17 June 2019 State and Local Tax Weekly for June 7 Colorado Supreme Court affirms lower court rulings which excluded holding company with no property or payroll from group's combined return; legislative "fix" enacted In two separate opinions — Agilent Technologies Inc.1 and Oracle2 — the Colorado Supreme Court (Court) affirmed lower court rulings and held that corporate taxpayers are not required by a state statute to include affiliated holding companies that do not have property or payroll in Colorado in their respective Colorado combined return because the holding company did not fall within the definition of "includable C corporation" for purposes of Colorado's combined reporting rules. To be an includable C corporation under the statute, the corporation must have more than 20% of its property and payroll (as determined by the factoring rules set forth under C.R.S. 24-60-1301) assigned to locations in the US. The Court also rejected the Colorado Department of Revenue's (Department) alternative argument that it had the authority to allocate the holding companies' gross income to the affiliates to avoid abuse and to clearly reflect income finding that the taxpayers followed the statutes as written. The Court found that the Department's "own regulation again undermine[d] its argument." The regulation, 1 CCR 201-2, Reg. 39-22-303.6, has been superseded by C.R.S. 39-22-303(11) as the provision that determines when combined reporting may be required. As these cases were pending before the Court, the Legislature in response to the earlier appellate court's ruling, approved SB 19-233, to require related domestic holding companies without property or payroll be included in combined corporate income tax returns. Three days after the Court's ruling in these cases, Colorado Governor Jared Polis signed SB 19-233 into law. Specifically, under the new law, C.R.S. Section 39-22-303(12)(c) is repealed and new section C.R.S. Section 39-22-303(11)(f) is added to make clear that any domestically formed C corporation with de minimis or no property and payroll (as determined by factoring under C.R.S. 24-60-1301), will be deemed to satisfy the requirements under C.R.S. Section 39-22-303(11)(a) (i.e., the three-of-six test) for purposes of being included in a combined return. The law further tasks the Department with promulgating rules prescribing the manner in which the de minimis standard will be uniformly applied. Further, new section C.R.S. Section 39-22-303(11)(g) provides that for purposes of satisfying the conditions set forth in C.R.S. Section 39-22-303(11)(a)(I) to (11)(a)(IV), the activities of any domestically formed entity treated as a partnership will be treated as activities performed by the member of the affiliated group of C corporations that own a portion of the entity, if more than 50% of the entity's ownership interest is held in the aggregate by one or more members of the affiliated group. If there is more than one owner, the entity's activities will be treated as activities performed by each member that owns a portion of the entity. These changes will take effect on Aug. 2, 2019, unless a referendum petition is filed against SB 19-233 before it takes effect. If such petition is filed, it will be voted on by residents of Colorado during the November 2020 general election. Federal: On May 17, 2019, the Department of the Treasury and the IRS (collectively, Treasury) released proposed regulations under IRC Section Section 954 and 958 (REG-125135-15) that if finalized will have important consequences for computing "subpart F income" and "GILTI" inclusions (as well as for other provisions). For more on this development, see Tax Alert 2019-1048. Federal: Proposed bill (HR 3063, the "Business Activity Tax Simplification Act of 2019") (BATSA)) would regulate state income taxation of interstate commerce and modernize and expand the protections of P.L. 86-272. A state would be prohibited from imposing a net income tax or other business activity tax on any person relating to such person's activities in interstate commerce unless the person has a physical presence in the state during the tax period. Physical presence in a state would be established if any of the following are met during the taxable year: (1) being an individual physically in the state, or assigning one or more employees to the state; (2) using the services of an agent to establish or maintain the market in the state, provided that the agent does not perform business services in the state for another person during the same taxable year; or (3) leasing or owning tangible personal property or real property in the state. Physical presence would not be established if presence in the state is for less than 15 days during the taxable year, or if presence in the state is for conducting limited or transient business activity. HR 3063 would define "other business activity tax" as a tax in the nature of a net income tax and other taxes measured by business activity, but would not include sales and use taxes or similar transaction taxes. Provisions of HR 3063 also would modernize and extend the protections of P.L. 86-272 to any business activity tax and soliciting orders for any type of property or service. HR 3063 is an example of the many attempts over the years to establish a uniform, "national" nexus standard. If approved, these provisions would apply to taxable periods beginning