Ernst & Young's State and Local Tax Weekly newsletter for May 3 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

Iowa enacts various tax changes, but does not decouple from GILTI or IRC §163(j) limitations on interest expense

On May 3, 2019, Iowa Governor Kim Reynolds signed into law House File 779 (HF 779), which makes a number of tax-related changes to the state's corporate income, bank franchise, and sales and use taxes. The final version of HF 779, however, does not include provisions that would have decoupled Iowa from the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) provisions related to global intangible low-taxed income (GILTI) set forth in IRC §§951A and 250 and the interest expense limitation rules provided in IRC §163(j).

For tax year 2019, HF 779 extends the tax-benefits of like-kind exchanges to include the exchange of all property, not just real property.

HF 779 also extends the Targeted Jobs Withholding Credit Pilot Project to June 30, 2021 (from June 30, 2019). The program offers a withholding tax credit to businesses that are located in, or expand into, one of the following project cities: Burlington, Council Bluffs, Fort Madison, Keokuk, and Sioux City. Qualified businesses must sign an agreement with the city and the Iowa Economic Development Authority in order to receive the credit, which equals 3% of gross wages paid to each employee covered by the agreement.

For taxpayers subject to the bank franchise tax, HF 779 extends the tax benefits of like-kind exchanges to include the exchange of all property for tax year 2019.

In addition, HF 779 eliminates the bank franchise tax alternative minimum tax effective for tax year 2021. A related credit for alternative minimum tax paid will be eliminated for tax year 2022 and thereafter.

Under current law, effective as of Jan. 1, 2019, Iowa requires a remote seller to collect and remit sales/use tax if during the year it made at least 200 sales or had at least $100,000 in sales to Iowa customers. Effective July 1, 2019, HF 779 eliminates the 200-sale threshold for remote sellers. With this change, remote sellers will only be subject to the $100,000 annual taxable sales threshold in Iowa.

In addition, HF 779 expands the sales tax exemption for manufacturers by adding the word "primarily" to the definition of "manufacturer." This change allows companies that are primarily manufacturers, but engage in some non-manufacturing activities, to claim the exemption. This change is retroactive to May 30, 2018 and is intended to override the narrower definition of a "manufacturer" provided by SF 2417 (Iowa Laws 2018).

Effective July 1, 2019, HF 779 makes two other changes to Iowa's sales/use tax law: First, carpentry repair and carpentry installation become taxable services. Second, an exemption is adopted for grain bins and materials used to build and repair grain bins. A third change, retroactive to Jan. 1, 2016, adds supplies and replacement parts purchased for use tax property that is centrally assessed to the exclusions from the existing machinery and equipment sales/use tax exemption.

The Iowa legislature had considered decoupling from the TCJA provisions related to GILTI and the interest expense limitation rules provided in IRC §163(j) but ultimately did not. Thus, these TCJA provisions are now in effect for taxpayers for taxable years beginning on or after Jan. 1, 2019. Such decoupling may be considered in future Iowa legislative sessions.

For additional information on this development, see Tax Alert 2019-0889.

