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Ernst & Young's State and Local Tax Weekly newsletter for August 2 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

Kansas revenue department announces economic nexus provisions for remote sellers (with no thresholds), collection set to begin October 1, 2019

The Kansas Department of Revenue (Department) in Notice 19-04 (Aug. 1, 2019) announced that it is requiring remote sellers to collect and remit the state's sales and use tax starting Oct. 1, 2019. Unlike other states, the Department did not include a threshold which must be met in order for a remote seller's collection and remittance obligation to begin.

Following the U.S. Supreme Court's ruling in South Dakota v. Wayfair, the Department determined that the state has the authority to require remote sellers to collect and remit its sales and use tax under K.S.A.  Section  79-3702(h)(1)(F), which defines "a retailer doing business in this state" to include "any retailer who has any other contact with this state that would allow this state to require the retailer to collect and remit tax under the provisions of the constitution and laws of the United States." Based on the law, the Department announced that "Kansas can, and does, require on-line and other remote sellers with no physical presence in Kansas to collect and remit the applicable sales or use tax on sales delivered into Kansas." The Department noted that sales are sourced using destination-based sourcing (e.g., the rate determined by the jurisdiction where the purchaser takes delivery or possession of the purchased items).

The Department indicated that it will not enforce these provisions for sales made into Kansas prior to Oct. 1, 2019. Affected remote sellers will need to register with the state and obtain a sales/or use tax account number. Remote sellers can register through the Streamlined Sales Tax Registration System or directly on the Department's website.

Lastly, the Department said that marketplace facilitators should contact it concerning entering into a voluntary compliance agreement with it.

New York State issues updated draft business apportionment factor rules

On July 18, 2019, the New York State Department of Taxation and Finance (Tax Department) posted for comment revised draft corporate franchise tax regulations under Article 9-A of the New York Tax Law (to be codified at N.Y. Comp. Codes and Regs. tit. 20, Part 4, Subparts 4-1 through 4-4). These draft rules address the sourcing of business receipts for purposes of determining a taxpayer's apportionment fraction.

These provisions replace earlier draft regulations posted on Aug. 31, 2017. The Tax Department specifically requests comments on the definition of "business receipts" and the elimination of the apportionment rule regarding unusual events as further described in Tax Alert 2019-1410. The discretionary adjustment rules were also revised replacing a previous draft of these rules issued on March 4, 2016. The draft rules include examples throughout to illustrate application of the rules. The Tax Department noted that the draft rules for sourcing receipts from digital products and other services and other business receipts were separately posted and will later be incorporated into these draft regulations.¹ Additionally, the Tax Department stated that draft rules for corporate partners will be released later and incorporated into a separate subpart dedicated to corporate partner issues.² Comments are due by Oct. 18, 2019, but the Tax Department indicated on its website that it will consider comments submitted after the due date.³

For more on this development, see Tax Alert 2019-1410.

INCOME/FRANCHISE

California: On Friday, July 19, 2019, the California Franchise Tax Board (FTB) held its fourth Interested Parties Meeting (4th IPM) continuing ongoing discussions between the FTB and the public for the next round of proposed amendments to its market-based sourcing rules (promulgated under California Code of Regulations, title 18, (CCR)  Section  25136-2). In anticipation of the 4th IPM, the FTB released draft language and discussion topics with explanations of the proposed amendments, including language that will affect asset managers, government contractors, research and development companies, and numerous other industries. Affected taxpayers should consider submitting written comments by the Sept. 19, 2019 deadline.⁴ For a recap of what was discussed at the fourth IPM, see Tax Alert 2019-1389.

Louisiana: New law (SB 223), as a workaround to the state and local tax paid deduction cap adopted by the federal Tax Cuts and Jobs Act (P.L. 115-97), allows S corporations and pass-through entities taxed as a partnership for federal income tax purposes (collectively, "PTE") to file and pay their Louisiana income tax as if they were C corporations, effective for tax periods beginning on or after Jan. 1, 2019. PTEs making the election will pay tax at the entity level instead of the shareholder or partner level, and any credits earned must be applied at the entity level. An electing PTE can deduct an amount equal to the federal income tax it would have paid on its Louisiana net income for the tax year if it had been required to file a federal income tax return as a C corporation for the current and all prior tax years. Additionally, an individual shareholder, partner, or member in computing Louisiana taxable income will exclude net income or losses received from the PTE of which the individual is a shareholder, partner, or member, provided the PTE properly filed a Louisiana corporate income tax return. The applicable tax rates on electing PTEs are: (1) 2% on the first $25,000 of Louisiana taxable income; (2) 4% on amounts above $25,000 up to $100,000; and (3) 6% on amounts above $100,000. The election must be in writing and can be made at any time during the preceding tax year, or during the tax year on or before the 15th day of the fourth month after the close of the tax year. The election is effective for the tax year for which it is made and for all succeeding tax years until the election is terminated by the state or revoked by the PTE's shareholders, partners, or members. A PTE filing a composite partnership return cannot make this election for the same tax year. La. Laws 2019, Act 442 (SB 223), signed by the governor on June 22, 2019.

