10 October 2019 State and Local Tax Weekly for October 4 Ernst & Young's State and Local Tax Weekly newsletter for October 4 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. California "split roll" ballot initiative would reassess commercial and industrial real property at fair market value Ballot Initiative 17-0055 (Measure), commonly referred to as a "split roll" measure, proposes amending the California constitution to eliminate property tax assessment protections under Proposition 13 for commercial and industrial real property while retaining them for residential real property. Adopted in 1978, Proposition 13 amended the California Constitution and established an acquisition value system of assessment. Under that system, real property is assigned a "base year" value that reflects fair market value at the time of purchase or when new construction is completed. Assessment increases on this "base year value" are limited to no more than 2% annually, absent a subsequent change in ownership or new construction of the property. This maximum annual increase is significantly below historical rates of appreciation for real property in California, so assessed values typically fall below market value, especially when property has been held for many years. The Measure proposes reassessment to fair market value for commercial and industrial real property, with continued reassessment to fair market value at least once every three years. Residential real property, including single family homes and apartment complexes, would continue to be protected from annual revaluation under Proposition 13 as it currently exists. The Measure is scheduled for a statewide general election vote on November 3, 2020 and needs only a simple majority to become law. If passed, the changes could go into effect as early as the 2020 assessment year. In August 2019, spilt-roll proponents filed a revised measure, Ballot Initiative 19-0008, to resolve drafting errors and gain broader voter support. The revisions aim to address criticism that it would be legally, administratively, and financially difficult to implement. If the requisite signatures are obtained by May 2020, this new version will qualify for the November 2020 ballot and will likely replace the current version of the Measure. For more on this development, see Tax Alert 2019-1746. Kansas governor and revenue department set to disregard Attorney General opinion that the department's notice on sales/use tax treatment of remote sellers is unlawful Kansas Gov. Laura Kelly and Secretary Mark Burghart of the Kansas Department of Revenue (KS DOR) have rejected the opinion of the Kansas Attorney General (KS AG) finding that KS DOR Notice 19-04 (Notice),1 which requires all remote sellers to register and begin collecting and remitting sales and use tax without having to meet an economic or transaction threshold, was unlawful. The KS AG said in the Sept. 30, 2019 opinion that the Notice was inconsistent with Wayfair,2 was not lawfully adopted under state procedures, and thus had no force or effect. In a press release, Gov. Kelly expressed her support for the action taken by the KS DOR in the Notice, while Secretary Burghart implied that the KS DOR will enforce the Notice unless otherwise directed by a court. For more on this development, see Tax Alert 2019-1767. Federal: In recently released Revenue Procedure 2019-38 (the revenue procedure), the IRS provides a safe harbor under which a "rental real estate enterprise" will be treated as a trade or business for purposes of the IRC § 199A pass-through deduction. The revenue procedure's safe harbor attempts to mitigate uncertainty about whether an interest in rental real estate rises to the level of a trade or business for purposes of IRC § 199A, which allows a deduction for certain income from a trade or business. The revenue procedure allows taxpayers and relevant pass-through entities to treat a rental real estate enterprise as a single trade or business solely for purposes of IRC § 199A, if certain requirements are met. For more information on this development, see Tax Alert 2019-1742. Illinois: New and amended regulations (new 86 Ill. Adm. Code 100.3600, amended 86 Ill. Adm. Code 100.3370, .3380, .5220, .5270, and .9700, and repealed 86 Ill. Adm. Code 100.Appendix A, Table A and Table B) implement a 2017 law change that permits persons that use different apportionment methods to be members of the same unitary business group, and provide guidance on how to combine income and apportionment factors of unitary business group members that are required to use different apportionment methods. New 86 Ill. Adm. Code 100.3600 provides guidance for apportioning business income of a unitary business group when members use different apportionment formulas. For tax years ending on or after Dec. 31, 2017, such business income is apportioned using the average of the apportionment percentages of each subgroup of members that use the same apportionment formula (calculated as if the subgroup were a separate unitary business group) and weighted by the everywhere sales of each subgroup's members. The regulation explains how to calculate the apportionment percentage of each unitary business group member and provides an example. Amended sales factor regulation, 86 Ill. Adm. Code 100.3370, provides that a unitary business group's "total gross receipts and gross receipts from the licensing, sale, or other disposition of a patent, copyright, trademark, or similar item of intangible personal property in the two years immediately preceding the tax year" only includes such receipts of all unitary business group members that were members at some time during the taxable year (regardless