05 September 2019 State and Local Tax Weekly for August 23 Ernst & Young's State and Local Tax Weekly newsletter for August 23 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. On May 23, 2019, Colorado Governor Jared Polis signed House Bill 19-1240, which makes significant changes to the state's sales and use tax laws. Specifically, the new law expands sales and use tax nexus standards for the state and state-collected localities, dramatically remodels Colorado's local sales and use tax sourcing and compliance requirements and imposes sales tax collection requirements on marketplace facilitators. The sales and use tax landscape, from a state-collected tax perspective, has been markedly altered in Colorado by enactment of this law. The new law will mean that vendors already collecting and remitting Colorado sales or use taxes now must collect in many more jurisdictions, while vendors that have not been collecting because they lacked physical nexus are likely now required to collect state-administered local taxes as well. As a result, vendors selling to customers in Colorado will need to quickly review their internal compliance systems and make all necessary changes as soon as possible. For more information on this development, see Tax Alert 2019-1512. The District of Columbia (DC) has enacted legislation increasing its Real Estate Deed Recordation Tax and the Real Property Transfer Tax on the recordation of certain commercial and mixed-use real estate transfers and security interests.1 The total combined rate on certain real estate transfers will move from 2.9% to a total combined rate of 5%, effective Oct. 1, 2019 (which would be among the highest transfer tax rates in the nation).2 DC currently imposes a Real Estate Deed Recordation Tax (DC Deed Tax) at the time a deed, certain leases, or a security interest in real property is submitted for recordation. The rate is 1.45% of the consideration or fair market value of the property.3 In addition to the DC Deed Tax, DC also imposes a Real Property Transfer Tax (DC Transfer Tax) at the time a deed or certain leases are submitted for recordation. The rate is 1.45% of the consideration or fair market value of the property.4 Thus, the current total combined rate is 2.9%. The new DC legislation will impose both an additional DC Deed Tax and an additional DC Transfer Tax each at the rate of 1.05% for recording deeds that transfer property of which any portion is classified as Class 2 (Commercial) property when the consideration for the deed is $2 million or more. The additional DC Deed Tax rate also applies to recording security interests that secure $2 million or more in real property where any portion of the property is classified as Class 2 (Commercial). The result of these tax law changes is the imposition of a 2.5% DC Deed Tax and a 2.5% DC Transfer Tax on transfers of real property for a combined 5% rate applicable to transfers of commercial or mixed-use real property which are transferred by recorded deed.5 This increased tax rate also applies to the transfer of an economic interest in real property. For additional information on this development, see Tax Alert 2019-1520. New Jersey: The New Jersey Tax Court (tax court) has held that an entity exempt from paying the New Jersey Corporate Business Tax (CBT) under P.L. 86-272 (hereafter, P.L. 86-272 entity), is not subject to the New Jersey Alternative Minimum Assessment (AMA),6 which is imposed exclusively on P.L. 86-272 entities, because the AMA is preempted by P.L. 86-272 and, as such, it is displaced. Consequently, P.L. 86-272 entities are not subject to the AMA for tax periods beginning after June 30, 2006.7 In reaching this conclusion, the tax court found that since a P.L. 86-272 entity can consent to pay the lesser of the CBT (measured by net income) or AMA (measured by gross receipts or gross profits), the AMA operates as an end-run around P.L. 86-272 for certain taxpayers, coercing an otherwise exempt entity to consent and pay the CBT. When the AMA is greater than the CBT, the AMA becomes a tax measured by net income because the entity would be paying the CBT. This is either grounds for express preemption because the AMA targets P.L. 86-272 entities, or conflict preemption since the AMA is an obstacle to Congress exempting P.L. 86-272 entities from paying a net income tax to a state. Despite the AMA's label as a gross receipts or gross profits tax, its economic effects are to solely and exclusively target and capture P.L. 86-272 entities that Congress has determined are exempt from net income tax. Lastly, the AMA is not a compensatory tax when Congress has preempted the imposition of state net