06 February 2020 State and Local Tax Weekly for January 31 Ernst & Young's State and Local Tax Weekly newsletter for January 31 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. Louisiana Supreme Court rules that marketplace provider is not a "dealer" required to collect tax on marketplace sales by third-party retailers In a 4-3 decision, the Louisiana Supreme Court (Court) concluded that an online marketplace is not a "dealer," as defined under Louisiana law, responsible for collecting and remitting local sales tax on property sold by third-party retailers through the marketplace's website.1 The decision reverses a ruling by the Louisiana Court of Appeal, which upheld a Louisiana District Court judgment that a "dealer" is not limited to a person that transfers title or possession of a product to the end consumer for a stated price. Although the case deals with local sales tax, the Court's decision effectively prohibits both the state and its local taxing jurisdictions from imposing a collection obligation on marketplace facilitators on third-party sales made through its marketplace. For more on this development, see Tax Alert 2020-0289. On Jan. 28, 2020, Utah Governor Gary Herbert signed HB 185, which effectively repeals a tax reform bill that was enacted in December 2019. The now repealed tax reform bill, SB 2001, would have cut corporate and individual income tax rates, expanded Utah's sales and use tax to a variety of previously untaxed services, repealed certain sales and use tax exemptions, and increased the sales and use tax on food, among other changes. With enactment of HB 185, and approval of HB 185 by a two-thirds majority in both the Utah House and the Utah Senate, the repeal took effect Jan. 28, 2020. Therefore, none of the provisions of SB 2001 ever went into effect. For more on this development, see Tax Alert 2020-0212. California: The California Office of Tax Appeals (OTA) has held that the gain recognized by nonresident shareholders of an S corporation sale of the stock of its qualified S corporation subsidiary — which was treated as an asset sale for federal and California income tax purposes, attributed to the sale of intangible property (i.e., goodwill), and characterized as business income of the S corporation — is apportionable to California based on the apportionment formula determined at the S corporation level as provided for under Cal. Code of Regs. (CCR), tit. 18, § 17951-4(f) and (d)(1) and not to the shareholders' states of residency. In so holding, the OTA explained that under the ruling in Valentino2 a shareholder's income from an S corporation is sourced based on the income producing activity of the S corporation. Although the ruling in Valentino suggests that Cal. Rev. & Tax Code (CR&TC) §19752 "would apply in cases of income from intangibles," the OTA determined that the case "offers an incomplete guide" to sourcing income similar to the income at issue in this case. This is so because the issue of sourcing income from the sale of intangible property was not the same as the issues presented to the Valentino court. In that case, the S corporation had conducted business entirely within California while in the current case the S corporation was engaged in a multistate business. Moreover, the OTA pointed out that the regulation relevant in Valentino (CCR § 17951-4) "was revised after the decision in Valentino to provide additional clarity on the treatment of S corporations." As revised, CCR § 17951-4(d)(1) requires business income be apportioned at the S corporation level, not the shareholder level (as argued by the shareholders in this case citing to CR&TC §19752). In contrast, CCR § 17951-4(d)(3) today provides that CR&TC §17952 is the "appropriate tool to use when sourcing nonbusiness income" received by an S corporation shareholder. The OTA further determined that following CCR § 17951-4 instead of CR&TC §19752 "comports with Valentino", reasoning that the Valentino court first characterized the pro rata S corporation income at the S corporation level and then sourced the income based on the applicable sourcing rules. The OTA noted that focusing on the classification of the income as a sale from an intangible and applying the general rules of CR&TC §17952 "would be to completely bypass the more explicit rules of [CCR § 17951-4] … , which would be an incorrect application of the law." Here, the income at issue is properly characterized as business income, which is sourced under the rules in CCR § 17951-4(d) for multistate unitary S corporations based upon the location of the activities of the S corporation. In the Matter of The 2009 Metropoulos Family Trust, et al, OTA Case Nos. 18010012 and 18010013 (Cal. Off. Tax App. Nov. 7, 2019) (Precedential). New York: The New York State Department of Taxation and Finance has posted for comment draft corporate franchise tax regulations under Article 9-A of the New York Tax Law (N.Y. Comp. Codes and Regs. tit. 20, Subparts 3-13.1 through 3-13.5 and Section 4-6.5) addressing how a corporate partner would compute its tax under the aggregate and entity methods. The proposed provisions would repeal the existing separate accounting election for foreign corporate