November 8, 2021
State and Local Tax Weekly for October 29
Ernst & Young's State and Local Tax Weekly newsletter for October 29 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's voluntary intercompany transfer pricing initiative begins November 1
The Louisiana Department of Revenue (LDR) announced1 a voluntary initiative allowing eligible corporate income taxpayers to resolve intercompany transfer pricing issues through the LDR's transfer pricing managed audit program (program). Benefits of participating in the program include wavier of penalties and interest and resolution of prior, current and up to four future periods.
The program begins on Nov. 1, 2021. Taxpayers must submit to LDR requests to participate in the program by April 30, 2022. All managed audits under the program must be closed by June 30, 2022.
To be eligible to participate in the program, a taxpayer must have: (1) an established history of voluntary tax compliance with the LDR (if it previously registered with the LDR), (2) suitable records concerning intercompany transactions, and (3) a reasonable expectation that it can pay an expected liability. In addition, the taxpayer must certify that it has the time and resources available to participate in the program. An eligible taxpayer can appoint a representative, such as a tax advisory firm, to assist with the managed audit.
Once an agreement is reached, the periods available for resolution are the current tax period (i.e., the taxpayer's 2021 tax year), any open tax periods2 under statute of limitations and up to four future tax periods. The applicability to open and future tax periods depends on the taxpayer's facts, circumstances, ownership and intercompany transactions.
Newly incorporated and currently registered taxpayers may participate in the program. Taxpayers currently under audit may participate in the program, but only transfer pricing issues may be resolved under the program's managed audit process. Non-transfer pricing issues may be resolved through standard audit procedures.
An eligible taxpayer (or its representative) seeking to participate in the program may notify the LDR via email at TPManagedAudit@la.gov. The email should include the following (or substantially similar) statement:
"I request consideration on behalf of [Taxpayer Legal Name and LDR Account Number, if previously registered with LDR] to participate in the Louisiana Transfer Pricing Managed Audit Program. I certify that [Taxpayer Legal Name] meets the eligibility requirements contained in LDR RIB 21-029 and, if approved, will engage in a managed audit under the supervision of LDR with respect to Intercompany Transactions."
The email also should include the contact information of the designated representative who will be primarily responsible for conducting the managed audit.
Taxpayers accepted into the program will have 30 days from the receipt of a fully executed managed audit agreement to provide required information to the LDR's Field Audit Income Tax (FAIT) representative. After the LDR's FAIT representative issues a written determination as to whether the LDR agrees or disagrees with the taxpayer's transfer pricing studies and methods used, the taxpayer will have 30 days to accept the determination or offer modifications or adjustments. The LDR may use external consultants in making its determination. The LDR will then have 30 days to review the taxpayer's comments.
When the managed audit process concludes, the LDR will collect the tax due. The LDR will not impose penalties on tax due related to the findings of the managed audit. Interest accruing during the managed audit period3 will be abated for up to 180 days. Modified program procedures apply to taxpayers previously audited by the LDR where transfer pricing matters were at issue.
For more on this development, see Tax Alert 2021-1994.
California: On Oct. 25, 2021, the California Franchise Tax Board (FTB) issued Legal Ruling 2021-01, Unity of Apportioning Pass-through Entities (Ruling), describing its views on how to apply unitary business principles to pass-through entities (such as partnerships, S corporations and limited liability companies treated as either) for the purpose of apportioning state income taxes. Specifically, the Ruling discusses situations where a pass-through entity serves as a holding entity of another pass-through entity; the FTB makes four determinations as part of its discussion. For additional information on this development, see Tax Alert 2021-2017.
