December and January were big months for state tax updates. Citrin Cooperman's State and Local Tax Practice put together a comprehensive summary of the biggest changes affecting our clients across 13 states. Read about C.T. taxation of income derived from stock options, M.A. source income rules for nonresident aliens, N.J. sales tax rate changes, and much more.
Northeast Region Connecticut I. Income Tax
Taxation of income derived from stock options.
The Connecticut Supreme Court determined that Connecticut properly taxed income of a nonresident derived from nonqualified stock options that were granted to the taxpayer as compensation for performing services in the state. The Connecticut Supreme Court determined that Conn. Agencies Regs. § 12-711(b)-18, requires only that the taxpayer performed services in Connecticut at the time the options were granted to be taxable by the state and does not require the taxpayer to be performing services in Connecticut at the time of exercising the options. (Allen, et al. v. Commissioner of Revenue Services, Conn. S.Ct., Dkt. No. SC 19567, 12/28/2016.) District of Columbia III. Other Taxes
- Estate tax threshold increased.
The Office of Tax and Revenue has announced that there will be a change to estate taxes for 2017. For persons who died after December 31, 2016, the estate tax threshold (the portion of the estate not subject to tax) will increase from $1 million to $2 million. DC estate tax returns are due 10 months from the date of death. For example, if a person died on December 31, 2016, an estate tax return will be due on October 31, 2017 using the $1 million threshold. If a person died on January 1, 2017, an estate tax return will be due on November 1, 2017 using the $2 million threshold. Taxpayers will continue to file their estate tax returns using Form D-76 using the DC-76 Tax Computation Worksheet to compute the amount of tax due. (DC OTR Blog, What's New for Estate Taxes in 2017?
, 12/29/2016.) Massachusetts I. Income Tax
- Massachusetts source income received by a nonresident who is a citizen of a foreign country whose income is excluded from federal gross income under an income tax treaty or convention to which the United States is a party is not subject to tax in MA.
- Massachusetts Issues Guidance on Job Creation and Workforce Development Law's Impact on Various Credits and Deductions Massachusetts Technical Information Release No. 16-15, 01/03/2017.
New Jersey I. Income Tax
- Deposition denied on issue of substantial nexus in New Jersey.
The New Jersey Tax Court has issued an opinion granting the taxpayers' motions for a protective order and to quash a certain deposition notice served by the Division of Taxation on one of the taxpayers' representatives. During the periods at issue, the taxpayers, Delaware corporations, were limited partners in Florida limited partnerships (FLPs) that conducted business in New Jersey. The taxpayers sought a refund of corporation business taxes paid on the basis that they did not have substantial nexus with the state, because they were passive investors in the FLPs. The Division sought to depose a high ranking member of the taxpayers' companies to ascertain whether there was a substantial intercompany-partnership relationship between the taxpayers (including their subsidiaries and affiliates) and the FLPs; the extent of the limited partnership interest held by the taxpayers; and the income derived from the FLPs; whether the corporations and FLPs conduct the same business; whether, and to what extent, there is an overlap between the entities of employees, offices, operation facilities, technology and/or know how. In its decision, the court recited 14 specific areas of inquiry the Division intended to present to the taxpayers' representative. The court denied the deposition request, because the taxpayers' representative did “not possess distinct, non-repetitive, or first-hand knowledge of key facts which are relevant” to the case. (HD Supply Waterworks Group, Inc., et al. v. Director, Division of Taxation, N.J. Tax Ct., Dkt. Nos. 003035-2015; 003488-2015; 003492-2015, 01/05/2017.)
II. Sales Tax
- Transition rules applicable to New Jersey sales tax rate change issued.
Sales of tangible property or digital products.
If the tangible personal property or specified digital products are sold before January 1, 2017, but the tangible personal property or specified digital products are delivered on or after January 1, 2017, the seller must collect tax at the rate of 6.875%. Leases.
If an agreement for a period of more than six months is entered into in New Jersey before January 1, 2017, the tax is imposed at the rate of 7%. Extensions or renewals of such agreements that occur on or after January 1, 2017, are subject to tax at the rate of 6.875%. For an agreement that is less than six months, the tax is imposed at the rate of 6.875% for all periods that begin on or after January 1, 2017. Construction contracts.
If taxable building materials are delivered on or after January 1, 2017, the sale of the materials is subject to tax at the rate of 6.875%. If the materials are for use in unalterable building contracts entered into before January 1, 2017, the seller must collect tax at the rate of 7%. Service or maintenance agreements.
