State tax amnesty programs
Tax amnesty programs are still being relied upon as one-time revenue generators by states. Pennsylvania’s amnesty is winding down and officially closes on June 19, 2017. Virginia has authorized an amnesty program to run sometime between June 1, 2017, and June 30, 2018. See specific analysis of Virginia tax developments later in this newsletter.
Amnesty and voluntary disclosure agreements are a key component of state and local tax risk management efforts. They can significantly decrease prior-year tax liabilities through limited look-back periods, penalty waivers and assessment interest. Not only can such programs yield cash savings but they can also improve a business’s balance sheet by eliminating reserves under ASC 740 (income taxes) and ASC 450 (contingent liabilities, e.g., sales and use taxes).
Specific state developments
During the recent legislative season, a number of states made significant changes to their tax systems. Over the past few months, there also have been court cases impacting taxes in particular states. The following summarizes key developments in certain states where such changes have taken place.
In April, the Connecticut Department of Revenue Services (DRS) issued guidance discussing the newly enacted single-sales-factor apportionment legislation. Under the apportionment legislation, a taxpayer subject to the corporation business tax or the personal income tax is required to use market-based sourcing for purposes of calculating its sales factor. This generally affects the sale of services and the rental, lease or license of intangible property. Under market-based sourcing, receipts from these transactions are sourced to Connecticut if, and to the extent, the customer uses such services or intangible property in the state.
For corporate business tax purposes, changes apply to companies that conduct business or have economic nexus both within and without Connecticut, other than those subject to industry-specific apportionment rules. For personal income tax purposes, the apportionment legislation applies to those businesses, trades, professions or occupations that are carried on or have economic nexus both within and without Connecticut.
The DRS also issued new guidance addressing specific combined unitary filing issues. For years beginning on or after Jan. 1, 2016, commonly owned companies engaged in a unitary business are required to calculate their corporation business tax on a combined unitary basis. Topics discussed include:
- Apportionment issues – covers exclusions from the apportionment factor, namely intergroup sales, types of income subject to separate apportionment rules; also provides for taxpayers to petition for alternative methods of apportionment if they believe the statutory method unfairly attributes an undue portion of net income to Connecticut
- Issues related to REITs and RICs – noncaptive REITs satisfying the criteria to be a combined group member should be included in a combined group; dividends between members of the combined group are eliminated, and noncaptive REIT members are not entitled for the dividends paid deduction for dividends paid to other group members
- Intercompany intangible or interest expenses – intercompany intangible or interest expenses must be added back; transactions between members of a combined group are eliminated for combined unitary purposes
- Water’s-edge filing method – companies incorporated in a foreign country are not included in the combined group unless 20 percent or more of the company’s payroll and 20 percent or more of the company’s property are located in the United States; an excluded foreign company on this basis that individually has Connecticut nexus must separately file
- Tax attributes from earlier years – a company can now carry forward tax attributes from 2014 it filed on a separate company basis to its 2016 combined unitary return (these attributes could not be carried forward to the 2015 combined unitary returns under the previous filing methodology)
- Aggregate minimum tax – the tax calculated for a combined group on a combined unitary basis, prior to surtax and application of credits, may not exceed the nexus combined base tax by more than $2.5 million
District of Columbia
Tax rates continue to drop in the District of Columbia. The Office of the Chief Financial Officer (District CFO) certified that projected revenues for fiscal years 2017 through 2021 would be sufficient to enact the remaining tax cuts per the Budget Support Act of 2014. This means that the unincorporated and incorporated business franchise tax rates each drop to 9 percent from 9.2 percent for tax years beginning on or after Dec. 31, 2016, and continue down to 8.25 percent for tax years beginning on or after Dec. 31, 2017. In addition, the individual personal exemption will increase to $4,000 in January 2018.
As part of the move by the Office of Tax and Revenue (OTR) to electronic filing, new combined reporting forms were released this year. While instructions are not yet available and the electronic filing process has not been completed, new Schedules 1A, 1B, 2A and 2B have been developed. OTR is encouraging taxpayers to utilize these schedules in lieu of the Excel spreadsheets used in previous years. The filing process remains the same (mailing a CD including PDF copies of these schedules to OTR) if filing a combined report prior to the electronic filing system’s implementation.
- Schedule 1A: This is the first two pages of the D.C. return to be completed by the designated agent. It includes a column to total all of the Schedule 1Bs, an elimination column and the net totals.
- Schedule 1B: Each member of the combined group (including the designated agent) is to complete a separate Schedule 1B.
