06 December 2018 State and Local Tax Weekly for November 21 Ernst & Young's State and Local Tax Weekly newsletter for November 21 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. Businesses paid $738.4 billion in state and local taxes in fiscal year (FY) 2017, an increase of 2% from FY2016, according to a newly released study of state and local business taxes prepared by Ernst & Young LLP in conjunction with the Council on State Taxation (COST) and the State Tax Research Institute (STRI). The report, "Total State and Local Business Taxes: State-by-State Estimates for Fiscal Year 2017," shows that state business taxes paid in FY2017 compared to FY2016 increased by 0.4% and local business tax grew by 3.7%. Growth in state and local tax revenue from business was concentrated in property taxes and sales taxes. In FY2017, business tax revenue accounted for approximately 44% of all state and local tax revenue. The business share has been within approximately one percentage point of 45% since FY2003.
On Nov. 7, 2017, the Ohio Supreme Court (Court) issued its decision in Willoughby Hills Development and Distribution, Inc.,1 holding that a gasoline distributor was not eligible for a gross receipts exclusion from the Ohio Commercial Activity Tax (CAT) because it was not acting as an agent of a manufacturer/supplier when selling gasoline to retailers. Willoughby Hills Development and Distribution (WHDD) purchased and resold gasoline to retailers in Ohio. WHDD's purchasing activities with Sunoco, Inc. (Sunoco) and its reselling activities with a retailer, Sopinski Enterprises, Inc. (Sopinski), are at issue in the case. WHDD negotiated an agreement with Sunoco under which WHDD purchased branded motor fuel from Sunoco. The parties agreed that WHDD's purchase and resale of the fuel would be consistent with Sunoco's brand and image requirements. The agreement memorialized WHDD's understanding of the importance of the image conveyed to the public by retailers authorized to use Sunoco's intangible assets. The agreement provided that WHDD was an independent contractor and precluded WHDD from acting as Sunoco's agent. WHDD also negotiated a product sales agreement with Sopinski where Sopinski later agreed to purchase its fuel requirements from WHDD. The agreement precluded WHDD from directing or controlling Sopinski's operations. WHDD filed an application for a CAT refund based on an agency relationship with Sunoco. The Ohio Department of Taxation (Department) denied the refund claim concluding that no agency relationship existed. The Ohio Board of Tax Appeals affirmed the denial of the refund claim. On appeal, the Court first analyzed which of WHDD's activities mattered for purposes of determining whether it was Sunoco's agent. The Court indicated that WHDD's argument rested on the claim that it was responsible for managing and protecting Sunoco's intangible assets. WHDD called the Court's attention to language in the agreement that directed it to use its best efforts to require retailers to operate its retail locations in a manner consistent with Sunoco's requirements as to brand image. The Court, agreeing with the Department, said that these activities had nothing to do with WHDD's generation of gross receipts. The relationship between the parties, as evidenced by the agreement, caused the Court to conclude that WHDD was selling its own gasoline, not Sunoco's, to Sopinski. Accordingly, those sales of gasoline were included in WHDD's CAT gross receipts. The Court also rejected WHDD's additional claims that it was, in fact, providing services to Sunoco (i.e., protection of intangible assets). The Court then turned to whether WHDD was an agent for purposes of the CAT exclusion. Ohio Rev. Code §5751.01(P) defines an "agent" as a "person authorized by another person to act on its behalf to undertake a transaction for the other." In analyzing this definition, the Court first considered whether WHDD was a "person authorized" to act on Sunoco's behalf. The Court looked to its prior decision in Cincinnati Golf Mgt., Inc.2 where it said that the proper inquiry was derived from common law concepts that the agent had actual authority to bind a principal. The Court then considered the language in the agreement, which specified that when selling gasoline WHDD was an independent contractor and not Sunoco's agent. The contract also provided that WHDD was not authorized to make any commitments, or incur any expenses or other obligations, without Sunoco's approval. Further, WHDD was not permitted to bind Sunoco, which the Court concluded was an essential feature of an agency relationship. Ultimately, the Court concluded that WHDD was acting as a principal, not an agent, when selling fuel. Finally, the Court rejected WHDD's argument that Sunoco exercised control over its responsibilities for managing and protecting Sunoco's intangible assets, noting that the contract allowed WHDD to select its own customers and set its own selling prices and terms. For additional information on this development, see Tax Alert 2018-2260. New York: The New York Department of Taxation and Finance enacted an emergency regulation to change the Article 9-A Metropolitan Transportation Business Tax Surcharge (MTA surcharge) rate. Under the emergency regulation, the MTA surcharge is increased to 28.9% (from 28.6%) for taxable years beginning on or after Jan. 1, 2019 and before Jan. 1, 2020. The 28.9% rate will remain in effect for succeeding tax years unless the Commissioner determines a new rate. N.Y. Dept. of Taxn. & Fin., 20 NYCRR 9-1.2(e) (emergency adoption Nov. 13, 2018). Montana: New rule (42.15.527) provides that the 20% deduction allowed to pass-through entity owners under IRC §199A is not allowed in determining Montana net income. Mont. Dept. of Rev., Tit. 42, Ch. 15, Rule 527 (Mont. Admin. Reg. Notice 42-2-995, No. 22, Nov. 16, 2018). Montana: The Montana Department of Revenue issued guidance on the corporate income tax treatment of IRC §965(a) income. Water's edge combined return filers should add the total amount of gross income from IRC §965 dividends on Page 3, line 2i of the Montana Form CIT as "other additions," and deduct 80% of the total amount of gross income from IRC §965 dividends on Page 3, line 3g, on Montana Form CIT as "other reductions." If any of the IRC §965 dividends included in "other additions" is from a subsidiary included in the water's edge filing and incorporated in a tax haven country, the taxpayer can deduct 100% of the total amount of gross income related to these entities as "other reductions." Worldwide combined return filers should add the total amount of gross income from IRC §965 dividends on Page 3, line 2i of the Montana Form CIT as "other additions," and deduct 100% of the total amount of gross income from IRC §965 dividends on Page 3, line 3g, on Montana Form CIT as "other reductions." A deduction is not allowed for IRC §965 dividends included in "other deductions" from a subsidiary not included in the worldwide filing. Corporate taxpayers filing separate returns, domestic or limited combination returns, are required to add the total amount of gross income from IRC §965 dividends on Page 3, line 2i of the Montana Form CIT as "other additions," and deduct 100% of the total amount of gross income from IRC §965 dividends received from unitary subsidiaries included in the Montana filing on Page 3, line 3g, on Montana Form CIT as "other reductions." A deduction is not allowed for IRC §965 dividends included in "other deductions" from a subsidiary not included in the Montana filing. A corporate taxpayer is required to attach a copy of its federal IRC §965 Transition Tax Statement to its Montana return. Mont. Dept. of Rev., Montana corporate income tax treatment of IRC § 965(A) Income (Oct. 13, 2018). Oklahoma: The Oklahoma Department of Revenue (Department) issued guidance on the Oklahoma income tax treatment of IRC §§ 951A (global intangible low-taxed income, or GILTI) and 965 (deemed repatriation) income. The Department has determined that both Section 965 income and GILTI are included in the state tax base and for purposes of calculating Oklahoma taxable income, both are treated as dividends. The Department intends to adopt administrative regulations confirming this interpretation. In regards to Section 965 income, if such income was not included on the federal Form 1120 but instead included on the IRC 965 Transition Tax Statement, the income is included on the Oklahoma return as an addition to net taxable income and then allocated as dividend income. Taxpayers will need to attach a copy of the IRC 965 Transition Tax Statement (and/or a statement identifying the amount of IRC §965 income included in "other income" on the federal tax return). Further, under legislation enacted earlier this year, the state will follow a taxpayer's federal election to pay tax related to Section 965 in installments. Taxpayers making such an election should include a schedule reflecting Oklahoma income tax attributable to Section 965 income and the amount of the installment payments that will be remitted each year. Okla. Dept. of Rev., "What Information do you have related to IRC 965 and IRC 951A Income?" (modified Oct. 8, 2018). Massachusetts: A corporation's sales of three online software products are subject to sales and use tax because the software constitutes sales of standardized software, which, under Massachusetts law, is considered a sale of taxable tangible personal property. In reaching this conclusion, the Massachusetts Appellate Tax Board (Board) explained that a 2005 statutory change broadened the definition of tangible personal property to include "[a] transfer of standardized computer software, including but not limited to electronic, telephonic, or similar transfer," and the Massachusetts Revenue Commissioner subsequently adopted 830 CMR 64H.1.3(3), construing the application of sales tax to sales of prewritten software to include "transfers of rights to use software installed on a remote server." The Board further determined that the online software is prewritten (a.k.a., canned or standardized) since it is not made to the specifications, or prepared to the special order of, any individual purchaser. Rather, customers receive access to, and use of, fundamentally the same online software application. Lastly, the Board found that 830 CMR 64H.1.3(13) distinguishes transfers of taxable remote software from non-taxable services, and the object of this transaction was the sale of the right to use standardized software. Citrix Systems, Inc. v. Mass. Comr. of Rev., Nos. C321160 and C325421 (Mass. App. Tax Bd. Nov. 2, 2018). New York: A company that designs and sells consumer electronics, software and personal computers under-collected sales and use tax on qualifying device sales made during a back-to-school promotion when it collected tax on the amount of the qualifying device less a discount equal to the value of gift card that the customer received as part of the promotion. The administrative law judge (ALJ) for the New York State Division of Tax Appeals explained that if the gift card is purchased along with the qualifying device, sales tax only is imposed on the part of the purchase price attributed to the