05 February 2019 State and Local Tax Weekly for January 25 Ernst & Young's State and Local Tax Weekly newsletter for January 25 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 Jan. 15, 2019, New York Governor Andrew Cuomo released his proposed fiscal year 2019–2020 Executive Budget Bill (A2009/S1509 or the Budget Bill). Some of the provisions addressed by the Budget Bill include the following:
Tax alert 2019-0217 provides a detailed summary of the more significant tax provisions in the Budget Bill. Taxpayers should keep upcoming business tax filing deadlines in San Francisco and Los Angeles in mind Local California municipal tax filing deadlines are quickly approaching and are commonly overlooked. While preparing for the upcoming federal and state filing season, taxpayers should keep in mind the following business tax filing obligations in San Francisco and Los Angeles. San Francisco's 2018 gross receipts tax and payroll expense tax returns are due on or before Feb. 28, 2019. A taxpayer may request a 60-day extension in writing provided the taxpayer files the request in writing and pays at least 90% of the tax due by the filing deadline. In addition to the gross receipts tax, San Francisco also requires payment of a business registration fee. Taxpayers must register or renew their business registration every year. The due date for registration or renewal is May 31, 2019. The business registration fee may be filed online on the San Francisco Treasurer's website. The Los Angeles business tax return is due on or before Feb. 28, 2019. A taxpayer can file its 2018 Business Tax Renewal Form either by mail or electronically. The city provides both copies of its forms for download and completion as well as access to an electronic filing system (with applicable instructions) on its website. To be considered timely filed, a taxpayer must postmark or electronically file the forms no later than 11:59 pm PST on Feb. 28, 2019. Interest and penalties will be assessed starting March 1, 2019. Taxpayers can apply for a maximum filing extension of 45 days. An extension request must be made in writing, accompanied by at least 90% of the total tax due, and received or postmarked by the Feb. 28, 2019 filing deadline. Additional information about the Los Angeles business tax renewal process is available here. By no means should taxpayers assume that only San Francisco and Los Angeles are the only California municipalities that impose local business license taxes. Nearly every California municipality does and the variety of these levies varies widely from locality to locality. As an example, the City of Santa Monica also imposes a gross receipts tax but unlike the San Francisco or Los Angeles levies, returns and payments are due August 31 of each year. For additional information on this development, see Tax Alert 2019-0192. Kentucky: The Kentucky Department of Revenue has released a proposed regulation regarding the treatment of net operating losses (NOLs) as modified by tax reform legislation enacted in April 2018 (see Tax Alert 2018-0911). Among other changes to Kentucky's tax system, the legislation adopted mandatory combined reporting for tax years beginning on or after Jan. 1, 2019. It also provided an eight-year elective consolidated return filing option based on the membership of the taxpayer's federal consolidated group. The new combined reporting regime significantly altered Kentucky's treatment of NOLs. Under the prior nexus consolidated regime, Kentucky NOLs were computed on a pre-apportionment basis and could be shared among members of the nexus consolidated group, subject to the 50% income limitation. Under the new law, NOLs will be computed on a post-apportionment basis with no sharing among members of the combined group and also subject to the 80% limitation as Kentucky did not decouple from the federal limitation adopted in the Tax Cuts and Jobs Act (P.L. 115-97). The proposed regulation amends existing 103 Kentucky Administrative Rule 16:250 and is intended to provide guidance on how to convert pre-apportioned NOLs from a nexus consolidated return to post-apportioned NOLs to be used on either a mandatory combined, elective consolidated, or separate company return. The proposed regulation sets forth the steps for a nexus consolidated filer to determine the NOLs to be carried into either a combined, elective consolidated, or separate return and sets forth several numerical examples to guide taxpayers in making these computations. For additional information on this development, see Tax Alert 2019-0197. Kentucky: Amended regulations (amended 103 Ky. Admin. R. 016:060, 016:090, 016:230, 016:240, 016:290, 016:330 and 016:340) explain corporate income tax apportionment and nexus provisions. Amended 103 Ky. Admin. R. 016:060 clarifies criteria to classify corporate income as apportionable (previously business) income and nonapportionable (nonbusiness) income, explains how to apportion