Ernst & Young's State and Local Tax Weekly newsletter for June 14 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

EY QUEST/COST/STRI study examines state and local sales taxes and their economic impact

EY's Quantitative Economics and Statistics practice (EY QUEST) and State Tax Research Institute (STRI) affiliated with the Council on State Taxation (COST) released a new study analyzing state and local sales taxes on business. Key findings include:

• Sales tax systems vary in structure from state to state, but they share a common characteristic: they differ significantly from a theoretically ideal retail sales tax.
• Current sales taxes on business inputs violate several tax policy principles (economic growth, efficiency, equity, simplicity and transparency) and cause a number of economic distortions due to tax pyramiding.
• While most states strive to reduce pyramiding of their sales tax through specific exemptions, these efforts are far from complete.
• In FY2017, the current sales tax systems imposed $157.4 billion of taxes on business-to-business sales of products, services and equipment representing 41.7 percent  of total state and local sales taxes.
• A state sales tax on business inputs functions as a tax on in-state production.
• Many states have proposed expansions of their sales tax bases in response to the growth in the overall proportion of services in the US relative to the sales of tangible goods, however, virtually all of the significant efforts to revamp state sales tax bases to include a wide range of service categories have failed to exempt intermediate services purchased by businesses.

See Tax Alert 2019-1097 for a copy of the report.

Minnesota tax bill updates IRC conformity date and economic nexus provisions, makes various other changes

On May 30, 2019, Minnesota Governor Tim Walz signed the omnibus tax bill (HF 5, 1st Special Session), which makes a number of changes to the state's tax laws. Key provisions:

• Update the state's date of conformity to the Internal Revenue Code of 1986, as amended through Dec. 31, 2018 (from Dec. 16, 2016)
• Address Minnesota's conformity to a variety of the provisions of the Tax Cuts and Jobs Act (P.L. 115-97), including deferred foreign income recognized under IRC  Section 965, global intangible low-taxed income (GILTI) under IRC  Section 951A, the GILTI and foreign-derived intangible income (FDII) deductions under IRC  Section  250 and the IRC  Section 163(j) 30 percent  business interest deduction limitation
• Limit the amount of net operating loss that can be deducted to 80 percent  of taxable income
• Change the starting point for calculating individual net income from federal taxable income (FTI) to federal adjusted gross income (AGI) (as a result of this change, Minnesota automatically decouples from the 20 percent  pass-through entity deduction under IRC  Section 199A)
• Modify individual income tax provisions related to the tax rate, standard and itemized deductions, and adjustments to income
• Revise sales and use tax nexus provisions for remote sellers and marketplace providers, changing the economic nexus threshold to retail sales totaling more than $100,000 or 200 or more retail sales, effective Oct. 1, 2019
• Increase the percent of the accelerated payment of June sales tax liability for calendar year 2020 and 2021 to 87.5 percent  (from 81.4 percent ), adjusted down to 84.5 percent  in 2022 and thereafter
• Adopt a "Wayfair" nexus standard for purposes of the MinnesotaCare Tax
• Modify the historic structure credit and small business investment tax credit

These and other changes are discussed in Tax Alert 2019-1107.

INCOME/FRANCHISE

Federal: On June 14, 2019, the Treasury Department published final regulations (Final Regulations) on global intangible low-taxed income (GILTI) under IRC  Section  951A. The Final Regulations are generally consistent with the proposed regulations published on Sept. 13, 2018, but make certain modifications. Treasury also proposed new GILTI regulations (New Proposed Regulations) under IRC  Sections  951(b) and 951A, along with the Final Regulations. The New Proposed Regulations include an election that would apply an elective high-tax exception to GILTI when the tax imposed on a tentative net tested income item exceeds an 18.9 percent  corporate tax rate. The applicability of the high-tax exception would be tested at the level of a single qualified business unit (QBU) and would apply to all CFCs controlled by the same domestic shareholders. For additional information on this development, see Tax Alert 2019-9008.

Federal: On June 14, 2019, the Treasury Department and the IRS released temporary regulations (REG-106282-18) under IRC  Sections 245A and 954(c)(6). The temporary regulations target transactions considered abusive and contrary to legislative intent and apply retroactively to transactions occurring after Dec. 31, 2017. They deny, in whole or in part, the IRC  Section 245A dividends received deduction and the IRC  Section 954(c)(6) exception to foreign personal holding company income. The regulations would therefore render fully or partially taxable, again with retroactive effect, certain transactions that were previously not subject to tax. For additional information on this development, see Tax Alert 2019-9009.

