22 January 2020 State and Local Tax Weekly for January 17 Ernst & Young's State and Local Tax Weekly newsletter for January 17 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. Final federal regulations on Opportunity Zones retain same approach as proposed regulations with a few big changes The IRS released eagerly-awaited final regulations (TD 9889, Final Regulations) on qualified Opportunity Zones (OZs). The Final Regulations address what types of gains may be invested and when, when gains may be excluded from tax, how qualified opportunity funds (QOFs) and qualified opportunity zone businesses (QOZBs) can invest in QOZs, how C corporations can invest in OZs, and new rules for QOF C corporations, among other topics.
The final regulations are effective 60 days after publication in the Federal Register (publication in the Federal Register is scheduled for Jan. 13, 2020 which would make the final regulations effective on March 14, 2020). For calendar-year taxpayers, this means that the final regulations must be applied for the 2021 tax year and thereafter. In prior years, taxpayers could choose to apply the proposed regulations or the final regulations as long as they applied either set of regulations consistently for all those tax years. If a taxpayer chooses to apply the proposed regulations, it must apply the Final Regulations for IRC Section 1400Z-2(c) instead of Proposed Treas. Reg. Section 1.1400Z2(c)-1, which addresses the disposal of OZ investments after at least 10 years. For additional information on this development, see Tax Alert 2020-0056. New Jersey enacts elective business alternative income tax for pass-through entities to address SALT deduction cap On Jan. 13, 2020, Governor Phil Murphy signed into law Senate Bill 3246 (S. 3246 or bill) establishing the "business alternative income tax" (BAIT), an elective New Jersey business tax regime for pass-through entities (PTEs). Under the bill, New Jersey PTEs (defined as partnerships, limited liability companies, or S corporations) can elect to pay an entity-level tax instead of passing through items of income and expense to the PTEs owners. In addition, a proportionate share of the BAIT paid by a PTE can be credited to the PTE owners' Gross Income Tax (GIT) (New Jersey's personal income tax) or Corporation Business Tax (CBT) liability. The BAIT is intended to provide owners of PTEs who taxpayers under the GIT a work-around of the $10,000 annual limitation on the deductibility of state and local taxes imposed by the federal Tax Cuts and Jobs Act (P.L. 115-97) (commonly referred to as the SALT deduction cap). This benefit is ostensibly accomplished by treating the BAIT paid at the entity level as an "above the line" deduction by the trade or business rather as an itemized deduction at the individual PTE owner level. Proponents of the bill believe that imposing the tax at the entity level would not be subject to the SALT deduction cap. New Jersey becomes the latest state to enact a state PTE tax at the entity level although all of these new state taxes differ markedly from one another. Neither the Treasury Department nor the IRS have issued specific guidance on whether any deduction flowing through to individual PTE owners would not be subject to the SALT deduction cap for federal income tax purposes. The BAIT statute is quite complex. Key features of the new law, as well as some of the open questions raised by the new tax, are summarized in Tax Alert 2020-0110. Federal: The IRS has issued proposed regulations (REG-107431-19) amending regulations under IRC Sections 162, 164 and 170 affecting limitations on the deductibility of charitable contributions for which the taxpayer receives some other benefit, most notably a state or local tax credit (2019 proposed regulations). In addition to updating the current regulations to reflect changes in the law brought about by the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA), the 2019 proposed regulations: (1) amend safe harbors under IRC Section 162 to provide certainty with respect to the treatment of payments business entities make to entities described in IRC Section 170(c); and (2) provide a new safe harbor under IRC Section 164 for payments made to an IRC Section 170(c) entity by individuals who itemize deductions and receive or expect to receive a credit against their state or local tax liabilities as a result. A public hearing has been scheduled for Feb. 20, 2020. The IRS asks that written comments and outlines of topics to be discussed at the hearing be submitted by Friday, Jan. 31, 2020. For additional information on this development, see Tax Alert 2020-0054. California: The Franchise Tax Board issued a legal ruling addressing California tax return filing requirements and minimum tax obligations for out-of-state professional athletic teams in four different situations. Generally, such teams must file a California tax return and pay the minimum tax for each tax year in which they play any league games in California, even if the team does not share in gate