05 June 2019 State and Local Tax Weekly for May 24 and May 31 Ernst & Young's State and Local Tax Weekly newsletter for May 24 and May 31 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. Alabama high court finds all software is tangible personal property subject to sales tax; nontaxable services should be separately stated, invoiced In its opinion in Ex parte Russell County Community Hospital,1 the Alabama Supreme Court (court) ruled that a series of transactions involving the sale of custom computer software and accompanying equipment are subject to the state's sales tax. The decision is significant in that it appears to directly contradict a long-standing Alabama regulation2 that classifies custom software programming as nontaxable. In affirming the Court of Appeals ruling, the court concluded that all software is tangible personal property for Alabama sales tax purposes, regardless of whether it is canned or custom software. The court also noted that when a seller provides an invoice for computer software, the gross amount charged for the software is subject to sales tax, while related, nontaxable services that are separately stated are not subject to sales tax. Citing Ala. Admin. Code Reg. 810-6-1-.37(5), the hospital argued that its software purchase qualified as nontaxable custom software programming. The court rejected this position, noting that it is not bound by administrative regulations. The court specifically cited Wal-Mart3 to support its findingthat all software, whether it is canned software or custom software created for a particular user, is "tangible personal property" for Alabama sales tax purposes. The court noted that the software in this case was preexisting software and equipment that was available for purchase by any hospital, and the software provider "implemented" it so that hospital personnel could use it efficiently. The implementation included determining how the hospital functions, setting up hardware and similar equipment, data entry and selection of "configuration options" for the software to make it function efficiently with the hospital's existing systems, and training hospital personnel on how to operate it. The parties did not dispute that sales tax was not collected on the separately stated charges for the software implementation services, and the items for which tax was collected were considered tangible personal property. Therefore, the court found the evidence sufficient to support the trial court's judgment denying the hospital's sales tax refund claim. Washington legislature approves B&O tax surcharge on over 40 services, rate increase on certain financial institutions, other changes On May 21, 2019, Governor Jay Inslee signed bills that increase taxes on various businesses. The new laws:
Indiana: New law (SB 563) adopts market based sourcing for sales of services and intangible property. Under the new law, the market for the sale of a service will be in Indiana if and to the extent the benefit of the service is received in the state. The market for the sale of intangible property that is rented, leased, licensed or sold will be in Indiana if and to the extent the property is used in Indiana (additional guidance is provided for intangible property that is sold). If the state of attribution cannot be determined, the state(s) of attribution is determined by the state(s) in which the delivery of a service occurs. If the state of attribution still cannot be determined, these receipts are excluded from the receipts factor denominator. Sales of broadcast services and telecommunications services are sourced based on costs of performance. The law also authorizes the Indiana Department of Revenue to adopt rules on the new market-based sourcing provisions, but requires that these rules be consistent with the Multistate Tax Commission's model regulation. In addition, the law attributes receipts from the maturity, redemption, sale, exchange, loan, or other disposition of stocks, bonds, notes, options, forward/futures contracts, and similar instruments to Indiana if the taxpayer's commercial domicile is in Indiana. These changes are retroactively effective to Jan. 1, 2019. Ind. Laws 2019, P.L. 158 (SB 563), signed by the governor on May 1, 2019. South Carolina: New law (SB 408) provides that receipts from operating cable systems and video streaming services are included in the measure of South Carolina "sales" and "gross receipts" for apportionment purposes. Receipts from these activities are attributable to South Carolina in pro rata proportion of the costs of performing the service. SB 408 further provides that if a pass-through business operates a cable system or a direct broadcast satellite service, or has video service receipts, then a corporation that owns a direct or indirect interest in that pass-through business must be treated as operating a cable system or a direct broadcast satellite service, or as having video service receipts. SB 408 took immediate effect and applies to all open tax periods, except assessments under judicial review upon SB 408's enactment. S.C. Laws 2019, SB 408, signed by the governor on May 16, 2019. Tennessee: New law (SB 558) provides deductions for IRC Section 965(a) amounts related to the "transition tax" and IRC Section 951A amounts related to global intangible low-taxed income (GILTI) and creates related addbacks for associated federal income tax