26 February 2019 State and Local Tax Weekly for February 15 Ernst & Young's State and Local Tax Weekly newsletter for February 15 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 Feb. 15, 2019, Virginia Governor Ralph Northam signed into law HB 2529/SB 1372,1 provisions of which update Virginia’s date of conformity to the Internal Revenue Code (IRC) and address certain provisions of the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). Effective only for taxable years beginning on and after Jan. 1, 2018, Virginia conforms to the IRC as it existed on Dec. 31, 2018 (from Feb. 9, 2018), with some exceptions. Virginia continues to decouple from certain IRC provisions, including bonus depreciation under IRC §168(k), the five year carryback of net operating losses (NOL) generated in 2008 and 2009 under IRC §172(b)(1)(H); and effective for taxable years beginning on or after Jan. 1, 2019, the TCJA provision related to the suspension of the overall limitation on itemized deductions. Also effective only for taxable years beginning on and after Jan. 1, 2018, the bill deletes the decoupling language regarding the TCJA and the Bipartisan Budget Act of 2018 enacted in 2018 as part of the IRC conformity legislation.
In regard to the GILTI subtraction, the Virginia Department of Taxation (Department) explained in Tax Bulletin 19-1 (Feb. 15, 2019) (Bulletin), that taxpayers may report a subtraction equal to the net inclusion of GILTI after taking into account the GILTI deduction under IRC §250.
Further, in the Bulletin, the Department lists various provisions of the TCJA to which the commonwealth’s tax law will generally conform to for taxable year 2018 and thereafter, including:
The Department noted that it will be issuing additional guidance on the individual income tax changes that may affect individual filing income tax returns for 2019 and thereafter. Idaho: New law (HB 13) updates the state’s date of conformity to the IRC to the IRC of 1986, as amended and in effect on Jan. 1, 2019. This change is retroactively effective to Jan. 1, 2019. Idaho Laws 2019, HB 13, signed by the governor on Feb. 4, 2019. Idaho: Temporary Rule (35.01.01 Income Tax Admin. Rule 645) amends the state’s water’s edge combined reporting treatment of dividends to avoid taxing repatriated dividend income that had been previously included in Idaho apportionable income and clarifies the state’s treatment of global intangible low-taxed income (GILTI) under IRC §951A. Idaho law treats amounts from IRC §§ 951 and 951A as foreign dividends. To avoid taxing income that had been included in Idaho apportionable income in a prior year, the remaining portion of the dividend that was not excluded from Idaho apportionable income is excluded from Idaho apportionable income if the taxpayer can prove that the income was previously included in such income in a prior tax year. The temporary rule took effect Jan. 4, 2019. Idaho Dept. of Rev., Temp. Rule 645 (Idaho Admin. Bulletin, Vol. 19-2, Feb. 6, 2019). Indiana: An Indiana company’s (company) sales to several US jurisdictions and one foreign jurisdiction were not required to have been thrown back to Indiana for the tax years at issue (tax years ending Sept. 30, 2011 and Sept. 30, 2012) because the company provided sufficient documentation that its activity in the out-of-state jurisdictions exceeded mere solicitation. The Indiana Department of Revenue (Department) found that the company’s provision of its returns for the jurisdictions at issue, some of which were combined returns with the company’s parent, established that the company was subject to income tax in the jurisdictions. For the foreign jurisdiction, the Department cited Wrigley,2 finding that the additional emails provided by the company during the audit included discussions of shipping, quality assurance, and ways to improve the product, showing that the activities of employees exceeded mere solicitation. Thus, the sales to the foreign jurisdiction were not required to be thrown back to Indiana for sales factor apportionment purposes. (Note that Indiana’s throwback rule was in effect until Dec. 31, 2015). Ind. Dept. of Rev., Letter of Findings 02-20181344 (Nov. 14, 2018). New Jersey: A corporate subsidiary is not required to add back intercompany payments under N.J.S.A. 54:10A-4(k)(2)(C) (hereafter, tax add back) that were based on the estimated tax liabilities and benefits amongst the affiliates arising from state consolidated and combined tax returns, because these payments are fundamentally contractual obligations within the consolidated group to fairly apportion expenses imposed on the group’s parent, and are not taxes, accrued taxes, or indirect payments of tax. The New Jersey Tax Court (Court) agreed with the subsidiary that the tax add back requirement does not require add back of “indirect” payments of tax.3 These payments do not relate to a specific state tax payment made by the parent on behalf of the subsidiary and other affiliates. Rather, they are an accounting method used by the parent to calculate, estimate, and reconcile its