28 October 2019 State and Local Tax Weekly for October 18 Ernst & Young's State and Local Tax Weekly newsletter for October 18 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. In Nissan North America, Inc. v. McClain,1 the Ohio Board of Tax Appeals (BTA) held that the Ohio Department of Taxation (Department) abused its discretion in denying a retroactive consolidated election for purposes of the Ohio Commercial Activity Tax (CAT). The BTA's decision appears to be a rebuke of a long-standing Departmental policy denying requests for retroactive consolidated status after CAT audits begin and may result in the Department giving more consideration to such requests. For more on this development, see Tax Alert 2019-1825. US and China reach initial accord towards trade agreement on agricultural purchases, tariff delays and next steps on framework for intellectual property and technology transfers On Oct. 11, 2019, the United States (US) President Donald Trump and Chinese Vice Premier Liu He announced that the two nations had reached an initial accord, referred to as the Phase One Agreement (Agreement or Phase One). In a joint press conference at the White House following a week-long negotiation process, the US has indicated that the Agreement will be the first step towards a more comprehensive trade agreement to ultimately address key concerns regarding China's discriminatory and unfair trade practices as sought by the Trump Administration under Section 301 of the Trade Act of 1974.2 Phase One features include increased purchases by China of US agricultural products, suspended punitive tariff increases by the US, certain Chinese concessions on currency manipulation, as well as the framework for next steps on other issues such as intellectual property (IP) and technology transfer matters, arguably the most complex and longstanding issues subject to the negotiations. The President indicated the Agreement in principle is pending formal write-up, which could take up to five weeks to complete, and may be signed at or around the time President Trump and Chinese President Xi Jinping attend the Asia-Pacific Economic Cooperation meeting in Santiago, Chile in November. Despite this progress, US$550 billion3 worth of annual US imports of Chinese-origin goods remains subject to tariffs ranging between 15% and 25%, and $185b4 worth of US goods imported into China remain subject to tariffs ranging between 5% and 25%. Notably, while China appears to be committing to up to $50b in US-origin agricultural purchases and the US has stated that the 5% tariff increase planned for Oct. 15, 2019 has now been suspended indefinitely but not cancelled, the 15% tariffs scheduled for Dec. 15, 2019 were not formally addressed in this initial phase. For more information on this development, see Tax Alert 2019-1820. Federal: In Notice 2019-58, released Oct. 11, 2019, the IRS announced that taxpayers may continue to rely on the Oct. 2016 proposed regulations on characterizing certain corporate interests as stock or debt under IRC Section 385, even though the related temporary regulations expired on Oct. 13, 2019. The expiration of a significant portion of the overall regulatory framework is expected to raise numerous questions regarding ongoing taxpayer compliance with the regulations that remain in place. For more information on this development, see Tax Alert 2019-1836. California: Interest income received by individual taxpayers from a regulated investment company (RIC) that was derived from California municipal bonds is subject to California income tax when the RIC, at the close of each quarter of its tax year, holds less than 50% of the value of its total assets in tax exempt bonds. In so holding, a California Court of Appeal found such taxation did not violate the California Constitution's provision that interest on state or local government bonds is tax-exempt and excludable from income. Under California statutory law, RICs may pay exempt "interest dividends" if, at the close of each quarter of its tax year, at least 50% of the value of the RIC's total assets consist of obligations that would be exempt from tax when held by an individual. The Court also found that the statute does not conflict with the state constitution since the state constitution is silent on exempt interest dividends paid to shareholders. Mass et al. v. Cal. FTB, No. B286857 (Cal. App. Ct., 2d Appel. Dist., Div. 3, Aug. 15, 2019). Massachusetts: In response to the U.S. Supreme Court's ruling in Wayfair,5 the Massachusetts Department of Revenue (Department) amended its regulation, 830 CMR 63.39.1: Corporate nexus, to adopt an economic or virtual contacts nexus standard for Corporate Excise Tax purposes. Under this rule, the Department will presume that a general business corporation has economic or virtual contacts sufficient to establish nexus with the state if the volume of the corporation's Massachusetts sales for the tax year exceeds $500,000. In determining whether the threshold has been met, the Department will include the Massachusetts sales of a related person engaged in a unitary business with respect to any corporation that has Massachusetts sales, if absent this inclusion no corporation engaged in a unitary business would be subject to the excise tax. Corporate taxpayers meeting this threshold, nevertheless, may be exempt from the corporate excise (but not the non-income measure or minimum excise) under the protection of P.L. 86-272. Mass. Dept. of Rev., 830 CMR 63.39.1: Corporate nexus (promulgated Oct. 18, 2019). Virginia: Virginia resident shareholders of an S corporation that paid District of Columbia (DC) corporate franchise tax are not eligible to claim a credit against their Virginia income tax for DC corporate franchise tax paid. The Virginia Tax Commissioner (Commissioner) reiterated its prior conclusion that the DC corporate franchise tax does not qualify as an "income tax" for purposes of the credit allowed under Virginia law since it is a franchise tax and it does not tax all of the DC-source income of a