New York: The New York Department of Taxation and Finance (Department) issued additional guidance on modifications to the required methodology for the attribution of interest deduction for Article 9-A taxpayers. This guidance applies to taxpayers with: (1) repatriated income under IRC  Section 965, (2) carryforward interest deduction limited by IRC  Section 163(j) that is deductible for federal income tax purposes in the current year, and (3) federal interest deductions limited by IRC  Section 163(j) in the current year. The Department emphasized that this guidance must be read in conjunction with the Department's previously issued guidance set forth in TSB-M-15(8)C, (7)I (Dec. 31, 2015). N.Y. Dept. of Taxn. and Fin., TSB-M-19(2)C, (2)I (June 12, 2019).

Oregon: New law (SB 193 ) extends for an additional two years sourcing provisions for interstate broadcasters enacted in 2014. For years 2014 through 2019, broadcasting gross receipts of an interstate broadcaster that engages in income producing activity in Oregon is included in the sales factor numerator if the commercial domicile or residency of the customer is in the state. Beginning in 2020, such gross receipts are included in the sales factor numerator in the ratio that the interstate broadcaster's audience or subscribers located in Oregon bears to its total audience and subscribers located both within and without the state. Further, the law directs the Legislative Revenue Office in conjunction with the Oregon Department of Revenue to study the operation of the statutory provisions governing the apportionment of the business income of a broadcaster; the report is due by Dec. 15, 2019. Ore. Laws 2019, Ch. 365 (SB 193), signed by the governor on June 13, 2019.

Oregon: New law (SB 213 ) updates the state's date of conformity to the IRC to the IRC as amended and in effect on Dec. 31, 2018 (from Dec. 31, 2017). The law leaves the state's "rolling conformity" to the definition of taxable income unchanged. These provisions take effect on the 91st day following adjournment sine die. Ore. Laws 2019, Ch. 319 (SB 213), signed by the governor on June 11, 2019.

Philadelphia, PA: The Philadelphia Department of Revenue (DOR) issued guidance on the city's treatment of the federal interest expense limitation under IRC  Section 163(j) for Business Income and Receipts Tax (BIRT) purposes. The DOR determined that absent Pennsylvania legislation decoupling from the federal interest expense deduction for BIRT purposes, a taxpayer should use the federal interest expense deduction calculated on a separate entity basis. If a taxpayer files a federal consolidated return and the consolidated group reports an interest limitation under IRC  Section 163(j), then each member of the consolidated group filing a BIRT return must calculate its applicable federal interest expense limitation on a separate entity basis. For purposes of calculating BIRT Method II net income, the proposed federal Section 163(j) regulations are to be followed, to the extent practicable, in determining the taxpayer's pro-forma interest expense deduction. Further, a BIRT Method II taxpayer that has a IRC  Section 163(j) limitation and reports nonbusiness income, should determine the amount of overall interest expense associated with nonbusiness income and allocate the interest limitation to that amount on a pro-rata basis. Lastly, the IRC  Section 163(j) limitation adjustment does not apply to BIRT Method I taxpayers, and for partnerships the expense limitation is calculated at the partnership level. Philadelphia Dept. of Rev., Advisory Notice — Net Interest Expense Limitation [IRC Sec. 163(j)] Tax Policy Update (May 29, 2019).

SALES & USE

Colorado: New law (HB 19-1240) adopts economic nexus provisions for remote retailers and marketplace facilitators, and codifies the destination sourcing rule for state sales tax collection issued by the Colorado Department of Revenue (Department). The economic nexus threshold is sales of tangible personal property, commodities, or services in Colorado exceeding $100,000 in the preceding or current calendar year. In determining whether the threshold has been met, a marketplace facilitator will include all sales made by marketplace sellers in and through its marketplace and, conversely, a marketplace seller will exclude any sales made in or through a marketplace facilitator's marketplace. The new law provides liability relief provisions for marketplace facilitators. In addition, the law deletes provisions related to click-through nexus and presumptive physical presence when a component member has a physical presence in the state. The law also codifies destination sourcing rules for state sales tax collection. The rules address sales of: (1) tangible personal property, commodities, or services; (2) the lease or rental of tangible personal property or commodities; and (3) lease or rental of motor vehicles, trailers, semi-trailers, or aircraft that do not qualify as transportation equipment. The provisions related to marketplace facilitators apply starting Oct. 1, 2019; all other changes, including the switch to destination sourcing, take effect June 1, 2019. Colo. Laws 2019, HB 19-1240, signed by the governor on May 23, 2019. Additional information is available on the Department's website.

