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The SALT Minds Blog

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David Caplan of CCH notes that, according to unofficial results of the August 19 primary election in Alaska, a ballot measure to repeal the oil and gas production tax changes made by S.B. 21, Laws 2013, has failed by a narrow margin. The legislation, also known as the More Alaska Production Act, modified the rate structure and revamped credit provisions of the oil and gas production tax. Gov. Sean Parnell signed S.B. 21 into law on May 21, 2013, and key provisions took effect on January 1, 2014. If approved, Ballot Measure No. 1 would have reinstated the previous tax structure, known as Alaska’s Clear and Equitable Share (ACES), passed during the administration of Gov. Sarah Palin.


S.B. 21 increased the base tax rate from 25% to 35% while eliminating the progressivity component of the tax, which applied in months when a producer’s average monthly production tax value exceeded $30. The legislation also provided that qualified oil and gas produced from leases or properties on the North Slope would be eligible for a 20% reduction, called a gross revenue exclusion, in the gross value at the point of production. The gross revenue exclusion is applicable only to certain “new” production. The law provided for an additional 10% gross revenue exclusion for oil and gas produced from certain North Slope units.


Tax credit modifications included the addition of two new per-barrel credits for North Slope producers and elimination of the tax credit for qualified capital expenditures on the North Slope after January 1, 2014. S.B. 21 also provided a corporate income tax credit for qualified oil and gas service-industry expenditures and established an Oil and Gas Competitiveness Review Board in the Department of Revenue. Other provisions of the law lowered the interest rate that applies to overdue taxes from 5% above the applicable federal rate, or 11%, whichever is greater, to 3% above the applicable federal rate.



Ballot Measure No. 1 (Referendum 13SB21), Alaska primary election on August 19, 2014

Several marijuana activists and business owners have filed a lawsuit (No Over Taxation v. Hickenlooper) in the Denver District Court, seeking a permanent injunction against the collection of Colorado’s marijuana taxes and a refund of those taxes. In addition to the 2.9% state sales tax, Colorado imposes a 10% sales tax on marijuana retail transactions and a 15% excise tax on the wholesale sale of marijuana from a cultivation facility to a retail store or infused manufacturer. As the manufacture and distribution of marijuana remains in violation of the Federal Controlled Substances Act, the complaint claims that the marijuana taxes require persons subject to those taxes to incriminate themselves as “committing multiple violations of federal law, including but not limited to, participating in, aiding and abetting in, or conspiring to commit a ‘continuing criminal enterprise’ and ‘money laundering.’” As such, the plaintiffs assert that the marijuana taxes violate the Self-Incrimination and Double Jeopardy protections contained in the Fifth Amendment of the U.S. Constitution and Article II §18 of the Colorado Constitution, respectively.

The complaint further contends that the state’s marijuana regulatory scheme violates federal law and is therefore preempted under the U.S. Constitution’s Supremacy Clause. Defendants Governor Hickenlooper and Denver Mayor Hancock are themselves alleged to be “federal criminal actors” who have laundered illegal drug proceeds and conspired with J.P. Morgan Chase Bank in depositing such funds and violating federal law. The lawsuit also asserts that the marijuana taxes are excessive, as Amendment 64 to the Colorado Constitution forbid any regulation that would make the operation of a marijuana enterprise “unreasonably impracticable.”

Colorado voters approved Amendment 64, legalizing recreational marijuana, in November 2012, and legal sales began January 1, 2014.

The first half of 2014 brought with it numerous developments on the sales and use tax front. A CCH Tax Tips video discusses some notable sales and use tax developments occurring in the first half of 2014, such as emerging trends in the sales tax treatment of virtual currency and legalized marijuana.

CLICK HERE to view the video.

At its 47th Annual Conference and Committee Meetings (July 28-31, 2014), the Multistate Tax Commission (MTC) moved forward on several important proposed amendments to the Multistate Tax Compact’s Uniform Division of Income for Tax Purposes Act (UDITPA) provisions. For example, on July 30, the full MTC voted to approve the following Compact amendments:


  • Art. IV.1(a), Definition of Business Income. The definition of "business income" is replaced with a more expansive definition of "apportionable income" (includes “all income that is apportionable under the Constitution of the United States and is not allocated under the laws of” the enacting state). Conversely, the definition of "nonbusiness income" is replaced with a definition of "nonapportionable income."


