Citrin Cooperman's State and Local Tax Practice put together a comprehensive summary of the biggest changes for the months of January and February affecting our clients across the various states. Read about CO alternative apportionment formula, CT unitary basis guidance, NYS sales tax regarding file management services, and much more.
Arkansas—Sales and Use Tax: Bill Would Require Certain Out-of-State Sellers to Collect Tax (Feb. 9, 2017)
The Arkansas Senate has passed a bill that, if enacted into law, would require an out-of-state seller that sells more than $100,000 worth of products or services delivered to Arkansas, or makes at least 200 transactions for product or services delivered to Arkansas in a calendar year, such as Internet seller Amazon.com, to collect sales taxes on Arkansas customers’ purchases, as if the seller had a physical presence in the state. The bill next goes to the House of Representatives for consideration.
District Court Finds Alternative Apportionment Formula to be Unreasonable and Unequitable, (Feb. 14, 2017)
TBI licensed its IP to Target for use nationwide, including in Colorado. Additionally, TBI knew it would be relying on the activities in each state where Target operated for its revenue and made a conscious decision to exploit the markets in each state to produce its income by choosing to tie its payments under license agreements to Target’s in-store sales. As a result, TBI received substantial income from Colorado.
A Colorado District Court concluded that TBI was doing business in the state by choosing to license its IP for use by Target in Colorado; relying on Target to present TBI’s IP in the best possible light in the state; and receiving hundreds of millions of dollars in income related to the use of its IP in Colorado. The court also found that Colorado’s taxation of TBI did not violate the Commerce Clause because TBI has substantial nexus with Colorado, in addition to several other factors. Target Brands, Inc. v. Dept. of Revenue
, District Court, 2nd Judicial District (Colorado), Dkt. 2015CV33831, January 27, 2017, 201-367 Connecticut
Corporation business tax on a combined unitary basis guidance
The Connecticut Department of Revenue Services Office of the Commissioner has issued a new guidance document addressing questions received on specific combined unitary filing issues. For income years beginning on or after January 1, 2016, commonly owned companies engaged in a unitary business are required to calculate their corporation business tax on a combined unitary basis. Among other topics, the guidance discusses apportionment; the water's-edge filing method; real estate investment trusts (REITs) and regulated investment companies (RICs); research and development credit exchange; intercompany intangible or interest expenses; tax attributes from earlier years; and the aggregate maximum tax. (Connecticut OCG-3, Calculation of Corporate Business Tax on a Combined Unitary Basis FAQs, Conn. DRS Office of the Commissioner, 01/23/2017.
Connecticut Governor Dannel Malloy's budget plan proposes to phase-in an increase in the estate tax exemption from its current $2 million level to the federal level of more than $5 million over three years. In addition, the maximum lifetime cap on the total amount that could be paid under the estate and gift tax would be lowered from $20 million to $15 million. (Connecticut Governor Dannel Malloy Fiscal Year 2018-2019 Biennial Budget Address and Proposal, 02/08/2017.)
Delaware has enacted legislation overhauling the state's unclaimed property law. The legislation, among other provisions: (1) sets a 10-year statute of limitations period for the State Escheator to commence an action to enforce the reporting, payment, or delivery of unclaimed property; (2) establishes a 10-year look-back period for unclaimed property audits; and (3) imposes a 10-year record retention requirement on holders filing an unclaimed property report. L. 2017, S13 (c. 1), effective 02/02/2017
Email, fax, meeting, and file management services in New York.
The Department of Taxation and Finance has issued an advisory opinion as to whether the taxpayer's email, fax, meeting, and file management services (hosted on the taxpayer's website) are subject to sales tax. The taxpayer's online server is located outside of New York. The Department concluded that the email service is not subject to tax, because of the Internet Tax Freedom Act's restrictions on taxing Internet access. However, the specified email software provided to the taxpayer's customers is subject to tax, because the definition of “tangible personal property” includes pre-written software, and when the rights to the software are transferred along with the service for one price, it is taxable as pre-written software. The Department noted that if the taxpayer bundles taxable and non-taxable charges, the entire receipt is subject to tax unless the charges can be reasonably identified though supporting records. The taxpayer's fax service is also subject to tax, because it constitutes telegraphy service, and as the taxpayer imposes a single charge for both inter-state and intra-state transmissions, the entire receipt is subject to tax. The Department stated that the meeting services are not taxable services, but where the taxpayer also transfers taxable conferencing software (pre-written software) with the service for one price, the entire receipt is taxable. As the taxpayer's file management service involves the storing of digital products, and not tangible personal property, it is not subject to tax. (New York Advisory Opinion No. TSB-A-16(30)S, 11/18/2016.)
