17 October 2018 State and Local Tax Weekly for October 5 Ernst & Young's State and Local Tax Weekly newsletter for October 5 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 enacts technical corrections and substantive changes to recently amended Corporation Business Tax Act, addresses CBT treatment of IRC § 951A "GILTI" income On Oct. 4, 2018, Governor Murphy signed into law SB 2989/AB 4495 (Bill) making both technical corrections and substantive changes to the modifications enacted in July 2018 to the New Jersey Corporation Business Tax (CBT) by AB 4202 (July Legislation).
In addition to the technical clarifications and corrections contained in the Bill, substantive changes to the CBT include the following:
Subsequently, on Oct. 5, 2018, the New Jersey Division of Taxation released Form CBT-DIV 2017 (the Form), which addresses the retroactive changes to the CBT. The Form specifically addresses changes to New Jersey's DRD rules, which reduced the deduction from 100% to 95% for dividends (including the deemed IRC § 965 dividends (the Transition Tax Dividends)),received from 80%-or-more-owned subsidiaries, and the attendant apportionment changes specific to these dividends and other dividends received. The Form effectively operates to amend a CBT taxpayer's 2017 return for these retroactive changes. Complicating matters, this Form must be manually prepared and filed (i.e., it is exempt from the general requirement to file returns electronically). For more on the law change, see Tax Alert 2018-1977, and for more on the Form, see Tax Alert 2018-1994. On Oct. 1, 2018, the United States President announced a preliminary agreement with Canada to revise the terms of the existing North American Free Trade Agreement (NAFTA) among the US, Mexico and Canada. The proposed agreement with Canada follows seven rounds of NAFTA renegotiations among the three nations that took place over the course of 13 months and comes roughly 30 days after the US and Mexico announced a similar "preliminary agreement in principle" to modernize the rules of NAFTA. The United States Trade Representative (USTR) subsequently published the full text of the proposed agreement, which is named the United States — Mexico — Canada Agreement (USMCA), and released details on how the USMCA will achieve stated objectives to modernize previous commitments made under NAFTA, including major changes to trade in agricultural products, automobiles and automotive parts and textiles; increased thresholds for low-value (de minimis) shipments subject to informal entry procedures; enhanced data protection for biologic drugs; and other provisions as discussed below. The proposed USMCA consists of 34 chapters, which exceeds the 22 chapters contained in the NAFTA, and covers new areas such as labor, the environment, anti-corruption and regulatory policy, among others. Notably, it also includes 11 annexes and 12 side letters. Four of those side letters specifically grant Canada and Mexico important concessions pertaining to the ongoing US investigation into imported automobiles and automotive parts. A similar agreement, however, was not reached on the punitive duties presently being imposed on imported Mexican and Canadian steel and aluminum. The preliminary agreement requires ratification by all three countries. Ratification is likely, and publication of the text provides businesses with a critical opportunity to now analyze the proposed text in advance, assess its impact on their operations, and evaluate necessary changes to business to take advantage of the new rules. For more on this development, see Tax Alert 2018-1940. Federal: In Notice 2018-78 (the Notice), the US Treasury Department and the Internal Revenue Service (IRS) have announced certain amendments to the rules included in the proposed regulations under Section 965 (Section 965 proposed regulations) that were issued on Aug. 1, 2018 (REG-104226-18) (See Tax Alert 2018-1571). The Notice announces that the final regulations will include the following: (1) a transition rule extending the due date and providing limited revocability for the basis election under Prop. Reg. § 1.965-2(f)(2) until 90 days after the Section 965 proposed regulations are finalized; (2) a rule treating a consolidated group as a single US shareholder for the purposes of disregarding certain assets in calculating the aggregate foreign cash position of the US shareholder; and (3) relief on the deadline to file an election under the Section 965 proposed regulations for taxpayers eligible for the extended due date of their income tax return in response to Hurricane Florence. For more on this development, see Tax Alert 2018-1946. Arkansas: The Arkansas Department of Finance and Administration advised that the state does not conform to IRC § 965. Thus, Arkansas "will continue to only tax the income as the dividends are actually paid and will not allow the new federal deduction." Ark. Dept. of Fin. and Admin., Legal Opinion 20180826 (Oct. 2, 2018). California: A multinational corporation in calculating its California tax liability under the Uniform Division of Income for Tax Purposes Act (UDITPA) is required to include income from related single member limited liability companies (SMLLCs) that were considered disregarded entities for income tax purposes. In so holding, a California Court of Appeal (Court) rejected the corporation's argument that when a limited liability company pays fees and taxes under Cal. Rev. & Tax Code § 18633.5, its income should be excluded from UDITPA's apportionment formula, even if the entities are