- Schedule 2A: This is the apportionment schedule to be completed by the designated agent and is the total of the Schedule 2Bs.
- Schedule 2B: Each member of the combined group (including the designated agent) is to complete a separate schedule.
OTR has been notifying taxpayers to complete and submit Form FR-500, Combined Business Tax Registration, using its e-Services portal found on www.MyTax.DC.gov.
Finally, two new tax laws, the Elderly Tenant and Tenant with a Disability Protection Amendment Act of 2016 and the Universal Paid Leave Amendment Act of 2016, have been enacted. The first act gives a housing provider a tax credit if a rent adjustment is not made for elderly tenants or tenants with disabilities. The second act establishes a paid family and medical leave system for District residents and workers employed within D.C. A covered employer must contribute 0.62 percent of wages of each covered employee to the Universal Paid Leave Implementation Fund. Both acts become effective once the District CFO certifies their inclusion dates in an approved budget and financial plan.
Donating to public schools was a key piece of legislation in Georgia. House Bill 237, passed by the general assembly and signed by the governor on April 27, 2017, allows a tax credit for donations to the state’s Innovation Fund which awards grants to public schools in Georgia. The credit is available to corporations and individuals. For corporations, the credit is the actual amount donated or 75 percent of the corporation’s income tax, whichever is lower. For a single individual or a head of household, the allowed credit is the lower of the amount donated or $1,000 per tax year. For a married couple filing a joint return, the credit allowed is the lower of the amount donated or $2,500 per tax year. The credits are available for tax years beginning on or after Jan. 1, 2018, and automatically sunset on Dec. 31, 2020.
In addition, the Georgia Tax Tribunal ruled in a recent case (Scholastic Book Clubs, Inc. v. Riley, Ga. Tax Tribunal, Dkt. No. 1552367, Feb. 14, 2017) that an out-of-state retailer that sells books and other educational materials by mail order and via the internet to Georgia school teachers, educators, parents and students was liable for Georgia use taxes. In this case, the taxpayer is considered a “dealer” liable for the use tax due to numerous factors, including soliciting business on a regular and systematic basis using Georgia school teachers and parents. The taxpayer also has a relationship with two affiliates having an office, warehouse and distribution center in Georgia and registered with the Department of Revenue to collect sales and use tax. The tribunal ruled that Georgia’s imposition of a use tax does not violate the Commerce Clause because the taxpayer created a substantial nexus in Georgia through its reliance on Georgia schools, Georgia school teachers and Georgia parent educators that serve as the sole conduit through which it makes its Georgia sales.
The sunset date for the Economic Development for a Growing Economy (EDGE) credit was extended to April 30, 2017, from Dec. 31, 2016. The EDGE credit may be claimed against Illinois corporate and personal income tax liability by taxpayers that enter an agreement with the Illinois Department of Commerce and Economic Opportunity (DCEO) to expand Illinois operations or to relocate headquarters to Illinois. Additional benefits are available if the proposed project meets certain business location efficiency standards. In addition, certain taxpayers may elect to claim the credit against the taxpayer’s personal income tax withholding obligations. The amount of the EDGE credit is calculated on an annual basis according to the terms of the agreement with the DCEO. Unused credits may be carried forward for five taxable years.
For tax years ending after Dec. 31, 2015, Illinois no longer allows a taxpayer to claim the research and development credit. Prior to expiration, a credit was allowed in an amount equal to 6.5 percent of qualified expenditures. Any credit earned before expiration that was in excess of the tax liability for the tax year can be carried forward for five years.
In addition, several withholding income tax changes have been made for tax year 2017, which will go into effect on Jan. 1, 2017:
- All Illinois withholding income tax filers will be required to file their IL-941 returns quarterly.
- All Illinois withholding income tax filers will be assigned to either a monthly or semi-weekly payment schedule.
- Form IL-941, Illinois Withholding Income Tax Return, has been updated for the 2017 tax year.
The Illinois Department of Revenue (IDOR) recently announced that the personal service/reasonable compensation deduction is now being audited. Efforts will be focused on investment and real estate partnerships and LLCs where the owners may not be involved in the business. IDOR expects to release guidance on how much can be deducted.
Highlights from the recent Maryland legislative session include manufacturing tax incentives and mortgage relief subtractions.
On April 11, the More Jobs for Marylanders Act of 2017 was enacted creating several different tax incentives for manufacturers. Qualified businesses that increase employment and offer job skills enhancement training can be eligible for income tax credits, sales and use tax refunds, property tax credits and increased depreciation expensing if certain criteria are met. The program is effective June 1, 2017, and applicable to tax years beginning after Dec. 31, 2017.
