09 July 2019 State and Local Tax Weekly for June 21 Ernst & Young's State and Local Tax Weekly newsletter for June 21 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. U.S. Supreme Court decision in North Carolina trust tax case could create refund opportunities, along with increased uncertainty and litigation In Kimberley Rice Kaestner 1992 Family Trust,1 the U.S. Supreme Court (Court) unanimously upheld the North Carolina Supreme Court's earlier ruling that the state could not tax the income of a trust based solely upon the presence of a noncontingent beneficiary who moved to the state. The Court noted that "[t]he presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain to receive it. In limiting our holding to the specific facts presented, we do not imply approval or disapproval of trust taxes that are premised on the residence of beneficiaries whose relationship to trust assets differs from that of the beneficiaries here." For more on the Court's ruling, see Tax Alert 2019-1183. In response to the Court's ruling the North Carolina Department of Revenue (Department) issued guidance to taxpayers who filed "Notice of Contingent Event" with the Secretary of Revenue before the expiration of the general statute of limitations for refunds related to Kaestner. Taxpayers who properly filed a Notice of Contingent Event have six months after the conclusion of the contingent event to request a refund of an overpayment of tax. The Department determined that the contingent event in the Kaestner case concluded on June 21, 2019, thus taxpayers who filed a Notice of Contingent Event and meet other requirements, have until Dec. 21, 2019 to file an amended return with the Department. Taxpayers who did not file a Notice of Contingent Event may request a refund by filing an amended return reflecting an overpayment due the taxpayer or filing a refund claim. For more information on this development, see Important Notice: Decision in the Kaestner Case (July 1, 2019). Arizona: New law (HB 2757) updates the state's conformity date to the IRC. Effective for tax years beginning from and after Dec. 31, 2018, Arizona conforms to the IRC in effect as of Jan. 1, 2019 (from Jan. 1, 2018), including those provisions that became effective during 2018 and with specific adoption of all retroactive effective dates for the applicable provisions. For purposes of computing income tax for tax years beginning from and after Dec. 31, 2017 through Dec. 31, 2018, the IRC means the IRC as amended, in effect on Jan. 1, 2018, including provisions that became effective during 2017 (with adoption of all retroactive effective dates). Thus, Arizona now specifically conforms to the measures included in the Bipartisan Budget Act of 2018 (P.L. 115-123) and the Consolidated Appropriations Act, 2018 (P.L. 115-141) that are retroactively effective during tax years beginning from and after Dec. 31, 2017 through Dec. 31, 2018. In updating its conformity to the IRS, the law makes certain modifications. Effective for tax years beginning from and after Dec. 31, 2018, in computing Arizona taxable income a corporation is required to add back to Arizona gross income the amount of dividend income received from corporations and allowed as a deduction under both IRC Sections 245A and 250(a)(1)(B) (i.e., the new federal DRD and the new GILTI deduction, respectively, both added by the TCJA). A subtraction is required for the amount of dividend income from foreign corporations. Lastly, the following are considered foreign dividends for Arizona corporate income tax purposes: (1) gross up income described in IRC Section 78, (2) GILTI under IRC Section 951A, and (3) Subpart F income under IRC Section 952. Ariz. Laws 2019, Ch. 273 (HB 2757), signed by the governor on May 31, 2019. Hawaii: New law (SB 394) adopts market-based sourcing for sales of intangibles and services for purposes of apportioning income under the Uniform Division of Income for Tax Purposes Act (UDITPA) as adopted by Hawaii. The new market-based sourcing rules apply to tax years beginning after Dec. 31, 2019. Haw. Laws 2019, SB 394, signed by the governor on June 7, 2019. Hawaii: New law (SB 1130) updates Hawaii's date of conformity to the IRC to the IRC as amended on Dec. 31, 2018 (from Feb. 9, 2018). The IRC conformity bill enacted in 2018 added Subchapter Z (IRC Section 1400Z-1 to 1400Z-2) (opportunity zones) to the list of non-operative IRC provisions for purposes of Hawaii's income tax. SB 1130 removes Subchapter Z from that list and instead adds Subchapter Z (IRC Section 1400Z-1 to 1400Z-2) to the list of operative provisions and makes clear that these provisions only apply to qualified opportunity zones designated as such by Hawaii Chief Executive Officer. These changes apply to taxable years beginning after Dec. 31, 2018. Haw. Laws 2019, SB 1130, signed by the governor on June 7, 2019. Indiana: New law (SB 565) makes various changes to the state's income tax laws, including provision enacted in response to the federal Tax Cuts and Jobs Act (P.L. 