28 January 2019 State and Local Tax Weekly for January 18 Ernst & Young's State and Local Tax Weekly newsletter for January 18 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 York announces new economic nexus standard for sales and use tax collection; applies starting January 15, 2019 On Jan. 15, 2019, the New York Department of Taxation and Finance (Department) issued a notice (N-19-1) announcing that any remote seller meeting the sales threshold set forth in N.Y. Tax Law § 1101(b)(8)(iv) should immediately register as a vendor and begin charging and collecting tax. The $300,000 threshold in New York-sourced gross receipts from the sale of tangible personal property and 100 transactions involving sales of tangible personal property to New York residents measures sales activity during the immediately preceding four quarters (March 1 through May 31; June 1 through August 31; September 1 through November 30; and December 1 through February 28/29). Enacted in 1989 as part of the state's "anti-Bellas Hess" laws, the threshold originally was intended to determine whether the presumption that the remote seller was "regularly and systematically" soliciting business in New York was met. Language in the 1989 law notes that vendors that regularly or systematically solicit business in New York via catalogs, flyers, or any other means of solicitation must collect tax "if such solicitation satisfies the nexus requirement of the United States Constitution." With the U.S. Supreme Court's abrogation of the physical presence doctrine in Wayfair,1 the Department believes that requirement now can be met based on sales volume. The Department has created a webpage where it will post additional information, including FAQs. For more on this development, see Tax Alert 2019-0177. Pennsylvania clarifies "maintaining a place of business in the Commonwealth" rule; sales tax collection for marketplace sellers/facilitators, remote sellers starts July 1, 2019 In response to the U.S. Supreme Court's ruling in South Dakota v. Wayfair, the Pennsylvania Department of Revenue (Department) issued Sales and Use Tax Bulletin 2019-01 (revised Jan. 11, 2019), to "clarify when marketplace and remote sellers, marketplace facilitators, and all other vendors maintain a place of business in the Commonwealth." The Department announced that, effective July 1, 2019, the commonwealth's economic nexus provisions will apply only to those persons who, in the previous 12 months, made more than $100,000 of gross sales into the Commonwealth. Marketplace facilitators with no physical presence in Pennsylvania must include both facilitated and direct sales in determining whether they have exceeded the economic nexus threshold. Marketplace sellers that lack any physical presence in Pennsylvania must include both their direct sales and those sales made through a marketplace facilitator that does not collect sales tax on its behalf in determining whether they have exceeded the economic nexus threshold. The Department noted that it will certify service providers that will offer software and perform services that, when relied upon by a vendor to determine whether or not the sale of a particular product or provision of a particular service is subject to sales tax, will relieve the vendor of liability upon audit. The certified service providers also will aid in the registration, collection, reporting and remittance of sales tax. Marketplace facilitators that establish economic nexus in Pennsylvania will be required to collect the sales tax on all sales into the Commonwealth, even if the sale is on behalf of a marketplace seller that does not individually have nexus. For additional information on this development, see Tax Alert 2019-0148. Federal: Treasury and the IRS released final regulations on the 20% deduction for pass-through businesses under Section 199A. Simultaneous with the issuance of the final regulations, the IRS also released additional proposed regulations (REG-13465-18), Notice 2019-07 and Revenue Procedure 2019-11. The final regulations adopt, with changes, the proposed regulations issued on Aug 8, 2018. For more on this development, see Tax Alert 2019-9002. Federal: On Dec. 20, 2018, the Joint Committee on Taxation (JCT) issued its general explanation or "Bluebook" of the Tax Cuts and Jobs Act (P.L. 115-97) (the Act). The Bluebook provides a comprehensive technical description of the Act and identifies several technical corrections needed to the law. While the Bluebook is not intended to serve as reliance guidance, it does shed light on congressional intent and offers clarifying descriptions of provisions that may have been ambiguous in the Act and congressional reports. Specifically, the Bluebook clarifies or otherwise addresses certain provisions under the Act related to Section 451, bonus depreciation, Section 199A, research and development incentives, and other provisions discussed herein. Tax Alert 2019-0157 provides a detailed overview of significant implications relevant to the provisions addressed; however, the Bluebook