payment of the subsidiary’s tax obligation on its apportioned income in consolidated and combined reporting states. Moreover, the payment is not based on the subsidiary’s actual tax liability in any given state and it is not an indirect payment or reimbursement of the subsidiary’s separately calculated state tax. The Court rejected the New Jersey Director of the Division of Taxation’s argument that the intercompany payments are accrued taxes, finding that since the parent paid the tax to the non-separate return states these states do not have a legally enforceable claim against the subsidiary and as such the taxes cannot be accrued in these states. The Court also determined that the tax add back requirement, unlike the related party intangible and interest expense and costs add back provisions, is not a “loophole closer.” The intercompany payments at issue were based on estimated tax obligations of the individual affiliates and were not designed to artificially move or hide income for one entity to another. Moreover, the purpose of the tax add back provisions is to measure an entity’s income in relation to its business activity in New Jersey. The Court concluded that the taxes add back requirement “is meant to refer to the tax liability of the reporting entity in other jurisdictions, and not to the entity making payment of the tax.” Accordingly, the intercompany payments “are irrelevant for the purpose of reporting tax liability,” and the amount added back is based on the subsidiary’s tax liability using its pro rata share of the parent’s total tax obligation to the other non-separate reporting jurisdictions. Daimler Investments US Corp. v. NJ Dir., Div. of Taxn., No. 008165–2016 (N.J. Tax Ct. Jan. 31, 2019) (Unpublished). New Jersey: The New Jersey Superior Court, Appellate Division (Appellate Court) substantially affirmed Xylem Dewatering Sols, Inc.,4 in which the New Jersey Tax Court (Tax Court) concluded that the gain an out-of-state resident made from the deemed sale of assets of a New Jersey S corporation pursuant to an election under IRC §338(h)(10) is nonoperational (nonbusiness) income wholly allocated to New Jersey as the S corporation’s domiciliary state. The Appellate Court rejected the individual’s argument that the Tax Court “improperly deferred” to the New Jersey Division of Taxation’s (Division) argument regarding the construction of the Gross Income Tax Statute, finding the argument lacked merit. Further, the Appellate Court found that the Tax Court overstated the deference that the Division receives in its interpretation and application of tax statutes to the facts and law governing an issue, when it stated that “[t]he review of this matter begins with the presumption that determinations made by the Director [of the Division] are valid[,]” and that “[d]eterminations of the Director are afforded a presumption of correctness[.]”After reviewing the Tax Court’s decision, the Appellate Court found that it fully and fairly reviewed the record before making independent determinations on the issues. Paz v. N.J. Dir., Div. of Taxn., No. A-4452-16T4 (N.J. Super. Ct., App. Div., Jan. 31, 2019) (Unpublished). New York: The New York Department of Taxation and Finance (Department) issued a memorandum to explain the impact of the Tax Cuts and Jobs Act (P.L. 115-97) provisions related to IRC §965 repatriation income, IRC §§ 951A and 250 global intangible low-taxed income (GILTI) inclusion and deduction, and IRC §250 foreign-derived intangible income (FDII) deduction, as well as New York law changes enacted in 2018 addressing such, have on New York businesses. In regard to repatriation income the Department explained how C corporations, S corporations, exempt organizations, and insurance corporations should treat the income for New York tax purposes and noted that unlike federal law, New York does not allow taxpayers to elect to defer payment of amounts due under IRC §965. The Department also explained how C corporations, S corporations, exempt organizations, and insurance corporations should treat GILTI for New York tax purposes (wide ranging treatment). Lastly, the FDII deduction is not allowed for purposes of Articles 9-A and 33, effective for tax years beginning on or after Jan. 1, 2017. In a separate memorandum, the Department discussed the impact of repatriation income and GILTI on individuals and fiduciaries — in general both are included in a fiduciary’s total income reported to New York and an individual’s New York taxable income. N.Y. Dept. of Taxn. and Fin., TSB-M-19(1)(C) (Feb. 8, 2019); TSB-M-19(1)(I) (Feb. 8, 2019). Iowa: A web-based information technology infrastructure services company beginning Jan. 1, 2019 must start collecting sales and use tax on its simple storage service (S3, a remote storage service) and related data transfer fees as these services fall with the scope of a 2018 law change that subjects specified digital products to tax. The Iowa Department of Revenue (Department) found that the S3 service is an enumerated taxable “storage service” under the new statutory terms applicable