income tax on certain businesses under P.L. 86-272. Stanislaus Food Products Co. v. NJ Dir., Div. of Taxn., No. 011050-2017 (N.J. Tax Ct. June 28, 2019) (not to be published). Mississippi: A national cable company properly excluded capital related to non-unitary investments held by subsidiaries with no Mississippi activity from its pre-apportioned franchise tax base for tax years 2008-2010. A Mississippi Chancery Court (court) further held that the company is allowed to apply factor representation to a divided capital base and use the Mississippi gross receipts and real and personal property of a subsidiary in the numerator of the apportionment factor and the total gross receipts and real and personal property of the company's everywhere unitary investments in the denominator of the apportionment factor. In so holding, the court agreed with the Mississippi Board of Tax Appeals finding that there was substantial credible evidence that the Mississippi Department of Revenue's assessment was distortive and did not fairly represent the true value of the company's capital in Mississippi. Miss. Dept. of Rev. v. Comcast of Georgia/Virginia, Inc. (N/K/A Comcast Cable Communications, LLC), Civ. Action No. G-2017-1147 T/1 (Miss. Chancery Ct., 1st Jud. Dist., June 13, 2019). District of Columbia: New law (A23-0091) sets the rate of tax imposed on the gross receipts from the sale of, or charges for, soft drinks at 8% (previously taxed at 6% as a retail sale). In addition, the definition of "soft drinks" is modified to exclude beverages that are at least 50% milk, including soy, rice, or similar milk substitutes (collectively, "milk"), 100% fruit or vegetable juice (previously, it excluded beverages that contained milk or; noncarbonated beverages that contained fruit or vegetable juice). The exclusion for coffee, coffee substitutes, cocoa, or tea continue is repealed. Consequently, such beverages will now be subject to tax. Soft drinks prepared for immediate consumption remain subject to the 10% sales tax. These provisions apply as of Oct. 1, 2019. DC Laws 2019, A23-0091 (B23-0352), signed by the mayor on July 22, 2019, expires on Oct. 20, 2019. Note that the mayor has approved similar permanent legislation that is undergoing Congressional review. See DC Laws 2019, A23-0092 (B23-0209), signed by the mayor on July 22, 2019, and projected to become law mid Sept. 2019. Tennessee: Following enactment of H.B. 667 (bill),8 which allows the state's economic nexus regulation for remote dealers to become effective, the Tennessee Department of Revenue (Department) announced that remote dealers that have no physical presence in Tennessee, but make sales exceeding $500,000 to Tennessee consumers during the previous 12 months must register and begin collecting Tennessee sales and use tax.9 In general, a remote dealer is required to register and begin collecting tax on the first day of the third month following the month in which it meets the threshold. The initial measurement date for the sales threshold is July 1, 2019, and remote sellers with sales as of that date exceeding the threshold amount for the prior 12-month period must begin collecting on Oct. 1, 2019. The state's local sales tax reporting requirements also will change beginning Oct. 1, 2019. At this time remote dealers will be required to report their sales tax based on the shipped to (or delivered to) address of the customer.10 While remote dealers may continue to have one location ID for reporting all sales into Tennessee, remote dealers must report sales by the shipped to or delivery destination in the local tax schedule on their Tennessee sales tax return. Further, remote dealers will no longer be able to use the uniform local rate option and instead will have to apply the specific rate in effect for the city or county to which the sale was shipped/delivered. EY has become aware that a number of remote dealers have been contacted by the Department with respect to this change. Reporting provisions for in-state dealers have not changed. For more on this development, see Tax Alert 2019-1518. District of Columbia: New law (A23-0091) modifies corporate franchise and sales and use tax credits and exemptions for Qualified High Technology Companies (QHTCs). For taxable years beginning after Dec. 31, 2019, a QHTC is allowed an income tax credit equal to 5% (previously 10%) of the wages paid during the 24 calendar months of employment to a qualified employee hired after Dec. 31, 2017, capped at $3,000 (previously $5,000). In addition, the law limits the 10-year credit carryforward to credits obtained from wages of a qualified employee hired before Oct. 1, 2019. For tax years