Tax Consequences - April 2015

Transcription

1 April 2015 Colorado Entities Using Different Apportionment Methodologies Included In Combined Report The Colorado Department of Revenue has issued a private letter ruling addressing whether a taxpayer must include all corporations (financial and nonfinancial) in an affiliated group in a combined corporate income tax return and whether the affiliated group may calculate its combined income tax liability using the methodology outlined in a previous private letter ruling (PLR ). Under the facts presented, the affiliated group engages in the business of providing data-driven marketing and loyalty solutions. According to the department, because the affiliated group satisfies the three-of-six test described in (11)(a)(I-VI), C.R.S., and satisfied the three-of-six test in the current tax year and in the immediate prior two tax years, all members of the affiliated group are required to be included in the combined report. The department also notes because the affiliated group engages in two distinctly different commercial activities, the affiliated group s members providing marketing and loyalty solutions must use the apportionment methodology outlined in , C.R.S., while the financial corporations must use the apportionment methodology outlined in 1 CCR Special Regulation 7A. The affiliated group is permitted to use the allocation and apportionment methodology outlined in PLR because little guidance exists on how to apportion income when a combined report requires two or more different apportionment methodologies. However, the department is currently in the process of working with stakeholders to revise its current regulation to provide specific guidance outlining how to apportion income when a combined report requires two or more different apportionment methodologies. If the department adopts a regulation whose methodology differs from PLR , then the affiliated group must prospectively follow the regulation adopted by the department for the tax year in which the regulation becomes effective or request an alternative apportionment methodology if the affiliated group feels the apportionment and allocation outlined in the newly adopted regulation does not fairly represent the extent of the taxpayer s activities in Colorado. According to the ruling, the department anticipates adopting an amended regulation sometime in PLR , Colorado Department of Revenue, January 30, 2015, released April 3, 2015

2 District of Columbia Market-Based Sourcing for Sales Factor Clarified District of Columbia emergency legislation clarifies the market-based sourcing rules for apportioning sales for corporation franchise tax purposes. For tax years beginning after December 31, 2014, sales, other than sales of tangible personal property, are in the District if the taxpayer's market for the sales is in the District. The legislation provides guidelines to determine the location of the market for the sales. However, if the state(s) of assignment cannot be determined, then the state(s) of assignment should be reasonably approximated. If that is not possible, then the sale is excluded from the denominator of the sales factor. This legislation mirrors a portion of the permanent budget legislation reported previously. Act (D.C.B ), Laws 2015, effective March 26, 2015, for a 90-day period that expires June 23, 2015 Illinois Taxpayers Not Entitled to Credit for Income Taxed by Illinois and New York ( Double- Taxed Income ) Resident taxpayers were not entitled to claim a credit on their Illinois personal income tax return for nonresident income tax that one of the taxpayers paid to New York because his services as an investment banker were only partially performed in New York for the tax year at issue, incidental to the services performed at his base of operations in Illinois and, therefore, 100% of his income should have been sourced to Illinois under the applicable statutory allocation and apportionment provisions. The taxpayers argued that they were entitled to a foreign tax credit on the base income taxed by both Illinois and New York ("double-taxed income"), minus deductions, provided that the foreign tax credit did not exceed their Illinois income tax otherwise due. However, the taxpayers argument was based on the statutory and regulatory language applicable to taxable years ending prior to December 31, The taxpayers version of the statute did not reflect language that the Legislature inserted to change the method of computing the maximum allowable credit paid to other states. In applying the statutory language for taxable years ending on or after December 31, 2009, to a mathematical formula, the foreign tax credit allowed is the smaller of either the total amount of taxes paid to the other state or the Illinois income tax otherwise due, multiplied by a fraction equal to the amount of the taxpayers base income sourced outside the state using Illinois allocation and apportionment