20 September 2019 State and Local Tax Weekly for September 13 Ernst & Young's State and Local Tax Weekly newsletter for September 13 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. South Carolina administrative law court finds online retailer liable for collecting and remitting sales and use tax on third-party merchant sales made on its marketplace An online retailer is responsible for collecting and remitting sales and use tax on third-party merchant sales made though the online retailer's marketplace because the online retailer functions like a consignee for purposes of South Carolina's sales and use tax according to the findings of a South Carolina administrative law court. Amazon Services, LLC v. SC Dept. of Rev. , No. 17-ALJ-17-0238-CC (S.C. Admin. Law Ct. Sept. 10, 2019). The South Carolina Department of Revenue (Department) assessed sales and use tax on an online retailer's third-party merchant sales facilitated through its marketplace during the period from January through March 2016. (This audit pre-dates the Department's issuance of guidance on the taxability of remote sellers/marketplace facilitators in Sept. 2018). The online retailer challenged the assessment, arguing that the third-party merchants are the sellers responsible for collecting sales and use tax. On appeal, an administrative law judge (ALJ) of the South Carolina Administrative Law Court upheld the assessment, finding the online retailer functions like a consignee for purposes of South Carolina's sales and use tax statute. The ALJ reasoned that similar to a consignee, the online retailer provides a service to the owner of the product that directly facilitates the sale of the product, it retains a percentage of the sales price as a fee, and it process the transaction. The ALJ rejected the online retailer's argument that consignment inherently requires an agency relationship. Instead, the ALJ found that a formal agency relationship is not required and that what matters is the nature of the transactions at issue and the resulting relationship between the parties. In this case, the ALJ concluded that the relationship between the online retailer and a third-party merchant functions as a consignment-type relationship as described in the statute. The ALJ also determined that the online retailer, similar to the online travel company discussed in the South Carolina Supreme Court's decision in Travelscape,1 is "engaged in the business of selling" tangible personal property at retail for purposes of the state's sales and use tax law. Facts the ALJ found supportive of this conclusion include: (1) that the purchase is often completed through the online retailer's website without any interaction between the customer and the third-party merchant, (2) the third-party merchant is not allowed to accept payment from the customer, (3) the online retailer sends the order confirmation to the customer and notifies the customer when an order has been received or shipped, and (4) the online retailer is the only party that provides a receipt for the product purchased and controls the return process. The ALJ noted that there is no opportunity for merchants to collect the tax. Further, the ALJ rejected the online retailer's due process and equal protection arguments. The online retailer argued that the Department's " … attempt to require it to remit sales and use tax … " violates due process in that the Department "is trying to impose a change in tax policy on it without 'fair notice.'" In response, the Department, citing the ruling in Travelscape asserts that the online retailer "should have been on notice that the responsibility for collecting sales and use tax could be imposed upon online retailers 'in the business' of selling." The ALJ determined due process was not violated, finding no evidence that the Department was trying to retroactively impose pending legislation on the online retailer. Rather, the ALJ found the assessment of tax " … is more reflective on an existing tax scheme being applied to a relatively new business model (the online marketplace)." In regard to the online retailer's equal protection charge, the ALJ rejected its argument that it was singled out for the imposition of tax while other e-commerce sites and online marketplaces were not. The AJL reasoned that the online retailer failed to submit evidence identifying other online marketplaces and showing that they are similarly situated. California: The taxpayer, an interstate unitary business group required to compute its California corporate income tax using the combined reporting method, is not entitled to a refund of corporate income tax paid based on the difference between its calculation of tax using the combined reporting method and the separate reporting method, which can be used by intrastate unitary businesses. In so holding, the California Court of Appeal (Court) determined that allowing the taxpayer to use the separate reporting method in a nondiscriminatory way would not have reduced its tax liability. Instead, use of that method would result in income not being properly apportioned to California and would exclude income that intrastate unitary businesses would not be able to exclude. Additionally, in its appeal, the taxpayer did not argue or show that one or more of four separate reporting advantages established at the trial court level could have been used to lower its tax liability for the tax period in question. Lastly, the Court did not decide whether the part of the statute that gives intrastate unitary businesses the option to choose separate reporting should be struck down as unconstitutional, since the taxpayer did not request such a remedy. Abercrombie & Fitch Co. et