part of a unitary business. Rather, the Court found that Section 18633.5 does not "replace the well-established apportionment principles set forth in UDITPA" but "merely provides that a disregarded LLC must pay a certain tax and fee on behalf of its owner when its owner declines to consent to California tax jurisdiction." Bunzl Distribution USA, Inc. v. Cal. Franchise Tax Bd., No. A137887 (Cal. App. Ct., 1st App. Dist. Div. 3, Sept. 28, 2018). Maryland: The Comptroller of Maryland (Comptroller) issued a tax alert to provide guidance on reporting and taxation of IRC § 965 repatriation income for tax year 2017. Section 965, as amended by the "Tax Cuts and Jobs Act" (P.L. 115-97), generally imposes a one-time transition tax on a US shareholder on certain previously untaxed post-1986 accumulated earnings of its relevant foreign corporate subsidiaries. The Comptroller has determined that the revenue impact of the amendments to Section 965 will be less than $5 million;1 thus, the auto-decoupling provision in Md. Code Ann., Tax-Gen § 10-108 is not triggered and Section 965 income reported at the federal level also must be included in the calculation of Maryland taxable income. The tax alert includes information on where Section 965 income is reported on Maryland tax forms for corporations, individuals, S corporations, partnerships, and fiduciaries. For example, for corporate income tax purposes Section 965 income is reported on the federal IRC 965 Transition Tax Statement and for Maryland purposes the net Section 965 amount must be included on Line 1a of the US shareholder's Maryland Form 500, with a copy of the IRC 965 Transition Tax Statement attached. In addition, corporate taxpayers that receive Section 965 income are allowed a subtraction modification for dividends received from the paying corporation, if: (1) it owns, directly or indirectly, 50% or more of the paying corporation's outstanding shares of capital stock; and (2) the paying corporation is organized under the laws of a foreign government. Further, if inclusion of Section 965 income results in distortion of Maryland taxable income, taxpayers can request to use an alternative apportionment formula. Such request should be submitted at the time the return is filed. Md. Comp. of Treas., Tax Alert "Maryland Guidance on the Reporting and Taxation of IRC §965 Repatriation Income for Tax Year 2017" (Oct. 5, 2018). For additional information on this development, see Tax Alert 2018-2047. Massachusetts: The Massachusetts Department of Revenue provides guidance on the state's treatment of deemed repatriated income under IRC § 965 for business corporations and financial institutions. For Massachusetts tax purposes IRC § 965 income is treated as dividend income and is included in a corporation's net income, and also is eligible for the 95% dividends received deduction. The deduction under IRC § 965(c) is not allowed. For apportionment purposes, IRC § 965 income is excluded from the numerator and denominator of the sales factor of any business corporations, but may be included in the numerator and denominator of the receipts factor of a financial institution. Lastly, Massachusetts does not follow the federal election to pay amounts due under IRC § 965 over an eight year period. Ma. Dept. of Rev., TIR 18-11 (Oct. 4, 2018). Arizona: In Orbitz Worldwide Inc., the Arizona Court of Appeals (Court) affirmed the superior court's ruling that online travel companies (OTCs) are brokers engaged in a taxable activity under Phoenix City Tax Code § 14-4442 and the entire sales price they charge is the gross income for lodging transactions which is subject to transaction privilege tax under Section 14-444. The Court reversed the superior court's grant of the cities' motion for summary judgement, under an alternative argument, that OTCs are taxable entities under Phoenix City Code § 14-447, rejecting the cities' assertion the Section 14-447 "institutes a tax on the entire consideration consumers pay for hotel rooms regardless of its later division." Instead, the Court agreed with the OTCs that the tax under Section 14-447 is imposed only on the income received by a hotel renting lodging to customers and does not extend to hotel brokers such as OTCs. Lastly, the Court reversed the superior court finding that cities could not assess tax, penalties and interest before 2013, noting that there was no change in the cities application or interpretation of the law and the OTCs' business activities were not new. This issue was remanded for further proceedings consistent with this decision. City of Phoenix, et al. v. Orbitz Worldwide Inc. et al., Nos. 1-CA-TX 16-0016 and 1 CA-TX 16-0018 (Ariz. Ct. App., Div. 1, Sept. 6, 2018). Arizona: A restaurant's gross income from fees charged to customers to access premium content such as news, sports, current events, songs and games on the restaurant's mobile point of sale devices is subject to transaction privilege tax under the restaurant classification. The Arizona Department of Revenue explained that there is no specific exemption or exclusion from the restaurant classification for such fees. Ariz. Dept. of Rev., Taxpayer Info. Ruling LR 18-002 (May 31, 2018). Massachusetts: The Massachusetts Department of Revenue (Department) issued a technical information release (TIR) to explain its administrative position regarding Regulation 830 CMR 64H.1.7 (Vendors Making Internet Sales) following the U.S. Supreme Court's ruling on June 21, 2018 in South Dakota v. Wayfair addressing the U.S. Constitutional nexus requirements for sales and use tax