Upon enrollment into the program, a qualified business is eligible for the following incentives:
- Ten-year credit against the state income tax (except for existing businesses that move from one county to another after June 1, 2017). The authorized credit amount is equal to the product of the state employer withholding amount and the total amount of wages paid for each qualified position at an eligible project. Any excess credit amount in a taxable year can be claimed as a refund.
- Credit against the state property tax. An enrolled business entity is entitled to a state real property tax credit equal to 100 percent of all state property tax that is due.
- Refund of sales and use tax paid during the immediately preceding taxable year. However, the Commerce Department cannot issue sales and use tax refunds in amounts in the aggregate totaling more than $1 million in a fiscal year.
- Waiver of fees charged by the Department of Assessments and Taxation.
Also, taxpayers with a discharge of qualified principal residence indebtedness are now eligible for a Maryland subtraction up to $100,000 ($200,000 if married filing a joint return) in 2017 and 2018. The discharge must be allowable under the federal Mortgage Forgiveness Debt Relief Act of 2007, and the subtraction can only be up to the amount included in federal adjusted gross income.
You may recall that in May 2015, the U.S. Supreme Court ruled that Maryland’s refusal to grant a credit for tax paid to nonresident states against the local county tax violates the dormant Commerce Clause of the U.S. Constitution. The court relied on a series of precedents that discriminated against interstate commerce. See Comptroller of the Treasury of Maryland v. Wynne et ux. Going forward, Maryland residents are allowed to claim this credit against state- and county-level tax.
For several years, Maryland taxpayers have filed protective refund claims and amended returns pending the court decision. In 2014, anticipating a possible loss in the courts, the Maryland General Assembly retroactively reduced the interest rate to be paid on these claims to 3 percent from 13 percent. This interest rate reduction applies only to refunds related to the Wynne decision. Maryland taxpayers due interest from the state relating to other issues continue to receive interest at a 13 percent rate.
A class action lawsuit, Holzheid et al v. Comptroller of the Treasury of Maryland, is challenging this retroactive interest rate reduction, claiming it violates the due process clause of the U.S. Constitution. This case, filed in November 2015, is winding its way through the Maryland courts. Over the past year, multiple motions to dismiss, motions to reconsider, summary judgments as well as extensions of time were filed with the courts. It is currently unclear how this case will be resolved.
In the meantime, the state comptroller’s office has been sending notices of denial for additional refund claims of interest. We continue to recommend filing an appeal to protest the amount of interest being refunded.
Michigan eliminated the flow-through withholding requirement for flow-through entities, effective for tax years beginning after June 30, 2016.
Prior to repeal, the flow-through withholding obligation imposed under Part 3 of Michigan’s Income Tax Act required some flow-through entities with Michigan business activity to withhold income tax on each member’s or owner’s distributive share of income. Withholding requirements applied when members were nonresident individuals, C corporations or other flow-through entities.
Under Public Act 158 (PA 158), flow-through withholding is no longer required for flow-through entities effective for tax years beginning after June 30, 2016. This means that a flow-through entity with a calendar tax year ending Dec. 31, 2016, for example, that was required before PA 158 to withhold under Part 3 of the Income Tax Act must continue to withhold on behalf of its members for its full tax year. Withholding is no longer required for tax years after the calendar 2016 tax year. A flow-through entity with a tax year beginning July 1, 2016, and ending June 30, 2017, however, is not required to withhold for that tax year or any succeeding tax year. Flow-through entities in a tiered structure should withhold and apply the cutoff based on their own tax year.
If a taxpayer under the Corporate Income Tax (CIT) or the Individual Income Tax (IIT) has a distributive share of business income attributable to a flow-through entity’s tax year beginning after June 30, 2016, that taxpayer will not have withholding from that flow-through entity to claim on its annual return. This should be considered by the CIT or IIT taxpayer when determining its quarterly estimated payments. Flow-through entities filing Form 807, Composite Individual Income Tax Return, on behalf of nonresident individuals may now be required to file quarterly estimated payments and should pay them using Form MI-1041ES, Fiduciary Voucher for Estimated Income Tax.
Regardless of the requirement to withhold, a flow-through entity must continue to report certain information to its members because individuals and CIT taxpayers require this information to complete their income tax returns.