Maryland: New law (HB 1301) expands the definition of vendor required to collect and remit sales and use tax to include certain marketplace facilitators and marketplace sellers. Effective Oct. 1, 2019, a marketplace facilitator is required to collect and remit sales and use tax on retail sales or sales for use by a marketplace seller to a buyer in Maryland. A marketplace seller is not required to collect sales and use tax to the extent that the marketplace facilitator collected the applicable tax. A marketplace facilitator does not include: a platform or forum that exclusively provides internet advertising services, a payment processor business appointed by the vendor to handle payment transactions from clients, a peer-to-peer car sharing program (this provision will terminate June 30, 2020 if a 2018 law regarding peer-to-peer car sharing terminates), and a delivery services company that delivers tangible personal property on behalf of a marketplace seller. The new law provides liability relief provisions for marketplace facilitators. Md. Laws 2019, Ch. 735 (HB 1301), became law without the governor's signature on May 25, 2019.

Nevada: New law (AB 445) establishes economic nexus provisions for marketplace facilitators. Under the new law, a marketplace facilitator is required to collect and remit sales and use tax if during the preceding or current calendar year it (1) has cumulative gross receipts from retail sales made on its own behalf or for marketplace sellers to Nevada customers which exceed $100,000 or (2) makes or facilitates 200 or more separate retail sales transactions to Nevada customers. The collection and remittance requirement does not apply to a marketplace facilitator meeting the threshold if: (1) the marketplace facilitator enters a written agreement with marketplace seller in which the marketplace seller assumes responsibility for collecting and remitting use tax on its sales made through the marketplace facilitator; and (2) the marketplace seller is registered to conduct business as a seller in Nevada. The new law includes liability relief for marketplace facilitators if certain conditions are met. A similar threshold is established for a referrer. A referrer meeting the threshold will not be required to collect and remit tax if it complies with notice and reporting requirements. These provides take effect Oct. 1, 2019. Nev. Laws 2019, Ch. 572 (AB 445), signed by the governor on June 12, 2019.

Oklahoma: New law (SB 513) modifies the state's economic nexus provisions for remote sellers and marketplace facilitators, and referrers. Under current law remote sellers, marketplace facilitators, and referrers with at least $10,000 in aggregate sales of tangible personal property within Oklahoma in the preceding 12-months can elect to collect and remit sales/use tax or comply with the state's notice and reporting requirements. Effective Nov. 1, 2019, this election is eliminated for remote sellers. Instead, a remote seller will have a duty to collect and remit sales/use tax if it has aggregate sales of taxable tangible personal property within Oklahoma (or delivered to locations within the state) worth at least $100,000 during the preceding or current calendar year. The duty to collect applies the first calendar month succeeding the month the threshold is met. In determining whether the threshold has been met, a remote seller will exclude sales it made through a marketplace forum or referrer's platform where tax is collected and remitted by the marketplace facilitator or referrer. Okla. Laws 2019, SB 513, signed by the governor on May 16, 2019.

Oklahoma: New law (HB 1262) modifies provisions related to durable medical equipment. The law adds allopathic physician and clinical nurse specialist to the list of practitioners who can administer, distribute or prescribe certain medical equipment that is exempt from sales tax. Additionally, it amends the definition of "durable medical equipment" to require in-home use. Lastly, the cost of prosthetic devices, durable medical equipment, and mobility-enhancing equipment is no longer required to be reimbursed under the Medicare or Medicaid Program to qualify for the sales tax exemption. HB 1262 took effect May 28, 2019. Okla. Laws 2019, HB 1262, signed by the governor on May 28, 2019.

CONTROVERSY

Oklahoma: New law (SB 402) prohibits taxpayers from participating in a statutory voluntary compliance initiative waiving penalties, interest and other collection fees on unpaid taxes enacted after Nov. 1, 2019 if the taxpayer previously participated in a similar initiative. This prohibition, however, does not prevent a taxpayer from seeking relief under statutory provisions for certain tax abatements or waiver or remission of interest or penalties. The Oklahoma Tax Commission may waive this prohibition upon written request if good cause exists. SB 402 takes effect Nov. 1, 2019. Okla. Laws 2019, SB 402, signed by the governor on May 7, 2019.

