12 December 2019 State and Local Tax Weekly for December 6 Ernst & Young's State and Local Tax Weekly newsletter for December 6 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. North Carolina enacts market-based sourcing and marketplace facilitator laws, expands holding company definition On Nov. 8, 2019, North Carolina Governor Roy Cooper signed SB 557 (Bill), which includes provisions affecting various taxes. Key provisions in the Bill do the following:
Unless otherwise provided, these provisions are effective for tax years beginning on or after Jan. 1, 2020. On the same day, the Governor vetoed SB 578, which included provisions that would have reduced the rate of, and make other changes to, North Carolina's franchise tax. For more on this development, see Tax Alert 2019-2113. Federal: The Treasury Department and the Internal Revenue Service have issued final and proposed regulations on the base erosion anti-abuse tax (BEAT) under IRC § 59A (the final BEAT regulations and the 2019 proposed regulations, respectively). The final BEAT regulations are largely consistent with the proposed BEAT regulations released on Dec. 13, 2018 but adopt several significant changes. Most notably, the final BEAT regulations generally exclude from the definition of a base erosion payment amounts transferred to a foreign related party in certain specified nonrecognition transactions. The 2019 proposed regulations also would allow taxpayers to elect to forego a deduction so that it is not taken into account as a base erosion tax benefit so long as the deduction is waived for all US federal income tax purposes. Tax Alert 2019-2154 describes significant changes in the final regulations compared to the 2018 proposed regulations and provides an overview of the 2019 proposed regulations. Federal: On Dec. 2, 2019, the Treasury Department published final regulations (T.D. 9882; Final Regulations) on determining the foreign tax credit under the IRC. The Final Regulations are generally consistent with the proposed regulations published on Nov. 28, 2018, but make certain, important modifications and clarifications. Notable provisions and changes in the Final Regulations include: (1) adding safe harbor methods for applying transition rules for the carryover of foreign taxes and loss accounts required as a result of the TCJA's addition of the foreign branch category; (2) applying special rules for allocating income to the foreign branch category only to disregarded transfers of intellectual property occurring on or after Dec. 7, 2018, and not if the intellectual property is repatriated to the US; (3) consolidating the 16 previously taxed earnings and profits groups introduced by Notice 2019-01 to 10; (4) requiring an upper-tier controlled foreign corporation (CFC) to take the gross tested income (net of interest expense) of lower-tier CFCs into account for purposes of allocating and apportioning its interest expense under the modified gross income method. Treasury also proposed new regulations (REG-105495-19) addressing the allocation and apportionment of expenses. For more information on this development, see Tax Alert 2019-9026. Iowa: The Iowa Department of Revenue (Department) recently updated its guidance on the state's treatment of global intangible low taxed income (GILTI) and foreign derived intangible income (FDII). The updated guidance was necessary due to changes in Iowa's conformity to the Internal Revenue Code (IRC). For tax years beginning before Jan. 1, 2019, Iowa conformed to the IRC in effect on Jan. 1, 2015, so the international tax provisions of the Tax Cuts and Jobs Act (TCJA) (which first enacted both the GILTI and FDII provisions) were not incorporated into Iowa's tax law. For tax years beginning on or after Jan. 1, 2019, the Department noted that Iowa's tax law conforms to the IRC in effect on March 24, 2018, which would have included the TCJA provisions. For tax years beginning on or after Jan. 1, 2020, it stated that Iowa's tax law will transition to a rolling conformity basis with the IRC (i.e., as changes occur to the IRC, they will be immediately incorporated into Iowa's tax law, unless state law is otherwise decoupled from those provisions). The Department also stated that the Iowa legislature did not decouple from certain provisions of the TCJA, such as GILTI, FDII, and the limitations on the deductibility of business interest imposed under IRC § 163(j). The Department's guidance only addresses Iowa's tax treatment of GILTI and FDII and does not address conformity to the new federal limitations on the deductibility of business interest under IRC § 163(j). For additional information on this development, see Tax Alert 2019-2137. New Mexico: A corporation that ships and delivers packages around the US established that the New Mexico Taxation and Revenue Department (Department) use of the regulatory special trucking company apportionment method (based on a Multistate Tax Commission audit recommendation) highly