24 December 2019 State and Local Tax Weekly for December 20 Ernst & Young's State and Local Tax Weekly newsletter for December 20 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. Texas adopts $500,000 economic nexus threshold for franchise "margin" tax purposes, applicable to reports due on or after Jan. 1, 2020 On Dec. 20, 2019, the Texas Comptroller of Public Accounts (Comptroller) adopted amendments to its franchise "margin" tax nexus rule (34 TAC §3.586) (§3.586 or final rule) establishing an economic nexus standard with a $500,000 threshold.1 This change takes effect Dec. 29, 2019, and applies to franchise tax reports due on or after Jan. 1, 2020. Under Texas law (Tex. Tax Code §171.001(b)), the state's ability to impose franchise tax extends to the limits of the U.S. Constitution and corresponding federal laws. In response to the U.S. Supreme Court's ruling in South Dakota v. Wayfair, Inc.2 by which it overturned its long-standing physical presence nexus standard concluding that it "is an unsound and incorrect" interpretation of the Commerce Clause, the Comptroller amended §3.586 to adopt an economic nexus provision for Texas franchise tax purposes. Under the final rule, for federal income tax accounting periods ending in 2019 or later, a foreign taxable entity (i.e., a taxable entity not chartered or organized in Texas) which does not have a physical presence in Texas will still be deemed to have nexus with Texas if, during its federal income tax accounting period, it had gross receipts from business done in the state of $500,000 or more, as determined using the state's apportionment sourcing rules set forth in 34 TAC §3.591. In addition, the final rule includes a provision pursuant to which a foreign taxable entity is presumed to have nexus with Texas if it holds a Texas use tax permit. In the preamble to the final rule, the Comptroller noted that this change (i.e., by which it expressly ties nexus under Texas' use tax to the nexus provisions of the state's franchise tax) codifies the Comptroller's existing practice. Further, in response to a public comment that the provision could be unconstitutional, the Comptroller concluded this provision "is appropriate because an entity may rebut the presumption." Under the final rule, a foreign taxable entity will be deemed to be doing business in Texas on the earliest of:
For additional information on this development, see Tax Alert 2019-2283. Multistate: Tax Alert 2019-2285 provides a summary of the significant legislative, administrative, and judicial actions that affected state and local income/franchise and other business taxes for the period from Oct. 1, 2019 through Dec. 20, 2019. Highlights include: (1) A summary of legislative developments in California, North Carolina, and Utah; (2) A summary of judicial developments in Maryland, Massachusetts, Pennsylvania, and Wisconsin; (3) A summary of administrative developments in California, Florida, Indiana, Iowa, Louisiana, Massachusetts, Montana, Nebraska, New Jersey, New Mexico, New York, New York City, Texas, and Virginia; and (4) A discussion of state and local tax items to watch in New Hampshire, Oregon, and Virginia. California: The California Franchise Tax Board announced adjustments to the bright-line "doing business in California" thresholds to reflect changes in the California Consumer Price Index as annually required by statute.3 The adjusted threshold values for taxable years beginning on and after Jan. 1, 2019 are: (1) taxpayer's in-state sales that exceed the lesser of $601,967 (from $583,867 in 2018) or 25% of the taxpayer's total sales; (2) taxpayer's real and tangible personal property in California exceeds the lesser of $60,197 (from $58,387 in 2018) or 25% of the taxpayer's total real and tangible personal property; and (3) taxpayer's in-state compensation exceeds the lesser of $60,197 (from $58,387 in 2018) or 25% of the total compensation paid by the taxpayer. Cal. FTB, taxnews (Dec. 2019). California: In its ruling in Robert Half International, the California Office of Tax Appeals (OTA) held that a global consulting firm based in California that operates a unitary business with its subsidiaries, can include gross receipts from foreign value added taxes (VAT) imposed on the provision of foreign sales of services in the denominator of its California sales factor. In so holding, the OTA determined that for the tax years at issue, the term "sales" (as defined by Cal. Rev. and Tax Code (CRTC) §25120(e)) means "all gross receipts" which California