on or after Jan. 1, 2020. HR 3063 was introduced on June 3, 2019 and referred to the House Committee on the Judiciary. Maine: New law (LD 1744) updates the state's date of conformity to the Internal Revenue Code of 1986, as amended (IRC) to Dec. 31, 2018 (from March 23, 2018). The law took immediate effect and applies to tax years beginning on or after Jan. 1, 2018 and to any prior tax years as provided by the IRC as of Dec. 31, 2018. Maine Laws 2019, Ch. 233 (LD 1744), signed by the governor on June 7, 2019. New Jersey: The New Jersey Division of Taxation issued guidance on combined group filing methods under the state's mandatory combined reporting regime, which is effective for tax years ending on and after July 31, 2019. For New Jersey combined reporting purposes, a combined group will file a combined return on a water's-edge basis, unless the managerial member of the group elects to use the world-wide group method or, alternatively, the affiliated group election. New Jersey uses both the Joyce and Finnigan methods to allocate income of a combined group. Water's-edge and worldwide filers will use the Joyce method (i.e., include all of the New Jersey allocation factor attributes in the numerator derived from members that have nexus with New Jersey), while those electing to file as an affiliated group will use the Finnigan method (i.e., include all New Jersey allocation factor attributes in the numerator derived from members of the combined group, regardless of whether the member has nexus with New Jersey). The guidance includes information on the incomes and allocation factors taken into account under each filing method. N.J. Div. of Taxn., TB-89 Combined Group Filing Methods (May 21, 2019). Ohio: In Time Warner Cable, Inc., the Ohio Board of Tax Appeals (BTA) clarified the membership of a city consolidated group for elections made under the city income tax laws in effect prior to 2016. Prior to 2016, Ohio Revised Code Section 718.06 required a city that imposes an income tax on a corporation to " … accept for filing a consolidated income tax return from any affiliated group of corporations … if that affiliated group filed for the same tax reporting period a consolidated return … pursuant to … " IRC Section 1501. Ohio cities interpreted this provision in two different ways. Many cities allowed taxpayers to file a city consolidated return with membership that mirrored and was identical to that of the federal consolidated group. Other cities, including Cincinnati, however, had enacted ordinances which only allowed those members of the federal consolidated group that actually had nexus with the city to join in a city consolidated return. In Time Warner Cable, the taxpayer claimed that the Cincinnati ordinance was inconsistent with, and pre-empted by, the provisions of Ohio Revised Code Section 718.06. The Cincinnati Board of Review (Board of Review), however, disagreed and ruled in favor of the city, finding that the Ohio statute did not expressly pre-empt the local ordinance in this area. On appeal, the BTA reversed the Board of Review's findings and concluded that under the state statute the city filing group had to be the same as the federal filing group focusing on the Legislature's use of the words "if that affiliated group" to support its ruling. Time Warner Cable, Inc. v. City of Cincinnati, BTA Case No. 2017–1448 (May 31, 2019) (Time Warner Cable)), For additional information on this development, see Tax Alert 2019-1044. Colorado: In City of Golden v. Sodexo America, LLC, the Colorado Supreme Court (Court) affirmed the appellate court's ruling that a food service vendor's sales of meal-plan meals to a university are not subject to the City of Golden's sales and use tax because the meal-plan meals were sold to the university at wholesale (a tax exempt transaction) and not at retail to students (a taxable transaction). In so holding, the Court determined that a wholesale transaction occurred since the vendor purchased, prepared, and served food under its contract with the university and the university in turn sold the prepared food at resale to students with a meal-plan. Thus, the vendor's sale of its food and services constituted a "sale for resale" and not a sale to the "ultimate consumer." Further, the Court overruled City of Golden v. Aramark Educational Services, LLC3 to the extent it conflicts with the opinion in this case finding that the appellate court in Aramark erred in failing to give controlling significance to the plain language of Golden's Municipal Code. City of Golden v. Sodexo America, LLC, No. 17SC735 (Colo. S.Ct. May 20, 2019). Colorado: New law (HB 1245) modifies the amount of the vendor fee allowance a retailer can retain to 4% (from 3.33%) of the tax reported, up to $1,000 in any one filing period (previously there was no cap), effective for sales made on or after Jan. 1, 2020. A retailer with multiple locations is treated as a single retailer for these purposes, and must register all locations under one account with the Colorado Department of Revenue. If a retailer is allowed to retain a vendor fee for collecting and remitting local sales tax that is the same amount as permitted by the state, then such amount is the same amount permitted as of Dec. 31, 2019, unless otherwise modified. These provisions take effect on Oct. 1, 2019, unless a referendum petition is filed against the legislation, in