14 December 2018 State and Local Tax Weekly for December 14 Ernst & Young's State and Local Tax Weekly newsletter for December 14 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. Federal proposed Section 163(j) business interest expense limitation regulations have state tax implications The United States Treasury Department (Treasury) and Internal Revenue Service (IRS) have released proposed regulations (REG-106089-18) under Section 163(j) of the Internal Revenue Code of 1986, as amended (IRC),1 which, as modified by the "Tax Cuts and Jobs Act"2 (TCJA), imposes limitations on the deduction of business interest expense. The proposed regulations package also included proposed regulations under various other IRC provisions, including Sections 381, 382, 383, 469, 860C and 1502 (collectively with regulations under Section 163(j), the Proposed Regulations). Since nearly every state with an income tax relies upon the IRC in some manner and most will generally follow the Proposed Regulations once finalized or determined to be temporary (unless otherwise modified by the state, such as non-conformity to Section 1502), the Proposed Regulations will have important implications for state and local (collectively, state) income tax reporting purposes. From a state corporate income tax perspective, key considerations of Section 163(j) and the Proposed Regulations taxpayers must evaluate are that:
Tax Alert 2018-2510 focuses on the general effects of the Proposed Regulations on state corporate income taxpayers (i.e., C corporations), assuming the Proposed Regulations are finalized in their current form. It does not address the state income or other business tax consequences of the Proposed Regulations on any other type of taxpayer, including individuals and pass-through entities. Readers are cautioned that the impact of the Proposed Regulations on state corporate income taxpayers as described in this Tax Alert may not necessarily be the same impact that applies to other types of state taxpayers. Federal: On Dec. 13, 2018, the United States Treasury Department (Treasury) and Internal Revenue Service issued proposed regulations (REG-104529-18) under Internal Revenue Code Section 59A (Proposed Regulations), providing guidance on the application of the base erosion and anti-abuse tax (BEAT). The Proposed Regulations include provisions addressing: (1) The identification of applicable taxpayers subject to the BEAT under the statutory aggregation rules; (2) Application of the BEAT to partnerships and consolidated groups; (3) Treatment of non-cash payments as base erosion payments; (4) Application of various exceptions from base erosion payments in certain circumstances; and (5) Accounting for net operating loss carryfowards when computing modified taxable income. The Proposed Regulations would apply to tax years beginning after Dec. 31, 2017. Until they are finalized, however, taxpayers may rely on the Proposed Regulations if they and all related parties consistently apply the regulations to all tax years ending before the date on which the final regulations are published. For additional information on this development, see Tax Alert 2018-2491. California: The California Franchise Tax Board (FTB) concluded that a specialty financial services company (company) that derives more than 50% of its total gross income from servicing mortgages rather than from dealings in money or moneyed capital is a general corporation, not a financial corporation under Cal. Code Regs. tit. 18, §23183. Citing Marble Mortgage Co.,3 the FTB clarified that while making and selling mortgage loans constitutes dealing in moneyed capital, servicing loans does not. Rather, servicing loans generates income from a service activity. Additionally, the FTB determined that the company's gains from hedging contracts designed to mitigate the exposure to price risk relative to its mortgage loans held for sale as well as to its interest rate locking commitments are general income rather than financial income since the hedging contracts are not "money or moneyed capital" under Cal. Code Regs. tit. 18, § 23183(b)(3). The FTB, noting the lack of a comprehensive definition of "money" or "moneyed capital", reasoned that the hedging transactions were not actual legal tender (i.e., coin, cash or currency) or an instrument evidencing a debt obligation (i.e., mortgages, deeds of trust, conditional sales contracts, loans, commercial paper, installment notes, credits cards, and accounts receivable). Cal. FTB, Chief Counsel Ruling No. 2018-1 (Nov. 2, 2018). Massachusetts: A corporation in filing its Massachusetts corporate excise tax combined report could not deduct for purposes of computing its Massachusetts net income the Indiana utility receipts tax (URT) paid by two group members because the URT, while it has some characteristics of a transaction-based tax, on balance it more resembles a tax based on or measured by income, a franchise tax measured by net income or for the privilege of doing business, and a capital stock tax, which is disallowed as a deduction from the Massachusetts corporate excise tax under Mass. Gen. L. ch. 63, § 30(4)(iii). The Massachusetts Appellate Tax Board (Board) found the following supported its finding that the URT is not deductible: (1) the URT is imposed on sales receipts, settlements and judgments, indicating it is a tax measured by income; (2) the statutory text (imposing the tax on "receipt of" taxable gross receipts and not on retail transactions) shows that the URT uses sales receipts to measure the privilege of doing business as a utility company; (3) similar to an income tax, the URT is paid in minimum quarterly payments of estimated tax liability; (4) the URT and related underpayment penalty