28 May 2019 State and Local Tax Weekly for May 17 Ernst & Young's State and Local Tax Weekly newsletter for May 17 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. Oregon Governor signs legislation enacting new commercial activity tax alongside existing corporate income tax Coupled to substantial increases in state educational spending, Oregon Governor Kate Brown on May 16, 2019 signed into law HB 3427, which establishes a new statewide corporate activity tax (CAT). The CAT applies to all persons (i.e., individuals, partnerships, corporation and others) with taxable commercial activity in Oregon. The new tax is effective for tax years beginning on or after Jan. 1, 2020, and is in addition to other taxes already imposed, including Oregon corporate income/excise taxes and individual income tax (the rates for the lower individual income tax brackets were slightly reduced).1
The term "commercial activity" is defined as "the total amount realized by a person, arising from transactions and activity in the regular course of the person's trade or business, without deduction for expenses incurred by the trade or business." Over 40 items are specifically excluded from the definition of "commercial activity." The new law also defines "commercial activity of a financial institution" and "commercial activity of an insurer." Lastly, the new law includes provisions regarding registration procedures, record keeping, filing returns and making payments, and audit and examination provisions, among other procedural items. For additional information on this development, see Tax Alert 2019-0940. Federal: The Treasury Department and the IRS released proposed regulations (REG-125135-15) under IRC §§ 954 and 958 that would, among other things, affect the computation of "subpart F income" and "global intangible low-taxed income" (GILTI). Generally, the proposed regulations would: (1) modify how the constructive ownership rules of IRC § 958(b) apply to characterize a person as a "related person" with respect to a controlled foreign corporation (CFC) under IRC § 954(d)(3); and (2) cause royalties paid by a CFC to be treated the same as rents paid by a CFC for purposes of the "active marketing" exception to "foreign personal holding company income" (FPHCI, a component of subpart F income). More specifically, the proposed regulations would: (1) render inapplicable the "downward" constructive ownership rules of IRC § 318(a)(3) and Treas. Reg. § 1.958-2(d) for purposes of determining related-person status; (2) render inapplicable the "option" constructive ownership rules of IRC § 318(a)(4) and Treas. Reg. § 1.958-2(d) for purposes of: (a) applying the FPHCI exception in IRC § 954(c)(6) if a principal purpose of "the use of an option" is to qualify for that exception, (b) characterizing a person holding an option as a related person if a principal purpose of "the use of the option" is to treat that person as a related person with respect to "a CFC"; (3) treat royalties paid by a CFC to the owner of licensed intangible property, for purposes of the "substantiality test" under the active marketing exception to FPHCI, the same as rents paid by a CFC to the owner of leased property. These proposed regulations would affect directly the treatment of amounts as FPHCI (or not). The proposed regulations would also have consequences under the GILTI regime, due to the relationship of subpart F income and "tested income" under that regime, as well as the incorporation of "related person" status in certain GILTI provisions. For more information on this development, see Tax Alert 2019-9007. Federal: In Revenue Procedure 2018-59, the IRS provides a safe harbor that allows taxpayers to treat certain infrastructure trades or businesses as real property trades or businesses, solely for purposes of qualifying as an electing real property trade or business under IRC § 163(j)(7)(B). The revenue procedure notes that the safe harbor was developed because the IRS was aware of uncertainty over whether arrangements between private and governmental entities to maintain or otherwise service "core infrastructure property," like roads and bridges, are included in the definition of a real property trade or business under IRC § 469 (c)(7)(C). Indiana: New law (HB 1001) retroactively repeals a credit against a for-profit acute care hospital's adjusted gross income tax liability as of Jan. 1, 2019. The credit was equal to 20% of the property taxes paid in Indiana on real property for the taxable year on property used as a hospital. Ind. Laws 2019, P.L. 108 (HB 1001), signed by the governor on April 29, 2019. Pennsylvania: The Pennsylvania Department of Revenue (Department) issued guidance on the state's treatment of the 30% business interest expense limitation under IRC §163(j) for Corporate Net Income Tax (CNIT) purposes. The Department said that for purposes of calculating Pennsylvania taxable income, the general intent is that the proposed federal IRC §163(j) regulations will be followed to the extent practicable in preparing the taxpayer's pro-forma federal interest expense deduction. Further, the Department said that it "will not expect any Pennsylvania corporate