al. v. Cal. Franchise Tax Bd. , No. F074873 (Cal. App. Ct., 5th Appel. Dist., Aug. 28, 2019) (not to be published). California: A foreign limited liability company (LLC1) that owned a minority interest in another foreign LLC (LLC2) that conducted business in California for the tax years at issue (2012–2016) is not subject to California's annual $800 LLC tax because LLC1 is not doing business in California under Cal. Rev. & Tax Code Section 23101(a) based on solely holding a passive minority interest in LLC2. In so holding, the California Office of Tax Appeals (OTA) found that LLC1's interest in LLC2 resembled that of a limited partner rather than a general partner, and LLC1 did not have the direct or indirect authority to influence or participate in LLC2's operation or management. The facts which were virtually identical to those in Swart,2 the OTA found supportive of this conclusion include that: (1) LLC2 is a manager-managed LLC; (2) LLC2 is managed by an elected director(s), not LLC1; (3) LLC1 is not personally liable for LLC2's debt, obligation, or liability; (4) LLC1 cannot participate in LLC2's management or bind or act on its behalf; (5) LLC1 has no interest in LLC2's property; and (6) LLC1 has a minority interest (between 1.12% and 4.75%) in LLC2. The OTA rejected the California Franchise Tax Board's argument that Swart's 0.2% ownership threshold should apply as the new bright-line legal dividing line between active and passive ownership interests in an LLC classified as a partnership, noting that ownership percentages can be a factor but are not dispositive. In the Matter of the Appeal of Jali, LLC, No. 18073414 (Cal. Ofc. of Tax App. July 8, 2019) (Pending Precedential). Illinois: New law (SB 1257) provides that for tax years beginning on or after Jan. 1, 2019, the base income of an organization that is exempt from federal income tax is computed using its unrelated business taxable income as determined under IRC Section 512 without regard to IRC Section 512(a)(7) (i.e., an increase in unrelated business taxable income by disallowed fringe), and without any deduction for the tax imposed under the Illinois Income Tax Act. Such an organization will not be allowed the Illinois standard exemption in determining its net income. Additionally, this law is exempted from statutory sunset provisions related to exemptions, credits, and deductions. SB 1257 took effect upon becoming law. Ill. Laws 2019, P.A. 101-0545 (SB 1257), signed by the governor on Aug. 23, 2019. Connecticut: The Connecticut Department of Revenue Services (Department) issued guidance on the taxation for sales and use purposes of digital goods and electronically accessed or transferred canned or prewritten software. Effective Oct. 1, 2019, the sales and use tax rate imposed on digital goods (e.g., electronically accessed or transferred audio works, visual works, audio-visual works, reading materials or ring tones) and electronically accessed or transferred canned or prewritten software for non-business use is increased to 6.35% (from 1%). The 6.35% rate on digital goods (including both downloaded and streamed) applies regardless of the format of the sale. Unless otherwise stated in a contract or other document, the Department will presume that digital goods are electronically delivered or transferred into Connecticut and subject to tax if the consumer's or subscriber's billing address is in the state. The 6.35% rate on digital goods does not apply to sales of newspapers or magazines, college textbooks, or access to an online professional or academic research database. The 6.35% rate also applies to sales of electronically accessed or transferred canned or prewritten software, and any additional content related to such software, for a non-business use. Such software purchased by a business for business use remains subject to the 1% rate imposed on computer and data processing services. If, however, the software is provided with any tangible personal property, the sale will be subject to the 6.35% rate. The guidance also explains the process for claiming a sale for resale exemption for purchases of software, digital goods, and services resold as an integral, inseparable component part of the digital goods. Conn. Dept. of Rev. Servs., Special Notice 2019(8) (Sept. 4, 2019). Tennessee: In a letter ruling, the Tennessee Department of Revenue (Department) concluded that a service provider (provider) whose main offering is a web-based information database is not subject to sales and use tax on its database services, data licenses, auto-notification services, or on fees to limit and maintain the data's accuracy, because these transactions are nontaxable data processing and information services. The provider, however, is subject to sales and use tax on certain fees to access a specific system since the fees are part of the sales price of tangible personal property. The Department found that even though the provider's database service involves the use of remotely accessed computer software, the primary purpose of the database service is a nontaxable data processing and information service. Since the provider does not sell software to customers and the provider's web-based portal is merely a tool to view the end result of the information services that customers purchase, this service is not subject to tax. Similarly, the provider's worldwide license to use its data for specific, approved purposes under third-party data access agreements is a nontaxable service since the customer's primary purpose for the agreement is access to specific information in the database. Additionally, the auto-notification service, which includes email messaging, is not taxable as a