19 December 2019 State and Local Tax Weekly for December 13 Ernst & Young's State and Local Tax Weekly newsletter for December 13 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. On Dec. 10, 2019, the Nebraska Department of Revenue (Department) issued General Information Letter (GIL) 24-19-3 which provides guidance on the state's income tax treatment of global intangible low taxed income (GILTI) and foreign derived intangible income (FDII). A GIL is advisory in nature but is binding on the Department until amended or superseded. Nebraska's income tax law conforms to the IRC on a rolling basis and, as such, since the legislature did not modify these provisions, incorporates the GILTI and the FDII provisions of the Tax Cuts and Jobs Act (P.L. 115-97). The Department in GIL 24-19-3 indicates that, because the IRC and related Treasury Regulations establish that GILTI is not a foreign dividend, any such income is not eligible for the Nebraska deduction for dividends or deemed dividends under Neb. Rev. Stat. 77-2716(5). GIL 24-19-3 goes on to say that GILTI and FDII deductions are included in federal taxable income and likewise are included on the Nebraska corporate income tax return. Further, according to the guidance, if a corporate taxpayer is taxable in both Nebraska and one or more other states, it must include its share of GILTI income in its sales factor denominator. GIL 24-19-3 indicates that for purposes of whether the GILTI amount is included in the taxpayer's sales factor numerator, the situsing rules for certain investment income provided for in Neb. Rev. Stat. 77-2734.14(3)(d) (dealing with interest, dividends, investment income and other net gains from transactions in intangible assets held in a treasury function) apply. Under those rules, GIL 24-19-3 indicated that GILTI is presumed to be included in a corporate taxpayer's Nebraska sales factor numerator if its commercial domicile is located in Nebraska. The taxpayer can rebut the presumption if it can show that the investment, management, and record-keeping activities associated with the controlled foreign corporation from which the GILTI income is derived occurs outside Nebraska. If the corporate taxpayer's commercial domicile is located in another state, GIL 24-19-3 states none of the GILTI income should be included in the Nebraska sales factor numerator unless it conducts relevant activities (i.e., investment, management and recordkeeping) in Nebraska. For additional information on this development, see Tax Alert 2019-2193. Arkansas: The Arkansas Department of Finance and Administration (Department) in response to a ruling request explained that a taxpayer developing solar facilities in Arkansas would be subject to an allowable depreciation schedule for equipment placed in service after Jan. 1, 2019 that is the same as allowed for the specific type of equipment under the applicable federal income tax law, as in effect on Jan. 1, 2019. For property purchased in tax years beginning on or after Jan. 1, 2019, Arkansas adopts IRC §§ 167 and 168(a)-(j) as in effect on Jan. 1, 2019, but the state does not adopt bonus depreciation under IRC §168(k) and limits the increased expense deduction under IRC § 179 to $25,000. Property can be depreciated in the first year based on when the property is placed in service under the same half-year and mid-quarter conventions used for federal income tax purposes under IRC § 168(d) as in effect Jan. 1, 2019 and the applicable federal rules. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20190912 (Oct. 30, 2019). Minnesota: An out-of-state S corporation's gains generated through the Dec. 2011 sale of a majority interest in 12 wholly owned operating subsidiaries is apportionable business income subject to Minnesota corporate income tax because the S corporation and the subsidiaries were engaged in a unitary business. In so holding, the Minnesota Tax Court (Court), citing Allied-Signal1 and MeadWestvaco,2 found that even though the S corporation was not engaged in a unitary business with outside investors that purchased an ownership interest in the subsidiaries, the S corporation and the subsidiaries were part of the same unitary business and the assets of the subsidiaries were an integral part of the business. Moreover, the subsidiaries, in addition to serving an "investment" function, also served an "operational" function. The Court reasoned that the sale provided additional cash for the operating subsidiaries and a related entity for "balance sheet needs" related to "adequate working capital," allowed the parent to eliminate restricted stock units and stock options previously granted to its employees and changed the structure of the entire business. Lastly, the Court did not reach the questions of whether the parent was "operating" in Minnesota or how much of the gains would be allocated to Minnesota, finding both unnecessary because the income was apportionable