  • Art. IV.9, Factor Weighting. The Compact’s current equally-weighted three-factor apportionment formula is replaced with the adopting state’s apportionment formula (although the MTC recommends using a double-weighted sales factor formula).


  • Art. IV.1(g), Definition of "Sales." The definition of “sales” is replaced by the definition of “receipts,” which is limited to receipts from transactions and activity in the regular course of the taxpayer’s trade or business. Receipts from hedging transactions and from the disposition of cash or securities (i.e., treasury functions) are specifically excluded from the definition.


  • Art. IV.17, Sales Factor Sourcing for Services and Intangibles. The current cost-of-performance sourcing rule for receipts from sales of intangible property and services is replaced with market-based sourcing rules. The “reasonable approximation” of an assignment is permitted if the market state cannot be determined using the provided guidelines. In addition, a “throwout rule” applies if the taxpayer is not taxable in the state to which a sale is assigned or if the market state cannot be reasonably approximated.


  • Art. IV.18(b), Distortion Relief. A state’s tax administrator may establish rules or regulations for determining alternative allocation and apportionment if the standard allocation and apportionment provisions do not fairly represent the extent of business activity in the state of taxpayers engaged in a particular industry or in a particular transaction or activity. Any regulation adopted must be applied uniformly (subject to adjustment for affected taxpayers).

Corresponding changes to the MTC’s model allocation and apportionment regulations are expected to follow.


In addition, on July 31, the MTC Executive Committee approved a separate set of amendments to the Compact’s UDITPA provisions that would establish the burden of proof where an alternative method of apportionment is proposed (Art. IV.18(c)). Under the proposed amendments, the taxpayer petitioning for, or the tax administrator requiring, the use of an alternative method must prove (1) that the standard allocation and apportionment provisions do not fairly represent the extent of the taxpayer’s activity in the state; and (2) that the alternative method is reasonable. The standard of proof is left to the state to decide. Other, non-substantive changes to the alternative apportionment provisions regarding penalties and agreements with the state were also approved. These proposed changes now move forward to the MTC’s state survey process where they are circulated to the MTC members to determine if the affected members will consider adoption of the recommendations within their respective jurisdictions.


Other corporate income tax-related developments during the MTC meetings included:


  • Hearing officer’s report on proposed amendments to financial institution allocation and apportionment provisions was approved and moved to the member survey stage (July 31, Executive Committee);
  • Proposed project on the use of trusts for state tax avoidance was allowed to proceed (July 28, Uniformity Subcommittee on Income and Franchise Tax);
  • Proposed projects on sourcing of cloud computing services and sourcing of electricity were tabled for now to save resources for revisions to the MTC’s model allocation and apportionment regulations expected following adoption of the UDITPA changes described above (July 28, Uniformity Subcommittee on Income and Franchise Tax); and
  • MTC Policy Statement 2009-01, which urges Native American tribes and states to resolve tribal-state tax issues through negotiated agreements rather than through the courts, was renewed (July 30, full MTC).

Several states are holding back-to-school sales tax holidays in August this year. Items that will be exempt from sales tax during the holidays vary from clothing, footwear, and school supplies to computers and related equipment. Many states exclude clothing and footwear accessories, as well as athletic and protective clothing and footwear, from their tax holidays.


Here are the details for the states that are holding a back-to-school sales tax holiday in August 2014. 


Alabama, August 1-3: The tax holiday applies to clothing, but not accessories or protective or recreational equipment, with a sales price of $100 or less per item; single purchases with a sales price of $750 or less of computers, computer software, school computer equipment; noncommercial purchases of school supplies, school art supplies, and school instructional materials with a sales price of $50 or less per item; and noncommercial book purchases with a sales price of $30 of less per book.


Arkansas, August 2-3: The tax holiday applies to clothing items under $100, clothing accessories or equipment under $50, school art supplies, school instructional materials, and school supplies. The tax holiday does not apply to protective equipment or sports or recreational equipment.