Fee for Report Analyzing Customer Data Taxable
An online information services company’s fee for a report analyzing customer data that incorporates some information personal to the client, but also includes general information that is an integral part of the service, is a service subject to New York sales and use tax under Tax Law §1105(c)(1). The taxpayer’s reports are information services subject to sales tax. The taxpayer’s reports are compilations of data that include information specific to a client, as well as industry related information that may be included in reports provided to multiple clients. The exclusion from tax pertaining to information that is personal or individual in nature, and that is not or may not be substantially incorporated in reports furnished to other persons, is inapplicable to the taxpayer’s reports. TSB-A-16(33)S, New York Commissioner of Taxation and Finance, December 7, 2016,
- Start-Up NY Incentives Program
Gov. Andrew Cuomo wants to make several changes to his signature Start-Up NY economic development program and rename it the Excelsior Business Program. The proposal was included in his fiscal 2018 budget. The changes simplify the current Start-Up NY program's eligibility requirements and focus the program more exclusively on smaller, early-stage companies.
Mayor proposes mansion tax to fund senior rental assistance program.
The tax would institute a 2.5% marginal tax for incremental price over $2 million. According to recent sales data, the policy would affect the top 4,500 residential real estate transactions in the upcoming year and would generate approximately $336 million in Fiscal Year 2018. Those funds would be devoted to a new rental assistance program for 25,000 New Yorkers, 62 years and older who earn less than $50,000 per year. (Release: Mayor de Blasio Rolls Out New Affordable Housing Initiatives, 02/10/2017.)
Limousine services exempted.
L. 2017, A3696 (c. 27), effective 05/01/2017, provides that transportation services originating in New Jersey and provided by a limousine operator are no longer subject to sales tax.
New Jersey — Estate & Gift, Inheritance, And Transfer — QTIP election.
The New Jersey Division of Taxation has announced that it will follow Rev Proc 2016-49 which provides guidance on making portability and Qualified Terminable Interest Property (QTIP) elections. This revenue procedure became effective for New Jersey estate tax purposes on September 27, 2016, the effective date for federal estate tax purposes. (New Jersey State Tax News, 02/01/2017.)
Philadelphia realty transfer tax—definitions.
Philadelphia Bill No. 160810, effective July 1, 2017, closes certain loopholes in the provisions related to Philadelphia Realty Transfer tax by amending the definition of “value” as it relates to acquired real estate companies, the definitions of “real estate company” and “acquired real estate company.” The definition of “value” is amended to provide that, in the case of a gift of real estate where the transfer is not arm's-length, sale by execution upon a judgment or upon the foreclosure of a mortgage by a judicial officer, or upon a deed in lieu of foreclosure, transactions without consideration or for consideration less than the actual monetary worth of the real estate, a lease subject to tax pursuant to Philadelphia City Code §19-3502, an occupancy agreement, a leasehold or possessory interest, any exchange of properties, a transfer by merger, consolidation, or acquisition, a transfer effectuated pursuant to a plan of liquidation and dissolution, or the real estate of an acquired real estate company that is a family farm corporation, the actual monetary worth of the real estate as determined by adjusting the assessed value of the real estate, as determined by the Board of Revision of Taxes for City real estate tax purposes, for the common level ratio factor for the City as established by the State Tax Equalization Board: Provided, that the value of real estate shall never be less than the readily ascertainable market value of any property (including cash) for which the real estate is exchanged however, the amendment further provides that the aforementioned provision will not apply to any exchange of real estate exclusively for property (including cash) with a readily ascertainable fair market value; also, in the case of the real estate of an acquired real estate company other than a family farm corporation, the monetary value of the real estate directly or indirectly held by the company; and where the change in ownership is part of a bona fide arm's-length sale, there shall be a rebuttable presumption that the monetary value is the actual consideration paid for the company, provided that the taxpayer may rebut that presumption by alternative proof of the actual value of the included real estate.
The definition of a “real estate company” is amended to clarify the portion of annual receipts that must be derived from the ownership, disposition or holding of real estate includes the holding a real estate or title to real estate. Also, a company is an “acquired real estate company” based on a change in the ownership interest in the company, however effected, if the change: (1) does not affect the continuity of the company; and (2) of itself or together with prior changes has the effect of transferring, directly or indirectly, 75% (previously 90%) or more of the total ownership interest in the company within a period of six years (previously three years).
Mandatory Combined Reporting, Other Changes Proposed in Budget, (Feb. 9, 2017)
Pennsylvania Gov. Tom Wolf’s proposed 2017-2018 budget contains proposals for mandatory unitary combined reporting and phased rate decreases for corporate net income tax purposes, as well as other proposals for severance, sales and use, and insurance premium taxes. Specifically, the budget proposes as follows:
- effective July 1, 2017, sales and use tax exemptions and exclusions would be eliminated for:
- custom programming, design, and data processing;
- commercial storage (excluding farm product and warehousing storage and transportation services);
- airline purchases of catered food and non-alcoholic beverages served to passengers in connection with airline service; and
- aircraft sales, use, and repair;
- for corporate net income tax purposes:
- effective January 1, 2018, net operating losses would be capped at 30% of taxable value;
- effective January 1, 2019, unitary combined reporting would become mandatory; and
- the rate would be reduced from 9.99% to 8.99% in 2019; 7.99% in 2020, 6.99% in 2021, and 6.49% in 2022; and
Governor Wolf’s 2017-2018 Budget Address and Governor’s Executive 2017-2018 Budget, Office of Pennsylvania Governor Tom Wolf, January 7, 2017
Passive LLC member is not doing business in California.
