January 25, 2022
State and Local Tax Weekly for January 14
Ernst & Young's State and Local Tax Weekly newsletter for January 14 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.
New York updates nonresident audit guidelines to change 11-month rule to 10-month rule for determining residency
In December 2021, the New York State Department of Taxation and Finance (Department) revised its Nonresident Audit Guidelines (the 2021 Guidelines), which were last updated in 2014 (the 2014 Guidelines). While several changes were made, one of the most important was changing the 11-Month Rule for determining whether someone is a permanent resident of New York state to a 10-Month Rule, beginning in tax year 2022.
Under New York law, individuals can only be deemed a New York resident if they:
The 2014 Guidelines defined "substantially all of the tax year" as generally requiring possession and/or access to the abode for more than 11 months, the so-called 11-Month Rule. As the 11-Month Rule is not in the NYS statute or regulations, its application has been largely discretionary.
The 2014 Guidelines permitted an auditor to deem a residence to be a permanent place of abode, even if the taxpayer possessed it for 11 months or less (for example, a taxpayer repeatedly leased an apartment for exactly 11 months every year). The 2014 Guidelines stated that, "[b]ecause of the potential for abuse … the 11-[M]onth [R]ule will generally be applied by Audit in those years where a taxpayer either acquires or disposes of a residence." In other words, the 11-Month Rule is a "general rule" and not an "absolute rule." If the rule applied, as was generally the case, individuals would only be deemed a statutory resident if they spent 184 or more days in New York (full or partial days) and had access to a residence in New York for more than 11 months during the tax year.
Beginning in tax year 2022, the December 2021 Guidelines consider "'substantially all of the year" to mean "a period exceeding 10 months." The 11-Month Rule, however, applies for tax years before tax year 2022.
While the 2014 Guidelines "generally" apply the 11-Month Rule in a year in which the taxpayer acquires or disposes of a residence, the December 2021 Guidelines "will" apply the 10-Month Rule "in tax years where [taxpayers] either acquir[e] or dispos[e] of their residence." In other words, the 2021 Guidelines not only change the period from 11 months to 10 months, they also appear to only apply the rule when a taxpayer acquires or disposes of the property in that particular tax year, further narrowing the rule's applicability (for example, individuals who lease out their home every summer will still be deemed to have a permanent place of abode). The 10-Month Rule remains a "general rule" and not an "absolute rule."
For more on this development, see Tax Alert 2022-0129.
California: Adopted regulation (Cal. Code of Regs., tit. 18, Section 23661-6) identifies which members of a combined reporting group are eligible assignees of eligible credits3 following a corporate reorganization or other corporate restructuring. An "eligible assignee", in addition to the requirements of Cal. Rev. and Tax Code Section 23663(b)(3), is a taxpayer that: (1) for credits earned in tax years beginning before July 1, 2008, was a member of the same combined reporting group as the taxpayer that was allowed the credit as of June 30, 2008; or (2) for credits earned in tax years beginning on or after July 1, 2008, was a member of the same combined reporting group as the taxpayer that originally earned the credit as of the last day of the tax year in which the credit was originally earned. The final regulation includes examples on the following: (1) assignor acquired by another combined group; (2) spin-off; (3) split-off; (4) split-up; (5) pre-reorganization credits; (6) no eligible assignees for the assignment of pre-merger credits; (7) F reorganization; (8) ineligible assignee; and (9) application of credit limitations. The final regulation took effect Jan. 1, 2022. Cal. OAL, Cal. Code of Regs., tit. 18, Section 23661-6 (Cal. Reg. Notice Register 2021, v. No. 51-Z, Dec. 17, 2021).