certain interest income, and provides illustrative examples, applicable to tax periods beginning on or after Jan. 1, 2018. Additionally, amended 103 Ky. Admin. R. 016:230, which addresses intangible expenses, intangible interest expense, and management fees, defines "arm's length transaction" as a freely negotiated transaction between unrelated parties as provided in 26 CFR 1.482-1. Amended 103 Ky. Admin. R. 016:240, addressing the nexus standard for corporations and pass-through entities, provides that P.L. 86-272 does not provide immunity from Kentucky's limited liability tax. Additionally, P.L. 86-272 protection in Kentucky applies to a corporation's/pass-through entity's representatives' sales solicitations of tangible personal property if the orders are sent outside Kentucky for approval or rejection, and are filled by shipment or delivery from a point outside Kentucky regardless of the shipment or delivery method (addition in italics). Further, amended 103 Ky. Admin. R. 016:330 provides guidance on filing a petition for alternative apportionment, providing taxpayer options if the petition to use an alternative apportionment method is denied, and clarifying when separate accounting is available. The alternative apportionment rule changes apply to taxable years beginning on or after Jan. 1, 2018. Amended 103 Ky. Admin. R. 016:340 clarifies how taxpayers determine apportionment of Kentucky income when using a completed contract method of accounting. Lastly, amended 103 Ky. Admin. R. 016:090 and amended 103 Ky. Admin. R. 016:290 changes statutory references related to the payroll and property factor for apportionment purposes. Ky. Dept. of Rev., amended 103 Ky. Admin. R. 016:060, 016:090, 016:230, 016:240, 016:290 and 016:330 (Ky. Admin. Reg. Jan. 1, 2019). Louisiana: A Texas holding company's gain from the sale of its 100% interest in a disregarded limited liability company doing business in Louisiana during taxable year 2011 to an unrelated third party was properly included in the denominator of the sales factor ratio. In reaching this conclusion, the Louisiana Board of Appeals (Board) found that the gain was not one of four specific categories of allocable income, and La. Rev. Stat. 47:287.95(F)(1)(c) required that a factor in determining the apportionment percentage is the "ratio of net sales made in the regular course of business and other gross apportionable income [emphasis added] attributable to this state and the total net sales made in the regular course of business and other gross apportionable income [emphasis added] of the taxpayer." Excluding the gain from apportionable income would render these words in the statute meaningless. Additionally, the Board found that LAC 61:I.1134(D), which excluded from the apportionment formula sales not made in the regular course of business, exceeded the scope of the statute it interpreted. Davis Lynch Holding Co., Inc. v. La. Dept. of Rev., No. 9586D (La. Bd. App. Dec. 11, 2018). Michigan: Outgoing Michigan Governor Rick Snyder vetoed SB 1097, SB 1170, and SB 362. The bills contained tax-related proposals that would have: decoupled from the IRC § 163(j) business interest limitation added by the federal Tax Cuts and Jobs Act (P.L. 115-97)(TCJA), created a flow-through entity tax in response to the TCJA's $10,000 cap on the federal deduction for state and local taxes paid, and revised the apportionment formula for financial institutions. With a new legislative session underway, in order to achieve these legislative goals, new similar bills will have to be introduced. For more on this development, see Tax Alert 2019-0210. New Jersey: The New Jersey Division of Taxation (Division) issued guidance on the treatment of IRC §§ 965 (the transition tax on repatriated income) and 951A (global intangible lowed-taxed income, or GILTI) for individual income tax purposes under the New Jersey Gross Income Tax (GIT). According to the Division's guidance, deemed dividends from repatriated income reported under IRC § 965 are included in New Jersey gross income in the same tax year and same amount as reported for federal income tax purposes. New Jersey tax liability related to IRC § 965 is payable at the same time such amounts are included in New Jersey gross income; New Jersey law does not allow for a deferment of payment or the payments in installments as permitted under the federal statute. Sole proprietorships, partnerships and S corporations will report deemed repatriation dividends in the same manner as described above. The GIT does not allow for the IRC § 965(c) deduction or any similar deduction for sole proprietorship or partnerships, but S corporations are allowed such deductions. Partners will report this income as a Distributive Share of Partnership income on the taxpayer's individual Form NJ-1040. In regard to IRC § 951A GILTI income, it is reported by a shareholder in the same tax year and the same amount as for federal income tax