INCOME/FRANCHISE

New Jersey: The New Jersey Division of Taxation (NJ DoT) issued guidance to combined groups regarding the exclusion of the double inclusion of global intangible low-taxed income (GILTI) under IRC §§951A and 250 and the treatment of related party addbacks. New Jersey law requires mandatory combined reporting for tax years ending on and after July 31, 2019 (the default for all taxpayers is a water's edge combined reporting group, unless an election is timely made to file either on a world-wide or affiliated group basis). Also, , New Jersey law provides an exception to the state's intercompany interest/expense addback rules for transactions between members of a combined group reported on a New Jersey combined return. For New Jersey Corporation Business Tax (CBT) purposes, a combined group may include a controlled foreign corporation (CFC) that generates GILTI that is reported in other related members' entire net income (ENI). Combined group members incorporated under the laws of a foreign nation must include all world-wide income regardless of whether it is reported as federal taxable income. The CBT does not provide an exclusion for non-effectively connected income of a combined group member that is a corporation incorporated under the laws of a foreign nation. The income of a CFC is included in the combined group if it is a member included on the same New Jersey combined return and, therefore, the NJ DoT recognizes that the inclusion of CFC-generated GILTI in ENI of other members of a combined group could result in double inclusion of the same income. NJ DoT has determined that such inclusion would be improper and, in response, is developing for taxpayer's use a schedule that will eliminate the double taxation in a combined reporting group. (NJ DoT's guidance lists the information required to be included in the schedule.) NJ DoT made clear that only the GILTI amount directly attributable to the CFC combined group members included in the same New Jersey combined return can be excluded. Further, the GILTI deduction under IRC §250 is still available to the extent taken for federal income tax purposes if any of the GILTI amount is excluded under the NJ DoT's guidance in order to prevent double taxation. The addback requirements do not apply to members of the combined group included in the same New Jersey combined return, but do apply to related parties not included in the same New Jersey combined return. For group members not in the same New Jersey combined return, the related party addback rules still apply unless an exception otherwise applies (e.g., unreasonable or GILTI and the unreasonable exception applies). NJ DoT stated that it will allow an unreasonable exception for expenses attributable to the related party CFC if: (1) there is a related party not included in the same New Jersey combined return, (2) any of the members of the combined group report GILTI derived from ownership of a related party, and (3) the members of the combined group can demonstrate that the related party was the entity that generated the GILTI included in the member's ENI. NJ DoT indicated in its guidance that a taxpayer which files a separate return may also qualify for the GILTI "unreasonable" exception. Amounts deducted under GILTI are not subject to addback. Lastly, NJ DoT indicated that it is in the process of drafting regulations addressing this topic. N.J. Div. of Taxn., TB-88 "Combined Groups: Exclusion of Double Inclusion of GILTI and Treatment of Related Party Addbacks" (April 23, 2019).

Tennessee: A multistate company and affiliated entities (collectively, "company") that provide cable television and high-speed data internet access services, are required to remit additional franchise and excise taxes on receipts for providing these services to Tennessee customers because the company failed to correctly identify its earnings' producing activities and establish that a greater portion of the activity occurred in a state other than Tennessee during the tax years at issue (i.e., the periods from 2006 through 2008). In so holding, the Tennessee Court of Appeals (Court) rejected the Tennessee Department of Revenue's (Department) argument that the earnings' producing activity occurred solely in Tennessee, explaining that the distribution of cable services depends on a series of "integrated, interdependent steps" necessary to deliver these services (e.g., video content only reached Tennessee customers after it travelled through the "national fiber backbone," and the regional area facility servicing Tennessee was located out of state and was jointly operated by teams in several other states). Further, even though the Court's interpretation of Rule 34 supports the company's argument that it could identify different categories as earnings' producing activities and then analyze each separately, the Court, nevertheless, determined that the company attempted to circumvent its tax liability through its category selection when the only explanation for its use of five categories of business activities (i.e., video services, high speed data services, telephone, rental of customer premises equipment, and an "other" category that included items like local franchise fees) was that it organized its national billing practice under the same five categories. The Court did not suggest an ideal set of categories, but found that the company's additional subcategories (i.e., integrated, interdependent steps for video and high-speed data services) did not produce earnings and were not necessary to produce Tennessee revenue. Therefore, according to the Court, the company did not prove its right to recovery and that the tax assessment was presumed correct. Comcast Holdings Corp. v. Tenn. Dept. of Rev., No. M2017–02250-COA-R3-CV (Tenn. App. Ct. April 25, 2019).

SALES & USE

Georgia: New law (HB 182) lowers the sales threshold of the state's economic nexus provision for remote sellers from $250,000 to $100,000, effective Jan. 1, 2020; and repeals the provision that allowed remote retailers meeting the threshold to elect to follow notice and reporting requirements instead of collecting and remitting tax, effective April 28, 2019. The 200-separate transaction threshold remains. Accordingly, the economic nexus threshold for 2019 is gross revenue exceeding $250,000 or 200 transactions, and starting in 2020 the threshold is $100,000 or 200 transactions. Ga. Laws 2019, HB 182, signed by the governor on April 28, 2019. See also Ga. Dept. of Rev., Policy Bulletin SUT-2019-02 (May 7, 2019) (Supersedes Policy Bulletin SUT-2018-07 (Oct. 1, 2018)).

North Dakota: New law (HB 1439) broadens the sales and use tax exemption for materials used in compressing, gathering, collecting, storing, transporting, or injecting carbon dioxide for use in enhanced recovery of oil and natural gas to include such materials used for secure geologic storage. This change is effective for taxable events occurring after June 30, 2019. N.D. Laws 2019, HB 1439, signed by the governor on April 24, 2019.