Michigan: The Michigan Department of Treasury (MI DOT) has issued guidance on the implementation of the state's new elective flow-through entity (FTE) tax. The guidance is extensive and: (1) provides an overview of the FTE tax, including tax years for which the FTE tax is effective; (2) describes who is eligible to pay the FTE tax; (3) explains how to make an election to pay the FTE tax as well as filing and payment deadlines; (4) discusses how to calculate the FTE tax, addressing how to determine and apportion the business income tax base; (5) explains relevant reporting requirements for FTEs; (6) provides a detailed discussion of the refundable credit available to members (individual, trust and estate, and corporate) of an electing FTE; (7) describes adjustments that must be made on a member return for taxes paid by the FTE and for FTE taxes that are refunded to the FTE; and (8) explains how the FTE tax impacts estimated tax payments of members of an electing FTE and how composite returns will be impacted by the FTE tax. Throughout the guidance there are special instructions for 2021 and various illustrative examples. In addition to the guidance on the implementation of the FTE tax, the MI DOT issued a notice on FTE tax quarterly estimated tax payments for tax years starting in 2021. The MI DOT said that for FTE electing into the tax for tax year 2021, the quarterly estimated tax payments that otherwise would be due for tax years beginning in 2021 will not accrue penalty or interest. Mich. Dept. of Treas., Notice Regarding the Implementation of the Michigan Flow-Through Entity Tax (last update Jan. 14, 2022); Notice: Flow-through Entity Tax Quarterly Estimated Tax Payments for Tax Years Beginning in 2021 Not Subject to Penalty or Interest (Jan. 18, 2022).
Oregon: New rule (Ore. Admin. R. Section 150-314-0466) defines the terms "programming" and "subscription services" for purposes of sourcing broadcasting sales to Oregon. For purposes of this provision, "programming" means "one … or more performance, event, or production, or segments of performances, events, or productions, intended to be distributed for visual and/or auditory perception, including … news, entertainment, sporting events, plays, stories, or other literary, commercial, educational, or artistic works." The rule includes examples of programming (e.g., transmission of a televised version of a play and streaming college lectures over the internet would be "programming", but release of a multiplayer game streamed online with audio and visual components would not be "programming"). "Subscription service" is defined as "a service provided by a cable service provider, a direct broadcast satellite system, an internet content distributor or any other distributor that charges viewers for access to any programming." The rule also provides that the taxpayer election to apply their apportionment ratio for broadcasting sales to their total gross receipts applies to any taxpayer with any broadcasting sales. The rule applies to tax years beginning on or after Jan. 1, 2020. Ore. Sec. of State, Permanent Admin. Order REV 19-2021 (approved Dec. 15, 2021).
Pennsylvania: The Pennsylvania Commonwealth Court (Pa. Commw. Ct.) held that the trial court did not err if finding at an individual resident of Philadelphia, who during the tax years at issue worked in Wilmington, Delaware, was not allowed a credit against the Philadelphia Wage Tax (PWT) for the portion of withheld Delaware Income Tax (Delaware Tax) not credited against her Pennsylvania Personal Income Tax (PIT). Pennsylvania allowed the individual a full credit for the Delaware Tax to offset her PIT. The Philadelphia Department of Revenue (DOR), however, only allowed a full credit for the Wilmington Earned Income Tax (Wilmington Tax) to offset the PWT. The individual argued that the DOR's refusal to apply the remainder of the Delaware Tax as a credit against the PWT resulted in double taxation in violation of the Commerce Clause. In finding the individual's income "is not being doubly taxed," the Pa. Commw. Ct. explained that Philadelphia taxes the individual the same as other residents who work intrastate, but since the individual works in Delaware she pays more tax than her intrastate counterparts due to Delaware's higher income tax rate. The Pa. Commw. Ct. further determined that the PWT is internally and externally consistent; finding respectively that (1) if every jurisdiction imposed a similar tax scheme all individuals earning income outside their home locality would receive a credit for income taxes paid to the foreign location and would pay no more than their interstate counterpart, and (2) the tax reasonably reflects how and where the individual's income is generated. The Pa. Commw. Ct. also found the PWT does not discriminate against the individual since Philadelphia taxes all of its residents' income at the same rate and permits a full credit for similar taxes paid to other jurisdictions. Lastly, the Pa. Commw. Ct. held that the U.S. Supreme Court ruling in "Wynne4 does not compel Philadelphia to apply an additional credit for any dissimilar taxes, such as the Delaware Tax or otherwise aggregate of tax credits." The Pa. Commw. Ct., distinguished the county tax at issue in Wynne, which was administered, adopted, mandated and collected by the state, from the PWT and the Wilmington Tax, both of which are municipal taxes. Zilka v. Tax Review Bd. City of Philadelphia, Nos. 1063 C.D. 2019 and 1064 C.D. 2019 (Pa. Commw. Ct. Jan. 7, 2022) (opinion not reported).
