September 1, 2022
State and Local Tax Weekly for August 26
Ernst & Young's State and Local Tax Weekly newsletter for August 26 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.
Puerto Rico's Act 52 of June 30, 2022 analyzed
The Governor of Puerto Rico signed Act 52 into law on June 30, 2022 (Act 52-2022). Act 52-2022 amends various provisions of the Puerto Rico Internal Revenue Code, Puerto Rico Incentives Code and Puerto Rico Municipal Code.
The Act's key change is the new alternate optional tax regime for entities subject to the 4% excise tax on the purchase of products manufactured in Puerto Rico. The Act also introduces the disregarded entity concept for income tax purposes. It establishes a new exception from the definition of engaged in trade or business within Puerto Rico for nonresident companies that employ a remote worker. Additionally, it includes provisions on the sourcing of personal property, the sale of partnership interests, and the sales and use tax.
With the new provisions and amendments, there are new filing requirements with which taxpayers must comply. Act 52 also incorporates modifications to the rules related to the submission of audited financial statements, and a new tax credit management system.
Tax Alert 2022-1289 addresses certain key amendments affecting income tax, tax incentives, municipal license tax and property tax. A First Impressions Alert was published on July 1, 2022, on the provision allowing some companies operating under industrial tax grants to elect to be taxed at a 10.5% tax rate instead of the 4% excise tax.
California: The American Catalog Mailers Association filed a complaint for declaratory and injunctive relief against the California Franchise Tax Board (FTB), seeking to have Technical Advice Memorandum 2022-01 (TAM 2022-01) and related publication, FTB 1050 "Application and Interpretation of P.L. 86-272", declared invalid. In TAM 2022-01, the FTB advised on applying P.L. 86-2721 to "fact patterns that are common in the current economy due to technological advancements … " (i.e., activities conducted over the internet and telecommuting). The FTB's positions on protected and nonprotected internet activities largely follow those expressed in the recently revised Statement of Information concerning practices of the MTC and supporting states under P.L. 86-272 issued by the Multistate Tax Commission. (For more on the TAM, see Tax Alert 2022-0281.) The Association is asserting that in publishing TAM 2022-01 and FTB 1050, the FTB failed to follow the applicable rulemaking procedures set forth by the California Administrative Procedure Act, and that the enforcement of the policy announced in TAM 2022-01 "is a departure from longstanding FTB practice and policy, which looked to a company's activities occurring within the physical boundaries of California when analyzing whether the company was protected by P.L. 86-272." The Association also contends that TAM 2022-01 (and FTB 1050) is a regulation as it "provides an interpretation of the law enforced by the FTB … ". The Association seeks a declaration by the court that TAM 2022-01 and FTB 1050 are invalid because the FTB's characterization of certain internet-based interaction processed on out-of-servers as unprotected activities is "in direct contravention of P.L. 86-272 and the U.S. Constitution", and that TAM 2022-01 and FTB 1050 conflict with federal law. American Catalog Mailers Ass'n v. Franchise Tax Bd., Compliant filed Cal. Superior Ct., San Francisco Cnty., Aug. 19, 2022.
Michigan: On remand with the direction to determine if an out-of-state taxpayer had nexus with Detroit, in light of the U.S. Supreme Court's ruling in Wayfair v. South Dakota,2 the Michigan Tax Tribunal (Tribunal) found an out-of-state holding company lacked a substantial nexus with, and it did not purposefully direct its activities toward, Detroit, precluding taxation under the Due Process Clause. (The out-of-state holding company possessed a Detroit mailing address but did not have any employees or property, provide services, or sell goods in Detroit.) In determining that the company lacked nexus for Due Process purposes, the Tribunal found the company's activities and exposure to Detroit were not continuous, its activities as a passive holding company were by design minimal, and it did not sell any goods or service in the Detroit marketplace. The Tribunal also found the company was "doing business" in Detroit based on the activities of its board of directors located in Detroit, but since they acted as the company's agents, their activities were specifically excluded from taxation under Detroit Regulation 5.1. Because these activities are excluded, the company did not have a physical or virtual presence with the city and, therefore, did not have nexus with Detroit under the Commerce Clause. Accordingly, the company was not subject to Detroit's income tax on dividend income from its shares in a Canadian company or the gain it received from the sale of those shares and is entitled to a refund of tax, interest and penalties paid in error. Apex Labs. Internat'l Inc. v. City of Detroit, MOAHR Dkt. No. 16-000724-R (Mich. Tax Trib. Aug. 19, 2022).
