09 April 2019 State and Local Tax Weekly for March 29 Kentucky law includes changes to the state's corporate income and sales and use taxes, among other tax provisions On March 26, 2019, HB 354, which includes various tax law changes, was signed into law by Governor Matthew Bevin. HB 354 adopted several tax-related provisions, many focused on a "clean-up" of the tax provisions adopted in 2018 through adoption of HB 487 (See Tax Alert 2018-0911), including the adoption of mandatory combined reporting starting in 2019. HB 354 modifies Kentucky's IRC conformity date for 2018 to specify the year to which the conformity date applies. Under the revision, the IRC conformity date of Dec. 31, 2017, applies to taxable years beginning on or after Jan. 1, 2018 but before Jan. 1, 2019. For 2019 and forward, Kentucky adopts the IRC as of Dec. 31, 2018. With regard to IRC §179 expensing, HB 354 updates to the IRC as of Dec. 31, 2003 allowing $100,000 to be expensed when property is placed in service after Jan. 1, 2020. With respect to the limited liability entity tax (LLET), HB 354 provides that certain smaller businesses (e.g., those with less than $6 million in gross receipts) are subject to a $175 minimum tax instead of the previous zero liability. In addition, the LLET statute of limitations is modified for assessments of the tax against pass-through entities. In those cases, the individual partners, members, etc. in the limited liability entity have 180 days from the assessment to file amended returns to allow for flow-through items stemming from the assessment. As to combined reporting, HB 354 amends the definition of a "combined group" to adopt a greater-than-50% ownership (voting stock) test (HB 487 did not specify an ownership threshold), and amends the definition of "tax haven" to exclude any country that has entered into a comprehensive tax treaty with the United States. Other combined reporting changes in HB 354 include: (1) providing that combined reporting applies on a water's-edge basis; (2) eliminating intercompany receipts in computing combined income; and (3) adopting an 80/20 test under which US-domiciled corporations earning 80% or more of their income from sources outside the United States are excluded from the combined income computation. In addition, the combined reporting provisions provided for the ability to elect, in lieu of combined reporting, to file on a consolidated basis, consistent with the membership of the federal consolidated group. As originally enacted, the election was binding for 96 months; HB 354 shortens the period to 48 months, subject to renewal by the taxpayer. HB 354 provides another notable change in that the bank franchise tax will sunset after 2021. Beginning Jan. 1, 2021, corporations subject to the bank franchise tax will be subject to the corporate income tax or the LLET, as the case may be. HB 354 also makes changes to Kentucky's sales tax. First, it adopts marketplace provider nexus provisions. Under the new law, a marketplace provider is deemed to have nexus with Kentucky if the provider makes retail sales on its own behalf or facilitates retail sales of tangible personal property, digital property, or services that are delivered or transferred electronically to a purchaser in the state in any sales combination that exceeds $100,000 or reaches 200 or more separate transactions in the preceding or current calendar year. This provision applies to transactions occurring on or after July 1, 2019. Other tax-related changes included in HB 354 adopt exemptions from otherwise taxable admissions charged by certain non-profit organizations, and modify, as of July 1, 2018, the exemptions for manufacturers for energy purchases. Under the new law, the exemption from sales tax applies to the extent that energy costs exceed 3% of the manufacturer's cost of production. HB 487 required a toller (defined as a person who performs a manufacturing or industrial processing activity for a fee but does not take ownership of the tangible personal property that is incorporated into, or becomes the product of, the manufacturing or industrial processing activity) to include the costs of its own tangible personal property in its computation of costs of production. HB 354 allows, as of July 1, 2018, a toller to exclude such costs from its computation of production costs if certain requirements are met. HB 354 also makes changes to some incentive programs and to the state's Recycling Credit. Finally, HB 354 prevents certain Kentucky Department of Revenue guidance, including private letter rulings, from being made public. For more on this development, see Tax Alert 2019-0568. Multistate: The summary of the significant legislative, administrative and judicial actions that affected state and local income/franchise taxes during the first quarter of 2019 is now available. Highlights include: (1) A summary of legislative developments in Arkansas, Idaho, Iowa, Kentucky, Mississippi, North Carolina, South Carolina, South Dakota, Virginia, Utah and West Virginia; (2) A summary of judicial developments in Kentucky, New Jersey, North