purposes. Shareholders will report IRC §§ 965 and 951A income as a Net Pro Rata Share of S corporation income on the Form NJ-1040. Other taxpayers will report GILTI income for GIT purposes when the income is actually distributed from earnings and profits in the category of dividend income. N.J. Div. of Taxn., "New Jersey Gross Income Tax Federal Tax Cuts and Jobs Act (TCJA) — Questions and Answers" (Jan. 16, 2019). Tennessee: A Florida incorporated corporation that was doing business, and had its principal office address, in Tennessee but was not doing business in other states is allowed to apportion its Tennessee franchise and excise taxes in the tax years at issue (2006 and 2007) because its incorporation in Florida creates a substantial nexus with Florida for purposes of taxation. In so holding, the Tennessee Court of Appeals (Court) found it immaterial that Florida did not impose tax on the corporation in the years at issue, reasoning that Florida's jurisdiction to tax created a risk of taxation. The Court further noted that state law in both Tennessee and Florida embrace a finding that incorporation in a jurisdiction creates substantial nexus. In addition, the Court rejected several of the corporation's other arguments that it had established nexus with other states, finding that the corporation's travel activities to other states did not create nexus because the travel was largely limited to isolated sales solicitation efforts that mostly occurred before the tax years at issue, other travel was attributable to individuals rather than to the corporation, and an "earnout" provision did not legally create a multistate partnership with another entity. Popularcategories.com, Inc. v. Gerregano, No. M2017–01382-COA-R3-CV (Tenn. App. Ct. Dec. 20, 2018). Multistate: The most recent sales and use tax quarterly newsletter, which provides a summary of recent significant legislative, administrative and judicial actions that affected state and local sales and use taxes is now available. A copy of the newsletter is available in Tax Alert 2019-0211. Colorado: The Colorado Department of Revenue provided guidance on factors considered in determining the taxability of computer software. Colorado subjects software to sales tax if it is prepackaged for repeated sale or license, its use is governed by a tear-open nonnegotiable license agreement, and it is delivered in a tangible medium such as a tape, disk, compact disc, or card. Charges for mandatory maintenance agreements included in the sale of taxable computer software are also taxable. Colorado does not subject computer software to sales tax when it is provided to a customer through an application service provider, delivered to the customer by electronic computer software delivery, or transferred to the customer by load and leave computer software delivery. If a Colorado-located buyer purchases multiple taxable computer software licenses with the intent to distribute and use some portion of the licenses at the buyer's non-Colorado locations, state sales tax is only due on the part of the fees associated with the licenses actually used in Colorado. The purchaser must provide a written statement to the retailer attesting to the Colorado and non-Colorado license fee amounts. Colo. Dept. of Rev., Sales Tax Topics: Computer Software (Dec. 2018). Florida: A design academy and a merchandising and design academy (academies) were not entitled to a sales and use tax exemption for certain qualified production activities because the exemption does not apply to educational institutions that are only primarily engaged in teaching students photography, sound and recording, creation of special effects, animation, etc. Rather, the exemption requires that the academies teach students to perform the activities or services "directly in connection with the production of a qualified motion picture." In so holding, the Florida Court of Appeal (Court) found that while both parties presented reasonable interpretations of the exemption the interpretation of the Florida Department of Revenue was entitled to greater deference, since the Department is the administrative agency responsible for enforcing this statute. (The Court noted that effective Jan. 8, 2019, a voter-approved Florida constitutional amendment prevents courts from deferring to agency interpretations of statutes.) Further, the Court strictly construed the exemption statute against the academies, and found they did not present sufficient evidence to determine that the academies were "primarily engaged" in teaching students to perform certain tasks "directly in connection with the production of a qualified motion picture." Internat'l Academy of Design, Inc. et al v. Fla. Dept. of Rev., No. 1D18-248 (Fla. Ct. of App., 1st Dist., Dec. 31, 2018). New York: A realty company (C1) that managed several properties on behalf of the New York City Housing Authority (NYCHA) was an agent of NYCHA and, therefore, its purchase