Georgia: The Georgia Department of Revenue (GA DOR) issued for public comment proposed new Rule 560-7-3.-03 "Election to Pay Tax at the Pass-Through Entity Level" and proposed amendments to Rules 560-7-3.06 "Taxation of Corporations", 560-7-3-.08 "Partnerships" and 560-7-5-.02 "Accounting Periods and Basis of Net Income". Proposed new Rule 560-7-3.-03 "Election to Pay Tax at the Pass-Through Entity Level" would provide for the implementation and administration of the new election for Georgia taxpayers to pay tax at the pass-through entity level (PTE tax) as enacted under Ga. Laws 2021 HB 149. The proposed PTE tax rule defines terms and addresses the following topics: (1) entities eligible to make the PTE tax election, (2) how to make the election, (3) estimated tax payments, (4) computing income and the PTE tax, (5) tax attributes, (6) rules for electing PTEs with certain pension plans, (7) the owner subtraction for income that was taxed at the PTE level, (8) rules for audits, (9) rules for investment PTEs and exempt owners, (10) rules for withholding and (11) S corporation specific issues. This rule would apply to tax years beginning on or after Jan. 1, 2022. Rules 560-7-3.06 "Taxation of Corporations" and 560-7-3-.08 "Partnerships" are being amended to add provisions regarding the elective PTE tax and to bring the rules into conformity with existing Georgia tax law. The proposed amendments would apply to tax years beginning on or after Jan. 1, 2022. Rule 560-7-5-.02 "Accounting Periods and Basis of Net Income" is being amended to provided that the tax year/method of accounting of a person is the same as the person's tax year/accounting method used for federal income tax purposes and to repeal outdated provisions. The GA DOR will hold a hearing on these rule proposals on Nov. 29, 2021. Information about the hearing and a copy of the proposed new and amended rules are available here.
New York: The New York Department of Taxation and Finance (NY DOTF) updated its pass-through entity tax (PTE tax) webpage to include a list of states which it has determined has a tax substantially similar to New York's PTE tax for purposes of the New York resident tax credit. A New York resident partner, member or shareholder can claim a resident tax credit against New York personal income tax for PTE tax imposed by another state, local government or the District of Columbia if it is substantially similar to New York's PTE tax paid by a partnership or New York S corporation to another jurisdiction on income derived from that jurisdiction and subject to New York personal income tax under New York Tax Law, Art. 22 (the statutory codification of the New York personal income tax). In this notice, the NY DOTF determined the following states' PTE taxes are substantially similar to New York's PTE tax: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Louisiana, Maryland, Minnesota, New Jersey, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina and Wisconsin. The NY DOTF noted that this list includes legislation enacted as of Sept. 24, 2021 (thus, Massachusetts, which enacted its PTE tax over the Governor's veto on Sept. 30, 2021, was not yet included in the published list).
SALES & USE
Colorado: In response to a ruling request, the Colorado Department of Revenue (CO DOR) determined that sales of heart monitors to Colorado customers are subject to state and state-administered local sales tax because they are retail sales of tangible personal property that do not qualify for the medical device sales tax exemption. The CO DOR explained that the sales are retail sales and not wholesale sales because the healthcare provider does not purchase the heart monitors for resale but purchases them to treat patients. In addition, the medical device exemption, which exempts specific types of medical devices (e.g., prosthetic devices, durable medical equipment) from sales tax, does not apply. The heart monitor does not qualify as a prosthetic device as it is used as a diagnostic tool and does not replace, correct or support any portion of the body. Nor does it qualify as durable medical equipment. Unlike durable medical equipment, which can withstand repeated use and is not worn in or on the body, the heart monitor at issue is designated as a single use product and it is implanted in the body. Colo. Dept. of Rev., PLR 21-006 (Oct. 20, 2021).
Indiana: The Indiana Department of Revenue (IN DOR) updated its information bulletin on the application of the state's sales tax on catalogs, advertising literature and additional advertising and promotional direct mail to include guidance on sourcing rules for direct mail. Whether a transaction involving printed materials that are delivered by common carrier or the postal service to recipients for purposes of advertising or promotion are sourced to Indiana (and subject to the state's sales tax) or sourced to another jurisdiction depends on the location of the printer, the classification of the printed materials, the documentation provided by the purchase and where the printed materials will be delivered. The bulletin addresses various issues for sourcing of advertising and promotional direct mail (when parties to the transaction are in the same state or in different states) and sourcing of other direct mail. The IN DOR noted that transactions for other direct mail are sourced differently than transactions for advertising and promotional direct mail. Ind. Dept. of Rev., Sales Tax Information Bulletin #54 (updated Oct. 2021) (replaces Information Bulletin #54 (Aug. 1990)).