Connecticut, August 17-23: The tax holiday applies to clothing and footwear that costs less than $300 per item, but does not apply to athletic or protective clothing or footwear, jewelry, handbags, luggage, umbrellas, wallets, watches, and similar items.


Florida, August 1-3: The tax holiday applies to clothing, wallets, bags, handbags, backpacks, fanny packs, and diaper bags (excluding briefcases, suitcases, and other garment bags) with a sales price of $100 or less per item; school supplies with a sales price of $15 or less per item; and the first $750 of the sales price of personal computers or personal computer-related accessories purchased for noncommercial home or personal use. The tax holiday does not apply to sales made within a theme park or entertainment complex, a public lodging establishment, or an airport.


Georgia, August 1-2: The tax holiday applies to computers, computer components, and prewritten computer software purchased for noncommercial home or personal use having a sales price of $1,000 or less per item; clothing having a sales price of $100 or less per item; and school supplies, school art supplies, school computer supplies, and school instructional materials purchased for noncommercial use having a sales price of $20 or less per item.

Iowa, August 1-2: The tax holiday applies to clothing and footwear with a sales price of less than $100 per item, but does not apply to accessories, rentals, or athletic or protective items.


Louisiana, August 1-2: The tax holiday applies to the first $2,500 of the sales price of noncommercial purchases, but not leases, of items of tangible personal property, excluding vehicles and meals. The tax holiday does not apply to local taxes, but St. Charles Parish will waive its local sales tax during the same weekend as the state's tax holiday.


Maryland, August 10-16: The tax holiday applies to items of clothing (excluding accessories) and footwear with a taxable price of $100 or less.


Missouri, August 1-3: The tax holiday applies to noncommercial purchases of clothing, but not accessories, with a taxable value of $100 or less per item; school supplies up to $50 per purchase; computer software with a taxable value of $350 or less; and personal computers and computer peripherals up to $3,500. Localities may opt out of the tax holiday. Also, if less than 2% of retailer's merchandise qualifies, the retailer must offer a tax refund in lieu of a tax holiday.


New Mexico, August 1-3: The tax holiday applies to footwear and clothing, but not accessories or athletic or protective clothing, with a sales price of less than $100 per item; school supplies with a sales price of less than $30 per item; computers with a sales price of $1,000 or less per item; computer peripherals with a sales price of $500 or less per item; book bags, backpacks, maps, and globes with a sales price less than $100 per item; and handheld calculators with a sales price of less than $200 per item. Retailers are not required to participate in the tax holiday.


Oklahoma, August 1-3: The tax holiday applies to items of clothing and footwear with a sales price of less than $100, but does not apply to accessories, rentals, or special clothing or footwear primarily designed for athletic or protective use.


South Carolina, August 1-3: The tax holiday applies to clothing (excluding  rentals), clothing accessories, footwear, school supplies, computers, printers, printer supplies, computer software, bath wash clothes, bed linens, pillows, bath towels, shower curtains, and bath rugs.


Tennessee, August 1-3: The tax holiday applies to clothing (excluding  accessories), school supplies, and school art supplies with a sales price of $100 or less per item; and computers with a sales price of $1,500 or less per item.


Texas, August 8-10: The tax holiday applies to clothing and footwear (excluding accessories, athletic  protective items, and rentals), school supplies, and school backpacks with a sales price of less than $100 per item.


Virginia, August 1-3: The tax holiday applies to clothing and footwear with a selling price of $100 or less per item, and school supplies with a selling price of $20 or less per item.


In addition, Mississippi held a tax holiday July 25-26. This tax holiday applied to clothing and footwear with a sales price under $100 per item, but did not apply to accessories, rentals, skis, swim fins, or skates.


Happy shopping!