business income rather than nonbusiness income. YAM Special Holdings, Inc. v. Minn. Comr. of Rev., No. 9122-R (Minn. Tax Ct. Nov. 12, 2019). Utah: The U.S. Supreme Court (Court) has been asked to review the Utah Supreme Court (Utah court) ruling in Steiner v. Utah State Tax Commission (Steiner). In Steiner, the Utah court held that individual taxpayers who received income from foreign and domestic pass-through entities were not entitled to: (1) apportion their residency-based income tax (as opposed to claiming a credit for taxes paid to other states) under the dormant Commerce Clause, (2) a foreign-earned income deduction under the dormant Foreign Commerce Clause, or (3) a deduction for foreign income through Utah's "equitable adjustment" statute. The question presented to the Court is whether Utah's tax code, which extends a credit for income taxes paid to other states but does not extend a similar credit for income taxes paid to foreign countries (or make other adjustments for foreign income), discriminates against foreign commerce in violation of the dormant Commerce Clause. Steiner v. Utah State Tax Comn., No. 20180223 (Utah S.Ct. Aug. 14, 2019), petition for cert. filed, Dkt. No. 19-775 (U.S. S.Ct. filed Dec. 12, 2019). Arkansas: The Arkansas Department of Finance and Administration (Department) advised a library that its purchases of digital versions of its subscriptions to newspapers, journals, periodicals, and academic databases are exempt from sales and use tax because these items are neither "tangible personal property" nor "specified digital products." Its purchases of digital subscriptions to e-books, streaming audio, and streaming video services, however, are subject to sales and use tax because these products are taxable "specified digital products" and the library is the end user of these products. The Department determined that the library it is the "end user" of the products because it purchases these products for its own use, which includes making them available to its patrons. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20191008 (Oct. 22, 2019). Arkansas: An entity that signs one-year contracts with educational institutions for digitized academic and scholarly content (i.e., e-books) by subscription must calculate the number of its Arkansas transactions for economic nexus purposes (i.e., making more than $100,000 in sales or entering into 200 or more transactions with Arkansas customers) by counting each time a party to the subscription service makes a purchase or download for consideration. The Arkansas Department of Finance and Administration advised that the entity could not calculate its Arkansas transactions using only the signing of customers' one-year contracts for non-exclusive licenses to the content because the initial contracts are not sales transactions and they merely anticipate additional purchases. Ark. Dept. of Fin. and Admin., Rev. Legal Counsel Op. No. 20190717 (Oct. 30, 2019). Illinois: A chemical corporation's purchases of metallurgical coke do not qualify for the manufacturing and assembly exemption from use tax because the coke does not directly and immediately cause a change in the zinc products the chemical corporation manufactured. In so holding, the Illinois Supreme Court (Court) found the terms "direct" and "immediate" in 35 ILCS 105/3-50(4) "to be clear and unambiguous"; thus, to be eligible for the use tax chemical exemption, the coke used in the manufacturing process must effect a change on the zinc "at once and without any intermediate steps." The Court rejected the corporation's argument that the definition of "proximate cause" should be used to define "direct" in the statute, reasoning that "proximate cause" is a tort concept that does not appear in the chemical exemption statute and it ignores the word "immediate." Ultimately, the Court determined that the Illinois Independent Tax Tribunal (tribunal) did not commit clear error in ruling that the corporation's purchases of coke did not qualify for the use tax chemical exemption. The Court, however, reversed the tribunal on the issue of penalties, finding instead that the corporation is entitled to abatement of late payment and late filing penalties. Horsehead Corp. v. Ill. Dept. of Rev., 2019 IL 124155 (Ill. S.Ct. Nov. 21, 2019). Michigan: The Michigan Department of Treasury (Department) issued guidance on sales tax refund procedures for motor vehicle dealers and manufacturers, applicable when a purchaser returns a vehicle for the full or partial purchase price (including vehicles returned directly to the manufacturer under the state's "lemon law" through a manufacturer buy-back) or where the dealer collects sales tax in error. A purchaser must return the motor vehicle to the original manufacturer or dealer for a tax credit or refund, the manufacturer or dealer must credit or refund the amount to the purchaser and document the credit or refund, and then