10 September 2019 State and Local Tax Weekly for August 30 Ernst & Young's State and Local Tax Weekly newsletter for August 30 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 Jersey releases another clarification of its GILTI and FDII guidance for Corporation Business Tax purposes On Aug. 26, 2019, the New Jersey Division of Taxation (DOT) placed on its website clarifying guidance regarding its Technical Bulletin (TB) 92, Sourcing IRC Section 951A (GILTI) and IRC Section 250 (FDII) Replacing TB-85(R) (TB-92), which was released on Aug. 22, 2019. The guidance updates the DOT's two prior pronouncements from the past week on the reporting of global intangible low-taxed income (GILTI) under IRC §§ 951A and 250 and foreign-derived intangible income (FDII) under IRC § 250 for New Jersey Corporation Business Tax (CBT) purposes. (See Tax Alert 2019-1522) The first guidance appeared on the DOT's website on Aug. 20, 2019 in which it stated it would issue guidance on the sourcing of revenues relating to GILTI and FDII that would reflect a sales factor dilution method (the "Aug. 20 Notice"). See Tax Alert 2019-1499. On Aug. 22, 2019, the DOT issued TB-92 which seemingly appeared to contradict the approach described in the Aug. 20 Notice. The DOT's Aug. 26, 2019 clarification appears to line up with the guidance set out in the Aug. 20 Notice stating that taxpayers in most, if not all, cases would be able to apply the sales factor dilution approach for revenues related to GILTI and that FDII relates to income that was previously included in the taxpayer's tax base and likely would not be counted again in its sales factor. TB-92 together with this latest guidance has broad tax planning and compliance implications for New Jersey CBT taxpayers reporting material GILTI and FDII for federal income tax purposes. For additional information on this development, see Tax Alert 2019-1531. On Aug. 30, 2019, the Texas Comptroller of Public Accounts (Comptroller) adopted amendments to its franchise tax reports and payment rule codified at 34 TAC §3.584. Section 3.584 generally allows retailers and wholesalers to claim the 0.375% franchise tax rate unless they or their affiliates produce a product that they sell. The original version of Rule 3.584, however, did not define the terms "produce" and "product." New subsection 3.584(b)(3) adds a definition of "produce," which is defined as "[t]o construct, manufacture, install during the manufacturing or construction process, develop, mine, extract, improve, create, raise, or grow either a product or a component of a product." Under the new rule, an entity also produces a product if it or an affiliate:
An entity does not produce a product it sells under the rule if an unrelated party manufactures the product and all the product's components to the entity's specifications. In explaining the rule change, the Comptroller's office stated that it believes that "[a] taxable entity should not be able to claim the cost-of-goods-sold deduction on goods that it 'produces,' while simultaneously claiming it does not 'produce' the same goods for purposes of determining qualification for the reduced rate." The Comptroller further indicated in its explanation of the rule change that it "will apply subsection 3.584(b)(3) to reports originally due on or after the effective date of the rule amendment, to the extent that the guidance in subsection 3.584(b)(3) may be inconsistent with prior [C]omptroller interpretations." New subsection 3.584(b)(4) defines "product" to mean "tangible personal property acquired or produced for sale." Tangible personal property includes personal property perceptible to the senses; films, sound recordings, videotapes, live and prerecorded TV and radio programs, books, and other similar products, regardless of the means or method of distribution or medium in which the property is embodied; and computer programs. Tangible personal property does not include intangible property or services. Under the new definition of "produce," certain taxpayers will no longer be considered a "retailer" or "wholesaler," which will result in these taxpayers no longer qualifying for the lower 0.375% tax rate for retailers and wholesalers. Instead, these taxpayers will be subject to the higher 0.75% general tax rate. The amended rule takes effect Sept. 4, 2019. For additional information on this development, including other changes made by the amendment, see Tax Alert 2019-1576. Federal: In Notice 2019-46 (the Notice), published Aug. 22, 2019, the IRS announced that it will issue regulations permitting certain domestic partnerships and S corporations to apply proposed, rather than final, regulations on determining inclusions of global intangible low-taxed income (GILTI), for tax years ending before June 22, 2019. The Notice also provides penalty relief for a domestic partnership or S corporation that acted consistently with Prop. Reg. §1.951A-5 on or before June 21, 2019, but filed tax returns consistent with the final regulations under Treas. Reg. § 