In February, the Minnesota Department of Revenue issued a bulletin informing taxpayers of an important change to the Schedule Key Performance Indicator portion of the general partnership instructions for 2016. Guaranteed payments, like other amounts of distributive share, should be allocated to Minnesota using the same apportionment percentage or assignment ratio used to allocate partnership income. Prior instructions that directed partnerships to allocate guaranteed payments for services to Minnesota if the services were performed in Minnesota were incorrect. The department will waive any assessed penalties in cases where partnerships reasonably relied on the incorrect instructions to prepare their return or calculate their withholding position.
The Minnesota Supreme Court ruled that a corporate president and 50 percent shareholder who was active in the corporation’s restaurant business, including sometimes signing the corporation’s tax returns, is personally liable for the unpaid sales tax liability of the corporation under the plain language of the statute (Minn. Stat. section 270C.56, subdivision 1) (Lo v. Commissioner of Revenue, Minn. S. Ct., Dkt. No. A16-0918, April 12, 2017). Starting in 1990 and continuing through 2005, the taxpayer and his wife operated several restaurants through their corporation. The taxpayer allowed his son to operate his restaurant through the taxpayer’s corporation. He argued that the son controlled the restaurant from the beginning and was “in charge of the entire business.” However, the facts did not support this assertion. The son never held an officer position in the corporation. Further, the taxpayer remained a director of the corporation and officer throughout the restaurant’s existence, and the taxpayer signed the tax returns for the corporation in 2005, 2006, 2007 and 2010; signed a power of attorney on the corporation’s behalf in 2008; and was involved in the restaurant’s operations. The statute imposes personal liability on any person who “has the control of, supervision of, or responsibility for filing returns or reports, paying taxes, or collecting or withholding and remitting taxes and who fails to do so.” The court ruled that the taxpayer retained control of and responsibility for the corporation throughout the relevant tax periods, so the taxpayer had sufficient control over the corporation to impose personal liability for unpaid sales taxes.
The New Jersey Division of Taxation has provided detailed guidance with respect to the taxes which are based on profits, income, business presence or business activity and must be added back to taxable income when preparing corporation business tax returns. Taxes imposed by another state, local jurisdiction or foreign jurisdiction, measured by profits or income, or business presence or business activity, including the New Jersey Corporation Business Tax, must be added back to taxable income. Property taxes, excise taxes (e.g., cigarette taxes), payroll taxes and sales taxes are not considered business presence or business activity taxes.
In addition, the taxation division issued a notice in January discussing the transition rules applicable to the sales tax rate reduction to 6.875 percent from 7 percent, effective Jan. 1, 2017. Several topics were reviewed, including:
- Sales of tangible property or digital products: If sold and delivered before Jan. 1, 2017, the seller must collect tax at the rate of 7 percent. If sold before Jan. 1, 2017, but delivered on or after Jan. 1, 2017, the seller must collect tax at the rate of 6.875 percent.
- Leases: If an agreement for a period of more than six months is entered into in Jersey before Jan. 1, 2017, the tax is imposed at the rate of 7 percent. Extensions or renewals of such agreements that occur on or after Jan. 1, 2017, are subject to tax at the rate of 6.875 percent. For an agreement that is less than six months, the tax is imposed at the rate of 6.875 percent for all periods that begin on or after Jan. 1, 2017.
- Construction contracts: If taxable building materials are delivered on or after Jan. 1, 2017, the sale of the materials is subject to tax at the rate of 6.875 percent. If the materials are for use in unalterable building contracts entered into before Jan. 1, 2017, the seller must collect tax at the rate of 7 percent.
- Service or maintenance agreements: If entered into on or before Dec. 31, 2016, the seller must charge and collect sales tax at the rate of 7 percent, regardless of whether or not the agreement covers periods after Jan. 1, 2017, unless the bill for such agreement is issued on or after Jan. 1, 2017, in which case the seller must charge and collect tax at the rate of 6.875 percent. If an 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.