which case the challenged portion will not take effect unless approved by the people in the November 2020 general election. Colo. Laws 2019, HB 1245, signed by the governor on May 17, 2019. Ohio: In Marion Ethanol, LLC, the Ohio Board of Tax Appeals (BTA) rejected a narrow interpretation of the manufacturing exemption by the Ohio Department of Taxation (Department) under the sales and use tax law as to when manufacturing begins. The taxpayer operates a biorefinery that manufactures ethanol and other corn-based products. The Department assessed the taxpayer additional use tax on certain items it used to process raw materials in order to remove contaminants. Under the taxpayer's manufacturing process, corn is delivered by truck to the taxpayer's facilities where it is immediately tested for quality, moisture and temperature. Accepted corn is emptied into hoppers that feed it to a conveyor that runs through the taxpayer's manufacturing facility. After falling onto the conveyor, the corn moves past a magnet that removes metal contaminants from the corn. For sales and use tax purposes, the taxpayer claimed that its manufacturing process begins at the magnet and thus, any purchase of machinery and equipment from that point on was eligible for the manufacturing exemption. On audit, the Department disagreed and assessed based on its conclusion that the taxpayer's manufacturing process actually begins at a later point. The BTA, relying on the Ohio Supreme Court's decision in LaFarge N. Am., Inc.,4 agreed with the taxpayer and concluded that the manufacturing process begins at the magnet as its purpose was to refine the corn and, therefore, was a part of a manufacturing process. Thus, the BTA concluded that any equipment installed from that point forward was eligible for the manufacturing exemption. The BTA also distinguished prior Ohio court decisions involving magnets on-the-ground that, in those cases, the magnets did not prepare raw materials for manufacturing as was the case in LaFarge and in this particular case. Marion Ethanol, LLC v. McClain, BTA Case Nos. 2017-337, 2017-338 (Ohio Bd. Tax App. May 16, 2019). For additional information on this development, see Tax Alert 2019-1044. Tennessee: New law (HB 667) allows the state's economic nexus regulation for remote dealers to become effective. Following enactment of this bill, the Tennessee Department of Revenue (Department) announced that out-of-state dealers that have no physical presence in Tennessee (i.e., a remote dealer) but makes sales exceeding $500,000 to Tennessee consumers during the previous 12 months must register and begin collecting Tennessee sales and use tax by Oct. 1, 2019. In general, a remote dealer is required to register and begin collecting tax on the first day of the third month following the month in which it meets the threshold. The Department said remote dealers that do not meet the threshold can voluntarily register and collect sales and use tax. In determining whether the threshold has been met, dealers should include all retail sales (including exempt retail sales) but exclude sales for resale. The Department also provides guidance on reporting requirements for local sales tax. Local sales tax reporting requirements will change for remote dealers starting Oct. 1, 2019. As of Oct. 1, remote dealers must report their sales tax based on the shipped to (or delivered to) address of the customer. While remote dealers may continue to have one location ID for reporting all sales into Tennessee, remote dealers will need to report sales by the shipped to or delivery destination in the local tax schedule on the sales tax return. Further, remote dealers will no longer be able to use the uniform local rate option and instead will have to apply the specific rate in effect for the city or county to which the sale was shipped/delivered. Reporting provisions for in-state dealers have not changed. Tenn. Laws 2019, Pub. Ch. 429 (HB 667), signed by the governor on May 21, 2019; Tenn. Dept. of Rev., Notice #19-04 (June 2019) (state tax); Tenn. Dept. of Rev., Notice #19-05 (June 2019) (local tax). Oklahoma: New law (HB 1884) expands the income tax credit for vehicle manufacturing companies and their qualified employees to include automotive parts manufacturing companies and their employees, when the automotive parts manufacturing company was first placed in operation in Oklahoma after Nov. 1, 2019. In addition, HB 1884 expands the definition of motor vehicle to include buses and truck tractors, effective Nov. 1, 2019. Okla. Laws 2019, HB 1884, signed by the governor on May 15, 2019. Washington: New law (HB 1746) permits a city in a county with a population of less than 1.5 million to designate a commercial office space development area and incentivize its development by establishing a local sales and use tax remittance program and a local property tax reinvestment program to make public improvements within that area. A project is eligible for sales and use tax remittance on the sale of or charge for labor and services rendered for construction or rehabilitation of a qualifying project, and the sale or use of tangible personal property that will be incorporated as a component of a qualifying project during construction or rehabilitation. A "qualifying project" is new construction or rehabilitation of a building or group of buildings intended for use as commercial office