24 April 2019 State and Local Tax Weekly for April 12 Ernst & Young's State and Local Tax Weekly newsletter for April 12 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 April 9, 2019, Governor Matt Bevin signed into law Ky. Acts 2019, Ch. 196 (HB 458), which makes various changes to Kentucky's corporate income tax law. HB 458 provides for a deduction for deferred taxes in an effort to mitigate the effect on certain tax attributes from the transition from the prior nexus consolidated filing regime to combined reporting. This deduction is allowed for a 10–year period starting in 2024 and is limited to publicly traded corporations and their affiliates that participate, as of Jan. 1, 2019, in the publicly traded corporation's financial statements. In addition, HB 458 allows the sharing of certain tax attributes, such as NOLs and credits, among taxpayer members of the combined group subject to certain conditions. HB 354, enacted on March 26, 2019, sunsets the bank franchise tax (BFT) after 2021 and subjects financial institutions to the corporate income tax (CIT) or the limited liability entity tax (LLET) beginning Jan. 1, 2021 with a refundable credit for BFT timely paid for the 2021 tax year. HB 458 eliminates this one–year period of overlapping taxes and simply provides that financial institutions are subject to the CIT or LLET beginning Jan. 1, 2021 and that the BFT phases out after 2020. HB 458 also provides that savings and loan associations are likewise subject to the CIT starting Jan. 1, 2021 and that the thrift tax sunsets after 2020. Further, HB 354 modified the LLET statute of limitations for assessments of the tax against pass-through entities to allow investors up to 180 days from the date of the assessment to file amended returns to allow for flow-through items stemming from the assessment. HB 458 modifies this statute of limitations to the greater of the normal 4-year statute of limitations or 180 days from the date the assessment is final. On April 12, 2019, New York Governor Andrew Cuomo signed into law the fiscal year 2019–2020 Budget Bill (A2009C/S1509C or the Final Bill). Key provisions of the Final Bill:
Arkansas: A recent decision by an administrative law judge (ALJ) concluded that an entity's capital gain income from the sale of goodwill and other intangible assets (as part of a larger transaction also involving the sale of tangible assets) is business income, because the gain was an integral part of the entity's regular trade or business operations and served an operational (not investment) function, satisfying the functional test. The ALJ found that the gain satisfied the functional test when, by and through a wholly owned subsidiary, the entire asset that was sold was an operating division of the entity, the entity had sufficient interest and management control over the asset to enable the sale, the asset was an integral part of the entity's business enterprise, and it had produced income for the entity. The ALJ found it unnecessary to address the transactional test for business income, since the functional test was met. In re [redacted] Acct. No. [redacted], No. 19–162 (Ark. Dept. of Fin. and Admin., Ofc. Of Hearings and Appeal, March 20, 2019). Arkansas: New law (SB 576) modifies Arkansas's corporate income tax by reducing the corporate income tax rate, extending the net operating loss (NOL) carryforward periods, and adopting a single sales factor apportionment formula. The corporate income tax rate reduction is phased-in as follows: (1) effective for the tax year beginning Jan. 1, 2021, the rate for corporations with net income exceeding $100,000 is 6.2% (from 6.5%); and (2) effective for tax years beginning on or after Jan. 1, 2022 is 5.9% for corporations with net income exceeding $25,000 (down from 6.0% for income exceeding $75,000 and 6.2% for income exceeding $100,000). SB 576 also provides for two extensions of the NOL carryforward periods. Currently, NOLs can be carried forward for five years. Under the revised provisions, NOLs occurring in calendar year 2020 can be carried forward eight years, and NOLs occurring in 2021 and thereafter, can be carried forward for 10 years. Further, Arkansas adopts a single sales factor apportionment formula effective for tax years beginning on or after Jan. 1, 2021. (Prior to the 2021, Arkansas employs a three-factor, double-weighted sales apportionment formula.) Provisions of SB 576 also amended provisions related to the allocation and apportionment of the net income of a financial institution. Lastly, a proposed repeal of the state's throwback rule was not included in the final bill, but the bill's proponents indicated that such provision will likely be revisited when the state's budget will allow for such a change. Ark. Laws 2019, Act 822 (SB 576), signed by the governor on April 9, 2019. New Jersey: On April 5, 2019, the New Jersey Division of Taxation (NJ DOT) released rules regarding mandatory registration of a combined group by a managing member. These rules are meant to provide guidance for the combined reporting mandate under New Jersey's corporation business tax (CBT), contained in P.L. 2018, chs. 48 and 131, which applies for reporting tax years ending on or after July 31, 2019. Commonly owned corporations must report on a combined basis for CBT purposes if (i) they are engaged in a unitary business as defined by N.J.S.A. 54:10A-4(gg) and supplemented by the guidance set forth in the NJ DOT's guidance in TB–86 or (ii) they have elected to file on an affiliated group basis and are includable per the state's affiliated group requirements. To report as a combined group, CBT taxpayers must register a managerial member with