28 September 2018 State and Local Tax Weekly for September 28 Ernst & Young's State and Local Tax Weekly newsletter for September 28 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. In Oswald v. Hamer,1 the Illinois Supreme Court (Court) upheld the constitutionality of an Illinois law stating that a hospital applying for a charitable use property tax exemption "shall be issued" the exemption if the value of certain qualifying services or activities in a given year equals or exceeds the hospital's estimated property tax liability for the same year. In so holding, the Court construed "shall" as used in the statute (35 ILCS 200/15-86(c)) as permissive rather than mandatory, and concluded that a hospital seeking a charitable use property tax exemption under 35 ILCS 200/15-86 must both document the services and activities it provides that meet statutory requirements and must show that the property meets the constitutional test of exclusive charitable use under Article IX, Section 6 of the Illinois Constitution (Constitution). The ruling in this case provides further clarity for hospitals and hospital affiliates regarding the requirements they must meet to qualify for the charitable use exemption from property tax under the Constitution and applicable statutes. For more on this development, see Tax Alert 2018-1929. Federal: The Treasury Department and IRS have issued proposed regulations (REG-130244-17) under Section 385 that would remove the minimum documentation requirements that must be satisfied to treat certain financial arrangements among related parties as indebtedness for federal income tax purposes (the Documentation Regulations). The Documentation Regulations were issued in final and temporary regulations published in October 2016. For more on this development, see Tax Alert 2018-1878. Multistate: Recently issued Tax Alert 2018-1987 provides a summary of the significant legislative, administrative and judicial actions that affected state and local income/franchise taxes during the third quarter of 2018, and developments to watch for in the fourth quarter of 2018. Louisiana: Adopted amended regulations (LAC: 61:I.301, 302 and 311) implement Act 12 of the 2016 First Extraordinary Session regarding entities subject to the corporate franchise tax, the determination of taxable capital, and the taxation of newly taxable corporations, including corporations that were previously determined to not be subject to the tax under Utelcom, Inc.2 The regulation provides that such entities are liable for the corporate franchise tax for the 2017 franchise tax period based on the entity's corporate books on the first day of the 2017 calendar or fiscal year. The regulation includes examples. The amended regulations took effect Sept. 20, 2018. La. Dept. of Rev., LAC: 61:I.301, 302 and 311 (La. Register Vol. 44, No. 09, Sept. 20, 2018). Louisiana: Proposed regulations (LAC 61:I.1135 and 1136) would implement provisions related to market-based sourcing for sales of services and non-tangible property that were established by Act 8 of the 2016 Second Extraordinary Session, and would exclude certain sales of tangible personal property from the Louisiana sales factor. The proposed regulations include guidance on how to determine the extent to which the market for a sale of services or non-tangible property is in Louisiana, how to reasonably approximate the state(s) of assignment, and which sales to exclude from the numerator and denominator of the sales factor. Further, under the proposed regulations, sales (including sales of tangible personal property) would be excluded from the sales factor numerator and denominator if: (1) the taxpayer is not taxable in a state to which a sale is assigned, or (2) the state of assignment cannot be determined or reasonably approximated. Lastly, the proposed regulations provide guidance on how to determine whether a taxpayer is taxable within another state and how to reasonably approximate the state of assignment using a taxpayer's known sales, related-party transactions, or based on place of sale. Comments on the proposed regulations are due by 4:30 p.m. Oct. 26, 2018, and a public hearing will be held on Oct. 29, 2018. La. Dept. of Rev., Proposed La. Admin. Code 61:I.1135 and 1136 (La. Register Vol. 44, No. 09, Sept. 20, 2018). New Jersey: In Xpedite Systems, Inc., the New Jersey Tax Court (court) upheld the New Jersey Division of Taxation's application of the "25-50-25" allocation method3 to source a corporation's receipts from providing fax blast services, finding the corporation's use of the