of whether they were members of the group in a preceding tax year). The special rules under 86 Ill. Adm. Code 100.3380 related to unitary partners are amended to provide that for tax years ending on or after Dec. 31, 2017, when the business activities of a partnership and any of its partners' business activities constitute a unitary business, a partner's distributive share of the partnership's everywhere sales are included in the partner's everywhere sales in applying 86 Ill. Adm. Code 100.3600. The regulation also provides guidance on how to compute respective apportionment percentages when a partner and partnership engaged in a unitary business apportion their business income using different apportionment formulas. Further, in response to the law change, 86 Ill. Adm. Code 100.5220 has been amended to add guidance on selecting a combined group's designated agent when the combined group in its first tax year ending on or after Dec. 31, 2017 has two or more combined groups that were not previously included in the same unitary business group. Basically, the combined group can choose any member of the group to be the designated agent. Amended 86 Ill. Adm. Code 100.5270 addresses how to compute combined net income and tax, and amended 86 Ill. Adm. Code 100.9700 clarifies terms related to the 80/20 US business activity test for prospective members of a unitary business group for tax years ending on or after Dec. 31, 2017. It also provides information regarding how taxpayers transition to the new combined group provisions. Lastly, an appendix and two tables related to business income and unitary business apportionment are repealed. These rules took effect Aug. 27, 2019. Ill. Register, Issue 38, 86 Ill. Adm. Code 100.3370, .3380, .5220, .5270, and .9700, and new 86 Ill. Adm. Code 100.3600 (Sept. 13, 2019). Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) in response to the U.S. Supreme Court ruling in Wayfair, announced that it will impose economic nexus for corporate net income tax purposes beginning Jan. 1, 2020. The PA DOR will presume nexus for out-of-state corporations that do not have a physical presence in the state but have $500,000 or more direct or indirect gross receipts from Pennsylvania sources (using the sales factor rules in 72 P.S. §7401) from any combination of the following, gross receipts from the: (1) sale, rental, lease, or licensing of tangible personal property; (2) sales of services; and/or (3) sale or licensing of intangibles, including franchise agreements. The PA DOR acknowledged that taxpayers eligible for protection under P.L. 86-272 can still claim exception from the net income tax if they qualify (e.g., only engage in specified sales solicitation activities protected under the federal law). Pa. Dept. of Rev., Corporation Tax Bulletin 2019-04 (Sept. 30, 2019). Vermont: In Sept. 2019, the Vermont Department of Taxes expanded its guidance on the state's conformity to the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) to include information on select TJCA provisions, including foreign-derived intangible income (FDII) (Vermont conforms to this federal deduction), IRC §163(j) business interest limitation (deduction reduces federal taxable income and flows to Vermont tax), and bonus depreciation under IRC §168(k) (Vermont taxable income is adjusted gross income without including the IRC §168(k) deduction). The guidance already addressed the following: (1) repatriated income under IRC §965 (instructions on how to report this income); (2) global intangible low-taxed income (GILTI) (for corporate and individual income tax purposes, GILTI is automatically included in the Vermont calculation starting point; GILTI deduction under IRC §250 is incorporated for corporate income tax purposes and is not available for individual income tax purposes); and (3) IRC §199A (the pass-through entity deduction does not affect or reduce Vermont tax liability). Vt. Dept. of Taxes, "Tax Cuts and Jobs Act (TCJA) Conformity" (last accessed Oct. 8, 2019). Maryland: The Comptroller of Maryland (Comptroller) issued guidance that lists whether sales of tangible personal property or services are subject to Maryland's sales and use tax. The guidance also addresses special situations that affect whether a sale is taxable, including sales made during a tax holiday, exempt charitable/nonprofit sales, government (federal, state and local) sales, fundraisers, and property used in film production. The Comptroller noted that the list is not "complete" but may be used as a guide in determining the taxability of a sale of tangible personal property or services. Md. Compt. of Treas., "List of Tangible Personal Property and Services Subject to Sales and Use Tax" (Oct. 1, 2019). Minnesota: A company that operates a burn-off oven to remove accumulated powder coating from its customers' production equipment (e.g., hooks and racks) is entitled to the industrial production sales and use tax exemption for natural gas and electricity used to operate the oven, because the natural gas and electricity is stored, used, or consumed in industrial production of tangible personal property that the company's customers intended to sell at retail. In so holding, the Minnesota Tax Court found that a statutory post-production processing exclusion from the industrial production exemption (excluding from "industrial production" the "painting, cleaning, repairing or similar processing of property except as part of the original manufacturing process") applies to property and, therefore, does not apply to the cleaning of production equipment. Inthermo, Inc. v. Minn. Comr. of Rev., No. 9143-R (Minn. Tax Ct. Sept. 10, 2019). New Jersey: A company that purchased materials