the New Jersey Division of Revenue and Enterprise Services. The registration site on the internet is now in service and registration can begin. For more on this development, see Tax Alert 2019-0745. West Virginia: New law (SB 499) adopts for individual income tax purposes provisions related to allocating and apportioning income of a nonresident partner or shareholder from multistate business activity and special apportionment rules for certain types of businesses. In general, when a taxpayer's business activities take place partially within and partially without West Virginia and the taxpayer is taxable in the other state, nonbusiness income is allocated, and business income is apportioned, to West Virginia as specified by law. SB 499 describes how the following will be allocated to West Virginia: net rents and royalties from real and tangible property, capital gains, interest, dividends or patent or copyright royalties. In regard to the apportionment of business income, SB 499 details what goes into the calculation of the property, payroll and sales factors, with additional guidance on allocating sales of tangible personal property (incorporating a throw out rule) and allocating sales of non-tangible personal property (adopting a costs of performance sourcing method). An alternative apportionment method may be allowed if necessary to fairly represent the extent of the taxpayer's business activities in West Virginia. These provisions apply to taxable years beginning on or after Jan. 1, 2018. Provisions of SB 499 also adopt special apportionment rules for motor carriers and financial organizations. These provisions apply to taxable years beginning on or after Jan. 1, 2018. W.Va. Laws 2019, Ch. 244 (SB 499), signed by the governor on March 25, 2019. Arkansas: New law (SB 576) makes various changes to the state's sales and use tax law by adopting economic nexus provisions for remote retailers and marketplace providers, requiring accommodations intermediaries to collect and remit sales and tourism taxes, and exempting certain products and services related to car washes from sales and use tax. Under the revised nexus rules, remote sellers or marketplace facilitators that sell or facilitate the sale of tangible personal property, taxable services, a digital code, or specified digital products for delivery into Arkansas (collectively, "goods") are required to collect and remit sales and use tax if in the prior, or current, calendar year, they had aggregate sales of such taxable goods within in or delivered to locations within Arkansas exceeding: (1) $100,000, or (2) 200 transactions. In determining whether the threshold is meet, a sale occurring through a marketplace facilitator is a sale of the marketplace facilitator and not a sale of a marketplace seller. These provisions take effect July 1, 2019; these provisions cannot be applied retroactively. The new law also requires accommodations intermediaries to collect and remit sales and tourism taxes due on arrangements they make for the sale or use of an accommodation. An "accommodations intermediary" is defined as a "person other than the owner, operator, or manager or a room, suite, condominium, townhouse, rental house, or other accommodation." The new law also exempts certain products and services related to car washes from sales and use tax, including tangible personal property and digital codes used by a car wash operator for use in an automatic car wash, services to a car wash operator, and ancillary services by a car wash operator (e.g., vacuuming, hand prepping and drying, waxing). In lieu of paying sales and use tax on such items, car wash operators will have to pay a fee on the exempt products and services. Ark. Laws 2019, Act 822 (SB 576), signed by the governor on April 9, 2019. Indiana: A remote retailer's sales of prepackaged bakery items into Indiana will create nexus with the state if either of the following sales and use tax economic nexus threshold is met during the current or prior calendar year: (1) its gross revenue from such sales exceeds $100,000, or (2) it sells such items in 200 or more separate transactions. The bakery items, however, are exempt from Indiana sales and use tax as food or a food ingredient because they are not sold with utensils and are not sold in a heated state. Nevertheless, the exempt sales are used in determining whether either threshold is met, and the retailer is still required to register as an Indiana retailer even if no tax is due. Registration can be done either directly with the Indiana Department of Revenue or through the Streamlined Sales Tax program (of which Indiana is a member). Ind. Dept. of Rev., Rev. Ruling No. 2018–06ST (Jan. 7, 2019). Louisiana: A movie theater's sales of rewards program memberships and annual renewals are not sales of services subject to Jefferson Parish sales tax because the memberships do not provide the privilege of access to/the use of clubs or amusement and entertainment facilities. In affirming the Louisiana Board of Tax Appeal, the Louisiana Court of Appeal (Court) distinguished the theater's situation from that which was considered in the Louisiana court of appeals decision in Wal-Mart Stores, Inc.,1 finding that the membership program was not vital to the movie theater's business, and that members of the general public could access and use the theaters without becoming rewards program members. Additionally, finding ambiguity in the meaning of "access" to clubs as used in the statute (i.e., whether "access" meant the general public could "approach," "gain entry," or "admittance" to the theaters where the membership program applied), the Court interpreted the statute in a