If a service or maintenance agreement is entered into on or before December 31, 2016, the seller must charge and collect sales tax at the rate of 7%, regardless of whether or not the agreement covers periods after January 1, 2017, unless the bill for such service or maintenance agreement is issued on or after January 1, 2017, in which case the seller must charge and collect tax at the rate of 6.875%. If a service or maintenance agreement is billed periodically (e.g., on a yearly, monthly, or weekly basis) then the seller must charge and collect sales tax at the rate applicable when the bill is issued. Admission charges.
Taxable admission charges occurring on or after January 1, 2017, are subject to tax at the rate of 6.875%. If, however, the tickets are actually sold and delivered before January 1, 2017, the seller must collect tax at the rate of 7%. Membership fees.
Charges for initiation fees, membership fees, or dues are taxable at the rate of 6.875% for bills rendered on or after January 1, 2017. A customer may apply to the Division of Taxation for a refund of tax if the customer has been charged tax at the rate of 7% for membership fees or dues paid on or before December 31, 2016, and the fees or dues cover periods beginning on or after January 1, 2017. Occupancies.
Taxable occupancies occurring before January 1, 2017, are taxable at the rate of 7%. Taxable occupancies occurring on or after January 1, 2017, are subject to tax at the rate of 6.875%, regardless of any prior agreement. A customer may apply to the Division of Taxation for a refund of tax if the customer has been charged tax at the rate of 7% for an occupancy which began on or before December 31, 2016, and has extended past January 1, 2017. New York I. Income Tax
- Gain from installment sale property taxed.
The taxpayer failed to prove that the tax year ending November 30, 2009 was not its final tax year and that it was subject to general corporation tax (GCT) after 2009; and also failed to establish that the Department of Taxation erred by including all the gain from an installment sale in the last year the taxpayer was subject to the GCT. (In the Matter of 1018 Morris Park Avenue
Realty Inc., NYC TAT, ALJ Division, TAT(H)14-4(GC), 12/5/2016.)
- Rate of MTA Surcharge Increased for 2017 (Dec. 19, 2016).
The New York Department of Taxation and Finance has adopted an emergency corporate franchise tax regulation amendment regarding the MTA surcharge imposed under Tax Law Article 9-A. Specifically, new Reg. Sec. 9-1.2(c) provides that the surcharge will be computed at the rate of 28.3% of the tax imposed under Tax Law Sec. 209 for tax year 2017 (the rate was 28% for tax year 2016). The rate will remain the same in any succeeding tax year, unless a new rate is determined
- Legal fees and other expense deductions.
The Tax Appeals Tribunal held that the Division of Taxation (Division) properly disallowed a number of expenses on the taxpayer's personal income tax returns including legal fees. These legal fees were incurred in the prosecution of the taxpayer's claim of defamation, which allegedly smeared her professional reputation as an English professor. The Tribunal agreed with the State Administered Law Judge (ALJ) conclusion that the taxpayer's defamation claim arose, not in connection with her employment, but in her personal actions, and therefore, the Division properly denied her deductions for these legal expenses. (In the Matter of the Petition of Georgette Fleischer, NYS Tax Appeals Tribunal, 825817, 12/16/2016.)
II. Sales Tax
- Sales/use tax treatment of food at funeral homes.
Effective January 17, 2017, funeral homes are allowed to prepare, sell, distribute, serve, or consume, nonalcoholic beverages, incidental refreshments (such as baked goods, sandwiches, snacks, and platters), and religious practice items of the deceased or the deceased's family, in connection with a funeral service. The law also allows funeral homes to permit catered food service in connection with the funeral service, as long as the catered food service is not affiliated or owned by the funeral establishment. As charges for a funeral are not subject to sales tax, any charges for the food and drink included in the funeral service charge are not subject to sales tax. However, tangible personal property (such as soda, napkins, plates, cups, etc.) purchased by the funeral director in connection with the funeral service is subject to sales tax, including any catering services, unless the caterer merely delivers the items purchased, without any other services provided after delivery. (New York Technical Service Bureau Memorandum No. TSB-M-16(10)S, 12/16/2016 .)
- Taxpayer personally responsible for outstanding taxes.
A state administrative law judge (ALJ) upheld a sales and use tax deficiency assessments against two car dealerships and determined that the taxpayer is personally responsible for those outstanding taxes. As an officer and responsible person of both companies, the taxpayer entered into a plea agreement acknowledging he deliberately failed to remit the sales and use tax on their behalf. As a result of his guilty plea, the ALJ stated that the taxpayer was estopped from challenging the Division's responsible person finding, because the responsible person finding was already decided in the criminal trial. (In the Matter of the Petition of Silverstein, N.Y.S. Division of Tax Appeals, ALJ, Dkt. Nos. 826824; 826825, 11/28/2016.)