collection methods are similar to those applied by the Massachusetts corporate income tax; and (5) the URT is a tax on the privilege of doing business. Further, the Board rejected the corporation's constitutional arguments, finding that the disallowance of the URT deduction does not discriminate against out-of-state businesses. The Board, however, abated the penalties, finding the corporation had reasonable cause to underpay tax when it was not clear based on state guidance whether the URT could be deducted in computing its Massachusetts corporate excise tax liability. Bay State Gas Co. and Affil. v. Mass. Comr. of Rev., No. C332071 (Mass. App. Tax Bd. Oct. 23, 2018). South Carolina: In addressing an issue of first impression, an administrative law judge (ALJ) for the South Carolina Administrative Law Court held that a bank is not entitled to deduct net operating loss (NOL) carryforwards in calculating its South Carolina bank tax liability under the state's IRC conformity provisions, but cited factual questions in leaving unresolved whether the bank could qualify for the NOL deduction based on how entire net income (ENI) is calculated for bank tax purposes. In so holding, the ALJ determined that the bank tax (under Chapter 11) is a franchise tax based on income, and not an income tax. Further, the state's IRC conformity provisions limit or exclude certain provisions related to banks, and banks, although generally organized as corporations, are not taxed like corporations or other entities governed by Chapter 6 (the South Carolina Income Tax Act). The ALJ also found that Chapter 11 partially adopts some of the provisions of the South Carolina Income Tax Act codified in Chapter 6. The ALJ concluded that Chapter 11 conforms to these provisions in the income tax act only for the purpose of administration, allocation and apportionment, and does not specifically adopt Chapter 6 for purposes of calculating a bank's tax base. Accordingly, the bank must show that it qualifies for the NOL deduction another way. The ALJ next considered whether the bank tax is based on taxable income (which contains the provision allowing NOL deductions). The ALJ concluded it is not and, as such, the IRC provisions modifying gross income do not apply to banks. Lastly, the ALJ could not determine whether the bank qualified for the NOL deduction based on how ENI is calculated, because this calculation is not defined by statutes or regulations. The ALJ noted that factual questions must be resolved before it can determine whether the Department's use of "book income" as a proxy for "entire net income" is appropriate. Synovus Bank v. S.C. Dept. of Rev., No. 17-ALJ-17-0418-CC (S.C. Admin. Law Ct. Oct. 22, 2018). Virginia: A corporate general partner (GP) of a foreign limited partnership (FLP) should not have included ordinary loss from the FLP in its sales factor, and instead should have included a proportionate share of the FLP's sales. In addition, the GP must remove all foreign currency exchange amounts from the sales factor numerator and denominator since currency transactions are a mere change in the form of money and are not considered sales. Additionally, the auditor's use of expenses from the consolidated Federal Form 1118 in making adjustments (rather than the separate Virginia return), was permissible since the information to prepare a pro forma Form 1118 on a separate company basis was unavailable. The commissioner, however, remanded the case to the auditor to review the accuracy of the pro forma foreign expenses submitted by the GP during the appeal and make adjustments accordingly. Va. Dept. of Taxn., PD No. 18-188 (Oct. 30, 2018). California: In response to the U.S. Supreme Court's ruling in South Dakota v. Wayfair, the California Department of Tax and Fee Administration (CDTFA) in two separate notices announced that starting April 1, 2019, an economic nexus threshold will be imposed for state and local sales and use tax collection purposes in California. As of April 1, 2019, out-of-state retailers are required to collect use tax, and all retailers registered, or those required to be registered, with the CDTFA are responsible for collecting and paying a district's use tax to the CDTFA, if during the preceding or current calendar year: (1) the retailer's sales into the state/into the district exceed $100,000; or (2) the retailer made sales into the state/into the district in 200 or more separate transactions. Importantly, the CDTFA bright-line nexus thresholds appear to differ from those announced in other states in that the threshold is applied to each individual district as well as to the state as a whole. In making its announcement, the CDTFA made clear that this new collection requirement is not retroactive, but retailers can voluntarily register and collect tax before April 1, 2019. Cal. Dept. of Tax and Fee Admin., Special Notice: New District Use Tax Collection Requirements for All Retailers Effective April 1, 2019 (Dec. 2018); Special Notice: New Use Tax Collection Requirements for Out-of-State Retailers Based on Sales into California Effective April 1, 2019 (Dec. 2018). California: On remand, the California Court of Appeal (Court) citing South San Francisco4 held that the California State Board of Equalization5 properly collected local use tax (rather than local sales tax) on sales of an internet retailer located in the city of Brisbane that were shipped from out-of-state warehouses. (Sales shipped from an in-state warehouse were not at issue in this case.) In so holding, the Court determined that title to the property passed outside of California, finding the transactions were shipping contracts, not destination contracts. The Court reasoned that these were not destination contracts