15 February 2019 State and Local Tax Weekly for February 8 Ernst & Young's State and Local Tax Weekly newsletter for February 8 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. States continue to respond to Wayfair for remote sellers but also focus on collection by marketplace facilitators and opinion's impact on other tax types In the aftermath of its historic ruling in South Dakota v. Wayfair (Wayfair) on June 21, 2018,1 in which the U.S. Supreme Court (Court) held the physical presence nexus standard "is [an] unsound and incorrect" interpretation of its dormant Commerce Clause jurisprudence, over 40 states have adopted economic nexus provisions for remote sellers either through statutory change, administrative regulation or a renewed interpretation of existing law. Of those states that have not yet adopted an economic nexus standard for remote sellers in response to Wayfair, nearly all have proposed economic nexus language that will be considered during the 2019 legislative sessions. In addition to adopting economic nexus provisions for remote retailers, a handful of states also have adopted economic nexus provisions for marketplace facilitators/providers and sellers, with proposed legislative language to be considered by a number of states this year. Moreover, states are now looking at Wayfair as a source of authority for extending nexus for other tax types, such as income and gross receipts taxes. A few of these state legislative proposals seem to be following the economic nexus thresholds seemingly endorsed by the Court in Wayfair (i.e., South Dakota's $100,000 of annual in-state sales or entering into 200 in-state transactions) instead of the Multistate State Tax Commission model bright-line factor presence nexus standard (i.e., $50,000 of property, $50,000 of payroll, or $500,000 in sales) that had been considered by or adopted by a few states (notably California) for purposes of their business income or gross receipts taxes. In 2018, some members of Congress proposed federal legislation in response to the Wayfair ruling directed at providing some level of uniformity. While those proposals died at the end of the 115th Congress, similar measures are already being introduced in the new 116th Congress. Tax Alert 2019-0305 provides a summary of this recent state, local and federal legislative and administrative activity, as well as a summary of some of the more notable state and local tax proposals being considered in response to the Wayfair ruling. Illinois: New rule (86 Ill. Admin. Code § 100.2850) provides guidance on the subtraction modification for personal service income or reasonable allowance for compensation to partners under IITA §203(d)(2)(H). Under the law, partnerships in computing their personal property tax replacement income tax liability generally are allowed to subtract from taxable income the greater of any partnership income that constitutes personal service income2 or a reasonable allowance for compensation paid or accrued for services rendered by partners to the partnership. The subtractions are comprised of the distributive shares of the partners in the partnership income. The rule describes amounts that may or may not be included in the computation of personal services income and reasonable compensation for services, and makes clear that the same amounts may not be deducted more than once. The rule defines "personal service income" and provides that personal service income of a partnership is equal to the aggregate of the distributive shares of the partners in the partnership income that would constitute personal service income in the hands of the partners (less deductions allocable to that income). The reasonable compensation allowance of the partnership is equal to the sum of the distributive shares of all partners who render services to or on behalf of the partnership of the partnership income to the extent the distributive share would have been allowed as a deduction to the partnership as a trade or business expense under IRC § 162 if it had been paid to the service partner for services performed in the capacity of an employee of the partnership rather than a partner. (Certain limitations to the computation of reasonable compensation for services may apply.) The rule, which includes illustrative examples, took effect Dec. 18, 2018. Ill. Dept. of Rev., new 86 Ill. Admin. Code § 100.2850 (published 43 Ill. Reg. 727 effective Jan. 4, 2019). New York City: The New York City Department of Finance (Department) issued guidance related to the issuer's allocation percentage under the Unincorporated Business Tax (UBT) and the General Corporation Tax (GCT) for issuers and obligors taxed under the Business Corporation Tax (BCT). Under the UBT and GCT, investment income is allocated to New York City (NYC) using the taxpayer's investment allocation percentage, sourcing investment income within and without NYC. To determine the investment allocation percentage, taxpayers use an issuer's allocation percentage for each stock, bond, or security (but not governmental securities) they hold. The guidance explains how to calculate the investment allocation percentage for S corporations subject to and filing GCT returns and unincorporated businesses subject to