to electronic files, documents, or other records. The company’s charges for elastic compute cloud service (EC2, a scalable virtual computing environment providing infrastructure as a service) and related data transfer fees, however, are not subject tax because the EC2 provides processing power as a service (whether using an open-source or third-party operating system), which is not the sale of tangible personal property, specified digital products, or an enumerated taxable service, and the “storage capacity” offered through EC2 ceases to exist once the data is processed. Further, the data transfer fees are included in the sale price of the underlying S3 and EC2 services, and follow the tax treatment of those respective services when the data transfer fees are not the sale of a separately taxable service, a telecommunication service, tangible personal property, or specified digital property, and are not “separately contracted for” when they are billed and paid at the same time as the S3 and EC2 services. The Department declined to determine whether the entities to which the company makes sales of the services are exempt “commercial enterprises,” declined to permit the company to treat all of its customers as exempt, and instead suggested that the company request exemption certificates from customers that would like to purchase S3 tax exempt. In re Amazon Web Services, Inc., No. 2018-300-2-0508 (Iowa Dept. of Rev. declaratory order Dec. 18, 2018). Michigan: A retailer that sold new cell phone activations and extended service plans to customers as an exclusive agent of a global telecommunications company, and transferred cell phones and related equipment to customers for little or no consideration as part of the bundle, is subject to use tax on the purchase price it paid to the telecommunications company for the cell phones. In reaching this conclusion, the Michigan Court of Appeals (Court) affirmed that under the plain terms of the agreement, the telecommunications company did not reimburse the retailer for the cost of the cell phones when it only paid commissions for the retailer’s sales of wireless service contracts. These were paid at tiered amounts based on equipment sold in conjunction with the service contracts or at a designated price. The retailer paid the telecommunications company for the cell phones and reported to Michigan a unit cost that reflected what it paid the telecommunications company for each cell phone. Lastly, the Court declined to rely on the substance-over-form doctrine, noting that it would not set aside the plain intent expressed by the parties to the agreement without the record showing that the agreement was “shaped solely by tax-avoidance features” or that it was not a genuine transaction. Emery Electronics, Inc. v. Mich. Dept. of Treas., No. 342250 (Mich. App. Ct. Feb. 12, 2019) (Unpublished). Colorado: Governor Polis announced that a new office within the Office of Economic Development and International Trade (OEDIT) will be formed to facilitate active investment in Colorado’s 126 federally designated Opportunity Zones. The office will provide procedural guidance and technical knowledge to communities with Opportunity Zones, and will work with the Colorado Department of Local Affairs to help communities develop Opportunity Zone strategies and attract capital to their projects. Grants will be available to support economic modeling, prospectus development, and other technical assistance in supporting Opportunity Zone investments. Investors can connect with Colorado Opportunity Zone investment opportunities through CO-Invest.co. Colo. Gov., Release: Gov. Polis Announces New Office to Help Colorado Communities Realize Opportunity Zone Investment (Feb. 11, 2019). New Jersey: New law (AB 15) provides a tax credit against corporation business tax (CBT) or gross income tax (GIT) for employers of employees with impairments (e.g., impaired by age or physical or mental deficiency or injury), for taxable years beginning on or after Jan. 1, 2019. For most employers, the credit is available before Jan. 1, 2025, but for certain small, seasonal, or farm labor employers, the credit is available before Jan. 1, 2028. The tax credit equals the amount by which the wages and payroll taxes the employer is required to pay each employee with an impairment under New Jersey’s recently enacted minimum wage increase during the tax year exceed the amount the employer actually paid to that employee in wages and payroll in the previous calendar year, subject to certain exceptions. An employer will not be eligible for the credit for a tax year in which the number of hours worked by an employee with an impairment is less than the number of hours worked during the previous calendar year, or if the tax commissioner determines that the employer reduced the wages paid to employees with an impairment to be eligible for the tax credit. Employers cannot carry forward unused credits, an employer’s CBT tax liability cannot be reduced below the statutory minimum tax due, and the credit is not refundable against an