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SALT Monthly Update April 2018

May 10, 2018

David Seiden 
Azriel Septimus 

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Sales and Use Tax

South Dakota v. Wayfair:

On Tuesday, April 17, 2018, the U.S. Supreme Court heard oral argument in South Dakota v. Wayfair. The case is a direct challenge to the “physical presence” nexus standard for imposing sales or use tax collection obligations on out-of-state companies that make sales to in-state customers, affirmed by the Court in Quill Corp. v. North Dakota in 1992. During oral argument, the Justices raised questions about compliance burdens and the role of Congress in addressing the parties’ concerns. Justices Kagan and Ginsburg touched on the argument that the physical presence standard puts small, in-state businesses at a disadvantage because they must pay and collect tax. Removing the standard, however, would also harm small businesses if they wanted to maintain or expand their markets into other states. The increased cost of sales tax compliance would, arguably, be highly prohibitive to these small businesses.


State-by-State Updates

Connecticut

IRC §965 Repatriation Transition Tax Guidance Issued

Connecticut issued guidance on reporting requirements for the IRC §965 repatriation transition tax enacted by the Tax Cuts and Jobs Act (P.L. 115-97).

Under IRC §965, certain taxpayers must include untaxed foreign earnings and profits from post-1986 tax years in their Subpart F income for the 2017 tax year. A deduction is allowed that reduces the tax rate on those earnings. Connecticut adopts the federal rule that taxpayers report this income on their return for the last tax year beginning before January 1, 2018. However, unlike federal law, Connecticut does not allow taxpayers an election to defer payment of any portion of the tax.

Office of the Commissioner Guidance, Connecticut Department of Revenue Services, April 6, 2018, ¶401-860

Kentucky

Legislature Passes Significant Tax Changes

The Kentucky Legislature passed and sent to Gov. Matt Bevin significant income, sales and use, and cigarette tax amendments. Among other changes, the legislation would:

  • Update the IRC conformity date for computing corporate and personal income tax liability from December 31, 2015 to December 31, 2017;
  • Replace the graduated income tax rates with a flat 5% rate for both corporations and individuals;
  • Adopt a single receipts factor apportionment formula for assigning business income to Kentucky;
  • Required market-based sourcing rules for assigning receipts to Kentucky from services and intangibles;
  • Reduce the pension income exclusion to $31,110;
  • Eliminate withholding exemptions, certain itemized deductions, and certain personal and dependent credits;
  • Amend the film industry income tax credit to remove commercials, impose a $1 million annual statewide cap, and make the credit nonrefundable and nontransferable;
  • Suspend new industrial revitalization, investment fund, and angel investment credits until July 1, 2022;
  • Create a new income tax credit for property tax paid on business inventory;
  • Repeal several income tax credits;
  • Expand the list of services subject to sales tax to include services like landscaping services, limousine services, and extended warranty services;
  • Add sales tax definitions like "extended warranty service," "marketplace retailer," and "admissions;"
  • Revise sales tax laws to update references to "tangible personal property, digital property, or an extended warranty service;"
  • Add charges for installing or applying tangible personal property, digital property, or services to the sales tax definition of "gross receipts" and "sales price;"
  • Add sales tax exemptions for certain admissions;
  • Add campsites, campgrounds, and recreational vehicle parks to the list of places offering taxable short-term lodging;
  • Expand "retailer engaged in business in this state" to include certain remote sellers and those engaged in selling or offering extended warranty services;
  • Remove the sales and use tax exemption for property certified as a pollution control facility;
  • Impose a July 1, 2022, sunset date for new applications for the sales and use tax credit for motion picture filming purchases;
  • Increase the new tire fee from $1 to $2, subject it to sales tax, and extend it to July 1, 2020;
  • Increase the $0.56 surtax per pack of 20 cigarettes to $1.06;
  • Allow for reductions in cigarette tax and cigarette surtax for electronic cigarettes on account of modified risk;
  • Exclude electronic cigarettes from the cigarette tax definition of "cigarettes;" and
  • Require a physical inventory of cigarettes be taken on June 30, 2018, a return filed on the inventory, and taxes paid.

Most of the tax changes would be effective for tax years after 2017.

H.B. 366, as passed by the Kentucky House of Representatives and Senate on April 2, 2018.

Kentucky Legislature Overrides Governor's Veto of Tax Reform Bill

On April 13, 2018, the Kentucky Legislature voted to override Governor Matt Bevin's veto of H366, the tax reform bill.