1.951A-1(e). For more on this development, see Tax Alert 2019-1557. Georgia: The Georgia Department of Revenue (Department) issued guidance to nonresident trust fiduciaries on the taxability and filing requirements under Georgia in light of the U.S. Supreme Court's (Court) decision in Kaestner.1 In Kaestner, the Court held that North Carolina beneficiaries alone did not supply the minimum connection necessary to impose the state's tax. The Court reasoned that: (1) the beneficiaries did not receive any income from the trust during the years in question; (2) the beneficiaries had no right to demand trust income or otherwise control, possess, or enjoy the trust, assets in the tax years at issue; and (3) it was uncertain whether they would ever receive any income from the trust in the future. Georgia law imposes an income tax upon resident fiduciaries and nonresident fiduciaries who are "[m]anaging funds or property for the benefit of a resident of this state;" among other activities. The Department indicated that it will follow Kaestner when the "facts … are specifically like those in Kaestner … ." When the facts are the same, the nonresident trust fiduciary will not be subject to Georgia taxation; otherwise, the fiduciary will be subject to tax. This guidance applies to all open years. Ga. Dept. of Rev., Policy Bulletin IT-2019-02: Taxn. of Nonresident Trust Fiduciaries — Effect of Kaestner Decision (Aug. 13, 2019). Utah: Individual taxpayers that received income from foreign and domestic pass-through entities are not entitled to: (1) apportion their residency-based income tax (as opposed to claiming a credit for taxes paid to other states) under the Dormant Commerce Clause, (2) a foreign-earned income deduction under the Dormant Foreign Commerce Clause, or (3) a deduction for foreign income through Utah's "equitable adjustment" statute. In so ruling, the Utah Supreme Court (Court) upheld the constitutionality of the Utah tax provisions "find[ing] no controlling precedent from the United States Supreme Court that mandates a decision striking down the challenged Utah tax provisions on dormant commerce grounds." Applying Wynne,2 the Court concluded that Utah's provision of credits for income taxes paid to other states is constitutional because it is internally consistent. (The Court noted that under Wynne, taxpayers need only satisfy the internal consistency test to pass Dormant Commerce Clause scrutiny rather than both the internal and external consistency tests as articulated in Complete Auto.)3 The Court next determined that Utah's lack of a credit for taxes paid to foreign countries does not violate the Dormant Foreign Commerce Clause, reasoning that "[t]here is not Supreme Court case in which that Court has struck down a state tax on the foreign income of an individual or an S corporation." The Court declined to extend the dormant Foreign Commerce Clause to individuals, stating that such extension is up to the United States Supreme Court. The Court further found that Utah may tax the entirety of the taxpayers' foreign income based on their Utah residency, Utah's tax code interacts with the federal tax code in a manner that treats foreign commerce evenhandedly, and Congressional approval of Utah's tax system could be inferred. The Court also held that although Utah's residency-based individual tax could subject a taxpayer to a double tax on some of their income, this alone could not be a basis to invalidate Utah's tax. Lastly, the taxpayers could not deduct their foreign income from their Utah tax base under the state's equitable adjustment provisions, because this provision applies only when Utah imposes double taxation, which did not happen in this instance. Steiner v. Utah State Tax Comn., No. 20180223 (Utah S.Ct. Aug. 14, 2019). Wisconsin: In Deere & Co., the Wisconsin Tax Appeals Commission (WTAC) reversed a Wisconsin Department of Revenue (DOR) assessment denying a taxpayer's dividends received deduction (DRD) for distributions received from a foreign limited partnership (LP) that elected to be treated as a corporation for federal income tax purposes. The taxpayer appealed the DOR's denial of its claim of a Wisconsin DRD for the distribution received from the LP. Wis. Stat. §71.26(3)(j) disconnects from the federal DRD provision and replaces it with the state's own rule that "corporations may deduct from income dividends received from a corporation with respect to its common stock if the corporation receiving the dividends owns, directly or indirectly, during the entire [tax] year at least 70% of the total combined voting stock of the payor corporation." The DOR argued that (1) the LP was not a corporation for purposes of the Wisconsin DRD statute, and (2) the dividends did not qualify as common stock under the Wisconsin DRD statute. The WTAC rejected both arguments, concluding that the LP was not only to be taxed as a corporation, it was a corporation under Wis. Stat. §71.22(1k). For this reason, the DOR had to accept the deemed transactions that facilitated