Missouri: New law (SB 87) decouples from the federal IRC  Section  163(j) business interest expense limitation for corporate and individual income tax purposes. For all tax years beginning on or after Jan. 1, 2018, taxpayers in computing their Missouri adjusted gross income are required to: (1) add back to federal adjusted gross income (AGI) interest expense paid or accrued in a previous tax year, but allowed as a deduction under IRC  Section  163, in the current year through carryforward of disallowed business interest provisions of IRC  Section  163(j); and (2) subtract from federal AGI, to the extent included, interest expense paid or accrued in the current tax year, but not deducted because of the IRC  Section  163(j) limitation. For both adjustments, an interest expense is considered paid or accrued only in the first taxable year the deduction would have been allowable under IRC  Section  163 if the limitation under IRC  Section  163(j) did not exist. Mo. Laws 2019, SB 87, signed by the governor on July 11, 2019.

SALES & USE

Federal: Proposed bill titled the "Online Sales Simplicity and Small Business Relief Act of 2019" (S. 2350) (bill) would, if enacted, prohibit states from retroactively imposing sales tax collection requirements on remote sellers and would establish a small business exception. Under the bill, a state would not be able to impose a sales tax collection duty on a remote seller for sales occurring before June 21, 2018, and would only be allowed to impose such an obligation on remote sellers for sales occurring after Jan. 1, 2021. Small business remote sellers (e.g., a remote seller with not more than $10 million in gross annual receipts in the US in the preceding calendar year) would be exempt from sales tax collection duties in any state until 30 days after the states develop, and Congress approves, an interstate compact that governs sales tax collection duties on remote sellers. The compact would need to provide for a clearly defined minimum substantial nexus standard and would need to simplify registration, collection, remittance, auditing, and other compliance processes to avoid undue burdens on interstate commerce. S. 2350 was introduced on July 31, 2019. A similar measure, HR 1933, is being considered by the House.

Kentucky: In reversing the Kentucky Board of Tax Appeals, a circuit court held an aluminum processing company's purchases of refractory materials are exempt from sales tax as industrial supplies used up in the manufacturing process, and not taxable repair or replacement parts. In so holding, the Madison County Circuit Court (court), citing Century Aluminum,⁵ found the refractory materials exempt as an equivalent of "fire brick," which is specifically listed as an example of industrial supplies. The court further noted that finding the refractory materials as exempt industrial supply is consistent with the treatment previously afforded the company throughout its history of operations. Novelis Corp. v. Ky. Dept. of Rev., No. 16-CI-00189 (Ky. Cir. Ct., Madison Cnty., July 2, 2019).

Louisiana: New law (HB 547) updates Louisiana's economic nexus provisions to include an applicable date and make other changes. HB 547 provides that the expansion of the state's sales and use tax nexus provisions in the law enacted in 2018 (Act 5, 2018, 2nd Extra. Sess.) to include an economic and transaction threshold applies to all tax periods beginning on or after July 1, 2019. Although Act 5 took effect on June 12, 2018, the tax period for which its provisions applied had not yet occurred since that period was contingent upon the U.S. Supreme Court in South Dakota v. Wayfair, Inc. finding South Dakota's economic nexus law to be constitutional. Until the Louisiana Sales and Use Tax Commission for Remote Sellers (Commission) enforces collection and remittance of state and local sales and use tax, which must be no later than July 1, 2020 (with at least 30 days' notice before the enforcement effective date), dealers must collect the additional tax and file all applicable sales and use tax returns. Additionally, a remote seller, within 30 days after reaching the threshold, must submit to the Commission an application to collect tax on remote sales for delivery into Louisiana, and once approved must begin collection within 60 days after surpassing the threshold. The Commission can enter into voluntary disclosure agreements with remote sellers as to state and local sales and use taxes, and Commission-related filings to the Board of Tax Appeals are subject to the same deadlines as other tax matters. HB 547 took effect Aug. 1, 2019, and its provisions apply to all tax years beginning on or after July 1, 2019. La. Laws 2019, Act 360 (HB 547), signed by the governor on June 17, 2019.