beginning on or after Dec. 31, 2019, QHTCs that are corporations will be subject to the District's corporate income tax at the generally applicable rate under DC Code § 47-1807.02. (Previously, QHTCs were subject to tax at the rate of 6%.) The law establishes a new credit under which a QHTC can claim a credit in an amount equal to the lesser of (1) $250,000 per taxable year, or (2) the difference between the amount of tax that would otherwise be due based on the applicable tax rate and the reduced 6% rate. The credit is allowed for five taxable years from the later of the tax year ending Dec. 31, 2019 or the last tax year the QHTC is eligible to receive the zero percent rate under DC Code § 47-1817.06(a)(2). In addition, the law repeals the sales and use tax exemptions for a QHTC's sale of certain intangible property or services that otherwise is taxable as a retail sale (e.g., internet-related services/consulting/applications, web design, graphic design) and sales of computer software/hardware and visualization and human interface technology equipment to a QHTC. According to guidance posted by the District of Columbia Office of Tax and Revenue, "[a]ll QHTC exempt purchase certificates issued before October 1, 2019 are terminated as of that date." DC Laws 2019, A23-0091 (B23-0352), signed by the mayor on July 22, 2019, expires on Oct. 20, 2019. Note that the mayor has approved similar permanent legislation that is undergoing Congressional review. See DC Laws 2019, A23-0092 (B23-0209), signed by the mayor on July 22, 2019, and projected to become law mid Sept. 2019. Ohio: New law (HB 6) amends several energy-related property tax provisions. The law prohibits the taxable property of an electric company that is, or is part of, a qualifying nuclear resource receiving payments for nuclear resource credits for any part of a tax year from being assessed for that year at less than the property's taxable value as of Oct. 22, 2019. Further, the electric company may not value such property at less than its taxable value as of that date in its annual report or file a petition for reassessment seeking a reduction in taxable value of the property below the property's value as of Oct. 22, 2019. The tax commissioner cannot grant such a reduction. Additionally, the law modifies current requirements for obtaining a property tax exemption for a qualified energy project by increasing the nameplate capacity (generally to a nameplate capacity of 20 megawatts) for applicable projects. These modifications apply to energy projects certified on or after the effective date, as well as existing qualified energy projects that have a nameplate capacity of fewer than five megawatts on the effective date. Ohio Laws 2019, HB 6, signed by the governor on July 23, 2019. Illinois: The Illinois Department of Revenue posted guidance on its website on how to report bonus depreciation. Taxpayers that file an income or replacement tax return and report special depreciation on federal Form 4562, Depreciation and Amortization, or Form 2106, Employee Business Expenses, should file Form IL-4562, Special Depreciation, to reverse the effects for Illinois state income tax purposes of bonus depreciation (other than 100% bonus depreciation) allowed by IRC § 168(k). Generally, for federal income tax purposes, property acquired before Sept. 28, 2017 and placed in service in 2018 is subject to 40% bonus depreciation. Since Illinois law does not include a provision for 40% federal bonus depreciation, a taxpayer cannot claim an Illinois subtraction modification for the property until the last year of regular depreciation. Taxpayers, however, must report the 40% bonus depreciation as an Illinois special depreciation in the same year in which they claimed a federal special depreciation allowance for the property. Taxpayers are not required to make an adjustment for 100% bonus depreciation allowed under the Tax Cuts and Jobs Act (P.L. 115-97) because such depreciation is already allowed by Illinois. Thus, 100% bonus depreciation property should not be included on Form IL-4562. Ill. Dept. of Rev., Questions and Answers: How do I report bonus depreciation? (last accessed Aug. 23, 2019). North Carolina: New law (SB 498) excludes nonresident businesses and nonresident employees who temporarily go to North Carolina at the request of a critical infrastructure company (i.e., registered public communications provider, registered public utility) solely to perform disaster-related work during a disaster response period from the following tax and regulatory requirements: corporate and individual income tax, franchise tax, unemployment tax, and business certificate of authority. Critical