18 January 2019 State and Local Tax Weekly for January 11 Ernst & Young's State and Local Tax Weekly newsletter for January 11 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. New Jersey Division of Taxation releases guidance related to corporation business tax overhaul — addresses state treatment of GILTI and other topics The New Jersey Division of Taxation (DOT) recently issued two technical bulletins (TB-84 and TB-85 (collectively, the technical bulletins)) in which it provides its interpretations of key aspects of the July 1 and Oct. 4, 2018 legislative amendments to the Corporation Business Tax (CBT) Act (the CBT overhaul). The technical bulletins address aspects of New Jersey's transition from separate to combined reporting, a newly-imposed temporary surtax, the CBT impact of various provisions of the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA), including the CBT treatment of the repatriation tax (IRC § 965), global intangible low-taxed income (GILTI) (IRC §§ 250 and 951A), foreign derived intangible income (FDII) (IRC § 250), and the limitations on the deductibility of business interest expense (IRC §163(j)). For additional information on this development, see Tax Alert 2019-0101. On Jan. 11, 2019, the U.S. Supreme Court (Court) granted certiorari in N.C. Dept. of Rev. v. The Kimberley Rice Kaestner 1992 Family Trust.1 North Carolina filed a petition asking to the Court to review the North Carolina Supreme Court's ruling that it was unconstitutional under the Due Process clause for the state to impose income tax on the income of a trust whose only connection to the state was the residence of the beneficiary. The issue before the Court is "Does the Due Process Clause prohibit states from taxing trusts based on trust beneficiaries' in-state residency?" States are split on this issue. Currently, four states have determined that the Due Process Clause allows the taxation of trust income based on the in-state residency of the trust's beneficiaries, while five states found it prohibits such taxation. A determination of this issue by the Court will resolve a split amongst the states. In addition to this case, a petition for certiorari has been filed in a similar case out of Minnesota — Minn. Comm'r of Rev. v. Fielding.2 In Fielding, the Minnesota Supreme 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. For more on Fielding, see Tax Alert 2018-1524. For more on Kaestner, see Tax Alert 2018-1376. Colorado: On Dec. 18, 2018, the Colorado Department of Revenue adopted emergency amendments to various regulations3 to provide guidance on the application of Colorado's apportionment and allocation methods in light of a 2018 law change that adopts market based sourcing effective for tax years beginning on and after Jan. 1, 2019. The emergency regulations are in force for 120 days. Regulations that will be permanent have been proposed as part of the rulemaking process. A hearing is scheduled for Jan. 30, 2019. Michigan: New law (SB 361) modifies a financial institution's tax base to mean the total equity capital of the financial institution or, in case of a unitary business group of financial institutions, the top-tiered parent entity, subject to the following deductions before allocation or apportionment: (1) the average daily book value of US and Michigan obligations owned during the tax year by members of the unitary business group; and (2) the equity capital of a person subject to tax under Chapter 12 (insurance companies), not to exceed 125% of the minimum regulatory capitalization requirements of the member. This change is effective for tax years beginning after Dec. 31, 2018. Further, for tax years beginning after Dec. 31, 2020, a financial institution's tax base will be determined as of the close of the tax year. (This is a change from the current tax base, which is determined based on a five-year average.) Mich. Laws 2018, Pub. Act 460 (SB 361), signed by the governor on Dec. 26, 2018. Michigan: The Michigan Department of Treasury (Department) issued guidance on the procedures and standards for alternative apportionment relief for business taxpayers under the Corporate Income Tax and the Michigan Business Tax, and for certain Michigan Income Tax Act taxpayers. The guidance addresses: (1) when and how a taxpayer may request alternative apportionment relief (request must be made in writing and made at least 90 days prior to the due date of the return (including extensions) for which permission to use the alternative method is sought