when the retailer's contracts did not contain an F.O.B. (free on board) term or any other term that explicitly allocated loss or addressed when title passed, and the retailer's return policies and testimony did not establish otherwise. City of Brisbane v. Cal. Dept. of Tax and Fee Admin., No. A151168 (Cal. Ct. App., 1st App. Dist., Div. 2, Nov. 14, 2018) (unpublished). Connecticut: The Connecticut Department of Revenue Services (Department) issued guidance on the state's new marketplace facilitators and marketplace seller provisions. Under a 2018 statute change, marketplace facilitators with sales in Connecticut are required to register with the Department, starting Dec. 1, 2018. A marketplace facilitator is defined as any person (regardless of where located) that: (1) facilitated retail sales of at least $250,000 during the prior 12 month period by marketplace sellers by providing a forum that lists or advertises taxable tangible personal property or taxable services for sale by such marketplace sellers; (2) directly or indirectly through agreements or arrangements with third parties, collects receipts from the customer and remits payment to the marketplace seller; and (3) receives compensation or other consideration for its services. The guidance includes a chart providing examples of when a marketplace seller is required to register with the Department; such determination depends on the location and business activity of the seller. Additional questions addressed by the guidance include the following: (1) What are marketplace sellers required to do? (2) How should a marketplace seller report sales made through a marketplace facilitator that is collecting and remitting tax on the sellers' behalf? (3) Aside from registering, what are marketplace facilitators required to do? (4) How does a marketplace facilitator report sales made on its forum for marketplace sellers? (5) How do audits of sales made through a marketplace facilitator's forum work? and (6) A description of the 12-month period that should be used to determine if the threshold has been met; among other questions. Conn. Dept. of Rev. Services, OCG-8 "Guidance Regarding Marketplace Facilitators and Marketplace Sellers"(Nov. 16, 2018). North Carolina: An entity's equipment that was used "directly and exclusively for the conversion of solar energy to electricity," despite being under construction on the Jan. 1, 2016 assessment date, qualified for a personal property tax exemption under N.C. Gen. Stat. § 105-275(45). The North Carolina Court of Appeal cited Harrison6 and Seminary, Inc.,7 and applied the dictionary definition of "used" ("[t]o put into service or apply for a purpose; employ"), in finding that the equipment clearly came within the scope of the exemption statute. In re Appeal of Snow Camp LLC, No. COA18-388 (N.C. App. Ct. Nov. 20, 2018) (unpublished) (consolidated with eight other cases). Louisiana: Out-of-state corporations that voluntarily paid Louisiana corporate income/franchise tax are not entitled to a refund of the overpaid tax under Louisiana's Overpayment Refund Procedure because La. Rev. Stat. 47:1621(F) prohibits a refund where tax was overpaid through a mistake of law arising from the Louisiana Department of Revenue's (Department) misinterpretation of tax law. In this case, the Department's misinterpretation of law was as determined in UTELCOM.8 The Louisiana Court of Appeal (Court) noted two exceptions to this general refund prohibition: (1) tax is paid under protest; and (2) the taxpayer appeals to the Board of Tax Appeals (BTA). Since the corporations voluntarily paid the tax, their only possible remedy to recover a refund of voluntarily paid taxes would be through an appeal to the BTA. The Court noted that La. Rev. Stat. 47:1484(C) provides relief to certain UTELCOM claimants who have reached settlement, permitting them in some situations to deduct the overpayments from corporate income or franchise tax liability. The Court also encouraged the corporations to notify the legislature of their issue, as they were entitled to a refund under the terms of a settlement agreement for which the state legislature had not appropriated money. Bannister Properties, Inc. et al v. La., Nos. 2018 CA 0030, 0031, 0032, and 0033 (La. App. Ct., 1st Cir., Nov. 2, 2018). New Mexico: A corporation was entitled to a penalty abatement for failure to timely pay oil and gas severance tax for payment one day late because the corporation's failure was due to its reliance on the advice of employees of the New Mexico Department of Finance and Administration (Department). The administrative law judge (ALJ) for the New Mexico Administrative Hearings Office found that the corporation worked with the Department at length and followed the Department's employee's instructions as to how to deal with a system error and ultimately filed its return within an hour of the issue being resolved. Although the return was filed on the due date, the time of day it was filed caused the payment to be submitted to the Department one day late. The ALJ rejected the Department's argument that the penalty assessment should be upheld because the corporation could have used another method of payment, finding that the corporation had not set up any other such payment method and this argument does not overcome the corporation's reliance on the Department's employee's advice. Moreover, it would be unfair to impose the late filing penalties on the corporation after it followed the Department's employee's guidance and it was the Department's reporting system error that caused the filing delay. In re Protest of Phillips 66 Co. v. N.M. Taxn. and Rev. Dept., No. 18-34 (N.M. Admin. Hearings Ofc. Oct. 31, 2018). Maine: Maine Revenue Services 