19 November 2019 State and Local Tax Weekly for November 8 Ernst & Young's State and Local Tax Weekly newsletter for November 8 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 a Joint Directive (Directive) issued Oct. 15, 2019, the IRS's Large Business & International and Small Business/Self-Employed Divisions instructed their examiners that taxpayers may claim the Work Opportunity Tax Credit (WOTC) in the year they receive WOTC certification. The WOTC allows a general business credit for employers that hire and pay qualified wages to individuals who are certified members of targeted groups. After receiving State Workforce Agency (SWA) certification, the employer computes and claims the WOTC in the year in which the employer paid or incurred the certified employee's qualified wages. Certifications, however, sometimes arrive from the SWA after the taxpayer has filed its return for the applicable tax year. Consequently, taxpayers historically had to amend their federal and state returns for multiple years to claim the WOTC in the year the qualified wages were paid or incurred. As a result of this onerous process, some employers resorted to the administrative practice of claiming the WOTC in the year the certification was received. In the absence of clear guidance on this issue, IRS examiners have been inconsistent in their treatment of this administrative practice during audits. In several cases, taxpayers that claimed the WOTC in the year they received the certification experienced lengthy examinations that did not result in a deficiency assessment but required significant time, money and resources from both the taxpayer and the IRS. EY worked with the American Staffing Association (ASA) to submit a request for this WOTC issue to be resolved through the IRS's Industry Issue Resolution (IIR) Program (IIR Program). The objective of the IIR Program is to identify and resolve frequently disputed or burdensome tax issues that are common to a significant number of entities. The WOTC issue was accepted into the IIR Program in August 2018. The Directive allows taxpayers to choose to continue amending their returns to claim the WOTC in the year wages are paid or incurred, or to claim the WOTC in the year the certification is received. The Directive instructs examiners that they "shall not challenge the timing of when a taxpayer claims the WOTC, if the claimed WOTC complies with all requirements of IRC § 51, but the WOTC is claimed in the year the taxpayer receives the delayed certification (Certification Year)." In addition, taxpayers that currently amend returns to claim the WOTC in the year qualified wages were paid or incurred are allowed a transition year to convert to claiming the WOTC in the Certification Year if they elect to do so. Further, to comply with the wage addback under IRC § 280C, "taxpayers claiming the WOTC under the Directive must not claim or have claimed a deduction for wages, equal to the WOTC." When following the Certification Year approach, the taxpayer must add back the corresponding wages in the same tax year in which the credit is taken. The purpose of this limitation is to make sure that the taxpayer does not receive a double benefit by receiving the WOTC and a deduction on the same set of wages. The Directive also instructs examiners that, when auditing the WOTC, they may verify a taxpayer's computation by confirming the amount and year qualified wages were paid, the year certifications were received, and that the taxpayer did not use the same qualified wages to compute other general business credits. For more information on this development, see Tax Alert 2019-1960. Federal: In final regulations (TD 9880) (issued Oct. 31, 2019), the Treasury Department (Treasury) removed the minimum documentation requirements that must be satisfied to treat certain financial arrangements among related parties as indebtedness for federal income tax purposes under IRC §385 (the Documentation Regulations). The final Documentation Regulations will be effective immediately upon publication in the Federal Register. At the same time, Treasury announced in an advance notice of proposed rulemaking (REG-123112-19) that it is contemplating future changes and requesting comments on the so-called Distribution Regulations under IRC §385, which treat certain issuances of a debt instrument in a distribution (or similar transaction) as an issuance of stock. Treasury intends the proposed regulations to apply to tax years beginning on or after the date of publication of the Treasury Decision adopting those rules as final regulations in the Federal Register. For more on this development, see Tax Alert 2019-1962. Illinois: In a recent ruling, the Illinois Department of Revenue (IL DoR) ruled that an investment advisor in computing its Illinois sales factor numerator for Illinois income tax act purposes shall source sales of advisory services performed on behalf of investment funds to the office of the customer to which the services are billed when the office from which the services were ordered cannot be determined. The IL DoR explained that under the state's tiered market-based "waterfall" methodology for sourcing sales of services, the investment advisor's services would be deemed to be received at the office location of the customer from