provisions. The regulation relied upon by the taxpayers mirrored the statutory language prior to the 2009 amendment and, therefore, was invalid to the extent that it was inconsistent with the statutory language pertaining to taxable years ending on or after December 31, Administrative Hearing Decision No. IT 15-02, Illinois Department of Revenue, January 14, 2015, released April 3, 2015 Manager Was Personally Liable as Responsible officer A manager of a business was liable for the business s Illinois sales taxes as a responsible officer of the business. Personal liability for a business s taxes is imposed when a person is responsible for filing corporate tax returns and/or making tax payments and willfully fails to file returns or make payments. The manager was in charge of the business s day-to-day operations, participated in financial decisions, signed sales tax returns and had the ability to sign checks for the business. Furthermore, the manager did not provide evidence which showed that he tried to correct mismanagement of the business after he was aware that the business was failing and that taxes were not being paid. 2

3 Administrative Hearing Decision No. ST 15-01, Illinois Department of Revenue, January 20, 2015, released April 2015 Deadlines Extended for Those Affected by Tornado Illinois Gov. Bruce Rauner has announced that residents affected by the April 9, 2015 tornado in DeKalb and Ogle Counties have until October 31 to file tax returns that were due in April of Taxpayers who opt to mail their deferred returns and payments should write "Tornado April 2015" on the outside of the envelope in red ink and on the top of each page of the tax filing. Filers using MyTax Illinois or electronic filing methods are instructed to refer to the Department of Revenue (DOR) website at The DOR has set up a mailbox dedicated to the tornado issue at Rev.TornadoApr2015@illinois.gov. News Release, Illinois Department of Revenue, April 14, 2015 Maryland Governor Signs Amnesty Bill Maryland Gov. Larry Hogan has signed legislation requiring the Comptroller to declare an amnesty period for delinquent taxpayers from September 1, 2015, to October 30, 2015, inclusive, that waives civil penalties and one-half of any interest imposed on taxpayers that, on or before December 31, 2014, failed to file a required personal income, corporate income, withholding, sales and use, or admission and amusement tax return. The amnesty allows taxpayers to (1) file returns and pay the delinquent tax, including one-half interest, (2) pay the tax and one-half interest on a previously filed return, or (3) enter into an agreement with the Comptroller to pay the tax and one-half interest. An agreement with the Comptroller must provide for payment of the delinquent tax plus one-half interest in full on or before December 31, The amnesty program does not apply to any taxpayer that was granted amnesty under a Maryland program held between calendar year 1999 and calendar year 2014 or any taxpayer eligible for the July 1, 2004, through November 1, 2004, Settlement Period, as provided in Chapter 557 of the Acts of 2004 for tax periods prior to tax year Ch. 50 (S.B. 763), Laws 2015, effective June 1, 2015, and applicable as noted above Michigan Services Provided by Remotely Accessed Software Were Exempt Services provided by the taxpayer via software hosted on its own servers were not subject to Michigan use tax because they did not qualify as sales of prewritten software or taxable telecommunications services. The taxpayer provided services related to electronic data interchanges, the electronic translation and transformation of business documents, and the synchronization and storage of data. No software was installed or downloaded to customers servers. The transactions did not meet the requirements to constitute prewritten software, as there was no "delivery" to the taxpayer s customers. The taxpayer did not surrender possession and control of the software to customers, nor did it transfer software used to process the services for which the customers contracted. Furthermore, the requisite "use" of the software was not present for tax purposes. The Use Tax Act defines use as "the exercise of a right or power over tangible personal property incident to the ownership of that property including transfer of the property in a transaction where possession is given." However, there was no evidence that the taxpayer s customers exercised any control over the software. 3

