11 March 2019 State and Local Tax Weekly for March 1 Ernst & Young's State and Local Tax Weekly newsletter for March 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. New Mexico issues guidance on the corporate income tax treatment of IRC Section 965 income; affected taxpayers may need to file amended returns The New Mexico Department of Taxation and Revenue (Department) issued guidance on the state's tax treatment of deferred foreign income under IRC Section 965, which is considered Subpart F income (or a deemed dividend). The Department explained that since IRC Section 965 income is included in federal taxable income (FTI), it also is included in the definition of New Mexico taxable income for both corporate and individual income tax purposes. The guidance, however, only focuses on the corporate income tax treatment of IRC Section 965 income. For New Mexico corporate income tax purposes, taxpayers that include Subpart F deemed dividends in their FTI are required to include such dividends in their New Mexico taxable income. In addition, NMAC Reg. 3.4.1.12 allows taxpayers filing a separate company return to exclude a portion of their income from foreign dividends (including Section 965 income), depending on their ownership percentage. Taxpayers filing on a combined or consolidated basis, however, are not allowed to exclude a portion of their Section 965 income. For combined and consolidated filers, the amount of Section 965 income included is the gross income reported under IRC Section 965(a) less the deductions allowed under IRC Section 965(c). The Department further stated that taxpayers are allowed to include an appropriate portion of the foreign dividend payor's payroll, property and sales in determining the percentage of their income subject to New Mexico tax. Because the record keeping to determining the appropriate New Mexico percentage may be onerous, the Department is allowing taxpayers to exclude 30% of their net IRC Section 965 deferred foreign income from their taxable income. The 30% exclusion applies to the taxpayer's net deferred foreign income after the deductions allowed under IRC Section 965(c) and NMAC Reg. 3.4.1.12. A taxpayer may request the use of an alternative apportionment or allocation method if it has evidence of factor representation for a foreign dividend payor that would be more equitable than that provided by the 30% income exclusion factor. Taxpayers that have already filed their 2017 New Mexico tax returns and who are affected by this guidance will need to file an amended return using the instructions in the guidance. The guidance includes a copy of the Department's Schedule 2017 CIT-DFI, which must be used for reporting IRC Section 965 income to New Mexico (the schedule, as well as a copy of the taxpayer's federal IRC Section 965 Transition Tax Statement, must be attached to New Mexico Form CIT-I with "DFI" written at the top of page one of the Form CIT-1). The guidance confirms that if the schedules and other required forms/attachments are not included, the return will be considered incomplete and it will not be processed by the Department. Lastly, the Department advised that New Mexico law does not follow IRC Section 965(h), which allows taxpayers to elect to pay the Section 965 tax liability over an eight year period; therefore, all of the taxpayer's Section 965 income must be included in a its 2017 New Mexico tax return. N.M. Dept. of Taxn. and Rev., Bulletin: New Mexico Corporate Income Tax on Deferred Foreign Income Pursuant to IRC Section 965 (Jan. 2019). Arkansas: New law (SB 211) reduces the top individual income tax rates and modifies the income tax brackets. Effective for tax years beginning on and after Jan. 1, 2020, all individual income tax brackets are modified, the income tax rate on those with income between $37,200 and $79,300 is reduced to 5.9% (from 6%), and the top individual income tax rate is reduced to 6.6% (from 6.9%) for those with net income of more than $79,300. Effective for tax years beginning on and after Jan. 1, 2021, the top individual income tax rate is further reduced to 5.9% for those with net income of more than $79,300. SB 211 took immediate effect. Ark. Laws 2019, Act 182 (SB 211), signed by the governor on Feb. 19, 2019. Arkansas: New law (SB 196) couples Arkansas income tax law to the tax benefits of the federal Opportunity Zone program under IRC Section 1400Z-2. Specifically, IRC Section 1400Z-2 is adopted for purposes of computing Arkansas income tax liability, retroactively effective for tax years beginning on or after Jan. 1, 2018. "Opportunity zones" are the population census tracts located in Arkansas that are designated as a qualified opportunity zone under IRC Section 1400Z as of Jan. 1, 2019. Ark. Laws 2019, Act 201 (SB 196), signed by the governor on Feb. 26, 2019. Utah: New law (HB 49) modifies the definition of unadjusted income as it relates to deferred foreign income described in IRC Section 965(a) by deleting the language regarding the applicable time period — "For the last taxable year of a taxpayer beginning on or before Dec. 31, 2017." This change applies retroactively for the last taxable year of a taxpayer beginning on or before Dec. 31, 2017, and a taxable year beginning on or after Jan. 1, 2018. The bill also modifies the language regarding the payment schedule for tax due under IRC Section 965, to remove the reference to 2017. Under the revised language, the