As CCH’s Jennifer Troyer has reported, the Michigan Supreme Court has held that (1) a taxpayer was allowed to elect to use the three-factor apportionment formula under the Multistate Tax Compact (MTC) for the 2008 Michigan business tax (MBT) year, and (2) the MTC’s apportionment formula could be used to apportion the MBT base subject to the modified gross receipts tax because the modified gross receipts tax qualified as an "income tax" for purposes of the MTC. (International Business Machines Corp. v. Department of Treasury, Michigan Supreme Court, No. 146440, July 14, 2014)


Implied Repeal of MTC in Michigan
First, the court considered whether the Legislature repealed the MTC’s election provision by implication when the MBT was enacted. The court concluded that the MTC’s election provision was not repealed by implication. Repeals by implication are disfavored. If the Legislature had intended to repeal the law, it could have been explicit. The court noted that statutes claimed to be in conflict should be construed harmoniously to find any other reasonable construction other than a repeal by implication. Thus, the MTC’s three-factor apportionment formula election and the MBT’s single-sales factor apportionment formula laws were in pari materia and had to be construed together.


The court reasoned that the MTC’s election provision ("may elect") contemplated a divergence between the party state’s mandated apportionment formula and the MTC’s own formula, either at the time of the MTC’s adoption by the party state or at some point in the future. Accordingly, the taxpayer could choose (1) the MTC and use the three-factor apportionment formula or (2) Michigan tax law and use the single-sales factor apportionment formula. By subsequently repealing the MTC’s election provision starting January 1, 2011, the Legislature created a window in which it did not expressly preclude the use of the MTC’s election provision.


Modified Gross Receipts Tax Portion of MBT
Second, the court considered, for purposes of the MTC, whether the modified gross receipts tax portion of the MBT was an "income tax." The court concluded that the modified gross receipts tax portion of the MBT was an income tax. The MTC election is available to any taxpayer subject to an income tax. Under the MTC’s broad definition of "income tax," a tax is an income tax if the tax measures net income by subtracting expenses from gross income, with at least one of the expense deductions not being specifically and directly related to a particular transaction. After examining how the modified gross receipts tax portion of the MBT was calculated, the court determined that the term "gross receipts" in Michigan was similar to "gross income" under the federal income tax law. There was at least one expense deduction allowed under the MBT that was not specifically and directly related to a particular transaction. As such, the modified gross receipts tax portion of the MBT qualified as an income tax for the MTC. This allowed the three-factor apportionment formula election to be applied to this portion of the MBT as well as the income tax portion of the MBT.

Louisiana Gov. Bobby Jindal has signed legislation (Act 822 (H.B. 663), Laws 2014) that makes several changes to the Tax Delinquency Amnesty Act of 2013, which requires the Louisiana Department of Revenue (LDR) to develop and implement a tax amnesty program applicable to all taxes administered by the LDR, except for motor fuel taxes and penalties for failure to submit information reports that are not based on an underpayment of tax. First, the legislation expands the scope of the amnesty program to include:


  • taxes for taxable periods that began before 2014 (previously, before 2013);
  • taxes for which the LDR and the taxpayer have entered into an agreement to toll the statute of limitations until the end of 2014 (previously, until the end of 2013);
  • for the 2014 amnesty program, taxes due prior to 2014 for which the LDR has issued a proposed assessment, notice of assessment, bill, notice, or demand for payment not later than May 31, 2014; and
  • for the 2015 amnesty program, taxes due prior to 2015 for which the LDR has issued a proposed assessment, notice of assessment, bill, notice, or demand for payment not later than May 31, 2015.


In addition, the legislation permits 100% of penalties and 50% of interest to be waived during the 2014 amnesty period (previously, 15% of penalties and no interest), making those parameters identical to the completed 2013 amnesty period. For the 2015 amnesty period, 33% of penalties and 17% of interest may be waived (previously, 10% of penalties and no interest). However, a taxpayer will be subject to double penalties if there is a final judgment rendered against the taxpayer by a court or if the taxpayer has exhausted all rights to protest taxes owed to the state 90 days prior to either the 2014 or the 2015 amnesty period, and the taxpayer then fails to submit an amnesty application before the end of the applicable amnesty period 90 days prior to which the final judgment was rendered or 90 days prior to which the taxpayer’s rights to protest taxes have been exhausted.