the deemed transformation of the entity from a partnership to a corporation. Following IRS guidance, the WTAC treated the taxpayer as owning stock in a corporation and, by that stock ownership, receiving dividends for which it may claim the DRD. Finally, the WTAC pointed to previous DOR guidance treating an LLC that elects to be treated as a corporation for federal purposes as a corporation for Wisconsin purposes, including treating the LLC interest as common stock. The WTAC concluded there was no basis to treat the LP interest any differently and that, as such, the DOR had to adhere to its own guidance in effect during the audit period. Deere & Co. v. Wis. Dept. of Rev., Dkt. No. 18-I-135 (Wis. Tax App. Comm. Aug. 21, 2019). For additional information on this development, see Tax Alert 2019-1535. Colorado: An out-of-state company that manufactures and sells through its website and over the phone prepackaged bakery food products (e.g., brownies, cookies, and bars), is doing business in, and has substantial nexus with, Colorado for the 2018 calendar year because its retail sales to Colorado are in excess of $100,000. Since the company satisfies the state's economic nexus threshold, starting June 1, 2019, the company must obtain a Colorado sales tax license and collect, report, and remit state sales tax and certain state-administered local sales taxes to the Colorado Department of Revenue (Department). The Department further noted that the company's baked goods are exempt from state and special district sales taxes as food sold for domestic home consumption. Sales of the baked goods, however, may be subject to local sales tax from state-administered taxing jurisdictions.. Colo. Dept. of Rev., PLR 19-003 (June 7, 2019). Michigan: A for-profit medical facility's purchases of implantable medical devices for subsequent sale to patients with prescriptions rather than used to render professional medical services to patients are not eligible for a sales and use tax exemption for prosthetic devices because the devices are not being "dispensed" in the transaction. The Michigan Department of Treasury concluded that "dispensed" as used in the context of the statute requires the device to be administered contemporaneous with or before the transaction for which the exemption is claimed, rather than in some future transaction. Thus, the device may only be exempt as a prosthetic device in the sale between the medical facility and the patient. The facility, however, may claim a valid resale exemption when it resells the device and does not consume it in providing medical services to the patient. Mich. Dept. of Treas., Letter Ruling 2019-2 (Aug. 15, 2019). South Carolina: The South Carolina Department of Revenue issued guidance regarding tax obligations for marketplace facilitators that operate marketplaces selling tangible personal property in the state, and for third parties selling products through such marketplaces. The guidance provides examples of marketplace facilitators, noting that they can sell or lease any type of product subject to sales and use tax, including meals, clothing, lodging, vehicles, machinery, and equipment. Marketplace facilitators are responsible for collecting and remitting state and local taxes on all sales that occur through the marketplace, while a third party must collect and remit tax only on the sales through its own website or brick-and-mortar store. Lastly, the guidance includes examples of the sales and use tax responsibilities of marketplace facilitators, third parties, and how to calculate the tax due for marketplace transactions involving food orders, payment, and delivery. S.C. Dept. of Rev., SC Rev. Ruling # 19-6 (Aug. 26, 2019). Federal: The IRS has added four new frequently asked questions (FAQs) to its Opportunity Zones FAQs: two new FAQs addressing whether investors can adjust their basis to fair market value, and two FAQs explaining the Qualified Opportunity Zone Business (QOZB) 50% gross income test. For additional information on this development, see Tax Alert 2019-1534. New Jersey: Conditionally vetoed bill (S. 3901) would have extended the application deadlines from July 1, 2019 to Jan. 31, 2020 for business tax credits for qualified commercial and residential development projects under the Grow New Jersey Assistance Program and the State and local Economic Redevelopment Growth Grant programs. In the conditional veto, the governor called New Jersey's tax incentives programs some of the most expensive and least productive in the nation, detailed the "troubled findings" by the New Jersey Comptroller regarding the credits programs, and recommended that the existing legislation be replaced with a series of business incentives programs that he presented to the legislature earlier this year. Under the governor's proposal, NJ Aspire would focus on neighborhood-based investments by permitting developers to redevelop vacant and underutilized properties and create jobs, working closely with competitive Brownfields Redevelopment and Historic