04 November 2019 State and Local Tax Weekly for October 25 Ernst & Young's State and Local Tax Weekly newsletter for October 25 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. According to a newly released study of state and local business taxes prepared by EY's Quantitative Economics and Statistics practice (QUEST) in conjunction with the Council on State Taxation (COST) and the State Tax Research Institute (STRI), businesses paid $781b in state and local taxes in FY18, an increase of 6.1% from FY17. The 6.1% increase is more than the increases over the prior four fiscal years combined, which totaled 6.0% for the entire period FY14 through FY17. The study analyzes all state and local business taxes paid in each of the 50 states and the District of Columbia. These taxes include business property taxes, sales and excise taxes paid by businesses on their input purchases and capital expenditures, gross receipts taxes, corporate income and franchise taxes, business and corporate license taxes, unemployment insurance taxes, individual income taxes paid by owners of non-corporate (pass-through) businesses, and other state and local taxes that are the statutory liability of business taxpayers. Growth in state and local tax revenue from business was spread across a number of these tax types. Only revenues from unemployment insurance taxes declined in FY18, reflective of the strong labor market and low unemployment rates. Corporate income taxes rose after two consecutive years of decline, largely because of the enactment of the Tax Cuts and Jobs Act in December 2017 that increased taxable income in many states. In FY18, state and local corporate income taxes totaled $66.2b, or 8.5% of all state and local business taxes, up 6.7% from FY17. The increase relating to state conformity with federal tax reform reflects the impact of only one-half of a year of revenues (the first six months of 2018) and can be expected to rise even more in FY19.
While the business share of total state and local tax revenues has remained relatively stable over the past five years, the study demonstrates that, on average, businesses continue to pay more in state and local taxes than they receive in government spending benefiting businesses. Montana: The Montana Department of Revenue issued guidance on the treatment of certain international provisions of the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA) for the Montana corporate income tax purposes. The guidance addresses the state's treatment of deemed repatriation of foreign income under IRC Section 965, global intangible low-taxed income (GILTI) under IRC Section 951A and the IRC Section 250 deductions for GILTI and foreign derived intangible income (FDII). The guidance addresses the treatment of each for tax year 2017 (for purposes of IRC Section 965 only) and tax year 2018 (and subsequent years) as it applies to water's edge filers, worldwide filers, and separate company, domestic or limited combination filers. Mont. Dept. of Rev., "Montana Corporate Income Tax Treatment of International Tax Provisions under Tax Cuts and Jobs Act of 2017" (Oct. 2019). New Jersey: The New Jersey Division of Taxation (DOT) issued guidance explaining the unitary business principle and defining unitary business for purposes of filing a combined return under New Jersey's Corporation Business Tax (CBT). The CBT defines a unitary business as "a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value among the separate parts." In determining whether a unitary business exists, the DOT indicated that it will look to legal and factual determinations of other mandatory unitary combined reporting jurisdictions as well as guidance issued by the Multistate Tax Commission. The DOT also describes circumstances that indicated an interdependence of functions exists and evidence that there is a unity of operations. Other issues addressed by the guidance include when holding companies are included/excluded from a unitary business of a combined group, when sharing intellectual property and providing intercompany financing provides evidence of a unitary relationship, and when a portion of a company's operation are independent of the unitary business activity of the combined group. N.J. Div. of Taxn., TB-93 The Unitary Business Principle and Combined Returns (Oct. 17, 2019). New York: The New York Department of Taxation and Finance issued guidance on computing the New York State (NYS) adjusted basis in property located in New York for purposes of qualifying as a qualified New York manufacturer eligible for the reduced (0%) tax rate. Effective for tax years beginning on or after Jan. 1, 2018, the NYS basis (instead of the federal adjusted basis) in the taxpayer's property will be used to determine whether a manufacturer meets the $1 million or $100 million property thresholds and, therefore, is eligible for tax rate reductions and real property tax credits available to a qualified New York manufacturer. For tax years prior to Jan. 1, 2018, the federal adjusted basis was used to determine whether the threshold was satisfied. Accelerated depreciation approved for federal, but not NYS, purposes under the Tax Cuts and Jobs Act meant that in some cases, using federal adjusted basis in property would mean that an otherwise eligible manufacturer no longer qualified for the special designation. The guidance describes how to compute the NYS adjusted basis for purposes of the manufacturing property test and includes special rules for 2018 tax returns that were filed before the 2019 law change that substituted the NYS adjusted basis for the federal adjusted basis in these computations. N.Y. Dept. of Taxn. and Fin., TSB-M-19(5)C, (6)I New York State Adjusted Basis for Qualified New York Manufacturers (Oct. 18, 2019). New York