11 February 2019 State and Local Tax Weekly for February 1 Ernst & Young's State and Local Tax Weekly newsletter for February 1 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. Wyoming bill would subject corporations in the retail and hospitality industries to a 7% corporate income tax starting in 2020 On Jan. 22, 2019, the "National Retail Fairness Act" (HB 220) was introduced in the Wyoming legislature. If enacted, HB 220 would impose a 7% income tax on certain corporations in the retail trade and the accommodation and food service industries, effective Jan. 1, 2020.
HB 220 does not include any provisions on conformity to the federal income tax code. For additional information on this development, see Tax Alert 2019-0248. Federal: Recently released guidance on Section 199A's 20% pass–through entity deduction generally contains welcome direction on issues raised by proposed Section 199A regulations issued in August 2018 (the 2018 Proposed Regulations), such as the aggregation of certain trades or businesses at the entity–level, the safe harbor for certain rental real estate activities and the elimination of the so–called incidental rule. The guidance, however, leaves some questions unanswered and raises new issues. Perhaps most significantly, many taxpayers will likely be unable to determine with certainty whether their activities constitute a trade or business and when their activities constitute multiple trades or businesses for Section 199A purposes. The Section 199A guidance released Jan. 18, 2019, consists of (1) final regulations, (2) proposed regulations (the 2019 Proposed Regulations), (3) Notice 2019–07, and (4) Revenue Procedure 2019–11. For additional information on this development, see Tax Alert 2019-0218. Louisiana: The Louisiana Board of Tax Appeals (Board) determined how an out–of–state company operating gaming businesses in Louisiana should calculate its franchise tax base and allocate revenue generated from in–state subsidiaries and affiliates for the tax years at issue (2008–2010). The Board considered four issues — two related to the amount of the franchise tax base and two concerning the allocation of the company's franchise tax base in Louisiana. In regard to the first two issues, the Board determined that the company's cash deposits held for its affiliates in a "concentrator account" are debt included in the franchise tax base when there were no restrictions on the company's or affiliates' use of the funds and the funds were not segregated physically or legally. Similarly, the funds are not advances, credits or deposits from the affiliates under La. R.S. 47:603(B)(2). The Board also found that the increase or decrease in the company's surplus and undivided profits on its financial statements using the equity method of accounting, attributable to the book value of its subsidiaries or affiliates, is correspondingly included in the company's franchise tax. The equity pickup adjustments were bona fide valuation adjustments that reasonably reflected the fair value of the company's investments in its subsidiaries. Turning to the issues concerning allocation, the Board determined that the company's revenue from an increase or decrease in a subsidiary's book value stemming from the equity method of accounting is included as "revenues" under La. R.S. 47:606(A)(1), and is sourced based on the percentage of capital employed in Louisiana for corporation franchise tax purposes by the subsidiary corporation (not the parent). Lastly, the company's support fee revenue generated from flat fee services to its subsidiaries and affiliates is included as revenue in its sales factor ratio for franchise tax allocation purposes, as the support fees were not pure cost recovery. Boyd Gaming Corp. v. La. Dept. of Rev., No. 9616D (La. Bd. Tax App. Dec. 12, 2018). Mississippi: The Mississippi Department of Revenue (Department) issued guidance on the state's income tax treatment of various provisions of the federal Tax Cuts and Jobs Act (P.L. 115–97) (TCJA). The Department determined that for Mississippi income and franchise tax purposes, IRC Section 965 repatriation dividends are non–business income as foreign sourced dividends. Such dividends are allocated to Mississippi under non–business allocation rules, if applicable. The Department also advised that Mississippi does not follow the provisions under IRC Section 951A — global intangible low–taxed income (GILTI) — noting that the state does not tax foreign income or subpart F income. Other business tax provisions discussed include: (1) bonus depreciation (Mississippi does not follow); (2) TCJA increase to IRC Section 179 expensing (Mississippi follows); (3) net operating loss changes — 80% limit, no carryback, unlimited carryforward (Mississippi does not follow); (4) IRC Section 163(j) business interest deduction 30% limitation (Mississippi does not follow); (5) limit the IRC Section 1031 exchange to real property not held primarily for sale (Mississippi follows for an exchange of Mississippi real property for real property located outside the state); (6) change in accounting method (Mississippi will follow); among other provisions. The Department also discussed the impact on individual income taxes, including the 20% deduction of qualified business income from a pass–through entity allowed under IRC Section 199A. Mississippi law does not provide for such a deduction. Other individual income tax provisions