21 August 2019 State and Local Tax Weekly for August 9 Ernst & Young's State and Local Tax Weekly newsletter for August 9 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. Massachusetts budget bill establishes economic nexus provisions for marketplace facilitators, adopts new threshold The fiscal year 2020 budget bill (H. 4000) (the bill) signed into law July 31, 2019, expands the scope of Massachusetts's sales and use tax law to include marketplace facilitators, marketplace sellers, and remote retailers, and sets a threshold for registration which differs from the one set by the Massachusetts Department of Revenue (Department) in 830 CMR 64H.1.7. In its regulation, the Department asserted nexus over out-of-state internet vendors if they recorded in excess of $500,000 in Massachusetts sales from transactions completed over the internet and made sales resulting in a delivery into Massachusetts in 100 or more transactions in the preceding calendar year. Effective Oct. 1, 2019, the threshold established under the bill requires remote retailers and marketplace facilitators to register for and collect and remit Massachusetts' sales and use tax if their sales within the Commonwealth in the prior or current tax year exceed $100,000. In determining whether the threshold has been met, a marketplace facilitator (remote and non-remote) is required to include its direct sales as well as any other sales facilitated on behalf of a marketplace seller. The bill further requires marketplace facilitators to collect and remit Massachusetts sales tax on its direct sales and those it facilitates on behalf of marketplace sellers to Massachusetts customers. A marketplace facilitator, however, can request a waiver from these requirements, at the Department's discretion, if certain criteria set forth in the bill is met. The Department also may grant a waiver to allow marketplace sellers to collect and remit applicable taxes on sales of telecommunications services. A marketplace facilitator will be relieved of liability for the incorrect collection and remittance of tax if such error is due to reasonable reliance on an invalid exemption certificate provided by the marketplace seller, incorrect information provided by the Commonwealth, or incorrect information provided by the marketplace seller or purchaser regarding the tax classification and proper sourcing of an item, provided the marketplace facilitator tried to obtain the correct information from the seller/purchaser. Lastly, the bill defines key terms, such as "marketplace", "marketplace facilitator", "marketplace seller", "remote marketplace facilitator", "remote marketplace seller", "remote retailer", and modifies the definition of "engaged in business in the Commonwealth". Pennsylvania updates marketplace seller provisions, conforms to federal opportunity zone benefits, modifies various credits Pennsylvania's recent budget bill (HB 262) (bill) makes various changes to Pennsylvania's tax laws. The bill updates the Commonwealth's sales and use tax marketplace provider and marketplace seller provisions in response the U.S. Supreme Court's ruling in South Dakota v. Wayfair, Inc. which eliminated the physical presence standard as a requirement under the Commerce Clause.1 Specifically, the bill expands the definition of "maintaining a business in this Commonwealth" to provide that: "engaging in any activity as a business by any person either directly through a subsidiary, representative or an agent, in connection with the lease, sale or delivery of tangible personal property into [Pennsylvania] or the performance of services for use, storage or consumption or in connection with the sale or delivery for use in [Pennsylvania] of at least … $100,000 during the preceding [12]-month calendar period." Marketplace facilitators, in determining whether the threshold is met, are required to include all sales, leases and deliveries of tangible personal property and sales of services it facilitates on behalf of marketplace sellers on its forum. The bill defines "marketplace facilitators" and "marketplace sellers" and adds these terms to the definitions of "taxpayer" and "vendor". A marketplace facilitator is relieved of liability for failing to collect the correct amount of tax due if it can show that such failure was due to incorrect information provided to it by a marketplace seller. Additionally, a marketplace seller is relieved of liability if the marketplace facilitator certifies to the seller that it will collect, report and remit the tax (unless the seller provides incorrect information). The elective notice and reporting provisions under prior law have been suspended as of July 1, 2019. These changes apply to sales occurring after June 30, 2019. The bill also conforms Pennsylvania's income tax laws to the new federal tax law provisions relating