City: The New York City Department of Finance issued guidance for taxpayers with interest deduction carryforwards subject to limitation under IRC Section 163(j) that are deductible for federal income tax purposes in the current year or federal interest deductions limited by IRC Section 163(j) in the current year. The guidance describes modifications to the required methodology for the attribution of interest deductions for taxpayers subject to the City's Business Corporation Tax, General Corporation Tax, Banking Corporation Tax, or the Unincorporated Business Tax. N.Y.C. Dept. of Fin., Finance Memo. 18-11 Attribution of Interest Deductions for Taxpayers with IRC Section 163(j) Limitations under the Business Corporation Tax, General Corporation Tax, Banking Corporation Tax, and Unincorporated Business Tax (Oct. 7, 2019). Pennsylvania: Following the U.S. Supreme Court's ruling in South Dakota v. Wayfair, Inc.,1 the Pennsylvania Department of Revenue (Department) announced (Corporation Tax Bulletin 2019-04: Nexus for Corporate Net Income Tax Purposes (Sept. 30, 2019) (Bulletin)) that it will impose an economic nexus threshold for corporate net income tax purposes beginning Jan. 1, 2020. According to the announcement, the Department will presume nexus for out-of-state corporations that do not have a physical presence in the state but have $500,000 or more in direct or indirect gross receipts from Pennsylvania sources. For more on this development, see Tax Alert 2019-1889. Multistate: The latest quarterly summary of recent significant legislative, administrative and judicial actions affecting state and local sales and use taxes is now available. A copy of the summary is available through Tax Alert 2019-1894. Arizona: New and amended regulations (new or amended Ariz. Admin. Reg. Sections R15-5-101 et al., R-15-5-2001 et al., R15-5-2201 et al., repealed R-15-5-2350, and amended R15-10-301, 302, 501 and 505) modify various sales and use tax provisions to address recently enacted Arizona statutes governing the transaction privilege tax (TPT) treatment of remote sellers and marketplace facilitators. The changes amend and add various definitions, clarify when remote sellers and marketplace facilitators cannot be considered to engage in casual activities or sales, and require marketplace facilitators to obtain a TPT license when their remote activity as consignors or auctioneers meet economic nexus thresholds, among other provisions. In regard to TPT liability, the amended regulations describe the activities the state will consider constituting economic nexus or physical presence nexus within Arizona, including examples. The regulations also provide that if a taxpayer terminates its physical presence in the state, the taxpayer must report and remit TPT for all transactions occurring on or before the last day of the month in which physical presence is terminated. The amended regulations address record retention requirements for marketplace facilitators and remote sellers. A new regulation explains that affiliated remote sellers and marketplace facilitators are required to aggregate retail sales in determining if they meet the collection and remittance threshold; if they do, all affiliates must obtain a TPT license. Other amendments address TPT administration, such as reporting TPT, making estimated tax payments, liability and penalty relief for marketplace facilitators and remote sellers (with examples), among other provisions. These rules took effect Oct. 1, 2019. Ariz. Sec. of State, Ariz. Admin. Reg. Sections R15-5-101 et al., R-15-5-2001 et al., R15-5-2201 et al., repealed R-15-5-2350, and amended R15-10-301, 302, 501 and 505 (Ariz. Admin. Reg., Vol. 25, Issue 41, Oct. 11, 2019). Hawaii: The Hawaii Department of Taxation released guidance regarding the expanded imposition of general excise tax (GET) on marketplace facilitator sales, effective Jan. 1, 2020. The guidance defines and describes which marketplace facilitators are affected, including educational service websites, food delivery service marketplaces, transportation network companies, in-person/task-based service platforms, remote service marketplaces (i.e., those that connect customers with service providers that provide computer programming services or other services), remote intangible property or data access marketplaces (i.e., those that provide customers access to third-party data store, other intangible property, or computing power), brick and mortar marketplaces of any type, and certain travel agents and tour packagers. The guidance details the registration requirements for GET licenses, describes how marketplace facilitators and marketplace sellers must calculate their sales into the state to determine whether they meet economic nexus thresholds, and which GET and use tax rates (i.e., retail and wholesale rates) apply in various situations. Lastly, under Hawaii law non-marketplace facilitators (i.e., those who provide a physical or electronic forum for sellers to list or advertise products but do not collect payment directly or indirectly from the purchaser) are required to either comply with notice and reporting requirements or elect to be deemed a marketplace facilitator. Such provisions also apply to any marketplace facilitators that request and are granted an exemption from marketplace facilitator requirements under Hawaii law. Haw. Dept. of Taxn., Tax Info. Release No. 2019-03 Guidance Regarding Marketplace Facilitators, Act 2, Session Laws of Hawaii 2019 (Oct. 17, 2019). Louisiana: Proposed regulations (La. Admin. Code 61:III.1537, .1538, .2901 and .2903) would require mandatory electronic filing of returns and payment requirements for remote sellers beginning July 1, 2020. The regulations also would define key terms and would explain the types of