limited partners based on the Tax Department's finding that those corporate partners often do not have the necessary detail to properly compute the tax, especially after changes to investment capital and customer-based sourcing. In conjunction with the repeal of this election, the Tax Department also would amend its nexus regulations for foreign corporate limited partners by increasing the basis and interest thresholds for determining whether a foreign corporate limited partner is deemed to be directly or indirectly participating in, or dominating or controlling, all or part of the partnership's business activities or affairs. Comments are due by Feb. 7, 2020, but comments submitted after the due date may still be considered, according to the Department's website. For more on this development, see Tax Alert 2020-0207. Georgia: New law (HB 276) amends the definition of "dealer" to include marketplace facilitators. For sales occurring on or after April 1, 2020, a marketplace facilitator is required to collect and remit Georgia sales and use tax if the total value of the sales price of its retail sales to in-state customers it made itself or on behalf of marketplace sellers, equals or exceeds $100,000 in the aggregate in the prior or current calendar year. In addition, the law defines: (1) "marketplace facilitator" and "marketplace seller"; (2) prohibits certain class action lawsuits from being brought against a marketplace facilitator; (3) specifies that the Georgia Department of Revenue will only audit the marketplace facilitator for sales made on behalf of marketplace sellers; (4) provides liability relief for marketplace facilitators that are given insufficient or incorrect information by a marketplace seller; and (5) excludes certain franchisors from being a marketplace facilitator with respect to any dealer that is its franchisee and that would otherwise be a marketplace seller of such franchisor (if certain conditions are met). Ga. Laws 2020, Act 322 (HB 276), enacted on Jan. 30, 2020. New York: In affirming an administrative law judge's ruling, the New York Tax Appeals Tribunal (Tribunal) concurred that a technology company under collected sales and use tax on qualifying device sales made during a back-to-school promotion when it collected tax on the amount of the qualifying device less a discount equal to the value of the gift card the customer received as part of the promotion. If the gift card is purchased along with the qualifying device, sales tax only is imposed on the part of the purchase price attributed to the qualifying device. If, however, the customer received the gift card for free, sales tax is collected on the total purchase price. Based on the terms and conditions of the promotion, the Tribunal found that customers were required to purchase a qualifying device in order to receive a gift card for free. The Tribunal found "particularly telling … the fact that if a customer declined the gift card as a part of the [back to school] promotion, the full price of the qualifying device with applicable tax would have been charged." Also supportive of this conclusion were sample invoices which indicated that gift cards could not be returned separately. Because the gift cards were free, the company is required to collect tax on the total purchase price (i.e., the price of the discounted device plus the value of the gift card). The Tribunal also rejected the company's argument that double taxation occurs, reasoning that since no tax was paid on the gift card at the time of issuance, it "cannot be subject to double taxation at its redemption." In the Matter of Apple Inc., DTA No. 827287 (N.Y. Tax App. Trib. Dec. 24, 2019). Wisconsin: The U.S. Supreme Court has been asked to review a federal appeals court's ruling that Wisconsin's imposition of ad valorem property tax on a railroad's intangible property, including the railroad's custom software, while providing an exemption from the tax to manufacturers and commercial taxpayers, singles out railroads as part of a targeted and isolated group, violating the federal Railroad Revitalization and Regulatory Reform Act of 1976 (the 4-R Act). Union Pacific Railroad Co. v. Wis. Dept. of Rev., No. 19-1741 (U.S. Ct. App., 7th Cir., Oct. 7, 2019), petition for cert. filed, Dkt. No. 19-949 (filed Jan. 27, 2020). California: Local California municipal tax filing deadlines are quickly approaching and are commonly overlooked. In preparation for the upcoming federal and state tax filing season, please keep in mind the following information pertaining to San Francisco and Los Angeles business taxes. San Francisco's 2019 gross receipts tax and payroll expense tax filings are due on or before March 2, 2020. A taxpayer can request a 60-day extension if it files the request in writing and pays at least 100% of the tax due by the filing deadline. The Los Angeles business tax is due March 2, 2020. A taxpayer can file its 2019 Business Tax Renewal Form either by mail or electronically. The city provides copies of its forms for download and completion, as well as access to an electronic filing system (with applicable instructions) on its website here. To be considered timely filed, a taxpayer