Ernst & Young's State and Local Tax Weekly newsletter for February 21 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.

TOP STORIES

Washington modifies its B&O tax and advance computer services surcharges

On February 10, 2020, Governor Jay Inslee signed into law SB 6492, which repeals the state's workforce education investment surcharge enacted in 2019. This surcharge applied to a broad base of services subject to the state's business and occupation (B&O) tax. The new law replaces this surcharge with a B&O tax rate increase on these services. As revised, the baseline B&O tax rate for service activities is increased from 1.5% to 1.75% of gross income. The tax rate increase, however, does not apply to: (1) hospitals; (2) businesses with less than $1 million in gross income (for affiliated persons, the $1 million is based on the aggregate gross income of the businesses subject to this tax); and (3) advanced computer services (which continue to be subject to the surcharge). These excepted services remain subject to a 1.5% B&O tax rate.

In addition, SB 6492 replaces the two-tier surcharge on advance computer services with a single surcharge equal to 1.22% of gross income. Beginning April 1, 2020, the new surcharge applies to advance computer service businesses with gross worldwide income over $25 billion.

The repeal of the B&O surcharge is retroactively effective to January 1, 2020. The tax rate increase and the modified surcharge on advance computer services take effect on April 1, 2020.

It should be noted that while SB 6492 repeals the surcharge on many service activity businesses, it does not affect the additional 1.2% B&O tax imposed on specified financial services. The constitutionality of this tax, however, is being challenged. For more on this development, see Tax Alert 2020-0399.

INCOME/FRANCHISE

Idaho: New law (HB 380) updates Idaho's date of conformity to the Internal Revenue Code to Jan. 1, 2020 (from Jan. 1, 2019). This change is retroactively effective to Jan. 1, 2020. Idaho Laws 2020, Ch. 17 (HB 380), signed by the governor on Feb. 18, 2020.

Iowa: The Iowa Department of Revenue issued guidance on the applicability of the federal S corporation built in gains tax for Iowa income tax purposes, with a focus on the state's conformity following the change to the recognition period under the federal P.L. 114-113 (Protecting Americans from Tax Hikes (PATH) Act). Specifically, the guidance addresses the state's non-conformity to the federal five-year recognition period for tax years 2016 through 2018 and the state's conformity to the federal five-year recognition period for tax year 2015 and for tax years beginning on or after Jan. 1, 2019. Due to the state's period of nonconformity, a different recognition period to calculate the built-in gains tax may apply, depending on the tax year. For tax year 2015 and tax years 2019 and thereafter, a five-year recognition period is used to compute the tax, while a 10-year recognition period is used to compute the tax for tax years 2016 through 2018. Iowa Dept. of Rev., "Built-In Gains Tax on S Corporation" (Jan. 27, 2020).

South Dakota: New law (HB 1019) for bank franchise tax purposes updates the state's date of conformity to the Internal Revenue Code to Jan. 1, 2020 (from Jan. 1, 2019). This change takes effect July 1, 2020. S.D. Laws 2020, HB 1019, signed by the governor on Feb. 19, 2020.

Virginia: New law (SB 582) updates Virginia's date of conformity to the Internal Revenue Code to Dec. 31, 2019 (from Dec. 31, 2018). This change applies to taxable years beginning on and after Jan. 1, 2018. Va. Laws 2020, Ch. 1 (SB 582), signed by the governor on Feb. 17, 2020. See also, Va. Dept. of Taxn., Tax Bulletin 20-1 (Feb. 18, 2020).