III. Other Taxes
- New York multi-agency unit launched to police new minimum wage rules (Jan. 6, 2017).
New York Governor Andrew M. Cuomo announced that a 200-member multi-agency Minimum Wage Enforcement and Outreach Unit has been launched to ensure that all minimum wage workers are paid the proper rate.
The first benchmark of the phase-in schedule for the minimum wage increase went into effect on December 31, 2016. Businesses in New York City with 11 or more employees are now required to pay at least $11.00 an hour. Businesses in the city with 10 or fewer employees are required to pay at least $10.50 an hour. The minimum wage on Long Island and in Westchester county is now $10.00 an hour, while in the rest of the state, the minimum wage is $9.70.
The $15 minimum wage legislation was passed as part of the 2016-17 state budget, with a phase-in schedule on a regional basis is follows:
- For workers in New York City employed by large businesses (those with at least 11 employees), the minimum wage will rise to $11 at the end of 2016, then another $2 each year, reaching $15 on December 21, 2018.
- For workers in New York City employed by small businesses (those with 10 employees or fewer), the minimum wage will rise to $10.50 by the end of 2016, then another $1.50 each year, reaching $15 on December 31, 2019.
- For workers in Nassau, Suffolk, and Westchester Counties, the minimum wage will increase to $10 at the end of 2016, then $1 each year, reaching $15 on December 31, 2021.
- For workers in the rest of the state, the minimum wage will increase to $9.70 at the end of 2016, then another $.70 each year until reaching $12.50 on December 31, 2020—after which the minimum wage will continue to increase to $15 on an indexed schedule to be set by the Director of the Division of Budget in consultation with the Department of Labor.
(New York Office of the Governor Press Release, January 2, 2017.
) Rhode Island III. Other Taxes
- 2017 estate tax credit and threshold.
The Rhode Island Division of Taxation has announced that the Rhode Island estate tax credit amount will be $65,370 for decedents dying on or after January 1, 2017. Consequently, the Rhode Island estate tax threshold will be $1,515,156 for decedents dying on or after January 1, 2017. For decedents dying on or after January 1, 2016, the threshold was $1.5 million and the related credit amount was $64,400. (Rhode Island Advisory No. 2016-24, 11/30/2016 .) Southeast Region Tennessee I. Income Tax
- Right to apportion income under Tennessee's definition of substantial nexus.
The Tennessee Department of Revenue has advised that for tax years beginning on or after July 1, 2016, a Tennessee taxpayer may apportion its business income subject to excise tax and its non-consolidated net worth subject to franchise tax if it also has business activities in another state, and the business activities performed in the other state are substantial enough to give the taxpayer nexus in the other state under Tennessee's definition of substantial nexus. Under Tennessee's definition of substantial nexus, nexus can be established if a corporation has $500,000 in sales to that other state or 25% of the taxpayer's sales are to the other state. A business would not establish the right to apportion its business income and unconsolidated net worth if its only activity in the other state were sales to the other state and the sales fell below the established thresholds. For example, if XYZ Corp. had $1 million in total sales and $990,000 were to Tennessee and $10,000 of the sales were to Kentucky, XYZ cannot apportion its income because XYZ's sales in Kentucky fell below the $500,000 and 25% thresholds. (Frequently asked questions updated, 01/10/2017.) Midwest Region Illinois II. Sales Tax
- Sales of computer software through cloud-based delivery system not taxable (Dec. 9, 2016).
A service provider’s online sales of web collaboration software would not be not subject to Illinois sales and use tax because the taxpayer delivered the software to its customer through its cloud-based delivery system. Under Illinois Law, computer software provided through a cloud-based delivery system, in which computer software is never downloaded onto a client’s computer and is only accessed remotely is not subject to tax. (General Information Letter ST 16-0034-GIL, Illinois Department of Revenue, August 17, 2016, released November 2016.)
- Sales of computer software with downloadable services taxable (Dec. 9, 2016).
A service provider’s online sales of web-based software tools would be subject to Illinois sales and use tax because its customers received a downloadable application program interface (API) as part of the service. Generally, sales of "computer software" provided through a cloud-based delivery system, in which the computer software is downloaded onto a client’s computer, is taxable. Under Illinois law, "computer software" includes services such as an API, applet, desktop agent, or a remote access agent. The taxpayer provided web-based software tools for marketing, analytics, and search engine optimization on a subscription basis to its customer with a downloadable API as a part of the services. (General Information Letter ST 16-0035-GIL
, Illinois Department of Revenue, August 17, 2016, released November 2016.) Indiana I. Income Tax
- Direct mail company allowed to use “cost of performance” sourcing (Dec. 13, 2016).