In a tax refund case in which the issue was whether the California franchise tax applies to an out-of-state corporation whose sole connection with California is a 0.2% ownership interest in a member-managed limited liability company (LLC) investment fund (Cypress LLC), the California Court of Appeal has concluded that passively holding a 0.2% ownership interest, with no right of control over the business affairs of the LLC does not constitute “doing business” in California within the meaning of Cal. Rev. & Tax. Cd. § 23101, affirming the trial court. For the year at issue, Swart was subject to the minimum franchise tax if it was doing business in California, and under Cal. Rev. & Tax. Cd. § 23101 for the year at issue, “doing business” meant actively engaging in any transaction for the purpose of financial or pecuniary gain. The court said that Swart's investment in Cypress LLC closely resembles that of a limited partnership, rather than a general partnership, and further said that Swart cannot be deemed to be “doing business” in California solely by virtue of its ownership interest in Cypress LLC because, under California case law, the partnership activities of a partnership cannot be attributed to limited partners. (Swart Enterprises, Inc. v. Franchise Tax Bd., Cal. Ct. App., Dkt. No. F070922, 01/12/2017.)
California film and TV tax credit—February 2017 application window.
The California Film Commission (CFC) has issued a production alert with respect to the application window for the California Film and TV Tax Credit Program 2.0 that will run from February 10 through February 17, 2017. During that window, applications will be accepted for relocating TV series and TV projects - new TV series, TV pilots, MOWs (movies of the week), mini-series, and recurring TV series (all pilots and new TV series require pick up orders). (Production Alert, California Film Commission, 01/16/2017.)
California sales tax rate decreases January 1, 2017.
The California State Board of Equalization is reminding taxpayers that 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 .)
Single-factor sales apportionment in Massachusetts—biotechnology company.
The taxpayer, a biotechnology company, was a manufacturing corporation and was required use single-factor sales apportionment in apportioning its investment income to Massachusetts. The Massachusetts Supreme Judicial Court found that the taxpayer engages in manufacturing for purposes of Mass. Gen. L. Chapter 63 § 38. Under Mass. Gen. L. Chapter 63 § 38(l)(1), a corporation engaged in manufacturing only qualifies as a “manufacturing corporation” subject to the single-factor apportionment formula based on sales in Mass. Gen. L. Chapter 63 § 38(l)(2) if it engages “in substantial part” in manufacturing activities. (Genentech, Inc. v. Commissioner of Revenue, Mass. Sup. Jud. Ct., Dkt. No. SJC-12083, 01/12/2017.)
Minnesota — Property — Minnesota unclaimed property act is constitutional.
The Minnesota Uniform Disposition of Unclaimed Property Act (MUPA), does not create an unconstitutional taking and satisfies procedural due-process requirements. The appeals court also said that even if the owners were deprived of a protected property interest, MUPA provides adequate notice. Accordingly, the appeals court reversed district court's denial of state's motion to dismiss for failure to state a claim upon which relief may be granted and remanded the case for proceedings consistent with the court's answer to the certified questions. (Hall, et al. v. State of Minnesota, et al., Minn. Ct. App., Dkt. No. A16-0874, 01/23/2017.)
Rhode Island manufacturing initiative.
Rhode Island Governor Gina Raimondo announced a new Rhode Island manufacturing initiative to rebuild Rhode Island's manufacturing industry. The initiative includes: establishing a manufacturing investment tax credit that provides a refundable tax credit for the purchase of new equipment; reducing the qualified jobs incentive tax credit's minimum hiring requirement for growing manufacturers; and providing refundable job training tax credits to help support job training. (Press Release, Office of Governor Raimondo, 01/26/2017.)
Will South Carolina be the next Click-Through Nexus State?
In an effort to increase sales/use tax revenues on e-commerce sales, several states have expanded the definition of nexus by enacting “click-through” or affiliate nexus laws. On January 10, 2017, the South Carolina Senate introduced legislation proposing the adoption of click-through nexus for remote retailers otherwise lacking a physical presence in the State. The proposed legislation creates a rebuttable presumption of sales tax nexus for retailers that: (1) enter into an agreement with a SC resident whereby such resident, for consideration (e.g., commission), directly or indirectly refers potential customers (by an Internet link or otherwise) to the out-of-state retailer; and (2) gross proceeds of sales attributable to purchasers who were referred pursuant to such agreements exceed $10,000 (in the aggregate) in the prior 12 calendar months.
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 the 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 those 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.)
Online Purchase Fraud Detection Service Not Taxable, (Jan. 16, 2017)
A taxpayer that gathers IP addresses and other information from computers, tablets, phones, and other devices used by online purchasers, compares that information against data compiled by the taxpayer to detect fraud, and then transmits a recommendation to the retailer (taxpayer’s customer) whether to allow the transaction based on that comparison is not providing an information service subject to Texas sales tax because the taxpayer is not selling information to its customers.
Letter No. 201611086L (PLR #150120751), Texas Comptroller of Public Accounts, November 9, 2016