nonresident S corporation shareholder. The Commissioner also found that Virginia's denial of the credit for DC corporate franchise tax paid does not violate the U.S. Commerce Clause under Wynne.6 The Commissioner reasoned that under the internal consistency test, the DC corporate franchise tax is significantly different from Virginia's income tax, and that DC has a broad-based net income tax for which Virginia would allow a credit under the appropriate circumstances. Va. Dept. of Taxn., Rulings of the Comr. No. 19-86 (Aug. 12, 2019). California: New law (AB 1583) extends through Jan. 1, 2026 (from Jan. 1, 2021) the sales and use tax exclusion under the California Alternative Energy and Advanced Transportation Financing Authority Act for certain projects that promote California-based manufacturing, California-based jobs, advanced manufacturing, greenhouse gas reduction, or reduction in air and water pollution or energy consumption. Specifically, the bill extends California's authority to provide financial assistance in the form of specified sales and use tax exclusions for such projects, as well as the corresponding sales and use tax exclusion. AB 1583 takes effect Jan. 1, 2020. Cal. Laws 2019, ch. 690 (AB 1583), signed by the governor on Oct. 9, 2019. Florida: Sales of pre-assembled individual meals as part of a weekly meal plan that are prepared off the seller's premises, packaged in a sealed container, and not sold for immediate consumption are exempt from sales tax as food products for human consumption. In considering the customary consumption practices prevailing at the selling facility, the Florida Department of Revenue noted that the meals require refrigeration, they are intended to be heated by the customer before eating, and they are delivered during non-meal times in a chilled condition. The seller does not provide customers with eating utensils, napkins, or serving ware, and the meals cannot be consumed on the seller's premises. Fla. Dept. of Rev., Tech. Assist. Advisement 19A-017 (July 17, 2019). California: New law (AB 263) extends state oversight requirements related to tax expenditures (e.g., credit, deduction, exclusion, exemption, or any other state-provided tax benefit) for personal income and corporate income and franchise tax purposes, and expands the application of such provisions to sales and use tax exemptions. Specifically, any bill introduced on or after Jan. 1, 2020, that would authorize a new tax expenditure must include: (1) the tax expenditure's specific goals, purposes, and objectives that it will achieve; and (2) detailed performance indicators and data collection requirements for the legislature to use in measuring whether such goals, purposes, and objectives were met. Cal. Laws 2019, ch. 743 (AB 263), signed by the governor on Oct. 11, 2019. Louisiana: On Oct. 12, 2019, Louisiana voters rejected a proposed Constitutional amendment (CA No. 1) set forth in HB 301 (La. Laws 2019) that would have extended the ad valorem tax exemption for raw materials, goods, commodities and personal property held in Louisiana for purposes of being exported or stored in transit in the state to include raw materials, goods, commodities, and other articles stored in Louisiana for maintenance and destined for the Outer Continental Shelf. New Jersey: The New Jersey Tax Court (Court) affirmed an original assessment of watershed property after finding neither the property owner's appraiser nor the municipality's expert used comparable property in valuing the property. In rejecting the conclusion of the property owner's appraiser, the Court determined the sales used by the appraiser in his sales comparison approach were non-comparable to the subject property. The Court also found that the value of property presented by the municipality's expert was not persuasive because the subject property was restricted by easements not present in the comparative analysis of the municipality's expert. City of Newark/Newark Watershed Corp. v. Township of Jefferson, Dkt. No. 013601-2009, et al. (N.J. Tax Ct. Oct. 4, 2019) (approved for publication). For more information on this development, see Tax Alert 2019-1826. Illinois: Reminder, the Illinois tax amnesty programs for taxes administered by the Illinois Department of Revenue (e.g., income, sales/use, among others) and the Illinois Secretary of State (e.g., Illinois Franchise Tax), will end on Nov. 15, 2019. Under the Department administered program, amnesty is available for taxes that were due for any tax period ending after June 30, 2011 and before July 1, 2018. The franchise tax amnesty program applies to all taxpayers owing a franchise tax or license fee imposed under Art. XV of the Business Corporation Act of 1983 (Art. XV) for any tax period ending after March 15, 2008, and on or before June 30, 2019. Under both programs, penalties and interest will be abated. For more on both programs, see Tax Alerts 2019-1542 and 2019-1684. Louisiana: On Oct. 12, 2019, Louisiana voters approved a Constitutional amendment (CA No. 3), as originated in joint resolution HB 428, to extend the jurisdiction of the Louisiana Board of Tax Appeals to matters addressing the constitutionality of taxes and fees. Iowa: The Iowa Department of Revenue has released revised income tax withholding tables/formulas and instructions to its website. The revisions take effect with wages paid on and after Jan. 1, 2020. The year 2019 was the first for which the Iowa withholding tables and formulas were revised since April 1, 2006. For additional information on this development, see Tax Alert 2019-1844. New Jersey: The New Jersey Compensation Rating and Inspection Bureau (Bureau) announced it is requesting a 3.8% decrease in the overall employer workers' compensation insurance premium and rate level effective Jan. 1, 2020. If approved, this would be the fourth consecutive year of rate decreases and the fifth year without rate hikes. The Bureau anticipates that the revised rates will be issued in plenty of time for preparation of new and renewal policies effective on