should be referenced for comprehensive and precise language offering further insights. Federal: On Jan. 15, 2019, final regulations under IRC §965 were made available on the IRS website. The final regulations are expected to be published shortly in the Federal Register. The final regulations are generally consistent with the proposed regulations published on Aug. 9, 2018, but make certain modifications. For more on this development, see Tax Alert 2019-0232. Kentucky: An affiliated group is not entitled to a refund of corporate income tax because the group's South Carolina parent corporation (parent) is not an "includable corporation" and, therefore, could not join in the filing of a Kentucky consolidated corporation income tax return with its wholly owned Kentucky subsidiary for the tax years at issue (those ending March 31, 2007 through March 31, 2010). In so holding, the Kentucky Court of Appeals (Court) found that the parent fell within two includable corporation definition exceptions when: (1) it realized a net operating loss and its Kentucky property, payroll and sales factors were de minimis; and (2) the sum of its Kentucky property, payroll and sales factors was zero. Under Kentucky law an affiliated group must include a common parent that is itself an includable corporation, and a common parent must be a member of an affiliated group. Additionally, a letter ruling issued to the parent through a third party requiring a consolidated return was non-controlling and non-binding because the parent's facts differed from facts presented in the letter ruling inquiry and the letter ruling lacked the force of law. Further, the Kentucky Department of Revenue's denial of the parent's refund request did not violate the contemporaneous construction doctrine because two letter rulings issued during a five year period do not constitute a long-standing "policy." World Acceptance Corp. v. Ky. Fin. and Admin. Cabinet, Dept. of Rev., No. 2015-CA-001852-MR (Ky. Ct. of App. Jan. 4, 2019) (unpublished). Michigan: Gain out-of-state wireless telecommunication companies (companies) received from the sale of a Federal Communications Commission license, which permits or prevents others from transmitting and receiving wireless signals, is included in the companies' sales factor numerator for Corporate Income Tax apportionment purposes. The Michigan Department of Treasury found that even though the companies never provided services to Michigan customers under the license, as a holder of the license that permits or prevents others from transmitting and receiving wireless signals, the companies used intangible property in the regular course of their business in Michigan. Since the geographic area the license covered is located entirely within Michigan, the gain is sourced to Michigan and must be included in the sales factor numerator for Corporate Income Tax apportionment purposes. Mich. Dept. of Treas., LR 2018-1 (Nov. 21, 2018). Oklahoma: Individual taxpayers petitioned the U.S. Supreme Court (Court) to review an Oklahoma Court of Civil Appeals (appeals court) case, asking the Court to consider whether the Oklahoma capital gains deduction tax scheme (Okla. Stat. tit. 68 § 2358(F)) prohibiting the capital gains deduction for the sale of stock in a non-Oklahoma headquartered company violates the Commerce Clause as applied to the individual taxpayers. The appeals court, citing CDR Systems Corp.,2 held that the statutory headquarters requirement did not violate the dormant Commerce Clause, noting that the Oklahoma legislature used the same language in the statutory headquarters requirement for individual taxpayers as it did for corporations, estates, or trusts. Baskins v. Okla. Tax Comn., No. 115,947 (Okla. Ct. Civ. App., Div. II, May 9, 2018) (unpublished), cert. filed, No. 18-807 (U.S. Dec. 21, 2018). Pennsylvania: The Pennsylvania Department of Revenue (Department) issued guidance on the corporate net income tax (CNIT) treatment of hedging transactions, finding that certain hedging transactions are excluded from the CNIT sales factor. The Department explained that for CNIT purposes, the definition of "sales"3 excludes certain gross receipts received from the sale, redemption, maturity or exchange of securities. Based on this definition, the following hedging transactions are excluded from the sales factor: (1) gross receipts related to gain or loss from capital assets hedging transactions and hedging transactions related to dealers in securities; (2) receipts attributed to accrued interest income or expense, gain or loss on a debt instrument, a payable, a receivable or a forward contract payable in a foreign currency or foreign currency gain or loss; and (3) gross receipts from foreign exchange gain or loss on distributions of previously taxed income as subpart F income or as earnings of a qualified electing fund. The Department finds that these transactions do not reflect the market for taxpayers' goods and services, they are similar to securities, and taxpayers do not primarily hold them for sale to customers