07 December 2018 State and Local Tax Weekly for December 7 Ernst & Young's State and Local Tax Weekly newsletter for December 7 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. 30, 2018, the United States (US)-Mexico-Canada Agreement (USMCA) was signed during a side meeting of the G-20 in Buenos Aires, Argentina. While key steps remain for the agreement to move into force, the signing provides a clear path forward to continued free trade.
For more information on this development, see Tax Alert 2018-2388. US announces temporary pause on planned increase of List 3 tariffs on China origin goods; duties remain in force and key issues remain unresolved On Dec. 1, 2018, United States (US) President Trump announced that the US will temporarily leave the additional 10% ad valorem punitive tariffs in place on China-origin products beyond Jan. 1, 2019. The announcement follows President Trump's meeting with China President Xi Jinping at the conclusion of the G20 summit in Buenos Aires, Argentina. When first announced on Sept. 17, 2018, President Trump stated that the 10% tariff, imposed on a wide range of products valued at US$200b, would increase to 25% at the beginning 2019. Duties of 25% previously imposed on $50b of China-origin goods remain in force at this time. China has imposed retaliatory duties on $110b of US-origin goods in response to the previous US actions. During the meeting between the two leaders and senior officials on trade matters, China committed to purchasing agricultural, energy, industrial and other products from the US. The US and China further agreed to immediately begin negotiations to address US-stated concerns on China's policies with respect to forced technology transfers, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. The US has stated that it anticipates satisfactory completion of these negotiations within 90 days, noting however that should the parties not reach an agreement, the 10% tariffs will then be raised to 25% as originally planned. For more information on this development, see Tax Alert 2018-2386. California: The California Franchise Tax Board (FTB) in Notice 2018-03 instructs taxpayers on how to file requests regarding defective credit assignments under Cal. Code Regs., tit. 18, §23663 (Notice). The Notice discusses the information taxpayers must include in their requests and where to send it. If the request impacts a current audit or protest, the request should be made directly to the auditor or protest officer handling the matter. For defective assignments made before the defective credit assignments regulation took effect on Sept. 18, 2018, taxpayers will have one year (until Sept. 18, 2019) to apply the error correction provisions in Cal. Code Regs., tit. 18, § 23663-4. Taxpayers that file amended tax returns should only include pages where the information on the tax return changed based on applying the defective credit assignment regulation. Additionally, amended tax returns that are submitted under the Notice will only be considered to raise issues related to the defective credit assignments regulation or its application. Taxpayers can raise additional unrelated issues or claims by filing an additional amended tax return with the FTB. (Taxpayers should note on the additional amended return that it has also submitted a request under the Notice.) Amended tax returns submitted under the Notice are exempt from electronic filing requirements. Cal. FTB, Notice 2018-03 (Nov. 29, 2018). Illinois: New rule (86 Ill. Admin. Code Sec. 100.9715), which took effect Oct. 12, 2018, defines "transportation company" for purposes of the apportionment formula for taxpayers providing transportation services in 35 ILCS 5/304(d). A "transportation company" is defined as any person deriving 80% or more of its gross income, averaged over a three-year period (current and two immediately preceding tax years), from furnishing transportation and ancillary services. Gross income includes only amounts that are received in the ordinary course of the person's regular business activities, and that are included in net income under Illinois's income tax statutes. The classification of a person as a transportation company does not affect the treatment of items of income that are not included in apportionable business income (e.g., interest on Treasury obligations); these items are disregarded for purposes of the gross income test. Further, for purposes of the gross income test, net gains from the sale or disposition of any asset that occurs in the ordinary course of a person's regular business activities are taken into account, but income from transactions outside the ordinary course of a person's regular business activities is not. In applying the gross income test, intercompany transactions are treated similarly to transactions between unrelated parties. The Department, however, has the authority to adjust income to properly reflect each party's Illinois business activity. Lastly, the new rule provides examples, and defines transportation services and ancillary services. Ill. Dept. of Rev., new 86 Ill. Admin. Code Sec. 100.9715 (adopted Oct. 12, 2018). Kentucky: The Kentucky Department of Revenue issued a technical advice memorandum explaining that Kentucky corporations may deduct from gross income all state taxes that are not based on gross or net income. "State tax" includes taxes paid or accrued to any US state, the District of Columbia, Puerto Rico, any US territory or possession, or to any foreign country or political subdivision. In Kentucky, state taxes that may be deducted include those based on capital stock or capital base, net worth, real and personal tangible property, intangible property, property