first installment of tax due under IRC Section 965 is the first taxable year in which the corporation reports such income. This change is retroactively effective for a taxable year beginning on or after Jan. 1, 2017. Utah Laws 2019, HB 49, signed by the governor on Feb. 26, 2019. Virginia: The Virginia Supreme Court (Court) affirmed a circuit court ruling upholding the Virginia Department of Taxation's (Department) allocation of nearly 100% of a multinational corporation's gross receipts to Virginia using the cost of performance sourcing method (COP method) for sales of services. In so doing, the Court determined that the use of the COP method is not unconstitutional and it does not constitute an "inequitable" method such that the corporation is entitled to equitable relief. The corporation, which is headquartered in Virginia, derives its income from an annual fee for internet access to bundled products and tools; 95% of these sales occur outside of Virginia. Based on application of the statutory apportionment method, the Department allocated nearly 100% of the corporation's gross receipts to Virginia. The corporation filed a refund claim, arguing that the standard apportionment method caused it to pay significantly more tax to Virginia than what Virginia was "constitutionally entitled", effectively resulting in double taxation, and that use of the COP method unconstitutionally apportioned its income in violation of the Commerce and Due Process Clauses. On appeal, the Court rejected the corporation's arguments, finding the COP method is externally consistent because it did not reach beyond the value that was fairly attributable to Virginia economic activity, and it reasonably reflected the in-state component of the taxed activity.1 The Court reasoned that when a customer uses the corporation's content, the customer is reaching into Virginia to consult materials developed, and stored, in Virginia. Further, the Court found that the apportionment formula does not produce a "grossly distorted" result as the tax imposed on the corporation's services "rests upon the labor of employees in Virginia who developed the product [the corporation] sells, which is located in servers stored in Virginia." Turning to the equitable apportionment issue, under Virginia law a statutory apportionment method is "inequitable" when: (1) it results in double taxation of income, and (2) the inequity is attributable to Virginia and not to the fact that some other state has a unique method of allocation and apportionment. Here, the Court acknowledged that Virginia's COP method resulted in double taxation of part of the corporation's income when considered in conjunction with other states' apportionment methods. The double taxation, however, is not "attributable" to Virginia, but is attributable to other states' more recent adoption of changes to their apportionment formula. Lastly, comparing a number of states that subject the corporation to income tax, the Court found that while they "conceptually [use] similar market sourcing methods," the record fails to establish whether those methods are unique." The Corporate Exec. Bd. Co. v. Va. Dept. of Taxn., No. 171627 (Va. S.Ct. Feb. 7, 2019). West Virginia: New law (SB 268) updates the state's date of conformity to the Internal Revenue Code in effect on Dec. 31, 2018. This change is effective retroactive to the extent allowable under federal income tax law. W.V. Laws 2019, SB 268, signed by the governor on Feb. 27, 2019. West Virginia: The U.S. Supreme Court (Court) in a unanimous opinion held that West Virginia's provision of an income tax exemption for the pensions of former state law enforcement officers, but not for the pensions of former federal law enforcement officers performing similar services, unlawfully discriminates in violation of the intergovernmental tax immunity doctrine (4 U.S.C. Section 111) between the two classes based on the federal retiree's source of pay or compensation, without significant differences to justify such treatment. The Court found that the nature of the job responsibilities previously performed by the federal retirees and the favored class of state retirees were not significantly different. Further, in rejecting the West Virginia State Tax Commissioner's arguments that a narrow preference should be permitted, the Court held that "Section 111 disallows any state tax that discriminates against a federal officer or employee … ," noting that such discrimination is not permissible when the size of the affected class is small, when the intent of the exemption is to benefit state employees rather than to burden federal employees, or when federal pensions are more generous than state pensions. Dawson et ux. v. Steager, No. 17-419 (U.S. S.Ct. Feb. 20, 2019). Wyoming: A bill (HB 220) that would have imposed a 7% income tax on certain corporations in the retail trade and the accommodation and food service industries starting in 2020, failed to pass before the end of the 2019 legislative session on Feb. 28, 2019. California: The California Department of Tax and Fee Administration issued a special notice to provide guidance on registration and collection requirements for out-of-state businesses selling the following items into California: (1) new tires or motor vehicles and equipment that include new tires, (2) covered electronic devices, (3) lead-acid batteries, and (4) lumber products or engineered wood