SALES & USE
Multistate: The latest EY Sales and Use Tax Quarterly Update, which provides a summary of the major legislative, administrative and judicial sales and use tax developments, is now available. Highlights of this edition include a review of the most recent developments involving nexus, tax base and exemptions, technology, and compliance and controversy. A copy of quarterly is available via Tax Alert 2022-0074.
California: The California Office of Administrative Law (OAL) approved the California Department of Tax and Fee Administration's amendments to Cal. Code of Regs., tit. 18, Section 1525.4 "Manufacturing and research and Development Equipment" (the regulation) to reflect changes made to the associated statutory provision under Cal. Rev. and Tax Code Section 6377.1 in 2017.5 The 2017 statutory changes modified existing and add new definitions; expanded the partial sales and use tax exemption to include purchases of qualified tangible personal property by a qualified person for use primarily in the generation or production, or storage and distribution of electric power; and extended the sunset date of the partial exemption to July 1, 2030 (from July 1, 2022). Amendments to the regulation (1) add definitions for "distribution", "generation or production", "storage", "transmission", and (2) amend the definitions of "qualified person", "qualified tangible personal property" and "useful life". The sunset date is updated throughout the regulation and references are added to electric power generation. The amended regulation took effect Dec. 27, 2021, which was the same day the amended regulation was approved by the OAL.
Kansas: The Kansas Department of Revenue issued guidance to marketplace facilitators that provide lodging. The definition of "marketplace facilitator includes a person that provides a platform through which unaffiliated third parties offer to rent to and collect consideration from occupants for rental, for a period of less than 29 consecutive days, of rooms, lodgings, accommodations, homes, apartments, cabins or residential dwelling units that are intended to be used as a room, lodging or sleeping accommodation … " A marketplace facilitator does not include a person that facilitates the sale, rental or charge for rooms, lodgings or sleeping accommodations provided by a hotel. Persons facilitating the sale, rental or charge for non-hotel rooms, and that meet the $100,000 cumulative gross receipts threshold, must register for and collect, report and remit sales and transient guest tax on the transaction between the property owner (marketplace seller) and the guest renting the property (purchaser), including any additional charges made by the owners (e.g., fees for additional guests, pets, and no-shows). Kan. Dept. of Rev., Notice No. 21-24 "Marketplace Facilitators Lodging" (Jan. 7, 2022).
Louisiana: Online travel companies (OTCs) did not owe Jefferson Parish sales and occupancy taxes on certain amounts the OTCs charged to consumers to facilitate online reservations between hotels located in Jefferson Parish and consumers. In so holding, a Louisiana Court of Appeal (LA COA) found that under the Uniform Local Sales Tax Code (1) the OTCs were not "dealers" responsible to collect and remit tax and (2) the fees they collected for facilitating the hotel reservations were not taxable sales of services. The LA COA found that the OTCs "did not become 'dealers' under the subject tax statutes simply by collecting anticipated sales and occupancy taxes directly from the consumers and then transmitting the anticipated taxes to the hotels." Further, this action does not relieve the hotels of their collection and remittance obligations nor does it cause the OTCs to assume the hotels' collection and remittance obligations. The LA COA also determined that the OTCs do not meet the plain definition of "hotel" under La. R.S. 47:301(6)(a) (as defined before and after the 2016 amendment) and, as such, the OTCs' services in facilitating reservation between the hotels in Jefferson Parish and the consumers are not taxable "sales of services". Lopinto v. Expedia, Inc. (WA), et al., No. 21-CA-132 (La. Ct. App., 5th Cir., Dec. 23, 2021).
