21 October 2019 State and Local Tax Weekly for October 11 Ernst & Young's State and Local Tax Weekly newsletter for October 11 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 Tax Court holds that baking racks are used in manufacturing and exempt from sales/use tax The New Jersey Tax Court (Court) held that mobile baking pan racks purchased by a bakery ae exempt from state sales and use tax. Liscio’s Italian Bakery, Inc. v. Director, Div. of Taxation, Docket No. 009658-2017 (N.J. Tax Ct. Sept. 27, 2019). In a detailed opinion, the Court delved into the facts related to the use of the racks in the bread production process to reach its conclusion that the purchase of the racks fit into New Jersey’s exemption for machinery, apparatus, or equipment (MAE) used directly and primarily in manufacturing. An auditor for the New Jersey Division of Taxation (Division) determined that the racks were taxable because they were not directly used in the refining of the finished product and were not “complex devices.” The Court, however, found that the racks were not used merely to store the bread dough; rather, they were used almost continuously during the bread production shift to create finished bakery products. The racks also were custom-made for the bakery, and their customized nature permitted active management and control of the processes that applied to the dough. Relying on these facts, the Court determined that the racks sustained the production process and were directly and primarily used in the process.1 On the complex devices issue, the Court reviewed the Division’s applicable regulation,2 parsing its language to determine that the Division incorrectly required the MAE to be complex. The MAE had to be either complex, mechanical, electrical, or electronic, and the Court concluded from the evidence that the baking racks were mechanical. Having determined that the racks were directly and primarily used in manufacturing and were mechanical, the Court reversed the Division’s determination that the racks were taxable. For more information on this development, see Tax Alert 2019-1778. California: Gain realized on target company’s deemed sales of assets as a result of the taxpayer, a global media and technology company, making an IRC § 338(g) election is reported by the target on target’s final return for the taxable year ending at the close of the acquisition date and apportioned to California using target’s adjusted apportionment formula. The California Franchise Tax Board noted that FTB Legal Ruling 2006-03, which addresses the apportionment of gain from an IRC § 338 election but does not address how these gains are apportioned for a transaction involving a group of foreign corporations, supports such separate reporting. Cal. FTB, Chief Counsel Ruling No. 2019-02 (July 11, 2019). New York: The US Supreme Court will not review New York court rulings upholding the constitutionality of New York’s statutory residence rule under which statutory residents are not provided with an offsetting credit for taxes paid to another state on intangible income sourced to both states (taxpayers argued that the denial of the offsetting credit may result in double taxation of the same income). Samuel Edelman, et ux. v. NY State Dept. of Taxn. and Fin., et al., Nos. 156415, 156416, 156970, 15697 (N.Y. S.Ct., App. Div., 1st Jud. Dept., June 26, 2018), motion for leave to appeal denied (N.Y. Ct. App. March 26, 2019), cert. denied, Dkt. No. 18-1570 (U.S. S.Ct. Oct. 1, 2019); Chamberlain v. N.Y. Dept. of Tax. and Fin., No. 525967 (N.Y. S.Ct., App. Div., 3rd Jud. Dept., Nov. 1, 2018), motion for leave to appeal denied (N.Y. Ct. App. March 26, 2019), cert. denied, Dkt. No. 18-1569 (U.S. S.Ct. Oct. 1, 2019). Puerto Rico: Taxpayers may be able to fully deduct related-party expenses in Puerto Rico if they submit a transfer pricing study with their income tax returns. For more information on this development, see Tax Alert 2019-1777. Utah: In a case of first impression, the Utah State Tax Commission (Commission) held an entity that filed as part of a federal consolidated group that included two foreign corporations (foreign co) under an IRC §1504(d) election (i.e., treating foreign co as domestic corporations) should not include foreign co’s income and activity in its “unadjusted income” for purposes of its Utah water’s edge combined return, because foreign co’s “threshold level of business activity” in the US was not equal to or greater than 20% of its total business activity. The Commission noted a statutory conflict and lack of guidance regarding what should happen with foreign co’s income when they did not meet the 20% threshold but were included in the Utah combined