cost-of-performance method "inadequately represented the receipts allocable to New Jersey." Further, the court found that the corporation could not calculate its New Jersey allocable receipts using Example 2 in NJAC 18:7-8.10(a) (which would have limited such receipts to the "billings for calls originating in New Jersey") because the application of Example 2 is limited to FCC-licensed long-distance telephone carriers. Xpedite Systems, Inc. v. NJ Dir., Div. of Taxn., No. 018847–2010 (N.J. Tax Ct. Sept. 5, 2018) (unpublished). New York City: The New York City Department of Finance (Department) issued two separate memorandum containing instructions for reporting IRC § 965 income on the 2017 NY City Business Corporation Tax returns and attachments (Finance Memorandum 18-7) and for taxpayers subject to the general corporation tax, the unincorporated business tax and banking corporation tax (Finance Memorandum 18-8). A taxpayer which reported IRC § 965 income in its 2017 tax year but filed its New York City 2017 return without include such amounts, must file an amended return and follow the instructions in the Department's guidance. N.Y. City Dept. of Fin., Finance Memorandum 18-7 and Finance Memorandum 18-8 (both issued Sept. 25, 2018). Pennsylvania: On Sept. 21, 2018, nearly one year after issuing its opinion in Nextel Communications, the Pennsylvania Supreme Court (the Court) issued a per curiam order in R.B. Alden Corp., vacating and remanding the case to the Commonwealth Court "for reconsideration in light of this Court's decision in Nextel[.]" For more on this development, see Tax Alert 2018-1909. Minnesota: The Minnesota Department of Revenue explained that in addition to remote retailers having to collect and remit state sales and use tax, they also will have to collect local level sales taxes when they make a sale into a local jurisdiction with a sales tax, including sales made using the internet, mail order or telephone. As a result of the US Supreme Court ruling in South Dakota v. Wayfair, all Minnesota sellers, regardless of their location, must collect state and local sales tax based on their customer's location (even if the seller does not have a physical presence in that local jurisdiction). Sellers must start collecting on the beginning of its next filing cycle: October 1, 2018 for monthly and quarterly filers; January 1, 2019 for annual filers. Minn. Dept. of Rev., Website: Updated local sales tax requirements for Minnesota sellers (updated Sept. 2018). Nevada: Approved regulation (R189-18), effective Oct. 1, 2018, requires remote sellers to register in Nevada and start collecting and remitting the state's sales and use tax if, in the previous or current calendar year, the remote seller had: (1) more than $100,000 of sales of tangible personal property into Nevada, or (2) 200 or more separate retail sales of tangible personal property for delivery into the state. Small sellers may volunteer to register with the state and collect and remit on behalf of their Nevada customers. This collection and remittance obligation also applies to local sales tax, which in Nevada are collected and reported at the same time the state sales tax is remitted. The regulation was approved by Nevada's Legislative Commission on Sept. 27, 2018. Tennessee: The 6th Circuit Court of Appeals (Court) affirmed the district court's determination that Tennessee did not discriminate against railroads under the federal Railroad Revitalization and Regulatory Reform Act of 1976 (P.L. 94-210) ("4-R Act") by imposing sales and use tax on their purchase or consumption of diesel fuel while exempting competing motor carriers, because the tax on railroads was roughly equivalent to the tax on diesel fuel that motor carriers paid. The Court also found that the district court erred in holding that the railroad's choice to use dyed diesel fuel rather than clear fuel justified their differential tax treatment, but found this error was harmless since it agreed with the district court's rough equivalence holding. Ill. Central Railroad Co. v. Tenn. Dept. of Rev., No. 17-5553 (6th Cir. Aug. 31, 2018) (unpublished). Texas: An out-of-state online clothing retailer (retailer) must collect sales and use tax on sales of clothes it sends to Texas customers because the presence of the clothes in the state creates a substantial nexus for the retailer. In making this determination, the Texas Comptroller of Public Accounts (Comptroller) found that the retailer continues to own the clothing during a seven-day try-on period (7-day period) in which customers receive the