to federal opportunity zones. The new federal law allows investors to defer the recognition of certain capital gains if the investors make investments in these federally designated opportunity zones. The bill provides for tax years beginning after Dec. 31, 2019 that an investor's net gains, net losses, and dividends for Pennsylvania income tax purposes excludes gains, income, and losses excluded from federal income taxation under IRC Section 1400Z-2. Net gains or net income, less net losses, that were excluded under these provisions will be included in income to the extent these amounts are included in gross income under IRC Section 1400Z-2(B). IRC Section 1400Z-2(C) applies to the computation of net gains or net income and net losses. In addition, the bill modifies Pennsylvania's manufacturing innovation and reinvestment deduction program by lowering the threshold to qualify for the deduction to private capital investment to in excess of $60 million (from $100 million) for the creation of new or refurbished manufacturing capacity within three years of a designated start date. The maximum allowable deduction when the investment is more than $60 million but less than $100 million is set at 37.5% of the private capital investment used in the creation of new or refurbished manufacturing capacity. Taxpayers can use the deduction in an amount not to exceed 7.5% of the private capital investment used in the creation of new or refurbished manufacturing capacity in any one year of the succeeding 10 years, up to the maximum allowable deduction. If the investment is more than $100 million, the maximum allowable deduction is reduced to 25% and the amount that a taxpayer can use as a deduction is reduced to 5%. Lastly, the time-period to use the maximum allowable deduction is extended to 10 years (from five years). These changes apply to tax years beginning after Dec. 31, 2019. The bill also modifies various Pennsylvania tax credit provisions including: (1) the new jobs tax credit (no credit allowed after June 30, 2020); (2) the rural jobs and investment tax credit (reduces the size of a rural business to less than 150 employees (from 250), increases the annual cap, among other changes); (3) keystone opportunity zone (allows designation additional zones, county application must be submitted by Oct. 1, 2021); (4) mixed-use development tax credit (increases cap); (5) historic preservation incentive tax credit (extend to 2031, allow a purchaser or assignee of the credit to carryover unused credit to the succeeding seven tax years, increase annual cap, among other changes); (6) the coal refuse energy and reclamation tax credit (extends through 2036, increases the cap); (7) film production credit (adds purchases of music rights, increases cap, allows credit to be sold or assigned to a purchaser or assignee included in the same federal consolidated tax return permitted under IRC Sections 1501 and 1502, among other changes); and (8) resource enhancement and protection tax credit (increases cap, amends definition).
Florida: Following the state's adoption of the IRC in effect as of Jan. 1, 2019 (Ch. 2019-168, Fla. Laws 2019), the Florida Department of Revenue (Department) issued guidance on how certain sections of the IRC affected by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) flow into the Florida corporate income/franchise tax return. In general, Florida follows the federal treatment of net operating losses (NOLs) in the same manner, to the same extent, and in the same time periods as provided in IRC Section 172, but with some modifications. For NOLs generated in tax years beginning after Dec. 31, 2017, Florida follows the TCJA's unlimited NOL carry forward provision and the 80% income limitation on the use of any NOL deduction. Like the TCJA, Florida does not allow NOLs be carried back but unlike the TCJA, Florida does not allow certain insurance and farming businesses to carry back NOLs. With respect to the 30% limitation on net interest deductions under IRC Section 163(j), the Department explained that when the Florida filer is the same as the federal filer, no separate interest limitation is computed for Florida corporate income tax purposes, but if the Florida and federal filers are different the interest limitation must be computed for Florida corporate income tax purposes as if the Florida filer had filed a federal income tax return on a separate company basis. Disallowed interest expense can be carried forward indefinitely. The Department suggests that taxpayers maintain a schedule of disallowed interest that includes information substantiating the amount of interest and the amount carried over. Florida provides a subtraction for net GILTI under IRC Sections 951A and 250. Adjustments are not required for the following: foreign-derived intangible income (FDII) under