Carolina, Oregon, Texas and Virginia; (3) A summary of administrative developments in Arkansas, California, Colorado, Idaho, Kentucky, Mississippi, Missouri, New Jersey, New Mexico, New York, New York City, Pennsylvania, City of Philadelphia and Texas; and (4) A discussion of state and local tax items to watch in Arkansas, Hawaii, Idaho, Kentucky, New Mexico, New York and Texas. For a copy of the summary, see Tax Alert 2019-0675. Colorado: On March 25, 2019, Colorado adopted amendments to various regulations1 to provide guidance on the application of Colorado's apportionment and allocation methods in light of a 2018 law change that adopts market-based sourcing effective for tax years beginning on and after Jan. 1, 2019. These changes take effect April 14, 2019. Florida: In response to a request for guidance on how to source income from the provision of various services, the Florida Department of Revenue (Department) advised a company and its affiliate (collectively, "company") that for Florida corporate income tax purposes, it should source this income "to the location of the customer to which the services are provided, on a market basis." Under Florida law, income from services performed within and without the state is sourced to Florida if the greater proportion of the income producing activity (IPA) is performed in Florida based on costs of performance (COP). Further, the Department stated that IPA is the "activity directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profits." The Department cited two non-Florida cases — Heller Western (Arizona)2 and Ameritech (Wisconsin)3 — as illustrative of Florida's interpretation of its sourcing rule. In both cases, the majority of the taxpayers' COP occurred outside the states in which their customers resided and where the IPA actually occurred. The taxpayers argued that the income should be sourced to the state in which the majority of the COP occurred. In both cases, the courts determined that the IPA "were the actual sales of services to its customers, as opposed to the costs of performing those services." According to the Department, the courts in these states ultimately sourced the sales to the states in which the customers resided (e.g., the market state) finding that the direct sale to the customer at the customer's location is where the IPA occurred. The Department is taking a similar approach, advising the company that income from the sales of services are sourced to the market state based on the reasoning that the direct sale to the customer at the customer's domicile is where the IPA occurred. Fla. Dept. of Rev., TAA No. 18C1-011 (Sept. 27, 2018) (released Feb. 13, 2019). Kansas: Vetoed bill (SB 22) would have exempted from Kansas income tax deferred foreign income under IRC §965(a), global intangible low taxed income (GILTI) under IRC §951A and certain disallowed business interest under IRC §163(j). The bill also would have excluded from Kansas income certain capital contributions under IRC §118 and certain amounts attributable to the disallowance of Federal Deposit Insurance Corporation premiums paid by large financial institutions. The bill was vetoed by the governor on March 25, 2019. South Carolina: New law (HB 3985) updates the state's date of conformity to the IRC to the IRC as amended through Dec. 31, 2018, including the effective date provisions contained in it. S.C. Laws 2019, HB 3985, signed by the governor on March 28, 2019. Texas: A corporation that manufactured ready-mixed concrete using mixer-trucks in calculating its Texas franchise tax is not allowed to subtract as costs of goods sold (COGS) all of its costs related to its mixer-trucks, drivers, and dispatchers who oversee the orders for ready-mixed concrete. In so holding, a Texas Court of Appeals determined that a portion of the costs related to the mixer-trucks and to the drivers are not costs of producing ready-mixed concrete (and, therefore, may not be included in its COGS deduction) or are transportation costs (which are specifically excluded from the COGS deduction). Truck costs and driver costs allocable to producing ready-mixed concrete, however, may be included as COGS. U.S. Concrete, Inc. v. Hegar, No. 03-17-00315-CV (Tex. Ct. App., 3rd Dist., March 28, 2019). Utah: New law (SB 28) expands the state's "doing business" provision to specifically include the activities of (1) selling or performing a service in the state, and (2) earning income from the use of intangible property in the state. The bill makes clear that "doing business" and "exercising a corporate franchise" does not include the business activity of a corporation if its only business activity within Utah is the solicitation of orders for sales of tangible personal property that are protected by P.L. 86-272. These changes are effective for a taxable year beginning on or after Jan. 1, 2019. Utah Laws 2019, SB 28, signed by the governor on March 27, 2019. West Virginia: Vetoed bill (HB 2828) would have provided similar West Virginia income tax benefits allowed for federal income tax purposes to those investing in federally