Minnesota: In a matter of first impression, the Minnesota Supreme Court (Court) affirmed earlier rulings that an entity's purchases of machinery and equipment for its online data recovery, document review, and electronic discovery system (system) are not exempt from sales tax under the capital equipment exemption (Minn. Stat.  Section  297A.68, subd. 5) because information in the system did not meet the statutory requirement that the information be equally available and accessible to all the entity's customers. The parties agreed that the "cumulation of information" on the entity's system is not equally accessible among the entity's customers, but that the system's formulas, protocols, and algorithms are equally accessible. Ultimately, the Court determined that the "cumulation of information" on the entity's system is its customers' litigation documents, rather than the formulas, protocols, and algorithms that allow the system to retrieve data. Since the customers' litigation documents are only accessible to the customer that uploaded them, the purchases do not qualify for the exemption. Kroll Ontrack, LLC v. Minn. Comr. of Rev., No. A18-1805 (Minn. S.Ct. July 17, 2019).

Missouri: New law (SB 87) requires sellers with more than $500,000 worth of sales of goods per year to clearly state on the sales receipt or sales invoice provided in conjunction with the sale, the total rate of all sales tax imposed on the sale. The total rate must reflect any applicable state or local sales tax authorized under Missouri law. SB 87 takes effect Aug. 28, 2019. Mo. Laws 2019, SB 87, signed by the governor on July 11, 2019.

Tennessee: A printing company's sale of blow-in cards (i.e., cards inserted into magazines to solicit subscriptions, meant to be removed, filled out, and returned) and other printed products that it manufactured at its Tennessee facility and shipped to an out-of-state facility for inclusion in customers' magazines did not qualify for the sale-for-resale or manufactured-for-export exemptions. In so holding, the Tennessee Court of Appeals (Court) found that the blow-in cards did not satisfy the requirements for the sale for resale exemption where the customers that purchased the blow-in cards did so for their own use (to advertise and sell magazine subscriptions), and the magazine purchasers did not purchase the blow-in cards as part of buying the magazine. Moreover, while the blow-in cards were inserted into the magazines, they were not put there as an ingredient or component part. The Court also held that the manufactured-for-export exemption did not apply because a "sale" for tax purposes occurred at the point where title to the finished (or semi-finished) products transferred in Tennessee to the company's customers. The Court, however, vacated and remanded the imposition of sales tax on blow-in cards purchased by one of the customer, finding a material fact dispute regarding whether the sale occurred within Tennessee. Check Printers, Inc. v. Gerregano et al., No. M2018–01030-COA-R3-CV (Tenn. Ct. App. June 28, 2019).

BUSINESS INCENTIVES

Hawaii: New law (SB 1394) establishes a historic preservation income tax credit for 30% of qualified rehabilitation expenditures for substantial rehabilitation of a certified historic structure. The credit is available in the tax year in which the structure is placed into service, or it is prorated for projects completed in phases. Excess credits can be carried forward 10 years. The aggregate amount of credits claimed for qualified rehabilitation projects cannot exceed $1 million for each of the tax years from 2020 through 2024. No credit is allowed for any portion of a qualified expense for which the taxpayer claims an IRC  Section  179 deduction. Additionally, an eligible property's basis for depreciation or accelerated cost recovery system purposes is reduced by the amount of credit allowable and claimed. Alternatively, the taxpayer will treat the claimed credit amount as a taxable income item for the tax year in which it is properly recognized. For certain pass-through entities, the cost upon which the credit is computed is determined at the entity level and distributed based on the federal partner distributive share provisions under IRC  Section  704(b). Credit recapture provisions apply if the taxpayer fails to timely submit qualified rehabilitation expenditures, the projected qualified expenditures do not materialize, or the rehabilitation of the certified historic structure does not timely proceed in accordance with the approved rehabilitation plan. SB 1394 takes effect July 1, 2019, and is repealed on Dec. 31, 2024. Haw. Laws 2019, Act 267 (SB 1394), signed by the governor on July 8, 2019.

Illinois: New law (SB 1591) extends the research and development (R&D) credit for five years by extending the expiration date to years ending prior to Jan. 1, 2027 (from Jan. 1, 2022). Ill. Laws 2019, Pub. Act 101-0207 (SB 1591), signed by the governor on Aug. 2, 2019.

Illinois: New law (SB 1595) extends the expiration date of the film production services tax credit to years ending prior to Jan. 1, 2027. Ill. Laws 2019, Pub. Act 101-0178 (SB 1595), signed by the governor on Aug. 1, 2019.