taxpayer-favorable way. The statutory language did not clearly and unambiguously express the intent to apply the statute to the movie theater's rewards program member fees, and members' ability to receive concession upgrades, virtual rewards, or online fee waivers did not mean that the rewards program membership payments were for the "access to or use" of the theaters. American Multi-Cinema, Inc. A/K/A AMC Theaters v. Normand, No. 18–CA–487 (La. Ct. App., 5th Cir., March 27, 2019). New Mexico: New law (SB 2) creates a new film production tax credit that applies to productions that begin principal photography on or after July 1, 2019 and modifies the current film production tax credit. Under the new film production tax credit, an eligible film production company may receive a refundable income tax credit equal to 25% of certain direct production and post-production expenditures made in New Mexico (reduced to 20% if the film production company receives a federal new markets tax credit). SB 2 also increases the aggregate credit cap of film credits to $110 million (previously $50 million) in a fiscal year for direct production or post-production expenditures made on film or commercial audiovisual products. Additionally, a film production company's budget for direct production and post-production expenditures must be certified by the state during a pre-production meeting; the state cannot certify the budget if the total expected claims would exceed the aggregate $110 million cap by more than $100 million in any fiscal year. (A New Mexico film partner is not subject to the $110 million or $100 million caps.) An additional 5% credit is available for payments for direct production and post-production expenditures for work, services, or items provided on location for certain productions located in New Mexico that are at least 60 miles outside the exterior of certain counties, for certain television pilots or series, or productions in a qualified production facility. Film production companies also may apply for a credit equal to 15% of the payment of wages for certain nonresident below-the-line crew. SB 2 adds definitions, including "below-the-line" crew, direct production expenditure, vendor, New Mexico film partner, adds television programs to the definition of film, and requires New Mexico to provide annual reports evaluating the Film Production Tax Credits' effectiveness. N.M. Laws 2019, Ch. 87 (SB 2), signed by the governor on March 28, 2019. West Virginia: New law (SB 499) establishes provisions for reporting federal partnership audit adjustments and modifies general provisions for reporting federal audit adjustments. Taxpayers generally are required to report adjustments to federal taxable income by filing a federal adjustments report with the state for the reviewed year, and pay any additional West Virginia tax owed within 180 days after the final determination date. If any items required to be shown on federal partnership returns (e.g., gross income, deduction, penalty, credit, or tax) is changed or corrected by the IRS and the partnership is issued an adjustment under IRC Section 6225 as part of a partnership level audit, the partnership must report each federal change or correction to West Virginia for the reviewed year within six months after the date of each final federal determination. In regard to reporting federal adjustments related to partnership level audits and administrative adjustment requests, no later than 90 days after the final determination date, a partnership must: (1) file a completed federal adjustment report with the state; (2) notify each of its direct partners of their distributive share of the final federal adjustments; and (3) file an amended composite return for direct partners and/or an amended withholding return for direct partners, and pay any additional amount due. Within 180 days after the final determination date, each direct partner must file a federal adjustment report of their distributive share of the adjustments and pay any additional amount of tax due, plus any additions to tax and interest due and less any credit for related amounts paid or withheld and remitted on the direct partner's behalf. SB 499 also: allows partnerships to elect to pay taxes due on behalf of direct and indirect partners; addresses reporting and payment requirements of tiered partners; provides a de minimis exception for reporting federal adjustments; provides for assessments of additional West Virginia tax, interest, and additions to tax from federal adjustments; among other changes. These provisions apply to adjustments to federal taxable income with a final determination date for a tax year beginning after Dec. 31, 2018. In addition, SB 499 modifies the general rules for reporting federal changes, including: (1) providing that a claim for a credit or refund resulting from a federal adjustment may be filed by the taxpayer within two years from the date of the final determination or applicable statute of limitations, whichever expires later; (2) reopening for three years the period of limitations for issuing a notices when the taxpayer has filed an amended federal return but no corresponding West Virginia amended return (only the items adjusted for federal income tax purposes are subject to adjustment for state purposes); and (3) establishing rules for reporting changes in taxes paid to other states. SB 499 also amends provisions related to filing composite returns and withholding tax on West Virginia source income of nonresident partners, shareholders, and beneficiaries. These changes apply to federal determinations that become final on or after July 1, 2019. W.Va. Laws 2019, Ch. 244 (SB 