08 May 2020 State and Local Tax Weekly for May 8 Ernst & Young's State and Local Tax Weekly newsletter for May 8 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. The Indirect Tax COVID-19 state response matrix provides updates on the latest state tax agency responses related to the COVID-19 emergency. EY's site is accessible directly through this link, or on ey.com where other important tax-related information pertaining to the COVID-19 emergency is available. On May 7, 2020, Maryland Governor Larry Hogan vetoed two bills (HB 732 and HB 932) that would have imposed a new tax on digital advertising and extended the state's existing sales and use tax to the sale of digital goods, respectively. HB 732, which was passed by the state's legislature on March 18, 2020 but was projected to be vetoed by the Governor, would have imposed a graduated tax, ranging from 2.5% to 10%, on the annual gross revenue derived from views of digital advertising in the state with the rates progressively increasing based on the annual global annual revenues of the advertiser. HB 732 defined "annual gross revenues" to mean income or revenue from all sources, before any expenses or taxes, computed according to generally accepted accounting principles. Persons with annual gross revenues derived from digital advertising services within Maryland of at least $1 million would have been required to file a return with the Office of the Comptroller of Maryland. HB 932, which was passed on the same day, would have applied Maryland's existing 6% sales and use tax to the sale of digital products, including digital code, streaming, music, ring tones, e-books and audio books, movies, online newspapers, and cable, satellite and pay-per-view television programming. The bill, which was not expected to be vetoed, would have aligned Maryland sales tax law with that of the more than 30 other state-level jurisdictions that also impose their sales and use tax in some manner on such digital goods. Legislative proponents suggested that both bills were passed as a means of funding recommended changes to the state's education system and were expected to raise more than $4 billion in tax revenue over the next 10 years. With the Maryland legislature currently out of session, and no Special Sessions currently scheduled, the earliest that a veto override vote may be considered would be in January 2021 — barring a Special Session being called prior to that date. If Governor Hogan's veto is overridden and HB 732 does ultimately become law, legal challenges can be expected to delay or invalidate the measure. The tax also had been criticized as effectuating bad policy by potentially double-taxing entities that provide or purchase digital advertising services in Maryland, as they already are paying tax on their in-state earnings. Nevertheless, it should be noted that a handful of other states, most notably New York, and nations within the European Union, have proposed similar sales/consumption-based taxes on such services in recent months, so taxpayers may expect additional activity at the state, local and international levels on the taxation of digital advertising. It is expected that, even if the Legislature does not override Governor Hogan's vetoes of either or both bills, they will be reintroduced in the next legislative session, currently scheduled to begin on January 13, 2021. For additional information on this development, see Tax Alert 2020-1234. New Hampshire: Adopted rule (Rev. 304.12) provides factor relief related to global intangible low-taxed income (GILTI) for business profits tax (BPT) purposes. Under law enacted in 2019, a portion of GILTI is subject to the BPT applicable to tax periods beginning on or after Jan. 1, 2020. The rule requires a business organization to apportion any gross business profits derived from Subpart F inclusions and net GILTI as foreign dividends. Further, for apportionment purposes, the percentage of included foreign dividends will not be applied to any actual distribution of foreign dividends that are or have been previously included in gross profits and subject to the BPT as GILTI. The rule is effective April 22, 2020 through April 22, 2030. N.H. Dept. of Rev. Admin., Rev. 304.12 (Rulemaking Reg., Vol. XL No. 18, May 7, 2020). North Carolina: The North Carolina Supreme Court affirmed without an opinion the Wake County Superior Court (court) ruling that a manufacturer of railroad brake pads and linings is not a public utility as defined by statute and, therefore, is not entitled to use the single sales factor apportionment formula for the tax years at issue (2011–2013). In so holding, the court found the manufacturer had failed to satisfy the two requirements under N.C. Stat. Gen. § 105-130.4(a)(6)1 that must be met to qualify as a public utility: (1) it was not subject to the control of a regulating agency listed in the statute; and (2) it did not own or operate its products to transport goods or persons, or for public use. Railroad