26 November 2019 State and Local Tax Weekly for November 15 Ernst & Young's State and Local Tax Weekly newsletter for November 15 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. Summary of select state and local ballot measures approved and rejected during the November 5, 2019 elections On Nov. 5, 2019, state and local tax related ballot measures were voted on in a number of states. The following is a summary of select approved and rejected measures. San Francisco, CA: Voter approved Proposition D imposes an excise tax on the net rider fares for rides originating in San Francisco and facilitated by commercial ride-share companies and rides provided by autonomous vehicles and private transit services vehicles. The tax becomes operative Jan. 1, 2020 and expires Nov. 5, 2045. Colorado: Voter approved Proposition DD legalizes sports betting and imposes a 10% tax on the net sport betting proceeds on persons licensed to conduct sports betting. Colorado: Voters rejected Proposition CC which would have allowed the state to retain revenue in excess of the limit on state spending instead of refunding the amount to taxpayers as required under existing law. Texas: Voter approved Proposition 3 amends the Texas Constitution to allow the legislature to provide a temporary exemption from ad valorem taxation on a portion of the appraised value of certain property damaged by a disaster. Texas: Voter approved Proposition 4 amends the Texas Constitution to prohibit imposition of an individual income tax, including on an individual's share of partnership and unincorporated association income. Texas: Voter approved Proposition 9 amends the Texas Constitution to exempt from ad valorem taxation precious metal held in a precious metal depository located in Texas. Washington: Voter approved Measure No. 976 limits state and local annual motor vehicle license fee on vehicles weighing 10,000 pounds or less to $30 (except for voter-approved changes), and repeals, reduces or removes state and local authority to impose certain motor vehicle sales/lease excise taxes and fees. It's worth noting that a number of local jurisdictions are challenging the constitutionality of this measure. California: The California Franchise Tax Board (FTB) issued guidance for nonresident independent contractors regarding the state's market-based sourcing rules, which took effect in 2013. It also explains the conditions when an independent contractor has a unitary business within and without California. Under California law, if a nonresident independent contractor operating as a sole proprietor performs services from his or her home state and the benefit of the service is received in California, the independent contractor has California-source income when the business is unitary. If an independent contractor is deemed to be operating a unitary business (i.e., it satisfies either the three unities test or the contribution and dependency test), the independent contractor will determine the amount of income sourced to California based on where the purchaser of the services receives the benefit, under Cal. Rev. & Tax. Code §25136-2(a)(1) and its corresponding regulation. When the customer of the independent contractor is a corporate or business entity, the market-based sourcing analysis and determination of where the benefit of the service is received starts with the first cascading rules at Cal. Code Regs., tit. 18, §25236-2(c)(2)(A). These rules would be considered in order, moving from one cascading provision to the next if the benefit cannot be ascertained or if the taxpayer or FTB can overcome the presumption of where the benefit is received. The FTB noted that it is currently considering amendments to this regulation, however, the proposed changes are not final and the current provisions (which focus on the location of the taxpayer's direct customer as the benefit received location and does not include a look-through provision for establishing the benefit of the service at the location of the customer's customer as under the rule proposal), remain effective. Cal. FTB, Tax News (Nov. 2019). Kentucky: The Kentucky Department of Revenue (KY DOR) issued a manual on filing Kentucky's combined unitary returns or the same-as-federal consolidated return election, as required for tax years beginning on or after Jan. 1, 2019. Mandatory nexus consolidated returns were required 2005–2018, separate entities in Kentucky will continue to file separate returns. The manual explains the nexus consolidated return, the combined unitary return, and the elective consolidated return. In explaining the construction of a combined unitary return, the manual includes information regarding what constitutes a unitary business and which entities are included in the combined report (with examples). It also offers apportionment calculation guidance, combined return filing rules, information about net operating losses (NOLs) (including calculations, sharing of NOLs among members of the combined reporting group, conformity to the federal NOL provisions of IRC § 172, and conversions of pre-apportioned NOLs to post-apportioned NOLs), and sample forms. Similarly, for the elective consolidated return, the manual discusses the differences between elective consolidated returns and combined unitary returns. It also provides apportionment calculation guidance, information about NOLs, the application of consolidated loss limitation rules (including Separate Return Limitation Year (SRLY) Rules, built-in deductions, and IRC § 382 limitations), and elective consolidated filing rules. The KY DOR states that the information