taxpayer which files its federal return on a consolidated basis to limit its separate company interest expense deduction for Pennsylvania purposes" unless the federal consolidated group of which it is a part reports an interest expense limitation under IRC §163(j) on the group's filed consolidated federal IRS Form 1120. If such federal return has been filed, then each member with a Pennsylvania CNIT filing obligation will have to perform its own set of calculations on a separate company basis to determine the interest expense limitation that applies to it. In addition, the Department indicated that for purposes of implementing IRC §163(j), it will follow any election the taxpayer or its federal consolidated group actually made for federal income tax purposes. The Department noted that while taxpayers generally will need to calculate their federal interest expense deduction on a separate entity basis, they may need to deal with specific situations such as treatment of nonbusiness income, Pennsylvania related-party intercompany interest expense addback requirements, and issues specific to corporations with partnership interests. The Department's guidance addresses these issues, and includes examples. For Pennsylvania Personal Income (PIT) tax purposes, the Department stated that the deductibility of interest costs and expenses is determined based on whether such costs and expenses constitute ordinary and necessary business expenses, and not by linking them to a particular section of the IRC. Pa. Dept. of Rev., Corporation Tax Bulletin 2019-03 (April 29, 2019). Arizona: In a private letter ruling, the Arizona Department of Revenue (Department) determined that a non-profit organization's gross income from retail, publication, and amusement activities are not subject to state or local transaction privilege tax (TPT) because they meet statutory exclusion requirements. As a non-profit, the organization can exclude from gross income for TPT base purposes the sale of membership fees and tangible personal property, and is not subject to the TPT on these transactions under the retail classification. Additionally, the non-profit's gross income from publication subscription fees and published author fees are not subject to TPT when the non-profit does not manufacture and distribute periodicals and open access magazines from a point inside Arizona. Further, since the non-profit's live and video-streamed education conferences and meetings are instructional and informative in nature, the gross income generated under the amusement classification is not subject to TPT as it qualifies for the group instruction activity exclusion. Lastly, the non-profit organization is not subject to the city privilege tax on any of its activities since by statute it is deemed to not be engaged in business. Ariz. Dept. of Rev., Taxpayer Info. Ruling LR 19-004 (April 2, 2019). Indiana: New law (HB 1001) establishes economic nexus provisions for marketplace facilitators. Effective July 1, 2019, a marketplace facilitator is required to collect and remit gross retail tax on each retail transaction made on its marketplace if it has gross revenue from the sale of tangible personal property, electronically transferred products or a service, delivered in Indiana that exceed $100,000 or in 200 more separate transactions. In determining whether it has met the threshold, a marketplace facilitator must include both transactions made on its own behalf and those facilitated for sellers, while a marketplace seller should not include sales made through the marketplace. A marketplace facilitator is considered the retail merchant of each transaction facilitated for sellers on its marketplace when, on the seller's behalf, it: (1) collects the sales price or purchase price of the seller's products; (2) provides direct or indirect access to payment processing services; or (3) charges, collects, or otherwise receives fees or other consideration for transactions made on its electronic marketplace. HB 1001 includes liability relief provisions for marketplace facilitators. In addition, HB 1001 repeals the existing "facilitator" language that was set to go into effect July 1, 2019. HB 1001 also clarifies what constitutes gross retail income when a retail merchant rents or furnishes rooms, lodgings, or other accommodations, and requires marketplace facilitators to collect and remit innkeeper's taxes as well as gross retail tax on the transactions. The rental or furnishing of rooms, lodgings, or other accommodations in a primary personal residence is subject to tax if rented or furnished for more than 14 days. Lastly, HB 1001 provides that sharing of passenger motor vehicles and trucks through a peer to peer vehicle sharing program is a retail transaction. If, however, an owner of one or more passenger vehicles shares these for consideration for fewer than 15 days in a calendar year, and none of the payments for sharing the motor vehicle are made through a marketplace facilitator, the transactions are exempt from state gross retail tax. These provisions take effect July 1, 2019. Ind. Laws 2019, P.L. 108 (HB 1001), signed by the governor on April 29, 2019. Ohio: The Ohio