New Jersey

Property Tax Prepayments

Governor Phil Murphy has conditionally vetoed legislation that would require property tax prepayments made in 2017 to be considered as having been accepted in 2017 regardless of whether the prepayment was in response to a tax bill that had been issued. However, the Governor made it clear in his conditional veto message that he would sign the legislation once technical corrections have been made. The legislation is designed to permit taxpayers to take deductions in 2017 for prepaid real estate taxes. Deductions for real estate taxes are subject to new limits in 2018 as a result of the Tax Cuts and Jobs Act.

New Jersey Governor Requests Technical Changes to Legislation Permitting Property Tax Prepayments in 2017 (04/09/2018).

New York

Credits and Incentives

Brownfield tax credits: The Department of Taxation and Finance has issued an advisory opinion as to whether a taxpayer will be eligible for the site preparation and tangible personal property components of the Brownfield Redevelopment Tax Credit under N.Y. Tax Law § 21. The Department stated that the taxpayer's "tangible property will be considered "placed in service" when any one of the separately occupied portions of the site is 'available to serve its assigned function.'" The Department also concluded that the taxpayer's costs may be eligible for the site preparation component of the credit as long as they are charged to a capital account, are incurred with a qualifying certificate of completion, or are used in connection with constructing a building or building component to create usable industrial or commercial space.

New York Advisory Opinion No. TSB-A-18(1)I, 03/07/2018.

Legislature Passes Budget Bill with IRC Conformity Changes, Opt-In Payroll Tax, Other Provisions

The New York Legislature has passed a budget bill that contains a variety of corporate franchise, personal income, property, sales and use, and other tax changes, including certain Internal Revenue Code (IRC) conformity amendments intended to address the effects of the federal Tax Cuts and Jobs Act. When enacted, the bill will:

  • Create an optional employer compensation expense program (ECEP), under which employers would be subject to a tax on annual payroll expenses exceeding $40,000 per employee and a corresponding credit would be allowed;
  • Create state-operated charitable contribution funds to accept donations, which can be claimed as itemized deductions (in addition, taxpayers making a donation will be allowed a state tax credit equal to 85% of the donation amount for the tax year after the donation);
  • Authorize school districts and other local governments to create charitable funds and donations to these funds provide a reduction in local property taxes (via a local credit) equal to a percentage of the donation;
  • Expand the definition of exempt CFC income to encompass repatriated income received from a corporation not included in a combined report with the taxpayer;
  • Require addbacks for the amount of federal deductions allowed under IRC Sec. 965(c) or IRC Sec. 250(a)(1)(A);
  • Provide that the subtraction for deemed dividends under IRC Sec. 78 applies to the extent that the dividends are not deducted under IRC Sec. 250;
  • Enact a surcharge on for-hire vehicles south of 96th Street in Manhattan ($2.75 for-hire vehicles, $2.50 for yellow cabs, and $0.75 for pooled trips);
  • Maintain the standard deduction for single filers;
  • Eliminate the requirement that taxpayers can itemize on their New York return only if they itemize on their federal return;
  • Create state modifications for alimony and qualified moving expense reimbursements and moving expenses;
  • Extend provisions of the state’s commercial and homeowner rehabilitation tax credit programs and allow the commercial credit to be used independently of the federal credit;
  • Extend and enhance various other credits;
  • Grant a resale exclusion to restaurants, cafeterias, caterers and others when purchasing prepared food and beverages for resale;
  • Convert the existing sales tax credit or refund for certain drugs and medicine used by veterinarians or farmers for livestock or poultry used in farm production to an upfront exemption;
  • Provide relief from sales tax responsible person liability to certain minority members of limited partnerships or limited liability corporations (LLCs);
  • Extend the property tax assessment ceiling program for telecommunications property by four years, to January 1, 2023. Also, extend and restructure the transitional provisions of the program so changes will be phased in gradually; and
  • Make various revisions to the school tax relief (STAR) program, including making participation in the STAR Income Verification Program (IVP) mandatory for Enhanced STAR recipients.

The text of the bill is available at http://assembly.state.ny.us/leg/?bn=s7509.

Personal Income Tax: NY Medical Days

Full-time stay(s) at a medical facility in NY does not count towards the 183 day test for statutory residency. Outpatient care would count.

Stranahan v State Tax Commission, 68 AD2d 250,416 NYS2d 836 (3d Dept 1979) addresses the issue of time spent in New York by a non-domiciliary for medical treatment. The Appellate Division of the State Supreme Court ruled that “when a non-domiciliary seeks treatment for a serious illness, the time spent in a medical facility for the treatment of that illness should not be counted toward the number of days the taxpayer is determined to be in New York for statutory residency purposes.