4 The transactions also did not qualify as telecommunications services, as they fell within the exclusion for "data processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser..." GXS Inc. v. Department of Treasury, Court of Claims (Michigan), No MT, March 4, 2015 Gifts Purchased by Event Planner Were Taxable An event management service company that designed and executed special events for clients was liable for Michigan use tax on tangible personal property that it purchased as gifts and giveaways as such items were used in partial fulfillment of its service obligation. Though the taxpayer contended that its purchases were exempt as sales for resale, the taxpayer did not sell the merchandise to its clients apart from its event management services. As the taxpayer s event management services were composed of both services and tangible personal property, it was a mixed transaction and the court of claims properly subjected the taxpayer s activities to the incidental-to-services test. The taxpayer also could not claim exemption based on its status as a purchasing agent for its clients because it did not hold itself out to third-party vendors as an agent. Testimony presented by the Department of Treasury showed that the taxpayer represented itself as a buyer purchasing property for resale. Morley Companies, Inc. v. Department of Treasury, Michigan Court of Appeals, No , March 24, 2015 New York Enacted Budget Legislation Includes Numerous Changes Enacted as part of New York s budget package, Ch. 59 (A.B. 3009) includes a variety of corporate franchise, personal income, sales and use, property, and other tax provisions, as detailed below. New York City personal income tax: The bill eliminates the New York City STAR personal income tax rate reduction benefit for taxpayers having income above $500,000, applicable to taxable years beginning after Charitable contributions: The bill extends for two years (through 2017) the provision reducing the amount of charitable contributions allowed as a New York itemized deduction from 50% to 25% for taxpayers with New York adjusted gross income above $10 million. Enhanced real property tax circuit breaker credit: With respect to the enhanced real property tax circuit breaker credit, the bill clarifies that a taxpayer s residence must be in New York City in order to qualify for the credit. MCTMT: The bill clarifies that all self-employed taxpayers subject to the metropolitan commuter transportation mobility tax (MCTMT), and not just New York state residents, may be required to report their MCTMT liabilities on their personal income tax returns. Manufacturer s real property tax credit: Personal income tax provisions regarding the manufacturer s real property tax credit are amended to clarify that the credit is limited to real property taxes not deducted from the taxpayer s New York adjusted gross income. In addition, an erroneous reference to combined groups has been eliminated. The bill also adds language making the credit available to certain farming businesses that lease real property from related or unrelated parties. 4

5 START-UP NY telecommunication services excise tax credit: Personal income tax provisions regarding the START-UP NY telecommunication services excise tax credit are amended to clarify that the credit is limited to taxes not deducted from the taxpayer s New York adjusted gross income. Excelsior Jobs Program: The bill expands eligibility under the Excelsior Jobs Program to include certain business entities operating in music production or as an entertainment company. "Entertainment company" is defined to include entities principally engaged in the production or post-production of motion pictures, instructional videos, televised commercial advertisements, animated films or cartoons, music videos, television programs, or programs primarily intended for radio broadcast. Certain types of companies are specifically excluded (e.g., those principally engaged in the live performance of events). "Music production" means the process of creating sound recordings of at least eight minutes, recorded in professional sound studios, and intended for commercial release; the term does not include live concert recordings, recordings that are primarily spoken word or wildlife or nature sounds, or recordings produced for instructional use or advertising or promotional purposes. The definition of "net new jobs" is expanded to include jobs obtained by an entertainment company in New York (1) as a result of the termination of a licensing agreement with another entertainment company, (2) that are at risk of leaving the state as a direct result of the termination, (3) that are either full-time wage-paying jobs or equivalent to full-time wage-paying jobs requiring at least 35 hours per week, and (4) that are filled for more than six months. New provisions are added specifying that a business entity operating predominately in music production must create at least five net new jobs, and a business entity operating predominantly as an entertainment company must create or obtain at least 100 net new jobs. The definition of "regionally significant project" is expanded to include an entertainment company creating or obtaining at least 200 net new jobs in New York and making a significant capital investment in the state. The bill also amends the definition of "software development" to include the production or post-production of certain video