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The SALT Minds Blog

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In the most recent version of Tax News, the California Franchise Tax Board (FTB) announced that California follows the federal "repair regulations," which provide rules for distinguishing capital expenditures from deductible supply, repair, and maintenance costs. As the FTB noted, California conforms to the federal Internal Revenue Code (IRC) as enacted on January 1, 2009, and any regulations for the IRC as in effect on January 1, 2009, are applicable as FTB regulations unless they conflict with a provision of the California Revenue & Taxation Code or a FTB regulation.

 

One issue that may arise with regard to the repair regulations is that there may be a difference between the federal and California depreciable basis, useful life, or method of depreciation. If a taxpayer submits a request to change an accounting method for federal tax purposes and the IRS approves the request, the change will also apply for California purposes, so long as California law has conformed to or is substantially similar to the underlying law that is being applied. Therefore, to the extent that the FTB follows the federal provision for which a federal approval for a change in accounting method was granted, the federal approval will still apply for California purposes, even though the resulting federal numbers may be different than the California numbers. In cases where there is a federal/California difference, taxpayers should attach to their California tax return both a copy of the federal Form 3115 (Application for Change in Accounting Method) and a pro forma Form 3115 with the numbers adjusted for California.

 

Finally, the FTB noted that California will follow IRS Revenue Procedure 2015-20, which allows qualifying small businesses to apply certain repair regulations on a prospective basis without the need to file Form 3115.

Gov. Paul LePage has signed legislation (Ch. 1, Laws 2015) that updates Maine’s corporate income and personal income tax federal Internal Revenue Code (IRC) conformity date to December 31, 2014 (previously December 31, 2013). The change applies to tax years beginning on or after January 1, 2014. This includes conformity to the extender items enacted by the federal Tax Increase Prevention Act of 2014, except that Maine continues to decouple from the federal bonus depreciation provisions.

 

In addition, the legislation extends the Maine capital investment credit for taxable years beginning in 2014 with respect to depreciable property placed in service in the state. The credit is equal to 9% of the amount of the net increase in depreciation attributable to the depreciation deduction claimed by the taxpayer under IRC §168(k) with respect to property placed in service in Maine during the taxable year.

 

Maine tax forms and instructions for 2014 (including the credit worksheet) were developed with the expectation that the legislation would be enacted; therefore, no changes to the 2014 tax forms or instructions are required.

Billed as “middle class tax relief,” Arkansas Gov. Asa Hutchinson has signed legislation that lowers certain personal income tax rates for 2015, and then adjusts rates again (raises some, lowers some) along with the addition of certain bracket adjustment deductions for tax years beginning in 2016 and thereafter. The legislation also decreases the capital gain exemption from 50% to 40% beginning February 1, 2015.

 

For a side-by-side comparison, the 2014 rates, the 2015 rates, and the post-2015 rates are below (based on taxpayer’s net income):

 

2014 Tax Year2015 Tax YearPost-2015 Tax Years
$0 to $4,299: 0.9%$0 to $4,299: 0.9%$0 to $4,299: 0.9%
$4,300 to $8,399: 2.5%$4,300 to $8,399: 2.4%$4,300 to $8,399: 2.5%
$8,400 to $12,599: 3.5%$8,400 to $12,599: 3.4%$8,400 to $12,599: 3.5%
$12,600 to $20,999: 4.5%$12,600 to $20,999: 4.4%$12,600 to $20,999: 4.5%
$21,000 to $35,099: 6%$21,000 to $35,099: 6%$21,000 to $35,099: 6% (5% if net income is not more than $75,000)
$35,100 and over: 7%$35,100 and over: 7%$35,100 and over: 6.9% (6% if net income is not more than $75,000)

 

For tax years beginning on or after January 1, 2016, taxpayers with net income between $75,000 and $80,000 can also claim a bracket adjustment deduction in the following amount (based on taxpayer’s net income):

 

  • $75,001 to $76,000: $440
  • $76,001 to $77,000: $340
  • $77,001 to $78,000: $240
  • $78,001 to $79,000: $140
  • $79,001 to $80,000: $40

 

The rates apply for individuals, trusts, and estates, and are to be adjusted annually for inflation.

About half of the 46 U.S. jurisdictions that impose sales tax have laws on the books prohibiting the sale, possession, or use of sales suppression devices (also known as “zappers”) and “phantom-ware.” These software programs and hidden programming options are designed to underreport sales in the electronic records of electronic cash registers and other point of sale systems. This underreporting of sales results in the underreporting of sales tax and income tax.

 

A Tax Tips video features in-depth discussion of sales suppression devices and the penalties imposed for the prohibited conduct associated with them. CLICK HERE to view the video.

