05 March 2020 State and Local Tax Weekly for February 28 Ernst & Young's State and Local Tax Weekly newsletter for February 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 Comptroller issues additional apportionment guidance on treatment of net losses from sales of investments and capital assets The Texas Comptroller of Public Accounts (Comptroller), through a policy memo released on its website as STAR 202001008L, revised its policy on the treatment of net losses from the sale of investments and capital assets when calculating gross receipts for apportionment purposes.1 Texas Tax Code § 171.105(b) explains how to determine a taxable entity's gross receipts from its entire business (gross receipts everywhere) for use in calculating taxable margin. Under this provision, for purposes of apportionment, when a taxable entity sells an investment or capital asset, the entity's "gross receipts everywhere" includes only the net gain from the sale. The term "net gain" was addressed in the Hallmark2 case, in which the Texas Supreme Court held that a net loss from the sale of an investment or capital asset is not included when calculating gross receipts everywhere. The Comptroller acknowledged that the "net gain" language in Texas Tax Code § 171.105(b) is expressly limited to the determination of "gross receipts everywhere," but said the analysis in Hallmark applies to the computation of Texas group receipts in the numerator of the apportionment factor because there must be "symmetry" between a taxable entity's Texas gross receipts and its gross receipts everywhere. The guidance further explains that the Comptroller intends to compute any net gain or loss for apportionment purposes on a separate-entity basis. The revised guidance includes examples of how to determine the net gain or loss for single-entity taxpayers and combined groups. In determining the net gain or loss of a combined group for apportionment purposes, the Comptroller will treat each member of the group separately. Thus, the capital losses of one member of the combined group cannot be netted against the capital gains of another member of the combined group when determining the combined group's total revenue. The Comptroller reasoned that Texas does not recognize or apply the federal consolidated group regulations, which allow netting of a member's loss against another member's gain. The Comptroller said it will amend Rule 3.5913 and any other relevant Comptroller guidance to reflect this revised policy. For additional information on this development, see Tax Alert 2020-0474. Iowa: The Iowa Department of Revenue (Department) adopted amendments to its administrative rules (amended rule) addressing the treatment of global intangible low-taxed income (GILTI) under IRC § 951A and the corresponding GILTI deduction under IRC § 250 for determining the sales factor for Iowa apportionment purposes. The amended rule incorporates much of the same guidance the Department issued in December 2019 (see Tax Alert 2019-2137). In the purpose and summary statement attached to publication of the amended rule, the Department states that GILTI does not neatly fit into any of Iowa's existing apportionment rules because it is a new category of income. The amended rule modified Iowa Admin. Code r. 701-54.2(422) to provide a formula for apportioning GILTI within and without Iowa. The amended rule also provides additional guidance about when investment income must, or by election may be, included in the Iowa apportionment factor. The final amended rule was published on Feb. 26, 2020 and takes effect April 1, 2020. According to the Department, no substantive changes from the proposed rule amendments were made. Mississippi: Adopted amendments to regulation 35 Miss. Admin. Code Pt. 3, R. 2.06 modifying provisions related to dividend income. Language added to the regulation provides additional guidance on the treatment of dividends paid after stock is sold, explains inclusion of an anticipated dividend in the stock purchase price, adds a definition of stock dividend, and lists exceptions to the general tax-free treatment of stock dividends that occur when a stock dividend results in a change in proportionate ownership or increases a shareholder's interest in the corporation's assets or earnings and profits. In addition, the modification deletes paragraphs that addressed the treatment of (1) dividends received from a state or national bank or mutual building and loan association and (2) dividends received by a holding company from a state or national bank or other corporations or associations. The amended regulation was finalized on Feb. 6, 2020, and the changes to the regulation take effect Jan. 1, 2021. Rhode Island: The Rhode Island Department of Revenue, Division of Taxation (Division) issued guidance on the taxability of interest received from certain federal, state, and local obligations. Generally, Rhode Island is precluded from taxing interest received from federal obligations and does not tax interest on obligations of Rhode Island or its political subdivisions. Interest or dividends on obligations or other securities of other states (and other states' political subdivisions), however, are subject to Rhode Island tax (in such case, a taxpayer will have to make an addition modification). The guidance includes a non-exhaustive list of examples of taxable and non-taxable obligations. R.I. Dept. of Rev., Division of Taxation, Notice 2020-01: Tax Status of Interest Received From Federal, State and Local Obligations (Feb. 26, 2020). Utah: The U.S. Supreme Court will not review the Utah Supreme Court (Utah court) ruling in Steiner v. Utah State Tax Commission (Steiner). In Steiner, the Utah court held that individual Utah resident taxpayers who received income from foreign and domestic pass-through entities were not entitled to: (1) apportion their residency-based income tax (as opposed to claiming a credit for taxes paid to other states) under the dormant Commerce Clause, (2) a foreign-earned income deduction under the dormant Foreign Commerce Clause, or (3) a deduction for foreign income through Utah's "equitable adjustment" statute. Steiner v. Utah State Tax Comn., No. 20180223 (Utah S.Ct. Aug. 14, 2019), cert. denied, Dkt. No. 19-775 (U.S. S.Ct. Feb. 24, 2020). Chicago, IL: The City of Chicago's Department of Finance (Department) updated its informational bulletin on the application of the city's personal property lease transaction tax to nonpossessory computer leases. Effective July 1, 2020, the Department will allow in certain instances the lease for re-lease exemption to apply to software as a service (SaaS), infrastructure as a service (IaaS), platform as a service (PaaS) or similar products. The Department said that it will follow the state's sale for resale rules; however, it's unclear whether a taxpayer must apply for a lease for re-lease certificate or if it can use a format