Virginia: A nonresident individual who had an ownership interest in a S corporation that had Virginia taxable income in 2017 was not entitled to subtract deferred foreign income earned by the S corporation as subpart F income, because a subtraction for such income did not flow-through to the individual. Va. Code §58.1-402(C)(7) allows a corporation to subtract any amounts included under IRC §951 (subpart F income). The individual contended that he had subpart F income that flowed to him in proportion to his ownership interest and, thus, he could subtract the subpart F income on his personal income tax return. (The individual subtracted the difference between the S corporation's untaxed earning and profits and its IRC §965(c) repatriated income as subpart F income.) Virginia law exempts electing small business corporations from Virginia corporate income tax. Its income, however, is taxed to its shareholders. The Virginia Department of Taxation (VA DOT) explained that for individual income tax purposes, the computation of Virginia taxable income begins with federal adjusted gross income (FAGI) with certain modifications. Modifications relating to items of pass-through entity income, gain, loss or deduction are made in accordance with the owner's distributive share to which the modification relates. Subtractions available under Va. Code §58.1-322.02 flow through from a pass-through entity to an individual taxpayer. Va. Code §58.1-322.02, however, does not provide a subtraction for subpart F income. Thus, the individual cannot subtract the subpart F income that was included in the taxpayer's FAGI. Va. Dept. of Taxn., PD 22-97 (May 26, 2022).
SALES & USE
Denver, CO: New law (CB22-0901) amends Denver's retail sales and use tax3 code provisions to exempt from tax any government fees, such as Colorado's new 27 cent Retail Delivery fee, imposed directly on the purchaser and required to be held in trust by the imposing government and separately stated on the invoice given to the purchaser at the time of sale. CB22-0901 was signed by the Denver Mayor on Aug. 23, 2022.
New Jersey: New law (A.4239) modifies the tax treatment of signs and sign fabrication and installation services to subject sign fabrication and installation services to sales tax even when such installation results in a capital improvement, applicable to sign fabrication and installation services rendered on or after Oct. 1, 2022. Under prior law, if installation resulted in a capital improvement, sales tax was not collected from the customer, rather the entity installing the sign was required to collect use tax. In response to this law change, the New Jersey Division of Taxation (NJ DOT) issued guidance, stating that effective Oct. 1, 2022, sign installers can purchase sign materials for use in sign fabrication and installation as a resale. The sign installer will need to issue a completed resale certificate to the seller to document the exemption. The sign installer also must charge sales tax to the customer on the sale of all signs as well as on the installation of all signs. The NJ DOT noted that labor to install signs that are not permanently affixed to real property as well as charges for maintaining, servicing and repairing real property and tangible personal property, remain taxable. N.J. Laws 2022, ch. 97 (A.4239), signed into law Aug. 5, 2022; N.J. Div. of Taxn., "Sign Purchases and Installation Services Sales and Use Tax" (last updated Aug. 25, 2022).
Virginia: The Virginia Department of Taxation (VA DOT) issued guidelines for the application of retail sales and use tax (RSUT) and transient occupancy taxes to sales of accommodations facilitated by an accommodations intermediary. Law enacted in 2022 (chs. 7 and 640 Laws 2022) changed the application of the RSUT and transient occupation taxes for such sales. The guidelines provide processes and procedures for implementing the application of these taxes to such sales as required by the 2022 law changes. The guidelines: (1) include a history of the taxation of sales of accommodations facilitated by accommodations intermediaries; (2) provide an overview of the 2022 law changes; (3) define key terms applicable for purposes of RSUT and transient occupancy taxes, such as "accommodations", "accommodations fee", "accommodation intermediary"; "room charge", "discount room charge", and "short-term rental"; (4) explain the collection of tax beginning Oct. 1, 2022, invoice requirements, and when an accommodations intermediary is obligated to register and collect RSUT as a marketplace facilitator. The guidelines include illustrative examples. The VA DOT noted that the "guidelines represent [its] interpretation of the relevant laws … [and] do not constitute formal rulemaking and … do not have the force and effect of law or regulation." The guidelines take effect Oct. 1, 2022. Va. Dept. of Taxn., "2022 Guidelines for the Application of the Retail Sales and Use Tax to Sales of Accommodations Facilitated by Accommodations Intermediaries" (Aug. 2022).