clothes and can return them before being charged. During the 7-day period the retailer can exercise its ownership rights over the clothing and it can charge the customer for the clothing she/he keeps. The Comptroller noted it is not bound to the private contract between the retailer and customers in which the retailer passes the risk of loss and title to the clothing upon the retailer's delivery of clothes to a common carrier. Lastly, the Comptroller stated that it intends to adopt new rules in early 2019 to implement the US Supreme Court's decision in South Dakota v. Wayfair,4 allowing states to require remote sellers to collect sales tax. Tex. Comp. of Pub. Accts., No. 201808011L (Aug. 14, 2018). Utah: The Utah State Tax Commission announced that in addition to requiring remote retailers that meet the $100,000 in sales or 200 separate transaction threshold to collect and remit Utah sales and use tax, the Utah legislature as part of SB 2001 (Laws 2018, 2nd Special Session) repealed the 18% seller discount for remote sellers who voluntarily collected and paid Utah sales tax. The repeal is effective for sales occurring on or after Jan. 1, 2019. Utah State Tax Comn., Tax Bulletin 8-18 (Sept. 2018). West Virginia: The West Virginia Tax Commissioner (Commissioner) issued a notice of nonacquiescence to the West Virginia Office of Tax Appeals (OTA) determination that an out-of-state specialized travel accommodations service provider (similar to a travel agency rather than an online travel company (OTC)) was not a vendor engaged in selling services in West Virginia and, therefore, did not have a duty to collect sales and service and use tax from its customers on either its $2 service fee or its commissions. The Commissioner asserts that the OTA erred in both its factual analysis and the application of law to the decision's facts. Specifically, the Commissioner contends that the OTA ignored its factually identical previous decisions (Decisions 12-432U and 14-081CU) in which it relied in part on Scripto5 and found that entities that provided services or sold tangible personal property in state, but did not have a physical location or employees there, had sufficient nexus with West Virginia to subject them to sales tax. The Commissioner noted that the service provider would be unable to provide any of its services without hotels located in West Virginia. Further, the Commissioner argued that the service provider mirrors an OTC, except that the service provider has more contact with West Virginia hotels than the OTCs. The Commissioner is not appealing the decision, which is binding on the Commissioner in this case, but not any others. W. Va. Ofc. of Tax Appeals, Admin. Div. No. 15-310 CU (issued May 3, 2018; released Aug. 30, 2018); W. Va. State Tax Dept., Notice of Nonacquiescence to the W. Va. Ofc. of Tax Appeals Decision in Docket No. 15-310 CU (issued Aug. 3, 2018). California: New law (SB 88) amends California's film tax credit provisions, including moving the deadline for the Legislative Analyst's Office to prepare reports on the effectiveness and administration of the state's film tax credits to Jan. 1, 2023 (from Jan. 1, 2019). Additionally, beginning on or after July 1, 2025, the California Film Commission (commission) may allocate any previously allocated credits not certified that have not previously been added to credit amounts available for allocation against the qualified taxpayer's personal or corporate income tax. "Previously allocated credits not certified" means either: (1) credits allocated for which the qualified taxpayer who was originally allocated the credit amounts has notified the commission in writing that it will not request the allocated credits to be certified; or (2) the difference between the amount of credits allocated to a qualified taxpayer and the amount of commission-certified credits for that qualified taxpayer (for purposes of this calculation, the commission cannot consider any credit amounts for which the qualified taxpayer notified the commission it will not request the allocated credits to be certified). The provisions of SB 878 took immediate effect. Cal. Laws 2018, Ch. 456 (SB 878), signed by the governor on Sept. 17, 2018. South Carolina: The South Carolina Department of Revenue issued guidance on the state's new partial property tax exemption for manufacturing property. For property tax years beginning after 2017, South Carolina offers a partial property tax exemption for the value of manufacturing property assessed for property tax purposes under S.C. Code Ann. § 12-43-220(a)(1). (Utilities