03 January 2019 State and Local Tax Weekly for December 21 Ernst & Young's State and Local Tax Weekly newsletter for December 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. In another decision on the sales and use tax treatment of employment services, the Ohio Supreme Court (Court) held that a company's staffing services are exempt from Ohio's sales and use tax under Ohio Rev. Code §5739.01(JJ)(1), which exempts services when personnel "performing the work are not under the direct control of the purchaser." Seaton Corp. v. Testa, No. 2018-Ohio-4911 (Ohio S.Ct. Dec. 12, 2018). Ohio Rev. Code §5739.01(B)(3)(k) imposes sales/use tax on employment services. Ohio Rev. Code §5739.01(JJ) defines "employment services" as "providing or supplying personnel, on a temporary or long-term basis, to perform work or labor under the supervision or control of another, when the personnel so provided or supplied receive their wages, salary, or other compensation from the provider or supplier of the employment." Ohio Rev. Code §5739.01(JJ) exempts certain employment services from Ohio's sales and use tax. The exemption on which the taxpayer relied, Ohio Rev. Code §5739.01(JJ)(1), exempts services when personnel "performing the work are not under the direct control of the purchaser." The Ohio Department of Taxation (Department) assessed these transactions, arguing that the manufacturer to whom the services were provided asserted supervision or control over the personnel provided by the company. The Ohio Board of Tax Appeals (BTA) reversed the assessment and the Department appealed. In affirming the BTA's reversal of the assessment, the Court focused on the scope of the "supervision or control" requirement of the statute. The Department had argued that the manufacturer's control over the manufacturing process equated to control over the company personnel. The Court concluded that the "supervision or control" requirement was specific to the work performed by the company personnel. In so doing, the Court distinguished one of its prior decisions, Crew 4 You, Inc. v. Wilkins.1 In that case, a business provided personnel to broadcasters televising certain events. The broadcasters decided what needed to be done at the events and "really called every shot" during the broadcasts, including providing guidelines on equipment needs and schedules for preproduction meetings, rehearsals and event start times. In the instant case, the Court observed that the company determined the number of workers needed for any shift, scheduled the workers, made job assignments, and monitored production. The company also was obligated to provide comprehensive on-site management of the workers, including pre-employment screening, orientation and training, performance management, and other administrative functions. Since the company maintained direction and control over the personnel provided, the exemption applied. For more on this development, see Tax Alert 2018-2534. Wisconsin enacts law to allow pass-through entities to elect to be taxed at entity level and provide for a corresponding income exclusion for investors On Dec. 14, 2018, Wisconsin Governor Scott Walker signed Senate Bill 883 (SB 883). The legislation provides for an election for pass-through entities, including partnerships, limited liability companies and tax-option corporations (e.g., S corporations) (each a PTE and collectively, PTEs) to be taxed at the entity level, with the owners in the PTE allowed an exclusion for the investor's distributive share of income subject to the new PTE tax. Under current Wisconsin law, PTEs are not subject to entity level income/franchise taxes. The PTE's income, loss and apportionment factors flow-through to the owners. SB 883 amends Wisconsin statutes to allow a PTE to elect to be taxed at the entity level at the corporate tax rate of 7.9%. If a PTE elects to be taxed at the entity level, SB 883 also provides an income exclusion for the owners of the PTE. The adjusted basis in a PTE owner's interest in the PTE is determined as if the election is not made (i.e., basis is still increased or decreased to reflect income or loss at the entity level as if the election was not made). Further, the PTE owner cannot claim a credit for taxes paid by the electing PTE. If the election is made, the PTE will compute and situs its income as if it the election was not made and the PTE will compute and situs income using the rules for individuals. Persons owning more than 50% of the PTE must consent to the election and any revocation thereof. If the election is made, the PTE may not claim losses or tax credits except for the credit for taxes paid to other states. If the PTE fails to pay any taxes due, the Wisconsin Department of Revenue may collect the tax from the PTE's owners. This election may be made for taxable years beginning in 2018 for tax-option corporations and 2019 for all other pass-through entities. The election must be made by the due date, including extensions, of the return. For more information on this development, see Tax Alert 2018-2521. Federal: On Dec. 20, 2018, the IRS issued proposed regulations (REG-104352-18) that would implement the anti-hybrid-mismatch rules under IRC §§ 245A(e) and 267A, which were enacted under the Tax Cuts and Jobs Act (P.L. 115-97). The proposed regulations also include rules under IRC §§ 1503(d), 