Preservation Tax Credits. Under the proposed NJ Forward program, jobs would be created in targeted high-growth and high-wage industries, particularly in New Jersey's most high-need census tracts, with incentivized local hiring, partnerships with New Jersey's research universities, and transit-oriented development. Lastly, the proposed Innovative Evergreen Fund would pair the proceeds from the sale of future tax credits with private venture capital funds to make direct investments in promising startups. NJ proposed S. 3901, conditionally vetoed by the governor on Aug. 23, 2019. Virginia: A single member limited liability company (SMLLC) whose sole owner is a non-profit corporation operating as an institution of learning is ineligible for Virginia's local property tax exemption for property the SMLLC owns because it does not independently qualify as an "institution of learning not conducted for profit." The Virginia Attorney General (AG) explained that Virginia treats a limited liability company (LLC) (including those with only one member) as a legal entity separate from its member(s) and title to property owned by the LLC/SMLLC vests in the LLC/SMLLC rather than its member(s). The AG noted that the Virginia Constitution requires tax exemptions to be strictly construed, with any doubt regarding the exemption is resolved against the party claiming it. Va. Atty. Gen., Op. No. 18-027 (Aug. 9, 2019). Alabama: The Alabama Department of Revenue (Department) announced that it is offering late-filing penalty relief to certain corporate taxpayers that are unable to meet the state's Oct. 15, 2019 filing deadline due to federal filing challenges. The Department will consider the taxpayers circumstances, including complexities caused by the continued implementation of the federal Tax Cuts and Jobs Act (P.L. 97-115) (TCJA), in determining whether the circumstances constitute reasonable cause. Taxpayers seeking penalty relief must file their return by Nov. 15, 2019 and must make a written request for relief. Ala. Dept. of Rev., "ADOR Offering Relief to Corporate Taxpayers Affected by TCJA" (Sept. 4, 2019). Florida: The Florida Department of Revenue (Department) announced that due to Hurricane Dorian, the due date of the corporate income tax additional information is extended to Oct. 27, 2019 (from Sept. 3, 2019). The additional information is required by HB 7127 (Fla. Laws 2019). Under the law, corporate taxpayers are required to report several key pieces of taxpayer-specific information for Florida corporate income tax returns filed beginning during the 2018 or 2019 taxable years, including the taxpayer's North American Industry Classification System (NAICS) code, amounts of global intangible low-taxed income amounts and/or foreign derived intangible income reported for federal income tax purposes, all interest expense including amounts limited by IRC Section 163(j) and the taxpayer's federal net operating losses (NOLs), and state NOLs. This information is to be online using the Department's website. A taxpayer that fails to provide the required information by the required submission date will be subject to a penalty of $1,000 or 1% of the tax due for the most recent taxable year filed return, whichever is greater. Fla. Dept. of Rev., TIP No: 19C01-03 (Aug. 26, 2019, updated Sept. 5, 2019). Illinois: On June 5, 2019, Illinois Governor J.B. Pritzker signed S.B. 689 (Public Act 101-0009), provisions of which establish a time-limited tax amnesty program that will run Oct. 1, 2019 through Nov. 15, 2019. Amnesty is available for taxes that were due for any tax period ending after June 30, 2011 and before July 1, 2018. In exchange for participating in, and complying with the terms of, the amnesty program, all interest and penalties otherwise due will be abated and the Illinois Department of Revenue (Department) will not seek civil or criminal prosecution. Most taxpayers are eligible to participate in the amnesty program, except for those who are party to any criminal investigation or civil proceedings. Unlike prior amnesties administered by the Department, which allowed for the doubling of penalties and interest on amnesty-eligible liabilities of non-participants, this amnesty program does not penalize taxpayers for non-participation. If a taxpayer elects not to participate, any amnesty-eligible liability paid after the amnesty period closes will be subject to regular interest and penalties imposed under the Uniform Penalty and Interest Act. For more on this development, see Tax Alert 2019-1542. District of Columbia: The District of Columbia Department of Employment Services, Office of Paid Family Leave issued program updates, including proposed regulations to govern paid family leave benefits and guidance on issues arising during the initial quarter that employers were required to begin paying and reporting employer assessments. For additional information on this development, see Tax Alert 2019-1572. Illinois: New law (SB 1515), effective Jan. 1, 2021, provides that nonresident