New York: An environmental, valuation and real-estate consulting firm's environmental risk assessment reports do not constitute taxable information services under N.Y. Tax Law Section 1105(c)(1), because the primary function of the reports is to provide customers (namely financial institutions) with a qualified environmental professionals' review and opinion regarding potential environmental risks of a parcel of property. In so holding, the New York Division of Tax Appeals (NY DTA) rejected the New York tax division's argument that the primary function of the firm's reports is the collection and dissemination of the underlying supporting documentation and information the environmental experts use in making a conclusion regarding the property at issue. The NY DTA noted that the firm's inclusion of the supporting documentation for the opinions is a regulatory requirement and necessary for the firm to justify the opinion reached. Thus, inclusion of this documentation "does not change the main purpose of the report" — i.e., the provision of nontaxable environmental analyses and opinion. Accordingly, the reports are not subject to sales tax. Matter of Lender Consulting Services, Inc., DTA No. 829198 (N.Y. Div. of Tax App. Dec. 2, 2021).
New York: A multilevel marketing company's sales of subscriptions to a web-based service (i.e., eSuite) to distributors/independent sales agents (DIAs), which among other things, gives DIAs to access confidential financial reports that allows DIAs to make informed business decisions, are not taxable transfers of pre-written computer software. Rather, the New York Division of Tax Appeals (NY DTA) determined that the main function of the eSuite subscription is the generation of the confidential reports, and that other features of the eSuite, such as the mobile application, training videos and access to a replicated website, are incidental to the subscription. The NY DTA also found that the subscription sales are not taxable sales of information services. Matter of IT Works Marketing, Inc., DTA No. 829134 (N.Y. Div. of Tax App. Dec. 30, 2021).
New Jersey: New law (SB 4094) enhances the state's film and digital media content production tax credit program. The amount of the credit is increased to 35% (from 25%) of the qualified digital media content production expenses of the taxpayer for services performed and tangible personal property purchased through vendors located in the following counties Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer or Salem, or 30% of all other qualified digital media content production expense (from 20%). The total cumulative annual limit on the amount of digital media content production tax credit available is increased to $30 million (from $10 million). The law also provides that if the cumulative total amount of tax credits, and tax credit transfers, allowed to taxpayers during a single fiscal year exceeds the amount tax credits available for the year, then taxpayers who first applied for and were not allowed a tax credit or credit transfer certificate for this reason, will be allowed the credit in the next succeeding fiscal year in which the tax credits and credit transfer certificates are not in excess of the amount of available credits. If the amount of tax credits approved to New Jersey studio partners, New Jersey film-lease partners or taxpayers other than New Jersey studio partners and New Jersey film-lease partners is less than the cumulative total amount of credits permitted to be approved to each group, the amount of credits available to such groups will be increased in the subsequent fiscal year. Such credits that remain unapproved, unredeemed or not transferred by the New Jersey film-lease partners, may be reallocated. Lastly, the law extends the diversity bonus tax credit program through 2034 (from 2028) and revises the definition of "New Jersey film-lease partner" SB 4049 took immediate effect. N.J. Laws 2021, ch. 367 (SB 4094), signed by the governor on Jan. 12, 2022.
Ohio: New law (SB 166) establishes the Employers Providing Work-Based Learning Pilot Program, establishing a nonrefundable income tax credit for employers providing work-based learning experiences, internships or cooperative education programs to eligible employees (e.g., students 19 years or younger) in approved career-technical programs. The credit is equal to the lesser of 15% of eligible compensation paid to all eligible employees during the calendar year or $5,000 per eligible employee. The total amount of credits that may be issued in a fiscal biennium is $5 million. The program is effective March 23, 2022 through March 23, 2024. Ohio Laws 2021, SB 166, signed by the governor on Dec. 22, 2021.
Michigan: New law (HB 5351) increases the small business taxpayer personal property tax exemption to $180,000 (from $80,000) of the combined true cash value of all industrial personal property and commercial personal property. This change takes effect Dec. 31, 2022. Mich. Laws 2021, PA 150 (HB 5351), signed by the governor on Dec. 15, 2021.