IRC §250, the deduction for the foreign-source portion of dividends received under IRC Section 245A, or federal amounts subject to base erosion and anti-abuse tax (BEAT) under IRC Section 59A. Florida also follows the treatment of like-kind exchanges, thus recognition of gain or loss flows through to the Florida corporate income/franchise tax return the same way it does for federal income tax purposes. Some taxpayers may need to file amended returns so that their returns are consistent with this guidance. Fla. Dept. of Rev., TIP No. 19C01-01 (July 31, 2019). Florida: The Florida Department of Revenue (Department) issued guidance on the state's adoption of the IRC in effect as of Jan. 1, 2019 and adjustments that must be made to federal taxable income (FTI) in computing Florida taxable income as required by Ch. 2019-168 (Fla. Laws 2019). Florida law requires add back of amounts deducted as bonus deprecation under IRC Section 168(k) for assets placed in service before Jan. 1, 2027. Taxpayers can subtract the amount added back over a seven-year period, in an amount equal to one seventh of the addition (beginning with the tax year of the addition). Retroactive to tax years beginning Jan. 1, 2018, and applicable to any tax year beginning thereafter, Florida law provides a subtraction from FTI for amounts of included global intangible low-taxed income (GILTI) under IRC Section 951A. The subtraction is net of direct and indirect expenses related to GILTI, and net of the GILTI deduction under IRC Section 250. The Department also clarified that the foreign source subtraction for amounts included in FTI under IRC Sections 78, 862, 951 and 951A, are allowed only to the extent such amounts are not deductible in determining the taxpayer's FTI. This clarification is retroactive to Jan. 1, 2018. Fla. Dept. of Rev., TIP No. 19C01-02 (July 31, 2019). Missouri: New law (SB 174) permits certain interest to be subtracted from Missouri adjusted gross income (AGI) and repeals a tax credit for banking institutions. Specifically, a taxpayer in computing Missouri AGI is required to subtract from federal AGI interest received on deposits held at a federal reserve bank. Additionally, for tax years beginning on or after Jan. 1, 2020 the tax credit for banking institutions against bank tax or corporate income tax on outstanding shares and surplus employed in Missouri exceeding $1 million is repealed. SB 174 takes effect Aug. 28, 2019. Mo. Laws 2019, SB 174, signed by the governor on July 11, 2019. West Virginia: New law (HB 113) provides personal and corporate income tax breaks for investments made in a qualified opportunity zone (QOZ) business2 located in West Virginia. In general, individual and corporate taxpayers can reduce their federal adjusted gross income (AGI) and federal taxable income (FTI), respectively, in an amount equal to the portion of net income included in AGI/FTI that is directly (individuals)/ordinary income (corporations), derived from a QOZ business located in a West Virginia QOZ. The adjustment made by a partner, member, or shareholder of a pass-through entity (PTE) is based on its distributive share attributable to the flow-through income directly derived from a QOZ business located in a West Virginia QOZ. To be eligible for the modification, the QOZ business must be a newly registered business on or after Jan. 1, 2019 and before Jan. 1, 2024. The modification applies for a 10-year period beginning with the first full tax year the QOZ business first qualifies as such or the first year in which it reports net income, provided that the QOZ business first qualifies as such on or after Jan. 1, 2019. New entitlements to the modification will not be authorized after Jan. 1, 2024. Provisions of HB 113 take effect Sept. 22, 2019. W. Va. Laws 2019 (1st Extra. Sess.), HB 113, signed by the governor on June 28, 2019. Iowa: The Iowa Department of Revenue (Department) issued guidance to explain when a food delivery service may be a marketplace facilitator. Beginning Jan. 1, 2019, businesses that meet the marketplace facilitator definition must collect and remit Iowa sales tax and applicable local option sales tax for sales made or facilitated on the business's marketplace if the business receives $100,000 or more in gross revenues from the sales. A marketplace facilitator is a business that provides infrastructure or support for retail sales to occur and collects the sales price, processes payments, or receives compensation from the retail sale. An online food delivery service company "likely qualifies" as a marketplace facilitator if it allows customers to order food and handles the payment for the customer. The Department's guidance provides examples illustrating potential situations encountered by various businesses and when they are and are not required to collect tax as marketplace