6038, 6038A and 7701. For more information on this development, see Tax Alert 2018-9034. Federal: On Dec. 20, 2018, the IRS and Treasury released proposed regulations (REG-113604-18), providing guidance under IRC § 864(c)(8) on the treatment of foreign persons that recognize gain or loss from the sale or exchange of an interest held directly or indirectly in a partnership that is engaged in a trade or business within the United States. For more information on this development, see Tax Alert 2018-9034. Federal: On Dec. 20, 2018, the Joint Committee on Taxation released its general explanation or "Bluebook" (JCS-1-18) of the "Tax Cuts and Jobs Act" (P.L. 115-97) (TCJA). The Bluebook reviews each of the TCJA's business, international and individual provisions, explaining the change made by each provision, the related law in effect before the provision's enactment, and each provision's effective date. It does not, however, discuss the reasons for the changes. California: The California Franchise Tax Board (FTB) advised that the use of private vehicles for the sole purpose of delivery of tangible personal property falls within the scope of solicitation of orders and, therefore, is a protected activity under P.L. 86-272. If, however, the private vehicles are used for any other business activity along with the delivery (such as backhaul of goods), the activity goes beyond solicitation of orders and no longer would be protected. Cal. FTB, TAM 2018-03 (Dec. 4, 2018). California: Amended regulations (amended Cal. Code Regs. tit. 18, §§ 25137-1 and 17951-4) clarify partnership income apportionment and allocation provisions. Amended Cal. Code Regs. tit. 18, § 25137-1 provides that when a taxpayer computes its net income for its taxable year (previously, income year) must include its distributive share of partnership items for any partnership year ending within or with the taxpayer's taxable year (previously, income year). This same principle applies when a taxpayer has an interest in a partnership that itself owns a direct or indirect interest in one or more other partnerships. When a partnership's business and the taxpayer's business are not unitary, the distributive share of income allocated to the taxpayer is from a separate trade or business, not nonbusiness income. Whether an item of income is apportionable business income or allocable nonbusiness income is determined at the partnership level based on the partnership's trade or business; the corporate income tax provision describing the type of income derived from or attributable to sources within California (Cal. Rev. and Taxn. Code § 23040) does not apply. Intercompany sales between the partnership and the taxpayer or the taxpayer's combined reporting group are excluded from the taxpayer's/taxpayer's combined reporting group's sales factor in the manner specified by the regulation. The amendments also provide that the taxpayer's interest in the partnership is determined by its interest in the partnership profits, and delete special rules related to apportionment of business income for long-term construction contracts. Lastly, amended Cal. Code Regs. tit. 18, § 17951-4 is clarified to provide that if a partnership and the business activity of the partner are part of one unitary business, the rules of Cal. Code Regs. tit. 18, § 25137-1 apply, with the partnership business income apportionment computed at the partner level for the unitary partner(s). The amended regulations take effect Jan. 1, 2019. Cal. FTB, amended Cal. Code Regs. tit. 18, §§ 25137-1 and 17951-4 (filed Nov. 20, 2018). New York: The New York State Department of Taxation and Finance (Tax Department) recently released proposed corporate franchise tax regulations under Article 9-A of the New York Tax Law (N.Y. Comp. Codes and Regs. tit. 20, Subparts 3-1 through 3-6) (Proposed Regulations). The Proposed Regulations address the following issues: (1) how to compute the tax bases; (2) providing general rules; (3) defining Entire Net Income; (4) providing definitions and rules pertaining to investment capital, investment income and other exempt income; (5) providing definitions of business capital and business income; and (6) setting out examples of applying the income and capital tax rules. The Tax Department indicates in placeholders in the Proposed Regulations that proposed regulations for the remaining subparts of Article 9-A Part 3 that are not addressed in this draft will be separately updated and issued at a later date. Key provisions that were not included in the Proposed Regulations include: (1) rules for calculating capital losses and capital loss carrybacks and carryforwards for New York purposes; (2) rules for calculating net operating losses; and (3) rules for attributing interest deductions. Comments on the Proposed Regulations are due March 5, 2019; however, the Tax Department has indicated that it will accept and consider comments submitted after March 5. Note, the Tax Department's web site provides that the Proposed Regulations should not be relied upon until finalized through the State's Administrative Procedures Act process. The New York City Department of Finance has indicated through its FAQ website that it will likely follow the Proposed Regulations issued by the Tax Department, in general. For a summary of the proposed regulations, see Tax Alert 2018-2552. Texas: A trucking company that transports goods throughout the US and Mexico in calculating its formula for sourcing Texas transportation receipts is required to either include or exclude unloaded mileage in both the apportionment factor numerator (intrastate mileage) and denominator (everywhere mileage). The Texas Comptroller of Public Accounts (Comptroller) citing 34 Tex. Admin. Code § 3.591(e)(32) and Letter Ruling 201609008L, determined that the trucking company could not include only intrastate commerce loaded miles in the numerator and both loaded and unloaded everywhere miles in the denominator of its apportionment calculation. The Comptroller noted that it was inconsistent for the rule to state that for the numerator, "in transporting goods and passengers" modifies "total mileage," while for the denominator the rule only includes "everywhere" to describe "total mileage." Nevertheless, the Comptroller applied the agency rule's plain meaning, finding that the trucking company's interpretation leads to unreasonable results. Tex. Comp. of Pub. Accts., No. 201809019H (Sept. 10, 2018). Virginia: The Virginia Department of Taxation (Department) issued guidelines for claiming the Virginia real estate investment trust (REIT) subtraction from individual or corporation income tax, available for certain investments made in taxable years beginning on or after Jan. 1, 2019 and before Dec. 31, 2024. A Virginia REIT is a REIT as provided in IRC § 856 that the Department has certified as having invested at least 90% of the trust funds in Virginia and at least 40% of the trust funds in distressed or double distressed localities. Eligible taxpayers can take the subtraction to the extent the income is included in an individual taxpayer's federal adjusted gross income or a corporate taxpayer's federal taxable income. The subtraction is not allowed for corporate income taxpayers for an investment in a trust that is managed by an affiliate, or when a taxpayer has claimed for the same investment the: (1) subtraction for certain long-term capital gains, or (2) subtraction for income attributable to a Virginia venture capital account investment. The subtraction is not allowed for individual income taxpayers for an investment in a trust that is managed by a family member or affiliate, or if for the same investment, the taxpayer has claimed the: (1) subtraction for certain long-term capital gains; (2) subtraction for income attributable to a Virginia venture capital account investment; or (3) Qualified Equity and Subordinated Debt Investments Tax Credit. The guidance includes information about the registration and certification process. Applications must be postmarked by January 31 of the calendar year following the calendar year for which the REIT seeks to be certified as a Virginia REIT. Va. Dept. of Taxn., PD No. 18-198 (Dec. 7, 2018). Louisiana: The Louisiana Department of Revenue (Department) updated its information bulletin for remote sellers to provide a general definition of remote seller, including examples. The bulletin also provides additional administrative guidance on a remote sellers' reporting requirements, collection and remittance requirements, and timeline of registration. The Department indicated that the Louisiana Legislature will consider proposals that would define marketplace facilitators and provide for collection and remittance requirements for marketplace facilitators. La. Dept. of Rev., Remote Sellers Information Bulletin No. 18-002 (revised Dec. 18, 2018). Texas: Amended rule (amended 34 Tex. Admin. Code § 3.286), in response to the U.S. Supreme Court ruling in South Dakota v. Wayfair,2 adopts economic nexus provisions. Beginning Oct. 1, 2019, remote sellers will be required to obtain a permit and collect and remit sales and use tax when their total Texas revenue exceeds $500,000 in the previous 12 calendar months. Effective Jan. 1, 2019, the definition of "engaged in business" is expanded to include remote sellers engaged in regular or systematic solicitation of sales of taxable items in Texas by the distribution of catalogs, periodicals, advertising flyers, or other advertising, through communication systems for the purpose of effecting sales of taxable items, as well as sellers soliciting orders for taxable items by mail or through other media including the internet or media that may be developed in the future. (The regulation provides an exception for certain broadcasters, printers, outdoor advertising firms, or publishers related to certain paid commercial advertising.) Remote sellers engaged in business in Texas must obtain a sales and use tax permit from the Texas Comptroller of Public Accounts for each place of business operated in Texas and a single permit for its out-of-state places of business. The initial 12 calendar months used to determine a remote seller's total Texas revenue is July 1, 2018 through June 30, 2019. Remote sellers that exceed the safe harbor threshold must start collecting and remitting tax by the first day of the fourth month after the month in which the remote seller exceeded the $500,000 threshold. The Comptroller has the authority to "consolidate the total Texas revenue of sellers engaged in conduct that circumvents the safe harbor amount … ." A shorter collection and remittance deadline applies to remote sellers that terminate and then restart