revenue generated from games played in California. Cal. FTB, Legal Ruling No. 2019-03 (Dec. 19, 2019). Hawaii: The Hawaii Department of Taxation (Department) issued advanced notice of proposed administrative rules on Hawaii's new market-based sourcing provisions for revenues from the sale of services and intangible property. The Department is accepting public testimony on the proposed rules. The proposed rules are effective Jan. 1, 2020, the same date the new market-based sourcing provision took effect, until the effective date of the final adopted rules. Haw. Dept. of Rev., Tax Information Release No. 2020-01 (Jan. 3, 2020). New Hampshire: Proposed bill (HB 1567) would change the method of filing a New Hampshire combined report from a water's edge to a worldwide basis starting in 2022. HB 1567 was introduced on Jan. 8, 2020. North Carolina: In-state resident individuals who expect to sell their interests in a limited liability company (LLC) taxed as a partnership for federal income tax purposes may continue to deduct from North Carolina adjusted gross income (AGI) the amount of bonus depreciation that was previously added back to their federal AGI. In a private letter ruling, the North Carolina Department of Revenue (Department) explained that the individual members only may claim the 20% bonus depreciation deduction in each of the five tax years beginning after they added back the bonus depreciation to federal AGI on their North Carolina individual income tax return. The individual members, however, may not deduct any remaining bonus depreciation deductions if the sale of the LLC member interests meets the criteria provided in N.C. Gen. Stat. Section 105-153.6(e) (bonus asset basis provisions related to adjustments from the state's decoupling from bonus depreciation provisions) and the individual member makes the required certification. N.C. Dept. of Rev., PTPLR 2019-2 Special Accelerated Depreciation (Nov. 20, 2019). Hawaii: The Hawaii Department of Taxation issued revised guidance on the state's new marketplace facilitator provisions that took effect on Jan. 1, 2020 (see Haw. Laws 2019, Act 2). The revised guidance expands the list of affected marketplace facilitators to include a business model of peer-to-peer car sharing/rental marketplaces, such as those that connect customers with individual car lessors. The revised guidance also makes clear that the rules for determining whether a marketplace facilitator is engaged in business in the state (and thus subject to Hawaii's general excise tax (GET)) are separate from the rules used to determine the revenue that marketplace facilitators or marketplace sellers must report on their GET returns. Additionally, the revised guidance adds that marketplace facilitators are subject to use tax at the wholesale rate for sales of services through the marketplace where the marketplace seller is not engaged in business in Hawaii and the services are ultimately used and consumed in Hawaii. Lastly, in terms of notice and reporting requirements for those that are not marketplace facilitators, the guidance explains that a person who provides any type of forum for sellers to list or advertise products, but who do not directly or indirectly collect payment from the purchaser, to either comply with Act 2's notice and reporting requirements or elect to be deemed a marketplace facilitator. Haw. Dept. of Taxn., Tax Info. Release No. 2019-03 (Revised) (Dec. 19, 2019). Louisiana: Medical facilities' costs associated with the repair and maintenance of medical resonance imaging (MRI) and computed tomography (CT) scan systems are not subject to sales and use tax for the tax years 2012 through 2015 because the MRI and CT scan systems are component parts of the medical facilities and they cannot be removed without substantial damage to systems or the building in which they are installed. In affirming the lower court, the Louisiana Court of Appeal for the Fifth Circuit distinguished Hitachi,1 noting that although the MRIs in that case were found to not be component parts of the medical facility in which they were installed and were subject to tax as movable property/tangible personal property, the evidence presented was substantially different than the case at hand, leading to a different conclusion. West Jefferson MRI, LLC v. Lopinto, No. 19-CA-82 (La. App. Ct., 5th Cir., Nov. 27, 2019). Michigan: The Michigan Department of Treasury (Department) in response to an information management services provider's ruling request advised on the likely sales and use tax treatment of 25 different transactions performed by three lines of the provider's business units. While the Department found that most of the transactions were either taxable or exempt, it did not reach a determination regarding Software as a Service (SaaS), software training, and professional services (including configuration of electronically delivered services), based on insufficient facts. Citing Auto-Owners,2 the Department noted that the right to access or use prewritten computer software (e.g., cloud