facilitators. Iowa Dept. of Rev., Food Delivery Services as Marketplace Facilitators (Aug. 1, 2019); IDR State Tax Reform Updated Guidance: Food Delivery Services (Aug. 2019). New Hampshire: New law (SB 242) requires foreign taxing jurisdictions to provide written notice to the New Hampshire Department of Justice (DOJ) at least 45 days before taking any action to determine or impose sales or use tax liability against a New Hampshire remote seller. New Hampshire remote sellers should notify the DOJ of a foreign taxing jurisdiction's first request for any private customer transaction information for use in determining the customer's sales and use tax liability or for use in the determination, collection, and remittance of sales and use tax by the seller. The law also requires the establishment of a commission that will monitor changes in federal and state law and actions concerning the imposition of tax collection obligations. The commissioner will report its findings by Nov. 1, 2020. These provisions took effect upon becoming law. N.H. Laws 2019, Ch. 280 (SB 242), signed by the governor on July 19, 2019. South Carolina: The South Carolina Department of Revenue (Department) determined that a company's charges for survey providing service are not subject to sales and use tax because the true object of the transactions is the provision of nontaxable professional services when the company develops surveys tailored to each client, conducts the surveys, gathers data from outside sources, analyzes that data, and provides results, insights and solutions based on the data to clients. Further, the part of the company's charges for giving clients online access to its reporting software is incidental to the provision of nontaxable professional services. In addition, the Department concluded that the company does not provide a taxable communication service. S.C. Dept. of Rev., SC Private Letter Ruling No. 19-1 (June 13, 2019). Minnesota: In two separate cases regarding how to calculate the Minnesota research and development (R&D) tax credit for the 2011 tax year, the Minnesota Supreme Court (Court) held that state law incorporates the minimum base amount limitation provisions under federal law and requires the entities claiming the credit to compute the Minnesota "base amount" using nationwide gross receipts rather than Minnesota gross receipts in the denominator of the fixed-base percentage. In so holding, the Court found that based on the state and federal statutes as well as the legislative history, the state statute incorporates the "minimum base amount" provided in IRC Section 41(c)(2) to calculate the Minnesota R&D credit. Regarding how to compute the Minnesota base amount, the Court determined that based on the plain language of Minn. Stat. Section 290.068, subd. 2(c) in effect for the period at issue, the state legislature did not alter the definition of "aggregate gross receipts" to refer exclusively to Minnesota gross receipts. Thus, the Minnesota base amount must be computed using federal aggregate gross receipts in the denominator. It's worth noting that in 2017, the state legislature amended Minn. Stat. Section 290.068 to include a Minnesota-specific limitation of aggregate gross receipts. General Mills, Inc. v. Minn. Comr. of Rev., No. A18-1660 (Minn. S.Ct. July 31, 2019); Int'l Bus. Machines Corp. and Subs. v. Minn. Comr. of Rev., No. A18-1740 (Minn. S.Ct. July 31, 2019). Oregon: New law (HB 2699) provides that property granted benefits under a brownfield incentives program adopted by a local government may receive any other special assessment, exemption, or partial exemption for which the property is eligible. The total amount of such incentives may not reduce the taxpayer's property tax liability below zero. These changes apply to property tax years beginning on or after July 1, 2020. Ore. Laws 2019, Ch. 492 (HB 2699), signed by the governor on June 25, 2019. Oregon: New law (HB 2141) establishes uniform procedures for transferring personal income and corporate income and excise tax credits on or after Jan. 1, 2020. These procedures address, among other items: (1) when a transferor and a transferee are required to provide notice of the credit transfer, (2) information required in the notice, (3) amount of the certified credit being transferred and retained by the transferor, and (4) when the transfer must be completed. If a credit must be claimed over multiple years, a transferor may separately transfer the part that corresponds to each tax year to one or more transferees, subject to certain requirements. Credit that would be allowed due only to carryforward provisions cannot be transferred. The Oregon Department of Revenue (Department) may establish policies and procedures for implementing these provisions. Lastly, the agency certifying the credit (or otherwise