distorted its true business activities in New Mexico for the tax years at issue (2007–2009) and that it is entitled to an equitable adjustment to the apportionment method in the form of the state-to-state volume method it had used since 1988. In so holding, an Administrative Law Judge (ALJ) for the New Mexico Administrative Hearings Office found that while the corporation is generally subject to the special trucking company apportionment method (which is based on mileage), application of this method attributed far more income to New Mexico than the corporation actually generated in the state, such that the increases had no rational relationship to the corporation's revenue generation and business activity in New Mexico in violation of the fair apportionment external consistency requirement.1 Specifically, the ALJ found that the use of the special trucking company apportionment method increased the sales attributed to New Mexico above the corporation's actual New Mexico revenue by 1,113% for 2007, 1,083% for 2008, and 1,328% for 2009. Additionally, referencing the Montana Supreme Court's decision in UPS,2 the ALJ found that using mileage to determine the apportionment sales factor distorted the extent of the corporation's activities in New Mexico as a low population, large geographic state. While the state-to-state volume method also reflects higher New Mexico sales than the corporation actually billed, the increases above the corporation's actual New Mexico revenues are much smaller (i.e., 53% increase for 2007, 64% increase for 2008, and 78% increase for 2009). Further, based on the Department's acceptance of the state-to-state volume method after two previous audits of the taxpayer (for the periods from 1988–1990 and 1997–2000), and its silence in response to the corporation's letter seeking continuing permission to use that method, the state-to-state volume method is a reasonable reflection of the corporation's actual New Mexico business income during the audit period. In re: Protest of United Parcel Service Inc. (Ohio) & Affiliates v. N.M. Taxn. and Rev. Dept., D&O No. 19-27 (N.M. Admin. Hearings Ofc. Oct. 25, 2019). Pennsylvania: In General Motors Corporation (GM)3 and RB Alden Corp. (RB Alden),4 a 2-1 divided panel of the Pennsylvania Commonwealth Court (court) severed Pennsylvania's flat dollar cap on net loss carryforward deductions from the Corporate Net Income Tax (CNIT) statute after finding the cap was unconstitutional under the Uniformity Clause of the commonwealth's constitution. The court also granted the taxpayers a full refund of CNIT paid for tax years 2001 and 2006. For additional information on this development, see Tax Alert 2019-2112. Puerto Rico: The Puerto Rico Treasury Department has issued 2019 informative return forms for deducting expenses, which are required by the tax reform act (Act 257-2018) enacted in 2018. Specifically, Act 257-2018 amendments to the PR Code include (1) expanding the reporting of certain expenses by requiring businesses to file informative returns, and (2) making compliance, with this modified reporting mandate, a condition for claiming certain deductions for income tax purposes. Expenses not previously required to be reported, unless paid to individuals, include rent, health or accident plans, property and contingency insurance, public liability and surety insurance, telecommunications services, internet services, cable and satellite television services, electricity, water and sewage, and advertising and marketing. For additional information on this development, see Tax Alert 2019-2124. Virginia: The Virginia Department of Taxation (Department) released draft guidelines on how taxpayers must account for the IRC §163(j) business interest deduction limitation for Virginia income tax purposes. Legislation enacted in 2019 (Ch. 17 and Ch. 18, Va. Laws 2019) substantially conforms Virginia's income tax laws to the IRC §163(j) limitation. According to the draft guidelines, the federal business interest expense limitation rules apply to the extent a Virginia taxpayer's business interest deduction is limited on its federal return and the deduction impacts the corporation's federal taxable income (FTI) or the individual's federal adjusted gross income (FAGI). Under the draft guidelines, a taxpayer that does not claim a federal business interest deduction is not subject to the limitation for Virginia income tax purposes. Further, because the interest deduction is allowed as a component of FTI or FAGI, a taxpayer, for Virginia income tax purposes, may carry forward and deduct business interest. The Department's draft guidelines also point out that Virginia law allows both corporate and individual income taxpayers to deduct an additional 20% of the amount of business interest disallowed as a deduction under IRC §163(j) for federal income tax purposes for Virginia income tax purposes. Consequently, while taxpayers will be allowed a larger deduction for Virginia