and filing UBT returns. The calculation requires an issuer's allocation percentage for all issuers and obligors for the taxpayers to source their investment income. The guidance provides information on how to find the issuer's allocation percentages under the UBT and the GCT. Additionally, under its discretionary authority, the Department determined that for GCT purposes, the issuer's allocation percentage for issuers and obligors subject to tax under the BCT (i.e., C corporations) will be the percentage of entire capital required to be allocated within NYC on its previous year report (the issuer's allocation percentage is the same as used under the UBT). The Department noted that it will publish the issuer's allocation percentage of BCT taxpayers in the same manner as it publishes the issuer's allocation percentage of GCT taxpayers for both GCT and UBT taxpayers to source their investment income. NYC Dept. of Fin., Fin. Memo. 19-2 (Jan. 14, 2019). North Carolina: The U.S. Supreme Court has set the argument date in the North Carolina trust due process nexus case — N.C. Dept. of Rev. v. Kaestner Family Trust — for April 16, 2019. For more on Kaestner, see Tax Alert 2018-1376. Philadelphia, PA: Amended regulation (Business Income and Receipts Tax (BIRT) Reg. §103) modifies Philadelphia's "doing business" provisions for purposes of the city's BIRT to establish an economic nexus standard to reflect the U.S. Supreme Court's ruling in South Dakota v. Wayfair. Effective Jan. 1, 2019, a business with no physical presence in the city will be deemed to have nexus with the city and be subject to the BIRT if it (1) has generated at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current year and (2) has sufficient connection with Philadelphia to establish nexus under the U.S. Constitution. For years prior to 2019, an active presence standard — i.e., purposeful, regular and continuous efforts in the city — was in place. The amended regulation was approved on Jan. 24, 2019. Philadelphia, PA: The Philadelphia Department of Revenue issued guidance on the city's treatment of the IRC § 199A pass-through entity deduction for Business Income & Receipts Tax (BIRT) and Net Profits Tax (NPT) purposes. For individuals filing a BIRT return, the IRC § 199A deduction is not reflected as a reduction for BIRT net income purposes as such amounts are reported after an individual's adjusted gross income on the Federal Form 1040. Thus, the IRC § 199A deduction cannot be used to reduce an individual's income reported to Philadelphia. The IRC § 199A deduction does not apply to partnerships or S corporations filing a BIRT return. For NPT filers, a resident partner of a partnership that does not have nexus with the city would file a NPT Return reporting its distributive share of the partnership income; the IRC § 199A deduction is not allowed. A partnership that has nexus with the city pays NPT based on its income, without any deduction under IRC § 199A. This income would not be taxed to the partners. Philadelphia Dept. of Rev., The IRC §199A Deduction: FAQs (Jan. 17, 2019). Philadelphia, PA: The Philadelphia Department of Revenue issued guidance on its treatment of IRC § 965 (Transition tax) income and deductions for purposes of the Business Income & Receipts Tax (BIRT). IRC § 965 income and deductions are reflected in the BIRT income tax base for Method II taxpayers.3 Most BIRT Method II taxpayers' net IRC § 965 income is eligible for the following deductions: (1) dividends received from a corporation that is part of the same affiliated group; or (2) dividends received from a corporation of which the receiving corporation or partnership owns at least 20% voting power of all classes of stock and at least 20% of each class of nonvoting stock. Only dividends received from 20% owned subsidiaries are included in the sales factor for BIRT apportionment purposes; such dividends are part of the BIRT income tax base. Further, the federal provision allowing taxpayers to elect to pay IRC § 965 transition tax over an eight year period does not apply to the BIRT. Lastly, in calculating the BIRT Gross Receipts Tax, IRC § 965 income is excluded as items (1) or (2) described above. Philadelphia Dept. of Rev., Advisory Notice — Repatriation Transition Tax Policy Update (Jan. 31, 2019). South Dakota: New law (HB 1015) updates the state's date of conformity to the IRC for purposes of the bank franchise tax to the IRC as amended and in effect on Jan. 1, 2019. S.D. Laws 2019, HB 1015, signed by the governor on Feb. 5, 2019. Texas: An oil and gas pipeline and storage company (company) is not entitled to a refund of franchise tax on receipts from the sale of bunker fuel oil to foreign-registered vessels from Texas ports and waters, because the transactions occurred in Texas and as such are Texas receipts. An administrative law judge (ALJ) for the Texas Comptroller of Public Accounts (Comptroller) explained that Texas gross receipts includes receipts from sales of tangible personal property that are delivered or shipped to a buyer in Texas and that the FOB point, location of title passage, and other conditions of sale are not relevant for Texas gross receipts determinations. Further, 34 Tex. Admin. Code § 3.591(e)(31) specifically