employer’s GIT. Lastly, AB 15 defines key terms such as “employee with an impairment,” and provides that the tax commissioner will adopt related regulations. AB 15 took immediate effect. N.J. Laws 2019, Ch. 32 (AB 15), signed by the governor on Feb. 4, 2019. New Jersey: A telecommunications company (company) is subject to tax under N.J.S.A. 54:4-1 on its business personal property located in Hopewell Borough (borough) for tax year 2009 because it provided dial tone and access to 51% of the Hopewell Telephone Exchange as of Jan. 1, 2008. Under New Jersey law, if a telecommunications carrier provides dial tone and access to 51% of a local telephone exchange, it is subject to a statutorily imposed tax on its business personal property. New Jersey has not defined “local telephone exchange” and has not provided a method by statute or rule to calculate what constitutes 51% of a local telephone exchange. After hearing expert testimony from both parties, the New Jersey Tax Court (Court) adopted the borough’s expert’s definition of “local telephone exchange” as a physical concept represented by the dial tone and access lines providing service within geographic boundaries established in the company’s tariff exchange maps and as represented by the Local Access and Transport Areas, and not by NPA-NXX numbers associated with a rate center as argued by the company. Further, the Court found that market share is determined by the number of dial tone and access lines within the boundaries of the tariff exchange maps, calculable using public data and information sources. Here, the parties had previously stipulated that the exclusion of a large corporate complex from the Hopewell Telephone Exchange would result in the company exceeding the 51% threshold of dial tone and access in the exchange. Thus, the company is subject to tax on its business personal property. Verizon New Jersey, Inc. v. Borough of Hopewell, No. 012215–2009 (N.J. Tax Ct. Jan. 28, 2019).5 Multistate: On Jan. 24, 2019, the Multistate Tax Commission (MTC) approved its Model Uniform Statute for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit Adjustments. These provisions update the general model rule for reporting federal taxable income adjustments and paying tax due to applicable state(s), and establish a model process for how to report and pay tax due to state(s) stemming from federal adjustments from a partnership-level audit or an administrative adjustment request. For partnership-level audits and administrative adjustment requests, the model provisions include how a state partnership representative can be established and provides for the binding nature of their actions on the partnership’s direct and indirect partners. It also includes reporting and payment requirements for partnerships and partners (including tiered partners), and makes available an election (generally irrevocable) for the partnership to calculate and pay the amount due in lieu of taxes owed by the partners. Under certain circumstances, an audited partnership or tiered partner could enter into an alternative reporting and payment method agreement with a state agency. Additionally, the provisions: (1) permit states to establish by regulation a de minimis amount upon which a taxpayer would not be required to report federal adjustments; (2) establish a statute of limitations for assessments of additional state tax, interest and penalties stemming from federal adjustments; (3) provide when federal adjustment reporting extensions may be available and the associated impact on tax liability; (4) describe the effect of estimated state tax payments made during the course of a federal audit; (5) clarify when taxpayers may file for refund claims or credits arising from final federal adjustments; and (6) scope of adjustments and extensions of time. MTC, News Release “MTC New Uniformity Model Partnership Project” (Jan. 24, 2019). South Dakota: New law (SB 25) permits the South Dakota Secretary of Revenue to appoint up to five special agents with law enforcement officer authority to investigate violations of provisions related to taxation, motor vehicles, alcoholic beverages, or unfair cigarette sales. The special agents must cooperate with and keep informed local law enforcement officers with primary responsibility for law enforcement in the applicable jurisdiction. These provisions will take effect July 1, 2019. S.D. Laws 2019, SB 25, signed by the governor on Feb. 13, 2019. North Carolina: The North Carolina Department of Revenue announced that the penalty for failure to file the 2018 Forms NC-3, Annual Withholding Reconciliation, and Forms W-2/1099 electronically with the Department will be automatically waived (no need to request a waiver). However, the deadline for filing, whether electronically or on paper, remained Jan. 31, 2019. The Department has in the past waived the electronic filing penalty, but had announced that for calendar year 2018 a penalty of $200 would apply unless the employer requested and was granted an electronic filing waiver. For additional information on this development, see