115-97). The law updates the state's conformity to the IRC to the IRC as of Jan. 1, 2019 (previously Feb. 11, 2018). Corporations (other than real estate investment trusts) are required to add back either an amount equal to the amount reported on IRC 965 Transition Tax Statement, line 1, or the amount deducted under IRC Section 965(c), if the taxpayer made such a deduction for federal income tax purposes. Additionally, Indiana generally conforms to IRC Section 965(b)(3)(B) for a taxpayer that is a direct or indirect shareholder in a corporation that is an earnings and profit deficit foreign corporation, except that the amount taxable under IRC Section 965 cannot be reduced to less than zero. These changes are effective for taxable years beginning after Dec. 25, 2016. Provisions of the SB 565 also treat any directly related interest expense that is business interest under IRC Section 163(j) as having reduced the taxpayer's federal taxable income only in the first taxable year in which the deduction otherwise would have been allowed under IRC Section 163 if the IRC Section 163(j)(1) limitation did not exist. Other changes: (1) provide a modification to corporate taxable income and individual adjust gross income for certain property involved in a like-kind exchange for which the taxpayer claims a federal IRC Section 179 deduction for tax years beginning after Dec. 31, 2017; (2) require a taxpayer to subtract from corporate taxable income or individual adjusted gross income the amount that would have been excluded from gross income but for the enactment of IRC Section 118(b)(2) for taxable years beginning after Dec. 22, 2017 (the date of enactment of the TCJA); (3) modify Indiana bonus depreciation provisions; and (4) modify Indiana's net operating loss (NOL) provisions by decoupling from the federal limitation on excess trade or business losses under IRC Section 461(l) (which was added by the TCJA), thus increasing the available state NOL. Lastly, taxpayers filing a combined report must petition the state within 30 days after the end of its tax year if it would like to discontinue filing a combined return. Unless otherwise noted, these changes are effective retroactively to Jan. 1, 2019. Ind. Laws 2019, P.L. 234 (SB 565), signed by the governor on May 5, 2019. Vermont: New law (H. 514) updates the state's conformity to the IRC and adopts market-based sourcing. Effective retroactively to Jan. 1, 2019, and applicable to tax years beginning on Jan. 1, 2018 and thereafter, Vermont conforms to the IRC as amended through Dec. 31, 2018 (from Dec. 31, 2017). H. 514 also adopts the market-based sourcing method for sourcing sales of intangibles and services. Under these rules the sales of services are in Vermont if and to the extent the service is delivered to a location in Vermont. The sale of intangible property that is rented, leased, or licensed, is in Vermont if and to the extent the property is utilized in the State, provided that intangible property used in marketing a good or service to a consumer is "used in this State" if that good or service is purchased by an in-state consumer. Intangible property that is sold is in Vermont if and to the extent the property is used in the State, provided that: (a) a contract right, government license, or similar intangible property authorizing the holder to conduct business activity in a specific geographic area is used in Vermont if the geographic area includes all or part of the State; (b) receipts from intangible property sales that are contingent on the productivity, use, or disposition of the intangible property are treated as receipts from the rental, lease, or licensing of such intangible property; and (c) all other receipts from the sale of intangible property are excluded from the numerator and denominator of the receipts factor. If the state of assignment cannot be determined it will be reasonably approximated. If, however, the state of assignment cannot be determined or reasonably approximated, the receipts will be excluded from the denominator of the receipts factor. The new market-based sourcing rules take effect Jan. 1, 2020 and apply to tax years starting after that date. Vt. Laws 2019, act 51 (H. 514), signed by the governor on June 10, 2019. Arizona: New law (HB 2757) adopts economic nexus provisions for remote sellers and marketplace facilitators for Arizona transaction privilege (TPT) and us tax purposes, with differing thresholds, but in both cases sales of all affiliated persons must be aggregated. The collection and remittance requirements for both begin Oct. 1, 2019. The threshold for remote sellers under the new law phases down over three years as follows: The gross proceeds of sales or gross income derived from the remote seller's business with customers in Arizona that is not facilitated by a marketplace facilitator is more than the following: (1) $200,000 in calendar year 2019; (2) $150,000 in calendar year 2020; and (3) $100,000 in calendar year 2021 and thereafter. The threshold for marketplace