employees are subject to Illinois income tax only if they work 30 or more days within the state. Under current law, there is no de minimis exception for nonresident employees — employers are required to withhold Illinois income tax on all compensation earned within the state without regard to the number of working days present. For more on this development, see Tax Alert 2019-1555. Minnesota: Effective Jan. 1, 2020, Duluth, Minnesota employers of five or more employees must provide paid sick and safe leave to employees. As of that date, employers must allow employees to begin accruing earned sick and safe time at a rate of one hour of earned sick and safe time for every 50 hours worked. Employers must permit an employee to accrue up to 64 hours of earned sick and safe time per year and carry over up to 40 hours of earned but unused sick and safe time into the following year. Employers may instead "front load" 40 hours of sick leave to employees at the beginning of the year. New employees must immediately begin accruing earned sick and safe time, but employers may delay usage of the accrued hours for the first 90 days of employment. (Ordinance No. 10571) For additional information on this development, see Tax Alert 2019-1570. Nevada Recently enacted legislation (SB 312) requires Nevada employers of 50 or more employees to provide paid leave to their employees. The bill provides that the law is effective January 1, 2020, or upon the state performing any other preparatory administrative tasks necessary to carry out the provisions of the Act. According to the Nevada Labor Commission, the law is effective July 1, 2020. Under the law, eligible employees do not have to provide employers with the reason for taking the paid leave, giving the employee the ability to use the leave for reasons other than illness. Employers in their first two years of operation are not required to comply with the paid leave law. For additional information on this development, see Tax Alert 2019-1543. Texas: Effective Sept. 1, 2019, recently enacted Texas HB 2240 allows employers, under certain circumstances, to mandate payment of wages by payroll debit card. Prior to this change in law, employers were required to obtain the employee's permission before paying wages by this method (though able to mandate payment of wages by electronic funds transfer). For more information on this development, see Tax Alert 2019-1525. Washington: Recently enacted Washington state legislation (HB 1087) establishes a state-run long-term care insurance program. Employees will pay for the long-term care insurance through payroll deduction. Employees who demonstrate that they have private long-term care insurance are exempt from the requirement. Self-employed individuals may elect to participate. Beginning Jan. 1, 2022 through Dec. 31, 2023, employers will withhold and remit to the Washington Employment Security Department premiums equal to 0.58% of employee wages. Effective Jan. 1, 2024, the Department will determine the premium biannually at a rate not greater than 0.58%. For additional information on this development, see Tax Alert 2019-1532. Virginia: A domestic single member limited liability company (SMLLC) that is a disregarded entity for federal income tax purposes and is solely owned by a charitable organization qualifying for federal charitable deductions, can exclude certain receipts, including gifts and contributions, from the Virginia business, professional and occupational license (BPOL) tax to the extent allowed under Virginia law. The Virginia Attorney General explained that a domestic SMLLC's income may be considered the same as the income of its owner under federal and Virginia law. In this case the disregarded SMLLC is wholly owned and controlled by a US charity and, as such, its income will be treated as charitable contributions to the charitable organization. Va. Atty. Gen., Op. No. 18-027 (Aug. 9, 2019). Texas: A business (assignee) that acquired a deed to mineral interests from the previously reported owner is not entitled to unclaimed royalty payments on the mineral interests that were sent to the State before the mineral interests transfer. In so holding, a Texas Court of Appeals (Court) affirmed that based on the plain language of the statute, the Texas Comptroller of Public Accounts (Comptroller) cannot pay an unclaimed property claim to the reported owner's assignee, and generally such unclaimed funds can only be paid to the previously reported owner. Additionally, the Court found the Comptroller's change in statutory interpretation (the Comptroller previously would pay similar claims) did not violate the assignee's constitutional rights since an incorrect interpretation of the law cannot give rise to a vested right. Enerlex, Inc. v. Hegar, No. 03-18-00238-CV (Tex. Ct. App., 3d Dist., Aug. 7, 2019). 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 NC Dept. of Rev. v. Kimberley Rice Kaestner 1992 Family Trust, Slip Op. No. 18-457 (U.S. S.Ct. June 21, 2019). Document ID: 2019-1600 |