states that "[R]evenues from transactions that occur in Texas waters are Texas receipts." In addition, the ALJ rejected the company's argument that the federal amended Maritime Transportation Security Act impliedly preempts Texas franchise tax apportionment law when the company did not provide legal authority for its position. The ALJ lacked jurisdiction to address the company's arguments that the Comptroller's rules are invalid and that the apportionment statutes are unconstitutional. Tex. Comp. of Pub. Accts., No. 201812008H (Nov. 29, 2018). Tennessee: A company's mobile and web data analytics services, which use remotely accessed computer software, are not subject to sales and use tax because the nontaxable data analytics services are the true object of the services. Customers who install the company's code on their mobile or web applications receive access (sometimes from locations within Tennessee) to the company's software, which collects customers' data. The Tennessee Department of Revenue (Department) found that while computer software is generally taxable, customers' use of the software is merely incidental to the company's data analytics services plans. The raw data collected by the software is meaningless without the company's data analytics services because customers do business with the company for its data analytics services, not to access its software. Similarly, the company's provision of access to a web-based dashboard that stores customers' data and reports is also computer software for state sales and use tax purposes, but the web-based dashboard is merely an incidental tool to see customers' end result data analytics. Tenn. Dept. of Rev., Letter Ruling No. 18-09 (Dec. 14, 2018). Texas: A hotel's purchase of consumables (such as facial tissue, coffee, toilet paper, soap, shampoo, conditioner, lotion, and cups) does not qualify for the sale-for-resale exemption because the hotel did not purchase the consumables for the purpose of reselling them to customers. In so holding, the Texas Court of Appeals (Court) found that the evidence did not support a finding that the hotel purchased the consumables for resale when the hotel advertises the consumables are free, the cost of consumables is not itemized on customers' bills, customers pay a single rate for the room and are not informed that they are paying for consumables, and the hotel provides customers with unlimited amounts of consumables at no additional charge. The Court distinguished this case from DTWC,4 finding that here the parties had not stipulated that the hotel charged its customers for the consumables. Alamo National Building Mgmt., LP v. Hegar, No. 13-17-00040-CV (Tex. Ct. App., 13th Dist., Jan. 24, 2019). Puerto Rico: Puerto Rico's Governor has proposed a tax incentives bill for investments in Qualified Opportunity Zones (Opportunity Zones) within Puerto Rico. Provisions of the bill (SB 1147) would establish the following tax incentives for eligible businesses for 15 years: (1) a 20% fixed tax rate on the net income from Opportunity Zones, (2) tax-free dividend distributions, (3) a tax exemption of 50% for patents and property tax, (4) a tax exemption of 90% for "priority residential projects" in Opportunity Zones, (5) a 100% exemption from construction taxes, (6) a maximum investment credit of 15% that is transferable, (7) a "priority credits system" for "priority projects" in Opportunity Zones, (8) deferral of capital gains taxes for investment gains of Qualified Opportunity Funds in Puerto Rico, and (9) an income tax exemption for accrued interest on loans to tax-exempt businesses. In addition, to expedite the evaluation of permit requests for investments in Opportunity Zones, the Bill would establish that developments designated as "priority projects" in Opportunity Zones under the provisions of the bill would be declared as having pressing interest because, according to the Bill, those projects would attract private economic investment in Puerto Rico. For more on this development, see Tax Alert 2019-0303. Arizona: The Arizona Department of Revenue (Department) properly valued renewable energy equipment used by electric generation facilities when it applied the valuation method in effect on the valuation date and did not apply a statutory amendment that was enacted after the valuation date but before the date the Department must determine the final valuation. The Arizona Court of Appeals (Court) found that the 2014 statutory amendment to Ariz. Rev. Stat. § 42-14155 was not retroactive when the legislature stated that the new law would take effect on the "general effective date" (in this case, July 24, 2014), with no mention of a retroactive intent. Moreover, the amendment did not authorize the Department to revalue property to reflect a valuation method change after the valuation date; rather, Ariz. Rev. Stat. § 42-14153(C) required the Department to apply the law in effect on the valuation date. Lastly, the Court noted that while the legislature has the power to change a valuation method after the valuation date, under Arizona's prospective valuation process a statute must be retroactive for the Department to apply a new valuation method for that tax year. Accordingly, in determining the equipment's