policy statements and guidance that the Louisiana Sales and Use Tax Commission for Remote Sellers can issue to communicate its position (which could be in the form of policy and procedure memoranda, declaratory rulings, commission information bulletins, and informal advice). The Louisiana Department of Revenue provides additional filing details in a Remote Sellers Information Bulletin, requiring remote sellers to electronically file the monthly Form R-1031, Direct Marketer Sales Tax Return and electronically remit sales tax collected through the Department's online Louisiana Taxpayer Access Point (LaTAP) system. Previously, the form could only be filed on paper. La. Dept. of Rev., proposed La. Admin. Code 61:III.1537, .1538, .2901 and .2903 (La. Reg. October 2019); La. Dept. of Rev., Remote Sellers Info. Bulletin No. 18-002 Definition of Remote Seller and Further Guidance to Remote Sellers (issued Dec. 18, 2018; revised Oct. 10, 2019). California: New law (AB 485) effective Jan. 1, 2020 requires local agencies, before approving any economic development subsidy2 for a warehouse distribution center within its jurisdiction, to provide written disclosure to the public of various aspects of the subsidy. Such information includes recipient identity, name and address of all warehouse distribution centers receiving the benefit, start and end dates of the project, description of the subsidy, the local agency's estimated public expenditures or lost revenue from the subsidy, projected tax revenues, number of jobs created, accountability measures, and other information. After a local agency grants the subsidy, it must issue an annual report for each subsidy granted, including the previously disclosed information as well as how the projections compare to actual performance. The governor vetoed a proposal (SB 531) that would have prohibited a local agency from entering into any agreement that would directly or indirectly result in a rebate of the Bradley-Burns Uniform Local Sales and Use Tax revenues to a retailer that locates or maintains a place of sales within the local agency's jurisdiction. In his veto message, Governor Newsom stated his opposition for completely removing these tax options from local decision makers, and noted that AB 485 will provide greater transparency for the economic outcomes of agreements like these. Cal. Laws 2019, Ch. 803 (AB 485), signed by the governor on Oct. 12, 2019; SB 531, vetoed by the governor on Oct. 12, 2019. California: New law (SB 451) establishes personal or corporate income tax credits for certain costs to rehabilitate certified historic structures, based on the federal rehabilitation credit under IRC Section 47 with certain modifications. For tax years beginning on or after Jan. 1, 2021 and before Jan. 1, 2026, qualified taxpayers can claim a credit for 20% of the qualified rehabilitation expenditures for a certified historic structure, or 25% if the certified historic structure meets specific requirements. The state credit remains effective if the federal credit is repealed, and it is available for qualified rehabilitation expenditures related to a taxpayer's qualified principal residence upon meeting specific conditions. The state must establish regulations to implement the credit, including providing a written application that includes a summary of expected economic benefits of the project. The credit is claimed in the first tax year in which the structure is placed in service, and unused credits can be carried forward for up to seven tax years until the credit is exhausted. An aggregate of up to $50 million in credits will be allocated each year beginning in 2021 through 2026 on a first-come, first-served basis. Additionally, credits awarded to a partnership will be allocated to the partners according to the partnership agreement, but recapture provisions under IRC Section 50(a) apply. Lastly, beginning Jan. 1, 2021, SB 451 requires the state to annually review the credits' effectiveness. SB 451 took immediate effect. Cal. Laws 2019, Ch. 703 (SB 451), signed by the governor on Oct. 9, 2019. Louisiana: The Louisiana Department of Revenue issued guidance on the state's income tax treatment of global intangible low-taxed income (GILTI) under IRC Section 951A. For Louisiana corporate income tax purposes, GILTI is classified as dividend income, the deduction for which is reported on CIFT-620, Schedule F, Line 3b. As a result, no portion of GILTI is subject to the Louisiana corporate income tax and any deduction related to GILTI income taken on the federal corporate income tax return is not allowed and must be added back on CIFT-620, Schedule F. For individual income tax purposes, GILTI income is reportable on an individual's federal income tax return as part of adjusted gross income (AGI). Since federal AGI is used as the starting point for Louisiana individual income tax purposes, all GILTI income is included on the individual's Louisiana income tax return on Form IT-540, line 7 on page 2. Individuals are not allowed to claim the GILTI deduction under IRC Section 250. (Nonresident individual filers report GILTI on line 3 of the Nonresident and Part-Year Resident worksheet of Form IT-540B). In addition, the guidance explains the GILTI filing requirements for resident and nonresident trusts. La. Dept. of Rev., RIB 19-016 (Oct. 8, 2019). Federal: Proposed bill "Mobile Workforce State Income Tax Simplification Act of 2019" (HR 4796) would limit the extent to which states may tax compensation earned by a nonresident for employment duties performed in other states. Specifically, an employee who performs employment duties in more than one state would be subject to income tax in the employee's state of residence and the state within which the employee is present and performing employment