deductions to the Tennessee tax base. For the 2017 tax year, the Tennessee Department of Revenue (TN DOR) issued guidance under TN DOR Notice #18-05, indicating that all IRC Section 965 amounts should be excluded from the Tennessee excise tax base. For tax years beginning on or after Jan. 1, 2018, the amendments made by SB 558 provide a deduction for amounts included in federal taxable income under IRC Section 965(a) to the extent such amounts would otherwise be included in the Tennessee excise tax base. SB 558 also requires an addback to the excise tax base of 5% of the gross IRC Section 965(a) amount, before the IRC Section 965(c) deduction. SB 558 provides a deduction for amounts included in federal taxable income under IRC Section 951A to the extent such amounts would otherwise be included in the Tennessee excise tax base. In addition, SB 558 requires an addback to the excise tax base of 5% of the gross IRC Section 951A amount, before the IRC Section 250 deduction. Tenn. Laws 2019, Pub. Ch. 306 (SB 558), signed by the governor on May 8, 2019. For additional information on this development, see Tax Alert 2019-0974. Arizona: New law (SB 1019) excludes "over-the-top services" (OTTS) from the telecommunications classification of the transaction privilege tax (TPT), prohibits municipal taxation of OTTS (subject to a conditional effective date), and clarifies sourcing provisions. Specifically, SB 1019 prohibits cities, towns, or taxing jurisdictions from imposing a transaction privilege, sales, gross receipts, use, franchise, or other similar tax or fee on gross proceeds or sales or gross income from OTTS. (This provision takes effect if certain conditions are met).4 OTTS are defined as certain audio or video programming services that the purchaser receives through an internet connection (i.e., streaming media), regardless of the technology used, including programming that is comparable to that provided by a radio or television broadcast station such as on-demand programming. In addition, SB 1019 expands the sourcing provisions for transactions involving tangible personal property, to allow the sourcing of a retail sale, or lease or rental, of tangible personal property to a purchaser's/lessor's billing address if there is no delivery/lessee's address. Unless otherwise noted, these provisions take effect Aug. 27, 2019. Ariz. Laws 2019, Ch. 189 (SB 1019), signed by the governor on May 8, 2019. Texas: New law (HB 1525) expands the definition of "seller" and "retailer" to include marketplace providers, effective Oct. 1, 2019. The new law requires marketplace providers to: (1) certify to each marketplace seller that it assumes the rights and duties of a seller or retailer for sales made by the marketplace seller through the marketplace; and (2) collect, report and remit sales and use tax on sales of taxable items made through the marketplace. A marketplace seller that accepts this certification in good faith must exclude its marketplace sales from its sales and use tax report. In addition, marketplace sellers are required to provide the marketplace provider information necessary to correctly collect and remit taxes. A marketplace provider is not liable for its failure to collect and remit the correct amount of tax if it shows that such failure resulted from the good faith reliance on incorrect or insufficient information provided by the marketplace seller. In this instance, the marketplace seller is liable for the tax deficiency. The law also provides that sales made through a marketplace is consummated at the in-state location to which the item is shipped or delivered or possession is taken by the purchaser. Tex. Laws 2019, HB 2153, signed by the governor on May 24, 2019. Texas: New law (HB 2153) provides a remote seller with an option to use a single local use tax rate as an alternative to the combined rate of all applicable local use taxes, effective Oct. 1, 2019. A remote retailer electing to use a single rate must notify the comptroller of this decision before using the rate. The election applies to all sales of taxable items made by the remote seller unless the seller revokes the election. Notice of the revocation must be made in the form and manner prescribed by the comptroller. The single rate in effect for the calendar year equals the estimated average rate of local sales and use taxes imposed in Texas during the prior state fiscal year. The comptroller will post the the single use tax rate in effect for the calendar in the Texas register. Tex. Laws 2019, HB 2153, signed by the governor on May 17, 2019. Washington: New law (HB 2042) reinstates a sales and use tax exemption on certain alternative fuel vehicles, extends the sales and use tax exemption for electric vehicle batteries, fuel cells, and infrastructure, and expands this exemption to include the electric battery and fuel cell components of electric and zero emissions buses. Beginning Aug. 1, 2019, a partial exemption from Washington's retail sales and use tax is provided for sales or leases of new or used passenger cars, light duty trucks, and medium duty passenger vehicles that: (1) are exclusively powered by a clean alternative fuel; or (2) use at least one propulsion method that can be reenergized by an external electricity source and can travel at least 30 miles using only battery power; and (3) have a specific vehicle selling price plus trade-in property