designated Opportunity Zones under IRC §1400Z. The governor vetoed this bill on March 27, 2019. Federal: Proposed bill titled the "Online Sales Simplicity and Small Business Relief Act of 2019" (HR 1933) would, if enacted, prohibit states from retroactively imposing sales tax collection requirements on remote sellers and would establish a small business exception. Under the bill, a state would be able to impose a sales tax collection duty on a remote seller for sales occurring after Jan. 1, 2019. Small business remote sellers (e.g., a remote seller with not more than $10 million in gross annual receipts in the US in the preceding calendar year) would be exempt from sales tax collection duties in any state until 30 days after the states develop, and Congress approves, an interstate compact governing sales tax collection duties on remote sellers. The compact would need to provide for a clearly defined minimum substantial nexus standard and would need to simplify registration, collection, remittance, auditing, and other compliance processes to avoid undue burdens on interstate commerce. HR 1933 was introduced on March 27, 2019. Similar legislation (HR 6842) was considered in the 115th Congress. District of Columbia: New law (B22-0914), expands on a permanent basis the reach of the District of Columbia's sales and use tax to remote retailers by enacting economic nexus and marketplace facilitator/provider provisions, and expands the sales tax base to include digital goods. Effective Jan. 1, 2019, remote sellers selling tangible personal property, products transferred electronically, or services for delivery into the District must collect and remit the District's sales and use tax if the seller's gross receipts from such sales delivered into the District exceeds $100,000 or such sales were made in 200 or more separate transactions in a 12-month period. These provisions will not be applied retroactively. Effective April 1, 2019, a marketplace facilitator is required to collect and remit sales tax on all sales it makes on its own behalf and all sales it facilitated on behalf of marketplace sellers to customers in the District, regardless of whether the marketplace seller for which sales are facilitated would have been required to collect tax had the sale not been facilitated by the marketplace facilitator. Effective Jan. 1, 2019, sales of, or charges for, digital goods are subject to the District's sales and use tax. The term "digital goods" includes digital audio/audiovisual works, digital books, digital codes, digital applications and games, and any otherwise taxable tangible personal property electronically or digitally delivered (including streaming), whether purchased singly, by subscription, or in any other manner, such as maintenance, updates, and support. The term does not include cable television service, satellite relay television service or any other distribution of television, video, or radio services (unless expressly included in the definition of digital goods). D.C. Laws 2018, L22-0258 (B22-0914), became final law March 22, 2019. (Note, these provisions were initially enacted as emergency law (B22-1070), which was enacted Dec. 31, 2018 and expired on March 31, 2019.) See also, D.C. Off. Tax and Rev., OTR Notice 2019-02 (Jan. 2, 2019), D.C. Off. Tax and Rev., "Taxation of Digital Goods in the District of Columbia" (Jan. 3, 2019). Kansas: Vetoed bill (SB 22) would have adopted economic nexus provisions for remote retailers and marketplace providers. The bill was vetoed by the governor on March 25, 2019. North Dakota: New law (SB 2338) adopts economic nexus provisions for marketplace facilitators. A marketplace facilitator that does not have a physical presence in the state, will be required to collect and remit sales and use tax if it facilitates or makes sales of tangible personal property and other taxable items delivered in North Dakota through the marketplace that, when combined, exceed $100,000. Marketplace facilitators meeting the threshold are required to begin collecting tax the earlier of the following year or 60 days after the threshold is met; however, marketplace facilitators are not required to collect and remit sales or use tax under these provisions on any sale made before Oct. 1, 2019. Marketplace facilitators are not liable for failure to collect and remit sales and use tax under certain circumstances, including when the failure to collect and remit the correct amount of tax is due to the reliance on incorrect or insufficient information provided by the seller, among other reasons. N.D. Laws 2019, SB 2338, signed by the governor on March 26, 2019. West Virginia: New law (HB 2813) adopts economic nexus provisions for marketplace facilitators and referrers, effective for sales made on or after July 1, 2019. Under these provisions, a marketplace facilitator, referrer, or remote seller is required to collect West Virginia use tax when it either: (1) makes or facilitates West Virginia sales on its own behalf or on behalf of one or more marketplace sellers equal to or exceeding $100,000 in gross revenue for the prior