Department of Taxation updated guidance to reflect a recent law change classifying prescription corrective eyeglasses and contact lenses as prosthetic devices, which exempts them from sales and use tax beginning July 1, 2019. Ohio Dept. of Taxn., Info. Release ST 2010-03 (issued Sept. 2010, revised May 2019). Indiana: New law (HB 1405) amends a property tax exemption for enterprise information technology equipment and establishes a new sales and use tax exemption for data centers. Effective July 1, 2019, qualifying for the property tax exemption for enterprise information technology equipment requires that an entity, the qualified property's lessor (if applicable), and all lessees of qualified property invest an aggregate of at least $25 million (from $10 million) in real and personal property at the facility or data center. HB 1405 also permits a designating body to enter into an agreement with an eligible business to grant the eligible business a property tax exemption, and no longer requires an eligible business to be in a high technology district area. Additionally, effective Jan. 1, 2019, the sale of qualified data center equipment is exempt from Indiana gross retail tax if it: (1) is sold to a qualified data center user approved by the Indiana Economic Development Corporation (IEDC), and (2) will be located in a qualified data center. A qualified data center must create a minimum qualified investment on or before the fifth anniversary of the issuance of a specific transaction award certificate from the IEDC of at least $25 million, $100 million, or $150 million or more, depending on the county's population. If the IEDC approves an application for a specific transaction award certificate, the qualified data center user will be required to enter into an agreement with the IEDC as a condition of receiving a specific transaction award certificate. Ind. Laws 2019, P.L. 256 (HB 1405), signed by the governor on May 5, 2019. Indiana: New law (HB 1001) requires a taxpayer claiming the Indiana research expense tax credit for a taxable year to report whether it has: (1) determined the credit for those Indiana qualified research expenses under either IRC §§ 41(a)(1) or (c)(4) (i.e., the standard calculation or alternative simplified credit election); and (2) claimed the determined credit for those Indiana qualified research expenses under either federal provision for that taxable year. If the taxpayer claims the Indiana credit but does not claim the federal credit, it must disclose to the state any reasons for not claiming it for federal income tax purposes. This provision takes effect retroactively to Jan. 1, 2019. Ind. Laws 2019, P.L. 108 (HB 1001), signed by the governor on April 29, 2019. Montana: New law (HB 723) sets a schedule for the revenue and transportation interim committee of the Montana legislature to review tax credits each biennium, including any individual or corporate income tax credits with an expiration or termination date that are not specifically scheduled for review. The committee will begin reviewing credits July 1, 2019, with the final review period set for July 1, 2027. In performing the credit review, the committee must use the criteria established in HB 723 (e.g., whether the credit changes a taxpayer's decision, to the extent the credit benefits some taxpayers at the expense of other taxpayers, length of the credit's effectiveness) and then provide recommendations regarding whether to revise or eliminate the credits. In addition, HB 723 repeals expired tax credits including the qualified research tax credit, credit for day-care facilities, and the credit for research expenses and research payments HB 723 took effect upon approval. Mont. Laws 2019, Ch. 399 (HB 723), signed by the governor on May 8, 2019. Puerto Rico: On May 14, 2019, Puerto Rico's Governor Ricardo Roselló Nevares enacted the Law for the Development of Opportunity Zones and the Economic Development of Puerto Rico of 2019 (the Law), which establishes various tax incentives in Puerto Rico for investments in qualified opportunity zones within Puerto Rico. The tax incentives include preferential tax rates, transferable tax credits, and partial exemptions of property and municipal taxes. For more information on the Law, see Tax Alert 2019-0303. Montana: New law (HB 507) revises the eligibility criteria to be considered a class 17 qualified data center. A qualified data center must have at least 25,000 square feet (from 300,000 square feet) of new or expanded area, where the total cost of land, improvements, personal property, and software is at least $50 million (from $150 million) invested during a 48-month period with construction beginning after Jan. 1, 2019. HB 507 took immediate effect and applies retroactively to property tax years beginning after Dec. 31, 2018. Mont. Laws 2019, Ch. 383 (HB 507), signed by the governor on May 8, 2019. New Jersey: Amended rules of the New Jersey Division of Consumer Affairs (NJ DCA)(N.J. Admin. Code 13:48-4.3 and 5.3) require charitable organizations that were previously required to report contributor information to the IRS to continue to report such information to the NJ DCA, even if