income tax purposes in the year the interest expense was paid or accrued than allowed on their corresponding federal income tax return, in future tax years they will have to reconcile the accelerated business interest deductions on their Virginia income tax returns. (The Department indicated that additional information on this matter will be published in forthcoming instructions to the appropriate income tax reporting forms.) The draft guidelines also address when corporate taxpayers will need to recompute FTI. Re-computation will be required when taxpayers joining in the filing of a Virginia consolidated return have different members of the Virginia and federal affiliated groups and when a corporation is subject to a fixed date conformity modification (e.g., bonus depreciation). The draft guidelines include examples highlighting these issues. The draft guidelines do not address the application of IRC §163(j) limitation to individuals and pass-through entities. The Department noted that these matters will be addressed in the future. Interested parties are invited to submit comments on the draft guidelines by Dec. 26, 2019. Additional information, including a copy of the draft guidelines, is available here. Arkansas: The Arkansas Department of Finance and Administration (Department) has issued a revised legal counsel opinion stating that in determining whether a remote retailer meets Arkansas's economic nexus threshold for sales tax purposes (i.e., making more than $100,000 in sales or entering into 200 or more transactions with Arkansas customers), a remote retailer must consider its online store sales only, and not sales made through a marketplace facilitator. Under Arkansas's law, sales made through a marketplace facilitator are counted in determining whether the marketplace facilitator meets the threshold. The legal opinion noted that out of the remote retailer's 321 sales to customers located in Arkansas, only 18 of those sales were made on the remote retailer's online store. Thus, only those 18 sales will be counted in determining whether the remote retailer meets the state's economic nexus threshold, provided that these sales were sales of tangible personal property, taxable services, digital codes, or specified digital products. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20190629 (Oct. 30, 2019). Michigan: The Michigan Department of Treasury updated its guidance on the applicability of its sales and use tax to taxpayers engaged in the construction industry generally and to contractors specifically in light of the enactment of new legislation from 2016 through 2018.5 The guidance addresses various scenarios related to taxable sales to contractors, including contractors' sales or use tax liability when engaging in the business of constructing, altering, repairing, or improving real estate for others and which items (i.e., equipment, supplies, materials) used by contractors in rendering their services are subject to sales or use tax, and whether contractors must pay use tax if they convert to a taxable use tangible personal property acquired for an exempt use, among other issues. Additionally, the guidance addresses various situations when a real property contractor qualifies for a sales/use tax exemption for property affixed to and made a structural part of certain pieces of real estate, what information is required for an exemption claim, what is a core charge credit and refund, and what equipment qualifies. Further, it considers when contractors are engaged in retail sales of tangible personal property and covers the applicable sales and use tax responsibilities, when a contractor must get a sales tax license by law, and whether the contractor-retailer must pay sales or use tax when tangible personal property is removed from resale inventory in Michigan. Lastly, the guidance addresses who constitutes a retailer (or supplier to the contractor) for sales and use tax purposes, whether the retailer/supplier must collect and remit sales and use tax, and sales and use tax liability that applies when a subcontractor affixes to real estate property that was sold in a retail transaction. Illustrative examples are provided. The guidance does not address the tax base for a manufacturer/contractor that affixes its product to the real estate of others, the distinction between tangible personal property and real property, or the agricultural production exemption. Mich. Dept. of Treas., Rev. Admin. Bull. 2019-15 (Nov. 12, 2019) (replaces Rev. Admin. Bull. 2016-18). Missouri: A pain management medical center (center) did not establish that its purchases of certain pain treatment service items used in compounding medications (such as syringes, needles, and other related items) fell under the use tax exemption6 for materials used or consumed in compounding a product. In so holding, the Missouri Supreme Court (Court) applied the three-prong test articulated in its earlier opinion in Ben Hur Steel Worx7 