16 August 2019 State and Local Tax Weekly for August 16 Ernst & Young's State and Local Tax Weekly newsletter for August 16 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. New York Tax Appeals Tribunal classifies online litigation support as other business receipts, sourced to location where the receipts were earned based upon prior statute In In the Matter of the Petition of Catalyst Repository Systems, Inc.,1 the New York Tax Appeals Tribunal (Tribunal) determined that an out-of-state corporation's receipts from online litigation support are not derived from the sale of a service but rather are for the license to use a technologically advanced tool (an intangible). As such, these receipts are properly classified as other business receipts (OBR) and based on the law2 applicable for the years at issue (2008 - 2010)3 are sourced to the location where the income was earned, in this case Colorado. Although the Tribunal reached the same outcome as the Administrative Law Judge (ALJ) of the New York Division of Tax Appeals (i.e., the ALJ sourced the receipts to Colorado too) it did so on different grounds. The Tribunal rejected the ALJ's determination that these receipts were derived from the sale of a service and, consequently, did not use the same sourcing method as the ALJ, which sourced the receipts to the location where the services were performed. The Tribunal's determination in this case is precedent and cannot be appealed by the Division of Taxation of the New York State Department of Taxation and Finance (Division). Accordingly, taxpayers charging a fee for the right and license to use a technologically advanced tool to New York State and City customers from outside of the State and/or City should review the Tribunal's determination as it may offer a basis for filing a claim for refund for New York State and City corporate income (franchise) tax purposes for tax years beginning before January 1, 2015 as long as the applicable statute of limitations on refunds is open (generally three years from the date of filing). Further, taxpayers that filed a protective refund claim based on the ALJ's finding that the receipts were derived from the sale of a service, should review the Tribunal's ruling and consider their procedural options, including whether their appeal should reflect the conclusions in the Tribunal's decision in this case. For additional information on this development, see Tax Alert 2019-1452. Oregon: New law (SB 212) makes the personal income tax rate cuts and various education program provisions included in HB 3427 (enacted on May 16, 2019) contingent upon the corporate activity tax becoming law by March 1, 2020. Ore. Laws 2019, Ch. 176 (SB 212), signed by the governor on July 23, 2019. Tennessee: The Tennessee Department of Revenue (Department) issued guidance on the computation of the business interest expense limitation under IRC §163(j) for Tennessee excise tax purposes (Notice). The Notice points out that Tennessee couples to the IRC §163(j) limitation for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2020 (conformity years) and decouples from the provision for tax years beginning on or after Jan. 1, 2020. During the conformity years, the Notice instructs Tennessee taxpayers that are members of a federal consolidated group (group) that they should allocate on a pro rata basis the group's allowed business interest expense deduction among the group members that had business interest expense during the tax year. For excise tax purposes, a member's business interest expense deduction is the sum of its intercompany interest expense paid or accrued plus its allocation of the group's federal interest expense deduction. The Department has developed a worksheet for making this computation. (The Notice lists the information necessary to complete the worksheet.) In addition, for the conformity years, a group member should allocate the group's carryforward of business interest expense for its 2018 and 2019 tax years in the same manner as it computes the allocation of the group's interest expense deduction. The Department is working on guidance for the use of such carryforwards in subsequent years. Tenn. Dept. of Rev., Franchise and Excise Tax Notice #19-18 (Aug. 2019). Washington: The Washington State Court of Appeals recently affirmed that Seattle's 2017 ordinance instituting a local income tax on high earners' income is unconstitutional because it is a graduated income tax. However, in a surprise twist, the high court also ruled that the 1984 Act (Ch. 90) enacting Washington law (RCW 36.65.030) that bans local income taxes is also unconstitutional. This recent ruling opens the door for Seattle and other Washington localities, barring a state Supreme Court appeal, to enact a local flat income tax. This ruling sets the stage for a Washington Supreme Court showdown. In the conclusion, the opinion states, "Article VII, section 1 of [Washington's state] constitution, as interpreted by Culliton [NOTE: which was decided by the Washington Supreme Court in 