Ernst & Young's State and Local Tax Weekly newsletter for April 19 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.

TOP STORIES

Oregon legislature considering a new corporate activity tax

The Oregon legislature is considering language (see proposed amendment to HB 3427, previously proposed to HB 2019) which would establish a new statewide corporate activity tax (CAT), effective for tax years beginning on or after Jan. 1, 2020. The CAT would be in addition to other taxes already imposed, including the Oregon corporate income and excise taxes. Key elements of the proposed CAT would:

• Impose an annual CAT on each person with taxable business receipts at a rate of $250 plus 0.49% of the taxpayer’s taxable commercial activity in excess of $1 million.
• Exempt from the CAT persons with less than $1 million in taxable commercial activity.
• Impose the CAT on persons that have substantial nexus with Oregon and make clear that as a “transactional tax” the protections of P.L. 86-272 would not apply.
• Define substantial nexus to include, among other activities, “bright-line” presence, which would be defined as having in the state during the calendar year (1) $50,000 in property; (2) $50,000 in payroll; (3) $750,000 in commercial activity; or (4) at least 25% of the person’s total property, total payroll, or total commercial activity.
• Include as commercial activity the value of certain property transferred into the state for the person’s own use in the course of a trade or business within one year after the person receives the property outside of Oregon.
• Require taxpayers to subtract from commercial activity sourced to Oregon 25% of the greater of the following amounts paid or incurred by the taxpayer: (1) the amount of the cost of inputs paid to other businesses, or (2) the taxpayer’s labor costs.
• Use the market-based sourcing method to source business receipts from the sales of services and intangibles, and allow for the use of alternative apportionment.
• Require a unitary group to file and pay the CAT as a single taxpayer, excluding intercompany transactions.
• Adopt the Internal Revenue Code of 1986, as amended (IRC) as amended and in effect on Dec. 31, 2018, unless otherwise provided.
• Preempt local jurisdictions from taxing commercial activity. This preemption would not apply to local taxes that are in effect and operative on March 1, 2019. For example, the Portland Clean Energy Surcharge of 1% would still be in effect.

The proposal also includes provisions regarding registration procedures, record keeping, filing returns and making payments.

INCOME/FRANCHISE

Arkansas: New law (HB 1953) updates Arkansas’ date of conformity to select IRC provisions and conforms to two new sections of the IRC. Arkansas adopts the following IRC sections as in effect on Jan. 1, 2019: IRC Sections 108, 1017 (income from the discharge of indebtedness); IRC Section 1361 (S corporations); IRC Sections  351, 354-358, 361, 362, 367 and 368 (gains and losses related to exchanges of property for income tax purposes); IRC Section  170 (charitable contribution deductions); IRC Section  162, except subsection (n), (trade or business expenses); IRC Section  274 (deductions for entertainment, business means, travel, etc.); IRC Sections  167 and 168 (a)-(j) (income tax deduction for depreciation and expensing of property); IRC Sections  611-614, 616, 617 (natural resources depletion deduction allowance under IRC Section  611); IRC Section  613A (oil and gas well depletion deduction allowance); IRC Sections  280F(a)-(d) (investment tax credit, depreciation for luxury automobiles and other property); IRC Sections  263A(a)-(h) (capitalization and inclusion in inventory costs of certain investments); Subchapter M (RIC, REIT, etc.); and IRC Section  7872 (taxation of foregone interest on below-market loans). In addition, Arkansas newly conforms to the following IRC provisions as in effect on Jan. 1, 2019: (1) IRC Section 118 (recognition or nonrecognition of income for contributions to capital); and (2) IRC Sections  174 and 280C (deduction of research and development costs). The changes in HB 1953 are effective for tax years beginning on or after Jan. 1, 2019. Ark. Laws 2019, Act 870 (HB 1953), signed by the governor on April 10, 2019.

Kentucky: In Kentucky Revenue Procedure KY-RP-19-02 (issued April 11, 2019), the Kentucky Department of Revenue (Department) provides instructions on complying with notice requirements to claim the deferred tax deduction (DTD). The Department also issued Schedule DTD, which must be filed by taxpayers intending to claim the DTD. For more on this development, see Tax Alert 2019-0778.