and found that while the items satisfied two prongs of the test (since they were used and consumed in the process of compounding medications and delivering pain management services), they did not meet the third prong of the test as they were not used or consumed in the compounding of "a product." The Court reasoned that in obtaining medical care, patients seek the medical service of pain relief from a treating physician, rather than a particular type of compounded drug. Additionally, the exemption for products used in compounding required that the injectable drug itself be a marketable "product" with value independent of medical care. In this case, the Court concluded that the items only have marketable value when paired with medical services and the expertise of a pain management physician. Lastly, the ability to use the same drug combination for multiple patients did not establish a market separate from the center's pain management medical care. Interventional Center for Pain Mgmt. v. Mo. Dir. of Rev., No. SC97582 (Mo. S.Ct. Nov. 19, 2019). Arkansas: The Arkansas Department of Finance and Administration (Department) determined that Create Rebate credits issued for a certain Arkansas Economic Development Commission (AEDC) project can be transferred from the successor in interest to the AEDC project to the current owner of the project following a number of transfers resulting from corporate reorganizations and restructurings, if certain conditions are met. Such conditions include that the facility at issue continues to operate under the same terms and conditions of the originally certified project and, if the credit has not been audited by the Department, the party with the credit acknowledges that it is subject to audit and adjustment, with potential billback liability resulting from an audit of the credit transfer. Lastly, certain parties may forfeit rights to the credits as a result of the transfers and assignments. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20191018 (Oct. 18, 2019). Wisconsin: New law (SB 208) permits partnerships, limited liability companies (LLCs), and tax-option corporations (each, an entity) to compute their early stage seed investment credit at the entity level rather than the claimant level and then allocate the credit among the claimants who make investments as provided in the entity's organizational documents. The early stage seed investment credit equals 25% of certain insurers' investments paid to a fund manager that the fund manager invests in specific businesses. An entity may not itself claim the credit, but instead can compute the credit amount that each of its partners, members, or shareholders may claim. Partners, members, and shareholders of an entity may claim the credit in proportion to their ownership interest or as specially allocated in their organizational documents. The entity must provide to the state the names and tax identification numbers of the claimants, the amounts of the credits allocated to the claimants, and the computation of the allocations. SB 208 took effect Nov. 27, 2019. Wis. Laws 2019, Act 61 (SB 208), signed by the governor on Nov. 25, 2019. Texas: A limited partnership (LP) that purchased certain assets of a bankrupt entity is not liable for the entity's outstanding personal property tax liability because the LP did not purchase the entity's name or goodwill. In so holding, the Texas Court of Appeals considered the express language of the purchase agreement and found the terms to unambiguously exclude the entity's name and goodwill. The "purchased assets" only include the entity's book of business, purchased equipment, all customer-related inventory, all work in progress, and printing supplies. Accordingly, the LP is not the successor in interest to the entity's personal property tax liability. Spring Branch Indep. School Dist. et al. v. Southwest Precision Printers, L.P., No. 14-18-00559-CV (Tex. Ct. App., 14th Dist., Nov. 14, 2019). California: The California Franchise Tax Board (FTB) announced that it is granting an automatic seven-month extension to file corporate franchise or income tax Forms 100 and 100W, effective for tax years beginning on or after Jan. 1, 2019. The automatic seven-month extension applies to all Part 11 taxpayers in good standing filing Form 100 (including real estate investment trusts (REITs), regulated investment companies (RICs), and real estate mortgage investment conduits (REMICs)) and Form 100W. Taxpayers will not have to file a written request for the seven-month extension if the return is filed within seven months of the original due date. The automatic seven-month extension does not apply to S corporations. The return due date for S corporations remains the 15th day of the 9th month after the close of the tax year. The FTB noted in its notice that the extension to file does not extend the time to pay. Cal. FTB, Notice 2019-07 (Dec. 2, 2019) (supersedes FTB Notice 2016-04 (Nov. 4, 2016) and FTB Notice 