their collection obligation. Tex. Comp. of Pub. Accts., amended 34 Tex. Admin. Code § 3.286 (adopted Dec. 14, 2018). Wisconsin: New law (SB 883) amends Wisconsin's sales and use tax provisions to codify economic nexus provisions. Under the revised provisions, "retailer engaged in business in the state" includes retailers that , in the previous or current year, either have annual gross sales into Wisconsin that exceed $100,000, or 200 or more of annual separate sales transactions into Wisconsin. Out-of-state retailers that exceed these thresholds in the previous year must register with the Wisconsin Department of Revenue and collect sales and use tax on sales sourced to Wisconsin for the entire current year. In determining whether the thresholds have been met the following apply: (1) both taxable and nontaxable sales are included; (2) each required periodic lease or license payment is treated as a separate sales transaction; (3) deposits made in advance of sales are not sales transactions; and (4) annual amounts include all sales into Wisconsin by the retailer on behalf of other persons, and all sales into Wisconsin by another person on the retailer's behalf. The legislation took effect Dec. 16, 2018. Under an emergency regulation adopted earlier in the year, Wisconsin's economic nexus collection and remittance requirement began Oct. 1, 2018. Wis. Laws 2018, Act 368 (SB 883), signed by the governor on Dec. 14, 2018. Kentucky: A report issued by the Kentucky General Assembly's Task Force on Tax Expenditures recommends that Kentucky should sunset all tax expenditures (i.e., an exemption, exclusion or deduction from the tax base, a credit against the tax, a deferral of a tax, or a preferential tax rate) on June 30, 2020, except for the top 10 tax expenditures by dollar value. In addition, the task force recommends that all new proposed tax expenditures include an initial sunset clause of five years, the creation of a Tax Expenditures Oversight Board to review each of the tax expenditures before the sunset date, the requirement of a fiscal note with each new tax expenditure introduced by the legislature, among other recommendations. According to the report, the top 10 tax expenditures are: sales and use tax expenditures for (1) prescription drugs, prosthetic devices, and physical aids; (2) food and food ingredients; (3) charitable, religious, and educational organizations; (4) residential utilities; (5) state, cities, counties, and special taxing districts; (6) various agricultural items; and individual income tax expenditures for (7) the standard deduction; and (8) Social Security benefits; and real property tax expenditures for (9) the annual tax rate ceiling; and the corporate income tax expenditure for (10) the exclusion of dividend income. Ky. Gen. Assembly, Legislative Research Comn., Report of the Task Force on Tax Expenditures (Dec. 13, 2018). Illinois: The Illinois Department of Revenue (Department) issued guidance on its Fast Track Resolution (FTR) pilot program, which provides a forum to resolve disputed audit issues that are under the Audit Bureau's jurisdiction. During an FTR conference, an FTR facilitator will serve as a neutral party to facilitate an agreement between the Department and taxpayer and can propose settlement possibilities and present collection alternatives. This permits the taxpayer to settle or mediate audit items before the issuance of a proposed liability notice. The FTR pilot program is available for certain "cash businesses" under audit that fall under certain categories of business types identified by their Standard Industrial Classification (SIC) and North American Industry Classification System (NAICS) codes. Only the issues and documents considered during the audit will be addressed in the FTR conference, and any recommended resolution is subject to review and approval by the Department. Under the FTR process, after an audit, the Department at its discretion will issue a FTR eligibility letter to the taxpayer. The taxpayer has 20 days to complete and file the FTR application. If the taxpayer is approved to participate, the entire process will be completed within 60 days after the Department receives the taxpayer's application. Benefits of participating in the FTR include quick resolution of audit issues, avoidance of formal protest and litigation, retention of traditional protest rights, and collections assistance. Ill. Dept. of Rev., Informational Bulletin: FY 2019-16: Audit Fast Track Resolution (FTR) Pilot Program (Dec. 14, 2018). New Jersey: Reminder: The New Jersey tax amnesty program will end on Jan. 15, 2019. Amnesty applies to taxes administered and collected by the New Jersey Division of Taxation (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. 