SALES & USE

Colorado: In response to a private letter ruling request, the Colorado Department of Revenue (Department) advised a company considering entering the vehicle sharing or peer-to-peer car sharing business on what its sales tax and daily rental fee collection and remittance obligations would be if it operated such a business. The company, which would be considered a platform operator, would enter into separate contracts with vehicle owners and drivers, it would collect amounts charged to drivers for use of the vehicles, and it would pay owners based on the formula set forth in the contract. The company would determine whether a vehicle was suitable for listing on its platform, and the listing and renting of vehicles would be completed through the company's website or app. The company would have the contractual authority to bill and collect payments as well as to impose and collect fines and fees. Based on these facts, the Department concluded that the company would be regarded as the lessor with respect to vehicles leased through the company's platform and that a driver's contract for the right to possess and use the vehicles for consideration is a taxable sale. Accordingly, the company would be obligated to collect and remit sales tax on the short-term lease payments received from drivers. The Department also concluded that the company would be responsible for collecting and remitting the $2 daily vehicle rental fee imposed on short-term vehicle rentals (i.e., vehicles leased for 30 days or less). Colo. Dept. of Rev., PLR-20-001 (Jan. 24, 2020). (Note: the ruling can only be relied upon by the taxpayer making the ruling request.)

Florida: The Florida Division of Administrative Hearings (Division) has recommended that the assessment against a for-profit medical center for sales tax on commercial rent payments on space leased from a hospital be upheld. In so recommending, the Division rejected the medical center's argument that it is exempt from and excluded from sales and use tax on commercial rent payments because patient rooms and open spaces used mostly by patients are dwelling units exempt from tax under Fla. Stat. §212.031(1)(a)2. According to the ruling, to qualify for the exemption, the space must be used exclusively as a dwelling unit. Unlike nursing homes (and certain other facilities such as inpatient substance abuse/mental health), whose residents reside at the home, the medical center has a patient-medical provider relationship with its patients and its patients who use the medical center's space are not leasing a bed or a room with the intent of dwelling. The mere fact that sleeping may occur at the medical center "does not alter its sole use or dominant purpose," which is to provide medical services. The Division noted that the medical center could not be used exclusively both as a medical facility and as a residential facility. In addition, the Division rejected the medical center's argument that the re-lease of the space to patients is excluded from tax as a sale for resale, finding that the medical center retains sole control and full use of the leased space. Lastly, the Division rejected the medical center's assertion that the effect of the Florida Department of Revenue's (Department) determination that it did not qualify for the exemption under Fla. Stat. §212.031(1)(a)2 is an unadopted rule. Rather, because the Department's "statement … merely reiterates a law or declares what is 'readily apparent' from the text of a law, [the statement] is not considered a rule." Bayfront HMA Medical Center, LLC v. Florida Dept. of Rev., Case Nos. 19-1880 — 19-1882 (Fla. Div. of Admin. Hearings Feb. 7, 2020).

North Carolina: The North Carolina Department of Revenue (Department) issued a directive to provide guidance to marketplace facilitators and marketplace sellers regarding their sales and use tax collection and remittance obligations under legislation enacted last year. Starting Feb. 1, 2020, marketplace facilitators that make North Carolina sourced sales of tangible personal property, digital property and taxable services in the current or previous calendar year in excess of $100,000 (gross sales) or 200 or more separate transactions are required to collect and remit North Carolina sales and use tax on such sales. The marketplace facilitator also is required to collect local sales or use tax on the transaction (whichever applies based on the sourcing rules under N.C. Gen. Stat. §105-164.8(c)). In addition, the directive includes responses to frequently asked questions, defines key terms, and addresses these topics: agreements between marketplace facilitators and marketplace sellers, liability relief, refunds from marketplace facilitators, use tax obligations of purchasers, reports marketplace facilitators must submit to marketplace sellers, registration requirements, and certified service providers. The economic nexus threshold and marketplace facilitator provisions as well as the directive do not apply to an accommodation facilitator, an admission facilitator, or a service contract facilitator (they are covered by different statutory provisions). N.C. Dept. of Rev., SD-20-1 (Jan. 28, 2020).

COMPLIANCE & REPORTING

Nevada: The Nevada Department of Taxation updated its Commerce Tax filing requirement frequently asked questions to provide that a business whose Nevada gross revenue for a tax year is $4 million or less is no longer required to file a commerce tax return, applicable starting with the 2018–2019 tax year. The update was made to reflect a statutory change enacted in 2019.