Massachusetts: New law (HB 3506) requires amounts included in federal gross income for a tax year under IRC Section  951(a) by reason of IRC Section  965 (repatriation income) be taken into account for purposes of Ch. 62 (i.e., Massachusetts income tax). Amounts taken into account for federal income tax purposes in tax years ending on or before Dec. 31, 2019, are to be taken into account in determining Massachusetts gross income in the tax year ending on Dec. 31, 2019. Income taken into account under this provision is treated as Part A dividend income. The deduction allowed under IRC Section  965(c) does not apply for Massachusetts tax purposes. Instead, in the taxable year ending Dec. 31, 2019, a taxpayer is entitled to a deduction from Part A gross income equal to 60% of the amount included in Part A income under the provisions above. Taxpayers that have made a valid election under IRC Sections  965 (h) or (i) to make eight installment payments of tax due under IRC Section  965, will be allowed to make payment of amounts due to Massachusetts generally consistent with the rules set forth in IRC Section  965 (h), with some modifications. Notably, the first three installment payments must be made on or before April 18, 2020. The deferral of tax payments described in IRC Section  965(i), however, does not apply for Massachusetts income tax purposes. These provisions apply to all taxable years in which income is required to be taken into account under IRC Section  951(a) by reason of IRC Section  965(a), including the tax year beginning on Jan. 1, 2017. Mass. Laws 2019, Ch. 5 (HB 3506), signed by the governor on March 29, 2019.

New Jersey: The New Jersey Division of Taxation (Division) posted on its website guidance on how the IRC Section  163(j) limitation on the deduction for business interest expense is treated for New Jersey Gross Income Tax (GIT) purposes, specifically partnerships. The Division advised that the state does not conform to the IRC Section  163(j) limitation for partnership tax returns. Further, for federal income tax purposes, a deduction for business interest expense disallowed under IRC Section  163(j) is carried forward to the next taxable year; the GIT, however, does not have any carryforward or carryback provisions. A partnership is allowed to deduct amounts disallowed for federal income tax purposes as an “other subtraction” on its NJ-1065 return and, in the year the carried forward deduction is used for federal income tax purposes, the partnership must add such amount back as an “other addition” on its NJ-1065 return. N.J. Div. of Taxn., “New Jersey Gross Income Tax Federal Tax Cuts and Jobs Act (TCJA) — Questions and Answers“ (last updated April 26, 2019).

SALES & USE

Multistate: The latest summary of recent significant legislative, administrative and judicial actions that affected state and local sales and use taxes is now available. These developments are compiled from the EY Indirect/State Tax Weekly and Indirect/State Tax Alerts. For a copy of the summary see Tax Alert 2019-0784.

Arkansas: New law (SB 582) expands the phased-in partial refunds of sales and use tax to include manufacturing machinery and equipment used to modify, replace, or repair (wholly or partially) existing molds and dies. The molds and dies must be used directly in producing, manufacturing, fabricating, assembling, processing, finishing, or packaging articles of commerce at a manufacturing or processing plant or facility in Arkansas. The refunds take effect on the first day of the calendar quarter after the legislation takes effect, which will be 90 days after the state legislature adjourns sine die. Ark. Laws 2019, Act 772 (SB 582), signed by the governor on April 8, 2019.

Hawaii: New law (SB 396) deems a marketplace facilitator the seller of tangible personal property, intangible property, or services, and deems the seller on whose behalf the sale is made to be making a sale at wholesale. A marketplace facilitator’s “gross income” or “gross proceeds of sale” includes receipts from sales on behalf of other sellers. SB 396 defines a “marketplace facilitator” as “any person who sells or assists in the sale of tangible personal property, intangible property, or services on behalf of another seller by: (1) Providing a forum, whether physical or electronic, in which sellers list or advertise tangible personal property, intangible property, or services for sale; and (2) Collecting payment from the purchaser, either directly or indirectly through an agreement with a third party.” In addition, SB 396 establishes notice and reporting requirements for any person other than a marketplace facilitator that provides a forum in which sellers can list or advertise tangible personal property, intangible property, or services for sale and takes or processes orders. Penalties may be imposed for failure to comply with these notice and reporting requirements. Provisions of SB 396 also make clear that the definition of “representative” does not include a marketplace facilitator, and amends the definition of “import” under the Use Tax Law to include the “sale of tangible personal property, intangible property, or services by a marketplace facilitator with a valid license … on behalf of an unlicensed seller for delivery to or use by a purchaser in the State.” These changes take effect Jan. 1, 2020. Haw. Laws 2019, Act 2 (SB 396), signed by the governor on April 4, 2019.