purposes. Under the regulation, which was approved Sept. 22, 2017, and starting Oct. 1, 2017, requires an out-of-state internet vendor to register, collect and remit Massachusetts sales and use tax if during the prior 12 month period, it had more than $500,000 in Massachusetts sales from internet transactions and made sales resulting in a delivery into the state in 100 or more transactions. The regulation noted that internet vendors meeting the threshold would have certain physical contacts with the state related to such sales that would establish a physical presence, which prior to Wayfair was required by Quill. In the TIR, the Department said that it "is enforcing the Regulation for all tax periods after the Regulation's effective date (October 1, 2017) both prior to and subsequent to Wayfair." The Department noted that out-of-state internet vendors may be subject to tax prior to the Oct. 1, 2017 effective date of the Regulation, if they owned inventory in the state sufficient to create nexus, such as storing inventory in a warehouse owned by a company operating an online marketplace. Ma. Dept. of Rev., TIR 18-8: Tax Jurisdiction Over Internet Vendors Prior to and Subsequent to Wayfair, Inc. (Sept. 17, 2018). New Jersey: New law (AB 4496), effective Nov. 1, 2018, adopts an economic nexus standard similar to South Dakota's provision that was the subject of the U.S. Supreme Court's ruling in South Dakota v. Wayfair as well as marketplace facilitator provisions. AB 4496 imposes the collection requirement on remote sellers that sell tangible personal property, services and specified digital products reported to New Jersey destinations exceeding $100,000, or with 200 or more separate transactions in the state, in any one calendar year. AB 4496 further provides for a one-year trailing requirement to collect tax if one of the two thresholds was met in the prior year. Marketplace facilitators are defined as entities that provide a forum whereby third parties can sell products on the forum, such as through the internet and are also required by AB 4496 to collect sales tax on all retail sales through the forum destined for New Jersey locations. The marketplace facilitator is only relieved of the requirement to collect tax if the third party has failed to provide correct information about sales despite the marketplace facilitator's reasonable efforts. N.J. Laws 2018, Ch. 132 (AB 4496), signed by the governor on Oct. 4, 2018. See also, N.J. Div. of Taxn., Sales and Use Tax Information for Remote Sellers Effective Nov. 1, 2018 (last updated Sept. 25, 2018). South Carolina: The South Carolina Department of Revenue advised that in light of the U.S. Supreme Court's ruling in South Dakota v. Wayfair, it will enforce an economic presence nexus standard starting Nov. 1, 2018. Nexus will be established for remote sellers that have gross revenue from sales of tangible personal property, electronically transferred products, and services delivered into the state which exceeds $100,000 in the previous or current calendar year. Retailers meeting this threshold in 2017 or from Jan. 1, 2018 through Sept. 30, 2018 are required to collect and remit sales and use tax on a prospective basis starting Nov. 1, 2018. Those meeting the threshold on or after Oct. 1, 2018 must register by and start collecting and remitting South Carolina sales and use tax beginning the first day of the second calendar month after economic nexus is established. Remote sellers include those selling through a marketplace, online, catalog, or by mail order as well as related entities assisting the remote seller in sales, storage, payment collection, or in any other manner with respect to the remote seller. S.C. Dept. of Rev., SC Rev. Ruling #18-14 (Sept. 18, 2018). South Carolina: The South Carolina Department of Revenue (Department) in light of the US Supreme Court's ruling in South Dakota v. Wayfair updated its guidance for the criteria that must be met to require a retailer to remit a local jurisdiction's sales and use tax when it delivers products to a purchaser in another jurisdiction. The Department explained that once a retailer establishes nexus with the state for sales and use tax purposes, it also has nexus with every local jurisdiction for which the Department administers and collects a local sales and use tax. Effective for deliveries made on or after Nov. 1, 2018, retailers will need to remit local sales and use taxes for any local jurisdiction in which it makes deliveries. The guidance includes a question and answer section concerning local sales and use taxes, covering over 20 topics. S.C. Dept. of Rev., SC Rev. Ruling #18-15 (Sept. 20, 2018). Federal: A Treasury official has announced that the pending proposed regulations on Opportunity Zones could be supplemented by additional regulations later this year, according to a report by Tax Analysts (2018 TNT 192-1). Daniel Kowalski, counselor to the Treasury Secretary, spoke about the pending Opportunity Zone regulations at a conference in New Orleans on Oct. 2, 2018. He said that he expects the first round of proposed regulations on Opportunity Zones that are currently under review by the Office of Information and Regulatory Affairs (OIRA) will be released within the month. He added that the new form to certify Opportunity Funds is also expected to be available this month. Although he discussed some comments received by the IRS regarding Opportunity Zones, such as what "gains" are considered eligible, he did not provide specifics on what was included in the pending first round of regulations. For