determining eligibility or granting approval of the credit) may suspend, revoke, or forfeit a tax credit approval in certain circumstances. If this occurs, the Department can collect unpaid taxes related to such credit, plus interest. Further, a certificate (or portion thereof) held by a transferee may not be considered revoked for purposes of the transferee, the tax credit allowable to the transferee may not be reduced, and the transferee is not liable for unpaid tax. HB 2141 takes effect Sept. 29, 2019. Ore. Laws 2019, Ch. 483 (HB 2141), signed by the governor on June 25, 2019. Philadelphia, Pa.: The Philadelphia County Court of Common Pleas (Court) has ruled that the City of Philadelphia's 2018 reassessment of over 700 commercial and industrial properties at current market value while not reassessing residential properties violated the Pennsylvania Constitution's Uniformity Clause and state law. Consequently, these assessments were invalidated as applicable to real estate taxes. Affected assessments must be reset to the tax year 2017 assessment; affected taxpayers are entitled to refunds based on the difference between the stricken and reinstated assessments, plus interest, with refunds being due and payable by July 1, 2021. In reaching these conclusions, the Court found that all taxable real estate in a jurisdiction must be treated as a single class entitled to uniform treatment, and one property sub-classification cannot be treated differently from others. Additionally, the Court concluded that the Philadelphia City Council's desire and demand for revenue from a reassessment of targeted commercial properties was a substantial motivating factor for the reassessment, and the city could not justify its differential treatment of taxpayers through an attempt to equalize the quality of real estate assessments of properties subject to the real estate tax or by the government's desire to raise more revenue. Duffield House, L.P., et al. v. City of Philadelphia, et al., Consol. Case Nos. 170902005, 170903155, 170903156, 170903464, 170903473, 170903726, 171000437, 171101838, 171202872, 180104365, 180105379, and 180400793 (Phil. Cnty. Ct. of Common Pleas July 17, 2019). Virginia: In reversing a circuit court ruling, the Virginia Supreme Court (Court) held that the Augusta County Circuit Court (circuit court) erred in upholding the county's tax assessments against a company that manufactures food for tax years 2011 through 2014 because the appraisers for the county improperly applied valuation methodologies, making the resulting assessments ineligible for a presumption of correctness. The Court, citing Keswick and HCA Health Servs.,3 found that for the 2011 assessment (to which a previous version of Va. Code Section 58.1-3984 applied) and the 2012–2013 assessments (governed by revised Va. Code Section 58.1-3984(B)), the appraiser's failure to use any of three accepted valuation methods meant that the assessment was not entitled to a presumption of correctness. Therefore, the circuit court should have applied a less stringent standard of review (considering whether the county's assessment was erroneous, rather than whether the county committed manifest error or disregarded controlling evidence in making its assessment). Further, for the 2014 assessment, the appraiser applied the cost approach without sufficiently attempting to gather the necessary data to use the income or sales valuation approaches (by not searching for comparable sales for food processing plants outside the eastern US region, or for rental data outside Augusta County, and possibly by limiting the potential comparable sales by only considering special use food processing plants). Therefore, the 2014 assessment was not entitled to a presumption of correctness. The Court remanded the matter for a new trial, consistent with the Court's holding, or a review of the existing record under the proper standard of review, based on the circuit court's discretion. McKee Foods Corp. v. Cnty. of Augusta, No. 180521 (Va. S.Ct. July 18, 2019). Kentucky: The Kentucky Department of Revenue (Department) issued a revenue procedure to explain the types of procedural guidance that it will issue to assist taxpayers and Department personnel in following and complying with the state's law. Types of guidance the Department will issue include technical advice memorandums, revenue procedures, private letter rulings, and general information letters. The Department explained that "[t]his guidance is issued in order to help taxpayers understand [the Department's] opinions concerning tax liability matters and to help ensure consistent application of the tax laws and regulations by all [Departmental] employees." The Department further noted that this guidance "while persuasive, are not regulations and do not have the force or effect of law." The