group’s “unadjusted income” through the entity’s IRC § 1504(d) election. The Commission found that the entity and the state offered plausible interpretations of the statutory framework, but the statute excluding foreign co’s income after failing to meet the 20% threshold was more specific. Taxpayer v. Utah State Tax Comn. Auditing Div., No. 18-56 (Utah State Tax Comn. June 25, 2019). Louisiana: In reversing the decision of the Louisiana Board of Tax Appeals (Board), the Louisiana Court of Appeal (Court) held that a medical center’s purchases of medical devices during the November 2016 sales tax period are exempt from the state’s sales and use tax because these sales fall within the scope of the Louisiana Constitution’s prohibition against state general sales and use tax on “prescription drugs.” Further, the state’s 2016 suspension of certain sales and use tax exemptions and exclusions3 did not apply to prescription drugs. In reaching these conclusions, the Court found the constitutional language of “prescription drugs” to be ambiguous and subject to more than one interpretation. To decipher its meaning, the Court considered the intent of the provision, which under the 2002 “Stelly Plan” was to constitutionally prohibit temporary taxes on “prescription drugs”, and the fact that Louisiana’s definition of prescription drugs has historically included medical devices. Ultimately, the Court determined “prescription drugs” set forth in Louisiana Constitution Art. VII, §2.2(B)(3) includes medical devices. Lastly, the Court found the Board erroneously relied on a 2017 law (Act 426, which preserved the exemption for medical devices) to support its conclusion that the 2016 laws subjected medical devices to tax, noting that the medical center and other interested parties’ proactive measures securing a legislative fix did not mean the tax prohibition did not apply during the time period at issue. Lafayette Gen. Med. Center, Inc. v. Robinson, No. 18-879 (La. App. Ct., 3rd Cir., Aug. 14, 2019). Massachusetts: A Virginia circuit court granted Massachusetts’ motion to dismiss a multistate online retailer’s suit filed in Virginia under a Virginia statute challenging the Massachusetts Department of Revenue’s (MA DoR) Directive 17-1 and 830 CMR 64H.1.7: Vendors Making Internet Sales (regulation) requiring internet retailers that meet certain requirements to collect and remit sales and use tax. The circuit court determined that it lacked jurisdiction to hear the case. (Crutchfield v. Massachusetts, Dkt. No. CL17001145-00 (Va. Cir. Ct., 16th Jud. Ct., Oct. 9, 2019)). On a related note, on Oct. 3, 2019 the MA DoR proposed repealing the regulation at issue in the Crutchfield case, and replacing it with a new regulation 830 CMR 64H.1.9: Remote Retailers and Marketplace Facilitators (this regulation also was proposed as, and is identical to, emergency regulation 830 CMR 64H.1.9). The MA DoR will hold a hearing on the regulations on Nov. 7, 2019. South Dakota: A federal appeals court upheld a district court’s ruling that South Dakota’s imposition of a use tax on purchases of non-gaming “amenities” at an Indian Tribe (Tribe) casino by patrons who are not members of the Tribe is preempted by federal law. However, in reversing part of the district court’s ruling, the appeals court held that the state can condition the Tribe’s renewal of alcoholic beverage licenses on its remittance of validly imposed use taxes on nonmember purchases made at the store in the casino. The appeals court found that the Tribe did not address whether license denials would unduly interfere with its gaming activity and did not demonstrate that the state alcohol license requirement is not reasonably necessary to further its interest in collecting valid state taxes. Flandreau Santee Sioux Tribe v. Noem, No. 18-1271 (U.S. App. Ct., 8th Cir., Sept. 6, 2019). Utah: In response to a ruling request regarding the application of the state’s new marketplace facilitator provisions,4 the Utah State Tax Commission determined that an entity that sells internet-based advertising of third-party merchants’ goods and services is not a marketplace facilitator for sales subsequently made through the third-party merchants’ websites after internet users click on those advertisements (i.e., referrals). Under the statutory definition of “marketplace facilitator,” the entity is a person that enters into a contract with sellers, for consideration, to facilitate the sale of a seller’s product, but sales of the seller’s product are not made through a marketplace that the entity owns, operates, or controls. Instead, the sales occur through third-party merchants’ websites. Therefore, the entity is not a “marketplace