PROPERTY TAX

District of Columbia: Amended rule (9 DC Mun. Reg. § 707) updates technical guidance related to personal property tax exemption certificate periods for exempt organizations. Personal property tax exemptions are only valid for the period stated on the exemption certificate, and the effective date for such an exemption is July 1 after the initial application request date. To establish a personal property tax exemption, an organization must get an exemption certificate from the Deputy Chief Financial Officer stating that it is entitled to the exemption. Exemption certificates issued to exempt organizations on or after Nov. 1, 2018 will be valid for up to five years from the issue date (certificates issued to exempt religious entities are valid for up to 10 years from the issue date). Exemption certificates issued before Nov. 1, 2018 will expire upon notice by the Office of Tax and Revenue (OTR). Exempt organizations must follow the OTR's electronic application process to obtain an exemption certificate, and all exemption applications filed by exempt organizations must include certain information, including federal exemption status, proof of IRS exemption (such as IRS Determination Letter or Application for Recognition of Exemption) and organizational details. The regulation was adopted on April 10, 2019 and took effect April 26, 2019. D.C. OTR, Notice N0082629 (D.C. Reg. Vo. 66/17 published April 26, 2019).

North Dakota: New law (HB 1439) broadens the carbon dioxide pipeline property tax exemption to include property and necessary associated equipment to transport or store carbon dioxide for secure geologic storage. Additionally, HB 1439 classifies as personal property equipment directly used for secure geologic storage of carbon dioxide and exempts such equipment from all ad valorem taxes except for taxes on the land on which the facility, capture system, or equipment is located. These provisions are effective for taxable years beginning after Dec. 31, 2018. N.D. Laws 2019, HB 1439, signed by the governor on April 24, 2019.

CONTROVERSY

California: The City of Santa Monica, California (City) announced that it will be conducting a six-week tax amnesty program to help bring unlicensed businesses into compliance with the City's business license taxes. The program will begin in May 2019, and will provide penalty relief for eligible taxpayers that participate in, and comply with the terms of, the program. For additional information on this development, see Tax Alert 2019-0844.

PAYROLL & EMPLOYMENT TAX

Puerto Rico: The Puerto Rico Department of Labor and Human Resources (PRDLHR) has postponed the mandatory e-filing of unemployment quarterly returns through the Employers' Portal from the first quarter, due April 30, 2019, to the second quarter of 2019, due July 31, 2019. For the unemployment quarterly returns due April 30, 2019, employers may still file on paper. For additional information on this development, see Tax Alert 2019-0843.

Utah: According to a notice posted on the website of the Utah Department of Workforce Services (Department), effective July 1, 2019, all Utah employers are required to file quarterly state unemployment insurance returns electronically. The Department will return to the employer any paper forms filed after this date. For additional information on this development, see Tax Alert 2019-0853.

MISCELLANEOUS TAX

Arizona: New law (HB 2229) permits county governments to impose an excise tax and license fee on video service providers of up to a total of 5% of the gross revenue the video service provider receives from its subscribers located within the county's boundaries. The license fee cannot be due more often than quarterly, and it must be imposed equally and uniformly on all video service providers and holdover cable operators that are operating within the county's boundaries. HB 2229 takes effect 90 days after the legislature adjourns sine die. Ariz. Laws 2019, Ch. 76 (HB 2229), signed by the governor on April 11, 2019.

Hawaii: New law (SB 380) imposes transient accommodations tax on resort fees. Specifically, the definition of "gross rental" or "gross rental proceeds" is amended to include a resort fee, which is defined as "any mandatory charge or surcharge imposed by an operator, owner, operator, or representative thereof to a transient for the use of the transient accommodation's property, services, or amenities." This change takes effect July 1, 2019. Haw. Laws 2019, Act 20 (SB 380), signed by the governor on April 24, 2019.

North Dakota: New law (HB 1439) creates an oil extraction tax exemption for the incremental production from certain tertiary recovery projects that uses carbon dioxide from coal in a qualified project, effective July 1, 2019. Specifically, it exempts the incremental production from a tertiary recovery project that injects more than 50% carbon dioxide produced from coal and has been certified as a qualified project by the industrial commission. The exemption applies for 10 years for projects located within the Bakken or Three Forks formations, and for 20 years for projects located outside the Bakken or Three Forks formations. The incremental production from the tertiary recovery project that has been certified by the industrial commission must be used to calculate the exemption. The provisions define "incremental production" for instances in which the industrial commission can and cannot establish an accurate production decline curve. N.D. Laws 2019, HB 1439, signed by the governor on April 24, 2019.