An Indiana corporate income taxpayer was allowed to apportion income received from delivering advertising to Indiana on a "cost of performance basis" (as compared to market sourcing) because it more fairly reflected the taxpayer’s Indiana source income.
(Letter of Findings No. 02-201580523, Indiana Department of Revenue, November 30, 2016.)
II. Sales Tax
- Webcasting and virtual communications in Indiana.
A company's product, a cloud-based solution for webcasting and virtual communications, is a service as enumerated in Ind. Admin. Code 45 § 2.2-4-2, and it is not a telecommunication service, therefore, the company's service is not subject to Indiana sales and use tax. Indiana may impose sales tax on products transferred electronically only if the products meet the definition of specified digital products, pre-written computer software, or telecommunication services. (Indiana Revenue Ruling No. ST 15-11, 11/21/2016.) Nebraska II. Sales Tax
- Remote seller legislation introduced (Jan. 10, 2017).
The Nebraska Legislature has introduced a bill that would require a remote seller to collect and remit Nebraska sales tax if, in the previous or current calendar year (i) its gross revenue from its sales delivered into Nebraska exceeds $100,000 or (ii) it has at least two hundred Nebraska sales transactions. If such a remote seller refuses to collect sales tax, it is required to notify Nebraska purchasers that sales or use tax is due on certain purchases from the remote seller, send a notification to Nebraska purchasers by January 31 of each year showing the total amount paid by the purchaser on transactions from the remote seller in the prior calendar year, and file an annual statement by March 1 with the Department of Revenue for each Nebraska purchaser showing the total amount paid on sales transactions with the remote seller during the preceding calendar year. West Region California I. Income Tax
- Bright-line nexus thresholds adjusted.
The inflation-adjusted property, payroll, and sales factor thresholds for determining whether a multistate corporation is doing business in California for corporation franchise and income tax purposes have been set for tax years beginning on or after January 1, 2016. The property factor threshold is increased to $54,771 (previously, $53,644 for 2015), the payroll factor is increased to $54,771 (previously, $53,644 for 2015), and the sales factor is increased to $547,711 (previously, $536,446 for 2015).
- Not a unitary business in California.
A California appellate court has affirmed a lower court decision finding that the taxpayer (a cable television provider) did not have a unitary business relationship with a home shopping subsidiary; and also affirmed the lower court finding that a fee paid to another subsidiary on termination of a merger agreement with another media company constituted taxable business income. The appellate court agreed with the trial court's determination that the taxpayer and the home shopping subsidiary were not integrated with each other and neither company was dependent on the other within the meaning of the legal standards for determining a unitary business. (Comcon Production Services I, Inc. v. Cal. Ct. App., Dkt. No. B259619, 12/14/2016.)
II. Sales Tax
- Sales tax rate decreases.
On January 1, 2017, the statewide sales and use tax rate will decrease 1/4 of 1% (0.25%) from 7.50% to 7.25%. The decrease in the statewide rate is effective for all cities and counties in California; however, in many jurisdictions in California the actual sales and use tax rate may still be higher than the statewide rate due to the addition of district taxes. (California SBE News Release No. 96-16-G, , 12/30/2016 .) Colorado
- U.S. Supreme Court declines to review Colorado case concerning notice and reporting obligations on out-of-state retailers.
On December 12, 2016, the U.S. Supreme Court denied a petition for a writ of certiorari regarding a case in which the U.S. Court of Appeals for the Tenth Circuit held that Colorado's statutory scheme imposing notice and reporting requirements on out-of-state retailers is not in violation of the dormant Commerce Clause because it does not discriminate against or unduly burden interstate commerce. (Direct Marketing Assn. v. Brohl, et al., U.S. Ct. App., 10th Cir., Dkt. No. 12-1175, 02/22/2016, reh'g. denied, 04/01/2016, petition for cert. denied, U.S. S.Ct., Dkt. Nos. 16-267, 16-458, 12/12/2016.) Oregon I. Income Tax
- Oregon corporate income tax may be imposed without physical presence.
The Oregon tax court determined that the corporate excise tax or the corporate income tax may be imposed on purely economic activity in Oregon without any physical presence by the taxpayer. (Capital One Auto Finance, Inc. v. Department of Revenue, Or. Tax Ct., Magis. Div., TC 5197, 12/23/2016.)