A taxpayer who disputes a portion of the amount of a delinquent tax assessed by the LDR may now be eligible to apply for amnesty if the taxpayer remits a complete one-time payment of that portion of the tax that is not in dispute, plus applicable interest and penalties, to the LDR prior to the end of the amnesty period for which the taxpayer applies. This payment is referred to as a "compromise amount." The LDR will then have 30 days to determine if the taxpayer should be granted amnesty based on the compromise amount paid. If the LDR approves the compromise amount paid by the taxpayer, the taxpayer will be granted amnesty. If the LDR rejects the compromise amount, amnesty will not be granted and the taxpayer will be responsible for the full amount of the delinquent tax, penalties, interest, and fees prior to his application for amnesty.


The legislation also authorizes the use of six-month installment payment agreements. However, taxpayers who apply for amnesty by opting to pay the tax and any applicable fees, costs, and interest in installments remain eligible to participate in the amnesty program only by making complete and timely payment of the entire amount due under the taxpayer's installment agreement. Taxpayers involved in field audits or litigation are not eligible for installment agreements under the amnesty program. All installment agreements must require the taxpayer to provide a down payment of no less than 20% of the total amount of delinquent tax, penalty, interest, and fees owed. In addition, taxpayers who cannot enter into an agreement to make payment by way of automated electronic transactions are not eligible for an installment agreement.


Under the new legislation, the LDR is prohibited from accepting tax credits as payment of any tax, interest, penalty, or fee paid as a result of participation in the amnesty program.


Finally, the legislation states that, after 2015, no new LDR amnesty programs are allowed before January 1, 2025.

As CCH’s Jennifer Troyer has reported, Rhode Island Gov. Lincoln D. Chafee has signed the 2015 budget bill (H.B. 7133), which for income tax purposes implements combined reporting, reduces the corporate income tax rate, adopts a 100% sales factor for apportionment, repeals the franchise tax, eliminates the captive REIT and related-party addback requirements, and makes other changes discussed below.


Combined Reporting
Applicable to tax years beginning on or after January 1, 2015, each C corporation that is part of a unitary business must file a combined return. In addition, an affiliated group may elect to be treated as a combined group. The election is binding for at least five years, unless earlier revocation is approved by the tax administrator. A combined report does not disregard the separate identities of the taxpayer members. A combined group will exclude as a member and disregard the income and apportionment factors of a corporation not incorporated in the United States if the sales factor outside the U.S. is 80% or more.


Net operating losses (NOLs) created before 2015 are allowed only to offset the income of the corporation that created the NOL. No deduction is allowed for NOLs sustained during a tax year in which the taxpayer was not subject to Rhode Island tax. For NOLs created in tax years beginning on or after January 1, 2015, there is no carryback and a five-year carryforward. NOLs are generally the same as under IRC §172. Tax credits earned before 2015 may only be used by the taxpayer that earned them. However, tax credits earned in tax years that begin on or after January 1, 2015, may be applied to other group members’ income. Furthermore, the tax rate reduction under the Jobs Development Act and the I-195 Redevelopment Act may be used against the net income of the entire group.


For taxpayers filing combined reports, estimated tax payments must be made that are (1) 100% of the tax due for the prior year plus any additional tax due to combined reporting; or (2) 100% of the current year tax liability.


"Combined group" is defined as a group of two or more corporations in which more than 50% of the voting stock of each member corporation is directly or indirectly owned by a common owner or owners, either corporate or non-corporate, or by one or more of the member corporations, and that are engaged in a unitary business. "Unitary business" means the activities of a group of two or more corporations under common ownership that are sufficiently interdependent, integrated or interrelated through their activities so as to provide mutual benefit and produce a significant sharing or exchange of value among them or a significant flow of value between the separate parts.


Corporate Income Tax Rate
Applicable to tax years beginning on or after January 1, 2015, the corporate income tax rate is reduced to 7% from 9% of net income.