produced, use or consumption, or on the right to conduct business in a state that are not based on gross or net income. Ky. Dept. of Rev., KY-TAM-18-06 (Nov. 1, 2018). Arizona: A traffic control equipment rental company's revenue derived from flaggers, police officers and traffic control plans is subject to the transaction privilege tax, because such revenue is included in the company's personal property rental tax base. In so holding, the Arizona Court of Appeals (Court) rejected the company's argument that revenue derived from flaggers, police officers and traffic control plans are not part of the rental transaction since it was not derived from the rental of tangible personal property, finding instead that under state law "revenue need not arise directly from the rental transaction to be taxable." The Court found instructive a comparison of the statutory definition of "gross income," which includes a taxpayer's gross receipts derived from trade, business, commerce or sales and the value or accruing from the sale of tangible personal property or services; with the term "sale" which includes a lease or rental. Accordingly, this revenue is part of the gross receipts the company derives from its rental business. Further, the Court applied the three part test articulated in Holmes & Narver1 for determining when nontaxable income from a separate line of business can be excluded from the tax base, finding the income must be included as the company failed two parts of the test. Specifically, revenues derived from traffic control personnel and plans are inconsequential when compared to the corporation's total income (revenue from flaggers, police officers and traffic control plans make up 3.07%, 3.80% and 0.67%, respectively of the company's total gross revenue, failing the second prong), and the services are incidental to the company's traffic control equipment rental business (failing the third prong). The Court did not address the first prong of the test since the corporation failed the other two prongs. Roadsafe Traffic Systems, Inc. v. Ariz. Dept. of Rev., No. CA-TX 17-0005 (Ariz. Ct. App., Div. 1, Oct. 23, 2018). Arkansas: The Arkansas Department of Finance and Administration advised a business that its purchase of a dual use printer for commercial and non-commercial printing qualified for the manufacturing exemption from sales and use tax because use of the printer to print magazines for sale to the general public constituted a manufacturing activity. The printer's dual use in some non-manufacturing printing did not disqualify it from the exemption, since Arkansas law does not require exclusive manufacturing use to qualify for the exemption. Rather, the printer will qualify for the manufacturing exemption when it otherwise meets the requirements of Arkansas Gross Receipts Tax Rules GR-10 and GR-55. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20181016 (Nov. 5, 2018). Colorado: The Colorado Department of Revenue (Department) is providing in-state and out-of-state retailers with a grace period through May 31, 2019 to implement destination-based sourcing for sales and use tax purposes. Out-of-state retailers that do not collect sales tax during the grace period must still comply with Colorado's reporting statute, which requires non-collecting retailers to provide notices to individual Colorado customers and provide certain information regarding purchases to the Department. During the grace period, the Department will strictly enforce these reporting requirements for non-collecting retailers. Colo. Dept. of Rev., Sales tax changes grace period and key facts (Nov. 30, 2018). Washington: A video game retailer was not entitled to a sales tax exclusion on transactions under its trade-in program where customers traded-in video game software and used the store credit toward the purchase of video game hardware (and vice versa) because these transactions did not qualify as an exchange of "property of like kind" and the retailer did not comply with the statutory "separately stated trade-in property" requirement. The Washington Court of Appeals (Court) found that video game hardware and video game software do not perform the same function or use (i.e., video game hardware contains a computer system made up of electronic and mechanical parts, while video game software provides commands to hardware). Also, each are a subcategory of computer software and computer hardware, which Wash. Admin. Code 458-20-247(5) specifically provides do not have the same function and purpose. Further, the statute unambiguously requires that the trade-in property (not just the consideration derived from it) must be identified for the sales tax exclusion. Here, the corporation's record system does not comply with RCW 82.02.010(1)(a)(i) because the traded-in merchandise is not separately stated on subsequent sales receipts, making it unclear whether the items are traded game-for-game or console-for-game. The Court did not resolve whether the purchase of merchandise with store credit was a single transaction, because the single transaction and same day sale requirements set forth in Wash. Admin. Code 458-20-274(4) conflict with the plain language of RCW 82.02.010(1)(a)(i), which does not mention the timing of the trade-in transaction. Thus, the regulation is invalid to the extent it conflicts with the statute's plain language. Wash. Dept. of Rev. v. GameStop, Inc. and Socom, LLC, No. 50409-0-II (Wash. App. Ct., Div. II, Oct. 30, 2018). North Carolina: New law (SB 820) increases to $16,000 (from $6,500) the per employee withholding cap used to calculate Job Development Investment Grant (JDIG) amounts available to entities that create high paying jobs in North