infrastructure is property and equipment owned or used by a critical infrastructure company for utility or communications transmission services provided to the North Carolina public, such as communication networks, electric generation, transmission and distribution systems, natural gas transmission and distribution systems, water pipelines, and related support facilities. SB 498 also permits the issuance of temporary licenses to import, export, distribute, or transport motor fuel in North Carolina in response to a disaster declaration. SB 498 applies to disaster declarations made on or after that date Aug. 1, 2019. N.C. Laws 2019, SL 2019-187 (SB 498), signed by the governor on Aug. 1, 2019. Connecticut: The Connecticut Department of Revenue Services (DRS) has announced that it is asking certain Connecticut employers to respond to an information request that will assist the Connecticut Payroll Tax Commission in evaluating the potential impact of instituting a new state payroll tax. The information request was sent in two emails from the DRS, one that explains the survey and the second with four survey questions. Employers are asked to complete the survey by Oct. 1, 2019. For additional information on this development, see Tax Alert 2019-1509. Massachusetts: The Massachusetts Department of Family and Medical Leave has made several changes to the paid family and medical leave (PFML) program. First, the definition of wages upon which the PFML contribution rate applies is now the same as for state unemployment insurance (SUI) tax purposes. Also, types of employment excluded from SUI tax are now excluded from PFML (i.e., services performed by real estate and insurance agents in commission only positions). Second, employers are required to withhold at a rate of 0.75% of subject wages when those wages are actually paid to employees, and not when they are earned. For example, wages earned in Sept. 2019 are not subject to withholding on the date earned, only those paid beginning on and after Oct. 1, 2019. Third, wages paid to H-2A visa holders are exempt from PFML withholding and these employees are not considered to be PFML-covered employees. All other temporary foreign worker visa program employees (e.g., those holding F-1, OPT, J-1, and J-2 visas) are subject to PFML withholding if all other criteria for being a covered employee are satisfied. For additional information on this development, see Tax Alert 2019-1511. Oregon: Under recently-enacted legislation (L.2019, S165), Oregon employers are required to report if a qualified retirement plan is available to employees on the annual withholding return filed with the Oregon Department of Revenue. This information may be disclosed to the Oregon state treasurer. The requirement is effective with Oregon annual withholding returns required to be filed on and after Jan. 1, 2020. For more on this development, see Tax Alert 2019-1495. Vermont: The Vermont Department of Taxes has updated its fact sheet for employers on the Health Care Fund Contribution (HCC) to include information about how to determine and report the assessment on Form WHT-436, Quarterly Withholding Reconciliation. Of significant mention, the Department clarifies that: (1) if the employer does not offer health coverage for which it pays some part of the expense, all hours worked by its employees must be reported as uncovered, without regard for whether the employees secure coverage anywhere else; and (2) giving cash bonuses to employees to purchase their own health coverage is not considered as offering a health plan. Effective March 31, 2019 and through Dec. 31, 2019, the HCC is $167.02 (up from $163.20 for the same period in 2018) per uncovered full-time equivalent (FTE) employee above the four FTE exemptions. For more on this development, see Tax Alert 2019-1488. District of Columbia: New law (A23-0091) establishes an Expenditure Commission to review the District's current budget structure, including expenditures and revenues, and to prepare comprehensive recommendations to the Mayor and the Council on future budgets. The recommendations must: (1) provide a vision for an expenditure regime that could withstand economic downturns without jeopardizing core government services; (2) assess sources of fiscal risks and strengths; (3) identify the economic growth necessary to support the District's growing fiscal needs; and (4) propose a plan to advance the District's fiscal and economic standing and competitiveness in the region. Recommendations cannot include spending or revenue caps. The report, along with draft legislation or other specific steps for implementing the recommendations, is due by Dec. 