12 December 2018 State and Local Tax Weekly for November 30 Ernst & Young's State and Local Tax Weekly newsletter for November 30 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. On Nov. 21, 2018, the Ohio Supreme Court (court) issued its decision in Cincinnati Reds, LLC v. Testa,1 and, in reversing the lower tribunal's ruling, held that promotional items distributed at professional baseball games were transferred for consideration and qualified for the sales and use tax resale exemption. The Ohio Department of Taxation (Department) conducted a use tax audit of the Cincinnati Reds baseball team (Reds) and assessed additional sales and use tax for the Reds' purchases of certain promotional items, including bobblehead dolls that were distributed to fans attending certain ballgames. The Reds identified certain games that might have low attendance and distributed the promotional items to fans free of charge to enhance attendance. Fans came to these games expecting these promotional items. If, for some reason, there were not enough promotional items at the game, the Reds would provide fans other items of comparable value or some other recompense to "make it right". The price of the promotional items were not separately stated on the non-taxable admission charge. The Department deemed that the Reds were the consumer of the promotional items. The Ohio Board of Tax Appeals (BTA) affirmed the Department's assessment finding that the Reds intended to give away the items rather than resell them. The court, in a 5-2 decision, reversed the BTA's decision as unreasonable and unlawful. The court analyzed whether the Reds purchased the promotional items with the intent to resell them. To have a valid resale exemption, the purchaser must show that the items were resold for consideration. The court concluded that consideration existed as the Reds promised to distribute the promotional items and, as such, created a contractual expectation on the part of the fans who purchased the tickets to receive the unique promotional items. The Reds could have offered discounted ticket prices to these less desirable games but, instead, offered the promotional items. The ticket price for those games accounted for both the rights to attend the game and receive the promotional item. The court distinguished these items from other items that a fan may receive when attending a game, such as catching a foul ball or a t-shirt tossed into the stands. In those cases, the fans had no expectation to receive the item as part of the ticket purchase. The court also addressed an argument made by the Department, relying on Hyatt Corp. v. Limbach,2 (Hyatt) to assert that the resale exemption did not apply because the ultimate sale of the ticket was not taxable. In Hyatt, the court held that the provision of industrial laundry service to a hotel was resold as part of the price for transient lodging, which itself is subject to Ohio sales/use tax. The same service sold to the hotel in conjunction with non-taxable long-term stays were not taxable and, as such, not subject to the resale exemption. Whether the linen cleaning services were taxable depended on the nature of the lodging. The court distinguished Hyatt reasoning that whether the promotional items were resold did not depend on whether the tickets were sold as part of a taxable sale. In Hyatt, the linen-cleaning service was not a separate and express "part of the bargain" by which lodging was provided. In the instant case, the promotional items were an express part of the bargain between the Reds and the fans and hence "sold". For additional information on this development, see Tax Alert 2018-2391. Federal: On Nov. 26, 2018, the US Treasury Department (Treasury) and Internal Revenue Service (IRS) released proposed regulations (REG-106089-18) under Section 163(j) of the Internal Revenue Code of 1986, as amended (IRC), which was modified in December 2017 by the "Tax Cuts and Jobs Act" (P.L. 115-97)(TCJA) and imposes limitations on the deductibility of business interest expense. The proposed regulations package also includes proposed regulations under various other IRC provisions, including Sections 381, 382, 383, 469, 860C and 1502 (collectively, the Proposed Regulations). The Proposed Regulations would apply to tax years ending after the date the Treasury decision adopting the regulations as final regulations is published in the Federal Register. Taxpayers and their related parties may, however, apply the Proposed Regulations to a tax year beginning after Dec. 31, 2017, so long as the taxpayers and their related parties consistently apply the Proposed Regulations with respect to Section 163(j), and if applicable, other relevant Proposed Regulations to those tax years. The Proposed Regulations include provisions addressing: (1) what constitutes interest for purposes of Section 