Carolina. According to a fiscal note, under the new cap, the North Carolina Department of Commerce now can use withholdings of employees who earn up to $410,000 per year to calculate companies' JDIG awards. SB 820 took effect Dec. 3, 2018 and applies to grants awarded on and after this date. N.C. Laws 2018, SL 2018-137 (SB 820), signed by the governor on Dec. 3, 2018. Virginia: The Virginia Department of Taxation (Department) issued guidelines for the worker retraining tax credits in light of the 2018 law change expanding the credit to allow certain manufacturers to claim the credit. Starting in 2018, eligible manufacturers can begin claiming the credit for conducting orientation, instruction, and training of certain Virginia students related to the business's manufacturing activities. Alternatively, taxpayers can claim the credit for expenditures paid or incurred for eligible worker retraining (this credit was previously allowed) or they can claim credits using both bases in the same taxable year when they qualify. The guidelines outline the requirements to qualify for the credit under each base and the procedures for applying for the credit. The new credit for manufacturers can be claimed against the corporate or individual income tax in an amount equal to 35% of the manufacturer's direct costs during the taxable year in conducting orientation, instruction, and training of certain Virginia students related to the business's manufacturing activities, up to $2,000 per taxpayer in a taxable year. The guidance provides examples of the types of orientation, instruction, or training programs that qualify for the credit. For tax years 2018 and later, the credit is capped at $1 million per fiscal year (previously capped at $2.5 million), and if the aggregate approved credits exceed the cap, the Department will grant taxpayers a pro rata share of the credit. To be eligible for the credit, taxpayers must file Form WRC, Worker Retraining Tax Credit Application, and supporting documentation by April 1 after the tax credit year to either the Virginia Economic Development Partnership Authority or the Department. Va. Dept. of Taxn., Doc. No. 18-191 (Nov. 20, 2018). Kentucky: The Kentucky Department of Revenue (Department) issued guidance on the credit that can be claimed against individual income, corporate income and limited liability entity tax for ad valorem (personal property) tax timely paid on inventory. Starting in 2018, the credit equals 25% of the ad valorem taxes timely paid and it will increase each year by 25%, with it being fully phased-in by 2021 and thereafter. Inventory is defined to be goods held for sale in the regular course of business, and includes: (1) machinery and equipment held in a retailer's inventory for sale or lease originating under a floor plan financing arrangement; (2) motor vehicles held for sale in the inventory of a licensed motor vehicle dealer, including certain licensed motor vehicle auction dealers; (3) raw materials; (4) in-process materials; (5) personal property placed in a warehouse or distribution center to later ship to an out-of-state destination; and (6) drugs held by a pharmaceutical manufacturer or by an affiliate of a pharmaceutical manufacturer in a warehouse or distribution center to later ship out of state. The Department will provide an inventory tax calculator on its website that will incorporate the most complete information available about local property tax rates to help taxpayers determine which part of the tax paid is deductible. Fiscal year taxpayers use the credit based on when the tax is timely paid. Ky. Dept. of Rev., KY-TAM-18-07 (Nov. 26, 2018) (supersedes KY-TAM-18-04). Georgia: Proposed rule (Proposed Rule 560-7-3-.11) would provide guidance on Georgia's implementation and administration of Ga. Code Ann. § 48-7-53 regarding partnership audit issues, including defining various terms and reporting federal adjustments. Under the proposed rule, federal adjustments would be reported by partnerships and direct and indirect partners, and partnerships and their representatives would be required to monitor the progress of federal audits to determine how to comply with Georgia law. The proposed rule describes the process a partnership or tiered partner should follow in order to make an irrevocable election to pay Georgia tax on behalf of its partners (the election must be made on behalf of all them), what information is required to be reported on each partner's behalf or to the partners, and how to calculate the tax. When an audit covers multiple years, the partnership or tiered partner could make a separate election for each year and would not be required to make the election for all years. The proposed rule also provide information about state partnership and state pass-through entity audits, including how to elect to pay tax on partners' behalf, how to protest proposed assessments and appeal final assessments, and how to designate or change the partnership representative. The proposed rule related to reporting federal partnership adjustments apply to taxable years beginning on or after Jan. 1, 2018, while the proposed rule related to state partnership audits and state pass-through entity audits apply to taxable years beginning on or after Jan. 1, 2017 unless the Commissioner and the partnership or pass-through entity agree to an earlier application. Comments on the proposed rule are due by 10 a.m. Jan. 9, 2019. Ga. Dept. of Rev., Notice IT-2018-7, Proposed Rule 560-7-3-.11 (released Nov. 29, 2018). Georgia: The Georgia Department of Revenue has released the 2019 employer withholding tax guide, which contains the income tax withholding wage-bracket and percentage method tables