Applicable to tax years beginning on or after January 1, 2015, C corporations apportion net income with a 100% sales factor. Currently, taxpayers apportion net income with an evenly-weighted property, payroll, and sales factor apportionment formula. A throwback rule is included. Among other things, sales include receipts from gross sales of tangible personal property, gross income from the performance of services where the recipient receives all of the benefit in Rhode Island, gross income from rentals of property situated in Rhode Island, and net income from the sale of securities or financial obligations. Furthermore, each unitary business group member must include all receipts in Rhode Island without regard to whether the member has nexus. Receipts between members included in the unitary business group are eliminated.


An independent appeals process is required to be established to resolve any disputes regarding the allocation method.


Franchise Tax
Applicable to tax years beginning on or after January 1, 2015, the franchise tax is repealed. Currently, the franchise tax is applied on authorized capital stock at a rate of $2.50 for each $10,000, with a minimum tax of $500.


Captive REIT, Related-Party Addbacks
Applicable to tax years beginning on or after January 1, 2015, for captive REITs, net income is not required to include the amount equal to the dividend paid deduction under the IRC. Also, the addback requirement for the deduction for interest expense and intangible expenses paid to one or more related members is removed.


S Corporation Minimum Tax
Applicable to tax years beginning on or after January 1, 2015, the law is amended to specify that S corporations are subject to a minimum tax, which is currently $500.


Jobs Development Act
Applicable to tax years beginning on or after January 1, 2015, the corporate income tax rate reduction available under the Jobs Development Act is allowed for combined groups. The formula to calculate the rate reduction is revised; the tax rate reduction is capped at 4% (previously, 6%).


I-195 Redevelopment Act of 2011
Applicable to tax years beginning on or after January 1, 2015, the corporate income tax rate reduction available under the I-195 Redevelopment Act is allowed for combined groups. The formula to calculate the rate reduction is revised; the tax rate reduction is capped at 4%.


Personal Income Tax
Effective July 1, 2014, when reporting the amount of use tax on a personal income tax return, a taxpayer must list the actual amount or the amount of use tax using a lookup table. The lookup table is a "safe harbor" alternative. Although the lookup table may be used, the actual amount of each single purchase must be listed if it is at least $1,000.


The tax administrator, by December 1, 2014, and each year thereafter, must notify any public employee who is not in compliance with the state income tax laws. The employee will be subject to mandatory wage garnishment. However, the employee will be deemed to be in compliance if he or she has entered into a payment agreement or has requested relief as an innocent spouse.


Applicable to tax years beginning on or after January 1, 2015, the earned income tax credit is 10% (previously, 25%) of the federal earned income tax credit. The refundable portion equals 100% (previously, 15%) of the amount by which the credit exceeds the tax.

As CCH’s Sandy Weiner has reported, legislation (H.B. 884) has been enacted that makes numerous changes to Vermont personal and corporate income tax provisions, including updating the IRC conformity date, reducing the research and development (R&D) credit amount, increasing the allocations available for the downtown and village center credits, and requiring affiliated corporations that elect to file a consolidated return to continue to do so for at least five years. In addition, a new voluntary checkoff will be available on the 2015 tax returns that will allow individual taxpayers to make a tax deductible contribution to Vermont Green Up, Inc., on their personal income tax return.


IRC Conformity
The IRC conformity date for personal and corporate income tax is updated so that Vermont generally conforms to the IRC as in effect for the 2013 taxable year, applicable to post-2012 taxable years. Previously, Vermont conformed to the IRC as in effect for the 2012 taxable year, applicable to post-2011 taxable years. As before, Vermont continues to decouple from the IRC §168(k) bonus depreciation deduction.


Research and Development Credit
The state R&D credit is decreased from 30% to 27% of the federal credit for R&D expenditures under IRC §41(a) that are made within Vermont, effective January 1, 2014, and applicable to any claims for credits filed after that date. The Vermont Department of Taxes is also mandated to publish an annual list of taxpayers that received the credit in the prior calendar year.


Downtown and Village Center Credits
The amount of tax credits against corporate income, personal income, bank franchise, and insurance premiums tax for historic rehabilitation, facade improvement, and code improvements that the Vermont Downtown Development Board may award is increased from $1.7 million to $2.2 million for each fiscal year beginning with the 2015 fiscal year.