1933], considers income to be intangible property, so a tax on income is a tax on property. Arguments to the contrary can be resolved only by [Washington's] Supreme Court." For more on this development, see Tax Alert 2019-1478. California: A telecommunications provider is not entitled to a sales and use tax refund on its purchase of completed telephone cables, conduit, and poles because these items are not excluded from the definition of tangible personal property under Cal. Rev. and Taxn. Code § 6016.5. In so holding, the California Court of Appeal for the Third Appellate District (Court) cited MCI4 (resolving identical issues in the Fourth Appellate District) and relied on the statute's plain language in finding that "[the statute] excludes only fully installed and completed telephone and telegraph lines from sales and use taxation, not the preinstallation component parts of such lines." Focusing on the meaning of "lines" from the tangible personal property exclusion, the Court concluded that a dictionary definition contemporaneous to when the exclusion was enacted in 1965 supported that preinstallation component parts are subject to sales and use tax. Additionally, the statute does not expressly exclude "component" parts of these lines. Verizon Cal., Inc. v. Cal. Dept. of Tax and Fee Admin., No. C084551 (Cal. Ct. App., 3d App. Dist., July 23, 2019) (not to be published). Nevada: The Nevada Department of Taxation issued guidance on items that qualify as exempt durable medical equipment, oxygen delivery equipment, and mobility enhancing equipment, including replacement parts, under SB 447, which took effect July 1, 2019. To be exempt from sales and use tax, these items must be prescribed for human use by a licensed health care provider acting within their scope of practice. Durable medical equipment includes abduction and orthotic pillows, anesthesia ventilators, bone growth stimulators, dialyzers, enteral feeding systems, drug infusion devices, and kidney dialysis machines. Oxygen delivery equipment includes tanks and concentrators, ventilators, nebulizers, oral-nasal cannulas, and continuous positive airway pressure machines. Lastly, mobility enhancing equipment includes wheelchairs, walkers, canes, crutches, mobility enhancing car seats for children with disabilities, and swivel seats for persons with disabilities. Nev. Dept. of Taxn., SB 447 Exempts Sales of Certain Medical Equipment (July 2019). North Carolina: New law (SB 523) makes various changes to North Carolina's sales and use tax provisions. Effective for sales occurring on or after Oct. 1, 2019, the sales tax on certain digital property is modified by eliminating the requirement that these items have a tangible equivalent in order to be subject to tax. Rather, the law defines "certain digital property" as audio works, audiovisual works, books, magazines, newspapers, newsletters, reports, or other publications, or photographs or greeting cards. The term does not include information services. The law further provides that the sales price at retail of repair, maintenance, and installation (RMI) services to tangible personal property or certain digital property is subject to tax at the general rate, regardless of whether an underlying item is subject to a different tax rate. In addition, under the new law RMI services provided by a real property manager under a property management contract are subject to sales and use tax in certain circumstances, including: (1) when RMI services are provided for an additional charge; (2) the real property manager arranges for a third party to provide RMI and imposes an additional contract amount or charge to arrange them; and (3) more than 25% of the time spent managing the real property for a billing or invoice period is attributable to taxable RMI services. Certain RMI services are not subject to sales and use tax (e.g., troubleshooting a problem and inspecting/monitoring the real property). A person may substantiate that RMI services are not taxable real property management services. The law provides a grace period, under which the North Carolina Department of Revenue will not assess any tax due for a filing period beginning on or after Jan. 1, 2019 and ending before Jan. 1, 2021, if the retailer did not collect sales tax on taxable RMI services (subject to exception). The law also does the following: (1) updates North Carolina's reference to the Streamlined Sales and Use Tax Agreement as amended as of Dec. 14, 2018 (previously, May 3, 2018); (2) modifies various sales and use tax exemption provisions, including for limited-service car washes and equipment (and attachments/repair parts) used to cut, shape, polish and finish rough cut stone for made-to-order countertops, walls or tubs (applies to sales made on or after Oct. 1, 2019); (3) clarifies that the tax on utilities (i.e., telecommunications service or ancillary service, video programming, electricity or piped natural gas, water or sewer service) applies to charges that are billed to a customer and are included in the gross