from another corporation (C2) of security guard services for the properties qualified for an exemption from sales tax. Although C2 did not obtain from C1 a properly completed form ST-122 (exempt purchase certificate for an agent of a New York governmental entity) and a copy of form DTF-122 (certification of agency by a New York governmental entity), the New York Tax Appeals Tribunal considered the totality of the facts and circumstances and found that the NYCHA had a sufficient degree of direction and control over C1. Hence, C1's security service purchases under subcontracts with C2 were exempt from tax. Matter of Garrison Protective Services, Inc., DTA No. 826738 (N.Y. Tax App. Trib. Dec. 27, 2018). South Dakota: A web-based business that offers dealers and individuals an online forum to advertise their vehicles for sale and other services is not entitled to an advertising exemption or a sale-for-resale exemption from use tax for services related to the online forum. The South Dakota Supreme Court (Court) found that the business is not entitled to the advertising exemption because it did not show that it "used any of the disputed services [web services for web hosting; transactions for access to a vehicle identification number database, software development services, and security services; and the purchase of domain name registration services] to assist it in completing a project for a current customer, to prepare vehicle listings, or to publish the vehicle listings on its website." Rather, dealers prepare and place their own inventory after the business builds the website, and the services connected to the disputed transactions were used to create and maintain the business's website and operating systems. Further, the business's purchase of domain name registration services did not qualify for the sale-for-resale exemption since the business purchased domain names on behalf of its customers, but used the domain names to build websites and then retained the domain names after building them (rather than selling the domain names to customers). Lastly, the Court encouraged the legislature to enact statutes or the South Dakota Department of Revenue to promulgate rules appropriate for internet-based media, noting that its decision was based on statutes and regulations designed for "traditional" media and that the current provisions could lead to inconsistent results as applied to new technologies. Carsforsale.com, Inc. v. S.D. Dept. of Rev., 2019 S.D. 4 (S.D. S.Ct. Jan. 9, 2019). California: The California Film Commission has announced application deadlines for Tax Credit Program 2.0 for both TV and film. For recurring or relocating TV projects, the next application period for non-transferable credits is Feb. 4-8, 2019, with approval letters due March 11, 2019. For all fiscal year 2019–2020 TV projects (recurring, new TV, relocating TV, pilots, movie for TV, and mini-series), the upcoming application dates are May 20-24, 2019, Nov. 4-8, 2019, and Feb. 3-7, 2020. For feature films (independent and non-independent), the next application period is Feb. 25-March 1, 2019, with the approval letter deadline of April 1, 2019. For fiscal year 2019–2020 feature films, the upcoming application dates are June 17-21, 2019, Oct. 7-11, 2019, and March 9-13, 2020. Credits for independent films are transferable, while credits for non-independent films and TV projects are not transferable. Cal. Film Comn., Tax Credit Program 2.0: Upcoming Application Dates (Jan. 2019). Oregon: In reversing the Oregon Tax Court, the Oregon Supreme Court (Court) held that the entire unit of a satellite television corporation's (corporation) property was newly added to the central assessment rolls in 2009 and, thus, it was excepted from a Constitutional cap on annual assessed value increases as "new property or new improvements to property." In so holding, the Court found that the definition of "new property or new improvements to property" included "the addition of *** property to the tax account", and the entire unit was subject to the statutory formula to determine the maximum assessed value and assessed value of new property. The corporation was subject to central assessment as a "communication" business, and even though its real tangible and personal property was previously subject to local assessment, the unit of property added to the central assessment roll had not been assessed previously since unit valuation under central assessment considers a company's market value as a whole (rather than assessing various component parts of a whole). Lastly, the Court's interpretation of the exception does not conflict with the voters' intentions when they adopted the constitutional limitations on property tax increases (Measure 50 codified at Ore. Const., Art. XI, § 11). Dish Network Corp. v. Ore. Dept. of Rev., No. SC S065019 (Ore. S.Ct. Jan. 25, 2019). Oregon: The Oregon Department of Revenue announced that due to the