or, if an amended return, at least 90 days prior to filing the amended return); (2) how such requests are evaluated (including presumptions, burdens and standards of proof — party seeking to apply an alternative apportionment has the burden to prove that the statutory apportionment method does not fairly represent the taxpayer's business activity in the state and that the proposed alternative apportionment is reasonable); (3) when alternative apportionment requests are invalid; (4) the Department's response to alternative apportionment requests (the Department is not required to respond within a certain time frame, but if the Department does not respond within 60 days the request will be deemed denied); (5) filing instructions for approved requests; (6) what taxpayers should do when their alternative apportionment requests are denied; and (7) when the Department will impose an alternative apportionment method, including applicable presumptions and burdens of proof. Mich. Dept. of Treas., Rev. Admin. Bulletin 2018-28 (Dec. 19, 2018). Nebraska: The Nebraska Department of Revenue (Department) issued guidance stating that state law conforms to the Transition Tax under IRC § 965, except for the provision allowing taxpayers to make an election to pay tax due under IRC § 965 in installments or to defer the tax. The guidance provides instructions for corporations, S corporations, partnerships, and individuals on the appropriate line upon which income included under IRC § 965(a) and the deduction allowed under IRC § 965(c) should be reported. Further, it is the Department's position that net Section 965 income (IRC § 965(a) inclusion - IRC § 965(c) deduction) is not a foreign dividend. The Department advised taxpayers deducting any part of net Section 965 income as a foreign dividend to include a legal analysis supporting its deduction of net Section 965 income as a foreign dividend. Neb. Dept. of Rev., GIL 24-18-1 Income Tax: Section 965 Transition Tax for Tax Year 2017 (Dec. 21, 2018). For additional information on this development, see Tax Alert 2019-0062. New Jersey: An out-of-state holding company (holdco) that conducted no business and had no employees was found to have maintained a regular place of business (RPOB) outside New Jersey for tax years 2008 - 2010 through its unitary business relationship with a general partnership (GP, of which it owned 80%)) that had a RPOB in California. Therefore, holdco was entitled to use New Jersey's three-factor apportionment formula. In so holding, the New Jersey Tax Court (Court) applied N.J. Admin. Code 18:7-7.2 and found that a plain reading of the regulation indicated that the factors listed to assist in determining whether a RPOB existed were characteristics rather than exclusive factors. Here, the Court concluded that the GP operated a bona fide office in California when: (1) the GP had regular employees that "regularly maintain, use, and occupy" the GP's California offices (noting that the employee remuneration method in payroll records on Forms W-2s are not controlling); (2) the GP maintained the property since it was financially responsible for rent payments; and (3) the GP's offices were identifiable as belonging to the GP through its website, employee business cards, contracts, and the nature of the GP's business, even without physical signage to indicate the GP on the premises. It should be noted that the RPOB requirement was repealed effective July 1, 2010. ADP Vehicle Registration, Inc. v. NJ Dir., Div. of Taxn., No. 014946–2014 (N.J. Tax Ct. Dec. 11, 2018). Federal: Proposed bill "Protecting Businesses from Burdensome Compliance Cost Act of 2019" (HR 379)would prohibit states from requiring remote retailers to collect and remit taxes and fees or collect information incident to the purchase of goods and services if the seller does not have a physical presence in the state, effective for sales made prior to Jan. 1, 2020. For sales occurring after Jan. 1, 2020, certain conditions would apply in order for the state to be able to require remote sellers to collect and remit tax, including that the tax or fee is payable at a uniform rate that does not exceed the combined rate of the state and local taxes and fees payable by the purchaser from sellers physically present in the state, and that the state law does not require a remote seller to remit to more than a single location or provide information about the purchaser other than the zip code areas in which such purchases were located in the state at the time