facilitator” for the sales at issue. Utah State Tax Comn., Private Letter Ruling No. 19-004 (Aug. 21, 2019). Wisconsin: A federal appeals court (court) held that Wisconsin’s imposition of ad valorem property tax on a railroad’s intangible property, including the railroad’s custom software, while providing an exemption from the tax to manufacturers and commercial taxpayers, singles out railroads as part of a targeted and isolated group, violating the federal Railroad Revitalization and Regulatory Reform Act of 1976 (the 4-R Act). In so holding, the court found Wisconsin’s reference to “its ‘generally applicable property tax’ is, functionally, generally applicable only to real and tangible personal property.” The court reasoned that manufacturing and commercial companies pay property tax on the value of real and tangible personal property, while only railroads and utilities pay property tax on intangible property. Moreover, the court concluded that the exemption from property tax for intangible property “— for which railroads and utilities companies categorically do not qualify — reflects and operates as ‘another tax that discriminates against a rail carrier’ … and thereby offends the 4-R Act.” Lastly, the court found the Wisconsin Department of Revenue (Department) neither provided a non-discriminatory justification to impose the targeted tax on railroad and utility companies’ intangible property, nor did it challenge the lower court’s ruling that the railroad and utility companies were a targeted and isolated group. Union Pacific Railroad Co. v. Wis. Dept. of Rev., No. 19-1741 (U.S. Ct. App., 7th Cir., Oct. 7, 2019). California: The California Franchise Tax Board announced that it will impose failure to withhold penalties against qualified intermediaries (QIs) who actively participate in structures where boot (i.e., non-like-kind property received in an exchange) or proceeds from an attempted like-kind exchange are converted into an installment note or similar arrangement under which payments are to be paid out over two or more years. Although a QI generally is not required to withhold if it in good faith relies on the transferor’s certification that the transfer will qualify as a simultaneous or deferred like-kind exchange under IRC § 1031, they are required to withhold when an exchange fails, does not occur, or does not meet the IRC § 1031 requirements, and does not qualify for any other withholding exemption. Unless the failure to withhold is due to reasonable cause, a penalty equal to the greater of $500 or 10% of the amount that should have been withheld will be imposed beginning with attempted like-kind exchanges where property is relinquished on or after March 24, 2020. Cal. Franchise Tax Bd., FTB Notice 2019-05 (Sept. 24, 2019). Mississippi: The US Supreme Court will not review the Mississippi Supreme Court’s ruling in Kansler. At issue in the case is the constitutionality of Mississippi’s income tax refund provisions which permit certain residents to recover overpaid taxes beyond the statute of limitations period when the overpayment resulted from a Mississippi or federal government delayed procedure, but not a delayed procedure of another state (the denial of which may result, according to the taxpayer, in double taxation). Kansler v. Mississippi Dept. of Rev., No. 2017-CA-01295-SCT (Miss. S.Ct. Nov. 29, 2018), cert. denied, Dkt. 18-1485 (U.S. S.Ct. Oct. 1, 2019). Massachusetts: The Massachusetts Department of Family and Medical Leave issued guidance for determining when to include independent contractors (referred to as 1099-MISC workers) and foreign visa workers in the employer's workforce count for reporting and determining whether it is responsible to pay and withhold the state's paid family and medical insurance (PFML) contributions. As we reported previously, employers of 25 or more covered workers are required to pay a portion of the PFML contributions and to withhold a portion from covered employees' wages. For additional information on this development, see Tax Alert 2019-1796. New York: The New York Department of Taxation and Finance announced that eligible employers may begin enrolling to participate in the 2020 Employer Compensation Expense Program (ECEP) on Oct. 1, 2019. The enrollment period for this voluntary program will run until Dec. 1, 2019. Calendar year 2020 will be the second year for the program. Employers may elect to pay the ECEP tax if they have employees that earn over $40,000 in wages each year and have compensation in New York State. Employers that elect into the ECEP for the year pay the ECET on employee total New York wages that exceed $40,000 for the calendar year. For additional information on this