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. For additional information on this development, see Tax Alert 2018-2488. New York: The New York Department of Taxation and Finance has released revised wage bracket and percentage method income tax withholding tables for the state of New York and the City of Yonkers, effective for wages paid on or after Jan. 1, 2019. The Department's email notification notes that there were no changes to the New York City resident wage bracket tables and exact calculation methods. Employers in New York City are instructed to continue using Publication NYS-50-T-NYC, New York City Withholding Tax Tables and Methods (revised 1-2018). For more on this development, see Tax Alert 2018-2460. Illinois (Chicago): The Chicago Department of Finance (Department) for purposes of the amusement, hotel, lease, and parking taxes, issued guidance on tax collection obligations for certain businesses (facilitators) that are required to collect tax because they contract with other businesses (clients) that provide taxable services. Tax owed is based on the full amount paid by the customer, including customer charges incidental to obtaining the taxable services, property, or products, such as service fees, convenience fees, facilitation fees or other charges. A client can contract with a facilitator to collect and/or remit the taxes on the client's behalf when the facilitator is registered and in good standing with the Department. If the facilitator is not in good standing, the Department can seek lost interest, tax, penalties, or other relief from either or both businesses. If either the client or the facilitator is registered and in good standing with the Department, they may agree which party will assume responsibility for remitting tax owed. Likewise, if a facilitator or client is not registered and in good standing, the other party must collect and remit taxes on all customer charges. If both parties are registered and in good standing, they may agree that the facilitator will remit taxes on its fees, and the client will remit taxes on the charges it receives after deducting the facilitator's fees. The Department will not permit a facilitator to delegate its collection and remittance obligations to clients who are individuals and/or whose taxable transactions involve small amounts of money (e.g., house or car sharing). The Department will work with businesses that have special circumstances that complicate tax collection. These provisions take effect Jan. 1, 2019. Chicago Dept. of Fin., Uniform Revenue Procedure Ordinance Ruling 6 (Dec. 10, 2018). International: Argentine resident beneficiaries of services provided by nonresidents should be prepared to pay the value-added tax (VAT) on those services through an electronic transfer of funds and may include the VAT paid on their VAT returns as input VAT. On Dec. 11, 2018, the Argentine tax authorities published, in the Official Gazette, General Resolution 4356/2018 (the Resolution), which implements the mechanism for the payment of VAT on transactions carried out in Argentina by nonresidents. For more on this development, see Tax Alert 2018-2471. International: With the coming into force of the new Swiss Value Added Tax (VAT) Law, the Swiss Federal Tax Administration (SFTA) has gradually updated its official guidelines on a number of topics. In updating these guidelines outlining VAT reporting obligations, taxpayers will see a significant change of practice with respect to how legal entities with branches in multiple jurisdictions are viewed from a Swiss VAT perspective. In the past, the Swiss practice has been relatively clear on two points: (1) the dual entity principle applied in Switzerland means that a foreign branch and its Swiss headquarters (HQ), or vice versa, are viewed as separate taxable persons from a Swiss VAT perspective; and (2) secondly, if, for example, a Swiss HQ had branches in multiple other jurisdictions, the branches were recognized as individual taxable persons from a Swiss VAT perspective. As a result of this position, a foreign branch doing business in Switzerland could end up having to register for Swiss VAT separately from its Swiss HQ. For more on this development, see Tax Alert 2018-2495. International: On Dec. 11, 2018, the European Commission announced new measures aimed at making online marketplaces play their part in the fight against tax fraud in the European Union (EU) and at easing administrative burdens for businesses selling goods online. The new measures form part of the EU's broader agenda to tackle Value Added Tax (VAT) fraud and to improve VAT collection on internet sales. They introduce building blocks for a new VAT system for businesses that sell goods online once the agreed framework comes into force in 2021 (One-Stop Shop). They also introduce controls on large online marketplaces making them responsible for ensuring that VAT is collected on sales of goods by non-EU companies to EU consumers (B2C sales) that take place on their platforms. For more on this development, see Tax Alert 2018-2496. 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 Except as otherwise indicated, "Section" refers to the relevant section or sections of the IRC, and "Reg. Section" and "Prop. Reg. Section" refer to the relevant section or sections of the Income Tax Regulations promulgated by Treasury under the IRC. 5 California sales tax is now administered by the California Department of Tax and Fee Administration. 8 UTELCOM, Inc. v. Bridges, 2010-0654 (La. App. 1st Cir. 2011), 77 So. 3d 39, writ denied, 2011-2632 (La. 2012), 83 So. 3d 1046. The ruling in UTELCOM was effectively overruled by a new statute enacted in 2016 and effective prospectively. Document ID: 2019-0026 |