courts have broadly interpreted to mean the "whole amount received, without deduction."4 The OTA further found that "VAT on sales of services comes within the court's interpretation of 'all gross receipts' under [CRTC §] 25120(e)." The OTA said it found "no reason to limit" the inclusion of VAT in gross receipts to only VAT collected on sales of goods or products and not on services. In the Matter of the Appeal of Robert Half International Inc. and Subsidiaries, California OTA Case No. 18011756 (Cal. OTA Oct. 3, 2019) (pending precedential). Florida: Adopted amendments to Fla. Admin. Code §12C-1.013 implement Florida's statutory decoupling from global intangible low-taxed income (GILTI) under IRC § 951A, requiring such amounts included in federal taxable income be subtracted in determining state taxable income. This amendment takes effect Jan. 1, 2020. Fla. Dept. of Rev., Fla. Admin. Code §12C-1.013 (adopted Nov. 22, 2019). Massachusetts: Governor Charlie Baker announced that the Massachusetts individual income tax rate will decrease to 5% (from 5.05%), effective Jan. 1, 2020. The rate reduction was triggered under a 2002 law which requires reducing the rate when specified revenue growth thresholds are met. Mass. Gov., Press Release (Dec. 13, 2019). New Jersey: The New Jersey Division of Taxation issued guidance on the changes to the state's net operating loss (NOL) rules from pre-allocation to post-allocation following the state's move to mandatory unitary combined reporting, effective for privilege periods ending on or after July 31, 2019. The guidance set forth in TB-94 General Information on the New Net Operating Loss Regime for Tax Years Ending on and After July 31, 2019 focuses on NOL carryovers for taxpayers filing a separate New Jersey corporation business tax (CBT) return and addresses the following topics: (1) prior NOL conversion carryovers; (2) current year post-allocation NOLs and post-allocation NOL carryovers; (3) discharge of indebtedness income and NOLs in (i) a tax year that the taxpayer has a current year post-allocation NOL, and (ii) in a tax year in which the taxpayer has allocated entire net income. N.J. Div. of Taxn., TB-94 General Information on the New Net Operating Loss Regime for Tax Years Ending on and After July 31, 2019 (Oct. 25, 2019). New Jersey: The New Jersey Division of Taxation (NJ DOT) issued revised guidance on sourcing global intangible low-taxed income under IRC §951A and foreign derived intangible income (FDII) under IRC §250 for purposes of the New Jersey corporation business tax (CBT). The revised guidance was issued for purposes of implementing the NJ DOT's earlier Aug. 26, 2019 notice in which it said that it would clarify the guidance it provided in TB-92. The most significant changes to the original TB-92 relate to the sourcing of GILTI and FDII for New Jersey allocation (i.e., apportionment) factor purposes. The revised guidance also includes updated instructions on how to file New Jersey Forms BFC-1 and CBT-100. Taxpayers that already filed a 2018 NJ Form CBT-100, CBT-100-R, or 2018 NJ Form BFC-1 for their 2018 tax year that ended before July 31, 2019 may need to file an amended return taking into account the NJ DOT interpretative changes described in the guidance. N.J. Div. of Taxn., TB-92(R) Sourcing IRC §951A (GILTI) and IRC §250 (FDII) Replacing TB-85(R) (Oct. 31, 2019). New York: The New York Department of Taxation and Finance adopted an emergency regulation to increase the Article 9-A Metropolitan Transportation Business Tax Surcharge (MTA surcharge) rate to 29.4% (from 28.9%) for taxable years beginning on or after Jan. 1, 2020 and before Jan. 1, 2021. The 29.4% rate will remain in effect for succeeding tax years unless the Commissioner determines a new rate. N.Y. Dept. of Taxn. & Fin., 20 NYCRR 9-1.2(f) (emergency adoption Nov. 25, 2019); see also TSB-M-19(6)C (Dec. 20, 2019). California: The California Department of Tax and Fee Administration (Department) issued guidance explaining the expansion of a sales and use tax exemption applicable to the purchase of certain new, used, and remanufactured trucks (under Cal. Rev. & Tax Code (CRTC) § 6388.5) available for the period from Jan. 1, 2020 through Dec. 31, 2023. The exemption applies to trucks delivered to both California residents and non-residents in California that are removed from California within a specific period of time and then exclusively used out-of-state or in interstate or foreign commerce. The Department's guidance provides documentation requirements and