the manufacturer or dealer can claim a refund or credit for the same amount from the Department. For vehicle buy-backs under Michigan's lemon law, only the original manufacturer may claim such credit or refund after first refunding the tax to the original purchaser. Vehicles returned to a dealer other than the original dealer are treated as goods exchanged in trade and are not eligible for the credit or refund. Lastly, goods returned to a seller in the following ways are excluded from the statutory refund procedures: (1) repossession or recapture by legal process, (2) abandonment of contract, (3) voluntary surrender of goods without a refund or credit given for the amount paid, and (4) goods accepted in trade or barter. Mich. Dept. of Treas., Rev. Admin. Bulletin 2019-19 (Nov. 25, 2019). Pennsylvania: New law (HB 17) excludes from sales and use tax the retail sale or use by a financial institution of canned computer software directly utilized in conducting the business of banking. "Directly utilized in conducting the business of banking" includes the purchase of canned computer software by a financial institution to be used in transactions with customers and service providers, but it does not include the purchase of canned computer software by entities (other than a financial institution) such as a financial institution's holding companies or subsidiaries. This change applies to sales at retail or use of canned software on or after Nov. 27, 2019. Pa. Laws 2019, Act 90 (HB 17), signed by the governor on Nov. 27, 2019. Texas: The Texas Comptroller of Public Accounts (Comptroller) issued a memo, notifying taxpayers of a change in its policy regarding medical billing services, including those performed before submitting a claim to an insurance company (such as providing additional information or adjusting submitted billing) concluding that they are taxable insurance services beginning April 1, 2020 (extended from Jan. 1, 2020). The Comptroller has determined broadly that services involving an insurance claim are taxable insurance services and has not delineated between services performed before and after receipt of the claim by the insurance company, other than for medical billing. Neither Texas statutes nor rules specifically address taxability of medical billing services and do not exclude completing a form for the insured for a medical insurance claim from the definition of insurance claims adjustment or claims processing. Because insurance claim preparation must occur before the claim is submitted to the insurance company and is an inherent part of the insurance claim process, the Comptroller determined that medical billing services to prepare a medical insurance claim for filing constitute insurance claims adjustment or claims processing. Accordingly, these are insurance services that are subject to Texas sales and use tax. The guidance supersedes various documents related to their statements on the taxability of medical billing services. Tex. Comp. of Pub. Accts., No. 201911003L (Nov. 22, 2019). California: The California Department of Finance re-designated the U.S. Census tracts that qualify as Designated Geographic Areas (DGAs) for purposes of the New Employment Credit (NEC), effective Jan. 1, 2020. As a result of this re-designation, some U.S. Census tracts that were previously eligible for the NEC are no longer in the DGA, while other Census tracts have been added and will now be eligible for the NEC. A business claiming the NEC must have employees working in a DGA. A state provided map permits users to see the new and previous DGAs, and allows them to enter an address to see if or when it is eligible for an NEC. Additional credit information is available on the NEC's webpage. Cal. FTB, Tax News: New Employment Credit — Changes beginning in Jan. 2020 (Dec. 2019). Pennsylvania: New law (HB 17) provides that the Pennsylvania Department of Revenue (Department) may collect tax owed (for taxes that it administers, except for the inheritance tax) if collection begins within 10 years of the date the related tax settlement, determination, or assessment becomes final. For nonfiled returns, the Department will induce the filing of a return or settle, determine, or assess the tax liability of a nonfiled tax period within 10 years of the tax return due date. The filing of a tax lien does not extend the 10-year-old period to collect a tax. The Department has no time limit to collect taxes in the following cases: (1) for trust fund tax liabilities a taxpayer either collected or withheld, as an agent of or in trust for Pennsylvania, but willfully failed, grossly neglected or refused to remit notwithstanding whether the taxpayer filed a return; (2) a false of fraudulently filed tax return or report; (3) willful failure to file a tax return or report; (4) attempts to evade or defeat a tax; (5) a tax offense for which a taxpayer has been criminally charged and convicted in which