Consolidated Returns
Beginning with the 2014 tax year, affiliated corporations that have Vermont allocable or apportionable income and that qualify and elect to file a federal consolidated return may elect to file a Vermont consolidated return. The election will continue for a period of five years, including the year of the election. Although Vermont previously allowed such corporations to file a state consolidated return, there was no minimum time period that the election applied.


Credit Card Transactions Information Reporting
A new provision requires credit card processors and third-party payment aggregators that are required to report gross card transactions to the IRS pursuant to IRC §6050W to file a duplicate information return with the Vermont Department of Taxes within 30 days of filing the federal information return if the recipient listed on the return has a Vermont address, applicable to post 2013 tax years.

Wolters Kluwer announced in a press release that its CCH Mobile app has won the prestigious 2014 SIIA Software CODiE Award in the Best Enterprise Mobile Application category. The SIIA CODiE Awards are the premier award for the software and information industries, and have been recognizing product excellence for 29 years.


CCH Mobile app provides anytime, anywhere mobile access and answers on-the-go. It is a convenient gateway for users of Wolters Kluwer's IntelliConnect®  research platform that includes customized Tracker News, Practice Tools, and CCH Smart Charts.


Additional features of CCH Mobile app include voice command and read-back ability; personalized home screen and content pages; offline access capability; and on-the-spot emails.

As CCH’s Cathy Agdeppa has reported, Minnesota enacted an omnibus supplemental tax bill that makes a number of changes to corporate franchise (income), personal income, and personal income withholding taxes, including expanding the angel investment tax credit; conforming to the new federal law allowing acceleration of income tax benefits for charitable contributions for the relief of victims of Typhoon Haiyan; changing the due date of the fourth quarter withholding tax return; and authorizing the Minnesota Commissioner of Revenue to enter into a new income tax reciprocity agreement with Wisconsin (see Ch. 308 (H.F. 3167), Laws 2014).


Angel investment credit: Effective for tax year beginning after 2013, the legislation expands the definition of a "qualified small business" for purposes of the angel investment credit by allowing businesses to qualify if they have as their primary business activity researching and developing a proprietary product, process, or service in the fields of agriculture, tourism, forestry, mining, manufacturing, or transportation. The Minnesota Commissioner of Employment and Economic Development (DEED) is also required to develop and implement a plan to promote use of the angel investment credit in greater Minnesota.


Greater Minnesota internship credit: The legislation makes several changes to the Greater Minnesota internship credit, including modifying "eligible institution" to include graduate degree-granting colleges and universities and amending the definition of "eligible student" to include a student who has completed one-half of the credits necessary to obtain a graduate degree. Prior law limited the definition to students who have completed half the credits necessary for an undergraduate degree. The minimum length of time for a qualifying internship is also shortened from 12 weeks to eight weeks.


Conformity update: Effective for tax year beginning after 2012, the legislation advances the state's corporate franchise and personal income tax conformity date to include all federal tax administrative changes enacted between December 20, 2013, and March 26, 2014, including all federal changes to taxable income in the Philippines Charitable Giving Assistance Act, which allows taxpayers to elect to treat contributions for typhoon relief made after March 25, 2014, and before April 15, 2014, as though they were made on December 31, 2013. These changes allow personal and corporate calendar-year taxpayers to deduct typhoon relief contributions made from March 26, 2014, through April 14, 2014, on their 2013 federal income tax returns, rather than on their 2014 returns. As such, deductions made by Minnesota taxpayers are permitted to flow through to their 2013 state returns.


Personal income tax modifications: Effective for tax years beginning after 2012, under the legislation the state limitation of itemized deductions and phase-out of personal exemptions are modified to ensure that the state’s limitation and phase-out are applied independently of the federal limitation and phase-out as reinstated in the American Taxpayers' Relief Act of 2012 (ATRA). The legislation also provides parity for vanpool and transit pass fringe benefits with parking benefits through a subtraction from taxable income and extends the military pay income tax subtraction for National Guard members who serve in Active Guard/Reserve status, effective for tax years beginning after 2013. Finally, a subtraction is provided from alternative minimum taxable income for amounts deducted under the subtraction for transit pass and vanpool expenses.


