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Although use tax has been on the books for decades in many states, it is now more relevant than ever in this day and age of Internet transactions. Due to efforts by state departments of revenue to bring awareness to use tax through informational materials and reminders, taxpayers are becoming more aware that this tax does not just apply when they make big ticket purchases from out-of-state sellers. A CCH Tax Tips video discusses how numerous states allow taxpayers to report their personal use tax liability on their individual income tax returns on an actual basis, or by using estimated tables based on adjusted gross income.

 

CLICK HERE to view the video.

As CCH’s Brian Plunkett and Bob Wilson have reported, New York’s 2014-15 budget package (Ch. 59, Laws 2014) includes a variety of corporate franchise and personal income tax provisions, as detailed below.

 

Corporate franchise tax rate: The corporate franchise tax rate is reduced from 7.1% to 6.5% for taxable years beginning on or after January 1, 2016. The legislation also lowers the tax rate on income for manufacturers to zero in 2014 and thereafter.

 

Corporate tax reform: Applicable to taxable years beginning on or after January 1, 2015, the legislation makes numerous changes to the corporate tax provisions.

 

The Article 32 bank franchise tax is repealed, and banks are merged into the Article 9-A corporate franchise tax. The legislation also repeals the organization and license taxes and maintenance fees under Tax Law §180 and §181.

 

Under Article 9-A, subtraction modification provisions are added for (1) qualified residential loan portfolios and (2) community banks and small thrifts.

 

An economic nexus provision is added to impose tax on businesses having receipts within New York of $1 million or more in a taxable year. In addition, the legislation amends the nexus provisions to remove the exception for the use of fulfillment services.

 

The legislation eliminates the minimum taxable income base, as well as the separate tax on subsidiary capital. In addition, the capital base tax is phased out over six years, beginning in 2016.

 

"Business income" is redefined to mean entire net income minus investment income and other exempt income. In no event will the sum of investment income and other exempt income exceed entire net income. If the taxpayer makes the election under Tax Law §210-A(5)(a)(1), then all income from qualified financial instruments will constitute business income.

 

A new provision is created to define "other exempt income" as the sum of exempt CFC income and exempt unitary corporation dividends.

 

The existing entire net income exclusions for income from subsidiary capital and 50% of dividends from non-subsidiaries are removed. With respect to an alien corporation (not treated as a domestic corporation under any provision of the IRC), the definition of "entire net income" is modified to refer to income that is effectively connected with the conduct of a trade or business within the U.S., as determined under IRC Sec. 882.

 

The legislation revises the definitions of "business capital," "investment capital," and "investment income."

 

The MTA surcharge under Tax Law §209-B is made permanent, and the rate is increased from 17% to 25.6% for taxable years beginning after 2014 and before 2016. For subsequent years, the rate is to be adjusted by the commissioner.

 

The legislation creates new Tax Law §210-A, generally providing for the sourcing of receipts based on customer location.

 

The legislation also adds Tax Law §210-C to generally require combined reporting if the taxpayer is engaged in a unitary business and a 50% common ownership test is met.

 

With respect to net operating losses (NOLs), the legislation provides for (1) a prior NOL conversion subtraction and (2) a deduction for NOLs generated in taxable years beginning after 2014.

 

The legislation also accelerates the phaseout of the temporary utility assessment.

 

Trusts: The legislation amends the New York state tax law and the New York city administrative code in relation to taxing residents who are grantors of exempt resident trusts that qualify as non-grantor incomplete gift trusts on the income from such trusts and taxing residents who are beneficiaries of all other exempt resident trusts or nonresident trusts on the distributions of accumulated income that they receive from such trusts.

 

Credits: The legislation creates new credits and amends many existing credits. New credits include:

 

  • an income tax credit for qualified manufacturers equal to 20% of real property tax paid;
  • a musical and theatrical production income tax credit which provides for a 25% refundable credit against taxes for production, promotion, performance and transportation expenses for live, dramatic, stage shows on national tour;
  • an income tax credit for the hiring of persons with developmental disabilities effective for taxable years beginning on or after January 1, 2015 and expiring January 1, 2020;
  • a personal income tax credit for homeowners and renters in New York City earning less than $200,000;
  • a credit for excise tax on telecommunication services for businesses located in tax-free NY areas; and
  • a real property tax freeze credit which is a refundable personal income tax credit for homeowners who reside in school and municipal jurisdictions that abide by the property tax cap.

 

The legislation amends the prepayment element of the family tax relief credit for tax years after 2014 and extends the empire state commercial production tax credit by two years so that it applies to taxable years beginning before January 1, 2017 (formerly 2015). The legislation also increases the aggregate dollar amount of credits available for the low-income housing credits in each of state fiscal years 2015-16 (from $48 million to $56 million) and 2016-17 (from $56 million to $64 million).

 

The Youth Works tax credit is amended to allow an additional $1,000 credit for eligible employees who are employed for one additional year. The legislation also amends the eligibility requirements of qualified employees to include full-time high school students working at least 10 hours.