the IRS no longer mandates the reporting of such information. Specifically, if a charitable organization's most recent, complete IRS filings did not include a completed schedule B, the charitable organization must file with the NJ DCA a schedule of every contributor who, during the organization's previous tax year, directly or indirectly gave the charitable organization money, securities, or any other property totaling $5,000 or more. The schedule must include each contributor's name and address, the total amount donated and, for noncash contributions, a description of the property given, its fair market value, and the date the charity received it. A charitable organization that filed an IRS Form 990-N is not required to report this information. These changes took effect May 6, 2019 and expire on Nov. 21, 2024. N.J. Div. of Consumer Affairs, amended N.J. Admin. Code 13:48-4.3 and 5.3 (51 N.J. Register Issue 9, Reg. 637(a), May 6, 2019). Minnesota: New for 2019, Minnesota Form W-4MN, Minnesota Employee Withholding Allowance/Exemption Certificate, allows individuals to calculate Minnesota withholding allowances separately from their federal Form W-4. Individuals can provide a completed Form W-4MN to their employer listing their Minnesota allowances and any additional amount they want withheld per paycheck. For additional information on this development, see Tax Alert 2019-0942. New York: Westchester County, New York recently enacted an ordinance that, effective July 10, 2019, requires employers of five or more employees operating in the county to provide paid sick leave to their employees. Employers with fewer than five employees must provide unpaid sick leave to employees. For additional information on this development, see Tax Alert 2019-0943. Indiana: New law (HB 1001) imposes a vehicle sharing excise tax and amends provisions related to the auto rental excise tax exemption, the county supplemental auto rental excise tax, the innkeeper's tax, and the food and beverage tax. Effective Jan. 1, 2020, Indiana will impose a 2% vehicle sharing excise tax on the sharing of passenger motor vehicles and trucks in the state for periods of less than 30 days. Certain exemptions apply. Effective July 1, 2019, the sharing of a passenger motor vehicle or truck through a peer to peer vehicle sharing program is exempt from auto rental excise tax. Additionally, the county supplemental auto rental excise tax does not apply to such sharing in a county unless the legislative body of the county's most populous city or the city-county council adopts an ordinance to impose that tax on the sharing of passenger motor vehicles registered in the county through a peer to peer vehicle sharing program. The tax is equal to 1% of the gross retail income received by the peer to peer vehicle sharing program for the sharing of the passenger motor vehicle. Further, HB 1001 provides marketplace facilitators are subject to the innkeeper's tax as well as food and beverage taxes, effective July 1, 2019. Ind. Laws 2019, P.L. 108 (HB 1001), signed by the governor on April 29, 2019. Louisiana: A limited liability company (LLC) that sold oil produced from mineral leases pursuant to contacts that contain per barrel price reductions is not liable for additional severance tax because the severance tax paid on these contracts was based on the LLC's full amount of the gross receipts it received and did not contain a deduction for transportation costs. In so holding, the Louisiana Court of Appeal (Court) rejected the Louisiana Department of Revenue's argument that the LLC impermissibly reduced its gross receipts, and its tax computation, when transportation costs were deducted in arriving at the oil contract price paid by the purchasers. The Court found no evidence the LLC claimed a transportation deduction, and noted that the extent to which the purchasers incurred transportation expenses they incorporated into the negotiated oil price in arms-length transactions was a fluctuating overhead expense in the cost of doing business. Avanti Exploration, LLC v. Robinson, No. CA-0018-750 (La. Ct. App., 3d Cir., April 17, 2019). Washington: New law (HB 1798) requires a short-term rental operator (operator) to remit all applicable local, state, and federal taxes unless a short-term rental platform (platform) does so on its behalf. This includes occupancy, sales, lodging, and other taxes, fees, and assessments to which an owner or operator of a hotel or bed and breakfast is subject in the jurisdiction in which the short-term rental is located. In addition, HB 1798 requires platforms to register with the Washington Department of Revenue before operating in the state and to inform all operators using the platform of the operator's tax collection responsibilities. HB 1798 also impose regulatory requirements on operators and platforms, and defines key terms, including "operator" or "short-term rental operator," "short-term rental," and "short-term rental platform" or "platform." HB 1798 takes effect July 28, 2019. Wash. Laws 2019, Ch. 346 (HB 1798), signed by the governor on May 9, 2019. Federal: In a May 9, 2019 notice, the United States Trade Representative (USTR) announced