notes that purchasers may use Form CDTFA-837, Affidavit for Section 6388 or 6388.5 Exemption from California Sales and Use Tax, or an alternative affidavit that meets specified documentation requirements. Purchasers must provide the affidavit to the truck or trailer manufacturer, remanufacturer, or dealer no later than 30 days from the date the truck or trailer is taken outside of California, and both sellers and purchasers must retain the documents for four years from the sale date. Lastly, the updated Form CDTFA-836 reflecting the exemption expansion will be available on the Department's website beginning Jan. 1, 2020. According to the notice, taxpayers should not use Form CDTFA-447, Statement Pursuant to 6247 of the California Sales and Use Tax Law, and Form CDTFA-448, Statement of Delivery Outside of California, to substantiate the exemption under CRTC § 6388.5 for a truck or trailer delivered in California. Cal. Dept. of Tax and Fee Admin., Special Notice L-721, Sales and Use Tax Exemption Expanded to Include Trucks Used Out-of-State or in Interstate or Foreign Commerce (Nov. 2019). Michigan: New law (HB 4540, HB 4541, HB 4542, HB 4543) requires a marketplace facilitator to collect and remit sales and use tax, effective Jan. 1, 2020. These provisions apply to a marketplace facilitator's sales made on its own behalf or facilitated through its marketplace for third-party marketplace sellers to Michigan purchasers. The new law addresses the rights and responsibilities of marketplace facilitators and sellers, tax liabilities (and relief from liability), audits (in general the Michigan Department of Treasury (Department) only will audit the marketplace facilitator for sales made by the marketplace seller, unless the marketplace seller provides insufficient information), and sales excluded from the marketplace facilitator provisions (such as sales of telecommunications services or sales of rooms or accommodations). The new law defines key terms such as "marketplace facilitator", "marketplace seller" and "affiliate". The Department indicated that upon request it will waive any "failure to file" or deficiency penalties for tax due on facilitated sales for returns due on or before April 20, 2020. Penalties will not be waived for direct sales made by the marketplace facilitator. The new law also codifies the state's economic nexus provisions (i.e., threshold of more than $100,000 in sales, or 200 or more separate transactions to Michigan purchasers), that were announced in Revenue Administrative Bulletin 2018-16, and applicable to transactions occurring on or after Oct. 1, 2018. Lastly, a marketplace facilitator in determining if it meets the economic nexus threshold, must include its sales and sales it facilitates on behalf of marketplace sellers, while a marketplace seller in determining whether it meets the threshold must include both sales made through a marketplace facilitator as well as its direct sales. Mich. Laws 2019, PA 143 (HB 4540), PA 144 (HB 4541), PA 145 (HB 4542), and PA 146 (HB 4543), all signed by the governor on Dec. 12, 2019; see also Mich. Dept. of Treas., Notice Regarding 2019 PAs 143-146 Marketplace Facilitators and Economic Nexus (Dec. 23, 2019). Ohio: In revised Information Release ST 1999-01 — Sale and Installation of Computer Cabling (issued Dec. 18, 2019), the Ohio Department of Taxation (Department) announced a change in the Department's application of sales and use tax to computer cabling. The change, which is effective Oct. 22, 2019, is in response to the recent decision by the Ohio Board of Tax Appeals in Nationwide Mutual Insurance Co. v. McClain,5 in which it overruled its previous 1998 decision in Newcome Corp. v. Tracy6 (see Tax Alert 2019-1983). The revised release treats computer cabling that is incorporated into realty as a construction contract under Ohio Rev. Code § 5739.01(B)(5), so the sale and installation of the cabling is not subject to the sales and use tax. People that sell and install computer cabling, the release said, should incur use tax on the cost of the cabling unless customers desire specialized networks to meet their technical requirements. For specialized networks, the computer cabling would be classified as tangible personal property (i.e., a business fixture) after it is installed into realty, with sales and use tax due from the customer on materials and installation labor, unless otherwise exempt from the tax. For additional information on this development, see Tax Alert 2019-2245. Texas: A restaurant chain is not