in response to the U.S. Supreme Court's ruling in South Dakota v. Wayfair. The Bill, if ultimately approved, would impose a sales tax collection requirement on remote sellers with no physical presence in New Jersey, but with at least $100,000 in sales, or 200 transactions, to in-state customers. It would also impose a sales tax collection requirement on marketplace facilitators (i.e., entities which provide a platform for third parties to sell products). The Governor stated that he supported the purpose of the Bill, but conditionally vetoed it for the Legislature to consider his changes expanding the Bill to all sellers of any combination of sales of tangible personal property, digital products and services that meet the thresholds. He further recommended that the Bill give expanded authority to the Division of Taxation to audit marketplace facilitators. The Bill has been sent back to the Legislature for consideration. For more on this development, see Tax Alert 2018-1725. New Jersey: Vetoed bill (AB 3267) would have imposed a 5 cent bag tax on every single-use carryout bag retailers provide to retail customers, effective Oct. 1, 2018. The governor vetoed the bill on Aug. 27, 2018. Click here for his veto message. For more on this development, see Tax Alert 2018-1725. Tennessee: The Tennessee Department of Revenue (Department) issued a status update on its proposed economic nexus rule (Sales Tax Rule 129(2)). The rule is currently pending review and approval by the state legislature. Thus, it is not currently being enforced. An out-of-state dealer that has no physical presence in Tennessee will not be required to collect and remit Tennessee sales and use tax until the yet-to-be determined date specified by the Department (although the Department is encouraging voluntary collection). The Department further noted that it will not apply the economic nexus rule retroactively. Tenn. Dept. of Rev., Notice #18-11 (Aug. 2018). Texas: A corporation's cloud-based website hosting services are subject to sales and use tax as data processing services unless they are sold for use entirely or partially out of state. The Texas Comptroller of Public Accounts found that the corporation's gross receipts are presumed taxable in Texas regardless of clients' locations and whether clients have nexus with Texas, because the corporation is located in Texas and provides a taxable service. However, the corporation should collect tax on only 80% of its data processing service charges because Texas exempts 20% of the charges from tax. Lastly, since the corporation purchases and resells the cloud resources from a vendor as an integral part of its website hosting services, it can purchase the cloud-based services tax free when it presents the vendor with a resale certificate. Tex. Comp. of Pub. Accts., No. 201807010L (July 10, 2018). Massachusetts: New law (HB 4732) establishes an apprenticeship tax credit for employers in certain industries, effective for tax years beginning on Jan. 1, 2019. The credit equals the lesser of $4,800 or 50% of the wages paid to each qualified apprentice in a taxable year, and is refundable at the employer's option. The credit, however, cannot be transferred. To qualify for the credit, the apprentice must be hired and trained, as defined by the Bureau of Labor Statistics, in one of the following: a computer occupation; a health technologist or technician; a health practitioner support technologist or technician; a healthcare support occupation; or in production occupations if employed in the manufacturing industry. The apprentice's primary place of employment must be in Massachusetts, the apprentice must have been employed for at least 180 calendar days in the taxable year in which the credit is claimed. The employer also must meet certain certification requirements. The Secretary of Labor and Workforce Development has been directed to draft regulations that will establish the process for claiming the credit and will set the maximum number of qualified apprentices for whom the employer can claim the credit within a year. Massachusetts can authorize up to $2.5 million total credits in a calendar year. Mass. Laws 2018, Ch. 228 (HB 4732), signed in part by the governor Aug. 10, 2018. Rhode Island: In response to a question regarding filing the Rhode Island Schedule 965 when multiple entities of a combined reporting group have deferred foreign income (IRC §965 income), the Rhode Island Division of Taxation (Division) advised that the group should file a single RI Schedule 965 that shows the combined Section 965-related amounts for all the entities. The Division also advised that the group create and keep on file a spreadsheet or other documentation listing the underlying details of each entity with Section 965 income, as the Division may need that information at a later date. R.I. Div. of Taxn., Section 965 and combined reporting (Aug. 24, 2018). Alabama: The Alabama Department of Revenue (Department) announced that effective July 1, 2018, taxpayers that fail to pay state taxes electronically if required to do so will be penalized. Under Alabama state tax law, single tax payments totaling $750 or more must be paid electronically, rather than by mailing paper checks to the Department. According to the Department's withholding tax guide, employers submitting a single withholding tax payment of $750 or more must not only pay the tax amount electronically, but must also file their withholding tax return electronically. For more information on filing and paying electronically, see the My Alabama Taxes electronic filing website. Maryland: The Comptroller of Maryland recently released revised percentage method withholding instructions that reflect the change to the maximum personal income tax standard deduction provided for under recently enacted SB 318 (Ch. 577). The percentage method and wage-bracket withholding tables and rates (including the supplemental withholding rate) did not change. For the purpose of the percentage method withholding calculation, the Maryland standard deduction amounts are now a minimum of $1,500 (unchanged) and a maximum of $2,250 (up from $2,000) per individual. For more on this development, see Tax Alert 2018-1716. Rhode Island: The Rhode Island Office of Child Support Services is asking employers that remit child support withheld from employee wages to take care to use the correct Federal Information Processing Standard (FIPS) locator code when submitting payments. All Rhode Island and Connecticut child support payments are processed in the same facility, by the same company, located in Hartford, Connecticut. However, each state has its own unique FIPS pay code. The Rhode Island FIPS code is 44002 (Connecticut's FIPS code is 0900003). For additional information on this development, see Tax Alert 2018-1668. Rhode Island: The Rhode Island Department of Labor and Training announced that while