must postmark or electronically file the forms no later than 11:59 p.m. PST on March 2, 2020. For additional information on this development, see Tax Alert 2020-0211. Illinois: New law (SB 1881) establishes the Local Government Revenue Recapture Act and the Local Government Revenue Recapture Certified Audit Pilot Program. The Local Government Revenue Recapture Act permits local governments that receive sales tax proceeds disbursements from the Illinois Department of Revenue (Department) to contract with a third party to monitor and correct Department disbursements to the local government. The program imposes certain requirements on third parties related to taxpayer confidentiality and retention, collection, use, disclosure and destruction of taxpayer financial information. SB 1881 takes effect June 1, 2020. Ill. Laws 2019, Pub. Act 101-0628 (SB 1881), signed by the governor Jan. 24, 2020. Federal: Proposed bill, the "Mobile Workforce State Income Tax Simplification Act of 2020" (HR 5674), would limit the extent to which states may tax compensation earned by a nonresident for employment duties performed in other states. Specifically, an employee who performs employment duties in more than one state would be subject to income tax in the employee's state of residence and any other state within which the employee is present and performing employment duties for more than 30 days during the calendar year and in which the wages or other remuneration were earned. An employee would be deemed present and performing employment duties within a state for a day if the employee performs more of his/her employment duties within that state than in any other state during a day. If, however, the employee performs duties in his/her resident state and only one nonresident state during one day, the employee would be considered to have performed more of his/her employment duties in the nonresident state than in the resident state for that day. The portion of the day the employee is in transit would not be considered in determining the location of an employee's performance of employment duties. If approved, these provisions would take effect on January 1 of the second calendar year that begins after the date of the bill's enactment. HR 5674 was introduced on Jan. 24, 2020 and is similar to legislation introduced in prior Congresses. Multistate: Though the federal minimum wage remains at $7.25 per hour, minimum wage rates increased in many states effective on Jan. 1, 2020. The increases were enacted either as the result of voter approval, law change or because the minimum wage is indexed for inflation each year. Employers should be aware that there may be differences in the minimum wage rates among localities in the same state since the localities may have independent authority to set a minimum wage for employees working within their city or county limits (e.g., several cities in California). While several states have passed laws preventing localities from imposing their own minimum wage rates (e.g., North Dakota), states, such as California, continue to allow this practice. In 2019, Colorado enacted legislation that repealed the preemption law on Colorado localities which in turn resulted in Denver enacting a new higher city minimum wage for employees in the city beginning in 2020. Tax Alert 2020-0147 chart details the states that have announced minimum wage increases for 2020. Georgia: The Georgia Department of Revenue has released its 2020 employer withholding tax guide, which contains the income tax withholding wage-bracket and percentage method tables that are effective with wages paid on and after Jan. 1, 2020. The 2020 percentage method tables, standard deductions and personal allowances are unchanged from 2019. For more on this development, see Tax Alert 2020-0156. Massachusetts: The Massachusetts Department of Unemployment Assistance confirms that the increase to the Employer Medical Assistance Contribution (EMAC) rates and the EMAC Supplement, both effective for calendar years 2018–2019 have expired for 2020. The EMAC rate for employers that paid at 0.51% for 2019 is 0.34% for 2020. The taxable wage base remains at $15,000. For additional information on this development, see Tax Alert 2020-0181. Michigan: The Michigan Treasury Department has released the 2020 wage-bracket income tax withholding tables. The 2020 flat withholding rate (and supplemental withholding rate) remains at 4.25%. The 2020 personal exemption increases to $4,750, up from $4,400 for 2019. The Michigan Income Tax Withholding Guide has also been updated for 2020. For more on this development see Tax Alert 2020-0166. North Carolina: The North Carolina Department of Revenue released its 2020 revised income tax withholding tables and guide. The revised income tax withholding tables and formulas reflect changes in the standard deductions beginning Jan. 1, 2020. For mote on this development, see Tax Alert 2020-0183. Federal: The United States (US) Government expanded its economic and trade sanctions against Iran on Jan. 10, 2020. Concurrent with the blocking and addition of 27 targets to the Specially Designated Nationals and Blocked Persons List by the US Department of the Treasury's