that are effective with wages paid on and after Jan. 1, 2019. As we previously reported, the maximum Georgia income tax rate has temporarily been reduced to 5.75%, down from 6.0%. For additional information on this development, see Tax Alert 2018-2415. North Carolina: The North Carolina Department of Revenue released the 2019 income tax withholding tables and guide. The revised income tax withholding tables and formulas reflect the changes in the withholding tax rate and standard deductions beginning Jan. 1, 2019. For additional information on this development, see Tax Alert 2018-2414. Texas: The Texas Third Court of Appeals (Court) ruled that Austin's paid sick leave ordinance that took effect Oct. 1, 2018, is unconstitutional, finding that the ordinance is preempted by the Texas Minimum Wage Act (TMWA). The ordinance required Austin employers to allow eligible employees to accrue one hour of sick leave for every 30 hours worked, up to a minimum of 64 hours of paid sick leave per year. Eligible employees were those who perform at least 80 hours of work within the city within a calendar year. The Court held that "the Texas Minimum Wage Act preempts local regulations that establish a wage, that the Ordinance establishes a wage, and that, accordingly, the TMWA preempts the City's Ordinance as a matter of law, thus making the Ordinance unconstitutional." Texas Association of Business et al. v. City of Austin, Texas, No. 03-18-00445-CV (Tex. Ct. App. Nov. 16, 2018). For additional information on this development, see Tax Alert 2018-2420. Wisconsin: Beginning in 2019, the nonresident entertainer withholding report (Form WT-11) will be revised to be tax-year specific and will allow a person to report withholding for multiple nonresident entertainers. In addition, nonresident entertainers may submit a request for a lower withholding rate using a new Form WT-12. Starting in January 2019, the updated Form WT-11 and new Form WT-12 may be filed using the electronic filing and payment system, My Tax Account of the Wisconsin Department of Revenue (Department). These forms will be available on the Department's website in mid-December 2018 for viewing and printing. For additional information on this development, see Tax Alert 2018-2395. Wisconsin: The Wisconsin Department of Revenue has revised the procedure for filing the annual withholding reconciliation form in 2019. For additional information on this development, see Tax Alert 2018-2396. Utah: New law (HB 3001) imposes a broad-based Medicaid hospital provider assessment on each hospital, due and payable on a quarterly basis, in an amount calculated at a uniform assessment rate for each hospital discharge. The uniform assessment rate is determined by using the total number of hospital discharges for assessed hospitals divided into the total non-federal portion in an amount consistent with Utah Code § 26-36d-205 that is needed to support capitated rates for accountable care organizations for purposes of hospital services provided to Medicaid enrollees. For purposes of the assessment, a hospital is defined to be: (1) a privately owned general acute hospital operating in Utah; and (2) a privately owned specialty hospital operating in Utah whose inpatient admissions are predominantly rehabilitation, psychiatric, chemical dependency, or long-term acute care services, but does not include a human services program or a hospital owned by federal or state government (including a state agency or political subdivision). HB 3001 describes how to determine discharges, and provides that the imposition of the assessment does not affect the nonprofit or tax exempt status of any nonprofit charitable, religious or educational health care provider under other federal or state law. Penalties and interest apply for facilities that do not pay any assessment or file a return as required by the due date. The provisions took effect upon enactment. Utah Laws 2018 (Third Special Session), HB 3001, signed by the governor on Dec. 3, 2018. International: The latest edition of Trade Watch is now available. Trade Watch is a quarterly communication prepared by Ernst & Young's Customs & International Trade Practice. See Tax Alert 2018-2416 for a copy of the newsletter. International: On Nov. 28, 2018, Bahrain's Assistant Undersecretary for Public Revenue Policy and Development at the Ministry of Finance announced some important developments with regards to Value Added Tax (VAT) implementation in Bahrain. The key developments include: (1) only businesses with turnover exceeding BHD5million need to register for VAT from Jan. 1, 2019; (2) guidance on the VAT registration process; and (3) VAT awareness sessions for companies/persons to ensure their readiness for VAT by Jan. 1, 2019. Further, it was confirmed that 94 basic food items will be zero-rated for VAT purposes, however, the official list of these food items has not been published. For additional information on this development, see Tax Alert 2018-2384. International: The Government of Tanzania published the Value Added Tax (General) (Amendment) regulations, 2018 (the Regulations) on Oct. 19, 2018. The Regulations amend the Value Added Tax (General) Regulations, 2015. Tax Alert 2018-2435 summarizes the key changes introduced by the Regulations. 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 State Tax Comn. v. Holmes & Narver, Inc., 113 Ariz. 165, 169 (1976) (nontaxable income is excluded if: (1) the receipts from the separate business can be readily ascertained, (2) the income from the separate business is not inconsequential in relation to the taxpayer's total income, and (3) the separate business is not incidental to the main business). Document ID: 2019-0025 |