Virginia: New law (SB 47) makes various changes to the Virginia housing opportunity tax credit by increasing the annual credit cap available in each calendar year from $15 million for calendar year 2021 to $60 million in each year for 2022–2025 and by imposing a new multi-year cap of $255 million that applies to all applicable projects across all calendar years (i.e., 2021 through 2025). The credit allowed for each qualified project for each year of the credit project is an amount up to the amount of the federal low-income housing tax credit allocated or allowed by the Virginia Housing Development Authority to such project. The law provides, however, that for years 2022–2025, the credit cannot be claimed immediately; instead, the credit will be allowed ratably over a 10-year period. In the first year of the credit period a reduction in the tax credit is allowed due to the calculation in 26 U.S.C. §42(f)(2); any reduction by reason of Section 42(f)(2) in the allowable credit in the first taxable year of the credit period is allowed for the first year following the credit period. Housing opportunity tax credits cannot be awarded after Dec. 31, 2025; however, a taxpayer can continue to claim credits awarded before Jan. 1, 2026, pursuant to the applicable credit period. Va. Laws 2022 Special Sess. 1, ch. 3 (SB 47), signed by the governor Aug. 4, 2022.
Connecticut: The Connecticut Supreme Court upheld the trial court's ruling that for property tax purposes an entity's wind turbines used to generate electricity are properly classified as real property under Conn. Gen. Stat. §12-64(a), but reversed the trial court in finding that the entity's associated equipment (i.e., a computer system and related software) should be classified as personal property, not real property, under Conn. Gen. Stat. §12-41(c). The Court remanded the case to the trial court for a determination of the valuation of the associated equipment as personal property. Wind Colebrook South, LLC v. Town of Colebrook, SC 20594 (Conn. S.Ct. Aug. 2, 2022).
Washington: On Oct. 20, 2022, the Washington Department of Revenue (WA DOR) will host a listening session as a follow-up to its Interim Guidance Statement on non-fungible tokens (NFTs). The interim guidance, which was issued on July 1, 2022, addresses the taxability of certain transactions involving NFTs for purposes of its sales and use tax and business and occupation (B&O) tax.4 The guidance: (1) defines key terms, such as "token", "non-fungible", "NFT", "digital automated services" and "digital code"; (2) makes clear that for purposes of determining the taxability of an NFT, it is important to consider "(a) whether the transaction is comprised of multiple components or merely a digital code which grants the owner access to a digital good, (b) the taxability of each underlying component, and (c) the identity of the parties to the transaction"; (3) requires a seller that receives cryptocurrency when selling an NFT to convert the value of the cryptocurrency tendered into US dollars as of the time of the sale; (4) describes the tax treatment under four basic types of arrangements involving NFTs; (5) provides rules for mixed transactions and marketplace facilitators; (6) provides sourcing or apportionment rules for both sales tax and B&O tax; and (7) includes examples. The WA DOR indicated that this guidance is not meant to be all encompassing and acknowledged that "[t]here are many types of NFTs available today." The WA DOR is seeking feedback on the interim guidance and is requesting topics related to NFTs and other digital assets for inclusion in future guidance. Information on the listening session is available on the WA DOR's website.
Thursday, September 22. Domestic tax quarterly webcast series: A focus on state tax matters (1:00-2:30 pm ET). For our third quarterly webcast of 2022, please join our panel to discuss state and local tax disruptions in an ever-changing world. The discussion will focus on top-of-mind issues impacting state and local taxes, including: (1) the US economy and key economic indicators, including inflation, GDP and labor; (2) state and local revenue and fiscal conditions; (3) the impact of workforce issues, such as the hybrid workplace and worker shortages at the state administrative level, on taxpayers; (4) recent state income and sales/use tax guidance on digital assets, which may clarify state tax positions but may also pose new questions as the technology evolves; and (5) select federal and recent state and local tax developments on other topics. Register for the webcast here.
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 Currently codified at 15 U.S.C § 381.
2 South Dakota v. Wayfair, Inc., 138 S.Ct. 2080 (2018).
3 Retail Sales Tax, Art. II, Ch. 53 of the Denver Revised Municipal Code (DRMC) and Use Tax Article, Art. III, Ch. 53 of the DRMC.
4 Wash. Dept. of Rev., Interim statement regarding the taxability of NFTs (July 1, 2022).