addressed include standard deduction, personal exemption, alimony payments, moving expenses, cancellation of debt, medical expenses, among others. Miss. Dept. of Rev., "Tax Effects from the Tax Cuts and Jobs Act" (Jan. 28, 2019). Missouri: The Missouri Department of Revenue issued guidance on the state tax treatment of global intangible low–taxed income (GILTI) under IRC Section 250 and 951A. Missouri corporate income is computed using federal taxable income after net operating losses and special deductions as its starting point. Based on this starting point, Missouri taxable income automatically includes GILTI income under IRC Section 951A and takes into account the GILTI deduction under IRC Section 250. Missouri corporate income taxpayers are to include the Net GILTI Amount (i.e., GILTI income — GILTI deduction) on MO–1120, Line 1. Missouri treats the Net GILTI Amount as a dividend, and the guidance explains how taxpayers using one of the three apportionment methods currently available under Missouri law should include the Net GILTI Amount on their Missouri returns. Special guidance is provided for corporate taxpayers joining in the filing of a federal consolidated return but filing separate Missouri corporate income tax returns. Notably, a separate company that is a member of an affiliated group for federal corporate income tax purposes is required to calculate its Net GILTI Amount as if it filed a separate federal corporate income tax return for the same year. As for individual income taxpayers, GILTI income is automatically included in the federal adjusted gross income and an individual reports this amount on his/her Form MO–1040, Line 1. Individuals, unlike corporations, are not entitled to a GILTI deduction under IRC Section 250. Mo. Dept. of Rev., Policy Guidance — TCJA: IRC Section 951A Global Intangible Low–taxed Income (GILTI) (Jan. 31, 2019). Pennsylvania: The Pennsylvania Department of Revenue (Department) issued guidance on the Pennsylvania Corporate Net Income Tax (CNIT) treatment of global intangible low–taxed income (GILTI) (IRC Section 951A) and the deductions for GILTI and foreign–derived intangible income (FDII) (IRC Section 250). For federal income tax purposes, GILTI is treated in the same manner as Subpart F income. The Department treats Subpart F income as dividend income for CNIT purposes and, since GILTI is treated the same as Subpart F income, it also will treat GILTI income as dividend income for CNIT purposes. GILTI is included in a taxpayer's CNIT base in the year in which it is recognized (or would be recognized on a separate company basis if the taxpayer were required to file a separate federal income tax return) for federal income purposes. When the amount is actually distributed, the Department will follow federal law and treat the distribution as previously taxed income not subject to the CNIT. In addition, the Department will allow a dividends received deduction (DRD) with respect to GILTI, including for CNIT taxpayers that would have been entitled to a deduction on a separate company basis if the taxpayer were required to file a separate federal income tax return. The Department noted that the taxpayer's DRD may be less than 100%, depending on its ownership interest in the entity generating the GILTI income. Taxpayers, however, are not entitled to the GILTI or FDII deductions, because the CNIT base is computed without regard to special deductions (which is how these deductions are treated for federal income tax purposes). The Department also explained that GILTI income is not included in a corporation's sales factor for apportionment purposes. For Pennsylvania personal income tax (PIT) purposes, a dividend is a distribution of cash or property made from current or accumulated earnings and profits (E&P). Since GILTI is a "deemed dividend" it is not a dividend for PIT purposes. GILTI only will be subject to the PIT when an actual distribution of cash out of E&P is made. Lastly, the Department said that it anticipates issuing further guidance on GILTI once the IRS provides clarification. Pa. Dept. of Rev., Corporation Tax Bulletin 2019–02 (Jan. 24, 2019). Texas: The Texas Comptroller of Public Accounts advised that an Accountable Care Organization (ACO) (i.e., an organization of doctors, hospitals and other health care providers that come together to coordinate care for Medicare patients) for franchise tax purposes may exclude from its total revenue, to the extent included, payments received from the Center of Medicare & Medicaid Services under the Medicare Shared Savings Program (MSSP). Under Texas law, a health care provider may exclude from its total revenue the total amount of payments received under Medicare programs. Since the ACO receives payments under the MSSP, a Medicare program, for the health care services it provides, it may exclude such payment from its total revenue. Tex. Comp. of Pub. Accts., NO. 201812004L (Dec. 13, 2018). Alabama: A nationwide furniture leasing company could not claim the temporary storage exemption from state consumers use tax on furniture and electronics purchased from out–of–state vendors and stored in its Alabama warehouse because the company did not provide complete records showing that its purchases were removed from Alabama. The Alabama Tax Tribunal found the testimony of the company's sole shareholder that the company never intended for its out–of–state purchases to be leased to Alabama