in the ordinary course of their trade or business. For Pennsylvania purposes, the guidance requires taxpayers to follow the federal practice of identifying hedging transactions. The bulletin is effective for taxable years beginning after Dec. 31, 2018. Pa. Dept. of Rev., Corp. Tax Bulletin 2019-01 (Jan. 4, 2019). Federal: Proposed bill (S. 128, Stop Taxing Our Potential Act of 2019 (STOP)), introduced by Senator Jon Tester (D-MT) on Jan. 15, 2019, would prohibit a state from imposing sales, use or similar tax collection and reporting obligations or from assessing such taxes on a person or treating a person as doing business in the state for purposes of collecting such tax, unless that person has a physical presence in the state. Physical presence would be created by (1) maintaining a commercial or legal domicile in the state; (2) owning, holding a leasehold interest in, or maintaining real property in the state; (3) leasing or owning tangible personal property in the state; (4) having one or more employees, agents or independent contractors in the state providing on-site design, installation or repair services on behalf of the remote retailer; (5) having one or more employees, exclusive agents or exclusive independent contractors present in the state who help the remote retailer establish and maintain a marketplace in the state; or (6) maintaining an office in the state at which it regularly employs three or more employees. The bill sets de minimis physical presence, defines key terms, and includes dispute resolution provisions. If enacted, these provisions would apply to the calendar quarter beginning on or after Aug. 1, 2019. Senator Tester introduced a similar measure in 2018. Iowa: Effective Jan. 1, 2019, remote sellers and marketplace facilitators must collect and remit Iowa state and local option sales taxes in the same manner as retailers with a physical presence in the state. A remote seller makes retail sales of tangible personal property, services, or specified digital products into Iowa, but does not have a physical presence in the state. Under legislation enacted last year (SF 2417), remote sellers with $100,000 in gross revenue from Iowa sales or 200 separate sales transactions in Iowa in 2018 must collect and remit Iowa state and local option sales tax, starting Jan. 1, 2019. A marketplace facilitator generally includes businesses that facilitate retail sales by (1) providing infrastructure (i.e., listing the product on the marketplace, communicating offer or acceptance of a retail sale, providing the physical or electronic marketplace, etc.) or support (i.e., customer service, fulfillment or storage services, etc.) for retail sales to occur; and (2) collecting the sales price, processing payments, or receiving compensation from the retail sale. Under SF 2417, if a marketplace facilitator makes or facilitates $100,000 or more in Iowa sales or makes or facilitates Iowa sales in 200 or more separate transactions during 2018, the marketplace facilitator must collect and remit Iowa sales tax and applicable local option sales tax on all taxable sales made through its marketplace starting Jan. 1, 2019. If a remote seller only makes retail sales in Iowa through a marketplace, and the marketplace facilitator collects Iowa sales tax and applicable local option sales tax, the remote seller does not need to obtain an Iowa sales tax permit or file Iowa sales tax returns. Iowa sales tax will be reported and paid on a sales tax return filed by the marketplace facilitator. For additional information on this development, see Tax Alert 2019-0127. Ohio: An Ohio Court of Appeals (court), issued its decision in R.L. Best Co., upholding an assessment of sales and use tax on the sale of certain motor vehicles and trailers for which an exemption was claimed. The taxpayer was a manufacturer of custom extrusion presses and handling systems and also rebuilt and provided repair services to that equipment. The taxpayer used its trucks and trailers for three purposes: (1) to deliver equipment that it sold to customers, (2) to retrieve equipment from its customer's location for rebuilding or repair at its location, and (3) to transport its own tools to be used for equipment removal or installation at a customer location. The taxpayer was only authorized to haul the type of equipment it sold or repaired, so there were no opportunities to back-haul, resulting in deadhead miles. The taxpayer claimed exemption for the vehicles and trailers under Ohio Rev. Code § 5739.02(B)(32), which exempts vehicles, including trailers, used primarily to transport tangible personal property belonging to others by a person engaged in providing highway transportation for hire. Ohio Rev. Code §5739.01(Z)(1) defines "highway transportation for hire" as "the transportation of tangible personal property belonging to others for consideration … ." The Ohio Department of Taxation (Department) assessed tax against the vehicles and trailers asserting they did not meet the requirements for exemption. The Ohio Board of Tax Appeals