Idaho: New law (HB 259) expands the state’s sales and use tax nexus provisions by adopting economic nexus provisions for remote retailers and marketplace facilitators. Nexus is created for a remote retailer or marketplace facilitator that does not have a physical presence in Idaho, if during the prior or current calendar year, it has cumulative gross receipts from sales delivered into Idaho in excess of $100,000. In determining whether a marketplace facilitator meets the $100,000 threshold, its sales are combined with the those it facilitates for a retailer and the retailer’s authorized agents. A marketplace facilitator is relieved of liability for failure to file, collect, and remit sales and use tax if it demonstrates that such failure was due to incorrect information or insufficient client information given to it by the retailer or the retailer’s authorized agent. This provision does not apply if the marketplace facilitator and retailer are related. A marketplace facilitator that has a physical presence in Idaho but did not previously facilitate sales will have 45 days from its first facilitated retail sale to comply with these provisions. HB 259 takes effect June 1, 2019. Idaho Laws 2019, Ch. 320 (HB 259), signed by the governor on April 9, 2019.

Tennessee: New law (HB 931) delays the effective date of certain Streamlined Sales Tax conformity changes to July 1, 2021 (from July 1, 2019). Provisions that will be delayed include sourcing sales to the delivery or shipping destination, modifications to the single article limitation on local option sales taxes, use of a single sales/use tax return covering multiple dealer locations and implementation of certain privilege taxes in lieu of sales taxes. Tenn. Laws 2019, Ch. 157 (HB 931), signed by the governor on April 12, 2019.

BUSINESS INCENTIVES

Federal: The IRS has released another set of proposed regulations (REG-120186-18) detailing the requirements that Opportunity Zone (OZ) investors must meet to defer the taxation of capital gains invested in a qualified opportunity fund. Among other things, the proposed regulations would: (1) clarify the definition of "substantially all" for purposes of holding period and property use requirements; (2) identify transactions that could cause deferred gain to be taxed immediately; (3) specify how much deferred gain could be immediately taxed and when; (4) outline how to treat leased property used by a qualified OZ business; (5) define what constitutes qualified OZ business property; and (6) outline how to source an OZ business's gross income. For additional information on this development, see Tax Alert 2019-0823.

Maryland: New law (HB 175) extends (1) the sunset date of the research and development tax credit to June 30, 2022 (from June 30, 2021), and (2) the applicability of the credit to tax years beginning before Jan. 1, 2021 (from Jan. 1, 2020). Md. Laws 2019, Ch. 85 (HB 175), signed by the governor on April 18, 2019.

Maryland: New law (HB 173) extends the sunset date of the jobs creation tax credit program to Jan. 1, 2022 (from Jan. 1, 2020). Md. Laws 2019, Ch. 84 (HB 173), signed by the governor on April 18, 2019.

Mississippi: New law (SB 2603) amends the definition of “base investment” under the Mississippi Motion Picture Incentive Act to allow eligible motion picture production companies to request to include payroll and fringes for any employee who is not a resident and whose wages are subject to Mississippi income tax withholding. A motion picture production company (or its owner, principal, member, production partner, independent contractor director or producer, or subsidiary company) is eligible to make such request if it: (1) is designated and pre-qualified as Mississippi-based or as a Mississippi resident by the Mississippi Development Authority (MDA); (2) has filed Mississippi income taxes during each of the three previous years; and (3) has engaged in production-related activities of at least two motion pictures in Mississippi during the past 10 years. The production company must make its request to the MDA when it submits its state-certified production application. Lastly, base investments that include payroll and fringes can only include the first $5 million paid to an employee. SB 2603 took effect upon passage. Miss. Laws 2019, SB 2603, signed by the governor on April 8, 2019.

North Dakota: New law (HB 1111) permits taxpayers eligible for the research and experimental expenditure credit to elect to use the alternative simplified credit under IRC Section  41(c)(5). For taxpayers making such election, the credit amount is 17.5% of the first $100,000 of the alternative excess research and development (R&D) for the tax year, plus 5.6% of the alternative excess R&D for the tax year that exceed $100,000. For taxpayers with zero qualified research expenses in any one of the three tax years before the tax year for which the credit is determined, the amount of the credit equals the amount of qualified research expenses for the tax year multiplied by 7.5% of the first $100,000, plus 2.4% of qualified research expenses for the tax year more than $100,000. Alternative excess R&D is the amount of qualified research expenses that exceed 50% of the average qualified research expenses for the three tax years before the tax year for which the credit is being determined. “Alternative simplified credit” is the computation provided in IRC Section  41(c)(5), excluding qualified research expenses incurred outside North Dakota. A taxpayer’s election is binding for the tax year it is made. Taxpayers may not file an amended return to use the alternative simplified credit to calculate credits claimed for tax years beginning before Jan. 1, 2019. HB 1111 is effective for tax years beginning after Dec. 31, 2018. N.D. Laws 2019, HB 1111, signed by the governor on April 8, 2019.