92-11 (Oct. 23, 1992)). New Hampshire: Proposed amendments to N.H. Reg. Rev. 307.11(a), (c), for purposes of business profits tax, would provide that any federal audit resulting in a refund that is referred to the Joint Committee on Taxation of the U.S. Congress would be deemed to be finally determined when the business organization has received the refund from the U.S. Department of Treasury. A public hearing on the proposed rule change is scheduled for Dec. 17, 2019, and written comments are due Dec. 30, 2019. N.H. Dept. of Rev. Admin., proposed amended N.H. Reg. Rev. 307.11(a), (c) (Oct. 31, 2019 Initial Proposal; N.H. Rulemaking Reg. (Nov. 21, 2019)). New York: The New York Department of Taxation and Finance has released revised wage bracket and percentage method income tax withholding tables for the state and the City of Yonkers, reflecting the proposed tables released earlier this year and effective with wages paid on or after Jan. 1, 2020. For additional information on this development, see Tax Alert 2019-2134. Philadelphia, PA: On Nov. 26, 2019, Philadelphia Mayor Jim Kenney officially signed into law a groundbreaking ordinance establishing a bill of rights for domestic workers that includes, in addition to basic labor protections, a legal right to a portable paid time off system. Prior to the May 1, 2020 effective date of the ordinance, the Domestic Workers Standards and Implementations Tax Force will be established for the crafting of regulations and to make arrangements for the development of the portable leave system. Oregon: On Dec. 6, 2019, the Oregon Department of Revenue announced that its online system to register for Oregon's new Corporate Activity Tax (CAT) is now open. Businesses with more than $750,000 of Oregon commercial activity are required to register for the CAT, while businesses with more than $1 million must pay the CAT. Additional information on the CAT, including FAQs, is available here. Seattle, WA: New ordinance (Ord. 125971) of the City of Seattle (City) imposes a $0.57 per trip tax on transportation network companies (TNCs) that provide at least 1 million rides that originate in the City per calendar quarter, effective July 1, 2020. TNCs can deduct from the measure of the tax any trip that originates in the City and ends outside of Washington State. TNCs that do not meet the 1 million rides per quarter threshold nevertheless must complete and file a return that includes the total number of trips originating in the City, declaring no tax due. The tax is due in quarterly installments, but the City's Director of Finance and Administrative Services has discretion to assign businesses to a monthly or annual reporting period. TNCs discontinuing their business in Seattle must report and pay the tax at the same time as they file their final business license tax return. Lastly, the tax is a general excise tax on the privilege of conducting certain business within the City and it is in addition to any other license fees or taxes imposed or levied by the City, the State or other governmental entity or political subdivision. Seattle, Wash. Ord. 125971, signed by the mayor Nov. 26, 2019. Federal: On Dec. 2, 2019, the Office of the United States Trade Representative (USTR) proposed additional duties of up to 100% on certain French products with an approximate trade value of $2.4 billion in response to the implementation of the French Digital Services Tax (DST). USTR is also seeking comments on whether to impose fees or restrictions on French services. The proposal was made in a Federal Register notice explaining that, for reasons set forth in a report prepared in conjunction with the proposal, the French DST is unreasonable, discriminatory, and burdens US commerce. The list of French products subject to potential duties includes 63 tariff subheadings, covering items such as cheese, Champagne, cosmetics, handbags and cast-iron cookware. The value of any action through either duties or fees may take into account the level of harm to the US economy resulting from the DST, USTR said. For more information on this development, see Tax Alert 2019-2121. Federal: A replay of the Nov. 20, 2019, Ernst & Young LLP (EY) webcast on the Work Opportunity Tax Credit (WOTC) is now available. The webcast focused on the current WOTC legislative environment. EY professionals discussed how businesses can continue to effectively leverage the WOTC program and benefit from guidance set forth in a recent Joint Directive to IRS examiners. Two senior IRS officials participated in the webcast to discuss the Joint Directive and its implications. The panelists also addressed: (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 listen to a replay of 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. 5 Mich. Laws 2016, PA 372 and 373, retroactive and effective beginning Jan. 1, 2013; Mich. Laws 2017, PA 48 and 49, effective July 24, 2017; and Mich. Laws 2018, PA 201, retroactive. Document ID: 2019-2182 |