games. Employee training credit: The bill creates a new tax credit for employers that procure certain training for employees. The credit equals 50% of a taxpayer s eligible training costs, up to a credit of $10,000 per employee completing eligible training, and 50% of the stipend paid to an intern, up to a credit of $3,000 per intern completing eligible training. The credit applies to taxable years beginning on or after January 1, 2015, and to eligible training costs incurred on or after April 13, Corporate tax reform statute technical changes: The bill caps the amount of investment income that may be deducted at 8% of the taxpayer s entire net income in cases where the taxpayer s investment income is determined without regard to the interest deductions allowed and makes numerous other technical changes to the corporate tax reform statute. For example, the bill clarifies that net operating losses (NOLs) are required to be carried back to the earliest of the three years. Additionally, taxpayers are entitled to make an irrevocable election to relinquish the entire carryback period. The bill adds apportionment rules for mark-to-market gains as well as for receipts from the operation of vessels. The bill also amends the definitions of "investment income" and "financial instrument." These technical changes are retroactive to the effective date of the Budget Bill. Alternative fuel vehicle refueling and electric vehicle recharging credit: Technical changes are made to the tax credit for alternative fuels and electric vehicle recharging property. The credit is available against the corporate and personal income tax. 5

6 Biennial information statement: The bill combines the Department of State biennial information statement and tax return filings and also repeals the $9 Department of State filing fee. Libraries exemption: The bill also amends the law in relation to the exemption of libraries from the imposition of the metropolitan commuter transportation mobility tax. This change applies to taxable periods on or after January 1, General aviation aircraft: A sales and use tax exemption is provided for general aviation aircraft, and machinery or equipment to be installed on such aircraft, effective September 1, For purposes of the exemption, "general aviation aircraft" means an aircraft that is used in civil aviation and that is not a commercial aircraft, military aircraft, unmanned aerial vehicle or drone. Also, leases of noncommercial aircraft having a seating capacity of less than 20 passengers and a maximum payload capacity of less than 6,000 pounds will not be subject to accelerated sales or use tax provisions, effective September 1, Wine tastings: The wine tasting sales and use tax exemption is extended to other alcoholic beverages (i.e., liquor, beer or cider) and items used to package such beverages (i.e., bottles, corks, caps, and labels), effective June 1, Also, the bill makes technical corrections to clarify that the exemption applies to tastings held off of a winery s premise. Vessels: A sales and use tax exemption is provided for sales, leases or uses of vessels in excess of $230,000, effective June 1, In addition, a use tax exemption is provided for the use of a vessel within New York until (1) the boat is registered, or is first required to be registered, under New York s vehicle and traffic laws, or (2) the boat is used in New York for more than 90 days. Prepaid mobile calling services: The bill clarifies that sales tax applies to prepaid mobile calling services under the same rules that apply to prepaid telephone calling services (tax generally imposed based on retail location). For purposes of the exemption, "prepaid mobile calling service" means the right to use a commercial mobile radio service, whether or not sold with other property or services, that must be paid for in advance and is sold for use over a specified period of time or in predetermined units or dollars that decline with use in a known amount, whether or not that right is represented by or includes the transfer to the purchaser of an item of tangible personal property. Solar energy system equipment: The existing sales tax exemptions for solar energy system equipment are expanded to include electricity generated by such equipment that is sold under a power purchase agreement, effective December 1, Specifically, the bill expands the existing exemptions from state and local sales tax for residential and commercial solar equipment to include electricity purchased from a person primarily engaged in the sale of solar energy systems equipment and/or electricity generated by such equipment if the electricity is sold under a written agreement and generated by equipment that is: (1) owned by a person other than the purchaser of the electricity; (2) installed at the purchaser s residence or nonresidential premises; and (3) used to provide heating, cooling, hot water or electricity. The bill also amends existing local option provisions