12 November 2019 State and Local Tax Weekly for November 1 Ernst & Young's State and Local Tax Weekly newsletter for November 1 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. Employers have questions on how to proceed after new California law further restricts classifying workers as independent contractors California Assembly Bill 5 (California AB 5) applies a stricter standard for classifying workers as independent contractors under California law, effective Jan. 1, 2020. The new law largely codifies the California Supreme Court's decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal.5th 903 (2018). Under this decision, a worker is presumed to be an employee for limited wage-rule purposes, and the hiring entity has the burden of establishing that the worker is an independent contractor based on a three-part test, commonly referred to as the "ABC test." It is widely reported that California AB 5 was enacted in response to "gig economy" or on-demand workers, such as rideshare and delivery drivers. In contrast to California AB 5, the Internal Revenue Code generally applies a "common law" test to determine who is an employee for federal income and employment tax purposes and does not incorporate a legal presumption as to a worker's status. Because California will apply a different standard beginning in 2020, a business could properly classify an individual worker as an independent contractor for federal income tax and employment law purposes but have to treat that same worker as an employee under California law. As California businesses analyze their response to, and compliance with, California AB 5, they should consider the effect of any changes made in the relationship with their temporary and "on-demand" workforce and whether those changes affect their federal income and employment tax obligations. Tax Alert 2019-1884 provides (1) a summary of the provisions of California AB 5, (2) a summary of the common law and other standards that apply for federal income and employment tax and employment law purposes, and (3) a discussion of the potential considerations for employers who must coordinate California's treatment with the federal tax and employment law rules applicable to employees and independent contractors. California: The California Franchise Tax Board (FTB) issued a chief counsel ruling in which it stated that fees or other compensation paid to a corporation's nonresident independent director for services performed in California are sourced to where the corporation's highest-ranking corporate officers carry out directions from the corporation's Board of Directors (Board). The FTB described independent directors as a "distinct class of service-providers" through which the Board acts as a body and directs management to take action. The FTB further explained that market-based sourcing rules apply in determining the source income of a nonresident director. Here, the value of an independent director's services derives from the place where the decisions and actions of the Board are executed, rather than from the place from which the Board confers and makes decisions. Cal. FTB, Chief Counsel Ruling 2019-03 (Oct. 7, 2019). California: An out-of-state single-member limited liability company (SMLLC) is subject to California's annual LLC tax by virtue of its holding a 50% interest in a multiple-member LLC registered to do business in California. In so holding, the California Office of Tax Appeals (OTA) distinguished Swart,1 attributing the LLC's doing business status to the SMLLC through the SMLLC ownership interest and therefore, concluding that the SMLLC was itself doing business in California subject to the state's minimum tax. The OTA noted that by holding a 50% interest in the LLC, the SMLLC "would have had significant authority over the activities of [LLC]." The OTA further found that the SMLLC did not show that it lacked the direct or indirect power or authority to participate in the LLC's management or operations. In re: Appeal of Wright Capital Holdings LLC, OTA Case No. 18010842 (Cal. Ofc. of Tax App. Aug. 21, 2019) (pending precedential). Indiana: An investment holding company is not entitled to an additional $200 million interest deduction based on the amount of repatriated income required to be added back on its 2017 Indiana corporate income tax return because no provisions of Indiana law allows for such a deduction. The Indiana Department of Revenue, however, in adjusting the company's income erred in converting the disallowed amount to an addition to the company's taxable income. Ind. Dept. of Rev., Letter of Findings 02-20190490 (Oct. 30, 2019). Texas: An out-of-state financial planning services entity that paid wages to a Texas-based employee is subject to Texas franchise tax because it is "doing business" in the state based on the in-state activities of the employee. The Texas Comptroller of Public Accounts explained that the franchise tax is imposed on taxable entities "doing business" in the state and having employees or representatives in Texas doing the taxable entity's business, such as the family office coordinator in this case, falls within the definition of "doing business" in the state. Tex. Comp. of Pub. Accts., No. 201909022H (Sept. 13, 