31, 2020. DC Laws 2019, A23-0091 (B23-0352), signed by the mayor on July 22, 2019, expires on Oct. 20, 2019. Note that the mayor has approved similar permanent legislation that is undergoing Congressional review. See DC Laws 2019, A23-0092 (B23-0209), signed by the mayor on July 22, 2019, and projected to become law mid Sept. 2019. Oregon: New law (HB 2164) makes various edits to the recently enacted Corporate Activity Tax (CAT). Notably, the law expands the list of items excluded from the definition of "commercial activity" to include certain receipts from hedging transactions, interest income received by a financial institution, certain compensation (whether current or deferred, or cash or in kind) received or to be received by an employee (current or former) for services rendered to or for an employee, among other modifications. The definition of "excluded person" is modified to exclude any person with commercial activity that does not exceed $750,000 (down from $1 million). Other changes do the following: (1) expand the definition of "commercial activity" to include amounts received by a financial institution (specifically if it is a holding company, bank organization, or nonbank financial organization) or an insurer; (2) modify the subtraction from commercial activity sourced to the state to provide that a subtraction is not allowed for certain expenses from transactions among members of a group excluded under Oregon law or cost inputs or labor costs attributable to a person's receipts from an item that is not commercial activity; (3) provide that commercial activity of a financial institution or an insurer is sourced to Oregon is from business conducted in the state, unless otherwise specified; (4) provide an exclusion from taxable commercial activity for subcontracting payments for labor costs that are made to a general contractor to a subcontractor under a contract for residential real estate construction (this provision applies Jan. 1, 2020 through Dec. 31, 2025); and (5) define "hedging transaction" and modify definitions of "taxable commercial activity" and "taxpayer". These changes apply to tax years beginning on or after Jan. 1, 2020. Ore. Laws 2019, Ch. 579 (HB 2164), signed by the governor on July 23, 2019. Oregon: New law (SB 119) provides that if the legislation establishing the Corporate Activity Tax (CAT) (HB 3427) is referred to Oregon voters by a referendum petition, a special election will be held on Jan. 21, 2020. Ore. Laws 2019, Ch. 674 (SB 119), signed by the governor on Aug. 9, 2019. Oregon: New law (HB 2449) phases-in an increase to the monthly tax on emergency communications for each consumer or paying retail subscriber who has telecommunications service or interconnected Voice over Internet Protocol service with access to the emergency communications system. The tax is increased to $1.00 (from $0.75) for each monthly subscriber bill issued, and for each retail transaction for prepaid wireless telecommunications service, from Jan. 1, 2020 and before Jan. 1, 2021. The tax is increased again to $1.25 for bills issued/ retail transaction made on or after Jan. 1, 2021. Lastly, the sunset date of the tax is extended to bills issued/retail transactions made before Jan. 1, 2030 (from Jan. 1, 2022). Ore. Laws 2019, Ch. 653 (HB 2449), signed by the governor on Aug. 9, 2019. Washington: Two non-profit healthcare companies are not entitled to a business and occupation (B&O) tax refund for taxes paid on compensation received from non-Washington state Medicaid or Children's Health Insurance Programs because the statute's plain language unambiguously limits the B&O tax deduction to compensation from Washington programs. In affirming the lower court, the Washington Court of Appeals (Court) found that "medical assistance, children's health, or other program" in the deduction statute are modified by "under chapter 74.09 RCW," therefore limiting the deduction to in-state programs' revenue only. The Court also rejected the companies' argument that the Court's reading of the statute raises dormant Commerce Clause concerns, finding instead that the exemption advances the legitimate government goal unrelated to economic protectionism. Peacehealth St. Joseph Medical Center v. Wash. Dept. of Rev., No. 79648-8-I (Wash. App. Ct., Div. 1, July 22, 2019) (unpublished). Federal/International: On Aug. 23, 2019, China's Customs Tariff Commission (Commission) announced it would implement additional tariffs of 5% and 10% on 5,078 tariff items that amount to US$75 billion of US-origin goods (China List 4). The Commission also announced that China would resume tariffs on US-origin vehicles and parts beginning Dec. 