similar to a resale certificate for vendors commonly used for Illinois sales tax purposes. Chicago Dept. of Fin., Revised Information Bulletin: Nonpossessory Computer Leases (revised Feb. 2020). South Dakota: The South Dakota Department of Revenue explained that due to the June 30, 2020 expiration of the grandfather provisions in the Internet Tax Freedom Act (ITFA), internet access will no longer be subject to South Dakota state and municipal sales tax as of July 1, 2020. In 2016, Congress made the ITFA permanent and the grandfather provisions under prior law, which allowed certain states (including South Dakota), to continue to impose sales tax on internet access, were extended but only through June 30, 2020. S.D. Dept. of Rev., Newsletter (Winter 2020); S.D. Dept. of Rev., Internet Tax Freedom Act: Internet Access Taxation (Dec. 2019). Federal: The IRS has released guidance on complying with the carbon capture credit under IRC § 45Q as amended by the Bipartisan Budget Act of 2018 (BBA). In Notice 2020-12, released on Feb. 19, 2020, the IRS addressed how to determine when construction has begun on a qualified facility or on carbon capture equipment that may be eligible for the IRC § 45Q credit. In Revenue Procedure 2020-12, released the same day, the IRS established a safe harbor under which the IRS will treat partnerships as properly allocating the IRC § 45Q credit. The IRS said it will not issue private letter rulings or determination letters on the issues in the guidance. For additional information on this development, see Tax Alert 2020-0432. California: The California Franchise Tax Board reminded taxpayers that the final application period for the fiscal year 2019/2020 California Competes Tax Credit is March 9, 2020 through March 30, 2020. For this application period, $71.8 million is available for allocation, plus any unallocated amount from prior application periods. Cal. FTB, taxnews (March 2020). North Carolina: The North Carolina Department of Revenue (Department) issued a notice informing taxpayers about a change in the requirements for applying for an extension of time to file a North Carolina income tax return. Effective for tax years beginning on or after Jan. 1, 2019, a taxpayer can receive an automatic six-month extension to file a North Carolina income tax return by using either of the following methods: (1) apply for a North Carolina extension with the Department by the original due date of the state income or franchise tax return; or (2) apply for a federal extension with the IRS by the original due date of the federal income tax return (Option 2)- North Carolina taxpayers granted an automatic federal extension also will be granted an automatic state extension. A taxpayer using Option 2 (i.e., filing an IRS extension) must certify on its North Carolina state income and franchise tax return that it was granted a federal extension. This can be done by filling in the "federal extension" circle on the North Carolina return. The Department noted that while an extension gives taxpayers more time to file a return, it does not extend the time to pay tax due. N.C. Dept. of Rev., Important Notice: Changes in Requirements for Applying for a North Carolina Extension (Feb. 24, 2020). Arizona: The U.S. Supreme Court denied Arizona's motion for leave to file a bill of complaint in which Arizona sought to challenge California's extraterritorial assessment and collection of its $800 "doing business" minimum tax imposed on LLCs, including out-of-state companies that have no connection to California except for a passive investment in a California company. Arizona asserted that California's actions violate the Due Process and Commerce Clauses of the U.S. Constitution. Arizona v. California, motion for leave to file a bill of complaint denied, Case No. 22O150 (U.S. S.Ct. Feb. 24, 2020). South Carolina: The South Carolina Department of Revenue (Department) updated guidance on its voluntary disclosure program (VDP) to reflect changes in the state's nexus standards. The guidance provides an overview of the state's VDP and provides that the VDP is not available to a taxpayer that: (1) has been contacted by the Department to schedule an audit or notified that an examination is pending before the time the taxpayer's name is disclosed to the Department; (2) is involved in an audit or litigation with the Department; (3) requests an advisory opinion on nexus; (4) is requesting voluntary disclosure participation for non-business individual income taxes; (5) fails to timely respond to a nexus questionnaire requested by the Department; (6) provides inadequate facts to the Department for a nexus determination; or (7) failed to file a return due to gross negligence or fraud. The guidance explains both the Department's and the taxpayer's responsibilities and describes the lookback period for when nexus existed for three or more years or less than three years, including illustrative examples. S.C. Dept. of Rev., SC Revenue Procedure #20-2 (Feb. 21, 2020) (supersedes SC Revenue Procedure #09-2 and all prior documents and any oral directives in conflict). South Carolina: The South Carolina Department of Revenue updated its guidance on its internal appeals process for tax matters, primarily to revise the process to include a newly established appeals section. The guidance provides a general overview; defines terms; describes the prehearing procedures for taxes and licenses administered by the Department (other than property taxes) as well as those for property taxes administered by the Department (i.e., property taxes the Department assess such as manufacturing, utilities, business personal property, carlines, and airlines); explains the appeal process if there is a failure to exhaust a taxpayer's prehearing remedy and settlement of an appeal based on the "hazards of litigation". S.C. Dept. of Rev., SC Revenue Procedure #20-1 (Feb. 21, 2020) (supersedes SC Revenue Procedure #06-2 and all prior documents and any oral directives in conflict, excepted as otherwise noted). North Carolina: The North Carolina Department of Revenue has announced that effective Jan. 1, 2020, businesses are required to use new Form NC-1099M, Compensation Paid to a Payee, to report the nonwage compensation paid to a payee for services performed in North Carolina and the North Carolina income tax withheld from that income. Note that if a business is required to complete an IRS Form 1099-MISC or Form 1099-NEC to report the non-wage compensation paid to a payee, the filing of Form NC-1099M is not required. Businesses are reminded not to use NC-1099M to report wages. (Form W-2 is used for that purpose.) For additional information on this development, see Tax Alert 2020-0431. 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 Tex. Comptr. Pub. Acct., STAR 202001008L (January 22, 2020) revises the policy guidance in STAR 201707002L (July 7, 2017). Document ID: 2020-0502 |