entitled to a sale-for-resale exemption for sales tax paid on purchases of coin-operated gaming equipment because the restaurant retains possession and control of the equipment while customers use it. In so holding, the Texas Court of Appeals rejected the restaurant's argument that it "transfers" the equipment to customers as an integral part of its amusement service, finding instead that the restaurant provides the customers with limited access to enjoy the games or rides offered through the equipment under its conditions and parameters. Specifically, the restaurant determines the predominant features of the equipment and its use - such as by controlling the games' volume, length of play time, skill level, location of the games, and overall access to them, among other features. CEC Entertainment, Inc. v. Hegar, No. 03-18-00375-CV (Tex. Ct. App., 3d Dist., Dec. 5, 2019). Federal: On Dec. 19, 2019, the IRS released final regulations (TD 9889) on investing in qualified Opportunity Zones (QOZs). In TD 9889, the IRS addressed the comments received in response to the proposed rules issued in 2018 and 2019 under IRC §1400Z-2 and revised the proposed regulations while retaining the basic approach. The final regulations address: (1) what types of gains may be invested in a QOZ and when, (2) when gains may be excluded from tax after a QOZ investment is held for 10 years, (3) how a qualified opportunity fund (QOF) determines levels of new investment in a QOZ, and (4) how large C corporations can invest in QOZs. A Tax Alert is forthcoming. Delaware: A farm's poultry house is not exempt from property tax under the nutrient management facilities property tax exemption because the purpose of the poultry houses is to raise and house poultry rather than generate or deal with the application of nutrients. In so holding, the Delaware Superior Court (Court) found some ambiguity regarding what is included in "other nutrient storage, disposal or management structures or facilities pursuant to the nutrient management plan" under the exemption statute. Thus, the Court considered the statute in its entirety in conjunction with the statutory definition of "nutrient management plan" (i.e., "a plan by a certified nutrient consultant to manage the amount, placement, timing and application of nutrients in order to reduce nutrient loss or runoff and to maintain the productivity of soil when growing agricultural commodities and turfgrass") as well as its purpose ("to regulate those activities involving the generation and application of nutrients"). The Court found that the poultry houses, even though they produce nutrients in the form of waste, do not facilitate the activities described for a "nutrient management plan." Spence v. Kent Cnty. Bd. of Asmt., No. K19A-03-001 WLW (Del. Super. Ct. Nov. 27, 2019). Puerto Rico: To allow service providers more time to comply with new filing requirements, the Puerto Rico Treasury Department (PRTD) has determined (in its Administrative Determination 19-08) that recipients of telecommunications, internet, insurance premium and television services must prepare and file Form 480.7E, Advertising, Insurance Premiums, Telecommunication, Internet, Access and Cable or Satellite Television Services, for tax year 2019. The recipients must file Form 480.7E on or before Feb. 28, 2020, through the PRTD's electronic filing platform. For more on this development, see Tax Alert 2019-2237. Multistate: Six jurisdictions — California, Hawaii, New Jersey, New York, Puerto Rico and Rhode Island — operate state disability insurance (SDI) programs. Another nine jurisdictions — California, Connecticut, District of Columbia, Massachusetts, New Jersey, New York, Oregon, Rhode Island and Washington - are now operating, or will soon be operating, paid family and medical leave (PFML) insurance programs. Depending on the jurisdiction, the employee may pay all contributions to the SDI and/or PFML program through wage withholding, or the employer and the employee may share the cost of the insurance coverage. Most states allow employers to use a private insurance company or self-insured plan in lieu of paying into the state insurance fund(s). Tax alert 2019-2252 shows the state SDI and PFML rates and taxable wage limits for 2020 based on information currently available. Arkansas: The Arkansas Department of Workforce Services announced that the total 2020 state unemployment insurance tax rates will range from 0.3% to 14.2%, including a 0.2% stabilization tax, down 0.1% from 2019. The 2020 new