Iowa: The Iowa Department of Revenue (IA DOR) issued guidance on the application of the state's sales and use tax to specified digital products, software and related services. Beginning on Jan. 1, 2019, prewritten software delivered or accessed electronically (in addition to "in a physical form", which was subject to tax prior to 2019), custom software sold in physical or electronic form and "specified digital products" are subject to Iowa's sales and use tax (and if applicable, local option sales tax). Examples of "specified digital products" include digital audio-visual works (e.g., movies), digital audio works (e.g., music, audio books), digital visual works (e.g., clip art, images), e-books and other digital written work (e.g., academic articles, magazines, catalogues) and other forms of digital products (e.g., greeting cards, video games, news, computer apps). While webinars generally are taxable as specified digital products, access to live webinars are not subject to tax if they allow for a level of participation that is substantially similar to an in-person presentation. The IA DOR also said sales of storage of tangible or electronic files, documents and other records are subject to Iowa sales tax and applicable local option sales tax. Other described taxable services include information services, software as a service, video games services and tournaments and web hosting. Two exemptions apply specifically to specified digital products and related services: (1) the commercial enterprise exemption, and (2) the non-end user exemption. For purposes of the commercial enterprise exemption, a commercial enterprise includes for profit businesses and manufacturers, for profit and nonprofit insurance companies and financial institutions, and certain professions and occupations such as medical offices, law firms and farming businesses. A non-end user is defined as "any person who contracts to receive specified digital products for further commercial broadcast, rebroadcast, transmission, retransmission, licensing, relicensing, distribution, redistribution, or exhibition of the product, in whole or in part, to another person. The IA DOR noted that certain specified digital products have been added to several existing exemptions. Lastly, the IA DOR said that it will engage in administrative rule making on this issue in the near future. Iowa Dept. of Rev., "IDR Releases New Tax Guidance: Web Hosting Taxability" (Oct. 26, 2021).
Texas: In response to a ruling request, the Texas Comptroller of Public Accounts (Tex. Comp.) determined that a foodservice category management company that provides various services (e.g., strategic overview, business planning, price and promotion evaluation, strategic quadrant mapping and consumer and operator insights) to clients to help them manage and grow their food-related businesses is selling nontaxable consulting services and not taxable information services. Under Texas law, "information service" is the provision of general or specialized news or other current information, including financial information. Here, the company uses its client's transaction sales information, insight into client's foodservice businesses and information from other resources to prepare reports that are "uniquely targeted towards each client." The company performs advanced data analytics to address various needs of each client and provides individualized suggestions to clients to improve their business planning. The Tex. Comp. found the company's "detailed reports clearly indicate that the services provided to their clients are consulting services, not information services." Tex. Comp. of Pub. Accts., Private Letter Ruling # 20209056L (Sept. 24, 2021).
Texas: In response to a ruling request, the Texas Comptroller of Public Accounts (Tex. Comp.) determined whether various fees a company charged restaurant clients in connection with its mobile ordering and payment platform are subject to sales and use tax. The following fees, the Tex. Comp. found, are a charge for taxable data processing services: (1) the service fee (it involves the compilation, storage and manipulation of data for restaurants); (2) credit card fees (it is part of the sales price of the service fee, and since the company is a marketplace provider, its credit card fee is not excluded from the definition of data processing); (3) setup fees (this fee involves data entry, storage and manipulation to configure and add a restaurant to the mobile app); and (4) subscription fees for the company's platform (this fee involves the manipulation and retrieval of data through its ordering functionality). The Tex. Comp. noted that Texas law provides a 20% exemption for data processing services. The Tex. Comp. determined that the following fees are for nontaxable services: (1) offers fees (these fees, which provide featured ad placement and allow restaurants to issue reward points to customers, are nontangible advertising services); and (2) the earn plus charge (this charge provides additional rewards points to customers and are equivalent to gift certificates). Tex. Comp. of Pub. Accts., Private Letter Ruling # 202109055L (Sept. 17, 2021).