in the manual "is for educational and informational purposes only and does not constitute legal advice." Ky. Dept. of Rev., Combined Unitary & Same-as-Federal Consolidated Returns: Understanding and Application (Oct. 2019). Massachusetts: In a recent ruling, the Massachusetts Appellate Tax Board (ATB) held that a manufacturing corporation commercially domiciled in Massachusetts is required to source litigation awards, settlement payments, and authorization royalties from patent litigation to the Commonwealth for corporate excise tax purposes because it failed to overcome the regulatory presumption that the receipts are attributable to Massachusetts. In so holding, the ATB explained that under the regulation1 applicable to the tax years at issue (i.e., 2011 and 2013), gross receipts from protection or enforcement of legal rights by taxpayers domiciled in Massachusetts were presumed to be attributable to Massachusetts since the legal dispute did not relate to real or tangible personal property located outside the Commonwealth. The ATB rejected the corporation's proffered apportionment methods, finding that none of the methods "was supported by evidence sufficient to overcome the presumption … " Specifically, the ATB found that neither suggested method one (by which the receipts would have been apportioned based on the corporation's average Massachusetts sales factor), nor suggested method two (by which the receipts would have been treated as receipts from intangible licensing fees); offered an adequate and reliable basis for apportioning an identifiable portion of the receipts at issue to out-of-state sources. In regard to suggested method three (by which receipts would have been sourced based upon an apportionment method that took effect in 2014), the ATB said that the 2014 regulation2 "could not inform the interpretation of the Commissioner's long-standing regulation in effect during the tax years at issue." Lastly, the ATB found that like the litigation awards and settlement proceeds, the authorization royalties were receipts from the enforcement of legal rights through litigation or settlement and should be sourced in the same manner. SynQor, Inc. v. Mass. Comr. of Rev., No. C331460 (Mass. App. Tax Bd. Oct. 2, 2019). North Carolina: New law (HB 399) requires a taxpayer in determining its state net income to deduct from its federal taxable income or adjusted gross income the amount it received as an economic incentive through the Job Maintenance and Capital Development Fund, the Job Development Investment Grant Program, or the One North Carolina Fund. This change is effective for tax years beginning on or after Jan. 1, 2019 and applies to amounts a taxpayer receives on or after that date. N.C. Laws 2019, ch. SL 2019-237 (HB 399), signed by the governor on Nov. 1, 2019. Texas: Interest income a packaged food company (company) earned on payment-in-kind (PIK) notes from the sale of the trading and merchandising segment of its business operations is included in its total revenue calculation for franchise "margin" tax purposes, because the income has a sufficient unitary connection with the company's activities in Texas. The Texas Comptroller of Public Accounts (Comptroller) found that the company was unitary with its trading and merchandising segment before selling it in 2008, this sale generated the interest income at issue, and there would be no interest income without this sale. Thus, under the U.S. Supreme Court holding in MeadWestvaco Corp.,3 the unitary business principle's minimum requirements test was met, even though after the sale, the company was not unitary with either its previously owned trading and merchandising business or the buyer. Lastly, the Comptroller excluded the gross proceeds attributed to a commodity hedge from the company's gross receipts since the company for federal income tax purposes characterized the net proceeds as costs of goods sold rather than as gross receipts or sales. This characterization, the Comptroller reasoned, indicated that the company did not hold the securities as inventory for federal income tax purposes and the proceeds should be excluded from total revenue. Tex. Comp. of Pub. Accts., No. 201908004H (Aug. 15, 2019). Nebraska: The Nebraska Department of Revenue (Department) announced that it is providing temporary penalty and interest relief to certain remote sellers and marketplace facilitators that have not yet complied with the state's new sales and use tax registration, collection and reporting requirements. Legislation enacted in 2019 (LB 284) requires remote sellers and marketplace facilitators that have more than $100,000 in gross Nebraska retail sales or who entered into 200 or more separate retail sales transactions in Nebraska to register with the Department and begin collecting and remitting tax. These requirements apply starting Jan. 1, 2019 for those exceeding either threshold in 2018, or on April 1, 2019 for those exceeding either threshold by the end of Feb. 2019. The Department acknowledged that following the U.S. Supreme Court's ruling in South Dakota v. Wayfair, Inc.,4 a number of states enacted similar provisions and that remote sellers and marketplace facilitators "may have faced difficulty in timely complying with all of these laws." The Department said that it will temporarily waive penalty and interest for remote sellers and marketplace facilitators that were not engaged in business prior to April 1, 2019, met one of the thresholds during 2018 or 2019, and have not yet complied with the requirements of LB 284. Relief does not apply to sellers that were