receipts derived from those services; among other changes. These provisions apply beginning July 26, 2019, unless noted otherwise. N.C. Laws 2019, SB 523, signed by the governor on July 26, 2019. Tennessee: The Tennessee Department of Revenue provided guidance on the sales tax treatment of fiber-optic cable. Legislation enacted in 20195 modifies the definition of tangible personal property for sales and use tax purposes to exclude fiber-optic cable after it has been attached to a utility pole, building, or other structure or has been installed underground, effective July 1, 2019. Thus, installation of fiber-optic cable is exempt from sales and use tax. In addition, the lease of fiber-optic cable is exempt if: (1) the lease is for "dark" fiber-optic cable (i.e., the lessor does not provide telecommunication services in connection with the lease); and (2) the lease is for fiber-optic cable that has already been attached to a utility pole, building, or other structure or installed underground. The purchase of fiber-optic cable before installation remains subject to sales and use tax, and a contractor that installs it is liable for contractor's use tax on the cable if sales or use tax was not paid on the original purchase. Tenn. Dept. of Rev., Important Notice No. 19-17 (Aug. 2019). Delaware: New law (SB 74) makes various amendments related to the eligibility for and the calculation of new economy jobs program credits. It replaces the formula for determining the "salary threshold" for eligible jobs with a set amount, currently set at $112,200 of Delaware sourced compensation paid to a common law employee, subject to an annual inflation adjustment. A qualified employer is eligible for the credit during its first certified year and for the 10 (from nine) taxable years afterward, and a qualified retained employer remains eligible during its first certified year and the next nine taxable years. SB 74 also allows a qualified employer to prorate job creation activity in the first certified year. Thus, the qualified employer will be eligible for the minimum credit percentage of 25% of qualified withholding payments on the compensation of the additional qualified employees or vital employees and for additional credits. Lastly, the law specifies when a qualified employer will be disqualified from the credit, when the Delaware Secretary of Finance (Secretary) may reverse a disqualification, when disqualified employers can submit new applications for the credit, and when the Secretary can reverse the grant of a credit and issue an assessment of the entire amount of unpaid tax, plus interest and penalties. SB 74 took effect July 17, 2019. Del. Laws 2019, SB 74, signed by the governor on July 17, 2019. Kansas: Beginning Aug. 28, 2019, an executive order issued by the Kansas Governor prohibits Kansas from using state-level economic development incentive programs to lure businesses with jobs currently located in Missouri border counties (Jackson, Platte, Clay, or Cass) to relocate to Kansas border counties (Johnson, Wyandotte, or Miami). Additionally, Kansas' state-level economic development incentive programs will be limited to the net new jobs created for any business or company relocating from Missouri border counties to Kansas border counties. The executive order is intended to satisfy a Missouri statute that places similar restrictions on incentives to lure businesses located in Kansas border counties to Missouri border counties. The two states' governors signed an agreement that provides additional details about how to carry out these provisions. Kan. Gov., Exec. Order No. 19-09, signed by the governor on Aug. 2, 2019. New York: In two separate cases regarding the taxability of certain fiber optic cables and accompanying equipment (hereafter, fiber optic installations), the New York Supreme Court, Appellate Division (Court) found that the communications company's fiber optic cables are subject to property tax as lines even though they do not conduct electricity. Further, the fiber optic installations are not exempt under a statutory exception for property used to transmit certain radio and television signals to the public. In reaching these conclusions, the Court rejected the company's argument that the fiber optic installations are not taxable because the installations to some unspecified extent are used to transmit news or entertainment radio, TV or cable TV signals for exhibition to the public. The Court reasoned that if the company's interpretation was accepted, the widespread use of cell phones to stream video and TV programming would result in all fiber optic cables qualifying for the tax exclusion. Instead, the Court determined that the "only reasonable construction" of the statute is that the exception applies only to cables that are exclusively or primarily used for the specifically enumerated exempt purposes. Here, the fiber optic installations are taxable property when they are primarily used as part of a cell phone system, and not for the transmission of news or entertainment