PROPERTY TAX

Arkansas: New law (SB 530 ) adds disclosure requirements in property tax protests and appeals for industrial and commercial property, operating as such at the time of assessment, in an effort to help county equalization boards and county courts determine whether proposed comparable properties are similarly situated to the subject property. Specifically, any party to a protest or appeal of commercial and industrial property that intends to offer into evidence a sale or lease transaction to establish the property’s value before the county equalization board or before the county court has an affirmative duty to disclose the following information at least five days before the hearing: (1) whether the proposed comparable property was occupied or unoccupied when the transaction was executed; and (2) whether the proposed comparable property was subject to any use, deed, or lease restriction at the time of the transaction that prohibits the property on which a building or structure sits from being used for the purpose for which the building or structure was designed, constructed, altered, renovated, or modified. County courts are required to consider all evidence when they determine whether a proposed comparable property is similarly situated to the property subject to protest or appeal. At the county equalization board level, if a party does not disclose this information, the county assessor will advise the county equalization board that the failure to disclose this information should be considered a material omission affecting the weight of the evidence. SB 530 takes effect July 1, 2019. Ark. Laws 2019, Act 737 (SB 530), signed by the governor on April 5, 2019.

West Virginia: New law (SB 3) establishes a special property tax valuation method for certain wireless technology property. Under the new law, for five years immediately after a cellular or wireless tower’s erection date, the tower’s value is its salvage value (5% of original cost), and the correlated value determined under a unit valuation approach is reduced by the difference between the original cost and the salvage value of a tower. For purposes of this provision, a tower means a structure that hosts an antenna or other equipment used to transmit cellular or wireless signals for communications or computing purposes, including any antenna and all associated equipment, and that is constructed or erected between July 1, 2019 and July 1, 2024. These provisions are effective July 1, 2019. W.V. Laws 2019, Ch. 42 (SB 3), signed by the governor on March 27, 2019.

CONTROVERSY

Arizona: New law (HB 2042) amends provisions of the state’s statute of limitations, providing that the Arizona Department of Revenue (Department) may assess tax due or begin a court proceeding to collect state tax at any time, except for income and withholding taxes. For these taxes, the Department may assess tax or begin a court proceeding at any time only when the taxpayer’s failure to file an income or withholding tax return was due to an intent to evade tax. Otherwise, if the taxpayer fails to file an income or withholding tax report or return, the Department may assess tax within seven years after the date such report or return was required to be filed. HB 2042 applies to assessments issued on or after the first day of the month following the general effective date, which is 90 days after the legislature adjourns sine die. Ariz. Laws 2019, Ch. 48 (HB 2042), signed by the governor on April 9, 2019.

MISCELLANEOUS TAX

North Dakota: New law (HB 1418) prohibits state or local agencies or political subdivisions from imposing a tax, fee, or other requirement specific to the operation of an autonomous vehicle, an automated driving system, or an on-demand vehicle network. Additionally, it permits the operation of an on-demand autonomous vehicle network to provide transportation of persons or goods, provides a regulatory framework, and prohibits state agencies or political subdivisions from imposing requirements or performance standards on autonomous vehicles and automated driving systems. HB 1418 defines key terms, including “autonomous vehicle,” “automated driving system,” “on-demand autonomous vehicle networks.” HB 1418 takes effect Aug. 1, 2019. N.D. Laws 2019, HB 1418, signed by the governor on April 10, 2019.

VALUE ADDED TAX

International: The United Arab Emirates (UAE) Federal Tax Authority (FTA) has published a Cabinet decision that will permit official participants of Expo 2020 Dubai (Expo 2020) to claim a refund of value added tax (VAT) on operating expenses they incur while participating in the Expo, even if they are not UAE VAT registered. In comparison, official participants that will make taxable supplies related to Expo 2020 will need to seek any refund of VAT by registering for UAE VAT and submitting their periodic VAT returns to the FTA. For additional information on this development, see Tax Alert 2019-0791.

International: On April 14, 2019, Saudi Arabia's General Authority of Zakat and Tax (GAZT) published an Arabic language press release on its website in which it indicates that Directors' fees are essentially to be disregarded for value added tax (VAT) purposes in Saudi Arabia. This means that Directors already registered — or those considering registering — for VAT purposes in Saudi Arabia solely on the basis of fees earned as Directors may no longer be required to be registered. Any other income generated by Directors (i.e., aside from Directors' fees or similar) continues to be taken into account for VAT purposes in the normal manner. For additional information on this development, see Tax Alert 2019-0790.

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.