and supplies to fabricate and install a baggage handling system in an airport terminal under a contract with a private non-exempt airline at an airport operated by the tax-exempt Port Authority of New York and New Jersey (PA) is not entitled to a refund of sales and use tax paid on its purchases. In so holding, the New Jersey Tax Court found that the contract at issue was between the company and the airline. Thus, the plain terms and legislative purpose of the exemption for "receipts from sales made to contractors or repairmen … for exclusive use in erecting structures or building on, or otherwise improving, altering or repairing real property of [exempt organizations]" was not fulfilled. Additionally, the company could not be a "subcontractor" when the airline for which it did work was not classified as a "contractor" by regulation. Moreover, the airline, and not the PA, was the "user" of the improvements. Jervis B. Webb Co. v. NJ Dir., Div. of Taxn., Nos. 000054—2016, 000269—2016, 000270—2016, 000271—2016, 000272—2016, 000273—2016, 000274—2016, 000275—2016, 000276—2016, 000277—2016 (N.J. Tax Ct. Aug. 13, 2018) (not for publication). Puerto Rico: Beginning Oct. 1, 2019, the reduced sales and use tax (SUT) rate of 7% applies to the sale of prepared foods in Puerto Rico, instead of the general 11.5% rate. The Puerto Rico Treasury Department (PRTD) issued Administrative Determination (AD) 19-03 to provide guidance on the procedure for merchants to obtain authorization to collect the 7% reduced SUT rate. To obtain authorization to collect the reduced SUT on sales of prepared food, the merchant must: (1) have a Merchant Register Certificate, (2) have complied with its SUT return and declaration obligations, (3) not have any outstanding tax debts, and (4) have a tax terminal installed at each point of sale. A merchant that meets the eligibility requirements will receive a certificate through SURI (i.e., the PRTD's integrated tax system) that will authorize it to collect the reduced SUT rate on the sale of prepared food beginning Oct. 1, 2019. For additional information on this development, see Tax Alert 2019-1736. Federal: On Sept. 25, 2019, the IRS released draft Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments, which investors in qualified opportunity zone funds (QOFs) must file to report QOF investments held at the beginning and end of the current tax year, current tax year capital gains deferred by investing in QOFs, as well as QOF investments disposed of during the current tax year. Eligible taxpayers — including individuals, C corporations, regulated investment companies, real estate investment trusts, partnerships, S corporations, trusts, and estates — holding a QOF investment at any time during the tax year must file Form 8997. For additional information on this development, see Tax Alert 2019-1750. Rhode Island: Governor Gina Raimondo announced that the new investment fund tax credit program — the Small Business Development Fund — will be subject to stricter controls by the Rhode Island Commerce Corporation than provided for by statute. The stricter controls are intended to protect taxpayers by ensuring that companies meet performance obligations (e.g., create a specified number of jobs) before receiving the tax credits. Emergency regulations, which will be released soon, will authorize the Board of the Rhode Island Commerce Corporation to approve program applications, impose strict financial disclosure and performance requirements around the application and reporting process, and ensure taxpayer protections if an approved applicant fails to deliver promised outcomes. R.I. Gov., Press Release: Commerce Board Moves to Add Safeguards to New Tax Credit Program (Sept. 18, 2019). Tennessee: A distillery's whiskey barrels are "aged whiskey barrels" under Tenn. Code Ann. §67-5-216(c) and, therefore, are exempt from property tax as "articles manufactured from the produce of this state, or any other state of the union, in the hands of the manufacturer." In so holding, an administrative law judge (ALJ) for the Tennessee State Board of Equalization found that the barrels were "aged whiskey barrels" since: (1) the distillery produced or manufactured whiskey in the barrels when the whiskey underwent substantial change in form and appearance from being aged in the whiskey barrels; (2) the barrels were primarily made of domestic timber; (3) the barrels contained "whiskey" as defined by federal law; and (4) the barrels changed in form and appearance as a result of the whiskey aging process. Further, the ALJ rejected the assessor's contention that the exemption statute, which was enacted May 17, 2018, could be applied retroactively to prior year assessments, finding that its application to the distillery's assessments for tax years 2016 — 2018 is permissible because the legislature in drafting the statutory provision "unmistakably commanded" that it be applied to all tax years properly under appeal. Lastly, the ALJ found the assessor failed to argue a meaningful "as applied" constitutional challenge to the statute but suggested the assessor bring a facial challenge before a court of competent jurisdiction. In re: Brown-Forman Corp. d/b/a Jack Daniels Distillery, Nos. 117543, 117544, 120742 (Tenn. State Bd. of Equal. Sept. 13, 2019). New Jersey: On Oct. 4, 2019, the New Jersey Division of Taxation (DOT) notified taxpayers that it has come to its attention that some vendor software used by taxpayers to file their 2018 New Jersey Corporation Business Tax (NJ CBT) returns may repeat the inclusion of foreign-derived intangible income (FDII) in their returns. Both FDII and global intangible low-taxed income (GILTI) are reported on