facilitators is the gross proceeds of sales or gross income derived from the marketplace facilitator's business on its own behalf or at least one marketplace seller with Arizona customers is more than $100,000. A marketplace facilitator is required to report the tax due from transactions facilitated on behalf of marketplace sellers. Tax can be reported on a separate or combined tax return. In addition, during 2019 and 2020, the law provides liability relief for remote sellers and marketplace facilitators if certain conditions are met. Ariz. Laws 2019, Ch. 273 (HB 2757), signed by the governor on May 31, 2019. Tennessee: New law (HB 1461) creates a sales and use tax exemption for qualified building materials used in the construction, expansion, or renovation of one or more qualified, new, or expanded warehouse or distribution facilities. To qualify for the exemption, the taxpayer or a lessor (or both) must make a $1 billion or more capital investment in the construction or renovation of these and related facilities at the same location during the qualified capital investment period. A "qualified capital investment period" begins on or after Jan. 1, 2019 and ends no later than Dec. 31, 2026. "Qualified building materials" is defined as tangible personal property purchased between July 1, 2019 and Dec. 31, 2026 that become part of the facility's real property. Taxpayers seeking the exemption, must submit an exemption application containing a description of the investment made during the investment period to the revenue commissioner by Oct. 1, 2019. Taxpayers that do not meet the requirements are liable for any sales or use tax, interest, or penalty that would have otherwise been due on items purchased on a tax-exempt basis under this exemption provision. HB 1461 took immediate effect. Tenn. Laws 2019, Pub. Ch. 503 (HB 1461), signed by the governor on May 24, 2019. Texas: A company's sales of online management solution services were properly classified as taxable data-processing services and not tax-exempt information services. In so holding, the Texas Court of Appeals (court) found that the online management solution services satisfy the data-processing services definitions, since the company enters into contracts to collect and manipulate the customers' data and to provide that data in a user-friendly format to help its clients with various management tasks. The court rejected the company's argument that its online management solutions were considered "information services" under the common law's "essence of the transaction" doctrine, noting that even if it found that the doctrine applied, it would hold that the "essence," "ultimate object," and "basic purpose" of the transactions at issue were the conveyance of data-processing services. Lastly, distinguishing CheckFree Services,2 the court found that the company's data processing was not "ancillary" to its provision of another professional service, when the company's customers purchased "the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information." Instill Corp. v. Hegar, No. 03-18-00374-CV (Tex. Ct. App., 3d Dist., May 31, 2019). Vermont: New law (HB 536) requires marketplace facilitator and marketplace sellers to collect and remit Vermont's sales/use tax. Such obligation applies to marketplace facilitators that facilitated sales by marketplace sellers to a destination in Vermont, or marketplace sellers that have combined sales and sales through a marketplace to a destination in Vermont, of at least $100,000, or in at least 200 individual sales transactions, during any 12-month period preceding the monthly period for which tax liability is determined. Marketplace facilitators are required to collect and remit sales tax on retail sales by marketplace sellers through a marketplace, and are required to certify to marketplace sellers that it will collect and remit the tax. Marketplace sellers that accept such certification in good faith should exclude sales made through the marketplace from its obligation as a vendor, and should only collect and remit tax on retail sales not made though a marketplace. The law provides liability relief to marketplace facilitators when the failure to collect the correct amount of tax was due to incorrect information given to the marketplace facilitator by the marketplace seller. These provisions took effect June 1, 2019. Vt. Laws 2019, Act 46 (HB 536), signed by the governor on June 4, 2019. Tennessee: New law (HB 1265) repeals certain tax credit provisions and adds a requirement for certain capital grant contracts. Applicable to tax years beginning on or after Jan. 1, 2019, HB 1265 repeals the provision of the job tax credit that permitted the state to award the credit to a qualified business enterprise that created less than 25 qualified jobs when it was located in an enhancement county. HB 1265 also repeals provisions that permitted the state to lower the number of jobs required to be created in order to qualify under the franchise tax for the additional annual job tax credit