On April 10, 2017, Gov. Andrew Cuomo signed the state’s 2018 budget. Included in the budget bill are a countywide shared services property tax savings plan, a reduction in personal income tax rates and various new tax credits. Other highlights:
- Personal income tax rates: for tax years 2018 through 2024 and later, adjustments will be made to the personal income tax rates including: (1) beginning in 2018, the 6.45 percent rate will be reduced by 0.12 percent each year until it reaches 5.5 percent in 2025; and (2) beginning in 2018, the 6.65 percent rate will be reduced by 0.08 percent until it reaches 6 percent in 2025
- School tax reduction credit: provides for a fixed credit amount and a rate reduction amount for New York City residents (applies to taxable years beginning on or after Jan. 1, 2017)
- Charitable contribution: permanently extends the high income charitable deduction limitations for individuals with AGI over $10 million
- Household and dependent care tax credit: provides for a new household and dependent care tax credit for taxpayers with an AGI of at least $50,000, but less than $150,000 (for tax years beginning after 2017)
- Nonresident partners: where there is a sale or transfer of a partner’s membership interest that is subject to the provisions of IRC section 1060, the gain recognized on the sale for federal purposes will be treated as New York source income, subject to allocation; the law closes the loophole relating to nonresident partnership asset sales
- General tax credits: extends and provides for new tax credits; creates a new life sciences research and development tax credit for a qualified life sciences company, including partners, sole proprietors or shareholders of a qualified life sciences company (applies to taxable years beginning on or after Jan. 1, 2018); excludes property used to produce or distribute electricity, natural gas, steam or water, or used to create, produce or reproduce a film, recording or commercial where the costs thereof were incurred outside of the state, from tangible personal property for business franchise and personal income investment tax credits; provides that the entity of a single member limited liability company (SMLLC) will be disregarded for purposes of the eligibility of the entity’s owner for the corporate, business franchise, personal income or insurance corporation tax credits he or she may otherwise be eligible for; and provides for a credit for farm donations to food pantries
- Sales tax: provides that retail sales of tangible personal property include a sale to an SMLLC or subsidiary for resale to its member or owner where that entity is disregarded for federal tax purposes
New York has also updated its combined group reporting frequently asked questions to cover capital losses and whether members of a combined group have to file a separate extension. The FAQs note that capital losses can be carried back three years, but net capital losses earned in 2015 or later cannot be carried back to a tax year beginning before 2015. The designated agent of a newly formed or pre-existing combined group must file one Form CT-5.3, Request for Six-Month Extension to File (for combined franchise tax return or combined MTA surcharge return, or both), to request an extension of time to file for all corporations in the combined group, including taxpayer members being added to an existing combined group.
- Taxpayer members being added to an existing combined group must each also file a separate Form CT-5, Request for Six-Month Extension to File,to extend the first period they are included in the combined group. A separate Form CT-5 must also be filed by each taxpayer member to extend the short period beginning immediately prior to the date it joined the combined group.
- Taxpayer members that are forming a new combined group must each also file a separate Form CT-5 to extend the first period they are included in the combined group. A separate Form CT-5 must also be filed by each taxpayer member to extend the short period beginning immediately prior to the date the combined group was formed.
- No payment is required with Form CT-5 filed by taxpayer members being added to an existing combined group and taxpayer members that are forming a new combined group to extend the first period they are included in the combined group. However, the fixed dollar minimum tax for each member must be included in the combined group’s payment made with the designated agent’s Form CT-5.3.
- Nontaxpayer members of a combined group are never required to file a separate Form CT-5, regardless of whether they are included on Form CT-5.3.
A designated agent of a newly formed or pre-existing combined group must also follow the rules specified above when filing a Form CT-5.1, Request for Additional Extension of Time to File. Taxpayer members being added to the existing combined group and taxpayer members forming such a new combined group must also follow the applicable instructions above but are required to file a separate Form CT-5.1 in these specific instances rather than a separate CT-5.
The state’s Department of Taxation and Finance in January issued a corporate franchise tax memorandum discussing tax law amendments that changed the estimated tax mandatory first installment (MFI) for certain corporations, applicable to payments due on or after March 15, 2017. Specifically, the law was amended to require certain corporations to use the second preceding year’s tax as the basis for determining whether an MFI payment is required and also for computing the amount of the payment.
Corporate taxpayers that do not have a second preceding tax year because a return was not required do not have to make an MFI payment. These corporate taxpayers are still required to make a declaration of estimated tax and pay the remaining three installments of estimated tax and MTA surcharge with Form CT-400.
Although certain corporate tax return due dates have been amended, no changes were made to the due dates for MFI payments. Corporations required to make MFI payments continue to pay their MFIs by the fifteenth day of the third month following the close of each tax year. Accordingly, beginning with MFI payments due on or after March 15, 2017, the payment for most corporate taxpayers can no longer be made with the prior-year’s tax return or MTA surcharge return, or with the request for an extension of time to file. MFI payments must be made on a new Form CT-300.
The New York Department of Taxation and Finance in January adopted an emergency corporate franchise tax regulation amendment regarding the MTA surcharge. Specifically, the new rate will be 28.3 percent of the tax imposed for tax year 2017 (the rate was 28 percent for tax year 2016). This rate will remain the same for succeeding tax years, unless a new rate is determined.