enforcement of the new paid sick and safe leave law began as of July 1, 2018, the Department will grant a six-month grace period for unintentional employer omissions. Until Jan. 1, 2019, if the Department finds that an employer has mistakenly denied benefits but has acted in good faith to comply with the paid sick and safe leave law, the agency will ensure that impacted employees are appropriately compensated, and waive the administrative penalties, as long as corrective action is taken to prevent further issues. For more on this development, see Tax Alert 2018-1681. Vermont: New law (HB 16, Act 11 of the 2018 special session) reduces Vermont's marginal income tax rates by 0.2% (with the exception of the second highest tax bracket) retroactively to Jan. 1, 2018. However, according to the Vermont Department of Taxes, revised withholding tables are not expected to be released until 2019. For additional information on this development see Tax Alert 2018-1724. Wisconsin: The Wisconsin Department of Workforce Development announced that employers will see an overall 6.03% rate decrease in workers' compensation premiums for the rate year beginning Oct. 1, 2018. This is the third consecutive year workers' compensation rates have declined, following an 8.46% decline in 2017, and a 3.19% decline in 2016. The latest reduction in premiums is expected to result in an annual savings of about $134 million for Wisconsin employers. Worker's compensation rates are adjusted yearly by a committee of actuaries from the Wisconsin Compensation Rating Bureau. For more on this development, see Tax Alert 2018-1678. Minnesota: An out-of-state pharmacy is not entitled to a refund of Minnesota's legend drug tax paid on delivery of prescription drugs to Minnesota based patients and doctors because application of tax to these transactions does not violate the Due Process of Commerce Clauses of the U.S. Constitution. In reversing the Minnesota Tax Court, the Minnesota Supreme Court (Court) held that based on the statute's plain language, the pharmacy received legend drugs intended for resale or use in Minnesota and was liable for the tax because it delivered through use of a common carrier the drugs in Minnesota. The Court further found that imposing a use tax on the pharmacy's delivery of prescribed legend drugs to Minnesota-based customers comports with due process when the pharmacy purposefully directed its activities at Minnesota residents through filling legend drugs prescriptions, which were ordered by Minnesota healthcare providers, and prescribed for and delivered to Minnesota-based customers. Minnesota-based customers could also use the pharmacy's website to refill prescribed legend drugs, and the pharmacy had a representative based in Minnesota, acting on the pharmacy's behalf, verifying delivery locations to Minnesota-based customers. Lastly, the legend drug tax does not violate the Commerce Clause based on its plain language as there is no internal inconsistency when a taxable person's receipt of "legend drugs for resale or use" in another state is mutually exclusive of the taxable person's receipt of "legend drugs for resale or use in Minnesota." Walgreens Specialty Pharmacy, LLC v. Minn. Comr. of Rev., No. A17-1991 (Minn. S. Ct. Aug. 15, 2018). New York: The New York State Department of Taxation and Finance (Department) clarified that a prepaid wireless communications service as defined in TSB-M-17(2)WCS includes a prepaid phone card or a recharge or refill authorization code that can be used on a mobile phone to make or receive calls, or to send or receive text messages. Purchases subject to the surcharge include long distance and international calling cards that can be used on both landlines and mobile phones, as well as cards, PINs, or codes that give access to only texting services. Cards, PINs or codes that provide data services access in addition to voice or texting services, sold together for one price, also are subject to the surcharge, but purchases of cards, PINs or codes that only provide data services access are nontaxable purchases of internet access. Aside from this clarification, the Department noted that the information in TSB-M-17(2)WCS is valid. N.Y. Dept. of Taxn. and Fin., TSB-M-18(1)WCS (Aug. 16, 2018). Pennsylvania: The Pennsylvania Department of Revenue (Department) issued guidance on the receipts from telecommunications businesses that are subject to the gross receipts tax (GRT) under statutory amendments made by Act 52 (HB 994) of 2018. The guidance provides information about the GRT base, the minimal deductions permitted, and case law interpreting receipts subject to the tax. A non-comprehensive sample of sales of services and equipment that generate taxable receipts includes: (1) end user charges, including costs, fees and surcharges itemized on a customer's bill; (2) Directory Assistance; (3) late payment fees; (4) non-recurring charges (i.e., termination, installation, repairs, moves and changes to service, as well charges for wires, switches, connectors or similar property provided as part of the non-recurring charges); (5) enhanced telecommunications (i.e., voicemail, call forwarding, call waiting and custom ringtones); (6) sales of service using voice over internet protocol (VOIP); (7) paging service; (8) sales and leasing of private lines and private networks, including dark fiber; and (9) sales and leasing of equipment and property (with exceptions). Additionally, the Department provided a comprehensive list of authorized GRT deductions: (1) receipts from sales of internet service to the ultimate consumer and sales of service exempt under the Internet Tax Freedom Act; (2) resale receipts from those subject to GRT on telecommunications resales; (3) sales tax collected by the taxpayer; (4) distributions to a telecommunications provider from the Universal Service Fund authorized by the Universal Service Administrative Company; (5) the 911 surcharge authorized by and exempt from tax under 35 Pa. C.S. §5306.2 relating to uniform 911 surcharge; (6) bad debt (if the taxpayer meets CT Bulletin 2011-02 requirements); and (7) receipts from sales and leasing of telephones, telephone headsets, modems, tablets and related accessories (i.e., cases, chargers, holsters, clips, hands-free devices, screen protectors and batteries). Penn. Dept. of Rev., Corp. Tax Bulletin 2018-04 (Aug. 20, 2018). International: China's Ministry of Finance and the State Administration of Taxation jointly released Circular 70. Under Circular 70, effective from June 27, 2018, accumulated uncredited input value added tax (VAT) balances, i.e., VAT receivables, for 18 industries, including advanced manufacturing and some of modern service industries as well as the power-grid enterprises, may be refundable. For more on this development, see Tax Alert 2018-1660. Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor. Document ID: 2018-1776 |