As CCH’s Tim Bjur has reported, the Massachusetts Department of Revenue has adopted final apportionment regulations implementing 2013 legislation that replaced cost-of-performance sales factor sourcing rules with market-based sourcing principles for assigning sales from transactions involving services and intangible property (see 830 CMR 63.38.1). The market-based sourcing rules take effect for tax years beginning on or after January 1, 2014. The regulations generally provide that sales from transactions involving services and intangible property are in Massachusetts if and to the extent that the taxpayer’s market for the sales is in Massachusetts. Rules are also established for determining whether and to what extent the market for a sale is in Massachusetts, reasonably approximating the state or states of assignment where such state or states cannot be determined by the taxpayer, and excluding the sale (i.e., throwout rule) where the state or states of assignment cannot be determined or reasonably approximated by the taxpayer.

 

In addition to addressing general sales of services, the regulations cover sourcing of various specific types of transactions involving the sale of services, including sales of:

 

  • In-person services;
  • Transportation and delivery services;
  • Professional services;
  • Services delivered by physical means; and
  • Services delivered by electronic transmission.

 

The regulations also cover sourcing for the license, lease, or sale of intangible property (including the license of sale of software and digital goods/services).

 

Several “reasonable approximation” rules are also included that apply when the state or states of assignment cannot be determined by the taxpayer using the applicable souring rules. “Throwout rules” (excluding sale from sales factor) are also added when the state or states of assignment cannot be determined using either the applicable sourcing rules or the reasonable approximation rules.

 

In addition, provisions have been added to clarify the application of existing regulations to taxpayers that are subject to combined reporting (e.g., expressly incorporating the Finnigan rule for combined reporting groups).

As CCH’s Tim Bjur has reported, the Massachusetts Department of Revenue certified that revenue growth has met the final threshold needed to lower the personal income tax rate from 5.20% to 5.15% beginning January 1, 2015. Under Massachusetts law, the state’s personal income tax rate for Part B income (which consists of income such as wages, pensions, business income, rents) is reduced by .05% if the inflation-adjusted growth in baseline taxes in the fiscal year ending June 30 of the previous year exceeds 2.5% and the inflation-adjusted change in baseline taxes for each consecutive three-month period between August and December of the previous year is greater than zero. The rate cannot drop below the minimum rate of 5%.

As CCH’s Lisa Tracey has reported, the Oklahoma Supreme Court has held that S.B. 1246, which reduces the top personal income tax rate beginning in 2016, is not unconstitutional (see Fent v. Fallin, Oklahoma Supreme Court, No. 112867, December 2, 2014). The petitioner argued that S.B. 1246 was a "raising revenue" bill subject to popular vote/super-majority approvals set forth in Art. 5, Sec. 33, of the Oklahoma Constitution. The respondent argued that any bill that lowers income taxes is not raising revenue, thus not falling within the confines of Sec. 33. According to the court, the obvious meaning of raising revenue in the context of Sec. 33 is to increase revenue.

 

NOTE: S.B. 1246 maintains the top marginal personal income tax rate at 5.25% through the 2015 tax year and reduces the top rate to 5% beginning with the 2016 tax year and to 4.85% for subsequent years, contingent upon certain revenue growth. If the total general revenue fund proposed estimate for fiscal year 2016 is greater than the total general revenue fund proposed estimate for fiscal year 2014, then the rate would be reduced to 5% for the 2016 tax year. If the tax cut is not implemented, then the State Board of Equalization must repeat the comparison for subsequent tax years until the trigger is met. Following the implementation of the 5% tax rate, there is a second trigger to reduce the income tax rate to 4.85%.

As CCH writers recently reported, voters in 15 states had their say on a variety of tax proposals that appeared on the November 4 ballot. Measures to legalize and tax nonmedical marijuana were approved in Alaska and Oregon. In Georgia, voters approved a proposed constitutional amendment to limit income taxes, and in Tennessee voters approved a proposed constitutional amendment to prohibit taxation upon payroll or earned personal income. An initiative to impose a margin tax on businesses was rejected by Nevada voters. Property tax exemption proposals related to veterans and their spouses gained approval in several states.

 

Unofficial results of the ballot measures follow.