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. Additional information on the program is available on the NJ DOT's website. Montana: The Montana Department of Revenue has released a new state withholding certificate, the Form MW-4 "Montana Employee's Withholding and Exemption Certificate", which must be used by new employees starting in calendar year 2019. Current employees (unless claiming exemption from state withholding) may choose whether to submit the new Form MW-4 to their employers or continue using a previously submitted federal Form W-4. For more on this development, see Tax Alert 2018-2553. New Jersey: The New Jersey Department of Labor and Workforce Development released the calendar year 2019 taxable wage base used for state unemployment insurance, temporary disability insurance and family leave insurance. The 2019 employer/employee taxable wage base increases to $34,400, up from $33,700 for calendar year 2018. For more on this development, see Tax Alert 2018-2550. Ohio: For the first time since Aug. 1, 2015, the Ohio Department of Taxation has released revised income tax withholding tables, effective with wages paid on and after Jan. 1, 2019. The revisions are the effect of a directive by Ohio Governor Kasich to align the state's income tax withholding rates with a 6.3% state income tax cut (HB 64) that applied in 2015 but was not structured at that time to reduce the withholding rates. For additional information on this development, see Tax Alert 2018-2530. Washington: The Washington Department of Labor & Industries announced that, as proposed, employer workers' compensation insurance premiums will decrease by an average of 5% for 2019, the largest drop since 2007. The new rates take effect at the beginning of the year. Employers will pay an average of about $58 less per employee for 2019. Workers will also pay less, with their share of the cost dropping by about $6 a year. As a result of the reduction, as a group, workers and employers will pay $136 million less in premiums in 2019. For additional information on this development, see Tax Alert 2018-2509. Chicago, Illinois: The Chicago Department of Finance (Department) issued guidance on the administration of the real property transfer tax on long-term ground leases of real property, effective Jan. 1, 2019. A taxable "beneficial interest in real property" includes the lessee interest in a ground lease (and the lessee's interest in any related improvements) that provides for a term of 30 or more years when all options to renew or extend are included, regardless of whether any portion of the term has expired. The tax is due at the earlier of the delivery or recording of the deed, assignment, or other transfer instrument. The taxable transfer price is the consideration provided for the transfer of title to, or beneficial interest in, real property; consideration for amounts that are not for the lessee's interest in real property can be deducted from the taxable transfer price. The guidance provides information about how to calculate the transfer price of existing leases and new leases, including for newly created leases the present valuing of scheduled lease payments, the option to defer tax payments until the corresponding lease payments are made, and an alternative safe harbor based on the estimated fair market value of the real property to be leased. Lastly, the Department noted that calculating the taxable transfer price is fact specific, and it will work with taxpayers to attempt to arrive at an agreed taxable transfer price in advance of a closing. Forms and instructions will be available on the Department's website. Chicago Dept. of Fin., Real Property Transfer Tax Ruling #6 (Dec. 10, 2018). Federal: The most recent edition of EY's Quantitative Economics and Statistics (QUEST) group's series on the economic implications of key trade issues and trends, discusses the US tariff conflict with China and its effect on global trade flows. See Tax Alert 2018-2529 for a copy of the article. International: Bahrain's Executive Regulations for Value Added Tax (VAT). The Regulations contain the tax invoicing requirements, which should be implemented by businesses operating in Bahrain. Key highlights include: (1) Tax invoices must be issued in respect of all supplies of goods and services and for all rates (standard rated, zero-rated, and exempt); (2) Invoices can be either issued in Arabic or English (there is no compulsory requirement to include Arabic); (3) Tax invoices do not need to include the customer's VAT registration number; (4) Approval is required from the National Bureau for Taxation (NBT) to issue tax invoices electronically; (5) Bank statements meeting certain criteria may replace full or simplified tax invoices, notably not requiring a description of goods or services to be included, or the total amount due including VAT. For more on this development, see Tax Alert 2018-2531. International: Portugal's Draft State Budget Law for 2019 (issued through the approval of Proposal Law no. 156/XII, of Oct. 13, 2018) includes some potential measures that may be introduced to the Portuguese Value Added Tax (VAT) Code as follows: (1) Transposition of the Council Directive (EU) 2016/1065 of June 27, 2016 addressing the VAT transposition rules of gift vouchers; (2) Transposition of the Council Directive (EU) 2017/2455 of Dec. 5, 2017 addressing place of supply rules in terms of telecommunications, radio broadcasting or television services and electronic services; and (3) Expansion of services subject to the reduced or intermediate VAT rate (still under public discussion, example, the bullfighting artists' services). As the State Budget Law for 2019 is still a proposal, it is subject to changes and final approval prior to entry into force, which will be only after Jan. 1. 2019. For more on this development, see Tax Alert 2018-2503. Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor. Document ID: 2019-0023 |