COMPLIANCE & REPORTING
California: Local California business tax filing deadlines are quickly approaching and are often overlooked. As the upcoming federal and state tax filing season approaches, taxpayers should be aware of the following information on reporting and paying San Francisco and Los Angeles business taxes (as well as those in other localities throughout the state). For more on this development, see Tax Alert 2022-0036.
Montana: Montana's corporate income tax law requires members of a unitary business to file returns on a worldwide combined basis, unless a water's-edge election is made to exclude foreign affiliates from the combined group. A Montana water's-edge group pays tax at an elevated tax rate of 7% instead of the regular rate of 6.75%. While many states require a water's-edge election to be made by the due date or extended due date of the return for the year for which it is intended to be effective, Montana is unique in that a water's-edge election must be made within 90 days of the beginning of the first year in which it is first intended to become effective. Accordingly, a corporation wishing to make a new water's-edge election, or renew an existing election, for the 2022 tax year must file a Form WE-ELECT by March 31, 2022. For additional information on this development, see Tax Alert 2022-0017.
Indiana: The Indiana Department of Revenue (IN DOR) issued guidance on the state's procedures for partnership audits, amended returns and adjustment for other entities arising from partnership adjustments. The guidance provides an overview of the state's regime governing partnership audits and amended returns and addresses: (1) IN DOR-initiated changes, (2) amended returns, (3) adjustment from federal changes, (4) elections to be taxed at the partnership level, (5) partnership representatives, (6) failure to provide timely reports or statements, (7) highest tax rate, (8) extensions, (9) refunds, and (10) statute of limitations. The guidance includes illustrative examples. Ind. Dept. of Rev., Income Tax: Information Bulletin #72A (Dec. 2021).
Massachusetts: The Massachusetts Department of Revenue (MA DOR) issued final guidance on Massachusetts' reporting and payment obligations of partnerships and partners subject to a centralized federal partnership audit. The MA DOR said that it has developed a process that will allow partnerships to report federal audit adjustments and report and pay audit assessments on behalf of their partners through the MA DOR's electronic tax systems — MassTaxConnect. The guidance addresses the following: (1) triggering event for a partnership's reporting and filing obligations: "final determination date"; (2) partner-level filing requirements; and (3) partnership-level reporting and filing requirements, including partnership reporting to the MA DOR and to its partners, amendment of withholding and composite returns, partnership-pays election, and partnership representative. Mass. Dept. of Rev., TIR 22-1: Reporting Rules Related to Centralized Federal Partnership Audits (Jan. 6, 2022).
PAYROLL & EMPLOYMENT TAX
Multistate: The chart inTax Alert 2022-0033 shows the preliminary 2022 state unemployment insurance (SUI) taxable wage bases and rates for new employers; minimum and maximum SUI contribution rates for experienced employers; SUI employee contribution rates where applicable; and special surcharges.
Maryland: New law (HB 319), effective Jan. 1, 2022, authorizes each Maryland county to set, by ordinance or resolution, a county income tax rate equal to at least 2.25%, from the previous 1%. HB 319 also allows each county to apply its income tax on a bracket basis with the following restrictions: (1) the county must set, by ordinance or resolution, the income brackets that apply to each income tax rate; (2) the county may set income brackets that differ from the income brackets to which the state income tax applies; (3) the county may not set a minimum income tax rate less than 2.25% of an individual's Maryland taxable income; (4) the county may not apply an income tax rate to a higher income bracket that is less than the income tax rate applied to a lower income bracket. The current Maryland county income tax rates for 2022, available here, reflect rate decreases for St. Mary's and Washington counties. The remainder of the county income tax rates are currently unchanged from 2021. Md. Laws 2021, ch. 23 (HB 319), enacted over the governor's veto on Dec. 6, 2021.