it was granting exclusions to an additional 35 Chinese-origin products meeting specific listed descriptions and for products covered by five 10-digit Harmonized Tariff of the United States (HTSUS) subheadings. The selected products are currently subject to a 25% punitive tariff as part of the 818 tariff lines covering US$34 billion worth of imports from China annually (US List 1). This announcement mirrors the prior three exclusion announcements of Dec. 21, 2018, March 21, 2019 and April 18, 2019 in that it provides relief from the punitive tariffs for one year from the notice date as well as retroactive relief back to the date the tariffs were implemented (July 6, 2018) for products meeting the listed descriptions. For additional information on this development, see Tax Alert 2019-0916. Federal: In response to the US increase in duties from 10% to 25% on US$200 billion of Chinese origin products (US List 3) in place since September 2018, China's Customs Tariff Commission (Customs) announced it would implement increased tariff rates of 10%, 20% or 25% on approximately 4,500 specific items that represent a significant portion of the US$60 billion of annual commerce with the US (China List 3). China List 3 was in response to the US actions last fall. Notably, China Customs also specified over 500 items that will remain at the current 5% punitive rate. In response and as previously signaled, on May 13, 2019, the US began the necessary proceedings to subject the remaining US$300 billion of China origin imports to a potential additional ad valorem duty of up to 25% under Section 301 of the Trade Act of 1974 (US List 4). Also on May 13, 2019, in a separate announcement, China's Customs stated that it will begin a trial of its tariff exclusion program for imported US origin goods. Similar to the US §301 exclusion process, the China process allows certain eligible goods to be excluded from the scope of retaliatory tariffs imposed on the US goods. Refunds of the tariffs are also possible. For additional information on this development, see Tax Alert 2019-0931. Federal: The latest Trade Policy Brief, which is part of a series by EY's Quantitative Economics and Statistics (QUEST) group, discusses the economic implications of key trade issues and trends. This edition examines what could happen to domestic commodity prices if the US imposes additional tariffs on EU goods as countermeasures to EU aircraft industry subsidies. For a copy of the article, see Tax Alert 2019-0952. International: Since the beginning of 2019, a number of cases have been reported where, during Value Added Tax (VAT) audits, the Romanian tax authorities have taken the position that local toll manufacturing arrangements result in a foreign principal having a fixed establishment for VAT purposes in the European Union (EU) Member State of the toll manufacturer, i.e., Romania. Consequently, the Romanian toll manufacturer becomes liable to account for Romanian VAT on the manufacturing services provided to its foreign principal, resulting in the assessment of additional historic VAT liabilities and significant penalties by the Romanian tax authorities. The tax authority's position appears to be based on the principles established in the European Court of Justice case of Welmory (C-605/12) and presumes that the principal is using the toll manufacturer's infrastructure in the furtherance of receiving taxable supplies for VAT purposes in Romania. For additional information on this development, see Tax Alert 2019-0954. 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). 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. Multinational: On Thursday, May 30, 2019, from 1:00-2:15 p.m. EDT New York (10:00-11:15 a.m. PDT Los Angeles), Ernst & Young LLP's transfer pricing group will host a webcast on the state income tax implications of the Tax Cuts and Jobs Act (TCJA) for multinationals. Federal tax reform under the TCJA significantly affects US multistate income taxation — particularly for global corporations. Most state corporate income tax regimes leverage concepts from federal taxable income in determining the state tax base, but do not incorporate the federal tax rate. States' adoption of the TCJA's base expansion, without the corresponding rate reduction, has increased state taxes for many multinational businesses. Additionally, corporations now operate in a more complex environment for strategic transactions. US-inbound repatriation and internal reorganizations, in particular, are likely to encounter more state technical challenges post-TCJA. Topics to be addressed during this webcast include: (1) importance of state conformity to the Internal Revenue Code, (2) key TCJA issues for multinationals doing business in the states, (3) impacts for future distributions and repatriations, and (4) the changing landscape for cross-border strategic transactions and structuring. To register for this event, go to BorderCrossings. 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 See HB 4327, §56 (reducing the lowest four brackets each by 0.25% but keeping the highest bracket (applicable to income over $125,000 per year) at 9.9% ). Document ID: 2019-0999 |