The issue in another New York City residency case was whether to count days a husband spent in New York City visiting his wife who was hospitalized. Although neither taxpayer was determined to be a statutory resident of the city in Matter of Dr. Charles F. Brush III & The Estate of Ellen S. Brush, DTA No. 817204, the ALJ concluded Stranahan did not apply to the husband's days.

Personal Income Tax – Deferred Compensation

Tax Department just issued a "Technical Memorandum" entitled “New York State Tax Treatment of Nonqualified Deferred Compensation.” Here are some highlights of what the Tax Department memorandum asks of taxpayers:

  1. Nonresident employees are to allocate the deferrals (including appreciation on the deferrals) based on New York work days/total work days for each year services were performed. 20 NYCRR § 132.18 is cited. These allocations have to be done year-by-year for each year in which deferred fees were earned and then separately flowed up to the 2017 return.
  2. Proprietorships and partnerships with nonresident owners also use a year of performance approach but use a books and records method or the 3-factor business allocation percentage from the year of performance to determine the source and then flow it up to the 2017 return.
  3. Part-year residents use a “time of receipt” approach to determine whether they are paying tax on everything as a resident or on New York source income as a nonresident.
  4. C Corps and non-resident shareholders of S Corps do NOT use the year of performance, but instead, use a year of receipt (i.e., 2017) apportionment percentage to source income to New York. All of the deferred income (including the appreciation) is included in the tax base as business income. We interpret a particularly confusing passage to require nonresident S corp. owners who are also employees use the employee approach for employee compensation and the apportionment percentage for flow-through deferred comp.

New York City

The NYC Department of Finance has issued a finance memorandum offering guidance on tax considerations and late payment penalty relief for New York City taxpayers affected by IRC § 965 and subject to the General Corporation Tax (GCT), the Banking Corporation Tax (BTX), and the Unincorporated Business Tax (UBT). New York City Finance Memorandum No. 18-4, 04/20/2018.

Oklahoma

Sales and Use Tax:

Marketplace Sales Legislation Enacted

Oklahoma Gov. Mary Fallin has signed a bill requiring third-party online retailers to collect and remit the state’s sales or use tax. The bill requires a "marketplace facilitator" to collect the tax on sales by third-party sellers in the marketplace. A "marketplace facilitator" is a person that facilitates the retail sale of tangible personal property (TPP) if it or an "affiliated person:"

  • Lists or advertises TPP for retail sale in any "forum;" and
  • Directly or indirectly, through agreements or arrangements with third parties, collects the purchaser’s payment and sends it to the seller.

The bill requires that by July 1, 2018—and by June 1 of each calendar year after—a marketplace facilitator, "remote seller, " or "referrer" who had at least $10,000 in aggregate Oklahoma sales in the preceding 12-calendar-month period to:

  • File an election with the OTC to collect and remit the tax on TPP and obtain a sales tax permit; or
  • Comply with certain notice and reporting requirements.

H.B. 1019, Laws 2018, Second Extraordinary Session, effective April 10, 2018; Press Release, Oklahoma Gov. Mary Fallin, April 10, 2018.

Pennsylvania

Corporate/Personal Income Tax

The Pennsylvania Department of Revenue has issued an information notice providing guidance on how the Repatriation Transition Tax enacted under the Tax Cuts and Jobs Act of 2017 (TCJA-P.L. 115-97) affects Pennsylvania corporate net income tax and Pennsylvania personal income tax.

Pennsylvania Informational Notice, Corporation Taxes and Personal Income Tax 2018-01, 04/20/2018.

RTT and Pennsylvania corporate income tax: 

The fact that RTT income and the RTT deductions are not included in "federal taxable income before net operating loss deduction and special deductions" does not exclude RTT income and RTT deductions from CNIT because Pa. Code Title 61 §153.11 specifically allows the starting point to calculate CNIT to differ from federal taxable income before net operating loss deduction and special deductions where "the context clearly indicates otherwise, " and the RTT is clearly an instance where the context clearly indicates otherwise. The RTT statement incorporates RTT income and the RTT deductions into federal taxable income, therefore RTT income is included in the definition of federal taxable income before net operating loss deduction and special deductions.

RTT deduction included in tax base: The RTT deduction also provides a separate deduction from the RTT, however, if the RTT deduction is treated as a "special deduction," for federal tax purposes then the corporate taxpayer is not entitled to the RTT deduction in calculating CNIT. Special deductions are those deductions set forth in Part VIII of the IRC. The RTT Deduction is not a special deduction because it is imposed by Code Sec. 965, which is not contained within the special deduction provisions. Therefore, the RTT deduction is included in determining the state tax base. However, the RTT deduction reduces the RTT Income, and the resulting amount is referred to as the "Net RTT Income." Net RTT income is subject to a dividends received deduction under Pennsylvania law because the Department of Revenue treats net RTT income as a subpart F income and therefore also treats it as a dividend for purposes of Pennsylvania CNIT.