Massachusetts: The Massachusetts Department of Revenue, Division of Local Services issued guidelines on property tax exemptions for solar powered systems, wind powered systems, fuel cell powered systems and energy storage systems. Law enacted in 2021 (Mass. Laws 2021, ch. 8) modifies Mass. G.L. c. 59, §5, cl. 45 and cl. 45B (referred to in the guidelines as clause 45 or clause 45 exemption) clarifies that when local officials are determining whether certain energy systems are exempt from local property taxes, the determination will be based on a combination of factors such as "the ability of that system to produce certain levels of electricity measured in relation to the real property where it is located, whether a solar or wind powered system is co-located with a verified energy storage system and whether the municipality has entered into an agreement for payments in lieu of taxes (PILOT) for that system." This clarification to the exemption is effective for the first time for property tax assessments as of the Jan. 1, 2022 assessment date for fiscal year 2023. The guidelines address the following: (1) application procedure — the application deadline, appeals; (2) exemption qualifications — eligibility and effective date, ineligible systems, eligible systems (system capable of producing not more than 125 per cent, verified energy system, system entered into a tax agreement, qualified fuel cell powered system); (3) PILOT agreements — entering PILOT agreements, estimating property tax revenues, agreement requirements, documentation; (4) prior year PILOT agreements; and (5) grandfathered solar or wind systems that were determined exempt under clause 45 before its amendment. The guidelines also include responses to frequently asked questions. Mass. Dept. of Rev., Div. Local Servs., Informational Guideline Release No. 21-24 (Oct. 2021).
PAYROLL & EMPLOYMENT TAX
Oregon: The Oregon Department of Consumer and Business Services has announced that the Workers' Benefit Fund (WBF) assessment is 2.2 cents per hour worked in 2022, unchanged from 2021. The 2.2 cents-per-hour rate is the employer and worker rate combined. Employers contribute not less than half of the hourly assessment (1.1 cents per hour) and deduct not more than half from worker's wages. In no case may an employer deduct more than half of the assessment from workers' wages, and, in all cases, the employer is responsible for payment of the full 2.2 cents-per-hour assessment. Employers report and pay the WBF assessment directly to the state with other state payroll taxes. For more on this development, see Tax Alert 2021-1926.
Rhode Island: Governor Daniel J. McKee's recently issued Executive Order 21-102, which delays the deadline of Sept. 30, 2021 for computing the 2022 state unemployment insurance (SUI) tax rates. It is hoped that delaying the SUI tax computation date to as late as Nov. 30, 2021 will allow the state's UI trust fund balance to further recover before determining the rate schedule for 2022. For more on this development, see Tax Alert 2021-1961.
Tennessee: Recently enacted Tennessee Laws 2021 Pub. Ch. 560 (2021 TN HB 1309) will, effective Dec. 1, 2023, cap the total number of weeks an individual may collect unemployment insurance (UI) benefits at 20 weeks, down from the current 26 weeks. For more on this development, see Tax Alert 2021-1949.
Washington: The Washington Department of Revenue (WA DOR) issued an excise tax advisory (ETA) to provide guidance on the allocation of membership fees and dues. Washington law (RCW 82.04.4282) provides a deduction for amounts representing bona fide initiation fees and dues paid for the privilege of being a member; the deduction does not apply to fees and dues paid in exchange for any significant goods or services provided by the business, organization, association or club. The ETA provides an acceptable method for allocating initiation fees between deductible and nondeductible amounts, which is not provided for by RCW 82.04.4282. The ETA addresses the following: (1) the scope of the ETA and its effective date; (2) describes bona fide membership fees and dues; (3) the allocation method — determining deductible and nondeductible amounts; and (4) documentation retention and production requirements. The ETA also includes illustrative examples. The ETA is effective beginning July 1, 2022. The WA DOR noted that it "will accept a taxpayer's reporting prior to July 1, 2022 if the taxpayer made a good faith effort to comply with its reporting requirements by using either the actual records of facilities usage method or the cost of production method, as described in the former WAC 458-20-183 (filed 11/1/95)." The WA DOR, however, will not issue refunds for taxes validly paid. Wash. Dept. of Rev., Excise Tax Advisory ETA 3230.2021 (Oct. 22, 2021) (supersedes any prior rulings or written reporting instructions that conflict with the guidance in this ETA).