physically present in the state. To receive the waiver, affected remote sellers and marketplace providers have until Jan. 20, 2020, to do the following: (1) obtain a Nebraska sales tax permit, (2) report and remit all Nebraska state and local sales tax due since April 1, 2019, and (3) submit a Request for Abatement of Penalty Form 21 and a Request for Abatement of Interest Form 21A, referencing this guidance on the forms. This relief also is available for remote sellers and marketplace facilitators that have already obtained a permit and paid penalty or interest for late periods since April 1, 2019. Neb. Dept. of Rev., GIL 1-19-2 "Sales and Use Tax: Temporary Penalty and Interest Relief for Certain Remote Sellers and Marketplace Facilitators" (updated Nov. 11, 2019). North Carolina: New law (HB 399) extends to Jan. 1, 2024 (from Jan. 1, 2020) the sales tax exemptions for sales of aviation gasoline and jet fuel to an interstate air business for use in a commercial aircraft, and the sales tax exemption and refund for certain sales to a professional motorsports racing team (or related member of the team). These provisions took effect upon becoming law. N.C. Laws 2019, ch. SL 2019-237 (HB 399), signed by the governor on Nov. 1, 2019. Tennessee: Motor vehicle subscription service fees (e.g., activation fees, monthly subscription fees, hold fees, late fees, cleaning fees, and additional driver fees) are subject to the $1,600 limitation on local option sales tax and the 2.75% state single article sales tax, but they are not subject to the rental car tax. The Tennessee Department of Revenue (Department) found the transfer of possession of a vehicle but not the vehicle's title to subscribers for consideration constitutes a motor vehicle lease subject to sales and use tax. Further, the monthly fee for the lease of a motor vehicle, which allows subscribers to use multiple vehicles but never more than one vehicle at a time, is properly characterized as a lease of a single article for purposes of the local option sales tax single article cap. The Department also stated it will continue to treat a subscriber's monthly renewal of the agreement as a single lease of a motor vehicle, even if the subscriber temporarily suspends the service, until the agreement is terminated. Lastly, the Department determined that the subscription fees are not subject to the rental tax because the agreement is for the lease of a motor vehicle in the state for a term of more than 31 days. Tenn. Dept. of Rev., Letter Ruling No. 19-08 (Oct. 14, 2019). Federal: On Nov. 6, 2019, Sen. Ron Wyden proposed the Opportunity Zone Reporting and Reform Act (bill), which would substantially change the requirements for Qualified Opportunity Zones by increasing reporting, immediately eliminating designated opportunity zones that are not low-income, clarifying investment rules, disallowing additional types of properties and business, and requiring review by the Government Accountability Office (GAO). While the bill is unlikely to pass in its current form, it signals an increased scrutiny of these programs by lawmakers. For more on this development, see Tax Alert 2019-2017. North Carolina: New law (HB 399) extends the sunset date of the historic rehabilitation tax credits investment program to include qualified rehabilitation expenditures and rehabilitation expenses incurred before Jan. 1, 2024 (from Jan. 1, 2020). The law also expands the mill rehabilitation tax credit to include railroad station rehabilitation projects meeting certain conditions. Lastly, a taxpayer that claims a mill rehabilitation tax credit may not also claim a credit under the historic rehabilitation tax credit and the historic rehabilitation tax credits investment program for the same activity. These provisions took effect upon becoming law. N.C. Laws 2019, ch. SL 2019-237 (HB 399), signed by the governor on Nov. 1, 2019. Kentucky: A Kentucky Revenue Procedure enumerates the responsibilities of certain county officials (i.e., property valuation administrator (PVA), county clerk, and sheriff) in assessment, tax bill preparation, and collection of omitted property taxes. The guidance provides information about how and when the PVA assesses omitted real property and what notice must be provided to the taxpayer regarding the assessment amount. The PVA cannot assess omitted tangible personal property, and instead such work must be performed by the Office of Property Valuation. Additionally, the county clerk is the only county official who legally can prepare a property tax bill. Lastly, sheriffs cannot accept omitted tax bills unless penalty and interest are computed according to law (additional information on this is included in the guidance). This guidance takes effect Nov. 1, 2019 and replaces Circular 62C112 (issued Nov. 1, 2018). Ky. Dept. of Rev., Ky. Revenue Procedure KY-RP-19-04 (Oct. 25, 2019). California: The 2020 state unemployment insurance (SUI), state disability insurance (SDI) and Employment Training Tax (ETT) rates and limits, as provided by a California Employment Development Department (EDD or Department) representative, are discussed in Tax Alert 2019-2001. Oregon: The Oregon Department of Consumer & Business Services announced the final 2020 workers' compensation rates, which match those proposed in September 2019. As we reported earlier, for the seventh consecutive year, the "pure premium" rate will decrease. Oregon employers will see an average 8.4% decrease in pure premium workers' compensation costs for calendar year 2020. With this change, the pure premium will have decreased by an average of 