Lastly, in January, the Office of the New York State Comptroller announced its revised voluntary compliance program for eligible taxpayers with unreported unclaimed property. The benefits of participation include a reduced reach-back audit period of 10 years (down from 20 years) and a six-month window to file required unclaimed property reports without interest or penalty assessment. To be eligible, the taxpayer must not have been previously contacted by the state regarding an audit and must be a first-time reporting organization (however, a taxpayer may still be eligible if they previously filed but failed to report a particular type of property and want to voluntarily correct the error).
The Philadelphia Realty Transfer Tax (RTT) applies to the sale or transfer of real estate located in Philadelphia. The RTT rate of 3.1 percent is in addition to the Pennsylvania RTT of 1 percent. The Philadelphia City Council recently made several changes (Philadelphia Bill No. 160810) designed to expand the scope of the RTT and to expand the tax base. First, the bill tightens the rules regarding changes of ownership in a real estate company. Under the new rules, the RTT applies when there is an ownership change of 75 percent or more within a six-year period (changed from 90 percent and three years under the old rules). This change apparently targets “89-11” transactions where 11 percent of a real estate transaction would be deferred for more than three years in order to mitigate the RTT. The bill also changes the definition of “value” to provide that in certain situations (including gifts where the transfer is not at arm’s length, foreclosures by a judicial officer, transfers as a result of mergers, consolidations or acquisitions, and various other situations), 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.
Due to pushback from taxpayers in the computer consulting industry, the Pennsylvania Department of Revenue (DOR) pulled its recently issued bulletin taxing technical support services for canned software. Legal Letter Ruling No. SUT-17-001, which provided that all support services to canned computer software be subject to sales and use tax when the services are transferred in a sale at retail or when services are made use of after being obtained in a purchase at retail, has been pulled from the Pennsylvania website. The ruling was pulled amid complaints that its interpretation of Act 84 of 2016, which subjects digital downloads to state sales tax, is an overreach and goes beyond the intent of the act. Reportedly, the DOR is reevaluating its position and may issue further guidance in the future.
Finally, the Pennsylvania legislature is evaluating combined reporting. Senate Bill No. 463, introduced on March 1, 2017, and currently before the Senate Finance Committee, would reduce the corporate net income tax rate to 6.99 percent from 9.99 percent and would impose mandatory combined reporting on Pennsylvania corporations. According to a memo by State Senator John Blake, one of the bill’s co-sponsors, during year one of the proposed legislation, “companies subject to the corporate net income (CNI) tax would file two tax returns: an informational return using combined reporting and their regular state tax return. The Department of Revenue would use this informational return to estimate the amount of CNI tax revenue unpaid to the Commonwealth for that year due to the transfer of in-state profits to outside subsidiaries. Companies would continue to pay the 9.99 percent CNI rate in that first year.” In years two through six, companies would continue to file the informational combined reporting return and the regular return, but would pay a surtax on the difference between the two calculations. That surtax would fund the gradual reduction of the corporate net income tax rate to 6.99 percent. Mandatory combined reporting would take effect after year six.
With healthcare reform dominating the national headlines, the Texas comptroller recently reminded taxpayers that there are special rules for healthcare providers for purposes of Texas franchise taxes. Healthcare providers can exclude from total revenue 100 percent of payments received from Medicaid, Medicare, the Children’s Health Insurance Program (CHIP), the state workers’ compensation program or the TRICARE military health system. However, certain healthcare “institutions” can exclude only 50 percent of payments received from these programs. The Texas comptroller recently published guidance (Texas Private Letter Ruling No. 201611093L, Nov. 29, 2016, released March 2017) for determining if a healthcare provider is a healthcare “institution” for Texas franchise tax purposes. The 12 categories of healthcare institutions are: ambulatory surgical centers, assisted living facilities, emergency medical services providers, home and community support services agencies, hospices, hospitals, hospital systems, intermediate care facilities for the mentally retarded, birthing centers, nursing homes, end-stage renal facilities and pharmacies.
The Texas comptroller recently held that an out-of-state company that sold subscriptions of its internet-based supply chain and purchasing services to food service providers and manufacturers in Texas was providing taxable data processing services for Texas sales tax purposes. Taxable data processing services include the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information. Data processing services specifically include word processing, payroll and business accounting, and computerized data and information storage or manipulation. The taxpayer’s services involved collecting raw data electronically from a customer, a customer’s vendors, a customer’s distributors or a customer’s delivery agents. The taxpayer then applied its proprietary software to clean (detect and correct inaccuracies), map (organize data type and source), enhance (apply coding), and maintain the data for use by the customer in managing its supply chain (Decision, Hearing No. 112,865, Texas Comptroller of Public Accounts, Sept. 23, 2016, released Feb. 2017).