Federal — International: On Oct. 31, 2021, United States (US) President Joe Biden and European Commission President Ursula von der Leyen announced that the US and the European Union (EU) have reached an interim arrangement regarding a dispute over imports of EU-origin steel and aluminum into the US. The arrangement will result in the elimination of US punitive duties imposed on EU-origin steel and aluminum under Section 232 of the Trade Expansion Act of 1962 and instead, implement a tariff rate quota (TRQ), set to be effective on Jan. 1, 2022. For additional information on this development, see Tax Alert 2021-2005.
International — Costa Rica: On Oct. 19, 2021, Costa Rica's Economic Affairs Commission of the Legislative Assembly approved a bill that would reform the General Customs Law. The bill would modify the provisions aimed at preventing smuggling, as well as the provisions on fines. It also would establish new rules for deferred payments and incorporate "authorized economic operator" into the General Customs Law. Additionally, the bill would make procedural changes for imports and expand customs tax fraud to include smuggling. For additional information on this development, see Tax Alert 2021-1942.
VALUE ADDED TAX
International — Portugal: On Oct. 11, 2021, the Law Proposal for the 2022 State Budget was submitted to the Portuguese National Assembly. The Law Proposal introduces, for Value Added Tax (VAT) purposes, among others, changes to the deadline for the submission of VAT returns as well as the deadline for the payment of VAT due. It also establishes the suspension of the entry in to force of the single document code and obligation of invoices' communication by taxable nonresidents. For more on this development, see Tax Alert 2021-1948.
International — Ghana: The Commissioner-General (CG) of the Ghana Revenue Authority (GRA), the officer responsible for the day-to-day administration of the GRA affairs and answerable to the Board for the performance of the functions of that office, has issued multiple practice notes on the interpretation of certain provisions in the Value Added Tax Act, 2013, Act 870 (as amended) (VAT Act) pursuant to sections 100 and 101 of the Revenue Administration Act, 2016, Act 915 (RAA). Specifically, the CG has issued three practice notes covering: (1) supplies to and from Free Zones under the VAT Act; (2) civil Engineering Public Works under the VAT Act; and (3) supplies that are exempt at importation but taxable in the domestic market under the VAT Act. Tax Alert 2021-1964 summarizes the guidance set forth in the practice notes.
Tuesday, Dec. 7, 2021. Webcast: 2021 employment tax year in review (3:30 pm ET). In meeting their 2021 year-end employment reporting requirements, employers will need to address the unique challenges created by temporary federal and state COVID-19 provisions while also following other necessary procedures for closing the tax year. In this information-packed webcast, EY's employment tax and benefits professionals will discuss the following common areas of year-end employment tax concern: (1) 2022 federal and state rates and limits; (2) temporary COVID-19 federal employment tax provisions, including employee retention tax credit; (3) taxation of domestic partner and paid family and medical leave insurance benefits; (4) Forms W-2/1099-NEC reporting changes; (5) state developments including teleworker income tax relief; (6) state unemployment insurance and the federal unemployment insurance credit reduction; (7) year-end reconciliation and required employee notices; and (8) preparing the year-end payroll checklist. Register.
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 La. Dept. of Rev., Revenue Information Bulletin No. 21-029 (Oct. 26, 2021).
2 Open tax periods include tax year 2020 and any periods subject to assessment by the LDR, including periods for which the taxpayer and LDR have entered into an agreement to suspend prescription.
3 The managed audit period is the date of the LDR's notice of acceptance into the program through the date of the LDR's notice of the correct amount of tax due.