Department's release describes each type of guidance, the reasons why such guidance would or would not be issued, how to request guidance (including the information that must be contained in the request), its procedures for issuing such guidance, and public disclosure of information and use of guidance. This revenue procedure takes effect Oct. 1, 2019. Ky. Dept. of Rev., Revenue Procedure KY-RP-19-03 (July 26, 2019). Delaware: New law (HB 198) freezes the Delaware state unemployment insurance (SUI) taxable wage base at the current $16,500 for 2020 (under the bill language from July 1, 2019 to Oct. 29, 2020). As a result of this legislative action, the Division of Unemployment Insurance and the Unemployment Compensation Advisory Council may determine whether the formula used to calculate the annual figure should be revised. For more information on this development, see Tax Alert 2019-1427. Pennsylvania: On July 17, 2019, the Pennsylvania Supreme Court (Supreme Court) overturned a decision of the Allegheny County Court of Common Pleas that the City of Pittsburgh's Paid Sick Days Act (PSDA) is invalid and unenforceable. Instead, the Supreme Court held that PSDA does not exceed the limitations of the qualified statutory preclusion of local regulations that burden business. According to a representative of Pittsburgh's Office of the City Controller, the decision is under review and the office will release further information in the future, including the effective date by which Pittsburgh employers must start complying with the ordinance. For additional information on this development, see Tax Alert 2019-1428. Multistate: On Aug. 27, 2019, from 2:00 — 3:00 p.m. ET, Ernst & Young LLP will host a webcast discussing recent state and local tax (SALT) developments which have significantly affected the real estate industry. While the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) contained many provisions that resulted in decreases to the US federal income tax burden for the real estate sector, the industry should be aware of significant SALT changes because of TCJA conformity that could result in increases to the sector's cost of doing business in certain state and local jurisdictions. Topics that will be discussed during the webcast include: (1) TCJA conformity, including recent California conformity legislation, (2) unique tax regimes (e.g., Oregon's Corporate Activity Tax, partnership entity taxes), (3) economic nexus and market-based sourcing developments, (4) the proposed ballot initiative in California which would effectively create a "split roll" for property tax purposes that could adversely affect commercial ownership of property in the state, and (5) transfer tax increases, including those enacted in New York and Washington. To register for this event, go to State & local tax developments in the real estate industry. Federal/Multistate: On Aug. 29, 2019 from 1:00 p.m. — 2:00 pm (ET), Ernst & Young LLP will host a webcast providing a federal and state Affordable Care Act (ACA) reporting update for employers. Although the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) effectively repealed the individual mandate starting with calendar year 2019, there are no changes to the employer mandate provision or reporting requirements. With the end of the federal individual mandate penalties, states and local jurisdictions are looking to fill the gap with their own individual mandates. New Jersey, Vermont and Washington, DC have passed individual mandate legislation last year with California and Rhode Island joining the list this year. Other states and local jurisdictions continue to consider enacting similar legislation. Additionally, the IRS is issuing assessments in full force (226J letters) with short deadlines for employers to respond. Join our panel of EY professionals for a discussion of how your business might appropriately navigate the increasing complexity and challenges of ACA reporting. Topics to be discussed include: (1) the latest on federal legislation and why the ACA is still important to your business, (2) state mandates and the variety of rules that are increasing compliance complexity, (3) potential penalties and costs related to IRS inquiries and audit assessments, (4) considerations regarding the impact of mergers and acquisitions on reporting, and (5) opportunities for cost and cash savings from ACA data collection. To register for this event, go to The Affordable Care Act. 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. 2 The terms "qualified opportunity zone business" and "qualified opportunity zone" have the same meaning as the terms are defined in IRC §§ 1400Z-2 and 1400Z-1, respectively. 3 Keswick Club, LP v. County of Albemarle, 273 Va. 128 (2007); Board of Supervisors v. HCA Health Services, 260 Va. 317 (2000). Document ID: 2019-1500 |