163(j); (2) ordering and operating rules to address the interaction of the Section 163(j) limitation with other provisions of the IRC; (3) the application of Section 163(j) to consolidated groups, partnerships, S corporations, controlled foreign corporations, and foreign persons with effectively connected income; (4) the treatment of disallowed business interest expense carryforwards; (5) elections made available under Section 163(j); and (6) allocating interest expense, interest income and other tax items when the taxpayer conducts a trade or business that is not subject to Section 163(j), as well as a trade or business that is subject to Section 163(j). For more on this development, see Tax Alert 2018-2369. Massachusetts: Amended regulation modifies 830 CMR 58.2.1 regarding the requirements for, and tax treatment of, corporations that apply to be classified as a manufacturing corporations to make clear that transition tax income recognized under IRC §965 and GILTI income recognized under IRC §951A are excluded from the gross receipts fraction used to determine whether the corporation qualifies. Such exclusion mitigates the possibility of distorting a corporation's gross receipts in a way that terminates its qualification as a manufacturing corporation. The amended regulation took effect Nov. 30, 2018. Mass. Dept. of Rev., amended 830 CMR 58.2.1 (Mass. Register Nov. 30, 2018). Minnesota: The U.S. Supreme Court has been asked to review the decision of the Minnesota Supreme Court (Minnesota court) in Fielding. In Fielding, the Minnesota court held that the state's resident trust statute, as applied to the trusts at issue, violated the Due Process Clauses of the Minnesota and the U.S. Constitutions, concluding that the trusts lacked sufficient relevant contacts with Minnesota to be subject to tax. Fielding v. Minn. Comm'r of Rev., 2018 WL 3447690 (July 18, 2018), petition for cert. filed, Dkt. No. 18-664 (U.S. S.Ct. filed Nov. 15, 2018). For more on this development, see Tax Alert 2018-1524. Ohio: The Ohio Department of Taxation issued guidance on how taxpayers that have opted for state administration of the municipal net profit tax will calculate the net operating loss (NOL) deductions available for taxable years 2018 and later. Based on legislative changes, two categories of NOL deductions apply to the calculation of the municipal net profit tax: the pre-2017 NOL deduction (old NOL) and the post-2016 NOL deduction (new NOL). The old NOL includes any NOL incurred in a taxable year beginning before Jan. 1, 2017 in municipal corporations that permitted the deduction. It is apportioned to the municipal corporation with the carryforward period determined by the municipal corporation's resolution or ordinance. Unlike new NOLs, old NOLs are not subject to any phase-in provisions. For the new NOL, all municipal corporations must permit an NOL with a five-year carryforward period for NOLs incurred in taxable years beginning on or after Jan. 1, 2017. The new NOL is phased in over a five year period (2018 — 2022) and is calculated and deducted on a pre-apportionment basis (which is a change from how old NOLs are treated). The guidance provides the following formula for calculating municipal taxable income: municipal taxable income = ((adjusted federal taxable income — new NOL) x apportionment factor) — old NOL. Because the amount of any new NOL that may be claimed will vary by municipality, new NOLs must be tracked on a municipality-by-municipality basis. During the five-year phase-in period, a taxpayer cannot deduct more than 50% of the new NOL deduction that it otherwise could have claimed; this 50% limitation does not apply to any municipal corporation that levies a new tax beginning on or after Jan. 1, 2016. The release provides calculation examples. Ohio Dept. of Taxn., Municipal Net Profit Tax Info. Release: MNP 2018-04: Net Operating Loss Deductions (Oct. 2018). South Carolina: On Oct. 31, 2018, the South Carolina Court of Appeals found that Dish DBS Corporation failed to prove that the corporate income tax assessment issued by the South Carolina Department of Revenue on the proper apportionment of income from the provision of satellite signals to South Carolina subscribers was erroneous. This ruling provides further support for the view that South Carolina is neither a "COP" nor "market-sourcing" state for sourcing receipts from services for sales factor apportionment purposes. Rather, South Carolina seeks to determine what a taxpayer's income-producing activity (IPA) is and where that activity occurs. Since South Carolina law does not define "IPA," that determination requires a stringent factual analysis. A key factor in this analysis is to determine a direct link between the potential IPA and the final product or service that creates the revenue. Dish DBS Corp. v. Dep't of Revenue, No. 2018-UP-404 (S.C. Ct. App. Oct. 31, 2018). For more on this development, see Tax Alert 2018-2378. Alabama: A hospital is not entitled to a sales tax refund on software products that during implementation were configured to meet its needs because the software products were "canned software" rather than "custom software programming." In reaching this conclusion, the Alabama Court of Civil Appeals (Court) found that when the hospital chose and purchased the software, the software had not yet been "integrated in a unique way to the specifications" of the hospital and, therefore, it did not qualify as nontaxable "custom software programming" under Ala. Reg. 810-6-1-.37(5). The Court, however, noted that the Alabama Supreme Court's decisions in Wal-Mart Stores3 (canned computer software sold to consumers at stores is taxable tangible personal property) and Central Computer Services4 ("software" is intangible knowledge purchased and thus is not taxable tangible personal property) are not mutually exclusive and still allow for the transfer of software not contemplated for transfer by a physical medium that is specially designed for a specific customer. Lastly, Ala. Reg. 810-6-1-.37(5) provides that "custom software programming" includes services for modifications to a canned computer program that are prepared to the special order of a customer, but only to the extent of the modification. In this case, the vendor did not collect taxes on the implementation of its software for the hospital. Russell County Comm. Hospital, LLC v. Ala. Dept. of Rev., No. 2170527 (Ala. Ct. Civ. App. Nov. 16, 2018). Washington: A manufacturer that sells chemicals is entitled to the machinery and equipment (M&E) exemption from sales and use tax for chemicals purchased to create a "working solution" essential to the production of hydrogen peroxide because the chemicals are a "device" under the exemption. In so holding, the Washington Court of Appeals (Court) reversed the trial court and found that the working solution is a device by dictionary definition since it is a chemical formed or formulated by design to cause specific chemical reactions to occur, and it is equipment designed to serve a special purpose or perform a special function. Further, working solution falls within the regulatory definition of device, as an item that forms a contributory part of the working solution loop and is not attached to the building or site. The Court also considered ETA 3121 (Feb. 9, 2009), in which the Washington Department of Revenue, in addressing the applicability of the M&E exemption to books and computer software, provided its "intended interpretation of unintuitive types of "devices." The Court found that similar to software in ETA 3121, the working solution does not fit within the common understanding of a "device," but performs an important role in the manufacturing process by flowing through a loop and providing a medium in which all of the chemical reactions required to form hydrogen peroxide occur. Additionally, the Court found that the "working solution" is an ingredient or component of an industrial fixture, making it "machinery or equipment," since the working solution loop (which includes a hydrogenator, an oxidizer, an extraction column, and all of the reaction vessels and pipes that connect these mechanisms) is an industrial fixture. Solvay Chemicals, Inc. v. Wash. Dept. of Rev., No. 50103-1-II (Wash. App. Ct., Div. II, Aug. 21, 2018). Georgia: New law (HB 4EX) provides a new refundable tax credit to the timber industry to aid recovery efforts related to Hurricane Michael. The credits are equal to 100% of a taxpayer's timber casualty loss, up to the number of the taxpayer's affected acres of eligible timber property in disaster areas multiplied by $400. The credits can be claimed in the taxable year in which the taxpayer first completes the timber replanting in a quantity projected to yield at least 90% of the value of the timber casualty loss claimed, using timber market conditions as of Oct. 8, 2018 to establish projected value. Eligible timber property is timber that was being grown on Oct. 8, 2018 by a taxpayer in a disaster area as part of a trade or business or a transaction entered into for profit, and the disaster area is the 28 counties included in Governor Executive Order 11.06.18.01 (Nov. 6, 2018). The credits are capped at $200 million in aggregate, taxpayers must submit preapproval applications, and the Georgia Revenue Commissioner will pro-rate available funds among eligible applicants when preapproval applications exceed available funds. The first round of preapproval applications are due between Jan. 1, 2019 and May 31, 2019, and if applicable, a second round will occur between July 1, 2019 and Dec. 31, 2019. Taxpayers can carry forward unused tax credits for 10 years from the close of the taxable year in which the credits