more on this development, see Tax Alert 2018-1975. Multistate: In response to the significant destruction caused by Hurricane Florence in North Carolina and South Carolina, government entities throughout the US are providing various tax relief to affected individuals and businesses. Such relief includes extending tax filing deadlines, providing exemptions or suspensions from tax, and waiving certain regulatory requirements. To date, the IRS, North Carolina, South Carolina, Alabama, Alaska, Arkansas, the District of Columbia, Florida, Georgia, Idaho, Mississippi, New Jersey, Pennsylvania, Tennessee and West Virginia are among the jurisdictions providing some form of relief to those affected by Hurricane Florence. Other states may join in providing filing relief to taxpayers affected by Hurricane Florence as well. Taxpayers should note that, in some situations, they must specifically request the relief available. For more on this development, see Tax Alert 2018-1996. California: New law (AB 2503) permits a domestic corporation or domestic limited liability company to be administratively dissolved if, as of Jan. 1, 2019, or any time afterward, the entity's corporate powers, rights and privileges are and have been suspended by the California Franchise Tax Board (FTB) for at least 60 continuous months. Before administrative dissolution, the entity must be notified by: (1) written notice from the FTB to the entity's last known address; or (2) if the FTB does not have the entity's valid address, the California Secretary of State must provide 60 days' notice of the pending dissolution on its website and provide instructions to submit a timely written objection. An entity can have the administrative dissolution canceled if it timely files a written objection and within 90 days from the date the FTB receives the written objection, it files returns, pays or otherwise satisfies all accrued taxes, penalties and interest, files a current Statement of Information with the Secretary of State, fulfills any other requirements, and applies for revivor. If these requirements are not met, the entity will be administratively dissolved as of the later of 90 days after the FTB received the written objection or after an extended 90-day period as granted by the FTB. The entity's liabilities for qualified taxes, interest and penalties that accrued while it was not doing business will be abated once it is administratively dissolved. No other tax liability will be discharged, nor will any of the entity's liability to creditors, or the liability of its directors, shareholders, transferees, or other persons related to the administratively dissolved corporation. A qualified entity that is administratively dissolved but continues to do business, or has any undisclosed remaining assets, will be subject to the total tax, interest and penalty that were abated. The abated amount will be immediately due and payable, along with an additional penalty of 50% of the total tax abated, plus accrued interest. Cal. Laws 2018, Ch. 679 (AB 2503), signed by the governor on Sept. 22, 2018. Illinois: New law (Public Act 100-0865)sets the basic standard exemption amount to $2,050, plus a cost of living adjustment, through Dec. 31, 2023. According to the Illinois Department of Revenue (IL DOR), this results in a standard exemption amount of $2,225 for calendar year 2018, up from $2,000. (Illinois Publication FY-2019-04, August 2018.) As a result, the IL DOR released a revised Publication IL-700-T, effective retroactively to Jan. 1, 2018. Because the change is minor, employers were instructed to adjust their withholding amounts as soon as possible. For more on this development, see Tax Alert 2018-1961. Illinois: The Illinois Office of the State Treasurer announced that the state will soon begin phasing employers into the required state-sponsored Roth IRA savings plan, Illinois Secure Choice. The first wave would require employers of 500 or more employees to register with the plan by Nov. 1, 2018. Employers that already have a retirement plan would be able to file an exemption certificate, exempting them from participation in the state program. For more on this development, see Tax Alert 2018-1967. International: On Sept. 20, 2018, Uganda's Minister of Finance, Planning and Economic Development issued the Value Added Tax (Designation of Tax Withholding Agents) (Revocation) Notice, 2018 (Revocation Notice') which withdraws the earlier issued Value Added Tax (Designation of Tax Withholding Agents) Notice, 2018. The Revocation Notice, published in the Uganda Gazette on the Sept. 28, 2018, effectively halts the operation of Value Added Tax (VAT) withholding in Uganda. For more on this development, see Tax Alert 2018-1956. International: On Sept. 18, 2018, the Dutch Government published its tax budget proposals (the Proposals) for fiscal year 2019. The Proposals are generally in line with earlier announcements by the Dutch Government, the consultation documents that were opened for public consultation in 2017 and the fiscal policy agenda that was released in 2018. For more on this development, see Tax Alert 2018-1946. 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. 1 Under Maryland law, an amendment to the IRC enacted in the same calendar year as the tax year the amendment affects, will not impact the calculation of Maryland taxable income unless the Comptroller determines the impact of Maryland tax revenue is less than $5 million. If the impact is $5 million or more the state automatically decouples from the provision. Document ID: 2018-2057 |