clients, and that it never in fact did so, did not satisfy the regulation's record–keeping requirements. The Tribunal, however, waived the negligence penalty for reasonable cause. Executive Furniture Leasing Internat'l, LLC v. Ala. Dept. of Rev., No. S. 17–1431–CE (Ala. Tax Trib. Jan. 14, 2019). Iowa: An out–of–state online retailer that sells prepackaged baked goods with "keepsake" boxes and other premium containers must obtain an Iowa sales tax permit and collect and remit sales tax on the sales price of the premium containers but not on the exempt baked goods, if the retailer meets Iowa's economic nexus thresholds that took effect Jan. 1, 2019. In addition, the Iowa Department of Revenue (Department) found that even though the prices of the baked goods and premium containers were not itemized, the sales were not bundled transactions. The premium containers are "distinct and identifiable" from the baked goods; the price of the container could be found by comparing the same or similar baked goods for sale without the premium container; and the selection of premium containers and the corresponding significant increase in price demonstrated that the premium containers are not "incidental or immaterial to the retail sale of the" baked goods. Accordingly, tax is due on the purchase of the premium containers. The Department further explained that in determining whether the retailer meets the economic nexus threshold, the retailer must include sales made through its own website as well as sales made through a marketplace facilitator. Since marketplace facilitators are required to collect and remit sales and use tax on sales made on its marketplace, the retailer would only be responsible for collecting tax on items sold on its own website. (Insufficient information was provided to determine whether the nexus threshold had been met.) In re Fairytale Brownies, Inc., No. 2018–300–2–0440 (Iowa Dept. of Rev. Dec. 7, 2018). Missouri: A company that operated the on–site cafeteria of a tax–exempt federal bank is liable for sales tax on food sold to the bank's employees because the company regularly sold food "to the public" and the bank's sales tax exemption did not apply to individual bank employees. In so holding, the Missouri Supreme Court (Court) cited J.B. Vending,1 finding that the bank's cafeteria was public for statutory purposes despite its restricted entry and access because the company is in the business of operating corporate cafeterias and it did not have a special relationship with its bank cafeteria customers. Additionally, the bank's sales tax exemption did not apply because: (1) the company exercised exclusive dominion and control over the food, (2) the bank did not purchase food from the company through employees' payroll deductions (rather the payroll deduction was an option for employees to pay for their food), and (3) customers decided which food products to purchase and when and where the purchased food was used. Myron Green Corp. v. Mo. Dir. of Rev., No. SC96903 (Mo. S.Ct. Jan. 15, 2019). South Carolina: A retailer that leases furniture is subject to sales tax on the gross proceeds of optional liability waivers offered with rental agreements based on the plain meaning of S.C. Code Ann. Section 12–36–910(A) and 12–36–90. In so holding, the South Carolina Court of Appeals (Court) noted that the South Carolina Department of Revenue previously applied S.C. Code Ann. Section 12–36–910(A) to impose sales tax on the sale of collision damage waivers on car rentals and maintenance contracts. Further, the Court found that under the true object test the waiver was merely incidental to the rental agreement because: (1) the rental agreement and waiver fees were paid together during each rental term, (2) the waiver could only be enforced if all rental agreement payments were made, (3) the rental agreement included a line item for the waiver fee, (4) the waiver fee was a fixed percentage of the rental agreement term payment, (5) customers could not purchase a waiver without first entering a rental agreement, (6) the retailer did not offer waivers for items sold by third parties, and (7) the waiver stated it was "an additional part of the rental agreement." Lastly, the Court found that since the waivers were merely incidental to the rental agreements, they also must be subject to sales tax as gross proceeds of the rental agreements (i.e., the waivers and rental agreements were "inextricably linked"). Rent–A–Center East, Inc. and Rent Way, Inc. v. SC Dept. of Rev., Op. No. 5615 (S.C. Ct. App. Jan. 16, 2019). Minnesota: An energy transportation company is entitled to a personal property tax exemption for sedimentation and erosion controls used during construction of two crude oil pipelines in Minnesota that were included in the cost of pipeline construction for regulatory purposes. The Minnesota Tax Court (Court) found that the company through the Minnesota Pollution Control Agency's August 2011 and February 2012 advice, showed that "the sedimentation and erosion controls satisfied the statutory requirements for the exemption even after the completion of construction on the pipelines." The Court also rejected the Commissioner's argument that once removed from the company's pipeline system, the property at issue became taxable because it was no longer being used for pollution abatement. The Court found no evidence that the property had been removed from the pipeline system and that subjecting personal property to taxation after it has been removed from a pipeline system is contrary to state law. Enbridge Pipelines (Southern Lights), LLC v. Minn. Comr. of Rev., No. 9081–R (Minn. Tax Ct. Jan. 23, 2019). 