are claimed. The credits also can be transferred or sold one time to a single other Georgia taxpayer, subject to certain requirements. The credits must be claimed on or before Dec. 31, 2024. Ga. Laws 2018 (2018 Special Session), Act 2 EX (HB 4EX), signed by the governor on Nov. 17, 2018. Texas: Following a 2012 law change, a company properly switched the taxable situs of compressors used to deliver natural gas into pipelines from the appraisal district in which the compressors were located (Loving County) to the appraisal district in which the company has a business location where it conducts business by, for example, maintaining inventory for sale or lease, storing the equipment when it is not used, returning inventory after leases expire and servicing the inventory (in this case Midland County). In so holding, the Texas Supreme Court (Court) rejected Loving County's argument that the compressors' "presence within the county fixes taxable situs there," explaining that the taxable situs of the compressors is controlled by the statutory provisions for valuing leased heavy equipment held by a dealer for sale — Tex. Tax Code §§ 23.1241 and 23.1242 — rather than the default provisions for determining taxable situs under Tex. Tax Code § 21.02. Citing EXLP Leasing, LLC v. Galveston Central Appraisal District5 as dispositive, the Court affirmed that Loving County did not establish that Tex. Tax Code §§ 23.1241 and 23.1242 are unconstitutional based on a requirement that the property be taxed in proportion to its market value, and that the statutes do not violate the Texas Constitution's equal-and-uniform provision. Loving County Appraisal Dist. v. EXLP Leasing, LLC and EES Leasing, LLC, No. 15-0971 (Tex. S. Ct. Nov. 16, 2018).6 San Francisco, CA: New ordinance (Ord. 235-18) adds provisions related to administering the Early Care and Education Commercial Rents Tax (commercial rents tax). For tax years ending on or before Dec. 31 2019, a person's or combined group's estimated tax payments of commercial rents tax are equal to their taxable gross receipts from the lease of commercial space in properties in the city for each quarter, multiplied by the applicable tax rate. For tax years beginning on or after Jan. 1, 2020, commercial rents tax estimated payments must equal the lesser of: (1) 25% of the commercial rents tax liability on the person's or combined group's return for the tax year (or 25% of that tax liability for the tax year if no return is filed), or (2) 25% of the commercial rents tax liability on the person's or combined group's return for the previous tax year. No estimated tax payments will be due for the current year for those who did not file a return in the previous year. Estimated tax penalties and filing requirements do not apply to the estimated tax payments of the commercial rents tax for tax periods ending on or before Dec. 31, 2019. The tax must be reported and paid by the last day of February of the year immediately following the tax year, less any estimated tax payments for the tax year. Overpaid commercial rents taxes will be credited against the taxpayer's payroll expense tax or gross receipts tax. The ordinance also provides information about when penalties and interest for failure to pay do not apply to the commercial rents tax. The ordinance becomes operative Jan. 1, 2019. San Francisco, Cal., Ordinance 235-18 (signed by the mayor on Oct. 12, 2018). New Jersey: The New Jersey Division of Taxation (NJ DOT) is conducting a state tax amnesty program that will end on Jan. 15, 2019. Amnesty applies to taxes administered and collected by the NJ DOT; local property taxes and payroll taxes are excluded from the amnesty program. The terms of the amnesty require taxpayers with delinquent taxes attributable to returns due from Feb. 1, 2009 through Sept. 1, 2017 to pay the delinquent tax, plus one-half of interest calculated through Nov. 1, 2018. The amnesty relieves participants of penalties, penalty collection costs, recovery fees and one-half of interest upon full payment, but taxpayers will still be required to pay any civil fraud or criminal penalties, if assessed. Amnesty is not open to taxpayers under criminal investigation or charge for any state tax matter, as certified by a county prosecutor or the Attorney General to the Director of the NJ DOT. Taxpayers that have filed an administrative or judicial appeal related to a tax assessment may participate in the amnesty program if they withdraw the appeal, waive all rights to future appeal, and receive approval from the Director of the NJ DOT. Taxpayers that do not remit eligible taxes under the amnesty program are subject to a non-waivable 5% penalty, in addition to any other applicable penalties, costs and interest. Amnesty participants must relinquish all unexpired administrative and judicial rights of appeal, and any amounts