full cash value for the 2015 tax year, the Department could not revalue the property to allow for a subtraction of the facilities' tax incentives amount from the cost of their equipment. Siete Solar, LLC v. Ariz. Dept. of Rev., No. 1 CA-TX 18-0002 (Ariz. Ct. App., Div. 1, Jan. 29, 2019). New Hampshire: The New Hampshire Department of Revenue Administration notified Business Profits Tax (BPT) taxpayers of new Schedule IV "Other Internal Revenue Code Reconciling Adjustments," which will be used to provide further detail on reconciling adjustments to account for the differences between the current IRC and the version of the IRC adopted for BPT purposes (currently the IRC as of Dec. 31, 2016). These adjustments are primarily attributed to changes made by the federal Tax Cuts and Jobs Act (P.L. 115-97), including the provisions addressing the following issues: global intangible low-taxed income (GILTI) under IRC §951A, the business interest limitation under IRC §163(j), modification of the research and experimental expenses deductions under IRC §174, like-kind exchanges under IRC §1031, Qualified Opportunity Zones under IRC §1400Z, among other provisions. The Department noted that adjustment for bonus depreciation and the IRC §179 expense are reported directly on the BPT return and should not be listed on Schedule IV. N.H. Dept. of Rev. Admin., TIR 2019-002 (Feb. 4, 2019). Ohio: The deadline for opting into the centralized Ohio municipal net profits tax returns for tax years ending Dec. 31, 2019, is March 1, 2019. Businesses that elect into the centralized system will be able to file a single municipal net profits tax return with the Ohio Department of Taxation (Department) that will encompass every municipality in which they are required to file returns. The Department will be responsible for all administrative functions including audits and appeals. The centralized system will be limited to municipal net profits (e.g., business) taxes and will not apply to individual taxation or employee withholding. Those elements of Ohio municipal income taxation will continue to be administered at the local level. The election is made by filing Form MNP R, which can be filed electronically or in paper form. Once made, the election is binding on the taxpayer for the tax year for which it is made and for all subsequent tax years until terminated. There is no fee to make the election. For more on this development, see Tax Alert 2019-0319. Ohio: The Ohio Court of Appeals (Court) affirmed that legislation (HB 5, Ohio Law 2014and HB 49, Ohio Law 2017) streamlining the Ohio municipalities' income tax systems and centralizing collection and administration of the municipal net profit taxes is constitutional. The Court found that the legislation does not violate the Home Rule Amendment because the General Assembly can limit municipalities' exercise of local self-government in tax matters, and the statutes at issue (Ohio Rev. Code 718.80 through 718.95 and uncodified Section 803.100(B)) are integral components of a statutory scheme to limit the power of municipalities to collect and administer taxes. HB 49 also did not violate the Ohio Constitution's One-Subject Rule when it addressed the single subject of balancing state expenditures against state revenues to ensure operation of state programs. Additionally, the legislative provisions neither impaired the constitutional contract rights of the municipalities nor affected an unconstitutional taking. City of Athens et al. v. Testa, 2019-Ohio-277 (Ohio Ct. App., 10th Appel. Dist., Jan. 29, 2019). New Jersey: The New Jersey Department of Treasury, Unclaimed Property Administration (UPA) posted information about its unclaimed property voluntary compliance program (VCP). Businesses that are not compliant with the Uniform Unclaimed Property Act laws have the option of participating in the VCP as an alternative to a potential full compliance audit. Businesses that successfully complete the VCP will have late penalties waived (simple interest will still be assessed). The steps of the VCP are: (1) the business must complete and submit the "Request for VCP Admission" form; (2) the UPA reviews and approves entry to the VCP — the business will receive a voluntary disclosure agreement (VDA) and instructions on how the process works; (3) the business (or its representative) within 90 days from the date on the finalized VDA must produce the records resulting from the internal audit of accounting records reviewed by the UPA — the reach-back period under the VDA is 10 report years (the preceding 10 years from the property type's statutory abandonment period); and (4) final approval of findings, report and remittance of unclaimed property. In general the VCP process should not take more than 180 days; a formal request for an extension of time can be made. It should be noted that "[t]he VCP is offered with the expectation that on a prospective basis the holder will report and remit all abandoned property owing to New Jersey residents in compliance with the requirements of New Jersey's Uniform Unclaimed Property Act." N.J. Unclaimed Property Admin., Voluntary Compliance Program (last updated Jan. 25, 2019). 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: 2019-0382 |