In January, the Texas Court of Appeals ruled that a purchaser of a heating and cooling business was liable for the sales taxes owed by the seller of the business. In Texas, if a person who is liable for the payment of a sales tax amount sells a business, the successor to the seller or the seller’s assignee must withhold an amount of the purchase price sufficient to pay the amount due until the seller provides a receipt from the comptroller showing that the amount has been paid or a certificate stating that no amount is due. In this case, the purchaser paid the seller consideration for the business assets and a noncompete agreement, but was unaware of the sales taxes owed by the seller. The purchaser did not withhold any amount of the purchase price to cover the sales tax liability, declined to ask the seller to provide a receipt from the comptroller stating that the amount had been paid or a certificate stating that no amount was due, and declined to ask the comptroller directly for a certificate of no tax due or a statement of the amount required to be paid (Agri-Plex Heating and Cooling, LLC v. Hegar et al., Court of Appeals of Texas, 3rd District, No. 03-15-00813-CV, Jan. 19, 2017).
Finally, Texas has been paying close attention to how taxpayers calculate cost of goods sold (COGS) for purposes of the franchise tax. Some recent rulings on this issue include the following:
- Auto repair costs: A Texas Appellate Court issued an opinion stating that an automobile dealership could not include auto repair costs in COGS for purposes of determining its Texas franchise tax liability. When calculating COGS, services are not includable as “goods.” Therefore, the crux of the dispute was whether the taxpayer’s repair labor costs were costs of producing the goods. The court determined that the repair labor costs were services and could not be included in the taxpayer’s COGS (Hegar v. Autohaus, Court of Appeals of Texas, 3rd District, No. 03-15-00427-CV, Feb. 24, 2017).
- Commercial housekeeping services: The comptroller ruled that a housekeeping services company, which provides cleaning services to commercial businesses, was not entitled to COGS deduction for labor costs incurred in providing those services. In this case, the taxpayer asserted that its assembly of cleaning products, floor wax, paper products, seating configurations and signage constitutes the product of clean and attractive facilities for the sight consumption of its customers, therefore, it should be entitled to deduct its labor costs. The comptroller disagreed, concluding that company is a service provider, and based on the plain meaning of the relevant statutory provisions, it cannot deduct its labor costs as part of its COGS (Texas Comptroller’s Decision No. 110,905, Nov. 30, 2016).
- Heavy equipment delivery/pickup costs: A Texas Appellate Court ruled that delivery and pickup costs incurred by a heavy equipment rental company are not “direct costs of acquiring or producing” the equipment that the company rents, are not eligible additional, indirect or administrative costs, nor do they fall under the category of “certain other expenses” that may be included in the company’s cost of COGS deduction (Comptroller of Public Accounts, et al. v. Sunstate Equip. Co., LLC, Tex. Ct. App. (3rd District), No. 03-15-00738-CV, Jan. 20, 2017).
The Virginia General Assembly recently enacted another tax amnesty program to occur for a period of 60 to 75 days sometime between July 1, 2017, and June 30, 2018. The tax commissioner will establish the exact dates and process in the near term. With limited exceptions, taxpayers with outstanding assessments or who have not filed a return for any tax administered by the Virginia Department of Taxation (DOT) may qualify for amnesty. Under the program, all penalties and 50 percent of the interest will be waived upon payment of the taxpayer’s remaining tax balance. Any remaining amnesty-eligible liabilities at the end of the program will be assessed an additional 20 percent penalty.
The Virginia DOT issued a reminder that for taxable years beginning on or after Jan. 1, 2017, individual taxpayers must make their estimated tax payments electronically if it exceeds $15,000. In addition, extension payments exceeding $15,000 or if the total income tax due in any taxable year exceeds $60,000, then all payments must be electronic. The DOT sent letters to identified taxpayers notifying them that if any of these thresholds apply to them then they must make all future individual income tax payments electronically.
Also during the legislative session, several income tax credits were amended or extended effective July 1, 2017:
- Enterprise zone real property investment credits. Certain expenditures can qualify for enterprise zone real property investment grants and enterprise zone real property investment tax credits regardless of whether such expenditures are considered properly chargeable to a capital account or deductible as business expenses under federal Treasury regulations.
- Worker retraining credit. The sunset date was extended to tax years beginning before Jan. 1, 2022, from tax years beginning before Jan. 1, 2018.
- Telework expenses credit. The sunset date was extended to taxable years beginning before Jan. 1, 2022, from tax years beginning before Jan. 1, 2017. The date before which an employer must enter into a telework agreement with a participating employee is extended to Jan. 1, 2022.