which the services were ordered in the regular course of the customer's trade or business. If the ordering office cannot be determined, the services are sourced to the office of the customer to which the services are billed. In this case, since the investment funds do not have an ordering office, the services are sourced to the customer's billing office. Ill. Dept. of Rev., IT 19-0001-PLR (Aug. 14, 2019). Maryland: The U.S. Supreme Court will not review the ruling in Staples, Inc. in which the Maryland Court of Special Appeals held that an out-of-state company had nexus with Maryland because "enterprise dependency" existed between the out-of-state company and its in-state affiliated companies, and that the Comptroller of Treasury did not err by not using the standard apportionment formula applicable to the in-state affiliates to calculate the out-of-state company's income attributable to Maryland. Staples, Inc., et al. v. Maryland Comp. of Treas., No. 2597 (Md. Ct. Special App. Aug. 9, 2018) (unreported), cert. denied COA-PET-0417–2018 (Md. Ct. of App., Feb. 22, 2019), cert. denied, Dkt. No. 19-119 (U.S. S.Ct. Nov. 4, 2019). New Jersey: The New Jersey Tax Court (Court) has ruled that the distributions made by a closely held corporation engaged in the construction industry in 2006 and 2007 to its two sole shareholders, who were also officers and directors of the corporation, are dividend payments (not compensation for managerial services) and, therefore, not deductible from the corporation's taxable income for New Jersey Corporation Business Tax purposes. In so holding, the Court applied the Elliotts1 test, finding that: (1) the two individuals' corporate roles were to make all financial decisions for the corporation and control its assets; (2) neither the corporation nor the two individuals provided a comparison to compensation paid by similar companies for similar services; (3) the corporation's size and complexity was modest; (4) the individuals control all of the corporation's financial decisions and there was no corporate resolution or other financial decision authorizing the 2006 and 2007 distributions to the individuals; and (5) the individuals' payments were not internally consistent with how they generally were compensated or with the compensation of other employees. A reasonable independent shareholder would view the 2006 and 2007 distributions as the two individuals receiving the profits to which they were entitled as shareholders. Additionally, the Court found that the final determinations of the New Jersey Division of Taxation (Division) assessing gross income tax (GIT) on the two individuals for 2006 must be adjusted to reflect each individual's receipt of a $100,000 repayment of money they loaned to the corporation. Shore Bldg. Contractors, Inc. v. N.J. Dir., Div. of Taxn., Nos. 002298–2012, 016994–2012, 002027–2012, 010595–2012, 017329–2011, 010597–2012 (N.J. Tax Ct. Oct. 3, 2019) (not for publication). Texas: Out-of-state motor carriers providing passenger transportation services in Texas are not exempt from the state's franchise tax under the Texas Transportation Code exemption for such motor carriers because this exemption only applies to occupation tax measured by gross receipts. The Texas Comptroller of Public Accounts (Comptroller) explained that even though the franchise tax is similar to an occupation tax, it is not an occupation tax. The Comptroller said this is demonstrated by the fact that the Texas Constitution requires 25% of occupation tax revenue to be set aside for public schools, but under the law, franchise tax revenues are deposited in the state's general revenue fund. Tex. Comp. of Pub. Accts., No. 201909028H (Sept. 11, 2019) and No. 201909030H (Sept. 16, 2019). Wisconsin: The Wisconsin Court of Appeals (court) affirmed decisions of the Wisconsin Circuit Court and Wisconsin Tax Appeals Commission in Microsoft Corp.2 that the taxpayer's sales factor does not include receipts from royalties received from original equipment manufacturers (OEMs) to the extent no income-producing activity occurred in Wisconsin. In doing so, the court rejected several arguments from the Wisconsin Department of Revenue effectively advocating a "look-through" approach in sourcing the taxpayer's receipts from certain software license royalties paid to the taxpayer by OEMs. Wisconsin Dept. of Rev. v. Microsoft Corp., Appeal No. 2018AP2024 (Wis. Ct. App. Oct. 31, 2019). For more information on this development, see Tax Alert 2019-1986. Arkansas: Seller service fees that a retailer pays on a standalone basis to a marketplace provider to sell items through the marketplace provider's website are not taxable services subject to Arkansas sales and use tax. In a recent legal counsel ruling, the Arkansas Department of Finance and Administration (Department) explained that taxable services do not include referral services, subscription services, variable closing services, per-item services, promotion and merchandising, refund commission services, check out services, or sales tax collection services. The Department noted that the seller service fee could be subject to tax if it is part of a bundled transaction that includes an item which would be subject to tax if sold separately. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20190412 (May 29, 2019). New Mexico: An administrative law judge (ALJ) for the New Mexico Administrative Hearings Office held that an entity's receipts from procuring and managing sponsorships of a university's athletic programs are not excluded from the gross receipts tax as sublicensed intellectual property, the entity cannot claim a deduction from its gross receipts for interstate radio broadcasts, and it cannot deduct its uncollectible (bad) debts. In so holding, the ALJ determined that the entity's receipts from procuring and managing sponsorships of the university's athletic programs were not derived from sublicensing intellectual property (i.e., trademarks) when the entity's contract with the university did not explicitly authorize such sublicensing. Hence, such receipts are not excluded from the definition of "property" and instead are subject to tax. The ALJ further found that the entity could not deduct receipts for interstate radio broadcasts when receipts for various sponsorship benefits — including purely in-state, non-broadcast marketing activities — were comingled with the sponsorship commitments for national radio broadcasts. Lastly, the ALJ determined that the entity is not entitled to the bad debt deduction because it failed to present evidence establishing what receipts it actually reported and which debts became uncollectible. In re: Consolidated Protests of Lobo Sports Properties, LLC and Iceberg Ventures, Inc. v. N.M. Taxn. and Rev. Dept., D&O No. 19-25 (N.M. Admin. Hearings Ofc. Oct. 11, 2019). New York: The New York Department of Taxation and Finance (Department) in response to a law change enacted in June 2019, issued updated guidance on sales tax registration requirements for businesses that do not have a physical presence in the state. The law change increased the sales threshold for out-of-state businesses to register from $300,000 to $500,000, retroactively effective June 21, 2018. The law did not modify the transaction threshold for registration. Thus, out-of-state businesses will be required to register and collect and remit New York sales tax if in the immediately preceding four sales tax quarters it had $500,000 in sales of tangible personal property delivered in the state and conducted more than 100 sales of tangible personal property delivered in the state. The Department is encouraging out-of-state businesses that have not yet registered as a vendor to do so. In addition, the recent law change provides relief to out-of-state business that registered for sales tax but collected and remitted tax at an incorrect local rate on sales made during the first four quarterly periods after the business was required to register. Such out-of-state businesses will have to collect the additional local tax due but will not be liable for penalties and interest. N.Y. Dept. of Taxn. and Fin., TSB-M-19(4)S (Nov. 5, 2019). Ohio: In its decision in Nationwide Mutual Insurance Company (Nationwide), the Ohio Board of Tax Appeals (BTA) held that the taxpayer is entitled to refunds of sales/use tax paid on its purchases of communications lines that were incorporated into real estate. The Nationwide decision is a departure from a BTA decision issued in 1998 and suggests that taxpayers may be entitled to refunds on purchases of communication lines depending on their facts and circumstances. Nationwide Mutual Insurance Company v. McClain¸ BTA Case Nos. 2018-313, 2018-315, 2018-316, 2018-318, 2018-318 (Ohio Bd. Tax App. Oct. 22, 2019). For additional information on this development, see Tax Alert 2019-1983. Virginia: Governor Ralph Northam announced the launch of "Opportunity Virginia", which is "designed to leverage the federal Opportunity Zone program" and "help connect communities in Opportunity Zones with investors." The Opportunity Virginia marketplace will connect investors, project sponsors, and communities throughout Virginia. Additional information is available here. Va. Gov., Release "Governor Northam Announces Launch of Opportunity Virginia" (Oct. 22, 2019). Oregon: The centrally assessed property of a telecommunications and internet services provider was properly valued based on an income approach that was determined by reference to the value of the whole company (including items such as "investment attributes," or attributes related to stock or other ownership interests), as well as a market approach incorporating a stock and debt indicator of value. In reaching this conclusion, the Oregon Tax Court (Court) considered the statutory text, context, and legislative history and found that despite important differences between property held or used by the provider and shares held by shareholders, the Oregon legislature in 1909 generally intended to authorize the predecessor to the Oregon Department of Revenue (Department) to value a centrally assessed company using the value of the company itself, absent a demonstrable factual difference, and later statutory enactments did not change that. The Court rejected the provider's arguments that the central assessment valuation could not include various investment attributes based on such attributes belonging to shareholders instead. Additionally, the Court assigned no weight to the cost approach to valuation, noting that the inclusion of accounting goodwill in such valuation