Friction Products Corp. v. N.C. Dept. of Rev., No. 18 CVS 3868 (N.C. Super. Ct., Wake Cnty., Feb. 21, 2019), aff'd, No. 278A19 (N.C. S.Ct. April 3, 2020). South Carolina: In addressing an issue of first impression, an administrative law judge (ALJ) for the South Carolina Administrative Law Court in a final order held that a bank is not entitled to deduct net operating loss (NOL) carryforwards in calculating its South Carolina bank tax liability under the state's conformity provisions to the Internal Revenue Code of 1986, as amended (IRC) or under how "entire net income" (ENI) is calculated for bank tax purposes. In so holding, the ALJ determined that the bank tax (under Chapter 11) is a franchise tax based on income, and not an income tax. Further, the state's IRC conformity provisions limit or exclude certain provisions related to banks, and banks, although generally organized as corporations, are not taxed like corporations or other entities governed by Chapter 6 of the Taxation Title of the South Carolina Code (Title 12 or the SC Taxation Code) (the South Carolina Income Tax Act or Chapter 6)). The ALJ also found that Chapter 11 of the SC Taxation Code (dealing with the taxation of banks or Chapter 11) partially adopts some of the provisions of the South Carolina Income Tax Act codified in Chapter 6. The ALJ concluded that Chapter 11 conforms to these provisions in the South Carolina Income Tax Act only for the purpose of administration, allocation and apportionment, and does not specifically adopt Chapter 6 for purposes of calculating a bank's tax base. Accordingly, the bank must show that it qualifies for the NOL deduction another way. The ALJ next considered whether the bank tax is based on taxable income (which contains the provision allowing NOL deductions). The ALJ concluded it is not and, as such, the IRC provisions modifying gross income do not apply to banks. Lastly, the ALJ found that the bank did not qualify for the NOL deduction based on how ENI is calculated for bank tax purposes. The ALJ concluded that despite the breadth of the term ENI to require all revenues and all expenses be included in the calculation of a bank's taxable income, such breadth does not mean that NOL carryforwards are inherently included. Rather, NOLs are "statutory creations of tax law in particular jurisdictions" and, for South Carolina bank tax purposes "NOL carryforwards are not clearly authorized by South Carolina law." Synovus Bank v. S.C. Dept. of Rev., No. 17-ALJ-17-0418-CC (S.C. Admin. Law Ct. final order April 17, 2020). Multistate: The Uniform Law Commission (ULC) has formed a committee to study the need for and feasibility of model uniform state online sales and use tax collection legislation following the U.S. Supreme Court's 2018 ruling in South Dakota v. Wayfair, Inc. (Wayfair). The ULC in a press release noted that "[m]any states are looking for guidance to address the Wayfair decision." ULC Press Release "New Study and Drafting Committees to be Appointed" (Jan. 29, 2020). California: In First American Title Ins. Co. v. Cal. Dep't of Tax and Fee Admin. (First American case), the Superior Court of California for San Diego County (court) found that a use tax regulation violated California's Constitution because it imposed sales tax on a lease for tangible personal property (TPP) between an insurance company and a non-California lessor, even though the state's constitution prohibits the imposition of certain business taxes on insurance companies that pay gross premiums tax, including sales and use tax in certain circumstances. Accordingly, affected insurance companies with similar facts that may have paid California sales tax on TPP leases as required by 18 Cal. Code Regs. § 1660, subd. (c)(1) should consider filing protective refund claims. First American Title Ins. Co. v. Cal. Dep't of Tax and Fee Admin., Case No. 37-2018–00065184-CU-WM-CTL (Cal. Superior Ct., San Diego Cnty., March 13, 2020). For more on this development, see Tax Alert 2020-1181. Maryland: New law (SB 573) extends the temporary 8% sales and use tax on sales and charges made in connection with a shared motor vehicle used for peer-to-peer car sharing and made available on a peer-to-peer car sharing program through June 30, 2021. The tax was set to expire on June 30, 2020. Md. Laws 2020, ch. 567 (SB 573), became law without the governor's signature on May 8, 2020. Rhode Island: An out-of-state company is entitled to a refund of sales tax charged and collected from its Rhode Island customers for subscriptions to its streaming television services when it did not have nexus with the state during the tax periods at issue (2015–2016), which were prior to the U.S. Supreme Court's 2018 ruling in South Dakota v. Wayfair, Inc. (Wayfair). In reaching this conclusion, the Rhode Island Division of Taxation (Division) rejected the company's argument that the subscription television service it provides is exempt from sales tax under the definition of digital products in the