qualifying device. If, however, the customer received the gift card for free, sales tax is collected on the total purchase price. Based on the terms and conditions of the promotion, the ALJ found that customers were required to purchase a qualifying device in order to receive a gift card for free. Thus, the company is required to collect tax on the total purchase price (i.e., the price of the discounted device plus the gift card). The ALJ rejected the company's argument that double taxation occurs because the customer pays sales tax on the full amount paid for the device, without a discount for the gift card, and later, on the value of the items purchased with the gift card. The ALJ noted that these are two separate transactions, and the incidence of taxation does not relate back to how a gift card was obtained. Matter of Apple, Inc., DTA No. 827287 (NYS Div. of Tax App. Nov. 1, 2018). Rhode Island: An out-of-state online and catalogue retailer (online retailer) that sold horse riding supplies and apparel and shared a brand name with a sister company that had a retail store in Rhode Island (affiliate) did not have substantial nexus in the state and thus, did not owe sales and use tax for the period at issue (Feb. 2009 — June 2011), because the affiliate did not perform services that were significantly associated with the online retailer's ability to establish and maintain a market in Rhode Island. In so holding, an administrative law judge (ALJ) found that: (1) the online retailer did not advertise that returns can be made to affiliate; (2) the affiliate did not give special benefits to returns from the online retailer; (3) the affiliate did not accept deliveries from the online retailer for customers; (4) the online retailer and the affiliate credit cards and gift cards could be used interchangeably; (5) the affiliate did not offer loyalty programs for any purchase from the online retailer; (6) the affiliate did not advertise on the online retailer's website; (7) the affiliate did not include the online retailer's website address on its receipts or advertising; (8) the affiliate and the online retailer did not share customer data; and (9) the affiliate's measuring and fabric testing services were available to anyone (not just to the online retailer's and the affiliate's customers). Further, the ALJ found that the online retailer's and the affiliate's common identity and brand name did not, without more, establish nexus, and activities that would increase goodwill must be directed at more than a shared brand name or common ownership. Matter of [Redacted], No. 2018-11 (RI Div. of Taxn., Admin. Hearing Dec., Oct. 12, 2018). Connecticut: The Connecticut Department of Revenue Services (Department) issued guidance on the state's voluntary disclosure program (VDP). In exchange for a taxpayer voluntarily disclosing nonpayment or underpayment of taxes and paying the total taxes and interest due under a Voluntary Disclosure Agreement (VDA), the Department will waive penalties, limit the look-back period, and will not subject a taxpayer to discovery through the state's normal investigative or audit procedures. Taxpayers can inquire about the VDA program anonymously. To apply, a taxpayer must submit a written request that includes the tax type, a description of the applicant's Connecticut activities, the starting date of the applicant's activities, reasons for noncompliance with Connecticut tax laws, the potential tax liability amount, and an admission of tax liability. In making VDA program acceptance decisions, the Department considers: (1) the nature and magnitude of the taxpayer's Connecticut presence potentially creating nexus; (2) whether the taxpayer demonstrated reasonable care in determining that its activities and presence were not subject to tax in Connecticut; (3) the taxpayer did not willfully disregard Connecticut's tax laws; (4) the taxpayer's demonstration of good faith; (5) the state's benefits of entering into a VDA with the taxpayer; and (6) whether the taxpayer has collected any taxes. The guidance sets forth the procedures for participating in the VDP, and it lists activities that will cause the taxpayer to be disqualified, rendering a VDA null and void. IP 2018(18) took effect upon issuance and applies to all open periods. Conn. Dept. of Rev. Svcs., IP 2018(18): Conn. Voluntary Disclosure Program (Nov. 6, 2018). New Mexico: The New Mexico Taxation and Revenue Department (Department) is conducting a time limited tax amnesty program. Eligible small businesses and individuals with unreported or underreported taxes that finalize enrollment in the amnesty program by Dec. 31, 2018 and pay the amount due within 180 days may qualify to have their penalties and interest waived. For taxpayers that fail to pay the full amount due within 180 days, the Department will assess interest on the remaining balance due. In determining program eligibility, the Department will consider whether the taxpayer: (1) demonstrates a willingness and ability to comply with the state's tax laws; (2) demonstrates a system of internal controls and business records acceptable to the Department (which may be income identified on the federal return, for most taxpayers); (3) has resources available to conduct the income disclosure; (4) has not been the subject of a criminal tax investigation; (5) is not already in a legal dispute with the Department over the taxability of the transactions that would be included in the program; and (6) has included periods that are not currently under audit or already assessed. N.M. Taxn. and Rev. Dept., New Mexico Fresh Start Program (Nov. 