17 September 2018 State and Local Tax Weekly for September 7 Ernst & Young's State and Local Tax Weekly newsletter for September 7 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. New Jersey Governor Phil Murphy proposes technical corrections and substantive changes to recently passed Corporate Business Tax law On Aug. 27, 2018, New Jersey Governor Phil Murphy conditionally vetoed a bill related to the Corporate Business Tax (CBT), Assembly Bill 4262 (A4262 or the Bill). A4262, which was passed by the New Jersey Senate and Assembly on June 25, 2018, provides technical corrections and substantive changes to previously enacted Assembly Bill 4202 (A4202) (signed into law on July 1, 2018). A4202 itself made historic, substantial changes to the CBT (see Tax Alert 2018-1342). With his conditional veto of A4262, however, the Governor proposed technical corrections, as well as various new substantive changes that, if enacted, would replace certain key provisions of the already-enacted A4202. — Expand the definition of "combined group" to include "all business entities" in place of "corporations" — Revise the new water's edge combined filing rules, includes controlled foreign corporations and tax havens — Bar taxpayers that don't renew worldwide or affiliated group elections in expiration year from making an election for three tax years — Empower the Director of the Division of Taxation to include income/factors of non-group members to more accurately reflect income — Change the effective date of combined filing and market-based sourcing to tax years ending on or after July 31, 2019 The Governor's proposed changes are currently being considered by the Assembly and Senate, which can either approve the Governor's recommended changes "as is" or modify and resubmit the bill for further consideration by the Governor. Regardless of which course the Legislature chooses, the reapproved bill would then go back to the Governor for his consideration (i.e., approval, conditional veto or outright veto). This process is likely to occur over the next few weeks. For more on this development, see Tax Alert 2018-1734. Federal: In a press release (IR-2018-178), the IRS has clarified that recently issued proposed regulations (REG-112176-18), concerning the availability of a charitable contribution deduction for contributions to state and local tax credit programs, do not affect a business taxpayer's ability to claim business expense deductions for certain payments to charities or government entities for which taxpayers receive state or local tax credits. "The business expense deduction is available to any business taxpayer, regardless of whether it is doing business as a sole proprietor, partnership or corporation, as long as the payment qualifies as an ordinary and necessary business expense," the IRS noted. For more on this development, see Tax Alert 2018-1778. California: A California Court of Appeal (Court) affirmed the trial court's ruling in Harley-Davidson that a statutory provision allowing intrastate unitary businesses to file on a separate basis but not similar interstate businesses could result in discrimination under the dormant Commerce Clause; however, even assuming discrimination, the discriminatory provision is permissible under the strict scrutiny standards of the Commerce Clause because the provision "advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives." The Court agreed with the trial court's determination that the state has an interest in requiring combined reporting to ensure that all business income from interstate business is accurately accounted for and to prevent the manipulation and hiding of taxable income. Lastly, the Court did not find the corporation's "alternative" of requiring intrastate unitary businesses to always file a combined report to be "a reasonable nondiscriminatory alternative." Harley-Davidson Inc. & Sub. v. Cal. Franchise Tax Bd., No. D071669 (Cal. App. Ct., 4th App. Dist. Div. 1, Aug. 22, 2018) (unpublished). Maryland: In an unreported opinion, the Court of Special Appeals of Maryland (appellate court) affirmed the Maryland Tax Court's (tax court) ruling that out-of-state corporations had nexus with Maryland because "enterprise dependency" existed between the out-of-state corporations and in-state affiliated companies and, as such, the out-of-state corporations were not separate business entities from the in-state affiliated companies. The appellate court also affirmed the tax court's finding that out-of-state corporations were part of a unitary business with the in-state companies, finding that substantial mutual interdependence existed between the entities, and that the Comptroller of Treasury (Comptroller) did not err in not using the standard apportionment formula to calculate the out-of-state corporation's income attributable to Maryland. Rather, the appellate court approved of the Comptroller's attribution of the in-state companies' apportionment factor to the out-of-state companies that received the interest and royalties, finding this alternative apportionment method reflected the income attributable to Maryland. Lastly, the appellate court found the tax court properly waived the interest assessment, stating that given the evolution of case law, the corporations had a reasonable basis for challenging the state law and acted in good faith. Staples, Inc., et al. v. Maryland Comp. of Treas., No. 2597 (Md. Ct. Special App. Aug. 9, 2018) (unreported). Federal: Proposed bill "Protecting Businesses from Burdensome Compliance Cost Act of 2018" (HR 6724), would prohibit states from requiring remote retailers to collect and remit taxes and fees or collect information incident to the purchase of goods and services if the seller does not have a physical presence in the state, effective for sales made prior