tax court's ruling in Ivelia,1 an election to change the Qualified Business Income Reduced Tax Rate (formerly, the Pass-Through Entity (PTE) Reduced Tax Rate), made on an amended return is considered to be made on an original return if the taxpayer has an extension and the amended return changing the PTE election is filed by the Oct. 15 extended due date. Previously, only amended returns that changed the PTE election filed before the April 15 due date were considered to be an original return. Further, when an amended return is received within the extension period, only the Qualified Business Income Reduced Tax Rate election is treated as the original election selected. Changes to other irrevocable elections (i.e., surplus refund (kicker) credit donation or federal tax subtraction changes) must be made on an amended return filed by April 15 regardless of whether the taxpayer had an extension. Ore. Dept. of Rev., Revenews: Qualified Business Income Reduced Tax Rate — Irrevocability (Jan. 8, 2019). Indiana: The Indiana Department of Revenue announced that the counties of Carroll, Cass, Dearborn, Grant, Hancock, Huntington, Jennings, and White changed their local withholding income tax rates effective Jan. 1, 2019. For additional information on this development, see Tax Alert 2019-0186. North Dakota: The North Dakota State Tax Department released the 2019 Income Tax Withholding, Rates and Instructions for Wages Paid in 2019, including the percentage method for North Dakota state income tax withholding for use with wages paid on or after Jan. 1, 2019 (annual table reproduced on the following pages). The 2019 wage-bracket withholding tables are also available on the North Dakota State Tax Department's website. For additional information, see Tax Alert 2019-0198. Oklahoma: The Oklahoma State Tax Commission released the state income tax withholding tables for tax year 2019. The 2019 annual percentage method is unchanged from 2018 and the annual withholding allowance amount remains at $1,000. For more on this development, see Tax Alert 2019-0200. Oregon: The Oregon Department of Revenue has released to its website the 2019 withholding tax formulas and wage-bracket withholding tables, effective with wages paid on or after Jan. 1, 2019. For additional information on this development, see Tax Alert 2019-0204. Vermont: The Vermont Department of Taxes released its 2019 state income tax withholding tables and guide. The supplemental rate is increased to 30% of federal income tax withholding. The 2019 income tax withholding rates are reduced due to 2018 legislation. For additional information on this development, see Tax Alert 2019-0185. International: The Italian Budget Law 2019 (Law no.145/2018), published in the Official Gazette on Dec. 31, 2018, clarifies that the reduced Value Added Tax (VAT) rate of 10% applicable for medicines also applies to medical devices based on substances generally used for therapeutic or prophylactic purposes and medical and veterinary treatments, classifiable in the tariff code 3004. Medical devices not falling under the new provision could benefit from the reduced VAT rate should they be included in other categories of products. An analysis of the tariff codes of medical devices contained in the product portfolio can ensure the accurate application of the VAT rate and appropriate pricing. For additional information on this development, see Tax Alert 2019-0212. International: Tax Alert 2019-0188 summarizes the relevant Value Added Tax (VAT)-related issues that businesses may have to address and report in the last Dutch VAT return of their (financial) year. This Alert also reflects on certain relevant VAT-related events of the past year as well as key issues to consider for 2019. International: The Philippine Value Added Tax (VAT) system imposes two VAT rates depending on the type of transaction. These rates are: (a) 12% as the regular VAT rate; and (b) 0% (VAT 0%) on specific transactions identified in the Philippine Tax Code (Tax Code). Under the amendments to the Tax Code that became effective on Jan. 1, 2018, the Bureau of Internal Revenue (BIR) is mandated to grant a refund of unutilized input VAT attributable to VAT 0% sales within 90 days. To further implement this amendment, the Philippine Finance Department issued regulations on Dec. 21, 2018 to clarify the timetable for processing input VAT attributable to VAT 0% sales. Under the new rules, the 90-day period will include both the filing of the application and the actual payment of refund to the taxpayer. This is in contrast to the previous rules where the 90-day period only covered the filing of the application up to the approval of the BIR recommendation for refund but not the actual issuance of the refund. The new regulation supersedes the previous rules on the process. Tax Alert 2019-0229 summarizes the key provisions of 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. Document ID: 2019-0301 |