of like kind for purchased vehicles. The exemption is available for new vehicles with a fair market value of $45,000 or less (reduced to $30,000 or less, if a used vehicle), and the amount of the exemption varies based on the purchase or lease signing date. The maximum eligible amount of the exemption is $25,000 from Aug. 1, 2019 to July 31, 2021; $20,000 from Aug. 1, 2021 to 2023; $15,000 from Aug. 1, 2023 to July 31, 2025 (if a used car, the maximum eligible amount is $16,000). The qualification period for the exemption ends July 31, 2025, however, leased vehicles maintain eligibility for the exemption through July 31, 2028. Effective July 28, 2019, the electric vehicle battery and infrastructure sales tax exemption is extended to electric vehicle fuel cells (including batteries or fuel cells sold as a component of an electric bus at the time of the vehicle's sale), certain labor and service charges related to electric fuel cells, hydrogen fueling stations, the sale of tangible personal property that will become a component of a battery or fuel cell electric vehicle infrastructure, and the sale of zero-emission buses. The expiration date of these provisions is extended to July 1, 2025 (from Jan. 1, 2020). Lastly, effective Aug. 1, 2019 through July 1, 2025, sales and use tax does not apply to the sale of new battery-powered electric marine propulsion systems with continuous power greater than 15 kilowatts, and the sale of new vessels equipped with propulsion systems with continuous power greater than 15 kilowatts. Wash. Laws 2019, Ch. 287 (HB 2042), signed by the governor on May 7, 2019. Georgia: New law (HB 224) amends Georgia's historic structures rehabilitation tax credit, quality jobs credit, and tax credits for existing manufacturing and telecommunications facilities. Effective June 1, 2019, HB 224 permits the historic structures rehabilitation tax credit to be claimed in the year the certified rehabilitation is placed in service, which could be up to two years after the end of the taxable year for which the credit was originally reserved. Applicable to tax years beginning on or after Jan. 1, 2020, the number of new quality jobs that must be established or created to claim the quality jobs tax credit are as follows: (1) in tier 1 counties, at least 10 new quality jobs within a single rural county within one year of the first wage withholding date; (2) in tier 2 counties, at least 25 new quality jobs within a single rural county within one year of the first wage withholding date; and (3) at least 50 new quality jobs in Georgia within two years of the first wage withholding date. (Previously, the credit generally required the employment of 50 persons in new quality jobs in Georgia.) Lastly, for tax years beginning on or after Jan. 1, 2020, tax credits for existing manufacturing and telecommunications facilities can only be taken beginning in the tax year immediately following the tax year in which a qualified investment property with an aggregate cost that exceeds $100,000 is purchased or acquired by the taxpayer. The credit for purchases of qualified investment property for a manufacturing or telecommunications facility in a rural county made on or after Jan. 1, 2020 first must be applied to the taxpayer's state income tax liability, limited to 50% of the liability before applying the credit. If the credit amount exceeds this, the taxpayer can claim the excess as a credit of up to $1 million for any one taxable year against the taxpayer's quarterly or monthly payroll withholding, subject to limitation. The credit is repealed Dec. 31, 2024. For any credit claimed before Jan. 1, 2020 that remains unused for subsequent taxable years, the credit can be carried forward if, within a single tax year beginning on or after Jan. 1, 2020, the taxpayer: (1) maintains within rural counties at least 100 full-time employee jobs; and (2) purchases or acquires at least $5 million of qualified investment property for manufacturing or telecommunications facilities within rural counties. Ga. Laws 2019, Act 228 (HB 224), signed by the governor on May 6, 2019. Montana: New law (HB 293) creates a media production tax credit and postproduction wages tax credit against corporate and individual income taxes. A production company and its affiliates can claim a media production tax credit for investments in a state-certified production approved by the Montana Department of Commerce. The credit is equal to 20% of the production expenditures in Montana in the tax year, plus certain additional amounts, with the aggregate not to exceed 35% of the production company's base investment in the tax year. Additional amounts that can be claimed include: (1) 25% of the compensation paid per production or season of a TV series to each crew member or production staff member who is a resident (reduced to 15% if a nonresident for whom Montana income taxes have been withheld); (2) 30% of compensation paid per production or season of a TV series to a student enrolled in a Montana college or university who works on the production for college credit; and (3) additional amounts for specified percentages of certain other costs such as the rental of equipment, in-studio facility rentals and other production expenditures. Unused credits are not refundable but may be carried forward for five years. All or part of the unclaimed credits may be transferred. Additionally, subject