45% for the period from 2013 to 2020. For more information on this development, see Tax Alert 2019-2000. Pennsylvania: The Pennsylvania Department of Labor & Industry announced that the 1.1% interest tax factor, that has been added to employers' assigned tax rates for several years, will not be in effect for calendar year 2020. The monies collected from this additional tax were used by the Department to pay the principal and interest due on the bonds sold to repay the state's federal UI loan. For additional information on this development, see Tax Alert 2019-2018. Texas: The City of San Antonio released a revised paid sick leave ordinance that goes into effect on Dec. 1, 2019. Note, however, that similar to the City of Dallas, while accrual of paid sick leave must begin on Dec. 1, 2019, the ordinance will not be enforced and employers will not be penalized until April 1, 2020, except in cases of retaliation against an employee. For more on this development, see Tax Alert 2019-2021. Washington: The Washington Department of Revenue (Department) issued guidance clarifying the use tax requirements for brokered natural gas (BNG) for pipeline businesses and end consumers of BNG delivered through a pipeline. Beginning with the Nov. 2019 return, pipeline businesses that deliver BNG to a destination in Washington must report and pay both the state BNG use tax on the value of fuel gas and the value of lost and unaccounted for gas on the transportation charges line of its return, and the local (city) BNG use tax on such gas in the delivery destination city (if the city has a local BNG use tax). Pipeline businesses delivering outside Washington must report and pay the state BNG use tax on the value of the fuel gas and the value of lost and unaccounted for gas used in Washington, on the transportation charges line of its return. End consumers that receive the BNG in Washington delivered by a pipeline must report and pay the state BNG use tax on the value of BNG received in Washington, and applicable local city BNG use tax. End consumers who use the natural gas at a county address only need to complete the state portion of the tax. Certain end consumers may be entitled to a BNG use tax refund if the BNG use tax was previously paid by the pipeline. In addition, the Department also announced it has withdrawn Det. 14-0219, 35 Washington Tax Decision (WTD) 372 (2016), finding that it incorrectly concluded that in-kind payment of lost and unaccounted for gas should be included in an end consumer's BNG use tax base. BNG is natural gas purchased by a consumer from an out-of-state source and delivered to the consumer inside or outside of Washington. Wash. Dept. of Rev., Special Notice: Brokered natural gas (BNG) use tax (Oct. 31, 2019). International: With the imminent enactment of Mexico's tax reform, foreign digital service providers should be aware of the new requirement to collect value-added tax on the sale of certain goods and services in Mexico. Tax Alert 2019-2023 explains what foreign digital service providers need to know about the new requirements. International: Following the Nov. 8, 2019 meeting of the Council of Finance Ministers (ECOFIN) of the European Union (EU), reports indicated that the EU's value added tax (VAT) system will be amended to help tackle fraud in the e-commerce sector. New rules provisionally agreed by the EU Member States will make relevant data regarding online purchases available to anti-fraud authorities to fight VAT fraud in the sector.The new rules will allow anti-fraud experts in EU Member States to have access to VAT-relevant data held by payment intermediaries (such as credit card and direct debit providers), who currently facilitate over 90% of online purchases in the EU. Amendments to the VAT Directive will require payment service providers to provide Member States VAT authorities with certain payment data from cross-border sales. Strict conditions will apply to data collection (including rules related to data protection). Anti-fraud specialists can then access and analyze the collected data. For more on this development, see Tax Alert 2019-2020. Federal/Multistate: On Thursday, Dec. 5, 2019, from 2:00-3:30 p.m. EST New York (11:00-12:30 p.m. PST Los Angeles), Ernst & Young LLP (EY) will host a webcast on preparing for payroll year-end and 2020. On this webcast, Ernst & Young LLP professionals will discuss the federal, state and local payroll/employment tax developments and trends that are shaping the goals and priorities of businesses as they close the year and prepare for 2020. Topics include: (1) changes to the 2020 federal Form W-4 and its impact on employers and employees; (2) changes in the federal overtime rules for salaried exempt employees and their employment tax consequences; (3) form W-2 reporting considerations for 2019; (4) state developments in paid family and medical leave insurance and challenges for employment tax compliance they create; (5) other state and local payroll tax developments; (6) state unemployment insurance cost outlook for 2019 and 2020; (7) federal, state and local taxability — myths, facts and leading practices; and (8) 2019 payroll year-end checklist. Register for this webcast here. 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. 2 Effective for tax years beginning on or after Jan. 1, 2014, the apportionment regulation excludes from both the sales factor numerator and denominator, "[r]eceipts attributable to the protection or enforcement of legal rights of a taxpayer through litigation, arbitration, or settlement of legal disputes or claims." Document ID: 2019-2094 |