space; a qualifying project may include mixed use buildings but would exclude any portion of the property used for residential purposes. A qualifying project owner claiming remittance must pay all applicable state and local sales and use taxes imposed or authorized by law on all purchases and uses qualifying for remittance. The amount of the remittance is 100% of the local sales and use taxes paid for qualifying purchases or uses. The right to the remittance can be transferred in certain circumstances. HB 1746 takes effect July 28, 2019. Wash. Laws 2019, Ch. 273 (HB 1746), signed by the governor on May 7, 2019. Washington: New law (HB 1257) requires the Washington Department of Commerce to establish an incentive program for building owners that are early adopters of a state energy performance standard for covered commercial buildings, aiming to maximize reductions of greenhouse gas emissions from the building sector. Under the program, eligible building owners meeting certain requirements may receive an incentive payment of $0.85 per gross square foot of floor area, excluding parking, unconditioned, or semi-conditioned spaces. Incentive applications may be submitted beginning July 1, 2021, with varying deadlines based on a building's square footage. The amount of incentives available under this program are capped at $75 million. Qualifying utilities administer incentive payments for the early adopter program. HB 1257 also permits a light and power business or gas distribution business to claim a public utility tax credit equal to: (1) incentive payments made in any calendar year under the state energy performance standard early adoption incentive program; and (2) documented administrative costs up to 8% of the incentive payments. The credit may be claimed during the same calendar year in which it is earned and the following two calendar years, but it cannot be carried back and or be refunded. The credit expires June 30, 2032. HB 1257 takes effect July 28, 2019. Wash. Laws 2019, Ch. 285 (HB 1257), signed by the governor on May 7, 2019. Oregon: New law (HB 2101) conforms Oregon law to the federal centralized partnership audit regime based upon the Multistate Tax Commission's model statute. The law requires partnerships to report federal adjustments to the Oregon Department of Revenue (Department) within a specified amount of time and details the information that must be included in the filing and the time in which payments of additional tax due must be made. The Department is permitted to assess additional tax, interest, and penalties for federal audit adjustments, including those at the partnership level, or reported in certain federal filings or as part of an administrative adjustment request, subject to limitations periods. HB 2101 provides filing requirements and deadlines for direct partners, and permits partnerships to irrevocably elect to pay at the partnership level. The law also provides that the partnership's federal partnership representatives will act as the partnership's Oregon partnership representative for the reviewed year unless the partnership designates otherwise. These provisions apply to partnership adjustments for partnership tax years beginning on or after Jan. 1, 2018. HB 2101 also modifies composite return provisions for pass-through entities (PTEs), applicable to tax years beginning on or after Jan. 1, 2019. Changes include making the election to file a composite return irrevocable, and requiring PTEs file an amended composite return to report adjustments arising from an audit or other action by the IRS or to correct any item reported on the original composite return. Ore. Laws 2019, Ch. 132 (HB 2101), signed by the governor on May 22, 2019. Global: In this increasingly globalized economy, more businesses are expanding their operations into the United States and raising questions about the employer obligations they will face. The fact is, US employment law is complicated by the sovereignty and independence of its states and localities to enact unique laws governing taxation and labor. Consequently, compliance with US taxation and wage-hour law is contingent on understanding a complex framework of requirements. Our new publication, Employing staff in the US: A guide to employer obligations (available through the referenced tax alert), explains some of the relevant federal, state and local requirements involved in maintaining a US workforce including wage taxes, worker protections and immigration verification. For a copy of the publication, see Tax Alert 2019-1029. Massachusetts: A coalition of businesses led by the Associated Industries of Massachusetts (AIM) is asking the legislature, specifically the state House Ways and Means Committee, to allow, at minimum, the increase to the Employer Medical Assistance Contribution (EMAC) to expire at the end of 2019 as provided for by law. According to AIM, by the time the EMAC assessment sunsets in 2019, Massachusetts businesses are anticipated to pay 30% more than the $400 million intended under the 2017 legislation. For additional information on this development, see Tax Alert 2019-1036. Massachusetts: As a reminder, effective July 1, 2019, employers must begin withholding and paying Massachusetts family and medical leave contributions at an initial rate of 0.63% of each employee's wages up to the 2019 Social Security wage base of $132,900. For additional