 

 

Income Tax Proposals

 

 

Georgia: Voters approved a proposed constitutional amendment to prohibit raising the rate of state income taxes above the rate that is in effect on January 1, 2015 (6%). S.R. 415

 

 

Illinois: An advisory question submitted to voters asking whether the state constitution should be amended to require that each school district receive additional revenue from an additional 3% tax on income greater than $1 million passed. Advisory Question (H.B. 3816, Laws 2014)

 

 

Nevada: Voters rejected an initiative to impose a 2% margin tax, effective January 1, 2015, on businesses having annual revenue of more than $1 million. Question 3

 

 

Tennessee: Voters approved a proposed constitutional amendment to prohibit taxation upon payroll or earned personal income. S.J.R. 1

 

 

Property Tax Exemption Proposals

 

 

Georgia: Voters approved a ballot measure that allows property owned by the University System of Georgia and operated by providers of student housing and other facilities to remain exempt from property taxation. The exemption is effective January 1, 2015, and applies to all tax years beginning on or after that date. Referendum 1

 

 

Louisiana: Voters rejected a proposed constitutional amendment excluding owners who are permanently totally disabled from the requirement that they annually certify to the assessor the amount of their adjusted gross income in order to receive the Special Assessment Level on their residences for property tax purposes. Amendment 9

 

 

Oklahoma: Voters approved a proposed constitutional amendment that would allow a qualified, 100% disabled U.S. military veteran, or his or her surviving spouse, who acquires a new homestead property to obtain a specified ad valorem property tax exemption for that new property for the same year during which an exemption was claimed for a previously held homestead property. State Question 770

 

 

Oklahoma: Voters approved a proposed constitutional amendment that would provide an ad valorem property tax exemption for the full fair cash value of a homestead belonging to an un-remarried surviving spouse of a member of the U.S. armed forces who was federally determined to have died while in the line of duty and would also allow that surviving spouse to acquire a new homestead property with a specified exemption for the same year during which an exemption was claimed for a previously held homestead property. State Question 771

 

 

Virginia: Voters approved an amendment to the state constitution that allows the state to exempt from taxation the real property of the surviving spouse of any member of the armed forces of the United States who was killed in action, where the surviving spouse occupies the real property as his or her principal place of residence and has not remarried. Legislatively-referred Constitutional Amendment

 

 

West Virginia: Voters approved a proposed amendment to the Constitution of West Virginia that would exempt from property tax certain properties owned by nonprofit youth organizations and that are built at a cost of at least $100 million, whether or not the property is used for the nonprofit youth organization’s charitable or nonprofit purpose to help raise funds for the benefit of the organization. Amendment 1

 

 

Property Tax Increase Proposals

 

 

Louisiana: Voters approved a proposed constitutional amendment authorizing the governing authority of Orleans Parish to increase the annual millage rate levied for fire and police protection, to require that the revenue from the fire and police millages be used for fire and police protection service enhancements, and to require that any increase be approved by the
voters of Orleans Parish. Amendment 6

 

 

Miscellaneous Property Tax Proposals

 

 

Louisiana: Voters approved a proposed constitutional amendment providing for an 18-month redemption period in any parish other than Orleans for vacant property sold at tax sale that is blighted or abandoned. Amendment 10

 

 

Louisiana: Voters rejected a proposed constitutional amendment allowing an authorized agent of a tax collector to assist in the tax sale process, including the sale of property for delinquent taxes and that the fee charged by the authorized agent be included within the costs that the collector can recover in the tax sale. Amendment 3

 

 

Marijuana Legalization Proposals

 

 

Alaska: Alaska voters approved an initiative to tax and regulate the production, sale, and use of marijuana. In addition to legalizing the use of marijuana for persons over the age of 21, the measure imposes a $50-per-ounce (or proportionate) excise tax on the sale or transfer of marijuana from a cultivation facility to a retail store or marijuana product manufacturing facility. The measure requires the marijuana cultivation facility to pay the tax and send monthly statements to the Department of Revenue. The department is authorized to exempt or establish a lower tax rate for certain parts of the marijuana plant. Ballot Measure 2

 

 

Oregon: Voters approved a measure to license, regulate, and tax marijuana. The measure grants regulatory authority to the Oregon Liquor Control Commission and provides that marijuana flowers, leaves, and immature plants should be taxed at different rates with "homegrown marijuana" excluded from regulation and tax. Measure 91

 

 

Motor Fuel Tax Proposals

 

 

Massachusetts: Voters approved a measure repealing a 2013 gas tax indexing law that linked gas tax increases to inflation. Question 1

 

 

Sales Tax Proposals

 

 

North Dakota: Voters approved an amendment to the state constitution that prohibits mortgage and sales taxes from being imposed on the mortgage or transfer of real property. Measure 2

 

 

Severance Tax Proposals

 

 

Nevada: Voters in Nevada rejected a measure to remove the cap on the taxation of minerals and other requirements and restrictions relating to the taxation of mines, mining claims, and minerals and the distribution of money collected from the tax. Question No. 2