Income tax reciprocity: The Minnesota Commissioner of Revenue is authorized to enter into a new income tax reciprocity agreement with Wisconsin under which the amount received by Minnesota could be up to $1 million less than the net revenue loss to Minnesota as a result of the agreement, provided the agreement is made before September 30, 2014.


Reading credit: Effective for tax year 2014 only, the legislation creates a new refundable credit equal to 75% of expenses for treatment of a reading disorder (such as dyslexia) that impairs a child from reading and comprehending language at the expected age level. The maximum credit is $2,000 per child and is not allowed for expenses covered by insurance or otherwise reimbursed to the parent, or for expenses used to claim the current law K-12 education credit or subtraction.


Procedure to request abatement: The recently enacted legislation clarifies that taxpayers requesting abatement of penalties may at the same time request abatement of related interest and the additional tax charge.


Withholding tax return due dates: Effective for withholding tax returns due after January 1, 2016, the legislation changes the due date of the fourth quarter withholding tax return from February 28 to January 31, or to February 10 if all withholding deposits for the quarter have been timely made. This change makes the state fourth quarter withholding tax due date the same as the federal due date. The legislation also relieves some seasonal employers from having to file withholding tax returns for periods of anticipated inactivity, unless they pay wages during that period, effective for wages paid after December 31, 2015.


Determination of sales factor: The legislation strikes a reference in the sales factor to sales of tangible personal property made in Minnesota that limited it to taxpayers with nexus in Minnesota.

As David Caplan of CCH reports, the Alaska Supreme Court ruled in favor of two same-sex couples who contended that a real property tax exemption program violated their rights to equal protection and equal opportunities under the state constitution because it provided opposite-sex married couples a greater benefit. The state of Alaska and the municipality of Anchorage exempt from municipal property taxation $150,000 of the assessed value of the residence of an owner who is a senior citizen or disabled veteran. However, the full value of the exemption is potentially unavailable if a person who is not the owner’s spouse also occupies the residence. In the case of each of the two couples, the state assessor determined that only 50% of the home’s assessed value was exempt. The Supreme Court stated that same-sex couples, who may not marry or have their marriages recognized in Alaska, cannot benefit or become eligible to benefit from the exemption program to the same extent as heterosexual couples who are married or may marry and, therefore, the exemption program potentially treats same-sex couples less favorably than it treats opposite-sex couples even though the two classes are similarly situated. The court further determined that the identified government interests did not satisfy even minimum scrutiny.


Marriage Amendment Did Not Bar Claims


The Marriage Amendment of the Alaska Constitution, which states that Alaska legally recognizes only marriages between one man and one woman, did not preclude consideration of the taxpayers’ case because the amendment speaks only to the definition of marriage, not to the benefits of marriage. In a previous case, the Supreme Court had held that, even though the amendment effectively prevents same-sex couples from marrying, it does not automatically permit the government to treat them differently in other ways.


Similarly Situated Classes Treated Unequally


For purposes of analyzing the effects of the exemption program, the Supreme Court held that committed same-sex domestic partners who would enter into marriages recognized by Alaska if they could were similarly situated to those opposite-sex couples who, by marrying, had entered into domestic partnerships formally recognized in Alaska. The court rejected the state’s contention that the program treats all unmarried couples equally because no unmarried couples can obtain the full exemption to the same extent as married couples. The court noted that it had previously held that the law treats same-sex couples differently from opposite-sex couples if it prevents same-sex couples from becoming eligible for the benefits at issue.


Ownership Interest Required


As to a third couple, the Supreme Court reversed the lower court’s ruling in their favor because the exemption program does not exempt a residence from taxation unless the senior citizen or veteran has some ownership interest in it. If the senior citizen or veteran has no actual ownership interest, the program treats a same-sex couple the same as a heterosexual couple by denying the exemption to both couples, rendering marital status and the ability to marry irrelevant. In this case, because the senior citizen member of the third couple had no ownership interest in the residence, that couple had no viable equal protection claim.


The full text of the opinion is attached.

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.

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