- Motion picture production credit. The expiration date of the refundable motion picture production credit available against corporate and personal income taxes is extended until Jan. 1, 2022, from Jan. 1, 2019.
- Land preservation tax credit. The $20,000 a taxpayer may claim per taxable year for tax year 2017 was increased to $50,000 for 2018 and thereafter.
In conclusion, a new income tax subtraction for Virginia venture capital account investments made between Jan. 1, 2018, and Dec. 31, 2023, was created. However, taxpayers making investments in affiliated companies are not eligible. The DOT must certify the investment fund, plus at least 50 percent of the committed fund capital must be invested in qualified portfolio companies and at least one employed individual investor must have at least four years of professional experience in venture capital investment or substantially equivalent experience. A qualified portfolio company means a company with its principal place of business in Virginia, has a primary purpose related to a product or service other than management or investment of capital and provides equity in the company to the Virginia venture capital account in exchange for a capital investment.
For taxable years that begin on or after Jan. 1, 2016, Wisconsin allows qualified taxpayers to claim a business development credit. The business development credit provides incentives for job creation, capital investment, training and corporate headquarters location or retention for new and current businesses located in Wisconsin. The credit is available to claimants certified by the Wisconsin Economic Development Corporation (WEDC) for taxable years that begin on or after Jan. 1, 2016.
The business development tax credit is a refundable credit equal to all of the following, as determined by the WEDC:
- The amount of wages the claimant paid to an eligible employee in the taxable year, not to exceed 10 percent of such wages.
- In addition to the above, the amount of wages that the claimant paid to the eligible employee in the taxable year, not to exceed 5 percent of such wages, if the eligible employee is employed in an economically distressed area.
- An amount equal to up to 50 percent of the claimant’s training costs incurred to undertake activities to enhance an eligible employee’s general knowledge, employability and flexibility in the workplace; to develop skills unique to the claimant’s workplace or equipment; or to develop skills that will increase the quality of the claimant’s product.
- The amount of the personal property investment, not to exceed 3 percent of such investment, and the amount of the real property investment, not to exceed 5 percent of such investment, in a capital investment project that involves a total capital investment of at least $1 million or, if less than $1 million, involves a capital investment equal to at least $10,000 per eligible employee employed on the project.
- An amount equal to a percentage of the amount of wages that the claimant paid to an eligible employee in the taxable year if the position in which the eligible employee was employed was created or retained in connection with the claimant’s location or retention of the claimant’s corporate headquarters in Wisconsin and the job duties associated with the eligible employee’s position involve the performance of corporate headquarters functions.
Republicans in the Wisconsin Assembly proposed a tax overhaul plan on May 4, 2017, that adopts a flat income tax scheme over 12 years, slashes credit and deduction programs and modifies fuel taxes to generate new revenue for transportation infrastructure.
The income tax portion of the plan eliminates Wisconsin’s graduated tax system and phases in a flat tax rate of 3.95 percent. Under current law, Wisconsin has four tax brackets with rates of 4 percent, 5.84 percent, 6.27 percent and 7.65 percent. The plan calls for the rates in the top three brackets to be reduced slowly each year, reaching 3.95 percent across all brackets by 2029.
The motor fuel portion of the plan expands the sales tax base by eliminating the current exemption on sales of gasoline and diesel, permitting the state to collect the 5 percent tax on purchases of those fuels. The sales tax expansion would be partially offset by a reduction in the motor fuel excise tax. The current rate of 30.9 cents per gallon would drop 4.8 cents.
Other key features of the plan include:
- The alternative minimum tax of 6.5 percent would be repealed effective for the 2018 tax year.
- The manufacturing and agriculture credit, currently equal to 7.5 percent on certain income, would be synced with the top individual income tax bracket, shifting to 3.95 percent for all taxpayers by 2029.
- The working families tax credit would be repealed beginning in tax year 2018.
- The $300 property tax credit available to renters would be repealed, effective for the 2019 tax year.
- The general exclusion for capital gains income would be repealed in the 2018 tax year.
- The itemized deduction credit of 5 percent would be cut to 3 percent in 2019 and 2 percent in 2020.
- The married couple credit, equal to 3 percent of the secondary earner’s income capped at $480, would be repealed in the 2019 tax year.
- The credit for taxes paid to other states would be converted to a smaller deduction for the income subject to taxation in another state.
Gov. Scott Walker expressed reluctance to commit to the specific plan, so its future remains uncertain.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.