to include the expanded exemptions. Sales to certain related persons: A sales and use tax exemption is provided for certain related persons tangible personal property or service transactions related to requirements pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, effective September 1, The exemption sunsets on June 30, STAR property tax exemption provisions: Effective April 13, 2015, the Department of Taxation and Finance is authorized to use data collected through the registration process to recoup improperly granted STAR property tax exemptions on one or more of the three preceding assessment rolls, along with interest. The law establishes notice and grievance procedures associated with any such recoupment. Neither assessors nor boards of assessment review have authority to consider objections to recoupment of an exemption; rather, such actions may only be challenged before the department. 6

7 Also effective April 13, 2015, the enacted law authorizes homeowners who registered for the STAR property tax exemption, but failed to file timely exemption applications with their local assessors, to receive the benefit for the 2014 exemption. If the Commissioner of Taxation and Finance is informed on or before October 1, 2015, that an owner of property is an unenrolled registrant, and if the unenrolled registrant's property would have qualified for the STAR exemption on the 2014 assessment roll if a completed application had been filed in a timely manner, then the Commissioner may remit directly to the property owner the tax savings that the STAR exemption would have yielded if the exemption had been granted on the 2014 assessment roll. Tax on mobile telecommunications businesses: On and after May 1, 2015, the surcharge on the gross receipts from telecommunication services imposed on utilities doing business in the metropolitan commuter transportation district is also imposed on the gross receipts from mobile telecommunication services relating to the metropolitan commuter transportation district, at the rate of 0.721%. Additionally, an excise tax is imposed on the sale of mobile telecommunications services at the rate of 2.9% of gross receipts from any mobile telecommunications service provided by a home service provider where the mobile telecommunications customer's place of primary use is within New York State. Petroleum business tax refund: Effective April 13, 2015, a reimbursement of the petroleum business tax is allowed for highway diesel fuel used in farm production. The enacted law extends the farming reimbursement for motor fuel to include highway diesel motor fuel for no more than 4,500 gallons purchased in-state in a 30-day period, or a greater amount that has been given prior clearance by the Commissioner, by a consumer for use or consumption directly and exclusively in the production for sale of tangible personal property by farming, but only if all of such highway diesel motor fuel is delivered on the farm site and is consumed other than on the public highways of New York. Extension of income executions on tax debtors without warrant: Provisions allowing service of income executions with respect to individual tax debtors without filing a warrant are extended to April 1, 2017 (formerly, April 1, 2015). Ch. 59 (A.B. 3009), Laws 2015, effective April 13, 2015, applicable as noted; Governor s Memorandum in Support, New York Division of the Budget Corporate Tax Reform Enacted Enacted New York legislation significantly revises the New York City corporate income tax system, generally applicable to taxable years beginning on or after January 1, However, S corporations remain subject to the existing New York City general corporation tax or banking corporation tax. For affected corporations (i.e., corporations and banks that are not S corporations), the new provisions make numerous changes, including the following: merging the banking and general corporation taxes; in place of the general 8.85% tax rate, allowing a reduced rate for certain small businesses and qualified manufacturing corporations; applying a 9% tax rate to certain financial corporations having more than $100 billion in assets; adopting combined reporting for unitary corporations that meet a more-than-50% stock ownership test; replacing the entire net income tax base with a business income tax base; adopting the phase-in of a single receipts factor, as previously contained in the general corporation tax; applying customer-based sourcing rules; eliminating the separate treatment of subsidiary capital and income; 7