or current calendar year; or (2) makes or facilitates West Virginia sales on its own behalf or on behalf of one or more marketplace sellers in 200 or more separate transactions for the prior or current calendar year. If either threshold is met, a marketplace facilitator's or referrer's obligation to collect and remit use tax applies to all taxable sales of tangible personal property, customer software, or services which (1) it makes directly, or (2) it facilitates for marketplace sellers in West Virginia. HB 2813 defines key terms including "affiliated person," "marketplace," "marketplace facilitator," "marketplace seller," "referrer," and "remote seller," among other terms. W.Va. Laws 2019, HB 2813, signed by the governor on March 27, 2019. West Virginia: New law (HB 2515) exempts from sales and use tax the sale and installation of mobility enhancing equipment installed in a new or used motor vehicle for a person with physical disabilities to use. The exemption applies to any sale and installation for the repair or replacement parts for mobility enhancing equipment, including when the parts are purchased separately or in conjunction with the mobility enhancing equipment, and regardless of whether the parts maintain or enhance the original functionality of the equipment. HB 2515 takes effect June 4, 2019. W. Va. Laws 2019, HB 2515, signed by the governor March 25, 2019. Mississippi: New law (SB 2271) expands the scope of tax credits available to qualifying data centers. SB 2271 reduces the requirements for a data center to be eligible for business enterprise tax exemptions, requiring a minimum capital investment in Mississippi of $20 million (previously $50 million), and creating a minimum of 20 (previously 50) new, full-time jobs with a minimum average annual salary of at least 125% (previously 150%) of the average annual state wage. Additionally, SB 2271 adds income and franchise tax to the taxes from which data centers may be exempt, and provides that the data centers are exempt from the applicable taxes for 10 years after they are certified as eligible by the Mississippi Development Authority. Lastly, SB 2271 exempts from sales tax sales of electricity, current, power, steam, coal, natural gas, liquefied petroleum gas or other fuel to data centers that fall within the definition of "business enterprise." SB 2271 takes effect July 1, 2019. Miss. Laws 2019, SB 2271, signed by the governor on March 22, 2019. Missouri: A health care clinic (clinic) qualifies for a charitable use property tax exemption because the property was not owned and operated for profit, it was dedicated unconditionally to charitable activity, and the medical treatment provided directly benefitted people by relieving their bodies of disease, suffering, or constraint. The Missouri State Tax Commission found the following supportive of its conclusion, the clinic: (1) provides medical, dental, and psychological care in an unserved area to unserved individuals regardless of ability to pay; (2) offers a sliding treatment payment scale and discount prescription drug program that accounts for patients' finances; (3) helps to address the opioid crisis in Holt County and permits the Holt County Health Department to operate a clinic on the property for no charge; and (4) there is no evidence of any profit to any individuals or corporations. Northwest Health Services, Inc. v. Jones, Nos. 18-60501 & 18-60502 (Mo. State Tax Comn. March 15, 2019). Louisiana: New rule (La. Admin. Code 72:I.105) establishes a voluntary disclosure agreement (VDA) program for local sales and use tax, to provide penalty relief to taxpayers with undisclosed tax liability to more than one local sales and use tax collector. Undisclosed liabilities are eligible for inclusion in a VDA when the underpayment or non-payment of sales tax stems from a math error regarding the tax due, the interpretation of law, or the process of reporting the tax due on the return, or if the undisclosed liability results from the merger or acquisition of a company that previously did not properly report sales and use tax to a collector. A VDA is not available if the undisclosed liability results from (1) the applicant's failure to file returns for local sales tax when the applicant is registered as a dealer required to report retail sales or sales at retail to the collector on the application date; or (2) the filing of false, fraudulent, or grossly incorrect returns and the taxpayers have the intent to defraud the local taxing authority. A VDA also is not available to applicants (or their affiliates) that have been contacted by the collector regarding a tax matter. The rule further provides guidance on: (1) the application and evaluation of an offer to enter into a VDA (2) how to determine the look-back period and treatment of pre-look-back periods; (3) post-approval procedures and conditions; (4) payment of tax, interest, and penalty due; and (5) actions that can be taken when fraud or certain misrepresentations are discovered, among other provisions. Applicants that applied for a VDA with a collector before the