development, see Tax Alert 2019-1782. Arizona: The U.S. Supreme Court will not review the Arizona Supreme Court ruling upholding the constitutionality of the car-rental surcharge enacted by Maricopa County to generate revenue to pay for a sports stadium and other sports- and tourism-related ventures. Saban Rent-A-Car LLC, et al. v. Ariz. Dept. of Rev., No. CV-18-0080-PR (Ariz. S.Ct. Feb. 25, 2019), cert. denied, Dkt. No. 19-136 (U.S. S.Ct. Oct. 1, 2019). Illinois: An Illinois appeals court (Court) upheld Chicago’s 9% amusement tax on internet-based streaming services, finding the tax is not an extraterritorial application of Chicago’s taxing power and the tax does not violate the Illinois Constitution’s Uniformity Clause or the federal Internet Tax Freedom Act (ITFA). In so holding, the Court rejected the taxpayer’s argument that the reach of Chicago’s amusement tax extends beyond the city’s boarders in violation of the Illinois Constitution’s home rule provision. The Court determined that unlike the invalid tax at issue in Hertz Corp.,5 the amusement tax, under Chicago’s home rule authority, is facially valid since the city is taxing an event that occurs within its boundaries and in an area for which it provides services, and the amusement tax ordinance sets forth a rebuttable presumption of residency (whereas the ordinance at issue in Hertz in involved a conclusive presumption that a Chicago resident customer would use a leased vehicle primarily in the City). The Court, however, found the city’s use of a customer’s credit card billing address to determine residency is unreasonable. Rather, residency is determined based on a customer’s primary place of use as defined by Illinois’ Mobile Telecommunications Sourcing Conformity Act. The Court further held that the amusement tax as applied to streaming services does not violate the Illinois Constitution’s Uniformity Clause in that it is based on real and substantial differences between those who are taxed and not taxed, and the streaming services are substantially different from the automatic amusement devices. Lastly, the Court determined that the amusement tax does not impose discriminatory taxes on electronic commerce in violation of the ITFA, because the streaming services are not sufficiently similar to live performances or automatic amusement machines. Labell v. City of Chicago, 2019 IL App (1st) 181379 (Ill. App. Ct., 1st Dist. 4th Div., Sept. 30, 2019). California: New law (SB 109) provides for a potential unclaimed property amnesty program. Under the law, the state Controller on or before March 1, 2020 will provide the Joint Legislative Budget Committee, among others, with a report on plans to either (1) provide for a one-time unclaimed property amnesty program, or (2) other options to increase compliance with the unclaimed property law. Cal. Laws 2019, ch. 363 (SB 109), signed by the governor on Sept. 27, 2019. International: In Sept. 2019, the United Arab Emirates (UAE) Federal Tax Authority (FTA) issued an updated guide on Value Added Tax (VAT) refunds for business visitors (the Guide). The Guide provides information on: (i) the eligibility of overseas businesses and business visitors to obtain refunds of VAT incurred in the UAE; (ii) the information required to be submitted with the claim; (iii) deadlines to submit the form; and (iv) a list of countries eligible for the scheme that operate reciprocal agreements. Businesses with no place of establishment in the UAE or another Gulf Cooperation Council (GCC) State and who are not registered for VAT in the UAE, should check their eligibility to recover input VAT incurred in the UAE. For more on this development, see Tax Alert 2019-1788. Federal/International: A replay of the Sept. 19, 2019, Ernst & Young LLP (EY) webcast in the global trade disruption series is now available. On this webcast, the EY panelists discussed recent trade developments, the intricacies of country of origin, and strategies to mitigate the impact. Other topics discussed included: (1) latest trade actions between the US and China, (2) additional trade actions across the globe, (3) the complexity of determining country of origin, and (4) strategies to address the current trade environment and plan for the future. Click here for a replay of this 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. 5 Hertz Corp. v. City of Chicago, 2017 IL 119945 (2017) (City’s tax on the use of personal property within its borders, including personal property rented or leased outside the City, was unconstitutional because it extended the reach of the tax ordinance beyond the City’s boarders in violation of the Illinois Constitution’s home rule provision). Document ID: 2019-1868 |