affirmed the assessment. On appeal the court affirmed the Department's assessment and held that the taxpayer was not transporting tangible personal property belonging to others for consideration. In so doing, the court concluded that the absence of a separately stated transportation charge in most cases, or providing a dramatically reduced charge in others, did not evidence the requisite consideration. Additionally, the court rejected testimony from the taxpayer that the taxpayer knew that the transportation charges were built into the overall cost and that it did not separately state the charge to avoid any effort by the customer to negotiate a lower price. Accordingly, the court concluded that the customers were not able to make a conscious choice to receive the transportation services and, as such, there was no consideration. R.L. Best Co. v. Testa, No. 18 MA 0001 (Ohio Ct. App. Dec. 28, 2018). For more on this development, see Tax Alert 2019-0150. South Dakota: The South Dakota Department of Revenue issued guidance on how sales and use tax applies to internet access and internet-related services. The sale of internet access and internet-related services (e.g., internet access fees, email services, arranging for live chat or conferencing sessions directly on the internet, technical assistance and support, web hosting and/or domain name registration, website development or maintenance (each without placement), and real-time streaming video and/or audio) are subject to state sales tax plus applicable municipal sales tax. Sales and use tax, however, does not apply to the following internet-related services: website development or maintenance that includes placement on the internet by the same agency and fees charged by a website owner to place adds on its website. State and applicable municipal sales tax on internet access (and satellite internet services) is determined based on the customer's place of primary use (i.e., residential/primary business street address of the customer), while prepaid internet cards are subject to sales tax at the time of purchase (tax based on store location, additional minutes purchased online are based on the customer's place of primary use). The guidance further clarified: (1) the taxability of equipment, telecommunication services, and wireless and portable internet devices; (2) taxability related to websites, including webpage development, preparing and placing websites, advertising on an existing page, and website internet storage or hosting; (3) the taxability of other services such as domain name registration and renewal fees, domain name sales, web application servers, search engine positioning, strategic links, and website security and certificates; (4) purchasing certain technology-related services for resale; (5) taxability of support services (taxable based on the customer's location); (6) Voice Over Internet Protocol taxability; and (7) taxability of sales over the internet and internet auction services. The guidance rescinds and replaces all previous written information about this subject. S.D. Dept. of Rev., Tax Facts: Internet (January 2019). California: The California Film Commission announced that the next application period for its TV tax credit program is Feb. 4-8, 2019; only recurring or relocating TV series may apply during this period. Credit Allocation Letters (CALs) will be issued March 11, 2019, and submitted budgets must exclude any costs before that date. Recurring TV series can submit applications without pick up orders, however, CALs only will be issued to projects with pick up orders. Applications for projects that plan on prepping or beginning principal photography after the end of the 2018-19 fiscal year should be submitted during the first TV application period for FY 2019-20, scheduled for May 20-24, 2019. Cal. Film Comn., Production Alert: Cal. Film and TV Tax Credit Program 2.0 Upcoming Application Window: Feb. 4-8, 2019 (Jan. 7, 2019). Multistate: Tax Alert 2019-0125 includes our preliminary report of the employment tax rates and limits for 2019 and our "US employment tax rates and limits for 2018," updated as of April 1, 2018. The 2019 report provides rates and limits for unemployment insurance, Social Security/Medicare, certain fringe benefits, state paid family and medical leave and disability insurance and income tax withholding. This guide is updated during the year to reflect changes that have occurred throughout the year. Michigan: The Michigan Treasury Department has released the 2019 wage-bracket income tax withholding tables. The 2019 flat withholding rate (and supplemental withholding rate) will remain at 4.25%. Legislation enacted earlier this year changes the due date for filing Forms W-2 with the Department to January 31 effective with tax year 2018 (due Jan. 31, 2019). Also effective for the 2018 tax year, the law requires employers with 250 or more employees to electronically file Form 5081, Sales, Use and Withholding Taxes Annual Return. However, the deadline for filing the annual return remains at Feb. 28, 2019. For more on this development, see Tax Alert 2019-0149. 