employer rate, including the additional tax, will be 3.1%. For additional information on this development, see Tax Alert 2019-2207. Colorado: To address the impact of changes to the federal Form W-4 starting in 2020 and acknowledging that Colorado income tax withholding relies on the information reported on the federal Form W-4, the Colorado Department of Revenue released a new withholding instruction worksheet that must be used by employers to calculate Colorado income tax withholding for employees that submit a federal Form W-4 in 2020 or later years. For additional information on this development, see Tax Alert 2019-2253. Oregon: The Oregon Department of Revenue announced that effective beginning Jan. 1, 2020, new employees, employees claiming an exemption from state withholding and those making changes to their withholding allowances must submit new Form OR-W-4, Oregon Employee's Withholding Allowance Certificate, to their employers. Also, employees who have submitted a 2019 or prior version of federal Form W-4 for Oregon and federal withholding purposes, and who submit a 2020 or later version of the federal Form W-4 to change their federal withholding, must complete a new Form OR-W-4 for Oregon withholding tax purposes. For additional information on this development, see Tax Alert 2019-2208. South Carolina: Governor McMaster and the South Carolina Department of Employment and Workforce announced that state unemployment insurance (SUI) tax rates will decrease in 2020 due to the elimination of the variable solvency surcharge that was added to employer tax rates for several years. This is the seventh consecutive year of rate reductions in the state. For additional information on this development, see Tax Alert 2019-2183. Federal: On Dec. 17, 2019, the US House of Representatives approved legislation (H.R. 1865 "The Further Consolidated Appropriations Act, 2020 (Act)) that would extend through at least Dec. 31, 2020, many of the tax extender provisions that previously expired or are expiring at the end of 2019, including excise tax provisions that affect federal taxes on fuel, alcohol and manufacturers. The Act also provides language intended to clarify certain provisions of the Alternative Fuel Mixture Credit under IRC §6426(e). The Act was passed by the Senate on Dec. 19, 2019; and signed by the President on Dec. 20, 2019. For more information on this development, see Tax Alert 2019-2271. Massachusetts: The Massachusetts Department of Revenue has amended its regulation (amended 830 CMR 64G.1.1) (amended regulation) which explains the application of state and local room occupancy excise tax to transfers of occupancy in a bed and breakfast establishment, hotel, lodging house, short-term rental, or motel, provides rules governing operators and intermediaries for collecting, remitting, and reporting the excise tax, and repeals and replaces previous regulations. The amended regulation discusses the following: (1) which accommodations are subject to tax and which are exempt, (2) how state and local excise taxes apply, and (3) general rules for short-term rentals, including the 14-day exemption. Other topics addressed by the amended regulation include the responsibilities, requirements and liabilities for intermediaries. Lastly, the amended regulation provides information about recordkeeping requirements, provides examples, and defines key terms including hosting platform, intermediary, and operator's agent. The amended regulations are effective for transfers of occupancies in bed and breakfast establishments, hotels, lodging houses, and motels beginning on or after July 1, 2019, and for transfers of occupancies in short-term rentals that begin on or after July 1, 2019 and for which contracts with occupants were entered into on or after Jan. 1, 2019. Mass. Dept. of Rev., amended 830 CMR 64G.1.1 (promulgated Dec. 13, 2019). New Hampshire: The New Hampshire Department of Revenue Administration (Department) issued guidance that clarifies the taxation of prepaid wireless telecommunications services (prepaid wireless) and voice over internet protocol (VoIP), effective Jan. 1, 2020. Retailers of prepaid wireless and VoIP must assess and collect the 7% communications services tax (CST), make monthly estimated payments (if applicable), and file the CST return and remit payment to the Department monthly. Intrastate and interstate prepaid wireless charges will be sourced to New Hampshire and subject to CST: (1) if the retail transaction occurs in person at a seller's location in New