Division's regulation SU 11-25, finding that SU 11-25 does not exempt streaming services from tax. Rather, it exempts from tax specific digital products such as books, movies, music, and ringtones. In this instance, the company is providing a method to watch television programming, and not a specific television program. With respect to nexus, the Division rejected the state's argument that the Complete Auto nexus standard applied because the company was providing a service and not selling goods and that under Complete Auto the company had substantial nexus with the state. The Division held that prior to the Wayfair decision, the Quill physical presence standard applies. Since the company did not have a physical presence in the state, it is not subject to the state's sales tax. The Division noted that subsequent to the Wayfair ruling, the "the outcome of this matter would most likely be different." R.I. Div. of Taxn., Admin. Div. 2020-04 (April 1, 2020). Texas: The Texas Comptroller of Public Accounts (Comptroller) announced that the change in its policy regarding medical billing services that was set to be implemented in April 2020, has been delayed until after the 2021 legislative session. Consequently, the Comptroller's policy that medical billing services occurring before the claim is submitted to an insurance company are not taxable insurance services will remain unchanged. Tex. Comp. of Pub. Accts., Tax Policy News (April 2020). Virginia: New law (SB 735) establishes statutory provisions to regulate peer-to-peer car sharing platforms, including state tax provisions. For periods beginning July 1, 2020 and ending July 1, 2021 a 6.5% tax on the gross proceeds paid by the shared vehicle driver for peer-to-peer vehicle sharing will be levied if the shared vehicle owner registers no more than 10 different shared vehicles on any combination of peer-to-peer vehicle sharing platforms at any one time. The tax rate is increased to 7% beginning July 1, 2021. If the shared vehicle owner registers more than 10 different vehicles on any combination of peer-to-peer vehicle sharing platforms, the tax imposed is the same as the motor vehicle rental tax. The shared vehicle driver is responsible for paying the tax, which shall be collected from the peer-to-peer vehicle sharing platforms that have established sufficient contact with Virginia. A shared vehicle owner is not eligible to collect tax on a shared vehicle transaction if the tax has been collected by the peer-to-peer vehicle sharing platform. The tax must be remitted to the Tax Commissioner on or before the 20th day of the month following the month in which the gross proceeds from the vehicle sharing were due. The Virginia Department of Taxation is authorized to develop guidelines implementing these provisions. Va. Laws 2020, ch.1266 (SB 735), signed by the governor on April 22, 2020. Indiana: New law (SB 272) modifies the industrial recovery tax credit by amending the definition of "taxpayer" to include an assignee that is assigned some part of the credit (changed from a lessee that is assigned some part of the credit). The law also modifies provisions for assigning the credit. Specifically, a taxpayer may assign any part of the credit (formerly, the credit only could be assigned to a lessee of the industrial recovery site) but could make only one assignment of a credit. (It should be noted that Ind. Law 2020, P.L. 154 (enacted March 21, 2020) modifies the assignment provisions to allow a taxpayer to make more than one credit assignment.) The law sets forth the process and procedures for assigning the credit. These changes take effect July 1, 2020. Ind. Law 2020, P.L. 74 (HB 1065), signed by the governor on March 18, 2020. Indiana: New law (HB 1065) amends the industrial recovery tax credit and the redevelopment tax credit. Under the revised industrial recovery tax credit provisions: (1) a taxpayer's qualified expenses must be certified by the Indiana Economic Development Corporation before the taxpayer can claim the credit; and (2) if the taxpayer assigns the credit, an assignee of the credit cannot subsequently assign all or part of the credit to another taxpayer. The taxpayer is not prohibited from assigning the credit to multiple assignees; the same part of the credit, however, cannot be assigned more than once. (Under prior law, the taxpayer could make only one assignment of a credit.) In addition, the law amends the redevelopment tax credit by expanding the definition of "qualified redevelopment site" to include a "mine reclamation site". The law also provides that a number of Indiana tax credits can be claimed against the new nonprofit agricultural organization health coverage tax liability. These changes take effect July 1, 2020. Lastly, the law urges the creation of an interim commission to study film and media production program tax credits, with a study due by Oct. 1, 2020. Ind. Law 2020, P.L. 154 (HB 1065), signed by the governor on March 21, 2020. Tennessee: New law (SB 