Office of Foreign Assets Control pursuant to existing sanctions authorities, US President Donald Trump issued Executive Order 13902, authorizing the imposition of sanctions against additional sectors of the Iranian economy. These new sectors include the construction, mining, manufacturing, and textiles sectors of the Iranian economy. For additional information on this development, see Tax Alert 2020-0245. Federal: On Jan. 24, 2020, United States (US) President Donald Trump announced in a Presidential Proclamation that the US would impose punitive tariffs of 10% on derivative articles of aluminum and 25% on derivative articles of steel under Section 232 of the Trade Expansion Act of 1962 (Section 232). The tariffs are scheduled to take effect Feb. 8, 2020. On the same day, the European Union (EU), China and 15 other member countries of the World Trade Organization (WTO) announced an agreement to create an interim dispute settlement mechanism to counter the now defunct WTO Appellate Body. The agreement, publicized at the recent World Economic Forum in Davos, Switzerland, preserves the two-step dispute settlement system at the WTO among the 17 nations, and acts as a contingency measure until the WTO Appellate Body becomes operational again. For additional information on this development, see Tax Alert 2020-0214. International: The conversion of Law Decree n. 124/2019 and the 2020 Italian Budget Law were published in the Italian Official Gazette, respectively on Dec. 19 and Dec. 27, 2019. Both the new Law and the Budget Law enact new value-added tax (VAT) measures. The key VAT measures include: postponement of VAT rate increases, new deadline for the submission of the so-called "esterometro", new rules regarding letters of intent, extension of the reverse charge for contract and subcontract agreements, among other changes. For more on this development, see Tax Alert 2020-0201. International: The Mexican tax authorities issued temporary regulations that implement various provisions of the recently enacted tax reform, including new Title 12 on the rendering of digital services. Title 12 establishes new tax obligations for digital service providers, including nonresident providers that otherwise do not have a taxable presence in Mexico. Title 12, Rendering of Digital Services, is divided into three chapters. The first chapter addresses general requirements for the digital services provided directly to recipients. The second chapter addresses digital service providers that act as intermediaries, and the third chapter addresses obligations and options for individuals that provide services or sell goods through a digital platform. Tax Alert 2020-0196 covers the regulations for nonresident digital service providers in chapters one and two. International: As the United Kingdom (UK) prepares to leave the European Union (EU) on Jan. 31, 2020, both businesses and Her Majesty's Revenue & Customs (HMRC) have started to consider the indirect tax implications post-Brexit. Initially the UK will enter an implementation period (also known as the "transitional period") to Dec. 31, 2020 during which no indirect tax changes will take place. The UK and the EU have the option to extend the implementation period but agreement to this extension would need to be requested and confirmed by June 30, 2020. In the absence of an extension to the implementation period, the UK will leave the umbrella of the EU's value-added tax (VAT) and Customs arrangements from midnight of Jan. 1, 2021. As the UK approached previous Brexit dates, HMRC released several VAT easements for businesses in the event of a no-deal scenario. These easements have now been removed, although they may come back into operation if a no-deal looms again. For more on this development, see Tax Alert 2020-0215. Multistate: On Wednesday, Feb. 12, 2020, from 1:00-2:30 p.m. EST New York; 10:00-11:30 a.m. PST Los Angeles, Ernst & Young LLP (EY) will host its quarterly webcast focusing on state tax matters. For our first webcast in 2020, we welcome Joe Crosby, CEO of MultiState Associates, and Brian Hamer, counsel to the Multistate Tax Commission (MTC), who will join EY panelists to discuss the following: (1) the status of the MTC's current project to update its guidance on Public Law 86-272, in response to the digital economy; (2) an overview of upcoming 2020 state legislative sessions and the state tax proposals already presented; (3) the current economic trends among the states and around the nation and the impact they may have on state tax policy; (4) a summary of the most significant state tax budget proposals that have been presented so far this year and have a state and local tax impact; (5) an advanced overview of the upcoming federal and state 2020 elections, focusing specifically on proposed and certified ballot measures that will directly affect state taxation if enacted; and (6) significant state and local judicial, legislative and administrative developments from the past quarter. To register for this event, go to State tax matters. Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor. 1 Normand v. Wal-Mart.com USA LLC, No. 2019-C-00263 (La. S. Ct. Jan. 29, 2020). Document ID: 2020-0309 |