paid as part of the amnesty are non-refundable. Taxpayers utilizing the amnesty to submit initial tax returns in addition to payments must submit completed tax returns and full payments prior to the last day of the amnesty program. Additional information on the amnesty program is available on the NJ DOT's website. New Jersey: On Nov. 20, 2018, Jersey City council members approved Ordinance 18-133, which, effective Jan. 1, 2019, imposes a 1% payroll tax on employers the proceeds from which are intended to benefit Jersey City schools. Employers will be required to file and pay the new tax on a quarterly basis. This is a tax on the employer, not a withholding tax on compensation paid to employees. The mayor is expected to sign the ordinance into law. For more on this development, see Tax Alert 2018-2355. New York: The New York Department of Taxation and Finance issued guidance on the state's new congestion surcharge, which applies to transportation in vehicles carrying people for-hire starting Jan. 1, 2019. The surcharge is added to transportation charges that: (1) both begin and end in New York State, and; (2) begin in, end in, or pass through Manhattan borough in New York City, south of and excluding 96th Street (i.e., the "congestion zone"). For-hire vehicles include taxis, green cabs, limousines, black cars, livery vehicles/community cars, rideshare/transportation network company vehicles, and pool vehicles (i.e., vehicles used to provide pool trips). The surcharge does not apply to ambulance, bus or funeral transportation and transportation provided to school districts or on behalf of the Metropolitan Transportation Authority. Generally, the person or entity that dispatches a vehicle to a customer is liable for the surcharge, however, the owner of a taxicab medallion that is affixed to the taxicab is responsible for the payment of the surcharge. The surcharge is imposed at the following rates: (1) $2.75 for each for-hire transportation trip in a vehicle that is not a medallion taxicab or a pool vehicle; (2) $2.50 per trip for transportation provided by a medallion taxicab vehicle; and (3) $0.75 per pool trip. The guidance also covers requirements for registration, monthly filing, and recordkeeping. N.Y. Dept. of Taxn. and Fin., TSB-M-18(1)CS (Nov. 16, 2018). Multistate: On Thursday, Dec. 13, 2018, from 1:00-2:30 p.m. EST New York (10:00-11:30 a.m. PST Los Angeles) Ernst & Young, LLP will host a state tax quarterly webcast. On this webcast, our special guest speaker Josh Pens, Director, Office of Tax Policy & Analysis, Colorado Department of Revenue (Department) will sit down with Ernst & Young LLP's Rachel Quintana to provide his first-hand perspective on current issues in Colorado. The panelists will address recent guidance issued by the Department on the application of the U.S. Supreme Court's decision in Wayfair on sales tax collection issues in Colorado's state and local taxing jurisdictions. In addition, other panelists on the webcast will discuss the following topics: (1) the results from the new 16th annual 50-state business tax study conducted by Ernst & Young LLP's Quantitative Economics and Statistics (QUEST) Practice with the Council on State Taxation (COST) and the State Tax Research Institute (STRI); (2) our annual wrap-up (and rating) of 2018's Top 10 state and local tax developments; (3) an update of the major judicial and administrative developments affecting state and local taxes over the last quarter. To register for this event, go to State tax matters. Multistate: A replay of the Ernst & Young LLP post-election webcast focusing on how the 2018 US elections will affect state and local taxes is now available. Topics discussed on the webcast included: (1) an analysis of the results of state gubernatorial and legislative elections as well as the impact of the US Senate and House elections; (2) a discussion of what Congress will consider during the lame duck session; (3) how the political landscape changed because of the 2018 elections and what the changes mean for state and local business taxes in 2019 and beyond; (4) state tax policy considerations and strategies that may emerge following the elections and in the 2019 state legislative sessions; and (5) an overview of which state and local tax-related ballot initiatives were approved and were rejected. Click here to access a replay of 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. 6 See also, Ward County Appraisal District v. EES Leasing LLC and EXLP Leasing LLC, No. 15-0965 (Tex. S. Ct. Nov. 16, 2018); Reeves County Appraisal District and Loving County Appraisal District v. MidCon Compression, LLC, No. 15-0969 (Tex. S. Ct. Nov. 16, 2018); Reeves County Appraisal District and Loving County Appraisal District v. Valerus Compression Services, et al., No. 15-0970, (Tex. S. Ct. Nov. 16, 2018). Document ID: 2018-2459 |