information on this development, see Tax Alert 2019-1039. Oregon: New law (HB 2119), effective Jan. 1, 2020, requires employers to withhold Oregon state income tax at a flat rate of 8% when employees have failed to submit Form W-4 or Form OR-W-4, Oregon Employee's Withholding Allowance Certificate. Under current law, the employer is instructed to calculate Oregon state income tax with single and zero allowances when an employee fails to provide Form W-4 or Form OR-W-4. For additional information on this development, see Tax Alert 2019-1043. Tennessee: New law (SB 624) provides that "responding out-of-state businesses" and "responding out-of-state employees" whose only connection with Tennessee is performing disaster or emergency related work5 in Tennessee do not establish a level of presence that would require them to register, file, or remit state or local taxes, or be licensed or registered to work in Tennessee. Responding out-of-state businesses, however, are still required to pay certain transaction taxes and fees (i.e., fuel excise taxes, state and local sales and use taxes, local hotel occupancy taxes, taxes imposed on the purchase or consumption of alcohol, and other transaction taxes or fees). Further, the tangible personal property of a responding out-of-state business is subject to use tax when installed or affixed to real property within Tennessee or sold or transferred to in-state persons (or otherwise coming to rest and acquiring situs within the state). The protections offered by SB 624 must be interpreted broadly such that a responding out-of-state business or a responding out-of-state employee does not have to provide documentation, registration, tax, fee or other submission or filing with the state or its political subdivisions. For income apportionment purposes, the responding out-of-state business's disaster or emergency-related work will not be sourced to Tennessee and will not impact or increase the amount of income, revenue, or receipts apportioned to Tennessee. A business or individual will lose these protections if it, he or she no longer qualifies as a responding out-of-state business or responding out-of-state employee. SB 624 took effect May 10, 2019. Tenn. Laws 2019, Pub. Ch. 378 (SB 624), signed by the governor on May 10, 2019. Federal: On June 7, 2019, President Trump announced that the US would indefinitely suspend the previously announced punitive tariffs on all goods imported from Mexico. The tariffs were set to be implemented June 10, 2019 at a 5% rate and would have escalated to 25% over a four-month period. The US State Department issued a formal announcement stating Mexico and the US reached a deal to address concerns over migrants entering the US in violation of US law. The indefinite suspension will be followed up by a review and may be revisited in 90 days. Additionally, on June 4, 2019, the Office of the US Trade Representative announced it was granting a new set of exclusions to one 10-digit Harmonized Tariff Schedule (HTS) code and 88 products 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). The announcement continues the agency's process of reviewing claims by companies that their imports are not available outside of China and that the tariffs otherwise harm US interests. This is the fifth action approving exemptions from the tariffs since late 2018. For additional information on this development, see Tax Alert 2019-1065. Federal: On May 31, 2019, the United States Trade Representative (USTR) announced a limited extension to the scheduled additional tariff increase for goods from China, from 10% to 25% for certain goods covered by the Section 301 actions from June 1, 2019 to June 15, 2019. On the same day, President Trump issued a Proclamation terminating India's designation as a beneficiary developing country under the Generalized System of Preferences, effective June 5, 2019. The action further removed India's exemption from the safeguard measures in place for certain crystalline silicon photovoltaic cells and residential washers. For additional information on these developments, see Tax Alert 2019-1028. International: The Italian tax authorities (ITA) have started a tax inspection program related to insurance and reinsurance companies with a taxable presence in Italy (i.e., both legal entities and permanent establishments) aimed at verifying the value added tax (VAT) treatment applied to reinsurance fees. In particular, the ITA are focusing their examinations on the VAT treatment applied to that part of the reinsurance fees that are remunerated by the claims handling services (Claims Handling Services) provided by the reinsurer, acting as the delegated party by the ceding insurer. According to the ITA's position, the Claims Handling Services provided by the delegated reinsurer within the framework of a reinsurance agreement would be neither exempt financial services nor ancillary to insurance services and, therefore, subject to VAT. For additional information on this development, see Tax Alert 2019-1027. 5 "Disaster or emergency related work" means repairing, renovating, installing, building, or rendering services or other business activities that relate to critical infrastructure that has been damaged, impaired, or destroyed during a disaster or emergency, or any activities conducted in good faith before a possible disaster or emergency to prepare. Document ID: 2019-1112 |