 

 

Other Proposals

 

 

California: A ballot measure that would increase the amount of potential savings in the state rainy day fund from 5% to 10% of the general fund passed. Proposition 2 (Ch. 1 (ACA 1b), Laws 2014

 

 

Louisiana: Voters rejected a proposed constitutional amendment providing that legislation relative to tax rebates, tax incentives, and tax abatements may not be introduced or considered by the Legislature in a regular session held in an even-numbered year. Amendment 14

 

 

Utah: A ballot measure that would eliminate a provision limiting membership on the State Tax Commission to no more than two members of the same political party did not pass. Amendment A (S.J.R., Laws 2013)

 

 

Washington: In a nonbinding advisory vote, voters advised retention of legislation (S.B. 6505) that eliminated agricultural excise tax preferences for various aspects of the marijuana industry. Advisory Vote No. 8

 

 

Washington: In a nonbinding advisory vote, voters advised retention of legislation (H.B. 1287) imposing leasehold excise tax on certain leasehold interests in tribal property. Advisory Vote No. 9

Apportionment Issues Answered! One of the most complex issues in administering state corporate income taxes is how to distribute the income of multistate corporations among the states in which they operate. The new CCH Apportionment Suite offers compliance-focused resources to help professionals conquer this problem area. Learn more and download your complimentary resources – a white paper on "State Apportionment of Business Income" plus our State Tax Review – at http://www.cchgroup.com/apportionment.

According to Columbus Business First, the Ohio Department of Medicaid is reviewing the application of state sales and use taxes to premiums received by Medicaid managed care organizations (MCOs) in light of a federal regulatory memo calling the practice into question. The state uses the tax revenue to obtain additional federal Medicaid matching funds, and increases the per-member monthly (capitation) payments to the plans in order to hold the MCOs harmless.

 

The July 25, 2014 memo from the Centers for Medicare and Medicaid Services states that amendments made in the Deficit Reduction Act of 2005 (DRA) terminated states’ ability to tax only Medicaid MCOs. The memo explains that "taxing a subset of health care services or providers at the same rate as a statewide sales tax, for example, does not result in equal treatment if the tax is applied specifically to a subset of health care services or providers (such as Medicaid MCOs), since the providers or users of those health care services are being treated differently than others who are not within the specified universe."

 

It remains unclear how other states imposing similar health care-related taxes on Medicaid MCOs will respond. In May, 2014, the Inspector General of the Department of Health and Human Services concluded that Pennsylvania’s gross receipts tax on Medicaid MCOs was impermissible for purposes of Medicaid funding. However, Michigan reinstated its use tax on Medicaid MCOs effective retroactive to April 1, 2014.

On its blog, Airbnb announced that it will begin collecting occupancy taxes on behalf of its San Francisco hosts on October 1, 2014. For reservations booked on or after October 1, Airbnb receipts will show a new line item for the 14% city-imposed transient occupancy tax. The tax applies to rentals of less than 30 days.

 

According to Airbnb, the collection of taxes was instigated by the local community. "Our community members in San Francisco have told us they want to pay their fair share and the overwhelming majority have asked us to help. In the past, it's been difficult for individual hosts to pay taxes that were designed for traditional hotels that operate year around."

 

On July 1, 2014, Airbnb started collecting hotel taxes totaling 11.5% on short-term Portland rentals. It remains uncertain, however, if Airbnb will reach similar agreements with other cities. In New York, concerned with tax evasion and the operation of illegal hotels, Attorney General Eric Schneiderman's office issued a subpoena against Airbnb, seeking information and records on Airbnb hosts.

In response to the Michigan Supreme Court's opinion in International Business Machines Corp. v. Department of Treasury, which held that IBM could use the three-factor formula provided in the Multistate Tax Compact (Compact) instead of the single sales factor formula required under the Michigan Business Tax (MBT) statutes, Gov. Rick Snyder has signed legislation repealing Michigan's adoption of the Compact retroactive to January 1, 2008 (see S.B. 156, Laws 2014).

 

In 1969, Michigan enacted the Compact, which contains an equally weighted three-factor apportionment formula. However, the Compact also gives taxpayers the option of apportioning income "in the manner provided by the laws of" Michigan. Effective January 1, 2008, Michigan enacted a separate law requiring use of a single sales factor apportionment formula for MBT purposes. In IBM, the court upheld the Compact provision permitting taxpayers to choose between the two apportionment formulas.

 

The new legislation takes away a taxpayer's ability to choose between the two formulas. So, only the single sales formula is available. Finally, the legislation also clarifies that the Compact's election provision is not available for purposes of the Michigan corporate income tax, which replaced the MBT effective January 1, 2012.