Tax Alert 2019-0362. New Jersey: New law (SB 2518) excludes certain out-of-state businesses and employees from some taxes and business registration requirements when during a declared disaster or emergency they temporarily perform work or services in New Jersey related to restoring critical infrastructure (i.e., property and equipment owned or used by communications networks, electric generation, transmission, and distribution, gas distribution systems, water pipelines and related support facilities that service multiple customers and residents). Out-of-state businesses are not required to register, file, report and pay state or local taxes or fees that require filing New Jersey tax returns, including employer withholding and unemployment insurance. However, they are still subject to state and local transaction taxes and fees such as fuel taxes, sales and use taxes, hotel taxes, and others, unless the transactions are otherwise exempt. In addition, the out-of-state business and its employees are not subject to state or local business licensing or registration requirements, but the businesses and employees must be duly licensed or legally authorized to engage in the business in their applicable home state. Lastly, SB 2518 extends the number of days that an out-of-state business has after entering New Jersey to 45 (from 30) to provide a written statement to the New Jersey Division of Taxation disclosing that it is doing business in the state to perform disaster or emergency-related work. SB 2518 took immediate effect. N.J. Laws 2019, Ch. 7 (SB 2518), signed by the governor on Jan. 31, 2019. New York: Amended regulation (20 NYCRR 9-1.2(e)) makes permanent the Article 9-A Metropolitan Transportation Business Tax Surcharge (MTA surcharge) rate change made through an emergency regulation in November 2018. Effective for taxable years beginning on or after Jan. 1, 2019 and before Jan. 1, 2020, the MTA surcharge is increased to 28.9% (from 28.6%). The 28.9% rate will remain in effect for succeeding tax years unless the Commissioner determines a new rate. N.Y. Dept. of Taxn. & Fin., 20 NYCRR 9-1.2(e) (adopted Jan. 29, 2019). Washington: A company that calculates and derives gross proceeds from its contracts with schools based on the number of potential dining patrons with meal plans rather than actual sales of meals is classified as a food service management operator and not a wholesaler. Therefore, its gross proceeds are subject to the 1.5% catchall “services and other activities” business and occupation (B&O) tax rate and not the lower 0.484% wholesaling B&O tax rate. In affirming the lower court, the Washington Court of Appeals found that under the company’s contract terms, it invoiced schools based on the number of persons with meal plans eligible to patronize a dining hall each week (regardless of whether they actually do so), and did not invoice based on the number of meals provided. Further, the company’s gross proceeds are derived from its services and not the sale of tangible personal property. Because the sale of tangible personal property is not required in order for the company to be paid, it is not engaged in wholesale sales. Aramark Educational Services, LLC v. Wash. Dept. of Rev., No. 79078-1-I (Wash. App. Ct., Div. 1, Feb. 5, 2019) (Unpublished). International: The Greek Tax Administration, through Decision A. 1035/2019 of the Governor of the Independent Authority of Public Revenues (IAPR) published on Feb. 5, 2019 in the Government Gazette, explicitly acknowledged the reduction of the taxable amount for Value Added Tax (VAT) purposes for rebates granted by pharmaceutical companies to social security organizations and hospitals pursuant to article 35 par. 3 of Law 3918/2011, as in force. For more on this development, see Tax Alert 2019-0376. 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. Multistate: Now available to watch on demand, the Jan. 24, 2019 Ernst & Young LLP (EY) webcast on current developments in state and local tax controversy. Transfer pricing audits, assessments and court decisions have become more and more frequent over the last few months. During the webcast leaders from EY's tax practice provided an overview of federal transfer pricing principles and recent decisions as well as an update on how specific states and the Multistate Tax Commission (MTC) view transfer pricing. Helen Hecht, general counsel for the MTC, discussed the MTC's point of view on transfer pricing and related issues. In addition, panelists discussed the most recent judicial, legislative and administrative developments in Illinois and California. Click here to watch a replay of the webcast. 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. 3 The Court distinguished the “taxes paid” add back requirement from the related party intangible and interest expense and costs add back provision (which requires add back of indirect payments). 5 The Court noted that many other similar cases have been filed making similar arguments, and they were stayed pending the outcome of this case. Document ID: 2019-0424 |