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 2019-0140. Nebraska: The Nebraska Department of Revenue announced that an updated Circular EN, Nebraska Income Tax Withholding for Wages, Pensions and Annuities, and Gambling Winnings, will not be issued for 2019. Employers are instructed to continue to use the 2017 income tax wage-bracket and percentage method withholding tables for 2019. For additional information on this development, see Tax Alert 2019-0151. Rhode Island: The Rhode Island Division of Taxation has released the state income tax withholding tables for tax year 2019. For additional information on this development, see Tax Alert 2019-0138. Oregon: New rule (OAR 150-307-0900) provides guidance to businesses to help determine whether they are qualified heavy equipment rental providers. Under law enacted in 2018, businesses primarily engaged in renting heavy equipment are deemed qualified heavy equipment rental providers and must register with the Oregon Department of Revenue (Department) by Dec. 31, 2018 and begin collecting heavy equipment rental tax on Jan. 1, 2019. A qualified heavy equipment rental provider is primarily engaged in the business of renting qualified heavy equipment without an operator. This occurs if more than 50% of gross rental revenue earned during the rental provider's prior fiscal year was from the rental of heavy equipment, heavy equipment attachments, associated trailers, and other equipment and tools that are mobile; are rented without an operator but typically require an operator for use; and can be used for construction, mining, earthmoving or industrial applications. For purposes of determining whether the threshold has been met, the following transactions are excluded from the gross rental revenue calculation: (1) renting equipment with an operator, (2) renting equipment for a single defined term of more than 365 consecutive days, (3) renting equipment from a facility outside of Oregon, and (4) renting equipment to an affiliate. A person that does not have any rental revenue in the prior fiscal year but expects to be primarily engaged in renting qualified heavy equipment in the next calendar year, must register with the Department in December of the current year and begin collecting and remitting heavy equipment rental tax beginning Jan. 1, 2019. The new rule took effect Jan. 1, 2019. Ore. Dept. of Rev., ORA 150-307-0900 (adopted Dec. 28, 2018). New Jersey: Amended regulations (amended NJ Admin. Code 17:18-3.1 and 17:18-3.3) clarify unclaimed property provisions related to dormancy periods and stored value cards. Amendments provide that holders of stored value cards redeemable for merchandise or services that were issued or sold on or after July 1, 2010, as well as all stored value cards sold that are redeemable for cash, regardless of the date of sale are not required to obtain the apparent owner's last known address at the point of the transaction. Unredeemed balances on any card, however, must be reported to the state if the last known address on the records of the holders is located in New Jersey and the information is available on the seller's books and records. This requirement does not apply when the stored value card is donated or sold below face value to a nonprofit or charitable organization or an educational organization, or is redeemable for admission to certain events or venues, among other exceptions. Other amendments provide that: (1) stored value cards issued through promotions, incentives, rewards, or loyalty programs may expire; (2) the conversion of a stored value card to a bank account must be initiated by the card's owner to restart the card's dormancy period; (3) a general purpose reloadable card is exempt from the five-year dormancy period applicable to stored value cards; (4) stored value cards given to a consumer based on purchasing a minimum amount of goods or services are exempt from the presumption of abandonment provisions for stored value cards, but stored value cards sold as gift cards at a discount are subject to reporting at 60% on the full unused card value; and (5) add definitions for "general purpose reloadable card" and "net card value" and modify definitions of "issuer of a stored value card" and "stored value card". The amendments took effect Dec. 17, 2018. N.J. Div. of Taxn., amended N.J. Admin. Code 17:18-3.1 and 17:18-3.3 (adopted Nov. 13, 2018). International: On Dec. 29, 2018, the Italian Parliament approved the 2019 Budget Law (i.e., Law No. 145 of 2018) published on the Official Gazette of Dec. 31, 2018 (the Budget Law). The Budget Law includes the following main indirect tax measures: (1) introduction of a tax on digital services, (2) postponement of the Value Added Tax (VAT) rates increase to 2020, and (3) extension of the VAT-reduced rate to certain medical devices and to certain bakery products. For more on this development, see Tax Alert 2019-0118. 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. Document ID: 2019-0235 |