2019). Alabama: A company's sales of chemical ingredients for spray-on bedliner to its franchisees are subject to Alabama's sales tax as taxable ingredient sales because the chemicals are consumed upon installation and are not sold at retail. In so holding, the Alabama Tax Tribunal (Tribunal) found the rules related to a repairman's consumption of materials and supplies as an incident to rendering a service (Ala. Rules 810-6-1-.07(2) and 810-6-1-.08(2)) applicable to the transactions at issue, since the chemicals are consumed upon installation and cannot be removed in such a way as to remain intact. The Tribunal also found the bedliners are not custom sales, reasoning that the bedliners are patented and customers cannot specify how they should be made. Lastly, the Tribunal determined that transfers of chemicals to the company store are taxable, but sales from the company store to dealers are not taxable as parts and materials used to repair or recondition dealers' automobiles. Line X, LLC v. Ala. Dept. of Rev., No. S. 18-369-LP (Ala. Tax Trib. Oct. 1, 2019). Wyoming: An entity's purchase of 28% of a seller's tangible and intangible assets is subject to sales tax because the exclusion from the definition of "sale" plainly required the entity to purchase at least 80% of the total value of the seller's assets located in Wyoming. In so holding, the Wyoming Supreme Court (Court) rejected the entity's argument that the statute, which provides that only purchases of "all or not less than [80%] of the value of all of the assets which are located in this state" are excluded from the definition of taxable sale, should be interpreted to require the sale of only 80% of a seller's tangible personal property, rather than 80% of its total Wyoming assets. The Court found that the statute does not differentiate between tangible and intangible assets and suggested that any perceived statutory defect should be taken up with the legislature. Delcon Partners, LLC v. Wyo. Dept. of Rev., 2019 WY 106 (Wyo. S.Ct. Oct. 21, 2019). Tennessee: The Tennessee Department of Revenue in a letter ruling explained how multiple lenders to an eligible housing entity that is refinancing an existing debt obligation would calculate and claim the community investment tax credit for credit-eligible activities. The amount of the credit depends on how mortgage refinancing loan(s) are structured using multiple lenders; specifically addressing syndicated loan and loan participation. The letter ruling provides explanatory illustrations. Tenn. Dept. of Rev., Letter Ruling No. 19-05 (Aug. 29, 2019). Utah: New law (HB 1003) modifies requirements for the severance tax credit for well recompletion or workover and the motion picture income tax credit. Under the revised provisions, taxpayers seeking the severance tax credit must prepare a summary of well recompletion or workover expenses during the calendar year the work was completed, and then must have an independent certified public accountant (CPA) review the expenses' accuracy and validity, in accordance with the agreed upon procedures. After reviewing the taxpayer's summary and the CPA's report, the state will provide its own report that includes the approved expense amounts. Similarly, a motion picture or digital media company must complete and return the state's required incentive request form and have an independent CPA review the form and provide a report on its accuracy and validity, in accordance with the agreed upon procedures. The state will then review the incentive request form, verify the independent CPA's review, and determine the incentive amount to which the motion picture company is entitled under its agreement with the state. These changes apply retroactively to tax years beginning on or after Jan. 1, 2019. Utah Laws 2019, HB 1003 (First Special Session), signed by the governor on Sept. 23, 2019. Arkansas: A hospital's seven parcels of land that included health clinics, qualify for the property tax exemption for a public charity because even though the clinics generated revenue necessary to exist they were used to further the hospital's charitable mission and were not operated with an expectation of payment for services provided. In so holding, the Arkansas Court of Appeals (Court) found no clear error by the lower court in establishing the hospital's entitlement to the exemption and affirmed that the hospital's use of the parcels is consistent with the charitable exemption requirements set out in Burgess2 and Sisters of Mercy.3 Specifically, the hospital and its clinics met the third Burgess requirement that all of the profits from paying patients be applied to maintaining the hospital and extending and enlarging its charity, when the hospital used its revenue to pay salaries, buy equipment, pay for maintenance, and provide giveaways or write-offs.4 Lastly, the Court rejected the county assessor's arguments that the hospital's free services and patient debt write offs were not a large enough percentage of the income generated, such that the hospital's property is "not used exclusively as a public charity," and that the hospital was required to establish that more than half of the health care provided was free of charge in order to qualify for the exemption. Hardesty