and after Jan. 1, 2020. Member companies should delay the issuance of policies until after the Bureau announces the new rates on its website. For additional information on this development, see Tax Alert 2019-1829. California: New law (SB 344) extends the Local Prepaid Mobile Telephony Services Collection Act (local prepaid MTS act) until Jan. 1, 2021 (from Jan. 1, 2020). Additionally, until Jan. 1, 2021, prepaid wireless services sellers that sell services or products not subject to local charges in combination with mobile telephony services for a single price are allowed to exclude those services and products from the price upon which the fee is calculated, if the seller can identify such services and products from its books and records kept in the ordinary course of business. Lastly, indirect sellers can deduct and retain an amount equal to 2% of the amount the seller collects from prepaid MTS consumers for local charges. SB 344 takes effect Jan. 1, 2020. Cal. Laws 2019, Ch. 642 (SB 344), signed by the governor on Oct. 8, 2019. California: New law (AB 857) authorizes the formation of up to 10 public banks in California (two per year) and exempts them from income and franchise tax, as well as all other taxes and licenses (state, county, and municipal) imposed on a public bank, local utility user taxes, sales and use taxes, state energy resources surcharges, state emergency telephone users surcharges, among other taxes and fees. A "public bank" is defined as a corporation that is organized as either a nonprofit mutual benefit corporation or nonprofit public benefit corporation for the purpose of engaging in the commercial or industrial banking business, that is wholly owned by a local agency, local agencies or a joint powers authority that is composed only of local agencies. AB 857 takes effect Jan. 1, 2020. Cal. Laws 2019, Ch. 442 (AB 857), signed by the governor on Oct. 2, 2019. Washington: The Washington Department of Revenue (Department) issued interim guidance explaining the application of the statutory insurance business exemption from business and occupation (B&O) tax and withdrew previously issued exemption guidance (Det. 88-311A, 9 WTD 293 (1990)) that it found to be inconsistent with the statute. The exemption may be claimed by persons engaged in the insurance business that receive gross income taxed under Washington's gross premium tax. Given that the statute does not define "insurance business" and determining whether a person's activities are in respect to the insurance business is a fact-specific inquiry, the Department has provided a non-exclusive list of activities that it typically finds do and do not directly relate to the insurance business. The person claiming the exemption must show proof it paid the Washington premium tax on the gross income it claims to be exempt from B&O tax. Lastly, in withdrawing the previously issued exemption guidance, the Department rejected the expansion of the deduction to activities that were functionally related to an insurance business, such as general administrative services, accounting services, and personnel and data processing services, particularly when those activities were not subject to insurance premium tax. Wash. Dept. of Rev., Interim guidance statement regarding the application of the insurance business exemption (Oct. 2, 2019); Wash. Dept. of Rev., ETA 3133.2019 (Oct. 2, 2019). Federal/International: EY's TradeWatch Autumn 2019 edition, which outlines key legislative and administrative developments for customs and trade around the world, is now available. Topics covered in this issue include: (1) trade disruption such as Brexit and the latest developments on the US-China trade dispute; (2) how trade executives are managing ongoing trade costs and the technological revolution in effective global trade management; and (3) regional insights, including an update on New Zealand's customs modernization, new rules for supply chains involving exports from the European Union involving non-European exporters. A copy of the latest issue is available through Tax Alert 2019-1840. Italy: In accordance with the European Union (EU) Directive no. 2017/2455, starting Jan. 1, 2021, the responsibility for the payment of Value Added Tax (VAT) on distance sales (sales to European consumers via the internet) of goods will be the marketplace operators, with the aim of combating VAT fraud. A marketplace operator is a taxable person who facilitates (under certain circumstances) distance sales of goods through an electronic interface, such as a marketplace, a platform, a portal or similar means. For more on this development, see Tax Alert 2019-1842. Multistate: Now available on demand, a replay of the Oct. 3, 2019 webcast on state activity post Wayfair. In the year since the U.S. Supreme Court's 2018 ruling in Wayfair, which eliminated the physical presence requirement for nexus purposes, legislation has been proposed or enacted addressing remote sellers and marketplace facilitators in nearly every state. Due to this activity, we are beginning to see several significant challenges and unforeseen consequences affecting not only multistate taxpayers but state tax administrators as well. During this webcast, panelists discussed the practical implications of the Wayfair decision. Panelists: (1) provided a high-level overview of state and local legislative and administrative responses to the Wayfair decision to date, with a focus on marketplace facilitator provisions; (2) highlighted challenges and associated unforeseen consequences of the various state responses to Wayfair; and (3) discussed some of the issues businesses will need to address while navigating the new sales and use tax landscape. A replay of the webcast is available 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. 1 Nissan North America, Inc. v. McClain, Ohio BTA Case No. 2016-1076 (Ohio Bd. Tax App. Oct. 9, 2019). 2 See White House transcript Remarks by President Trump and Vice Premier Liu He of the People's Republic of China in a Meeting. Document ID: 2019-1913 |