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. For additional information on this development, see Tax Alert 2019-0249. Iowa: The Iowa Department of Revenue announced that due to technical difficulties, the deadline for filing calendar year 2018 Forms W–2 and 1099 is extended to Feb. 28, 2019. The deadline for filing the 2018 Form VSP, Verified Summary of Payment, whether electronically or on paper, remained Jan. 31, 2019. For additional information on this development, see Tax Alert 2019-0270. New Jersey: The New Jersey Division of Taxation has released an updated employer withholding guide containing revised percentage method withholding tables effective Jan. 1, 2019. The revised tables reflect a reduction of the withholding rate for individuals earning over $5 million to 11.8% beginning Jan. 1, 2019, down from the 15.6% withholding rate used for wages paid on or after Sept. 1, 2018. For additional information on this development, see Tax Alert 2019-0269. International: The Supreme Court of Cyprus has issued another Value Added Tax (VAT) decision finding company directors as criminally liable for unpaid VAT amounts reported in VAT returns, unsettled VAT assessment and associated penalties. Although the District Court had initially found the company Directors innocent, the Supreme Court, on appeal, emphasized the absolute and strict liability of the VAT legislation, whereby entity officers are personally liable for the VAT affairs of the entities they manage. For additional information on this development, see Tax Alert 2019-0260. International: The Cyprus Tax Department recently released Circular 229 clarifying the Value Added Tax (VAT) treatment of long–term leases of immovable property. As from Jan. 1, 2019, a long–term lease of immovable property which effectively transfers the right to dispose of the property as owner to the lessee constitutes a supply of goods subject to VAT. The factual circumstances of the lease will determine the VAT implications including VAT treatment and time of supply. For additional information on this development, see Tax Alert 2019-0271. International: On Jan. 24, 2019, the Court of Justice of the European Union (CJEU) released its judgment in a case that considered the Value Added Tax (VAT) recovery right for a French branch which provided services to its UK head office. The case will be of particular interest to financial services groups which operate via a branch network and which experience a VAT recovery restriction on their costs. In its judgment, the CJEU held that VAT incurred by a branch which is used to provide support to its head office is available for recovery by "looking through" to the head office's supplies. The mechanism for calculating the level of recovery is, however, not straightforward and impacted businesses across the European Union will need to understand how this impacts their VAT recovery position. For additional information on this development, see Tax alert 2019-0261. International: Based on Russia's Federal Law No. 335–FZ (the Law), non–Russian entities providing electronic services to Russian companies (B2B supplies) are obliged, from Jan. 1, 2019, to account for and pay Value Added Tax (VAT) on such transactions on their own behalf. To account for and pay the VAT due, foreign suppliers have to register for VAT purposes in Russia and submit quarterly VAT returns. The tax agent mechanism with respect to the provision of e–services (similar to the "reverse charge", when the customer pays VAT on behalf of the foreign supplier) was eliminated as of Jan. 1, 2019. Accordingly, as provided in the Law, the foreign supplier should submit a VAT registration application together with the required documents translated into Russian by Feb. 15, 2019. For additional information on this development, see Tax Alert 2019-0264. Multistate: On Wednesday, Feb. 27, 2019, from 1:00–2:30 p.m. EST New York; 10:00–11:30 a.m. PST Los Angeles, Ernst & Young LLP's Indirect Tax group presents a webcast in which panelists, discuss the latest developments in US state and local taxation. The webcast covers major tax law changes in the 50 states and the District of Columbia, highlights important state tax policy developments and addresses federal tax developments that could impact state and local taxes. For our first webcast in 2019, we welcome David Sawyer of the Council on State Taxation (COST) as our guest who will join EY panelists to discuss the following: (1) an overview of the current state of the economy both nationally and regionally as it affects developing state tax policy responses; (2) a summary of the most significant state budget proposals that influence state taxes; (3) an update on state responses to federal tax reform as well as to the U.S. Supreme Court's historic ruling in South Dakota v. Wayfair which greatly expanded the permissible nexus for the imposition of sales tax on remote sellers; (4) identification of the emerging state and local tax policy trends we're already seeing in 2019; and (5) an update on the more significant state and local judicial and administrative developments. Click here to register. 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: 2019-0343 |