15, 2019. These actions formalize China's retaliation to the recently announced imposition by the United States (US) of a 10% punitive tariff on $265b of Chinese origin goods, out of the remaining $300b (US List 4) not already subject to punitive tariffs. The US tariffs were recently set to be imposed Sept. 1, 2019 and Dec. 15, 2019, based on two defined lists of products, respectively. In response to that announcement, officials from the Commission on Aug. 15, 2019 indicated that China would take necessary countermeasures if the US took action with the planned implementation of 10% punitive tariffs. In an immediate response to the Aug. 23 actions by China, the US Trade Representative (USTR) announced a 5% increase to the existing 25% punitive tariffs on $250b of Chinese origin goods (Lists 1, 2 and 3). The increase is scheduled to take effect beginning on Oct. 1, 2019. Additionally, the 10% punitive tariffs on the remaining $300b of Chinese origin goods (Lists 4A and 4B), due to take effect later this year, will be increased to 15%. The announcement cites China's retaliatory decision to impose "unjustified tariffs" on US-origin goods by the Chinese Government. For more on this development, see Tax Alert 2019-1527. International: Foreign service providers of digital services may elect to be subject to a new value-added tax (VAT) withholding system under which they will no longer be responsible for collecting the VAT on the provision of digital services to Colombian residents. Rather, the collection and payment of the VAT will shift to credit card and debit card issuers, prepaid card sellers, and those who collect cash on behalf of third parties. For additional information on this development, see Tax Alert 2019-1517. International: On Aug. 20, 2019, the United Arab Emirates (UAE) Federal Tax Authority (FTA) issued value added tax (VAT) public clarification VATP015 on the transfer of a business as a going concern (TOGC). The public clarification sets out the conditions that must be met for a transfer to qualify as a TOGC under Article 7(2) of Federal Decree-Law No. (8) of 2017 on VAT (UAE VAT Law). For additional information on this development, see Tax Alert 2019-1510. Multistate: On Wednesday, Sept. 18, 2019, from 1:00-2:30 p.m. EDT (New York), Ernst & Young LLP (EY) will host its quarterly webcast focusing on state tax matters. For our third webcast in 2019, our featured discussion will highlight various state proposals related to market-based sourcing rules. Panelists from our California and New York offices will discuss proposed regulations being considered in their respective states and how these proposals compare to the Multistate Tax Commission's model regulations, which several states have adopted. The panelists also will provide: (1) an update on state responses to federal tax reform and to the U.S. Supreme Court's (Court) ruling in South Dakota v. Wayfair, Inc.; (2) an overview of state budget legislation enacted since our May 2019 quarterly webcast; (3) an overview of recent Court decisions and pending certiorari petitions; (4) a tax policy update, including a discussion of various ballot measures proposed throughout the country, and an overview of France's new digital services tax; and (5) an update on other significant judicial and administrative developments since our last webcast in May 2019. To register for this event, go to State tax matters. Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor. 1 Only the DC Real Estate Deed Recordation Tax applies to security interests in real property. The DC Real Property Transfer Tax does not apply to security interests. 2 A23-0091/B23-0352, the "Fiscal Year 2020 Budget Support Emergency Act of 2019" was enacted July 22, 2019 and expires Oct. 20, 2019. B23-0209, the "Fiscal Year 2020 Budget Support Act of 2019" was transmitted to Congress for approval on July 22, 2019 and is projected to become permanent DC law mid Sept. 2019. 3 D.C. Code Ann. § 42-1103(a). Part of the rate (0.35% of the rate) does not apply to instruments recorded for residential real property with consideration less than $400,000. 4 D.C. Code Ann. § 47-903. Part of the rate (0.35% of the rate) does not apply to instruments recorded for residential real property with consideration less than $400,000. 5 The DC Deed Tax on security instruments secured by commercial or mixed-use real property is increased from 1.45% to 2.5%. 7 The first phase of the AMA, in effect 2002 through June 30, 2006, applied to entities regardless of P.L. 86-272. The second phase of the AMA, in effect for tax period beginning after June 30, 2006, applies only to P.L. 86-272 entities. Document ID: 2019-1574 |