would lead to inaccurate property taxes. Further, the Court adopted the Department's real market values (RMVs) for the 2015-16 and 2016-17 tax years based on a combination of the income and market approaches. It similarly adopted the Department's RMVs for the 2014-15 tax year, finding that the Department was permitted to change the unit upon which it bases its central assessment during litigation in the Court (i.e., switching from using North America as the unit that defined the corporation's property to a worldwide unit), since the Department followed its previously established rules as required, and statutes protecting against adding previously omitted Oregon properties to the valuation did not apply. Level 3 Comms., LLC v. Ore. Dept. of Rev., TC 5236 (Control); 5269; 5291 (Ore. Tax Ct., Reg. Div., Oct. 25, 2019). Illinois: A company that rents movies and video games through self-service kiosks is not entitled to a refund of use tax that it self-assessed and erroneously paid for certain licensing agreements because it filed its refund claim after the expiration of the statute of limitations. The Illinois Appellate Court (Court) found that under statutory law the company's refund claim was barred when it was not filed within the three-year statute of limitations period, or by the agreed deadline in the parties' written extension agreement between the Illinois Department of Revenue (Department) and the company relating to a Departmental audit of the company covering the periods at issue. In rejecting the company's argument that the Department's audit of the company tolled or restarted the applicable statute of limitations for filing a refund claim, the Court said the applicable statute of limitations began when the company erroneously paid the taxes, not when it or the Department learned of the error during a second audit covering the periods at issue. Additionally, the Court found that the uniformity clause of the Illinois Constitution is not violated when the statute of limitations provisions in the Use Tax Act and the Retailers Occupation Tax Act do not create two classifications of audited taxpayers (a Department audited taxpayer that can benefit from a refund claim, and a taxpayer who self discovers an error but cannot benefit from a refund claim), other than those who timely file a refund claim and those who do not. Lastly, the Court found the statute of limitations provisions are constitutionally permissible regulatory and procedural legislation governing the administration of tax refunds. Redbox Automated Retail, LLC v. Ill. Dept. of Rev. and Ill. Indep. Tax Trib., 2019 IL App (5th) 180489-U (Ill. App. Ct., 5th Dist., Oct. 30, 2019). California: The City of San Francisco (City) has issued the payroll expense tax rate for 2019, which is unchanged from the prior year at 0.380%. San Francisco's payroll expense tax was set to fully phase out in 2018 after the phase-in of the City's gross receipts tax. Nevertheless, the City ordinance enacting the gross receipts tax allows the San Francisco Controller to retain the payroll expense tax to enable the City to meet its projected revenue. As such, the San Francisco Controller issues a rate modification to the payroll expense tax every year. Ernst & Young LLP reached out to the City to confirm the rate, as the City republished its 2018 memorandum on the subject in July without updating it for 2019. Representatives of the City confirmed that the San Francisco Controller rate adjustments applicable for 2018 apply for 2019 as well. For more on this development, see Tax Alert 2019-1965. Rhode Island: Recently enacted legislation (HB 5151A, PL 2019, ch. 88, article 5) makes significant amendments to Rhode Island's withholding tax law effective in 2020 including a change in the deposit frequency for income tax withholding and a reduction in the threshold that triggers the requirement to file and pay electronically. For more information on this development, see Tax Alert 2019-1956. Illinois: Property sales from the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, enterprises) are not exempt from Chicago's real property transfer tax because the enterprises are not "governmental bodies" under the plain language of Chicago law and guidance. The Illinois Appellate Court found the following supportive of this finding, the enterprises cannot impose taxes, maintain a police force, provide water or sewer treatment, their charters do not recognize them as governmental bodies, and neither the federal government nor the enterprises are dependent on each other for day-to-day activities. Further, the enterprises are privately owned, the money they borrow is not backed by the full faith and credit of the federal government, they do not exercise powers reserved to the government, they cannot commit the government financially, and their employees are not federal employees. Lastly, each enterprise was created as a "body corporate" and the Federal Housing Finance Agency (FHFA) lost its governmental character and assumed the non-governmental character of the enterprises when the FHFA succeeded to "all rights, titles, powers, and privileges" of the enterprises in 2008 through conservatorship. Trilisky v. City of Chicago, 2019 IL App (1st) 182189 (Ill. App. Ct., 1st Dist., 4th Div., Sept. 26, 2019). Maryland: A single-member limited liability company (SMLLC) owned and controlled by the Los Angeles County Employees Retirement Association (LACERA) is not entitled to a refund of state transfer taxes, state recordation taxes, and county transfer taxes paid in connection with the recording of a deed conveying property to the SMLLC because the SMLLC is not eligible for exemptions applicable only to conveyances to the State of Maryland. In reaching this conclusion, the Maryland Tax Court found that under the plain language of the exemption statutes for both state and county taxes, "the State" refers only to Maryland, and does not apply to conveyances to California. Further, regardless of how "the State" is defined, the SMLLC still would be subject to tax on the conveyance because the deed at issue transferred property to the SMLLC rather than to the State of California, its agency, or political subdivision. Moreover, LACERA, as the sole member of the SMLLC, had a personal property interest in the limited liability company, which is distinct from the real property title vested in the SMLLC itself. Gateway Terry, LLC v. Prince George's County, Maryland, et al., No. 18-RC-00-0566 (Md. Tax Ct. Oct. 22, 2019). Ohio: On Nov. 6, 2019, Ohio Governor Mike DeWine signed Substitute SB 26 , which restores the business income deduction to individual owners of a law or lobbying firm. SB 26 adopted the following other income tax changes which includes the delay until tax years beginning in or after 2020 of the repeal of the income tax credit for a pass-through entity investor's share of the entity's financial institutions tax. In addition, SB 26 exempts the sale of feminine hygiene products and prescription diapers or incontinence pads covered by Medicaid from sales/use tax. For more on this development, see Tax Alert 2019-2005. International: Mexico's Congress has approved the economic package submitted by Mexico's President Lopez Obrador with few substantive changes. The final economic package (the Reform) now awaits the president's signature, which is expected shortly. The Reform would amend Mexico's VAT law to require digital service providers to collect VAT on the sale of certain goods and services in Mexico. Specifically, the Reform would amend Mexico's VAT law to expand the definition of services performed in Mexico to include those performed through a digital platform to Mexican users. As such, the digital service provider would be required to charge, collect and remit VAT on the goods and services sold through its platform. The services subject to the new rules include streaming services; gaming activities; access to websites for information such as news and weather; third-party intermediation services between providers and users of goods; access to online clubs and websites; and online educational services. For additional information on this development, see Tax Alert 2019-1967. International: Currently, the Dutch Value-added Tax (VAT) registration numbers of sole traders are related to their Dutch personal social security number. However, as these numbers fall within the protected data rules of the European Union General Data Protection Regulation, the Dutch tax authorities are now issuing new VAT registration numbers. The new VAT numbers are being issued to sole traders from mid-October onwards and will be effective as of Jan. 1, 2020. For more on this development see Tax Alert 2019-1976. International: The United Arab Emirates (UAE) Federal Tax Authority (FTA) recently issued notices to certain banks encouraging them to apply for special Value-added Tax (VAT) apportionment methods where the standard input-based method is not appropriate. Even though the notices were only issued to certain banks, the wording indicated that businesses in other partially exempt industries may also be impacted. According to the notice, businesses that consider the standard apportionment method to not be appropriate should apply for a special method by the end of this year (i.e., by Dec. 31, 2019). Taxpayers failing to submit applications within this period could be prioritized for a full VAT audit in 2020. For additional information on this development, see Tax Alert 2019-1990. 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. Multistate: On Thursday, Dec. 12, 2019, from 1:00-2:30 p.m. EST New York (10:00-11.30 a.m. PST Los Angeles), Ernst & Young LLP (EY) will host its quarterly webcast focusing on state tax matters. For our final webcast in 2019, panelists from our Indirect, State and Local Tax practice will look back on 2019 and the decade that was the 2010s and look forward to 2020 and what that decade could bring. Looking back, the panelists will highlight the most important developments affecting state income, sales and use, property and payroll taxes as well as federal and state business credits and incentives. As panelists look forward to the upcoming year and the forthcoming decade, they will highlight trends likely to carry over from 2019 and into the new year and decade to come. They will also identify emerging developments that deserve every tax practitioner's attention along with the potential disruptions on the horizon. To register for this event, go to State tax matters. 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: 2019-2061 |