v. North Ark. Medical Svcs., Inc., and North Ark. Regional Medical Center, Inc., No. CV-18-949 (Ark. Ct. App., Div. I, Sept. 25, 2019). California: New law (SB 790) clarifies California law enacted in 2018 that implements federal partnership audit procedures. Under existing California law, the Franchise Tax Board (FTB) is required to grant a partnership's request to make an election different from the election it made for federal income tax audit purposes, if the partnership can establish that the FTB's ability to collect state income tax will not be impeded, among other things. The new law clarifies when the FTB must grant a partnership's request to make a different election. If an audited partnership or tiered partnership makes a federal election for alternative payment requiring partners to take adjustments into account, the FTB must grant a request to make an election different from the federal election if the partnership properly computes the amount of in-lieu tax due. Further, if an audited partnership or tiered partnership pays tax at the federal level, the FTB must grant a request to make an election different from the federal election if the partnership can show that the FTB's ability to collect any state income or franchise taxes would not be impeded and the partnership properly follows the required reporting provisions. These provisions apply to final federal determinations assessed pursuant to amendments to federal partnership assessment provisions as in effect Jan. 1, 2018. Cal. Laws 2019, Ch. 332 (SB 790), signed by the governor on Sept. 20, 2019. 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. Under the Secretary of State administered program, amnesty 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, respectively. District of Columbia: The District of Columbia released final regulations to govern the requirement that employers with 20 or more employees offer commuter transportation benefits to employees. The final regulations provide for penalties that may be assessed against applicable employers that fail to offer at least one of three commuter transportation benefit options. For more information on this development, see Tax Alert 2019-1933. New York: The New York Department of Taxation and Finance reminds employers that effective with the first quarter 2019, withholding tax information per employee must be reported on a quarterly basis, not annually on the fourth-quarter wage report. Also, the amounts to be reported are those applicable to the quarter being reported, not cumulative amounts for the year. For more information on this development, see Tax Alert 2019-1922. Washington: The Washington Department of Revenue (Department) issued guidance on the new 1.2% tax that will be imposed on the gross income of specified financial institutions subject to service and other activities business and occupation tax beginning January 1, 2020.5 The new 1.2% tax is in addition to any other taxes imposed on these entities. A "specified financial institution" is a financial institution that is a member of a consolidated financial institution group that reported an annual net income of at least $1 billion on its consolidated financial statement for the previous calendar year, not including net income attributable to noncontrolling interests. The Department's guidance clarifies that the financial institution definition for this additional tax is different from the definition for income apportionment purposes, and provides specific examples of included financial institutions, such as a business chartered under certain state or federal banking laws, national banks organized and existing as a national bank association by federal law, a savings association or federal savings bank, or a bank or thrift institution incorporated or organized under any state's laws, among others. Wash. Dept. of Rev., Special Notice: Additional tax imposed on specified financial institutions (Oct. 18, 2019). Federal: The United States (US) Trade Representative (USTR) has advanced four notable actions related to the exclusion process for punitive tariffs levied on Chinese origin goods. Outside of US-China relations, the USTR continues to utilize the Generalized System of Preferences (GSP) review mechanism as part of its overall ongoing assessment of its trading partners. On Oct. 25, 2019, the USTR announced enforcement and adjustment actions regarding the GSP status of several countries, namely, Thailand, Ukraine, South Africa, Azerbaijan, Bolivia, Iraq and Uzbekistan. For more on this development, see Tax Alert 2019-1948. 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) the impact of 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 with respect to state conformity to the various provisions of the TCJA; and (4) state 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, from 1:00-2:00 p.m. EST New York (10:00-11.00 a.m. PST Los Angeles), 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 2019; and (3) the 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. 4 The first two Burgess requirements (i.e., that the hospital and its clinics must be open to the general public and that no one can be refused services based on inability to pay) were not in dispute. Document ID: 2019-2022 |