PROPERTY TAX

Louisiana: New law (HB 301) would extend the ad valorem tax exemption for raw materials, goods, commodities and personal property held in Louisiana for purposes of being exported or stored in transit in the state to include raw materials, goods, commodities, and other articles stored in Louisiana for maintenance and destined for the Outer Continental Shelf. This provision only takes effect and becomes operative when the proposed Louisiana Constitution Art. VII amendment, as originated in HB 234 from 2019, is adopted at a statewide election to be held on Oct. 12, 2019 and becomes effective. La. Laws 2019, Act 432 (HB 301), signed by the governor on June 22, 2019.

COMPLIANCE & REPORTING

Nebraska: New law (LB 512) requires all S corporations, limited liability companies, and partnerships (collectively, PTEs) with Nebraska source income to file a Nebraska return for all tax years beginning on or after Jan. 1, 2019. This is a change from previous policy, which did not require a PTE to file a return if all of its shareholders, members or partners as the case may be, were Nebraska residents and all of its income was derived from Nebraska sources. The Nebraska Department of Revenue (Department) encourages PTEs to file returns using e-filing and reminds businesses that do not have the requisite Department-issued Nebraska state ID to apply for one by using the Department's Online Nebraska Tax Application. Neb. Laws 2019, LB 512, signed by the governor May 30, 2019; Neb. Dept. of Rev., Important Notice for Business Income Tax Licensing (June 25, 2019).

CONTROVERSY

California: On July 5, 2019, the San Francisco Superior Court (court) upheld the legality of San Francisco's commercial rent tax and homelessness tax, both of which were approved by voters in June and November 2018, respectively. The court ruled that the public — not lawmakers — placed these tax initiatives on the ballot and, therefore, they only required simple majorities to pass and not the more onerous two-thirds super-majority. For more on this development, see Tax Alert 2019-1382.

Missouri: New law (SB 87 ) extends the statute of limitations to 10 years (from three years) for claiming a refund of sales and use tax that has been erroneously or illegally collected or computed. This change applies to claims filed after August 28, 2019. Mo. Laws 2019, SB 87, signed by the governor on July 11, 2019.

PAYROLL & EMPLOYMENT TAX

Texas: The city of San Antonio, Texas announced that the effective date for its paid sick leave ordinance (originally Aug. 1, 2019) has been delayed to Dec. 1, 2019. As previously reported, a San Antonio business coalition sued to stop the city's paid sick leave ordinance from taking effect on Aug. 1, 2019. Further, news sources are reporting that a court challenge to the Dallas paid sick leave ordinance, scheduled to take effect Aug. 1, 2019, is forthcoming. The Dallas ordinance mirrors San Antonio's ordinance. For more on this development, see Tax Alert 2019-1376.

Washington: The Washington Employment Security Department announced that due to a 5.5% increase in the average annual wage for 2018, the state unemployment insurance (SUI) taxable wage base will increase to $52,700 for calendar year 2020, up from $49,800 which applies in 2019. The Department also announced that effective with new claims filed on or after July 1, 2019, the minimum weekly unemployment benefit amount, calculated at 15% of the average weekly wage for 2018, will increase by $10 to $188, and the maximum weekly unemployment benefit amount, calculated at the greater of $496 or 63% of the 2018 average weekly wage, will increase by $41 to $790. For more information on this development, see Tax Alert 2019-1388.

MISCELLANEOUS TAX

Arizona: The U.S. Supreme Court (Court) has been asked to review the Arizona Supreme Court ruling upholding the constitutionality of the car-rental surcharge enacted by Maricopa County to generate revenue to pay for a sports stadium and other sports- and tourism-related ventures. The questions presented to the Court are: "(1) Whether a car-rental tax designed to foist a disproportionate share of the tax's burden onto nonresidents is nonetheless immune from dormant Commerce Clause scrutiny simply because the tax is assessed on the companies that rent the cars rather than the nonresidents who are the ultimate target for the tax. (2) Whether evidence that a tax was intended to impose a disproportionate burden on nonresidents is relevant in determining whether a statute imposes an impermissibly discriminatory design." Saban Rent-A-Car LLC, et al. v. Ariz. Dept. of Rev., No. CV-18-0080-PR (Ariz. S.Ct. Feb. 25, 2019), petition for cert. filed, Dkt. No. 19-136 (U.S. S.Ct. filed July 25, 2019).