duties for more than 30 days during the calendar year the wages were earned. An employee would be deemed present and performing employment duties within a state for a day if the employee performs more of his/her employment duties within that state than in any other state during a day. If, however, the employee performs duties in his/her resident state and only one nonresident state during one day, the employee would be considered to have performed more of his/her employment duties in the nonresident state than in the resident state for that day. The portion of the day the employee is in transit would not be considered in determining the location of an employee's performance of employment duties. If approved, these provisions would take effect on January 1 of the second calendar year that begins after the date of the bill's enactment. HR 4796 was introduced on Oct. 22, 2019. A similar bill (S 604) is being considered by the Senate. Arkansas: Under recently enacted HB 1850, the Employer Independent Contractors Act of 2019, Arkansas law adopts the IRS 20-factor test outlined in Revenue Ruling 87-41 (1987-1 C.B. 296) for determining employment status for wages, income tax withholding and workers' compensation insurance purposes. The law also replaces the prior ABC test that applied for unemployment insurance purposes with the IRS 20-factor test. For more information on this development, see Tax Alert 2019-1892. California: The City of Mountain View, California has enacted an ordinance that, starting Jan. 1, 2020, modifies its business registration and license tax ("head tax") to incorporate a progressive rate schedule which will require larger businesses to pay significantly more in head tax compared to smaller businesses. Qualified non-profit organizations and businesses with annual gross receipts from business derived in the city of less than $5,000 are exempt from the tax. The increase was approved by voters in 2018. For more on this development, see Tax Alert 2019-1869. North Carolina: In a recent directive, effective Jan. 1, 2020, the North Carolina Department of Revenue will require income tax withholding of 4% from payments made to nonresident contractors and certain nonemployee compensation payments where a taxpayer identification or individual taxpayer identification number is not available. The directive reflects changes that were enacted to North Carolina law as part of Session Law 2019-169. For more on this development, see Tax Alert 2019-1878. International: Costa Rica's tax authorities published a new procedure (Resolution No. DGT-DGH-R-060-2019) for requesting a VAT exemption or reduced VAT rate in the Official Gazette on Oct. 15, 2019. The new procedure must be followed by (1) exporters, (2) suppliers of exporters, (3) suppliers of local governments, (4) suppliers of the Costa Rican Social Security (CCSS), and (5) traders, distributors and producers of products included in the list of basic foods and their inputs. Those taxpayers who apply the procedure and meet all requirements will be able to acquire the goods and services for their operations without paying VAT or with a VAT-reduced rate. In addition, the new procedure contains a series of specific requirements that must be met, depending on whether the taxpayer is an exporter, supplier to exporters, supplier to local governments or CCSS, or trader, distributor and producer of the list of basic foods and their inputs. For additional information on this development, see Tax Alert 2019-1877. Multistate: On Thursday, Nov. 14, 2019, from 1:00-2:00 p.m. EST New York (10:00-11.00 a.m. PST Los Angeles), Ernst & Young LLP will host the second webcast is a series on the ongoing impacts of the Tax Cuts and Jobs Act on state taxation. On the second webcast of the series, panelists will discuss the various state tax policy approaches to the TCJA and how these varied approaches can help shape discussions with state policymakers about key TCJA implementation, compliance and conformity challenges. Topics to be addressed include: (1) the state policy timeline: where we've been and where we're going; (2) notable state approaches to the TCJA; (3) other federal, state and local tax developments, such as the U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc., which are influencing state tax policy decisions around the TCJA; and (4) tax policy considerations for 2020, with a focus on TCJA provisions that warrant discussion in the upcoming year. To register for this event, go to Ongoing impacts of TCJA on state taxation . Federal: On Wednesday, Nov. 20, 2019, Ernst & Young LLP (EY) will host a webcast on the Work Opportunity Tax Credit (WOTC), with a focus on the current WOTC legislative environment. Hear from our EY professionals on how your business can continue to effectively leverage this program and benefit from a recent Joint Directive to IRS examiners. Two senior IRS officials will be on hand to discuss the Joint Directive and its implications. The panelists will also address: (1) implementation considerations for the Joint Directive; (2) federal legislative extension prospects for WOTC, which is scheduled to expire at the end of the year; and (3) year-end legislative outlook for other employment-related federal tax law extenders. To register for this event, go to Work Opportunity Tax Credit. 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. 2 An "economic development subsidy" is any expenditure of public funds or loss of revenue to a local agency of $100,000 or more, for the purpose of stimulating economic development within the local agency's jurisdiction, including but not limited to bonds, grants, loans, loan guarantees, fee waivers, land price subsidies, matching funds, tax abatements, tax exemptions, and tax credits. Document ID: 2019-1952 |