to Jan. 1, 2019. For sales occurring after Jan. 1, 2019, certain conditions would apply in order for the state to require remote sellers to collect and remit tax, including that the tax or fee is payable at a uniform rate that does not exceed the combined rate of the state and local taxes and fees payable by the purchaser from sellers physically present in the state, and that the state law does not require a remote seller to remit to more than a single location or provide information about the purchaser other than the zip code areas in which such purchases were located in the state at the time of purchase and the aggregate amount of such taxes and fees collected by the seller in a particular zip code. Further, HR 6724 would prohibit subdivisions of the state from requiring remote sellers to collect and remit taxes or fees owed by a purchaser or collect information incident to the purchase. HR 6724 was introduced on Sept. 6, 2018. Arkansas: A company's provision of onboard computing and mobile communications systems for long haul carrier fleets are private communications services excluded from taxable telecommunications services for gross receipts tax purposes because the company's customers have exclusive use of the communications channel or group of channels assigned to its fleet. Exempt "private communication services" means a telecommunications service that entitles the customer to exclusive or priority use of a communications channel or group of channels between or among termination points regardless of the manner in which the channel or channels are connected, and includes switching capacity, extension lines, stations, and any other associated services that are provided in connection with the use of the channel(s). Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20161221 (July 31, 2018). Maryland: The Maryland Joint Committee on Administrative, Executive and Legislative Review approved emergency amendments to COMAR 03.06.01.33 that expand the definition of an out-of-state vendor who engages in business. Under the amended regulation, an out-of-state vendor includes a person that sells tangible personal property or taxable services for delivery in Maryland if, during the previous or the current, calendar year, the vendor has: (1) gross revenue from such sales in excess of $100,000 or (2) made such sales to Maryland customers in 200 or more separate transactions. This change takes effect Oct. 1, 2018. The emergency regulation was approved on Aug. 30, 2018 and will remain in effect until March 30, 2019. Maryland: The Maryland Comptroller of the Treasury (Comptroller) is reminding taxpayers of Maryland's new tax and regulatory framework for peer-to-peer car sharing. Effective July 1, 2018, the state expanded the definition of "short-term vehicle rental" for sales tax purposes to include a shared motor vehicle used for peer-to-peer car sharing and made available on a peer-to-peer car sharing program. The sales tax rate is 8% for charges connected with a shared motor vehicle used for peer-to-peer car sharing and made available on a peer-to-peer car sharing program. The taxable price includes all sales and charges (i.e., delivery fees, cleaning fees, protection packages, etc.), but excludes the sale of motor vehicle fuel that is subject to motor fuel tax. Operators of peer-to-peer car sharing programs who are not already registered with the Comptroller should immediately complete the registration process on the Comptroller's website using a Combined Registration Application. Md. Comp., Sales and Use Tax Alert Regarding Peer-to-Peer Car Sharing (Aug. 2, 2018). New Jersey: The New Jersey Division of Taxation (Division) issued guidance to remote sellers regarding sales and use tax collection and remittance requirements in light of the U.S. Supreme Court's ruling in South Dakota v. Wayfair. Beginning Oct. 1, 2018, remote sellers that make sales of tangible personal property, specified digital products or services (collectively "goods") for delivery in New Jersey will have to register, collect and remit New Jersey sales tax if the remote retailer has either: (1) gross revenue from delivery of such goods into New Jersey during the current or prior calendar year in excess of $100,000 or (2) sale of such goods for delivery into New Jersey in 200 or more separate transactions during the current or prior calendar year. Remote retailers that do not meet either of these conditions, nevertheless may voluntarily collect and remit tax. The Division further indicated that it will apply the Wayfair ruling on a prospective basis, and that it will soon be posting additional guidance regarding this new registration and collection requirement. N.J. Div. Taxn., Notice: Sales and Use Tax Information for Remote Sellers (Aug. 14, 2018). Arkansas: In response to questions from the Arkansas Economic Development Commission (AEDC), the Arkansas Department of Finance and Administration (Department) provided guidance for the state's Targeted Create Rebate, which provides various incentives for new, knowledge-based businesses. In regard to how long a company has to meet the minimum wage and payroll thresholds for purposes of qualifying for the rebate, a business that does not meet annual payroll requirements within 24 months after signing the financial incentive agreement with the state may request and receive an extension of up to 48 months. If the company fails to meet the minimum wage and payroll thresholds, it will be liable to repay all of the benefits it previously received. Further, the AEDC must determine when a company doing business in a targeted business sector (targeted business) started operating in Arkansas. The period must be for less than five years and begins when the minimum annual payroll threshold is met and the minimum equity investment has been constructively received. Turning to the Targeted Business Incentives, a company would no longer be eligible to receive the incentives if it did not maintain the minimum and maximum payroll requirements, or did not meet other qualification requirements, during the term of the agreement. The Department noted that if the AEDC director so approves, the targeted business payroll income tax credit can be combined with the targeted business sales and use tax refund and the targeted business research and development income tax credit. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20180420 (July 20, 2018). Minnesota: In two separate cases regarding how to calculate the Minnesota research and development (R&D) tax credit for the 2011 tax year, the Minnesota Tax Court (Court) agreed with the corporations' argument that they were required to compute the Minnesota "base amount" using nationwide gross receipts rather than Minnesota gross receipts in the denominator of the fixed-base percentage, and agreed with the Commissioner of Revenue that state law incorporated the federal minimum base amount limitation provisions but did not incorporate the federal election to use an alternative simplified credit. In reaching these conclusions, the Court found that Minnesota law incorporated IRC §§41(c)(1)-(3) defining "base amount," which included the federal minimum base amount limitation provision. Further, regarding how to compute the Minnesota base amount, the Court found that based on the plain language of Minn. Stat. §290.068, subd. 2(c), the state legislature did not alter the definition of "aggregate gross receipts" to refer exclusively to Minnesota gross receipts. Thus, the Minnesota base amount must be computed using federal gross receipts in the denominator. (The Court noted that in 2017, the state legislature amended Minn. Stat. §290.068 to include a Minnesota-specific limitation of "aggregate gross receipts.") Lastly, the Court held that Minnesota law did not incorporate IRC §41(c)(5), which permits taxpayers to choose an alternative method of R&D credit calculation, as this provision pertains to the credit determined under IRC §41(a)(1), rather than to the meaning of "base amount" as defined by IRC §§41(c)(1)-(3). General Mills, Inc. v. Minn. Comr. of Rev., No. 9016-R (Minn. Tax Ct. Aug. 17, 2018); IBM Corp. and Subs. v. Minn. Comr. of Rev., No. 9053-R (Minn. Tax Ct. Aug. 17, 2018). New Jersey: A tax assessment district (borough) could not retroactively revoke a hospital's nonprofit property tax exempt status for 2014 and 2015 in tax year 2016 using New Jersey's statutory provisions governing assessment of omitted property, because the hospital did not change owners or change use that would cause it to cease being entitled a tax exemption (i.e., exemption cessation statute). In reaching this conclusion, the New Jersey Tax Court (Court) found that the borough's reliance on AHS Hosp. Corp., 1 in which an unrelated hospital lost its tax-exempt status when it failed the profit test, as a basis to revoke the hospital's exemption does not satisfy the exemption cessation statute's requirements that a change in use must occur. The borough believed that the hospital operated for profit similar to the unrelated hospital in AHS Hosp. Corp. but failed to provide evidence that it did or of any change in use of the hospital property — no inspection, observation or finding by the assessor that the hospital was not being used for non-profit purposes during the 2014 or 2015 tax years, nor that it was vacant or abandoned. Additionally, the borough circumvented the tax appeal process, since it could have sought to revoke the hospital's exemption through a timely appeal. Lastly, the Court distinguished the use of rollback taxes in Messer,2 finding that unlike the plain language of the exemption cessation statute, the rollback statute does not require a change in use in order to impose taxes for the prior two tax years, and rollback taxes are additional taxes imposed using omitted assessment law rather than taxes on property omitted from the tax rolls. Borough of Red Bank v. RMC-Meridian Health, Nos. 000007–2016 and 000008–2016 (N.J. Tax Ct. July 25, 2018). Texas: A power plant operator was not entitled to a pollution control property tax exemption for recovery steam generators, because the "negative use determination" by the executive director of the Texas Commission on Environmental Quality (Commission) is binding on the Appraisal District. In affirming the district court, the Texas Court of Appeals (Court) concluded that the plain meaning of the statute gives the Commission's executive director the sole authority to make a positive or negative use determination. A "use determination" is a positive or negative finding by the executive director that the property is used wholly or partially for pollution control purposes. The Court reasoned that if the executive director makes a negative use determination, it is binding because the taxpayer cannot meet the exemption's statutory requirement to obtain a positive use determination. Panda Sherman Power, LLC v. Grayson Central Appraisal Dist., No. 05-17-00267-CV (Tex. App. Ct., 5th Dist., Aug. 7, 2018). North Carolina: The North Carolina Department of Revenue issued guidance that identifies federal tax provisions included in the Tax Cuts and Jobs Act (TCJA) and the Bipartisan Budget Act (BBA) that the state decouples from, and the lines on 2017 North Carolina corporate and individual income tax returns that are impacted. Federal provisions discussed include the following: (1) temporary deferral of and non-inclusion in the calculation of federal taxable income (FTI) or adjusted gross income (AGI) of certain gains timely invested in a qualified Opportunity Fund under IRC §1400Z-2 — for North Carolina corporate and