are ineligible for the partial exemption.) New or existing real or personal property that is owned or leased to a manufacturer and that is used in the conduct of the manufacturing business qualifies as manufacturing property eligible for the partial exemption. The partial exemption applies to all property used in the manufacturer's conduct of the manufacturing business — including machinery and equipment, office equipment, computers and real property. The partial exemption, however, does not apply to manufacturing property subject to a negotiated fee in lieu of taxes or to a negotiated multicounty park fee, but does apply to manufacturing property subject to a non-negotiated multicounty park fee. The partial exemption is phased in over six equal and cumulative percentage installments: 2.38095% in 2018, 4.7619% in 2019, 7.14285% in 2020, 9.5238% in 2021, 11.90475% in 2022, and 14.2857% in 2023 and thereafter. It will be automatically applied when a manufacturer files its PT-300 manufacturing return, in conjunction with appropriate schedules. S.C. Dept. of Rev., SC Rev. Ruling No. 18-13 (Aug. 30, 2018). Kentucky: The Kentucky Department of Revenue (Department) advised that resident and part-year resident taxpayers must meet the following requirements in order to claim a credit for individual income taxes paid to another state: (1) the taxpayer must be a Kentucky resident, (2) the income must be derived from sources outside Kentucky and subject to Kentucky taxation, and (3) income tax must have been assessed and paid on this income in another state. Kentucky limits the credit to the lesser of the amount of Kentucky tax savings had the income reported to the other state been omitted, or the amount of tax paid to the other state. The District of Columbia, Puerto Rico, and any US territory or possession are included within the definition of "state" for purposes of claiming the credit. The Department noted that benefits through reciprocal tax agreements that Kentucky has with several other states apply only to nonresidents, and are separate from provisions related to credits for taxes paid to other states. Ky. Dept. of Rev., KY-TAM-18-03 (Aug. 31, 2018). New Mexico: The New Mexico Taxation and Revenue Department (Department) expanded the qualifications for its managed audit program, allowing more individual and small business taxpayers to voluntarily pay back taxes without penalty or interest. The Department is permitting taxpayers to conduct self-audits for certain liabilities identified by the Department that were not previously allowed. The Department will waive penalty and interest if the taxpayer pays the liabilities within 180 days, and it will apply interest to the remaining assessment amount after that period concludes. Taxpayers who do not participate in the managed audit program will be assessed tax, penalty and interest. Click here for more information on New Mexico's managed audit program. N.M. Taxn. and Rev. Dept., Release: Taxation and Revenue Department Announces Expanded Qualifications for Tax Penalty Forgiveness Program (Sept. 20, 2018). Oregon: The Oregon Department of Revenue (Department) recently announced that a state Form W-4 will be developed and released for calendar year 2019 in response to federal changes under the Tax Cut and Jobs Act (P.L 115-97) (TCJA). Historically, the Department has used the federal Form W-4 for state income tax withholding purposes; however, with the implementation of the TCJA, the agency determined a state-specific form would best suit Oregon taxpayer needs. For more on this development, see Tax Alert 2018-1899. Washington: The Washington Department of Revenue issued guidance on apportionment under the Business & Occupation (B&O) Tax economic nexus standard, which applies to apportionable income, including income from apportionable activities. Under the state's single sales factor apportionment formula, a taxpayer's apportionable income is multiplied by the receipts factor to arrive at taxable income. The receipts factor is a fraction, the numerator of which is the total gross apportionable income attributed to Washington during the current tax year, and the denominator of which is the total gross apportionable worldwide income during the current tax year less throwout income. Washington taxpayers can exclude from the denominator of the receipts factor gross income from engaging in an apportionable activity if the income is attributed to a state where the taxpayer is not subject to tax or the taxpayer does not have nexus and some of the activity is performed in