Oklahoma: New law (SB 429) changes the due date for the remission and reporting of motor fuel taxes. Per-gallon taxes paid by licensed bonded importers that have imported nonexempt motor fuel during a calendar month are due on the 20th (previously 25th) day of the next month, unless the 20th falls on a weekend or holiday, in which case the taxes are due on the following business day. In instances of precollection and remittance of taxes by suppliers on motor fuel removed from an Oklahoma terminal or refinery other than by bulk transfer, all taxes paid by a supplier for gallons removed during a calendar month are due and payable by the 20th (previously 27th) day of the next month, unless the 20th falls on a weekend or holiday, in which case the taxes are due on the following business day. SB 429 takes effect Nov. 1, 2019. Okla. Laws 2019, SB 429, signed by the governor on April 25, 2019.

UNCLAIMED PROPERTY

Colorado: New law (SB 88) repeals and replaces Colorado's unclaimed property provisions with the Revised Uniform Unclaimed Property Act (RUUPA), with amendments specific to Colorado. Key changes include: (1) reducing the general dormancy period for certain property to three years (previously five years); (2) establishing rules with respect to the filing of a holder's unclaimed property report (i.e., when it must be filed, record retention rules, and when property is reportable and payable or deliverable); (3) increasing the number of days a holder has to notify an apparent owner of unclaimed property to 180 days (from 120 days); (4) providing that the state cannot enforce Colorado's RUUPA laws more than five years after a holder filed a non-fraudulent report, or more than 10 years after a holder's duty arose; (5) providing that generally the state may publicly sell abandoned property after three years, and detail how an owner would recover securities or value. Additionally, the revised law defines terms and addresses the duty insurers have regarding locating insureds for life insurance purposes, among various other changes. SB 88 takes effect July 1, 2020. Colo. Laws 2019, SB 88, signed by the governor on April 16, 2019.

UPCOMING WEBCASTS

International: On Thursday, May 23, 2019 from 1:00-2:15 p.m. EDT New York; 10:00-11:15 a.m. PDT Los Angeles, Ernst & Young LLP will host a webcast discussing recent developments impacting trade around the world. After a relatively quiet period of significant progress in trade negotiations between the US and its major trading partners, global trade policy is back in the headlines. The recent US announcement of tariff increases on targeted Chinese origin goods, the proposed imposition of additional tariffs, and China's reactions have ratcheted up tensions between the two nations. Simultaneously, the US is considering imposing new tariffs on EU goods, obstacles have been encountered in various trade agreement negotiations and additional tariffs may be imposed on the auto sector. Consequently, companies are experiencing heightened uncertainty in navigating this increasingly complex trade environment. Join us for our first webcast in a series dedicated to discussing ongoing trade disruption actions. This webcast will bring you up to date on the most recent trade developments, including the following: (1) latest trade actions between US and China, (2) trade actions in Europe, (3) latest update on other trade actions, and (4) strategies to address the tariff impacts and planning for now and into the future. To register for this event, go to Global trade disruption.

Multistate: On Wednesday, May 29, 2019, from 1:00-2:30 p.m. EDT (New York), Ernst & Young LLP (EY) will host its quarterly webcast focusing on state tax matters. For our second webcast in 2019, we welcome John Ficara, the Director of the New Jersey Division of Taxation, and Alan Kline, Counsel to the Director of the New Jersey Division of Taxation, as our guests who will join EY panelists to discuss New Jersey's implementation of the significant changes to its tax law enacted during 2018. Topics that will be addressed include: New Jersey's move to mandatory combined reporting, its selective conformity to many of the provisions of the federal Tax Cuts and Jobs Act, with a special focus on conformity to the new global intangible low-taxed income (GILTI) regime and the business interest limitation under IRC §163(j), as well as the state's adoption of sales and use tax economic nexus provisions. EY panelists also will provide: (1) an overview of significant legislative developments enacted in 2019, (2) an update on state responses to the U.S. Supreme Court's ruling in South Dakota v. Wayfair, (3) a synopsis of the seeming flood of petitions on state and local tax matters to the U.S. Supreme Court, and (4) a discussion of some of the more significant state and local judicial and administrative developments that have occurred since our last webcast in February 2019. To register for this event, go to State tax matters.

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.