Connecticut: On June 26, 2019, Connecticut Governor Ned Lamont signed into law the state's fiscal 2020–2021 budget bill (HB 7424) (the bill). Notable changes in the bill include: (1) expanded sales and use tax nexus provisions; (2) an increase to the sales and use tax rate on digital goods and certain computer software; (3) expansion of the state's sale tax base to include certain services; (4) an extension of the corporate surcharge; (5) the phase-out of the capital base tax; (6) a modification to the corporation business credit cap; and (7) a modification to the pass-through entity tax. For more on these and other changes, see Tax Alert 2019-1377.

Missouri: New law (SB 87) imposes annual license renewal fees and annual operation fees on fantasy sports contest operators. The annual license fee, which is based on net revenue of the operators from the prior calendar year, are: (1) $5,000 for those with net revenues of $2 million or more; (2) $2,500 for those with net revenues of more than $1 million and less than $2 million; and (3) $1,000 for those with net revenues of greater than $250,000 and up to $1 million. No license fee applies for a fantasy sports contest operator with less than $250,000 in net revenues. In addition, the annual operation fee paid by licensed operators is reduced to 6% (previously 11.5%) of their net revenue from the previous calendar year (prorated if an operator's fantasy sports contests are not offered in Missouri for the entire year). The fees are due by Nov. 1 of each subsequent calendar year. SB 87 takes effect Aug. 28, 2019. Mo. Laws 2019, SB 87, signed by the governor on July 11, 2019.

GLOBAL TRADE

Federal: On Aug. 1, 2019, President Trump announced via Twitter that the United States (US) will impose a 10% punitive tariff on US$300b of Chinese origin goods (List 4). As stated, the tariffs will be set to go into effect Sept. 1, 2019. Further, Section 301 duties at a rate of 25% are currently in place for the initial $250b of China origin goods imported annually to the US, identified on three specific lists of products. A process for requesting exclusions exists for importers that meet certain criteria. The United States Trade Representative (USTR) recently announced exclusions for Lists 2 and 3; this is the first exclusion announcement from the USTR for both List 2 and List 3 to date as the agency continues to review company requests for relief from the punitive tariffs. Additionally, on Aug. 2, 2019, the US and the European Union (EU), signed an agreement easing EU market access for the US beef industry by way of an increased duty-free tariff rate quota. For more information on this development, see Tax Alert 2019-1424.

VALUE ADDED TAX

International: The Cyprus Tax Department (CTD) released Circular 235 to clarify a number of significant aspects of legislation amending the Value Added Tax (VAT) treatment of vouchers. Aspects discussed include: (i) the categories of vouchers affected; (ii) coupons not constituting vouchers; (iii) single and multi-purpose voucher distinctions; (iv) timing of VAT accounting; and (v) implications for intermediary sellers and purchasers. For additional information on this development, see Tax Alert 2019-1392.

International: The President of Namibia has declared a State of Emergency in Namibia due to the prevailing drought that exists in all regions of the country. The Minister of Finance, Honorable Calle Schlettwein, in turn has announced in a media statement on July 22, 2019 that the import of certain goods will not be subject to import value-added tax on the importation of such goods by farmers. For additional information on this development, see Tax Alert 2019-1408.

International: Nigeria's Court of Appeal (Court) delivered a judgment on June 27, 2019 upholding the judgment of the Federal High Court (FHC) in the case of Vodacom Business Nigeria Limited (VBNL) vs. Federal Inland Revenue Service (FIRS) on the imposition of value added tax (VAT) on services rendered by a nonresident company.The Court, deciding in favor of the FIRS, ruled that where goods and services were exchanged for consideration in line with Section 2 of the VAT Act, and where such goods and services do not fall within the list of exempt goods and services as specified in the First Schedule to the Act, such transactions should be liable to VAT. For additional information on this development, see Tax Alert 2019-1391.

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.

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ENDNOTES

¹ Draft N.Y. Comp. Codes and Regs., tit. 20, §§ 4-2.3 and 4-2.18; see Tax Alert 2019-1311.

² See N.Y. Comp. Codes and Regs., tit. 20, Part 3, Subpart 3-13.

³ While the New York City Department of Finance has not yet issued its own version of draft regulations on these topics, it has indicated on its website that taxpayers may rely on the Tax Department's draft regulations by substituting the City for the State where necessary and disregarding provisions that do not correspond to New York City Admin. Code tit. 11, ch. 6, sub. 3-A.

⁴ The initial notice stated a comment deadline of Aug. 19, 2019, however, EY has confirmed with the FTB that the intended deadline is Sept. 19, 2019.

⁵ Century Aluminum of Ky., GP v. Ky. Fin. and Admin. Cabinet, Dept. of Rev., Consolidated File No. K17-R-39; Final Order No. K-25903 (Ky. Claims Comn. March 27, 2019). This ruling addressed issued identical to those considered in this case.