PAYROLL & EMPLOYMENT TAX

Massachusetts: The Massachusetts Department of Family and Medical Leave (Department) announced that emergency legislation has been enacted to provide for a three-month delay in the effective date for collecting and remitting contributions for Massachusetts' paid family and medical leave (PFML) program. The Department has issued final regulations reflecting this change. Effective Oct. 1, 2019, employers must begin withholding and paying Massachusetts family and medical leave contributions at an initial rate of 0.75 percent  (up from 0.63 percent ) of each employee's wages up to the 2019 Social Security wage base of $132,900. Under prior law, the requirement for making PFML contributions was effective July 1, 2019. Employers will begin remitting employee and employer contributions for the fourth quarter of 2019 (Oct. 1 to Dec. 31, 2019) through MassTaxConnect by Jan. 31, 2020. For additional information on this development, see Tax Alert 2019-1125.

Oregon: The Eugene, Oregon City Council announced it passed an ordinance implementing a new payroll tax paid by employers and most employees to be used for "sustainable funding for city-wide public safety efforts." Unless approved by voters, the payroll tax will sunset in 2028. Eugene's Mayor, Lucy Vinis, supports the measure. The City will be working with the Oregon Department of Revenue, which currently administers the state and local transit district payroll taxes, to implement the new payroll tax by July 1, 2020. The payroll tax would apply to both private and public sector employees but does not apply to visitors, city residents employed elsewhere, retirees or the unemployed. For additional information on this development, see Tax Alert 2019-1082.

MISCELLANEOUS TAX

Michigan: The Michigan Department of Treasury (Department) announced that beginning July 1, 2019, it is discontinuing the state's 3.2 gallon per vehicle standard allowance refund (safe harbor) that can be claimed by automakers for fuel placed into a newly manufactured vehicle for export without providing fuel fill specification records. As of that date, such refund claims must include supporting documentation substantiating the actual fuel fill (e.g., gallons) per vehicle during the tax period(s) for which the refund is claimed. The Department listed documentation required to substantiate a refund claim, including: (1) motor fuel purchase invoices with specific information included; (2) fuel specification document(s); (3) reports, spreadsheets, schedules, or other documents that summarize information regarding the exported vehicles and fuel fill amounts for each tax period for which the refund is claimed; and (4) sworn affidavit(s) from relevant persons that establish the taxpayer as an "end user" of the fuel for non-highway purchases and that lay the foundation for and describe or explain how the other information provided supports the refund claim. Other information or documentation that is substantially similar to the required documentation can be used to support a refund claim if the Department provides prior written approval. Mich. Dept. of Treas., Release: Treasury Discontinues Its 3.2 Gallon Per Vehicle Standard Allowance (Safe Harbor) for Automaker Fuel Tax Refund Claims (May 28, 2019).

Tennessee: New law (HB 605) repeals the excise tax credit for qualified broadband internet access equipment. Further, the definition of tangible personal property is amended to provide that the term does not include fiber-optic cable after it becomes attached to a utility pole, building, or other structure or installed underground. Rather, such fiber-optic cable is deemed realty upon installation. HB 605 takes effect July 1, 2019. Tenn. Laws 2019, Pub. Ch. 501 (HB 605), signed by the governor on May 24, 2019.

GLOBAL TRADE

International: On June 12, 2019, Costa Rica's Customs General Directorate announced proposed changes to six sections of the General Customs Law Regulation. The proposed changes would include: (1) redefining some competencies and functions of the Technical Management Directorate and the Statistics and Registries Department, both part of the Customs General Directorate; (2) modifying the list of documents that must be submitted with the authorization request to become a Customs Public Function Assistant, including a plan of the area where the activities will be carried out, duly approved by the Engineers and Architects Federated College; and (3) simplifying the inspection of facilities for free trade zones. For additional information on this development, see Tax Alert 2019-1096.

International: On May 24, 2019, Turkey amended certain provisions of the Customs Regulation regarding the proof of origin documents for goods that are subject to Additional Financial Duty (AFD) and Additional Customs Duty (ACD). According to the amendments, the certificate of origin may not be required if the document evidences the status of the goods with respect to free circulation via an A.TR Movement Certificate, during the importation of the goods that are subject to AFD and/or ACD. For additional information on this development, see Tax Alert 2019-1104.

WEBCAST

Multistate: A replay of the May 29, 2019, Ernst & Young LLP (EY) quarterly webcast focusing on state tax matters is now available. On this webcast guest speakers, 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, joined EY panelists to discuss New Jersey's implementation of the significant changes to its corporate business tax law enacted during 2018. Topics discussed included 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  Section 163(j). In addition, EY panelists provided: (1) an overview of significant legislative developments enacted in 2019, (2) an overview of taxpayer considerations in light of the state responses to the U.S. Supreme Court's ruling in South Dakota v. Wayfair, (3) a synopsis of state tax matters pending before the U.S. Supreme Court, and (4) an overview of selection state and local judicial and administrative developments. To watch a replay, 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.