8 modifying the definitions of "investment capital" and "investment income" and exempting both from tax; for pre-2015 net operating losses (NOLs), providing for a prior NOL conversion subtraction; allowing a three-year carryback for NOLs incurred in tax years beginning after 2014; repealing the alternative minimum tax base for income plus compensation; eliminating the tax on assets for banks; and increasing the maximum capital base tax to $10 million, but allowing a $10,000 reduction for all capital base tax calculations. Ch. 60 (S.B. 4610), Laws 2015, effective April 13, 2015, applicable as noted; Summary of Tax Provisions, New York City Department of Finance North Carolina IRC Conformity Updated Legislation has been enacted to advance the Internal Revenue Code (IRC) conformity date from December 31, 2013, to January 1, 2015, for North Carolina corporate and personal income tax purposes. While the legislation generally conforms North Carolina law to changes made to the IRC by the Tax Increase Prevention Act of 2014, it also decouples North Carolina law from certain provisions in the federal act. For example, the IRC 179 asset expense deduction for North Carolina purposes continues to be limited to $25,000, with an investment limitation of $200,000, for the 2014 tax year. In addition, for the 2014 tax year, the amount allowed as a deduction under North Carolina law for interest paid or accrued during the tax year under IRC 163(h) with respect to any qualified residence cannot include the amount for mortgage insurance premiums treated as qualified residence interest. Finally, for the 2014 tax year, taxpayers must add the following to adjusted gross income for North Carolina income tax purposes: the amount excluded from the taxpayer's gross income for the discharge of qualified principal residence indebtedness under IRC 108; the amount of the taxpayer's deduction for qualified tuition and related expenses under IRC 222; and the amount excluded from the taxpayer's gross income for a qualified charitable distribution from an individual retirement plan by a person who has attained age 70 1/2 under IRC 408(d)(8) (however, a deduction is allowed for the amount that would have been allowed as a charitable deduction under IRC 170 had the taxpayer not elected to take the income exclusion). Ch (S.B. 20), Laws 2015, effective March 31, 2015; however, any amendments to the IRC enacted after December 31, 2013, that increase North Carolina taxable income for the 2014 taxable year are effective for taxable years beginning on or after January 1, 2015 North Dakota Exemption for Internet Access Services Enacted North Dakota Gov. Jack Dalrymple has signed legislation that provides a sales and use tax exemption for Internet access services. The exemption is scheduled to become effective for taxable events occurring after June 30, S.B. 2096, Laws 2015, effective as noted 8

9 Ohio Bright-Line Presence Test Met by Retailer with No Physical Presence Again The Ohio Board of Tax Appeals (BTA) has released another opinion upholding a commercial activity tax (CAT) assessment on an out-of-state retailer (taxpayer) with no physical presence in the state. The taxpayer was determined to have met the bright-line presence test for nexus with Ohio because it had more than $500,000 in gross receipts in Ohio sales over the periods at issue. The taxpayer operated a family-owned, mail-order and Internet footwear and apparel company during the time period in question. After being assessed CAT on its gross receipts, the taxpayer appealed the assessments and argued that it did not have nexus with Ohio. The taxpayer argued that it was located exclusively in Wisconsin and had no physical presence in Ohio during the time in question. All of the taxpayer s communications with consumers and all of its product shipments originate from its facilities located in Wisconsin. Therefore, the taxpayer felt it did not have sufficient nexus with Ohio and should not have been assessed CAT. The BTA disagreed and upheld the assessment, noting that it is constrained to follow the mandate of the General Assembly and conclude that an out-of-state seller has substantial nexus in Ohio by virtue of its gross receipts for the reporting periods in question. In fact, the BTA has consistently ruled that a plain reading of the statutes under consideration provides that an entity has substantial nexus with Ohio if it has a bright-line presence, which is defined as having taxable gross receipts of at least $500,000. (L.L. Bean, Inc. v. Levin, Tax Commissioner, Ohio Board of Tax Appeals, No , March 6, 2014; Crutchfield, Inc. v. Testa, Ohio Board of Tax Appeals, Nos , , and , February 26, 2015; Newegg, Inc. v. Testa, Ohio Board of Tax Appeals, No , February 26, 2015). Thus, nexus was established in this instance because the taxpayer had more than $500,000 in gross receipts from Ohio sales. Mason Companies, Inc. v. Testa, Tax Commissioner, Ohio Board of Tax Appeals, Nos , , April 20, 2015 If you have any questions, please contact your tax advisor or: Curtis Ruppal Mike Merkel , Ext , Ext curtis.ruppal@plantemoran.com michael.merkel@plantemoran.com Bob Woolley Ron Cook , Ext , Ext bob.woolley@plantemoran.com ron.cook@plantemoran.com The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC, is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use CCH. All Rights Reserved 9