499), signed by the governor on March 25, 2019. New Jersey: The Jersey City quarterly payroll tax return is now available on the Jersey City Office of Tax Collector website. The return for the first quarter of 2019 must be received by April 30, 2019. As previously reported, a New Jersey Superior Court judge held that the recently established Jersey City, New Jersey payroll tax is constitutional and valid and the lawsuit brought by several Jersey City employers and state employer groups is dismissed. The New Jersey Business and Industry Association reports that an appeal of the decision was filed. For more on this development, see Tax Alert 2019-0761. Ohio: New law (HB 62), effective July 1, 2019, increases the Ohio motor fuel tax rate to 38.5 cents (previously 28.5 cents) per gallon of gasoline, and increases the other motor fuels tax rate to 47 cents (previously 28 cents) per gallon. A tax on the compressed natural gas gallon equivalent is phased in over five years, starting at $0.10 beginning July 1, 2019 and before July 1, 2020, and gradually increasing each year until it reaches $0.47 beginning July 1, 2023. Starting Jan. 1, 2020, plug-in electric motor vehicles are subject to an additional registration fee of $200, and hybrid motor vehicles are subject to a $100 fee. Lastly, municipalities and townships are authorized to impose an additional $5 motor vehicle registration fee (annual license tax) for certain purposes, including roads and bridges costs, streets, traffic signs, markers, and signals. Ohio Laws 2019, HB 62, signed by the governor on April 3, 2019. Virginia: New law (HB 2718/SB 1716) imposes an additional per-gallon tax on diesel fuel, a regional fuel tax, a motor carrier road tax, and a new registration fee to support transportation infrastructure projects. Beginning July 1, 2021, an additional tax will be imposed on diesel fuel at a rate of 2.03% of the statewide average wholesale price of a gallon of diesel fuel for the applicable base period, excluding federal and state excise taxes. Further, an additional tax will be imposed on every distributor who engages in the business of selling fuels at wholesale to retail dealers for retail sale in a specific geographic area (e.g., the Interstate 81 Corridor). The tax is imposed on each gallon of diesel and non-diesel fuel at a rate of 2.1% of the statewide average distributor price for the applicable fuel. The Virginia Tax Commissioner will determine an equivalent tax rate based on gasoline gallon equivalency for alternative fuels other than liquid alternative fuels. The new law also modifies the amount of road tax paid by motor carriers, providing that the additional per-gallon amount (previously $0.035) will be calculated by multiplying the average fuel economy by $0.01125 on July 1, 2019, and by $0.0225 on July 1, 2020 and each July 1 thereafter. Lastly, the new law imposes an additional fee for the registration of motor vehicles not designed and used for passenger transportation (excludes farm vehicles used exclusively for farm use). Va. Laws 2019, Ch. 837 (HB 2718) and Ch. 846 (SB 1716), both signed by the governor on April 3, 2019. International: On April 8, 2019, the United States Trade Representative (USTR) proposed tariff countermeasures in response to harm caused by European Union (EU) aircraft subsidies. Under the authority of Section 301 of the Trade Act of 1974, the USTR proposed the imposition of additional ad valorem duties of up to 100% on a list of 326 Harmonized Tariff Schedule of the United States codes. The list of announced tariffs is preliminary and could be modified following issuance of the World Trade Organization arbitrator's report regarding appropriate value of acceptable countermeasures. The USTR is also requesting comments from industry on the potential effects of the tariffs through May 28, 2019 and has announced that a hearing will take place on May 15, 2019. For additional information on this development, see Tax Alert 2019-0743. International: The Russian Tax Authority recently met with both tax and industry professionals to discuss the application of Value Added Tax (VAT) rules on electronic services (e-services). Following this meeting, the FTA prepared a draft position paper (the guidance) that they plan to officially issue this month. The guidance is intended to clarify certain issues regarding the obligations of foreign suppliers of e-services in Russia in light of the new VAT payment mechanism applicable to business to business (B2B) supplies as of Jan. 1, 2019. For additional information on this development, see Tax Alert 2019-0751. International: On April 4, 2019, Russia's State Duma (one of the Russian Parliament's two chambers) approved, in the final reading, a bill that, among other things, would allow taxpayers to recover input Value Added Tax (VAT) on goods, works and services used in providing services outside Russia (exported services). This provision represents a major change in Russia's VAT rules. An exception is made for services supplied outside Russia that fall within the category of VAT-exempt transactions. The recovery of input VAT would remain prohibited for this group of services. The bill still has to pass through two further stages before it becomes law: approval by the Federation Council (Parliament's other chamber) and signature by the President. For additional information on this development, see Tax Alert 2019-0752. 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. 1 Wal-Mart Stores, Inc. v. Fitch, 836 So.2d 1155 (La. App. 2nd Cir., Jan. 29, 2003) (sales of memberships to Sam's Club, which allowed access to the store, were taxable sales of services). Document ID: 2019-0818 |