PAYROLL & EMPLOYMENT TAX

Michigan: The Michigan Treasury Department (Department) reminds employers that even though the 2019 Forms W-2 were due to the Department by Jan. 31, 2020, the deadline to file the calendar year 2019 Form 5081, Sales, Use and Withholding (SUW) Taxes Annual Return, remains Feb. 28, 2020. Employers that filed 250 or more Forms W-2 are required to file Form 5081 electronically over the Department's Michigan Treasury Online system. The Department released a new, streamlined annual reconciliation form, the Form 5081 EZ, Sales, Use and Withholding Tax EZ Annual Return, that businesses with less than $10 million in gross receipts and no allowable deductions or exemptions can file in place of the Form 5081. For additional information on this development, see Tax Alert 2020-0402.

Texas: Legislation enacted in mid-2019 (SB 2296) and effective Jan. 1, 2020, amends Texas state unemployment insurance (SUI) law to include in the definition of "employing unit" the term "common paymaster." The Texas Workforce Commission continues to prohibit the practice known as "payrolling" in which an entity that is not a licensed professional employer organization attempts to avoid or reduce its SUI tax obligations by assigning its employees to an outside nonrelated entity for which the employees do not perform services. As a result of conforming to the federal definition of common paymaster in IRC §3306(p), Texas will allow related companies to establish or designate one entity (the common paymaster) from among the related employer group to pay and report the combined wages of employees who work concurrently for the common paymaster and one or more other of the related companies within the group's members. For additional information on this development, see Tax Alert 2020-0397.

MISCELLANEOUS TAX

Ohio: In Hyundai Motor Finance Company, the Ohio Board of Tax Appeals (BTA) reversed an assessment by the Ohio Department of Taxation (Department) under the Commercial Activity Tax (CAT) against a captive automobile financing company. In its decision, the BTA considered whether the CAT applied to three categories of transactions: receipts from sales of retired leased vehicles, securitization transactions, and subvention and interest buy-down payments. The BTA applied federal income tax concepts even though it historically has not considered itself bound by such concepts when addressing CAT matters. Hyundai Motor Finance Company v. McClain, BTA No. 2015-785 (Ohio Bd. Tax App. Feb. 6, 2020). For additional information on this development, see Tax Alert 2020-0387.

Ohio: In Rockies Express Pipeline, LLC, the Supreme Court of Ohio (Court) held that a company operating an interstate pipeline for the transportation of natural gas is subject to Ohio's public utility excise tax on receipts earned from transporting the gas solely within Ohio. The Court concluded that the exclusion from the excise tax for "receipts derived wholly from interstate business" does not apply to receipts earned solely from intrastate transportation. Rockies Express Pipeline, LLC v. McClain, Slip Opinion No. 2020-Ohio-410 (Ohio S.Ct. Feb. 11, 2020). For additional information on this development, see Tax Alert 2020-0391.

Portland, OR: Under new rules issued by the Revenue Division of the City of Portland (Division), the Clean Energy Surcharge (CES) may apply to gross receipts generated by real estate businesses operating in Portland, Oregon. On Nov. 6, 2018, Portland voters approved Ballot Measure 26-201, which imposes a 1% "surcharge" on the Portland revenues of certain large retailers to fund clean renewable energy projects and job training. The CES is imposed on "large retailers" and measured by their Portland "retail sales." These terms are broadly defined to encompass many activities not commonly considered retail activity. The Division interprets "retail sales" for purposes of the CES as including "all goods-producing or service-providing business activity." The rule provides examples of certain interest income and sales of real property as "retail sales" subject to the CES. Due to the Division's broad interpretation of the term "retail sales," many forms of gross receipts generated by real estate businesses, such as sales of real estate, interest income, and rents from real estate, are all potentially subject to the CES. The Division has interpreted an "incidental" sale of real property as not subject to CES. By implication, this could mean that sales of real estate by entities in the real estate industry could be subject to CES. The Division has not yet published guidance on whether a stock sale or the sale of a partnership interest may be subject to the CES. The CES may be partially passed on to consumers, but the tax paid by the consumer is considered a retail sale subject to the CES. The administration of the CES with respect to complex, multi-tiered structures remains unclear. For more on this development, see Tax Alert 2020-0411.