Washington. Taxpayers must file a reconciliation of their apportionable income once they have the information necessary to determine the receipts factor for an entire calendar year, either paying tax due or obtaining a refund. The reconciliation is due by Oct. 31 of the following year, and can be filed online. Click here for more on Washington's B&O tax economic nexus provisions. Wash. Dept. of Rev., Apportionment under economic nexus standard (Sept. 2018). International: The Oman Chamber of Commerce and Industry held a special seminar on Sept. 25, 2018 entitled Value Added Tax (VAT): The Motives, Objectives and Potential Impacts on Economy and Development. During the event, it was stated that the authorities are now targeting September 2019 to implement VAT in Oman. For additional information on this development, see Tax Alert 2018-1921. International: South Africa's National Treasury has proposed the postponement of the implementation date for the Draft Regulations expanding the definition of "electronic services" (E-services) for value added tax (VAT) purposes to April 1, 2019, to allow sufficient time for businesses to make the required adjustments under the new regulations. The initial date proposed for implementation was Oct. 1, 2018. For more on this development, see Tax Alert 2018-1920. Multistate: On Wednesday, Oct. 24, 2018, from 1:00-2:00 p.m. EDT New York (10:00-11.00 a.m. PDT Los Angeles) Ernst & Young LLP will host the fourth seminar in its state income tax webcast series focused on nexus. Building on previous webcasts which provided an historical overview of state income tax nexus, Public Law 86-272, and judicial developments through Geoffrey, this fourth webcast in the series will focus on evolving nexus theories and the recent US Supreme Court ruling in South Dakota v. Wayfair, in which the Court overturned Quill and Bellas Hess, finding that the physical presence standard articulated in Quill "is unsound and incorrect." For this webcast, panelists will discuss the following topics: (1) state income tax nexus theories, including bright line factors of profitability, economic nexus, agency and alter ego; (2) constitutional implications of state related party add back statutes; and (3) state income tax implications of Wayfair. To register for this event, go to Evolving nexus theories and the impact of Wayfair. Multistate: On Tuesday, Oct. 30, 2018, from 2:00 p.m.-3:00 p.m. EDT New York (11:00 a.m.-12:00 p.m. PDT Los Angeles) Ernst & Young LLP (EY) will host a webcast focused on unclaimed property issues for financial services organizations (FSOs). FSOs face highly complex unclaimed property (UP) matters across all facets of compliance, enforcement, governance and recovery. The regulatory and audit landscapes continue to change, often contradicting one another as holders strive to adapt and comply. From understanding the IRS's recent ruling on escheatable IRAs to navigating the inconsistent application of unclaimed property laws among states, there are numerous and relevant updates to consider. Further complicating matters is the general flux of state statutes, as more and more states are adopting or considering adoption of the Revised Uniform Unclaimed Property Act of 2016. Please join members of EY's Unclaimed Property and Escheat Services practice as they address the current landscape, applicable for all subsectors of financial services. Our panel also welcomes guest speakers from the Unclaimed Property practice group of the law firm of Alston & Bird LLP, who will discuss the ever-critical legal issues such as ambiguities, risks, and defenses to regulatory and enforcement challenges. During this webcast, the panelists will provide an update on legislation, litigation, real-time controversy issues, industry responses and overall trends. The panelists will also discuss the impact on current and future compliance issues, in addition to identifying leading practices that are vital to an effective unclaimed property compliance and recovery program. To register for this event, go to Unclaimed property spotlight for FSOs. 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. 2 Utelcom, Inc. and Ucom, Inc. v. Bridges, 2010-0654 (La. App. 1 Cir. Sept. 12, 2011), 77 So. 3d 39, writ denied 2011-2632 (La. S.Ct. March 2, 2012). 3 Under this method, 25% of receipts are allocated to the state in which the costs originate, 50% of the receipts are allocated to the state in which the service is performed, and 25% of the receipts are allocated to the state in which the transaction terminates. Document ID: 2018-2056 |