  • Apportionment of RTT: Since RTT income is treated as a dividend for purposes of Pennsylvania CNIT and dividends are excluded from the sales factor, no portion of the RTT income is included in the corporation's sales factor for purposes of Pennsylvania apportionment.
  • Deferral of RTT liability: The election to pay the RTT liability over eight years is not applicable for purposes of Pennsylvania CNIT, except in the case of REITs. This is because the federal election defers the taxpayer's RTT liability but has no effect on its federal taxable income. However, for REITs that elect to defer income inclusions under Code Sec. 965(m), the RTT income and RTT deduction will be included in the CNIT as those amounts are subject to federal income tax.
  • RTT and Pennsylvania personal income tax. Pennsylvania personal income tax (PIT) is imposed on eight classes of income, including dividends. For PIT purposes, a dividend is defined as a distribution in cash or property made out of current or accumulated E&P. The RTT is imposed even though no actual distribution of cash or property out of E&P occurs. Because this "deemed dividend" does not involve an actual distribution of cash, it is not a dividend for PIT purposes. However, if and when an actual distribution of cash out of E&P is made to a PIT taxpayer, it will be subject to PIT as a dividend, and PIT taxpayers will be required to report this taxable dividend income regardless of whether they receive a Form 1099-DIV with respect to the actual distribution.

Pass-through entities: Pass-through entities required to report the RTT as other income on Schedule K, line 11 (Form 1065) or line 10 (Form 1120S) for federal tax purposes should adjust this income out of the Pennsylvania tax base by using Schedule M of the PA-20S/PA-65. Specifically, the income included on Schedule K, line 11 (Form 1065) or line 10 (Form 1120S) will be reported on Schedule M, Part A, line 11, column (a), classified as business income under column (b) and then backed out by reporting the income on Schedule M, Part B, Section C, line d. A statement explaining this adjustment should accompany the return.

Returns already filed. The Pennsylvania Department of Revenue intends to issue additional guidance for corporate taxpayers by way of a worksheet to guide taxpayers on the adjustments required to modify federal taxable income before net loss deduction and special deduction to include RTT income, the RTT deduction, and the Pennsylvania dividends received deduction. Taxpayers who filed their 2017 return before guidance was issued should amend their returns to report their net RTT income. The Department will not impose interest or penalties with respect to amended tax returns filed before November 15, 2018 to the extent that the amendment reflects only the changes necessary to report net RTT income in the manner described in the Information Notice. Note that filing an amended tax return will result in an extension of the statute of limitations with respect to the Department's authority to adjust the taxpayer's liability relating to net RTT income for three years from the date the amended tax return is filed. However, the statute of limitations will not be extended for other items on the originally filed return.

Rhode Island

Corporate/Personal Income Taxes:

Treatment of IRC Sec. 965 Income

Rhode Island provided guidance on the state income tax treatment of IRC Sec. 965 income for individuals and pass-through entities.

The Rhode Island treatment of IRC Sec. 965 income is as follows:

  • Individuals – Included in federal adjusted gross income, so it should be included for Rhode Island purposes on Form RI-1040, line 1.
  • Partnerships and Limited Liability Companies – Included on line 11 of federal Schedule K, so it should be included for Rhode Island purposes on Form RI-1065, line 1 (the income also flows through to owners on Schedule K-1).
  • S Corporations – Included in federal taxable income, so it should be included for Rhode Island purposes on Form RI-1120S, Schedule A, line 1.

For apportionment purposes, IRC Sec. 965 income is only included in the apportionment formula’s denominator, not in the numerator.

Guidance is expected to come later for fiduciaries (trusts and estates) and C corporations.

Advisory for Tax Professionals 2018-19, Rhode Island Department of Revenue, Division of Taxation, April 17, 2018.

Texas

Franchise Tax

Officer liability.

The Texas Comptroller of Public Accounts has ruled that the vice chairman and manager of a holding company with real estate interests in Texas, is liable for the Texas franchise tax debt of the company. In Texas, if a taxable entity fails to file required franchise tax reports, it forfeits its corporate privileges to transact business in Texas. As a result, each director or officer of the entity is liable for each debt of the entity that is created or incurred in Texas after the date on which the report, tax, or penalty is due and before the entity privileges are revived.

Texas Comptroller's Decision No. 112,712, 02/20/2018.