to certification requirements, a postproduction company that incurs qualified postproduction wages in a tax year can claim a 25% postproduction wages tax credit. The credit is not refundable, and unused credits may be carried forward five years. A postproduction company cannot claim a credit under these provisions for production expenditures for which the media production credit is claimed. For both credits, to prevent disguised sales, Montana may not recognize allocations of credits through partnership and membership agreements unless they have a substantial economic effect as provided under federal tax law. HB 293 includes application, filing, production expenditure report, and fee requirements, as well as definitions of key terms. Revoked credits are subject to recapture. Total claims for the credits cannot exceed $10 million per calendar year, and are allowed on a first-come, first-served basis. The Department of Commerce and the Department of Revenue are authorized to make rules to implement the credit program. HB 293 takes effect July 1, 2019; the media production tax credit applies after June 30, 2019, and the rest of HB 293 applies to tax years beginning after Dec. 31, 2020. Both credits expire on Dec. 31, 2029. Mont. Laws 2019, Ch. 352 (HB 293), signed by the governor on May 7, 2019. Washington: New law (HB 2042), effective Jan. 1, 2020, extends the business and occupation (B&O) tax and public utility tax credit for clean alternative fuel commercial vehicles and expands it to include clean alternative fuel infrastructure. Specifically, it amends a credit for the purchase of certain alternative fuel commercial vehicles for up to 75% (previously 50%) of the incremental cost of the vehicle purchased above the purchase price of a comparable conventionally fueled vehicle, subject to limitations. Additionally, HB 2042 provides a B&O tax and public utility tax credit for up to 50% of the cost to purchase alternative fuel vehicle infrastructure, tangible personal property that will become a component of alternative fuel vehicle infrastructure, and installation and construction of alternative fuel vehicle infrastructure, subject to certain exclusions. The maximum annual credit amount is $2 million. Lastly, a person subject to B&O tax or public utility tax is allowed, subject to vehicle category credit maximums, a credit for the lesser of $25,000 or 50% (previously 30%) of the costs of converting a commercial vehicle to be principally powered by a clean alternative fuel with a US Environmental Protection Agency certified conversion. A taxpayer cannot claim this credit against both the B&O and public utility tax. Wash. Laws 2019, Ch. 287 (HB 2042), signed by the governor on May 7, 2019. Kentucky: On May 23, 2019, the Kentucky Department of Revenue (Department) announced that it will provide transitional penalty relief related to the recent adoption of revised estimated payment rules enacted on March 26, 2019, as part of HB 354. Effective Jan. 1, 2019, HB 354 aligns Kentucky's individual income, corporation income, limited liability entity and nonresident withholding estimated tax filing rules with those followed by the IRS. By aligning with the federal rules, calendar-year taxpayers were faced with an estimated payment deadline of April 15, 2019, instead of the later date that existed under prior law. The Department said that it will waive penalties from the imposition of the 110% current tax year estimated tax safe harbor. Taxpayers, however, must comply with the 100% prior tax year safe harbor. The Department will be updating various forms and instructions to reflect this transitional relief. Maryland: New law (SB 280, Ch. 11) increases the state minimum wage incrementally to $15 per hour by 2025 (July 1, 2026 for employers with 14 or fewer employees), starting with a jump from the current $10.10 to $11 effective Jan. 1, 2020. For employers with more than 14 employees, the increase to $11 per hour effective Jan. 1, 2020 is followed: by $11.75 per hour effective Jan. 1, 2021; $12.50 per hour effective Jan. 1, 2022; $13.25 per hour effective Jan. 1, 2023; $14.00 per hour effective Jan. 1, 2024; and $15 per hour effective Jan. 1, 2025. For additional information on this development, see Tax Alert 2019-0969. Puerto Rico: In Informative Bulletin (IB) 19-07, the Puerto Rico Treasury Department (PRTD) has extended the deadline from March 31, 2019 to June 30, 2019, for employers to request the employee retention benefit related to Hurricanes Irma and Maria. Additionally, IB 19-07 extends the deadline from April 30, 2019 to July 10, 2019, for employers to file a claim to modify their filed application for the employee retention benefit related to Hurricanes Irma and Maria. To file a claim, an employer must have requested the benefit no later than June 30, 2019. For additional information on this development, see Tax Alert 2019-0972. Oregon: Recently promulgated regulations of the Oregon Department of Revenue (Department) require employers to report the statewide transit tax in Box 14 of Form W-2, with the designation "ORSTT W/H" (for example, ORSTT W/H - $15.00). This change is effective for calendar year 2019 Forms W-2, due to employees and the Department by Jan. 31, 2020. For more information on this development, see Tax Alert 2019-0970. Arizona: New law (SB 1214) exempts from the 5% rental vehicle surcharge