radio, television or cable television signals for immediate, delayed, or ultimate exhibition to the public. Matter of Level 3 Comms., LLC, et al. v. Erie Cnty., et al., 2019 NY Slip Op. 05913 (N.Y. Sup. Ct., App. Div., 4th Dept., July 31, 2019); Matter of Level 3 Comms., LLC v. Chautauqua Cnty. et al., 2019 Slip Op. 05915 (N.Y. Sup. Ct., App. Div., 4th Dept., July 31, 2019). North Carolina: New law (SB 523) amends provisions related to the statute of limitations, finality of federal determination and refund claims, among others. SB 523 expands the exceptions to the general statute of limitations, permitting a taxpayer to seek an extension if the taxpayer is engaged in litigation or a state tax audit, or some other event, that prevents the taxpayer from filing an accurate and definite request for a refund of an overpayment. In both cases, the taxpayer must request the extension before the statute of limitations expires. Further, the law makes clear that a federal determination is final when it is not subject to administrative or judicial review. Audit findings by the IRS are deemed final when: (1) the taxpayer has received audit findings from the IRS for the tax period and the taxpayer does not timely file an administrative appeal with the IRS; or (2) the taxpayer consented to any of the audit findings for the tax period through a form or other written agreement with the IRS. SB 523 further provides that the state must issue a notice of a refund denial to taxpayers as applicable, in addition to a proposed denial of refund. Lastly, effective with refund requests made on or after Jan. 1, 2019, the manager of a business is prohibited from requesting a refund of an overpayment made on behalf of a nonresident owner or partner if that manager previously filed the return and paid the tax due. Instead, the nonresident owner or partner, on its own income tax return, will have to request the refund. These provisions took effect July 26, 2019, unless otherwise noted. N.C. Laws 2019, SB 523, signed by the governor on July 26, 2019. District of Columbia: The District of Columbia's Office of Tax and Revenue (OTR) has issued new guidance on employer reporting requirements in light of the District's adoption of the health insurance mandate, effective for calendar year 2019.For more on this development, see Tax Alert 2019-1467. Oregon: New law (HB 2005) creates a state paid family and medical leave insurance (FMLI) program to be funded by both employers and employees. Employers with less than 25 employees are exempt from paying the employer contribution. Self-employed individuals may opt into the state FMLI program. Ore. Laws 2019, HB 2005, signed by the governor Aug. 9, 2019. For more on this development, see Tax Alert 2019-1458. Washington: The Washington Department of Revenue (Department) issued a special notice explaining the change to the advertising deduction for radio and television broadcasting. Effective July 28, 2019, radio and television broadcasting stations can compute the business and occupation (B&O) tax deduction for network, national, and regional advertising revenues using either: (1) the standard deduction, once published by the Washington Department of Revenue (Department); or (2) as an itemized deduction, excluding the network, national, and regional advertising revenue. The Department will publish the amount of the standard deduction, which is based on the national average of network, national, and regional advertising revenue as reported by the US Census Bureau's Economic Census, by Sept. 30, 2020, with an update published on Sept. 30 every five years. Broadcasting stations must continue to itemize their deduction until the standard deduction is published, and then may choose between the standard deduction or itemizing. Additionally, a broadcasting station must exclude the portion of revenue from its out-of-state audience, calculated as a ratio to the broadcasting station's total audience. Lastly, the Department listed the minimum signal strength contours used to determine a broadcasting station's (e.g., AM radio, FM radio or television station's) audience areas. Wash. Dept. of Rev., Special Notice (Aug. 9, 2019). Federal: On Aug. 13, 2019, the United States (US) Trade Representative (USTR) formally announced the imposition of a 10% punitive tariff on approximately US$265b of Chinese origin goods (List 4). According to the announcement, the implementation of the List 4 tariffs will occur in two installments, by defined groupings of products. The announcement further notes that certain products have been removed from the initial proposed List 4 citing factors such as health, safety, and national security as the reasons for removal. For more on this development, see Tax Alert 2019-1469. 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 In the Matter of the Petition of Catalyst Repository Systems, Inc., DTA No. 826545 (N.Y. Tax App. Trib. July 24, 2019). 5 Tenn. Laws 2019, Pub. Ch. 501 (HB 605), signed by the governor on May 24, 2019. Document ID: 2019-1573 |