Ohio: The Ohio Department of Taxation (DOT) has released the 2022 Ohio Employer and School District Withholding Tax Filing Guidelines and the school district income tax rates for 2022. The Ohio state income tax withholding tables, last updated Sept. 1, 2021, reflect a range of rates from 0.501% to 5.009%, incorporating the income tax rate changes under HB 110. The supplemental rate of Ohio state income tax withholding on bonuses, commissions, and nonrecurring types of payments, or compensation is not affected by the income tax changes under HB 110. For more on this development, seeTax Alert 2022-0064.
Oregon: The Oregon Bureau of Labor & Industry has updated its website for the Oregon Family Leave Act (OFLA) to reflect changes under HB 2474. Specifically, effective Jan. 1, 2022, OFLA-eligible employees who "terminate or are laid off, but return to service within 180 days, remain eligible for OFLA leave on their return." Any OFLA leave the employee takes within a one-year period continues to count against the amount of OFLA leave available to the employee. Additionally, when the employee is reemployed or returned to service, the employer must restore, within 180 days, credit for days of employment prior to the break in service. Finally, employees may become eligible for OFLA leave with just 30 days of employment (rather than 180) during a public health emergency. For more on this development, see Tax Alert 2022-0071.
Oregon: The Oregon Supreme Court (Ore. S.Ct.) affirmed the Oregon Tax Court's ruling that an out-of-state company whose only connection to Oregon was the provision of Voice over Internet Protocol (VoIP) services must collect Oregon's emergency communications tax (9-1-1 tax) from its subscribers, when imposition of such tax is not prohibited by the Due Process or Commerce Clauses. The Oregon S.Ct. found that the Due Process Clause does not prevent Oregon from requiring the corporation to collect the 9-1-1 tax because the company's "contacts with Oregon were not random, isolated, or fortuitous but were, instead, the result of its intentional efforts to serve the Oregon market." Notably, the company developed marketing plans and business strategies that were intended to reach Oregon residents, it shipped products into the state and engaged retailers to sell its products in Oregon. The Ore. S.Ct. determined that the company's efforts to attract Oregon customers and provide services to Oregon customers established that it purposefully availed itself of the Oregon market. Additionally, under the Commerce Clause, the company had substantial nexus with Oregon. The Ore. S.Ct. reasoned that "[i]t necessarily follow that a company that earned far greater revenue and engaged in far more transaction than involved in Wayfair must be deemed to have also availed itself of the substantial privilege of carrying on business in Oregon." Ooma, Inc. v. Ore. Dept. of Rev., SC S067581 (Ore. S.Ct. Dec. 23, 2021).
VALUE ADDED TAX
International — Kazakhstan: The new Section 25 of the Tax Code of the Republic of Kazakhstan (RK), "Aspects of taxation of foreign companies engaged in the electronic trade in goods and provision of services in electronic form to individuals," entered into force on Jan. 1, 2022 (with some recent amendments). According to the new section, a nonresident legal entity carrying out electronic trade in goods or providing services to individuals in electronic form will be required to register "conditionally" in the RK as a value-added tax (VAT) payer and to calculate and pay VAT on services whose place of supply is the RK.For more on this development, see Tax Alert 2022-0051.
International — Kenya: Kenya's High Court recently held that the 2020 tax law amendment that required insurance agencies, insurance brokerage and securities brokerage services to change from Value Added Tax exempt status to taxable status at 16% is unlawful and unconstitutional. For more on this development, see Tax Alert 2022-0058.
International — Peru: The President of Peru enacted several tax measures that include provisions for aquaculture and forestry activities and extending the value-added tax (VAT) exemption for certain activities and services. For more on this development, see Tax Alert 2022-0005.
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 20 NYRCRR § 105.20(a)(2).
2 N.Y. Tax Law § 605(b)(1).
3 An "eligible credit" is any credit earned by the taxpayer, including any credit allowed to the taxpayer other than a credit that was sold or assigned to the taxpayer under Cal. Rev. and Tax Code §23663 or any other section that allows the sale or assignment of credits.
4 Comptroller of Treasury of Maryland v. Wynne, 575 U.S. 542 (2015).
5 See Cal. Laws 2017, ch. 135 (AB 398) and ch. 252 (AB 131).