Hampshire; (2) if (1) does not apply, the prepaid wireless is evidenced by a physical item (such as a card) and the purchaser provides a New Hampshire delivery address for the item; (3) if (1) and (2) do not apply, the consumer gives a New Hampshire address during the sale, including the address associated with the consumer's payment instrument if no other address is available, and the address is not given in bad faith; or (4) if (1), (2) or (3) do not apply, the consumer's mobile telephone number is associated with a ZIP code, area code, or New Hampshire location. Additionally, intrastate and interstate VoIP charges will be sourced to New Hampshire and subject to CST if provided to a person with a place of primary use in New Hampshire, but not if provided to a person with a place of primary use outside New Hampshire. N.H. Dept. of Rev. Admin., TIR 2019-007 (Nov. 25, 2019). Oregon: The Oregon Department of Revenue released draft rules to implement the recently enacted Corporate Activity Tax (CAT) base on gross receipts, which takes effect Jan. 1, 2020. The draft rules include: OAR 150-317-1000 (defining commercial activity); 150-317-1010 (substantial nexus guidelines for the CAT); 150-317-1020 (factors used in determining whether a group of persons forms a unitary group); 150-317-1030 and -1040 (sourcing CAT to Oregon from sales of tangible personal property and sales on non-tangible personal property in Oregon, respectively); 150-317-1130 (property brought into Oregon); and 150-317-1200 (cost input or labor cost subtraction). A copy of these draft rules can be found here. Federal: On Dec. 19, 2019, the House approved by a 385-41 vote U.S.-Mexico-Canada Agreement (USMCA) implementing legislation (H.R. 5430) after Democratic leaders announced last week that agreement had been reached with the Administration on the deal sought by both parties. The Senate is expected to consider the agreement in early 2020. For additional information on this development, see Tax Alert 2019-2256. Federal: On Dec. 17, 2019, the United States (US) Trade Representative (USTR) published three separate Federal Register Notices (FRNs) related to exclusions for goods subject to the punitive tariffs levied on Chinese origin goods. The first two FRNs detail certain amendments to exclusions previously granted to Chinese-origin goods on List 1 and List 2, which cover US$34b and $16b worth of Chinese-origin goods, respectively. The amendments correct technical and ministerial errors in original publications to prior FRNs granting the initial exclusions. The third FRN announces specific new exclusions granted to Chinese-origin goods subject to punitive tariffs on List 3, which covers $200b worth of Chinese-origin goods. For more information on this development, see Tax Alert 2019-2262. Federal: On Dec. 13, 2019, the United States (US) and China reached a framework for a formalized agreement to address the ongoing trade tensions between the two countries that has resulted in a series of tariff actions during the past two years.For more on this development, see Tax Alert 2019-2220. International: Equatorial Guinea's Ministry of Finances issued two new Ministerial orders on Nov. 5, 2019. The objective of the orders is to facilitate the analysis of information transmitted to the tax administration as part of its control operations. The first Ministerial order (No. 06/2019) establishes additional measures on the application of value-added tax (VAT). The second Ministerial order (No. 07/2019) addresses the creation of agents for the validation of corporate income tax (CIT). For additional information on this development, see Tax Alert 2019-2230. International: On Dec. 12, 2019, Peru enacted Urgent Decree 024-2019 and Urgent Decree 025-2019, extending income tax and value-added tax (VAT) exemptions. Both Urgent Decrees will go into effect on Jan. 1, 2020. For more on this development, see Tax Alert 2019-2223. 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. 1 The final rule was adopted without changes to the proposed rule. Text of the proposed rule (which was adopted as the final rule) is available here. 3 See Cal. Rev. & Tax Code §§23101(c) ("doing business") and 17041(h) ("Tax brackets, annual recomputation" (based on changes to the California Consumer Price Index as annually determined by the California Department of Industrial Relations)). 5 Nationwide Mutual Insurance Co. v. McClain, BTA Case Nos. 2018-313, 2018-315, 2018-316, 2018-317, 2018-318 (Ohio Bd. Tax App. Oct. 22, 2019). Document ID: 2019-2291 |