of purchase and the aggregate amount of such taxes and fees collected by the seller in a particular zip code. Further, HR 379 would prohibit subdivisions of the state from requiring remote sellers to collect and remit taxes or fees owed by a purchaser or collect information incident to the purchase. HR 379 was introduced on Jan. 9, 2019. District of Columbia: Emergency law (B22-1070) expands the District of Columbia's sales and use tax to reach remote retailers by enacting economic nexus and marketplace facilitator/provider provisions, and expands the sales tax base to include digital goods. Effective Jan. 1, 2019, remote sellers selling tangible personal property, products transferred electronically, or services for delivery into the District have to collect and remit the District's sales and use tax if the seller's gross receipts from such sales delivered into the District exceeds $100,000 or such sales were made in 200 or more separate transactions in a 12-month period. These provisions will not be applied retroactively. Effective April 1, 2019, a marketplace facilitator is required to collect and remit sales tax on all sales it makes on its own behalf and all sales it facilitated on behalf of marketplace sellers to customers in the District, regardless of whether the marketplace seller for which sales are facilitated would have been required to collect tax had the sale not been facilitated by the marketplace facilitator. Effective Jan. 1, 2019, sales of, or charges for, digital goods are subject to the District's sales and use tax. The term "digital goods" includes digital audio/audiovisual works, digital books, digital codes, digital applications and games, and any otherwise taxable tangible personal property electronically or digitally delivered (including streaming), whether purchased singly, by subscription, or in any other manner, such as maintenance, updates, and support. The term does not include cable television service, satellite relay television service or any other distribution of television, video, or radio services (unless expressly included in the definition of digital goods). D.C. Laws 2018, Act 22-556 (B22-1070), enacted Dec. 31, 2018; expires March 31, 2019. Legislation (B22-0914) to enact these provisions on a permanent basis was approved by the D.C. Council on Dec. 4, 2018. Once the legislation is approved by the mayor it will be sent to Congress for a mandatory 30 in-session day review period. See also D.C. Off. Tax and Rev., OTR Notice 2019-02 (Jan. 2, 2019), D.C. Off. Tax and Rev., "Taxation of Digital Goods in the District of Columbia" (Jan. 3, 2019). Louisiana: A Louisiana appeals court (court) affirmed a trial court ruling that an online retailer is liable for local sales and use taxes on third-party sales made through its marketplace. In so holding, the court found that under Louisiana law (La. R.S. 47:337.17(A)(1), sales tax is collected by the dealer from the purchaser or consumer and that the definition of "dealer" is not limited to a seller and the detailed definition of dealer "clearly encompasses a wider group of people than 'seller'." The court also found reasonable (and not manifestly erroneous) the trial court's determination that the online company is a dealer under La. R.S. 47:301(4)(l) as it is "engaged in 'regular or systematic solicitation of a consumer market'." The trial court reasoned that the online retailer's marketplace provides third-party retailers the service of reaching new customers, it's a service that brings retailers and customers together, it provides various services (e.g., facilitating transactions and payment processes, taking on the risk of fraudulent activity, and making sure the third-party retailers' products are found by new customers). Newell Normand, Sheriff and Ex-Offico Tax Collector for the Parish of Jefferson v. Wal-Mart.Com USA, LLC, No. 18-CA-211 (La. Ct. App., 5th Cir., Dec. 28, 2018). Louisiana: A business that welds and fabricates metal is not entitled to a sales tax refund for welding gases it purchased between Jan. 2011 and Feb. 2014 when two laws passed by the Louisiana legislature during its 2008 Second Extraordinary Session (Act 1 and Act 9) addressing a relevant exemption (La. Rev. Stat. 47:301(10)(x)) were in conflict and could not be reconciled, and the last expression of the legislature's will (Act 9) did not exempt welding gases for commercial use from tax. Since Act 9 controlled, the exemption was limited to purchases for residential use by the consumer. Metals