computing) generally will not be subject to sales or use tax if the consumer does not receive either a copy of the software program or any part of the program's computer code, but the software program will be taxable if the software program is downloaded in its entirety. If, however, a portion of a software program is downloaded, Michigan will apply the incidental-to-the-service test provided in Catalina3(considering the totality of the transaction) to determine whether the transaction constitutes a nontaxable service or a taxable sale of tangible personal property. Mich. Dept. of Treas., Letter Ruling 2019-3 (Dec. 9, 2019). Washington: Two manufacturers' lease payments made to a vendor for the use of pallets are not exempt from retail sales or use tax as a lease-for-sublease or as a wholesale sale of nonreturnable packing materials under Rule 115. In so holding, the Washington Court of Appeals found that the manufacturers failed to qualify for the lease-for-sublease exception because they did not receive consideration in exchange for the possession or control of the pallets by their customers, since the customers gave consideration only for the right to possess the manufacturers' products, and the manufacturers' right to possess or control the pallets ended upon the transfer to their customers. Additionally, the manufacturers' customers did not contract with or give consideration to the manufacturers in exchange for their own "period of possession" of the pallets for a fixed or indeterminate term, which is an essential element of a lease. Further, the manufacturers did not lease the pallets for the purpose of subleasing them when they used the pallets to transport and distribute their products to their customers. Lastly, the manufacturers' pallet lease transactions were not exempt as a resale or sublease of "packing materials" when the manufacturers did not sublease the pallets to their customers and sold the products contained on the pallets for shipment purposes and transferred possession only of the pallets. Wash. Dept. of Rev. v. Advanced H2O, LLC, No. 51468-1-II (Wash. Ct. App., Div. II, Dec. 10, 2019). Hawaii: The Hawaii Department of Taxation issued guidance on what is required under the mandatory verification review (i.e., agreed upon procedures report, or AUPR) for the refundable motion picture, digital media, and film production tax credit (film credit). Recently adopted administrative rules (HAR 18-235-17-14) define a verification review as an agreed upon procedures report (AUPR) prepared by a qualified certified public accountant (QCPA). The guidance "clarify[ies] details regarding the requirements of the AUPR" and explains the procedures a QCPA must follow regarding required documentation, minimum expenditure thresholds, and expenditures verifications of qualified production costs. The guidance includes a sample AUPR. Haw. Dept. of Taxn., Tax Info. Release No. 2019-04 (revised Dec. 20, 2019). Florida: An administrative law judge (ALJ) for the Florida Division of Administrative Hearings found that the Florida Department of Revenue's (Department) policy to impose stamp tax on the entire property sale price when the sale includes both real estate and personal property (lump sum mixed sale) and the parties have not apportioned the consideration by mutual agreement amounts to an unadopted rule in violation of Florida law. In reaching this conclusion, the ALJ determined that the Department's interpretation of the statute (Fla. Stat. Section 201.02) gave it meaning beyond the literal reading of the statutory text to the point that the Department was legislating when nothing in the statute required the parties to agree upon consensually allocated consideration. The ALJ also noted Florida's constitutional repeal of its Deference Doctrine, previously requiring deference to an agency's statutory interpretation. 1701 Collins (Miami) Owner LLC v. Fla. Dept. of Rev., No. 19-3639RU (Fla. Div. of Admin. Hearings Dec. 17, 2019). Michigan: The Michigan Department of Treasury (Department) issued guidance on when it can begin to actively collect after a final (non-jeopardy) assessment of tax liability has been issued, how long collection efforts can continue, and the specific collection actions it can take. In regard to assessments, the guidance provides information about the statute of limitations for the assessment of any deficiency, interest, or penalty (including items that may extend the limitations period) and the Department's required methods of taxpayer communication (i.e., letter of inquiry, notice of intent to assess, final notice of assessment). After an assessment becomes final, the specific collection actions that the Department may use for enforcement include referring the tax debt to a private collection agency, imposing liens against the taxpayer's real and personal property (including priority rules, as well as potential later release or withdrawal of the lien), levying and/or garnishing property, filing civil actions in court, and offsetting a taxpayer's claimed