2158/HB 2227) makes various changes to Tennessee's brownfield property tax credit law. Under the current law, a qualified development project is a project that includes, among other things, a capital investment of at least $25 million using at least five acres of brownfield property or non-prime agricultural property. The definition of "capital investment" means a business investment in real or tangible personal property or computer software leased or owned in Tennessee. The law change removes the word "business" from capital investment, eliminates the five-acre minimum requirement, and removes as a credit qualifier the project development on non-prime agricultural property. Thus, as revised, the $25 million investment must be made on a brownfield property. In addition, the law change: (1) eliminates the increased brownfield tax credit for taxpayers making an enhanced capital investment of at least $200 million; (2) modifies the date upon which a taxpayer can claim the credit from the first year of the investment period to when the $25 million investment has been made and the revenue commissioner has approved the credit; (3) eliminates the $10 million cap on the value of all brownfield property tax credits; and (4) allows for a 75% credit if the brownfield property is in a tier three or tier four county and a $5 million investment is made; among other changes. These changes take effect July 1, 2020. Tenn. Laws 2020, Pub. Ch. 606 (SB 2158/HB 2227), signed by the governor on March 20, 2020. Indiana: New law (HB 1065) expands the definition of "inventory" for property tax purposes to include "uniforms, garments, linens, and facilities services supplies owned, held, possessed, or controlled for the purpose of rental or lease in the ordinary course of trade or business." This change is retroactively effective to Jan. 1, 2014. Ind. Law 2020, P.L. 154 (HB 1065), signed by the governor on March 21, 2020. Wisconsin: The U.S. Supreme Court will not 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), cert. denied, Wisconsin Dept. of Rev. v. Union Pacific Railroad Co., Dkt. No. 19-949 (U.S. S.Ct. May 4, 2020). Indiana: New law (HB 1065) allows a taxpayer that believes it overreported a personal property assessment which is discovered during the course of a review of its personal property assessment for which the assessing official fails to make an adjustment to correct the error, to either: (1) initiate an appeal of the assessment for a credit the taxpayer can use to offset any resulting overpayment against its current personal property tax liability, or (2) file a refund claim for the overpaid amount of personal property tax. Further, the law allows a taxpayer to appeal the denial of a refund claim for such overpayment by the county, the county assessor or the county treasurer to the Indiana Board of Tax Review. These provisions are retroactively effective to Jan. 1, 2019. Ind. Law 2020, P.L. 154 (HB 1065), signed by the governor on March 21, 2020. Indiana: New law (HB 1065) establishes the nonprofit agricultural organization health coverage tax. The new tax equals 1.3% of gross premiums collected in the prior calendar year by an organization providing nonprofit agricultural organization coverage in Indiana. In computing the tax, such organization can deduct any annual Indiana gross premiums returned due to cancellation or dividends returned to members or expenditures used from the purchase of reinsurance or stop-loss coverage. Tax payments are due quarterly, on the 15th day of April, June, September and December; interest will accrue on underpayments of estimated tax. These provisions take effect July 1, 2020. Ind. Law 2020, P.L. 154 (HB 1065), signed by the governor on March 21, 2020. Washington: A company that provides an online loan marketplace which matches prospective borrowers with potential lenders should attribute receipts from fees related to these transactions to the location of the lenders for purposes of apportioning business and occupation (B&O) tax. In so holding, the Washington Court of Appeals (court) rejected the Washington Department of Revenue's attribution of these receipts based on the location of potential borrowers, finding instead that the lenders are the company's customers. Therefore, the taxes are attributed to the state where the lenders conduct their business activity that most closely or directly relate to the service performed by the company. Here, the court found that the lender receives no value from the company's services until it receives a referral of a potential borrower from the company. Thus, a lender receives the benefit of the company's services at the location where it receives and evaluates the company's referral. LendingTree, LLC v. Wash. Dept. of Rev., No. 80637-8-1 (Wash. Ct. App., Div. One, March 30, 2020). 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 N.C. Stat. Gen. § 105-130.4(a)(6) was repealed for taxable years beginning on or after Jan. 1, 2018. Document ID: 2020-1398 |