 

 

As David Caplan of CCH recently reported, the Washington Department of Revenue’s Appeals Division has ruled that visits to trade shows by employees of an out-of-state manufacturer and seller of custom sportswear were sufficient to establish nexus for purposes of Washington sales and use and business and occupation (B&O) taxes.

 

 

The taxpayer sold custom apparel for college, school, and club sport and spirit teams over the Internet, by telephone, and by catalog. The taxpayer’s sales were a mixture of retail and wholesale sales, and its orders were shipped from locations outside Washington to customers by common carrier.

 

 

The Appeals Division noted that the nexus standard under case law and Washington rule provisions is not whether the in-state activity directly solicits a sale but, rather, whether the activity is significantly associated with establishing or maintaining a market within the state. Further, there is no trade show exemption in any Washington statute or rule.

 

 

In this case, for a period of at least seven years, the taxpayer’s representatives made at least four visits per year to trade shows in Washington in which the company displayed its products, made contact with potential buyers, discussed its service model with potential buyers, and distributed its catalogs. The Appeals Division found that the direct presence of the taxpayer’s representatives at the Washington trade shows was significantly associated with establishing or maintaining a market for the sales of its products in Washington. The taxpayer engaged in those activities to increase familiarity with its brand and, in turn, promote the sales of its products. Accordingly, the Appeals Division ruled that the activities were sufficient to establish taxing nexus for Washington sales.

 

 

The text of the determination is attached.

As Lisa Blaeser of CCH recently reported, Illinois has enacted legislation
that creates a rebuttable presumption that retailers will
have nexus with Illinois if their in-state sales contacts provide potential customers
with a promotional code that allows the retailer to track the referred
customers’ purchases. 

 

P.L. 98-1089 (S.B. 352), Laws 2014, which is scheduled to take
effect on January 1, 2015, has amended the existing Illinois click-through
nexus law to provide that a retailer is presumed to be maintaining a place of
business in the state if the retailer has a contract with a person located in
Illinois under which the person, for a commission or other consideration that
is based on the sale of tangible personal property by the retailer, directly or
indirectly refers potential customers to the retailer by providing them with a promotional code
or other mechanism that allows the retailer to track purchases referred by such
persons. Under the law, examples of a mechanism that allows the tracking of
purchases include the use of a link on the person’s website, promotional codes distributed
through hand delivery or by mail, and promotional codes distributed through
radio or other broadcast media.

 

The presumption will apply only if the cumulative gross receipts from sales of
tangible personal property by the retailer to customers who are referred to the
retailer by all persons in Illinois under such contracts exceed $10,000 during the
preceding four quarterly periods ending on the last day of March, June,
September, and December. The presumption can be rebutted by submitting proof
that the in-state contacts’ referrals or other activities in Illinois did not meet
the nexus standards of the U.S. Constitution during the four quarterly periods.

 

The legislation purportedly fixes a defect Illinois’ click-through nexus law, which,
as Blaeser reported, was previously held void and unenforceable by the Illinois
Supreme Court in
Performance Marketing Association, Inc. v. Hamer. In that case, the court held that the
Illinois click-through nexus law was preempted by the Internet Tax Freedom Act
because it imposed discriminatory taxes on electronic commerce. The law was
found to be discriminatory because it imposed a use tax collection obligation
on out-of-state retailers who maintained links on websites, but it did not
impose such an obligation on similar types of advertising such as promotional codes made
available by out-of-state retailers in newspapers or other printed publications
or through over-the-air broadcasting. The court did not address the issue of
whether the click-through nexus law violated the Commerce Clause of the U.S.
Constitution.

As CCH’s Bob Wilson has reported, the Texas Comptroller has announced that it is implementing a franchise tax processing improvement effective for the 2014 extended due date in order to deal with combined reports with missing affiliates.

 

The Comptroller notes that sometimes a reporting entity for a combined group requests an extension of time to file and includes an entity on its affiliate extension list that, for various reasons, is not included when the report is ultimately filed. The Comptroller explains that when it evaluates the reported data and finds the two sets of affiliate data do not match, current processing rules create a delinquency for the reporting entity and for all members of the combined group until the discrepancy is resolved.

 

Beginning in mid-October 2014 the process will change. The Comptroller’s office will notify the reporting entity of the failure to report the affiliate. If the issue is not resolved, the Comptroller’s office will sever the affiliation between the entity that was not reported and the rest of the combined group. The severed entity must file a franchise tax report on its own, while the combined group members’ right to transact business will remain intact.

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