USA Plates & Shapes Southeast, Inc. v. Robinson, No. 17-CA-421 (La. App. Ct., 5th Cir., Dec. 27, 2018). Ohio: The Ohio Supreme Court (Court) recently issued two decisions in the area of sales and use taxes. One decision, Great Lakes Bar Control, Inc.,4 upheld that Board of Tax Appeal's reversal of an Ohio Department of Taxation assessment of sales tax on certain bar cleaning services. Another decision, Pi In The Sky, L.L.C.,5 upheld an assessment of tax on an limited liability company's purchase of an aircraft that was leased to the LLC's sole member. For more on these developments, see Tax Alert 2019-0053. Montana: Montana's corporate income tax requires members of a unitary business to file returns on a worldwide combined basis, unless a water's-edge election is made to exclude foreign affiliates from the combined group. A Montana water's-edge group pays tax at a rate of 7% instead of the regular rate of 6.75%. While many states require a water's-edge election to be made by the due date or extended due date of the return for the year for which it is intended to be effective, Montana is unique in that a water's-edge election must be made within 90 days of the beginning of the first year in which it is first intended to become effective. Accordingly, a corporation wishing to make a new water's edge election, or renew an existing election, applicable to the 2019 tax year must file a Form WE-ELECT by March 31, 2019. For additional information on this development, see Tax Alert 2019-0050. Multistate: Though the federal minimum wage remains at $7.25 per hour, state minimum wage rates increased in a number of states effective on Jan. 1, 2019. The increases can be the result of voter approval, law change or because the minimum wage is indexed for inflation each year. Employers should be aware of differences in the minimum wage rates among localities since they are independently set to apply to employees whose employees are working within their city or county limits (for example, several cities in California, such as Los Angeles). Although several states have passed laws preventing localities from imposing their own minimum wage (e.g., Missouri in mid-2017, to block St. Louis/Kansas City minimum wage increases), there remain states, such as California, that allow this practice. For more on this development, see Tax Alert 2019-0086. Multistate: Similar to the federal supplemental income tax withholding rate, most states also allow for an optional flat percentage of income tax withholding for wages that are in addition to regular pay. Where allowed, the supplemental rate greatly simplifies income tax withholding calculations on irregular payments such as bonuses, equity compensation and separation pay. Employers may optionally use a federal flat rate of income tax federal withholding of 22% on supplemental wages up to $1 million for the year; however, a mandatory flat rate of 37% applies to supplemental wages in excess of $ 1 million. Note that the flat 37% rate applies even if an employee has submitted a federal Form W-4 claiming exemption from federal income tax withholding. For additional information on this development, see Tax Alert 2019-0064. Multistate: To assist you in reviewing your state income tax withholding rates for 2019, the chart in Tax Alert 2019-0065 lists the most recent income tax withholding tables published by the states. Reference the column "Last update" to identify the last year the publication was updated. If the last update was prior to 2018 and the pending column is "no", we have confirmed with the state that no update is expected for 2019. Connecticut: The Connecticut Department of Revenue Services released its 2019 income tax withholding rules and wage-bracket tables to its website. According to the guidance, the 2019 withholding calculation rules and 2018 withholding tables are unchanged from 2018. There is no percentage method available to determine Connecticut withholding. For additional information on this development, see Tax Alert 2019-0103. Idaho: The Idaho State Tax Commission announced release of a new state Form ID W-4, Employee's Withholding Allowance Certificate. The new form may be found on the agency's website and the agency plans to mail copies of the new form to the more than 70,000 employers with Idaho payroll withholding accounts. Idaho joins several other states (i.e., Montana, Oklahoma and Oregon) in releasing a new state Form W-4 due to the Tax Cuts and Jobs Act. For additional information on this development, see