the liabilities remain unpaid; and (6) certain liabilities for eligible taxes unknown to the Department that have not been extinguished before beginning the tax amnesty period of a later enacted or approved Department-administered tax amnesty program. HB 17 also provides specific situations in which the collection expiration date is tolled, such as bankruptcy, an installment payment plan has been entered, an offer-in-compromise is being considered, the tax assessment is being appealed, among other situations. These provisions take effect Jan. 1, 2021. Pa. Laws 2019, Act 90 (HB 17), signed by the governor on Nov. 27, 2019. Multistate: State unemployment insurance (SUI) trust funds are largely financed by employer contributions (except in Alaska, New Jersey and Pennsylvania, where employees also make contributions). States are required to maintain an SUI wage base of no less than the limit set under FUTA. The 2020 FUTA wage base of $7,000 has remained unchanged since 1983, despite increases in the federal minimum wage and annual cost-of-living adjustments over the last 36 years. Some states are conservative in their approach to maintaining adequate SUI trust fund reserves. Consequently, the SUI wage base is flexible, meaning it is indexed to the average wage or varies based on the trust fund balance. Tax Alert 2019-2186 contains a preliminary list of the 2020 SUI taxable wage bases (as compared to 2019) and employee SUI withholding rates, if applicable. Ohio: The Ohio Department of Taxation (Department) released revised income tax withholding tables, effective with wages paid on and after Jan. 1, 2020. The 2020 withholding tax filing deadlines have also been released. According to the Department's withholding website, other information on 2020 withholding requirements will be released soon. For more on this development, see Tax Alert 2019-2206. South Carolina: The South Carolina Department of Revenue (Department) announced on its website that it is developing a new SC Form W-4 for use starting in 2020 that will closely resemble the 2019 SC Form W-4, including the ability to claim personal allowances. The Department expects the new SC Form W-4 to be available when it releases its 2020 state income tax withholding tables. For additional information on this development, see Tax Alert 2019-2168. Chicago, IL: New ordinance (Ord. O2019–8527) restructures taxes on ridesharing through Chicago's Ground Transportation Tax (GTT), imposes a congestion tax surcharge on ride-hailing companies, increases the personal property lease transaction tax (i.e., cloud-computing tax), and increases the restaurant tax. Effective Jan. 6, 2020, the GTT applicable to rideshare companies increases to $1.13 per single ride accepted (from $0.60), decreases the GTT on each pool ride accepted to $0.53 (from $0.60), and imposes a $0.53 tax for every wheelchair-accessible ride, per vehicle per ride accepted. Further, a new congestion tax surcharge — $1.75 on single rides and $0.60 for pool rides — applies to rideshare companies dropping off and picking up passengers in a designated downtown congestion area on weekdays between 6:00 a.m. and 10:00 p.m. An additional $5 per vehicle per ride accepted (previously $5.55) applies to rides that include a pickup or drop-off or both at O'Hare International Airport, Midway International Airport, Navy Pier, or McCormick Place. In addition, the exemption from the motor vehicle lessor tax for the lease, rental, or use of a ground transportation vehicle to provide ground transportation services does not apply to a transportation network provider, transportation network driver, or transportation network vehicle owner. The ordinance also increases the personal property lease transaction tax on the nonpossessory lease of a computer to 7.25% (from 5.25%), effective Jan. 1, 2020. The tax applies to the lease or rental price of a computer primarily to allow the customer to use the provider's computer and software to input, modify or retrieve data or information that is supplied by the customer. Lastly, effective Jan. 1, 2020, the ordinance increases the restaurant tax to 0.50% (from 0.25%) of the selling price of all food and beverages sold at retail by a place for eating located in the city. Chicago, Ill. Laws 2019, Ofc. of the City Clerk, Ord. O2019–8527 (approved by the City Council Nov. 26, 2019). International: Mexico enacted the final economic package (the Reform) through publication in the Official Gazette on Dec. 9, 2019. President Lopez Obrador signed the Reform on Dec. 6, 2019. Most of the Reform will be effective Jan. 1, 2020, with exceptions for the digital services rules and certain rules on fiscally transparent entities, which have their own effective dates. For more information on the tax reform, see Tax Alert 2019-1967. For more on the new digital services rules, see Tax Alert 2019-2023. 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: 2019-2241 |