 

The Empire film production credit is expanded by adding Albany and Schenectady counties to the list of counties participating in the 10% additional credit for upstate counties. Additionally, the non-custodial earned income tax credit is extended for two years making it applicable to taxable years beginning on or after January 1, 2006 and before January 1, 2017 (previously, 2015).

 

Exemption: The legislation creates an exemption from taxable income for any distributions from length of service defined contribution or benefit plans to volunteer firefighters and ambulance workers over the age of 59½ effective for taxable years beginning on and after January 1, 2014.

 

Electronic filing: The signature requirements on returns prepared by tax professionals are modified.

 

PIT add-on tax: The personal income tax add-on minimum tax is eliminated.

 

Metropolitan commuter transportation mobility tax: The legislation conforms the due dates for the metropolitan commuter transportation mobility tax (MCTMT) for taxpayers with income from self-employment with the due dates for the personal income tax. The legislation also allows the tax commissioner to require the filing of MCTMT combined returns in certain situations for taxable years beginning on or after January 1, 2015.

Taxpayers can breathe a sigh in relief now that Maryland’s highest court has reversed a lower court opinion that essentially created a new brand of nexus based on the unitary business principle. In 2013, a lower appellate court held that, if a parent company has nexus with Maryland, a subsidiary engaged in a unitary business with the parent company “inherits the parent’s nexus.” However, in Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury, the Maryland Court of Appeals emphatically rejected this form of nexus, stating that the unitary business principle “does not confer nexus to allow a state to directly tax a subsidiary based on the fact that the parent company is taxable and that the parent and subsidiary are unitary.”

 

For the subsidiaries in Gore, however, the overall result was not what they had hoped for. Although nexus was not established via the unitary business principle, it was established under the existing “economic substance” test found in Comptroller of the Treasury v. SYL, Inc. One of the out-of-state subsidiaries in Gore was created to hold and manage the parent company’s patents. The other subsidiary was created to manage the parent company’s excess capital. Based on the subsidiaries' dependence on the parent company for their income, the circular flow of money between the subsidiaries and the parent, the subsidiaries' reliance on the parent for core functions and services, and the general absence of substantive activity from either subsidiary that was in any meaningful way separate from the parent company, the court held that the subsidiaries “had no real economic substance as separate business entities,” which satisfied the constitutional nexus requirements for taxation in Maryland. Furthermore, the court noted that “[a]lthough the unitary business principle and economic substance inquiry under SYL are distinct inquiries with distinct purposes, there is no reason—based either in case law or logic—for holding that the factors that indicate a unitary business cannot also be relevant in determining whether subsidiaries have no real economic substance as separate business entities.”

 

Finally, the court also upheld the Maryland Comptroller’s use of the parent company’s three-factor apportionment formula to calculate the subsidiaries’ tax liability. The subsidiaries claimed that, under Maryland statutes and regulations, income earned from intangibles must be apportioned according to a two-factor (payroll and property) formula. However, the court noted that the Comptroller can alter an apportionment formula or its components where the prescribed formula does not fairly represent the extent of a taxpayer's activity in Maryland. Furthermore, since the subsidiaries and the parent company were engaged in a unitary business, the subsidiaries bore the burden of demonstrating that the three-factor formula distorted the proportion of their income traceable to Maryland. According to the court, the subsidiaries failed to meet this burden.

Lawsuits filed by local governments against online travel companies (also known as “OTCs”) most often allege underpayment of hotel occupancy tax or sales tax arising from OTCs collecting these taxes on the wholesale rate that hotels charge them for rooms, rather than on the retail rate that OTCs ultimately charge customers. A CCH Tax Tips video examines the proliferation of these lawsuits in recent years and the legislative response to them in certain states.

 

CLICK HERE to view the video.

The Mississippi Supreme Court upheld the denial of a local utility company’s motion to quash a grand jury subpoena duces tecum, which compelled the company to release the names and billing addresses of all of its residential customers in certain areas. The subpoena was issued subsequent to the company’s refusal to release the information to the Madison County Tax Assessor, who sought to use the information to ascertain whether property tax homestead exemption claimants were committing tax fraud by comparing the billing addresses of the homeowners to the current tax roll.

 

 

The court held that the subpoena was not an abuse of the grand jury process because the grand jury requested information that reasonably could support criminal indictments based on tax fraud. Further, the tax assessor’s involvement did not constitute an improper influence of the grand jury, nor did it violate any other rules. Finally, the court found that the subpoena did not violate due process or privacy rights of customers, nor was it an improper, arbitrary “fishing” expedition, as grand juries may seek evidence even when they do not have a specific individual or crime to investigate.

 

 

The court concluded by noting that the grand jury requested information that was potentially relevant to a criminal investigation, and the utility failed to show that the subpoenas was sought for an unauthorized purposes. “Although there existed a possibility, perhaps a strong one, that the evidence thus acquired might be used for a collateral purpose, the fact that the subject matter of the subpoena carried with it the potential for ferreting out criminal activity for which the grand jury could have returned indictments ends the discussion.” Thus, the denial of the utility company’s motion to quash was affirmed.

 

 

The full text of the opinion is attached.

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