different lines for New Jersey and federal income tax purposes. In order to avoid double inclusion of the income, the DOT said "the amounts reported on any other lines must be reduced by the amount of the FDII and GILTI included on lines 10a and 10b of the 2018 Schedule A when transferring income data reported on the federal [Form] 1120 onto the New Jersey Schedule A." N.J. Div. of Tax., NOTICE: Reporting FDII on Schedule A (Oct. 4, 2019).For additional information on this development, see Tax Alert 2019-1771. Massachusetts: A corporation that timely filed abatement applications in response to notices of deficiency assessments for the tax years at issue (2007 and 2012) is barred by the statute of limitations from receiving refunds of other overpaid taxes for those tax years. In so holding, the Massachusetts Appeals Court (Court) cited RHI Holdings, Inc.,3 and found that the 2007 and 2012 deficiency assessments "did not operate to impose a new assessment of any amount overpaid with the 2007 and 2012 returns" and "were effective only to abate any amounts imposed by the notices of those assessments … ." Therefore, the commonwealth properly declined jurisdiction over other amounts, including the difference between the amount the corporation self-reported on its original return and the amount "properly due" after all adjustments or credits that were or could have been applied (and which did not become known until after the date on which the corporation could have filed an abatement application). In addition, the Court rejected the corporation's argument that its timely filed 2012 deficiency assessment abatement application preserved its right to claim an abatement of a different assessment (which came about due to a subsequent event that provided the corporation with significant investment tax credit carryforwards that could be used in the 2012 year) that otherwise would be barred by the statute of limitations. Raytheon Co. v. Mass. Comr. of Rev., Nos. 18-P-790 and 18-P-1468 (Mass. App. Ct. Sept. 12, 2019). New Mexico: Effective July 1, 2020, employers of two or more employees in Bernalillo County, New Mexico required to apply for a county business registration must provide paid time off to most full-time, part-time, seasonal, and temporary basis employees that have worked a minimum of 56 hours in a year for the employer. The ordinance covers business owners in the unincorporated areas of the county (the area outside the city limits of Albuquerque). Employers must allow employees to use accrued paid time off for any reason. For more on this development, see Tax Alert 2019-1766. Oregon: The Oregon Department of Consumer & Business Services is proposing to change certain workers' compensation rates for 2020. For the seventh consecutive year, the "pure premium" rate is scheduled to decrease. Oregon employers would see an average 8.4% decrease in pure premium workers' compensation costs for calendar year 2020. With this change, the pure premium will have decreased by an average of 45% for the periods of 2013—2020. For more on this development see Tax Alert 2019-1757. Washington: The Washington Department of Labor & Industries (Department) is proposing an average decrease in employer workers' compensation insurance premiums of 0.8% for 2020, marking the third consecutive year of decreases. In 2018, the average workers' compensation premium rate dropped by 2.5% and the 2019 rate dropped by another 5%, the largest decline in more than 10 years. According to the Department's news release, the proposed 2020 decrease would save employers an average of approximately $15 each year per employee. The proposed decrease would result in Washington employers, as a group, paying $21 million less in premiums. For more on this development, see Tax Alert 2019-1758. Federal: On Oct. 2, 2019, the World Trade Organization (WTO) Arbitrator, comprised of a three-person appellate body, issued its report regarding the appropriate value of acceptable countermeasures the United States (US) could impose on the European Union (EU) for providing subsidies to non-US aircraft manufacturers. The WTO arbitrators determined that the US was entitled to impose tariffs on US$7.5 billion of EU-origin goods.Following the WTO announcement, the US Trade Representative (USTR) released a formal statement, noting that the arbitration award represented the largest ever in WTO history, and published a final product list with 15 different sections covering 160 different 8-digit Harmonized Tariff Schedule codes. Certain aircraft from specified European countries are subject to a 10% ad valorem duty rate, and other products are subject to a 25% duty rate. In addition, on Oct. 2, 2019, the USTR published newly granted exclusions for Chinese origin products subject to punitive tariffs. For more on these developments, see Tax Alert 2019-1762. Multistate: A replay of the Sept. 18, 2019, Ernst & Young LLP (EY) quarterly webcast focusing on state tax matters is now available. On the third webcast in 2019, our featured discussion highlighted various state proposals related to market-based sourcing rules. Panelists from our California and New York offices discussed proposed regulations being considered in their respective states. The panelists also provided: (1) an update on state responses to federal tax reform and to the U.S. Supreme Court's (Court) ruling in Wayfair; (2) an overview of state budget legislation enacted since our May 2019 quarterly webcast; (3) an overview of recent Court decisions; and (4) an update on other significant judicial and administrative developments. Click here to listen to a replay of the webcast. 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: 2019-1799 |