motor vehicles owned by a governmental entity. The rental vehicle surcharge is generally imposed on persons engaged in the business of renting motor vehicles without drivers for rental contracts that are for 180 days or less. SB 1214 takes effect Aug. 27, 2019. Ariz. Laws 2019, Ch. 206 (SB 1214), signed by the governor on May 10, 2019. San Francisco, CA: Amidst the myriad of 2018 voter-approved tax increases in the city (namely the commercial rents tax (see Tax Alert 2018-1423) and homelessness tax (see Tax Alert 2018-2307)), San Francisco Supervisor Gordon Mar has proposed asking San Francisco voters to approve an additional 1.12% payroll tax on stock-based compensation on the Nov. 5, 2019 ballot. Referred to as the "IPO Tax," the proposed tax would be retroactive to May 7, 2019, the date it was introduced. Consequently, all companies doing business in San Francisco would be subject to the new payroll tax when their employees working in the city exercise their stock options starting in May of this year. The proposed tax is not a direct tax on IPOs, but rather a tax on the payroll expense of any business with stock-based compensation. Combined with the current 0.38% payroll tax rate, the additional 1.12% payroll tax rate would effectively restore San Francisco's old payroll tax rate of 1.5%. For additional information on this development, see Tax Alert 2019-0973. Washington: New law (SB 6004) increases the business and occupation tax rate on travel agents and tour operators to 0.9% (from 0.275%) beginning July 1, 2019. The rate change applies to travel agents and tour operators whose annual taxable amount for the prior calendar year was more than $250,000. Wash. Laws 2019, Ch. 425 (SB 6004), signed by the governor on May 21, 2019. Washington: New law (HB 2035) updates the method that in-state broadcasters use to calculate the income from network, national, and regional advertising that is excluded from income subject to the business and occupation tax. Excluded revenues are calculated either: (1) as a standard deduction, which is based on the national average as reported by the U.S. Census Bureau's economic census, the Washington Department of Revenue must publish by Sept. 30, 2020 (updated every fifth year thereafter); or (2) through itemization by the individual broadcasting station, excluding the part of the revenue represented by the out-of-state audience computed as a ratio to the broadcasting station's total audience, with various measures based on signal strength of the delivery medium (e.g., AM/FM radio, wire or satellite delivery). HB 2035 takes effect July 28, 2019. Wash. Laws 2019, Ch. 449 (HB 2035), signed by the governor on May 21, 2019. Washington: New law (HB 2042) extends a leasehold excise tax exemption and imposes certain annual vehicle fees. Effective Aug. 1, 2019, a leasehold excise tax exemption for electric vehicle infrastructure is extended to fueling stations that provide hydrogen for fuel cell electric vehicles and renewable hydrogen production facilities. The expiration date of this exemption is extended to July 1, 2025 (from Jan. 1, 2020). Additionally, effective Aug. 1, 2019, a new annual transportation electrification fee of $75 is imposed on vehicles that (1) use at least one method of propulsion that can be reenergized by an external electricity source and (2) can travel at least 30 miles using only battery power. Beginning Oct. 1, 2019, the state or its agent may impose a $75 hybrid vehicle transportation electrification fee on such vehicles, in addition to other fees and taxes. Wash. Laws 2019, Ch. 287 (HB 2042), signed by the governor on May 7, 2019. Federal: The US and Canada have agreed to eliminate, within two days from the announcement, all US Section 232 tariffs on Canadian steel and aluminum, and all Canadian retaliatory tariffs on imports of US steel, aluminum and various other consumer goods (e.g., lawn mowers, whiskies) and industrial goods. Effective May 19, 2019, Canada has repealed the United States Surtax Order (Steel and Aluminum) and the United States Surtax Order (Other Goods), and Canadian importers are no longer required to pay surtax pursuant to the orders. For more on this development, see Tax Alert 2019-0963. International: With recent Laws 4611/2019, 4607/2019 and 4591/2019, Greece amended the Value Added Tax (VAT) Code with respect to: (1) the extension of the application of the reduced VAT rates in Annex III; (2) the tax treatment of vouchers; (3) the application of the effective use and enjoyment rule in the short-term leasing of professional pleasure vessels; and (4) the determination of the place of taxation when e-services are supplied to individuals and non-taxable persons. For additional information on this development, see Tax Alert 2019-0991. 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 Ex parte Russell County Community Hospital, LLC, d/b/a Jack Hughston Memorial Hospital v. Ala. Dept. of Rev., No. 1180204 (Ala. S.Ct. May 17, 2019). 4 This prohibition applies if on or before Dec. 31, 2022, both of the following occur: (1) the Navajo Nation approves the transfer of ownership of the Navajo generating station by a resolution adopted by the Navajo Nation council and signed by the Navajo Nation president; and (2) the Navajo Nation delivers the resolution to the governor and a copy to the Arizona Department of Revenue director. Document ID: 2019-1037 |