and the credit for qualified headquarters facilities relocation, and (2) the sales and use tax credit for qualified headquarters facilities. In addition, HB 1265 requires the Tennessee Department of Economic and Community Development (Department) to execute a separate agreement in conjunction with any capital grant contract awarded through State Building Commission provisions for economic development purposes that reserve the Department's right to recover the amount of grants, funds, or other incentives disbursed under the grant contract if the person or entity benefitting from such amounts does not fulfill the commitments made to the Department. This requirement applies to such contracts executed on or after July 1, 2019. Tenn. Laws 2019, Pub. Ch. 451 (HB 1265), signed by the governor on May 22, 2019. Nebraska: New law (LB 492) establishes the Regional Metropolitan Transit Authority (RMTA) Act and permits the board of directors of any such RMTA to levy a property tax to pay for related costs. In any one year, the tax cannot exceed $0.10 on each $100 on the taxable value of the taxable property that at the time of the levy is located in, or during the next fiscal year will be located in, any municipality in which the RMTA will be deemed to have operating jurisdiction. The RMTA's board of directors must certify the tax levy by Sept. 20 of each year to the assessor of the county or counties in which the RMTA operates. The tax would be imposed for the fiscal year beginning the following Jan. 1. LB 492 takes effect three months after May 31, 2019, the date the legislature adjourned sine die. Neb. Laws 2019, LB 492, enacted over governor's veto on May 31, 2019. New Jersey: In partially reversing the New Jersey Tax Court, the New Jersey Superior Court, Appellate Division (court) held that an entity operating a for-profit restaurant on the campus of a New Jersey public university is not subject to local property tax on the portion of the public building it occupies because it qualifies for a property tax exemption based on its use of the building for a public purpose. The court, after considering all the relationships between the university and the restaurant, determined that when considered together, the following factors support such a finding: (1) the university's Board of Trustees' "multi-faceted" goals for the restaurant (i.e., generation of scholarship funding, positive publicity generated for the university, and the availability of an upscale, in-house caterer); (2) the restaurant's purchase of produce grown on the university's property and provision of food scrap waste to be used in the university's composting laboratory for research; (3) the unique nature of the restaurant being located on campus, the frequency with which the university's students and parents dine there, and its use as a recruiting tool for students and faculty; (4) the restaurant's payment of revenues to the university that are earmarked for student scholarships; and (5) the significant number of university students employed by the restaurant. (The court noted that none of these factors alone would support a public purpose finding.) Additionally, the entity is not subject to local property taxes because the agreement between the entity and the university does not grant the entity a possessory interest in the premises as a lessee, but rather provides for the restaurant's management and operation. Gourmet Dining, LLC v. Union Twp. and NJ Educ. Facilities Auth. and Kean Univ., No. A-4799-17T3 (N.J. Sup. Ct., App. Div., May 31, 2019) (approved for publication). Federal: The latest edition of Trade Watch is now available through Tax Alert 2019-1196. Trade Watch is a quarterly communication prepared by Ernst & Young's Customs & International Trade Practice. Multistate: On Thursday, July 18, 2019 from 1:00-2:00 p.m. EDT (10:00-11.00 a.m. PDT) Ernst & Young LLP's state income tax group will host the first webcast in its new state income tax seminar series focusing on the ongoing impacts of TCJA on state taxation. The first webcast will focus on how state responses to the TCJA are currently impacting state tax compliance. Topics to be addressed include compliance considerations for: (1) global intangible low-taxed income (GILTI), (2) deduction for GILTI and foreign-derived intangible income (FDII), (3) Section 163(j) limitation on business interest expense, and (4) enduring implications of the Section 965 transition tax. Future webcasts in this series will address impacts elsewhere along the tax lifecycle — including financial reporting, tax policy, tax strategy, and controversy — as well as further technical developments. To register for this event, go to Ongoing impacts of TCJA on state taxation. 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 North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust, No. 18-457 (S. Ct. June 21, 2019). 2 Hegar v. CheckFree Servs. Corp., No. 14-15-00027-CV (Tex. App. — Houston [14th Dist.] April 19, 2016, no pet.) (mem. op.). Document ID: 2019-1226 |