products. These requirements are effective April 1, 2019. Cal. Dept. of Tax and Fee Admin., Special Notice: Additional Registration and Collection Requirements for Out-of-State Business Selling Certain Items into California Effective April 1, 2019 (Feb. 2019). Washington: The Washington Department of Revenue (Department) issued interim guidance on how the place of sale is determined for purposes of sourcing sales of service charges associated with tickets to professional sporting events. The location of where a retail service is sourced determines whether state, and if applicable, local, sales tax is due. The Department said that it is aware that sellers have generally been sourcing sales of service charges based on either the event location or the purchaser location (i.e., the place where the purchaser takes receipt of the ticket). The Department said that since there is "currently no consensus as to the proper method of sourcing these services" it will continue to accept use of either method "as long as the seller applies the selected approach consistently to their sales." The Department said that it intends to hold a stakeholders meeting to discuss the administrative and interpretive issues involved with sourcing such sales; after which it intends to issue final guidance on how to source these sales. The final guidance will apply prospectively. This interim statement will remain in effect until final guidance is issued or the Department cancels it. Wash. Dept. of Rev., Interim Statement Regarding the Sourcing of Service Charges Associated with Tickets to Professional Sporting Events (Feb. 14, 2019). Wyoming: New law (HB 97) exempts from sales and use tax purchases of equipment to a telecommunications service provider, video programming service provider or internet access provider for use in the provision of broadband internet services in unserved areas. The bill defines "broadband internet service," "equipment," "unserved area," among other terms. This provision is effective July 1, 2019 and is repealed July 1, 2024. Wyo. Laws 2019, Ch. 120 (HB 97), signed by the governor on Feb. 26, 2019. Virginia: New law (SB 1785) allows the governor, upon the recommendation of the Director of the Department of Housing and Community Development, to renew an enterprise zone designation for up to three five-year periods (from two five-year periods). This applies to zones designated on or after July 1, 2005. Zones designated before July 1, 2005 may only be renewed for one five-year period (from two five-year periods). SB 1785 takes effect July 1, 2019. Va. Laws 2019, Ch. 119 (SB 1785), signed by the governor on Feb. 21, 2019. North Carolina: A retailer engaged in rent-to-own transactions for furniture, appliances, personal computers and other household electronics using "lease purchase agreements" does not qualify for an exemption from business personal property tax on items subject to these agreements because the property is not classified as "inventories owned by retail and wholesale merchants." The North Carolina Court of Appeals found that the retailer did not hold the property for "sale" when, after lease purchase agreements were executed and possession of the property was transferred to the lessees, the lessees had the option not to purchase the property or pay the "total cost to own" the property under the terms of the lease purchase agreement. Further, the substantial cost discrepancy between engaging in rent-to-own transactions compared to direct sales, and the fact that the leased property was in the lessees' possession rather than the retailer's possession, is another indication that the rent-to-own transactions are leases rather than sales. In re Appeal of Aaron's, Inc., No. COA18-607 (N.C. App. Ct. Feb. 19, 2019). Puerto Rico: The Puerto Rico Treasury Department has extended (Informative Bulletin (IB) 19-06) the deadline for filing certain information returns from Feb. 28, 2019 to March 15, 2019. The extension only applies to the information returns listed in IB 19-06. The extension only covers the reporting obligation; it does not apply to any tax deposit or tax payable that may be due by Feb. 28, 2019. Federal: Proposed bill "Mobile Workforce State Income Tax Simplification Act of 2019" (S. 604) would limit the extent to which states may tax compensation earned by nonresident telecommuters and other multistate workers. Specifically, an employee who performs employment duties in more than one state would be subject to income tax in the employee's state of residence and the state within which the employee is present and performing employment duties for more than 30 days during the calendar year the wages were earned. An employee would be deemed present and performing employment duties within a state for a day if the employee performs more of his/her employment duties within that state than in any other state during a day. If, however, the employee performs duties in his/her resident state and only one nonresident state during one day, the employee would be considered to have performed more of his/her employment duties in the nonresident state than in the resident state for that day. The portion of the day the employee is in transit would not be considered in determining the location of an employee's performance of employment duties. If approved, these provision would take effect on January 1 of the second calendar year that begins after the date of the bill's