telecommunications service when its primary purpose is to provide database information to customers. Further, the provider's fees to limit and maintain the accuracy of its data are not subject to sales and use tax, as the fees are charges made in conjunction with having access to a nontaxable data processing and information service. Lastly, the provider's sale of a system that includes both tangible personal property and services is subject to sales and use tax on its system fee and annual access fee as the sale of tangible personal property for a consideration. Tenn. Dept. of Rev., Letter Ruling No. 19-04 (July 26, 2019). Montana: A state-wide internet service provider's property (including telecommunication equipment and fiber optic cables) is subject to central assessment because, based on the physical attributes, use and functioning of its property, the service provider operates a single and continuous property in more than one county. In so holding, the Montana Supreme Court (Court) found that despite the service provider's lease of some connecting cable, its network is operated as a single and continuous property when, as a whole, it is "functionally integrated over a wide area," allowing it to "enjoy a unity of use and management." The Court also rejected the service provider's contention that it did not "operate" the leased fiber optic cables as required by the statute, finding that the service provider "operated" these cables through its unfettered right to use and monitor them. Vision Net, Inc. v. Mont. Dept. of Rev., 2019 MT 205 (Mont. S.Ct. Aug. 27, 2019). California: The California Franchise Tax Board (FTB) issued guidance on how taxpayers can elect to apply the federal rules related to eliminating the technical termination of a partnership for the 2018 tax year. To make the election, taxpayers must: (1) state their intent to make the election under Cal. Rev. and Tax. Code Section 17859(d)(1) in a statement included with their original or amended California tax return for the appropriate tax year; (2) write or print "AB 91 — Section 17859(d)(1) Election" on the top of the first page of the original or amended return, in blue or black ink; and (3) mail the return to the FTB. Taxpayers required to e-file returns may file a paper return to make this election. Such taxpayers must include a statement with the return disclosing that they are filing a paper return in lieu of an electronic return under FTB Notice 2019-04. Cal. FTB, Notice 2019-04 (Sept. 6, 2019). Kentucky: On Sept. 9, 2019, the Kentucky Department of Revenue (Department) issued guidance that it would extend the return due date for certain corporate taxpayers an additional 30 days. During the 2019 legislative session, the Kentucky Legislature amended Ky. Rev. Stat. Section 141.170, enacting a new seven-month extension for C corporations, effective June 27, 2019. (Prior law provided for a six-month extension.) Accordingly, C corporations that file a valid extension on or after June 27, 2019, have a seven-month extension. In its guidance, the Department said any corporate taxpayer that filed an extension before June 27, 2019, will also be granted a seven-month extension. (The 2018 forms and instructions, however, do not state this revised due date.) In addition, the Department will waive any late filing penalties for a taxpayer that filed an extension request before June 27, 2019, if it files its return no later than 30 days after the extended due date. For additional information on this development, see Tax Alert 2019-1617. New Jersey: On Sept. 9, 2019, the New Jersey Division of Taxation (DOT) released a statement on its website announcing an automatic waiver of the late filing penalty for filers of the 2018 New Jersey Corporation Business Tax Return. If a return filer has properly extended its filing requirement to the Oct. 15, 2019 due date (for calendar year filers), the DOT will automatically waive any late filing penalty that would be due if the return is filed by Nov. 15, 2019. Fiscal-year filers are also given an additional month to file. For additional information on this development, see Tax Alert 2019-1601. Connecticut: The Connecticut Department of Revenue Services (Department) announced that it will waive the late payment penalty and related interest imposed on a pass-through entity's (PTE) 2018 PTE tax liability, if the full amount of PTE tax due is paid within one year of the return's original due date (March 15, 2020 for calendar year filers). The Department will automatically process the penalty and interest waiver, thus PTEs are not required to submit any form or document requesting it. Further, the Department is mailing notices to the taxpayers against whom penalty and/or interest was assessed for the 2018 period. Conn. Dept. of Rev. Svcs., SN 2019(6) (Aug. 16, 2019). Colorado: New law (HB 1210) repeals the state's 20-year-old preemption law that prohibits state localities from passing ordinances requiring a minimum wage that differs from state law. Effective Jan. 1, 2020, Colorado localities may start passing ordinances that provide for a local hourly minimum wage that is higher than the statewide minimum wage (currently, $11.10 per hour, increasing to $12 per hour effective Jan. 1, 2020). The number of localities allowed to pass ordinances increasing the minimum wage is limited to 10% of the local governments in the state (local governments may enter into intergovernmental agreements to establish local hourly minimum rates). For more on this development, see Tax Alert 2019-1613. Massachusetts: As previously reported, effective Oct. 1, 2019, contributions are required to be paid for Massachusetts Paid Family and Medical Leave (PFML) in advance of benefits that will become available on and after Jan. 1, 2021. Tax Alert 2019-1588 addresses questions that have been raised about the tax treatment of Massachusetts PFML contributions. Minnesota: The Minnesota Department of Revenue released revised 2019 withholding wage-bracket tables and the computer formula that reflect legislation enacted earlier this year (HF 5). Under the law, the second-tier income tax rate bracket is reduced from 7.05% to 6.8% and the income tax brackets for all tiers are adjusted. According to a Department withholding tax representative, employers should begin using the updated tables as soon as possible, but there is no need to retroactively apply the revisions to state income tax already withheld. For additional information on this development, see Tax Alert 2019-1612. Ohio: According to representatives of the Ohio Department of Taxation, although recently enacted HB 166 reduces state income tax rates retroactively to Jan. 1, 2019, there currently is no plan to issue revised 2019 withholding tax tables. Employers should continue to use the 2019 withholding tables issued in December 2018 until further notice. For additional information on this development, see Tax Alert 2019-1586. Virginia: The Virginia Department of Taxation has released revised withholding wage-bracket tables for the first time since Jan. 1, 2008, and a revised employer guide for the first time since January 2016. The revised withholding tables are effective for calendar year 2019 and after. The Department explains that because of several differences between Virginia and federal income tax laws, it is not possible to correctly compute Virginia income tax withholding by using a method comparable to the federal "percentage method" or by using a set percentage of the federal tax withheld. However, the guide does provide (on page 10) an updated computer formula. For additional information on this development, see Tax Alert 2019-1627. Wisconsin: According to the Wisconsin Department of Revenue's Wisconsin Tax Bulletin, although the individual income tax rates were reduced for calendar year 2019-2020 under recently enacted budget bills AB 56/Act 9 and AB 251/Act 10, there will be no changes to the withholding tax rates and tables for 2019 or 2020. The withholding tax rates and tables have not changed since April 1, 2014. An employee who determines that the amount withheld from his or her wages will be more than the employee's estimated net tax liability for 2019 or 2020 may complete Wisconsin Form WT-4A. For additional information on this development, see Tax Alert 2019-1597. Washington: The Washington Department of Revenue (Department) issued guidance addressing the taxability of bitcoin-related activities, bitcoin mining and bitcoin for certain investment purposes. In regard to sales and use tax, the Department explained that when a vendor receives bitcoin as payment for goods and services, a transaction occurs because bitcoin is treated as consideration for the purchase. The guidance describes the type of records sellers accepting bitcoin should retain when bitcoin is and is not converted to US dollars at the time of the sale. For purposes of the business and occupation (B&O) tax, the Department advised that block awards and transaction fees taxpayers receive by engaging in "bitcoin mining" (i.e., the process of digitally adding transaction records to bitcoin's public ledger of historical transactions) are gross income from activities subject to the B&O tax for service and other activities classification. The measure of the tax is based on the value of the bitcoin at the time the miner obtains it. For those who purchase and sell bitcoin as an individual or non-financial business investment, a B&O tax deduction is available for amounts derived from investments, but financial business entities (e.g., lending, banking and security businesses) are not eligible for this deduction. Income derived from purchasing and selling bitcoin as a financial business investment (including income from interest, commissions, trading, dividends, and other sources realized from bitcoin investments by stockbrokers and security houses, and income derived from investments for banking and lending businesses) is reportable as "gross income of the business" and generally is subject to B&O tax under the service and other activities classification. Lastly, the Department noted that this guidance may be relevant for addressing the taxability of other cryptocurrency business activities but cautioned that since different forms of cryptocurrency may have different features, the tax results may differ. Wash. Dept. of Rev., Interim Statement Regarding Bitcoin: Payments, Mining, and Investment Income (Aug. 20, 2019). Illinois: New law (SB 1813) permits credit unions to deduct a dormancy charge or escheat fee from property that is required to be paid or delivered to the administrator under the Revised Uniform Unclaimed Property Act (RUUPA), if the amount of the deduction is consistent with RUUPA related to dormancy charges and escheat fees — i.e., not unconscionable considering all relevant factors. These factors include the marginal transactional costs incurred by the holder in maintaining the apparent owner's property and any services received by the apparent owner. The credit union may allocate, classify, and record all or a portion of the deduction as the minimum share amount required to preserve the member's status as a credit union member. SB 1813 took effect upon becoming law. Ill. Laws 2019, P.A. 101-0567 (SB 1813), signed by the governor on Aug. 23, 2019. Illinois: New law (SB 1264) provides that the Revised Uniform Unclaimed Property Act (RUUPA) does not apply to any annuity, pension, or benefit fund held in a fiduciary capacity by or on behalf of a retirement system, pension fund, or investment board created under Illinois pension provisions (investment board), retroactive to Jan. 1, 2018. Additionally, the law prohibits a retirement system, a pension fund, or an investment board from paying or delivering any annuity, pension, or benefit fund held in a fiduciary capacity to the administrator. Instead, beginning Jan. 1, 2020, when this property is presumed abandoned it must be reported to the administrator as provided under RUUPA. Further, each retirement system, pension fund, or investment board must meet or exceed the minimum standards for due diligence for property presumed abandoned. This includes specific requirements for contacting apparent owners, using certified mail, checking related plan and employer records for apparent owners' current contact information, attempting to contact designated beneficiaries, using electronic search tools, as well as other steps if the property is valued at over $1,000. No due diligence activities are required for property valued at less than $50. SB 1264 takes effect Jan. 1, 2020 unless otherwise noted. Ill. Laws 2019, P.A. 101-0546 (SB 1264), signed by the governor on Aug. 23, 2019. Federal/International: On Sept. 11, 2019, China's Customs Tariff Commission (Commission) announced a list of 16 tariff items that will be exempted from the retaliatory tariffs on the US$500 billion of United States (US) origin goods (China Lists 1 and 2). These are the first group of exemptions to be granted by the Commission since the punitive tariffs went into effect in July and August 2018. Following this announcement out of China, US President Donald Trump announced that the US would delay a scheduled 5% increase to the 25% punitive tariffs on $250b of Chinese origin goods (Lists 1, 2 and 3). The increase, originally due to take place Oct. 1, 2019, has been delayed until Oct. 15, 2019. In addition to the latest actions between the US and China, there have been recent trade developments between the US and other countries in the Asia region. For more on these and other developments, see Tax Alert 2019-1629. International: The State Revenue Committee of the Republic of Kazakhstan has proposed the introduction of a new Article 426-1 of the Tax Code, "Features of the fulfillment of Value Added Tax (VAT) liabilities by a nonresident providing services in electronic form to individuals." The new provision would be effective as of Jan. 1, 2020. According to the proposed changes, a nonresident legal entity, when providing services to individuals in electronic form, will be required to register as a VAT payer and calculate VAT based on the turnover of services rendered if the place of supply of such services is Kazakhstan (regardless of whether they have established a registered presence). For more on this development, see Tax Alert 2019-1584. International: On Sept. 5, 2019, a bill was submitted to Mexico's Chamber of Deputies that would amend the VAT Law and the Federal Fiscal Code (FFC) to impose a VAT on digital services rendered by nonresidents without a permanent establishment in Mexico to customers located in Mexico. Those nonresidents, however, would be entitled to opt to pay the VAT directly or be subject to a VAT withholding mechanism provided by the VAT Law. For additional information on this development, see Tax Alert 2019-1605. International: Taiwan's Ministry of Finance issued Tax Ruling No. 1080054900 (the Tax Ruling) relating to Article 1 of the Value-added and Non-value-added Business Tax Act (the VAT Act) on Aug. 26, 2019. The Tax Ruling states that the transfer of renewable energy certificates (RECs) should be treated as a sale of services, resulting in the transaction being subject to value-added tax (VAT). The Tax Ruling applies to all transfers of RECs, including transfers occurring prior to the release of the Tax Ruling. For additional information on this development, see Tax Alert 2019-1609. International: On Sept. 2, 2019, the Uzbekistan Government published on its draft legislation portal a draft of the new Uzbek Tax Code for public discussion. According to the text, the Uzbekistan Government is considering the introduction of Value Added Tax (VAT) on digital services rendered by nonresidents to Uzbekistan individuals, anticipated to start from Jan. 1, 2020. For additional information on this development, see Tax Alert 2019-1583. Multistate: On Oct. 3, 2019, from 1:00-2:00 p.m. EDT New York; 10:00-11:00 a.m. PDT Los Angeles, Ernst & Young LLP (EY) will host a webcast providing an update on state activity post Wayfair. In the year since the U.S. Supreme Court's ruling in Wayfair, eliminating the physical presence requirement for nexus purposes, there has been legislation proposed or enacted around the issue of remote seller and marketplace facilitator in nearly every state. Because of this activity, we are beginning to see several significant challenges and unforeseen consequences to multistate taxpayers and state tax administrators alike. During this webcast, EY panelists will discuss the practical implications of the Wayfair decision. The panelists will: (1) provide a high-level overview of state and local responses to date, with a focus on marketplace facilitator provisions; (2) highlight challenges and associated unforeseen consequences of the various state responses to Wayfair; and (3) discuss some of the issues businesses will need to address while navigating the new sales and use tax landscape. Register for this webcast here. 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. Document ID: 2019-1679 |