individual income tax purposes these gains are not deferred and are included in the calculation of North Carolina taxable income; (2) permanent exclusion from FTI or AGI of certain gains from the sale or exchange of an investment in a qualified Opportunity Fund under IRC §1400Z-2 — for North Carolina corporate and individual income tax purposes such gain is included in the calculation of the taxpayer's state tax liability; (3) beginning in 2018 the inclusion of global intangible low-taxed income (GILTI) in gross income under IRC §951A — for corporate income tax purposes, GILTI, net related expenses, is deductible in determining state net income; for individual income tax purposes, GILTI is included in determining state net income to the extent GILTI is included in AGI; and (4) beginning in 2018 the deduction available to a domestic corporation for GILTI and foreign derived intangible income (FDII) under IRC §250 — for corporate income tax purposes, an addition is required for the amount deducted on the federal return. The notice addresses additional individual income tax provisions. Impact of the decoupling to 2018 returns will be addressed in the 2018 form instructions, which are scheduled to be related in January 2019. Taxpayers that already filed their 2017 return may need to file an amended return if their federal AGI or FTI is impacted by North Carolina's amendments to federal law included in the TCJA and BBA. N.C. Dept. of Rev., Important Notice: North Carolina's Reference to the Internal Revenue Code Updated — Impact on 2017 and 2018 North Carolina Corporate and Individual Tax Returns (Aug. 21, 2018). North Carolina: The North Carolina Department of Revenue (Department) issued guidance regarding when a mailed North Carolina tax return or other document (i.e., an original or amended return, informational report, payment, refund claim, request for review) is timely filed or tax timely paid, with a focus on the mailbox rule under IRC §7502. For purposes of determining when mailed tax documents are timely filed for North Carolina purposes, the federal mailbox rule and the rules under IRC §7503 regarding timely filing/payment when the due date falls on the weekend or legal holiday govern. Under the mailbox rule, a return or document is timely filed or a tax is timely paid if its postmark date is on or before the return or document's due date, and the document is actually received. The date of registration is deemed to be the postmark date for registered or certified mail. Taxpayers must preserve evidence of mailing a document to the Department and provide it if the Department does not have a record of the document's timely receipt. Direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a private delivery service approved by the IRS are the only way to establish prima facie evidence of a document's delivery. Otherwise, the Department will not consider the document to be filed. The directive provides examples of timely filed documents. This guidance, which focuses on the mailbox rule, supplements and modifies Directive TA-16-1, which focused on when a document is considered timely filed or a tax timely paid when the due date falls on a weekend or legal holiday. N.C. Dept. of Rev., Directive No. TA-18-1 (Aug. 24, 2018). Federal: US President Trump signed two Presidential proclamations on Aug. 29, 2018 granting targeted relief to US importers of steel and aluminum products that are subject to country specific quotas covered by Section 232 of the Trade Expansion Act of 1962. For imports of steel and aluminum subject to country specific quotas, interested parties can apply for a product-specific exclusion from quantitative limitations on steel and aluminum under a process that will be similar to the existing product exclusion process established for the relief of punitive tariffs. Steel and aluminum products relieved from quantitative limitations under this process will not be subject to punitive tariffs. For more on this development, see Tax Alert 2018-1741. International: The requirement to file a monthly SAF-T, i.e., Standard Audit File for Value Added Tax (VAT) (pl. Jednolity Plik Kontrolny) was implemented in Poland as of July 1, 2016 for large companies and since 2018 for all entrepreneurs. Therefore, all taxpayers registered for VAT in Poland are obliged to submit monthly SAF-T and simultaneously monthly (or quarterly for some entities) VAT returns. For more information on this development, see Tax Alert 2018-1739. Federal: On Sept. 18, 2018, Ernst & Young LLP, will host a webcast to discuss the global implications and business responses to US trade actions. Trade continues to be at the forefront of the news, with the recent announcement on the path forward for trade agreement relations between the US and Mexico, the fate of North American Free Trade Agreement (NAFTA), and the continued flow of US tariffs and sanctions increasing or changing on an almost daily basis. This fluid environment makes it very difficult for businesses to navigate the current state — much less plan for the future. Our panel of global trade subject matter professionals from the US, Mexico and Canada will provide an overview of the latest agreement between the US and Mexico, the status of NAFTA and next steps with Canada, the US trade actions in the Section 232 and 301 arena, resulting global implications, and will discuss how businesses are responding. Topics will include: (1) the latest NAFTA update including new aspects of the announced US and Mexico Trade Agreement, (2) the global responses to US trade actions, (3) critical considerations for businesses relative to their supply chain, and (4) leading practices to help identify areas of risk and potential increased duties. 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. Document ID: 2018-1827 |