enactment. S. 604 was introduced on Feb. 28, 2019. Similar bills have been considered in prior legislative sessions. District of Columbia: The District of Columbia Office of Tax and Revenue (OTR) announced that it is further delaying the release of the 2019 income tax withholding tables due to the continued impact of the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). Because the TCJA suspends personal exemptions and many itemized deductions, they can no longer be included in the development of the withholding tables. Beginning with tax year 2018, the District's personal exemption and standard deductions conform to federal law. As a result, the amount of both the federal and District personal exemption is zero. In the interim, taxpayers are instructed to continue using the 2018 withholding tables (Publication FR-230) until the IRS and the OTR issue further withholding guidance. For additional information on this development, see Tax Alert 2019-0444. Georgia: For the first time since July 2014, the Georgia Department of Revenue released an updated Form G-4, Georgia Employee's Withholding Allowance Certificate. According to the form's instructions, Georgia law (O.C.G.A. Section 48-7-102) requires employees to complete and submit Form G-4 to their employers in order to have the correct state income tax withheld. Failure to submit a completed Form G-4 will result in the employer withholding income tax as though the employee were single with zero allowances. However, the 2019 Georgia employer tax guide (page 13) continues to state: Employers can use the federal election to determine state income tax withholding if sufficient information is available to do so. Otherwise, employers should withhold as if the employee were single with zero allowances. For additional information on this development, see Tax Alert 2019-0425. Arizona: The Arizona Supreme Court (Court) upheld the car-rental surcharge enacted by Maricopa County to generate revenue to pay for a sports stadium and other sports- and tourism-related ventures, finding the surcharge valid under the dormant Commerce Clause and the anti-diversion provision in Ariz. Const. Art. IX, Section 14, which directs that revenue collected from certain fees, excises, or license taxes "relating to" registration, operation, or use of vehicles on public highways and streets be spent on highways and streets. In so holding, the Court found the surcharge was not enacted with discriminatory intent under the dormant Commerce Clause, when it is uniformly imposed on all car rental agencies and their customers regardless of their residency status. Additionally, any voter intent for out-of-state visitors to pay most of the surcharge did not show intent for those visitors to be treated differently from residents. Further, based on the anti-diversion provision's text, context, and history, the Court affirmed the appeals court's narrower view that "relating to" the use or operation of vehicles means "a tax or fee that is a prerequisite to, or triggered by, the legal operation or use of a vehicle on a public thoroughfare." The Court noted that the taxes and fees to which the anti-diversion provision historically has been applied (i.e., registration fees, unladen weight fees, and motor carrier taxes based on gross receipts) are prerequisites for or triggered by legal use of vehicles on the roads, rather than taxes imposed on businesses such as car rental agencies that "merely benefit from the existence of roads." Saban Rent-A-Car LLC, et al. v. Ariz. Dept. of Rev., No. CV-18-0080-PR (Ariz. S.Ct. Feb. 25, 2019). New Mexico: New law (SB 106) removes the exemption for certain short-term occupancy rentals from the occupancy tax, effective Jan. 1, 2020. The repealed exemption applied to vendors that do not offer at least three rooms within or attached to a taxable premises for lodging or at least three other premises for lodging (or a combination of these within a taxing jurisdiction). N.M. Laws 2019, Ch. 25 (SB 106), signed by the governor on Feb. 4, 2019. Federal: The latest edition of Trade Watch is now available. Trade Watch is a quarterly communication prepared by Ernst & Young's Customs & International Trade Practice. See Tax Alert 2019-0474 for a copy of the newsletter. Federal: On Feb. 27, 2019, the House Ways and Means Committee held a hearing on US-China trade policy. The sole witness was U.S. Trade Representative Robert Lighthizer. United States and Chinese officials have been meeting to forge a trade deal ahead of a previous March 1, 2019 deadline to avoid an escalation of US tariffs, although President Trump tweeted Feb. 25, 2019 "I have … agreed to delay U.S. tariff hikes. Let's see what happens?" The hearing was characterized by bipartisan agreement that the United States had to press China for structural changes to its trade practices, but there was some disagreement as to the tactics to achieve those changes. For more on this development, see Tax Alert 2019-0442. International: The Irish Government has announced that a "Postponed Accounting" scheme will be implemented in Ireland for import Value Added Tax (VAT) in a post-Brexit scenario. It is a measure being introduced to allow Irish companies importing from the United Kingdom to postpone payment of VAT due on imports until the VAT return is filed. For more on this development, see Tax Alert 2019-0432. 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: 2019-0508 |