GLOBAL TRADE

Federal: The latest edition of Trade Watch is now available. Highlights of this edition include: (1) Global - Customs valuation impact of the OECD/G20 BEPS project, Free trade agreement between the European Union and Singapore enters into force, International Chamber of Commerce launches Incoterms® 2020, WTO moratorium on electronic transmissions continues, WTO's Appellate Body disbands; (2) Americas - A round-up of US trade disruption actions in 2019, Actions taken by Ecuadorian authorities to promote global trade, Canada's Border Services Agency's new Assessment and Revenue Management System, Issues affecting customs administrative processes in Mexico, New Repetro-Manufacturing regime for the oil and gas industry in Brazil, Overview of the Pacific Alliance and its development, United States Department of Justice's revised export control and sanctions enforcement policy for voluntary disclosures; (3) Asia-Pacific and Japan - Regional Comprehensive Economic Partnership — true progress or an opportunity missed?, Transfer pricing adjustments and customs in Asia-Pacific; (4) Europe, Middle East, India and Africa - Brexit: latest state of play, Customs valuation cases in Germany: treatment of costs for print files used for the production of labels, European Court of Justice: preliminary ruling request on customs valuation of software provides opportunity to file refund applications. For a copy Trade Watch, see Tax Alert 2020-0420.

International: On Feb. 14, 2020, the United States (US) Trade Representative (USTR) published a notification announcing modifications to punitive tariffs on European Union (EU)-origin goods currently assessed under Section 301 of the Trade Act of 1974 regarding the EU's subsidies provided to civil aircraft manufacturers. The revisions include the increase in the duty rate for aircrafts from 10% to 15%, effective March 18, 2020, as well as the removal and addition of certain items, or rotation of items, subject to 25% punitive tariffs, effective March 5, 2020. The next anticipated benchmark in this dispute is the expected World Trade Organization penalties phase against US subsidies for Boeing that will allow the EU to apply punitive tariffs to some value of US exports to the EU. It is unclear if that event will provide the incentive for both sides to eventually come to the negotiating table to address both parties' subsidies, rather than resorting to punitive tariffs. For additional information on this development, see Tax Alert 2020-0395.

International: On Feb. 4, 2020, United States (US) Customs and Border Protection (CBP) issued guidance with respect to List 4A duties imposed under Section 301 of the Trade Act of 1974 (Section 301), for merchandise held in a Foreign Trade Zone (FTZ). The guidance, issued in follow up to a Federal Register notice (FRN) announcing the reduction of the current punitive tariffs on imported products subject to List 4A from 15% to 7.5%, notes "[m]erchandise covered by Tranche 4A/Annex A that was admitted to a foreign trade zone under Privileged Foreign (PF) status will be subject to tariff classification at the rate of duty and tax in force on the date of filing the application for privileged foreign status." On Feb. 11, 2020, the US Trade Representative (USTR) published an FRN announcing four new exclusions for Chinese-origin goods subject to 25% punitive tariffs covering US$34b (List 1). In the same FRN, the USTR also issued technical amendments to previous exclusions. On the same day, the USTR issued a report detailing US concerns regarding the World Trade Organization dispute settlement system, specifically the Appellate Body. For additional information on this development, see Tax Alert 2020-0396.

VALUE ADDED TAX

International: On Feb. 18, 2020, the Council of the European Union (the Council or ECOFIN) held a meeting where, among other things, it adopted two reforms of existing value-added tax (VAT) rules. The ECOFIN adopted simplified VAT rules for small businesses. The purpose of the new rules is to reduce the administrative burden and compliance costs for small enterprises and create a fiscal environment which will help small enterprises grow and trade across borders more efficiently. These new rules will apply as of Jan. 1, 2025. Further, the Council adopted a set of rules to facilitate the detection of tax fraud in cross-border e-commerce transactions. To this end, the Council adopted amendments to the VAT Directive, putting in place requirements on payment service providers to keep records of cross-border payments related to e-commerce, and amendments to a regulation on administrative cooperation in the area of VAT. The new measures will apply as of Jan. 1, 2024. For more on this development, see Tax Alert 2020-0404.

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.