tax refunds against tax and non-tax debts owed to the state. Lastly, limitations on the collection actions include time limits for bringing suit under the Revised Judicature Act, suspension of levy activities related to offers-in-compromise, and the administrative suspension of collection actions (such as timely appealed assessments, the "write off" of the debt) or other state and federal laws (such as automatic stays in bankruptcy provisions and laws regulating collection practices used against debtors). Mich. Dept. of Treas., Rev. Admin. Bulletin 2019-21 (Dec. 11, 2019) (replaces Rev. Admin. Bulletin 1993-15). Arizona: An omnibus budget bill enacted in mid-2019 ( HB 2757 ) makes several changes to Arizona state individual income tax law, including conformity with the Internal Revenue Code as of January 1, 2019, and consolidation of the 2019 income tax brackets. The 2020 Form A-4 , Employee's Arizona Withholding Election, from which the employee elects the percentage of withholding from gross taxable wages, shows the same seven percentage options (0.8% to 5.1%) as for 2019. For more information on this development, see Tax Alert 2020-0057. California: The California Employment Development Department issued the wage-bracket and percentage method withholding tables for calendar year 2020 to its website. For additional information on this development, see Tax Alert 2020-0058. Kentucky: The Kentucky Department of Revenue released the 2020 income tax withholding computer formula and wage-bracket tables and the withholding tax guide. The Kentucky 2020 standard deduction amount increases to $2,650, up from $2,590 for 2019. For additional information on these developments, see Tax Alert 2020-0035. Maine: For the fourth consecutive year, Maine's 2020 state unemployment insurance tax rates continue to range from 0.00% to 5.4% on Schedule A, the lowest possible rate schedule. The average/new employer rate for 2020 is 1.86%, up from 1.83% for 2019. For more on this development, see Tax Alert 2020-0082. Maryland: The Maryland Comptroller's office has released the 2020 state and local income tax withholding percentage and regular methods. For 2020, the rate of withholding for Maryland residents is 5.75% plus the local tax rate. For Maryland nonresidents the rate is increased to 8.0% (the resident rate of 5.75% plus the nonresident rate of 2.25%). For Maryland residents employed in Delaware the rate is 3.2%. For more on this development, see Tax Alert 2020-0036. Ohio: The Ohio Department of Taxation released the 2020 school district withholding tax rates and the 2020 employer and school district withholding tax filing guidelines publication. As we reported, the Department previously released revised income tax withholding tables, effective with wages paid on and after Jan. 1, 2020.The 2020 withholding tax filing deadlines were also released. For additional information on this development, see Tax Alert 2020-0079. Oklahoma: The Oklahoma State Tax Commission released the state income tax withholding tables for tax year 2020. The 2020 annual percentage method is unchanged from 2019 and the annual withholding allowance amount remains at $1,000. For more on this development, see Tax Alert 2020-0114. Connecticut: New law (SB 1221) settles a lawsuit4 challenging Connecticut's hospital provider tax and amends the tax's terms. Specifically, on and after July 1, 2017 and through June 30, 2026, the hospital provider tax rate for inpatient hospital services is 6% of each hospital's audited net revenue for fiscal year 2016 (previously, the current fiscal year). The rate also will apply for fiscal years beginning on or after July 1, 2026, unless modified by law. Additionally, SB 1221 gradually decreases both the total revenue collected in calculating the hospital provider tax rate for outpatient services and the effective tax rate, in two-year increments. Further, for periods beginning before July 1, 2026, the bill prohibits the legislature from (1) amending the hospital provider tax; (2) imposing new health-care related taxes on net revenue from hospital services generated by nongovernmental licensed short-term general hospitals; and (3) amending repealing, or restricting any tax exemption available to nongovernmental hospitals, subject to specific exceptions; among other changes. Conn. Laws 2019 (December Special Session 2019), Pub. Act 19-1 (SB 1221), signed by the governor on Dec. 19, 2019. Michigan: New law (HB 4916) legalizes and taxes sports betting, requiring sports betting operators to pay 8.4% of their adjusted gross sports betting receipts to the state on a monthly basis. It also imposes license requirements and specifies that a sports betting operator is not subject to any other excise tax, license tax, privilege tax, occupation tax, or other tax, payment, or fee imposed exclusively on sports betting operator(s) by the state or any political subdivision of the state. If, however, a city has imposed a municipal services fee equal to 1.25% on a casino licensee, the city may charge a 1.25% fee