Tax Alert 2019-0088. Illinois: The Illinois Department of Revenue issued Publication IL-700-T, Illinois Withholding Tax Tables, to be used effective with wages paid on and after Jan. 1, 2019. The flat income tax rate continues at 4.95% for 2019. For additional information on this development, see Tax Alert 2019-0031. Massachusetts: The Massachusetts Department of Revenue (Department) announced that because a target revenue trigger has been met, the state's flat income tax rate will drop on Jan. 1, 2019 to 5.05%, down from the 5.10% rate that has been in effect since 2016. As a result, the Department issued revised income tax withholding tables for calendar year 2019. Because the state has a flat income tax rate, the supplemental withholding rate for 2019 is also 5.05%. According to the Department, if revenues in 2019 are sufficient to trigger a further rate reduction, the income tax rate will drop to 5% for the 2020 tax year. For additional information on this development, see Tax Alert 2019-0074. Michigan: New law (SB 1171) slows down an increase to Michigan's minimum wage and increases the threshold at which employers are required to provide paid sick leave to employees, while lowering the number of hours of sick leave required per year (SB 1175). In his news release, Governor Snyder said: "The two bills I signed today strike a good balance between the initial proposals and the original legislation as drafted. They address a number of difficulties for job providers while still ensuring paid medical leave benefits and increased minimum-wage incomes for many Michiganders." For additional information on this development, see Tax Alert 2019-0071. Minnesota: The Minnesota Department of Revenue (Department) released the 2019 withholding tax guide, computer formula and wage-bracket withholding tables to its website. As we reported previously, the Department announced last year that the 2018 state income tax withholding wage-bracket and percentage-method tables released in December 2017 remained unchanged for 2018 by the federal Tax Cuts and Jobs Act. Employers were urged to suggest to employees who had made recent changes to their federal withholding to review their Minnesota withholding, using the federal 2017 Form W-4 as a guide to determine whether they are having enough Minnesota state income tax withheld for 2018. For additional information on this development, see Tax Alert 2019-0030. Mississippi: The Mississippi Department of Revenue released an updated Form 89-700-18, Withholding Income Tax Tables and Employer Instructions, containing updated wage-bracket withholding tables for 2019. There is no percentage method available to determine Mississippi withholding. For additional information on this development, see Tax Alert 2019-0104. Massachusetts: New law (HB 4841) expands the Massachusetts room occupancy excise to short-term rentals and permits certain cities and towns to impose local occupancy excises. Effective July 1, 2019, for rental contracts that were entered into on or after Jan. 1, 2019, the state and local room occupancy excise is imposed on short-term rentals of property that were rented for more than 14 days in a calendar year. A short-term rental is an owner-occupied, tenant-occupied, or non-owner occupied property that includes an apartment, house, cottage, condominium, or a furnished accommodation that is not a hotel, motel, lodging house, or bed and breakfast establishment, where at least one room or unit is rented out by an operator using advance reservation for a period of not more than 31 consecutive calendar days. The excise is imposed on the transfer of occupancy, and generally, the occupant of a room will pay the excise to the operator, however, an operator can allow an intermediary to collect the excise. HB 4841 provides specific exceptions to the excise based on length of stay or accommodations classifications. Additionally, certain cities or towns may impose a local excise on occupancy transfers and a community impact fee, and an additional excise is imposed on occupancy transfers of a room in a bed and breakfast establishment, hotel, lodging house, short-term rental, or motel located within a municipality that is a member of the Cape Cod and Islands Water Protection Fund. Mass. Law 2018, Ch. 337 (HB 4841), signed by the governor on Dec. 28, 2018. See also, Mass. Dept. of Rev., Short-term rentals FAQs (Jan. 2019). New York: The U.S. District Court for the Southern District of New York (Court) held New York's opioid fee, which