effective date of this rule and subsequently entered into the VDA are deemed to have satisfied the requirements of the VDA under this new rule. The rule was adopted on March 20, 2019. La. Uniform Local Sales Tax Bd., La. Admin. Code 72:I.105 (La. Register, Vol. 45 No. 03, March 20, 2019). California: On July 1, 2019, California will begin implementing its mandatory auto-enroll retirement program, called CalSavers, with the first wave of employers (those with 100 or more employees) required to register by June 30, 2020. During the three-year phased rollout, employers that do not offer a retirement plan to employees will be required to register to participate in the state's auto-enroll retirement program. Eventually, all employers with five or more employees that do not offer a retirement plan will be required to participate in the CalSavers program. For more information on this development, see Tax Alert 2019-0636. North Carolina: New law (HB 1112) reduces the threshold for mandatory electronic filing of Forms W-2 with the North Dakota State Tax Commission from 250 or more forms to 10 or more forms, effective with tax year 2019, due Jan. 31, 2020. The new law also codifies the requirement that payroll service providers filing on behalf of client employers file all returns electronically, regardless of the number of returns to be filed. For additional information on this development, see Tax Alert 2019-0635. New Mexico: New law (SB 246) imposes a temporary health care quality surcharge on skilled nursing facilities, intermediate care facilities, and intermediate care facilities for individuals with intellectual disabilities (collectively, health care facilities). The Health Services Department annually must calculate the rate of the surcharge that will be paid by the health care facility during the subsequent fiscal year. In calculating the rates, the Health Services Department will set a uniform rate per day for each non-Medicare bed day in the health care facilities, up to the maximum permitted by federal law, among other requirements. The new law requires quarterly reporting for health care facilities and provides the first and subsequent surcharge due dates. A health care facility with more than 90,000 annual Medicaid-financed bed days may claim an exemption equal to 65% of the health care quality surcharge due in a reporting period (this threshold may be modified). SB 246 takes effect July 1, 2019, and is repealed effective Jan. 1, 2023. N.M. Laws 2019, Ch. 53 (SB 246), signed by the governor on March 14, 2019. South Dakota: New law (HB 1146) requires U.S. savings bonds included in a safe deposit box or other repository be reported and recorded in the unclaimed property database, independently of the box or repository. U.S. savings bonds must be listed using the owner information on the original bond and must be claimable by the person listed on the bond or by that person's heirs. Further, the holder's verified report must include each person that appears to be the owner of presumed abandoned property valued at $10 (previously $50) or more (except for travelers checks and money orders). Internet auctions may be conducted as a form of public sale if the administrator determines that this is the most favorable market for the property. Lastly, for claims for presumptively abandoned stock and other intangible interests in business associations and that the administrator sold within 180 (previously 90) days of confirmed receipt of the property, the amount payable for the claim is the net sale proceeds. HB 1146 takes effect July 1, 2019. S.D. Laws 2019, HB 1146, signed by the governor on March 21, 2019. West Virginia: New law (HB 2609) provides that when certain unclaimed property is presumed abandoned, an indication of the owner's interest in any demand, savings and time deposit held by a financial organization for that owner is an indication of the owner's interest in all demand, savings and time deposits held by that financial organization. HB 2609 takes effect June 2, 2019. W. Va. Laws 2019 (HB 2609), signed by the governor on March 25, 2019. International: On March 18, 2019, the South African National Treasury published amendments to the Regulation prescribing electronic services for purposes of the definition of "electronic services" in section 1 of the Value-Added Tax Act. The amendments to this Regulation, which is key in determining whether a foreign supplier of electronic services should register for and levy South African Value-Added Tax (VAT), became effective on April 1, 2019. The effect of these amendments is to significantly broaden the scope of the 2014 Regulation, which defined "electronic services" for South African VAT purposes since June 1, 2014. For additional information on this development, see Tax Alert 2019-0618. 1 Amended regulations include: Colo. Regs. §§ 39-22-109, 39-22-303.6-1 through -18, 39-22-303.7-1 and -2, 39-22-303(10), 39-22-303(11)(c), and 39-22-305. 3 Ameritech Publishing, Inc. v. Wis. Dept. of Rev., No. 2009AP445 (App. Ct. IV 2009), 788 N.W.2d 383 (Wis. Ct. App. 2010). Document ID: 2019-0725 |