on the adjusted gross sports betting receipts of a sports betting operator that holds a casino license under the Michigan Gaming Control and Revenue Act, whose casino is in that city. HB 4916 took immediate effect. Mich. Laws 2019, P.A. 149 (HB 4916), signed by the governor on Dec. 20, 2019. Federal: The United States (US) President Donald Trump signed a proclamation, on Dec. 26, 2019, implementing two separate trade deals with Japan (collectively, the Agreements). The proclamation came approximately three weeks after Japan's bicameral legislature, the National Diet, approved both Agreements in early December. The US-Japan Trade Agreement will eliminate or reduce duty rates on agricultural and industrial goods and establish preferential quotas for US-specific goods. The US-Japan Digital Trade Agreement is a separate agreement between the two countries that will provide guidelines on priority areas of digital trade. The Agreements went into effect on Jan. 1, 2020 and are expected to be the foundation for further negotiations of a broader free trade agreement between the US and Japan. For more information on this development, see Tax Alert 2020-0086. Federal: On Jan. 16, 2020, the Senate approved implementing legislation (HR 5430) for the U.S.-Mexico-Canada Agreement (USMCA), sending the measure to the President. In his floor statement, Chairman Grassley championed the USMCA overall, including benefits in the Canadian market for US agricultural products. For more on this development, see Tax Alert 2020-0109. Federal: On Jan. 15, 2020, the United States (US) President Donald Trump and Chinese Vice Premier Lui He signed the Phase One Economic and Trade Agreement (Agreement or Phase One) negotiated between their respective nations and designed to rebalance trade and address unfair trade practices asserted by the US. The Agreement, initially concluded in principal in October 2019, was announced to be formalized in December 2019 following additional negotiations which included translation and final agreement of key provisions. For more on this development, see Tax Alert 2020-0118. International: Greece's Independent Authority for Public Revenue, in the context of complying with Decision 1862/2019 of the Greek Supreme Administrative Court, issued instructions regarding the obligation of taxable businesses to proceed with an adjustment of input value-added tax (VAT) incurred on the purchase or construction of capital goods, if they are not utilized within five years as of the date of the respective expense. For additional information on this development, see Tax Alert 2020-0130. International: Following the announcement in Zambia's 2020 National Budget that the Government would not proceed with the introduction of the Sales Tax, the Zambian Minister of Finance (the Minister) indicated that changes would be made to the Value Added Tax (VAT) Act as part of broader reforms aimed at increasing tax revenue. To achieve this objective, the Minister has now issued amendments to the VAT Regulations and Zero-Rating Order. The amendments were issued on Dec. 31, 2019 through Statutory Instrument Nos. 88 and 90 of 2019, the VAT (Zero Rating) (Amendment) Order 2019 and the VAT (General) (Amendment) Regulations 2019. The amendments took effect Jan. 1, 2020. For additional information on this development, see Tax Alert 2020-0073. Federal: On Jan. 29, 2020, from 2:00-3:00 p.m. EST New York; 11:00-12:00 p.m. PST Los Angeles, Ernst & Young LLP will host a webcast providing an update on various federal tax extenders and the disaster zone employee retention credit. The Taxpayer Certainty and Disaster Tax Relief Act of 2019 extended and created several key federal tax credits. These federal tax credits encourage employers to hire and retain individuals who face hiring barriers (Work Opportunity Tax Credit (WOTC) and Indian Employment Credit), conduct business and invest in distressed areas (New Markets Tax Credit (NMTC) and Federal Empowerment Zone incentives), provide employees with paid family and medical leave and continue to pay employees during and in the aftermath of major disasters (2018-2019 Disaster Zone Credit). These credits can provide substantial potential savings for taxpayers. During this webcast, the panelists will explore the following topics: (1) the Disaster Zone Credit for 2018 and 2019; (2) extension of the WOTC; (3) retroactive renewal of the Federal Empowerment Zone and Indian Employment credits; (4) extension of the tax credit for employer paid family and medical leave; and (5) extension of the NMTC and other important business tax credits. Register for this event here. 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 Hitachi Medical Systems America, Inc. v. Bridges, 15-658 (La. App. 1 Cir. Dec. 9, 2015); 2015 WL8479021 (unpublished opinion), writ denied, 16-42 (La. Feb. 26, 2016); 187 So.3d 1004. 4 Conn. Hospital Assn. et al. v. Conn. Dept. of Social Services et al. The New Britain Superior Court has jurisdiction to enforce the settlement agreement. Document ID: 2020-0162 |