was enacted in 2018 as part of the Opioid Stewardship Act (the Act),6 violates the dormant Commerce Clause of the U.S. Constitution because of its prohibition on passing the costs of the stewardship payments onto New York residents to the detriment of consumers outside of the state. In doing so, the Court granted a preliminary injunction on collection of New York's stewardship payments which were scheduled to begin on Jan. 1, 2019. In rendering its decision, the Court found that it was not barred by the Tax Injunction Act (TIA) from hearing the case, finding that the opioid fee is not a tax but instead it is a regulatory penalty on opioid manufacturers and distributors. The Court also found that the TIA did not bar a challenge to the Act's prohibition against opioid distributors and manufacturers passing on the costs of fee to downstream purchasers (pass-through prohibition). Turning to the constitutionality of the pass-through prohibition provision, the Court found that it: (1) violates the dormant Commerce Clause because it requires the extraterritorial application of state law and if its application is limited to New York it discriminates against out-of-state purchasers; and (2) cannot be severed from the Act since the Act rests on having both the assessment and the pass-through prohibition, and the legislative history indicates that state policymakers never intended for the assessment to be imposed without a way to prevent the costs from being passed to the consumer. Healthcare Distrib. Alliance v. Zucker, No. 18 Civ. 6168 (KPF) (S.D.N.Y. Dec. 19, 2018) (consolidated with two other cases Association for Accessible Medicines v. Underwood, 18 Civ. 8180 (KPF) and Specgx LLC v Underwood, 18 Civ. 9830 (KPF)). Washington: The Washington Department of Revenue recently set the economic nexus minimum thresholds for calendar year 2019 for business and occupation tax purposes. The thresholds, which are the same as the calendar year 2018 thresholds, are: $57,000 in property; $57,000 in payroll; and $285,000 in receipts. Wash. Dept. of Rev., ETA 3195.2018 (Dec. 20, 2018). Multistate: On Thursday, Jan. 24, 2019 from 1:00-2:15 p.m. EST New York (10:00-11:15 a.m. PST Los Angeles) Ernst & Young LLP (EY) will host a webcast during which the panelists will discuss current developments in state and local tax controversy. Transfer pricing audits, assessments and court decisions have become more and more frequent over the last few months. Leaders from EY's tax practice will provide an overview of federal transfer pricing principles and recent decisions as well as dive into the details of how specific states and the Multistate Tax Commission (MTC) view transfer pricing. The webcast will conclude with updates on controversy trends in Illinois and California. On this webcast, Helen Hecht, general counsel for the MTC, will sit down with EY's Mike Semes and Scott Susko to discuss the MTC's point of view on transfer pricing and related issues. In addition, panelists will discuss the most recent judicial, legislative and administrative developments in Illinois and California. Click here to register for this event. Multistate: On Wednesday, Jan. 30, 2019, EY will host a webcast to provide an overview of the relevant business implications of the Wayfair decision to both US and non-US parented groups. Topics of discussion will include: (1) evolution of the US state tax nexus landscape, (2) discussions regarding new compliance protocols/due dates/nexus thresholds, (3) update on states' reactions to the Wayfair decision, including increase in audit activity, (4) market observations, and systems and process considerations, and (5) practical client case studies. Click here to register for 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. 1 Kaestner 1992 Family Trust v. N.C. Dept. of Rev., No. 307PA15-2 (N.C. S.Ct. June 8, 2018), petition for cert. granted, N.C. Dept. of Rev. v. The Kimberley Rice Kaestner 1992 Family Trust, Dkt. No. 18-457 (U.S. Sup. Ct. granted Jan. 11, 2019). 2 Fielding v. Minn. Comm'r of Rev., 2018 WL 3447690 (July 18, 2018), petition for cert. filed, Minn. Comm'r of Rev. v. Fielding, Dkt. No. 18-664 (U.S. S.Ct. filed Nov. 15, 2018). 3 Amended regulations include: Regs. §§ 39-22-109, 39-22-303.6-1 through -18, 39-22-303.7-1 and -2, 39-22-303.10, 39-22-303(11)(c), and 39-22-305. 4 Great Lakes Bar Control, Inc. v. Testa, Slip Opinion No 2018-Ohio-5207 (Ohio S.Ct. Dec. 27, 2018). 6 The Act is codified at N.Y. Pub. Health Law §3223. Document ID: 2019-0180 |