8, 2018). Wisconsin: The Wisconsin Department of Revenue (Department) updated its guidance regarding how to get a private letter ruling to clarify that ordinarily it will not rule on a request of any issue that is in an audit in progress or completed. This includes an issue that has been appealed to the Department, the Wisconsin Tax Appeals Commission, or the courts. The guidance also provides general information about rulings (including areas that it will not rule on), how to obtain a ruling, how the Department handles ruling requests, and the effects of rulings on the requestor and other taxpayers. Wis. Dept. of Rev., Pub. 111: How to Get a Private Letter Ruling (Oct. 2018). Oregon: New temporary rule (Temp. OAR 150-307-0900) provides guidance to businesses to help determine whether they are a qualified heavy equipment rental provider. Under law enacted in 2018, businesses primarily engaged in renting heavy equipment are deemed qualified heavy equipment rental providers and must register with the Oregon Department of Revenue (Department) by Dec. 31, 2018 and begin collecting heavy equipment rental tax on Jan. 1, 2019. A qualified heavy equipment rental provider is primarily engaged in the business of renting qualified heavy equipment without an operator. This occurs if more than 50% of gross rental revenue earned during the rental provider's prior fiscal year was from the rental of heavy equipment, heavy equipment attachments, associated trailers, and other equipment and tools that are mobile; are rented without an operator but typically require an operator for use; and can be used for construction, mining, earthmoving or industrial applications. For purposes of determining whether the threshold has been met, the following transactions are excluded from the gross rental revenue calculation: (1) renting equipment with an operator, (2) renting equipment for a single defined term of more than 365 consecutive days, (3) renting equipment from a facility outside of Oregon, and (4) renting equipment to an affiliate. A person that does not have any rental revenue in the prior fiscal year but expects to be primarily engaged in renting qualified heavy equipment in the next calendar year, must register with the Department in December of the current year and begin collecting and remitting heavy equipment rental tax beginning Jan. 1, 2019. The Department anticipates a permanent rule to be promulgated. The temporary rule is effective Oct. 26, 2018 through April 23, 2019; the Department is expected to adopt a permanent rule. Ore. Dept. of Rev., Temp. ORA 150-307-0900 (filed Oct. 26, 2018). International: At the end of 2017, the Angolan Government proposed the introduction of Value Added Tax (VAT) in the general state budget for 2019, which comes into force on Jan. 1, 2019. Accordingly, VAT was to be introduced on Jan. 1, 2019, replacing the exiting consumption tax of 10%. The latter is a non-deductible tax charged throughout the production chain, resulting in a compounding of the tax levy and discouraging internal manufacturing development. However, due to a delay in the readiness of the new e-invoice clearing system, the Angolan Government has announced that the introduction of VAT and elimination of the existing consumption tax will be delayed until July 1, 2019. The new VAT, when implemented, will be 14%, with nil rating on foodstuffs and other essentials. For additional information on this development, see Tax Alert 2018-2273. International: As of Nov. 1, 2018, the Romanian government announced that the Value Added Tax (VAT) rate has been reduced to 5% for the following categories of services: (1) accommodation in the hotel sector or similar-function sectors, including rental of camping grounds (currently subject to the reduced VAT rate of 9%); (2) restaurant and catering services, except for alcoholic beverages, other than beer (currently subject to the reduced VAT rate of 9%); (3) the right to use sports facilities for the purpose of practicing sport and physical education, other than those already VAT exempt (currently subject to the standard VAT rate of 19%); and (4) services that allow access to benches, amusement parks and recreational parks (currently subject to the standard VAT rate of 19%). The extension of the reduced VAT rate to the above-mentioned services will have a significant impact, mainly for the economic agents carrying out activities in the HORECA sector (i.e., hotels, restaurants, catering, coffee shops). For additional information on this development, see Tax Alert 2018-2285. Multistate: A replay of the Ernst & Young LLP's state income tax webcast series focused on nexus is now available. Building on previous webcasts, which provided an historical overview of state income tax nexus, Public Law 86-272, and judicial developments through Geoffrey, the fourth webcast focused on evolving nexus theories and the recent U.S. Supreme Court ruling in South Dakota v. Wayfair, in which the Court overturned its earlier decisions in Quill and Bellas Hess, finding that the physical presence standard articulated in Quill "is unsound and incorrect." During this webcast, panelists discussed state income tax nexus theories, including bright line factors of profitability, economic nexus, agency and alter ego, and the state income tax implications of Wayfair. To listen to a replay of this webcast, go to Evolving nexus theories and the impact of Wayfair. 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 Willoughby Hills Development and Distribution, Inc. v. Testa, Slip Opinion No. 2018-Ohio-4488 (Ohio S. Ct. Nov. 7, 2018). Document ID: 2018-2412 |
